Schedule 14A Information
Proxy Statement Pursuant to Section 14(a) of the Securities Exchange
Act of 1934.
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[X] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11 (c) or Section 240.14a-12
PAMIDA HOLDINGS CORPORATION
(Name of Registrant as Specified In Its Charter)
N/A
(Name of Person (s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required
[ ] Fee Computed on table below per Exchange Act Rules 14a-6 (i) (l) and 0-11.
(1) Title of each class of securities to which transaction applies:
...................................................................
(2) Aggregate number of securities to which transaction applies:
...................................................................
(3) Per Unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:
...................................................................
(4) Proposed maximum aggregate value of transaction:
...................................................................
(5) Total fee paid:
...................................................................
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
...................................................................
(2) Form, Schedule or Registration Statement No.:
...................................................................
(3) Filing Party:
...................................................................
(4) Date Filed:
...................................................................
PAMIDA HOLDINGS CORPORATION
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
October 28, 1997
A Special Meeting of Stockholders of Pamida Holdings Corporation, a
Delaware corporation (the "Corporation"), will be held on October, 1997, at
8:30 a.m. at the office of the Corporation, 8800 "F" Street, Omaha, Nebraska,
for the following purposes:
1. To approve the Note Amendment Agreement No. 3 between the Corporation
and 399 Venture Partners, Inc., a wholly owned subsidiary of Citicorp, and the
transactions contemplated thereby, including the issuance of shares of Common
Stock and Nonvoting Common Stock of the Corporation in payment of the
outstanding 13.5% Senior Promissory Notes, 14% Subordinated Promissory Notes and
14.25% Junior Subordinated Promissory Notes of the Corporation at the rate of
one share for each $9.00 of outstanding principal of and accrued interest on
such notes and the issuance of shares of Common Stock upon the conversion of
shares of Nonvoting Common Stock into shares of Common Stock at the rate of
one-to-one.
2. To consider and vote upon an amendment to the Restated Certificate of
Incorporation of the Corporation to change and reclassify all of the outstanding
shares of 16.25% Senior Cumulative Preferred Stock, par value $1.00 per share,
and 14.25% Junior Cumulative Preferred Stock, par value $1.00 per share, of the
Corporation into shares of Common Stock at the rate of one share of Common Stock
for each $9.00 of liquidation value and accrued dividends.
3. To consider and vote upon amendments to the Restated Certificate of
Incorporation of the Corporation to increase the number of authorized shares of
Common Stock and Nonvoting Common Stock, amend the conversion terms of the
Nonvoting Common Stock and reduce the number of authorized shares of 14.25%
Junior Cumulative Preferred Stock.
The stock transfer books of the Corporation will not be closed. The Board
of Directors of the Corporation has fixed the close of business on September 15,
1997, as the record date for determining the stockholders of the Corporation
entitled to notice of and to vote at the meeting.
Dated ___________, 1997 BY ORDER OF THE BOARD OF
DIRECTORS,
FRANK A. WASHBURN, Secretary
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PLEASE MARK, SIGN AND DATE THE ACCOMPANYING PROXY AND RETURN IT PROMPTLY IN
THE ENVELOPE ENCLOSED FOR YOUR USE. THE PROXY WILL NOT BE USED IF YOU ATTEND
THE MEETING IN PERSON AND SO REQUEST.
- -------------------------------------------------------------------------------
PAMIDA HOLDINGS CORPORATION
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
October 28, 1997
This Proxy Statement is furnished in connection with the solicitation by
the Board of Directors (the "Board of Directors") of Pamida Holdings Corporation
(the "Corporation") of proxies from holders of the Corporation's $.01 par value
Common Stock ("Common Stock") for use at the special meeting of stockholders of
the Corporation to be held on October 28, 1997, at 8:30 a.m. at the office of
the Corporation, 8800 "F" Street, Omaha, Nebraska, and at any adjournments
thereof (the "Special Meeting"), for the purposes set forth below and in the
accompanying Notice of Special Meeting of Stockholders. Stockholders of record
at the close of business on September 15, 1997 will be entitled to vote at the
Special Meeting.
The mailing address of the principal executive offices of the Corporation
is 8800 "F" Street, Omaha, Nebraska 68127. This Proxy Statement and the
accompanying form of Proxy are first being sent to the holders of Common Stock
on or about ___________, 1997.
PURPOSES OF THE MEETING
The Special Meeting will be held for the following purposes:
1. To approve the Note Amendment Agreement No. 3 (the "Note Amendment
Agreement") between the Corporation and 399 Venture Partners, Inc. ("399 Venture
Partners"), a wholly owned subsidiary of Citicorp, and the transactions
contemplated thereby, including the issuance of shares of Common Stock ("Common
Stock") and Nonvoting Common Stock ("Nonvoting Common Stock") of the Corporation
in payment of the outstanding 13.5% Senior Promissory Notes, 14% Subordinated
Promissory Notes and 14.25% Junior Subordinated Promissory Notes of the
Corporation (collectively, the "Notes") at the rate of one share for each $9.00
of outstanding principal of and accrued interest on such Notes and the issuance
of shares of Common Stock upon the subsequent conversion of shares of Nonvoting
Common Stock into shares of Common Stock at the rate of one-to-one (the "Note
Payment Proposal"). Assuming the Note Payment Proposal is approved by the
stockholders and the transactions contemplated thereby become effective on
November 2, 1997, approximately 631,654 shares of Common Stock and approximately
3,030,990 shares of Nonvoting Common Stock would be issued in full payment of
the Notes, and 3,030,990 shares of Common Stock would be issued upon the
subsequent conversion of such shares of Nonvoting Common Stock into shares of
Common Stock. The exact number of shares of Common Stock and Nonvoting Common
Stock to be issued in connection with the Note Payment Proposal will depend upon
the actual effective date of the Note Payment Proposal. See "Proposal 1 -
Approval of the Note Payment Proposal" and "Certain Effects of the Note Payment
Proposal and Reclassification Proposal" below.
2. To consider and vote upon an amendment to the Restated Certificate of
Incorporation of the Corporation, as amended (the "Restated Certificate") to
change and reclassify all of the outstanding shares of 16.25% Senior Cumulative
Preferred Stock, par value $1.00 per share (the "Senior Preferred"), and 14.25%
Junior Cumulative Preferred Stock, par value $1.00 per share (the "Junior
Preferred"), of the Corporation into shares of Common Stock at the rate of one
share of Common Stock for each $9.00 of liquidation value and accrued dividends
(the "Reclassification Proposal"). Assuming the Reclassification Proposal is
approved by the stockholders and effected on November 2, 1997, approximately
327,204 shares of Common Stock would be issued upon the change and
reclassification of the Preferred Stock into Common Stock. The exact number of
shares of Common Stock to be issued in connection with the Reclassification
Proposal will depend upon the actual effective date of the Reclassification
Proposal. See "Proposal 2 Approval of the Reclassification Proposal" and
"Certain Effects of the Note Payment Proposal and Reclassification Proposal "
below.
3. To consider and vote upon amendments to the Restated Certificate to
increase the number of authorized shares of Common Stock and Nonvoting Common
Stock, amend the conversion terms of the Nonvoting Common Stock and reduce the
number of authorized shares of Junior Preferred (the "Charter Amendment
Proposal"). See "Proposal 3 - Approval of Charter Amendments" below.
THE BOARD OF DIRECTORS, BY UNANIMOUS VOTE OF ALL OF ITS MEMBERS, EXCEPT M.
SALEEM MUQADDAM WHO ABSTAINED BECAUSE OF HIS ASSOCIATION WITH 399 VENTURE
PARTNERS, HAS RECOMMENDED THAT THE STOCKHOLDERS OF THE CORPORATION VOTE FOR ALL
OF THE FOREGOING PROPOSALS.
THE FAILURE OF THE CORPORATION'S STOCKHOLDERS TO APPROVE ALL OF THE
FOREGOING PROPOSALS WILL PRECLUDE IMPLEMENTATION OF ANY OF THE PROPOSALS AND THE
TRANSACTIONS CONTEMPLATED THEREBY, EXCEPT THAT THE NOTE PAYMENT PROPOSAL AND THE
CHARTER AMENDMENT PROPOSAL MAY BE EFFECTED EVEN IF THE RECLASSIFICATION PROPOSAL
IS NOT APPROVED BY THE STOCKHOLDERS OF THE CORPORATION IF THE CORPORATION AND
399 VENTURE PARTNERS WAIVE THE CHANGE AND RECLASSIFICATION OF THE SENIOR
PREFERRED AND JUNIOR PREFERRED AS A CONDITION TO THE EFFECTIVENESS OF THE NOTE
PAYMENT PROPOSAL. THE SENIOR PREFERRED AND JUNIOR PREFERRED ARE REFERRED TO
COLLECTIVELY IN THIS PROXY STATEMENT AS THE "PREFERRED STOCK".
OUTSTANDING SECURITIES AND VOTING RIGHTS
The Board of Directors of the Corporation has fixed the close of business
on September 15, 1997, as the record date for determining the stockholders of
the Corporation entitled to notice of and to vote at the Special Meeting. At the
close of business on that date, the Corporation had outstanding 5,004,942 shares
of Common Stock, each such share entitling the holder thereof to one vote upon
each matter to be voted upon at the Special Meeting.
The accompanying Proxy may be revoked by the person giving it at any time
prior to its being voted; such revocation may be accomplished by a letter, or by
a duly executed Proxy bearing a later date, filed with the Secretary of the
Corporation prior to the Special Meeting. If a stockholder who has given a Proxy
is present at the Special Meeting and wishes to vote in person, such stockholder
may withdraw the Proxy at that time. The mere presence at the Special Meeting of
the stockholder appointing the proxy will not revoke the appointment.
If not revoked, a properly executed and returned Proxy will be voted at
the Special Meeting in accordance with the instructions indicated on the Proxy
by the stockholder or, if no instructions are indicated, will be voted FOR the
Note Payment Proposal, FOR the Reclassification Proposal and FOR the Charter
Amendment Proposal.
The cost of soliciting proxies in the accompanying form will be borne by
the Corporation. Officers and directors of the Corporation, without compensation
other than their regular compensation, also may solicit proxies either by mail,
personal conversation, telephone or other means of communication. Upon request,
the Corporation will reimburse brokerage firms, nominees and others for their
reasonable expenses of forwarding solicitation material to the beneficial owners
of Common Stock. The Corporation has engaged D.F. King & Co., Inc. to solicit
proxies on behalf of the Corporation for a fee of approximately $4,000 to $6,000
plus reasonable out-of-pocket expenses.
The presence in person or by proxy at the Special Meeting of the holders
of a majority of the issued and outstanding shares of Common Stock shall
constitute a quorum. Assuming that a quorum is present at the Special Meeting,
under Delaware law the affirmative vote of a majority of the shares of Common
Stock represented at the Special Meeting and entitled to vote on the matter is
required for approval of the Note Payment Proposal, and the affirmative vote of
a majority of the issued and outstanding shares of Common Stock is required for
approval of the Reclassification Proposal and the Charter Amendment Proposal.
Under the Restated Certificate, with certain exceptions, the Corporation cannot
issue any Common Stock to any person who would be, after giving effect to such
issuance, the beneficial owner of more than 5% of the Common Stock without the
affirmative vote of the holders of Common Stock which represents at least a
majority of the aggregate voting power of all outstanding shares of Common
Stock, excluding the shares of Common Stock owned by such person, voting
together as a single class. Accordingly, based on the current beneficial
ownership of Common Stock, Notes and Preferred Stock derived from statements
filed under Section 13(d) or 13(g) of the Securities and Exchange Act of 1934
(the "Exchange Act") and the Corporation's stock and note records, approval of
the Note Payment Proposal also requires the affirmative vote of the holders of
Common Stock which represents at least a majority of the outstanding shares of
Common Stock, excluding shares of Common Stock beneficially owned by 399 Venture
Partners (which, based on a Schedule 13G filed by Citicorp as of December 31,
1996, and additional information obtained by the Corporation, is 907,387
shares), voting together as a single class. William T. Comfort, a holder of
Junior Preferred, may be deemed to be the beneficial owner of 574,000 shares of
Common Stock of which his wife is the beneficial owner (see Natasha Partnership
in the first table below). Therefore, so as to assure compliance with the voting
requirements of the Restated Certificate described above, the Corporation will
deem the Reclassification Proposal to be approved only if such proposal also
receives the affirmative vote of the holders of Common Stock which represents at
least a majority of the outstanding shares of Common Stock, excluding shares of
Common Stock beneficially owned by Natasha Partnership, voting together as a
single class.
The Reclassification Proposal also requires for its approval the
affirmative vote or written consent of the holders of a majority of the issued
and outstanding shares of Preferred Stock; and holders of Preferred Stock,
voting as a single class, have the right to vote on the Reclassification
Proposal. There is an aggregate of 2,140.81955 shares of Preferred Stock
outstanding, and each share is entitled to one vote on the Reclassification
Proposal. However, holders of a majority of the outstanding shares of Preferred
Stock have given their written consent to the Reclassification Proposal.
Accordingly, assuming that such written consents are not withdrawn or revoked
prior to the Special Meeting, such requirement for Preferred Stock approval
already has been satisfied, and the Corporation therefore does not intend to
submit the Reclassification Proposal to the holders of Preferred Stock for a
vote at the Special Meeting.
Abstentions and broker "non-votes" are not deemed to be "votes cast" for
any purpose but will be included for purposes of determining whether a quorum is
present at the Special Meeting. A broker "non-vote" occurs when a nominee
holding shares for a beneficial owner does not vote on a particular matter
because the nominee does not have discretionary authority to vote on such matter
and has not received voting instructions from the beneficial owner of the shares
involved.
No dissenters' or appraisal rights are available to holders of Notes,
Preferred Stock or Common Stock in connection with any of the proposals set
forth in this Proxy Statement.
The Corporation expects that a representative of Deloitte & Touche LLP,
the Corporation's principal accountants for the current fiscal year and the most
recently completed fiscal year, will be present at the Special Meeting, with the
opportunity to make a statement if he or she desires to do so, and that such
representative will be available to respond to appropriate questions.
The Restated Certificate provides that all proxies, ballots, votes and
tabulations that identify the particular vote of holders of Common Stock shall
be confidential and shall not be disclosed except (i) to independent election
inspectors appointed by the Corporation who shall not be directors, officers or
employees of the Corporation, (ii) as required by law or (iii) when expressly
requested by the voting stockholder.
The following table sets forth information as to (i) the beneficial
ownership of Common Stock of each person or group who, as of August 31, 1997, to
the knowledge of the Corporation, beneficially owned more than 5% of the Common
Stock and (ii) the beneficial ownership of Common Stock and Nonvoting Common
Stock that such persons will have if the Note Payment Proposal and the
Reclassification Proposal are approved and become effective on November 2, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Number of
Shares of Number of Shares Number of Shares of
Name and Common Stock Percent of Common Stock Nonvoting Common
Address of Beneficially of Class Beneficially Owned Percent Stock Beneficially Percent
Beneficial Owned as of as of if Proposals Become of Owned if Proposals of
Owner August 31,1997 August 31, 1997 Effective (3) Class (3) Become Effective (3) Class (3)
- ------------------------------------------------------------------------------------------------------------------------------------
399 Venture Partners, Inc. (1) 907,387 18.13% 907,387 15.21% 3,030,990 100%
399 Park Avenue
New York, NY 10043
Natasha Partnership (2) 574,000 11.47% 574,000 (4) 9.62% -- --
Nathalie P. Comfort
63 South Beach Road
Hobe Sound, FL 33475
</TABLE>
(1) 399 Venture Partners, Inc. is a wholly owned subsidiary of Citicorp.
Information relating to the stockholdings of 399 Venture Partners, Inc. is
based upon a Schedule 13G filed by Citicorp as of December 31, 1996. M.
Saleem Muqaddam, a director of the Corporation, is a Vice President of 399
Venture Partners, Inc. Citibank, N.A., an affiliate of 399 Venture
Partners, as a fiduciary, beneficially owns an additional 6,300 shares of
Common Stock.
(2) According to a Schedule 13D, amended through January 21, 1994, filed on
behalf of Natasha Partnership ("Natasha"), Nathalie P. Comfort is the sole
general partner of Natasha with sole voting and sole dispositive power
over the shares of Common Stock owned by Natasha and therefore also may be
deemed to be the beneficial owner of such shares. William T. Comfort, the
husband of Nathalie P. Comfort, owns 175.26266 shares of Junior Preferred
and is a limited partner in Natasha. William T. Comfort is Chairman of 399
Venture Partners. The Company has no knowledge as to whether William T.
Comfort has disclaimed beneficial ownership of the shares of Common Stock
owned by Natasha. However, based solely upon William T. Comfort's status
as a limited partner in Natasha and the information contained in such
Schedule 13D with respect to the sole voting power and sole dispositive
power of Nathalie P. Comfort as the sole general partner of Natasha, the
Corporation has no reason to believe that William T. Comfort also is the
beneficial owner of the shares of Common Stock owned by Natasha.
Stuyvesant P. Comfort, a director of the Corporation, is the son of
William T. Comfort and Nathalie P. Comfort.
(3) Assumes an effective date of November 2, 1997. The actual numbers of
shares and percentages will be different if the effective date is other
than November 2, 1997.
(4) Does not include 26,547 shares of Common Stock to be issued to William T.
Comfort upon the change and reclassification of his shares of Junior
Preferred. See Note (2) above.
The following table sets forth information as to each class of equity
securities of the Corporation beneficially owned as of August 31, 1997, by each
director of the Corporation, by the executive officers of the Corporation and by
all directors and executive officers of the Corporation as a group and the
changes in the respective ownership percentages that will occur if the Note
Payment Proposal and the Reclassification Proposal are approved and become
effective on November 2, 1997:
Number of
Shares of Percent of
Common Stock Percent Class if
Beneficially of Proposal
Beneficial Owned as of Class as of Becomes
OWNER AUGUST 31, 1997 (1) AUGUST 31, 1997 EFFECTIVE (2)
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L. David Callaway, III 16,500(3) 0.33% 0.28%
Stuyvesant P. Comfort 204,067 4.08% 3.42%
Steven S. Fishman 142,122(4) 2.79% 2.35%
George R. Mihalko 12,775(5) 0.26% 0.21%
M. Saleem Muqaddam 20,000 0.40% 0.34%
Peter J. Sodini 1,000 0.02% 0.02%
Frank A. Washburn 22,233(6) 0.44% 0.37%
All directors and 418,697(3)(4)
executive officers as a (5)(6) 8.19% 6.87%
group (7 persons)
(1) Each person named in the table above has sole voting power and sole
investment power with respect to the shares set forth after his name,
except for the shares referred to in notes (3) and (4) as being owned or
held by the person's spouse.
(2) Assumes an effective date of November 2, 1997. The actual percentages will
be different if the effective date is other than November 2, 1997. None of
the persons named in this table will receive any shares of Common Stock or
Nonvoting Common Stock as a result of the Note Payment Proposal or the
Reclassification Proposal. The percentages shown in this column assume no
change in the number of shares beneficially owned by such persons when the
proposals become effective from those beneficially owned by such persons
on August 31, 1997.
(3) Mr. Callaway disclaims beneficial ownership of these shares, which are
owned by his wife.
(4) Mr. Fishman disclaims beneficial ownership of 40,000 of these shares,
which are held by him (15,500) or his wife (24,500) as custodian for his
children. Mr. Fishman has the right to acquire beneficial ownership of
92,122 of these shares pursuant to currently exercisable options.
(5) Mr. Mihalko has the right to acquire beneficial ownership of 4,600 of
these shares pursuant to currently exercisable options or options which
will become exercisable within 60 days from August 31, 1997.
(6) Mr. Washburn has the right to acquire beneficial ownership of 9,133 of
these shares pursuant to currently exercisable options.
Assuming all of the proposals set forth in this Proxy Statement are
approved by the stockholders of the Corporation and a November 2, 1997 effective
date for the Note Payment Proposal and Reclassification Proposal, a total of
approximately 3,989,848 shares of Common Stock and Nonvoting Common Stock would
be issued in payment of the Notes and in connection with the change and
reclassification of the Preferred Stock. See "Background - The Notes,"
"Background - The Preferred Stock" and "Certain Effects of the Note Payment
Proposal and Reclassification Proposal."
BACKGROUND
THE NOTES
At June 1, 1997, the Corporation had outstanding $5,315,118.09 principal
amount of 13.5% Senior Promissory Notes (the "Senior Notes"), $14,551,384.79
principal amount of 14% Subordinated Promissory Notes (the "Subordinated Notes")
and $10,974,758.55 principal amount of 14.25% Junior Subordinated Promissory
Notes (the "Junior Subordinated Notes"). The Senior Notes, Subordinated Notes
and Junior Subordinated Notes are collectively referred to herein as the
"Notes". At June 1, 1997, the aggregate principal amount of all of the Notes was
$30,841,261. The Senior Notes and Subordinated Notes originally were issued in
July 1986 in the aggregate principal amount of $3,500,000 and $8,000,000,
respectively. The Junior Subordinated Notes originally were issued in December
1990 in the aggregate principal amount of $5,359,180.45 in exchange for shares
of Junior Preferred. In December 1992 the Notes were amended to provide that
until the obligations of the Corporation and its wholly owned subsidiary,
Pamida, Inc. (the "Subsidiary"), under certain loan agreements have been paid in
full, the quarterly interest payments on the Notes will be paid in kind (rather
than in cash) by increasing the principal amount of each Note on the applicable
quarterly payment date by the amount of accrued interest then being paid in
kind. Such amendment of the Notes became necessary as a result of restrictions
imposed by certain of the Subsidiary's lenders upon cash payments by the
Subsidiary to the Corporation; such cash payments were the Corporation's only
source of funds to pay interest in cash on the Notes, and the Corporation did
not want to cause a default under the Notes as a result of its nonpayment of the
required quarterly interest payments. Interest on the Notes paid in kind accrues
at a rate which, in each case, is two percentage points higher than the
applicable cash interest rate. Accordingly, the Notes currently bear interest at
rates ranging from 15.5% to 16.25% per annum payable quarterly by increasing the
principal amount of each Note. The Notes originally would have matured in 2001
but were further amended in March 1993 to change the maturity dates to August
31, 2003 for the Senior Notes, September 30, 2003 for the Junior Notes and
December 31, 2003 for the Junior Subordinated Notes and to subordinate the Notes
to the Corporation's guaranty of the Subsidiary's 11 3/4% Senior Subordinated
Notes due March 15, 2003; such amendments were required as a condition of the
Subsidiary's issuance and sale of such Senior Subordinated Notes. If the Notes
remain outstanding and interest is paid in kind through the respective maturity
dates in 2003, then the aggregate outstanding principal amount of the Notes at
maturity will be $84,386,629. Upon maturity, the Notes are payable in cash.
The Senior Notes, Subordinated Notes and Junior Subordinated Notes,
respectively, may be amended with the written consent of the holder or holders
of the particular series of such notes with an aggregate principal balance equal
to over 50% of the aggregate principal balance of all the notes of such series
then outstanding. 399 Venture Partners is the owner of $3,915,677.52 of the
aggregate outstanding principal amount of the Senior Notes, $10,629,263.60 of
the aggregate outstanding principal amount of the Subordinated Notes and
$10,974,758.55 of the aggregate outstanding principal amount of the Junior
Subordinated Notes as of June 1, 1997. Accordingly, 399 Venture Partners holds
more than 50% of the aggregate outstanding principal amount of each series of
the Notes; and, under the terms of the Notes, the Corporation with the consent
of 399 Venture Partners has the power to amend the Notes.
THE PREFERRED STOCK
The Corporation has outstanding 513.95939 shares of Senior Preferred and
1,626.86016 shares of Junior Preferred. The Preferred Stock was issued on July
29, 1986 in connection with the Corporation's acquisition of the Subsidiary.
The Corporation is obligated to redeem all outstanding shares of Preferred
Stock on December 31, 2001 at a price per share equal to 25% of the book value
of the Corporation's Preferred Stock and Common Stock immediately before the
redemption divided by the number of shares of Preferred Stock then outstanding;
provided, that the redemption price may not exceed the liquidation value of the
Preferred Stock (the "Liquidation Value") which is $1,000 per share plus (i) any
unpaid dividends added to such liquidation value as of a quarterly dividend
payment date and not thereafter paid and (ii) any accrued dividends not
previously added to such liquidation value. Subject to certain loan
restrictions, the Corporation may, at any time, redeem all or any portion of the
Preferred Stock outstanding at a price equal to the Liquidation Value; however,
any optional redemption of fewer than all shares of Preferred Stock must be made
pro rata among all of the holders of Preferred Stock.
Each share of Senior Preferred and Junior Preferred entitles its holder to
receive a quarterly dividend of 16.25% and 14.25% per annum, respectively, of
the Liquidation Value from the date of issuance until redeemed. Any unpaid
dividends are added to and become part of the Liquidation Value until paid in
cash.
The General Corporation Law of the State of Delaware, under which the
Corporation is incorporated, generally allows a corporation to declare or pay a
dividend only from its surplus or from the current or prior year's earnings. Due
to an accumulated deficit, the Corporation has not declared or paid any cash
dividends on the Preferred Stock since the quarterly dividend payable on
November 30, 1995 and may pay cash dividends on the Preferred Stock in the
future only to the extent that the Corporation satisfies the applicable
statutory standards which include the Corporation's having a net worth equal to
at least the aggregate par value of the outstanding Preferred Stock. Pursuant to
the Restated Certificate, the dividend rate on the Preferred Stock increases
cumulatively by 0.5% per quarter (with a maximum cumulative increase of 5%) on
each quarterly dividend payment date on which the Preferred Stock dividends are
not paid currently on a cumulative basis. Accordingly, for the quarterly
dividend period ended August 31, 1997, dividends accrued on the Senior Preferred
at the rate of 19.75% per annum and on the Junior Preferred at the rate of
17.75% per annum. At August 31, 1997, the total Preferred Stock dividend
arrearage was $711,343, representing seven quarterly dividend payments at the
applicable dividend rates.
At August 31, 1997, the Liquidation Value (including accrued dividends) of
the Preferred Stock was $2,852,162. If none of the Preferred Stock is redeemed
and no dividends are paid on the Preferred Stock prior to the December 31, 2001
mandatory redemption date, the Liquidation Value of the Preferred Stock at such
date including accrued dividends will be $6,559,873.
REASONS FOR NOTE PAYMENT PROPOSAL AND RECLASSIFICATION PROPOSAL
The outstanding Notes are part of a highly leveraged capital structure
which restricts the Corporation's access to equity and other financial markets.
The Corporation's highly leveraged capital structure also reduces the
Subsidiary's ability to obtain competitive interest rates and favorable lease
terms in real estate transactions which are critical to the financing and
leasing of the new store locations required to enable the Subsidiary to pursue
its store expansion program. Payment of the Notes in Common Stock and Nonvoting
Common Stock as contemplated by the Note Payment Proposal would significantly
improve the Corporation's capital structure. See "Unaudited Pro Forma
Consolidated Financial Data."
In addition, the payment of the outstanding Notes with shares of Common
Stock and Nonvoting Common Stock would relieve the Corporation of the obligation
to repay the Notes in 2003 as discussed above. See "Background - The Notes."
Similarly, the change and reclassification of the Preferred Stock into Common
Stock pursuant to the Reclassification Proposal would relieve the Corporation of
the obligation to redeem the Preferred Stock (including the payment of accrued
dividends) in December 2001.
The transactions would relieve the Corporation of substantial amounts of
compounding non-cash interest expense on the Notes and from earnings per share
dilution caused both by the Preferred Stock dividends and by discount
amortization on the Subordinated Notes and the Junior Subordinated Notes and on
the Junior Preferred. Assuming a November 2, 1997 effective date for the Note
Payment Proposal and the Reclassification Proposal, approximately $1,526,000 of
interest expense, Preferred Stock dividends and discount amortization would be
eliminated for the remainder of the current fiscal year. Scheduled interest and
discount amortization on the Notes is $5,981,000, $6,958,000 and $8,119,000 for
the fiscal years ending in 1999, 2000 and 2001, respectively. The scheduled
provision for dividends and discount amortization on the Preferred Stock is
$705,000, $845,000 and $1,016,000 for the fiscal years ending in 1999, 2000 and
2001, respectively. Based on the foregoing, the combined benefit of the Note and
Preferred Stock transactions on net income available to common stockholders,
assuming a continued effective tax rate of 38.29%, would be $4,462,000,
$5,207,000 and $6,097,000 for the fiscal years ending in 1999, 2000 and 2001,
respectively.
Finally, under the terms of the Note Proposal and Reclassification
Proposal, the Corporation would convert the Notes and Preferred Stock into
Common Stock and Nonvoting Common Stock at a rate which effectively ascribes a
value to the Common Stock and Nonvoting Common Stock above the market price of
the Common Stock at the time the Corporation and 399 Venture Partners entered
into the Note Amendment Agreement and prior to public announcement of the
proposals set forth in this Proxy Statement and above the currently negative
book value of the Common Stock. The closing price of the Common Stock on the
American Stock Exchange was $2.75 per share on July 21, 1997, the day before the
Corporation and 399 Venture Partners entered into the Note Amendment Agreement
and publicly announced the proposals set forth in this Proxy Statement. The
closing price of the Common Stock was $4.125 per share on July 22, 1997, the day
the Corporation and 399 Venture Partners entered into the Note Amendment
Agreement and publicly announced the proposals. At the end of the Corporation's
second fiscal quarter (August 3, 1997), the book value per share of the Common
Stock was a deficit of $18.48. Accordingly, if the proposals set forth in this
Proxy Statement are approved by the stockholders and effected, the Corporation
would convert the Notes and Preferred Stock at a rate which represents a premium
of $6.25 per share over the closing price of the Common Stock on the day before
the public announcement of the proposals and which is $27.48 per share over the
negative book value of the Common Stock on August 3, 1997.
APPOINTMENT OF SPECIAL COMMITTEE AND NEGOTIATIONS WITH
399 VENTURE PARTNERS
M. Saleem Muqaddam, a Vice President of 399 Venture Partners, has served
on the Board of Directors of the Corporation since May 1993, and 399 Venture
Partners and certain of its affiliates from time to time have been substantial
holders of Notes and various equity interests in the Corporation since 1986.
Management and the Board of Directors of the Corporation, including Mr.
Muqaddam, have been discussing for several years the need to address the highly
leveraged capital structure of the Corporation (see "Background - Reasons for
Note Payment Proposal and Reclassification Proposal" above), and the
Corporation's finance staff has analyzed possible alternative means for dealing
with the capital structure issue. Independent investment bankers with whom the
Corporation's finance staff has informally consulted over the last several
years, as well as financial analysts and stockholders of the Corporation,
similarly have encouraged the Corporation to seek a means by which the
Corporation's capital structure could be improved.
On January 5, 1996, upon the recommendation of management of the
Corporation, the Board of Directors, at a meeting attended by all of the then
directors of the corporation except Mr. Muqaddam (such other directors being L.
David Callaway, III, Stuyvesant P. Comfort, Steven S. Fishman (Chairman of the
Board and Chief Executive Officer of the Corporation), Robert D. Gordman, Peter
J. Sodini and Frank A. Washburn (Executive Vice President of the Corporation),
appointed a special committee of the Board of Directors (the "Special
Committee"), composed of L. David Callaway, III and Peter J. Sodini, to oversee
negotiations by management of the Corporation relating to an exchange of newly
issued shares of Common Stock for outstanding Notes and to recommend to the
Board of Directors the action to be taken by the Board of Directors with respect
to any such exchange that may be negotiated by management of the Corporation.
The Special Committee was authorized on behalf of the Corporation to engage an
independent financial advisor to provide such analysis of a proposed exchange as
the Special Committee may deem necessary or appropriate and, if requested by the
Special Committee, to provide an opinion as to the fairness of any such exchange
which may be negotiated by management of the Corporation. Mr. Callaway serves
part time as Chief Executive Officer of Express Messenger Service, Inc., a
company in which an affiliate of 399 Venture Partners is a substantial
stockholder.
However, at the end of fiscal 1996, the Subsidiary announced the closing
of 40 stores in unprofitable or highly competitive markets and proceeded to
implement such store closing program (including real estate dispositions) during
the first part of fiscal 1997. Because management's attention was devoted to
such store closing program and other extraordinary operational matters involving
the Subsidiary (primarily relating to difficulties in implementing a new
warehouse management software system and resulting problems in maintaining
proper store-level inventories in the Corporation's remaining 144 stores)
throughout much of fiscal 1997 and because management believed that the
Corporation's financial performance and stock price during the first two
quarters of fiscal 1997 were not conducive to the negotiation of a transaction
relating to the Notes that would be in the best interests of the Corporation and
the holders of its Common Stock, management of the Corporation did not actively
pursue such a transaction during such time frame although the concept was
periodically discussed by the Board of Directors on an informal basis.
