[Picture of a Pamida Store, with Pharmacy]
1999 ANNUAL REPORT
[Picture of a farmstead]
[Picture of a small town main street]
"A Retail Growth Strategy"
[Picture of "Pamida Hometown Values" logo]
<PAGE>
PAMIDA HOLDINGS CORPORATION
PAMIDA HOLDINGS CORPORATION (ASE:PAM), through its principal subsidiary, Pamida,
Inc., currently operates 147 retail stores in 15 Midwestern, North Central and
Rocky Mountain states.
Pamida executes a location strategy which offers consumers in small, rural
communities convenient one-stop shopping. A typical store carries a broad
assortment of value-priced hardlines and softlines merchandise as well as
consumables and a pharmacy.
For more information about Pamida, visit our web site at www.pamida.com.
[Map of Pamida's store locations]
[Picture of "Pamida Hometown Values" logo]
Table of Contents
1. Key Accomplishments & Financial Highlights
2. Chairman's Letter
4. The Pamida "Road Show"
9. Financial Statements and Notes
<PAGE>
KEY ACCOMPLISHMENTS IN FISCAL 1999
* Achieved a solid 3% comparable-store-sales increase over the prior year and
an average sales ticket now exceeding $20 per transaction.
* Developed and opened a new 35,000 square foot prototype store, featuring a
pantry and designed to accommodate a drive-through pharmacy.
* Added 62 in-store pantries featuring an expanded assortment of
traffic-driving consumable merchandise.
* Added ten in-store pharmacies, increasing the total to 54.
* Overcame a challenging merchandising system implementation, thereby enhancing
our ability to compete and grow.
* Added a $25 million real estate borrowing facility to a new committed line of
credit to support the development of up to 15 new stores during fiscal 2000.
* Continued to add shareholder value by increasing normalized EPS(a) from $0.28
last year to $0.50 this year - a 79% increase.
(a) Adjusted for extraordinary items and taxes.
[FINANCIAL HIGHLIGHTS]
<TABLE>
<CAPTION>
(Dollar amounts in thousands - except per share data)
<S> <C> <C> <C>
Fiscal Year Ended
------------------------------------
January 31, February 1, February 2,
1999 1998 1997
---------- ---------- ----------
Number of stores at fiscal year end 147 148 148
Sales $ 672,394 $ 657,017 $ 633,189
Comparable store sales % increase (decrease) 3.0% 4.0% (2.6)%
Gross profit percent to sales 24.9% 24.6% 24.3%
Selling, general and administrative expenses
percent to sales 20.0% 19.5% 19.7%
FIFO EBITDA 46,498 46,178 41,631
Income (loss) before extraordinary
items and taxes 7,433 3,286 (796)
Net income (loss) available for
common shares 4,546 5,370 (1,187)
Composition of diluted net income (loss) per share:
Income (loss) available for common shares before
extraordinary items and preferred
stock reclassification $ 0.50 $ 0.49 $ (0.24)
Extraordinary items
- 0.29 -
Effect of preferred stock
reclassification - 0.13 -
---------- ---------- ----------
Diluted net income (loss) per share $ 0.50 $ 0.91 $ (0.24)
========== ========== ==========
Weighted average number of diluted shares
outstanding 9,094 5,875 5,005
</TABLE>
[Three graphs displaying the following information:
1997 1998 1999
---- ---- ----
Sales ($ in millions) $633 $657 $672
FIFO EBITDA ($ in millions) 42 46 46
Income Before Extraordinary
Items and Taxes ($ in millions) (1) 3 7]
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To Our Shareholders and Business Partners
FISCAL 1999 was a year of contrast. In strengthening Pamida for the future,
we were able to log many important achievements. However, we also had to deal
with some unexpected as well as expected challenges. Overall, we produced a
respectable year, highlighted by a solid 3% comparable store-sales increase and
a 79% increase in earnings per share, when normalized for extraordinary items
and assuming normal tax rates.
[Corporate structure graph]
As depicted in the adjacent illustration, the secret to long-term success
in any business venture is to find the proper balance between the interests of
customers, employees, business partners, and investors. During my six-year
tenure at Pamida, this has become our single most important goal. Achieving that
goal has been and continues to be a challenging task, since striking the proper
balance depends on a solid strategy, access to growth capital and a modern,
efficient operating model. All of this, of course, has to be accomplished in a
highly competitive environment.
The most significant difference between Pamida and the other remaining
regional general merchandisers is our strategy. Pamida's strategy -- TO BE THE
LEADING RETAILER IN SMALL-TOWN AMERICA -- is as fundamentally sound as any in
retail today. This strategy allows us to successfully compete and co-exist with
national competition - an arena where other regional retailers have struggled
and often failed.
Quite simply, we strive to serve customers in small, rural hometowns and
want to be their number one choice for general merchandise, consumables and
pharmacy needs. In 80% of our markets, we are the only major general merchandise
retailer within 15 miles of the nearest national competition. To serve these
special customers, one has to understand them, and our team members do. Frankly,
stink bait and winter boots are more important to our customers than caviar and
Belgian loafers.
Our customers also insist on a broad assortment for good selection. We have
worked diligently to meet their needs and desires. For example, during fiscal
1999 we added 62 in-store pantries, which carry up to an additional 700 stock
keeping units (SKUs) of traffic-driving consumables, and ten new pharmacies.
We have invested heavily in our strategy - over $79 million in the last
five years with $37 million more planned this year. All of these investments,
whether in supply chain, computer systems or new stores, were targeted to
improve the efficiency and execution of our operating model. Even though Pamida
is 36 years old, by the end of this fiscal year nearly 40% of our stores will be
less than five years old.
In addition to investing heavily in new stores - that is, in the front-line
of customer service - we also have invested heavily in our information systems
to better support all facets of the company's business. Our team members,
through great personal sacrifice, commitment, dedication and perseverance, have
transitioned Pamida from an antiquated main-frame based computer system to
modern, scaleable client-server based information technology systems. Our new
systems not only enable us to
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serve our existing customers more effectively but also will allow us to grow and
expand our operating model into new markets. In fact, we plan to add up to 15
new stores in new markets during our fiscal year ending January 2000.
However, while we have one of the best strategies in retail today and a
strong operating model supported by state-of-the-art systems, Pamida is still a
highly leveraged company. To harvest our true potential, we need to strengthen
our capital structure by attracting fresh equity capital. While our strong cash
flow allows for a moderate investment in new store growth in future years,
today's retail environment requires even faster growth and increased size to
remain competitive. With this in mind, we have established our objectives for
Fiscal 2000. We plan to:
* STRENGTHEN OUR CAPITAL STRUCTURE to enhance and accelerate our ability to
grow. We will explore and evaluate all alternatives for accessing new capital
to expeditiously expand our operating model to new markets. In today's retail
environment, time is of the essence!
* Concentrate on PERFECTING OUR SYSTEMS' UTILIZATION AND OPERATIONAL EXECUTION
to drive our top and bottom lines.
* Open up to 15 NEW STORES in new markets.
* Add 10 NEW PHARMACIES, bringing our total pharmacy count to 64. Expand our
very successful in-store pantry concept, featuring a broader assortment of
high traffic, repeat business consumables, into 42 additional stores by
mid-year. This will increase our TOTAL PANTRY COUNT TO 120. Our customers are
demanding broader assortments and expanded selection, and we are eager to
meet this demand!
* Commit $20 MILLION IN CAPITAL EXPENDITURES plus $17 million in new store
development investments to these efforts.
In the pages to follow, we have included a Pamida "Road Show", detailing
further who we are and where we plan to go. We know that you understand the
Pamida Story. Help us spread the word! Thank you for your support.
Wishing the best to you and your family,
[Picture of Steven S. Fishman]
[Signature of Steven S. Fishman]
Steven S. Fishman
Chairman, Chief Executive Officer and President
3
<PAGE>
THE PAMIDA "ROAD SHOW"
- --------------------------------------------------------------------------------
Over the last year, we have traveled to many locations across the country to
communicate the Pamida Story to analysts, investment managers and other
interested constituents. We want to share this "Road Show" presentation with
you.
