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 29, 1994
---------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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AMES DEPARTMENT STORES, INC.
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(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 offices) (Zip Code)
Registrant's telephone number including area code: (203) 257-2000
-------------------------
None
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Former name, former address and former fiscal year if changed since last report
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
---- ----
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Sections 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
YES X NO
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18,059,260 shares of Common Stock and 2,068,009 shares of
Priority Common Stock were outstanding on December 1, 1994.
Exhibit Index on page 16
Page 1 of 73 (including exhibits)
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 29, 1994
I N D E X
Page
Part I: Financial Information
Consolidated Condensed Statements of Operations 3
for the Thirteen and Thirty-nine Weeks Ended
October 29, 1994 and October 30, 1993
Consolidated Condensed Balance Sheets at 4
October 29, 1994, January 29, 1994 and
October 30, 1993
Consolidated Condensed Statements of Cash Flows 5
for the Thirty-nine Weeks Ended October 29, 1994
and October 30, 1993
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Part II: Other Information
Submission of Matters to a Vote of Security Holders 16
and Exhibits and Reports on Form 8-K
- - 2 -
PART I
FINANCIAL INFORMATION
AMES DEPARTMENT STORES, INC. AND SUSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
For the Thirteen For the Thirty-nine
Weeks Ended Weeks Ended
October 29, October 30, October 29, October 30,
1994 1993 1994 1993
----------- ----------- ------------ ------------
TOTAL SALES $537,093 $552,649 $1,510,931 $1,532,747
Less: Leased department sales 25,825 26,147 72,608 74,634
----------- ----------- ------------ ------------
NET SALES 511,268 526,502 1,438,323 1,458,113
COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold 376,487 382,723 1,055,037 1,060,007
Selling, general and administrative expenses 141,093 149,773 417,800 436,537
Leased department and other operating income (8,204) (9,317) (22,197) (23,977)
Depreciation and amortization expense 1,590 736 3,611 1,254
Amortization of the excess of revalued net assets
over equity under fresh-start reporting (1,538) (1,494) (4,614) (4,527)
Interest and debt expense, net 6,887 7,506 19,646 20,192
Nonrecurring gain - litigation settlement - - (12,001) -
Gain on disposition of properties - (844) (3,535) (844)
Distribution center closing costs 2,500 - 2,500 -
----------- ----------- ------------ ------------
LOSS BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM (7,547) (2,581) (17,924) (30,529)
Income tax benefit 2,445 - 5,807 -
----------- ----------- ------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (5,102) (2,581) (12,117) (30,529)
Extraordinary item - gain (loss) on early extinguish-
ment of debt (net of tax benefit of $727 in 1994) - 928 (1,517) 928
----------- ----------- ------------ ------------
NET LOSS ($5,102) ($1,653) ($13,634) ($29,601)
=========== =========== ============ ============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 20,127 20,068 20,127 20,023
=========== =========== ============ ============
LOSS PER SHARE BEFORE EXTRAORDINARY GAIN (LOSS) ($0.25) ($0.13) ($0.60) ($1.52)
EXTRAORDINARY GAIN (LOSS) - 0.05 (0.08) 0.04
----------- ----------- ------------ ------------
NET LOSS PER SHARE ($0.25) ($0.08) ($0.68) ($1.48)
=========== =========== ============ ============
<FN>
(The accompanying notes are an integral part of these condensed financial statements)
-3-
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
October 29, January 29, October 30,
1994 1994 1993
ASSETS ------------------------------------
Current Assets:
Unrestricted cash and short-term investments $26,910 $16,465 $28,983
Restricted cash and short-term investments 722 55,980 49,803
------------------------------------
Total cash and short-term investments 27,632 72,445 78,786
Receivables 45,843 18,703 44,302
Merchandise inventories 596,926 442,198 578,471
Prepaid expenses and other current assets 17,833 10,130 8,439
Net assets held for disposition - - 1,947
------------------------------------
Total current assets 688,234 543,476 711,945
Fixed Assets 45,332 23,686 19,083
Less - Accumulated depreciation and amortization (5,873) (2,098) (1,239)
------------------------------------
Net fixed assets 39,459 21,588 17,844
Other assets and deferred charges 6,633 2,067 473
------------------------------------
$734,326 $567,131 $730,262
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $200,480 $74,091 $123,424
Other 39,728 36,045 36,750
------------------------------------
Total accounts payable 240,208 110,136 160,174
Note payable - revolver 153,737 15,360 148,278
Current portion of long-term debt and capital lease obligations 18,831 18,609 20,033
Long-term debt classified as current (Note 5) - 67,702 -
Self-insurance reserve 49,908 48,433 54,303
Accrued expenses and other current liabilities 60,187 62,268 74,478
------------------------------------
Total current liabilities 522,871 322,508 457,266
Long-term debt and capital lease obligations 80,305 93,309 163,642
Other long-term liabilities 10,776 11,046 10,628
Unfavorable lease liability 23,426 25,072 25,603
Excess of revalued net assets over equity under fresh-start reporting 50,172 54,786 56,475
Stockholders' Equity:
Priority common stock 23 38 43
Common stock 178 163 158
Additional paid-in capital 73,278 73,278 69,940
Accumulated deficit (26,703) (13,069) (53,493)
------------------------------------
Total stockholders' equity 46,776 60,410 16,648
------------------------------------
$734,326 $567,131 $730,262
====================================
<FN>
(The accompanying notes are an integral part of these condensed balance sheets.)