The Corporation completed fiscal 1997 with an improved second-half
performance and negotiated an increase in the Subsidiary's operating line of
credit and an extension of the maturity date of such credit facility. After the
close of the fiscal year, at a meeting of the Board of Directors on March 6,
1997, Mr. Muqaddam indicated to the Board of Directors that, in light of
improved conditions in the retail industry generally as compared with the
preceding several years and the equity market's currently more favorable view of
retail stocks in general, it appeared appropriate for the Corporation to
actively pursue a plan for the elimination of the Notes and Preferred Stock as a
first step in the possible further recapitalization of the Corporation. Mr.
Muqaddam further indicated to the Board of Directors his expectation that 399
Venture Partners would be receptive to an appropriate proposal with respect to
its Notes, although no specific terms were discussed. The Board then instructed
management of the Corporation, in coordination with the Special Committee, to
investigate further the possible exchange of the Notes and Preferred Stock for
common equity in the Corporation.
After consultation with the members of the Special Committee, the
Corporation in April 1997 engaged Alex. Brown & Sons Incorporated ("Alex.
Brown") to render financial advisory services to the Corporation relating to the
possible restructuring of the Notes and Preferred Stock. Alex. Brown's services
were to include, among other things, as necessary, a review and analysis of the
Corporation's business, operations and financial projections, general capital
restructuring advice, assistance in determining an appropriate capital structure
for the Corporation, financial advice and advice as to the timing, nature and
terms of any new securities, other consideration or other inducements to be
offered in connection with the Note and Preferred Stock restructuring. In
addition, Alex. Brown also agreed, if requested by the Board of Directors or the
Special Committee, to render its opinion as to the fairness of the Note and
Preferred Stock restructuring, from a financial point of view, to the current
holders of Common Stock.
Alex. Brown submitted a report to the Special Committee in mid-May 1997,
and the report was made available to all of the members of the Board of
Directors. Such report included a valuation of the Corporation based on various
methodologies, a discussion and evaluation of various strategic alternatives
potentially available to the Corporation to assist it in achieving certain
business goals, a debt capacity analysis of the Corporation and a recommendation
that the Corporation pursue a de-leveraging of its capital structure. The Board
of Directors discussed all aspects of the report by a conference telephone call
with representatives of Alex. Brown at a meeting of the Board of Directors on
May 22, 1997. All of the then members of the Board of Directors except Mr.
Sodini (Messrs. Callaway, Comfort, Fishman, Muqaddam and Washburn) attended such
meeting. The Board of Directors then discussed the possible terms of a proposal
for the payment of the Notes with shares of newly issued Common Stock and by
consensus proposed to Mr. Muqaddam the payment terms which ultimately
constituted the Note Payment Proposal. Mr. Muqaddam advised the Board of
Directors that such proposal would require consideration by a committee that
oversees investments by 399 Venture Partners and a review of certain legal
matters by counsel for 399 Venture Partners.
Pending consideration by such investment committee, counsel for the
Corporation prepared drafts of a proposed Note Amendment Agreement No. 3 and
related documents which were submitted to the Board of Directors and counsel for
399 Venture Partners for review. On July 21, 1997, Mr. Muqaddam advised
management of the Corporation that 399 Venture Partners had obtained the
necessary approvals of the financial terms reflected in the Note Payment
Proposal but would require as a condition of the consummation of the transaction
the concurrent change and reclassification of the Corporation's Preferred Stock
as reflected in the Reclassification Proposal. Revised versions of the Note
Amendment Agreement No. 3 and the requisite amendments of the Restated
Certificate reflecting such additional condition then were prepared and
submitted to counsel for 399 Venture Partners and the Corporation's Board of
Directors (including the members of the Special Committee) for their review and
consideration.
DETERMINATIONS OF THE SPECIAL COMMITTEE AND BOARD OF DIRECTORS
At a meeting on July 22, 1997, the Special Committee by a unanimous vote
determined that the Note Payment Proposal, the Reclassification Proposal and the
Charter Amendment Proposal taken together would be in the best interests of the
Corporation and its stockholders and recommended that the Board of Directors
take such actions as may be necessary to authorize and consummate the
transactions contemplated by such proposals as soon as practicable. In reaching
its conclusions, the Special Committee considered, among other things, the
information, documents and matters referred to in (i) through (v) below. At a
meeting of the Board of Directors held on July 22, 1997, immediately following
such meeting of the Special Committee, the Board of Directors (with all members
being present and Mr. Muqaddam abstaining because of his affiliation with 399
Venture Partners) approved the Note Payment Proposal, the Reclassification
Proposal and the Charter Amendment Proposal and the transactions contemplated
thereunder and determined that such proposals, if consummated, would be in the
best interests of the Corporation and its stockholders and should be submitted
to the stockholders of the Corporation for approval. All of the members of the
Board of Directors other than Mr. Muqaddam (Messrs. Callaway, Comfort, Fishman,
Sodini and Washburn) voted in favor of the Note Payment Proposal, the
Reclassification Proposal and the Charter Amendment Proposal. In reaching such
determinations, the Board of Directors considered, among other things, the
following:
(i) The May 1997 report of Alex. Brown with respect to the valuation of
the Corporation and certain strategic alternatives potentially available to the
Corporation (as further described below) and the July 1997 supplement to such
report.
(ii) Non-public information provided by the Corporation's management and
the Corporation's financial, tax and legal advisors with respect to various
current and future financial implications for the Corporation of the Notes and
Preferred Stock if they remain outstanding, the anticipated accounting treatment
of the proposed transactions, the anticipated effects of the proposed
transactions on the Corporation's financial statements, the anticipated federal
income tax consequences of the proposed transactions and various corporate,
procedural and legal aspects of the proposed transactions.
(iii) The reasons for the proposals described above. See
"Background - Reasons for Note Payment Proposal and Reclassification Proposal."
(iv) The oral opinion of Alex. Brown (subsequently confirmed in writing)
given on or about July 17, 1997, that the transactions contemplated by the Note
Payment Proposal and Reclassification Proposal are fair, from a financial point
of view, to the holders of the presently outstanding Common Stock of the
Corporation, together with a report to the Board of Directors as of July 17,
1997, in which Alex. Brown summarized certain pertinent information (described
below in "Fairness Opinion") prepared by Alex. Brown in reaching its
conclusions.
(v) Draft copies of the various transaction documents (consisting of the
Note Amendment Agreement and a Certificate of Amendment of the Restated
Certificate containing the Reclassification Proposal and the Charter Amendment
Proposal).
(vi) The recommendation of the Special Committee.
In reaching such decisions, the Board of Directors considered all of the
foregoing factors together and did not place greater relative weight on any one
or more particular factors.
Prior to its approval of the Note Payment Proposal and Reclassification
Proposal, the Board of Directors also informally considered and rejected the
following other strategic alternatives identified by Alex. Brown in its May 1997
report: (1) obtain new equity capital for the Corporation through the sale of
newly issued Common Stock, (2) obtain new equity capital for the Corporation
through the sale of a new issue of convertible preferred stock, (3) obtain new
capital for the Corporation in the form of privately placed or publicly offered
debt securities, (4) sell the Corporation to an independent purchaser, (5)
effect a buy-out of the Corporation's stockholders through an alliance with a
financial partner, and (6) take no action with respect to the Notes and
Preferred Stock. Alex. Brown indicated in its report that, if market conditions
were appropriate and the Corporation were able to de-leverage its balance sheet
without significant dilution, the optimal alternative would be the sale of newly
issued Common Stock of the Corporation as a means of raising new equity capital
to allow the Subsidiary to pursue a growth strategy and potentially to also
reduce its debt. However, this alternative did not currently appear viable
either to Alex. Brown or the Board of Directors because of the dilutive effect a
stock sale would have at the then current price of the Corporation's Common
Stock and because of the Corporation's present capital structure and recent
financial performance. Alex. Brown therefore recommended that the Corporation's
initial action with respect to a capital restructuring be a de-leveraging of the
Corporation through a transaction of the type contemplated by the Note Payment
Proposal and the Reclassification Proposal.
FAIRNESS OPINION
Alex. Brown has delivered to the Board of Directors of the Corporation a
written opinion (the "Fairness Opinion") as to the fairness to the present
holders of Common Stock of the Corporation from a financial point of view of the
Note Payment Proposal and Reclassification Proposal. The full text of the
Fairness Opinion is attached hereto as Exhibit A. Stockholders are urged to read
the Fairness Opinion in its entirety. The summary of the Fairness Opinion set
forth in this Proxy Statement is qualified in its entirety by reference to the
full text of the opinion attached hereto. Alex. Brown's opinion was prepared for
the use of the Board of Directors and does not constitute a recommendation to
any stockholders as to how such stockholder should vote.
In connection with its opinion, Alex. Brown, among other things, reviewed
(i) the Note Amendment Agreement, (ii) the proposed amendment to the
Corporation's Restated Certificate that would effect the change and
reclassification of the outstanding Preferred Stock into Common Stock, (iii)
certain publicly available financial information concerning the Corporation,
(iv) certain non-public information, including financial forecasts, concerning
the Corporation, (v) the reported price and trading activity for the Common
Stock and (vi) certain financial and stock market information for the
Corporation and similar information for certain other public companies. In
addition, Alex. Brown held discussions with members of the senior management of
the Corporation regarding its business and prospects and performed such other
studies and analyses and considered such other factors as Alex. Brown deemed
appropriate.
The following is a summary of the analyses performed and factors
considered by Alex. Brown in connection with the rendering of the Fairness
Opinion:
FINANCIAL POSITION. In rendering its opinion, Alex. Brown reviewed and
analyzed the historical and current financial condition of the Corporation which
included (i) an assessment of the Corporation's financial statements for its
fiscal years ended on or about January 31, 1992-1997, (ii) an analysis of the
Corporation's revenue, growth and operating performance trends, (iii) an
assessment of the Corporation's leverage and preferred stock dividend
obligations and related discount amortization, (iv) the Corporation's projected
consolidated income statement for its fiscal year ending February 1, 1998, as
adjusted to reflect the Note Payment Proposal and the Reclassification Proposal
and (v) the Corporation's capitalization as of a recent date, as adjusted to
give effect to the Note Payment Proposal and the Reclassification Proposal.
Alex. Brown also reviewed financial forecasts provided by management of the
Corporation indicating, among other things, the potential effects of the Note
Payment Proposal and the Reclassification Proposal on the Corporation's income
statements and balance sheets for future periods.
HISTORICAL STOCK PRICE PERFORMANCE. Alex. Brown reviewed and analyzed the
daily closing per share market prices and trading volume for the Common Stock,
from September 18, 1990, the effective date of the Company's initial public
offering, to July 17, 1997. In addition, for such period, Alex. Brown (i)
reviewed the trading volume of the Common Stock at various prices, (ii) compared
the closing per share market price of the Common Stock to the movement of prices
of the Dow Jones Industrial Average, the S&P 500 and the Nasdaq composite
average, and (iii) compared the per share market price of the Common Stock to
the proposed price per share for purposes of the Note Payment Proposal and the
Reclassification Proposal. Alex. Brown noted that the Corporation generally
underperformed the indices to which it was compared and that the Common Stock
generally traded well below such proposed price per share. This information was
presented to give the Board of Directors background information that is relevant
to the Note Repayment Proposal and the Reclassification Proposal.
ANALYSIS OF CERTAIN OTHER PUBLICLY TRADED COMPANIES. Alex. Brown's
analysis included an examination of the Corporation's valuation in the public
market as compared to the valuation in the public market of other selected
publicly traded companies. Alex. Brown compared certain financial information
(based on the commonly used valuation measurements described below) relating to
the Corporation to certain corresponding information from a group of 13 publicly
traded discount retailers (consisting of Ames Department Stores, Dayton Hudson,
Dollar General, Dollar Tree Stores, Duckwall-ALCO Stores, Family Dollar Stores,
Fred's, Kmart Corporation, ShopKo Stores, Stage Stores, Venture Stores and
Wal-Mart Stores (collectively, the "Selected Companies")). Such financial
information included, among other things, (i) common equity market valuation,
(ii) capitalization ratios, (iii) operating performance, (iv) ratios of common
equity market value as adjusted for debt and cash to revenues, earnings before
interest expense and income taxes ("EBIT") and earnings before interest expense,
income taxes, depreciation and amortization ("EBITDA"), each for the latest
reported twelve-month period as derived from publicly available information and
(v) ratios of common equity market prices per share to earnings per share
("EPS"). Alex. Brown noted that the total enterprise value (market
capitalization for common equity plus debt and preferred stock less cash) to
trailing twelve months revenues for the Selected Companies was a range of .10x
to 2.51x, with a median of .58x, as compared to .43x for the Corporation, the
multiple of total enterprise value to trailing twelve months EBIT for the
Selected Companies was a range of 4.84x to 21.07x, with a median of 12.28x, as
compared to 9.67x for the Corporation, the multiple of total enterprise value to
trailing twelve months EBITDA for the Selected Companies was a range of 4.24x to
18.09x, with a median of 7.98x, as compared to 6.71x for the Corporation, and
the per share market price as a multiple of trailing twelve months EPS, which
was not meaningful for the Corporation, was a range of 10.01x to 36.18x, with a
median of 21.96x, for the Selected Companies. The financial information used in
connection with the analysis was based on the latest reported twelve-month
period as derived from publicly available information and on estimated EPS for
such period. In choosing the Selected Companies, Alex. Brown looked for four key
elements: broadline retailing of many different products, large-size store
format, discount or value price-point retailing and a small market focus. The
Selected Companies in all cases satisfied a majority of the criteria. As a
result of the foregoing procedures, Alex. Brown noted that the multiples for the
Corporation were generally lower than the range of the multiples for the
Selected Companies. In arriving at an implied value for the Common Stock, Alex.
Brown valued the Corporation between the lower quartile and the median of the
Selected Companies because of the Corporation's lower profitability margin and
lower revenue growth as compared to the Selected Companies.
ANALYSIS OF SELECTED MERGERS AND ACQUISITIONS. Alex. Brown reviewed the
financial terms, to the extent publicly available, of 11 completed mergers and
acquisitions since November 1993 in the retail area (the "Selected
Transactions"). Alex. Brown calculated various financial multiples based on
certain publicly available information for each of the Selected Transactions and
applied them to the Corporation to arrive at an implied range of values for the
Common Stock. Alex. Brown noted that the multiple of adjusted purchase price
(value of consideration paid for common equity adjusted for debt, preferred
stock and cash) to trailing twelve months revenues for the acquired company was
a range of .22x to .78x, with a median of .49x, for the Selected Transactions,
the multiple of adjusted purchase price to trailing twelve months EBIT for the
acquired company was a range of 6.02x to 17.04x, with a median of 11.43x, for
the Selected Transactions, and the multiple of adjusted purchase price to
trailing twelve months EBITDA for the acquired company was a range of 4.02x to
21.98x, with a median of 9.53x, for the Selected Transactions. Alex. Brown
further noted that the multiple of aggregate purchase price to trailing twelve
months net income for the acquired company was a range of 6.41x to 19.97x, with
a median of 16.58x, for the Selected Transactions. All multiples for the
Selected Transactions were based on public information available at the time of
announcement of such transactions, without taking into account differing market
and other conditions during the period in which the Selected Transactions
occurred. In arriving at an implied value for the Common Stock, Alex. Brown
valued the Corporation between the lower quartile and the median of the
companies acquired in the Selected Transactions because of the Corporation's
lower profitability margin and lower revenue growth as compared to the Selected
Companies. The Selected Transactions involved the acquisitions of Eckerd Corp.
by J.C. Penney Co., Thrifty Payless Holdings by Rite Aid Corp., Big B by Revco
D.S., Inc., Kash N' Karry Food Stores, Inc. by Food Lion, Inc., Fay's Inc. by
J.C. Penney Co., Strawbridge & Clothier by May Department Stores, Broadway
Stores by Federated Department Stores, R.H. Macy & Co. by Federated Department
Stores, Hess Department Stores by Bon-Ton and Hook-SuperRx by Revco D.S., Inc.
and the merger of Price Club and Costco Warehouse Co.
DISCOUNTED CASH FLOW ANALYSIS. Alex. Brown performed a discounted cash
flow analysis for the Corporation. The discounted cash flow approach values
businesses based on the current value of the future cash flow that the business
will generate. To establish a current value under this approach, future cash
flow must be estimated and an appropriate discount rate determined. Alex. Brown
used estimates of projected financial performance for the Corporation for the
fiscal years 1998 through 2002, prepared by management of the Corporation. Alex.
Brown aggregated the present value of the cash flows through 2002 with the
present value of a range of terminal values. Alex. Brown discounted these cash
flows at discount rates ranging from 16% to 20%. The terminal value was computed
based upon projected EBITDA in fiscal year 2002 and a range of terminal
multiples of 6.37x and 7.05x. Alex. Brown arrived at such discount rates based
on its judgment of the weighted average cost of capital of publicly traded
companies in the discount retail industry and arrived at such terminal values
based on its review of the trading characteristics of the common stock of the
Selected Companies. This analysis as applied to the current capital structure of
the Corporation indicated a range of values of $6.76 to $11.15 per share.
RELEVANT MARKET AND ECONOMIC FACTORS. In rendering its opinion, Alex.
Brown considered, among other factors, the condition of the U.S. stock markets,
particularly in the discount store sector, and the current level of economic
activity. Alex. Brown also considered the Corporation's liquidity, its
stockholder base and recent transactions involving the conversion of securities.
No company used in the analysis of the other publicly traded companies is
identical to the Corporation. Accordingly, such analyses must take into account
differences in the financial and operating characteristics of the Selected
Companies and the Corporation and other factors that would affect the public
trading value of the Selected Companies.
While the foregoing summary describes certain of the analyses and factors
that Alex. Brown deemed material in its presentation to the Board of Directors,
it is not a comprehensive description of all analyses and factors considered by
Alex. Brown. The preparation of a fairness opinion is a complex process
involving various determinations as to the most appropriate and relevant methods
of financial analysis and the application of these methods to the particular
circumstances; and, therefore, the analytical process underlying such an opinion
is not readily susceptible to summary description. Alex. Brown believes that its
analyses must be considered as a whole and that selecting portions of its
analyses and of the factors considered by it, without considering all analyses
and factors, would create an incomplete view of the evaluation process
underlying the Fairness Opinion. In performing its analyses, Alex. Brown
considered general economic, market and financial conditions and other matters,
many of which are beyond the control of the Corporation. The analyses performed
by Alex. Brown are not necessarily indicative of actual values or future
results, which may be significantly more or less favorable than those suggested
by such analyses. Accordingly, such analyses and estimates are inherently
subject to substantial uncertainty. Additionally, analyses relating to the value
of a business do not purport to be appraisals or to reflect the prices at which
the business actually may be sold. Furthermore, Alex. Brown expressed no opinion
as to the prices at which shares of the Common Stock may trade at any future
time.
Alex. Brown did not independently verify any of the foregoing information
and assumed the accuracy, completeness and fair presentation of such
information. With respect to financial forecasts and other information relating
to the prospects of the Corporation, Alex. Brown assumed that such forecasts and
other information were reasonably prepared and reflect the best currently
available estimates and good faith judgments of the management of the
Corporation as to the likely future financial performance of the Corporation. In
addition, Alex. Brown did not conduct a physical inspection of the properties or
facilities or make an independent evaluation or appraisal of the assets of the
Corporation, nor was it furnished with any such evaluation or appraisal.
Further, Alex. Brown's opinion was based on financial, economic, monetary,
market and other conditions as of the date of the Fairness Opinion.
Alex. Brown did not express any opinion as to the price at which the
Corporation's Common Stock would trade subsequent to the effectiveness of the
Note Payment Proposal and Reclassification Proposal. Alex. Brown made no
independent investigation of any legal matters affecting the Corporation and
assumed the correctness of all legal advice given to the Corporation and the
Board of Directors.
Management of the Corporation, after consultation with the Special
Committee, selected Alex. Brown to act as its financial advisor in connection
with transactions of the type contemplated by the Note Payment Proposal and
Reclassification Proposal and to render the Fairness Opinion on the basis of
Alex. Brown's expertise in such matters and its familiarity with the industry
and business of the Corporation. The Corporation agreed to pay Alex. Brown a fee
of $100,000 for rendering such financial advisory services and an additional fee
of $150,000 for rendering the Fairness Opinion. The Corporation also agreed to
reimburse Alex. Brown for its reasonable out-of-pocket expenses in connection
with its services to the Corporation. The Corporation has agreed to indemnify
Alex. Brown and its directors, officers, agents, employees and controlling
persons against any losses, claims, damages, liabilities or expenses relating to
Alex. Brown's engagement to render financial advisory services to the
Corporation; provided, that the Corporation will not be liable for losses,
claims, damages, liabilities or expenses that a court of competent jurisdiction
shall have found in a final judgment to have arisen primarily from the
negligence, willful or reckless misconduct or bad faith of the person seeking
indemnification.
In connection with Alex. Brown's engagement by the Corporation and the
preparation of the Fairness Opinion, representatives of Alex. Brown met (i) with
Frank A. Washburn, Executive Vice President and Chief Operating Officer of the
Corporation, George R. Mihalko, Senior Vice President and Chief Financial
Officer of the Corporation, Todd D. Weyhrich, Principal Accounting Officer of
the Corporation, and David Nilsson, Manager of Treasury and Investor Relations
of the Corporation, at the Corporation's office in Omaha on March 25, 1997, (ii)
with Steven S. Fishman, Chairman of the Board and Chief Executive Officer of the
Corporation, and Mr. Mihalko in New York on April 14, 1997, and (iii) with
Messrs. Fishman, Mihalko and Nilsson at the Corporation's office in Omaha on May
8, 1997. In addition, representatives of Alex. Brown conferred by telephone with
various members of the Corporation's management on numerous occasions from late
March through mid-August of 1997.
PROPOSAL 1
APPROVAL OF THE NOTE PAYMENT PROPOSAL
The Corporation entered into the Note Amendment Agreement with 399 Venture
Partners on July 22, 1997. Under the terms of the Note Amendment Agreement, a
copy of which is attached to this Proxy Statement as Exhibit B, shares of Common
Stock and Nonvoting Common Stock would be issued in full payment of the Notes.
The number of shares of Common Stock or Nonvoting Common Stock to be issued to a
holder of a Note will be equal to the sum of the principal and accrued interest
on such Note as of the effective date of payment, divided by nine (9) and
rounded up to the next whole number. Assuming the Note Payment Proposal is
approved by the stockholders and the transactions contemplated thereby are
effected on November 2, 1997, approximately 631,654 shares of Common Stock and
approximately 3,030,990 shares of Nonvoting Common Stock would be issued in full
payment of the Notes, and 3,030,990 shares of Common Stock would be issued upon
the subsequent conversion of such shares of Nonvoting Common Stock into shares
of Common Stock. The exact number of shares of Common Stock and Nonvoting Common
Stock to be issued in connection with the Note Payment Proposal will depend upon
the actual effective date of the Note Payment Proposal. The number of shares to
be issued to a particular holder of Notes will be rounded up to the next whole
share, and no fractional shares will be issued. See "Certain Effects of the Note
Payment Proposal and Reclassification Proposal" below. The payment rate (one
share for each $9.00 of principal and accrued interest as of the effective date
of the Note Payment Proposal) was proposed by the Board of Directors (exclusive
of Mr. Muqaddam) to 399 Venture Partners after the Board's receipt and review of
the May 1997 report from Alex. Brown (see "Background - Appointment of Special
Committee and Negotiations with 399 Venture Partners" above) and consideration
of the financial effects of such payment rate, including the effect upon the
present holders of Common Stock of the Corporation, and was subsequently
accepted by 399 Venture Partners. Such payment rate was not based upon a
specific formula or other calculation and is not subject to any limitations,
ceilings or adjustments.
If the payment of the Notes in shares of Common Stock would have the
effect of causing any registered holder (or a group acting in concert as a
partnership or other group of which the holder is a member) to become the
beneficial owner (within the meaning of Rule 13d-3 under the Securities Exchange
Act of 1934, as amended) of securities of the Corporation representing 30% or
more of the combined voting power of the outstanding securities of the
Corporation ordinarily (and apart from rights arising under special
circumstances) having the right to vote in the election of directors
(hereinafter, a "30% Holder"), then any Notes held by such holder will be
payable in shares of Nonvoting Common Stock in lieu of Common Stock. The Notes
of all other holders will be payable in Common Stock. The Note Amendment
Agreement provides that any person who would become a 30% Holder through the
Note Payment Proposal will receive Nonvoting Common Stock in lieu of Common
Stock to avoid triggering a possible mandatory redemption of certain debt issued
by the Subsidiary. Specifically, the Subsidiary has outstanding $140,000,000
principal amount of 11 3/4% Senior Subordinated Notes due in 2003 (the
"Subsidiary Debt"). Under the terms of the Subsidiary Debt, Pamida is obligated
to make an offer to redeem the Subsidiary Debt if a person or group of persons
becomes a 30% Holder. Issuance of Nonvoting Common Stock in lieu of Common Stock
in payment of Notes held by any holder which would otherwise become a 30% Holder
avoids triggering such possible mandatory redemption of the Subsidiary Debt.
Based on the current beneficial ownership of Common Stock, Notes and Preferred
Stock derived from statements filed under Section 13(d) or 13(g) of the Exchange
Act and the Corporation's stock and note records, the Corporation expects that
the only holder of Notes which will receive Nonvoting Common Stock in payment of
Notes is 399 Venture Partners. 399 Venture Partners has expressed a preference
for receiving Nonvoting Common Stock with the right to convert into Common
Stock, and the terms of the Nonvoting Common Stock to be issued in connection
with the Note Payment Proposal have been structured to allow for such conversion
under certain conditions designed to avoid triggering the possible mandatory
redemption of the Subsidiary Debt referred to above. See "Proposal 3 - Approval
of Charter Amendments Conversion Terms of Nonvoting Common Stock." The
Subsidiary Debt will not be paid or converted in connection with or otherwise
affected by the transactions contemplated by the Note Payment Proposal or
Reclassification Proposal.
Except for the right to vote, shares of Nonvoting Common Stock will be
equal in all respects to the Common Stock and will be convertible into the same
number of shares of Common Stock under certain conditions. See "Proposal 3 -
Approval of Charter Amendments - Conversion Terms of Nonvoting Common Stock."
Under the terms of the Note Amendment Agreement, issuance of the Common
Stock and Nonvoting Common Stock in payment of the Notes is conditioned upon the
approval of the Note Payment Proposal and the Charter Amendment Proposal by the
Corporation's stockholders and the effectiveness of the Reclassification
Proposal.
Upon satisfaction of these conditions, the amendments to the Notes
contemplated by the Note Amendment Agreement will be effective, and the Notes
will be automatically converted solely into the right to receive the applicable
number of shares of Common Stock or Nonvoting Common Stock. Upon the surrender
of the Notes by the holders thereof and the issuance of the Common Stock and
Nonvoting Common Stock in payment of the Notes pursuant to the terms of the Note
Amendment Agreement, the Notes will be canceled and the Corporation will be
released from all its obligations and liabilities under the Notes.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE NOTE PAYMENT PROPOSAL AND
THE TRANSACTIONS CONTEMPLATED THEREBY.
PROPOSAL 2
APPROVAL OF THE RECLASSIFICATION PROPOSAL
The Board of Directors of the Corporation has adopted a resolution that
submits for stockholder approval at the Special Meeting an amendment to the
Restated Certificate to change and reclassify the outstanding Preferred Stock of
the Corporation into Common Stock. Under the terms of the proposed amendment to
the Restated Certificate, the number of shares of Common Stock to be issued for
the outstanding shares of Senior Preferred and Junior Preferred held by each
holder thereof will be equal to the liquidation value of such holder's shares of
Senior Preferred and Junior Preferred plus any unpaid Preferred Stock dividends
not included in the liquidation value accrued as of the close of business on the
effective date of the change and reclassification, divided by nine (9) and
rounded up to the next whole number. A copy of the proposed amendment to the
Corporation's Restated Certificate that would effect such change and
reclassification is attached hereto as Exhibit C. See "Background - The
Preferred Stock." Assuming that the Reclassification Proposal is approved by the
stockholders and effected on November 2, 1997, approximately 327,204 shares of
Common Stock would be issued upon the change and reclassification of the
Preferred Stock into Common Stock. The exact number of shares of Common Stock to
be issued in connection with the Reclassification Proposal will depend upon the
actual effective date of the Reclassification Proposal. The number of shares to
be issued to a particular holder of shares of Preferred Stock will be rounded up
to the next whole share, and no fractional shares will be issued. See "Certain
Effects of the Note Payment Proposal and Reclassification Proposal" below. The
reclassification rate (one share of Common Stock for each $9.00 of Preferred
Stock liquidation value plus unpaid Preferred Stock dividends not included in
such liquidation value) is the same as and based solely upon the payment rate
for the Notes and is not subject to any limitations, ceilings or adjustments.
See "Proposal 1 - Approval of the Note Payment Proposal" above.
The effective date (the "Effective Date") of the change and
reclassification of the Preferred Stock into Common Stock will be the date a
Certificate of Amendment to the Restated Certificate reflecting the amendment
set forth in Exhibit C hereto is filed with the Secretary of State of Delaware.
The Corporation intends to file such a Certificate of Amendment to the Restated
Certificate with the Delaware Secretary of State promptly after stockholder
approval of all of the proposals set forth in this Proxy Statement.
At and after the Effective Date of the change and reclassification,
holders of shares of Preferred Stock, upon surrender of a certificate or
certificates for such shares to the Corporation, will be entitled to receive in
replacement thereof a certificate representing the number of shares of Common
Stock into which the aggregate number of shares of Preferred Stock represented
by the certificate or certificates so surrendered will have been changed and
reclassified. After the Effective Date, no holder of shares of Preferred Stock
will have the right to vote on any matter submitted to a vote of the holders of
Common Stock until the Corporation has issued to such holder a certificate for
the shares of Common Stock into which such shares of Preferred Stock will have
been changed and reclassified. Unless and until the certificate or certificates
representing shares of Preferred Stock have been surrendered to the Corporation,
no dividends or other distributions payable to holders of Common Stock as of a
record date at or after the Effective Date will be paid to any holder of such
certificate or certificates. Subject to the effect of applicable laws, after the
surrender of any such certificate for shares of Preferred Stock, there will be
paid to the record holder of the shares of Common Stock issued in replacement of
such certificate, without interest, (i) the amount of dividends or other
distributions with a record date at or after the Effective Date but prior to
such surrender theretofore paid with respect to such shares of Common Stock and
(ii) on the appropriate payment date, the amount of dividends or other
distributions with a record date at or after the Effective Date but prior to
such surrender and a payment date subsequent to such surrender payable with
respect to such shares of Common Stock. From and after the Effective Date, the
stock transfer books of the Corporation with respect to the Preferred Stock will
be closed, and no transfer of any of such shares thereafter will be made. If,
after the Effective Date, certificates for shares of Preferred Stock are
presented to the Corporation for transfer, then such certificates will be
cancelled and replaced by certificates issued in the name of the transferee
representing the appropriate number of shares of Common Stock.
If the change and reclassification of the Preferred Stock into Common
Stock is effected, the Common Stock issued to current holders of Preferred Stock
will not have the rights, preferences and privileges of the Preferred Stock,
including (i) the right to receive preferential cumulative dividends, (ii) the
right, upon any liquidation, dissolution or winding up of the Corporation, to
receive the liquidation value of the Preferred Stock before any distribution or
other payment is made with respect to the Common Stock or (iii) the redemption
rights described above. See "Background - The Preferred Stock." However, if the
reclassification is effected, the Common Stock issued to the current holders of
Preferred Stock will entitle the holder thereof to vote on all matters submitted
to a vote of stockholders. See "Description of Common Stock and Nonvoting Common
Stock." The Preferred Stock currently has no voting rights, except in connection
with an amendment or waiver of the rights of the Preferred Stock under the
Restated Certificate or as provided by law.
Implementation of the Reclassification Proposal is conditioned upon
stockholder approval of all of the proposals set forth in this Proxy Statement.
Accordingly, even if the Reclassification Proposal is approved by the
stockholders, if the Note Payment Proposal and the Charter Amendment Proposal
are not approved by the stockholders, then the Reclassification Proposal will
not be effected.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE RECLASSIFICATION
PROPOSAL.
PROPOSAL 3
APPROVAL OF CHARTER AMENDMENTS
The Board of Directors of the Corporation has adopted a resolution that
submits for stockholder approval at the Special Meeting amendments to the
Restated Certificate that would (i) increase the number of authorized shares of
Common Stock from 10,000,000 to 25,000,000 and the authorized number of shares
of Nonvoting Common Stock from 2,000,000 to 4,000,000, (ii) amend the conversion
terms of the Nonvoting Common Stock and (iii) reduce the number of authorized
shares of Junior Preferred to 1,627.
