SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____ to ____
AMES DEPARTMENT STORES, INC.
(Exact Name of Registrant as Specified in its Charter)
DELAWARE 04-2269444
(State or Other Jurisdiction (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 (860) 257-2000
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
Common Stock, $.01 par value NASDAQ
Series B Warrants None
Series C Warrants NASDAQ
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 2, 1998, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $364,694,352 based on the last reported
sale price of the Registrant's Common Stock on the NASDAQ National Market
System.
22,616,704 shares of Common Stock were outstanding on March 2, 1998.
Documents Incorporated by Reference: Portions of the Registrant's
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the Registrant's fiscal year are incorporated by reference
in Part III.
47 pages to follow (including Exhibits) Exhibit Index on page 44
PART I
Item 1. Description of Business.
(a) General.
Ames Department Stores, Inc. and its subsidiaries (collectively, "Ames" or
the "Company") are retail merchandisers. As of March 1, 1998, Ames operated 296
discount department stores under the Ames name in 14 states in the Northeast,
Mid-Atlantic and Mid-West regions and the District of Columbia. The Company's
stores are located in rural communities, some of which are not served by other
large retail stores, high-traffic suburban sites, small cities and several major
metropolitan areas. The stores largely serve middle and lower-middle income
customers.
Ames is a Delaware corporation organized in 1962 as a successor to a
business originally founded in 1958. Ames was reorganized in December, 1992
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). The
principal executive offices are located at 2418 Main Street, Rocky Hill,
Connecticut 06067, and the telephone number is (860) 257-2000.
Fiscal 1997
The Company continued to improve operations and its long-term competitive
position during the fiscal year ended January 31, 1998 ("Fiscal 1997" or
"1997"):
- Cost-Reduction Initiatives to Pursue Growth Opportunities: The Company
continued its efforts to reduce costs and implement growth strategies
during Fiscal 1997. The closing of twelve (12) underperforming stores,
announced in December, 1996, was completed in February, 1997, and the
closing of two (2) underperforming stores, announced in December, 1997, was
completed in February, 1998. In addition, significant information system
progress was made in 1997. The Company's $36 million project to replace its
point-of-sale and back-office hardware and systems was launched
successfully as ten (10) stores were retrofitted in 1997. The remaining
stores will be upgraded in 1998. The new system is expected to improve
customer service as well as employee productivity. Electronic Article
Surveillance (EAS), which is an electronic sensor attached to merchandise
that helps to detect shoplifters, was installed in 89 stores in 1997.
- Advertising and Marketing Programs: The Ames price-value promotional
strategies continued to be a driving force behind the Company's success in
1997. The Company's Special Buy program, which enables Ames to sell current
close-out and end-of-run items for significantly less than the original
retail price, was refined in 1997 to provide customers with an enhanced
awareness of bargain opportunities. The 55 Gold(R) Savings Card Program,
which provides a 10% discount each Tuesday on all merchandise purchased by
customers aged 55 or older, continued to experience significant growth as
the number of card holders expanded to 2.0 million in 1997 from 1.6 million
in 1996.
- Remodeling and New Stores: The Company continued to strengthen its market
presence by opening nine (9) new stores in Fiscal 1997. These stores
feature an easy-to-negotiate open floor plan that allows customers to see
the entire store at a glance. Bright, attractive signing and "soft corners"
highlight key departments and make finding the right department easy. In
addition, the Company completed the remodel of eight (8) stores in Fiscal
1997, incorporating many of the latest design formats featured in the new
stores. The Company expects to open or remodel up to twenty (20) stores in
the fiscal year ending January 30, 1999 ("Fiscal 1998" or "1998").
The Company believes its operating performance and the availability of its
financing facilities will provide sufficient liquidity to allow the Company to
meet its financial obligations. The Company continually reviews the
profitability of its stores in the ordinary course of business and closes or
sells stores whose performance is thought to be inadequate. The Company will
consider relocating certain stores and opening new stores, particularly in
selected markets that would reinforce marketing programs, enhance name
recognition, and/or achieve market penetration.
(b) Financial Information about Industry Segments.
Ames operates self-service retail discount department stores selling a
broad range of merchandise. There are no other reportable industry segments.
(c) Narrative Description of Business.
(i) Services, Markets and Distribution.
Ames sells primarily brand name general merchandise, including the
following items: family apparel and accessories, shoes, housewares,
home furnishings, crafts, hardware and automotive accessories, sporting
goods, toys, small appliances and consumer electronics, pre-recorded tapes
and compact discs, jewelry, health and beauty products, household
products, camera and photographic supplies, pet products, party and paper
products, and school and office supplies. Although Ames attempts to be
competitive on everyday pricing, the Company primarily employs a high/low
promotional pricing strategy with an emphasis on quality weekly circular
advertising. The Company will continue to stress breadth of products in
selected merchandise categories; clean, neat and well-maintained
facilities; appealing merchandise presentation; and customer service.
Merchandise is purchased centrally for all stores by Ames associates
at the Rocky Hill, CT headquarters and is shipped by vendors either
directly to individual stores or to Ames' distribution centers in
Massachusetts and Pennsylvania which then make deliveries to stores.
For the last three fiscal years, women's apparel has been the only
class of product that exceeded 10% of total sales, accounting for an
average of approximately 13% of total sales. An average of approximately
27% of sales for the last three fiscal years were made using third party
credit cards and the remainder were made by cash or check.
The table below sets forth the number of retail stores in operation
in each state at the end of each of the last three fiscal years.
Stores in Operation at Fiscal Year End
-----------------------------------------------
1997(a) 1996(b) 1995(c)
-------- -------- --------
Connecticut 15 15 15
Delaware 4 4 4
District of Columbia 1 1 1
Maine 23 23 28
Maryland 23 25 25
Massachusetts 33 33 32
New Hampshire 19 18 18
New Jersey 11 9 6
New York 73 75 81
Ohio 7 11 11
Pennsylvania 56 56 53
Rhode Island 7 7 7
Vermont 13 13 13
Virginia 6 6 6
West Virginia 7 7 7
----- ----- -----
Total 298 303 307
===== ===== =====
- ----------------
(a) Includes two (2) stores to be closed in February, 1998: New York (1) and
Vermont (1).
(b) Includes twelve (12) stores in the process of closing at year-end and
one (1) Pennsylvania store closed as a result of flooding in January, 1996.
In March, 1997, it was determined that this store would not be re-opened.
(c) Includes seventeen (17) stores in the process of closing at year-end.
(ii) New Products.
The introduction of new products was not significant to the business
of the Company for Fiscal 1997.
(iii) Raw Materials.
The Company does not rely on any one or a few suppliers for a
material portion of its purchases, and there is no current or anticipated
problem with respect to the availability of merchandise.
(iv) Patents, Trademarks and Licenses.
The mark "Ames" is registered with the United States Patent and
Trademark Office. The Company considers this mark and the associated name
recognition to be valuable to its business. The Company has a significant
number of other trademarks, trade names, and service marks, including
"Bargains by the Bagful(R)", which has become a key marketing slogan.
Other trademarks, such as "Crafts & More(R)" "Pawsitively Pets(R)" and
"Party Plaza(R)" are used in connection with certain of the Company's
specialty departments within the stores. Although the Company considers
these additional marks and its patents and licenses to be valuable in the
aggregate, none of them individually is currently considered to have a
material impact on the Company's business.
(v) Seasonality of Business.
The Company's sales are greater during the second half of the fiscal
year as a result of the back-to-school and Christmas shopping seasons.
Sales are highest in the last fiscal quarter.
(vi) Working Capital.
As of January 31, 1998, the Company's current ratio (current assets
divided by current liabilities) was 1.5 to 1.0. See Item 7(b) -
Management's Discussion and Analysis - Liquidity and Capital Resources for
discussion of liquidity and plans to meet future liquidity needs.
The demand for working capital is heaviest in May and June, and from
August through November, when sufficient merchandise must be purchased for
the spring, back-to-school and Christmas selling seasons, respectively.
(vii) Customers.
No material part of the Company's business is dependent upon a single
customer or a few customers. During Fiscal 1997, Ames had no single
customer or affiliated group of customers to whom sales were made in an
amount which accounted for 10% or more of the Company's total sales for
such period.
As is customary in the discount store industry, the Company's retail
operations allow merchandise to be returned by customers. In addition, the
Company has a program that allows for the matching of its sales prices to
the advertised sales prices of its local competitors upon presentation of
proper proof of the competitor's advertised price on the same item.
Merchandise may also be purchased under the Ames layaway plan.
(viii) Backlog.
Backlog is not a significant factor in the Company's business.
(ix) Government Contracts.
Ames has no material contracts with any government agency.
(x) Competition.
Ames operates in a highly competitive environment. Ames competes with
other stores, including large national and regional chains, in the
purchase and sale of merchandise, as well as for store locations. Ames
currently anticipates a further increase in competition from other
national discount store chains.
Many of the Company's stores are located in smaller communities and
are, in some cases, the largest non-food retail store in their market
area. They compete, however, with many smaller stores offering a similar
range of products. The Company's stores located in suburban sites and
urban areas are in direct competition with other discount stores,
including other large national and regional chains.
(xi) Research and Development.
Research and development activities are not a material aspect of the
Company's business.
(xii) Environmental Matters.
To date, compliance with federal, state and local laws and
regulations enacted to regulate the discharge of materials into the
environment has not had, and is not expected to have, a material effect
upon the Company's business. See Note 12 to the Consolidated Financial
Statements included in this Form 10-K for further discussion on
environmental matters.
(xiii) Employees.
At March 1, 1998, Ames employed approximately 20,500 people.
(d) Foreign and Domestic Operations and Export Sales.
The information called for by this item is not relevant to the Company's
business.
Item 2. Properties.
As of January 31, 1998, the Company's store lease obligations covered a
total of 17.6 million square feet, including approximately 0.1 million square
feet for stores to be closed in 1998. The average store size is approximately
60,000 square feet, of which approximately 82% is selling area.
The construction of one store, located in Monroeville, PA, was financed
with an industrial development bond. Ames has an option to purchase this
location at nominal cost at the expiration of the lease term in May, 2003. The
Company owns the building and leases the land of the Mercerville, NJ store. The
land and buildings for four other store locations are owned by Ames. The
remainder of the Company's stores are leased, with the leases expiring at
various times between 1998 and 2018. The leases generally have renewal options
permitting extensions for at least five years. In addition, the leases typically
provide for fixed annual rentals, payment of certain taxes, insurance and other
charges, and additional rentals based on a percentage of sales in excess of
certain fixed amounts. Except for certain point-of-sale equipment that is
leased, vendor-owned greeting card equipment and leased department equipment,
Ames owns the fixtures and equipment in its stores, some of which are subject to
various financing arrangements.
The Company's warehouse and distribution facilities in Leesport, PA, and
Mansfield, MA are owned and occupy approximately 1.7 million square feet in the
aggregate. The Mansfield, MA facility is subject to a mortgage.
Ames leases approximately 386,000 square feet of space in Rochester, NY
under a lease expiring on December 31, 2007, with two ten-year renewal options.
These premises have been subleased to an unaffiliated tenant for the remainder
of the lease term.
Ames owns and occupies its 225,000 square foot corporate office in Rocky
Hill, CT. The Company has a lease for 11,000 square feet for plan-o-gramming in
Rocky Hill, CT, which expires in November, 2001, and a lease, which expires in
April, 2006, for 33,000 square feet in Rocky Hill, CT for an in-house
photography studio and print shop.
Item 3. Legal Proceedings.
Ames is involved in various litigation as detailed in Note 12 to the
Consolidated Financial Statements included in this Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of Fiscal 1997
to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Common Stock and Related Matters Concerning
Security Holders.
The Company's common stock is listed on the NASDAQ National Market System
("NASDAQ"; symbol: AMES). As of March 2, 1998, Ames had 8,274 registered
stockholders of record. Low and high prices of the Company's common stock for
Fiscal 1997 and for the fiscal year ended January 25, 1997 ("Fiscal 1996" or
"1996"), as reported on NASDAQ, are shown in the table below:
Fiscal 1997 Fiscal 1996
---------------------- -----------------------
Low High Low High
-------- ---------- --------- ---------
1st Quarter $6 1/4 $10 1/4 $1 1/4 $2 7/16
2nd Quarter 6 3/4 12 13/16 1 7/8 3 5/8
3rd Quarter 12 5/8 18 2 1/8 5 3/16
4th Quarter 12 3/8 19 5/8 3 11/16 6 1/2
There were no quarterly dividends paid by Ames to the holders of its
common stock during these periods. Dividends cannot be declared under the terms
of the Company's revolving credit facility. On November 30, 1994, the Company
adopted a Stock Purchase Rights Agreement as described in Note 7 to the
Consolidated Financial Statements.
Item 6. Selected Financial Data.
The following selected financial data of Ames should be read in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this Form 10-K.
(in thousands except per share data)
----------------------------------------------------------------------------------------
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
Jan. 31, 1998(g) Jan. 25, 1997 Jan. 27, 1996 Jan. 28, 1995 Jan. 29, 1994
---------------- --------------- --------------- --------------- ---------------
Net sales $2,233,118 $2,161,680 $2,104,231 $2,142,827 $2,123,527
Net income(loss) $34,546(a) $17,301(b) $(1,618)(c) $17,026(d) $10,823(e)
Net income(loss)per
common share (f) $1.46(a) $.79(b) $(.08)(c) $.79(d) $.51(e)
Total assets $610,042 $536,793 $502,582 $533,388 $567,131
Long-term debt &
capital leases $35,733 $38,220 $52,531 $77,095 $93,309
- ---------------------------
<FN>
(a) Includes charges of $1.6 million for the costs associated with the closing
of two (2) stores.
(b) Includes charges of $9.7 million for the costs associated with the closing
of thirteen (13) stores and an extraordinary loss, net of tax, of $1.4
million for the early extinguishment of debt.
(c) Includes charges of $20.9 million for the costs associated with the closing
of seventeen (17) stores and property gains of $9.1 million.
