12
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2000
-------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------- --------------
Commission File Number 1-05380
AMES DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2269444
-------- ----------
(State or other jurisdiction of (I.R.S.Employer Identification Number)
incorporation or organization)
2418 Main Street, Rocky Hill, Connecticut 06067
- ----------------------------------------- -----
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number including area code: (860)257-2000
-------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
29,408,057 shares of Common Stock were outstanding on November 24, 2000.
Exhibit Index on page 14
Page 1 of 39 (including exhibits)
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 28, 2000
I N D E X
Page
Part I: FINANCIAL INFORMATION
Item 1. Consolidated Condensed Statements of Operations 3
for the Thirteen and Thirty-Nine Weeks ended October 28,
2000 and October 30, 1999
Consolidated Condensed Balance Sheets as of 4
October 28, 2000, January 29, 2000, and October 30,
1999
Consolidated Condensed Statements of Cash Flows 5
for the Thirty-Nine Weeks ended October 28, 2000
and October 30, 1999
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 13
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Item 5. Other Information 14
Item 6. Exhibits and Reports on Form 8-K 14
Page - 2
PART I
Item 1.
FINANCIAL INFORMATION
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
For the Thirteen For the Thirty-Nine
Weeks Ended Weeks Ended
----------------------------- ------------------------------
October 28, October 30, October 28, October 30,
2000 1999 2000 1999
-------------- -------------- ------------- ----------------
Total net sales $ 920,321 $ 883,500 $2,623,012 $2,559,634
Leased department and other income 14,588 9,274 34,391 29,244
-------------- -------------- -------------- ---------------
Total revenue 934,909 892,774 2,657,403 2,588,878
Costs and expenses:
Cost of merchandise sold 689,762 638,455 1,923,567 1,817,050
Selling, general and administrative expenses 261,856 262,349 757,437 801,933
Depreciation and amortization expense, net 19,252 17,516 54,189 48,203
Interest and debt expense, net 24,098 17,736 64,843 43,279
-------------- -------------- -------------- ---------------
Loss before income taxes (60,059) (43,282) (142,633) (121,587)
Income tax benefit 22,823 15,582 54,201 43,770
-------------- -------------- -------------- ---------------
Loss before cumulative effect adjustment ($37,236) ($27,700) ($88,432) ($77,817)
Cumulative effect adjustment, net of tax - - - (1,107)
-------------- -------------- -------------- ---------------
Net Loss ($37,236) ($27,700) ($88,432) ($78,924)
============== ============== ============== ===============
Basic net loss per common share:
Before cumulative effect adjustment $ (1.27) $ (0.95) $ (3.01) $ (2.88)
Cumulative effect adjustment - - - (0.04)
-------------- -------------- -------------- ---------------
Net Loss per share $ (1.27) $ (0.95) $ (3.01) $ (2.92)
============== ============== ============== ===============
Basic weighted average number of common shares
outstanding 29,407 29,109 29,378 27,027
============== ============== ============== ===============
(The accompanying Notes are an integral part of these consolidated condensed financial statements.)
Page - 3
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
---------------- ----------------- -----------------
October 28, January 29, October 30,
2000 2000 1999
---------------- ----------------- -----------------
ASSETS
Current Assets:
Cash and short-term investments $ 41,876 $ 30,612 $ 42,383
Receivables 58,814 25,302 51,172
Merchandise inventories 1,045,847 831,387 1,126,598
Deferred taxes, net 83,055 28,854 43,770
Prepaid expenses and other current assets 40,360 36,772 25,651
---------------- --------------- -------------
Total current assets 1,269,952 952,927 1,289,574
Fixed Assets 739,723 629,979 615,379
Less - Accumulated depreciation and amortization (188,188) (128,229) (110,957)
---------------- --------------- -------------
Net fixed assets 551,535 501,750 504,422
---------------- --------------- -------------
Other assets and deferred charges 59,835 57,256 59,451
Deferred taxes, net 346,055 346,055 102,406
Beneficial lease rights, net 54,209 56,280 56,817
Goodwill, net 59,113 61,026 195,449
---------------- --------------- -------------
$2,340,699 $ 1,975,294 $ 2,208,119
================ =============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $ 420,730 $ 325,356 $ 433,991
Other 84,881 96,224 73,142
-------------- --------------- -------------
Total accounts payable 505,611 421,580 507,133
-------------- --------------- -------------
Current portion of capital lease and financing obligations 22,057 22,086 20,999
Self-insurance reserves 28,063 29,827 28,385
Accrued expenses and other current liabilities 135,474 133,110 221,520
Store closing reserves 51,242 55,468 53,516
