Pamida Holdings Corporation
1998 Annual Report
[Picture of a family of five shopping in a Pamida store.]
"A proven retail concept
...a solid foundation for profitable growth."
PAMIDA HOMETOWN VALUES
PAMIDA HOLDINGS CORPORATION
Pamida Holdings Corporation (ASE: PAM), through its principal subsidiary,
Pamida, Inc., operates 148 mass merchandise retail stores in 15 Midwestern,
North Central and Rocky Mountain states.
A typical store carries a broad assortment of value-priced hardlines and
softlines merchandise and offers convenient one-stop shopping in small, rural
communities. For more information about Pamida visit our web site at
www.pamida.com.
[Map of Pamida's store locations]
TABLE OF CONTENTS
1 Key Accomplishments & Financial Highlights
2-3 Chairman's Letter to Shareholders
4-5 Listening To Our Customers
6-7 Meeting Customer's Expectations
8 Investing In Profitable Growth
KEY ACCOMPLISHMENTS IN FISCAL 1998
* We dramatically strengthened the capital structure of Pamida through the
conversion of $36 million of debt and preferred equity to common stock.
* We conducted extensive market and customer research, encompassing 25
markets and over 4,600 consumers, which validated our strategy with
particular focus on improving in-stocks and the breadth of our assortment.
* We began operations in a new distribution center in Lebanon, Indiana,
setting the stage for planned store growth.
And, most notably,
* Pamida's strategy, strengthened by major operational and financial
initiatives, produced strong EBITDA and Net Income growth, thereby adding
value to our shareholders' investments.
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Fiscal Year Ended
-----------------------------------------
February 1, February 2, January 28,
1998 1997 1996
----------- ----------- -----------
Number of stores at fiscal year end 148 148 184
Sales $ 657,017 $ 633,189 $ 736,315
Comparable store sales % increase (decrease) 4.0% (2.6)% (0.7)%
Gross profit percent to sales 24.6% 24.3% 24.1%
Selling, general and administrative expenses percent to sales 19.6% 19.8% 20.5%
Income (loss) available for common shares before special charges,
extraordinary item and preferred stock reclassification 2,879 (1,187) (3,026)
Net income (loss) available for common shares 5,370 (1,187) (95,010)
Composition of diluted net income (loss) per share:
Income (loss) available for common shares before extraordinary item,
preferred stock reclassification and special charges $ .49 $ (.24) $ (.61)
Special charges (net of tax) - - (18.46)
Extraordinary item .29 - .08
Effect of preferred stock reclassification .13 - -
----------- ----------- -----------
Diluted net income (loss) per share $ .91 $ (.24) $ (18.99)
=========== =========== ===========
Weighted average number of diluted shares outstanding 5,875 5,005 5,003
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[Three graphs displaying the following information:
1996 1997 1998
------- ------- -------
FIFO EBITDA ($ in millions) $41,378 $41,525 $46,112
FIFO EDITDA (as a percent of sales) 5.6% 6.6% 7.0%
Operating Income ($ in millions) 26,592 28,985 32,904 ]
TO OUR SHAREHOLDERS AND BUSINESS PARTNERS
I am pleased to share with you one of the most satisfying reports I've been able
to make since my arrival at Pamida in 1993.
Fiscal 1998 rewarded all of us with a solid comparable store sales increase of
4.0% and a dramatic improvement in operating profitability and net income.
This positive performance is due primarily to the talented and experienced team
members in our stores, distribution centers, and corporate offices who clearly
understand Pamida's mission and who have dedicated themselves to serving our
customers. In short, as a Company and as a team, we know who we are...and we
know where we're going.
"A PROVEN RETAIL CONCEPT..." In our rapidly changing world, and our highly
competitive industry, many retailers have found it necessary to redefine
themselves and have been forced into molds they were never intended to fit,
often with disastrous results. They no longer know who they are. Only that they
are struggling. And they have no niche in the marketplace. The customer has
moved on. But that has not happened to Pamida. We know our niche.
Now, it's true, people in major cities like New York, Minneapolis, and even
Omaha (our headquarters) might say, "Pamida stores? Never been in one!" That's
because, when this Company was founded in 1963, its strategy was to serve the
retailing needs of rural America, with trade centers of about 15,000 people. To
offer brand name merchandise in small stores averaging 30,000 selling square
feet. And to deliver competitive Hometown Values that would give rural customers
a solid reason to stay in town and shop.
Fundamentally, this simple and sensible strategy has never changed. Just ask
about Pamida in our small-town markets where we are the pre-eminent retailer.
They know us well and appreciate how we enhance the quality of life in their
hometown.
Today, in 15 states in the heartland of mid-America, we serve 148 markets, and
we are the primary mass merchandise retailer in over 77% of those markets.
Dealing with challenge and change. In 1986, the Company was involved in a
leveraged buy-out which subsequently limited its ability to counter the
competitive pressures of expanding national chains. In 1993, I was asked to join
the Company to help address these challenges.
Pamida's strategy has developed out of a customer need that has continued and
will remain into the future.
Nothing happens unless the right people are in place to make it happen. So, my
first order of business was to build a dedicated, high-energy management team.
We identified a nucleus of successful Pamida veterans who had an intimate
knowledge of Pamida's Hometown customers and the Company's operations. To this
core group we added new and dynamic "agents of change" from the retail industry
and from other service industries.
Here is a summary of our team's most critical achievements:
We revalidated our "Hometown Values" theme. We had to confront this question: Is
our Hometown strategy still valid? To find out, we conducted extensive market
and customer research to confirm that yes, in small towns, where the mega
retailers are not likely to infringe, we are still the right store with the
right values.
We developed a new prototype store, scalable up to 42,500 square feet. By
scaling our store size to the targeted trade area, we are better able to
showcase for our customers Pamida's broader selection, create a better visual
merchandising effect, add more assortments and reinforce our "Hometown
Values-low prices, that's a promise" theme.
We fortified our financial foundation by:
* Eliminating the goodwill on the Company's balance sheet associated with the
leveraged buyout of 1986.
* Completing a fiscal 1998 recapitalization involving the conversion of over
$36 million of high-yield debt and preferred equity to common stock.
* Closing more than seventy under-performing stores and redeploying their
assets for improved capital utilization.
Listening to our customers, expanding into new markets and further
strengthening our capital position are critical to our future success.
[Picture of Steven S. Fishman, Chairman, Chief Executive Officer and President]
We invested over $50 million primarily in...
* More than forty exciting new stores in our niche markets.
* New systems and technology which support merchandising, warehousing and
logistics, store operations, finance and inventory management which
position us for profitable growth well into the 21st century.
Here are the results. By implementing these successful initiatives, we increased
Pamida's EBITDA as a percent of sales to over 7%, which ranks us in the top tier
of mass merchandise retailers in the United States. This is a remarkable
accomplishment when you consider that we are without the tremendous economies of
scale which the mega-chains enjoy.
"...A SOLID FOUNDATION FOR PROFITABLE GROWTH." Knowing who we are is only part
of the equation. We also have a clear vision of where we must go from here. To
stay competitive we must grow.
Pamida's team of employees recognizes that satisfying our customers is the only
way to remain a successful and profitable business.
Here's our growth formula:
(1) We will continue to listen to our customers and be their most reliable and
convenient source of value-priced mass merchandise.
(2) We will expand our proven store operating model into eight markets during
this fiscal year.
(3) We will continue to strengthen our capital resources and seize appropriate
business opportunities.
Our business strategy, operational investments, capital restructuring, and
improved financial performance are being recognized by the analyst and investor
communities and position us well to achieve the growth that is critical to our
future success.
Now and into the future, Pamida will adapt to and initiate change. My role - and
the role of our management team - is to recognize the changes truly relevant to
our business, whether in technology, merchandising or finance, whether
influenced by the competition or customer-driven. This commitment is essential
in order to produce an acceptable return to our investors, and thereby afford
our vendor partners and team members the opportunities and rewards to which they
aspire.