(d) Includes an extraordinary loss, net of tax, of $1.5 million for the early
extinguishment of debt; property gains of $7.5 million; and a non-recurring
gain of $12.0 million for a litigation settlement.
(e) Includes an extraordinary gain, net of tax, of $0.9 million for the early
extinguishment of debt and property gains of $1.3 million.
(f) Net income (loss) per common share has been restated to conform to the
requirements of Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("SFAS No. 128"). See Note 1 to the Consolidated
Financial Statements included in this Form 10-K for a further description
of the provisions of SFAS No. 128.
(g) Fiscal year ended January 31, 1998 consisted of 53 weeks; all other years
presented consisted of 52 weeks.
</FN>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Results of Operations.
The following table sets forth the number of stores in operation during
each fiscal year:
Fiscal Year Ended
----------------------------------------------------
January 31, 1998 January 25, 1997 January 27, 1996
---------------- ---------------- ----------------
Stores, beginning of period 303 307 306
New stores 9 13 2
Closed stores (14) (a) (17) (b) (1) (c)
----- ----- -----
Stores, end of period 298 303 307
===== ===== =====
(a) Excludes two (2) stores to be closed in 1998 and includes one (1) store
closed as a result of flooding (see below).
(b) Excludes (i) twelve (12) stores in the process of closing at year-end and
(ii) one (1) store closed as a result of flooding in January, 1996. In
March, 1997, it was determined that this store would not be re-opened.
(c) Excludes (i) two (2) stores temporarily closed as a result of flooding in
January, 1996 and (ii) seventeen (17) stores in the process of closing at
year-end.
The following discussion and analysis is based on the results of
operations of the Company for Fiscal 1997 and 1996 and for the fiscal year ended
January 27, 1996 ("Fiscal 1995" or "1995"). The financial information set forth
below should be read in conjunction with the Consolidated Financial Statements
of Ames Department Stores, Inc. and its subsidiaries included elsewhere in this
filing.
The Company's business is seasonal in nature, with a large portion (34.5%
in Fiscal 1997) of its net sales occurring in the fourth quarter, which includes
the Christmas selling season. Total sales, including sales from leased
departments, for the last three fiscal years and the respective total sales
percentage increases/decreases and comparable store sales percentage
increases/decreases over the prior year for stores that have been open and
operated by Ames for at least the prior full fiscal year were:
(000's omitted) Percentage Increases (Decreases)
--------------- --------------------------------
Fiscal Year Ended Total Sales Total Sales Comparable Stores
- ------------------- --------------- ----------- -----------------
January 31, 1998(a) $2,325,295 3.1% 2.1% (b)
January 25, 1997 $2,255,749 2.6% 1.0%
January 27, 1996 $2,199,409 (1.9)% (1.0)%
(a) Fiscal year ended January 31, 1998 consisted of 53 weeks; all other years
presented consisted of 52 weeks.
(b) Comparable store sales was calculated using the fifty-two (52) weeks ended
January 24, 1998 and January 25, 1997.
The rate of inflation did not have a significant effect on sales during
these periods.
Results of Operations for Fiscal 1997 Compared to Fiscal 1996
- -------------------------------------------------------------
The Company reported improvements in sales and net earnings for the
fifty-three (53) weeks ended January 31, 1998 as compared to the fifty-two (52)
weeks ended January 25, 1997. The Company achieved this improvement due to the
favorable impact of twenty-one (21) new stores opened in the last two (2) fiscal
years, the closing of twelve (12) underperforming stores at the beginning of the
year in addition to continued improvement in the Company's gross margin rate.
Net sales increased 3.3% from 1996 due to an increase of 2.1% in
comparable store sales, the addition of the 53rd week and the opening of new
stores cited above, partially offset by the closing of the stores cited above.
The following table sets forth the results of operations for 1997 and 1996 in
millions and as a percentage of net sales:
Fifty-three weeks ended Fifty-two weeks ended
January 31, 1998 January 25, 1997
------------------------ ------------------------
$ mil. % of Sales $ mil. % of Sales
--------- ---------- --------- ----------
Net sales $2,233.1 100.0% $2,161.7 100.0%
Costs, expenses and (income):
Cost of merchandise sold 1,604.4 71.8 1,569.0 72.6
Selling, general and administrative expenses 580.9 26.0 563.4 26.1
Leased department and other operating income (26.5) (1.2) (29.3) (1.4)
Depreciation and amortization expense 14.3 0.7 12.5 0.6
Amortization of the excess of revalued net assets
over equity under fresh-start reporting (6.2) (0.3) (6.2) (0.3)
Interest and debt expense, net 11.6 0.5 19.0 0.9
Gain on disposition of properties - - (0.4) -
Store closing charge 1.0 - 6.9 0.3
--------- ---------- --------- ----------
Income before income taxes
and extraordinary item 53.6 2.5 26.8 1.2
Income tax provision 19.1 0.9 8.1 0.4
--------- ---------- --------- ----------
Income before extraordinary item 34.5 1.6 18.7 0.9
Extraordinary loss, net - - 1.4 0.1
--------- ---------- --------- ----------
Net income $34.5 1.6% $17.3 0.8%
========= ========== ========= ==========
Gross margin increased $36.0 million or 0.8% as a percentage of net sales
in 1997 compared to 1996. The gross margin rate was favorably impacted by a
slightly higher markup on sales and a reduction in markdowns. These factors were
partially offset by higher "55 Gold(R)" senior citizen markdowns in 1997
compared to 1996. Cost of merchandise sold for 1997 included a $0.6 million
charge for the inventory write-down incurred in connection with the two (2)
stores to be closed in 1998. Cost of merchandise sold for 1996 included a $2.8
million charge for the inventory write-down recorded in 1996 in connection with
thirteen (13) stores closed in 1997.
Selling, general and administrative expenses increased $17.5 million, but
decreased by 0.1% as a percentage of net sales in 1997 compared to 1996. The
increase in expenses was primarily due to higher payroll expenses, a substantial
portion of which was related to the additional week in the fiscal year and to
the recent federal minimum wage increases. Insurance expense increased due to a
greater loss experience in fiscal 1997 compared to 1996.
Leased department and other operating income declined $2.8 million or 0.2%
as a percentage of net sales in 1997 compared to 1996. This decline was due
primarily to the reduction in recoveries from merchandise related claims.
Depreciation and amortization expense increased by $1.8 million or 0.1% as
a percentage of net sales in 1997 compared to 1996. Depreciation and
amortization expense included impairment losses of $1.2 million and $2.2 million
in 1997 and 1996, respectively, pursuant to the adoption of SFAS No. 121 in the
fourth quarter of 1995. Depreciation and amortization also included depreciation
on capital additions subsequent to December 26, 1992, the date on which the
Company wrote off all of the Company's non-current assets in connection with the
adoption of fresh-start reporting. The amortization of the excess of revalued
net assets over equity under fresh-start reporting remained the same in 1997 as
in 1996. The Company is amortizing this amount over a ten-year period.
Interest and debt expense, net of interest income, declined $7.4 million
or 0.4% of net sales in 1997 compared to 1996. The reduction was primarily due
to a reduction in the amortization of deferred financing costs, a reduction in
short-term interest expense as well as the favorable impact of lower outstanding
long-term debt and capital lease balances. The decrease in short-term interest
expense reflected a decrease in short-term borrowings (weighted average of $66.5
million in 1997 from $86.1 million in 1996) and a decrease in interest rates
under the Company's revolving credit agreement. The Company's average
outstanding long-term debt and capital lease balances decreased to $41.3 million
in 1997 from $56.3 million in 1996.
During 1997, the Company realized proceeds of $1.9 million from the sale
of a lease which resulted in a deferred gain of $1.7 million to be recognized
over a 20-year period. During 1996, the Company sold several leases for a total
of $0.7 million in proceeds and recognized gains totaling $0.4 million.
In the fourth quarter of 1997, the Company recorded charges of $1.6
million in connection with the closing of two (2) stores. The $1.6 million is
classified in two line items: $1.0 million as store closing charge and $0.6
million as part of cost of merchandise sold. Both of the stores closed in
February, 1998. In the fourth quarter of 1996, the Company recorded charges of
$9.7 million in connection with the closing of thirteen (13) stores. The $9.7
million is classified in two line items: $6.9 million as store closing charge
and $2.8 million as part of cost of merchandise sold.
The Company recorded a 1997 income tax provision of $19.1 million, of
which approximately $0.3 million will be paid in cash. In 1996, the Company
recorded a non-cash income tax provision of $8.1 million. See Note 9 for
further discussion of the impact of fresh-start reporting and SFAS No. 109 on
the Company's accounting for income taxes.
As a result of the termination of the Prior Credit Agreement in December,
1996 (see "Liquidity and Capital Resources" below), the Company recorded in 1996
a non-cash extraordinary charge of $1.4 million, net of tax benefit of $0.6
million. The tax benefit was recorded as a reduction of additional paid-in
capital. The charge was for the write-off of the deferred financing costs
related to the Prior Credit Agreement.
Results of Operations for Fiscal 1996 Compared to Fiscal 1995
- -------------------------------------------------------------
The Company reported improvements in 1996 in sales and net earnings. The
Company achieved this improvement principally because of the favorable impact of
thirteen (13) new stores, the closing of seventeen (17) underperforming stores
at the beginning of the year and an improvement in the control of merchandise
inventories.
Net sales increased 2.7% from 1995 due to an increase of 1.0% in
comparable store sales and the opening of new stores cited above, partially
offset by the closing of the stores cited above. Net sales for Fiscal 1995 have
been restated to reflect the effect of recording "55 Gold(R)" senior citizen
discounts as markdowns, which conforms with the 1996 treatment.
The following table sets forth the results of operations for 1996
and 1995 in millions and as a percentage of net sales:
Fifty-two weeks ended Fifty-two weeks ended
January 25, 1997 January 27, 1996
------------------------ ------------------------
$ mil. % of Sales $ mil. % of Sales
--------- ---------- --------- ----------
Net sales $2,161.7 100.0% $2,104.2 100.0%
Costs, expenses and (income):
Cost of merchandise sold 1,569.0 72.6 1,544.0 73.4
Selling, general and administrative expenses 563.4 26.1 552.7 26.3
Leased department and other operating income (29.3) (1.4) (29.7) (1.4)
Depreciation and amortization expense 12.5 0.6 12.4 0.6
Amortization of the excess of revalued net assets
over equity under fresh-start reporting (6.2) (0.3) (6.2) (0.3)
Interest and debt expense, net 19.0 0.9 24.1 1.1
Gain on disposition of properties (0.4) - (9.1) (0.4)
Store closing charge 6.9 0.3 17.6 0.8
--------- ---------- --------- ----------
Income (loss) before income taxes
and extraordinary item 26.8 1.2 (1.6) (0.1)
Income tax provision 8.1 0.4 - -
--------- ---------- --------- ----------
Income (loss) before extraordinary item 18.7 0.9 (1.6) (0.1)
Extraordinary loss, net 1.4 0.1 - -
--------- ---------- --------- ----------
Net income (loss) $17.3 0.8% $(1.6) (0.1)%
========= ========== ========= ==========
Gross margin increased $32.5 million or 0.8% as a percentage of net sales
in 1996 compared to 1995. The gross margin rate was favorably impacted by a
higher markup on sales and a reduction in clearance markdowns due to the
improvement in controlling merchandise inventories. These factors were partially
offset by higher "55 Gold(R)" senior citizen markdowns in 1996 compared to 1995.
Cost of merchandise sold for 1996 includes a $2.8 million charge for the
inventory write-down incurred in connection with the 13 stores to be closed in
1997. Approximately $3.3 million for the inventory write-down recorded in 1995
in connection with the 17-store closing was reclassified to cost of merchandise
sold in order to conform to the 1996 presentation. The inventory write-down had
been classified as part of the store closing charge in 1995.
Selling, general and administrative expenses increased $10.7 million, but
decreased by 0.2% as a percentage of net sales in 1996 compared to 1995. The
increase in expenses was due primarily to higher expenses recorded under the
Company's various incentive compensation plans (Note 10) and an increase in
pre-opening expenses resulting from the opening of the 13 new stores. Partially
offsetting these increases was a decrease in the Company's store payroll
expense.
Leased department and other operating income declined $0.4 million and
remained flat as a percentage of net sales in 1996 compared to 1995. This
decline was due primarily to the decline in leased department sales.
Depreciation and amortization expense increased by $0.1 million and
remained flat as a percentage of net sales, in 1996 compared to 1995.
Depreciation and amortization expense includes impairment losses of $2.2 million
and $3.4 million in 1996 and 1995, respectively, pursuant to the adoption of
SFAS No. 121 in the fourth quarter of 1995. Depreciation and amortization also
includes depreciation on capital additions subsequent to December 26, 1992, the
date on which the Company wrote off all of the Company's non-current assets in
connection with the adoption of fresh-start reporting. The amortization of the
excess of revalued net assets over equity under fresh-start reporting remained
the same in 1996 as in 1995. The Company is amortizing this amount over a
ten-year period.
Interest and debt expense, net of interest income, declined $5.1 million
or 0.3% of net sales in 1996 compared to 1995. The reduction was primarily due
to a significant reduction in short-term interest expense as well as the
favorable impact of lower outstanding long-term debt and capital lease balances.
The decrease in short-term interest expense reflected a decrease in short-term
borrowings (weighted average of $86.1 million in 1996 from $101.7 million in
1995) and a decrease in interest rates under the Company's revolving credit
agreement. The Company's average outstanding long-term debt and capital lease
balances decreased to $56.3 million in 1996 from $78.8 million in 1995 due to
certain prepayments of debt made in connection with the sales of properties in
1995 and payments made in the normal course of business.
During 1996, the Company sold several leases for a total of $0.7 million
in proceeds and recognized gains totaling $0.4 million. During 1995, the Company
sold or assigned several properties (Note 15) for a total of $11.6 million in
proceeds and recognized gains totaling $9.1 million.
In the fourth quarter of 1996, the Company recorded charges of $9.7
million in connection with the closing of thirteen (13) stores. The $9.7 million
is classified in two line items: $6.9 million as store closing charge and $2.8
million as part of cost of merchandise sold. Twelve of the stores closed in
February, 1997, and the thirteenth store closed in July, 1997.