-------------- --------------- -------------
Total current liabilities 742,447 662,071 831,553
-------------- --------------- -------------
Long-term debt 820,068 421,769 615,696
Capital lease and financing obligations 166,095 180,404 184,039
Other long-term liabilities 50,874 57,916 124,100
Excess of revalued net assets over equity under fresh-start reporting 13,253 17,868 19,406
Commitments and contingencies (see Note 8)
Stockholders' Equity:
Preferred stock (3,000,000 shares authorized; no shares issued
or outstanding at October 28, 2000, January 29, 2000 and October
30, 1999; par value per share $.01) - - -
Common stock (40,000,000 shares authorized; 29,408,057, 29,233,650
and 29,210,662 shares outstanding at October 28, 2000, January 29,
2000 and October 30, 1999, respectively; par value per share $.01) 296 293 292
Additional paid-in capital 531,879 530,744 424,855
Retained earnings 16,709 105,143 9,092
Treasury stock, at cost (922) (914) (914)
-------------- --------------- -------------
Total stockholders' equity 547,962 635,266 433,325
-------------- --------------- -------------
$2,340,699 $1,975,294 $ 2,208,119
============== =============== =============
(The accompanying Notes are an integral part of these consolidated condensed financial statements.)
Page - 4
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the Thirty-Nine
Weeks Ended
----------------------------------------
October 28, October 30,
2000 1999
------------------ --------------------
Cash flows from operating activities:
Net loss $ (88,432) $ (78,924)
Expenses not requiring the outlay of cash:
Income tax benefit (54,201) (43,770)
Depreciation and amortization of fixed and other assets 60,195 51,119
Amortization of debt discounts and deferred financing costs 3,589 3,585
------------------ --------------------
Cash used by operations before changes in working capital and
store closing activities (78,849) (67,990)
Changes in working capital:
Increase in receivables (33,512) (20,928)
Increase in merchandise inventories (214,460) (476,730)
Increase in accounts payable 84,031 106,376
Increase (decrease) in accrued expenses and other current
liabilities 600 (4,499)
(Increase) decrease in other working capital and other, net (9,318) 3,477
Changes due to store closing activities:
Payments of store closing costs (4,226) (4,773)
------------------ --------------------
Net cash used for operating activities (255,734) (465,067)
------------------ --------------------
Cash flows from investing activities:
Purchases of fixed assets (110,317) (169,345)
Purchases of leases (7,054) (42,835)
------------------ --------------------
Net cash used for investing activities (117,371) (212,180)
------------------ --------------------
Cash flows from financing activities:
Borrowings under the revolving credit facility, net 401,151 319,886
Payments on debt and capital lease obligations (14,338) (17,026)
Repurchase of Hills Senior Notes (2,852) -
Purchase of treasury stock (8) -
Proceeds from the issuance of senior notes - 200,000
Proceeds from the issuance of common stock, net - 187,216
Payments of deferred financing costs (723) (7,215)
Proceeds from the exercise of options and warrants 1,139 1,025
------------------ --------------------
Net cash provided by financing activities 384,369 683,886
------------------ --------------------
Increase in cash and short-term investments 11,264 6,639
Cash and short-term investments, beginning of period 30,612 35,744
------------------ --------------------
Cash and short-term investments, end of period $ 41,876 $ 42,383
================== ====================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest and debt fees not capitalized $ 61,234 $ 34,571
Income taxes 1,711 172
(The accompanying Notes are an integral part of these consolidated condensed financial statements.)
Page - 5
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation :
---------------------
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements of Ames Department Stores, Inc. (a
Delaware corporation) and subsidiaries (collectively "Ames" or the
"Company") contain all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of such financial
statements for the interim periods. Due to the seasonality of the
Company's operations, the results of its operations for the interim
period ended October 28, 2000 may not be indicative of total results
for the full year. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or omitted
pursuant to the rules and regulations promulgated by the Securities and
Exchange Commission (the "SEC"). Certain prior year amounts have been
reclassified to conform to the presentation used for the current year.
Pursuant to the indenture governing the Ames Senior Notes (as defined
in Note 5), all of Ames' subsidiaries have jointly and severally
guaranteed the Ames Senior Notes on a full and unconditional basis.
Separate financial statements of those subsidiaries have not been
included herein because management has determined that they are not
material to investors.