-4-
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the
Thirty-nine Weeks Ended
October 29, October 30,
1994 1993
----------- ------------
Cash flows from operating activities:
Net loss ($13,634) ($29,601)
Adjustments to reconcile net loss to net cash
used for operating activities:
Extraordinary loss (gain) on early extinguishment of debt 1,517 (928)
Income tax benefit (5,807) -
Distribution center closing costs 2,500 -
Gain on disposition of properties (3,535) (844)
Depreciation and amortization of fixed assets 3,781 1,290
Amortization of deferred financing costs 2,076 38
Amort. of the excess of revalued net assets over equity (4,614) (4,527)
Amort. of debt discounts and unfavorable leases, net 554 2,599
Increase in accounts receivable (27,651) (20,115)
Increase in merchandise inventories (154,728) (113,915)
Increase in accounts payable 130,072 55,508
Decrease in accrued expenses and other current liabs. (75) (23,288)
Increase in other working capital and other, net (1,148) (1,328)
----------- ------------
Cash used for operations before restructuring items (70,692) (135,111)
Changes due to restructuring activities:
Payments of restructuring costs (4,399) (28,355)
----------- ------------
Net cash used for operating activities (75,091) (163,466)
----------- ------------
Cash flows from investing activities:
Proceeds from the sale of assets held for disposition 1,458 36,826
Proceeds from the disposition of properties 4,101 2,943
Purchases of fixed assets (21,148) (15,603)
Decrease in restricted cash and short-term investments 55,258 33,864
----------- ------------
Net cash provided by investing activities 39,669 58,030
----------- ------------
Cash flows from financing activities:
Payments of debt and capital lease obligations (84,741) (22,754)
Short-term borrowings under the revolver 150,306 138,915
Payments on the revolver (11,929) (13,597)
Increase in deferred financing costs (7,769) -
----------- ------------
Net cash provided by financing activities 45,867 102,564
----------- ------------
Increase (decr.) in unrest. cash and short-term invest. 10,445 (2,872)
Unrestricted cash and short-term invest., beg. of period 16,465 31,855
----------- ------------
Unrestricted cash and short-term invest., end of period $26,910 $28,983
=========== ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest and debt fees not capitalized $14,731 $15,555
Income taxes 7 19
<FN>
(The accompanying notes are an integral part of these condensed financial
statements.)
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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. and
subsidiaries (collectively 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 operations for the interim periods ended
October 29, 1994 may not be indicative of 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. Certain prior year amounts have been
reclassified to conform to the presentation used for the current year. The
consolidated condensed balance sheet at January 29, 1994 was taken from
audited financial statements previously filed with the Commission in the
Company's latest 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 Company's latest Form 10-K.
2. EARNINGS PER COMMON SHARE:
Earnings per share was determined using the weighted average number of
common shares outstanding. There were no exercises of warrants during the
thirty-nine weeks ended October 29, 1994. Common stock equivalents and fully
diluted earnings per share were excluded as their inclusion would have reduced
the reported loss per share.
3. CASH AND SHORT-TERM INVESTMENTS:
The New Facility (Note 5), which became effective in June, 1994, does not
require cash collateralization of letters of credit, except in limited
instances as described in the New Facility. As of January 29, 1994 and
October 30, 1993, approximately $55.0 and $46.3 million, respectively, was
placed for collateral pledge and consignment with Republic National Bank of
New York as a condition precedent to the issuance of letters of credit under
the Letter of Credit Facility (Note 5). This cash collateral was included in
"Restricted cash and short-term investments." The amounts of cash collateral
changed as the balances outstanding under the Letter of Credit Facility
changed, since the cash collateral was required to equal 105% of the Company's
outstanding letters of credit, including expected future increases to stand-by
letters of credit to cover expected workers' compensation claims. The
Company earned interest on invested cash collateral.