On the pages to follow we discuss in greater detail some of the initiatives we
have taken and are pursuing to reach our goals. On behalf of our 5,600 Pamida
team members, I extend a sincere thank you for your support and confidence as we
set the stage for fiscal 1999.
Wishing the best to you and your family,
/s/Steven S. Fishman
Steven S. Fishman
Chairman, Chief Executive Officer and President
LISTENING TO OUR CUSTOMERS
HOMETOWN VALUES
Our Market Research Study. In our continuing effort to listen to our customers,
we conducted a major research project in the past year in 25 markets, and we
"listened" to over 4,600 consumers. Some findings were consistent with what we
knew, other discoveries were new.
[Picture of family of four, and Pamida team member, in the check out isle of a
Pamida store.]
Here is what our customers told us:
* The primary reason they shop a store in our market is selection.
* They want merchandise that is new and exciting.
* The majority of consumers in our markets shop our stores at least once a
month.
* The majority of consumers read our weekly advertising, and when they
respond they expect us to be in stock.
This is what it means to us:
Focus on selection and in-stocks! Pamida team members understand this is Job #1.
Pamida has a location advantage versus other retailers, and this advantage can
best be harvested by offering the customer a broad selection and by consistently
being in stock.
[Picture of "Hometown Value! Our Low Price" logo]
Our Hometown Values program. Pamida's Hometown Values positioning continues to
be a strong marketing tool. We are now expanding our merchandise strategy to
provide highly recognized, most-wanted items at a great value...every day! These
items are carefully selected by team members from Operations, Merchandising, and
Marketing.We have already seen some promising results from categories that have
been a part of this program. We are also benefiting from our investments in
pricing systems which enable us to offer special "Buy More, Save More," and
similar promotions, designed to drive sales and profitability.
[Picture of several Pamida weekly advertising circulars.]
Our advertising program. Consumers in our markets have told us they like our
weekly advertising, and the majority read all or most of each ad. This high
readership confirms that we can benefit from highlighting in our
advertisements Pamida's broader selection in key businesses. In addition, in
cooperation with our vendors, we are planning more "special event" marketing
offering reduced prices on key products, giving our customers one more reason to
visit their Pamida store. Our market research further indicates that our
customers especially enjoy finding new and exciting merchandise each time they
visit our stores, and our advertising will continue to highlight new and fresh
items.
Over 4,600 consumers told us what they like about us...and what they expect of
us. And we listened! They told us they want more selection, and we will give
them more. We are working to meet their expectations, and our marketing programs
will highlight improvements, thereby reinforcing that we care.
[Picture of Pamida team member assisting a mother and son in Pamida's toy
department.]
[Picture of denim jean display at a Pamida store.]
Our in-store marketing. Our research tells us that we have a tremendous
opportunity to increase our customers' average sales transaction by focusing on
the in-store marketing of selected categories. We will continue to create shop
concepts and focus on new projects. We are planning to implement improvements in
our visual presentation and signing of merchandise to convey "newness" for our
customers.
[Picture of a customer inspecting a "We Value Your Opinion" customer
comment form.]
Staying in touch with our customer. We fully recognize that understanding our
customers is critical to our future success. To continue to build on the
baseline established by our market research we have introduced an improved
customer comment card and quick-response program as a tool to keep us connected
with their needs.
[Picture of Mark Naasz, Store Manager of the Year, Worland, Wyoming.]
"I know that my most important task on any given day is listening to our
customers. We never want to disappoint someone who likes our store and comes
here to shop. If they leave unhappy, they may not give us another chance."
Mark Naasz, Store Manager of the Year
Worland, Wyoming
MEETING CUSTOMERS' EXPECTATIONS
MERCHANDISING & VENDOR RELATIONS
In the previous section, we highlighted the research-driven insights into our
customers' expectations of us. The people we serve every day have made it very
clear to us: "Give us more selection. And when you invite us into your stores
with your advertisements, be in stock."
Here is how we are responding to those expectations:
Selection and in-stocks. Over the last few years we have invested heavily in
merchandise selection, planning, flow and tracking technology. SKU-level
merchandise inventory management, supported by logistics optimization
initiatives as well as store-level Min-Max automated replenishment, have enabled
us to achieve the highest and most consistent merchandise in-stock positions in
Pamida's history. Information derived from this technology also allows us to
expand market-specific merchandising and timing.
Learning from our "Research and Development" store. Somewhat unusual in the
retail industry, our R&D store allows us to efficiently test certain initiatives
and concepts. One example is our pantry test. The pantry has received such
encouraging response that we are now rolling out pantries to 20 additional
stores. We will introduce other changes chain-wide as we continue to monitor
performance.
Pharmacy success story. Our in-store Pharmacies account for our fastest-growing
comparable store sales in the last four years. While we now have pharmacies in
30% of the chain, strong sales and customer demands support our plan to expand
the number of pharmacies by 18%.
The right for a business to exist has to be earned every day. Whether retailer
or vendor, it is earned by meeting customers' expectations.
The importance of vendor relationships. To better meet our customers' demands
and to better position us for our planned growth, we have worked with our
vendors to ensure we are given the same buying opportunities as larger national
chains. Moreover, we have reduced our resource base by over 15% in the past two
years so that we can maintain importance to our true vendor partners.
We are nearing completion of systems that will measure objectively, over time,
our vendors' performance regarding complete and timely shipping. This
information will allow us to adjust our vendor structure accordingly in order to
meet our customers' expectations.
[Picture of a buyer and a vendor representative discussing a selection of
athletic shoes.]
Something exciting happens when our vendors share our enthusiasm for satisfying
customers and boosting sales. Our buyers are constantly working to cement these
strategic vendor partnerships, and we are getting results. Our goal is to be
recognized in the marketplace as a pacesetter in successful merchandising.
Our Vendors of the Year
Building solid vendor relationships is vital to our success. After all,
desirable and timely merchandise is the lifeblood of our Company. Many of our
vendors consistently provide us with the new products that drive additional
sales. Many work in partnership with us in bringing us complete and on-time
product. To show our appreciation, our best vendors are recognized on an annual
basis. Pamida's "Vendors of the Year" are:
Ameriwood
Aramark Books
Barth & Dreyfuss
Bestform
Black Hills Gold Jewelry by Coleman
The Clorox Company
D & K Healthcare Resources, Inc.
Daewoo Electronics
Duracell USA
Endless Design
Evenflo
Exide Corporation
Gateway Hosiery Mills, Inc.
Gillette
Golden Books Publishing Company
Golden Touch, Inc.
Handleman
Hoover
Industrie Wear
Kimberly Clark
Maurice Sporting Goods
Orent Graphics
Paper Magic Group
Pepsi
Qualex
Ralston Purina Co.
RGIS Inventory Specialists
The Scotts Company
Springs Window Fashions
Superior Light & Sign
Tamor Corporation
Werner Logistics
Wrangler
Zachary Confections, Inc.
"Pamida's buyers and merchandisers are setting high expectations for future
relationships with our vendors. With my vendors, I look for the kind of
partnership which is sensitive to our customers by shipping the right quantities
to the right places at the right time. This in turn, helps us grow our business
to our mutual benefit."
Joe Fell,
Pamida Buyer of the Year
[Picture of Joe Fell, Pamida Buyer of the Year.]
INVESTING IN PROFITABLE GROWTH
CONVERTING PAMIDA'S STRATEGY INTO SHAREHOLDER VALUE
[Picture of the front of a Pamida prototype store.]
Our $50 million investment. To realize the full potential of our rural Hometown
strategy and position Pamida for profitable growth, in the last five years we
have invested over $50 million to strengthen the operational foundation of the
Company. This includes fresh, new store prototypes in over 28% of our markets.
Our substantial investments in sophisticated systems and information technology
will accommodate growth well into the next decade. And with our new Lebanon,
Indiana, distribution center, our supply chain can comfortably accommodate
anticipated growth.
