SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1998
----------------------
[ ] 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 of (I.R.S. Employer Identification Number)
incorporation or organization)
2418 Main Street, Rocky Hill, Connecticut 06067
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (860) 257-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
----- -----
22,800,249 shares of Common Stock were outstanding on May 15, 1998.
Exhibit Index on page 11
Page 1 of 13 (including exhibits)
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MAY 2, 1998
I N D E X
Page
Part I: Financial Information
Consolidated Condensed Statements of Operations 3
for the Thirteen Weeks ended May 2, 1998 and
April 26, 1997
Consolidated Condensed Balance Sheets as of 4
May 2, 1998, January 31, 1998, and April 26,
1997
Consolidated Condensed Statements of Cash Flows 5
for the Thirteen Weeks ended May 2, 1998 and
April 26, 1997
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial 8
Condition and Results of Operations
Part II: Other Information
Submission of Matters to a Vote of Security Holders 11
and Exhibits and Reports on Form 8-K
PART I
FINANCIAL INFORMATION
AMES DEPARTMENT STORES, INC. AND SUSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
For the Thirteen
Weeks Ended
-----------------------
May 2, April 26,
1998 1997
---------- ----------
TOTAL SALES $518,223 $448,575
Less: Leased department sales 19,175 15,974
---------- ----------
NET SALES 499,048 432,601
COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold 360,614 313,617
Selling, general and administrative expenses 143,632 128,885
Leased department and other operating income (6,186) (4,687)
Depreciation and amortization expense 3,816 2,923
Amortization of the excess of revalued net assets
over equity under fresh-start reporting (1,538) (1,538)
Interest and debt expense, net 2,054 2,392
---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES (3,344) (8,991)
Income tax benefit 1,226 3,061
---------- ----------
NET INCOME (LOSS) ($2,118) ($5,930)
========== ==========
Weighted average number of common shares outstanding 22,640 20,912
========== ==========
NET INCOME (LOSS) PER SHARE ($0.09) ($0.28)
========== ==========
<FN>
(The accompanying notes are an integral part of these consolidated
condensed financial statements.)
</FN>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
May 2, January 31, April 26,
1998 1998 1997
ASSETS ------------------------------------
Current Assets:
Cash and short-term investments $22,348 $57,828 $17,214
Receivables 26,713 18,922 26,228
Merchandise inventories 499,911 423,836 461,796
Prepaid expenses and other current assets 15,069 12,060 14,259
------------------------------------
Total current assets 564,041 512,646 519,497
------------------------------------
Fixed Assets 141,887 128,790 103,451
Less - Accumulated depreciation and amortization (49,065) (45,457) (34,931)
------------------------------------
Net fixed assets 92,822 83,333 68,520
------------------------------------
Other assets and deferred charges 13,675 14,063 7,271
------------------------------------
$670,538 $610,042 $595,288
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $182,258 $180,971 $154,153
Other 50,782 42,185 47,109
------------------------------------
Total accounts payable 233,040 223,156 201,262
Note payable - revolver 54,256 - 73,107
Current portion of long-term debt and capital lease obligations 12,306 4,177 8,182
Self-insurance reserves 30,886 31,657 33,507
Accrued expenses and other current liabilities 69,870 73,437 61,659
Store closing reserves 10,946 12,050 19,560
------------------------------------
Total current liabilities 411,304 344,477 397,277
Long-term debt - 9,340 9,192
Capital lease obligations 29,823 26,393 26,347
Other long-term liabilities 13,425 10,943 7,366
Unfavorable lease liability 14,975 15,333 16,668
Excess of revalued net assets over equity under fresh-start
reporting 28,636 30,174 34,789
Stockholders' Equity:
Common stock 227 225 213
Additional paid-in capital 120,080 118,971 89,726
Retained earnings 52,068 54,186 13,710
------------------------------------
Total stockholders' equity 172,375 173,382 103,649
------------------------------------
$670,538 $610,042 $595,288
====================================
<FN>
(The accompanying notes are an integral part of these consolidated condensed
financial statements.)
</FN>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the Thirteen
Weeks Ended
---------------------
May 2, April 26,
1998 1997
---------- ----------
Cash flows from operating activities:
Net income (loss) ($2,118) ($5,930)
Adjustments to reconcile net loss to net cash
used for operating activities:
Income tax benefit (1,226) (3,061)
Depreciation and amortization of fixed and other assets 3,999 3,064
Amortization of the excess of revalued net assets
over equity (1,538) (1,538)
Increase in accounts receivable (7,791) (7,157)
Increase in merchandise inventories (76,075) (70,720)
Increase in accounts payable 9,884 12,345
Decrease in accrued expenses and other current liabilities (3,684) (5,367)
Decrease in other working capital and other, net 629 717
---------- ----------
Cash used for operations before store closing items (77,920) (77,647)
Payments of store closing costs (710) (3,980)
---------- ----------
Net cash used for operating activities (78,630) (81,627)
---------- ----------
Cash flows from investing activities:
Purchases of fixed assets (8,957) (8,806)
Purchase of leases - (2,826)
---------- ----------
Net cash used for investing activities (8,957) (11,632)
---------- ----------
Cash flows from financing activities:
Payments of debt and capital lease obligations (2,606) (10,146)
Short-term borrowings under the revolver, net 54,256 73,107
Proceeds from the exercise of options and warrants 457 1,393
---------- ----------
Net cash provided by financing activities 52,107 64,354
---------- ----------
Decrease in cash and short-term investments (35,480) (28,905)
Cash and short-term investments, beginning of period 57,828 46,119
---------- ----------
Cash and short-term investments, end of period $22,348 $17,214
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest and debt fees not capitalized $1,661 $1,987
Income taxes 10 2
<FN>
(The accompanying notes are an integral part of these consolidated condensed
financial statements.)