In addition, as of October 29, 1994, January 29, 1994, and October 30,
1993, approximately $.7, $1.0 and $3.5 million of cash and short-term
investments, respectively, was restricted for expected payments of certain
remaining administrative and priority claims under the Company's plan of
reorganization. These amounts are also included in "Restricted cash and
short-term investments." The Company believes that the remaining segregated
funds are adequate to cover all related payments and the Company earns
interest on invested segregated funds.
- 6 -
4. INVENTORIES:
Substantially all inventories are valued at the lower of cost or market.
Cost is determined by the retail last-in, first-out (LIFO) cost method for all
merchandise inventories. If the first-in, first-out (FIFO) cost method had
been used, inventories would have increased by $.7 and $1.8 million at October
29, 1994 and October 30, 1993, respectively. No LIFO reserve was necessary at
January 29, 1994.
5. DEBT:
On April 28, 1994, the Company entered into an agreement with BankAmerica
Business Credit, Inc., as agent, two financial institutions as co-agents
(together with the agent, the "Agents"), and a syndicate of five other banks
and financial institutions, for a secured revolving credit facility of up to
$300 million, with a sublimit of $100 million for letters of credit (the "New
Facility"). The Company believes that the New Facility contains terms,
covenants and interest rates that are generally more favorable than those in
the Credit Agreement (see below) and the Republic $120 million Letter of
Credit Facility (see below). The New Facility is in effect until June 22,
1997, is secured by substantially all of the assets of the Company and
requires the Company to meet certain quarterly financial covenants. In
addition, each year the Company must have no outstanding borrowings under the
New Facility for a consecutive 30-day period between November 15th and
February 15th of the following year. The Company is in compliance with these
financial covenants through the quarter ended October 29, 1994.
As of October 29, 1994, borrowings of approximately $153.7 million were
outstanding under the New Facility. In addition, approximately $32.9 and $8.6
million of standby and trade letters of credit, respectively, were outstanding
under the New Facility as of October 29, 1994, including a standby amount
necessary to back-up letters of credit still outstanding under the Letter of
Credit Facility. The weighted average interest rate on all revolving credit
borrowings, including the borrowings under the Credit Agreement prior to June
22, was approximately 9.1% for the thirteen and thirty-nine weeks ended
October 29, 1994. The peak borrowing level through October 29, 1994 was
$165.7 million.
In June, 1994, the Company utilized the funds that were no longer
restricted for the collateralization of letters of credit (Note 3), and funds
from the New Facility, to prepay its then outstanding Series A, B and D Notes,
a $1.2 million term note, and the outstanding borrowings under the Credit
Agreement. As a result of the refinancing and associated commitment to prepay
the above debt, a non-cash extraordinary charge of approximately $1.5 million,
net of tax benefit of approximately $.7 million, was recorded in the quarter
ended April 30, 1994, primarily for the write-off of deferred financing costs
and debt discounts related to the debt to be prepaid. As of January 29, 1994,
approximately $67.7 million represented the portion of long-term debt that was
to be prepaid and was classified as "Long-term debt classified as current".
During the prior-year's third quarter, the Company recorded an extraordinary
gain of $.9 million, before and after income taxes, from the early settlement
of certain tax notes.
The amount of borrowing under the New Facility generally shall not exceed
the sum of (i) an amount equal to 55% of inventory not covered by any
outstanding letter of credit plus (ii) an amount equal to 50% of inventory
covered by any outstanding letter of credit less (iii) a reserve for
reinstated debt ($33,386 as of October 29, 1994). In addition, the New
Facility provides for potential establishment of other reserves contingent
upon the Company's financial performance. In addition, each Agent reserves
the right in good faith, based upon such collateral consideration as such
Agent may in its sole discretion deem necessary or appropriate to adjust the
total available to be borrowed by establishing reserves, making determinations
- 7 -
of eligible inventory, revising standards of eligibility or decreasing from
time to time the percentages set forth above. Reference can be made to the
latest Form 10-K for further descriptions of the New Facility and the
obligations summarized below, and for descriptions of the Company's other
obligations not discussed herein.