We know that to be an industry leader we must continue to harvest the potential
offered through systems and technology. With this in mind, three parallel
systems initiatives are currently underway.
Chain-wide system upgrades. Replacement of core financial software and
merchandise management systems, in combination with existing supply chain
automation software, will provide Pamida with an integrated information
management and control system capable of supporting the existing organization,
as well as future growth, for years to come.
[Pictures of the interior and exterior of Pamida's new distribution facility in
Lebanon, IN.]
Expanded capabilities. These systems also will allow Pamida to offer innovative
and attractive point-of-sale merchandise pricing programs not commonly found in
mass merchandise store systems. These enhancements form the basis for future
customer-focused marketing and analysis that will enable us to be more
responsive to our customers' ever-changing needs.
Catch us on the web! This year Pamida took initial steps toward a comprehensive
Internet presence with the introduction of our Web page (www.pamida.com). In
addition to utilizing this medium as an information, sales promotion and
marketing tool, we are also exploring the expansion of our Web page to
Internet-enabled retailing.
[Picture of an IS team member performing network functions in Pamida's main
computer operations facility.]
We are preparing today for retailing leadership tomorrow. Our investments in
systems and information technology, combined with our low cost operating model,
form a solid foundation for profitable growth into the next decade.
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PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS - EXCEPT PER SHARE, NUMBER OF SHARES AND OTHER DATA)
Fiscal Year Ended
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February 1, February 2, January 28, January 29, January 30,
1998 1997 (1) 1996 1995 1994
----------- ----------- ----------- ----------- -----------
INCOME STATEMENT DATA:
Sales .............................................. $ 657,017 $ 633,189 $ 736,315 $ 711,019 $ 656,910
Gross profit ....................................... 161,935 154,090 177,688 177,367 158,906
Selling, general and
administrative expenses .......................... 129,031 125,105 151,096 143,585 133,921
----------- ----------- ----------- ----------- -----------
Operating income ................................... 32,904 28,985 26,592 33,782 24,985
Interest expense ................................... 29,618 29,781 29,526 27,367 26,588
Long-lived asset write-off ......................... - - 78,551 - -
Store closing costs ................................ - - 21,397 - -
Income (loss) before provision for income
taxes and extraordinary item ..................... 3,286 (796) (102,882) 6,415 (1,603)
Income tax (benefit) provision ..................... - - (7,863) 3,500 427
----------- ----------- ----------- ----------- -----------
Income (loss) before extraordinary item ............ 3,286 (796) (95,019) 2,915 (2,030)
Extraordinary item ................................. 1,735 - 371 - (4,943)
----------- ----------- ----------- ----------- -----------
Net income (loss) .................................. 5,021 (796) (94,648) 2,915 (6,973)
Effect of preferred stock reclassification ......... 756 - - - -
Less preferred dividends
and discount amortization ........................ (407) (391) (362) (361) (359)
----------- ----------- ----------- ----------- -----------
Net income (loss) available
for common shares ................................ $ 5,370 $ (1,187) $ (95,010) $ 2,554 $ (7,332)
=========== =========== =========== =========== ===========
Weighted average number of basic shares
outstanding ...................................... 5,843,441 5,004,942 5,002,853 4,999,984 4,999,984
Weighted average number of diluted shares
outstanding ...................................... 5,875,463 5,004,942 5,002,853 5,039,684 4,999,984
Basic net income (loss) per share:
Income (loss) before extraordinary item.. $ .62 $ (.24) $ (19.07) $ .51 $ (.48)
Extraordinary item ...................... .30 - .08 - (.99)
----------- ----------- ----------- ----------- -----------
Basic income (loss)....................... $ .92 $ (.24) $ (18.99) $ .51 $ (1.47)
=========== =========== =========== =========== ===========
Diluted net income (loss) per share:
Income (loss) before extraordinary item.... $ .62 $ (.24) $ (19.07) $ .51 $ (.48)
Extraordinary item......................... .29 - .08 - (.99)
----------- ----------- ----------- ----------- -----------
Diluted income (loss)...................... $ .91 $ (.24) $ (18.99) $ .51 $ (1.47)
=========== =========== =========== =========== ===========
BALANCE SHEET DATA:
Working capital.............................. $ 37,421 $ 28,673 $ 34,082 $ 46,725 $ 41,323
Total assets................................. 260,081 269,188 258,525 354,367 314,621
Long-term debt............................... 140,289 168,000 163,746 162,505 160,315
Obligations under capital leases............. 32,156 33,999 36,559 43,050 35,618
Redeemable preferred stock.................... - 1,875 1,826 1,779 1,734
Common shareholders' (deficit) equity......... (52,275) (87,303) (86,116) 8,876 6,322
OTHER DATA:
Team members.................................. 5,600 5,700 7,200 7,200 6,100
Number of stores.............................. 148 148 184 184 173
Retail square feet (in millions).............. 4.41 4.35 5.22 5.09 4.68
(1) Represents a 53-week year.
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PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED FEBRUARY 1, 1998 COMPARED TO YEAR ENDED FEBRUARY 2, 1997
SALES - Total sales during the 52-week fiscal 1998 period increased by
$23,828, or 3.8%, from the 53-week fiscal 1997 period. On a 52 to 52-week basis,
total net sales increased by 5.2%. During fiscal 1998, sales in comparable
stores increased by $24,135, or 4.0%.
During fiscal 1998, the Company opened three new stores, of which one is
located in a new market and two were relocations; the Company also closed one
store (which will be replaced during fiscal 1999 by a new store in the same
market), resulting in a net increase in selling area during the fiscal year of
approximately 61,000 square feet to a total of approximately 4,408,000 square
feet.
The Company experienced sales increases in most merchandise categories
during fiscal 1998. The most significant increases occurred in pharmacy
prescriptions, housewares, toys, athletic shoes and team sports apparel. Other
categories experiencing gains were stationery, sporting goods, appliances, paper
and cleaning supplies and pets. The Company experienced sales decreases in
several categories. The largest dollar decreases were in the automotive, mens'
fashion apparel, jewelry and watches and juniors' apparel categories.
GROSS PROFIT - Gross profit for the 52-week fiscal 1998 period increased by
$7,845, or 5.1%, compared to the 53-week fiscal 1997 period. As a percentage of
sales, gross profit improved to 24.6% from 24.3%. The Company's merchandise
gross margin as a percentage of sales decreased to 27.6% in fiscal 1998 from
27.8% in fiscal 1997. The decrease in merchandise gross margin percent of sales
was offset by substantial expense reductions in the warehouse and distribution
areas made possible by operating efficiencies gained largely from a new
warehouse management system implemented during fiscal 1997. During the prior
fiscal year, the Company incurred higher than normal labor cost in the warehouse
and distribution areas due to implementation issues related to the warehouse
management system. Total warehouse and distribution costs amounted to 2.8% of
sales compared to 3.3% last year.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) expense increased $3,926, or
3.1%, to $129,031 in fiscal 1998 from $125,105 in fiscal 1997. As a percentage
of sales, SG&A expense decreased to 19.6% from 19.8% last year. Most of the
total net increase in SG&A expense for the year was attributable to higher
corporate general and administrative expenses, primarily involving planned
increases in payroll and incentive compensation expenses. Store occupancy costs
increased by $1,030, but remained at 3.9% as a percentage of net sales for both
fiscal 1998 and 1997. Store payroll costs and controllable costs decreased by
$391 and $163, respectively, during fiscal 1998 as compared to last year. As a
percentage of net sales, store payroll costs and controllable costs decreased
from 8.0% to 7.7% and 3.0% to 2.9% for the fiscal periods ended 1998 and 1997,
respectively.