In the fourth quarter of 1995, the Company recorded charges of $20.9
million in connection with the closing of seventeen (17) stores and the
elimination of 71 positions in the corporate headquarters. The $20.9 million is
now classified in two line items: $17.6 million as store closing charge and $3.3
million as part of cost of goods sold. The 17 stores closed in March, 1996. The
$3.3 million charge, representing the inventory write-down for the 17 closing
stores, had been classified as part of the store closing charge in the original
presentation of the results for 1995.
The Company recorded a non-cash income tax provision of $8.1 million for
1996 with an associated increase in additional paid-in capital. See Note 9 for
further discussion of the impact of fresh-start reporting and SFAS No. 109 on
the Company's accounting for income taxes.
As a result of the termination of the Prior Credit Agreement in December,
1996 (see "Liquidity and Capital Resources" below), the Company recorded in 1996
a non-cash extraordinary charge of $1.4 million, net of tax benefit of $0.6
million. The tax benefit was recorded as a reduction of additional paid-in
capital. The charge was for the write-off of the deferred financing costs
related to the Prior Credit Agreement.
(b) Liquidity and Capital Resources.
Credit Facilities - Fiscal 1997 and Fiscal 1996
- -----------------------------------------------
The Company's principal sources of liquidity are certain available credit
facilities, cash from operations, and cash on hand. On December 27, 1996, the
Company entered into an agreement with BankAmerica Business Credit, Inc., as
agent, and a syndicate consisting of seven other banks and financial
institutions, for a secured revolving credit facility of up to $320 million (the
"Credit Agreement"). Prior to this date, the Company had a $300 million secured
revolving credit facility (the "Prior Credit Agreement") in place with the same
financial institutions. The Prior Credit Agreement terminated on the effective
date of the Credit Agreement.
The Credit Agreement is in effect until June 30, 2000, is secured by
substantially all of the assets of the Company, and requires the Company to meet
certain financial covenants. Ames is in compliance with the financial covenants
through the quarter ended January 31, 1998. Reference can be made to Note 5 for
a further description of the Credit Agreement.
The Company's peak borrowing level in 1997 under the Credit Agreement was
$146.6 million. Ames repaid all such borrowings in December, 1997, and fulfilled
its "clean-up" requirement (Note 5) in January, 1998.
Review of Cash Flows, Liquidity and Financial Condition
- -------------------------------------------------------
The Company's unrestricted cash position increased $11.7 million during
1997. This increase was primarily due to $56.8 million in cash from operations,
partially offset by $32.9 million of capital expenditures and payments of $15.7
million on debt and capital lease obligations. The Company's unrestricted cash
position increased $31.9 million during 1996. This increase was primarily due to
$78.0 million in cash from operations, partially offset by $19.8 million of
capital expenditures and payments of $17.4 million on debt and capital lease
obligations.
Merchandise inventories increased by $32.8 million in 1997 as a result of
planned increases as well as early receipts of merchandise for the Company's
40th anniversary promotion held in March, 1998. During 1996, inventories
declined $7.9 million due to planned reductions. Effective October 25, 1997, the
Company changed from the retail last-in, first-out (LIFO) method of accounting
for inventories to the first-in, first-out (FIFO) method and restated all prior
periods for the change. The change had no impact on the historical results of
operations of the Company.
Accounts payable increased $34.2 million during 1997 due to improved
payment terms and an increase in merchandise receipts in January, 1998 over
January, 1997. Accounts payable increased $32.6 million during 1996 due to
improved payment terms and an increase in merchandise receipts in January, 1997
over January, 1996. During 1997 and 1996, the Company paid its trade payables
within the terms negotiated with vendors.
The major component of the "Current portion of long-term debt" at January
25, 1997 related primarily to a cash distribution of $7.5 million paid on
January 31, 1997 pursuant to the Company's plan of reorganization.
There were no outstanding borrowings under the Credit Agreement as of
January 31, 1998 nor as of January 25, 1997. The "Unfavorable lease liability"
was recorded as part of fresh-start reporting.
No dividends have been paid since Ames emergence from Chapter 11. The
Company is restricted from declaring dividends under the terms of the Credit
Agreement.
Capital Expenditures
- --------------------
Capital expenditures for 1997 were $32.9 million and included, among other
items, the opening of nine (9) new stores, the remodel of eight (8) stores, and
the upgrade of certain management information systems including the installation
of new point-of-sale and back-office hardware and software in ten (10) stores.
Capital expenditures for 1996 were $19.8 million and included, among other
items, the opening of thirteen (13) new stores, the remodel of four (4) stores
and the opening of an in-house photo studio.
Capital spending is expected to be approximately $85 million for 1998,
primarily for the opening or remodeling of up to twenty (20) stores and the
upgrade of certain management information systems, including the completion of
the new point-of-sale and back-office system roll-out. The Company expects to
finance a substantial portion of the new point-of-sale and back-office systems
through capital leases. The balance of equipment purchases, new store fixtures
and equipment, and the remodeling of stores is expected to be financed through
internally-generated funds. The Company adjusts its plans for making such
expenditures depending on the amount of internally-generated funds available.
Land, buildings and improvements are financed principally through long-term
leases.
Summary
- -------
The Company believes the ability to meet its financial obligations and
make planned capital expenditures will depend on the Company's future operating
performance, which will be subject to financial, economic and other factors
affecting the industry and operations of the Company, including factors beyond
its control. The Company believes its operating performance and the availability
of its financing facilities will provide sufficient liquidity to allow the
Company to meet its financial obligations.
Ames currently anticipates the following investing and financing
activities for 1998: capital expenditures as described above, seasonal
borrowings and payments under the Credit Agreement and planned payments of debt
and capital lease obligations.
The Company believes the actions set forth above and the availability of
its financing facilities, together with the Company's available cash and
expected cash flows from 1998 operations and beyond, will enable Ames to fund
its expected needs for working capital, capital expenditures and debt service
requirements. Achievement of expected cash flows from operations and compliance
with the EBITDA covenant (Note 5) is dependent upon the Company's attainment of
sales, gross profit, and expense levels that are reasonably consistent with its
financial projections.
The Company expects from time to time to consider possible capital market
transactions, debt refinancing, and other transactions to further enhance the
Company's financial flexibility.
The significant net operating loss carryforwards remaining after 1997,
subject to limitations pursuant to Internal Revenue Code Sec. 382, should offset
income on which taxes would otherwise be payable in future years.
The Company has initiated a comprehensive program to prepare its computer
systems and applications for the year 2000. This program also includes formal
communications with all of its significant vendors and suppliers requesting
information regarding their efforts to remediate the Year 2000 issue. During
1997, the Company spent approximately $1.7 million on its Year 2000 initiatives
and expects to spend $2.0 to $3.0 million over the next two years for
conversion and testing of systems. These costs include software, outside
consulting and other expenses. Although the Company expects to be "Year 2000"
compliant by mid-1999 and does not expect to be materially impacted by the
external environment, such future events cannot be known with certainty.
When used in this Form 10-K, in any future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases and in oral
statements made with the approval of an authorized executive officer, the words
or phrases "will likely result," "are expected to," "will continue," "is
anticipated," "estimate," "projected," "projections," "plans," or similar
expressions are intended to identify "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from historical earnings and those presently anticipated or
projected. The Company wishes to caution readers not to place undue reliance on
any such forward-looking statements, which speak only as of the date made.
Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements.
Item 9. Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10. Officers and Directors of the Registrant.
Information as to the directors of the registrant required by Item 10 is
incorporated herein by reference from the information set forth under the
caption "ELECTION OF DIRECTORS" of the Company's definitive proxy statement to
be filed pursuant to Regulation 14A within 120 days after the close of its
fiscal year.
The following table indicates the names of all executive officers of Ames
and the offices held by each. Other than employment contracts with Mr. Ettore
and Mr. Lemire (and Mr. de Aguiar as of April 14, 1998), there are no other
arrangements or understandings between any officer below and any other person
pursuant to which he was selected as an officer.
Joseph R. Ettore .............President, Chief Executive Officer, and Director
Denis T. Lemire ..............Executive Vice President, Merchandising
Eugene E. Bankers.............Senior Vice President, Marketing
Richard L. Carter ............Senior Vice President, Human Resources
Gregory D. Lambert ...........Senior Vice President, Finance
Paul C. Lanham ...............Senior Vice President, Management
Information Systems
David H. Lissy ...............Senior Vice President, General Counsel
and Corporate Secretary
Alfred B. Petrillo, Jr. ......Senior Vice President, Store Planning
Grant C. Sanborn .............Senior Vice President, Store Operations
James A. Varhol ..............Senior Vice President, Asset Protection
Joseph R. Ettore, age 58, joined Ames as President, Chief Executive Officer and
Director in June, 1994. Prior to joining Ames, he was
President, Chief Executive Officer and Director of Jamesway
Corporation ("Jamesway") from July, 1993 to June, 1994;
President, Chief Operating Officer and Director of Jamesway in
June, 1993; Chairman of the Board and Chief Executive Officer
of Stuarts Department Stores, Inc. ("Stuarts") from October,
1992 to June, 1993; and President, Chief Operating Officer and
Director of Stuarts from October, 1989 to October, 1992. He
remained a Director of Stuarts until May, 1994. Jamesway filed
for protection under Chapter 11 of the Bankruptcy Code
("Chapter 11") in July, 1993; emerged from the Chapter 11 case
in January, 1995; and re-filed for protection under Chapter 11
in October, 1995. Stuarts filed under Chapter 11 in December,
1990; emerged from the Chapter 11 case in October, 1992; and
re-filed for protection under Chapter 11 in May, 1995.
Denis T. Lemire, age 50, joined Ames as Executive Vice President, Merchandising
in August, 1994. Prior to joining Ames, he was President and
Chief Operating Officer of Stuarts from November, 1993 to
August, 1994 and Senior Vice President, Merchandising for
Stuarts from April, 1990 to November, 1993. Stuarts filed for
protection under Chapter 11 in December, 1990; emerged from
the Chapter 11 case in October, 1992; and re-filed for
protection under Chapter 11 in May, 1995.
Rolando de Aguiar, age 49, will join Ames as Executive Vice President, Chief
Financial Officer on April 14, 1998. Prior to joining Ames, he
was President of Aguiar Associates from March, 1997 to March,
1998. He served as Executive Vice President and Chief
Administrative Officer for Gruma from October, 1994 to
January, 1997, and from September, 1991 to August, 1994 he
held senior financial positions at Sears, Roebuck & Co., the
most recent of which was Vice President and Controller-
Merchandise Group.
Eugene E. Bankers, age 58, joined Ames as Senior Vice President, Marketing in
December, 1993. Prior to joining Ames, he was Vice President,
Communications and Investor Relations at Shopko Stores, Inc.
from 1991 to 1993, and Vice President of Advertising, Sales
Promotions, Special Events and Public Relations from 1982 to
1991.
Richard L. Carter, age 49, joined Ames as Senior Vice President, Human Resources
in February, 1993. Prior to joining Ames, he was Senior Vice
President, Human Resources at the G. Fox division of The May
Department Stores Company from 1989 to 1993.
Gregory D. Lambert, age 46, joined Ames as Senior Vice President, Finance in
September, 1996. Prior to joining Ames, he was employed at
Homart Development as Vice President-Strategy from 1994 to
1996 and was employed at The May Department Stores Company
as Director of Strategic Planning from 1989 to 1994.
Paul C. Lanham, age 40, became Senior Vice President, Management Information
Systems, in March, 1996. He joined Ames in October, 1994 as
Vice President, Allocation and Planning. Prior to joining
Ames, he was employed at Brookstone Stores from 1989 in
various capacities related to inventory systems and inventory
planning and allocation, most recently as Director of
Inventory Management.
David H. Lissy, age 54, became Senior Vice President, General Counsel and
Corporate Secretary in December, 1992. He began work on the
Ames Chapter 11 cases in June, 1990, and in July, 1990 was
named Vice President, Legal Services. He was appointed Vice
President, General Counsel and Corporate Secretary in October,
1991. He has been owner of Samuel Lehrer & Co., Inc., a
wholesaler of fine quality fabrics, since 1988.
Alfred B. Petrillo, Jr., age 55, joined Ames as Senior Vice President, Store
Planning in October, 1995. Prior to joining Ames, he was
employed at Jamesway as Vice President, Store Planning,
Construction, Maintenance and Energy from 1976 to 1995 when he
was appointed Senior Vice President, Store Planning, Construc-
tion, Visual Merchandising, Plan-o-gramming, Maintenance and
Energy.
Grant C. Sanborn, age 46, became Senior Vice President, Store Operations in
January, 1995. Since joining Ames in 1971, he has served in
a number of store operations positions, including Assistant
Regional Manager from July, 1989 to May, 1991; Regional
Director from May, 1991 to July, 1991; Director, Store
Operations from July, 1991 to October, 1993; and Vice
President, Store Operations from October, 1993 to January,
1995.
James A. Varhol, age 42, joined Ames as Senior Vice President, Asset Protection
in August, 1995. Prior to joining Ames, he was employed at
Jamesway where he held a number of increasingly senior
positions from 1977 to 1995; the most recent of which being
Vice President, Loss Prevention from June, 1987 to August,
1995.
Item 11. Executive Compensation.
The information required by Item 11 is incorporated herein by reference
from the information set forth under the sections titled "Executive
Compensation," "Board Meetings and Committees," "Compensation of Directors,"
"Employment Contracts, Termination, Severance and Change-of-Control
Arrangements," "Additional Information with respect to Board of Directors
Interlocks and Insider Participation in Compensation Decisions," "The
Compensation Committee's Report on Executive Compensation," and "Performance
Graph" of the Company's definitive proxy statement to be filed pursuant to
Regulation 14A within 120 days after the close of its fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 is incorporated herein by reference
from the information set forth under the sections titled "Security Ownership of
Management" and "Security Ownership of Certain Beneficial Owners" of the
Company's definitive proxy statement to be filed pursuant to Regulation 14A
within 120 days after the close of its fiscal year.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated herein by reference
from the information set forth under the section titled "Transactions with
Management and Others" of the Company's definitive proxy statement to be filed
pursuant to Regulation 14A within 120 days after the close of its fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) Documents Filed as Part of this Form 10-K
1. Financial Statements
The Financial Statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Form 10-K.