INCREASE NUMBER OF AUTHORIZED SHARES OF COMMON STOCK AND NONVOTING
COMMON STOCK
The Restated Certificate currently authorizes 12,007,501 shares of capital
stock, consisting of 514 shares of Senior Preferred, 6,987 shares of Junior
Preferred, 10,000,000 shares of Common Stock and 2,000,000 shares of Nonvoting
Common Stock. If the proposed amendment to the Restated Certificate is approved,
the number of authorized shares of Common Stock will be increased to 25,000,000
and the number of authorized shares of Nonvoting Common Stock will be increased
to 4,000,000. The proposed amendment to the Restated Certificate does not change
the number of authorized shares of Senior Preferred but reduces the number of
authorized shares of Junior Preferred to the number of shares of Junior
Preferred currently outstanding; if the Reclassification Proposal becomes
effective, the Corporation will have no shares of Preferred Stock outstanding,
and the authorization of shares of Preferred Stock will have no further
relevance because the Restated Certificate will contain no provisions setting
forth the terms of the Preferred Stock or otherwise providing for the
establishment of any such terms. The text of the proposed amendment to the
Corporation's Restated Certificate that would effect the increase in the number
of authorized shares of Common Stock and Nonvoting Common Stock and reduce the
number of authorized shares of Junior Preferred is attached hereto as Exhibit D.
As of August 31, 1997, 5,004,942 shares of Common Stock were issued and
outstanding, and no shares of Nonvoting Common Stock were issued and
outstanding. In addition, 345,042 shares of Common Stock are reserved for
issuance under the Pamida Holdings Corporation 1992 Stock Option Plan. As
described below in "Certain Effects of the Note Payment Proposal and
Reclassification Proposal," assuming the transactions contemplated by the Note
Payment Proposal and Reclassification Proposal are approved by the stockholders
and effected on November 2, 1997, a total of 3,989,848 shares of Common Stock
and Nonvoting Common Stock would be issued. Based on the current beneficial
ownership of Common Stock, Notes and Preferred Stock of the Corporation derived
from statements filed under Section 13(d) or 13(g) of the Exchange Act, the
Corporation's stock and note records and other sources which the Corporation
considers reliable, approximately 5,963,800 shares of Common Stock and 3,030,990
shares of Nonvoting Common Stock would be issued and outstanding immediately
after the Note Payment Proposal and Reclassification Proposal become effective,
and approximately 3,030,990 shares of Common Stock would be reserved for
issuance upon conversion of the Nonvoting Common Stock.
Accordingly, the proposed amendment to the Restated Certificate is
required to provide sufficient shares of Nonvoting Common Stock to effect the
transactions contemplated by the Note Payment Proposal. Although the Corporation
currently has enough authorized shares of Common Stock to effect the Note
Payment Proposal and Reclassification Proposal, the issuance of the number of
shares of Common Stock required to effect such proposals would leave the
Corporation with only approximately 660,000 unreserved shares of Common Stock
authorized and available for issuance in the future for other purposes.
The Board of Directors of the Corporation believes that the authorized
number of shares of Common Stock should be increased to provide sufficient
shares for such appropriate purposes as may be determined from time to time by
the Board of Directors. The Board of Directors believes that having additional
shares authorized and available for issuance or reservation will give the
Corporation greater flexibility in considering potential future actions
involving the issuance of stock, including without limitation capital raising
transactions, additional employee stock options or awards, acquisitions of other
businesses in exchange for stock and stock dividends or splits. The Corporation
has no current plans to effect any such potential actions and no pending
arrangements to issue any of the additional shares of Common Stock that would be
authorized as a result of the proposed amendment to the Restated Certificate.
The Board of Directors does not intend to seek further stockholder approval
prior to the issuance of any of the newly authorized shares of Common Stock or
Nonvoting Common Stock, unless required by law, the Restated Certificate or the
rules of any stock exchange upon which the stock may be listed. Under the
provisions of Article Eleventh of the Restated Certificate, with certain
exceptions (relating to pro rata stock splits or stock dividends, dividend
reinvestment plans in which all stockholders may participate and normal
compensatory employee stock options or rights), the Corporation cannot issue any
Common Stock to any person who would be, after giving effect to such issuance,
the beneficial owner of more than 5% of the Common Stock without the affirmative
vote of the holders of Common Stock which represent at least a majority of the
aggregate voting power of all outstanding shares of Common Stock, excluding the
shares of Common Stock owned by such person, voting together as a single class.
The newly authorized shares of Common Stock will have voting and other
rights identical to those of the currently authorized shares of Common Stock.
The newly authorized shares of Nonvoting Common Stock will have rights identical
to those of the currently authorized shares of Nonvoting Common Stock, except
that the conversion terms described below will replace the conversion terms
presently contained in the Restated Certificate. Under the Restated Certificate,
holders of Common Stock or Nonvoting Common Stock do not have preemptive rights.
Any issuance of additional shares of Common Stock or Nonvoting Common Stock
could have a dilutive effect on existing holders of Common Stock.
The additional authorized shares of Common Stock and Nonvoting Common
Stock could, under certain circumstances, have the effect of rendering more
difficult or discouraging an attempt to acquire control of the Corporation.
However, the Board of Directors is not aware of any such attempt and has no
present intention to authorize the issuance of Common Stock or Nonvoting Common
Stock for anti-takeover purposes.
CONVERSION TERMS OF NONVOTING COMMON STOCK
No shares of Nonvoting Common Stock are currently outstanding. However, as
described above, shares of Nonvoting Common Stock may be issued if the
transactions contemplated by the Note Payment Proposal are approved by the
stockholders and effected.
Specifically, if payment of the Notes in shares of Common Stock would have the
effect of causing any holder (or a group of which such holder is a member) to
become a 30% Holder, then any Notes held by such holder will be payable in
shares of Nonvoting Common Stock in lieu of Common Stock. The Note Amendment
Agreement provides that any person who would become a 30% Holder through the
Note Payment Proposal will receive Nonvoting Common Stock in lieu of Common
Stock to avoid triggering the mandatory redemption of the Subsidiary Debt. Under
the terms of the Subsidiary Debt, Pamida is obligated to make an offer to redeem
the Subsidiary Debt if a person or group of persons becomes a 30% Holder.
Issuance of Nonvoting Common Stock in lieu of Common Stock in payment of Notes
held by any holder which otherwise would become a 30% Holder avoids triggering
the possible mandatory redemption of the Subsidiary Debt. See "Proposal 1
Approval of Note Payment Proposal."
Under the terms of the proposed amendment to the Restated Certificate
approved by the Board of Directors, the text of which is attached hereto as
Exhibit E, each holder of shares of Nonvoting Common Stock will be entitled to
convert into the same number of shares of Common Stock any or all of such
holder's shares of Nonvoting Common Stock if (i) such conversion would not have
the effect of causing such holder (or a group of which such holder is a member)
to become a 30% Holder; provided, however, that if immediately prior to a
transfer of shares of Nonvoting Common Stock to a transferee holder, the
transferor of such shares would have been a 30% Holder if its holdings of
Nonvoting Common Stock were deemed converted into shares of Common Stock, then
the transferee holder of such shares of Nonvoting Common Stock will not have the
right to convert such shares of Nonvoting Common Stock into shares of Common
Stock until the sixty-first day after the date of the transfer, or (ii) the
Subsidiary Debt is not outstanding and has not been replaced with a debt issue
with comparable provisions requiring redemption or otherwise imposing
requirements or restrictions on the Corporation or the issuer of such
replacement debt issue in the event a person or group becomes a 30% Holder.
Accordingly, the proposed amendment to the Restated Certificate would permit
conversion of the Nonvoting Common Stock into Common Stock when such conversion
would not trigger the possible mandatory redemption of the Subsidiary Debt.
The Restated Certificate presently permits the conversion of shares of
Nonvoting Common Stock (of which none currently are outstanding) into the same
number of shares of Common Stock upon the occurrence or expected occurrence of a
Conversion Event. A Conversion Event presently is defined in the Restated
Certificate to mean (a) any public offering or public sale of securities of the
Corporation (including a public offering registered under the Securities Act of
1933, as amended, and a public sale pursuant to Rule 144 of the Securities and
Exchange Commission or any similar rule then in force), (b) any sale of
securities of the Corporation to a person or group of persons (within the
meaning of the Exchange Act) if, after such sale, such person or group of
persons in the aggregate would own or control securities which possess in the
aggregate the ordinary voting power to elect a majority of the Corporation's
directors (provided, that such sale has been approved by the Corporation's Board
of Directors or a committee thereof), (c) any sale of securities of the
Corporation to a person or group of persons (within the meaning of the Exchange
Act) if, after such sale, such person or group of persons in the aggregate would
own or control securities of the Corporation (excluding any Nonvoting Common
Stock being converted and disposed of in connection with such Conversion Event)
which possess in the aggregate the ordinary voting power to elect a majority of
the Corporation's directors, (d) any sale of securities of the Corporation to a
person or group of persons (within the meaning of the Exchange Act) if, after
such sale, such person or group of persons would not, in the aggregate, own,
control or have the right to acquire more than two percent of the outstanding
securities of any class of voting securities of the Corporation and (e) a
merger, consolidation or similar transaction involving the Corporation if, after
such transaction, a person or group of persons (within the meaning of the
Exchange Act) in the aggregate would own or control securities which possess in
the aggregate the ordinary voting power to elect a majority of the surviving
corporation's directors (provided, that the transaction has been approved by the
Corporation's Board of Directors or a committee thereof). For purposes of such
definition, "person" includes any natural person and any corporation,
partnership, joint venture, trust, unincorporated organization and other entity
or organization. If the Charter Amendment Proposal becomes effective, the
conversion terms of the Restated Certificate described in this paragraph will be
replaced by the conversion terms discussed in the preceding paragraph and set
forth in Exhibit E to this Proxy Statement.
Implementation of the Charter Amendment Proposal is conditioned upon
stockholder approval of all of the proposals set forth in this Proxy Statement,
except that the Charter Amendment Proposal may be effected even if the
Reclassification Proposal is not approved by the stockholders if the Corporation
and 399 Venture Partners waive the change and reclassification of the Preferred
Stock as a condition to the effectiveness of the Note Payment Proposal. The
failure of the stockholders to approve the Charter Amendment Proposal will
preclude implementation of the Note Payment Proposal and Reclassification
Proposal.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE CHARTER AMENDMENT
PROPOSAL.
CERTAIN EFFECTS OF THE NOTE PAYMENT
PROPOSAL AND RECLASSIFICATION PROPOSAL
Assuming all of the proposals set forth in this Proxy Statement are
approved by the stockholders of the Corporation and a November 2, 1997 effective
date for the Note Payment Proposal and Reclassification Proposal, a total of
approximately 3,989,848 shares of Common Stock and Nonvoting Common Stock would
be issued in payment of the Notes and in connection with the change and
reclassification of the Preferred Stock. Of such total, approximately 631,654
shares of Common Stock and approximately 3,030,990 shares of Nonvoting Common
Stock will be issued in payment of the Notes, and approximately 327,204 shares
of Common Stock will be issued upon the change and reclassification of the
Preferred Stock into Common Stock. Based on the current beneficial ownership of
Common Stock, Notes and Preferred Stock of the Corporation derived from
statements filed under Section 13(d) or 13(g) of the Exchange Act, the
Corporation's stock and note records and other sources which the Corporation
considers reliable, approximately 5,963,800 shares of Common Stock and 3,030,990
shares of Nonvoting Common Stock would be issued and outstanding immediately
after the Note Payment Proposal and Reclassification Proposal become effective,
and approximately 3,030,990 shares of Common Stock would be reserved for
issuance upon conversion of the Nonvoting Common Stock.
If the Note Payment Proposal and Reclassification Proposal are effected,
the Corporation's annual interest expense will be reduced substantially and
Preferred Stock dividend accruals will be eliminated. If the Note Payment
Proposal and Reclassification Proposal are effected on November 2, 1997, then
the benefit to net income available for common stockholders for fiscal 1998,
assuming an effective tax rate of 38.29%, would be an increase of $1,017,000.
See "Background - Reasons for Note Payment Proposal and Reclassification
Proposal" above.
Based on a Schedule 13G filed by Citicorp as of December 31, 1996 and
additional information obtained by the Corporation, 399 Venture Partners owns
907,387 or 18.13% of the issued and outstanding shares of Common Stock. 399
Venture Partners owns no shares of Preferred Stock. 399 Venture Partners has
advised the Corporation that there has been no change in its ownership of Common
Stock since December 31, 1996. 399 Venture Partners is the owner of
$3,915,677.52 of the aggregate outstanding principal amount of the Senior Notes,
$10,629,263.60 of the aggregate outstanding principal amount of the Subordinated
Notes and $10,974,758.55 of the aggregate outstanding principal amount of the
Junior Subordinated Notes as of June 1, 1997. Based on this information and
assuming a November 2, 1997 effective date for the Note Payment Proposal, 399
Venture Partners would receive approximately 3,030,990 shares of Nonvoting
Common Stock in payment of the Notes held by 399 Venture Partners. Combining the
shares of Nonvoting Common Stock which would be issued to 399 Venture Partners
in payment of its Notes with the shares of Common Stock currently owned by 399
Venture Partners, 399 Venture Partners would beneficially own approximately
43.79% of the total number of shares of Common Stock and Nonvoting Common Stock
expected to be outstanding after the consummation of the transactions
contemplated by the Note Payment Proposal and Reclassification Proposal,
assuming a November 2, 1997 effective date. The shares of Nonvoting Common Stock
received by 399 Venture Partners would be convertible into shares of Common
Stock under the terms described above in "Proposal 3 - Approval of Charter
Amendments - Conversion Terms of Nonvoting Common Stock."
The issuance of shares of Common Stock as contemplated by the Note Payment
Proposal and Reclassification Proposal would have a dilutive effect on the
voting power of the currently outstanding shares of Common Stock. The shares of
Common Stock currently outstanding would represent (i) approximately 83.92% of
the total number of shares of Common Stock which would be outstanding assuming a
November 2, 1997 effective date and assuming 399 Venture Partners is the only
person receiving Nonvoting Common Stock pursuant to either proposal and (ii)
approximately 55.64% of the total number of shares of Common Stock which would
be outstanding assuming such effective date and conversion of all Nonvoting
Common Stock issued to 399 Venture Partners.
FEDERAL INCOME TAX CONSEQUENCES AND ACCOUNTING TREATMENT OF THE
RECLASSIFICATION PROPOSAL AND NOTE PAYMENT PROPOSAL
FEDERAL INCOME TAX CONSEQUENCES
Reclassification Proposal. The Reclassification Proposal, if consummated,
will be a tax-free reorganization for the Corporation and will have no direct
tax impact on the Corporation.
Note Payment Proposal. The difference, if any, between the recorded value
of the Notes and the fair market value of the Common Stock and Nonvoting Common
Stock issued in payment of the Notes as of the effective date of the Note
Payment Proposal, as contemplated by the Note Payment Proposal, would cause a
taxable gain on extinguishment of indebtedness for the Corporation which will be
taxed as ordinary income for federal income tax purposes. As of August 3, 1997,
the Corporation had net operating loss carryforwards (NOLs) and other previously
unrecognized tax attribute carryforwards approximating $8,900,000 and tax credit
carryforwards approximating $1,973,000. The amount of income taxes attributable
to the taxable income created by the consummation of the Note Payment Proposal
would be reduced by existing net operating loss and tax credit carryforwards.
ACCOUNTING TREATMENT
For financial statement purposes, any gain on extinguishment of the Notes
held by persons other than 399 Venture Partners would be reflected on the
Corporation's Statement of Operations as an extraordinary item (net of related
taxes), separate from the operating results of the Corporation. Any gain related
to the payment of Notes owned by 399 Venture Partners with Nonvoting Common
Stock would be considered to be a capital transaction; accordingly, such gain,
net of taxes, would be recorded directly to additional paid-in capital on the
Corporation's financial statements. The gain on the Preferred Stock
reclassification as Common Stock will be accounted for as a capital transaction.
DESCRIPTION OF COMMON STOCK AND NONVOTING COMMON STOCK
COMMON STOCK
The holders of Common Stock are entitled to one vote for each share of
Common Stock on all matters submitted to a vote of stockholders and have
cumulative voting rights in the election of directors. The holders of Common
Stock are entitled to receive ratably such dividends, if any, as may be declared
by the Board of Directors out of legally available funds. Upon liquidation,
dissolution or winding up of the Corporation, the holders of Common Stock are
entitled to share ratably in all assets of the Corporation which are legally
available for distribution to its stockholders, after payment of all debts and
other liabilities of the Corporation and subject to the prior rights of the
holders of any Senior Preferred and Junior Preferred then outstanding. The
holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The rights of holders of Common Stock are subject to the
rights and preferences of the Senior Preferred and the Junior Preferred.
If all of the proposals presented in this Proxy Statement are effected, no
Senior Preferred or Junior Preferred will remain outstanding, and the
Corporation does not intend to reissue any shares of Senior Preferred or Junior
Preferred.
NONVOTING COMMON STOCK
The Nonvoting Common Stock generally is identical in all respects to the
Common Stock; however, the holders of Nonvoting Common Stock have no right to
vote on any matters to be voted on by the Corporation's stockholders except that
such holders have the right in certain cases specified in the Restated
Certificate to vote as a separate class on any merger or consolidation of the
Corporation with or into another entity or entities, or any recapitalization or
reorganization, in which shares of Nonvoting Common Stock would receive or be
exchanged for consideration different on a per share basis from the
consideration received with respect to or in exchange for shares of Common Stock
or would otherwise be treated differently from shares of Common Stock. Under
Delaware law, the Nonvoting Common Stock has voting rights in certain special
circumstances but generally has no right to vote in the election of directors of
the Corporation.
If the Charter Amendment Proposal is approved at the Special Meeting and
effected, shares of Nonvoting Common Stock will be convertible into the same
number of shares of Common Stock under the terms described above in "Proposal 3
- - Approval of Charter Amendments - Conversion Terms of Nonvoting Common Stock."
INTERESTS OF CERTAIN PERSONS
As described above, based on a Schedule 13G filed by Citicorp as of
December 31, 1996 and additional information obtained by the Corporation, 399
Venture Partners owns 18.13% of the issued and outstanding shares of Common
Stock and, as of June 1, 1997, $25,519,699.67 of the aggregate outstanding
principal amount of the Notes. Based on this information and assuming a
November2, 1997 effective date for the Note Payment Proposal, 399 Venture
Partners would beneficially own approximately 43.79% of the total number of
shares of Common Stock and Nonvoting Common Stock expected to be outstanding
after the consummation of the transactions contemplated by the Note Payment
Proposal and Reclassification Proposal. See "Certain Effects of the Note Payment
Proposal and Reclassification Proposal." M. Saleem Muqaddam, a member of the
Board of Directors of the Corporation, is a Vice President of 399 Venture
Partners.
According to a Schedule 13D amended through January 21, 1994, Natasha
Partnership, of which Nathalie P. Comfort is the sole general partner, owns
11.47% of the issued and outstanding shares of Common Stock. William T. Comfort,
the husband of Nathalie P. Comfort and a limited partner in Natasha Partnership,
is the Chairman of 399 Venture Partners and owns 175.26266 shares of Junior
Preferred. Stuyvesant P. Comfort, a director of the Corporation, is the son of
William T. Comfort and Nathalie P. Comfort.
See "Outstanding Securities and Voting Rights."
OTHER BUSINESS
As of the date of this Proxy Statement, the Board of Directors knows of no
other business which will be presented for consideration at the Special Meeting.
As to other business, if any, that properly may come before the Special Meeting,
the Board of Directors intends that Proxies in the accompanying form will be
voted in respect thereof in accordance with the judgment of the person or
persons voting the Proxies.
STOCKHOLDER PROPOSALS
As stated in the Corporation's Proxy Statement for the 1997 annual meeting
of its stockholders, stockholder proposals intended to be presented at the 1998
annual meeting of stockholders of the Corporation must be received by the
Corporation not later than November 26, 1997 for inclusion in the Corporation's
proxy statement and form of proxy relating to that meeting.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Consolidated Financial Data (the "Pro
Forma Financial Data") reflects (1) the issuance of shares of Common Stock and
Nonvoting Common Stock in payment of the Notes at the rate of one share for each
$9.00 of outstanding principal of and accrued interest on the Notes (the Note
Payment Proposal) and (2) the effect of changing and reclassifying all of the
Preferred Stock into shares of Common Stock at the rate of one share for each
$9.00 of liquidation value and accrued dividends (the Reclassification
Proposal). The following Unaudited Pro Forma Consolidated Statement of
Operations for the year ended February 2, 1997 and the six months ended August
3, 1997 gives effect to the Note Payment Proposal and Reclassification Proposal
(collectively, the "Transactions") as if they had occurred on January 29, 1996
and excludes the one-time extraordinary gain to be recognized on the effective
date of the Transactions. The Unaudited Pro Forma Balance Sheet gives effect to
the Transactions as if they had occurred on August 3, 1997 and includes the
one-time extraordinary gain to be recognized on the effective date of the
Transactions.
If the Transactions are consummated, the actual number of shares of Common
Stock and Nonvoting Common Stock which will be issued will differ somewhat from
the shares assumed in the Pro Forma Financial Data. The effective date of the
Transactions, if consummated, will occur at a date later than the dates assumed
for the Pro Forma Financial Data, and the principal of and accrued interest on
the Notes and the liquidation value of and accrued dividends on the Preferred
Stock will be greater than the amounts assumed because of the additional accrual
of interest and dividends to the effective date of the Transactions. The Pro
Forma Financial Data do not purport to represent what the Corporation's results
of operations actually would have been if the Transactions had occurred as of
the dates indicated or what such results will be for any future periods.
The Pro Forma Financial Data is based upon assumptions that the
Corporation believes are reasonable and should be read in conjunction with the
Consolidated Financial Statements of the Corporation and the accompanying notes
thereto which are incorporated by reference in this document.
<TABLE>
<CAPTION>
Unaudited Pro Forma Financial Data
(In thousands, except per share data)
STATEMENT OF OPERATIONS
Year Ended, February 2, 1997 6 Months Ended August 3, 1997
--------------------------------- ---------------------------------
<S> <C> <C> <C> <C>
Pro Forma Pro Forma
Historical Adjustment Pro Forma Historical Adjustment Pro Forma
---------- ---------- --------- ---------- ---------- ---------
Sales ................................... $ 633,189 $ 633,189 $ 307,781 $ 307,781
Cost of goods sold ...................... 479,099 479,099 233,011 233,011
---------- --------- ---------- ---------- ---------
Gross profit ............................ 154,090 154,090 74,770 74,770
Expenses
Selling, general and administrative ... 125,105 125,105 64,249 64,249
Interest .............................. 29,781 (4,473) 25,308 15,417 (2,457) 12,960
---------- ---------- --------- ---------- ---------- ---------
154,886 (4,473) 150,413 79,666 (2,457) 77,209
---------- ---------- --------- ---------- ---------- ---------
(Loss) income before provision for
income taxes .......................... (796) 4,473 3,677 (4,896) 2,457 (2,439)
Income tax (provision) benefit .......... -- (1,408) (1,408) -- 934 934
---------- ---------- ---------- ---------- ---------- ---------
Net (loss) income ....................... (796) 3,065 2,269 (4,896) 3,391 (1,505)
Less provision for preferred dividends
and discount amortization ............. 391 (391) -- 270 (270) --
---------- ---------- ---------- ---------- ---------- ---------
Net (loss) income available for
common shares ......................... $ ($,187) $ 3,456 $ 2,269 $ (5,166) $ 3,661 (1,505)
========== ========== ========== ========== ========== =========
Net (loss) earnings per common share: ... ($0.24) $0.26 ($1.03) ($0.17)
Weighted average shares outstanding 5,004,942 3,825,264 8,830,206 5,004,942 3,825,264 8,830,206
</TABLE>
(1) To reflect the reduction of interest expense, preferred dividends and
discount amortization resulting from the Transactions as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Interest Expense
------------------------------------
Year Ended, Six Months Ended,
February 2, 1997 August 3, 1997
---------------- -----------------
13.50% Senior Promissory Notes ............ $ 723 $ 397
14.00% Subordinated Promissory Notes ...... 2,035 1,120
14.25% Junior Subordinated Promissory Notes 1,555 858
Discount amortization ..................... 160 82
------ ------
$4,473 $2,457
====== ======
Preferred Dividends and
Discount Amortization
--------------------------
16.25% Senior Cumulative Preferred Stock .. $ 90 $ 65
14.25% Junior Cumulative Preferred Stock .. 252 180
Discount amortization ..................... 49 25
------ ------
$ 391 $ 270
====== ======
</TABLE>
(2) To reflect pro forma income tax expense at the expected effective rate. No
income tax benefit on losses was recorded for the year ended February 2,
1997 and the six months ended August 3, 1997 due to uncertainty regarding
the potential utilization of certain tax loss carryforwards. Had the
Transactions occurred on January 29, 1996, a substantial portion of the
Company's net operating loss and tax credit carryforwards would have been
utilized at that time. Therefore, on a pro forma basis, income tax
(provision) benefit is shown at the expected effective rate.
(3) To reflect the issuance of Common Stock and Nonvoting Common Stock in
payment of the Notes and from reclassification of the Preferred Stock at
face or liquidation value and including accrued interest and dividends.
Notes Preferred Stock Total
------- --------------- ---------
Book value as of August 3, 1997 ..... $30,045 $1,900
Accrued interest and dividends ...... 858 587
Unamortized discount ................ 796 241
------- ------
Redemption value as of August 3, 1997 31,699 2,728
Transaction value per common share .. /$9 /$9
------- ------
Common shares to be issued ..........3,522,178 303,086 3,825,264
<TABLE>
<CAPTION>
Unaudited Pro Forma Financial Data
(In thousands, except per share data)
BALANCE SHEET
<S> <C> <C> <C>
August 3, Pro Forma
Assets 1997 Adjustments Pro Forma
--------- ----------- ---------
Current assets:
Cash ................................................. $ 8,485 $ (500) $ 7,985
Accounts receivable, less allowance
for doubtful accounts of $50 in both years ......... 7,679 7,679
Merchandise inventories .............................. 147,240 147,240
Prepaid expense ...................................... 3,624 3,624
--------- ---------
Total current assets .............................. 167,028 (500) 166,528
Property, buildings and equipment, net ............... 43,494 43,494
Leased property under capital leases, net ............ 26,417 26,417
Deferred financing costs ............................. 3,098 3,098
Other assets ......................................... 20,244 20,244
--------- ----------- ---------
260,281 (500) 259,781
========= =========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable ..................................... 53,315 53,315
Loan and security agreement .......................... 47,210 47,210
Accrued compensation ................................. 4,320 4,320
Accrued interest ..................................... 7,217 (858) 6,359
Store closing reserve ................................ 2,158 2,158
Other accrued expenses ............................... 13,499 13,499
Income taxes - deferred and current payable .......... 11,867 11,867
Current maturities of long-term debt ................. 47 47
Current obligations under capital leases ............. 1,749 1,749
--------- ----------- ---------
Total current liabilities ......................... 141,382 (858) 140,524
Long-term debt, less current maturities .............. 170,386 (30,045) 140,341
Obligations under capital leases,
less current obligations ........................... 33,140 33,140
Other long-term liabilities .......................... 5,355 5,355
Commitments and contingencies -- --
Preferred stock subject to mandatory redemption
and reserve for dividends payable .................. 2,487 (2,487) --
Common shareholders' equity:
Common stock, $.01 par value; ...................... 50 38 88
Additional paid-in capital ........................... 968 31,666 32,134
(500)
Accumulated deficit .................................. (93,487) 1,686 (91,801)
--------- ----------- ---------
Total common shareholders' deficit ................... (92,469) 32,890 (59,579)
--------- ----------- ---------
$ 260,281 $ (500) $ 259,781
========= =========== =========
</TABLE>
(1) To reflect the issuance of Common Stock and Nonvoting Common Stock in
payment of the Notes and from reclassification of the Preferred Stock at
face or liquidation value and including accrued interest and dividends,
and the extraordinary gain on the extinguishment of debt, net of the
related income tax effect. The extraordinary gain is based upon the recent
stock market value of the Corporation's Common Stock, whereas the actual
extraordinary gain will be based on the fair market value of the Common
Stock and Nonvoting Common Stock upon issuance.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NOTES PREFERRED STOCK TOTAL
------- --------------- -------
Carrying value at August 3, 1997 ............ $30,903 $2,487 $33,390
Fair value of common stock exchanged assuming
a current market value of $6.00 per share 21,133 1,819 22,952
------ ----- ------
Pre-tax gain ................................ 9,770 668 10,438
Less: Income taxes ......................... -- -- --
------- ------ -------
Net gain .................................... 9,770 668 10,438
Less: Capital transaction .................. 8,084 668 8,752
------- ----- -------
Extraordinary gain .......................... $ 1,686 $ -- $ 1,686
======= ====== ========
</TABLE>
A majority of the Notes is held by an entity (399 Venture Partners) having a
significant equity interest in the Corporation. In accordance with APB No.
26, "Early Extinquishment of Debt" the gain on such portion of the
transactions is considered a capital transaction recorded directly to
Additional Paid-In Capital, net of tax. The income tax effect of the note
payment transaction is calculated assuming the utilization of the net
operating loss and tax credit carryforwards. The reclassification of the
Preferred Stock is a tax-free reorganization.
(2) Reflects estimated transaction costs of $500.
INCORPORATION BY REFERENCE
The Corporation's Annual Report on Form 10-K for the fiscal year ended
February 2, 1997 accompanies this Proxy Statement. The following sections of
such Form 10-K are incorporated in this Proxy Statement by reference:
1. Financial Statements and Supplementary Data.
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Corporation's Quarterly Report on Form 10-Q for the quarter ended
August 3, 1997 also accompanies this Proxy Statement and is incorporated herein
by reference.
Dated _________, 1997
BY ORDER OF THE BOARD OF
DIRECTORS,
FRANK A. WASHBURN, SECRETARY
EXHIBIT A
ALEX. BROWN & SONS INCORPORATED
1290 Avenue of the Americas
10th Floor
New York, New York 10104
Dated as of August 18, 1997
Board of Directors of Pamida Holdings Corporation
8800 "F" Street
Omaha, Nebraska 68127
Dears Sirs:
Pamida Holdings Corporation (the "Company") has entered into that certain
Note Amendment Agreement No. 3, dated as of July 22, 1997 (the "Amendment")
between the Company and 399 Venture Partners, Inc. ("Venture"), which amends the
"Notes" (as defined in the Amendment). Pursuant to the Amendment, each of the
Notes shall be amended to be payable solely in shares of the Company's stock,
with one share of either Common Stock or Nonvoting Common Stock of the Company
to be issued for each $9.00 of outstanding principal and accrued interest on the
Notes. Such issuance will be effected as is provided in the "Allonge to
Promissory Note", the form of which is attached as Exhibit A to the Amendment.
Pursuant to the Amendment, the Allonge to Promissory Note shall become effective
upon, and shall be dated as of, the date of stockholder approval of the
transactions contemplated by the Allonge to Promissory Note and the requisite
number of shares and amendment to the terms of the Nonvoting Common Stock
(substantially in the form of Exhibit B to the Amendment) to be issued in
connection with transactions contemplated by the Amendment and the Allonge to
Promissory Note.
Further, the holders (the "Preferred Holders") of a majority of the issued
and outstanding shares of the Company's 16.25% Senior Cumulative Preferred
Stock, par value $1.00 per share, and 14.25% Junior Cumulative Preferred Stock,
par value $1.00 per share (collectively the "Preferred Stock"), have voted their
shares of Preferred Stock by written consents (the "Written Consents") to
approve the amendment of Section 4.2 of ARTICLE FOURTH of the Company's Restated
Certificate of Incorporation (the "Amended Section") so that such Section 4.2 of
ARTICLE FOURTH shall read in its entirety as set forth in the Written Consents.
Pursuant to the Amended Section, upon the effectiveness thereof, each
outstanding share of Preferred Stock shall be changed and reclassified into the
number of shares of Common Stock equal to the Liquidation Value (as defined in
the Amended Section) of such shares of Preferred Stock divided by nine and
rounded up to the next whole number. The transactions contemplated by the
Allonge to Promissory Note are subject to the effectiveness of the Amended
Section.
The transactions contemplated by the Amendment and the Amended Section are
referred to herein as the "Transaction". The holders of the Company's
outstanding Common Stock are referred to herein as the "Common Stockholders".
You have requested our opinion as to whether the Transaction is fair, from a
financial point of view, to the Common Stockholders, in their capacity as such.
Alex. Brown & Sons Incorporated, as a customary part of its investment
banking business, is engaged in the valuation of businesses and their securities
in connection with recapitalizations, mergers and acquisitions, negotiated
underwritings, private placements and valuations for estate, corporate and other
purposes. We are rendering the opinion set forth herein to the Board of
Directors of the Company in connection with the Transaction and will receive a
fee for such services and have received fees for rendering other financial
advisory services to the Company.
In connection with our opinion, we have reviewed the Amendment, the
Amended Section and the documents referred to therein, certain publicly
available financial information concerning the Company, certain non-public
information, including financial forecasts, furnished to us concerning the
Company, and the Preliminary Proxy Statement filed with the Securities and
Exchange commission on August 18, 1997 (the "Preliminary Proxy Statement")
pertaining to the Transaction. We have also held discussions with members of the
senior management of the Company regarding its business and prospects. In
addition, we have (i) reviewed the reported price and trading activity for the
common stock of the Company, (ii) reviewed certain financial and stock market
information for the Company, and similar information for certain other companies
whose securities are publicly traded, and (iii) performed such other studies and
analyses, and considered such other factors, as we deemed appropriate.