INTEREST expense decreased by $163, or 0.5%, for fiscal 1998 compared to
fiscal 1997. As described in Note B to the financial statements, the decrease in
interest expense for fiscal 1998 was attributable to the payment of certain
promissory notes of the Company with common stock in November 1997, thereby
relieving the Company of the quarterly compounding interest obligation which had
previously been paid-in-kind. That decrease was offset in part by an increase in
interest expense of approximately $900 related to higher outstanding balances on
the revolving line of credit resulting from higher investments in basic
inventory during the year as well as the funding of certain of the Company's
information systems initiatives.
INCOME TAX PROVISION - The Company's loss carryforwards from store closing
charges recorded in fiscal 1996 were utilized during fiscal 1998 to completely
offset income taxes from normal operating activities of the Company and to
reduce income taxes related to the Note repayment and preferred stock
reclassification transactions which are described in Note B to the financial
statements. The Company expects that operations in future periods will be taxed
at a normal tax rate. No income tax benefit on losses for fiscal 1997 was
recorded as the Company could not establish, as of fiscal year end 1997, with a
reasonable degree of certainty, the potential utilization of loss carryforwards.
YEAR ENDED FEBRUARY 2, 1997 COMPARED TO YEAR ENDED JANUARY 28, 1996
SALES - As discussed in Note Q 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 the previous year and increased as a percent of sales to 2.1% from 1.5%
the previous year. Delivery costs decreased to $7,637 in fiscal 1997 from $8,845
the previous 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.
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 were
recorded since the Company could not 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.
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
29% 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 provided by operating activities totaled $17,640 in
fiscal 1998, and funds used by operating activities totaled $11,577 in fiscal
1997. Funds provided from operations totaled $4,967 in fiscal 1996. The positive
change in cash flow from operating activities from fiscal 1997 to fiscal 1998
was primarily the result of improved operating results, a net decrease in
inventory and increases in operating and tax liabilities. 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.
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 .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 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 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-lease-back 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 $45,194 at February 1, 1998 and
$57,115 at February 2, 1997. 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 $172,445 at February 1, 1998 and $201,999 at February 2, 1997. 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 1, 1998, 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 had been
repaid, the quarterly interest payments on the promissory notes of the Company
were to be paid-in-kind. As discussed in Note B to the financial statements, the
Company repaid all of the promissory notes with common stock of the Company on
November 18, 1997.
As described in Note B to the financial statements, the Company
reclassified all preferred stock into common stock effective November 18, 1997.
Accordingly, the Company has no remaining obligations related to the preferred
stock as of the end of fiscal 1998. 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 N 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, prior to the November 18, 1997
reclassification of the preferred stock, the only cash requirement of the
Company related to preferred stock dividends in the aggregate annual amount of
approximately $316; and Pamida was 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 retained 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.
The Company made capital expenditures of $6,654 in fiscal 1998 compared to
$4,947 during fiscal 1997. The Company also made expenditures of $3,848 and
$3,680 in fiscal 1998 and 1997, respectively, related to information systems
software. The Company plans to open eight new stores in fiscal 1999 and will
consider additional opportunities for new store locations as they arise. Capital
expenditures and information systems software costs are expected to total
approximately $13,000 in fiscal 1999. 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 1997 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,
distribution and infrastructure enhancements and working capital. 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 additional 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.
YEAR 2000 COMPLIANCE
The Company has developed a comprehensive plan to mitigate the Company's
exposure to potential problems with its systems' ability to properly process
data beyond the calendar year 1999, which is commonly referred to as Year 2000
compliance. The Company has completed implementation of several new systems and
is at various stages of implementation of others which replace legacy systems.
The Company plans to complete installation of current releases or upgrades for
all of these systems no later than July, 1999 to help ensure that these systems
will be Year 2000 compliant. All of these systems have substantially improved
functionality over the Company's legacy systems which they replace and will,
therefore, be capitalized. Failure to implement such releases or upgrades, or
the failure of the vendors of the aforementioned software to have eliminated the
potential Year 2000 issues within the software, could materially and adversely
affect the Company's operations and financial results. The cost of directly
addressing Year 2000 compliance for legacy systems which are not planned to be
replaced by new systems is being charged to expense as incurred and is not
expected to be material.
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, Year 2000 compliance 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.
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
INDEPENDENT AUDITORS' REPORT
INDEPENDENT AUDITORS' REPORT
Board of Directors
Pamida Holdings Corporation
Omaha, Nebraska
We have audited the accompanying consolidated balance sheets of Pamida
Holdings Corporation and subsidiary as of February 1, 1998 and February 2, 1997,
and the related consolidated statements of operations, common stockholders'
equity and cash flows for each of the years 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 audits. The consolidated statements of operations, common stockholders'
equity and cash flows of Pamida Holdings Corporation and subsidiary 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, such 1998 and 1997 financial statements present fairly, in
all material respects, the financial position of Pamida Holdings Corporation and
subsidiary as of February 1, 1998 and February 2, 1997, and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 5, 1998
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS - EXCEPT PER SHARE DATA)
Fiscal Year Ended
------------------------------------
<S> <C> <C> <C>
February 1, February 2, January 28,
1998 1997 1996
(52 Weeks) (53 Weeks) (52 Weeks)
--------- --------- ---------
Sales .......................................................... $ 657,017 $ 633,189 $ 736,315
Cost of goods sold ............................................. 495,082 479,099 558,627
--------- --------- ---------
Gross profit ................................................... 161,935 154,090 177,688
--------- --------- ---------
Expenses:
Selling, general and administrative ........................ 129,031 125,105 151,096
Interest ................................................... 29,618 29,781 29,526
Long-lived asset write-off ................................. - - 78,551
Store closing costs ........................................ - - 21,397
--------- --------- ---------
158,649 154,886 280,570
--------- --------- ---------
Income (loss) before provision for income
taxes and extraordinary item ............................... 3,286 (796) (102,882)
Income tax benefit ............................................. - - (7,863)
--------- --------- ---------
Income (loss) before extraordinary item ........................ 3,286 (796) (95,019)
Extraordinary item ............................................. 1,735 - 371
--------- --------- ---------
Net income (loss) .............................................. 5,021 (796) (94,648)
Effect of preferred stock reclassification ..................... 756 - -
Less provision for preferred dividends and discount amortization (407) (391) (362)
--------- --------- ---------
Net income (loss) available for common shares .................. $ 5,370 $ (1,187) $ (95,010)
========= ========= =========
Basic income (loss) per share:
Income (loss) before extraordinary item..................... $ .62 $ (.24) $ 19.07)
Extraordinary item.......................................... .30 - .08
--------- --------- ---------
Basic income (loss)......................................... $ .92 $ (.24) $ (18.99)
========= ========= =========
Diluted income (loss) per share:
Income (loss) before extraordinary item..................... $ .62 $ (.24) $ (19.07)
Extraordinary item.......................................... .29 - .08
--------- --------- ----------
Diluted income (loss)....................................... $ .91 $ (.24) $ (18.99)
========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS - EXCEPT PER SHARE DATA)
<S> <C> <C>
February 1, February 2,
ASSETS 1998 1997
----------- -----------
Current assets:
Cash................................................................................ $ 6,816 $ 6,973
Accounts receivable, less allowance for doubtful accounts of $50 in both years...... 8,384 6,919
Merchandise inventories............................................................. 152,927 157,490
Prepaid expenses.................................................................... 2,838 2,993
Property held for sale.............................................................. - 1,748
----------- -----------
Total current assets............................................................. 170,965 176,123
Property, buildings and equipment, net.................................................. 40,812 42,403
Leased property under capital leases, less accumulated
amortization of $15,387 and $14,604, respectively................................... 25,181 27,713
Deferred financing costs................................................................ 2,755 3,176
Other assets............................................................................ 20,368 19,773
----------- -----------
$ 260,081 $ 269,188
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.................................................................... $ 47,687 $ 54,245
Loan and security agreement......................................................... 45,194 57,115
Accrued compensation................................................................ 5,768 3,860
Accrued interest.................................................................... 6,668 7,668
Store closing reserve............................................................... 1,564 4,521
Other accrued expenses.............................................................. 12,227 10,112
Income taxes - deferred and current payable......................................... 12,546 8,101
Current maturities of long-term debt................................................ 47 47
Current obligations under capital leases............................................ 1,843 1,781
----------- -----------
Total current liabilities........................................................ 133,544 147,450
Long-term debt, less current maturities................................................. 140,289 168,000
Obligations under capital leases, less current obligations.............................. 32,156 33,999
Reserve for dividends................................................................... - 342
Other long-term liabilities............................................................. 6,367 4,825
Commitments and contingencies (Note O).................................................. - -
Preferred stock subject to mandatory redemption:
16-1/4% senior cumulative preferred stock, $1 par value;
514 shares authorized; 0 and 514 shares issued and outstanding................... - 514
14-1/4% junior cumulative preferred stock, $1 par value;
1,627 and 6,986 shares authorized; 0 and 1,627 shares issued and outstanding;
redemption amount of $0 and $1,627, less unamortized discount.................... - 1,361
Common stockholders' equity:
Common stock, $.01 par value; 25,000,000 and 10,000,000 shares authorized; 5,970,439
and 5,004,942 shares issued and outstanding...................................... 60 50
Nonvoting common stock, $.01 par value; 4,000,000 and 2,000,000 shares authorized;
3,050,473 and 0 shares issued and outstanding.................................... 30 -
Additional paid-in capital.......................................................... 30,586 968
Accumulated deficit................................................................. (82,951) (88,321)
----------- -----------
Total common stockholders' deficit............................................... (52,275) (87,303)
----------- -----------
$ 260,081 $ 269,188
=========== ===========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Retained
Nonvoting Additional Earnings
Common Common Paid-in (Accumulated
Stock Stock Capital Deficit)
--------- --------- --------- ---------
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)
Net income............................................ - - _ 5,021
Amortization of discount on 14-1/4%
junior cumulative preferred..................... - - - (38)
Accrued dividends for preferred stockholders.......... - - - (369)
Reclassification of preferred stock into common stock. 3 - 1,811 756
Payment of notes with common stock.................... 7 30 20,236 -
Gain on payment of notes held by Venture (net of tax). - - 7,571 -
--------- --------- --------- ---------
Balance at February 1, 1998............................. $ 60 $ 30 $ 30,586 $ (82,951)
========= ========= ========= =========
See notes to consolidated financial statements.