The consolidated condensed balance sheet at January 29, 2000 was
obtained from audited financial statements previously filed with the
SEC in the Company's Annual Report on Form 10-K for the fiscal year
ended January 29, 2000 (the "1999 Form 10-K"). The accompanying
unaudited consolidated condensed financial statements should be read in
conjunction with the financial statements and Notes thereto included in
the 1999 Form 10-K.
In the fourth quarter of the year ended January 29, 2000 ("Fiscal
1999"), the Company adopted Staff Accounting Bulletin ("SAB") No. 101
"Revenue Recognition" as promulgated by the staff of the SEC, effective
retroactively to the first quarter of Fiscal 1999. Therefore, the
consolidated condensed financial statements for the thirteen and
thirty-nine weeks ended October 30, 1999 have been adjusted
accordingly. Reference can be made to the 1999 Form 10-K for additional
discussion of the adoption of SAB No. 101 by the Company.
2. Acquisition and Agency Agreement:
--------------------------------
Acquisition of Hills Stores Company
On December 31, 1998, HSC Acquisition Corp. ("HSC"), a wholly owned
subsidiary of the Company, acquired in excess of 80% of the outstanding
voting stock of Hills Stores Company ("Hills") and approximately 74% of
the outstanding Hills 12 1/2% senior notes. Subsequently, Hills was
merged with HSC and became a wholly owned subsidiary of Ames Department
Stores, Inc. In April 1999, Hills was merged with and into Ames
Department Stores, Inc. The acquisition has been recorded under the
purchase method of accounting.
Total cash consideration for the acquisition of Hills was $129 million.
Reference can be made to the 1999 Form 10-K for further discussion of
the Hills acquisition.
At the time of the acquisition, Hills operated 155 discount department
stores. During 1999, the Company remodeled and converted 151 of the
Hills stores to Ames stores. The four remaining Hills stores, along
with seven other Ames stores, were closed because they were in
locations that were either competitive with or were under-performing
other Hills or Ames stores. The remodeling and conversion process was
conducted in three stages, each stage involving approximately one third
of the Hills stores. The first stage was completed in late April 1999;
the second stage was completed in late July 1999; and the third stage
was completed in late September 1999.
Page - 6
Concurrent with the Hills acquisition, the Company entered into a
transition and agency agreement (the "Agency Agreement") with Gordon
Brothers Retail Partners, LLC and The Nassi Group, LLC (collectively
the "Agent"), which provided that the Agent serve for a period of time
to operate all of the acquired Hills stores and to conduct inventory
liquidation sales at each of those stores prior to its scheduled
remodeling or final closure. Accordingly, the Agent managed the sale of
the inventory acquired in the Hills acquisition as well as certain
other inventory identified in the Agency Agreement. The Agency
Agreement entitled the Company to receive out of the sale proceeds a
minimum amount equal to 40% of the initial retail value or ticketed
selling price of the merchandise (the "Guaranteed Return"), with the
possibility of a greater return if the sale proceeds exceeded a target
percentage of initial retail value.
The results of operations of the former Hills stores prior to their
conversion to Ames stores for the thirteen and thirty-nine weeks ended
October 30, 1999 have been included in the accompanying consolidated
condensed financial statements.
Acquisition of Goldblatt's Leases
In April 2000, the Company consummated its purchase of the leases for
seven stores from Goldblatt's Department Stores, Inc. for a cash
purchase price of $7.0 million.
Reference can be made to the 1999 Form 10-K for additional discussion
of the Hills acquisition and the acquisition of the Goldblatt's leases.
3. Net Loss Per Common Share:
-------------------------
Net loss per share was determined using the weighted average number of
common shares outstanding. Diluted net loss per share was equal to
basic net loss per share because inclusion of common stock equivalents
would have been anti-dilutive. During the quarter ended October 28,
2000, options representing 3,470 shares were exercised. During the
quarter ended October 30, 1999, 29,023 options were exercised.
4. Inventories:
-----------
Inventories are valued at the lower of cost, using the first-in,
first-out (FIFO) method, or market and include the capitalization of
transportation and distribution center costs.
5. Debt:
----
Credit Agreement
On December 31, 1998, in connection with the acquisition of Hills,
certain of the Company's subsidiaries entered into an agreement (the
"Credit Agreement") with a syndicate of banks and financial
institutions for which Bank of America, N.A. is serving as agent. The
Credit Agreement is in effect until June 30, 2002 and is secured by
substantially all of the assets of the Company.
