WGM_TrailerNY2:\1079784\01\N56001!.DOC\15079.0001
NY2:\1079784\01\N56001!.DOC\15079.0001 4
NY2:\1079784\01\N56001!.DOC\15079.0001
<s> <c>
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 November 3, 2001
--------------------------------------------------------------------
[ ] 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 ---------------------------------------
incorporation or organization) (I.R.S. Employer Identification Number)
2418 Main Street, Rocky Hill, Connecticut 06067
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
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 December 1, 2001.
Exhibit Index on page 21
Page 1 of 24
<page>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED NOVEMBER 3, 2001
I N D E X
Page
Part I: FINANCIAL INFORMATION
Item 1. Consolidated Condensed Statements of Operations 3
for the Thirteen Weeks and Thirty-Nine weeks ended November 3, 2001
and October 28, 2000
Consolidated Condensed Balance Sheets as of 4
November 3, 2001, February 3, 2001, and October 28, 2000
Consolidated Condensed Statements of Cash Flows 5
for the Thirty-Nine Weeks ended November 3, 2001 and October 28, 2000
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 12
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Part II: OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 19
<s>
PART I
Item 1.
FINANCIAL INFORMATION
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(DEBTORS-IN-POSSESSION)
(In Thousands, Except Per Share Amounts)
(Unaudited)
For the Thirteen For the Thirty-Nine
Weeks Ended Weeks Ended
----------------------------------- ---------------------------------
November 3, October 28, November 3, October 28,
2001 2000 2001 2000
---------------- --------------- ---------------- -------------
Total net sales $676,892 $920,321 $2,276,593 $2,623,012
Leased department and other income 9,677 14,588 28,991 34,391
---------------- --------------- ---------------- -------------
TOTAL REVENUE 686,569 934,909 2,305,584 2,657,403
COSTS AND EXPENSES
Cost of merchandise sold 535,499 689,762 1,682,919 1,923,567
Selling, general and administrative expenses 229,039 261,856 704,051 757,437
Depreciation and amortization expense, net 26,193 19,252 64,665 54,189
Interest and debt expense, net 17,582 24,098 63,046 64,843
Closed Stores Income (24,098) - (24,098) -
Reorganization expenses 25,674 - 25,674 -
---------------- --------------- ---------------- -------------
LOSS BEFORE INCOME TAXES (123,320) (60,059) (210,673) (142,633)
Income tax (provision) benefit (212,856) 22,823 (429,662) 54,201
---------------- --------------- ---------------- -------------
NET LOSS $(336,176) $(37,236) $(640,335) $(88,432)
================ =============== ================ =============
Weighted average number of common shares outstanding 29,408 29,407 29,405 29,378
================ =============== ================ =============
Net loss per share $(11.43) $(1.27) $(21.78) $(3.01)
================ =============== ================ =============
(The accompanying Notes are an integral part of these consolidated condensed financial statements.)
<c> <c> <c>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(DEBTORS-IN-POSSESSION)
(In Thousands, Except Shares and Per Share Amounts)
(Unaudited) (Unaudited)
---------------- ----------------- -----------------
November 3, February 3, October 28,
2001 2001 2000
---------------- ----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $34,628 $49,761 $41,876
Receivables 23,299 17,039 58,814
Merchandise inventories 749,452 744,132 1,045,847
Deferred taxes, net - 17,771 83,055
Prepaid expenses and other current assets 42,079 41,494 40,360
---------------- --------------- -------------
Total current assets 849,458 870,197 1,269,952
---------------- --------------- -------------
Fixed Assets 628,048 761,903 739,723
Less - Accumulated depreciation and amortization (239,422) (213,904) (188,188)
---------------- --------------------------------
Net fixed assets 388,626 547,999 551,535
---------------- --------------- -------------
Other assets and deferred charges 60,121 56,490 59,835
Deferred taxes, net - 411,891 346,055
Beneficial lease rights, net 39,082 50,675 54,209
Goodwill, net 56,561 58,475 59,113
---------------- --------------- -------------
$1,393,848 $1,995,727 $2,340,699
================ =============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $131,678 $345,915 $420,730
Other 46,464 78,371 84,881
-------------- --------------- -------------
Total accounts payable 178,142 424,286 505,611
-------------- --------------- -------------
Current portion of capital lease and financing obligations 6,497 19,018 22,057
Self-insurance reserves 15,624 29,878 28,063
Accrued expenses and other current liabilities 86,230 114,205 135,474
Store closing reserves 12,846 179,365 51,242
Current portion of long term debt 496,534 - -
-------------- --------------- -------------
Total current liabilities 795,873 766,752 742,447
-------------- --------------- -------------
Long-term debt - 606,057 820,068
Capital lease and financing obligations 64,575 165,365 166,095
Other long-term liabilities 27,932 49,256 50,874
Excess of revalued net assets over equity under fresh-start reporting 7,100 11,715 13,253
Liabilities subject to compromise 741,381 - -
Commitments and contingencies (see Note 8)
Stockholders' (Deficit) Equity
Preferred stock - - -
Common stock 295 295 296
Additional paid-in capital 533,394 532,654 531,879
(Accumulated deficit) Retained earnings (775,780) (135,445) 16,709
Treasury stock (922) (922) (922)
-------------- --------------- -------------
Total stockholders' (deficit) equity (243,013) 396,582 547,962
-------------- --------------- -------------
$1,393,848 $1,995,727 $2,340,699
============== =============== =============
(The accompanying Notes are an integral part of these consolidated condensed financial statements.)
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(DEBTORS-IN-POSSESSION)
(In Thousands)
(Unaudited)
For the Thirty-Nine
Weeks Ended
----------------------------------------
November 3, October 28,
2001 2000
------------------ --------------------
Cash flows from operating activities:
Net loss ($640,335) ($88,432)
Expenses not requiring the outlay of cash:
Income tax provision (benefit) 429,662 (54,201)
Depreciation and amortization of fixed and other assets 70,312 60,195
Amortization of debt discounts and deferred financing costs 5,414 3,589
Store closing charge (income) (24,098) -
Reorganization costs/ write off of deferred financing costs 21,938 -
------------------ --------------------
Cash used by operations before changes in working capital and
store closing activities (137,107) (78,849)
Changes in working capital:
Increase in receivables (6,260) (33,512)
Increase in merchandise inventories (5,320) (214,460)
Increase in accounts payable 84,955 84,031
Increase (decrease)in accrued expenses and other liabilities (2,472) 600
Increase in other working capital and other, net (1,122) (9,318)
Changes due to store closing activities:
Payments of store closing costs (15,075) (4,226)
------------------ --------------------
Net cash used for operating activities (82,401) (255,734)
------------------ --------------------
Cash flows from investing activities:
Purchases of fixed assets (22,893) (110,317)
Purchases of leases - (7,054)
------------------ --------------------
Net cash used for investing activities (22,893) (117,371)
------------------ --------------------
Cash flows from financing activities:
Borrowings under the revolving credit facilities, net 79,740 401,151
Borrowings under the Kimco DIP 55,000 -
Payments on debt and capital lease obligations (13,059) (14,338)
Repurchase of Hills Senior Notes - (2,852)
Deferred financing costs (31,520) (723)
Purchase of treasury stock - (8)
Proceeds from the exercise of options and warrants, net - 1,139
------------------ --------------------
Net cash provided by financing activities 90,161 384,369
------------------ --------------------
(Decrease) increase in cash and cash equivalents (15,133) 11,264
Cash and cash equivalents, beginning of period 49,761 30,612
------------------ --------------------
Cash and cash equivalents, end of period $34,628 $41,876
================== ====================
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Interest and debt fees not capitalized $59,991 $61,234
Income taxes 162 1,711
(The accompanying Notes are an integral part of these consolidated condensed financial statements.)