We have not independently verified the information described above, and
for purposes of this opinion, and with your consent, have assumed the accuracy,
completeness and fair presentation thereof. With respect to financial forecasts
and other information relating to the prospects of the Company, we have assumed
that such forecasts and other information were reasonably prepared and reflect
the best currently available estimates and good faith judgments of the
management of the Company as to the likely future financial performance of the
Company. In addition, we have not conducted a physical inspection of the
properties or facilities or made an independent evaluation or appraisal of the
assets of the Company, nor have we been furnished with any such evaluation or
appraisal. Our opinion is based on financial, economic, monetary, market, and
other conditions as they exist and can be evaluated as of the date of this
letter. We are not expressing any opinion as to the price at which the Company's
Common Stock will trade subsequent to the Transaction. We have made no
independent investigation of any legal matters affecting the Company and have
assumed the correctness of all legal advice given to the Company and the Board
of Directors of the Company.
Alex. Brown & Sons Incorporated did not participate in negotiating the
terms of the Transaction and received no instruction to, and did not, seek or
solicit alternative transactions.
Our opinion expressed herein was prepared for the use of the Board of
Directors of the Company and does not constitute a recommendation to any
stockholders as to how such stockholder should vote. We hereby consent to the
inclusion of this opinion in its entirety as an exhibit to any proxy statement
distributed in connection with the Transaction.
Based upon and subject to the foregoing, it is our opinion that as of the
date of this letter, the Transaction is fair, from a financial point of view, to
the Common Stockholders.
Very truly yours,
ALEX. BROWN & SONS INCORPORATED
EXHIBIT B
NOTE AMENDMENT AGREEMENT NO. 3
THIS NOTE AMENDMENT AGREEMENT NO. 3, dated as of July 22, 1997, is between
PAMIDA HOLDINGS CORPORATION, a Delaware corporation (the "Company"), and 399
VENTURE PARTNERS, INC., a Delaware corporation ("Venture").
* * *
As of the date of this Agreement, the Company has outstanding
$5,315,118.09 principal amount of 13.5% Senior Promissory Notes (the "Senior
Notes"), $14,551,384.79 principal amount of 14% Subordinated Promissory Notes
(the "Subordinated Notes") and $10,974,758.55 principal amount of 14.25% Junior
Subordinated Promissory Notes (the "Junior Subordinated Notes"). The Senior
Notes, Subordinated Notes and Junior Subordinated Notes are collectively
referred to herein as the "Notes". Venture holds more than 50% of the aggregate
outstanding principal amount of the Senior Notes, more than 50% of the aggregate
outstanding principal amount of the Subordinated Notes and more than 50% of the
aggregate outstanding principal amount of the Junior Subordinated Notes. Venture
and the Company have the power to amend the Notes pursuant to paragraph 6 of
each of the Notes. Venture and the Company now desire to further amend all of
the Notes, as previously amended pursuant to a Note Amendment Agreement dated as
of December 18, 1992, between the Company and Court Square Capital Limited, and
a Note Amendment Agreement No. 2 dated as of March 1, 1993 between the Company
and Venture (formerly known as Citicorp Investments Inc.), pursuant to this
Agreement.
THEREFORE, the parties hereto agree as follows:
SECTION 1. AMENDMENT OF NOTES. Each of the Notes shall be amended to be
payable solely in shares of the Company's stock in accordance with the
provisions of the following sentence of this Section 1. One share of either
Common Stock of the Company ("Common Stock") or Nonvoting Common Stock of the
Company ("Nonvoting Common Stock") shall be issued for each $9.00 of outstanding
principal and accrued interest as provided in the "Allonge to Promissory Note"
in the form of Exhibit A hereto (the "Allonge") which shall become effective
upon satisfaction of certain conditions as provided in Section 4 hereof.
SECTION 2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company
hereby represents and warrants to Venture that, subject to approval by the
Company's stockholders as provided in Section 4 hereof, the execution, delivery
and performance of this Agreement and the transactions contemplated hereby have
been duly authorized by the Company; and that execution and delivery by the
Company of this Agreement and the issuance of shares of Common Stock or
Nonvoting Common Stock as contemplated by the Allonge do not and will not (i)
conflict with or result in a breach of the terms, conditions or provisions of,
(ii) constitute a default under, (iii) result in the creation of any lien,
security interest, charge or encumbrances upon the Company's capital stock or
assets pursuant to, (iv) give any third party the right to accelerate any
obligation under, (v) result in a violation of, or (vi) require any
authorization, consent, approval, exemption or other action by or notice to any
court or administrative or governmental body (other than in connection with
certain state and federal securities laws) pursuant to the Company's Restated
Certificate of Incorporation, as amended, or the Company's Revised Bylaws, as
amended, or any law, statute, rule, regulation, instrument, order, judgment or
decree to which the Company or any of its subsidiaries or any of their
respective properties is subject, or any agreement or instrument to which the
Company or any of its subsidiaries is a party or any of their respective
properties is subject. The Company further represents and warrants to Venture
that the authorized equity capital of the Company as of the date hereof consists
of 10,000,000 shares of Common Stock, par value $.01 per share, of which
5,004,942 shares are issued and outstanding, 514 shares of 16.25% Senior
Cumulative Preferred Stock, par value $1.00 per share (the "Senior Preferred"),
of which 513.95939 shares are issued and outstanding, 6,987 shares of 14.25%
Junior Cumulative Preferred Stock, par value $1.00 per share (the "Junior
Preferred"), of which 1,626.86016 shares are issued and outstanding, and
2,000,000 shares of Nonvoting Common Stock, par value $.01 per share, no shares
of which are issued and outstanding; that, except for 345,042 shares of Common
Stock reserved for issuance under the Pamida Holdings Corporation 1992 Stock
Option Plan and except as contemplated hereby, there are no outstanding rights
to acquire shares of the Company through options, warrants, conversion rights or
otherwise; that the liquidation value (as determined pursuant to the terms of
the Restated Certificate of Incorporation of the Company as in effect as of the
date hereof) for the Senior Preferred and the Junior Preferred, respectively,
was $669,300.42 and $2,058,471.04 as of May 31, 1997; and that, as of the date
hereof, the Company has outstanding $5,315,118.09 principal amount of Senior
Notes, $14,551,384.79 principal amount of Subordinated Notes and $10,974,758.55
principal amount of Junior Subordinated Notes. The Company further represents
and agrees that it shall not issue any additional shares of capital stock prior
to the effective date of the amendments to the Notes effected by the Allonge as
determined pursuant to Section 4 hereof, other than issuances of shares under
the Pamida Holdings Corporation 1992 Stock Option Plan, without the prior
written consent of Venture.
SECTION 3. REPRESENTATIONS AND WARRANTIES OF VENTURE. Venture hereby
represents and warrants to the Company that it is the sole and lawful owner of
$3,915,677.52 of the aggregate outstanding principal amount of the Senior Notes,
$10,629,263.60 of the aggregate outstanding principal amount of the Subordinated
Notes and $10,974,758.55 of the aggregate outstanding principal amount of the
Junior Subordinated Notes as of the date hereof; that it has full right and
lawful authority, without the consent of anyone whose consent has not been
given, to enter into, execute and deliver this Agreement and to consummate the
transactions contemplated hereby; and that M. Saleem Muqaddam has authority to
execute and deliver this Agreement and to carry out its terms on behalf of
Venture.
SECTION 4. CONDITIONS TO EFFECTIVENESS OF AMENDMENT. The amendments to the
Notes effected by the Allonge shall become effective upon the satisfaction of
all of the following conditions: (i) the requisite approval by the Company's
stockholders pursuant to the Company's Restated Certificate of Incorporation of
the transactions contemplated by the Allonge and the concurrent authorization by
the Company's stockholders pursuant to the General Corporation law of the State
of Delaware of the requisite number of shares of the Common Stock and the
requisite number of shares and amendment to the terms of the Nonvoting Common
Stock (substantially in the form of Exhibit B hereto) to be issued in connection
with such transactions, (ii) the change and reclassification of each outstanding
share of Senior Preferred and each outstanding share of Junior Preferred
(collectively, the "Preferred Stock") into the number of shares of Common Stock
of the Company equal to the liquidation value of the Preferred Stock (as
determined pursuant to the terms of the Restated Certificate of Incorporation of
the Company as in effect as of the date hereof) plus any unpaid Preferred Stock
dividends not included in the liquidation value accrued as of the close of
business on the effective date of the change and reclassification divided by
nine and, on an individual shareholder basis, rounded up to the next whole
number, and (iii) the receipt by the Company of a favorable opinion from Alex.
Brown & Sons, Incorporated as to the fairness of the transactions contemplated
by the Allonge and the change and reclassification of the Preferred Stock to the
present holders of Common Stock of the Company. If all of the conditions
referred to in the preceding sentence are not satisfied on or prior to December
31, 1997, then this Agreement shall be null and void and of no further force or
effect.
SECTION 5. NO COMMISSIONS. Each party represents and agrees that no
commission or other remuneration has been or will be paid or given directly or
indirectly for soliciting the execution or delivery of this Amendment or the
transactions contemplated hereby.
SECTION 6. SECURITIES LAW RESTRICTIONS. The shares of Nonvoting Common
Stock or Common Stock to be issued to Venture either initially or upon
conversion of Nonvoting Common Stock shall be restricted securities within the
meaning of Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"), and shall bear an appropriate legend. Venture agrees that
such shares may be transferred only pursuant to Rule 144 under the Securities
Act or another available exemption from registration under the Securities Act
if, in the opinion of counsel to the Company, such other exemption is available.
All other holders of Notes will receive unrestricted shares of Common Stock
provided that they have continually held the Notes for at least two years
(calculated in accordance with Rule 144) and have not been affiliates of the
Company for at least three months as of the effective date of the Allonge.
SECTION 7. COUNTERPARTS. This Agreement may be executed simultaneously in
two or more counterparts, any one of which need not contain the signatures of
more than one party, but all such counterparts taken together will constitute
one and the same Agreement.
SECTION 8. DESCRIPTIVE HEADINGS. The descriptive headings of this
Agreement are inserted for convenience only and do not constitute a part of this
Agreement.
SECTION 9. GOVERNING LAW. All questions concerning the construction,
validity and interpretation of this Agreement will be governed by the internal
law, and not the law of conflicts, of Delaware.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year first above written.
PAMIDA HOLDINGS CORPORATION
By: /S/ STEVEN S. FISHMAN
Steven S. Fishman, Chairman of
the Board and Chief
Executive Officer
399 VENTURE PARTNERS, INC.
By: /S/ M. SALEEM MUQADDAM
M. Saleem Muqaddam, Vice President
EXHIBIT A
ALLONGE TO PROMISSORY NOTE
The Promissory Note ("Promissory Note") of Pamida Holdings Corporation
(the "Company") described below is hereby amended by this Allonge to Promissory
Note which shall form part of the Promissory Note and shall supersede the terms
and conditions of the Promissory Note to the extent inconsistent herewith.
1. PAYMENT. The entire outstanding principal balance of this Promissory
Note as of the date hereof (including amounts previously added to the principal
balance in payment of interest) ("Principal") and interest accrued under this
Promissory Note from the most recent Quarterly Payment Date through the date
immediately preceding the date hereof as set forth below ("Interest") shall be
due and payable on the date hereof in the number of shares of Common Stock (or
Nonvoting Common Stock if Section 2 hereof is applicable) of the Company
calculated as follows: The number of shares to be issued in full payment of all
of the Company's obligations under this Promissory Note shall equal the sum of
the Principal and Interest divided by nine (9) and rounded up to the next whole
number.
2. NONVOTING COMMON STOCK. Notwithstanding the provisions of Section 1
hereof, if the payment of this Promissory Note in shares of Common Stock
together with the contemporaneous payment in shares of Common Stock of other
presently outstanding promissory notes of the Company held by the holder of this
Promissory Note would have the effect of causing the registered holder (or a
group acting in concert as a partnership or other group of which the holder is a
member) to become the beneficial owner (within the meaning of Rule 13d-3 under
the Securities Exchange Act of 1934, as amended) of securities of the Company
representing 30% or more of the combined voting power of the outstanding
securities of the Company ordinarily (and apart from rights arising under
special circumstances) having the right to vote in the election of directors,
then this Promissory Note shall be payable in shares of Nonvoting Common Stock
(as constituted as of the close of business on the date hereof) in lieu of
Common Stock. Except for such right to vote, shares of Nonvoting Common Stock
shall be equal in all respects to the Common Stock and shall be convertible into
the same number of shares of Common Stock under certain conditions.
3. AUTOMATIC CONVERSION. Effective on the date hereof, this Promissory
Note automatically and without further action being required shall be deemed
converted solely into the right to receive the applicable number of shares of
Common Stock or Nonvoting Common Stock, as the case may be, as calculated in
accordance with this Allonge to Promissory Note; and the registered holder of
this Promissory Note thereafter shall have no rights under this Promissory Note
except to receive such number of shares.
4. DISCHARGE AND CANCELLATION. This Promissory Note is hereby discharged,
and the Company shall be forever released from all its obligations and
liabilities under this Promissory Note, subject only to issuance of such shares
of Common Stock or Nonvoting Common Stock, as the case may be, which shall be
delivered to the registered holder upon surrender of this Promissory Note
(including this Allonge to Promissory Note) to the Company for cancellation and
will not be reissued.
5. NO STOCKHOLDER RIGHTS. Nothing contained in this Promissory Note shall
be construed as conferring upon the registered holder or any other person the
right to vote or to consent or to receive notice as a stockholder in respect of
meetings of stockholders for the election of directors of the Company or with
respect to any other matters or any rights whatsoever as a stockholder of the
Company; and no dividends or interest shall hereafter be payable or accrued in
respect of this Note or the interest represented hereby or the shares obtainable
hereunder until, and only to the extent that, this Promissory Note shall have
been surrendered and shares shall have been issued to the registered holder in
accordance with the terms of this Allonge to Promissory Note.
6. PLACE OF TENDER. Tender of this Promissory Note (including this Allonge
to Promissory Note) is to be made at the offices of the Company, Pamida Holdings
Corporation, 8800 "F" Street, Omaha, Nebraska 68127-1574, Attention: Chief
Financial Officer or to such other address as specified by prior written notice
from the Company to the registered holder of this Promissory Note. Shares of
Common Stock will be delivered to the registered holder promptly upon such
tender at such holder's address as set forth on the records of the Company.
7. GOVERNING LAW. This Promissory Note shall be governed by and construed
in accordance with the laws of Delaware, excluding that body of law relating to
conflict of laws.
8. HEADINGS; REFERENCES. All headings used herein are used for convenience
only and shall not be used to construe or interpret this Promissory Note. Except
where otherwise indicated, all references herein to sections refer to sections
hereof.
9. DEFINITIONS. For purposes of this Allonge to Promissory Note, "Common
Stock" means Common Stock of the Company, and "Nonvoting Common Stock" means
Nonvoting Common Stock of the Company.
IN WITNESS WHEREOF, the Company has executed and delivered this Allonge to
Promissory Note on _________________, 1997.
PAMIDA HOLDINGS CORPORATION
By:________________________________
Steven S. Fishman, Chairman of the
Board and Chief Executive Officer
This Allonge to Promissory Note amends the Promissory Note described below:
Series:
Date:
Registered Holder:
Principal (including amounts
added in payment of interest):
Interest:
Total Principal and Interest:
Shares to be issued in full payment of this Promissory Note Number of shares:
Class:
Endorsed and Tendered
for Exchange in Accordance
with this Allonge to Promissory Note
____________________________________
Registered Holder
By:_________________________________
Its:________________________________
Date:_______________________________
EXHIBIT B
NONVOTING COMMON STOCK
Part 4 of Section 4.3 of Article Fourth of the Restated Certificate of
Incorporation of the Corporation shall be amended to read in its entirety as
follows:
Part 4. CONVERSION.
4A. CONVERSION OF NONVOTING COMMON STOCK.
Each holder of shares of Nonvoting Common Stock shall be entitled to
convert into the same number of shares of Common Stock any or all of such
holder's shares of Nonvoting Common Stock if (i) such conversion would not
have the effect of causing such holder (or a group acting in concert as a
partnership or other group of which such holder is a member) to become the
beneficial owner (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) of securities of the Corporation
representing 30% or more of the combined voting power of the outstanding
securities of the Corporation ordinarily (and apart from rights arising
under special circumstances) having the right to vote in the election of
directors (hereinafter, a "30% Holder"); provided, however, that,
notwithstanding the foregoing provisions of this clause (i), if
immediately prior to a transfer of shares of Nonvoting Common Stock to a
transferee holder, the transferor of such shares would have been a 30%
Holder if its holdings of Nonvoting Common Stock were deemed converted
into shares of Common Stock, then the transferee holder of such shares of
Nonvoting Common Stock shall not have the right to convert such shares of
Nonvoting Common Stock into shares of Common Stock until the sixty-first
day after the date of the transfer, or (ii) the 11 3/4% Senior
Subordinated Notes due 2003 of Pamida, Inc., a Delaware corporation (the
"Senior Subordinated Notes") are not outstanding and have not been
replaced with a debt issue with comparable provisions requiring redemption
or otherwise imposing requirements or restrictions on the Corporation or
the issuer of such replacement debt issue in the event a person or group
becomes a 30% Holder. For purposes of this Part 4, a "person" shall
include any natural person and any corporation, partnership, joint
venture, trust, unincorporated organization, or other entity or
organization.
4B. CONVERSION PROCEDURE.
(i) Each conversion of shares of Nonvoting Common Stock into shares
of Common Stock pursuant to Part 4A above shall be effected by the
surrender of the certificate or certificates representing the shares to be
converted at the principal office of the Corporation at any time during
normal business hours, together with a written notice by the holder of
such shares of Nonvoting Common Stock stating that such holder desires to
convert the shares, or a stated number of the shares, of Nonvoting Common
Stock represented by such certificate or certificates into shares of
Common Stock. Each conversion shall be deemed to have been effected as of
the close of business on the date on which such certificate or
certificates have been surrendered and such notice has been received, and
at such time the rights of the holder of the converted shares of Nonvoting
Common Stock as such holder shall cease and the person or persons in whose
name or names the certificate or certificates for shares of Common Stock
are to be issued upon such conversion shall be deemed to have become the
holder or holders of record of the shares of Common Stock represented
thereby.
(ii) Promptly after the surrender of such certificates and the
receipt of such written notice, the Corporation shall issue and deliver in
accordance with the surrendering holder's instructions (a) the certificate
or certificates for the shares of Common Stock issuable upon such
conversion and (b) a certificate representing any shares of Nonvoting
Common Stock which were represented by the certificate or certificates
surrendered to the Corporation in connection with such conversion but
which were not converted.
(iii) The issuance of certificates for shares of Common Stock upon
conversion of shares of Nonvoting Common Stock will be made without charge
to the holders of such shares for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection with such conversion
and the related issuance of shares of Common Stock.
(iv) The Corporation at all times shall reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for the
purpose of issuance upon the conversion of shares of Nonvoting Common
Stock, such number of shares of Common Stock as may be issuable upon the
conversion of all outstanding shares of Nonvoting Common Stock. All shares
of Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable, and free from all taxes,
liens, and charges. The Corporation shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of
Common Stock may be listed (except for official notice of issuance which
will be immediately transmitted by the Corporation upon issuance).
(v) The Corporation shall not close its books against the transfer
of shares of Nonvoting Common Stock or shares of Common Stock issued or
issuable upon conversion of shares of Nonvoting Common Stock in any manner
which would interfere with the timely conversion of shares of Nonvoting
Common Stock.
(vi) If the Corporation in any manner subdivides or combines the
outstanding shares of Common Stock or Nonvoting Common Stock, then the
outstanding shares of the other of such classes of stock shall be
proportionately subdivided or combined in a similar manner.
EXHIBIT C
Text of Proposed Amendment to Section 4.2 of Restated Certificate of
Incorporation of Pamida Holdings Corporation.
4.2 RECLASSIFICATION OF PREFERRED STOCK
Upon the effectiveness of this Certificate of Amendment of the
Restated Certificate of Incorporation of the Corporation (the "Effective
Date"), each outstanding share of Senior Preferred and each outstanding
share of Junior Preferred shall be changed and reclassified, without any
other action being required on the part of the respective holders thereof,
into the number of shares of Common Stock of the Corporation calculated as
follows: The number of shares of Common Stock to be issued for the
outstanding shares of Senior Preferred and Junior Preferred held by each
holder thereof shall be equal to the Liquidation Value of such holder's
shares of Senior Preferred and Junior Preferred divided by nine (9) and
rounded up to the next whole number. The "Liquidation Value" of each share
of Senior Preferred or Junior Preferred shall mean the Liquidation Value
as determined pursuant to the terms of Section 4.2 of Article Fourth of
the Restated Certificate of Incorporation of the Corporation as in effect
immediately prior to the Effective Date plus any unpaid dividends not
included in the Liquidation Value accrued from the most recent Dividend
Reference Date (as such term is defined in the Restated Certificate of
Incorporation of the Corporation as in effect immediately prior to the
Effective Date) to the close of business on the Effective Date.
At and after the Effective Date, holders of shares of Senior
Preferred and Junior Preferred, upon surrender of a certificate or
certificates for such shares to the Corporation, shall be entitled to
receive in replacement thereof a certificate representing the number of
shares of Common Stock of the Corporation into which the aggregate number
of shares of Senior Preferred or Junior Preferred represented by the
certificate or certificates so surrendered shall have been changed and
reclassified pursuant to the preceding paragraph of this Section 4.2. From
and after the Effective Date, until surrendered and replaced in accordance
with this paragraph, each such certificate representing shares of Senior
Preferred or Junior Preferred shall be deemed for all corporate purposes
to represent the number of shares of Common Stock of the Corporation into
which such shares of Senior Preferred or Junior Preferred shall have been
changed and reclassified pursuant to the preceding paragraph of this
Section 4.2; provided, however, that the rights of the holders of such
certificates representing shares of Senior Preferred or Junior Preferred
(i) to vote and (ii) to receive dividends and distributions, if any,
payable to holders of Common Stock of the Corporation shall be governed by
the following provisions of this paragraph. After the Effective Date, no
holder of shares of Senior Preferred or Junior Preferred shall have the
right to vote on any matter submitted to a vote of the holders of Common
Stock of the Corporation until the Corporation, in accordance with the
provisions of this paragraph, has issued to such holder a certificate for
the shares of Common Stock of the Corporation into which such shares of
Senior Preferred or Junior Preferred shall have been changed and
reclassified pursuant to the preceding paragraph of this Section 4.2.
Unless and until the certificate or certificates representing shares of
Senior Preferred or Junior Preferred have been surrendered to the
Corporation as contemplated in this paragraph, no dividends or other
distributions payable to holders of Common Stock of the Corporation as of
a record date at or after the Effective Date shall be paid to any holder
of such certificate or certificates. Subject to the effect of unclaimed
property, escheat, and other applicable laws, after the surrender of any
such certificate for shares of Senior Preferred or Junior Preferred, there
shall be paid to the record holder of the shares of Common Stock of the
Corporation issued in replacement of such certificate, without interest,
(i) the amount of dividends or other distributions with a record date at
or after the Effective Date but prior to such surrender theretofore paid
with respect to such shares of Common Stock of the Corporation and (ii) on
the appropriate payment date, the amount of dividends or other
distributions with a record date at or after the Effective Date but prior
to such surrender and a payment date subsequent to such surrender payable
with respect to such shares of Common Stock of the Corporation. From and
after the Effective Date, the stock transfer books of the Corporation with
respect to the Senior Preferred and the Junior Preferred shall be closed,
and no transfer of any of such shares thereafter shall be made. If, after
the Effective Date, certificates for shares of Senior Preferred or Junior
Preferred are presented to the Corporation for transfer, then such
certificates shall be cancelled and replaced by certificates issued in the
name of the transferee representing the appropriate number of shares of
Common Stock of the Corporation as provided in this paragraph.
EXHIBIT D
Text of Proposed Amendment to Section 4.1 of Restated Certificate of
Incorporation of Pamida Holdings Corporation.
4.1 GENERAL
The total number of shares of stock which the Corporation has
authority to issue is 29,002,141 consisting of:
(i) 514 shares of 16.25% Senior Cumulative Preferred Stock, par
value $1.00 per share (the "Senior Preferred");
(ii) 1,627 shares of 14.25% Junior Cumulative Preferred Stock, par
value $1.00 per share (the "Junior Preferred");
(iii) 25,000,000 shares of Common Stock, par value $.01 per share
(the "Common Stock"); and
(iv) 4,000,000 shares of Nonvoting Common Stock, par value $.01 per
share (the "Nonvoting Common Stock").
EXHIBIT E
Text of Proposed Amendment to Section 4.3 of Restated Certificate of
Incorporation of Pamida Holdings Corporation.
4.3 COMMON STOCK AND NONVOTING COMMON STOCK
Except as otherwise provided in this Section 4.3 or as otherwise
required by applicable law, all shares of Common Stock and Nonvoting
Common Stock shall be identical in all respects and shall entitle the
holders thereof to the same rights and privileges, subject to the same
qualifications, limitations, and restrictions.
Part 1. VOTING RIGHTS.
Except as otherwise provided in this Section 4.3 or in ARTICLE
ELEVENTH or as otherwise required by applicable law, the holders of Common
Stock shall be entitled to one vote per share on all matters to be voted
on by the Corporation's stockholders, and the holders of Nonvoting Common
Stock shall have no right to vote on any matters to be voted on by the
Corporation's stockholders; provided, that the holders of Nonvoting Common
Stock shall have the right to vote as a separate class on any merger or
consolidation of the Corporation with or into another entity or entities,
or any recapitalization or reorganization, in which shares of Nonvoting
Common Stock would receive or be exchanged for consideration different on
a per share basis from the consideration received with respect to or in
exchange for shares of Common Stock or would otherwise be treated
differently from shares of Common Stock, except that shares of Nonvoting
Common Stock may, without such a separate class vote, receive or be
exchanged for non-voting securities which are otherwise identical on a per
share basis in amount and form to the voting securities received with
respect to or in exchange for the Common Stock so long as (i) such
non-voting securities are convertible into voting securities on the same
terms as Nonvoting Common Stock is convertible into Common Stock under
Part 4 of this Section 4.3 and (ii) all other consideration is equal on a
per share basis.
Part 2. DIVIDENDS
As and when dividends are declared or paid thereon, whether in cash,
property, or securities of the Corporation, the holders of Common Stock
and the holders of Nonvoting Common Stock shall be entitled to participate
in such dividends ratably on a per share basis; provided, that (i) if
dividends are declared which are payable in shares of Common Stock or
Nonvoting Common Stock, then dividends shall be declared which are payable
at the same rate on both classes of stock, the dividends payable in shares
of Common Stock shall be payable to holders of Common Stock, and the
dividends payable in shares of Nonvoting Common Stock shall be payable to
holders of Nonvoting Common Stock and (ii) if the dividends consist of
other voting securities of the Corporation, the Corporation shall make
available to each holder of Nonvoting Common Stock, at such holder's
request, dividends consisting of non-voting securities of the Corporation
which are otherwise identical to such voting securities and which are
convertible into or exchangeable for such voting securities on the same
terms as Nonvoting Common Stock is convertible into Common Stock under
Part 4 of this Section 4.3.
Part 3. LIQUIDATION.
Except as otherwise provided by applicable law or by the Restated
Certificate of Incorporation of the Corporation or any amendments thereto,
in the event of any liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, the holders of Common Stock
and the holders of Nonvoting Common Stock shall be entitled to share,
ratably according to the number of shares of Common Stock and Nonvoting
Common Stock held by them, in all remaining assets of the Corporation
available for distribution to its stockholders.
Part 4. CONVERSION.
4A. CONVERSION OF NONVOTING COMMON STOCK.
Each holder of shares of Nonvoting Common Stock shall be entitled to
convert into the same number of shares of Common Stock any or all of such
holder's shares of Nonvoting Common Stock if (i) such conversion would not
have the effect of causing such holder (or a group acting in concert as a
partnership or other group of which such holder is a member) to become the
beneficial owner (within the meaning of Rule 13d-3 under the Securities
Exchange Act of 1934, as amended) of securities of the Corporation
representing 30% or more of the combined voting power of the outstanding
securities of the Corporation ordinarily (and apart from rights arising
under special circumstances) having the right to vote in the election of
directors (hereinafter, a "30% Holder"); provided, however, that,
notwithstanding the foregoing provisions of this clause (i), if
immediately prior to a transfer of shares of Nonvoting Common Stock to a
transferee holder, the transferor of such shares would have been a 30%
Holder if its holdings of Nonvoting Common Stock were deemed converted
into shares of Common Stock, then the transferee holder of such shares of
Nonvoting Common Stock shall not have the right to convert such shares of
Nonvoting Common Stock into shares of Common Stock until the sixty-first
day after the date of the transfer, or (ii) the 11 3/4% Senior
Subordinated Notes due 2003 of Pamida, Inc., a Delaware corporation (the
"Senior Subordinated Notes") are not outstanding and have not been
replaced with a debt issue with comparable provisions requiring redemption
or otherwise imposing requirements or restrictions on the Corporation or
the issuer of such replacement debt issue in the event a person or group
becomes a 30% Holder. For purposes of this Part 4, a "person" shall
include any natural person and any corporation, partnership, joint
venture, trust, unincorporated organization, or other entity or
organization.
4B. CONVERSION PROCEDURE.
(i) Each conversion of shares of Nonvoting Common Stock into shares
of Common Stock pursuant to Part 4A above shall be effected by the
surrender of the certificate or certificates representing the shares to be
converted at the principal office of the Corporation at any time during
normal business hours, together with a written notice by the holder of
such shares of Nonvoting Common Stock stating that such holder desires to
convert the shares, or a stated number of the shares, of Nonvoting Common
Stock represented by such certificate or certificates into shares of
Common Stock. Each conversion shall be deemed to have been effected as of
the close of business on the date on which such certificate or
certificates have been surrendered and such notice has been received, and
at such time the rights of the holder of the converted shares of Nonvoting
Common Stock as such holder shall cease and the person or persons in whose
name or names the certificate or certificates for shares of Common Stock
are to be issued upon such conversion shall be deemed to have become the
holder or holders of record of the shares of Common Stock represented
thereby.
(ii) Promptly after the surrender of such certificates and the
receipt of such written notice, the Corporation shall issue and deliver in
accordance with the surrendering holder's instructions (a) the certificate
or certificates for the shares of Common Stock issuable upon such
conversion and (b) a certificate representing any shares of Nonvoting
Common Stock which were represented by the certificate or certificates
surrendered to the Corporation in connection with such conversion but
which were not converted.
(iii) The issuance of certificates for shares of Common Stock upon
conversion of shares of Nonvoting Common Stock will be made without charge
to the holders of such shares for any issuance tax in respect thereof or
other cost incurred by the Corporation in connection with such conversion
and the related issuance of shares of Common Stock.
(iv) The Corporation at all times shall reserve and keep available
out of its authorized but unissued shares of Common Stock, solely for the
purpose of issuance upon the conversion of shares of Nonvoting Common
Stock, such number of shares of Common Stock as may be issuable upon the
conversion of all outstanding shares of Nonvoting Common Stock. All shares
of Common Stock which are so issuable shall, when issued, be duly and
validly issued, fully paid and nonassessable, and free from all taxes,
liens, and charges. The Corporation shall take all such actions as may be
necessary to assure that all such shares of Common Stock may be so issued
without violation of any applicable law or governmental regulation or any
requirements of any domestic securities exchange upon which shares of
Common Stock may be listed (except for official notice of issuance which
will be immediately transmitted by the Corporation upon issuance).
(v) The Corporation shall not close its books against the transfer
of shares of Nonvoting Common Stock or shares of Common Stock issued or
issuable upon conversion of shares of Nonvoting Common Stock in any manner
which would interfere with the timely conversion of shares of Nonvoting
Common Stock.
(vi) If the Corporation in any manner subdivides or combines the
outstanding shares of Common Stock or Nonvoting Common Stock, then the
outstanding shares of the other of such classes of stock shall be
proportionately subdivided or combined in a similar manner.
Part 5. AMENDMENT AND WAIVER.
No amendment or waiver of any provision of this Section 4.3 shall be
effective without the prior approval of the holders of a majority of the
then outstanding shares of Nonvoting Common Stock voting as a separate
class."
PROXY
PAMIDA HOLDINGS CORPORATION
Proxy for Special Meeting of Stockholders to be held October 28, 1997
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned hereby constitutes and appoints Steven S. Fishman, Frank
A. Washburn, and George R. Mihalko, and each or any of them, attorneys and
proxies of the undersigned, with full power of substitution to each of them, to
vote all stock of Pamida Holdings Corporation (the "Corporation") standing in
the name of the undersigned at the special meeting of stockholders of the
Corporation to be held at the office of the , 8800 "F" Street, Omaha, Nebraska,
at 8:30 a.m. on October 28, 1997, and at any adjournments thereof, on the
matters set forth on the reverse side hereof and on any other matters that
properly may come before the meeting or any adjournments thereof.
This Proxy, when properly signed, will be voted as specified. If no
specification is given, this Proxy will be voted FOR all of the matters set
forth on the reverse side hereof.