As of November 8, 2000, the Company entered into an Eighth Amendment
and Waiver Agreement (the "Eighth Amendment") with its lenders. The
Eighth Amendment reduced our fixed charge coverage ratio requirements
and permitted the Company to record restructuring charges associated
with the closing of up to thirty-three stores. The Eighth Amendment
also provided that covenants will be tested quarterly rather than
monthly, as long as the Company's availability remains above a
specified level, and any non-compliance events prior to November 8,
2000 were waived. The Eighth Amendment also provided for certain
changes to the interest rate margins. Reference can be made to the 1999
Form 10-K, the Company's quarterly report on Form 10-Q for the thirteen
weeks ended July 29, 2000 and Part II, Item 5 of this Form 10-Q for
additional discussion of the Credit Agreement, applicable amendments
and descriptions of the Company's other obligations not discussed
herein.
As of October 28, 2000, borrowings of $575.7 million were outstanding
under the Credit Agreement. These borrowings are included in long-term
debt in the accompanying consolidated condensed balance sheet as of
October 28, 2000. In addition, $23.7 and $0.6 million of standby and
trade letters of credit, respectively, were outstanding under the
Credit Agreement. The weighted average interest rate on the borrowings
for the thirty-nine weeks ended October 28, 2000 was 8.13%. The peak
borrowing level through October 28, 2000 was $611.1 million and
occurred in October 2000.
Page - 7
Senior Notes due 2006
On April 27, 1999, the Company completed the sale of $200 million of
its 10% seven-year senior notes (the "Ames Senior Notes"). The net
proceeds from the sale of the Ames Senior Notes, approximately $193.4
million, were used to reduce outstanding borrowings under the Credit
Agreement. The Ames Senior Notes pay interest semi-annually in April
and October and mature April 2006.
Senior Notes due 2003
The 12.5% Senior Notes due 2003 (the "Hills Senior Notes") were, at the
time of the acquisition of Hills, an unsecured obligation of Hills. The
Hills Senior Notes pay interest in January and June and mature July
2003.
Reference can be made to the 1999 Form 10-K for additional discussion
of the Ames Senior Notes and Hills Senior Notes.
6. Stock Options:
-------------
The Company has four stock option plans (the "Option Plans"): the 1994
Management Stock Option Plan, the 1994 Non-Employee Directors Stock
Option Plan, the 1998 Management Stock Incentive Plan, as amended and
restated, and the 2000 Store Manager Stock Option Plan.
In October 1995, the Financial Accounting Standard Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123
"Accounting for Stock Based Compensation," which established a
fair-value based method of accounting for stock-based compensation.
SFAS No. 123 did, however, allow entities to continue accounting for
employee stock based compensation under the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company elected to account for the
Option Plans under APB Opinion No. 25, under which no compensation cost
has been recognized, and to adopt SFAS No. 123 through disclosure.
If the Company had elected to recognize compensation cost for the
Option Plans based on the fair value at the grant dates for awards
under those plans, consistent with the method prescribed by SFAS No.
123, net loss and basic net loss per common share would have
approximated the pro forma amounts indicated below:
For the Thirteen For the Thirty-Nine
Weeks Ended Weeks Ended
----------------------------------- ----------------------------------
(In Thousands) October 28, October 30, October 28, October 30,
2000 1999 2000 1999
--------------- ---------------- ---------------- ---------------
Net loss:
As reported $(37,236) $(27,700) $(88,432) $(78,924)
Pro forma $(39,830) $(29,916) $(95,586) $(84,695)
Basic net loss per common
share: (a)
As reported $(1.27) $(0.95) $(3.01) $(2.92)
Pro forma $(1.35) $(1.03) $(3.25) $(3.13)
(a) Common stock equivalent shares have not been included because the effect would be anti-dilutive.
The fair value of stock options used to compute pro forma net income
and net income per diluted common share is the estimated present value
as of the grant date using the Black-Scholes option-pricing model with
the following weighted average assumptions: no dividend yield, expected
option volatilities, a risk-free interest rate equal to U.S. Treasury
securities with a maturity equal to the expected life of the option and
an expected life from date of grant until option expiration date.
Page - 8
7. Income Taxes:
------------
The Company's estimated annual effective income tax rate for each year
was applied to the loss before income taxes for the thirteen and
thirty-nine weeks ended October 28, 2000 and October 30, 1999 to
compute a non-cash income tax benefit. The income tax benefit is
included in current deferred taxes in the accompanying consolidated
condensed balance sheet as of October 28, 2000 and October 30, 1999.