<page>
AMES DEPARTMENT STORES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(DEBTORS-IN-POSSESSION)
(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 November 3, 2001 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 February 3, 2001 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 February 3, 2001 (the "2000 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 2000 Form 10-K.
The accompanying unaudited consolidated condensed financial statements
have been prepared on a going concern basis, which contemplates
continuity of operations, realization of assets and liquidation of
liabilities and commitments in the normal course of business and do not
reflect any adjustments that might result if the Company is unable to
continue as a going concern. The filing of the voluntary Chapter 11
petitions referred to below, losses from operations and negative cash
flow from operations raise doubt about the Company's ability to
continue as a going concern. The appropriateness of using a going
concern basis is dependent upon, among other things, confirmation of a
plan or plans of reorganization, future profitable operations and the
ability to generate cash from operations and financing sources
sufficient to meet obligations. As a result of the filing of the
Chapter 11 cases and related circumstances, realization of assets and
liquidation of liabilities is subject to significant uncertainty. While
under the protection of Chapter 11, the Debtors (as defined below in
Note 2) may sell or otherwise dispose of assets, and liquidate or
settle liabilities for amounts other than those reflected in the
consolidated condensed financial statements. Further, a plan or plans
of reorganization could materially change the amounts reported in the
accompanying consolidated condensed financial statements. The
consolidated condensed financial statements do not include any
adjustments relating to recoverability of the value of recorded asset
amounts or the amount and classification of liabilities that might be
necessary as a consequence of a plan of reorganization. The Company
anticipates significant adjustments to the consolidated condensed
financial statements as a result of applying the provisions of
Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" during the proceedings. At
this time, it is not possible to predict the outcome of the Chapter 11
cases or their effect on the Company's business, its financial
position, results of operations or cash flows. If it is determined that
the liabilities subject to compromise in the Chapter 11 cases exceed
the fair value of the assets, unsecured claims may be satisfied at less
than 100% of their face value and equity interests of the Company's
stockholders may have no value. The Company believes the DIP Facilities
(as defined below in Note 2), which received final approval from the
Bankruptcy Court (as defined below in Note 2) on September 25, 2001,
should provide the Company with adequate liquidity to conduct its
business while it prepares a reorganization plan. However, the
Company's liquidity, capital resources, results of operations and
ability to continue as a going concern are subject to known and unknown
risks and uncertainties, including those set forth in Item 2 below
under "Forward Looking Statements."
2. Chapter 11 Filing
On August 20, 2001, the Company and each of its four subsidiaries
(collectively, the "Debtors") filed voluntary petitions under Chapter
11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United
States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court"). The Chapter 11 cases Nos. 01-42217 (REG) through
01-42221 (REG) (the "Chapter 11 Cases") have been consolidated for the
purpose of joint administration. As of August 20, 2001, the Debtors are
continuing to operate their business as debtors-in-possession under
Chapter 11 of the Bankruptcy Code and are subject to the jurisdiction
of the Bankruptcy Court.
As a result of these filings, actions to collect pre-petition
indebtedness are stayed and other contractual obligations against the
Debtors may not be enforceable. In addition, under the Bankruptcy Code,
the Debtors may assume or reject executory contracts, including real
estate leases, employment contracts, personal property leases, service
contracts and other unexpired executory pre-petition contracts, subject
to Bankruptcy Court approval. Parties affected by these rejections may
file claims with the Bankruptcy Court in accordance with the Bankruptcy
Code. The Debtors cannot presently determine or reasonably estimate the
ultimate liability that may result from the filing of claims for all
contracts that may be rejected. Substantially all pre-petition
liabilities are subject to settlement under a plan of reorganization to
be voted on by the creditors and equity holders and approved by the
Bankruptcy Court. Although the Debtors expect to file a reorganization
plan or plans that provide for emergence from bankruptcy sometime
during Fiscal Year 2002, there can be no assurance that a
reorganization plan or plans will be proposed by the Debtors or
confirmed by the Bankruptcy Court or that any such plan will be
consummated.
As provided by the Bankruptcy Code, the Debtors have the exclusive
right to submit a plan of reorganization for 120 days from the date of
the filing of the voluntary petitions On December 5, 2001 the Company
filed a motion with the Bankruptcy Court to extend the period of
exclusivity. If the Debtors fail to file a plan of
reorganization during such period or if such plan is not accepted by
the required number of creditors and equity holders within the required
period, any party in interest may subsequently file its own plan of
reorganization for the Debtors. A plan of reorganization must be
confirmed by the Bankruptcy Court, upon certain findings being made by
the Bankruptcy Court which are required by the Bankruptcy Code. The
Bankruptcy Court may confirm a plan of reorganization notwithstanding
the non-acceptance of the plan by an impaired class of creditors or
equity holders if certain requirements of the Bankruptcy Code are met.
A plan of reorganization also could result in holders of the Company's
common stock receiving no value for their interest. The Chapter 11
filing, the uncertainty regarding the eventual outcome of the
reorganization case and the effect of other unknown adverse factors
could threaten the Company's existence as a going concern.
At the first day hearing held on August 20, 2001 before Judge Robert E.
Gerber, the Bankruptcy Court entered its first day orders granting
authority to the Debtors to, among other things, pay pre-petition and
post-petition employee wages, salaries, benefits and other employee
obligations, pay certain administrative fees and insurance related
obligations and honor customer service programs, including warranties,
returns, layaways and gift certificates.
Schedules will be filed with the Bankruptcy Court setting forth the
assets and liabilities of the Debtors as of the filing date as shown by
the Company's accounting records. Differences between amounts shown by
the Company and claims filed by creditors will be investigated and, if
necessary, unresolved diputes will be determined by the Bankruptcy
Court. The ultimate settlement terms for such liabilities are subject
to a plan of reorganization, and accordingly, are not presently
determinable.
.
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 November 3,
2001, no options were exercised. During the quarter ended October 28,
2000, options representing 3,470 shares of Common Stock 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:
As a result of the Chapter 11 filing (see Note 2), the Ames Senior
Notes and the Hills Senior Notes (see below) will be classified as
"liabilities subject to settlement under the reorganization case." No
principal or interest payments will be made without Bankruptcy Court
approval until a reorganization plan defining the repayment terms has
been approved. During the quarter ended November 3, 2001, the Company
wrote off deferred financing costs of approximately $21.9 million
associated with this long-term debt as well as the Prior Credit
Facility (see below).