The undersigned hereby ratifies and confirms all that any of such
attorneys and proxies, or their substitutes, may due or cause to be done by
virtue hereof and acknowledges receipt of the Notice of Special Meeting of
Stockholders of the Corporation to be held on October 28, 1997, the Proxy
Statement of the Corporation for such Special Meeting, and copies of the Annual
Report of the Corporation on Form 10-K for the fiscal year ended February 2,
1997, and the Quarterly Report of the Corporation on Form 10-Q for the quarterly
period ended August 3, 1997.
(To be signed on reverse side) (See reverse side)
1. Approval of Note Amendment Agreement No. 3 between the Corporation and 399
Venture Partners, Inc. and the transactions contemplated thereby.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
2. Approval of an amendment to the Restated Certificate of Incorporation of
the Corporation to change and reclassify all of the outstanding shares of
Preferred Stock of the Corporation into shares of Common Stock of the
Corporation.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
3. Approval of amendments to the Restated Certificate of Incorporation of the
Corporation to increase the number of authorized shares of Common Stock
and Nonvoting Common Stock of the Corporation, amend the conversion terms
of the Nonvoting Common Stock of the Corporation, and reduce the number of
authorized shares of Junior Cumulative Preferred Stock of the Corporation.
FOR AGAINST ABSTAIN
[ ] [ ] [ ]
- ------------------------ ------------------------- ----------
Signature of Shareholder Signature if Held Jointly Date
Note: Please sign exactly as name appears above. When shares are held by joint
tenants, both should sign. When signing as attorney, executor,
administrator, trustee, or guardian, please give full title as such.
Corporations, partnerships, and limited liability companies should sign in
their names by an authorized officer, partner, member, or manager.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended February 2, 1997
Commission File Number 1-10619
PAMIDA HOLDINGS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 47-0696125
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
8800 "F" Street, Omaha, Nebraska 68127
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 339-2400
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Name of Each Exchange
Class on Which Registered
------------- -----------------------
Common Stock American Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
NONE
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of April 15, 1997, was $10,899,162 based upon the closing
price for such stock on the American Stock Exchange on such date.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date:
Outstanding at
Class of Stock April 15, 1997
-------------- ----------------
Common Stock 5,004,942 shares
Documents Incorporated by Reference: Portions of the registrant's proxy
statement dated March 26, 1997, for the annual meeting of the registrant's
stockholders to be held on May 22, 1997, are incorporated by reference into Part
III.
PART I
Item 1. BUSINESS.
FORWARD-LOOKING STATEMENTS
This 10-K contains certain forward-looking statements within the meaning of
the Private Securities Litigation Reform Act of 1995 (the "1995 Act"). Such
statements are made in good faith by the Company pursuant to the safe-harbor
provisions of the 1995 Act. In connection with these safe-harbor provisions,
this 10-K contains certain forward-looking statements which reflect management's
current views and estimates of future economic circumstances, industry
conditions, Company performance and financial results. The statements are based
on many assumptions and factors including sales results, expense levels,
competition and interest rates as well as other risks and uncertainties inherent
in the Company's business, capital structure and the retail industry in general.
Any changes in these factors could result in significantly different results.
The Company further cautions that the forward-looking information contained
herein is not exhaustive or exclusive. The Company does not undertake to update
any forward-looking statements which may be made from time to time by or on
behalf of the Company.
GENERAL.
Pamida Holdings Corporation conducts its mass merchandise retail business
through its wholly owned subsidiary, Pamida, Inc., a Delaware corporation.
Unless the context indicates otherwise, the terms "Pamida" and "Company" refer
collectively to Pamida Holdings Corporation, its direct and indirect
subsidiaries and their predecessors, and "Holdings" refers only to Pamida
Holdings Corporation.
Holdings is a Delaware corporation incorporated in 1986 to acquire all of
the capital stock of Pamida, Inc. which, directly since 1981 and through a
predecessor prior to 1981, had been engaged in the mass merchandise retail
business since 1963. The capital stock of Pamida, Inc. is the only significant
asset of Holdings, and Holdings has no material operations of its own.
On January 19, 1996, the Company announced its intention to close 40 stores
located in unprofitable or highly competitive markets. Store closing sales began
on January 29, 1996, and the Company completed all of such store closings during
the second quarter of the fiscal year ended February 2, 1997. References in this
Form 10-K to the "40 Closed Stores" mean such 40 stores.
STORES.
At February 2, 1997, Pamida operated 148 mass merchandise retail stores
located in 148 small towns (having an average population of approximately 5,500)
in 15 Midwestern, North Central and Rocky Mountain states. Pamida's strategic
objective is to be the dominant mass merchandise retailer in the communities it
serves. The Company believes that it holds the leading market position in over
80% of the communities in which its stores are located.
Pamida stores generally are located in small towns, normally county seats,
where there often is little or no competition from another major mass
merchandise retailer and which the Company considers to be either too small to
support more than one major mass merchandise retailer (thereby creating a
potential barrier to entry by a major competitor) or too small to attract
competitors whose stores generally are designed to serve larger populations. At
February 2, 1997, 119 of the Company's 148 stores faced no direct local
competition from other major mass merchandise retailers.
The Company's stores average approximately 29,000 square feet of sales area
and range in size from approximately 6,000 to 51,000 square feet of sales area.
At February 2, 1997, Pamida's stores had an aggregate sales area of
approximately 4,348,000 square feet.
The following table indicates the states in which Pamida's stores were
located as of February 2, 1997:
STATE TOTAL
----- -----
Minnesota..................................................... 29
Iowa.......................................................... 26
Nebraska...................................................... 15
Wisconsin..................................................... 14
Michigan..................................................... 12
Ohio......................................................... 10
Wyoming....................................................... 9
North Dakota.................................................. 7
South Dakota.................................................. 7
Montana....................................................... 7
Indiana....................................................... 4
Kansas........................................................ 3
Kentucky ..................................................... 2
Illinois...................................................... 2
Missouri ..................................................... 1
---
148
===
The following tables show the number of the Company's store openings,
relocations and closings and the aggregate year-end store sales area by fiscal
year since fiscal 1993:
Fiscal Year Ended
1997 1996 1995 1994 1993
Beginning of year ... 144 184 173 178 178
Stores opened in
new markets ..... 6 7 17 8 9
Stores relocated in
existing markets 2 3 -- -- --
Stores closed ..... (4) (10) (6) (13) (9)
--- --- --- --- ---
End of year ......... 148 184 184 173 178
Less 40 Closed Stores === (40) === === ===
---
144
===
Fiscal Year Ended
1997 1996 1995 1994 1993
Square feet of
store sales area
at year-end (in
millions) 4.35 5.22 5.09 4.68 4.75
Less 40 Closed Stores (1.09)
------
4.13
Pamida regularly evaluates all of its stores and from time to time closes
stores which no longer meet its standards for sales, profitability, selling area
or other applicable criteria.
STORE EXPANSION PROGRAM.
Pamida's store expansion program is subject to the Company's ability to
negotiate satisfactory leases, to the ability of prospective landlords to obtain
financing for new store buildings and to various zoning, site acquisition,
environmental, traffic, construction and other contingencies. Three new stores,
two of which are replacement stores, are expected to commence operations this
year.
Pamida has identified numerous communities which are potential sites for
the Company's prototype stores and in which Pamida believes it can achieve a
leading market position, although there is no assurance that Pamida will open
stores in such communities or on any particular time schedule.
In October 1996 the Company agreed to lease a new 200,000 square foot
distribution facility to be located in Lebanon, Indiana. Construction of this
new facility is underway, and the facility is expected to be completed and
operational during the second quarter of the current year.
Pamida believes that its existing distribution facilities (including the
new Lebanon, Indiana facility), senior and middle management staff and corporate
infrastructure are sufficient to accommodate the Company's anticipated growth.
The Company typically invests approximately $1,450,000 to $1,750,000 in a
new prototype store. Such expenditures consist primarily of approximately
$1,000,000 to $1,200,000 for the initial store inventory, a portion of which is
financed by vendor trade credit, and approximately $450,000 to $550,000 for
store fixtures and equipment. Because of the redeployment of store fixtures and
equipment from the 40 Closed Stores to new stores, the Company expects store
fixture and equipment expense to be limited to approximately $250,000 per new
store for fiscal 1998. In most cases, building and land costs of approximately
$1,450,000 to $1,750,000 per store are financed by unaffiliated developers who
lease the real estate to Pamida. To expedite the construction process, Pamida
occasionally may construct stores on sites which it acquires, with the
expectation that it subsequently will enter into sale-leaseback transactions
with respect to such stores with unaffiliated investors.
SALES AND MERCHANDISING.
Pamida's merchandising policy is to provide customers with one-stop family
shopping convenience and to feature nationally advertised brand-name products as
well as some private-label merchandise at attractive prices. Pamida operates its
stores on a self-service, primarily cash-and-carry basis and runs weekly
advertised promotions throughout the year. All of Pamida's stores accept bank
credit cards, which accounted for 14.2% of total store sales during the fiscal
year ended February 2, 1997.
Pamida's typical customers are price-conscious families across the income
spectrum. To effectively serve such customers, the Company's stores are open
seven days a week for an average of at least 75 hours per week.
Pamida's two basic merchandise divisions are softlines and hardlines. The
softlines division includes men's, women's, children's and infants' clothing,
footwear, accessories and jewelry. The hardlines division includes categories
such as health and beauty aids, automotive accessories, housewares, cleaning
supplies, hardware, paint, sporting goods, toys, stationery, small appliances
and electronic items, videos, compact discs and tapes, lawn and garden supplies,
linens and other domestics, cameras and accessories, pet supplies and some food
and candy items.
The Company currently owns and operates pharmacies in 41 of its larger
stores, and eight of Pamida's other stores contain prescription pharmacies
leased to and operated by independent pharmacists. The pharmacies have proved to
be effective in building customer loyalty and attracting customers who are
likely to purchase other items in addition to prescription drugs. Pamida
intends, whenever feasible in light of regulatory and personnel considerations
and where space permits, to include a pharmacy in each of its new prototype
stores and to add pharmacies to existing stores.
During the fiscal year ended February 2, 1997, the hardlines division
accounted for approximately 72% of Pamida's total sales, while the apparel
division and the pharmacies accounted for 23% and 5%, respectively, of Pamida's
total sales.
Among the methods that the Company employs to build customer loyalty and
satisfaction are weekly advertised specials, competitive pricing, clean and
orderly stores, friendly well-trained personnel, a liberal return policy and a
wide variety of special customer services (such as wheelchairs for the elderly
and handicapped, restroom facilities and water fountains, seating benches,
speedy check-out lanes and expedited check cashing and raincheck and layaway
processing) offered under various customer-oriented themes such as "We Care" and
"We're Listening". Pamida places special emphasis on maintaining a strong
in-stock position in all merchandise categories, particularly with respect to
sale items.
Pamida's business, like that of most other mass merchandise retailers, is
seasonal. First quarter sales (February through April) are lower than sales
during the other three fiscal quarters, while fourth quarter sales (November
through January) in recent years have increased to approximately 30% of the full
year's sales and normally involve a greater proportion of higher margin
merchandise.
ADVERTISING AND PROMOTION.
The Company's extensive advertising primarily utilizes colorful weekly
circulars developed by a centralized advertising department at Pamida's
headquarters. Such circulars advertise brand-name and other merchandise at
significant price reductions and are inserted into local newspapers or mailed
directly to customers. Pamida also uses local shoppers publications and coupon
books. During fiscal 1997, Pamida spent approximately $11,618,000 (net of
promotional allowances provided by vendors) on advertising, which represented
approximately 1.8% of fiscal 1997 sales.
PURCHASING AND DISTRIBUTION.
Pamida maintains a centralized buying, merchandising and store planning
staff at its executive offices. The merchandising department includes two
general merchandise managers, five hardlines divisional merchandise managers and
three apparel divisional merchandise managers. Each of the divisional
merchandise managers supervises from five to seven buyers. Members of the
Company's experienced buying staff regularly attend major trade shows, visit
both domestic and overseas markets and meet with vendor representatives at the
Company's headquarters.
The merchandise in the Company's stores is purchased from over 3,000
primary manufacturers and suppliers and numerous other vendors. Centralized
purchasing enables Pamida to more effectively control inventory shrinkage and to
take advantage of promotional programs and volume discounts offered by certain
vendors. The Company continuously seeks to optimize merchandise costs, including
promotional allowances offered by its suppliers. Pamida also has centralized the
management of returned merchandise, which enables the Company to most
effectively secure vendor credits and refunds with respect to such merchandise.
The Company's point-of-sale data capture equipment located in its stores
provides current information to Pamida's buyers to assist them in managing
inventories, effecting prompt reorders of popular items, eliminating
slow-selling merchandise and reducing markdowns.
Seaway Importing Company, a wholly owned subsidiary of Pamida, Inc.,
imports a wide variety of merchandise, including sporting goods, pet supplies,
toys, electronic items, apparel, hair care items, painting supplies, automotive
items and hardware, for sale in Pamida's stores.
During fiscal 1997, approximately 76% of Pamida's merchandise was supplied
to the stores through Pamida's own distribution centers, while the remaining
merchandise was supplied directly to the stores by manufacturers or
distributors.
COMPETITION.
The mass merchandise retail business is highly competitive. The Company's
stores generally compete with supermarkets, drug and specialty stores, mail
order and catalog merchants and, in some communities, department stores and
other mass merchandise retailers. Competitors consist both of independent stores
and of regional and national chains, some of which have substantially greater
resources than the Company. The type and degree of competition and the number of
competitors which Pamida's stores face vary significantly by market.
Pamida believes that the principal areas of competition in the mass
merchandise retail industry are store location, price, merchandise variety and
quality and customer service, although numerous other factors also affect the
competitive position of any particular store. Among the methods that the Company
employs to build customer loyalty and satisfaction are weekly advertised
specials, competitive pricing, clean and orderly stores, friendly well-trained
personnel, a liberal return policy and a wide variety of special customer
services offered under themes such as "We Care" and "We're Listening".
Pamida stores generally are located in small towns, normally county seats,
where there often is little or no competition from another major mass
merchandise retailer and which may be either too small to support more than one
major mass merchandise retailer (thereby creating a potential barrier to entry
by a major competitor) or too small to attract competitors whose stores
generally are designed to serve larger populations. The Company believes that,
in terms of sales, it is the leading mass merchandise retailer in over 80% of
the communities in which its stores are located.
At February 2, 1997, 119 of Pamida's 148 stores were located in communities
in which there was no direct local competition from other major mass merchandise
retailers. As of that date, Kmart, Alco, Wal-Mart, Target and ShopKo had stores
in 16, 11, 6, 2 and 1 communities, respectively, where Pamida stores are
located; however, because some of these communities have more than one of such
competitors, only 29 Pamida stores face direct local competition from such
retail chains. In recent years the Company's business strategy has been to focus
its store expansion program on communities with less likelihood of the entry of
a new major competitor, but there can be no assurance that in the future major
competitors will not open additional stores in the Company's markets.
Merchandise prices generally are established on a zone basis at Pamida's
executive offices, although store managers are given discretion to adjust prices
of key items to meet local competition and to match a competitor's advertised
prices. Zone pricing allows the Company to establish prices at different levels
in different trade territories, based primarily on competitive conditions within
such territories, rather than having a uniform pricing structure throughout the
entire chain. Pamida conducts a continuous program of competitor price
comparisons that enables the Company to make merchandise price adjustments, when
necessary, to assure that the Company maintains a competitive position.
EMPLOYEES.
As of February 2, 1997, Pamida had approximately 5,700 employees, of whom
approximately 2,800 were full-time and 2,900 were part-time. The number of
employees varies on a seasonal basis. None of Pamida's employees are represented
by a labor union, and the Company believes that its relations with its employees
are good.
At February 2, 1997, the average length of service of the Company's
management staff was as follows:
Average
Years
Number of Service
------ ----------
Top Management 2 15.3
Senior Vice Presidents and Vice Presidents 16 5.7
District Managers 12 20.3
Pharmacy District Supervisors 3 4.9
Store Managers 148 10.7
Pharmacy Managers 41 3.1
Pamida's human resources department is responsible for company-wide salary
and wage administration, as well as all benefit-plan administration. The human
resources department works closely with store operations in the development and
administration of Pamida's store-level employee training programs. In addition,
Pamida has an ongoing program for the development of management personnel to
fill positions in all facets of the Company's operations and makes a concerted
effort to identify and train potential successors for all of its key middle and
senior managers.
Item 2. PROPERTIES.
At February 2, 1997, the Company owned 20 of its 148 store buildings, while
its remaining 128 stores operated in leased premises. A substantial majority of
the Company's leases have renewal options, with approximately 49% of the leases
having unexpired current terms of five years or more. The following table
provides information relating to the remaining lease terms for the Company's
leased stores at February 2, 1997:
Lease Expiring Number of Leased Stores
During the Period (1) 2/02/97
1/97 to 12/98 5
1/99 to 12/00 5
1/01 to 12/02 10
1/03 to 12/04 8
After 12/04 100
---
Total 128
===
- ---------------
(1) Includes renewal options.
Pamida's management believes that the physical condition of the Company's
stores generally is very good. All of the Company's stores are continuously
updated to conform to Pamida's operating and merchandising standards.
The Company's general offices and one of its two distribution centers are
located in a 215,000 square foot building in Omaha, Nebraska, owned by the
Company. This facility contains approximately 135,000 square feet of warehouse
space and approximately 80,000 square feet of office space.
Pamida's primary distribution center is a 336,000 square foot
"flow-through" facility situated on a 22-acre tract of land in Omaha
approximately one mile from the distribution center described above. This
facility, which is owned by Pamida, serves primarily as a redistribution center
for bulk shipments and promotional merchandise on which cost savings can be
realized through quantity purchasing. Pamida also owns an additional 10-acre
tract of land adjacent to such distribution center which would permit that
facility to be further expanded by almost 60%.
In October 1996, the Company agreed to lease a new 200,000 square foot
distribution facility to be located in Lebanon, Indiana. Construction of this
new facility, currently is underway, and the facility is expected to be
operational during the second quarter of the current year. This distribution
facility will replace the 100,000 square foot warehouse facility previously
operated by the Company in the Milwaukee, Wisconsin area, which was closed and
the lease terminated in December 1996 due to eminent domain action by the City
of Glendale, Wisconsin. Under the Wisconsin administrative code, Pamida has up
to two years to file a claim for "Actual and Reasonable Moving Expenses" in
connection with the Company's relocation to Lebanon, Indiana. The Lebanon
facility also will be used as a redistribution center for bulk shipments and
promotional merchandise.
Pamida also has a warehouse facility in Omaha which contains approximately
41,000 square feet of space and is located immediately adjacent to the Company's
general offices. This warehouse, which is owned by Pamida, is used for the
processing of merchandise to be returned to vendors and by the advertising
department in connection with its printing operations.
In addition to its retail stores, distribution centers and warehouse
facility, Pamida's tangible assets include inventories, warehouse and store
fixtures and equipment, merchandise handling equipment, office and data
processing equipment, motor vehicles and an airplane.
Item 3. LEGAL PROCEEDINGS.
Pamida is a party to a number of lawsuits incidental to its business, the
outcome of which, both individually and in the aggregate, is not expected to
have a material adverse effect on the Company's operations or financial
condition.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
* * *
EXECUTIVE OFFICERS OF THE REGISTRANT.
The present executive officers of Holdings are Steven S. Fishman (Chairman
of the Board, President and Chief Executive Officer) Frank A. Washburn
(Executive Vice President, Chief Operating Officer and Secretary), and George R.
Mihalko (Senior Vice President, Chief Financial Officer, Treasurer and Assistant
Secretary). Information concerning such executive officers appears in the
following paragraphs:
Mr. Fishman, age 46, has served as President and Chief Executive Officer of
Holdings and Pamida, Inc. since April 1993 and as Chairman of the Board of
Holdings and Pamida, Inc. since August 1993. From 1988 to March 1993, Mr.
Fishman was employed by Caldor, Inc. as Senior Vice President and General
Merchandise Manager-Homelines. Mr. Fishman has been a director of Holdings since
1993 and also is a director of Pamida, Inc.
Mr. Washburn, age 48, has served as Chief Operating Officer of Holdings and
Pamida, Inc. since March 1997, Executive Vice President of Holdings since
September 1995 and Executive Vice President of Pamida, Inc. since February 1995.
Mr. Washburn previously served as Senior Vice President - Human Resources of
Pamida, Inc. from 1993 to 1995 and as Vice President - Human Resources of
Pamida, Inc. from 1987 to 1993. Mr. Washburn also serves as Secretary of
Holdings and Pamida Inc. Mr. Washburn joined Pamida's predecessor in 1965. Mr.
Washburn has been a director of Holdings since 1995 and also is a director of
Pamida, Inc.
Mr. Mihalko, age 42, has served as Senior Vice President, Chief Financial
Officer, Treasurer and Assistant Secretary of Holdings and Pamida, Inc. since
September 1995. From February 1993 to September 1995, Mr. Mihalko was employed
by Pier 1 Imports, Inc. as Vice President and Treasurer. From July 1990 to
February 1993, Mr. Mihalko was employed by Burlington Northern Railroad as
Assistant Treasurer.
The executive officers of Holdings may be removed from their respective
positions as such officers at any time by the Board of Directors of Holdings,
subject to any rights which they may have under employment agreements with the
Company.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Common Stock of Holdings has been listed and traded on the American
Stock Exchange since September 18, 1990. Prior to that date, no market existed
for such Common Stock.
The high and low sales prices for the Common Stock of Holdings on the
American Stock Exchange for fiscal 1997 and fiscal 1996 are as follows:
Fiscal 1997: High Low
4th Quarter 2 5/16 1 1/2
3rd Quarter 2 3/8 1 5/8
2nd Quarter 3 1/4 2 1/8
1st Quarter 3 1/4 2 1/8
Fiscal 1996: High Low
4th Quarter 4 3/16 2 1/2
3rd Quarter 4 5/8 2 1/4
2nd Quarter 6 4
1st Quarter 7 3/4 6
As of March 24, 1997 there were 297 record holders of the Common Stock of
Holdings.
Holdings has never declared or paid any cash dividends on its Common Stock
and does not intend to pay any such dividends in the foreseeable future. The
obligations of Pamida, Inc. under certain of its financing arrangements are
guaranteed by Holdings. Such financing arrangements presently prohibit the
payment of dividends by Holdings on its Common Stock and also significantly
restrict the ability of Pamida, Inc. to pay dividends or make other
distributions to Holdings.
Item 6. SELECTED FINANCIAL DATA.
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(Dollar amounts in thousands - except per share and other data)
<TABLE>
<CAPTION>
Fiscal Years Ended
----------------------------------------------------------------
February 2, January 28, January 29, January 30, January 31,
1997 (1) 1996 1995 1994 1993
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Sales ................................... $ 633,189 $ 736,315 $ 711,019 $ 656,910 $ 622,941
Gross profit ............................ 154,090 177,688 177,367 158,906 154,695
Selling, general and
administrative expenses .............. 125,105 151,096 143,585 133,921 124,225
--------- --------- --------- --------- ---------
Operating income ........................ 28,985 26,592 33,782 24,985 30,470
Interest expense ........................ 29,781 29,526 27,367 26,588 25,147
Long-lived asset write-off .............. -- 78,551 -- -- --
Store closing costs ..................... -- 21,397 -- -- --
--------- --------- --------- --------- ---------
(Loss) income before provision for income
taxes and extraordinary item ......... (796) (102,882) 6,415 (1,603) 5,323
Income tax (benefit) provision .......... -- (7,863) 3,500 427 3,061
--------- --------- --------- --------- ---------
(Loss) income before extraordinary item . (796) (95,019) 2,915 (2,030) 2,262
Extraordinary item ...................... -- 371 -- (4,943) --
--------- --------- --------- --------- ---------
Net (loss) income ....................... (796) (94,648) 2,915 (6,973) 2,262
Less preferred dividends
and discount amortization ............ 391 362 361 359 357
--------- --------- --------- --------- ---------
Net (loss) income available
for common shares .................... $ (1,187) $ (95,010) $ 2,554 $ (7,332) $ 1,905
========= ========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding 5,004,942 5,034,536 5,024,745 4,999,984 4,999,984
========= ========= ========= ========= =========
Net (loss) earnings per common share:
(Loss) earnings before extraordinary
item ............................. $ (.24) $ (18.94) $ .51 $ (.48) $ .38
Extraordinary item ................. -- $ .07 -- (.99) --
--------- --------- --------- --------- ---------
Net (loss) earnings per common share $ (.24) $ (18.87) $ .51 $ (1.47) $ .38
========= ========= ========= ========= =========
BALANCE SHEET DATA:
Working capital ..................... $ 28,673 $ 34,082 $ 46,725 $ 41,323 $ 16,515
Total assets ........................ 269,188 258,525 354,367 314,621 309,629
Long-term debt ...................... 168,000 163,746 162,505 160,315 132,006
Obligations under capital leases .... 33,999 36,559 43,050 35,618 37,164
Redeemable preferred stock .......... 1,875 1,826 1,779 1,734 1,690
Common shareholders' (deficit) equity (87,303) (86,116) 8,876 6,322 13,654
OTHER DATA:
Team Members ........................ 5,700 7,200 7,200 6,100 5,900
Number of stores .................... 148 184 184 173 178
Retail square feet (in millions) .... 4.35 5.22 5.09 4.68 4.75
(1) Represents a 53 week year.
</TABLE>
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(Dollar amounts in thousands)
YEAR ENDED FEBRUARY 2, 1997 COMPARED TO YEAR ENDED JANUARY 28, 1996
SALES - As discussed in Note O to the financial statements, the Company
closed forty stores at the end of fiscal 1996 in unprofitable or highly
competitive markets which did not fit the Company's niche market strategy.
Consequently, the Company experienced a planned decrease in total sales for
fiscal 1997 of $103,126 or 14.0% compared to fiscal 1996 due primarily to the
reduced number of stores. During fiscal 1997 the Company opened eight new
prototype stores, of which six are located in new markets and two were
relocations; the Company also closed two stores, resulting in a net increase in
selling area during the fiscal year of approximately 216,000 square feet (not
including changes relating to the forty stores closed as of fiscal year end
1996) to a total of 4,348,000 square feet. As of February 2, 1997, the Company's
store base included 35 of the Company's most recent store prototype, which
represented 28.7% of the Company's total selling square feet.
Comparable store sales during the 53-week fiscal 1997 period decreased by
$8,893 or 1.5% from the 52-week fiscal 1996 period. Comparable store sales on a
53-week to 53-week basis decreased by 2.6%. Sales were affected primarily by
slowed warehouse distributions to stores as a result of the implementation of a
new warehouse inventory management system initiated in the first quarter of
fiscal 1997. The slowed distributions caused a deterioration of merchandise
in-stock positions in most of the Company's stores, resulting in lost sales.
While implementation of the warehouse system was largely completed by August
1996, and in-stock positions at the stores improved thereafter, sales remained
below management expectations due to reduced customer traffic continuing in the
third and fourth quarters. Comparable sales also were affected during much of
the year by low-margin clearance sales in fiscal 1996 which were not necessary
at the same level in fiscal 1997. However, beginning late in the holiday
shopping season and continuing through fiscal year end, sales improved as the
Company demonstrated to customers its improved in-stock position in all product
categories.
The Company experienced substantial comparable store sales increases in
fiscal 1997 in several merchandise categories, the most dramatic of which were
in the pharmacy prescription, junior apparel, grocery and ready-to-wear areas.
Comparable store sales gains also were generated in the hosiery, team sports,
camera, stationery, health aids and bath categories. The Company experienced
comparable store sales decreases in several categories. The largest dollar
decreases on a comparable store basis were in the electronics, automotive,
misses bottoms, men's shoes, electrical and appliance areas. Management believes
that subtle adjustments made to the Company's softlines strategy at the end of
fiscal 1996 to meet customer demand for a deeper selection of basic apparel had
a positive impact on sales and margins in softlines during fiscal 1997.
GROSS PROFIT - Gross profit dollars were affected by the reduced number of
stores in operation during fiscal 1997 as compared to fiscal 1996. The Company's
merchandise gross profit as a percentage of sales improved to 27.8% in fiscal
1997 from 26.8% in fiscal 1996. However, this improvement was diluted by
additional costs related to the implementation of the new warehouse inventory
management system discussed above. Warehouse costs increased to $13,457 from
$11,066 last year and increased as a percent of sales to 2.1% from 1.5% last
year. Delivery costs decreased to $7,637 in fiscal 1997 from $8,845 last year
and amounted to 1.2% of sales in both years. Accordingly, gross profit decreased
by $23,598, or 13.3%, to $154,090 in fiscal 1997 from $177,688 in fiscal 1996
but, as a percentage of sales, increased to 24.3% in fiscal 1997 from 24.1% in
fiscal 1996.
SELLING, GENERAL AND ADMINISTRATIVE expense decreased $25,991, or 17.2%, to
$125,105 in fiscal 1997 from $151,096 in fiscal 1996. As a percentage of sales,
selling, general and administrative expense decreased to 19.8% from 20.5% last
year. This reduction was largely attributable to reductions in store level
expenses. Store payroll, controllable and occupancy expenses accounted for 64.2%
of the total decrease in selling, general and administrative expense and
decreased by 14.5%, 17.5% and 13.9%, respectively. Selling, general and
administrative expense also was positively impacted by a 28.9% reduction in
advertising costs which accounted for 18.2% of the gross decrease in selling,
general and administrative expense. All of these areas of expense were impacted
by the elimination of costs related to the forty stores which were closed as of
the end of fiscal 1996. Selling, general and administrative expense also was
impacted by an 11.0% decrease in corporate general and administrative costs
which accounted for 11.3% of the gross decreases in selling, general and
administrative expense. The major components of this decrease were decreases in
the net costs of insurance, professional fees, management bonuses and related
fringe benefits.
Selling, general and administrative expense also was positively impacted by
the elimination of amortization of goodwill and favorable leasehold interests
resulting from the write-off of these items in the fourth quarter of fiscal
1996. The decreases in selling, general and administrative expense were offset
by a $1,246 reduction in other income which was attributable largely to one-time
gains realized in fiscal 1996, primarily from the sale of idle transportation
company assets.
The Company is continuing to focus on controlling selling, general and
administrative expenses. Store operating expenses as a percent of sales are
anticipated to remain relatively constant in fiscal 1998. Certain expense
categories are anticipated to increase somewhat as a percent of sales due to
more normal clearance activity and expected increases in interest expense,
information systems costs, store payroll expenses (due to federally mandated
minimum wage increases) and incentive compensation. The Company expects to begin
to realize operating efficiencies from systems enhancements in the warehouse and
distribution areas in fiscal 1998 and in the merchandising areas beginning in
the second half of fiscal 1999. Further expense leveraging is expected in future
years through internal growth as well as the addition of new stores.
INTEREST expense increased marginally by $255 or 0.9% for fiscal 1997
compared to fiscal 1996. The increase in interest expense for fiscal 1997 was
attributable primarily to higher usage of the revolving line of credit and to
the outstanding promissory notes of the Company which require quarterly
compounding interest payments to be paid in kind. These increases were largely
offset by decreased interest related to lower average outstanding capitalized
lease obligations in fiscal 1997 compared to fiscal 1996.
INCOME TAX PROVISION - No income tax benefit on losses for fiscal 1997 will
be recorded until the Company can establish with a reasonable degree of
certainty the potential utilization of certain tax loss carry forwards from
prior year store closing charges. The effective tax rate in fiscal 1996 was 7.6%
and was impacted by the non-deductible amortization and write-off of goodwill
and the reserves recorded to offset the deferred tax assets.
YEAR ENDED JANUARY 28, 1996 COMPARED TO YEAR ENDED JANUARY 29, 1995
WRITE-OFF OF LONG-LIVED ASSETS AND STORE CLOSING CHARGE.
During fiscal 1996, weak trends in the retail industry combined with
increasing competition lowered the operating results of the Company. While
operating results in the first three quarters of the year were behind plan,
management focused on strategies to achieve its plan during the important fourth
quarter season.
During the fourth quarter, management reviewed its expectations for near-
and long-term performance of the Company, revised its earnings projections and
reassessed the recoverability of the Company's long-lived assets.
As explained in Note N to the financial statements, in the fourth quarter
of fiscal 1996, the Company adopted Statement of Financial Accounting Standards
No.121 "Accounting For the Impairment of Long-Lived Assets and Long-Lived Assets
to Be Disposed Of" (SFAS 121). This financial accounting standard requires the
Company to perform an analysis of the recoverability of the net book value of
long-lived assets. The Company analyzed cash flows on an individual store basis
to assess recoverability of store level long-lived assets including allocated
goodwill. As a result of this analysis, impairment totaling $27,228 on a pre-tax
basis was indicated at certain stores.