2. Financial Statement Schedule
The Financial Statement Schedule listed in the accompanying
Index to Consolidated Financial Statements is filed as part of
this Form 10-K.
3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the
Exhibit Index immediately preceding such Exhibits, incorporated
herein by reference.
(b) Reports on Form 8-K
Reports on Form 8-K were filed with the Securities and Exchange
Commission during the fourth quarter as follows:
Date of Report Date of Filing Item # Description
---------------- ---------------- ------ -----------------------------
November 6, 1997 November 6, 1997 5 Disclosure of fiscal October
1997 results.
December 4, 1997 December 4, 1997 5 Disclosure of fiscal November
1997 results.
January 8, 1998 January 8, 1998 5 Disclosure of fiscal December
1997 results.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: April 8, 1998 /s/ Joseph R. Ettore
------------------------
Joseph R. Ettore,
President, Chief Executive Officer and Director
Dated: April 8, 1998 /s/ Gregory D. Lambert
------------------------
Gregory D. Lambert,
Senior Vice President, Finance
Dated: April 8, 1998 /s/ Mark von Mayrhauser
------------------------
Mark von Mayrhauser,
Vice President, Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: April 8, 1998 /s/ Paul M. Buxbaum
-----------------------
Paul M. Buxbaum, Director and Chairman
Dated: April 8, 1998 /s/ Francis X. Basile
-----------------------
Francis X. Basile, Director
Dated: April 8, 1998 /s/ Alan Cohen
-----------------------
Alan Cohen, Director
Dated: April 8, 1998 /s/ Richard M. Felner
-----------------------
Richard M. Felner, Director
Dated: April 8, 1998 /s/ Sidney S. Pearlman
-----------------------
Sidney S. Pearlman, Director
Dated: April 8, 1998 /s/ Laurie M. Shahon
-----------------------
Laurie M. Shahon, Director
AMES DEPARTMENT STORES, INC.
AND SUBSIDIARIES
---------------
FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
(FORM 10-K)
EXHIBITS
For the Fiscal Years Ended January 31, 1998,
January 25, 1997 and January 27, 1996
(With Report of Independent Public Accountants)
---------------
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial
Statement Schedule for the Fiscal Years Ended
January 31, 1998, January 25, 1997 and January 27, 1996
Financial Statements:
- ---------------------
Report of Independent Public Accountants.
Consolidated Statements of Operations for the fiscal years ended January
31, 1998, January 25, 1997 and January 27, 1996.
Consolidated Balance Sheets as of January 31, 1998 and January 25, 1997.
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended January 31, 1998, January 25, 1997 and January 27, 1996.
Consolidated Statements of Cash Flows for the fiscal years ended January
31, 1998, January 25, 1997 and January 27, 1996.
Notes to Consolidated Financial Statements.
Schedule:
- ---------
II. Valuation and Qualifying Accounts for the fiscal years ended January
31, 1998, January 25, 1997 and January 27, 1996.
Schedules Omitted:
- ------------------
All other schedules are omitted as they are not applicable or the
information is shown in the consolidated financial statements or notes thereto.
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
----------------------------------------
To the Stockholders and Board of Directors of
AMES DEPARTMENT STORES, INC.:
We have audited the accompanying consolidated balance sheets of Ames
Department Stores, Inc. (a Delaware corporation) and subsidiaries as of January
31, 1998 and January 25, 1997, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the fifty-three
weeks ended January 31, 1998, and the fifty-two weeks ended January 25, 1997 and
January 27, 1996. These consolidated financial statements and the schedule
referred to below are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ames Department Stores, Inc.
and subsidiaries as of January 31, 1998 and January 25, 1997, and the results of
their operations and their cash flows for the fifty-three weeks ended January
31, 1998, and the fifty-two weeks ended January 25, 1997 and January 27, 1996 in
conformity with generally accepted accounting principles.
As discussed in Note 19 to the consolidated financial statements, in the
quarter ended January 27, 1996, the Company changed their method of accounting
for long-lived assets to conform with SFAS No. 121, and in connection therewith,
recorded an impairment loss of $3.4 million for long-lived assets to be held and
used.
Our audits were performed for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 6, 1998
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 31, January 25, January 27,
1998 1997 1996
---------------- ---------------- ----------------
TOTAL SALES $2,325,295 $2,255,749 $2,199,409
Less: Leased department sales 92,177 94,069 95,178
---------------- ---------------- ----------------
NET SALES 2,233,118 2,161,680 2,104,231
COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold 1,604,364 1,568,974 1,543,989
Selling, general and administrative expenses 580,918 563,344 552,729
Leased department and other operating income (26,494) (29,284) (29,677)
Depreciation and amortization expense 14,250 12,489 12,360
Amortization of the excess of revalued net assets
over equity under fresh-start reporting (6,153) (6,153) (6,153)
Interest and debt expense, net 11,600 19,043 24,116
Gain on disposition of properties - (395) (9,136)
Store closing charge 1,000 6,858 17,621
---------------- ---------------- ----------------
INCOME (LOSS) BEFORE INCOME TAXES
AND EXTRAORDINARY ITEM 53,633 26,804 (1,618)
Income tax provision (19,087) (8,149) -
---------------- ---------------- ----------------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM 34,546 18,655 (1,618)
Extraordinary item - loss on early extinguishment
of debt (net of tax benefit of $571) - (1,354) -
---------------- ---------------- ----------------
NET INCOME (LOSS) $34,546 $17,301 ($1,618)
================ ================ ================
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary item $1.59 $0.91 ($0.08)
Extraordinary item - (0.06) -
---------------- ---------------- ----------------
Net income (loss) $1.59 $0.85 ($0.08)
================ ================ ================
Weighted average common shares 21,723 20,467 20,127
================ ================ ================
DILUTED NET INCOME (LOSS) PER COMMON SHARE
Income (loss) before extraordinary item $1.46 $0.85 ($0.08)
Extraordinary item - (0.06) -
---------------- ---------------- ----------------
Net income (loss) $1.46 $0.79 ($0.08)
================ ================ ================
Weighted average common and common equivalent shares 23,649 21,812 20,127
================ ================ ================
<FN>
(The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share Amounts)
January 31, January 25,
1998 1997
---------------- ----------------
ASSETS
Current Assets:
Cash and short-term investments $57,828 $46,119
Receivables:
Trade 8,977 7,521
Other 9,945 11,550
---------------- ----------------
Total receivables 18,922 19,071
Merchandise inventories 423,836 391,076
Prepaid expenses and other current assets 12,060 12,169
---------------- ----------------
Total current assets 512,646 468,435
Fixed Assets:
Land and buildings 3,694 1,293
Property under capital leases 7,115 4,185
Fixtures and equipment 83,335 63,474
Leasehold improvements 34,646 27,162
---------------- ----------------
128,790 96,114
Less - Accumulated depreciation and amortization (45,457) (32,529)
---------------- ----------------
Net fixed assets 83,333 63,585
Other assets and deferred charges 14,063 4,773
---------------- ----------------
$610,042 $536,793
================ ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $180,971 $145,737
Other 42,185 43,180
---------------- ----------------
Total accounts payable 223,156 188,917
Current portion of long-term debt 2,000 12,884
Current portion of capital lease obligations 2,177 2,694
Self-insurance reserves 31,657 34,177
Accrued compensation 31,789 29,366
Accrued expenses 41,648 36,990
Store closing reserve 12,050 24,438
---------------- ----------------
Total current liabilities 344,477 329,466
Long-term debt 9,340 11,134
Capital lease obligations 26,393 27,086
Other long-term liabilities 10,943 7,565
Unfavorable lease liability 15,333 17,029
Excess of revalued net assets over equity under fresh-start reporting 30,174 36,327
Commitments and contingencies
Stockholders' Equity:
Common Stock (40,000,000 shares authorized; 22,506,108 and 20,474,469
shares outstanding at January 31, 1998 and January 25, 1997,
respectively; par value per share $.01) 225 205
Additional paid-in capital 118,971 88,341
Retained earnings 54,186 19,640
---------------- ----------------
Total stockholders' equity 173,382 108,186
---------------- ----------------
$610,042 $536,793
================ ================
<FN>
(The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In Thousands)
Common Stock Additional
--------------------- Paid-In Retained Total
Shares Amount Capital Earnings Equity
-------- ----------- -------------- ------------ ------------
Balance, January 28, 1995 20,127 $201 $80,759 $3,957 $84,917
Issuance of Common Stock under
1995 Long Term Incentive Plan 345 4 4
Net Loss (1,618) (1,618)
-------- ----------- -------------- ------------ ------------
Balance, January 27, 1996 20,472 $205 $80,759 $2,339 $83,303
Exercise of Stock Options 2 - 4 4
Utilization of Tax Attributes 7,578 7,578
Net Income 17,301 17,301
-------- ----------- -------------- ------------ ------------
Balance, January 25, 1997 20,474 $205 $88,341 $19,640 $108,186
Exercise of Stock Options 2,032 20 4,460 4,480
Utilization of Tax Attributes 26,170 26,170
Net Income 34,546 34,546
-------- ----------- -------------- ------------ ------------
Balance, January 31, 1998 22,506 $225 $118,971 $54,186 $173,382
======== =========== ============== ============ ============
<FN>
(The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 31, January 25, January 27,
1998 1997 1996
-------------- -------------- ---------------
Cash flows from operating activities:
Net income (loss) $34,546 $17,301 ($1,618)
Expenses not requiring the outlay of cash:
Extraordinary loss on early extinguishment of debt - 1,354 -
Income tax provision 18,764 8,149 -
Depreciation and amortization of fixed and other assets 14,475 12,989 12,713
Amortization of the excess of revalued net assets over equity (6,153) (6,153) (6,153)
Amortization of unfavorable lease liability (1,438) (1,635) (1,884)
Amortization of debt discounts and deferred financing costs 861 3,037 4,755
Gain on disposition of properties - (395) (9,136)
Other, net 1,834 1,141 (315)
-------------- --------------- ---------------
Cash provided by (used for) operations before changes
in working capital and store closing activities 62,889 35,788 (1,638)
Changes in working capital:
Decrease (increase) in receivables 149 (4,593) 2,329
(Increase) decrease in merchandise inventories (32,760) 7,857 31,219
Decrease (increase) in prepaid expenses and other current assets 109 624 (3,794)
Increase (decrease) in accounts payable 34,239 32,599 (8,213)
Increase (decrease) in accrued expenses and other current liabilities 5,033 6,516 (16,790)
Changes due to store closing activities:
Payments of store closing costs (13,907) (7,621) (1,498)
Store closing charge 1,000 6,858 17,621
-------------- --------------- ---------------
Net cash provided by operating activities 56,752 78,028 19,236
-------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from the disposition of properties 1,900 690 11,634
Purchases of fixed assets (32,875) (19,805) (27,152)
Purchases of leases (2,801) (3,211) -
Decrease in restricted cash - - 2,047
-------------- --------------- ---------------
Net cash used for investing activities (33,776) (22,326) (13,471)
-------------- --------------- ---------------
Cash flows from financing activities:
(Payments) borrowings under the revolving credit facilities, net - (4,284) 4,284
Proceeds from option exercises 4,480 4 -
Payments on debt and capital lease obligations (15,747) (17,388) (23,766)
Deferred financing costs - (2,100) (500)
-------------- --------------- ---------------
Net cash used for financing activities (11,267) (23,768) (19,982)
-------------- --------------- ---------------
Increase (decrease) in unrestricted cash and short-term investments 11,709 31,934 (14,217)
Unrestricted cash and short-term investments, beginning of period 46,119 14,185 28,402
-------------- --------------- ---------------
Unrestricted cash and short-term investments, end of period $57,828 $46,119 $14,185
============== =============== ===============
<FN>
(The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
-------------------------------------------
(a) Nature of operations:
Ames Department Stores, Inc. (a Delaware corporation) and its subsidiaries
(collectively, "Ames" or the "Company") are retail merchandisers. As of March 1,
1998, Ames operated 296 discount department stores under the Ames name in 14
states in the Northeast, Mid-Atlantic and Mid-West regions and the District of
Columbia. The Company's stores are located in rural communities, some of which
are not served by other large retail stores, high-traffic suburban sites, small
cities and several major metropolitan areas. The stores largely serve middle and
lower-middle income customers.
The Company filed petitions under Chapter 11 of the U.S. Bankruptcy Code
("Chapter 11") on April 25, 1990. From that time until December 30, 1992, Ames
operated its business as a debtor-in-possession subject to the jurisdiction of
the United States Bankruptcy Court for the Southern District of New York (the
"Bankruptcy Court"). On December 30, 1992, Ames emerged from bankruptcy (Note
2).
(b) Basis of presentation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year items have been reclassified to conform to the current
year presentation.
(c) Fiscal year:
The Company's fiscal year ends on the last Saturday in January. The fiscal
year ended January 31, 1998 ("Fiscal 1997" or "1997") included 53 weeks. The
fiscal years ended January 25, 1997 ("Fiscal 1996" or "1996") and January 27,
1996 ("Fiscal 1995" or "1995") each included 52 weeks.
(d) Principles of consolidation:
The consolidated financial statements include the accounts of Ames and its
subsidiaries, all of which are wholly-owned. All intercompany accounts and
transactions have been eliminated.
(e) Cash and short-term investments:
Ames considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash and short-term investments.
(f) Inventory valuation:
All periods are stated at the lower of cost or market and include the
capitalization of transportation and distribution center costs. Effective
October 25, 1997, the Company changed from the last-in, first-out ("LIFO")
method of accounting of inventories to the first-in, first-out ("FIFO") method
and restated all prior periods for the change. The change had no impact on the
historical results of operations of the Company.