Debtor-In-Possession Credit Facilities
On August 20, 2001, the Company entered into a $700 million
Debtor-In-Possession Credit Agreement, dated as of August 20, 2001
(the "GECC DIP Facility"), with General Electric Capital Corporation
("GE Capital"). The Company also entered into a $55 million Credit
Agreement, dated as of August 20, 2001 (the "Kimco DIP Facility" and
together with the GECC DIP Facility, the "DIP Facilities"), with Kimco
Funding, LLC ("Kimco"). The GECC DIP Facility consists of a
$575 million Tranche A Revolver (including a Swing Line Commitment of
$30 million as a subfacility thereof), a $50 million fully drawn
Tranche B Revolver and a $75 million Term Loan. The GECC DIP Facility
has a sublimit of $75 million for the issuance of letters of credit.
Amounts borrowed under the Tranche A and Tranche B Revolvers bear
interest at the Index Rate plus 1.50% per annum or, at the election of
the Company, the applicable LIBOR Rate plus 2.75% per annum. Amounts
borrowed under the Term Loan bear interest at the Index Rate plus
5.25% per annum. The Company must also pay an unused commitment fee
equal to 0.35% per annum multiplied by the average unused daily
balance of the Revolving Loan and the Swing Line Loan. The GECC DIP
Facility terminates on the earliest of, among other dates,
August 20, 2003 and the effective date of a plan of reorganization in
the Chapter 11 Cases. Proceeds from the GECC DIP Facility were used to
repay in full the Prior Credit Facility (as defined below), and will
be used to pay such transaction costs and expenses related to the
Chapter 11 Cases, to provide working capital and for other general
corporate purposes.
The GECC DIP Facility replaced the Company's former credit facility
under the Credit Agreement dated as of March 2, 2001 (the "Prior Credit
Facility") with GE Capital, as agent, and a syndicate of other banks
and financial institutions. The Prior Credit Facility provided for a
secured revolving credit facility of up to $750 million, with a
sub-limit of $50 million for letters of credit, and a secured term
facility for $50 million. On August 20, 2001, as part of its Interim
Order, the Bankruptcy Court authorized the Company to use the proceeds
of the GECC DIP Facility to repay the Company's outstanding
indebtedness under the Prior Credit Facility.
The lenders under the GECC DIP Facility have a super-priority claim
against the estates of the Debtors (except with respect to the
Company's right, title and interest in all real property leases in
which the lenders under the Kimco DIP Facility, as defined below, have
a first priority lien).
The Kimco DIP Facility consists of a $55 million term loan. Amounts
borrowed under the Kimco DIP Facility bear interest at the Index Rate
plus 6.00% per annum. The Company must also pay an additional fee on or
prior to July 31, 2002 and each anniversary date thereof occurring on
or prior to the maturity date equal to 0.33% multiplied by the
aggregate principal amount of loans outstanding on such date. The Kimco
DIP Facility terminates on the earliest of, among other dates, August
20, 2003 and the effective date of a plan of reorganization in the
Chapter 11 Cases.
The lenders under the Kimco DIP Facility have a priority claim against
the estates of the Debtors, which ranks junior to the super-priority
claims of the lenders under the GECC DIP Facility (except with respect
to the Company's right, title and interest in all real property leases
in which the lenders under the Kimco DIP Facility have a first priority
lien).
As of November 3, 2001, borrowings of $441.5 million were outstanding
under the GECC DIP Facility. These borrowings are included in the
current portion of long-term debt in the accompanying consolidated
condensed balance sheet as of November 3, 2001. In addition, $28.9 and
$9.4 million of standby and trade letters of credit, respectively, were
outstanding under the GECC DIP Facility. The weighted average interest
rate on the borrowings under the Prior Credit Facility and the GECC DIP
Facility for the thirteen weeks ended November 3, 2001 was 8.52%. The
peak borrowing level under the Prior Credit Facility and the GECC DIP
Facility through November 3, 2001 was $573.4 million and occurred in
the fiscal month of May, 2001.
Senior Notes due 2003
The 12.5% Senior Notes due 2003 (the "Hills Senior Notes") were, at the
time of the acquisition of Hills Stores Company ("Hills"), an
unsecured obligation of Hills. The Company had Hills Senior Notes with
a recorded value of $44.1 million outstanding as of August 4, 2001.
The Hills Senior Notes pay interest in January and June and mature
July 2003. No principal or interest payments will be made without
Bankruptcy Court approval until a reorganization plan defining the
repayment terms has been approved.
Senior Notes due 2006
The Company had $200.0 million of its 10% seven-year senior notes (the
"Ames Senior Notes") outstanding as of August 4, 2001. The Ames Senior
Notes pay interest semi-annually in April and October and mature April,
2006. The Company did not pay interest on the Ames Senior notes in
October, 2001, and no principal or interest payments will be made
without Bankruptcy Court approval until a reorganization plan defining
the repayment terms has been approved.
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 (as amended), the 1998 Management Stock Incentive Plan, as
amended and restated, and the 2000 Store Manager Stock Option Plan.
The Company accounts for its stock option plans under Accounting
Principles Board ("APB") Opinion No. 25. Had compensation cost for the
Company's stock option grants been determined in accordance with SFAS
No. 123, the Company's net income and net income per common share for
quarters ended November 3, 2001 and October 28, 2000 would have
approximated the pro forma amounts below:
For the Thirteen For the Thirty-nine Weeks
Weeks Ended ended
-------------------------------- -----------------------------
(In Thousands) November 3, October 28, November3, October 28,
2001 2000 2001 2000
-------------- ------------ ------------- ------------
Net loss:
As reported ($336,176) ($37,236) ($640,335) ($88,432)
Pro forma ($337,839) ($39,830) ($646,403) ($95,586)
Basic net loss per common share: (a)
As reported ($11.43) ($1.27) ($21.78) ($3.01)
Pro forma ($11.49) ($1.35) ($21.98) ($3.25)
(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.
7. Income Taxes:
The Company's estimated annual effective income tax rate was applied to
the loss before income taxes for the thirteen and thirty nine weeks
ended October 28, 2000 to compute a non-cash income tax benefit. The
income tax benefit was included in current deferred taxes in the
accompanying consolidated condensed balance sheet as of October 28,
2000.
In assessing the realizability of deferred tax assets, management
considers whether it is more likely than not that some portion or all
of the deferred taxes will be realized. Based on a number of factors,
including the Company's filing for Chapter 11 bankruptcy protection on
August 20,2001, as previously discussed, and management's current
financial forecasts, the Company recorded an increase to the valuation
allowance of $212.9 million and $429.7 million during the thirteen and
thirty-nine weeks ended November 3, 2001, respectively.
8. Commitments and Contingencies:
Reference can be made to the 2000 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 2000 Form
10-K.
On August 20, 2001, the Debtors filed their voluntary petitions for
reorganization under Chapter 11 of the Bankruptcy Code with the United
States Bankruptcy Court for the Southern District of New York, Case
Nos. 01-42217 through 01-42221 (REG). All civil litigation commenced
against the Debtors prior to that date has been stayed by operation of
law. The Company may agree from time to time to proceed with the
resolution of certain litigation or the Court may allow certain
litigation to proceed. Any judgements against the Company, however,
ultimately may be paid only pursuant to a confirmed plan of
reorganization.