The Company also analyzed the value of its remaining goodwill and favorable
leasehold interests not impaired under the store-level SFAS 121 analysis using
its historical method under Accounting Principles Board Opinion No. 17 (APB 17)
and determined that such remaining amounts also were impaired. The APB 17
analysis projected a fifteen-year forecast period and produced $5,186 of
aggregate undiscounted adjusted net income, including projected adjusted net
losses for fiscal 1997 of $4,522, which included interest expense of $26,242
paid in cash and interest payable `in kind' (PIK) of $4,453, and for fiscal 1998
of $2,863, which included cash interest expense of $26,581 and PIK interest of
$5,121. For fiscal 1999, the Company projected adjusted net income of
approximately $967, which included cash interest expense of approximately
$26,581 and PIK interest of $5,889. Due to the uncertainty of projections beyond
1999, this level of adjusted net income was assumed to continue for each of the
remaining fiscal years in the projection period. Accordingly, a non-cash pre-tax
charge totaling $51,323 was recorded as indicated in Note N to the financial
statements.
Also, management's fourth quarter review of individual stores' operations
and cash flows resulted in the identification of forty unprofitable or
competitive market stores which did not fit the Company's niche market strategy.
Consequently, a pre-tax charge totaling $21,397 was recorded at January 28, 1996
to cover the costs necessary to close these stores as indicated in Note O to the
financial statements.
SALES for fiscal 1996 increased $25,300 or 3.6% compared to fiscal 1995.
Comparable store sales decreased $4,160 or 0.7%. Excluding the forty stores
closed as of the end of fiscal 1996, comparable store sales increased by 0.1%.
During fiscal 1996 the Company opened ten new prototype stores of which seven
were located in new markets and three were relocations. The Company also closed
ten stores (excluding the 40 stores identified to be closed as discussed above),
resulting in a net increase in selling area of approximately 126,000 square
feet. The openings and closings of stores over the last two fiscal years has
resulted in a net increase in sales of $33,662.
The modest overall sales increases were affected by weak consumer demand
which was generally experienced throughout the retail industry. Management
believes that the Company's geographical niche market positioning combined with
its ability to distribute quality merchandise on a more timely basis tempered
these generally weak retail trends. The Company experienced substantial sales
increases in several merchandise categories, the most dramatic of which were in
the housewares, prescriptions, junior apparel and bath and floor areas.
Substantial sales gains also were generated in paper, cleaning and seasonal
categories. The Company experienced sales declines in several softlines
categories, primarily women's apparel.
The initial operating results of the seven new prototype stores and three
relocated prototype stores opened during fiscal 1996 exceeded the Company's
original sales projections and reflected the success of the Company's niche
market positioning and merchandising strategies. At fiscal year end 1996,
twenty-seven new format stores were in operation, representing 14.7% of all
stores and 18.3% of total Company selling square feet.
GROSS PROFIT increased $321 or 0.2% in fiscal 1996 compared to fiscal 1995
and, as a percentage of sales, decreased from 24.9% in fiscal 1995 to 24.1% in
fiscal 1996. The decline in gross profit percent in fiscal 1996 compared to
fiscal 1995 was attributable primarily to the increased markdown activity which
was necessary to counter sluggish customer demand during most of the year and to
meet customers' pricing expectations during this difficult period for the retail
industry. Markdown expense increased by 23.8% over such expense in fiscal 1995.
During fiscal 1996, the Company experienced margin dollar increases due to
higher sales in several merchandise categories, most notably stationery,
prescriptions, bath and floor and seasonal. While the Company experienced margin
dollar decreases in several softlines categories, they were concentrated
primarily in the women's apparel and fashion areas.
SELLING, GENERAL AND ADMINISTRATIVE expense increased $7,511 or 5.2% from
fiscal 1995. As a percentage of sales, selling, general and administrative
expense increased from 20.2% in fiscal 1995 to 20.5% in fiscal 1996.
Approximately 40% of the total gross increase in selling, general and
administrative expense was attributable to increases in corporate general
administrative costs. Payroll and fringe benefits costs increased by
approximately 13% due to the effect of a full year's salary for the
merchandising, real estate and other corporate personnel added in fiscal 1995 as
well as the costs related to information systems personnel added during fiscal
1996 to support the new systems implementations to enhance efficiencies in
warehouse, distribution and merchandising. In addition, professional fees
increased approximately 54% due primarily to information systems and strategic
planning consulting costs as well as increases in legal fees related to new
store construction and financing.
In addition to the corporate general and administrative cost changes,
advertising expenses as a percent of sales increased from 2.0% to 2.2% due to
increases in the costs of paper and postage. This accounted for approximately
25% of the gross increase in selling, general and administrative expense. Store
controllable expenses increased by 8%, which also accounted for approximately
25% of the gross increase in selling, general and administrative expense. The
change in store controllable expense was due primarily to increases in the costs
of security equipment rentals, charge card processing fees (due to increased
credit card sales volume), utilities and inventory counting (as a result of
changes in procedures to allow for detailed SKU level counts). Store
controllable costs were partially reduced by decreases in supplies, travel and
entertainment costs. Store fixed costs as a percent of sales increased from 2.8%
to 3.0% due primarily to increases in rent expense. These increases in selling,
general and administrative expense were offset in part by an increase in other
income resulting primarily from the sale of idle transportation assets.
INTEREST expense increased $2,159 or 7.9% for fiscal 1996 compared to
fiscal 1995. The increase in interest expense for fiscal 1996 was attributable
primarily to higher usage of the revolving line of credit in fiscal 1996 and to
the outstanding promissory notes of the Company which require quarterly
compounding interest payments to be paid in kind. The Company also had higher
average outstanding capitalized lease obligations in fiscal 1996 compared to
fiscal 1995.
INCOME TAX PROVISION - The effective tax rate was 7.6% in fiscal 1996
compared to 54.6% in fiscal 1995. The effective tax rate for fiscal 1996 was
impacted by the non-deductible amortization and write-off of goodwill and the
reserve recorded to offset the deferred tax assets. In fiscal 1995, the
effective tax rate was higher than the normal statutory rates primarily as a
result of non-deductible goodwill amortization.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is seasonal with first quarter sales (February
through April) being lower than sales during the other three quarters, while
fourth quarter sales (November through January) have represented approximately
30% of the full year's retail sales in recent years and normally involve a
greater proportion of higher margin sales.
The Company has satisfied its seasonal liquidity requirements primarily
through a combination of funds provided from operations and from a revolving
credit facility. Funds used by operating activities totaled $11,577 in fiscal
1997, and funds provided from operations totaled $4,967 in fiscal 1996 and
$3,816 in fiscal 1995. The change in cash flow from operating activities from
fiscal 1996 to fiscal 1997 was primarily the result of planned net increases in
inventory and other operating assets and decreases in accounts payable and other
operating liabilities. These decreases in cash flow were offset in part by
changes in deferred income taxes. The positive change in cash flow from
operating activities from fiscal 1995 to fiscal 1996 was primarily the result of
net decreases in inventory and accounts payable. These increases in cash flow
were offset in part by current and deferred tax payable changes, principally as
a result of the store closing charge, the changes in profitability of the
continuing operations and changes in other operating assets and liabilities.
Effective March 17, 1997, the term of Pamida, Inc.'s (Pamida) committed
Loan and Security Agreement (the Agreement) was extended to March 2000 and the
maximum borrowing limit of the facility was increased to $95,000 from $70,000,
which had been the limit throughout fiscal 1997. Prior to March 17, 1997,
borrowings under the Agreement bore interest at a rate which was 0.75% per annum
greater than the applicable prime rate. Effective March 17, 1997, borrowings
under the Agreement bear interest at a rate which is tied to the applicable
prime rate or the London Interbank Offered Rate (LIBOR), generally at Pamida's
discretion. The amounts Pamida is permitted to borrow are determined by a
formula based upon the amount of Pamida's eligible inventory from time to time.
Such borrowings are secured by security interests in all of the current assets
(including inventory) of Pamida and by liens on certain real estate interests
and other property of Pamida. The Company and two subsidiaries of Pamida have
guaranteed the payment and performance of Pamida's obligations under the Loan
and Security Agreement and have pledged some or all of their respective assets,
including the stock of Pamida owned by the Company, to secure such guarantees.
The Agreement contains provisions imposing operating and financial
restrictions on the Company. Certain provisions of the Agreement require the
maintenance of specified amounts of tangible net worth (as defined) and working
capital (as defined) and the achievement of specified minimum amounts of cash
flow (as defined). Other restrictions in the Agreement and those provided under
the Indenture relating to the Senior Subordinated Notes will affect, among other
things, the ability of Pamida to incur additional indebtedness, pay dividends,
repay indebtedness prior to its stated maturity, create liens, enter into
leases, sell assets or engage in mergers or acquisitions, make capital
expenditures and make investments. These covenants currently have not had an
impact on the Company's ability to fully utilize the revolving credit facility.
However, certain of the covenants, such as those which restrict the ability of
the Company to incur indebtedness or encumber its property or which impose
restrictions on or otherwise limit the Company's ability to engage in
sale-leaseback transactions, may at some future time prevent the Company from
pursuing its store expansion program at the rate that the Company desires.
Obligations under the Agreement were $57,115 at February 2, 1997 and
$31,588 at January 28, 1996. As noted above, this facility expires in March
2000, and the Company intends to refinance any outstanding balance by such date.
Borrowings under the Agreement are senior to the Senior Subordinated Notes of
the Company. The Company had long-term debt and obligations under capital leases
of $201,999 at February 2, 1997 and $200,305 at January 28, 1996. The Company's
ability to satisfy scheduled principal and interest payments under such
obligations in the ordinary course of business is dependent primarily upon the
sufficiency of the Company's operating cash flow. At February 2, 1997, the
Company was in compliance with all covenants contained in its various financing
agreements.
On December 18, 1992, the promissory notes of the Company were amended
effective as of December 1, 1992 to provide that, until the obligations of
Pamida and the Company under certain of Pamida's credit agreements have been
repaid, the quarterly interest payments on the promissory notes of the Company
will be paid in kind. Pamida paid the Company $315 in fiscal 1996 under a
tax-sharing agreement to enable the Company to pay quarterly dividends to its
preferred stockholders. During fiscal 1996, the Company received $967 from
Pamida under a tax-sharing agreement as a reimbursement for certain tax benefits
derived by Pamida. Such remittance, along with $18 from the exercise of certain
stock options, was used by the Company to redeem Subordinated Promissory Notes
as described in Note L to the financial statements, to repay intercompany
balances totaling $29, and to pay quarterly dividends on preferred stock. Since
the Company conducts no operations of its own, the only cash requirement of the
Company relates to preferred stock dividends in the aggregate annual amount of
approximately $316; and Pamida is expressly permitted under its existing credit
facilities to pay dividends to the Company to fund such preferred stock
dividends. However, the General Corporation Law of the State of Delaware, under
which the Company and Pamida are incorporated, allows a corporation to declare
or pay a dividend only from its surplus or from the current or the prior year's
earnings. Due to the accumulated deficit resulting primarily from the store
closings and the write-off of goodwill and other long-lived assets recognized in
the fourth quarter of fiscal 1996, the Company and Pamida did not declare or pay
any cash dividends in fiscal 1997 and may pay cash dividends in ensuing years
only to the extent that the Company and Pamida satisfy the applicable statutory
standards which include the Company's having a net worth equal to at least the
aggregate par value of the preferred stock which amounts to $2. The cumulative
dividend rate on the preferred stock increases by 0.5% per quarter (with a
maximum aggregate increase of 5%) on each quarterly dividend payment date on
which the preferred stock dividends are not paid currently on a cumulative
basis. Any unpaid dividends are added to the liquidation value until paid in
cash. Such nonpayment of preferred stock dividends does not accelerate the
redemption rights of the preferred stockholders.
The Company made capital expenditures of $4,947 in fiscal 1997 compared to
$9,265 during fiscal 1996. The Company plans to open three new stores in fiscal
1998 and will consider additional opportunities for new store locations as they
arise. Total capital expenditures are expected to be approximately $9,500 in
fiscal 1998. The Company expects to fund these expenditures from cash flow from
its operations. The costs of buildings and land for new store locations are
expected to be financed by operating or capital leases with unaffiliated
landlords. The Company's expansion program also will require inventory of
approximately $1,000 to $1,200 for each new market store, which the Company
expects to finance through trade credit, borrowings under the Agreement and cash
flow from operations.
The recent changes to the Agreement, along with expected improvements in
the Company's cash flow from operations, should provide adequate resources to
meet the Company's near term liquidity requirements. On a long-term basis, the
Company's expansion will require continued investments in store locations,
working capital and distribution and infrastructure enhancements. The Company
expects to continue to finance some of these investments through leases from
unaffiliated landlords, trade credit, borrowings under the Agreement and cash
flow from operations but ultimately will need to explore additional sources of
funds which may include capital structure changes. Currently, it is not possible
for the Company to predict with any certainty either the timing or the
availability of such additional financing.
INFLATION
The Company uses the LIFO method of inventory valuation in its financial
statements; as a result, the cost of merchandise sold approximates current
costs. The Company's rental expense is generally fixed and, except for small
amounts of percentage rents and rentals adjusted by cost-of-living increases
tied to the Consumer Price Index or interest rates, has not been affected by
inflation.
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "1995 Act"). Such statements are made in good faith by the Company
pursuant to the safe-harbor provisions of the 1995 Act. In connection with these
safe-harbor provisions, this management's discussion and analysis contains
certain forward-looking statements which reflect management's current views and
estimates of future economic circumstances, industry conditions, company
performance and financial results. The statements are based on many assumptions
and factors including sales results, expense levels, competition and interest
rates as well as other risks and uncertainties inherent in the Company's
business, capital structure and the retail industry in general. Any changes in
these factors could result in significantly different results. The Company
further cautions that the forward-looking information contained herein is not
exhaustive or exclusive. The Company does not undertake to update any
forward-looking statements which may be made from time to time by or on behalf
of the Company.
Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pamida Holdings Corporation
Omaha, Nebraska
We have audited the consolidated balance sheet of Pamida Holdings
Corporation and subsidiary as of February 2, 1997, and the related consolidated
statements of operations, common stockholders' equity and cash flows for each of
the years ended February 2, 1997 and January 29, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits. The consolidated balance sheet of Pamida Holdings Corporation and
subsidiary as of January 28, 1996, and the related consolidated statements of
operations, common stockholders' equity and cash flows for the year ended
January 28, 1996, were audited by other auditors, whose report, dated March 26,
1996, expressed an unqualified opinion on those statements and included an
explanatory paragraph that described the adoption of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of."
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Pamida
Holdings Corporation and subsidiary as of February 2, 1997, and the results of
their operations and their cash flows for each of the years ended February 2,
1997 and January 29, 1995 in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 7, 1997
(March 17, 1997 as to Note E)
16
<PAGE>
REPORT OF INDENPENDENT ACCOUNTANTS
Board of Directors
Pamida Holdings Corporation
Omaha, Nebraska
We have audited the accompanying consolidated balance sheet of Pamida Holdings
Corporation and Subsidiary as of January 28, 1996, and the related consolidated
statements of operations, common stockholders' equity and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Pamida Holdings
Corporation and Subsidiary as of January 28, 1996, and the results of their
operations and their cash flows for the year then ended, in conformity with
generally accepted accounting principles.
As discussed in Note N to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of."
/s/ Coopers & Lybrand L.L.P.
Chicago, Illinois
March 26, 1996
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
February 2, January 28, January 29,
1997 1996 1995
(53 Weeks) (52 Weeks) (52 Weeks)
----------- ----------- -----------
<S> <C> <C> <C>
Sales ......................................... $ 633,189 $ 736,315 $ 711,019
Cost of goods sold ............................ 479,099 558,627 533,652
----------- ----------- -----------
Gross profit .................................. 154,090 177,688 177,367
----------- ----------- -----------
Expenses:
Selling, general and administrative ....... 125,105 151,096 143,585
Interest .................................. 29,781 29,526 27,367
Long-lived asset write-off ................ -- 78,551 --
Store closing costs ....................... -- 21,397 --
----------- ----------- -----------
154,886 280,570 170,952
----------- ----------- -----------
(Loss) income before provision for income
taxes and extraordinary item .............. (796) (102,882) 6,415
Income tax (benefit) provision ................ -- (7,863) 3,500
----------- ----------- -----------
(Loss) income before extraordinary item ....... (796) (95,019) 2,915
Extraordinary item ............................ -- 371 --
----------- ----------- -----------
Net (loss) income ............................. (796) (94,648) 2,915
Less provision for preferred dividends and
discount amortization ..................... 391 362 361
----------- ----------- -----------
Net (loss) income available for
common shares ............................. $ (1,187) $ (95,010) $ 2,554
=========== =========== ===========
Net (loss) earnings per common share:
(Loss) earnings before extraordinary item. $ (.24) $ (18.94) $ 0.51
Extraordinary item......................... -- .07 --
----------- ----------- -----------
Net (loss) earnings per common share....... $ (.24) $ (18.87) $ 0.51
----------- ----------- -----------
</TABLE>
17
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
February 2, January 28,
ASSETS 1997 1996
---------- -----------
<S> <C> <C>
Current assets:
Cash ......................................................................... $ 6,973 $ 7,298
Accounts receivable, less allowance for doubtful accounts of $50 in both years 6,919 9,049
Merchandise inventories ...................................................... 157,490 150,837
Prepaid expenses ............................................................. 2,993 2,953
Property held for sale ....................................................... 1,748 2,218
----------- -----------
Total current assets ...................................................... $ 176,123 $ 172,355
Property, buildings and equipment, (net) ......................................... 42,403 44,153
Leased property under capital leases, less accumulated
amortization of $14,604 and $13,496, respectively ............................ 27,713 30,977
Deferred financing costs ......................................................... 3,176 3,809
Other assets ..................................................................... 19,773 7,231
----------- -----------
$ 269,188 $ 258,525
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................................. $ 54,245 $ 63,087
Loan and security agreement .................................................. 57,115 31,588
Accrued compensation ......................................................... 3,860 5,923
Accrued interest ............................................................. 7,668 6,992
Store closing reserve ........................................................ 4,521 7,818
Other accrued expenses ....................................................... 10,112 10,823
Income taxes - deferred and current payable .................................. 8,101 8,861
Current maturities of long-term debt ......................................... 47 1,334
Current obligations under capital leases ..................................... 1,781 1,847
----------- -----------
Total current liabilities ................................................. 147,450 138,273
Long-term debt, less current maturities .......................................... 168,000 163,746
Obligations under capital leases, less current obligations ....................... 33,999 36,559
Reserve for dividends ............................................................ 342 --
Other long-term liabilities ...................................................... 4,825 4,237
Commitments and contingencies .................................................... -- --
Preferred stock subject to mandatory redemption:
16-1/4% senior cumulative preferred stock, $1 par value;
514 shares authorized, issued and outstanding ............................. 514 514
14-1/4% junior cumulative preferred stock, $1 par value;
6,986 shares authorized; 1,627 shares issued and outstanding;
redemption amount of $1,627, less unamortized discount .................... 1,361 1,312
Common shareholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized; 5,004,942
shares issued and outstanding in both years ............................... 50 50
Additional paid-in capital ................................................... 968 968
Accumulated deficit .......................................................... (88,321) (87,134)
----------- -----------
Total common shareholders' deficit ........................................ (87,303) (86,116)
----------- -----------
$ 269,188 $ 258,525
=========== ===========
</TABLE>
18
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Retained
Nonvoting Additional Earnings
Common Common Paid-in (Accumulated
Shares Stock Capital Deficit)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance at January 30, 1994 ........... $ 41 $ 9 $ 950 $ 15,322
Net income ........................ -- -- -- 2,915
Amortization of discount on 14-1/4%
junior cumulative preferred .... -- -- -- (45)
Cash dividends to preferred
stockholders ................... -- -- -- (316)
Conversion of nonvoting common
stock to common shares ......... 9 (9) -- --
---------- ---------- ---------- ----------
Balance at January 29, 1995 ........... 50 -- 950 7,876
Net loss .......................... -- -- -- (94,648)
Amortization of discount on 14-1/4%
junior cumulative preferred .... -- -- -- (47)
Cash dividends to preferred
stockholders ................... -- -- -- (315)
Stock sold under incentive stock
option plan .................... -- -- 18 --
---------- ----------- --------- ----------
Balance at January 28, 1996 ........... 50 -- 968 (87,134)
Net loss .......................... -- -- -- (796)
Amortization of discount on 14-1/4%
junior cumulative preferred .... -- -- -- (49)
Accrued dividends for preferred
stockholders ................... -- -- -- (342)
---------- ---------- ---------- ----------
Balance at February 2, 1997 ........... $ 50 $ -- $ 968 $ (88,321)
========== ========== ========== ==========
</TABLE>
19
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollar amounts in thousands)
<TABLE>
<CAPTION>
Years Ended
-----------------------------------------
February 2, January 28, January 29,
1997 1996 1995
(53 Weeks) (52 Weeks) (52 Weeks)
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income ................................................. $ (796) $ (94,648) $ 2,915
Adjustments to reconcile net (loss) income to net cash from operating
activities:
Depreciation and amortization .......................... 11,658 15,345 14,962
Provision (credit) for LIFO inventory valuation ........ 874 (585) (675)
Provision (credit) for deferred income taxes ........... 3,305 (6,647) (1,555)
Noncash interest expense ............................... 4,313 3,756 3,315
Accretion of original issue debt discount .............. 160 154 149
Gain on disposal of assets ............................. (56) (982) (58)
Stock incentive benefits ............................... -- -- 84
Deferred retirement benefits ........................... (125) 13 37
Extraordinary item ..................................... -- (371) --
Long-lived assets write-off ............................ -- 78,551 --
Store closing costs .................................... (3,726) 21,397 --
(Increase) decrease in merchandise inventories ......... (7,527) 4,532 (30,951)
Increase in other operating assets ..................... (5,622) (3,847) (486)
Increase (decrease) in accounts payable ................ (8,842) (6,749) 8,153
Increase (decrease) in income taxes payable ............ (3,250) (4,607) 3,942
Increase (decrease) in other operating liabilities...... (1,943) (345) 3,984
----------- ----------- -----------
Total adjustments .......................................... (10,781) 99,615 901
----------- ----------- -----------
Net cash from operating activities ......................... (11,577) 4,967 3,816
Cash flows from investing activities:
Proceeds from disposal of assets .............................. 917 1,163 980
Principal payments received on notes receivable ............... 16 15 14
Assets acquired for sale ...................................... (391) -- --
Capital expenditures .......................................... (4,947) (9,265) (12,888)
Construction notes receivable ................................. (5,845) (4,412) --
----------- ----------- -----------
Net cash from investing activities ......................... (10,250) (12,499) (11,894)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings under loan and security agreement net .............. 25,527 10,986 12,417
Principal payments on other long-term debt .................... (1,335) (193) (177)
Dividends paid on preferred stock ............................. -- (315) (316)
Principal payments on promissory notes ........................ -- (641) (1,029)
Payments for deferred finance costs ........................... (54) (13) (200)
Principal payments on capital lease obligations ............... (2,636) (2,071) (1,894)
Proceeds from sale of stock ................................... -- 18 --
----------- ----------- -----------
Net cash from financing activities ..................... 21,502 7,771 8,801
----------- ----------- -----------
Net (decrease) increase in cash ............................... (325) 239 723
Cash at beginning of year ..................................... 7,298 7,059 6,336
----------- ----------- -----------
Cash at end of year ........................................... $ 6,973 $ 7,298 $ 7,059
=========== =========== ===========
20
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest..................................................... $ 24,804 $ 25,691 $ 24,021
Income taxes:
Payments to taxing authorities........................... 386 3,622 1,785
Refunds received from taxing authorities................. (442) (231) (672)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING
AND FINANCING ACTIVITIES:
Capital lease obligations incurred when the Company entered
into lease agreements for new store facilities and equipment. $ 11 $ 620 $ 9,721
Capital lease obligations terminated............................ -- 154 --
Amortization of discount on junior cumulative preferred stock
recorded as a direct charge to retained earnings............. 49 47 45
Payment of interest in kind by increasing the
principal amount of the notes................................ 4,313 3,702 3,263
Provision for dividends payable................................. 342 -- --
Conversion of 919,587 shares of nonvoting common
stock, $.01 par value, to common stock
Common stock............................................. -- -- 9
Nonvoting common stock................................... -- -- (9)
</TABLE>
21
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in thousands - except per share data)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pamida Holdings Corporation (the "Company") was formed for the sole purpose
of acquiring Pamida, Inc. ("Pamida") through a merger in a leveraged buy-out
transaction which was consummated on July 29, 1986.
CONSOLIDATION - The consolidated financial statements include the results
of operations, account balances and cash flows of the Company and its
wholly-owned subsidiary, Pamida, and of Seaway Importing Company ("Seaway") and
Pamida Transportation Company, wholly-owned subsidiaries of Pamida. All material
intercompany accounts and transactions have been eliminated in consolidation.
FISCAL YEAR - All references in these financial statements to fiscal years
are to the calendar year in which the fiscal year ends.
LINE OF BUSINESS - Through Pamida, the Company is engaged in the operation
of retail discount stores in a fifteen-state Midwestern, North Central and Rocky
Mountain area. Seaway imports primarily seasonal merchandise for sale to Pamida.
Pamida Transportation Company operated as a contract carrier for Pamida until
July 1995, at which time independent contractors were engaged to provide all
transportation needs of the Company. Due to the similarity in nature of the
Company's businesses, the Company considers itself to be a single business
segment.
CASH FLOW REPORTING - For purposes of the statement of cash flows, the
Company considers all temporary cash investments purchased with a maturity of
three months or less to be cash equivalents. There were no temporary investments
at February 2, 1997 and January 28, 1996.
MERCHANDISE INVENTORIES - Substantially all of the Company's inventory is
stated at the lower of cost (last-in, first-out) or market.
PROPERTY, BUILDINGS AND EQUIPMENT - Property, buildings and equipment are
stated at cost and depreciated on the straight-line method over the estimated
useful lives. Buildings and building improvements are generally depreciated over
8-40 years, while store, warehouse and office equipment, vehicles and aircraft
equipment are generally depreciated over 3-10 years. Leasehold improvements are
depreciated over the life of the lease or the estimated life of the asset,
whichever is shorter.
LEASED PROPERTY UNDER CAPITAL LEASES - Noncancellable financing leases are
capitalized at the estimated fair value of the leasehold interest and are
amortized on the straight-line method over the terms of the leases.
LONG-LIVED ASSETS - When facts and circumstances indicated potential
impairment, the Company evaluates the recoverability of assets carrying values,
including goodwill, using estimates of future cash flows over remaining assets
lives. When impairment is indicated, any impairment loss in measured by the
excess of carrying values over fair values.
DEFERRED FINANCING COSTS AND ORIGINAL ISSUE DEBT DISCOUNT - Deferred
financing costs are being amortized using the straight-line method over the
terms of the issues which approximates the effective interest method. Original
issue debt discount is being amortized using the effective interest method over
the terms of the issues.
PRE-OPENING EXPENSES - Costs related to opening new stores are expensed as
incurred.
EARNINGS PER SHARE - Earnings per share were calculated using the weighted
average common shares and dilutive common share equivalents outstanding during
the year using the treasury stock method.
MANAGEMENT'S USE OF ESTIMATES - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
STOCK-BASED COMPENSATION - The Company accounts for its stock-based
compensation under the provisions of Accounting Principles Board Opinion 25,
"Accounting for Stock Issued to Employees" (APB 25).
RECLASSIFICATIONS - Certain reclassifications have been made to prior
years' financial statements to conform to the current year presentation.
22
<PAGE>
B. MERCHANDISE INVENTORIES
Total inventories would have been higher at February 2, 1997 and January
28, 1996 by $6,574 and $5,700, respectively, had the FIFO (first-in, first-out)
method been used to determine the cost of all inventories. On a FIFO basis, net
income (loss) before extraordinary item would have been $78, $(95,604) and
$2,666, respectively, for fiscal years 1997, 1996, and 1995. During fiscal years
1997, 1996, and 1995, certain inventory quantities were reduced resulting in a
liquidation of certain LIFO layers carried at costs which were lower than the
cost of current purchases, the effect of which increased net income by $116,
$125, and $102, respectively.
C. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consists of:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Land and land improvements .. $ 4,013 $ 3,943
Buildings and building
improvements............... 22,076 21,578
Store, warehouse and office
equipment.................. 59,668 55,638
Vehicles and aircraft
equipment.................. 1,513 1,578
Leasehold improvements ...... 16,497 15,362
103,767 98,099
Less accumulated depreciation
and amortization .......... 61,364 53,946
-------- --------
$ 42,403 $ 44,153
======== ========
D. OTHER ASSETS
Other assets consist of:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Construction notes receivable. $ 10,257 $ 2,767
Unamortized software
costs, net ................. 7,541 3,357
Other ........................ 1,975 1,107
-------- --------
$ 19,773 $ 7,231
======== ========
E. FINANCING AGREEMENTS
Effective March 17, 1997, the term of Pamida's committed Loan and Security
Agreement (the Agreement) was extended to March 2000 and the maximum borrowing
limit of the facility was increased to $95,000 from $70,000, which had been the
limit throughout fiscal 1997. Prior to March 17, 1997, borrowings under the
Agreement bore interest at a rate which was 0.75% per annum greater than the
applicable prime rate. Effective March 17, 1997, borrowings under the Agreement
bear interest at a rate which is tied to the applicable prime rate or the London
Interbank Offered Rate (LIBOR), generally at Pamida's discretion. The amounts
Pamida is permitted to borrow under the Agreement are determined by a formula
based upon the amount of Pamida's eligible inventory from time to time. Such
borrowings of Pamida under the Agreement are secured by security interests in
substantially all of the current assets (including inventory) of Pamida and by
liens on certain real estate interests and other property of Pamida. The Company
and two subsidiaries of Pamida have guaranteed payment and performance of
Pamida's obligations under the Agreement and have pledged some or all of their
respective assets, including the stock of Pamida owned by the Company, to secure
such guarantees.
The Agreement contains provisions imposing operating and financial
restrictions on the Company. Certain provisions of the Agreement require the
maintenance of specified amounts of tangible net worth (as defined) and working
capital (as defined) and the achievement of specified minimum amounts of cash
flow (as defined). Other restrictions in the Agreement and those provided under
the Indenture relating to the Senior Subordinated Notes will affect, among other
things, the ability of Pamida to incur additional indebtedness, pay dividends,
repay indebtedness prior to its stated maturity, create liens, enter into
leases, sell assets or engage in mergers or acquisitions, make capital
expenditures and make investments.
The maximum amount of borrowings under the Agreement during fiscal 1997 and
1996 was $69,256 and $63,884, respectively. The weighted average amounts of
borrowings under the Agreement for fiscal 1997 and 1996 were $43,002 and
$35,544, respectively; and the weighted average interest rates were 10.0% and
10.4%, respectively.
23
<PAGE>
Long-term debt consists of:
Feb. 2, Jan. 28,
1997 1996
------- --------
Senior Subordinated Notes,
11.75%, due March 2003 ...... $140,000 $140,000
Industrial development bonds,
8.5%, due in monthly install-
ments through 2005 .......... 411 1,745
Senior promissory notes, 15.5%,
due in 2003, interest paid
in kind quarterly ........... 4,926 4,231
Subordinated promissory notes,
16%, due in 2003, interest
paid in kind quarterly ...... 13,454 11,500
Junior subordinated promissory
notes, 16.25%, net of
unamortized discount of $878
and $1,038, due in 2003,
interest paid in kind quarterly 9,256 7,604
-------- -------
168,047 165,080
Less current maturities ....... 47 1,334
-------- --------
$168,000 $163,746
======== ========
As of February 2, 1997, the fair value of long-term debt was $153,900
compared to its recorded value of $168,000. The fair value of long-term debt was
estimated based on quoted market values for the same or similar debt issues or
rates currently available for debt with similar terms. The aggregate maturities
of long-term debt in each of the next five fiscal years are as follows: 1998 -
$47; 1999 - $47; 2000 - $47; 2001 - $47; and 2002 - $47.
The Senior Subordinated Notes and the promissory notes are unsecured and
are subordinate borrowings under the Agreement. Presently, under the most
restrictive debt covenants, the Company is not permitted to pay dividends on its
common stock.
The senior subordinated and junior subordinated promissory notes of the
Company were amended to provide that until the obligations of the Company and
Pamida under certain loan agreements have been paid in full, the quarterly
interest payments on the notes will be paid in kind by increasing the principal
amount of each note on the applicable quarterly payment date by the amount of
accrued interest then being paid in kind. Interest on the notes paid in kind
accrues at a rate which, in each case, is two percentage points higher than the
applicable cash interest rate.