PRESENTATION TOPICS
* History
* Strategy
* Investments in Strategy
* Stores
* Systems
* Supply Chain
* Merchandising
* Marketing
* Vendor Partnerships
* Financial Highlights
* Future Course
ANCIENT HISTORY
Founded in 1963 and named after its founder's three sons (PAtrick, MIchael,
and DAvid), the company has undergone a number of ownership and capital
structure changes.
["Ancient History" slide with content as follows:
* 1963 DJ Witherspoon founded Pamida
* 1981 Company sold to employees-ESOP
* 1986 Reverse ESOP/Leveraged buyout
* 1989/1992 Increasing Competition
* 1990 Public Equity Offering - AMEX
* 1993 $140 million Public Debt Offering]
MODERN HISTORY
The current management team began joining the company when Steve Fishman arrived
in 1993. Management's charge: Save and reinvigorate Pamida. Since then, change
and a new urgency to satisfy the customer have been the credo of the company.
["Modern History" slide with content as follows:
* 1993 Steve Fishman Joins Pamida
* 1994 New Management Team
New Prototype Store
"Hometown Values" Theme
* 1996 Closed 40 Underperforming Stores
Goodwill Write-off
* 1997/1998 Commenced Strengthening of Capital Structure]
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STRATEGY
Pamida's strategy is as valid today as it was when the company was founded 36
years ago. However, today's customers are more demanding, and competition
requires superior execution to earn our customers' trust.
["Small Town Strategy" slide with content as follows:
* 36 years of experience in small rural markets
* Convenient location combined with consistent in-stock position and excellent
value
* 17,000 Basic SKUs / 35,000 total SKUs
* Typical new trade area characteristics:
* Primary mass merchandiser within 15 mile radius
* Less than 15,000 population in trade area
* Economic capacity to support a $5 million store]
COMPETITIVE PROFILE
Our competitive market profile illustrates Pamida's return to its roots in
executing its small-town, less competitive market strategy.
["Competitive Market Profile" slide with content as follows:
Fiscal Year Ended
1/31/93 1/31/99
Competitor Stores 100 37
PAMIDA
Total Stores 178 147
Competitive Markets (75) (29)
--- ---
Less-Competitive Markets 103 118
% Less-Competitive Markets 58% 80%]
INVESTMENTS IN STORES
Over $116 million have been channeled into strategic investments under the new
management team. Emphasis was placed on new stores and new systems.
["New Prototype Stores" slide with content as follows:
Fiscal Year # of Stores
1994 2
1995 17
1996 10
1997 9
1998 3
1999 6
2000 Plan 15
---
Newer Prototypes 62
Total Planned Stores 161
% of Chain 39%]
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INVESTMENTS IN SYSTEMS
Best of Breed systems were installed and integrated to enable Pamida to move
from antiquated mainframe technology to an environment comparable to integrated
Enterprise Resource Planning (ERP) architecture.
["Systems Reengineering" slide with content as follows:
* POS Scanning
* SKU Level Inventory
* Manugistics Transportation Optimization
* Catalyst Warehouse Management Package
* Retek Merchandise Management
* Min/Max Automatic Replenishment
* Arthur Planning and Budgeting
* PeopleSoft Financial Systems
* PeopleSoft HR & Payroll Systems]
INVESTMENTS IN SUPPLY CHAIN
Pamida's small, rural market strategy produces lower inventory turns, which
requires a break-case distribution center operation that can quickly and
accurately pick over 10 million individual items per year in addition to
processing nearly 10 million full cases per year. In light of the stores' remote
locations and moderate inventory turnover, replenishment usually takes place
once per week. The Lebanon, Indiana distribution center can be doubled in size
to accommodate anticipated growth.
["Distribution Centers" slide with content as follows:
Size
---------------
Omaha Complex 617,000 sq. ft.
Lebanon, IN* 200,000 sq. ft.
---------------
Total 817,000 sq. ft.
*Expandable to 400,000 sq. ft.]
MERCHANDISING
Our merchandising focus is the direct result of listening to our customers.
["Our Customers Tell Us" slide with content as follows:
* Be in stock
* Provide breadth of assortment
* Offer great value]
6
<PAGE>
MERCHANDISE ASSORTMENT PROFILE
Pamida's assortment is a reflection of its customers' needs and desires.
["Merchandise Assortment Profile" slide with content as follows:
* Hardlines 71%
* Softlines 22%
* Pharmacies 7%
* Centered on nationally branded products
* Mix tailored to specific markets
* Targeted initiatives
* Pantries
* Pharmacies]
MARKETING
Pamida's tag line, "HOMETOWN VALUES", communicates a commitment to the
communities in which our stores are located. We reinforce this commitment
through weekly advertising circulars featuring great prices and highlighting
especially attractive "Hometown Values".
["Advertising Profile" slide with content as follows:
* 52 weekly circulars and 11 supplemental ads distributed to 1.7 million
households per week
* 79% of households read Pamida's ads
* Ad sales = 35% of total sales; therefore, 65% of sales at regular prices
* Average customer shops at Pamida 34 times per year
* Average Sales Ticket is greater than $20]
VENDOR PARTNERSHIPS
We offer our over 2,400 active vendor partners an opportunity to reach a unique
market segment.
["Vendor Partnerships" slide with content as follows:
* Pamida provides access to markets not served by others
* We partner with those vendors who seek unique marketing channels and who
support our business
* Pamida expects vendors to meet the same performance standards imposed by
national chains]
7
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FINANCIAL HIGHLIGHTS
At nearly 7%, Pamida's EBITDA as a percent of sales puts Pamida in an elite
class with Target, Shopko and Wal-Mart. Normalized EPS show a positive trend.
["Financial Highlights" slide with content as follows:
* EBITDA as % sales = 6.9%
* Normalize EPS(a) Growth
Fiscal 1997 $(0.18)
Fiscal 1998 $ 0.28
Fiscal 1999 $ 0.50
(a) Adjusted for extraordinary items & taxes
* Strengthened Balance Sheet]
FUTURE COURSE
Our future course is clear!
["Future Course" slide with content as follows:
* Grow comparable store sales
* Access growth capital
* Aggressively add new stores in new markets
* Execute targeted initiatives
* Pantries
* Pharmacies]
[Picture of pantry aisle of Pamida store with inset of customer in pharmacy]
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<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
SELECTED CONSOLIDATED FINANCIAL DATA
(AMOUNTS IN THOUSANDS - EXCEPT PER SHARE, NUMBER OF SHARES AND OTHER DATA)
<S> <C> <C> <C> <C> <C>
FISCAL YEAR ENDED
--------------------------------------------------------------
January 31, February 1, February 2, January 28, January 29,
1999 1998 1997 (1) 1996 1995
INCOME STATEMENT DATA:
Sales...................................... $ 672,394 $ 657,017 $ 633,189 $ 736,315 $ 711,019
Gross profit............................... 167,568 161,935 154,090 177,688 177,367
Selling, general and
administrative expenses.................. 134,288 128,436 124,429 150,102 142,689
Interest expense........................... 25,847 30,213 30,457 30,520 28,263
Long-lived asset write-off - - - 78,551 -
Store closing costs........................ - - - 21,397 -
---------- ---------- ---------- ---------- ----------
Income (loss) before provision for income
taxes and extraordinary item............. 7,433 3,286 (796) (102,882) 6,415
Income tax provision (benefit)............ 2,887 - - (7,863) 3,500
---------- ---------- ---------- ---------- ----------
Income (loss) before extraordinary item.... 4,546 3,286 (796) (95,019) 2,915
Extraordinary item......................... - 1,735 - 371 -
---------- ---------- ---------- ---------- ----------
Net income (loss) ......................... 4,546 5,021 (796) (94,648) 2,915
Effect of preferred stock reclassification. - 756 - - -
Less preferred dividends
and discount amortization................ - (407) (391) (362) (361)
---------- ---------- ---------- ---------- ----------
Net income (loss) available
for common shares........................ $ 4,546 $ 5,370 $ (1,187) $ (95,010) $ 2,554
========== ========== ========== ========== ==========
Weighted average number of basic shares
outstanding.............................. 9,046,410 5,843,441 5,004,942 5,002,853 4,999,984
Weighted average number of diluted shares
outstanding.............................. 9,094,194 5,875,463 5,004,942 5,002,853 5,039,684
Basic net income (loss) per share:
Income (loss) before extraordinary item.... $ .50 $ .62 $ (.24) $ (19.07) $ .51
Extraordinary item......................... - .30 - .08 -
---------- ---------- ---------- ---------- ----------
Basic income (loss)........................ $ .50 $ .92 $ (.24) $ (18.99) $ .51
========== ========== ========== ========== ==========
Diluted net income (loss) per share:
Income (loss) before extraordinary item.... $ .50 $ .62 $ (.24) $ (19.07) $ .51
Extraordinary item......................... - .29 - .08 -
---------- ---------- ---------- ---------- ----------
Diluted income (loss)...................... $ .50 $ .91 $ (.24) $ (18.99) $ .51
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Working capital............................ $ 43,329 $ 37,421 $ 28,673 $ 34,082 $ 46,725
Total assets............................... 298,215 260,081 269,188 258,525 354,367
Long-term debt (less current portion)...... 140,242 140,289 168,000 163,746 162,505
Obligations under capital leases (less
current portion)......................... 35,925 32,156 33,999 36,559 43,050
Redeemable preferred stock................. - - 1,875 1,826 1,779
Stockholders' (deficit) equity............. (47,539) (52,275) (87,303) (86,116) 8,876
OTHER DATA:
Team members............................... 6,000 5,600 5,700 7,200 7,200
Number of stores........................... 147 148 148 184 184
Retail square feet (in millions)........... 4.45 4.41 4.35 5.22 5.09
(1) Represents a 53-week year.