9. Closed Store Reserves and Inventory Charges:
On August 16, 2001 the Company announced that it would close 47 store
locations. The stores began liquidation sales immediately and closed in
October, 2001. In connection with these closings, the Company recorded
a $75.9 million charge in the third quarter. The charge includes
provisions for the write off of long term assets ($42.7 million), the
estimated cost of leases to be rejected in the chapter 11 proceedings
($29.2 million), employee severance costs ($2.7 million) and other
costs ($1.3 million). The Company also recorded a $13.3 million charge
to cost of merchandise sold for the impairment of inventory value in
these stores.
As a result of the Chapter 11 filing, the Company rejected many of the
real estate leases for the stores closed prior to August 20, 2001. The
Company's estimate for the rejection claim associated with these leases
was well below the amounts previously reserved for these lease
obligations. Accordingly, the Company recorded a reduction of $100
million to its closed store reserve during the quarter ended November
3, 2001.
The Company has established reserves against the costs associated with
the closure of a number of stores. The following items represent the
major components of the change in the closed store reserves.
(in thousands)
----------------
Balance 2/3/01 $179,365
Lease costs (7,078)
Fixed asset write-downs (61,805)
Other occupancy costs (7,050)
Severance (2,041)
47 store closing charge 75,902
Reduction of reserves (100,000)
Transferred to Liabilities
Subject to Compromise (64,447)
----------------
Balance 11/3/01 $12,846
================
During the third quarter, the Company recorded a charge of $17.8
million to cost of merchandise sold to reserve for anticipated
additional markdowns.
10. Liabilities Subject to Compromise
Liabilities subject to compromise consist of various obligations of
the Company as of the August 20, 2001 Chapter 11 filing date. As of
November 3, 2001 liabilities subject to compromise was composed of:
(in thousands) Balance at
November 3, 2001
---------------------
Accounts payable trade $258,807
Accounts payable other 74,098
Lease rejection claims 64,447
Capital leases and financing obligations 42,359
Senior notes 244,147
Accrued taxes, general liability and other
prepetition obligations 57,523
---------------------
Total $741,381
=====================
11. Subsequent Events
On November 14, 2001, the Company announced that it would close 16
store locations. The stores began liquidation sales immediately and are
expected to close in January, 2002. On November 27, 2001, the Company
announced that it would close its distribution center in Columbus,
Ohio. The distribution center is expected to close in March, 2002. The
Company will record a charge of up to $60 million related to these
closings in the fourth quarter.
On December 5, 2001, the Company announced that it will close 54
locations. The stores will begin liquidation sales in late December,
2001 and are expected to close by March, 2002. The Company will record
a charge related to these store closings in the fourth quarter of
fiscal 2001.
12. 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. The Company
adopted SFAS No. 133, as amended by SFAS No. 138, effective the
beginning of Fiscal 2001. The impact of adopting this standard was not
significant.
During June 2001, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 141 " Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets."
In addition to requiring the use of the purchase method for all
business combinations, SFAS 141 requires intangible assets that meet
certain criteria to be recognized as assets apart from gooodwill. SFAS
142 addresses accounting and reporting standards for acquired goodwill
and other intangible assets, and generally, requires that goodwill and
indefinite life intangible assets no longer be amortized but be tested
for impairment annually. Finite life intangible assets will continue to
be amortized over their useful lives. The impact of these statements on
the Company's consolidated financial statements is currently being
evaluated.
During August, 2001, the Financial Accounting Standards Board issued
SFAS No. 144 " Accounting for the impairment or disposal of long lived
assets". The statement addresses financial accounting and reporting for
the impairment or disposal of long-lived assets and supersedes SFAS No.
121 "Accounting for the impairment of long-lived assets and for
long-lived assets to be disposed of" and the accounting and reporting
provisions of Accounting Principles Board No. 30 "Reporting the results
of operations- Reporting the effects of disposal of a segment of
business, and extraordinary, unusual and infrequently occurring events
and transactions for the disposal of a segment of a business". SFAS no.
144 excludes goodwill and other intangibles that are not amortized. The
statement is effective for fiscal years beginning after December 15,
2001. The impact of this statement on the Company's consolidated
financial statements is currently being evaluated.
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.
Chapter 11 Filing
On August 20, 2001, the Company and each of its four subsidiaries (collectively,
the "Debtors") filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy
Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the
Southern District of New York (the "Bankruptcy Court"). The Chapter 11 cases
Nos. 01-42217 (REG) through 01-42221 (REG) (the "Chapter 11 Cases") have been
consolidated for the purpose of joint administration. As of August 20, 2001, the
Debtors are continuing to operate their business as debtors-in-possession under
Chapter 11 of the Bankruptcy Code and are subject to the jurisdiction of the
Bankruptcy Court.
As a result of these filings, actions to collect pre-petition indebtedness are
stayed and other contractual obligations against the Debtors may not be
enforceable. In addition, under the Bankruptcy Code, the Debtors may assume or
reject executory contracts, including real estate leases, employment contracts,
personal property leases, service contracts and other unexpired executory
pre-petition contracts, subject to Bankruptcy Court approval. Parties affected
by these rejections may file claims with the Bankruptcy Court in accordance with
the Bankruptcy Code. The Debtors cannot presently determine or reasonably
estimate the ultimate liability that may result from the filing of claims for
all contracts that may be rejected. Substantially all pre-petition liabilities
are subject to settlement under a plan of reorganization to be voted on by the
creditors and equity holders and approved by the Bankruptcy Court. Although the
Debtors expect to file a reorganization plan or plans that provide for emergence
from bankruptcy sometime during Fiscal Year 2002, there can be no assurance that
a reorganization plan or plans will be proposed by the Debtors or confirmed by
the Bankruptcy Court or that any such plan will be consummated.
As provided by the Bankruptcy Code, the Debtors have the exclusive right to
submit a plan of reorganization for 120 days from the date of the filing of the
voluntary petitions. On December 5, 2001 the Company filed a motion with the
Bankruptcy Court to extend the exclusivity period. If the Debtors fail to file a
plan of reorganization during such period or if such plan is not accepted by the
required number of creditors and equity holders within the required period, any
party in interest may subsequently file its own plan of reorganization for the
Debtors. A plan of reorganization must be confirmed by the Bankruptcy Court,
upon certain findings being made by the Bankruptcy Court which are required by
the Bankruptcy Code. The Bankruptcy Court may confirm a plan of reorganization
notwithstanding the non-acceptance of the plan by an impaired class of creditors
or equity holders if certain requirements of the Bankruptcy Code are met. A plan
of reorganization also could result in holders of the Company's common stock
receiving no value for their interest. The Chapter 11 filing, the uncertainty
regarding the eventual outcome of the reorganization case and the effect of
other unknown adverse factors could threaten the Company's existence as a going
concern.
At the first day hearing held on August 20, 2001 before Judge Robert E. Gerber,
the Bankruptcy Court entered its first day orders granting authority to the
Debtors to, among other things, pay pre-petition and post-petition employee
wages, salaries, benefits and other employee obligations, pay certain
administrative fees and insurance related obligations and honor customer service
programs, including warranties, returns, layaways and gift certificates.