F. INCOME TAXES
Components of the income tax provision (benefit) are as follows:
Years Ended
--------------------------------
Feb. 2, Jan. 28, Jan. 29,
1997 1996 1995
-------- -------- --------
Current:
Federal .... $ (3,155) $ (993) $ 4,048
State ...... (150) (223) 1,007
-------- -------- --------
(3,305) (1,216) 5,055
-------- -------- --------
Deferred:
Federal ..... 3,189 (5,865) (679)
State ....... 116 (782) (876)
-------- -------- --------
3,305 (6,647) (1,555)
-------- -------- --------
Total (benefit)
provision ... $ -- $ (7,863) $ 3,500
======== ======== ========
The differences between the U.S. Federal statutory tax rate and the
Company's effective tax rate are as follows:
Years Ended
---------------------------
Feb. 2, Jan. 28, Jan. 29,
1997 1996 1995
-------- -------- --------
Statutory rate ......... (34.0)% (34.0)% 34.0%
State income tax effect. (2.8) (1.3) 5.5
Amortization of the excess
of cost over net assets
acquired ............. -- 23.9 12.2
Valuation allowance ....... 25.1 3.6 0.1
Accretion of discount on
junior subordinated debt 6.8 0.1 0.8
Other ..................... 4.9 0.1 2.0
-------- -------- --------
0.0% (7.6)% 54.6%
======== ======== ========
24
<PAGE>
Significant temporary differences between reported and taxable earnings
that give rise to deferred tax assets and liabilities were as follows:
Feb. 2, Jan. 28,
1997 1996
--------- --------
Net current deferred tax liabilities:
Inventories ......................... $ 15,302 $ 13,681
Valuation allowance ................. -- 3,869
Prepaid insurance ................... 210 514
Other ............................... 453 366
Supplier allowances ................. (41) --
Post employment health costs ........ (189) (237)
Accrued expenses .................... (941) (1,300)
Store closing costs ................. (2,570) (7,159)
--------- ---------
Net current deferred
tax liabilities ................ 12,224 9,734
--------- ---------
Net long-term deferred tax liabilities:
Property, buildings and
equipment ...................... 2,862 3,109
Other ............................. 1,436 438
Valuation allowance ............... 4,069 5
Capital loss carryforward ......... -- (5)
Capital leases .................... (3,089) (2,602)
Tax benefit carryforward .......... (3,518) --
--------- ---------
Net long-term deferred
tax liabilities ..................... 1,760 945
--------- ---------
Net total deferred tax
liabilities ...................... $ 13,984 $ 10,679
========= =========
Net long-term deferred tax liabilities are classified with other long-term
liabilities in the consolidated balance sheets of the Company. As of February 2,
1997 the Company had net operating loss carryforwards totaling $4,034 which
expire in 2012 and the Company had tax credit carryforwards totaling $1,973
which expire in 2006 through 2011.
G. LEASES
The majority of store facilities are leased under noncancelable leases.
Substantially all of the leases are net leases which require the payment of
property taxes, insurance and maintenance costs in addition to rental payments.
Certain leases provide for additional rentals based on a percentage of sales and
have renewal options for one or more periods totaling from one to twenty years.
Leases have been categorized as capital or operating leases in conformity with
the definition in Statement of Financial Accounting Standards No. 13, Accounting
for Leases.
At February 2, 1997 the future minimum lease payments under capital and
operating leases with rental terms of more than one year amounted to:
Fiscal Year Ending Capital Operating
Leases Leases
--------- ---------
1998..................... $ 5,802 $ 10,010
1999..................... 5,659 8,800
2000..................... 5,442 6,879
2001..................... 5,352 5,639
2002..................... 5,267 5,103
Later years.............. 41,384 46,069
--------- ---------
Total minimum obligations $ 68,906 $ 82,500
--------- ---------
Less amount representing
interest................ 33,126
---------
Present value of net minimum
lease payments.......... 35,780
Less current portion..... 1,781
---------
Long-term obligations..... $ 33,999
=========
The minimum rentals under operating leases have not been reduced by minimum
sublease rentals of $191 due in the future under noncancelable subleases.
Total rental expense related to all operating leases (including those with
terms less than one year) is as follows:
Years Ended
-------------------------------
Feb. 2, Jan. 28, Jan. 29,
1997 1996 1995
-------- -------- --------
Minimum rentals ..... $ 10,938 $ 11,715 $ 9,585
Contingent rentals .. 258 399 477
Less sublease rentals (735) (852) (918)
-------- -------- --------
$ 10,461 $ 11,262 $ 9,144
======== ======== ========
H. SAVINGS AND OTHER POSTEMPLOYMENT BENEFIT PLANS
Pamida has adopted a 401(k) savings plan that covers all employees who are
21 years of age with one or more years of service. Participants can contribute
from 1% to 15% of their pre-tax compensation. Pamida has currently elected to
match 50% of the participant's contribution up to 5% of compensation. Pamida's
savings plan contribution expenses for fiscal years 1997, 1996, and 1995 were
$770, $749, and $716, respectively.
Prior to December 1993, the Company had agreed to continue to provide
health insurance coverage and pay a portion of the health insurance premiums
until age 65 for individuals who retire if the individual was eligible to
participate in the plan, had attained age 55, had completed ten or more
consecutive years of service and
25
<PAGE>
elected to continue on the Company plan. The plan is unfunded, and the Company
had the right to modify or terminate these benefits. In December 1993, the
Company amended the Plan to no longer offer postretirement health benefits for
employees retiring after February 1, 1994.
The components of periodic expense for postretirement benefits in fiscal
1997, 1996 and 1995 were as follows:
Feb. 2, Jan. 28, Jan. 29,
1997 1996 1995
-------- -------- --------
Annual postretirement benefit expense:
Interest cost ....................... 16 32 42
Amortization of
unrecognized
net obligations ...................... (44) (6) --
-------- -------- --------
Annual postretirement
benefit expense ...................... $ (28) $ 26 $ 42
======== ======== ========
The accumulated postretirement benefit obligation consists of:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Accumulated postretirement
benefit obligation ......... $ 194 $ 395
Unrecognized gain ............ 299 223
-------- --------
Accrued expense .............. $ 493 $ 618
======== ========
A 5% and a 10% increase in the cost of covered health care benefits was
assumed for fiscal 1997 and 1996, respectively. The rate of 5% used as of
February 2, 1997 is assumed to remain level after fiscal 1997. At January 28,
1996, the 10% was assumed to decrease incrementally to 5% after five years and
remain level thereafter. Assuming a 1% increase in the health care trend rate,
the annual postretirement benefit expense would remain the same for fiscal 1997
and increase by $1 for fiscal 1996, and the unfunded accumulated postretirement
benefit obligation would increase by $4 and $13 for fiscal 1997 and 1996,
respectively. The weighted average discount rate used in determining the
accumulated postretirement benefit obligation was 7.0% for both fiscal 1997 and
1996.
I. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
The Company is obligated to redeem all outstanding shares of senior
cumulative and junior cumulative preferred stock on December 31, 2001, at a
price not to exceed the liquidation value which is $1,000 per share plus any
accrued dividends. Subject to certain loan restrictions, the Company may, at any
time, redeem all or any portion of the preferred shares outstanding at a price
of $1,000 per share plus any accrued dividends.
Each share of senior cumulative and junior cumulative preferred stock
entitles its holder to receive a quarterly dividend of 16.25% and 14.25% per
annum, respectively, of the liquidation value from the date of issuance until
redeemed. Both series of preferred stock are non-voting, and any unpaid
dividends are added to the liquidation value until paid.
The General Corporation Law of the State of Delaware, under which the
Company and Pamida are incorporated, allows a corporation to declare or pay a
dividend only from its surplus or from the current or the prior year's earnings.
Due to the accumulated deficit resulting primarily from the store closings and
the write-off of goodwill and other long-lived assets recognized in the fourth
quarter of fiscal 1996, the Company and Pamida did not declare or pay any cash
dividends in fiscal 1997 and may pay cash dividends in ensuing years only to the
extent that the Company and Pamida satisfy the applicable statutory standards
which include the Company's having a net worth equal to at least the aggregate
par value of the preferred stock which amounts to $2. A liability and provision
for preferred stock dividends have been recorded in the fiscal 1997 financial
statements. The cumulative dividend rate on the preferred stock increases by
0.5% per quarter (with a maximum aggregate increase of 5%) on each quarterly
dividend payment date on which the preferred stock dividends are not paid
currently on a cumulative basis.
The difference between the fair value of the junior cumulative preferred
stock at issuance and the mandatory redemption value is being recorded through
periodic accretions, using the effective interest method with a related charge
to retained earnings.
J. STOCK OPTIONS
On November 24, 1992, the Board of Directors of the Company adopted the
Pamida Holdings Corporation 1992 Stock Option Plan (the "Plan"), which was
approved by the Company's stockholders in May 1993. The Plan, administered by a
Committee of the Board of
26
<PAGE>
Directors, provides for the granting of options to key employees of the Company
and its subsidiaries to purchase up to an aggregate of 350,000 shares of Common
Stock of the Company. Options granted under the Plan may be either incentive
stock options, within the meaning of Section 422 of the Internal Revenue Code,
or non-qualified options. Options granted under the Plan will be exercisable
during the period fixed by the Committee for each option; however, in general,
no option will be exercisable earlier than one year after the date of its grant,
and no incentive stock option will be exercisable more than ten years after the
date of its grant. The option exercise price must be at least 100% of the fair
market value of the Common Stock on the date of the option grant. No
compensation expense related to stock options was recorded during fiscal 1997,
1996 or 1995.
The Company accounts for its stock-based compensation under the provisions
of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB Opinion No. 25), which utilizes the intrinsic value method. The
effect on 1997 and 1996 net income and earnings per share of accounting for
stock-based compensation using the fair value method required by Statement of
Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation
(SFAS 123) is immaterial.
The weighted average fair value of options granted during the year was
$0.70 and $2.86 per option for fiscal 1997 and 1996, respectively. The fair
value of options granted under the Plan was estimated at the date of grant using
a binomial options pricing model with the following assumptions:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Risk-free interest rate............... 6.0% 7.0%
Dividend yield........................ 0.0% 0.0%
Expected Volatility................... 8.1% 8.1%
Expected life (years) ................ 6.6 years 6.7 years
A summary of the Company's stock-based compensation activity related to
stock options for the last three fiscal years is as follows:
<TABLE>
<CAPTION>
February 2, 1997 January 28, 1996 January 29, 1995
-------------------- -------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Outstanding-beginning of year 296,546 $ 5.05 227,545 $ 4.33 171,750 $ 3.63
Granted ..................... 86,800 2.37 122,205 6.80 75,000 5.75
Expired/terminated .......... (80,530) 4.66 (48,246) 6.22 (19,205) 3.63
Exercised ................... -- -- (4,958) 3.63 -- --
Outstanding-end of year ..... 302,816 $ 4.39 296,546 $ 5.05 227,545 $ 4.33
</TABLE>
There were 123,616, 85,474 and 61,681 options exercisable at February 2,
1997, January 28, 1996 and Janaury 29, 1995, respectively.
The following table summarizes information about stock options outstanding
as at February 2, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ------------------------------------------------------ -------------------------------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Excercise Number Contractual Exercise Number Exercise
Prices Outstanding Life Price Exercisable Price
----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
$1.94-$2.78 83,800 9.5 Years $ 2.36 -- $ --
3.63-5.75 171,016 7.3 Years 4.60 114,016 4.20
7.19 48,000 8.1 Years 7.19 9,600 7.19
----------- ----------- ----------- ----------- ----------- -----------
Totals $1.94-$7.19 302,816 8.0 Years $ 4.39 123,616 $ 4.43
</TABLE>
27
<PAGE>
K. CAPITAL STOCK
In October 1994, 919,587 shares of nonvoting common stock of the Company
were converted into the same number of shares of common stock. After giving
effect to such conversion, the Company had 5,004,942 shares of common stock and
no shares of nonvoting common stock outstanding at the end of fiscal 1997 and
1996.
L. EXTRAORDINARY ITEMS
On July 31, 1995, the Company made an offer to purchase for cash 39.5% of
the aggregate outstanding principal amount of 14% Subordinated Promissory Notes
(Notes) of Pamida Holdings Corporation. The offered purchase price was 50% of
the principal amount to be purchased. In the third quarter of fiscal 1996, the
Company redeemed Notes tendered in the aggregate principal amount of $1,281 and
made cash payments of $641, resulting in an after-tax gain of $371.
M. COMMITMENTS AND CONTINGENCIES
Pamida has employment agreements with three key executive officers which
expire in 2000 and 2001. In addition to a base salary, the agreements provide
for a bonus to be paid if certain Company performance goals are achieved. Also,
in March 1997, the Board of Directors approved a long-term incentive
compensation program in order to enhance retention of certain key members of
management. Payout is tied to continued employment and future Company common
stock price appreciation.
The terms of the senior and junior preferred stock and the senior,
subordinated and junior subordinated promissory notes provide that, upon the
occurrence of an event of noncompliance with respect to the preferred stock or
event of default with respect to the promissory notes, the Company is required
to pay higher dividend and interest rates with the amount of the increase
depending on the nature of the event of noncompliance or default.
During fiscal 1996, the Company received $967 from Pamida as a
reimbursement for certain tax benefits derived by Pamida. Such remittance, along
with $18 from the exercise of certain stock options, was used by the Company to
redeem Subordinated Promissory Notes as described in Note L, to repay to Pamida
intercompany balances totaling $29, and to pay quarterly dividends on preferred
stock totaling $315.
In June 1994, the Company received $1,316 from Pamida as a reimbursement
for certain tax benefits derived by Pamida. Such remittance was used by the
Company to make a principal payment on its outstanding promissory notes of
$1,029 and to repay Pamida certain intercompany advances aggregating $287.
In connection with the Company's self insured retention of worker's
compensation liabilities and future rental payments on a warehouse, on February
2, 1997, the Company had standby letters of credit outstanding totaling
approximately $1,188.
N. IMPAIRMENT OF LONG-LIVED ASSETS RECORDED IN FISCAL 1996
During fiscal 1996, weak trends in the retail industry combined with
increasing competition lowered the operating results of the Company.
Therefore, during the fourth quarter of fiscal 1996, management reviewed
its expectations for near- and long-term performance of the Company and revised
its earnings projections to reflect developing and projected trends, primarily
in comparable-store-sales growth, gross margins, operating expenses and interest
expenses. Consequently, the recoverability of the Company's long-lived assets
was also reassessed.
In the fourth quarter of fiscal 1996, the Company adopted Statement of
Financial Accounting Standards No. 121 "Accounting For the Impairment of
Long-Lived Assets and Long-Lived Assets to Be Disposed Of" (SFAS 121). This
financial accounting standard requires the Company to perform an analysis of the
recoverability of the net book value of long-lived assets. The Company analyzed
cash flows on an individual store basis to assess recoverability of store level
long-lived assets including allocated goodwill.
As a result of this analysis, impairment was indicated at certain stores,
and a noncash pre-tax charge was recorded as illustrated in the table below. The
impairment losses were based on fair value which was determined through
discounted cash flows for the particular stores utilizing a rate commensurate
with the associated risks. The effect of this accounting change was to increase
the net loss for the year by $24,693 or $4.90 per common share.
The Company also analyzed the value of its remaining goodwill and favorable
leasehold interests not impaired
28
<PAGE>
under the store-level SFAS 121 analysis using its historical method under
Accounting Principles Board Opinion No. 17 (APB 17) and determined that such
remaining amounts also were impaired. For this analysis the value of the
goodwill and favorable leasehold interests was determined by projecting
aggregate net income and adjusting it by adding back amortization of intangible
assets. With respect to the projections of net income used to evaluate
intangible assets impairment, management made several assumptions in projecting
their best estimate of the results of future operations of the Company. The most
significant assumptions were an estimated remaining useful life of goodwill of
fifteen years, modest annual comparable store sales growth, gross margin rates
consistent with those experienced over the past fiscal year in the stores not
being closed, an annual expense escalation consistent with recent inflation
trends and the ability to refinance debt maturities as they come due.
These assumptions resulted in aggregate undiscounted adjusted net income
for the fifteen-year forecast period of approximately $5,186, which reflects
aggregate pre-tax interest expense of approximately $398,000 payable in cash and
$86,000 payable "in kind" (PIK). The $5,186 of aggregate adjusted net income for
the fifteen-year forecast period also reflected projected adjusted net losses
for fiscal 1997 of $4,522, which included cash interest expense of $26,242 and
PIK interest of $4,453, and for fiscal 1998 of $2,863, which included cash
interest expense of $26,581 and PIK interest of $5,121. For fiscal 1999, the
Company projected adjusted net income of approximately $967, which included cash
interest expense of approximately $26,581 and PIK interest of $5,889. Due to the
uncertainty of projections beyond 1999, this level of adjusted net income was
assumed to continue for each of the remaining fiscal years in the projection
period. As a result of this evaluation in fiscal 1996, management concluded that
the remaining goodwill and favorable leasehold interests were fully impaired.
Pre-Tax Components of Long-Lived Asset Write-Off As Reflected in the
Statement of Operations for the year ended January 28, 1996:
SFAS APB
121 17 Total
-------- -------- --------
Goodwill $ 20,607 $ 49,406 $ 70,013
Favorable leasehold
interests 4,245 1,917 6,162
Property, buildings
and equipment 2,376 -- 2,376
-------- -------- --------
Total $ 27,228 $ 51,323 $ 78,551
======== ======== ========
The goodwill was originally recorded in July 1986 when Pamida Holdings
Corporation acquired Pamida, Inc. through a leveraged buy-out and represented
the excess of the purchase price over the fair value of the net assets acquired.
Goodwill had been amortized on a straight-line basis over a forty-year period
but, due to the trends cited above, its estimated remaining useful life was
adjusted to fifteen years during the fourth quarter of fiscal 1996.
29
<PAGE>
O. STORE CLOSINGS IN FISCAL 1996
As discussed in Note N above, the Company's operating performance during
fiscal 1996 was below plan. Management's analysis of individual stores'
operations and cash flows resulted in the identification of forty unprofitable
or competitive market stores which did not fit the Company's niche market
strategy. Consequently, a charge was recorded at January 28, 1996 as indicated
below to cover the costs necessary to close these stores. The Company received
positive net cash flow from closing the stores due to cash generated from the
disposition of related inventories. The amounts the Company will ultimately
realize from the disposal of assets or pay on the resolution of liabilities may
differ from the estimated amounts utilized in arriving at the income statement
effect.
Pre-Tax Income
Components of fiscal 1996 Statement
Store Closing Costs Effect
--------
Real estate exit costs and
write-off of property,
buildings, and equipment ........... $ 11,455
Inventory liquidation ................ 9,080
Professional charges ................. 314
Severance and other costs and fees ... 548
--------
Totals ............................... $ 21,397
========
The store closing reserve balance as of January 28, 1996 included amounts
related to real estate, inventory, severance, professional fees and other costs
of closing the forty stores. The liquidation of the closing stores inventory was
completed in the second quarter of fiscal 1997. All known ancillary costs of the
store closings have been paid except those related to the remaining real estate.
During fiscal 1997, the Company negotiated settlements on twenty closed store
properties which had been leased, two which have been subleased, and sold four
closed store properties which had been owned. As of February 2, 1997, the
Company remains liable for lease obligations on twelve closed store properties
and owns four closed store properties. The Company anticipates that final
disposition of the remaining obligations and properties will be completed in
fiscal 1999. There were no adjustments made during fiscal 1997 to the store
closing reserve other than cash inflows and outflows related to the store
closings.
The store closing reserve is presented in the balance sheets as follows:
Feb. 2, Jan. 28,
1997 1996
-------- --------
Store closing reserve
(short-term) $ 4,521 $ 7,818
Amount included in other
long-term liabilities 2,190 2,619
-------- --------
Total $ 6,711 $ 10,437
======== ========
30
<PAGE>
P. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 2, 1997 and January 28, 1996:
<TABLE>
<CAPTION>
April 28, July 28, October 27, February 2,
Fiscal 1997 1996 1996 1996 1997 Year
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales ................................. $ 131,786 $ 155,817 $ 151,980 $ 193,606 $ 633,189
Gross profit .......................... 31,575 37,096 36,446 48,973 154,090
Net (loss) income ..................... (4,742) (1,294) 189 5,051 (796)
Less provision for preferred
dividends and discount
amortization ..................... 93 97 99 102 391
----------- ----------- ----------- ----------- -----------
Net (loss) income available
for common shares ................ $ (4,835) $ (1,391) $ 90 $ 4,949 $ (1,187)
=========== =========== =========== =========== ===========
Net (loss) earnings
per common share .................. $ (.97) $ (.28) $ .02 $ .99 $ (.24)
=========== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
April 30, July 30, October 29, January 28,
Fiscal 1996 1995 1995 1995 1996 Year
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sales................................... $ 153,961 $ 186,953 $ 176,206 $ 219,195 $ 736,315
Gross profit............................ 36,813 44,638 42,802 53,435 177,688
Net (loss) income before
Extraordinary item.................. (2,179) 608 130 (93,578) (95,019)
Extraordinary item...................... -- -- 371 -- 371
----------- ----------- ----------- ----------- -----------
Net (loss) income....................... (2,179) 608 501 (93,578) (94,648)
Less preferred dividends and
discount amortization............... 91 90 90 91 362
----------- ----------- ----------- ----------- -----------
Net (loss) income available
for common shares................... $ (2,270) $ 518 $ 411 $ (93,669) $ (95,010)
=========== =========== =========== =========== ===========
Net (loss) earnings
per common share $ (.45) $ .10 $ .08 $ (18.60) $ (18.87)
=========== =========== =========== =========== ===========
</TABLE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT ON SCHEDULE
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pamida Holdings Corporation
Omaha, Nebraska
We have audited the consolidated balance sheet of Pamida Holdings Corporation
and subsidiary as of February 2, 1997, and the related consolidated statements
of operations, stockholders' equity and cash flows for each of the years ended
February 2, 1997 and January 29, 1995 and have issued our report thereon dated
March 7, 1997 (March 17, 1997 as to Note E). Such financial statements and
report are included in this Annual Report on Form 10-K. Our audits also included
the financial statement schedule of Pamida Holdings Corporation and subsidiary
as of February 2, 1997, and for each of the years ended February 2, 1997 and
January 29, 1995 listed in Item 14(a)2. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 7, 1997
PAMIDA HOLDINGS CORPORATION
(Parent Company Only)
(Dollar amounts in thousands)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS - FEBRUARY 2, 1997 AND JANUARY 28, 1996
ASSETS 1997 1996
Current assets: -------- --------
Refundable income taxes ............................ $ 855 $ 855
Investment in subsidiary ........................... (57,531) (61,226)
Deferred financing costs ........................... 52 63
-------- --------
$(56,624) $(60,308)
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ -- $ 8
Accrued interest ................................... 811 639
Payable to Pamida, Inc. ............................ 16 --
-------- --------
Total current liabilities ...................... 827 647
Long-term debt ....................................... 27,636 23,335
Dividends payable .................................... 342 --
Preferred stock subject to mandatory redemption:
16-1/4% senior cumulative preferred stock, $1
par value; 514 shares authorized, issued and
outstanding ...................................... 514 514
14-1/4% junior cumulative preferred stock, $1
par value; 6,986 shares authorized;
1,627 shares issued and outstanding;
redemption amount of $1,627 less
unamortized discount ............................. 1,360 1,312
Common stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares
authorized; 5,004,942 shares issued and
outstanding, in both years ....................... 50 50
Additional paid-in capital ......................... 968 968
Accumulated deficit ................................ (88,321) (87,134)
-------- --------
Total common stockholders' equity .............. (87,303) (86,116)
-------- --------
$(56,624) $(60,308)
======== ========
PAMIDA HOLDINGS CORPORATION
(Parent Company Only)
(Dollar amount in thousands except for per share data)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS AND RETAINED (DEFICIT) EARNINGS
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
1997 1996 1995
-------- -------- --------
Equity in earnings (loss) of subsidiary .... $ 3,696 $(92,527) $ 5,130
Expenses:
General and administrative ............... 19 33 34
Interest ................................. 4,473 3,910 3,463
-------- -------- --------
4,492 3,943 3,497
-------- -------- --------
(Loss) income before income tax benefit
and extraordinary item ................... (796) (96,470) 1,633
Extraordinary item ......................... -- 371 --
-------- -------- --------
(Loss) income before income tax benefit .... (796) (96,099) 1,633
Income tax benefit ......................... -- 1,451 1,282
-------- -------- --------
Net (loss) income .......................... (796) (94,648) 2,915
Amortization of discount on 14-1/4%
junior cumulative preferred .............. (49) (47) (45)
Cash dividends paid to preferred
stockholders ............................. -- (315) (316)
Accrued dividends for
preferred stockholders .................. (342) -- --
Retained earnings (accumulated deficit) -
beginning of year ....................... (87,134) 7,876 5,322
-------- -------- --------
Retained earnings (accumulated deficit) -
end of year ............................. $(88,321) $(87,134) $ 7,876
======== ======== ========
(Loss) earnings per common share ........... $ (.24) $ (18.87) $ .51
======== ======== ========
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION
(Parent Company Only)
(Dollar amounts in thousands)
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
YEARS ENDED FEBRUARY 2, 1997, JANUARY 28, 1996 AND JANUARY 29, 1995
1997 1996 1995
Cash flows from operating activities: -------- -------- --------
<S> <C> <C> <C>
Net (loss) income ........................................ $ (796) $(94,648) $ 2,915
-------- -------- --------
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Equity in (earnings) loss of subsidiary .............. (3,696) 92,527 (5,130)
Noncash interest expense ............................. 4,313 3,756 3,315
Accretion of original issue debt discount ............ 160 154 149
Amortization of intangible assets .................... 11 10 11
Extraordinary item related to retirement of debt ..... -- (371) --
(Increase) decrease in refundable income tax ......... -- (483) 349
Increase (decrease) in operating liabilities ......... 8 (7) (264)
-------- -------- --------
Total adjustments ............................... 796 95,586 (1,570)
-------- -------- --------
Net cash provided by operating activities ....... -- 938 1,345
-------- -------- --------
Cash flows from investing activities:
Dividends received from subsidiary ....................... -- -- --
Cash flows from financing activities:
Proceeds from sale of stock .............................. -- 18 --
Principal payments on promissory notes ................... -- -- (1,029)
Payments to redeem subordinated notes .................... -- (641) --
Dividends paid to preferred stockholders ................. -- (315) (316)
-------- -------- --------
Net cash used in financing activities ........... -- (938) (1,345)
-------- -------- --------
Net change in cash ......................................... -- -- --
Cash at beginning of year .................................. -- -- --
-------- -------- --------
Cash at end of year ........................................ $ -- $ -- $ --
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the year for interest ................. $ -- $ -- $ --
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING
ACTIVITY:
Amortization of discount on junior cumulative preferred
stock recorded as a direct charge to retained earnings $ 49 $ 47 $ 45
Payment of interest in kind by increasing the
principal amount of the notes ........................ 4,141 3,702 3,263
Conversion on nonvoting common stock to common stock:
Common stock ......................................... -- -- 9
Nonvoting stock ...................................... -- -- (9)
</TABLE>
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The information required by this item has been previously reported in the
Form 8-K Current Report of the registrant dated October 16, 1996.
PART III
The information required by this Part III is incorporated by reference from
the registrant's definitive proxy statement for the 1997 annual meeting of the
registrant's stockholders to be held on May 22, 1997, which involves the
election of directors. Such definitive proxy statement will be filed with the
Securities and Exchange Commission not later than 120 days after the end of the
fiscal year covered by this Form 10-K. However, information concerning the
registrant's executive officers will be omitted from such proxy statement and is
furnished in a separate item captioned "Executive Officers of the Registrant"
included in Part I of this Form 10-K.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this report in Item
8 of Part II:
1. FINANCIAL STATEMENTS.
Pamida Holdings Corporation and Subsidiary
- Independent Auditors' Report
- Consolidated Statements of Operations for the Years Ended February
2, 1997, January 28, 1996 and January 29, 1995
- Consolidated Balance Sheets at February 2, 1997 and January 28, 1996
- Consolidated Statements of Common Stockholders' Equity for the Years
Ended February 2, 1997, January 28, 1996 and January 29, 1995
- Consolidated Statements of Cash Flows for the Years Ended February
2, 1997, January 28, 1996 and January 29, 1995
- Notes to Consolidated Financial Statements for the Years Ended
February 2, 1997, January 28, 1996 and January 29, 1995
2. FINANCIAL STATEMENT SCHEDULES.
- Independent Auditors' Report on Schedule
- Schedule I - Condensed Financial Information of Registrant
All other schedules of the registrant for which provision is made in the
applicable accounting regulations of the Securities and Exchange Commission are
not required under the related instructions, are inapplicable or have been
disclosed in the Notes to Consolidated Financial Statements and, therefore, have
been omitted.
3. EXHIBITS.
(1) 3.1 - Restated Certificate of Incorporation of Pamida Holdings
Corporation, as amended.
(2) 3.2 - Revised By-Laws of Pamida Holdings Corporation.
(1) 3.3 - Certificate of Amendment of Certificate of Incorporation
of Pamida Holdings Corporation (amends Exhibit 3.1).
(9) 3.4 - Certificate of Amendment of Certificate of Incorporation
of Pamida Holdings Corporation (amends Exhibit 3.1).
(2) 4.1 - Form of certificate representing shares of the Common Stock
of Pamida Holdings Corporation.
(6) 4.2 - Indenture dated as of March 15, 1993, among Pamida, Inc. as
Issuer, Pamida Holdings Corporation as Guarantor, and State
Street Bank and Trust Company as Trustee relating to 11 3/4%
Senior Subordinated Notes due 2003 of Pamida, Inc.
(6) 4.3 - Specimen form of 11 3/4% Senior Subordinated Note due 2003 of
Pamida, Inc.
(3) 10.1 - Stock and Note Purchase Agreement dated as of July 29, 1986,
among Pamida Holdings Corporation, Citicorp Venture Capital,
Ltd., Citicorp Capital Investors, Ltd., and the individual
purchasers who are parties thereto.
(1) 10.2 - Amendment to Stock and Note Purchase Agreement, dated July 31,
1990 (amends Exhibit 10.1).
(1) 10.3 - Second Amendment to Stock and Note Purchase Agreement, dated
August 10, 1990 (amends Exhibit 10.1).
(1) 10.4 - Third Amendment to Stock and Note Purchase Agreement, dated
September 13, 1990 (amends Exhibit 10.1).
(1) 10.5 - Registration Agreement dated July 29, 1986, among Pamida Holdings
Corporation and the persons listed on the signature pages
thereof.
(1) 10.6 - Amendment No.1 to Registration Agreement, dated August 10, 1990,
among Pamida Holdings Corporation, Citicorp Venture Capital,
Ltd. and C. Clayton Burkstrand (amends Exhibit 10.5).
(1) 10.7 - Exchange Agreement dated August 10, 1990, among Pamida Holdings
Corporation, Citicorp Venture Capital, Ltd. and Court Square
Capital Limited.
(1) 10.8 - Agreement dated September 13, 1990, among Pamida Holdings
Corporation, Citicorp Venture Capital, Ltd. and Court Square
Capital Limited.
(2) 10.9 - Agreement dated September 20, 1990, among Pamida Holdings
Corporation, Citicorp Venture Capital, Ltd. and Court Square
Capital Limited.
(4) 10.10 - Exchange Agreement dated as of December 1, 1990 between Pamida
Holdings Corporation, Citicorp Venture Capital, Ltd. and
Court Square Capital Limited.
(4) 10.11 - Form of 14.25% Junior Subordinated Promissory Note of Pamida
Holdings Corporation.
(4) 10.12 - Form of Indemnification Agreement between Pamida Holdings
Corporation and its officers and directors.
(5) 10.13 - Note Amendment Agreement dated as of December 18, 1992, between
Pamida Holdings Corporation and Court Square Capital Limited.
(5) 10.14 - Note Amendment Agreement No. 2 dated as of March 1, 1993, between
Pamida Holdings Corporation and Citicorp Investments Inc.
(5) 10.15 - Tax-Sharing Agreement dated as of February 2, 1992, among Pamida
Holdings Corporation, Pamida, Inc., Seaway Importing company,
and Pamida Transportation Company.
(6) 10.16 - Loan and Security Agreement dated March 30, 1993, by and among
Congress Financial Corporation (Southwest) and BA Business
Credit, Inc. as Lenders, Congress Financial Corporation
(Southwest)as Agent for the Lenders, and Pamida, Inc. and
Seaway Importing Company as Borrowers.
(12) 10.17 - Amendment No. 1 to Loan and Security Agreement, dated January 23,
1995, among Pamida, Inc. and Seaway Importing Company as
Borrowers, Congress Financial Corporation (Southwest) as a
Lender and Agent, and BA Business Credit Inc. as a Lender
(amends Exhibit 10.16).
(13) 10.18 - Amendment No. 2 to Loan and Security Agreement, dated January 28,
1996, among Pamida, Inc. and Seaway Importing Company as
Borrowers, Congress Financial Corporation (Southwest) as a
Lender and Agent, and BankAmerica Business Credit as a Lender
(amends Exhibit 10.16).
(14) 10.19 - Amendment No. 3 to Loan and Security Agreement among Pamida,
Inc. and Seaway Importing Company, as Borrowers, Congress
Financial Corporation (Southwest) and BankAmerica Business
Credit, Inc., as Lenders, and Congress Financial Corporation
(Southwest), as Agent, dated September 16, 1996 (amends
Exhibit 10.16).
10.20 - Amendment No. 4 to Loan and Security Agreement among Pamida,
Inc. and Seaway Importing Company, as Borrowers, Congress
Financial Corporation (Southwest) and BankAmerica Business
Credit, Inc., as Lenders, and Congress Financial Corporation
(Southwest), as Agent, dated January 31, 1997 (amends
Exhibit 10.16).