</TABLE>
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
Fiscal Year Ended
-------------------------------------------
<S> <C> <C> <C>
February 1, February 2, January 28,
1998 1997 1996
(52 Weeks) (53 Weeks) (52 Weeks)
----------- ----------- -----------
Cash flows from operating activities:
Net income (loss) $ 5,021 $ (796) $ (94,648)
----------- ----------- -----------
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization............................... 12,593 11,658 15,345
Provision (credit) for LIFO inventory valuation............. 606 874 (585)
Provision (credit) for deferred income taxes................ (3,297) 3,305 (6,647)
Noncash interest expense.................................... 3,974 4,473 3,910
Gain on disposal of assets.................................. (150) (56) (982)
Deferred retirement benefits................................ (142) (125) 13
Extraordinary item.......................................... (1,735) - (371)
Long-lived assets write-off................................. - - 78,551
Store closing costs......................................... (3,457) (3,726) 21,397
Decrease (increase) in merchandise inventories.............. 3,957 (7,527) 4,532
Increase in other operating assets.......................... (4,730) (5,622) (3,847)
Decrease in accounts payable................................ (6,558) (8,842) (6,749)
Increase (decrease) in income taxes payable................. 3,537 (3,250) (4,607)
Increase (decrease) in other operating liabilities.......... 8,021 (1,943) (345)
----------- ----------- -----------
Total adjustments............................................. 12,619 (10,781) 99,615
----------- ----------- -----------
Net cash from operating activities............................ 17,640 (11,577) 4,967
----------- ----------- -----------
Cash flows from investing activities:
Capital expenditures............................................ (6,654) (4,947) (9,265)
Proceeds from disposal of assets................................ 1,701 917 1,163
Principal payments received on notes receivable................. 18 16 15
Assets acquired for sale........................................ - (391) -
Changes in constructed stores to be refinanced through lease
financing.................................................... 1,790 (5,845) (4,412)
----------- ----------- -----------
Net cash from investing activities............................ (3,145) (10,250) (12,499)
----------- ----------- -----------
Cash flows from financing activities:
Borrowings (payments) under loan and security agreement, net.... (11,921) 25,527 10,986
Principal payments on other long-term debt...................... (75) (1,335) (193)
Dividends paid on preferred stock............................... - - (315)
Principal payments on promissory notes.......................... - - (641)
Payments for deferred finance costs............................. (225) (54) (13)
Principal payments on capital lease obligations................. (1,781) (2,636) (2,071)
Fees related to payment of debt and reclasification
of preferred stock............................................ (650) - -
Proceeds from sale of stock..................................... - - 18
----------- ----------- -----------
Net cash from financing activities............................ (14,652) 21,502 7,771
----------- ----------- -----------
Net (decrease) increase in cash................................. (157) (325) 239
Cash at beginning of year....................................... 6,973 7,298 7,059
----------- ----------- -----------
Cash at end of year............................................. $ 6,816 $ 6,973 $ 7,298
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest...................................................... $ 25,834 $ 24,804 $ 25,691
Income taxes:
Payments to taxing authorities.............................. 112 386 3,622
Refunds received from taxing authorities.................... (3,952) (442) (231)
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
Capital lease obligations terminated............................ - - 154
Amortization of discount on junior cumulative preferred stock
recorded as a direct charge to retained earnings............. 38 49 47
Payment of interest in kind by increasing the
principal amount of the notes................................ 3,561 4,141 3,702
Provision for dividends payable................................. 369 342 -
Common stock issued in payment of notes
and reclassification of preferred stock...................... 8,690 - -
Nonvoting common stock issued in payment of notes............... 27,454 - -
Notes paid with, and preferred stock reclassified into,
common stock................................................. (36,144) - -
See notes to consolidated financial statements.
</TABLE>
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 general merchandise retail 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. Because of the similarity in
nature of the Company's businesses, the Company considers itself to be a single
business segment.
REVENUE RECOGNITION - Pamida operates its stores on a self-service,
primarily cash-and-carry basis. Because of the insignificance of sales returns,
revenue is recognized at the point-of-sale without allowance for returns.
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 1, 1998 and February 2, 1997.
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 indicate potential
impairment, the Company evaluates the recoverability of asset carrying values,
including associated goodwill, using estimates of future cash flows over
remaining asset lives. When impairment is indicated, any impairment loss is
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.
ADVERTISING COSTS - Advertising costs are expensed as incurred and totaled
$10,468, $11,653 and $16,381 for fiscal years 1998, 1997 and 1996, respectively.
PRE-OPENING EXPENSES - Costs related to opening new stores are expensed as
incurred.
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).
EARNINGS PER SHARE - In February 1997, the Financial Accounting Standards
Board ("FASB") adopted Statement of Financial Accounting Standards ("SFAS") No.
128, "Earnings per Share." SFAS 128 requires dual presentation of basic and
diluted earnings per share for all periods for which an income statement is
presented. Basic income per common share is based on the weighted average
outstanding common shares during the respective period. Diluted income per share
is based on the weighted average outstanding common shares and the effect of all
dilutive potential common shares, including stock options. All prior period
income per share data has been restated in accordance with SFAS 128.
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.
NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the FASB adopted SFAS No.
130, "Reporting Comprehensive Income", and No. 131, "Disclosures about Segments
of an Enterprise and Related Information". SFAS 130 establishes standards for
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. This statement is effective for the
Company's fiscal 1999 financial statements. SFAS 131, also effective in fiscal
1999, redefines how operating segments are determined and requires disclosure of
certain financial and descriptive information about a company's operating
segments. The Company currently complies with most provisions of the statements
and any incremental disclosure required is expected to be minimal.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
years' financial statements to conform to the current year presentation.