Schedules will be filed with the Bankruptcy Court setting forth the assets and
liabilities of the Debtors as of the filing date as shown by the Company's
accounting records. Differences between amounts shown by the Company and claims
filed by creditors will be investigated and if necessary, unresolved disputes
will be determined by the Bankruptcy Court. The ultimate settlement terms for
such liabilities are subject to a plan of reorganization, and accordingly, are
not presently determinable.
Forward-looking Statements
The statements contained or incorporated by reference under the captions
"Business," "Legal Proceedings," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Quantitative and Qualitative
Disclosures about Market Risk" and elsewhere in this Form 10-Q that are not
historical facts are "forward-looking statements," as that term is defined in
the Private Securities Litigation Reform Act of 1995. Those statements include
all discussions of strategy as well as statements that contain such
forward-looking expressions as "believes," "estimates," "intends," "may,"
"will," "should," or "anticipates" or the negative thereof. In addition, from
time to time, our representatives or we have made or may make forward-looking
statements orally or in writing. Furthermore, forward-looking statements may be
included in our filings with the Securities and Exchange Commission as well as
in the press releases or oral presentations made by or with the approval of one
of our authorized executive officers.
We caution you to bear in mind that forward-looking statements, by their very
nature, involve assumptions and expectations and are subject to risks and
uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained herein are reasonable, no
assurance can be given that those assumptions or expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from our expectations include, but are not limited to, the ones
discussed below.
The filing of the voluntary Chapter 11 petitions referred to above, losses from
operations and negative cash flow from operations raise doubt about the
Company's ability to continue as a going concern. In addition, the Company is
subject to the risks associated with (i) the ability of the Company to operate
pursuant to the terms of the DIP Facilities (defined below), (ii) the ability of
the Company to operate successfully under the Chapter 11 proceedings, (iii) the
approval of plans and activities by the Bankruptcy Court and (iv) the ability of
the Company to create and have approved a reorganization plan in the Chapter 11
cases.
Our financial performance is sensitive to changes in overall economic conditions
that impact consumer spending, particularly discretionary spending. Future
economic conditions affecting disposable consumer income such as employment
levels, business conditions, fuel and energy costs, interest rates, and tax
rates could reduce consumer spending or cause consumers to shift their spending
to other products. A general slowdown in the United States' economy or an
uncertain economic outlook would adversely affect consumer spending habits,
which would likely result in lower net sales than expected on a quarterly or
annual basis. A general reduction in the level of discretionary spending or
shifts in consumer discretionary spending to other products could adversely
affect our growth, net sales, and profitability. Our operating results may be
adversely affected by unfavorable local, regional or national economic
conditions, especially those affecting the Northeast, Midwest or Mid-Atlantic
Regions where our stores are currently located.
Our business is affected by the pattern of seasonality common to most retailers.
Our net sales and net income are generally weakest during the first two fiscal
quarters and strongest during the third and fourth quarters. Historically, we
have generated a significant portion of our net sales and profits during our
fourth fiscal quarter, which includes the Christmas selling season, and have
experienced losses or minimal earnings in the first, second, and third fiscal
quarters.
We realize a disproportionately large amount of our net sales and net income
during the Christmas selling season. In anticipation of the holidays, we
purchase substantial amounts of seasonal inventory and hire many temporary
employees. If for any reason our net sales during the Christmas selling season
were below seasonal norms, we could have excess inventory, necessitating
mark-downs to minimize this excess, which would reduce our profitability and
adversely affect our operating results.
We continually change our mix of seasonal merchandise, non-seasonal merchandise,
and consumable products. Our gross profit margins may fluctuate from quarter to
quarter. Our quarterly and annual results of operations, including comparable
store net sales and income, also fluctuate for a variety of other reasons,
including adverse weather conditions, particularly during the peak Christmas
season, and difficulties in obtaining sufficient quantities of merchandise from
our suppliers.
The retail industry is highly competitive and we expect competition to increase
in the future. We compete with many smaller stores offering a similar range of
products. Although Ames is a large regional discount retailer, we are still
considerably smaller in terms of our total number of stores, sales and earnings
than the three leading national chains: Wal-Mart, Kmart, and Target Stores. Each
of these chains, as well as other regional operators, currently operates stores
within our regional market and competes with us for customers and potential
store locations. We anticipate a further increase in competition from these
national discount store chains.
Our merchandising focus is primarily directed to consumers who, we believe, are
underserved by the major national chains. Although this approach, combined with
our smaller store size, has enabled us to compete effectively with these chains
and operate profitably in proximity to their stores, we remain vulnerable to the
marketing power and high level of consumer recognition of the major national
discount chains. We expect to face increased competition in the future which
could adversely affect our business, results of operations, and financial
condition.
The efficient operation of our business is heavily dependent on our information
systems. We depend on others to maintain and periodically upgrade many of these
systems so that they can continue to support our business. The software programs
supporting many of our systems were licensed to us by independent software
developers. The inability of these developers to continue to maintain and
upgrade these information systems and software programs would disrupt our
operations if we were unable to convert to alternate systems in an efficient and
timely manner.
Our business is dependent on continued good relations with our vendors. In
particular, we believe that we generally are able to obtain attractive pricing
and other terms from vendors because we are perceived as a desirable customer.
Our failure to maintain good relations with our vendors could increase our
exposure to shifts in market demand, which may in turn lead to improper
inventory levels and increased inventory markdown rates.
Substantially all of our assets are encumbered by debt incurred through our
credit agreement borrowings. At November 3, 2001, the amount of credit agreement
debt outstanding was $441.5 million. Our leveraged position impairs our ability
to obtain additional financing to fund working capital requirements, capital
expenditures or other purposes.
The amount of our credit facility available for cash borrowings and letters of
credit is based on specified percentages of our inventory on hand as well as
in-transit inventory from overseas, certain receivables and certain of our owned
real estate. Our borrowing availability under the credit facility fluctuates
relative to this borrowing base. This borrowing base varies in value as a result
of sales, merchandise purchases, and profitability. Lack of short-term liquidity
due to reaching the limits of our borrowing availability would adversely affect
our business, results of operations, and financial condition.
We incurred a year-to-date net pre-tax loss of $210.7 million through the end of
the quarter ended November 3, 2001. There can be no assurance that losses will
not continue in the future. If losses do continue to occur, we will likely need
to obtain additional capital to continue our operations.
All subsequent written and oral forward-looking statements attributable to us or
persons acting on our behalf are expressly qualified in their entirety by these
factors and the cautionary statements contained herein.
Basis of Presentation
The accompanying unaudited consolidated condensed financial statements have been
prepared on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities and commitments in the
normal course of business and do not reflect any adjustments that might result
if the Company is unable to continue as a going concern. The filing of the
voluntary Chapter 11 petitions referred to above, losses from operations and
negative cash flow from operations raise doubt about the Company's ability to
continue as a going concern. The appropriateness of using a going concern basis
is dependent upon, among other things, confirmation of a plan or plans of
reorganization, future profitable operations and the ability to generate cash
from operations and financing sources sufficient to meet obligations. As a
result of the filing of the Chapter 11 cases and related circumstances,
realization of assets and liquidation of liabilities is subject to significant
uncertainty. While under the protection of Chapter 11, the Debtors may sell or
otherwise dispose of assets, and liquidate or settle liabilities for amounts
other than those reflected in the consolidated condensed financial statements.