10.21 - Amendment No. 5 to Loan and Security Agreement among Pamida,
Inc. and Seaway Importing Company, as Borrowers, Congress
Financial Corporation (Southwest) and BankAmerica Business
Credit, Inc., as Lenders, and Congress Financial Corporation
(Southwest), as Agent, dated March 17, 1997 (amends
Exhibit 10.16).
(8) 10.22 - Pamida Holdings Corporation 1992 Stock Option Plan.
(7) 10.23 - Employment Agreement dated April 19, 1993, between
Pamida, Inc. and Steven S. Fishman.
(10) 10.24 - Amendment No. 1 to Employment Agreement, dated January 3, 1994,
between Pamida, Inc. and Steven S. Fishman (amends Exhibit
10.23).
(11) 10.25 - Amendment No. 2 to Employment Agreement, dated January 23, 1995,
between Pamida, Inc. and Steven S. Fishman (amends Exhibit
10.23).
(12) 10.26 - Employment Agreement dated September 22, 1995, among Pamida
Holdings Corporation, Pamida, Inc. and Steven S. Fishman.
(14) 10.27 - Amendment No. 1 to Employment Agreement among Pamida Holdings
Corporation, Pamida, Inc., and Steve S. Fishman dated August
29, 1996 (amends Exhibit 10.26).
10.28 - Amendment No. 2 to Employment Agreement among Pamida Holdings
Corporation, Pamida, Inc., and Steven S. Fishman dated March 6,
1997 (amends Exhibit 10.26).
(11) 10.29 - Pamida, Inc. 1995 Deferred Compensation Plan.
10.30 - Employment Agreement dated as of March 6, 1997, among Pamida
Holdings Corporation, Pamida, Inc., and Frank A. Washburn.
10.31 - Employment Agreement dated as of March 6, 1997, among Pamida
Holdings Corporation, Pamida, Inc., and George R. Mihalko.
10.32 - Long-Term Incentive Award Agreement dated as of March 6, 1997,
between Pamida, Inc. and, Steven S. Fishman.
10.33 - Long-Term Incentive Award Agreement dated as of March 6, 1997,
between Pamida, Inc., and Frank A. Washburn.
10.34 - Long-Term Incentive Award Agreement dated as of March 6, 1997,
between Pamida, Inc., and George R. Mihalko.
(1) 22.1 - Subsidiaries of Pamida Holdings Corporation.
23.1 - Consent of Deloitte & Touche LLP.
23.2 - Consent of Coopers & Lybrand L.L.P.
24.1 - Power of Attorney
27.1 - Financial Data Schedule (EDGAR filing only)
- -------------------------
(1) Previously filed as an exhibit to Registration Statement of Pamida Holdings
Corporation on Form S-1 (Registration No. 33-35324) and incorporated herein
by this reference.
(2) Previously filed as an exhibit to Form 10-Q Quarterly Report of Pamida
Holdings Corporation for the period ended October 28, 1990, and
incorporated herein by this reference.
(3) Previously filed as an exhibit to Registration Statement of Pamida, Inc. on
Form S-l (Registration No. 33-10980) and incorporated herein by this
reference.
(4) Previously filed as an exhibit to Form 10-K Annual Report of Pamida
Holdings Corporation for the fiscal year ended February 3, 1991, and
incorporated herein by this reference.
(5) Previously filed as an exhibit to Registration Statement of Pamida, Inc.
and Pamida Holdings Corporation on Form S-1 (Registration No. 33-57990) and
incorporated herein by this reference.
(6) Previously filed as an exhibit to Form 10-Q Quarterly Report of Pamida
Holdings Corporation for the period ended May 2, 1993, and incorporated
herein by this reference.
(7) Previously filed as an exhibit to Form 10-Q Quarterly Report of Pamida,
Inc. (File No. 33-57990) for the period ended August 1, 1993, and
incorporated herein by this reference.
(8) Previously filed as an exhibit to Form 10-Q Quarterly Report of Pamida
Holdings Corporation for the period ended August 1, 1993, and incorporated
herein by this reference.
(9) Previously filed as an exhibit to Form 10-Q Quarterly Report of Pamida
Holdings Corporation for the period ended July 31, 1994, and incorporated
herein by this reference.
(10) Previously filed as an exhibit to Form 10-K Annual Report of Pamida
Holdings Corporation for the fiscal year ended January 30, 1994, and
incorporated herein by this reference.
(11) Previously filed as an exhibit to Form 10-K Annual Report of Pamida
Holdings Corporation for the fiscal year ended January 29, 1995, and
incorporated herein by this reference.
(12) Previously filed as an exhibit to Form 10-Q Quarterly Report of Pamida
Holdings Corporation for the period ended October 29, 1995, and
incorporated herein by this reference.
(13) Previously filed as an exhibit to Form 10-K Annual Report of Pamida
Holdings Corporation for the fiscal year ended January 28, 1996, and
incorporated herein by this reference.
(14) Previously filed as an exhibit to Form 10-Q Quarterly Report of Pamida
Holdings Corporation for the period ended October 27, 1996, and
incorporated herein by this reference.
* * *
(b) No reports on Form 8-K were filed by the registrant during the last quarter
of the period covered by this report.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Date: April 15, 1997 PAMIDA HOLDINGS CORPORATION
By:/s/ Steven S. Fishman
Steven S. Fishman, Chairman
of the Board, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
/s/ Steven S. Fishman Chairman of the Board, April 15, 1997
Steven S. Fishman President, Chief Executive
Officer and Director
/s/ George R. Mihalko Senior Vice President, April 15, 1997
George R. Mihalko Chief Financial Officer
and Treasurer
/s/ Todd D. Weyhrich Principal Accounting April 15, 1997
Todd D. Weyhrich Officer
/s/ Frank A. Washburn Director April 15, 1997
Frank A. Washburn
* Director April 15, 1997
L. David Callaway, III
* Director April 15, 1997
Stuyvesant P. Comfort
* Director April 15, 1997
M. Saleem Muqaddam
* Director April 15, 1997
Peter J. Sodini
* By: /s/ George R. Mihalko
George R. Mihalko,
Attorney-in-Fact
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR
[X] 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 3, 1997
--------------
Commission File Number 1-10619
-------
PAMIDA HOLDINGS CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 47-0696125
- -------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
8800 "F" Street, Omaha, Nebraska 68127
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(402) 339-2400
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES [X] NO [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date:
Class of Common Stock Outstanding at September 5, 1997
- --------------------- --------------------------------
Common Stock 5,004,942 Shares
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
ASSETS: August 3, February 2,
Current assets: 1997 1997
---------- -----------
<S> <C> <C>
Cash ...................................................... $ 8,485 $ 6,973
Accounts receivable, less allowance for
doubtful accounts of $50 ................................ 7,679 6,919
Merchandise inventories ................................... 147,240 157,490
Prepaid expenses .......................................... 3,624 2,993
Property held for sale .................................... -- 1,748
---------- -----------
Total current assets ................................... 167,028 176,123
Property, buildings and equipment, less accumulated
depreciation and amortization of $64,805 and $61,364 ...... 43,494 42,403
Leased property under capital leases, less accumulated
amortization of $15,900 and $14,604 ....................... 26,417 27,713
Deferred financing costs .................................... 3,098 3,176
Other assets ................................................ 20,244 19,773
---------- -----------
$ 260,281 $ 269,188
========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Accounts payable .......................................... $ 53,315 $ 54,245
Loan and security agreement ............................... 47,210 57,115
Accrued compensation ...................................... 4,320 3,860
Accrued interest .......................................... 7,217 7,668
Store closing reserve ..................................... 2,158 4,521
Other accrued expenses .................................... 13,499 10,112
Income taxes - deferred and current payable ............... 11,867 8,101
Current maturities of long-term debt ...................... 47 47
Current obligations under capital leases .................. 1,749 1,781
---------- -----------
Total current liabilities .............................. 141,382 147,450
Long-term debt, less current maturities ..................... 170,386 168,000
Obligations under capital leases, less current obligations .. 33,140 33,999
Other long-term liabilities ................................. 5,355 4,825
Commitments and contingencies ............................... -- --
Preferred stock subject to mandatory redemption
and reserve for dividends payable ......................... 2,487 2,217
Common stockholders' equity:
Common stock, $.01 par value; 10,000,000 shares authorized;
5,004,942 shares issued and outstanding, ................ 50 50
Additional paid-in capital ................................ 968 968
Accumulated deficit ....................................... (93,487) (88,321)
---------- -----------
Total common stockholders' equity ....................... (92,469) (87,303)
---------- -----------
$ 260,281 $ 269,188
========== ===========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
--------------------- ---------------------
August 3, July 28, August 3, July 28,
1997 1996 1997 1996
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Sales ...................... $ 163,217 $ 155,817 $ 307,781 $ 287,603
Cost of goods sold ......... 121,715 118,721 233,011 218,932
--------- --------- --------- ---------
Gross profit ............... 41,502 37,096 74,770 68,671
Expenses:
Selling, general and
administrative ......... 33,275 31,262 64,249 60,473
Interest ................. 7,664 7,128 15,417 14,234
--------- --------- --------- ---------
40,939 38,390 79,666 74,707
--------- --------- --------- ---------
Income (loss) before income
tax provision ............ 563 (1,294) (4,896) (6,036)
Income tax provision ....... -- -- -- --
--------- --------- --------- ---------
Net income (loss) .......... 563 (1,294) (4,896) (6,036)
Less provision for preferred
dividends and discount
amortization ............. 165 97 270 190
--------- --------- --------- ---------
Net income (loss) available
for common stock ......... $ 398 $ (1,391) $ (5,166) $ (6,226)
========= ========= ========= =========
Income (loss) per common share $ .08 $ (.27) $ (1.03) $ (1.24)
========= ========= ========= =========
</TABLE>
See notes to consolidated financial statements.
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
--------------------
August 3, July 28,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net loss .......................................................... $ (4,896) $ (6,036)
-------- --------
Adjustments to reconcile net loss to net cash from operations:
Depreciation and amortization ................................. 5,890 5,468
Provision for LIFO inventory valuation ........................ 433 300
Non-cash interest expense ..................................... 2,375 2,015
Gain on disposal of assets .................................... (77) (28)
Other ......................................................... 82 79
Decrease in store closing reserve ............................. (2,028) (3,365)
Decrease in merchandise inventories ........................... 9,817 13,501
Increase in other operating assets ............................ (4,266) (3,252)
Increase (decrease) in accounts payable ....................... (930) 2,119
Increase (decrease) in other operating liabilities ............ 7,309 (864)
-------- --------
Total adjustments .......................................... 18,605 15,973
-------- --------
Net cash from operating activities ....................... 13,709 9,937
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................. (4,833) (3,148)
Construction notes receivable .................................... 1,765 (3,022)
Proceeds from disposal of fixed assets ........................... 1,906 672
Assets acquired for sale, net .................................... -- (391)
Other ............................................................ 9 8
-------- --------
Net cash from investing activities ........................ (1,153) (5,881)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under loan and security agreement, net ................ (9,905) 667
Principal payments on capital lease obligations .................. (891) (884)
Principal payments on long-term debt ............................. (23) (104)
Payments for deferred finance costs .............................. (225) --
-------- --------
Net cash from financing activities ....................... (11,044) (321)
-------- --------
Net increase in cash ................................................ 1,512 3,735
Cash at beginning of year ........................................... 6,973 7,298
-------- --------
Cash at end of period ............................................... $ 8,485 $ 11,033
======== ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
(1) Cash paid (received) during the period for:
Interest ..................................................... $ 13,459 $ 12,158
Income taxes:
Payments to taxing authorities ............................. 32 257
Refunds received from taxing authorities ................... (3,798) (169)
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITY:
(1) Amortization of discount on junior cumulative preferred
stock recorded as a direct charge to retained earnings ....... 25 24
(2) Provision for dividends payable ................................ 245 166
(3) In-kind payment of accrued interest on promissory notes:
Promissory notes ............................................. 2,327 1,989
Accrued interest ............................................. (2,327) (1,989)
</TABLE>
See notes to consolidated financial statements.
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SIX MONTHS ENDED AUGUST 3, 1997 AND JULY 28, 1996
(Unaudited)
(Dollars in Thousands)
1. MANAGEMENT REPRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for
interim financial information. In the opinion of management, all
adjustments necessary for a fair presentation of the results of operations
for the interim periods have been included. All such adjustments are of a
normal recurring nature. Because of the seasonal nature of the business,
results for interim periods are not necessarily indicative of a full year's
operations. The accounting policies followed by Pamida Holdings Corporation
(the Company) and additional footnotes are reflected in the consolidated
financial statements contained in the Form 10-K Annual Report of the
Company for the fiscal year ended February 2, 1997.
2. INVENTORIES
Substantially all inventories are stated at the lower of cost (last-in,
first-out) or market. Total inventories would have been higher at August 3,
1997 and February 2, 1997 by $7,007 and $6,574 respectively, had the FIFO
(first-in, first-out) method been used to determine the cost of all
inventories. Quarterly LIFO inventory determinations reflect assumptions
regarding fiscal year-end inventory levels and the estimated impact of
annual inflation. Actual inventory levels and annual inflation could vary
from estimates made on a quarterly basis.
3. INCOME (LOSS) PER COMMON SHARE
Income (loss) per common share was calculated using the weighted average
common shares and dilutive common share equivalents outstanding during the
period using the treasury stock method.
4. RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128, "Earnings Per Share" which specifies the computation, presentation and
disclosure requirements for earnings per share. The objective of the
statement is to simplify the computation of earnings per share. The impact
on the Company's earnings per share is not materially different than
earnings per share determined in accordance with current guidance. SFAS No.
128 is applicable for fiscal years ending after December 15, 1997.
5. RECLASSIFICATIONS
Certain reclassifications have been made to the prior year's financial
statements to conform to the current year's presentation.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars in Thousands)
The following is management's discussion and analysis of certain significant
factors which have affected the Company's results of operations and financial
condition for the periods included in the accompanying consolidated financial
statements.
RESULTS OF OPERATIONS
The following table sets forth an analysis of various components of the
Consolidated Statements of Operations as a percentage of sales for the three and
six months ended August 3, 1997 and July 28, 1996:
August 3, July 28, August 3, July 28,
1997 1996 1997 1996
--------- -------- --------- --------
Sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 74.6% 76.2% 75.7% 76.1%
--------- -------- --------- --------
Gross profit 25.4% 23.8% 24.3% 23.9%
Selling, general and
administrative expenses 20.4% 20.0% 20.9% 21.0%
--------- -------- --------- --------
Operating income 5.0% 3.8% 3.4% 2.9%
Interest expense 4.7% 4.6% 5.0% 5.0%
--------- -------- --------- --------
Income (loss) before income
tax provision 0.3% -0.8% -1.6% -2.1%
Income tax provision -- -- -- --
--------- -------- --------- --------
Net income (loss) 0.3% -0.8% -1.6% -2.1%
========= ======== ========= ========
SALES - During the second quarter and first six months of fiscal 1998, sales in
comparable stores increased $5,300 or 3.5% and $13,907 or 5.0%, respectively, as
compared to the second quarter and first six months last year. Total sales for
the second quarter and the first six months of fiscal 1998 increased by $7,400
or 4.8% and $20,179 or 7.0%, respectively, as compared to the same periods last
year.
The Company operated 149 stores at the end of the first quarter of fiscal 1998
as compared with 144 stores at the end of the first quarter last year and
operated 149 stores at the end of the second quarter of fiscal 1998 as compared
with 146 stores at the end of the second quarter last year. Since July 28, 1996
the Company has opened four stores in new markets, reopened a store which had
been closed due to storm damage, relocated one store and closed two stores. The
increase in total sales was primarily attributable to comparable store sales
increases and the effects of the net increase in the number of stores in
operation during the respective periods this year as compared with last year.
The Company experienced sales increases in most merchandise categories during
the second quarter of fiscal 1998. The largest dollar increases were in the
pharmacy prescriptions, sporting goods, housewares, men's denim apparel, women's
shoes, toys, stationary, appliances and misses tops categories. The Company
experienced sales declines in only a few categories, with men's fashions
experiencing the largest decrease.
GROSS PROFIT increased $4,406 or 11.9% and $6,099 or 8.9% for the second quarter
and first six months, respectively, of fiscal 1998 compared to the same periods
last year. As a percentage of sales, gross profit increased to 25.4% from 23.8%
and to 24.3% from 23.9% for the second quarter and first six months,
respectively, of fiscal 1998 compared to the same periods last year. The Company
improved its in-stock positions in most merchandise categories during the second
quarter of fiscal 1998 as compared with the second quarter of fiscal 1997. Sales
improved in most merchandise categories this year, with a marked increase in
sales of higher margin basic goods which experienced substantial out-of-stocks
during the second quarter last year. Also, the Company realized substantial
decreases in warehousing and distribution costs during the first half of fiscal
1998 compared to last year.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) expense increased $2,013 or 6.4% for
the second quarter of fiscal 1998 compared to the second quarter of fiscal 1997
and increased $3,776 or 6.2% for the first six months of fiscal 1997 compared to
the same period last year. As a percentage of sales, SG&A expense was 20.4% and
20.0%, respectively, for the second quarter of fiscal 1998 and 1997. As a
percentage of sales, SG&A expense was 20.9% and 21.0%, respectively, for the
first half of fiscal 1998 and 1997.
Most of the total net increase in SG&A expense for the second quarter of fiscal
1998 as compared to the second quarter last year was attributable to planned
higher corporate general and administrative expenses, primarily involving
increases in payroll and incentive compensation. As planned, store occupancy
costs also increased over last year to accommodate the higher sales activity.
These increases were offset partially by a $224 increase in other income,
primarily due to a gain on the sale of a parcel of land and business
interruption insurance settlements related to two stores.
Most of the total net increase in SG&A expense for the first half of fiscal 1998
as compared to the first half of last year was attributable to planned higher
corporate general and administrative expenses, primarily involving increases in
payroll, incentive compensation expenses and professional fees. As planned,
store controllable, occupancy and payroll costs also increased over last year to
accommodate the higher sales activity. These increases were offset partially by
a $135 increase in other income.
INTEREST expense increased $536 or 7.5% for the second quarter of fiscal 1998
compared to the same period of fiscal 1997 and increased $1,183 or 8.3% for the
first half of fiscal 1998 compared to the same period of fiscal 1997. The
increases were due primarily to increased revolver borrowings to support higher
investments in basic inventory and the Company's seasonal operating pattern.
There also was an increase in interest expense attributable to the promissory
notes which require quarterly interest to be paid in kind.
INCOME TAX BENEFIT - No income tax benefit on losses will be recorded until the
Company can establish with a reasonable degree of certainty the potential
utilization of certain tax loss carryforwards from prior year store closing
charges.
PROPOSED TRANSACTIONS - On July 22, 1997, the Company announced that it had
entered into an agreement with 399 Venture Partners, Inc., a Citicorp
subsidiary, providing for the payment of all of the presently outstanding Senior
Promissory Notes, Subordinated Promissory Notes and Junior Subordinated
Promissory Notes (the Notes) of the Company with shares of newly issued common
stock and nonvoting common stock of the Company. 399 Venture Partners, Inc. owns
approximately 82.75% of such Notes.
Shares of the Company's stock will be issued in payment of the Notes at the rate
of one share for each $9.00 of principal and accrued interest as of the
effective date. 399 Venture Partners, Inc. will receive shares of nonvoting
common stock, which may be converted into the same number of shares of common
stock under certain conditions; and the remaining note holders will receive
shares of common stock. The proposed transactions and the authorization of
sufficient shares to accomplish such transactions are subject to stockholder
approval. The Company presently anticipates that, if the requisite stockholder
approvals are obtained, the proposed transactions described above will be
completed during the Company's third fiscal quarter ending November 2, 1997.
The proposed transactions described above also are subject to the simultaneous
change and reclassification of all of the outstanding shares of preferred stock
of the Company into shares of common stock at the rate of one share of common
stock for each $9.00 of preferred stock liquidation value plus accrued dividends
as of the effective date. Such change and reclassification of preferred stock
has been approved by the holders of a majority of the shares of preferred stock
but is subject to approval by the holders of a majority of the presently
outstanding shares of common stock of the Company.
The Company currently has outstanding 5,004,942 shares of common stock. Assuming
approval by the stockholders of the Company and a November 2, 1997 effective
date for the proposed transactions, a total of approximately 3,989,848
additional shares of common stock and nonvoting common stock would be issued in
payment of the Notes and in connection with the change and reclassification of
the preferred stock.
If the proposed transactions are effected, the Company would be relieved of the
obligation to repay the Notes in 2003 and to redeem the preferred stock
(including the payment of accrued dividends) in December 2001. The transactions
would also relieve the Company of substantial amounts of compounding non-cash
interest expense on the Notes and from earnings per share dilution caused both
by the preferred stock dividends and by discount amortization. Assuming a
November 2, 1997 effective date for the proposed transactions, approximately
$1,526,000 of interest expense, preferred stock dividends and discount
amortization would be eliminated for the remainder of the current fiscal year.
Scheduled interest and discount amortization on the Notes is $5,981,000,
$6,958,000 and $8,119,000 for the fiscal years ending in 1999, 2000 and 2001,
respectively. The scheduled provision for dividends and discount amortization on
the preferred stock is $705,000, $845,000 and $1,016,000 for the fiscal years
ending in 1999, 2000 and 2001, respectively.
The proposed reclassification of the Company's preferred stock into common
stock, if consummated, will be a tax-free reorganization for the Company and
will have no direct tax impact on the corporation. However, if the proposed
transaction involving the issuance of common stock of the Company in payment of
the Company's Notes is approved by the common stockholders of the Company and
consummated, then some of the Company's tax loss carryforwards may be utilized,
potentially requiring tax expense to be recorded related to operations. The
difference, if any, between the recorded value of the Notes and the fair market
value of the common stock issued in payment of the Notes as of the effective
date of such transaction would result in a taxable gain or loss on
extinguishment of indebtedness for the Company which will be taxed as ordinary
income or loss for federal income tax purposes. The amount of income taxes
attributable to the taxable income or loss which may result from the
consummation of such transaction would be reduced by the existing net operating
loss and tax credit carryforwards. No assurances can be given that such
transactions will be approved by the common stockholders of the Company or that
the transactions will be consummated. Similarly, no assurances can be given
regarding the potential impact of the tax consequences of the transactions if
they are consummated.
For financial statement purposes, any gain on extinguishment of the Notes held
by persons other than 399 Venture Partners would be reflected on the Company's
Statement of Operations as an extraordinary item (net of related taxes),
separate from the operating results of the Corporation. Any gain related to the
payment of Notes owned by 399 Venture Partners with nonvoting common stock would
be considered to be a capital transaction; accordingly, such gain, net of taxes,
would be recorded directly to additional paid-in capital on the Company's
financial statements. The gain on the preferred stock exchange for common stock
will be accounted for as a capital transaction.
LIQUIDITY AND CAPITAL RESOURCES
The Company's business is seasonal with first quarter sales (February through
April) being lower than sales during the other three quarters. Fourth quarter
sales (November through January) have represented approximately 30% of the full
year's sales in recent years and normally involve a greater proportion of higher
margin sales. Funds provided by operating activities were $13,709 in the first
half of fiscal 1998 compared to $9,937 in the first half of fiscal 1997. This
$3,772 improvement in net cash generated by operating activities during the
first half of fiscal 1998 resulted primarily from changes in other operating
liabilities and the store closing reserve as well as the decreased net loss for
the period, offset somewhat by changes in inventory, accounts payable and
operating assets.
Effective March 17, 1997, the term of Pamida, Inc.'s (Pamida) committed Loan and
Security Agreement (the Agreement) was extended to March 2000 and the maximum
borrowing limit of the facility was increased to $95,000. Prior to March 17,
1997, borrowings under the Agreement bore interest at a rate of 0.75% per annum
greater than the applicable prime rate. Effective March 17, 1997, borrowings
under the Agreement bear interest at a rate 0.50% per annum greater than the
applicable prime rate or a rate which is tied to the London Interbank Offered
Rate (LIBOR), generally at Pamida's discretion. The amounts Pamida is permitted
to borrow are determined by a formula based upon the amount of Pamida's eligible
inventory. Such borrowings are secured by security interests in all of the
current assets (including inventory) of Pamida and by liens on certain real
estate interests and other property of Pamida. The Company and two subsidiaries
of Pamida have guaranteed the payment and performance of Pamida's obligations
under the Agreement and have pledged some or all of their respective assets,
including the stock of Pamida owned by the Company, to secure such guarantees.
The Agreement contains provisions imposing operating and financial restrictions
on the Company. Certain provisions of the Agreement require the maintenance of
specified amounts of tangible net worth (as defined) and working capital (as
defined) and the achievement of specified minimum amounts of cash flow (as
defined). Other restrictions in the Agreement and those provided under the
Indenture relating to the Senior Subordinated Notes of Pamida will affect, among
other things, the ability of Pamida to incur additional indebtedness, pay
dividends, repay indebtedness prior to its stated maturity, create liens, enter
into leases, sell assets or engage in mergers or acquisitions, make capital
expenditures and make investments. These covenants currently have not had an
impact on the Company's ability to fully utilize the revolving credit facility.
However, certain of the covenants, such as those which restrict the ability of
the Company to incur indebtedness or encumber its property or which impose
restrictions on or otherwise limit the Company's ability to engage in
sale-leaseback transactions, may at some future time prevent the Company from
pursuing its store expansion program at the rate that the Company desires.
Obligations under the Agreement were $47,210 at August 3, 1997 and $32,255 at
July 28, 1996. As noted above, this facility expires in March 2000, and the
Company intends to refinance any outstanding balance by such date. Borrowings
under the Agreement are senior to the Senior Subordinated Notes of Pamida. The
Company had long-term debt and obligations under capital leases of $203,526 at
August 3, 1997 and $201,703 at July 28, 1996. The Company's ability to satisfy
scheduled principal and interest payments under such obligations in the ordinary
course of business is dependent primarily upon the sufficiency of the Company's
operating cash flow and continued access to financial markets. At August 3,
1997, the Company was in compliance with all covenants contained in its various
financing agreements.
On December 18, 1992, the promissory notes of the Company were amended effective
as of December 1, 1992 to provide that, until the obligations of Pamida and the
Company under certain of Pamida's credit agreements have been repaid, the
quarterly interest payments on the promissory notes of the Company will be paid
in kind. Since the Company conducts no operations of its own, the only cash
requirement of the Company relates to preferred stock dividends in the aggregate
annual amount for fiscal 1998 totaling approximately $503; and Pamida is
expressly permitted under its existing credit facilities to pay dividends to the
Company to fund such preferred stock dividends. However, the General Corporation
Law of the State of Delaware, under which the Company and Pamida are
incorporated, generally allows a corporation to declare or pay a dividend only
from its surplus or from the current or the prior year's earnings. Due to the
accumulated deficit resulting primarily from the store closings and the
write-off of goodwill and other long-lived assets recognized in the fourth
quarter of fiscal 1996, the Company and Pamida did not declare or pay any cash
dividends in fiscal 1997 or the first half of fiscal 1998 and may pay cash
dividends in future periods only to the extent that the Company and Pamida
satisfy the applicable statutory standards which include the Company's having a
net worth equal to at least the aggregate par value of the preferred stock which
amounts to $2. The cumulative dividend rate on the preferred stock increases by
0.5% per quarter (with a maximum aggregate increase of 5%) on each quarterly
dividend payment date on which the preferred stock dividends are not paid
currently on a cumulative basis. Any unpaid dividends are added to the
liquidation value until paid in cash. Such nonpayment of preferred stock
dividends does not accelerate the redemption rights of the preferred
stockholders.
The Company made capital expenditures of $4,833 in the first half of fiscal 1998
compared to $3,148 during the first half of fiscal 1997. The Company plans to
open a total of three new stores in fiscal 1998, two of which were opened in the
first half, and will consider additional opportunities for new store locations
as they arise. Total capital expenditures are expected to total approximately
$10,000 in fiscal 1998. The Company expects to fund these expenditures from cash
flow from its operations. The costs of buildings and land for new store
locations are expected to be financed by operating or capital leases with
unaffiliated landlords. The Company's expansion program also will require
inventory of approximately $1,000 to $1,200 for each new market store, which the
Company expects to finance through trade credit, borrowings under the Agreement
and cash flow from operations.
The recent changes to the Agreement, along with expected improvements in the
Company's cash flow from operations, should provide adequate resources to meet
the Company's near- term liquidity requirements. On a long-term basis, the
Company's expansion will require continued investments in store locations,
working capital and distribution and infrastructure enhancements. The Company
expects to continue to finance some of these investments through leases from
unaffiliated landlords, trade credit, borrowings under the Agreement and cash
flow from operations but ultimately will need to explore additional sources of
funds which may include capital structure changes. Currently, it is not possible
for the Company to predict with any certainty either the timing or the
availability of such additional financing.
INFLATION
The Company uses the LIFO method of inventory valuation in its financial
statements; as a result, the cost of merchandise sold approximates current
costs. The Company's rental expense is generally fixed and, except for small
amounts of percentage rents and rentals adjusted by cost-of-living increases
tied to the Consumer Price Index or interest rates, has not been affected by
inflation.
FORWARD-LOOKING STATEMENTS
This management's discussion and analysis contains certain forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995 (the "1995 Act"). Such statements are made in good faith by the Company
pursuant to the safe-harbor provisions of the 1995 Act. In connection with these
safe-harbor provisions, this management's discussion and analysis contains
certain forward-looking statements which reflect management's current views and
estimates of future economic circumstances, industry conditions, company
performance and financial results. The statements are based on many assumptions
and factors including sales results, expense levels, competition and interest
rates as well as other risks and uncertainties inherent in the Company's
business, capital structure and the retail industry in general. Any changes in
these factors could result in significantly different results for the Company.
The Company further cautions that the forward-looking information contained
herein is not exhaustive or exclusive. The Company does not undertake to update
any forward-looking statements which may be made from time to time by or on
behalf of the Company.
PART II - OTHER INFORMATION
ITEMS 1-2:
None
ITEM 3:
The General Corporation Law of Delaware, under which the registrant is
incorporated, generally allows a corporation to declare or pay a dividend
only from its surplus or from the current or the prior year's earnings. Due
to the retained deficit resulting primarily from store closings and the
write-off of goodwill and other long-lived assets in the fourth quarter of
fiscal 1996, the registrant was not permitted to pay dividends in fiscal
1997 and may pay dividends in fiscal 1998 and ensuing years only to the
extent that the registrant satisfies the applicable statutory standards,
which include the registrant's having a net worth equal to at least the
aggregate par value of its outstanding preferred stock, which amounts to
$2. Accordingly, the registrant was restricted from declaring or paying the
quarterly dividends payable during fiscal 1997 and on February 28 and May
31, 1997, with respect to the outstanding 16.25% Senior Cumulative
Preferred Stock and 14.25% Junior Cumulative Preferred Stock of the
registrant and does not anticipate paying dividends on the registrant's
preferred stock in the foreseeable future. Pursuant to the Certificate of
Incorporation of the registrant, the dividend rate on the registrant's
preferred stock increases cumulatively by 0.5% per quarter (with a maximum
cumulative increase of 5%) on each quarterly dividend payment date on which
the preferred stock dividends are not paid currently on a cumulative basis.
As of the date of this report, the total preferred stock dividend arrearage
was $586,952 representing six quarterly dividend payments at the applicable
dividend rates. Any unpaid dividends are added to the liquidation value of
the preferred stock until paid in cash. Such nonpayment of preferred stock
dividends does not accelerate the redemption rights of the preferred
stockholders.
ITEM 4:
(a) The 1997 annual meeting (the "Annual Meeting") of stockholders of the
registrant was held on May 22, 1997.
(b) The following persons were elected as directors at the Annual Meeting:
L. David Callaway, III
Stuyvesant P. Comfort
M. Saleem Muqaddam
Steven S. Fishman
Peter J. Sodini
Frank A. Washburn.
No other director's term of office continued after the Annual Meeting.
(c) Votes were cast or withheld in the election of directors at the Annual
Meeting as follows:
Director For Withheld
---------------------- --------- --------
L. David Callaway, III 4,516,580 20,865
Stuyvesant P. Comfort 4,517,580 19,865
M. Saleem Muqaddam 4,517,480 19,965
Steven S. Fishman 4,517,580 19,865
Peter J. Sodini 4,517,580 19,865
Frank A. Washburn 4,517,480 19,965
ITEM 5:
None
ITEM 6:
(a) Exhibits.
- 27.0 Financial Data Schedule (EDGAR version only)
(b) Reports on Form 8-K
A report on Form 8-K was filed during the quarter for which this Form
10-Q is filed. Such report had a Date of Report of July 22, 1997, and
related to Item 5, Other Events. No financial statements were filed with
such report.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PAMIDA HOLDINGS CORPORATION
---------------------------
(Registrant)
Date: September 5, 1997 By: /s/ Steven S. Fishman
Steven S. Fishman, Chairman of the
Board, President and Chief
Executive Officer
Date: September 5, 1997 By: /s/ Todd D. Weyhrich
Todd D. Weyhrich,
Chief Accounting Officer