CREDIT AGREEMENT
Citibank was the agent in the post-Chapter 11 credit agreement (the
"Credit Agreement") which combined a $175.9 million revolving credit facility
and a $1.2 million term note. The Credit Agreement was between the Company,
Citibank, and a syndicate consisting of other banks and financial
institutions. Approximately $15.4 and $148.3 million was outstanding under
the revolver portion of the Credit Agreement at January 29, 1994 and October
30, 1993, respectively. The Credit Agreement was terminated when the New
Facility became effective.
LETTER OF CREDIT FACILITY
The $120 million letter of credit facility with Republic National Bank of
New York (the "Letter of Credit Facility") had sublimits of $60 million for
trade letters of credit and $60 million for standby letters of credit. As of
October 29, 1994, January 29, 1994, and October 30, 1993, approximately $2.8,
$11.3 and $9.6 million and $.6, $35.6 and $34.4 million was outstanding in
trade and stand-by letters of credit, respectively, under the Letter of Credit
Facility. Before the New Facility became effective and the Letter of Credit
Facility was terminated, all letters of credit outstanding under the Letter of
Credit Facility had to be cash collateralized at 105% from the date of
issuance.
DEFERRED CASH DISTRIBUTIONS
The Company's plan of reorganization, which was consummated on December
30, 1992, provided that approximately $46.5 million of cash distributions in
respect to several classes of claims would be paid subsequent to the
consummation date. Approximately $15.0 and $8.0 million of these deferred
cash distributions were paid as scheduled on January 31, 1993 and January 31,
1994, respectively, and the remaining unsecured amounts are due as follows,
with interest that began on February 1, 1994 at 5% per annum: $8.0 million due
at January 31, 1995 and January 31, 1996; and $7.5 million due at January 31,
1997.
6. INCOME TAXES:
The Company's estimated annual effective income tax rate was applied to
the loss incurred before income taxes and extraordinary item for the thirty-
nine weeks ended October 29, 1994 to compute an income tax benefit of
approximately $5.8 million for the period. The same method was used to
compute an income tax benefit of approximately $.7 million for the
extraordinary loss and an income tax benefit of approximately $2.4 million for
the third quarter of this year. The Company currently expects that, as a
result of the seasonality of the Company's business, the year-to-date income
tax benefit will be offset by non-cash income tax expense in the remaining
interim period. The year-to-date income tax benefit has been reflected in
other current assets in the accompanying balance sheet. Reference can be made
to the latest Form 10-K for discussion of other income tax issues affecting
the Company.
- 8 -
7. DISTRIBUTION CENTER CLOSING COSTS:
On November 1, 1994, the Company announced that it would close its
distribution center in Clinton, Massachusetts in June, 1995 and recorded a
provision of $2.5 million in the third quarter for the estimated costs
associated with closing the facility. Transfer of the Clinton operations to
the Company's distribution center in Leesport, Pennsylvania will begin in
January, 1995. The Clinton facility will be held for sale after the closing.
Approximately $.6 million of estimated termination benefits was included
in the above provision. Approximately 330 employees will be affected by the
closing. The following items represent the major components ($ in millions)
of the total provision for the Clinton closing costs:
Termination benefits and other
human resource costs $ .8
Real estate taxes and other
property holding costs 1.4
Asset write-off and
other closing costs .3
-----
$2.5
=====
8. LITIGATION:
Reference can be made to the latest Form 10-K (Note 12 to the
Consolidated Financial Statements) for various litigation involving the
Company, for which there were no material changes since the filing date of the
Form 10-K. The closing on the Wertheim Settlement Agreement took place in
June, 1994 and the Company recorded a nonrecurring gain for its $12 million
portion of the settlement. The Class AG-6A Trust received $7 million for its
portion of the settlement.
9. RESTRUCTURING:
As part of its restructuring prior to emergence from Chapter 11
Reorganization, the Company announced on October 30, 1992 that in early 1993
it would close 60 discount stores and the three remaining freestanding Crafts
& More stores. All of these stores were closed as planned in March, 1993.
Certain distribution centers/warehouses also were closed and office facilities
were further consolidated.
Restructuring costs represent losses from store operations from the date
of announcement until closing, employee payroll and severance costs, losses on
liquidation of inventories, and other related restructuring costs. Net assets
held for disposition are recorded net of anticipated costs associated with the
sale of such assets. Such assets, other than merchandise inventories, are
sold as market conditions permit.