Further, a plan or plans of reorganization could materially change the amounts
reported in the accompanying consolidated condensed financial statements. The
consolidated financial statements do not include any adjustments relating to
recoverability of the value of recorded asset amounts or the amount and
classification of liabilities that might be necessary as a consequence of a plan
of reorganization. The Company anticipates significant adjustments to the
consolidated condensed financial statements as a result of applying the
provisions of Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" during the proceedings. At this time,
it is not possible to predict the outcome of the Chapter 11 cases or their
effect on the Company's business, its financial position, results of operations
or cash flows. If it is determined that the liabilities subject to compromise in
the Chapter 11 cases exceed the fair value of the assets, unsecured claims may
be satisfied at less than 100% of their face value and equity interests of the
Company's stockholders may have no value. The Company believes the DIP
Facilities (as defined below in "Liquidity and Capital Resources"), should
provide the Company with adequate liquidity to conduct its business while it
prepares a reorganization plan. However, the Company's liquidity, capital
resources, results of operations and ability to continue as a going concern are
subject to known and unknown risks and uncertainties, including those set forth
above under "Forward-looking Statements."
Store Closings
In our annual report on Form 10-K for the year ended February 3, 2001 ("Fiscal
2000") we disclosed the planned closing of thirty-two stores. We completed the
closing of the thirty-two stores by the end of March 2001. All but one of the
stores were under-performing stores that were acquired in the Hills Stores
Company acquisition in December 1998; the other store was closed as a result of
the expiration of its lease.
On August 16, 2001, the Company announced that it would close 47 store
locations. The stores began liquidation sales immediately and completed closing
in October 2001. In connection with these closings the Company recorded a $75.9
million charge in the third quarter.
On November 14, 2001 the Company announced that it would close 16 store
locations. The stores began liquidation sales immediately and are expected to
close in January, 2002. On November 27, 2001 the Company announced that it would
close its distribution center in Columbus, Ohio. The distribution center is
expected to close in March of 2002. The Company will record a charge in the
fourth quarter of fiscal 2001 up to $60 million related to these closings.
On December 5, 2001 the Company announced that it will close 54 store locations.
The stores will begin liquidation sales in late December, 2001 and are expected
to close by March, 2002. The Company will record a charge in the fourth quarter
of fiscal 2001 related to these store closings.
Results of Operations
A significant factor affecting the Company's results of operations and financial
condition for the quarter ended November 3, 2001, was the continued
deterioration of its liquidity position caused by declining sales volume and the
reduced number of merchandise shipments from suppliers. The following tables
illustrate the consolidated results of operations for the thirteen and
thirty-nine weeks ended November 3, 2001, as compared to the consolidated
results of operations for the thirteen and thirty-nine weeks ended October 28,
2000.
November 3, October 28, Percentage
For the thirteen weeks ended 2001 2000 Change
---------------- -------------- ----------------
(In thousands)
Net sales $676,892 $920,321 (26.5)%
Leased department and other income 9,677 14,588 (33.7)%
-------------- --------------
Total revenue 686,569 934,909 (26.6)%
Costs and expenses:
Cost of merchandise sold 535,499 689,762 (22.4)%
Selling, general, and administrative expense 229,039 261,856 (12.5)%
Depreciation and amortization expense, net 26,193 19,252 36.1%
Interest and debt expense, net 17,582 24,098 (27.0)%
Closed stores income (24,098) -
Reorganization expenses 25,674 -
-------------- --------------
Loss before income taxes (123,320) (60,059)
Income tax (provision) benefit (212,856) 22,823
-------------- --------------
Net loss ($336,176) ($37,236)
============== ==============
November 3, October 28, Percentage
For the thirty-nine weeks ended 2001 2000 Change
---------------- -------------- -----------------
(In thousands)
Net sales 2,276,593 2,623,012 (13.2)%
Leased department and other income 28,991 34,391 (15.7)%
-------------- --------------
Total revenue 2,305,584 2,657,403 (13.2)%
Costs and expenses:
Cost of merchandise sold 1,682,919 1,923,567 (12.5)%
Selling, general and administrative expense 704,051 757,437 (7.1)%
Depreciation and amortization expense, net 64,665 54,189 19.3%
Interest and debt expense, net 63,046 64,843 (2.8)%
Closed stores income (24,098) -
Reorganization expenses 25,674 -
-------------- --------------
Loss before income taxes (210,673) (142,633)
Income tax (provision) benefit (429,662) 54,201
-------------- --------------
Net loss ($640,335) ($88,432)
============== ==============
The decrease in net sales is primarily attributable to a comparable store sales
decrease of 28.9% for the quarter and 13.8% for the first three quarters of
Fiscal 2001 compared to the same periods in Fiscal 2000.
Gross margin as a percentage of sales decreased to 20.9% from 25.1% during the
third quarter of fiscal 2001 compared to the same period in Fiscal 2000. During
the thirty nine weeks ended November 3, 2001, gross margin rates decreased from
26.7% to 26.1% compared to the same period in Fiscal 2000. For the quarter, the
gross margin rate was negatively impacted by the liquidation sales in the 47
closing stores as well as a lower amount of vendor funds. For the year, the
gross margin was negatively impacted by the 47 store closing as well as a higher
rate of inventory shrinkage, partially offset by an improved promotional
markdown rate. Additionally, a charge of $17.8 million was recorded to margin in
the third quarter of 2001 to reserve for anticipated additional inventory
markdowns.
The decrease in selling, general and administrative expenses primarily resulted
from cost reduction programs and the closing of the thirty-two stores. Selling,
general and administrative expenses as a percentage of sales increased from
28.5% to 33.8% for the quarter and from 28.9% to 30.9% for the first thirty nine
weeks as compared to last year; the increase was primarily a result of lower
than expected sales.
The increase in depreciation and amortization expense is primarily a result of
additional depreciation associated with the new store and remodeling
expenditures incurred during Fiscal 2000.
The decrease in interest expense is mainly attributable to a lower level of
borrowings under our credit facility.
Our estimated annual effective income tax rate for fiscal 2000 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 sheets as of October 28, 2000.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some or all of the deferred taxes will
be realized. Based on a number of factors, including the Company's filing for
Chapter 11 bankruptcy protection on August 20, 2001, as previously discussed,
and management's current financial forecasts, the Company recorded an increase
to the valuation allowance of $212.9 million and $429.7 million during the
thirteen and thirty-nine weeks ended November 3, 2001.
Liquidity and Capital Resources
Current Year
The Company's liquidity position deteriorated in the second and third quarters
primarily due to a continuation of declining sales that resulted in a
significant deficiency in cash necessary for operating activities. As described
above under "Chapter 11 Filing," on August 20, 2001, the Company filed a
voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. The following table reflects certain balance sheet account balances as of
the end of the current fiscal quarter compared to the same account balances
as of the beginning of the current fiscal year.