</TABLE>
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PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
MANAGEMENT'S DISCUSSION AND ANALYSIS
(DOLLAR AMOUNTS IN THOUSANDS)
YEAR ENDED JANUARY 31, 1999 COMPARED TO YEAR ENDED FEBRUARY 1, 1998
SALES - Total sales during fiscal 1999 increased by $15,377, or 2.3%, from
1998. During fiscal 1999, sales in comparable stores increased by $18,826, or
3.0%. During fiscal 1999, the Company opened six new stores, of which four are
located in new markets and two were relocations; the Company also closed seven
stores during fiscal 1999, resulting in a net increase in selling area during
the fiscal year of approximately 43,000 square feet. At January 31, 1999, the
Company had a total of approximately 4,451,000 square feet of sales area.
Sales during the second half of the year were adversely affected by
economic weaknesses in the agricultural communities in which many of the
Company's stores are located. Also, unseasonably warm weather during much of the
fall and early winter season further tempered sales, especially in the winter
clothing and other seasonal sales categories. The Company's in-stock position in
basic merchandise suffered during the third quarter and the early part of the
fourth quarter due to implementation issues related to a comprehensive new
merchandising and inventory replenishment system installed late in the second
quarter. Sales increased dramatically during the period from Christmas to the
end of the fiscal year due to improved in-stock positions and normal seasonal
weather conditions.
The Company experienced sales increases in many merchandise categories
during fiscal 1999. The most significant increases occurred in pharmacy and
prescriptions, which increased 27.4% or $10,685, and in the yarns and crafts,
lawn and garden, bath and floor care, pet supplies and furniture categories
which increased by lesser amounts. Other categories experiencing gains were
athletic shoes, boys' toys, bedding, grocery, beauty aids, audio and video,
junior apparel, appliances, team sports and electronics. The Company experienced
sales decreases in several categories. The largest dollar decreases were in the
automotive, hosiery, paint and electric, paper and cleaning, misses apparel and
infants and toddlers categories.
During the third quarter, the Company converted a former general
merchandise store, which had substantial direct competition from a national
discount chain store, to a "Heartland Home Furnishings" (Heartland) store, which
sells furniture, rugs, lamps, accessories and other home furnishings items. This
new concept is currently being tested as a potential alternative use for certain
of the Company's general merchandise store properties which are not performing
to management's standards. The Company plans to open four additional Heartland
stores in the first quarter of fiscal 2000 and will consider a very limited
number of additional Heartland stores during the year. The Company will continue
to assess the results of this test concept on a going forward basis, and there
can be no assurance that the Company will either continue or expand this retail
store concept.
GROSS PROFIT - Gross profit for fiscal 1999 increased by $5,633, or 3.5%,
compared to fiscal 1998. As a percent of sales, gross profit improved to 24.9%
from 24.6%. The Company's merchandise gross margin as a percent of sales
increased to 27.9% in fiscal 1999 from 27.6% in fiscal 1998. Total warehouse and
distribution costs amounted to 2.9% of sales compared to 2.8% last year.
Markdowns were substantially lower for the year due to lower inventory in most
softlines categories, especially in fashions and other categories which have
higher potential for markdowns. The Company also implemented more competitive
pricing on many softlines goods which also contributed to a reduced need for
markdowns due to greater sell-through. Most sales categories experienced
increases in gross margin dollars for the year. Categories with the largest
increases in gross margin dollars were pharmacy and prescriptions, groceries,
yarns and crafts, housewares, junior apparel, beauty aids, pet supplies and
furniture. The largest dollar decreases in gross margin were in the automotive,
hosiery, misses apparel, cameras and candy categories.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) expense increased $5,852, or
4.6%, to $134,288 in fiscal 1999 from $128,436 in fiscal 1998. As a percentage
of sales, SG&A expense increased to 20.0% from 19.5% last year. Over half of the
total net increase in SG&A expense for the year was attributable to higher store
payroll due primarily to normal wage increases and the effects of federally
mandated minimum wage increases. Corporate general and administrative costs
increased by $1,859, or 6.6%, due primarily to increased depreciation and
amortization costs related to financial and merchandising systems implemented
within the last year. General and administrative payroll also increased with the
largest increase being incurred in the information systems area to support the
implementation and maintenance of the various new systems which have been, and
are being, implemented. Store controllable expenses increased $1,558, or 8.2%.
The largest increases in these expenses related to supplies, janitorial costs
and charge card fees. Advertising expenses increased $1,468, or 14.0%, due to a
significant increase in the number and cost of special advertising events and
increased costs of advertising circulars. Store fixed costs increased $813, or
3.2%, primarily due to the effect of higher costs of new store locations. These
increases in costs were offset by other income which increased by approximately
$2,685 and included: 1) the favorable settlement of a lawsuit related to
pharmacy operations which netted $1,333 in income, 2) a gain on the sale of the
Polson, Montana store property of $999, 3) the partial reversal of a reserve
established in fiscal 1996 related to the 40 store closings at that time
totaling $535 to reflect the impact of the planned conversion of two of the
leased properties to Heartland stores in fiscal 2000 and 4) the partial reversal
of a reserve established in fiscal 1998 for a long-term incentive plan, the
value of which is determined by the trading price of the stock, totaling $575 to
reflect the
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liability indicated by the actual price of the common stock at year end.
INTEREST expense decreased by $4,366, or 14.5%, for fiscal 1999 compared to
fiscal 1998. As described in Note L to the financial statements, the decrease in
interest expense for fiscal 1999 was primarily 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. In fiscal 1998 total interest expense
related to these promissory notes totaled $3,974. In addition, interest expense
related to the revolving line of credit decreased by $859 in fiscal 1999
compared to fiscal 1998 due to lower average borrowings, especially during the
early part of fiscal 1999, and reduced interest rates. These decreases in
expense were offset somewhat by higher interest expense related to capital
leases.
INCOME TAX PROVISION - In fiscal 1999, income taxes were recorded at a
38.8% effective tax rate. The Company's loss carryforwards from store closing
charges recorded in fiscal 1996 were utilized in the fourth quarter of fiscal
1998 to completely offset income taxes from normal operating activities of the
Company and to reduce income taxes related to the promissory note repayment and
preferred stock reclassification transactions which were consummated on November
18, 1997. The Company expects that operations in the future will continue to be
taxable at a normal tax rate.
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 was 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 and a year-end 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 pet supplies. 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 distribution and
transportation areas made possible by operating efficiencies gained largely from
a new distribution center management system implemented during fiscal 1997.