B. EXCHANGE OF DEBT AND PREFERRED STOCK FOR COMMON STOCK AND RELATED
EXTRAORDINARY ITEM
On November 14, 1997, the stockholders of the Company approved various
proposals necessary to effect the payment of all of the Company's outstanding
Senior Promissory Notes, Subordinated Promissory Notes and Junior Subordinated
Promissory Notes (collectively, the "Notes") with common stock and to change and
reclassify all of the Company's outstanding preferred stock into common stock.
In connection with these transactions, which became effective on November
18, 1997, the Company issued 965,497 shares of Common Stock and 3,050,473 shares
of Nonvoting Common Stock. The Nonvoting Common Stock was issued only to 399
Venture Partners, Inc. ("Venture"), an affiliate of Citicorp, and is convertible
into Common Stock on a share-for-share basis upon certain conditions. Common
Stock was issued to all other holders of Notes and to all holders of Preferred
Stock.
The aggregate redemption value of the Preferred Stock at the effective date
of the transactions was $2,968, comprised of $1,000 per share stated liquidation
value plus accrued dividends. The aggregate principal amount and accrued
interest on the Notes at the effective date of the transactions was $33,175.
Based upon a value of $9 per share for purposes of the transactions, (i) 329,815
shares of Common Stock were issued to the holders of Preferred Stock resulting
in a net gain to the Company of $756, credited directly to retained earnings,
(ii) 635,682 shares of Common Stock were issued to Note holders other than
Venture resulting in a net gain to the Company of $1,735, reflected as an
extraordinary item in the consolidated statement of operations, and (iii)
3,050,473 shares of Nonvoting Common Stock were issued to Venture resulting in a
net gain to the Company of $7,571, credited directly to paid-in capital. These
net gains represent the excess of the value of the Common Stock for purposes of
the transactions over the value of the stock as determined by the closing market
price of the Common Stock as of the transaction date, net of applicable
transaction costs, unamortized discounts, and income taxes.
C. NET INCOME PER COMMON SHARE
The following table provides a reconciliation between basic and diluted
income per share (income and shares in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------- --------------------------- ---------------------------
<S> <C> <C> <C>
Per-Share Per-Share Per-Share
Income Shares Amount Income Shares Amount Income Shares Amount
--------------------------- --------------------------- ---------------------------
Income (loss) before
extraordinary item $3,286 $ (796) $(95,019)
Less provision for
preferred dividends and
discount amortization (407) (391) (362)
Effect of preferred stock
reclassification 756 - -
------ ------ --------
Basic income (loss) per share
before extraordinary item 3,635 5,843 $ .62 (1,187) 5,005 $ (. 24) (95,381) 5,003 $ (19.07)
Effect of dilutive stock options - 32 - - - -
--------------------------- --------------------------- ---------------------------
Diluted income (loss) per share
before extraordinary item $3,635 5,875 $ .62 $(1,187) 5,005 $ (.24) $(95,381) 5,003 $ (19.07)
=========================== =========================== ============================
</TABLE>
D. MERCHANDISE INVENTORIES
Total inventories would have been higher at February 1, 1998 and February
2, 1997 by $7,180 and $6,574, 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 $3,892, $78 and
$(95,604), respectively, for fiscal years 1998, 1997, and 1996. During fiscal
years 1998, 1997, and 1996, 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 $263,
$116, and $125, respectively.
E. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consists of:
Feb. 1, Feb. 2,
1998 1997
--------- ---------
Land and land improvements..................... $ 4,030 $ 4,013
Buildings and building improvements............ 22,183 22,076
Store, warehouse and office equipment.......... 59,842 59,668
Vehicles and aircraft equipment................ 1,551 1,513
Leasehold improvements......................... 16,944 16,497
--------- ---------
104,550 103,767
Less accumulated depreciation and amortization. 63,738 61,364
--------- ---------
$ 40,812 $ 42,403
========= =========
F. OTHER ASSETS
Other assets consist of:
Feb. 1, Feb. 2,
1998 1997
--------- ---------
Constructed stores to be refinanced through
lease financing.............................. $ 7,969 $ 10,257
Unamortized software costs, net................ 10,435 7,541
Other.......................................... 1,964 1,975
--------- ---------
$ 20,368 $ 19,773
========= =========
The Company contracted for the construction of two and five store locations
during the periods ended January 28, 1996 and February 2, 1997, respectively.
The construction costs capitalized are recorded as other long-term assets during
the period of construction and for the period following completion of
construction to the date of sale of such stores through a lease financing
arrangement. The construction costs for five stores remain in Other Assets at
February 1, 1998. The cost of construction has been financed through the
Company's working capital and cash flow from operations. The Company expects to
obtain lease financing under favorable terms for each of the constructed stores
in the near future.
G. 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.
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 1998 and
1997 was $66,461 and $69,256, respectively. The weighted average amounts of
borrowings under the Agreement for fiscal 1998 and 1997 were $52,869 and
$43,002, respectively; and the weighted average interest rates were 9.8% and
10.0%, respectively.
Long-term debt consists of:
Feb. 1, Feb. 2,
1998 1997
-------- --------
Senior Subordinated Notes, 11.75%, due March 2003 .. $140,000 $140,000
Industrial development bond, 5.5%, due in monthly
installments through 2005......................... 336 411
Senior promissory notes, 15.5%, interest paid
in kind quarterly................................. - 4,926
Subordinated promissory notes, 16%, interest paid
in kind quarterly................................. - 13,454
Junior subordinated promissory notes, 16.25%, net of
unamortized discount of $0 and $878, interest paid
in kind quarterly................................. - 9,256
-------- --------
140,336 168,047
Less current maturities............................. 47 47
-------- --------
$140,289 $168,000
======== ========
As of February 1, 1998, the fair value of long-term debt was $144,489
compared to its recorded value of $140,289. The fair value of long-term debt was
estimated based on quoted market values for the notes. The aggregate maturities
of long-term debt totals $47 in each of the next five fiscal years.
The Senior Subordinated 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 had been paid in full, the quarterly
interest payments on the notes were to 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 accrued at a rate which, in each case, was two percentage points
higher than the applicable cash interest rate. See Note B describing the
transaction effecting the payment of these notes with shares of common stock of
the Company which was effective November 18, 1997.
H. INCOME TAXES
Components of the income tax provision (benefit) from continuing operations
are as follows:
Year Ended
----------------------------
Feb. 1, Feb. 2, Jan. 28,
1998 1997 1996
------- ------- -------
Current:
Federal..................................... $ 491 $(3,155) $ (993)
State....................................... 311 (150) (223)
------- ------- -------
802 (3,305) (1,216)
------- ------- -------
Deferred:
Federal..................................... (1,616) 3,189 (5,865)
State....................................... (330) 116 (782)
Utilization of tax benefit carryforward....... 2,718 - -
Change in beginning of year
valuation allowance......................... (1,574) - -
------- ------- -------
(802) 3,305 (6,647)
------- ------- -------
Total benefit from continuing operations...... $ - $ - $(7,863)
======= ======= =======
The differences between the U.S. Federal statutory tax rate and the
Company's effective tax rate are as follows:
Year Ended
----------------------------
Feb. 1, Feb. 2, Jan. 28,
1998 1997 1996
------- ------- -------
Statutory rate................................ 34.0% (34.0)% (34.0)%
State income tax effect....................... 4.6 (2.8)% (1.3)%
Amortization of the excess of cost over
net assets acquired......................... - - 23.9
Valuation allowance........................... (40.9) 25.1 3.6
Accretion of discount on junior
subordinated debt........................... 1.3 6.8 0.1
Other......................................... 1.0 4.9 0.1
------- ------- -------
- - (7.6)%
======= ======= =======
In fiscal 1998, income tax expense allocated to the extraordinary item was
$379 and income tax expense charged directly to stockholders' equity was $1,821.