November 3, February 3, Percentage
2001 2001 Change Change
---------------- ---------------- ------------ -------------
(In thousands)
----------------------------------------------------
Cash and cash equivalents $34,628 $49,761 ($15,133) (30.4)%
Merchandise inventories 749,452 744,132 5,320 0.7%
Net fixed assets 388,626 547,999 (159,373) (29.1)%
Trade accounts payable 131,678 345,915 (214,237) (61.9)%
Store closing reserves 12,846 179,365 (166,519) (92.8)%
Accrued expenses 86,230 114,205 (27,975) (24.5)%
Capital lease and financing obligations 64,575 165,365 (100,790) (61.0)%
The decrease in our cash position was primarily due to merchandise inventory
purchases, reduction of accounts payable, and payments of deferred financing
costs and capital expenditures. These cash reductions were partially offset by
additional credit agreement borrowings of $79.7 million.
The decrease in net fixed assets was due to net fixed asset retirements
(including capital lease retirements) totaling $116.4 million, associated with
the 81 stores that have closed since the beginning of the year, and $62.8
million in depreciation expense partially offset by $22.9 million in capital
expenditures and $4.5 million in capital lease additions.
The decrease in trade accounts payable was principally the result of a decrease
in purchases resulting from the closing of 32 stores in March of 2001 and 47
stores in October of 2001 as well as from reduced vendor payment terms
experienced as a result of our Chapter 11 bankruptcy filing.
Store closing reserves decreased primarily as a result of costs related to the
store closings, including $61.8 million in fixed asset write-downs, $2.0 million
in severance costs and $14.1 million in occupancy costs. An additional $64.4
million was transferred to the Liabilities Subject to Compromise account for
lease rejection costs. We reduced the reserve for stores closed prior to August
20, 2001 by $100 million and recorded a $75.9 million charge related to the
closing of the 47 stores.
The decrease in capital lease and financing obligations was due to $58.7 million
in write-offs associated with the closing of the 32 stores and 47 stores as
previously referenced, $13.1 million in payments on capital lease obligations
partially offset by $4.5 million in capital lease additions and $42.4 million
which was transferred to Liabilities Subject to Compromise.
Liabilities Subject to Compromise consists of obligations of the Company as of
the August 20, 2001 Chapter 11 filing date (see note 10 to the consolidated
financial statements for further details).
Our principal sources of liquidity are our Debtor in Possession credit
agreements, cash from operations, and cash on hand.
On August 20, 2001, the Company entered into a $700 million Debtor-In-Possession
Credit Agreement, dated as of August 20, 2001 ( the "GECC DIP Facility"), with
General Electric Capital Corporation ("GE Capital"). The Company also entered
into a $55 million Credit Agreement, dated as of August 20, 2001 (the "Kimco DIP
Facility" and, together with the GECC DIP Facility, the "DIP Facilities"), with
Kimco Funding, LLC ("Kimco"). The GECC DIP Facility consists of a $575 million
Tranche A Revolver (including a Swing Line Commitment of $30 million as a
subfacility thereof), a $50 million fully drawn Tranche B Revolver and a $75
million Term Loan. The GECC DIP Facility has a sublimit of $75 million for the
issuance of letters of credit. Amounts borrowed under the Tranche A and Tranche
B Revolvers bear interest at the Index Rate plus 1.50% per annum or, at the
election of the Company, the applicable LIBOR Rate plus 2.75% per annum. Amounts
borrowed under the Term Loan bear interest at the Index Rate plus 5.25% per
annum. The Company must also pay an unused commitment fee equal to 0.35% per
annum multiplied by the average unused daily balance of the Revolving Loan and
the Swing Line Loan. The GECC DIP Facility terminates on the earliest of, among
other dates, August 20, 2003 and the effective date of a plan of reorganization
in the Chapter 11 Cases. Proceeds from the GECC DIP Facility were used to repay
in full the Prior Credit Facility (as defined below), and will be used to pay
such transaction costs and expenses related to the Chapter 11 cases, to provide
working capital and for other general corporate purposes.
The GECC DIP Facility replaced the Company's former credit facility under the
Credit Agreement, dated as of March 2, 2001 (the "Prior Credit Facility"), with
GE Capital, as agent, and a syndicate of other banks and financial institutions.
The Prior Credit Facility provided for a secured revolving credit facility of up
to $750 million, with a sub-limit of $50 million for letters of credit, and a
secured term facility for $50 million. On September 25, 2001, the Bankruptcy
Court issued a final order authorizing the Company to use the GECC DIP Facility.
The lenders under the GECC DIP Facility have a super-priority claim against the
estates of the Debtors (except with respect to the Company's right, title and
interest in all real property leases in which the lenders under the Kimco DIP
Facility have a first priority lien).
The Kimco DIP Facility consists of a $55 million term loan. Amounts borrowed
under the Kimco DIP Facility bear interest at the Index Rate plus 6.00% per
annum. The Company must also pay an additional fee on or prior to July 31, 2002
and each anniversary date thereof occurring on or prior to the maturity date
equal to 0.33% multiplied by the aggregate principal amount of loans outstanding
on such date. The Kimco DIP Facility terminates on the earliest of, among other
dates, August 20, 2003 and the effective date of a plan of reorganization in the
Chapter 11 Cases. Proceeds from the Kimco DIP Facility will be used for the
financing of (i) capital expenditures relating to the Company's real property
assets, (ii) its operating expenses and (iii) intercompany loans to Ames
Merchandising Corporation.
The lenders under the Kimco DIP Facility have a priority claim against the
estates of the Debtors, which ranks junior to the super-priority claims of the
lenders under the GECC DIP Facility (except with respect to the Company's right,
title and interest in all real property leases in which the lenders under the
Kimco DIP Facility have a first priority lien).
As of November 3, 2001, borrowings of $441.5 million were outstanding under the
GECC DIP Credit Facility. These borrowings are included in the current portion
of long-term debt in the accompanying consolidated condensed balance sheet as of
November 3, 2001. In addition, $28.9 and $9.4 million of standby and trade
letters of credit, respectively, were outstanding under the Credit Facility. The
weighted average interest rate on the borrowings for the thirteen weeks ended
November 3, 2001 was 8.52%. The peak borrowing level through November 3, 2001
was $573.4 million and occurred in the fiscal month of May, 2001.
Achievement of expected cash flows from operations and compliance with our
credit agreement covenants (see Note 5 to the consolidated financial statements)
are dependent upon the attainment of sales, gross profit, expense levels, vendor
relations, and flow of merchandise that are consistent with our financial
projections.
Comparable Quarters
The following table reflects certain balance sheet account balances as of the
end of the current fiscal quarter compared to the same account balances at the
end of the Fiscal 2000 third quarter.