During the prior fiscal year, the Company incurred higher than normal labor cost
in its distribution centers due to implementation issues related to the
distribution center management system. Total distribution and transportation
costs amounted to 2.8% of sales compared to 3.3% last year.
SELLING, GENERAL AND ADMINISTRATIVE (SG&A) expense increased $4,007, or
3.2%, to $128,436 in fiscal 1998 from $124,429 in fiscal 1997. As a percentage
of sales, SG&A expense decreased to 19.5% from 19.7% 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 $989, 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
$392 and $121, 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 $244, or 0.8%, for fiscal 1998 compared to
fiscal 1997. As described in Note L 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 promissory note repayment and preferred stock
reclassification transactions which are described in Note L to the financial
statements. No income tax benefit on losses for fiscal 1997 was recorded
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as the Company could not establish, as of fiscal year end 1997, with a
reasonable degree of certainty, the potential utilization of loss carryforwards.
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 used in operating activities totaled $5,734 in fiscal
1999, and funds provided by operating activities totaled $21,488 in fiscal 1998.
Funds used in operations totaled $7,897 in fiscal 1997. The change in cash flow
from operating activities from fiscal 1998 to fiscal 1999 was primarily the
result of increases in inventory and other operating assets, offset somewhat by
increases in accounts payable, primarily related to the Company's higher
inventory levels. 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.
Pamida, Inc.'s (Pamida) committed Loan and Security Agreement (the
Agreement) was amended and restated on July 2, 1998 and extended to July 2001.
The amendment increased the maximum borrowing limit to $125,000 from $95,000 and
reduced interest rate spreads by 75 basis points. The amended $125,000 facility
includes a $25,000 supplemental facility primarily intended for real estate
development activities, which the Company is using to accelerate its new store
opening program in fiscal 2000.
Borrowings under the Agreement bear interest at a rate which is tied to the
prime rate (as defined) or the London Interbank Offered Rate (LIBOR), generally
at Pamida's discretion. Included in the July 2, 1998 amendment to the Agreement
were provisions substantially increasing the maximum permitted borrowings
available to Pamida. 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 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. The Agreement requires 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, engage in
sale/leaseback transactions, or encumber its property, may at some future time,
unless waived or amended, prevent the Company from pursuing its store expansion
program at the rate that the Company desires.
Obligations under the Agreement were $66,497 at January 31, 1999 and
$45,194 at February 1, 1998. Included in this amount is $9,590 of borrowings
under the $25,000 supplemental facility. Total unused borrowing availability
under the Agreement as of January 31, 1999 totaled $49,568 compared to $31,288
at the end of the prior fiscal year. As noted above, this facility expires in
July 2001, and the Company intends to refinance any outstanding balance by such
date. Borrowings under the Agreement are senior to the Senior Subordinated Notes
of Pamida. The Company had long-term debt and obligations under capital leases
of $176,167 at January 31, 1999 and $172,445 at February 1, 1998. The Company's
ability to satisfy scheduled principal and interest payments under such
obligations in the ordinary course of business is dependent primarily upon the
sufficiency of the Company's operating cash flow and refinancings. At January
31, 1999, the Company was in compliance with all covenants contained in its
various financing agreements.
The Company reclassified all preferred stock into common stock effective
November 18, 1997. Accordingly, the Company had no remaining obligations related
to the preferred stock as of the end of fiscal 1998. 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 then existing credit facilities to
pay dividends to the Company to fund such preferred stock dividends. Because of
the accumulated deficit which resulted primarily from the store closings and the
write-off of goodwill and other long-lived assets recognized in the fourth
quarter of fiscal 1996, applicable corporate law did not permit the Company or
Pamida to declare or pay any cash dividends in fiscal 1999, 1998 and 1997.
The Company made capital expenditures of $8,328 in fiscal 1999 compared to
$6,654 during fiscal 1998. The Company also made expenditures of $6,435 and
$3,848 in
12
<PAGE>
fiscal 1999 and 1998, respectively, related to information systems software. In
addition, the Company incurred construction costs related to new stores opened
during fiscal 1999 totaling $8,720. Capital expenditures and information systems
software costs are expected to total approximately $20,000 in fiscal 2000. 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, as well as
borrowings under the Agreement. 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. In the first half of fiscal 1999, the
Company sold and leased back six store properties with net cash proceeds
totaling $8,475. The leases are classified as capital and operating leases for
four and two store properties, respectively. The annual lease payments for the
six store properties for each of the next five years total $933. Proceeds from
the sales were used to reduce outstanding indebtedness under the Company's
revolving line of credit.
The Company's cash flow from operations, along with the Agreement, 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, systems and working capital. The Company expects to continue to
finance these investments through cash flow from operations, leases from
unaffiliated landlords, trade credit and borrowings under the Agreement. The
Company is also exploring 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 READINESS DISCLOSURE
The information in this Year 2000 section is a Year 2000 Readiness
Disclosure under the Year 2000 Information Readiness and Disclosure Act.
The Company has developed and begun execution of a plan to mitigate the
Company's exposure to risks emanating from computer software and hardware being
potentially unable to properly process data beyond the calendar year 1999, which
is commonly referred to as Year 2000 compliance. This plan includes addressing
three major elements of risk both within, and external to, the Company: 1)
information technology (IT) systems, 2) non-IT, or embedded technology, systems
and 3) relationships with its key business partners. The plan is further divided
into four phases related to each of the elements of risk: assessment,
remediation planning, solutions implementation, and validation (testing) of
compliance. The Company has substantially completed the assessment phase for all
three elements and currently is at varying points of completion of the other
phases as described more fully below.
INTERNAL CONSIDERATIONS:
The Company's IT systems include proprietary and third-party software and
related hardware as well as data and telephone networks. Since 1994, the Company
has modernized its information technology by replacing five of its
mission-critical legacy systems (inventory, distribution center management,
logistics, store operations and financial systems) with purchased and leased
software and hardware. While the primary impetus for replacing the legacy
systems was to substantially improve each system's functionality, an additional
expected benefit is that the new systems are designed to be Year 2000 compliant.
The two most recent implementations, financial and inventory systems, are each
approximately 85% complete. The remaining 15% of these projects is planned to be
completed by the end of August 1999. The logistics, distribution center
management and store operations systems implementations are complete and, as
needed, will be upgraded further. The Company's other major system, human
resources (including payroll processing), is being replaced currently and is
planned for completion by the end of October 1999. Each of these systems has
been certified as being Year 2000 compliant by the respective vendors.
In addition to the aforementioned systems, the Company has numerous other
systems applications and interfaces between systems which are maintained by the
Company. Approximately 25% of these systems and interfaces have been modified to
address the Year 2000 issue. Those remaining systems and interfaces which are
believed to have potentially material adverse effects on the Company's
operations or financial results in the event of failure are planned for
necessary modifications to be completed and tested by July 1999. The hardware
supporting these systems is planned to be replaced with Year 2000 compliant
hardware before July 1999.
The Company plans to extensively test its key operating systems and mission
critical systems, through simulation of Year 2000 transactions, in the first
half of 1999 and anticipates completion of the testing phase for all of the
Company's software by October 1999.
The Company has recently begun to address its non-IT systems, or embedded
technology risks. While assessment is not yet complete, the Company plans to
complete any necessary remediation by the end of July 1999. Validation is
planned for completion by the end of October 1999.
EXTERNAL CONSIDERATIONS:
The Company has identified its key business partners and will take prudent
steps to assess their Year 2000 readiness and mitigate the risk if they are not
prepared for the
13
<PAGE>
Year 2000. Accordingly, the Company is participating in the International Mass
Retail Association (IMRA) task force's efforts to obtain assurances from vendors
and service providers related to their Year 2000 compliance. If certain vendors
are unable to deliver product on a timely basis, due to their own Year 2000
issues, the Company anticipates there will be others who will be able to deliver
similar goods. The Company also recognizes the risks to the Company if other key
suppliers in utilities, communications, transportation, banking and government
areas are not ready for the Year 2000, and therefore is beginning to develop
contingency plans to mitigate the potential adverse effects of these risks, and
intends to have such plans completed before December 1999.