In Note 8 to the Notes to Consolidated Financial Statements in the 1999
Form 10-K, the Company reported it had filed a $20 million refund claim
under Section 172 (f) of the Internal Revenue Code and that the claim
was under review by the Internal Revenue Service ("IRS"). The Company
has recently received from the IRS an adverse Technical Advice
Memorandum ("TAM"). The positions set forth in the TAM would have the
effect of denying all or virtually all of the refund claim. The Company
is presently considering what further action to take.
8. Commitments and Contingencies:
-----------------------------
Reference can be made to the 1999 Form 10-K (Item 3 - Legal
Proceedings) for various litigation involving the Company, for which
there were no material changes since the filing date of the 1999 Form
10-K, except as follows:
With regard to the Smoot matter, on November 14, 2000, the Court gave
preliminary approval to a class action settlement that had been reached
by the parties. Notice of the settlement and Fairness Hearing for final
approval of the settlement will be mailed to class members on or about
December 14, 2000. The deadline for filing objections to the class
action settlement is January 28, 2001. The Fairness Hearing will be
held on February 12, 2001. The settlement, if approved, will require an
evidentiary hearing on the proper classification of the Assistant
Manager positions. The total cost of the settlement to the Company will
depend upon the outcome of the evidentiary hearing. In the event the
Company prevails, the total cost to the Company will be $1 million,
inclusive of attorney's fees. If the plaintiffs prevail at the
evidentiary hearing, the cost to the Company of the settlement will be
$3 million, exclusive of attorney's fees. A date has not been set for
the evidentiary hearing.
9. Recently Issued Accounting Pronouncements:
-----------------------------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for derivative
instruments and Hedging Activities." In June 2000, the FASB issued SFAS
No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," an amendment of SFAS No. 133. These statements
establish accounting and reporting standards requiring that every
derivative instrument (including certain derivative instruments
embedded in other contracts) be recorded in the balance sheet as either
an asset or liability measured at its fair value. The statements also
require that changes in a derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are
met. The statements are effective, prospectively, for all fiscal
quarters of all fiscal years beginning after June 15, 2000. Management
is currently analyzing the impact of this new pronouncement on the
Company's financial position and results of operations.
10. Subsequent Events:
-----------------
On November 9, 2000, the Company announced the planned closing of
thirty-two stores. All but one of the stores are under-performing
stores that were acquired in the Hills acquisition in December 1998.
The other store will be closed as a result of the expiration of its
lease. Management estimates that a restructuring charge of up to $140
million will be recorded in the fourth quarter of this year. The
restructuring charge will include provisions for inventory impairment
costs, severance related costs, lease liability payments over a number
of years, asset impairment write-downs and other related charges.
In addition, the Company announced plans to curtail purchases of
property, equipment and other capital items in fiscal 2001 and
initiate programs to further reduce its selling, general and
administrative expenses.
Page - 9
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the
consolidated condensed financial statements and footnotes presented in this
report.
Results of Operations
- ---------------------
The consolidated results of operations, as reported in our Consolidated
Condensed Statement of Operations, for the thirty-nine weeks ended October 30,
1999 include the results of the former Hills stores during the period they were
operated by Gordon Brothers, LLC and The Nassi Group, LLC under an agency
agreement. These firms were engaged to operate the Hills stores until their
closure and to liquidate the merchandise inventories.
As of the quarter ended October 30, 1999, Gordon Brothers, LLC and The Nassi
Group, LLC completed the merchandise liquidation sales in all 155 Hills stores.
Subsequent to the liquidation sales, we closed four of the stores and remodeled
the remaining 151 stores. The remodeled stores were re-opened as Ames stores in
three phases: 50 stores in April 1999, 54 stores in July 1999, and 47 stores in
September 1999.
The following tables illustrate the results of Ames' operations for the thirteen
and thirty-nine weeks ended October 28, 2000, as compared to the separate
contributions of Ames' and Hills' operations and the other costs described below
to the consolidated results of operations for the thirteen and thirty-nine weeks
ended October 30, 1999.