November 3, October 28, Percentage
2001 2000 Change Change
---------------- ---------------- ------------ -------------
(In thousands)
----------------------------------------------------
Cash and cash equivalents $34,628 $41,876 $(7,248) (17.3)%
Merchandise inventories 749,452 1,045,847 (296,395) (28.3)%
Net fixed assets 388,626 551,535 (162,909) (29.5)%
Trade accounts payable 131,678 420,730 (289,052) (68.7)%
Other accounts payable 46,464 84,881 (38,417) (45.3)%
Store closing reserves 12,846 51,242 (38,396) (74.9)%
Accrued expenses 86,230 135,474 (49,244) (36.3)%
Capital lease and financing obligations 64,575 166,095 (101,520) (61.1)%
The decrease in merchandise inventories from October 28, 2000 was due to the
closing of 32 stores in March of 2001 and 47 stores in October of 2001 as well
as reduced purchases of inventory as a result of the difficult retail
environment.
The reduction in net fixed assets resulted from write-offs primarily associated
with the closing of 32 stores and 47 stores, as referenced above, and $85.2
million in depreciation expense offset by $31.7 million in capital expenditures
and $9.0 million in capital lease additions incurred during the twelve months
ended November 3, 2001.
The decrease in trade accounts payable from October 28, 2000 resulted primarily
from reduced purchases of merchandise related to the closed stores, and reduced
vendor payment terms experienced as a result of our Chapter 11 filing.
The decrease in other accounts payable results from our expense control programs
and a reduction in selling general and administrative expenses related to the
closing stores.
Store closing reserves decreased as a result of the $129.8 million charge taken
in the fourth quarter of Fiscal 2000 offset by $78.0 million in the current year
usage previously discussed and $1.7 million in usage during the fourth quarter
of fiscal 2000. The reserve increased by $75.9 million related to the 47 store
closing offset by a $100.0 million reduction in the reserve related to stores
closed prior to August 20, 2001. An additional $64.4 million was transferred to
Liabilities Subject to Compromise in recognition of potential lease rejection
costs.
The decrease in capital lease and financing obligations was due to $58.7 million
in write-offs associated with the closing stores as previously referenced, $21.4
million in payments on capital lease obligations partially offset by $9.0
million in capital lease additions and $42.4 million transferred to Liabilities
Subject to Compromise.
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 credit facilities. These loans
bear interest at rates which vary with changes in (i) the London Interbank
Offered Rate (LIBOR) or (ii) the Index Rate (as defined in our credit
agreement).
We do not speculate on the future direction of interest rates. As of November 3,
2001, approximately $496.5 million of our debt bore interest at variable rates.
We believe that the effect, if any, of possible near term changes in interest
rates on our consolidated financial position, results of operations or cash
flows would not be significant.
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 Part I, Item 2 - Management's Discussion and Analysis
of Financial Condition and Results of Operations.
On August 20, 2001, the Debtors filed their voluntary
petitions for reorganization under Chapter 11 of the
Bankruptcy Code with the United States Bankruptcy Court for
the Southern District of New York, Case Nos. 01-42217 through
01-42221 (REG). All civil litigation commenced against the
Debtors prior to that date has been stayed by operation of
law.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 6. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits
Exhibit No. Exhibit
11 Schedule of computation of basic and
diluted net income (loss)per share
12 Ratio of Earnings to Fixed Charges
(b) Reports on Form 8-K
On August 24, 2001, the Company filed a report on form 8K regarding
the filing of voluntary petitions by the Company and its subsidiaries
under Chapter 11 of the U.S. Bankruptcy Code.
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 17, 2001 /s/ Joseph R. Ettore
----------------------------------------------------
Joseph R. Ettore, Chairman, Chief Executive
Officer, and Director
Dated: December 17, 2001 /s/ Rolando de Aguiar
----------------------------------------------------
Rolando de Aguiar, Senior Executive Vice
President, Chief Financial and Administrative Officer
Exhibit 11
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
<s> <c> <c> <c> <c>
For the Thirteen For the Thirty-Nine
Weeks Ended Weeks Ended
------------------------------ ----------------------------
November 3, October 28, November 3, October, 28
2001 2000 2001 2000
-------------- -------------- ---------------- ---------------
Net loss................. (336,176) ($37,236) ($640,335) ($88,432)
============== ============== ================ ================
For Basic Earnings Per Share:
Weighted average number of common shares outstanding
During the period (b)............................... 29,408 29,407 29,405 29,378
================ ============== ================ ================
Basic net loss per share.......... ($11.43) ($1.27) ($21.78) ($3.01)
================ ============== ================ ===============
For Diluted Earnings Per Share:
Weighted average number of common shares outstanding during
the period (b)........................... 29,408 29,407 29,405 29,378
Add common stock equivalent shares represented by:
Series B Warrants.................. - - - 4
Options under the 1994 Management Stock Option
Plan and 1998 Stock Incentive Plan......... - 36 143 202
Options under the 1994 Non-Employee Director Stock
Option Plan.................. - 21 - 40
Options under 2000 Store Manager Stock Option Plan - - 33 22
---------------- -------------- ---------------- --------------
Weighted average number of common and common
Equivalent shares................................... 29,408 29,407 29,405 29,378
================ ================ ================ =============
Diluted net loss per share (a)........... ($11.43) ($1.27) ($21.78) ($3.01)
================ ============== ================ =============
(a) Common stock equivalents have not been included, because the effect would be anti-dilutive.
(b) The weighted average number of common shares outstanding is net of treasury stock.
Exhibit 12
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands, Except Ratio Data)
<s> <c> <c> <c> <c> <c> <c>
Thirty-Nine
Weeks Ended
Fiscal Year Ended
------------- -------------------------------------------------------------------------
November 3, February 3, January 29, January 30, January 31, January 25,
2001 2001 2000 1999 1998 1997
------------- ------------ ------------ ------------- ------------ ------------
Income (loss) before
income
taxes, extraordinary item
and cumulative effect
adjustment (210,673) (288,377) (31,355) 52,605 53,633 26,804
Add:
Interest expense 63,046 87,961 60,843 15,253 11,600 19,043
Interest component of
rental expense 28,046 28,876 29,253 21,121 18,409 16,541
------------- ------------ ------------ ------------- ------------ ------------
Earnings available for fixed
charges (119,581) (171,540) 58,741 88,979 83,642 62,388
Fixed Charges:
Interest expense 63,046 87,961 60,843 15,253 11,600 19,043
Interest component of
rental expense 28,046 28,876 29,253 21,121 18,409 16,541
------------- ------------ ------------ ------------- ------------ ------------
Total fixed charges 91,092 116,837 90,096 36,374 30,009 35,584
Ratio of earnings to fixed
charges (1.3)x (1.5)x 0.7x 2.4x 2.8x 1.8x
For the purpose of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes, extraordinary item and cumulative effect
adjustment plus fixed charges (net of capitalized interest). Fixed charges
consist of interest expense on all indebtedness and capitalized interest,
amortized premiums, discounts and capitalized expenses related to indebtedness,
and one-third of rent expense on operating leases representing that portion of
rent expense deemed by us to be attributable to interest. For the thirty-nine
weeks ended November 3, 2001 and the fiscal year ended February 3, 2001, the
amount of additional earnings that would have been required to cover fixed
charges for these periods was $210.7 million and $288.4 million, respectively.