Prior to the start of 1993, the Company entered into an agreement (the
"60-Store Agency Agreement") with an agent to assist the Company with the
disposition of merchandise inventory in "going-out-of-business" ("GOB") sales
at the 60 discount stores and three Crafts & More stores. The GOB sales
commenced in January 1993, were completed in March 1993, and the Company
realized approximately $46 million in cash for the merchandise inventory after
payment of all direct GOB expenses as defined in the 60-Store Agency
Agreement. This represented approximately 52% of the beginning GOB retail
inventory value at the closed stores.
- 9 -
10. STOCK PURCHASE RIGHTS AGREEMENT:
On November 30, 1994, the Company adopted a Stock Purchase Rights
Agreement (the"Agreement"), a copy of which is attached to this Form 10-Q as
Exhibit 4. Under the terms of the Agreement, one purchase right ("Right"),
with an exercise price of $14.00, is attached to each share of the Company's
Common Stock outstanding as of, or issued subsequent to, November 30, 1994
but prior to the occurrence of certain events (as more fully described in
the Agreement).
The Rights become exercisable in the event that a person or group (an
"Acquiring Person") either acquires 15% or more of the Company's outstanding
voting stock or announces an intention to acquire 20% or more of such stock.
Once exercisable, each Right will, depending on the circumstances, entitle
a holder, other than an Acquiring Person, to purchase shares of either the
Company or an acquiring company having a market value equal to twice the
exercise price. The Agreement was adopted to assure that all of the
Company's shareholders receive full value for their investment in the event
of stock accumulation by an Acquiring Person. Unless previously redeemed
by the Company, the Rights will expire on November 29, 2004.
- 10 -
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FISCAL QUARTER ENDED OCTOBER 29, 1994
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
The following table sets forth the number of stores in operation as of the dates indicated:
Number of Stores in Operation
October 29, January 29, October 30,
1994 1994 1993
--------- ----------- -----------
305 308 309
The following discussion and analysis is based on the historical results of operations for the thirteen
and thirty-nine weeks ended October 29, 1994 and October 30, 1993. Three stores were closed during this
year's first two quarters ended July 30, 1994. The Company's Mt. Pocono, PA store, which was destroyed
by fire on November 2, 1993, was rebuilt by the landlord and reopened by the Company in November of this
year.
The following table sets forth the historical operating results expressed as a percentage of net
sales for the periods indicated:
Thirteen Thirty-nine
Weeks Ended Weeks Ended
Oct. 29, Oct. 30, Oct. 29, Oct. 30,
1994 1993 1994 1993
------- -------- ------- ---------
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of merchandise sold 73.6 72.7 73.4 72.7
------- ------- ------- --------
Gross margin 26.4 27.3 26.6 27.3
Expenses and (income):
Selling, general and administrative expenses 27.6 28.5 29.0 29.9
Leased department and other operating income (1.6) (1.8) (1.5) (1.6)
Depreciation and amortization expense 0.3 0.1 0.2 0.1
Amortization of the excess of revalued net
assets over equity (0.3) (0.3) (0.3) (0.3)
Interest and debt expense, net 1.4 1.4 1.3 1.4
Nonrecurring gain - litigation settlement - - (0.8) -
Distribution center closing costs 0.5 - 0.2 -
Gain on disposition of properties - (0.1) (0.3) (0.1)
------- ------- ------- --------
Loss before Income Taxes and
Extraordinary Item (1.5) (0.5) (1.2) (2.1)
Income tax benefit 0.5 - 0.4 -
------- ------- ------- --------
Loss before Extraordinary Item (1.0) (0.5) (0.8) (2.1)
Extraordinary gain (loss) - 0.2 (0.1) 0.1
------- ------- ------- --------
Net Loss (1.0)% (0.3)% (0.9)% (2.0)%
======= ======= ======= ========
- 11 -
Total sales (which include leased department sales) for the thirteen
weeks ended October 29, 1994 declined $15.6 million or 2.8% from the prior-
year's third quarter. Net sales for the same period decreased $15.2 million
or 2.9% from the prior year. These declines were due to a decrease of 1.8%
in comparable store sales on a 305-store base and the operation of four
fewer stores during this year's third quarter. The major causes for the
decline in comparable store sales were increased discount store competition
and weak apparel sales, partially offset by sales increases in certain home
product categories and increases from remodeled stores and expansions of
certain specialty departments.
Total sales for the thirty-nine weeks ended October 29, 1994 declined
$21.8 million or 1.4% from the same prior-year period. Net sales for the
same period decreased $19.8 million or 1.4% from the prior year. These
declines were due to a decrease of .5% in year-to-date comparable store
sales on a 305-store base, a decrease of 1.8% in leased department (shoes)
comparable store sales, and the operation of four fewer stores this year.