These amounts are net of a change in the beginning of year valuation allowance
of $2,495.
Significant temporary differences between reported and taxable income that
give rise to deferred tax assets and liabilities were as follows:
Feb. 1, Feb. 2,
1998 1997
------- -------
Net current deferred tax liabilities:
Inventories................................. $13,910 $15,302
Prepaid insurance........................... 172 210
Other....................................... 423 412
Post employment health costs................ (135) (189)
Accrued expenses............................ (2,192) (941)
Store closing costs......................... (1,246) (2,570)
------- -------
Net current deferred tax liabilities...... 10,932 12,224
------- -------
Net long-term deferred tax liabilities:
Property, buildings and equipment........... 2,096 2,862
Other....................................... 1,836 1,436
Valuation allowance......................... - 4,069
Capital leases.............................. (3,377) (3,089)
Tax benefit carryforward.................... (800) (3,518)
------- -------
Net long-term deferred tax (asset) liabilities (245) 1,760
------- -------
Net total deferred tax liabilities............ $10,687 $13,984
======= =======
Net long-term deferred tax (asset) liabilities are classified with other
assets or other long-term liabilities in the consolidated balance sheets of the
Company. As of February 1, 1998 the Company had alternative minimum tax credit
carryforwards totaling $800, which do not expire.
I. 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.
At February 1, 1998 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
-------- --------
1999....................................... $ 5,659 $ 10,996
2000....................................... 5,442 8,867
2001....................................... 5,352 7,554
2002....................................... 5,267 6,788
2003....................................... 5,255 6,076
Later years................................ 36,129 61,356
-------- --------
Total minimum obligations.................. 63,104 $101,637
-------- ========
Less amount representing interest.......... 29,105
--------
Present value of net minimum lease payments 33,999
Less current portion....................... 1,843
--------
Long-term obligations...................... $ 32,156
========
The minimum rentals under operating leases have not been reduced by minimum
sublease rentals of $157 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:
Year Ended
---------------------------
Feb. 1, Feb. 2, Jan. 28,
1998 1997 1996
------- ------- -------
Minimum rentals............................ $11,669 $10,938 $11,715
Contingent rentals......................... 272 258 399
Less sublease rental income................ (705) (735) (852)
------- ------- -------
$11,236 $10,461 $11,262
======= ======= =======
J. SAVINGS AND OTHER POSTEMPLOYMENT BENEFITS PLANS
Pamida has adopted a 401(k) 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 1998, 1997 and 1996, were $765, 770, and
$749, 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 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
1998, 1997 and 1996 were as follows:
Feb. 1, Feb. 2, Jan. 28,
1998 1997 1996
------ ------ ------
Annual postretirement benefit expense:
Interest cost............................... $ 11 $ 16 $ 32
Amortization of unrecognized net obligations (73) (44) (6)
------ ------ ------
Annual postretirement benefit (income) expense $ (62) $ (28) $ 26
====== ====== ======
The accumulated postretirement benefit obligation consists of:
Feb. 1, Feb. 2,
1998 1997
------ ------
Accumulated postretirement
benefit obligation.......................... $ 163 $ 194
Unrecognized gain............................. 189 299
------ ------
Accrued expense............................... $ 352 $ 493
====== ======
A 5% increase in the cost of covered health care benefits was assumed for
both fiscal 1998 and 1997. The rate of 5% is assumed to remain level after
fiscal 1998. Assuming a 1% increase in the health care trend rate, the annual
postretirement benefit expense would remain the same for both fiscal 1998 and
1997, and the unfunded accumulated postretirement benefit obligation would
increase by $2 and $4 for fiscal 1998 and 1997, respectively. The weighted
average discount rate used in determining the accumulated postretirement benefit
obligation was 7.0% for both fiscal 1998 and 1997.
K. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
See Note B describing the change and reclassification of all preferred
stock into common stock of the Company, effective November 18, 1997. Prior to
the reclassification, the Company was 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 was $1,000 per share plus
any accrued dividends. Subject to certain loan restrictions, the Company could,
at any time, have redeemed all or any portion of the preferred stock outstanding
at a price of $1,000 per share plus any accrued dividends.
Each share of senior cumulative and junior cumulative preferred stock
entitled 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 were nonvoting, and any unpaid
dividends were 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 1998 or 1997 and could pay cash dividends in ensuing years
only to the extent that the Company and Pamida satisfied the applicable
statutory standards which included the Company's having a net worth equal to at
least the aggregate par value of the preferred stock which amounted to $2. A
provision for preferred stock dividends has been recorded in the fiscal 1998 and
1997 financial statements. The cumulative dividend rate on the preferred stock
increased by 0.5% per quarter (with a maximum aggregate increase of 5%) on each
quarterly dividend payment date on which the preferred stock dividends were not
paid currently on a cumulative basis. As a result of the reclassification of the
preferred stock into common stock, the Company's obligation for further
preferred stock dividend payments or accrual has been eliminated.
The difference between the fair value of the junior cumulative preferred
stock at issuance and the mandatory redemption value was recorded through
periodic accretions, using the effective interest method with a related charge
to retained earnings.
L. 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 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 1998, 1997 or 1996.
On March 5, 1998, the Board of Directors of the Company adopted the Pamida
Holdings Corporation 1998 Stock Incentive Plan (the "1998 Plan") which will
require approval by the stockholders to become effective. The 1998 Plan
authorizes 500,000 shares of Common Stock for option grants or other awards to
eligible officers and other key employees of the Corporation. No grants or other
awards have been made under the 1998 Plan.
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.
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>
Feb. 1, 1998 Feb. 2, 1997 Jan. 28, 1996
------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C>
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- -------- ------- -------- ------- --------
Outstanding - beginning of year 302,816 $ 4.39 296,546 $ 5.05 227,545 $ 4.33
Granted 40,700 3.06 86,800 2.37 122,205 6.80
Expired/terminated 21,083 4.93 80,530 4.66 48,246 6.22
Exercised - - - - 4,958 3.63
------- -------- ------- -------- ------- --------
Outstanding - end of year 322,433 $ 4.19 302,816 $ 4.39 296,546 $ 5.05
======= ======== ======= ======== ======= ========
</TABLE>
There were 161,093, 123,616 and 85,474 options exercisable at February 1,
1998, February 2, 1997 and January 28, 1996, respectively.
The following table summarizes information about stock options outstanding
as of February 1, 1998:
Options Outstanding Options Exercisable
- ------------------------------------------------------- ----------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
- --------------- ----------- ------------ -------- ----------- --------
$ 1.94 - $2.78 77,300 8.5 Years $ 2.36 15,460 $ 2.36
3.06 39,200 9.1 Years 3.06 - 0.00
3.63 - 5.75 167,933 6.2 Years 4.61 130,433 4.37
7.19 38,000 7.1 Years 7.19 15,200 7.19
- --------------- ----------- ------------ -------- ----------- --------
$ 1.94 - $7.19 322,433 7.2 Years $ 4.19 161,093 $ 4.45
=============== =========== ============ ======== =========== =======-
If compensation cost for the Company's Plan had been determined based on
the fair value at the grant dates for awards under the Plan consistent with the
method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's
net income and net income per share would have been reduced to the pro forma
amounts indicated below:
Feb. 1, Feb. 2, Jan. 28,
1998 1997 1996
------ ------- --------
Net income (loss) As reported $5,370 $(1,187) $(95,010)
Pro forma 5,326 (1,235) (95,046)
Basic income (loss) per share As reported .92 (.24) (18.99)
Pro forma .91 (.25) (19.00)
Diluted income (loss) per share As reported .91 (.24) (18.99)
Pro forma .91 (.25) (19.00)
The weighted average fair value of options granted during the year was
$1.43, $0.70 and $2.86 per option for fiscal 1998, 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. 1, Feb. 2, Jan. 28,
1998 1997 1996
------ ------ -------
Risk-free interest rate 6.5% 6.0% 7.0%
Dividend yield 0.0% 0.0% 0.0%
Expected volatility 8.4% 8.1% 8.1 %
Expected life (years) 6.0 years 6.6 years 6.7 years
M. CAPITAL STOCK
As described in Note B, the Company issued an additional 965,497 shares of
Common Stock and 3,050,473 shares of Nonvoting Common Stock during fiscal 1998.