For the
Thirteen
Weeks Ended For The Thirteen Weeks Ended
October 28, 2000 October 30, 1999
---------------- ------------------------------------------------
(In Thousands) Consolidated Ames Hills Other Total
------------ ---- ----- ----- -----
Net sales $920,321 $883,500 $ - $ - $883,500
Leased department and other income 14,588 10,065 (791) - 9,274
--------------------------------------------------------------------
Total revenue 934,909 893,565 (791) - 892,774
Costs and expenses:
Cost of merchandise sold 689,762 638,455 - - 638,455
Selling, general and administrative expenses 261,856 227,404 7,385 27,560 262,349
Depreciation and amortization expense, net 19,252 15,309 643 1,564 17,516
Interest and debt expense, net 24,098 17,114 17 605 17,736
--------------------------------------------------------------------
Loss before income taxes (60,059) (4,717) (8,836) (29,729) (43,282)
Income tax benefit 22,823 1,698 3,181 10,703 15,582
--------------------------------------------------------------------
Net loss ($ 37,236) ($ 3,019) ($ 5,655) ($19,026) ($27,700)
====================================================================
Page - 10
For the
Thirty-Nine
Weeks Ended For The Thirty-Nine Weeks Ended
October 28, 2000 October 30, 1999
---------------- ------------------------------------------------
(In Thousands) Consolidated Ames Hills Other Total
------------ ---- ----- ----- -----
Net sales $2,623,012 $2,182,517 $377,117 $ - $2,559,634
Leased department and other income 34,391 26,667 2,577 - 29,244
--------------------------------------------------------------------
Total revenue 2,657,403 2,209,184 379,694 - 2,588,878
Costs and expenses:
Cost of merchandise sold 1,923,567 1,564,965 252,085 - 1,817,050
Selling, general and administrative expenses 757,437 578,269 149,432 74,232 801,933
Depreciation and amortization expense, net 54,189 31,832 11,036 5,335 48,203
Interest and debt expense, net 64,843 36,531 4,179 2,569 43,279
--------------------------------------------------------------------
Loss before income taxes and cumulative effect
adjustment (142,633) (2,413) (37,038) (82,136) (121,587)
Income tax benefit 54,201 869 13,332 29,569 43,770
--------------------------------------------------------------------
Loss before cumulative effect adjustment (88,432) (1,544) (23,706) (52,567) (77,817)
Cumulative effect adjustment, net of tax - - - (1,107) (1,107)
--------------------------------------------------------------------
Net loss ($88,432) ($1,544) ($23,706) ($53,674) ($78,924)
====================================================================
The Ames column, represents (a) the results of the Ames store base, (b) the
results of the converted Hills stores and (c) certain expenses associated with
the acquisition of Hills, including the interest expense on the acquired Hills
senior notes and a pro-rata share of the amortization of the goodwill recorded
in connection with the acquisition.
The Hills column represents (a) the results of operations for the Hills stores
during the period that these stores were operated pursuant to the Gordon
Brothers/Nassi agency agreement, including depreciation and interest expense
directly associated with such stores and (b) Hills corporate overhead expenses,
principally the Canton, MA facility.
The Other column represents the expenses incurred during the period of
remodeling the Hills stores (for example, pre-opening expenses incurred during
the conversion or "dark" period) as well as certain other expenses.
The unique circumstances under which Hills operations were conducted through the
thirteen and thirty-nine weeks ended October 30, 1999 distort any direct
comparison of the principal components of Ames consolidated results for the
thirteen and thirty-nine weeks ended October 28, 2000 and October 30, 1999. In
the discussion that follows, the Ames net sales; leased department and other
income; gross margin; and selling, general and administrative expenses for the
thirteen and thirty-nine weeks ended October 28, 2000 are compared to the Ames
results for the thirteen and thirty-nine weeks ended October 30, 1999, exclusive
of the Hills results and other expenses. The comparison of depreciation and
amortization expense and interest and debt expense is on a consolidated basis.
Ames' net sales increased 4.2% during the third quarter of 2000 compared to the
third quarter of 1999. Ames' net sales for the thirty-nine weeks ending October
28, 2000 increased 20.2% compared to the thirty-nine weeks ended October 30,
1999. Both increases are primarily the result of the inclusion of all 151 of the
converted Hills stores in the Ames store base for the periods in fiscal 2000
compared to 105 stores for the entire third quarter in fiscal 1999 and an
additional 46 stores for a portion of the quarter. These increases are partially
offset by decreases in comparable store sales of 2.6% and 1.6% for the thirteen
and thirty-nine weeks ended October 28, 2000.
Leased department and other income increased $4.5 million and $7.7 million for
the thirteen and thirty-nine weeks ended October 28, 2000 compared to the same
period in 1999. The increase is primarily attributable to the inclusion of all
151 Hills stores as previously discussed and the inclusion of a $2.8 million
gain in the third quarter on the disposal of a store lease.