In addition to the factors discussed above for the third quarter,
year-to-date comparable store sales were partially affected by certain
merchandise shortages due to a partial roof collapse at the Company's
Leesport, PA distribution center and the temporary closing of the facility
in February and March. The Leesport facility became fully operational in
October.
Gross margin for the third quarter decreased $9.0 million, or 0.9% as a
percentage of net sales, compared to the prior-year's third quarter. Gross
margin for the thirty-nine weeks declined $14.8 million, or 0.7% as a
percentage of net sales, compared to the same prior-year period. The third
quarter's gross margin rate was negatively impacted by lower apparel sales,
higher markdowns in apparel and convenience goods, and a decrease in
purchase discounts. The decrease in the year-to-date gross margin rate was
principally the result of higher markdowns in apparel and convenience goods
and a decrease in purchase discounts. These year-to-date factors were
partially offset by a decrease of $1.1 million in the LIFO charge in the
thirty-nine weeks ended October 29, 1994 compared to the same prior-year
period.
Selling, general and administrative expenses declined approximately $8.7
and $18.7 million, or 0.9% as a percentage of net sales, in the thirteen and
thirty-nine weeks ended October 29, 1994, respectively, compared to the same
prior-year periods. Reductions in store non-payroll, advertising, home
office and field support expenses were partially offset by an increase in
store payroll expense in both periods.
Depreciation and amortization expense increased $.9 and $2.4 million, or
0.2% and 0.1% as a percentage of net sales, in the thirteen and thirty-nine
weeks ended October 29, 1994, respectively, compared to the same prior-year
periods. The adoption of fresh-start reporting as of December 26, 1992
resulted in the write-off of all of the Company's non-current assets at that
date, and therefore depreciation and amortization expense is for capital
additions after that date.
The amortization of the "excess of revalued net assets over equity under
fresh-start reporting" remained approximately the same in the current
periods presented as compared to the prior year. The Company is amortizing
this expense over a ten-year period.
Interest and debt expense, net declined $.6 and $.5 million for the
thirteen and thirty-nine weeks, respectively, and remained approximately the
same as a percentage of net sales as compared to the prior year. The
Company had an average of $137.0 and $101.0 million in outstanding debt
under its revolving credit facilities during this year's third quarter and
- 12 -
thirty-nine weeks, respectively. This compares to average borrowings of
$134.7 and $97.3 million under the prior revolving credit facility during
the prior-year's third quarter and thirty-nine weeks, respectively. As a
result of the partial roof collapse at the Leesport distribution center and
the temporary closing of the facility, the Company incurred incremental
borrowings of approximately $10 million during a portion of the current
year-to-date period to replace certain inventories. In June, 1994, the
Company prepaid approximately $69 million of debt utilizing a portion of the
New Facility (Note 5) and the funds that were no longer required to be
restricted for the collateralization of letters of credit. The favorable
impact on interest expense from this prepayment has been partially offset by
an increase in market interest rates and the amortization of the financing
costs associated with the New Facility.
The closing on the Wertheim Settlement Agreement (Note 8) took place in
June, 1994 and the Company recognized a nonrecurring gain in the second
quarter for its $12 million portion of the settlement.
During the thirteen-week period ended October 29, 1994, the Company
decided to close its Clinton, MA distribution center in June, 1995 and
recorded a provision of $2.5 million for the estimated costs related thereto
(Note 7). Transfer of the Clinton operations to the Company's Leesport, PA
distribution center will begin in January, 1995. This consolidation is part
of the Company's continuing productivity enhancement and expense-reduction
efforts. Use of enhanced automation capabilities in the Leesport facility
will allow the Company to efficiently service its stores with fewer
distribution centers. The Company currently anticipates that this
consolidation will result in future pre-tax savings of approximately $3
million per year.
The Company recognized approximately $3.5 million of net property gains
during the first two quarters ended July 30, 1994. During the first
quarter, the Company sold its interest in a store lease, which was an
operating property until closed in February, for approximately $1.2 million
in cash proceeds and recognized a gain of approximately $1.1 million. Also
during the first quarter, the Company received approximately $1.2 million,
representing the final payment for the settlement of the inventory portion
of its property insurance claim for the Mt. Pocono store, and recognized a
gain of approximately $.7 million. During this year's second quarter, the
Company recorded a net property gain of approximately $1.7 million,
primarily related to the sale of a shopping center property. This property
was an operating property and the Company has maintained ownership of its
store within the shopping center. In the prior year's third quarter, the
Company sold a shopping plaza for approximately $2.9 million in cash
proceeds and recognized a gain of approximately $.8 million.