(g) Fixed assets:
Land and buildings, fixtures and equipment, and leasehold improvements are
recorded at cost. All fixed assets at December 26, 1992 were written-off under
fresh-start reporting (Note 2). Major replacements and betterments are
capitalized. Maintenance and repairs are charged to earnings as incurred. The
cost of assets sold or retired and the related amounts of accumulated
depreciation are eliminated from the accounts in the year of disposal, with the
resulting gain or loss included in earnings.
(h) Depreciation and amortization:
Land and buildings, fixtures and equipment are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives. Property
under capital leases and leasehold improvements are depreciated over the shorter
of their estimated useful lives or their related lease terms.
The unfavorable lease liability (recorded under fresh-start reporting) is
being amortized on a straight-line basis over the applicable lease terms.
The excess of revalued net assets over equity under fresh-start reporting
is being amortized over a 10 year period (Note 2).
(i) Deferred charges:
Expenses related to new store openings are expensed in the fiscal year in
which the store opens.
Debt transaction costs and related issue expenses are deferred and
amortized over the term of the associated debt. Lease acquisition and related
costs are deferred and amortized over the term of the lease.
(j) Income taxes:
Ames files a consolidated Federal income tax return. Ames adopted
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS No. 109") under fresh-start reporting. Under this method, any
deferred income taxes recorded are provided for at currently enacted statutory
rates on the differences in the basis of assets and liabilities for tax and
financial reporting purposes. If recorded, deferred income taxes are classified
in the balance sheet as current or non-current based upon the expected future
period in which such deferred income taxes are anticipated to reverse.
(k) Self-insurance reserves:
The Company is self-insured for workers' compensation, general liability,
property and casualty, and accident and health insurance claims, subject to
certain limitations. The Company has insurance coverage for losses that may
occur above certain levels. The Company determines its liability for claims
based on each individual claim's circumstances and estimates its liability for
claims incurred but not yet reported based on historical experience. As of
January 31, 1998 and January 25, 1997, Ames had established self-insurance
reserves of $31.7 million and $34.2 million, respectively. Major portions of
these reserves may not be paid within a year and are subject to changes in
estimates as claims are settled or continue to remain outstanding.
(l) Leased department sales and income:
Ames has an agreement with an independent contractor that allows the
independent contractor to operate shoe departments within the Ames stores. Ames
receives a percentage of the sales under the agreement.
(m) Earnings per common share:
In February, 1997 the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). Under SFAS No. 128, the presentation of Primary and Fully Diluted
Earnings per Share was replaced by Basic and Diluted Earnings per Share. The
Company adopted the provisions of SFAS No. 128, effective January 31, 1998, and
has restated all periods presented.
Net income (loss) per common share for Fiscal 1997, 1996 and 1995 was
determined by using the weighted average number of common and common equivalent
shares outstanding during each fiscal year. Common equivalent shares represented
the assumed exercise of the outstanding Series B and Series C Warrants and stock
options.
(n) Stock-Based Compensation
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB Option No.25") and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
exercise price of the options.
2. Reorganization Case and Fresh-Start Reporting:
----------------------------------------------
Reorganization Case
As discussed in Note 1, Ames and its subsidiaries filed petitions for
reorganization under Chapter 11 on April 25, 1990 (the "Filing Date"). The
Company's disclosure statement relating to its Third Amended and Restated Joint
Plan of Reorganization dated October 23, 1992 (the "Amended Plan") was approved
by the Bankruptcy Court on October 29, 1992. The Amended Plan was confirmed by
the Bankruptcy Court on December 18, 1992 and consummated on December 30, 1992
(the "Consummation Date").
Fresh-Start Reporting
Pursuant to the guidance provided by the American Institute of Certified
Public Accountants in Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company
adopted fresh-start reporting and reflected the consummation distributions in
the consolidated balance sheet as of December 26, 1992 (the fiscal month-end for
December, 1992). Under fresh-start reporting, the reorganization value of the
Company was allocated to the emerging Company's net assets on the basis of the
purchase method of accounting.
The Company's reorganization value was less than the fair value of the
current assets at the Consummation Date. In accordance with the purchase method
of accounting, the excess of book value over fair value was allocated to reduce
proportionately the values assigned to non-current assets in determining their
fair values. Because this allocation reduced the non-current assets to zero
value, the remainder was classified as a deferred credit ("Excess of revalued
net assets over equity under fresh-start reporting" or "negative goodwill") and
is being amortized systematically to income over the period estimated to be
benefited (ten years). Depreciation and amortization of fixed assets is for
capital additions after December 26, 1992.
3. Cash and Short-Term Investments:
--------------------------------
As of January 31, 1998 and January 25, 1997 short-term investments totaled
$37.9 million and $31.1 million, respectively. These investments consisted of
time deposits, certificates of deposit, bankers acceptances, repurchase
agreements and high grade commercial paper.
4. Inventories:
------------
Inventories are valued at the lower of cost or market and include the
capitalization of transportation and distribution center costs. Effective
October 25, 1997, the Company changed from the last-in, first-out ("LIFO")
method of accounting of inventories to the first-in, first-out ("FIFO") method
and restated all prior periods for the change. The change had no impact on the
historical results of operations of the Company.
5. Debt:
-----
The Credit Agreement
On December 27, 1996, 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 consisting of
five other banks and financial institutions, for a secured revolving credit
facility of up to $320 million, with a sublimit of $100 million for letters of
credit and a $20 million term loan portion available for capital expenditures
(the "Credit Agreement").
Prior to this date, the Company had a $300 million secured revolving
credit facility (the "Prior Credit Agreement") in place with the same financial
institutions. The Prior Credit Agreement terminated on the effective date of the
Credit Agreement.
The Credit Agreement is in effect until June 30, 2000, is secured by
substantially all of the assets of the Company, and requires the Company to meet
certain financial covenants. The interest rate per annum on the Credit Agreement
is equal to the Reference Rate (as defined in the Credit Agreement) plus 0.75%
(subject to downward adjustments). Alternatively, the interest rate per annum
may be equal to the Eurodollar Rate (as defined in the Credit Agreement) plus
2.25% (subject to downward adjustments).
Fees required under the Credit Agreement include: (1) quarterly commitment
fees on the unused portion of the facility, (2) an initial closing fee, (3) two
quarterly facility fee payments due under the Prior Credit Agreement and (4) an
annual syndication fee to the agents.
For Fiscal 1997, the weighted average interest rate on the Company's
revolving credit facilities was 8.2%. The peak borrowing level under the Credit
Agreement during Fiscal 1997 was $146.6 million. As of January 31, 1998, $2.7
and $21.6 million was outstanding in trade and standby letters of credit,
respectively.
The amount of borrowing under the Credit Agreement shall not exceed the
sum of (i) an amount equal to 60% 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. In addition, the Credit Agreement provides for the
potential establishment of other reserves contingent upon the Company's
financial performance. Each Agent, in addition, reserves the right to adjust the
total available to be borrowed by establishing reserves, making determinations
of eligible inventory, revising standards of eligibility or decreasing from time
to time the percentages set forth above.
The financial covenants under the Credit Agreement are limited to: capital
expenditure and lease obligation limits; minimum EBITDA (as defined below); and
minimum EBITDA to cash interest expense. The definition of EBITDA is: income
before (a) interest expense, (b) income tax expense or benefit, (c) depreciation
and amortization expense, LIFO expense, stock appreciation rights accruals,
certain restructuring charges and other noncash charges, (d) gain or losses on
sale of properties.
In addition, each year outstanding borrowings under the Credit Agreement
may not exceed any balance due under the term loan portion plus up to $20
million in revolver loans for a consecutive 30-day period between November 15th
and February 15th of the following year (the "clean-up" requirement). The
Company is in compliance with the financial covenants through the quarter ended
January 31, 1998.
Other Debt
The Company's outstanding debt as of January 31, 1998 and January 25, 1997
is listed and described below. Pursuant to the Amended Plan, the Company and its
lenders agreed to a restructuring of the Company's obligations at December 26,
1992.
New and reinstated debt obligations that carried face interest rates
significantly lower than market rates (for financing of a similar nature) as of
the Consummation Date were discounted to their present values using estimated
market rates. The discount amounts are being amortized to interest expense over
the terms of the related obligations using the effective interest method. The
market interest rates used to determine the present values at December 26, 1992
are shown in the table below.
As of January 31, 1998, payments due on long-term debt for the next five
years and thereafter were as follows:
(000's Omitted)
Fiscal Year Ending January Amount
-------------------------- ---------------
1999 2,000
2000 9,500
2001 -0-
2002 -0-
2003 -0-
Thereafter -0-
Outstanding debt at January 31, 1998 and January 25, 1997 is listed below.
Further explanations of certain of the obligations follow the table.
(000's omitted)
------------------------
Secured Debt - 1/31/98 1/25/97
- -------------- ------- -------
Senior Debt:
Guaranteed First Mortgage Notes, interest rate of 9.5%, due through 3/99.
Discount rate 11%.......................................................... $11,500 $12,500
Real Estate Mortgage, interest rate 6%, due 12/97. Discount rate 12%......... - 2,900
Equipment Notes, interest rates at 9% to 10%, due through 12/97.
Discount rate 11% to 12%................................................... - 548
------- -------
Total Face Value of Secured Debt...................................... $11,500 $15,948
------- -------
Unsecured Debt -
- ----------------
Senior Debt:
Allowed Priority Tax Obligations, 5% interest rate. Discount rate 9%......... $ - $ 150
Subordinated Debt:
Deferred Cash Distributions due through 1/31/97,
5% interest rate beginning 2/94. Discount rate 12%........................... - 7,500
TJX Expense Note, 10% interest rate, due 1/98 (Note 11)......... - 786
------- -------
Total Face Value of Unsecured Debt......................................... $ - $ 8,436
------- -------
Total Face Value of Debt............................................................ 11,500 24,384
Less: Current Portion................................................... 2,000 12,884
Debt Discounts................................................ 160 366
------- -------
Amount Due After One Year........................................................... $ 9,340 $11,134
======= =======
Deferred Cash Distributions
The Amended Plan provided that approximately $46.5 million of cash
distributions in respect to several classes of claims would be paid subsequent
to the Consummation Date. On January 31, 1997, January 31, 1996, January 31,
1995, January 31, 1994 and January 31, 1993, $7.5, $8.0, $8.0, $8.0 and $15.0
million, respectively, of these deferred cash distributions were paid as
scheduled.
6. Lease Commitments and Unfavorable Lease Liability:
--------------------------------------------------
Ames is committed under long-term leases for various retail stores,
warehouses and equipment expiring at various dates through 2018 with varying
renewal options and escalating rent clauses. Some leases are classified as
capital leases under Statement of Financial Accounting Standards No. 13. Capital
lease obligations were revalued under fresh-start reporting. Ames generally pays
for real estate taxes, insurance, and specified maintenance costs under real
property leases. Most leases also provide for contingent rentals based on
percentages of sales in excess of specified amounts.
Future minimum lease payments for leases as of January 31, 1998 were as
follows:
(000's Omitted)
Lease Payments
-----------------------
Fiscal Year Capital Operating
Ending January Leases Leases
-------------- --------- ---------
1999........................................................................... $ 5,291 $49,787
2000........................................................................... 4,791 46,845
2001........................................................................... 4,567 41,575
2002........................................................................... 4,433 37,746
2003........................................................................... 4,396 33,926
Thereafter....................................................................... 31,265 184,866
--------- ---------
Total minimum lease payments........................................................ 54,743 $394,745
========= =========
Less: amount representing estimated executory costs................................ 513
---------
Net minimum lease payments.......................................................... 54,230
Less: amount representing interest................................................. 25,660
---------
Present value of net minimum lease payments......................................... 28,570
Less: currently payable............................................................ 2,177
---------
Long-term capital lease obligations................................................. $26,393
=========
Total payments have not been reduced by minimum sublease rentals to be
received in the aggregate under noncancellable subleases of capital leases and
operating leases of approximately $0.1 and $10.9 million, respectively, as of
January 31, 1998. Amortization of capital lease assets was approximately $0.4,
$0.4 and $0.2 million for Fiscal 1997, Fiscal 1996 and Fiscal 1995,
respectively. Rent expense (income), excluding the benefit from the amortization
of the unfavorable lease liability, was as follows:
(000's Omitted)
-----------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
--------- --------- ---------
Minimum rent on operating leases $48,577 $43,856 $42,751
Contingent rental expense 6,651 5,768 5,873
Sublease rental income (1,730) (1,988) (2,491)
The unfavorable lease liability in the Consolidated Balance Sheets was
recorded as part of fresh-start reporting and represents the estimated liability
related to lease commitments that exceeded market rents for similar locations.
This liability is being amortized as a reduction of rent expense in the
Consolidated Statements of Operations over the remaining lease terms.
7. Stockholders' Equity:
---------------------
Common Stock
As provided under the Restated Certificate of Incorporation, the
authorized capital stock of the reorganized Ames consisted of 40,000,000 shares
of common stock (22,506,108 and 20,474,469 shares outstanding as of January 31,
1998 and January 25, 1997, respectively), par value $.01 per share (the "Common
Stock").
Holders of shares of Common Stock are entitled to one vote per share on
all matters to be voted upon by stockholders and are entitled to receive
dividends when, as and if declared by the Board of Directors.
Dividends cannot be declared under the terms of the Credit Agreement.
The Common Stock does not have any preemptive right or subscription or
redemption privilege. The Common Stock also does not have cumulative voting
rights, which means the holder or holders of more than half of the shares voting
for the election of directors can elect all the directors then being elected.
All of the shares of Common Stock are fully paid and nonassessable.
Warrants
An aggregate of 200,000 Series B Warrants were issued under the Amended
Plan. Each such warrant entitles the holder to purchase one share of the Common
Stock at any time from June 30, 1993 through December 30, 2000. The exercise
price is $5.92 per share. No Series B Warrants have yet been exercised.
An aggregate of 2,120,000 Series C Warrants were issued under the Amended
Plan. Each such warrant entitles the holder to purchase one share of the Common
Stock at any time from June 30, 1993 through January 31, 1999. The exercise
price is $1.11 per share. As of January 31, 1998, 732,502 Series C Warrants were
outstanding and during Fiscal 1997, 1,260,213 Series C Warrants were exercised.