Page - 11
Gross margin as a percentage of sales declined from 27.7% to 25.1% during the
third quarter and from 28.3% to 26.7% for the year-to-date period compared to
the same period in 1999. The decrease is the result of increased promotional and
clearance markdowns as well as a lower markup on sales resulting from increased
logistical costs and changes in merchandise mix.
Selling, general and administrative expenses increased by $34.5 million and
$179.2 million for the thirteen and thirty-nine weeks ended October 28, 2000,
compared to the same period in 1999, primarily as a result of the expanded Ames
store base. Excluding the pre-opening expenses included in the fiscal 2000
selling, general and administrative expenses, expenses as a percentage of sales
increased from 25.7% to 27.4% and 26.5% to 28.0% for those periods. The
percentage increase was primarily a result of lower than expected sales.
Depreciation and amortization expense increased $1.7 million and $6.0 million
for the thirteen and thirty-nine weeks ended October 28, 2000, compared to the
same periods in 1999, primarily as a result of additional depreciation
associated with the remodeling expenditures incurred during the conversion of
the former Hills stores.
The increase in interest expense of $6.4 million and $21.6 million for the
thirteen and thirty-nine weeks ended October 28, 2000, compared to the same
periods in 1999, is mainly attributable to a higher level of borrowings under
our revolving credit facility as well as interest expense associated with the
Ames senior notes issued in April 1999.
Our estimated annual effective income tax rate for each year was applied to the
loss before income taxes for each period to compute a non-cash income tax
benefit. The income tax benefits are included in current assets in the
consolidated condensed balance sheet as of October 28, 2000 and October 30,
1999.
Liquidity and Capital Resources
- -------------------------------
Merchandise inventories increased 25.8% from January 29, 2000 due to a seasonal
merchandise build-up. Merchandise inventories decreased 7.2% from October 30,
1999 while the number of open stores increased by a net of twenty-four. The
decrease was primarily a result of inventory control initiatives.
Trade accounts payable increased 29.3% from January 29, 2000 and decreased 3.1%
from October 30, 1999. The increase from the beginning of the year is due to the
holiday season inventory buildup. The decrease from the same period last year is
primarily a result of efforts to control merchandise inventory levels as
previously discussed.
Federal income tax law allows taxpayers, including corporations, to use net
operating losses in future years to reduce taxable income ("net operating loss
carryovers"). Our net operating loss carryovers remaining after fiscal 1999
should offset income on which taxes would otherwise be payable in the next
several years, subject to any limitations imposed by federal income tax law.
Purchases of property and equipment for the thirteen and thirty-nine weeks ended
October 28, 2000 totaled $33.8 million and $117.4 million, respectively. Such
purchases for the balance of the year are expected to be approximately $25
million.
Long-term debt as of October 28, 2000 consisted of borrowings under our bank
credit facility of $575.7 million, $200.0 million of the Ames senior notes
issued in April 1999 and $44.4 million of the Hills senior notes. The Ames
senior notes and the Hills senior notes are due April 2006 and July 2003,
respectively.
Sources of liquidity
- --------------------
Our principal sources of operating funds are our bank credit facility, cash from
operations and cash on hand. We have a bank credit facility revolving line of
credit that provided up to $705 million during the period from July 1, 2000
through November 30, 2000 and, at all other times, provides for up to $650
million. Borrowings under the bank credit facility are secured by substantially
all of our assets. The credit facility expires on June 30, 2002. Our borrowing
rates for the credit facility are based on either the London Interbank Offered
Rate or a reference rate announced by Bank of America, San Francisco, and may
include an additional percentage margin added to both. During the quarter ended
October 28, 2000, our borrowings increased under the credit facility by
approximately $67.3 million. The bank credit facility was amended on November 8,
2000 to modify our minimum fixed charge coverage ratio covenant requirement and
permit the restructuring charges associated with the closing of up to
thirty-three stores. Any non-compliance event prior to November 8, 2000 was
waived and covenants were amended. The peak borrowing level under the credit
facility during the quarter was $611.1 million. We believe the company will have
sufficient sources of cash to meet our financial obligations for the foreseeable
future.
Page - 12
Lease Commitments
- -----------------
We are committed under long-term leases for various retail stores, warehouses
and equipment expiring at various dates through 2026 with varying renewal
options and escalating rent clauses. Some leases are classified as capital
leases in accordance with generally accepted accounting principles. We generally
pay for real estate taxes, insurance, and specified maintenance costs under real
property leases. Most leases also provide for contingent rent payments, in
addition to fixed lease payments, based on a percentage of sales in excess of
specified amounts.