The Company's estimated annual effective income tax rate was applied to
the loss incurred before income taxes and extraordinary item for the
thirteen and thirty-nine weeks ended October 29, 1994 to compute an income
tax benefit of approximately $2.4 and $5.8 million, respectively. The
quarterly and year-to-date income tax benefits were recorded because the
Company currently expects that there will be offsetting non-cash income tax
expense in the remaining interim period.
As a result of the debt refinancing and associated commitment to prepay
certain debt, the Company recorded a non-cash extraordinary charge of
approximately $1.5 million, net of tax benefit of approximately $.7 million,
in this year's first quarter. The charge was primarily for the write-off of
deferred financing costs and debt discounts related to the debt to be
prepaid. During the prior-year's third quarter, the Company recorded an
extraordinary gain of $.9 million, before and after income taxes, from the
early settlement of certain tax notes.
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Compared with the projections for the third quarter of fiscal year 1995
contained in the Form 8-K filed on May 27, 1994 (referred to herein as the
"Plan"), sales for the third quarter were $22.4 million less than Plan and
EBITDA (earnings before interest, income taxes, LIFO expense, stock
appreciation rights accruals, extraordinary or non-recurring items,
depreciation and amortization, and other non-cash charges) was $10.6 million
less than Plan and $1.7 million less than last year. Year-to-date sales
were $34.6 million less than Plan and year-to-date EBITDA was $10.3 million
less than Plan but $8.4 million greater than last year. The unfavorable
year-to-date EBITDA variance to Plan was due to lower-than-planned sales and
gross margin, partially offset by lower-than-planned expenses.
LIQUIDITY AND CAPITAL RESOURCES
On April 28, 1994, the Company entered into an agreement with BankAmerica
Business Credit, Inc., as agent, and a syndicate consisting of seven other
banks and financial institutions (collectively, the "Bank Group")
for a secured revolving credit facility of
up to $300 million (the "New Facility"). The New Facility has a sublimit of
$100 million for letters of credit. The Company believes that the New
Facility contains terms, covenants and interest rates that are generally
more favorable than those in the prior Credit Agreement (Note 5) and Letter
of Credit Facility (Note 5). The New Facility is in effect until June 22,
1997, is secured by substantially all of the assets of the Company, and
requires the Company to meet certain quarterly financial covenants. In
addition, each year the Company must have no outstanding borrowings under
the New Facility for a consecutive 30-day period between November 15th and
February 15th of the following year. The Company was in compliance with
these financial covenants through the quarter ended October 29, 1994.
As a result, however, of the most recent quarter's performance, the Company
is not certain that it will be in compliance with these financial covenants
for the quarterly periods ending January 28, 1995 and beyond. The Company
and the Bank Group have agreed to discuss potential modifications to the
financial covenants after December results are available.
Reference can be made to Note 5 of this Quarterly Report and the latest
Form 10-K for further descriptions of the New Facility and the Company's
other obligations. In June, 1994, the Company utilized the funds that were
no longer restricted for the collateralization of letters of credit, and
funds from the New Facility, to prepay the Series A, B and D Notes, the $1.2
million term note, and the outstanding borrowings under the Credit
Agreement.
Notes 3 and 9 of the Notes to the Consolidated Condensed Financial
Statements discuss components of restricted cash and short-term investments,
restructuring activities, and cash flows from the sale of assets held for
disposition.
Merchandise inventories, valued on a LIFO basis, increased $18.5 million
from October 30, 1993 to October 29, 1994 due to this year's sales
shortfall, special purchases and a build-up for several new sales promotions
for the fall and Christmas seasons. The increase in inventories of $154.7
million from January 29, 1994 to October 29, 1994 was the result of a normal
seasonal build-up of inventories and the factors mentioned above.
The Company currently anticipates that it will receive some insurance
recoveries in excess of those recorded through October 29, 1994, in
connection with the partial roof collapse at the Leesport distribution
center. However, there is no current assurance of such reimbursement and
the Company has not yet completed its determination of the total insurance
claim. The Leesport recoveries and expected recoveries relate primarily to
incremental transportation costs, distribution center expenses and other
expenses incurred, lost sales and profit, and damages to inventory and
equipment.