COSTS RELATED TO YEAR 2000:
The majority of the systems the Company has recently implemented, and those
new systems yet to be implemented, have substantially improved functionality
over the Company's legacy systems which they replace. Accordingly, most of the
costs associated with these systems have been, and will continue to be,
capitalized. Thus far in fiscal 1999, the Company has expensed less than $50
related directly to Year 2000 readiness, and prior to fiscal 1999 the amounts
expensed were similarly immaterial. 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 expected to total
approximately $500 to $1,000. All expenditures related to the Company's Year
2000 readiness initiatives will be funded by cash flow from operations and the
Agreement and are included in the Company's operating plans.
SUMMARY:
The Company anticipates that the most reasonably likely worst-case
scenarios include, but are not limited to, loss of communications with stores,
loss of electric power and other utility services, inability to process
transactions or engage in normal business activity, and delayed receipt of
merchandise from vendors. In planning for the most likely worst-case scenarios,
the Company is addressing all three major elements in its plan. The Company
believes its IT systems will be ready for the Year 2000, but the Company may
experience some incidences of non-compliance. The Company plans to allocate
internal resources and, if possible, retain dedicated consultants and vendor
representatives to be ready to take action if these events occur. Development of
contingency plans for non-IT systems is currently in process, and the Company is
prepared to dedicate the required resources to carry out those plans for key
non-IT systems, such as store and phone communications systems.
In addition to the risks previously described, the Company must also be
successful in retaining numerous key employees and external service providers
involved with systems implementation and validation. Failure by the Company to
complete implementation of all mission-critical systems, inability of the
Company to properly address significant system interface issues or failure of
the vendors of the aforementioned software and hardware to have eliminated the
potential Year 2000 issues within the software and hardware could materially and
adversely affect the Company's ability to execute various aspects of its
operations, its ability to generate sales and ultimately its operations'
financial results.
Although the Company is taking the steps it deems reasonable to mitigate
external Year 2000 issues, many elements of these risks, and the ability to
definitively mitigate them, are outside the control the Company. Given the
importance of certain key vendors and service providers, the inability of these
business partners to provide their goods or services to the Company on a timely
basis could also have material adverse effects on the Company's operations and
financial results.
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 except for some
percentage rents and periodic rental adjustments.
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, customer buying
preferences and patterns, competitive conditions, Company performance, Year 2000
compliance and Company financial results. The statements are based on many
assumptions and factors including sales results, expense levels, competition and
interest rates as well as other risks and uncertainties inherent in the
Company's business, capital structure and the retail industry in general. Any
changes in these factors could result in significantly different results for the
Company. Plans for new stores are subject to numerous contingencies discussed in
the Company's Form 10-K Annual Report. 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.
14
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
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 January 31, 1999 and February 1, 1998,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the three years in the period ended January 31, 1999.
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.
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 consolidated financial statements present fairly, in
all material respects, the financial position of Pamida Holdings Corporation and
subsidiary as of January 31, 1999 and February 1, 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
January 31, 1999 in conformity with generally accepted accounting principles.
/s/Deloitte & Touche LLP
Deloitte & Touche LLP
Omaha, Nebraska
March 9, 1999
15
<PAGE>
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLAR AMOUNTS IN THOUSANDS) - EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Fiscal Year Ended
------------------------------------
January 31, February 1, February 2,
1999 1998 1997
(52 weeks) (52 Weeks) (53 Weeks)
---------- ---------- ----------
Sales........................................................... $ 672,394 $ 657,017 $ 633,189
Cost of goods sold.............................................. 504,826 495,082 479,099
---------- ---------- ----------
Gross profit.................................................... 167,568 161,935 154,090
---------- ---------- ----------
Expenses:
Selling, general and administrative........................... 134,288 128,436 124,429
Interest...................................................... 25,847 30,213 30,457
---------- ---------- ----------
160,135 158,649 154,886
---------- ---------- ----------
Income (loss) before provision for income
taxes and extraordinary item.................................. 7,433 3,286 (796)
Income tax provision........................................... 2,887 - -
---------- ---------- ----------
Income (loss) before extraordinary item......................... 4,546 3,286 (796)
Extraordinary item.............................................. - 1,735 -
---------- ---------- ----------
Net income (loss) .............................................. 4,546 5,021 (796)
Effect of preferred stock reclassification...................... - 756 -
Less provision for preferred dividends and discount amortization - (407) (391)
---------- ---------- ----------
Net income (loss) available for common shares................... $ 4,546 $ 5,370 $ (1,187)
========== ========== ==========
Basic income (loss) per share:
Income (loss) before extraordinary item....................... $ .50 $ .62 $ (.24)
Extraordinary item............................................ - .30 -
---------- ---------- ----------
Basic income (loss)........................................... $ .50 $ .92 $ (.24)
========== ========== ==========
Diluted income (loss) per share:
Income (loss) before extraordinary item....................... $ .50 $ .62 $ (.24)
Extraordinary item............................................ - .29 -
---------- ---------- ----------
Diluted income (loss)......................................... $ .50 $ .91 $ (.24)
========== ========== ==========
See notes to consolidated financial statements.
</TABLE>
16
<PAGE>
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(DOLLAR AMOUNTS IN THOUSANDS - EXCEPT PER SHARE DATA)
<S> <C> <C>
ASSETS January 31, February 1,
1999 1998
Current assets: ---------- ----------
Cash.......................................................................... $ 7,588 $ 6,816
Accounts receivable, less allowance for doubtful accounts of $50 in both years 10,125 8,384
Merchandise inventories....................................................... 180,063 152,927
Prepaid expenses.............................................................. 3,698 2,838
---------- ----------
Total current assets....................................................... 201,474 170,965
Property, buildings and equipment, net.......................................... 38,411 40,812
Leased property under capital leases, less accumulated
amortization of $18,024 and $15,387, respectively............................ 28,254 25,181
Deferred financing costs........................................................ 2,301 2,755
Other assets.................................................................... 27,775 20,368
---------- ----------
$ 298,215 $ 260,081
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.............................................................. $ 53,772 $ 47,687
Loan and security agreement................................................... 66,497 45,194
Accrued compensation.......................................................... 5,405 5,768
Accrued interest.............................................................. 6,614 6,668
Other accrued expenses........................................................ 12,196 13,791
Income taxes - deferred and current payable................................... 11,740 12,546
Current maturities of long-term debt.......................................... 47 47
Current obligations under capital leases...................................... 1,874 1,843
---------- ----------
Total current liabilities.................................................. 158,145 133,544
Long-term debt, less current maturities......................................... 140,242 140,289
Obligations under capital leases, less current obligations...................... 35,925 32,156
Other long-term liabilities..................................................... 11,442 6,367
Commitments and contingencies (Note O).......................................... - -
Stockholders' equity:
Common stock, $.01 par value; 25,000,000 shares authorized; 6,025,595
and 5,970,439 shares issued and outstanding................................. 60 60
Nonvoting common stock, $.01 par value; 4,000,000 shares authorized;
3,050,473 shares issued and outstanding..................................... 30 30
Additional paid-in capital.................................................... 30,776 30,586
Accumulated deficit........................................................... (78,405) (82,951)
---------- ----------
Total stockholders' deficit................................................ (47,539) (52,275)
---------- ----------
$ 298,215 $ 260,081
========== ==========
See notes to consolidated financial statements.
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Nonvoting Additional
Common Common Paid-in (Accumulated
Stock Stock Capital Deficit)
------ --------- ---------- ------------
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)
Net income........................................... - - - 4,546
Exercise of stock options............................ - - 190 -
------ --------- ---------- ------------
Balance at January 31, 1999............................ $ 60 $ 30 $ 30,776 $ (78,405)
====== ========= ========== ============
See notes to consolidated financial statements.