Accordingly, the Company had 5,970,439 shares of Common Stock and 3,050,473
shares of Nonvoting Common Stock outstanding at February 1, 1998. The Nonvoting
Common Stock is held entirely by 399 Venture Partners, Inc. which is also the
Company's largest holder of Common Stock. The Nonvoting Common Stock is
convertible into Common Stock on a share-for-share basis upon certain
conditions. The Company had 5,004,942 shares of Common Stock and no shares of
Nonvoting Common Stock outstanding at February 2, 1997.
N. EXTRAORDINARY ITEMS
As described in Note B, on November 18, 1997 the Company issued 635,682
shares of common stock to certain holders of Notes which resulted in an
extraordinary gain. 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.
O. 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 under such program is tied to continued employment and future
Company common stock price appreciation.
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 N, to repay to Pamida
intercompany balances totaling $29, and to pay quarterly dividends on preferred
stock totaling $315.
On February 1, 1998, the Company had standby letters of credit outstanding
totaling $2,379 related to the Company's self-insured retention of worker's
compensation liabilities and future rental payments on a warehouse. Additional
letters of credit outstanding totaling $5,017 were committed for purchases of
merchandise inventory.
P. 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 income
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 $4.94 per basic and diluted share.
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. 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.
Q. STORE CLOSINGS IN FISCAL 1996
As discussed in Note P 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 Components of fiscal 1996 Store Closing Costs:
Income
Statement
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
--------
Total............................................ $ 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 years 1997 and 1998, the Company negotiated settlements on
twenty-five closed store properties which had been leased, three which had been
subleased, and sold eight closed store properties which had been owned. As of
February 1, 1998, the Company remains liable for lease obligations on seven
closed store properties. The Company anticipates that final disposition of the
remaining obligations will be completed in fiscal 1999 and 2000. There were no
adjustments made during fiscal 1998 and 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. 1, Feb. 2,
1998 1997
-------- --------
Store closing reserve (short-term)............... $ 1,564 $ 4,521
Amount included in other
long-term liabilities.......................... 1,690 2,190
-------- --------
Total............................................ $ 3,254 $ 6,711
======== ========
R. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended February 1, 1998 and February 2, 1997:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
May 4, August 3, November 2, February 1,
Fiscal 1998 1997 1997 1997 1998 Year
- -------------------------------- ----------- ----------- ----------- ----------- -----------
Sales .......................... $ 144,564 $ 163,217 $ 158,749 $ 190,487 $ 657,017
Gross profit.................... 33,268 41,502 37,854 49,311 161,935
(Loss) income before
extraordinary item............ (5,459) 563 340 7,842 3,286
Extraordinary item.............. - - - 1,735 1,735
Net (loss) income (5,459) 563 340 9,577 5,021
Effect of preferred stock
reclassification.............. - - - 756 756
Less provision for preferred
dividends and discount
amortization.................. (105) (165) (137) - (407)
----------- ----------- ----------- ----------- -----------
Net (loss) income available
for common shares $ (5,564) $ 398 $ 203 $ 10,333 $ 5,370
=========== =========== =========== =========== ===========
Basic (loss) income per share:
(Loss) income before
extraordinary item.......... $ (1.11) $ .08 $ .04 $ 1.03 $ .62
Extraordinary item............ - - - .21 .30
----------- ----------- ----------- ----------- -----------
Basic (loss) income........... $ (1.11) $ .08 $ .04 $ 1.24 $ .92
=========== =========== =========== =========== ===========
Diluted (loss) income per share:
(Loss) income before
extraordinary item.......... $ (1.11) $ .08 $ .04 $ 1.02 $ .62
Extraordinary item............ - - - .21 .29
----------- ----------- ----------- ----------- -----------
Diluted (loss) income......... $ (1.11) $ .08 $ .04 $ 1.23 $ .91
=========== =========== =========== =========== ===========
April 28, July 28, October 27, February 2,
Fiscal 1997 1996 1996 1996 1997 Year
- -------------------------------- ----------- ----------- ----------- ----------- -----------
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)
=========== =========== =========== =========== ===========
Basic and diluted (loss)
income per share.............. $ (.97) $ (.28) $ .02 $ .99 $ (.24)
=========== =========== =========== =========== ===========
</TABLE>
FORWARD-LOOKING STATEMENTS
This annual report 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 annual report contains certain forward-looking statements which
reflect management's current views and estimates of future economic
circumstances, industry conditions, Company performance, Year 2000 compliance
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.
DIRECTORS, MANAGEMENT AND CORPORATE INFORMATION
DIRECTORS
L. David Callaway, III(2)
Chairman and Chief Executive Officer,
Express Messenger Systems, Inc.
Stuyvesant P. Comfort(1)
Business Development and Investment Analyst,
Microsoft Corporation
Steven S. Fishman
Chairman, Chief Executive Officer, and President
M. Saleem Muqaddam(1)(2)
Vice President,
Citicorp Venture Capital, Ltd.
Peter J. Sodini(1)(2)
President and Chief Executive Officer,
The Pantry, Inc.
Frank A. Washburn
Executive Vice President, Chief Operating Officer,
and Secretary
(1) Member of Compensation and Stock Option Committees
(2) Member of Audit Committee
MANAGEMENT
Steven S. Fishman*
Chairman, Chief Executive Officer,
and President
Frank A. Washburn*
Executive Vice President,
Chief Operating Officer,
and Secretary
George R. Mihalko*
Senior Vice President,
Chief Financial Officer, Treasurer,
and Assistant Secretary
Robert C. Hafner
Senior Vice President, Marketing and
Business Development - Pamida, Inc.
Don G. Hendricksen
Senior Vice President, General
Merchandise Manager, Hardlines - Pamida, Inc.
Paul L. Knutson
Senior Vice President,
Human Resources - Pamida, Inc.
Stephen D. Robinson
Senior Vice President, General
Merchandise Manager, Softlines - Pamida, Inc.
Kurt Streitz
Senior Vice President,
Chief Information Officer - Pamida, Inc.
*Executive Officers
CORPORATE INFORMATION
CORPORATE OFFICES
8800 "F" Street
Omaha, Nebraska 68127-1574
Investor Relations: (402) 339-2400
Internet Address: www.pamida.com
FORM 10-K
A copy of the Company's annual report to the Securities and Exchange Commission
on Form 10-K may be obtained by writing to Pamida Holdings Corporation, Attn:
Investor Relations, P.O. Box 3856, Omaha, Nebraska 68103-0856. Form 10-K as well
as other financial information is also available on Pamida's web site at
www.pamida.com.
INDEPENDENT AUDITORS
Deloitte & Touche LLP
Omaha, NE
ANNUAL MEETING
The Annual Meeting of Stockholders will be held on Thursday, May 21, 1998, at
8:30 a.m. at the offices of the Corporation, 8800 "F" Street, Omaha, Nebraska
68127-1574.
MARKET PRICE OF COMMON STOCK
The Common Stock of Pamida Holdings Corporation is listed and traded on the
American Stock Exchange under the "PAM" ticker symbol. The high and low selling
prices for the Common Stock on the American Stock Exchange for fiscal 1998 and
fiscal 1997 were as follows:
High Low
------ -----
Fiscal 1998:
4th Quarter 6 1/8 4 1/4
3rd Quarter 6 7/16 4 1/8
2nd Quarter 4 1/8 2 3/4
1st Quarter 3 1/2 2
Fiscal 1997:
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
As of March 23, 1998, there were 281 record holders of the Company's Common
Stock.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
New York, New York