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Accounts payable increased $80.0 million from October 30, 1993 to October
29, 1994 due primarily to improved trade payment terms and the higher level
of merchandise purchases. The increase in accounts payable of $130.1
million from January 29, 1994 to October 29, 1994 was principally the result
of the seasonal build-up of inventories and improved trade payment terms.
The decline in accrued expenses and other current liabilities from October
30, 1993 was primarily due to the payments of restructuring costs previously
reserved.
Capital expenditures for the thirty-nine weeks ended October 29, 1994
totalled $21.1 million and for the balance of this fiscal year are estimated
to be approximately $6.0 million. The increase in capital expenditures of
$5.5 million from the prior-year's thirty-nine week period was primarily due
to the current year's expenditures for new apparel fixtures. The Company is
completing the purchase of the new apparel fixtures and the remodeling of
some of its stores during the fourth quarter, along with expansions of
certain specialty departments in additional stores.
The net operating loss carryovers remaining after fiscal year 1994,
subject to any limitations pursuant to Internal Revenue Code Sec. 382,
should offset income on which taxes would otherwise be payable in future
years.
Subject to compliance with the financial covenants of the New Facility,
the Company believes that available cash and expected cash flows from the
current fiscal year's operations and beyond, and the availability of
financing facilities, will enable the Company to fund its expected needs for
working capital, debt service requirements, and capital expenditures.
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Part II
OTHER INFORMATION
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 29, 1994, through the solicitation of
proxies or otherwise.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) INDEX TO EXHIBITS
Exhibit No. Exhibit Page No.
----------- ------- --------
4 Rights Agreement dated as of November 18
30, 1994 between Ames Department
Stores, Inc. and Chemical Bank, as
Rights Agent
11 Schedule of computation of primary 73
earnings per share
(b) REPORTS ON FORM 8-K:
The following reports on Form 8-K were filed
with the Securities and Exchange Commission
during the third quarter:
DATE OF REPORT DATE OF FILING ITEM # DESCRIPTION
-------------- -------------- ------ -----------
August 25, 1994 August 25, 1994 5 Disclosure of fiscal
July 1994 results.
September 12, 1994 September 12,1994 5 Disclosure of fiscal
August 1994 results.
October 14, 1994 October 14, 1994 5 Disclosure of fiscal
September 1994
results.
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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 12, 1994 /s/ Joseph R. Ettore
---------------------------------------
Joseph R. Ettore, President, Director,
and Chief Executive Officer
Dated: December 12, 1994 /s/ John F. Burtelow
---------------------------------------
John F. Burtelow, Executive Vice
President and Chief Financial Officer
Dated: December 12, 1994 /s/ William C. Najdecki
---------------------------------------
William C. Najdecki, Senior Vice
President and Chief Accounting Officer
- 17 -
EXHIBIT 11
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF PRIMARY EARNINGS PER SHARE
(Amounts in thousands except per share amounts)
For the Thirteen For the Thirty-nine
Weeks Ended Weeks Ended
October 29, October 30, October 29, October 30,
1994 1993 1994 1993
------------ ------------ ------------ ------------
Loss before extraordinary item ($5,102) ($2,581) ($12,117) ($30,529)
Extraordinary gain (loss) - 928 (1,517) 928
------------ ------------ ------------ ------------
Primary net loss ($5,102) ($1,653) ($13,634) ($29,601)
------------ ------------ ------------ ------------
Weighted average number of common shares
outstanding during the period 20,127 20,068 20,127 20,023
Add: Common stock equivalent shares
represented by the Series B Warrants (a) (a) (a) (a)
Common stock equivalent shares
represented by the Series C Warrants (a) (a) (a) (a)
Common stock equivalent shares represented
by management stock options granted on March
17, May 1, June 9, and August 1, 1994 (a) - (a) -
------------ ------------ ------------ ------------
Weighted average number of common and
common equivalent shares used in the
computation of primary earnings per share 20,127 20,068 20,127 20,023
============ ============ ============ ============
Primary earnings per share:
Primary loss per share
before extraordinary item ($0.25) ($0.13) ($0.60) ($1.52)
Extraordinary gain (loss) - 0.05 (0.08) 0.04
------------ ------------ ------------ ------------
Primary net loss per share ($0.25) ($0.08) ($0.68) ($1.48)
============ ============ ============ ============
<FN>
(a) Common stock equivalents have not been included because the effect would be anti-dilutive.
Note: Fully diluted earnings per share has not been presented because the effect would
be anti-dilutive for each of the periods.
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