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Fiscal Year Ended
------------------------------------
January 31, February 1, February 2,
1999 1998 1997
(52 Weeks) (52 Weeks) (53 Weeks)
---------- ---------- ----------
Cash flows from operating activities:
Net income (loss)............................................. $ 4,546 $ 5,021 $ (796)
Adjustments to reconcile net income (loss) to net cash ---------- ---------- ----------
from operating activities:
Depreciation and amortization............................. 13,456 12,668 11,773
Provision for LIFO inventory valuation.................... 385 606 874
Provision (benefit) for deferred income taxes............. (2,738) (3,297) 3,305
Noncash interest expense.................................. - 3,974 4,473
Gain on disposal of assets................................ (1,032) (150) (56)
Deferred retirement benefits.............................. (129) (142) (125)
Extraordinary item........................................ - (1,735) -
Decrease in store closing reserves........................ (1,967) (3,457) (3,726)
Changes in operating assets and liabilities:
(Increase) decrease in merchandise inventories......... (27,521) 3,957 (7,527)
Increase in other operating assets...................... ( 3,910) (957) (2,057)
Increase (decrease) in accounts payable................. 6,085 (6,558) (8,842)
(Decrease) increase in income taxes payable............. (294) 3,537 (3,250)
Increase (decrease) in other operating liabilities...... 7,385 8,021 (1,943)
---------- ---------- ----------
Total adjustments......................................... (10,280) 16,467 (7,101)
---------- ---------- ----------
Net cash from operating activities........................ (5,734) 21,488 (7,897)
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures.......................................... (8,328) (6,654) (4,947)
Capitalized software costs.................................... (6,435) (3,848) (3,680)
Proceeds from disposal of assets.............................. 2,095 1,701 917
Proceeds from sale-leaseback of store facilities.............. 8,475 - -
Principal payments received on notes receivable............... 52 18 16
Assets acquired for sale...................................... - - (391)
Changes in constructed stores to be refinanced through lease
financing................................................... (8,720) 1,790 (5,845)
---------- ---------- ----------
Net cash from investing activities........................ (12,861) (6,993) (13,930)
---------- ---------- ----------
Cash flows from financing activities:
Borrowings (payments) under loan and security agreement, net.. 21,303 (11,921) 25,527
Principal payments on other long-term debt.................... (47) (75) (1,335)
Payments for deferred finance costs........................... (169) (225) (54)
Principal payments on capital lease obligations............... (1,910) (1,781) (2,636)
Fees related to payment of debt and reclassification of
preferred stock............................................. - (650) -
Proceeds from the exercise of stock options.................. 190 - -
---------- ---------- ----------
Net cash from financing activities........................ 19,367 (14,652) 21,502
---------- ---------- ----------
Net increase (decrease) in cash............................... 772 (157) (325)
Cash at beginning of year..................................... 6,816 6,973 7,298
---------- ---------- ----------
Cash at end of year............................................. $ 7,588 $ 6,816 $ 6,973
========== ========== ==========
19
<PAGE>
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid (received) during the year for:
Interest.................................................... $ 25,278 $ 25,834 $ 24,804
Income taxes:
Payments to taxing authorities............................ 1,608 112 386
Refunds received from taxing authorities.................. (141) (3,952) (442)
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 $ 5,710 $ - $ 11
Amortization of discount on junior cumulative preferred stock
recorded as a direct charge to accumulated deficit.......... - 38 49
Payment of interest in kind by increasing the
principal amount of the notes............................... - 3,561 4,141
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>
20
<PAGE>
PAMIDA HOLDINGS CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS - EXCEPT PER SHARE DATA)
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Pamida Holdings Corporation (the "Company") was formed for the sole purpose
of acquiring Pamida, Inc. ("Pamida") through a merger in a leveraged buy-out
transaction which was consummated on July 29, 1986.
CONSOLIDATION - The consolidated financial statements include the results
of operations, account balances and cash flows of the Company and its
wholly-owned subsidiary, Pamida, and of Seaway Importing Company ("Seaway") and
Pamida Transportation Company, wholly-owned subsidiaries of Pamida. All material
intercompany accounts and transactions have been eliminated in consolidation.
FISCAL YEAR - All references in these financial statements to fiscal years
are to the calendar year in which the fiscal year ends.
LINE OF BUSINESS - Through Pamida, the Company is engaged in the operation
of 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 operates as 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 January 31, 1999 and February 1, 1998.
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, distribution center 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 netted
to $11,936, $10,468 and $11,653 for fiscal years 1999, 1998 and 1997,
respectively.
PRE-OPENING EXPENSES - Costs related to opening new stores are expensed as
incurred.
SOFTWARE COSTS - The Company capitalizes internally developed software
costs, which then are amortized on a straight-line basis over three to five
years.
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) which utilizes the intrinsic
value method.
EARNINGS PER SHARE - 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.
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.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The historical cost of financial
instruments (cash, accounts receivable, accounts payable and the Company's
committed line of credit) as presented in the financial statements approximates
their fair value in all instances, except for long-term debt, which is disclosed
in Note F.
RECLASSIFICATIONS - Certain reclassifications have been made to prior
years' financial statements to conform to the current year presentation.
21
<PAGE>
B. NET INCOME PER SHARE
The following table provides a reconciliation between basic and diluted
income (loss) per share (income and shares in thousands):
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 1998 1997
------------------------- ------------------------- --------------------------
Per Share Per Share Per Share
Income Shares Amount Income Shares Amount Loss Shares Amount
------ ------ --------- ------ ------ --------- ------- ------ ---------
Income (loss) before
extraordinary item .... $4,546 $3,286 $ (796)
Less provision for
preferred dividends and
discount amortization . - (407) (391)
Effect of preferred stock
reclassification ...... - 756 -
------ ------ --------- ------ ------ --------- ------- ------ ---------
Basic income (loss)
before extraordinary
item .................. 4,546 9,046 $ .50 3,635 5,843 $ .62 (1,187) 5,005 $ (.24)
Effect of dilutive stock
options ............... - 48 - - 32 - - - -
------ ------ --------- ------ ------ --------- ------- ------ ---------
Diluted income (loss)
before extraordinary
item .................. $4,546 9,094 $ .50 $3,635 5,875 $ .62 $(1,187) 5,005 $ (. 24)
====== ====== ========= ====== ====== ========= ======= ====== =========
</TABLE>
C. MERCHANDISE INVENTORIES
Total inventories would have been higher at January 31, 1999 and February
1, 1998 by $7,565 and $7,180, respectively, had the FIFO (first-in, first-out)
method been used to determine the cost of all inventories. On a FIFO basis, net
income before extraordinary item would have been $4,931, $3,892 and $78
respectively, for fiscal years 1999, 1998, and 1997. During fiscal years 1999,
1998, and 1997, 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 $33,
$263, and $116, respectively.
D. PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment consists of:
Jan. 31, Feb. 1,
1999 1998
--------- ---------
Land and land improvements.................... $ 3,504 $ 4,030
Buildings and building improvements........... 18,807 22,183
Store, warehouse and office equipment......... 65,349 59,842
Vehicles and aircraft equipment............... 1,658 1,551
Leasehold improvements........................ 18,186 16,944
--------- ---------
107,504 104,550
Less accumulated depreciation and amortization 69,093 63,738
--------- ---------
$ 38,411 $ 40,812
========= =========
E. OTHER ASSETS
Other assets consist of:
Jan. 31, Feb. 1,
1999 1998
--------- ---------
Constructed stores to be refinanced through
lease financing $ 10,084 $ 7,969
Unamortized software costs, net............... 14,568 10,435
Other......................................... 3,123 1,964
--------- ---------
$ 27,775 $ 20,368
========= =========
The Company contracted for the construction of five and eleven stores
during the periods ended February 1, 1998 and January 31, 1999, 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 lease financing
arrangements. The construction costs for twelve stores remain in Other Assets at
January 31, 1999. The cost of construction has been financed through the
Company's working capital, including the Company's committed line of credit, and
cash flow from operations. In the first half of fiscal 1999, the Company sold
and leased back six store properties with net cash proceeds totaling $8,475.
Proceeds from the sales were used to reduce outstanding indebtedness under the
Company's committed line of credit.
22
<PAGE>
F. FINANCING AGREEMENTS
Pamida, Inc.'s (Pamida) committed Loan and Security Agreement (the
Agreement) was amended and restated on July 2, 1998 and extended to July 2001.