There were no exercises of the Series C Warrants during Fiscal 1996.
The exercise prices of the above warrants are subject to adjustment upon
the occurrence of certain events, including, among other things, the payment of
a stock dividend, a merger or consolidation and the issuance for consideration
of rights, options or warrants (other than rights to purchase Common Stock
issued to shareholders generally) to acquire the Common Stock of the Company.
A holder of any of the warrants described above as such will not be
entitled to any rights as a stockholder of the Company, including, without
limitation, the right to vote with respect to the shares of Common Stock of the
Company, until such holder has exercised the warrants.
Stock Purchase Rights Agreement
On November 30, 1994, the Company adopted a Stock Purchase Rights
Agreement (the "Rights Agreement"). Under the terms of the Rights 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 Rights 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 Rights Agreement was adopted to assure that all
of the Company's stockholders 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.
8. Stock Options:
--------------
Pursuant to the 1994 Management Stock Option Plan (the "Option Plan")
approved by stockholders in June, 1994, the Company may grant options with
respect to an aggregate of up to 1,700,000 shares of Common Stock, with no
individual optionee to receive in excess of 200,000 shares of Common Stock upon
exercise of options granted. The exercise prices of the options are equal to the
fair market value of the Common Stock on the date the options are granted. The
options become exercisable over one to five years and terminate after five to
ten years from the grant date.
Pursuant to the 1994 Non-Employee Directors Stock Option Plan (the
"Non-Employee Plan") approved by stockholders in May, 1995, the Company may
grant to non-employee directors options to purchase up to an aggregate of
200,000 shares of Common Stock. The exercise prices of the options are equal to
the fair market value of the Common Stock on the date the options are granted.
The options become exercisable in full six months after date of grant and
terminate ten years after date of grant. Effective on the date of each annual
meeting of stockholders of the Company commencing with the 1996 Annual Meeting,
each non-employee director of the Company then in office will be granted an
option to purchase 2,500 shares, with the date of grant to be the date of such
meeting. As of January 31, 1998, 75,000 options had been granted under the
Non-Employee Plan; all were exercisable.
The following table sets forth the stock option activity for both stock
option plans for Fiscal 1997, Fiscal 1996 and Fiscal 1995 (shares in thousands):
1997 1996 1995
----------------------- ----------------------- -----------------------
Number Weighted Number Weighted Number Weighted
of Average of Average of Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------ -------------- ------ -------------- ------ --------------
Outstanding at beginning of year.......... 1,664 $3.73 1,320 $4.15 1,300 $4.63
Granted........................... 76 9.43 538 2.82 275 2.40
Exercised......................... (775) 4.03 (2) 1.76 - -
Forfeited......................... (51) 3.59 (192) 4.07 (255) 4.67
------ ------ ------
Outstanding at year-end................... 914 3.97 1,664 3.73 1,320 4.15
====== ====== ======
Options exercisable at year-end........... 640 3.77 691 4.27 375 4.45
====== ====== ======
Weighted average fair value of
options granted................... $7.09 $1.80 $1.44
====== ====== ======
The fair value of options granted per the above table was estimated on the
date of grant using the Black-Scholes pricing model with the following
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 (weighted average interest rate of 6.4%, 6.4% and
6.5% for 1997, 1996 and 1995, respectively) and an expected life from date of
grant until option expiration date (weighted average expected life of 6.0, 5.6
and 5.1 years for 1997, 1996 and 1995, respectively).
Not included in the 538,000 options granted during 1996 are 300,000
options granted pursuant to an employment agreement. The grant of these options
is subject to shareholder approval at its annual meeting to be held on May 27,
1998. These options have been accounted for on a mark-to-market basis and
compensation expense of approximately $2.6 and $1.8 million was recorded in 1997
and 1996, respectively. If shareholder approval is not obtained, the granted
options will revert to stock appreciation rights.
Had the 300,000 options been included in the 1996 option grants, the
weighted average fair value of options granted in 1996 would have been $1.63 per
option.
The following table summarizes information about the stock options
outstanding as of January 31, 1998:
Options Outstanding Options Exercisable
----------------------------------- -----------------------
Weighted Avg. Weighted Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 1/31/98 Life Price at 1/31/98 Price
-------------- ----------- ------------ -------- ----------- ----------
$1.50 - $3.00 322 4.1 $2.38 214 $2.50
$3.13 - $4.38 348 3.0 3.75 233 3.66
$5.06 - $5.12 177 1.1 5.06 178 5.06
$6.31 - $15.56 67 4.8 9.82 15 8.44
----- -----
914 3.1 3.97 640 3.77
===== =====
The Company accounts for its stock option plans under APB Opinion No.
25. Had compensation cost for the Company's 1997, 1996 and 1995 stock option
grants been determined in accordance with the alternative fair value method SFAS
No. 123, the Company's net income (loss) and net income (loss) per common share
for Fiscal 1997, Fiscal 1996 and Fiscal 1995 would have approximated the
proforma amounts below:
Fiscal 1997 Fiscal 1996 Fiscal 1995
---------------------- ---------------------- ----------------------
As Reported Proforma As Reported Proforma As Reported Proforma
----------- --------- ----------- --------- ----------- ---------
Net income (loss)........ $34,546 $35,847 $17,301 $17,969 ($1,618) ($1,686)
Net income (loss) per
common share
-basic............... $1.59 $1.65 $.85 $.88 ($.08) ($.08)
-diluted............ $1.46 $1.52 $.79 $.82 ($.08) ($.08)
<FN>
SFAS 123 does not apply to stock options granted prior to 1995.
</FN>
9. Income Taxes:
-------------
For Fiscal 1997, the Company recorded an income tax provision of $19.1
million, of which approximately $0.3 million will be paid in cash. For Fiscal
1996, the Company recorded a non-cash income tax provision of approximately $8.1
million. The Company had no income tax provision for Fiscal 1995.
The provision for income taxes is comprised of the following:
(In Millions)
-------------------------------------
Fiscal 1997 Fiscal 1996 Fiscal 1995
----------- ----------- -----------
Currently Payable: Federal Alternative Minimum Tax... $0.3 - -
Deferred Non-cash Pre-emergence Tax Provision........ 26.2 $15.8 -
Deferred Non-cash Post-emergence Tax Benefit......... (7.4) (7.7) -
-------- -------- --------
Total Income Tax Provision........................ $19.1 $8.1 -
======== ======== ========
The Company adopted SFAS No. 109 in conjunction with the adoption of
fresh-start reporting. Under SFAS No. 109, deferred income taxes are recognized
by applying the enacted statutory tax rates in future years to the changes in
"cumulative temporary differences" (the differences between financial statement
carrying values and the tax basis of assets and liabilities).
As a consequence of the adoption of fresh-start reporting and SFAS No.
109, any tax benefits realized for tax purposes after the Consummation Date for
pre-consummation cumulative temporary differences, as well as for the
pre-consummation net operating loss carryovers, are reported as additions to
paid-in capital (see Consolidated Statements of Changes in Stockholders' Equity)
rather than as reductions in the tax provisions in the Consolidated Statements
of Operations. Tax benefits or liabilities realized for book purposes after the
Consummation Date will be segregated from the pre-consummation deferred tax
assets. However, the utilization of post-consummation deferred tax assets may
reduce future income tax provisions. Such income tax provisions have no impact
on the Company's taxes payable or cash flows.
Ames has the following deferred tax assets/(liabilities) from
pre-consummation ("Pre") and post-consummation ("Post") periods, as of the
following dates ($ in millions):
As of January 31, 1998 As of January 25, 1997
----------------------- -----------------------
Pre Post Total Pre Post Total
----- ----- ----- ----- ----- -----
Fixed assets...................... $34 ($3) $31 $40 ($3) $37
Self insurance reserves........... 5 8 13 7 7 14
Store closing reserves............ - 9 9 2 13 15
Leases............................ - 15 15 11 7 18
Vacation pay reserve and other.... (1) 17 16 (2) 14 12
Net operating loss carryovers..... 172 - 172 179 - 179
----- ----- ----- ----- ----- -----
Total deferred tax assets......... 210 46 256 237 38 275
Valuation allowances.............. (210) (39) (249) (237) (38) (275)
----- ----- ----- ----- ----- -----
Net deferred tax assets........ $0 $7 $7 $0 $0 $0
===== ===== ===== ===== ===== =====
The Company has reserved for a significant portion of its deferred tax
assets because of the current uncertainty of the future recognition of such
deductions. In subsequent periods, Ames may further reduce the valuation
allowances, provided that the possibility of utilization of the deferred tax
asset is more likely than not, as defined by SFAS No. 109. Any such reduction in
the valuation allowance in the near future will result in a corresponding
addition to paid-in-capital.
The Company has treated "pre-emergence net operating losses" (qualified
losses incurred prior to the Consummation Date) under Section 382(l)(5) of the
Internal Revenue Code (hereafter "L-5"). Under L-5, there is approximately
$280 million in pre-emergence net operating losses currently available as
carryovers without any annual limitation. The Company has filed a $20 million
refund claim under Section 172(f) of the Internal Revenue Code. The claim
represents a 10-year carryback of qualified expenses and is currently under
review by the Internal Revenue Service ("IRS"). The claim will reduce net
operating losses by approximately $47 million.
Ames also has a "post-emergence net operating loss" carryover (incurred
after the Consummation Date) of approximately $151 million. Both pre- and
post-emergence net operating loss carryovers, which together total $431 million,
will expire between 2007 and 2012, except in the event of a change in control of
the Company. In addition, Ames has targeted jobs tax credit carryovers of
approximately $7 million, which will expire in 2007, and alternative minimum tax
credit carryovers of approximately $3.3 million, which have no expiration
period. Federal net operating loss carryovers for fiscal years subsequent to
January 27, 1990 are subject to future adjustments, if any, by the IRS.
As noted above, in the event of a change of control, there could be
significant limitations on the ability of the Company to utilize the net
operating loss carryovers and other tax benefits.
Ames has substantial potential state net operating loss carryovers. It is
difficult, however, to quantify the utilizable amounts of such state operating
losses because of the uncertainty related to the mix of future profits in
specific states.
10. Benefit and Compensation Plans:
-------------------------------
Retirement and Savings Plan
Ames has a defined contribution retirement and savings plan (the
"Retirement and Savings Plan") that is qualified under Sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as amended, for employees who,
after one year of service, have reached the age of 21 and have completed at
least 1,000 hours of service in a 12-month period. For each participant's
contribution (up to a maximum of 5% of such participant's total compensation),
the Company contributes to the Retirement and Savings Plan an amount equal to
50% of such contribution. Ames funds all administrative costs incurred by the
plan. Ames' expense associated with this plan amounted to approximately $3.0,
$2.9 and $3.0 million, in 1997, 1996 and 1995, respectively.
Retirement Plan
Ames has an unfunded Retirement Plan for Officers/Directors (the
"Retirement Plan"). It provides that every person who is employed by Ames when
he or she retires, dies or becomes disabled and who serves as both a full-time
officer and a director of Ames and has completed five years of service, not
necessarily consecutive, in both of these capacities, is eligible for benefits
under the Retirement Plan.
The maximum annual benefit under the Retirement Plan is $100,000, reduced
by certain of each participant's annual Social Security benefits. Each
participant in the Retirement Plan is entitled to benefits for a period of 10
years. The Company has a reserve established for potential payments under the
Retirement Plan. No payments were made under this plan during the periods
presented.
The G.C. Murphy Company Life Insurance Plan
The G.C. Murphy Company Life Insurance Plan (the "GCM Plan") granted a
flat dollar amount (defined benefit) of group term life insurance at no cost to
certain retired employees. This plan excludes G.C. Murphy Co. employees who
retired from Ames after January 31, 1986. The amount of coverage varies by
retiree, is payable only upon death, and has no loan or cash value. During 1997,
the Company entered into a contract with an insurance company which effectively
transferred to the insurance company all future liabilities associated with the
GCM Plan in exchange for fixed annual payments over ten years.
Annual Incentive Compensation Plan
The Company has an Annual Incentive Compensation Plan (the "Annual Bonus
Plan") that is subject to annual review by the Board of Directors. The Annual
Bonus Plan provides annual incentive cash bonuses based on the achievement of
the Company's financial goals for the year (and customer service goals for store
and field management). There are approximately 1,500 members of management
eligible under the plan. Bonus expense recorded under the plan was $6.3, $7.9
and $1.5 million for Fiscal 1997, 1996 and 1995, respectively.
Long Term Incentive Plan
Pursuant to the 1995 Long Term Incentive Plan (the "LTIP"), approved by
the stockholders in May, 1995, the Company may make awards of an aggregate of up
to 500,000 shares of Common Stock and cash payment in an amount up to 50% of the
fair market value (as defined in the LTIP) of the Common Stock awarded,
determined as of and paid on the vesting date. Each award under the LTIP vests
in full on the third anniversary of the date of grant of such award. Awards may
be made to the Chief Executive Officer, any Executive Vice President and any
Senior Vice President of the Company. Other than for death or disability, awards
which have not yet vested are forfeited upon the termination of the employment
of the executive.
As of January 31, 1998, awards aggregating to 345,000 shares of Common
Stock had been made to certain executives of the Company, 310,000 of which
remain outstanding. The Compensation Committee of the Board of Directors
accelerated the March 22, 1998 vesting date of 35,000 shares of Common Stock to
January 2, 1998 for the former Executive Vice President-Chief Financial Officer
who had served until his resignation effective January 3, 1998. The shares for
the outstanding awards that have been issued, but have not yet vested, are being
held in custody by the Company on behalf of the grantees thereof. A portion of
the estimated market value of the awards, including the cash, has been accrued
as compensation expense as of January 31, 1998. The Company recorded as
compensation expense for the LTIP $2.0, $1.1 and $0.3 million during 1997, 1996
and 1995, respectively.