Subsequent Events
- -----------------
On November 9, 2000, we announced the planned closing of thirty-two stores.
All but one of the stores are under-performing stores that we acquired in the
Hills acquisition in December 1998. The other store will be closed as a result
of the expiration of its lease. We estimate a restructuring charge of up to $140
million will be taken in the fourth quarter of this year. The restructuring
charge will include provisions for inventory impairment costs, severance related
costs, lease liability payments over a number of years, asset impairment
write-downs and other related charges.
In addition, we announced plans to curtail purchases of property, equipment and
other capital items in fiscal 2001 and to initiate programs to further reduce
selling, general and administrative expenses.
Note Concerning Forward-looking Statements
- ------------------------------------------
Statements other than those based on historical facts which address activities,
events, or developments that we expect or anticipate may occur in the future are
forward-looking statements which are based upon a number of assumptions
concerning further conditions that may ultimately prove to be inaccurate. Actual
events and results may differ materially from anticipated results described in
any forward-looking statements. Our ability to achieve such results is subject
to risks and uncertainties which may include, but are not limited to, the
competitive environment in which the Company operates, the ability of the
Company to maintain and improve its sales and gross margins, regional weather
conditions, and the general economic conditions in the geographic areas in which
the Company operates. Consequently, these cautionary statements qualify all of
the forward-looking statements and there can be no assurance that the results or
developments anticipated by us will be realized or that they will have the
expected effects on Ames or its business or operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
We have exposure to interest rate volatility primarily relating to interest rate
changes applicable to revolving loans under our bank credit facility. These
loans bear interest at rates which vary with changes in (i) the London Interbank
Offered Rate (LIBOR) or (ii) a rate of interest announced publicly by Bank of
America, N.A.
We do not speculate on the future direction of interest rates. As of October 28,
2000, approximately $575.7 million of our debt bore interest at variable rates.
We believe that the effect, if any, of reasonably possible near term changes in
interest rates on our consolidated financial position, results of operations or
cash flows would not be significant.
Page - 13
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Reference can be made to Item 3 - Legal Proceedings included
in the Company's most recent Form 10-K for various litigation
involving the Company, for which there were no material
changes since the filing date of the Form 10-K, except as set
forth in Note 8 to the above Consolidated Condensed Financial
Statements.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders
during the third quarter ended October 28, 2000, through the
solicitation of proxies or otherwise.
Item 5. Other Information.
On October 23, 2000, the Board of Directors of the Company
adopted an amendment to the Amended and Restated Bylaws of the
Company which provides the Board of Directors with the ability
to act without a meeting through the use of electronic
transmission. A copy of the Amended and Restated Bylaws of the
Company, as amended, is filed as Exhibit 3 to this Form 10-Q.
As of November 8, 2000, the Company amended the Credit
Agreement (the "Eighth Amendment") with Bank of America, N.A.,
as agent, and a syndicate consisting of nineteen other banks
and financial institutions, a copy of which is filed as an
Exhibit hereto.
On November 9, 2000, the Company announced the planned closing
of thirty-two stores and its intention to record an associated
restructuring charge of up to $140 million.
Item 6. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits
Exhibit No. Exhibit Page No.
----------- ------- --------
3 Form of Amended and Restated By-Laws of Ames Department 16
Stores, Inc., as amended on October 23, 2000.
10 Eighth Amendment and Waiver, dated as of November 8, 2000, 27
among certain lenders, Bank of America,
N.A., as agent, and Ames Merchandising
Corporation, and other Credit Parties
named in and signatory to the Second
Amended and Restated Credit Agreement.
11 Schedule of computation of basic and diluted net income (loss) 38
per share
12 Ratio of Earnings to Fixed Charges 39
(b) Reports on Form 8-K
There were no reports on Form 8-K filed with the Securities
and Exchange Commission during the third quarter.
Page - 14
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
AMES DEPARTMENT STORES, INC.
(Registrant)
Dated: December 11, 2000 /s/ Joseph R. Ettore
----------------------------------------------------
Joseph R. Ettore, Chairman, Chief Executive
Officer, and Director
Dated: December 11, 2000 /s/ Rolando de Aguiar
----------------------------------------------------
Rolando de Aguiar, Senior Executive Vice
President, Chief Financial and Administrative
Officer
Page - 15