The amendment increased the maximum borrowing limit to $125,000 from $95,000 and
reduced interest rate spreads by 75 basis points. The amended $125,000 facility
includes a $25,000 supplemental facility primarily intended for real estate
development activities.
Borrowings under the Agreement bear interest at a rate which is tied to the
prime rate (as defined) or the London Interbank Offered Rate (LIBOR), generally
at Pamida's discretion. Included in the July 2, 1998 amendment to the Agreement
were provisions substantially increasing the maximum permitted borrowings
available to Pamida. 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 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. The Agreement requires 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 1999 and
1998 was $66,469 and $66,461, respectively. The weighted average amounts of
borrowings under the Agreement for fiscal 1999 and 1998 were $48,414 and 52,869,
respectively; and the weighted average interest rates were 8.9% and 9.8%,
respectively.
Long-term debt consists of:
Jan. 31, Feb. 1,
1999 1998
-------- --------
Senior Subordinated Notes, 11.75%, due March 2003 $140,000 $140,000
Industrial development bond 5.5%, due in monthly
installments through 2005...................... 289 336
-------- --------
140,289 140,336
Less current maturities.......................... 47 47
-------- --------
$140,242 $140,289
======== ========
As of January 31, 1999 and February 1, 1998, the fair value of long-term
debt was $134,992 and $144,489, respectively. The fair value of long-term debt
was estimated based on quoted market values for the notes. The aggregate
maturities of long-term debt in each of the next five fiscal years are $47, $47,
$47, $47 and $140,047.
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.
G. INCOME TAXES
Components of the income tax provision (benefit) from continuing operations
are as follows:
Year Ended
---------------------------
Jan. 31, Feb. 1, Feb. 2,
1999 1998 1997
Current: ------- ------- -------
Federal...................................... $ (12) $ 491 $(3,155)
State........................................ 161 311 (150)
------- ------- -------
149 802 (3,305)
------- ------- -------
Deferred:
Federal...................................... 2,409 (1,616) 3,189
State........................................ 329 (330) 116
Utilization of tax benefit carryforward........ - 2,718 -
Change in beginning of year valuation allowance - (1,574) -
------- ------- -------
2,738 (802) 3,305
------- ------- -------
Total provision from continuing operations..... $ 2,887 $ - $ -
======= ======= =======
The differences between the U.S. Federal statutory tax rate and the
Company's effective tax rate are as follows:
Year Ended
---------------------------
Jan. 31, Feb.1, Feb. 2,
1999 1998 1997
------- ------- -------
Statutory rate................................. 34.0% 34.0% (34.0)%
State income tax effect........................ 4.4 4.6 (2.8)
Valuation allowance............................ - (40.9) 25.1
Accretion of discount on junior
subordinated debt............................ - 1.3 6.8
Other.......................................... .4 1.0 4.9
------- ------- -------
38.8% - -
======= ======= =======
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.
23
<PAGE>
Significant temporary differences between reported and taxable income that
give rise to deferred tax assets and liabilities were as follows:
Jan. 31, Feb. 1,
1999 1998
------- -------
Net current deferred tax liabilities:
Inventories................................. $14,155 $13,910
Prepaid insurance........................... 240 172
Other....................................... 790 423
Post employment health costs................ (85) (135)
Accrued expenses............................ (3,034) (2,192)
Store closing costs......................... (623) (1,246)
------- -------
Net current deferred tax liabilities.... 11,443 10,932
------- -------
Net long-term deferred tax liabilities:
Property, buildings and equipment........... 1,957 2,096
Other....................................... 3,680 1,836
Capital leases.............................. (3,655) (3,377)
Tax benefit carryforward.................... - (800)
------- -------
Net long-term deferred tax (asset) liabilities 1,982 (245)
------- -------
Net total deferred tax liabilities............. $13,425 $10,687
======= =======
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.
H. LEASES
The majority of store facilities are leased under noncancelable leases.
Substantially all of the store 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 January 31, 1999 the future minimum lease payments under all capital and
operating leases with rental terms of more than one year amounted to:
Fiscal Year Ending Capital Operating
Leases Leases
-------- --------
2000....................................... $ 6,100 $ 11,207
2001....................................... 6,010 9,635
2002....................................... 5,925 8,602
2003....................................... 5,913 7,566
2004....................................... 5,915 6,880
Later years................................ 43,994 64,292
-------- --------
Total minimum obligations.................. 73,857 $108,182
========
Less amount representing interest.......... 36,058
--------
Present value of net minimum lease payments 37,799
Less current portion....................... 1,874
--------
Long-term obligations...................... $ 35,925
========
The minimum rentals under operating leases have not been reduced by minimum
sublease rental income of $89 due in the future under noncancelable subleases
of stores.
Total rental expense related to all operating leases (including those with
terms less than one year) is as follows:
Year Ended
---------------------------
Jan. 31, Feb. 1, Feb. 2,
1999 1998 1997
------- ------- -------
Minimum rentals........................... $13,086 $11,669 $10,938
Contingent rentals........................ 292 272 258
Less sublease rental income............... (532) (705) (735)
------- ------- -------
$12,846 $11,236 $10,461
======= ======= =======
I. OTHER INCOME
The following non-recurring other income items reduced selling, general and
administrative costs during the:
Year Ended
---------------------------
Jan. 31, Feb. 1, Feb. 2,
1999 1998 1997
------- ------- -------
Legal settlements......................... $ 1,333 $ - $ 207
Gain on sale of closed store properties... 999 - -
Gain on sale of idle assets............... - 103 -
Reduction of store closing reserve........ 535 - -
------- ------- -------
$ 2,867 $ 103 $ 207
======= ======= =======
J. EMPLOYEE SAVINGS AND OTHER POSTEMPLOYMENT BENEFIT PLANS
Pamida has adopted a 401(k) savings plan that covers all employees who are
21 years of age with one or more years of service. Participants can contribute
from 1% to 15% of their pre-tax compensation. Pamida has currently elected to
match 50% of the participant's contribution up to 5% of compensation. Pamida's
savings plan contribution expenses for fiscal years 1999, 1998, and 1997 were
$792, $765, and $770, 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 accumulated postretirement benefit
24
<PAGE>
obligation as of January 31, 1999 and February 1, 1998 and the components of
periodic expense for postretirement benefits in fiscal 1999, 1998 and 1997 were
insignificant.
K. STOCK OPTIONS
On November 24, 1992, the Board of Directors of the Company adopted the
Pamida Holdings Corporation 1992 Stock Option Plan (the "1992 Plan"), which was
approved by the Company's stockholders in May 1993. On March 5, 1998, the Board
of Directors of the Company adopted the Pamida Holdings Corporation 1998 Stock
Incentive Plan (the "1998 Plan") which was approved by the Company's
stockholders in May 1998. The 1992 Plan and the 1998 Plan are administered by a
Committee of the Board of Directors and provide for the granting of options to
key employees of the Company and its subsidiaries to purchase up to an aggregate
of 350,000 and 500,000 shares of Common Stock of the Company under the 1992 Plan
and the 1998 Plan, respectively. The 1998 Plan also permits the granting of
other types of awards in the form of Common Stock of the Company; none have been
granted. Options granted under the 1992 Plan and the 1998 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 1992 Plan and the 1998 Plan will be exercisable
during the period fixed by the Committee for each option at the time of its
grant; 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 1999, 1998 or 1997.
A summary of the Company's stock-based compensation activity related to
stock options for the last three fiscal years is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
JAN. 31, 1999 FEB. 1, 1998 FEB. 2, 1997
------------------ ------------------ ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Number Price Number Price Number Price
------- -------- ------- -------- ------- --------
Outstanding - beginning of year 322,433 $ 4.19 302,816 $ 4.39 296,546 $ 5.05
Granted 190,200 6.18 40,700 3.06 86,800 2.37
Expired/terminated 2,100 2.94 21,083 4.93 80,530 4.66
Exercised 55,156 3.45 - - - -
------- -------- ------- -------- ------- --------
Outstanding - end of year 455,377 $ 5.11 322,433 $ 4.19 302,816 $ 4.39
======= ======== ======= ======== ======= ========
</TABLE>
Options covering 154,337, 161,093 and 123,616 shares were exercisable at
January 31, 1999, February 1, 1998 and February 2, 1997, respectively.