Stock Appreciation Rights
In connection with the Amended Plan, 1.2 million stock appreciation
rights ("SARs"), exercisable only for cash, were granted to certain members of
management as compensation for their efforts in restructuring Ames and enabling
it to emerge from Chapter 11. All such SARs expired as of December 30, 1997.
Each SAR entitled the recipient upon exercise to receive in cash the excess of
(a) the average closing price of a share of Common Stock during the ten trading
days prior to the exercise date over (b) $2.96. During Fiscal 1997 and Fiscal
1996, a total of 166,683 and 16,667 SARs were exercised, respectively. The
Company recorded a SARs expense of $0.1 and $0.8 million in 1997 and 1996,
respectively. There was no SARs expense in 1995.
Income Continuation Plan
Certain officers of Ames participate in an Income Continuation Plan
("ICP"), which guarantees up to one year's salary in the event of termination
other than for cause. As of January 31, 1998, the Company had no obligations
under the ICP.
Key Employee Continuity Benefit Plan
Ames has a Key Employee Continuity Benefit Plan (the "Continuity Plan")
that covers all officers, Vice President and above, and certain other employees
of Ames. If the employment of any participant in the Continuity Plan is
terminated, other than for death, disability, cause (as defined in the
Continuity Plan) or by the participant other than for good reason (as defined in
the Continuity Plan), within 18 months after a change of control of Ames, the
participant will receive a lump sum cash severance payment. The severance
payment is 2.99 times Base Compensation for the President and Executive Vice
Presidents, 2 times Base Compensation for Senior Vice Presidents and selected
Vice Presidents and 1 times Base Compensation for other Vice Presidents. Base
Compensation is defined generally as the sum of the participant's annual base
compensation in effect immediately prior to the participant's termination plus
one-third of the value of the cash and stock bonuses paid to the participant
during the 36 months ending on the date of termination. For purposes of the
Continuity Plan, a change of control includes but is not limited to the
acquisition by any person of beneficial ownership of 20% or more of Ames
outstanding voting securities or the failure of the individuals who constituted
the Board of Directors at the beginning of any period of 12 consecutive months
to continue to constitute a majority of the Board during such period.
11. Commitments and Contingencies:
------------------------------
As part of the Company's settlement with TJX Companies, Inc. ("TJX") under
the Amended Plan, Ames must reimburse TJX for various obligations, fees, and
expenses that may be paid by TJX relating to various properties that were under
leases rejected by Ames. The obligations, fees, and expenses are subject to
certain maximum amounts and the total reimbursement could not exceed $2.7
million and was in the form of an unsecured note payable due on January 31, 1998
(the "TJX Expense Note"). TJX provided Ames with the amounts paid, if any,
during each quarter and those amounts, after appropriate review, become the
principal due under the TJX Expense Note. On January 30, 1998, the Company paid
the TJX Expense Note in full, including interest which had accrued at 10% per
annum.
12. Litigation:
-----------
Wage and Hour Litigation
On March 21, 1995, a Class Action Complaint (the "Abrams Complaint") was
filed against the Company in the Superior Court Department of the Trial Court,
Suffolk County, Massachusetts entitled David W. Abrams, Individually and On
Behalf of All Other Persons Similarly Situated v. Ames Department Stores, Inc.
The Complaint alleged that Ames violated Massachusetts wage and hour law by
failing to pay Abrams, and other similarly situated Assistant Managers in
Massachusetts, time and one-half their regular rates of pay for hours worked in
excess of 40 hours a week. The Complaint sought injunctive relief, treble
damages, costs and attorney's fees. On April 21, 1995, the case was removed to
the United States District Court for the District of Massachusetts. The Company
has denied the claims on the basis that Abrams and other similarly situated
Assistant Managers were exempt employees not entitled to overtime pay. The
Company further denied that the action was properly maintainable as a class
action and that the plaintiff was a proper representative of the purported
class.
On March 14, 1996, Abrams amended his Complaint to include Richard Serrano
as name representative of all Replenishment Assistant Managers located
throughout Massachusetts. On November 22, 1996, the Court remanded the claims of
Serrano and the putative class of Replenishment Assistant Managers to State
Court because Serrano failed to satisfy the amount in controversy requirement
for federal jurisdiction. On January 3, 1997, the United States District Court
for the District of Massachusetts certified a class of Hardlines and Softlines
Assistant Managers employed by Ames in any Ames store in Massachusetts on or
after March 21, 1993, but limited the class to those Assistant Managers whose
claim satisfied the amount in controversy requirement for federal jurisdiction
as of April 21, 1995, the date of removal. Abrams caused notice to be sent to
the class apprising them of the pending action and their right to opt-out of the
action if they do not wish to participate in the litigation. A trial date has
tentatively been set for June 22, 1998.
On December 13, 1995, a Class Action Complaint was filed and on January
23, 1996 an Amended Class Action Complaint was filed (the "Second Complaint") in
the United States District Court for the District of Massachusetts entitled
Colleen Austin, On Behalf of Herself and Others Similarly Situated v. Ames
Department Stores, Inc. et al. The factual allegations in the Second Complaint
are essentially the same as those in the Abrams Complaint referenced above.
However, the Second Complaint also includes claims against the Company and
certain of its officers and directors under the Fair Labor Standards Act, ERISA
and the wage and hours laws of each state where Ames does business, and purports
to state claims on behalf of Assistant Managers in each of those states. The
Company believes, among other things, that the case is not properly maintainable
as a class action suit and that the plaintiff is not a proper class
representative. The Company also denied liability on the basis that Austin and
other similarly situated Assistant Managers were exempt employees and moved to
dismiss the claims under ERISA and the laws of all states except Massachusetts.
On November 21, 1997, the Court granted the Company's motion to dismiss the
ERISA Count and denied the remainder of the motion. Discovery has not yet
commenced in this matter.
On June 26, 1996, a Class Action Complaint was filed (the "Third
Complaint") in the United States District Court for the District of
Massachusetts entitled David Root, On Behalf of Himself and all Other Persons
Similarly Situated v. Ames Department Stores, Inc. The factual allegations in
the Third Complaint are essentially the same as in the Abrams Complaint
referenced above. However, the Third Complaint pertains only to Replenishment
Assistant Managers who worked at any Ames Store throughout the United States and
is brought solely under the Fair Labor Standards Act. The Complaint sought
injunctive relief, damages, costs and attorneys' fees. The Company denied the
claims on the basis that Root and other similarly situated Replenishment
Assistant Managers were exempt employees and, thus, not entitled to time and
one-half pay for hours worked in excess of 40 hours per week. The Company
further denied that the action was properly maintainable as a class action and
that the plaintiff was a proper representative for the purported class. In the
Fall of 1996, the parties reached an agreement to settle the action whereby each
putative class member opting-in to the settlement would receive a calculated sum
based on the number of weeks worked and individual weekly salary levels in
exchange for a release of all claims against the Company. The total of the
settlement cannot exceed $1 million in cash and $500,000 in scrip usable in Ames
stores. The Court approved the settlement on January 31, 1997 and notices of the
class action settlement were sent to all potential members on February 3, 1997.
Individuals wishing to opt-in to the settlement did so by April 4, 1997.
Payments have been made according to the terms of the settlement.
On December 6, 1996, the remand referenced above from the United States
District Court for the District of Massachusetts of Abrams v. Ames Department
Stores, Inc. as to Richard Serrano and the putative class of Replenishment
Assistant Managers was docketed in the Superior Court Department of the Trial
Court, Suffolk County, Commonwealth of Massachusetts (the "Fourth Complaint").
The Fourth Complaint alleged that Ames violated General Laws, Chapter 151, ss.1A
by failing to pay Serrano and other similarly situated Replenishment Assistant
Managers located throughout Massachusetts time and one-half their regular rates
of pay for hours worked in excess of 40 hours per week. Serrano dismissed the
action on behalf of himself and other similarly situated Replenishment Assistant
Managers pursuant to the settlement reached between Ames and David Root
described above. Serrano and other former or current Replenishment Assistant
Managers employed by Ames in Massachusetts had the option to opt-in to the
settlement.
On March 18, 1997, the Fourth Complaint was amended to add Kristen Gould
as a named plaintiff to represent the putative class of Hardlines and Softlines
Assistant Managers employed by Ames in the Ames Store in Massachusetts whose
claim failed to satisfy the amount in controversy requirement for federal
jurisdiction in the Abrams case. Gould's substantive claims mirror those
currently pending in the Abrams case for Massachusetts Hardlines and Softlines
Assistants. Also, on March 18, 1997, the Court dismissed Serrano's action on
behalf of himself and other similar situated Replenishment Assistant Managers
pursuant to the settlement reached between Ames and David Root described above.
This case will hereafter go forward solely on behalf of the Hardlines and
Softlines Assistant Managers under the caption Kristen Gould v. Ames Department
Stores, Inc. in the Superior Court Department of the Trial Court, Suffolk
County, Commonwealth of Massachusetts. The Company responded to the Gould
Complaint and asserted the same defenses as it did with regard to the Abrams
Complaint. Gould moved for class certification and on February 5, 1998, the
Supreme Court certified a class of Hardlines and Softlines Assistant Managers
employed in any Ames store in Massachusetts on or after March 21, 1993 whose
claim did not satisfy the amount in controversy requirement for federal
jurisdiction as of April 21, 1995. Discovery has not yet commenced in this
action.
On February 18, 1997, a Class Action Complaint (the "Fifth Complaint") was
filed in the United States District Court for the Northern District of New York
entitled Michelle Moschelle, Individually, and on Behalf of Herself and Others
Similarly Situated v. Ames Department Stores, Inc. et al. The Fifth Complaint is
substantially identical to the Second Complaint except for the name of the
plaintiff. The Company answered the Fifth Complaint, and asserted the same
defenses as it did with regard to the Second Complaint and moved to stay the
Moschelle matter pending a decision on the Company's motion to dismiss in the
Austin matter. On August 7, 1997 the District Court allowed the motion to stay.
As to the Abrams, Austin, Gould and Moschelle matters referenced above,
the Company intends to defend each of them vigorously and believes it should
prevail.
Other Matters
Ames has owned and/or leased current and former facilities that are
subject to several environmental laws relating to the operation and maintenance
of those facilities, particularly with respect to any underground storage tanks
currently or previously located at those facilities. The Company believes the
vast majority of those tanks have already been cleanly removed. Some residual
contamination exists at a limited number of facilities, the extent of which has
not been determined at this time. Environmental liabilities associated with
these facilities may be shared with facility landlords, tenants, subtenants, or
other third parties. In some states, clean-ups may be eligible for financing
from state funds. Based on currently available information, no liabilities
material to the Company will result from any underground storage tank residual
contamination. The Company believes that adequate liabilities have been recorded
related to any potential costs.
Under the Comprehensive Environmental Response, Compensation and Liability
Act of 1980 as amended by the Superfund Amendments and Reauthorization Act of
1986 ("Superfund"), liability may be imposed on waste generators, site owners
and operators, and others regardless of fault or the legality of the original
waste disposal activity. Ames may be liable for costs at several sites under
Superfund or similar state laws either for generating wastes, including waste
oils disposed of at those sites, or in connection with the assumption by Ames of
certain Zayre Discount Division liabilities. Ames believes that it has been
connected to most of these sites based on relatively small amounts of wastes and
that many other parties are involved at these sites and may share in the
ultimate liability. Ames does not have sufficient information to determine its
relative responsibility for, or contribution to (if any), all of these sites at
this time.
The Company is a party to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business
activities. The Company believes that its likely liability as to these matters
will not have a material adverse effect on the consolidated financial position
or results of operations of the Company.
13. Supplemental Cash Flow Information:
-----------------------------------
Cash paid for interest and income taxes were as follows:
(000's Omitted)
---------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
------- ------- -------
Interest....................... $11,655 $15,149 $19,217
Income taxes................... 73 2 2
Ames entered into other non-cash investing and financing activities as
follows:
(000's Omitted)
---------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
------- ------- -------
New capital lease obligations..... $ 2,940 $ 375 $3,203
Issuance of Common Stock under
1995 Long Term Incentive Plan... - - 4
14. Fair Values of Financial Instruments:
-------------------------------------
The Financial Accounting Standards Board requires disclosure of the fair
value of financial instruments under Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No.
107"). The following methods and assumptions were used by the Company in
estimating the fair value disclosures for its financial instruments.
The Company's financial instruments as of January 31, 1998 and January 25,
1997 were cash and short-term investments, long-term debt, and the Series C
Warrants. For cash and short-term investments, the carrying amounts reported in
the Consolidated Balance Sheets approximated fair values. For long-term debt
obligations, the fair values were estimated using a discounted cash flow
analysis (based upon the Company's incremental borrowing rates for similar types
of borrowing arrangements). The fair value of the Series C Warrants was based on
the market trading price at year-end times the number of such warrants that were
outstanding.
The carrying amounts and fair values of the Company's financial
instruments at January 31, 1998 and January 25, 1997 were as follows:
(000's Omitted)
-------------------------------------------
January 31, 1998 January 25, 1997
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ------- -------- -------
Cash and short-term investments. $57,828 $57,828 $46,119 $46,119
Long-term debt:
Secured debt............... 11,340 11,500 15,574 15,737
Unsecured debt............. - - 8,444 8,442
Series C Warrants............... - 9,065 - 10,462
15. Gain on Disposition of Properties:
----------------------------------
The following is a summary of the major components of the "Gain on
disposition of properties":
(000's Omitted)
----------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
------ ------ ------
Gain on:
Sales of closed distribution centers... $ - $ - $5,099
Sales/assignment of lease interests
at closed locations................ - 395 991
Sales of shopping centers.............. - - 3,046
------ ------ ------
$ - $ 395 $9,136
====== ====== ======
16. Store Closing Charges:
----------------------
In the fourth quarter of 1997, the Company recorded charges of $1.6
million in connection with the closing of two (2) stores. The $1.6 million is
classified in two line items: $1.0 million as store closing charge and $0.6
million as part of cost of merchandise sold. Both of the stores closed in
February, 1998.
In the fourth quarter of 1996, the Company recorded charges of $9.7
million in connection with the closing of thirteen (13) stores. The $9.7 million
is classified in two line items: $6.9 million as store closing charge and $2.8
million as part of cost of merchandise sold.