The following table summarizes information about stock options outstanding
as of January 31, 1999:
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 68,240 7.5 Years $ 2.34 22,760 $ 2.32
3.06 37,137 8.1 Years 3.06 6,97 3.06
3.63 - 5.75 144,400 5.6 Years 5.02 101,800 4.91
6.31 - 7.19 205,600 8.9 Years 6.47 22,800 7.19
- --------------- ----------- ----------- -------- ----------- --------
$1.94 - $7.19 455,377 7.8 Years $ 5.11 154,337 $ 4.78
=============== =========== =========== ======== =========== ========
25
<PAGE>
If compensation cost for the Company's Plan had been determined based on
the fair value at the grant dates of awards under the Plan consistent with the
method of SFAS No. 123, Accounting for Stock-Based Compensation, the Company's
net income (loss) and net income (loss) per share would have been reduced to the
pro forma amounts indicated below:
Jan. 31, Feb. 1, Feb. 2,
1999 1998 1997
------- ------- -------
Net income (loss) As reported $ 4,546 $ 5,370 $(1,187)
Pro forma 4,402 5,326 (1,235)
Basic net income (loss)
per share As reported .50 .92 (.24)
Pro forma .49 .91 (.25)
Diluted net income (loss)
per share As reported .50 .91 (.24)
Pro forma .48 .91 (.25)
The weighted average fair value of options granted during the year was
$2.07, $1.43 and $0.70 per option for fiscal 1999, 1998 and 1997, respectively.
The fair value of options granted under the Plan was estimated at the date of
grant using a binomial option pricing model with the following assumptions:
Jan. 31, Feb. 1, Feb. 2,
1999 1998 1997
------- ------- -------
Risk-free interest rate 5.2 % 6.5 % 6.0 %
Dividend yield - - -
Expected volatility 8.3 % 8.4 % 8.1 %
Expected life (years) 7.5 years 6.0 years 6.6 years
L. 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 Citigroup Inc., 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 accumulated deficit,
(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.
M. CAPITAL STOCK
As described in Note L, the Company issued an additional 965,497 shares of
Common Stock and 3,050,473 shares of Nonvoting Common Stock during fiscal 1998.
During fiscal 1999, 55,156 shares of Common Stock were issued upon the exercise
of stock options. The Company had 6,025,595 shares of Common Stock and 3,050,473
shares of Nonvoting Common Stock outstanding at January 31, 1999. 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 5,970,439 shares of Common Stock and 3,050,473
shares of Nonvoting Common Stock outstanding at February 1, 1998.
N. PREFERRED STOCK SUBJECT TO MANDATORY REDEMPTION
Note L describes 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.
26
<PAGE>
Because of the accumulated deficit which resulted primarily from the store
closings and the write-off of goodwill and other long-lived assets recognized in
the fourth quarter of fiscal 1996, applicable corporate law did not permit the
Company or Pamida to declare or pay any cash dividends on any stock in fiscal
1998 or 1997. A provision for preferred stock dividends was recorded in the
fiscal 1998 and 1997 financial statements. As a result of the reclassification
of the preferred stock into common stock, the Company's obligation for further
preferred stock dividend payments or accruals 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.
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.
On January 31, 1999, the Company had standby letters of credit outstanding
totaling $4,879 related to the Company's self-insured retention of workers'
compensation and general liabilities as well as future rental payments on a
distribution center. Additional letters of credit outstanding totaling $4,057
were committed for purchases of merchandise inventory.
P. STORE CLOSING RESERVES
During fiscal 1996, the Company recognized a $21,397 charge reflecting
management's best estimate of total costs to close forty unprofitable or
competitive market stores which did not fit the Company's niche market strategy.
Remaining expected future charges are recorded in the store closing reserve. 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
established in the 1996 store closing reserve.
The 1996 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 closed stores'
inventory was completed in the second quarter of fiscal 1997. As of January 31,
1999, all known ancillary costs of the store closings have been paid except
those related to the remaining real estate. During fiscal 1997, 1998 and 1999
the Company negotiated settlements on twenty-seven closed store properties which
had been leased, three of which have been subleased, and sold eight closed store
properties which had been owned. As of January 31, 1999, the Company remains
liable for lease obligations on five closed store properties. The Company
anticipates that final disposition of the remaining obligations will be
accomplished in fiscal 2000 and 2001.
The 1996 store closing reserve activity and amounts included in the balance
sheets are as follows:
1996 Store Closing Reserves
----------------------------------------------
Amount included Amount included
in other accrued in other long-
expenses term liabilities Total
---------------- ----------------- -------
Balance at January 28, 1996 $ 7,818 $ 2,619 $10,437
Payments applied to reserve 3,297 429 3,726
---------------- ----------------- -------
Balance at February 2, 1997 4,521 2,190 6,711
Payments applied to reserve 2,957 500 3,457
---------------- ----------------- -------
Balance at February 1, 1998 1,564 1,690 3,254
Payments applied to reserve 477 955 1,432
Reduction in the required reserve - 535 535
---------------- ----------------- -------
Balance at January 31, 1999 $ 1,087 $ 200 $ 1,287
================ ================= =======
27
<PAGE>
Q. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of the quarterly results of operations for the
years ended January 31, 1999 and February 1, 1998:
<TABLE>
<S> <C> <C> <C> <C> <C>
May 3, August 2, November 1, January 31,
FISCAL 1999 1998 1998 1998 1999 Year
- ----------- ----------- ----------- ----------- ----------- -----------
Sales....................... $ 144,532 $ 170,169 $ 157,585 $ 200,108 $ 672,394
Gross profit................ 34,360 43,308 37,306 52,594 167,568
Net (loss) income........... (2,301) 1,483 535 4,829 4,546
Basic and diluted (loss)
income per share ......... $ (.26) $ .16 $ .06 $ .53 $ .50
=========== =========== =========== =========== ===========
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
=========== =========== =========== =========== ===========
</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 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.
28
<PAGE>
Pamida Holdings Corporation And Subsidiary
Directors, Management and Corporate Information
DIRECTORS
L. David Callaway, III M. Saleem Muqaddam
Chairman and Chief Executive Officer, Vice President,
Express Messenger Systems, Inc. (2) Citicorp Venture
Capital, Ltd. (1)
Stuyvesant P. Comfort Peter J. Sodini
Executive, President and Chief Executive
Alchemy Partners, London (1) (2) Officer, The Pantry, Inc. (1)(2)
Steven S. Fishman Frank A. Washburn
Chairman, Executive Vice President,
Chief Executive Officer, Chief Operating Officer,
and President and Secretary
(1) Member of Compensation and Stock
Option Committees
(2) Member of Audit Committee
MANAGEMENT
Steven S. Fishman Robert C. Hafner
Chairman, Chief Executive Officer Senior Vice President, Marketing and
and President* Business Development - Pamida, Inc.
Frank A. Washburn Don G. Hendricksen
Executive Vice President, Senior Vice President, Merchandising,
Chief Operating Officer Administration and Field
and Secretary* Operations - Pamida, Inc.
George R. Mihalko Kathy Hurley
Senior Vice President, General Senior Vice President,
Chief Financial Officer, Treasurer Merchandise Manager,
and Assistant Secretary* Softlines - Pamida, Inc.
Paul L. Knutson
Senior Vice President,
Human Resources - Pamida, Inc.
Stephen D. Robinson
Senior Vice President, General
Merchandise Manager,
Hardlines - 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 20, 1999, 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 1999 and
fiscal 1998 were as follows:
High Low
------ -----
FISCAL 1999:
4th Quarter............. 4 9/16 3
3rd Quarter............. 7 3 1/4
2nd Quarter............. 7 3/4 5 7/8
1st Quarter............. 6 1/4 4 5/8
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
As of March 22, 1999, there were 256 record holders of the Company's Common
Stock.
STOCK TRANSFER AGENT
American Stock Transfer & Trust Company
New York, New York
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[Picture of "Pamida Hometown Values" logo.]
8800 "F" Street
Omaha, Nebraska, 68127
Internet address: www. pamida.com