In the fourth quarter of 1995, the Company recorded charges of $20.9
million in connection with the closing of seventeen (17) stores and the
elimination of 71 positions in the corporate headquarters. The $20.9 million is
classified in two line items: $17.6 million as store closing charge and $3.3
million as part of cost of merchandise sold. The $3.3 million charge,
representing the inventory write-down for the seventeen (17) closing stores,
had been classified as part of the store closing charge in the original
presentation of the results for 1995 and was changed to conform to the current
presentations.
The following items represent the major components of the total charges
recorded in January, 1998, January, 1997 and January, 1996 in connection with
store closings:
(000's Omitted)
-----------------------------------
Fiscal Fiscal Fiscal
Item 1997 1996 1995
---- ------ ------ -------
Lease costs.......................... $ 363 $3,535 $12,926
Net fixed asset write-down........... 394 1,149 2,094
Severance costs...................... 113 773 1,857
Other................................ 130 1,401 744
------ ------ -------
Store closing charge............. 1,000 6,858 17,621
Inventory write-down............. 560 2,860 3,244
------ ------ -------
Total charges................ $1,560 $9,718 $20,865
====== ====== =======
The lease costs provided for in the store closing charge include all
projected occupancy costs from date of closing until estimated lease disposition
date.
17. Leased Department and Other Operating Income:
---------------------------------------------
The following is a summary of the major components of the "Leased
department and other operating income":
(000's Omitted)
-----------------------------------
Fiscal Fiscal Fiscal
1997 1996 1995
------- ------- -------
Leased department income........... $16,592 $16,932 $17,132
Concession and vending income...... 1,252 1,148 1,291
Layaway service fees............... 2,605 2,382 2,386
Various other...................... 6,045 8,822 8,868
------- ------- -------
$26,494 $29,284 $29,677
======= ======= =======
18. Extraordinary Items:
--------------------
In December, 1996, the Company terminated the Prior Credit Agreement (Note
5) and recorded a non-cash extraordinary charge of $1.4 million, net of tax
benefit of $0.6 million, for the write-off of deferred financing costs.
19. Accounting for Long-Lived Assets:
---------------------------------
Effective January 27, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of." As a result, the Company
recorded an impairment loss of $3.4 million in the quarter ended January 27,
1996. During Fiscal 1997 and 1996, the Company recorded additional impairment
losses of $1.2 million and $2.2 million, respectively. The impairment loss,
classified as part of "Depreciation and amortization expense," was equivalent to
the current carrying value of fixtures and equipment and leasehold improvements
for specific stores where estimated undiscounted future operating cash flows
were less than the current carrying value of the assets. The Company will
continue to operate these stores until such time the estimated closing costs are
less than any projected cash losses.
20. Recently Issued Accounting Standards:
-------------------------------------
In June 1997, the Financial Accounting Standards Board released Statement
No. 130, "Reporting Comprehensive Income", and Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information". These statements,
which are effective beginning in 1998, expand and modify disclosures and
accordingly will have no impact on the Company's consolidated financial
condition or results of operations.
21. Quarterly Financial Data (Unaudited):
-------------------------------------
Summarized unaudited quarterly financial data (in thousands except for per
share amounts) for the last three fiscal years are shown below. The quarterly
sales for Fiscal 1995 have been restated to reflect the effect of recording "55
Gold(R)" senior citizen discounts as markdowns, which conforms with the Fiscal
1997 and Fiscal 1996 treatment.
First Second Third Fourth
--------- --------- --------- ---------
Fiscal 1997:
Net sales.......................................... $432,601 $503,567 $527,573 $769,377
Gross margin....................................... 118,366 146,348 148,231 215,809
Income (loss) before extraordinary item............ (5,930) 7,378 3,519 29,579 (a)
Income (loss) per share before extraordinary item.. (0.28) 0.31 0.15 1.23
Net income (loss).................................. (5,930) 7,378 3,519 29,579 (a)
Net income (loss)per share - basic................. (0.28) 0.34 0.16 1.32
- diluted............... (0.28) 0.31 0.15 1.23
Fiscal 1996:
Net sales.......................................... $438,667 $499,107 $516,876 707,030
Gross margin....................................... 117,402 139,725 141,224 194,355
Income (loss) before extraordinary item............ (6,998) 4,514 421 20,718 (b)
Income (loss) per share before extraordinary item.. (0.34) 0.21 0.02 0.93
Net income (loss).................................. (6,998) 4,514 421 19,364 (b)
Net income (loss)per share - basic................. (0.34) 0.22 0.02 0.95
- diluted............... (0.34) 0.21 0.02 0.87
Fiscal 1995:
Net sales.......................................... $438,312 $500,188 $501,550 664,181
Gross margin....................................... 115,345 136,000 134,137 174,760
Income (loss) before extraordinary item............ (11,141) 3,188 (4,884) 11,219 (c)
Income (loss) per share before extraordinary item.. (0.55) 0.15 (0.24) 0.54
Net income (loss).................................. (11,141) 3,188 (4,884) 11,219 (c)
Net income (loss)per share - basic................. (0.55) 0.16 (0.24) 0.56
- diluted............... (0.55) 0.15 (0.24) 0.54
<FN>
- --------------
(a) Includes charges of $1.6 million related to the closing of two (2) stores
(Note 16).
(b) Includes charges of $9.7 million related to the closing of thirteen (13)
stores (Note 16).
(c) Includes charges of $20.9 million related to the closing of seventeen (17)
stores (Note 16).
</FN>
SCHEDULE II
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Balance at Charged to Balance at
Beginning of Cost and End of
Description Period Expense Reclassifications(a) Deductions Period
- ----------- ------------ ---------- -------------------- ---------- ----------
Fiscal 1997
Store Closing Reserve............. $24,438 $ 1,000 $519 ($13,907) $12,050
Fiscal 1996
Store Closing Reserve............. $27,379 $ 6,858 ($2,178) ($7,621) $24,438
Distribution Center Closing
Reserve included in Accrued
Expenses....................... $123 - ($ 122) ($ 1) -
Fiscal 1995
Store Closing Reserve............. $ 2,878 $17,621 $8,378 ($1,498)(b) $27,379
Distribution Center Closing
Reserve included in Accrued
Expenses....................... $1,567 - ($ 194) ($1,250)(c) $ 123
<FN>
- --------------
(a) Represents reclassifications of liabilities associated with closed stores
and other reclassifications.
(b) Represents payments of restructuring costs.
(c) Represents payments related to the closing of the distribution center.
</FN>
E X H I B I T I N D E X
Cross-reference
Exhibit or page number
Number Exhibit in Form 10-K
- ------- ------- ---------------
2(a) Third Amended and Restated Plan of Reorganization
of the Ames Department Stores, Inc. and other
members of the Ames Group, Citibank, N.A. as
Agent, the Parent Creditor's Committee, the
Subsidiaries Creditor's Committee, the Bond-
holders' Committee and the Employees' Committee
dated October 23, 1992 (incorporated herein by
reference to Exhibit 2 of the Company's Report on
Form 8-K dated December 29, 1992 and filed
December 31, 1992).
2(b) Statement of Ames Group with respect to conditions
to Consummation of Third Amended and Restated
Joint Plan of Reorganization of Ames Department
Stores, Inc. other members of Ames Group,
Citibank, N.A., the Parent Creditor's Committee,
Subsidiaries Creditors' Committee, Bondholders'
Committee and Employees' Committee dated
December 28, 1992 (incorporated herein by
reference to Exhibit 2B of the Company's Report
on Form 8-K dated December 29, 1992 and filed
December 31, 1992).
2(c) Ames Department Stores, Inc. Information Supplementing
Disclosure Statement dated December 29, 1992
(incorporated herein by reference to Exhibit 2C of the
Company's Report on Form 8-K dated December 29, 1992
and filed December 31, 1992).
3(a) Amended and Restated Certificate of Incorporation
of Ames Department Stores, Inc. (incorporated herein
by reference to Form 8 dated and filed December 29,
1992).
3(b) Form of By-laws of Ames Department Stores, Inc. as
amended February 23, 1995 (incorporated herein by
reference to Exhibit 3(b) of the Company's Annual
Report on Form 10-K dated January 28, 1995 and filed
on April 10, 1995).
4(a) Series B Warrant Certificate for Purchase of New Common
Stock of Ames Department Stores, Inc. (incorporated
herein by reference to Form 8-A dated and filed
December 11, 1992).
4(b) Series C Warrant Certificate for Purchase of New
Common Stock of Ames Department Stores, Inc.
(incorporated herein by reference to Form 8-A
dated and filed December 11, 1992).
4(c) Rights Agreement, dated as of November 30, 1994,
between Ames Department Stores, Inc. and Chemical
Bank, as Rights Agent (incorporated herein by
reference to Exhibit 4 of the Company's Quarterly
Report on Form 10-Q for the quarterly period ended
October 29, 1994 filed on December 13, 1994).
10(a) Retirement and Savings Plan as restated December 27,
1984, and Amendment No. 1 (incorporated herein by
reference to Exhibit 10(n) of the Company's Annual
Report on Form 10-K dated January 26, 1985 and filed
April 24, 1985).
10(b) Settlement Agreement, dated March 31, 1994, between
Ames Department Stores, Inc. and Subsidiaries and
Wertheim Schroder & Co. Incorporated and James A.
Harmon (incorporated herein by reference to Exhibit
10 of the Company's Report on Form 8-K dated and
filed April 8, 1994).
10(c) 1994 Management Stock Option Plan (incorporated herein
by reference to the Company's definitive proxy statement
filed on May 5, 1994).
10(d) 1994 Non-Employee Directors Stock Option Plan
(incorporated by reference to the Company's
definitive proxy statement filed April 10, 1995).
10(e) 1995 Long Term Incentive Plan (incorporated by
reference to the Company's definitive proxy statement
filed on April 10, 1995).
10(f) Credit Agreement, dated as of December 27, 1996, among
BankAmerica Business Credit, Inc., as Agent, the
lenders party thereto and Ames Department Stores, Inc.
(incorporated herein by reference to Exhibit 10 of the
Company's Report on Form 8-K dated and filed
January 14, 1997).
10(g) Employment Agreement, dated June 1, 1996, between Ames
Department Stores, Inc. and Joseph Ettore (incorporated
herein by reference to Exhibit 10(g) of the Company's
Annual Report on Form 10-K dated January 25, 1997 and
filed April 3, 1997).
10(h) Employment Agreement, dated August 1, 1996, between Ames
Department Stores, Inc. and Denis Lemire (incorporated
herein by reference to Exhibit 10(h) of the Company's
Annual Report on Form 10-K dated January 25, 1997 and
filed April 3, 1997).
11 Schedule of computation of basic and diluted net 46
earnings per share.
18 Letter of Preferability, dated November 21, 1997,
(incorporated herein by reference to Exhibit 12 of the
Company's Quarterly Report on Form 10-Q for the
quarterly period ended October 25, 1997 filed on
November 27, 1997).
21 Subsidiaries of the Registrant. 47
Exhibit 11
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED
NET EARNINGS PER SHARE
(Amounts in thousands except per share amounts)
53 Weeks 52 Weeks 52 Weeks
Ended Ended Ended
January 31, January 25, January 27,
1998 1997 1996
----------- ----------- ---------
Income (loss) before extraordinary item $34,546 $18,655 ($1,618)
Extraordinary loss, net - (1,354) -
----------- ----------- ---------
Basic and diluted net income (loss) $34,546 $17,301 ($1,618)
=========== =========== =========
For Basic Earnings Per Share:
- -----------------------------
Weighted average number of common shares outstanding
during the period 21,723 20,467 20,127
Basic earnings per share:
Basic income (loss) per share before extraordinary item $1.59 $0.91 ($0.08)
Extraordinary loss - (0.06) -
----------- ----------- ---------
Basic net income (loss) per share $1.59 $0.85 ($0.08)
=========== =========== =========
For Diluted Earnings Per Share:
- -------------------------------
Weighted average number of common shares outstanding
during the period 21,723 20,467 20,127
Add: Common stock equivalent shares represented by
- Series B Warrants 95 (a) (b)
- Series C Warrants 1,018 1,191 (b)
- Options under 1994 Management Stock Option Plan 47 147 (b)
- Options under 1995 Non-Employee Director Stock
Option Plan 766 7 (b)
----------- ----------- ---------
Weighted average number of common and common equivalent
shares used in the calculation of diluted earnings per share 23,649 21,812 20,127
=========== =========== =========
Diluted earnings per share:
Diluted income (loss) per share before extraordinary item $1.46 $0.85 ($0.08)
Extraordinary loss - (0.06) -
----------- ----------- ---------
Diluted net income (loss) per share $1.46 $0.79 ($0.08)
=========== =========== =========
<FN>
- ------------
(a) These options/warrants were not considered common stock equivalent shares
because the exercise price exceeded the market price of the common stock for
all or substantially all of the period.
(b) Common stock equivalents have not been included because the effect would be
anti-dilutive.
</FN>
EXHIBIT 21
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
Subsidiaries of the Registrant
As of January 31, 1998, the subsidiaries of the Company were as follows:
Name State of Incorporation
- ---------------------- ----------------------
Ames Transportation Systems, Inc.......................... Delaware
Ames Realty II, Inc....................................... Delaware
Ames FS, Inc.............................................. Delaware
AMD, Inc. a subsidiary of Ames FS, Inc................. Delaware
Zayre New England Corp. * a subsidiary of AMD, Inc.. Delaware
Zayre Central Corp.* a subsidiary of AMD, Inc....... Delaware
*Holds a 50% interest in Ames Stores, a partnership.
As of February 1, 1998, the subsidiaries of the Company were restructured
as follows:
Name State of Incorporation
- ---------------------- ----------------------
Ames Transportation Systems, Inc.......................... Delaware
Ames Realty II, Inc....................................... Delaware
Ames FS, Inc.............................................. Delaware
AMD, Inc. a subsidiary of Ames FS, Inc............... Delaware
Zayre Central Corp. a subsidiary of AMD, Inc...... Delaware