</FN>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
In the opinion of management, the accompanying unaudited
consolidated condensed financial statements of Ames Department Stores,
Inc. (a Delaware Corporation) and subsidiaries (collectively "Ames" or
the "Company") contain all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of such financial
statements for the interim periods. Due to the seasonality of the
Company's operations, the results of its operations for the interim
period ended May 2, 1998 may not be indicative of total results for the
full year. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to the
rules and regulations promulgated by the Securities and Exchange
Commission (the "SEC"). Certain prior year amounts have been reclassified
to conform to the presentation used for the current year. The
consolidated condensed balance sheet at January 31, 1998 was obtained
from audited financial statements previously filed with the SEC in the
Company's latest Form 10-K. The accompanying unaudited consolidated
condensed financial statements should be read in conjunction with the
financial statements and notes thereto included in the Company's latest
Form 10-K.
2. Net Income (loss) Per Common Share:
Net income (loss) per share was determined using the weighted
average number of common shares outstanding. 188,135 warrants were
converted and 61,760 options were exercised during the quarter ended May
2, 1998. During the quarter ended April 26, 1997, 646,581 warrants were
converted and 158,750 options were exercised. Common stock equivalents
were excluded for the thirteen weeks ended May 2, 1998 and April 26,
1997, as their inclusion would have reduced the reported loss per share
and, therefore, diluted net income (loss) per share was equal to basic
net income (loss) per share for both periods presented.
3. Inventories:
Inventories are valued at the lower of cost or market. 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.
4. Debt:
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").
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. 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 Company is in compliance with
the financial covenants through the quarter ended May 2, 1998.
As of May 2, 1998, borrowings of $54.3 million were outstanding
under the Credit Agreement. In addition, $21.0 and $5.9 million of
standby and trade letters of credit, respectively, were outstanding under
the Credit Agreement. The weighted average interest rate on the
borrowings for the thirteen weeks ended May 2, 1998 was 8.2%. The peak
borrowing level through May 2, 1998 was $54.3 million.
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. Reference can be made to the latest
Form 10-K for further descriptions of the Credit Agreement and for
descriptions of the Company's other obligations not discussed herein.
5. Stock Options:
The Company has granted stock options under two stock option
plans, the 1994 Management Stock Plan and the 1994 Non-Employee Directors
Stock Option Plan. The Company accounts for these plans under APB Opinion
No. 25, under which no compensation cost has been recognized. The impact
of applying SFAS Statement No. 123 to the Company's net income and loss
per share would have been immaterial for all periods presented.
A third plan, the 1998 Management Stock Incentive Plan, was
subject to shareholder approval at the Annual Meeting of Stockholders
held May 27, 1998. For further description of the above, reference can be
made to the Company's definitive proxy statement as filed on April 8,
1998. The results of the stockholder vote will be reported in the
Quarterly Report for the Company's fiscal quarter ending August 1, 1998.
6. Income Taxes:
The Company's estimated annual effective income tax rate for each
year was applied to the income (loss) before income taxes for the
thirteen weeks ended May 2, 1998 and April 26, 1997 to compute a non-cash
income tax benefit. The income tax benefit is included in other current
assets in the accompanying balance sheet as of May 2, 1998 and April 26,
1997.
7. Litigation:
Reference can be made to the latest Form 10-K (Note 12 to the
Consolidated Financial Statements) for various litigation involving the
Company, for which there were no material changes since the filing date
of the Form 10-K.
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FISCAL QUARTER ENDED MAY 2, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations
- ----------------------
The following table sets forth the number of stores in operation as of the
dates indicated:
Number of Stores in Operation
---------------------------------------------
May 2, January 31, April 26,
1998 1998 1997
--------- ----------- -----------
298 298 294
The following discussion and analysis is based on the results of operations
for the thirteen weeks ended May 2, 1998 and April 26, 1997. During the quarter
ended May 2, 1998, two (2) stores were opened and two (2) stores were closed.
During the quarter ended April 26, 1997, four (4) stores were opened, twelve
(12) stores were closed and the Company determined that it would not re-open a
store previously closed as a result of flooding.
The following table sets forth the operating results expressed as a percentage
of net sales for the periods indicated:
Thirteen
Weeks Ended
------------------
May 2, April 26,
1998 1997
------- --------
Net sales 100.0 % 100.0 %
Cost of merchandise sold 72.3 72.5
------- -------
Gross margin 27.7 27.5
Expenses and (income):
Selling, general and administrative expenses 28.8 29.8
Leased department and other operating income (1.2) (1.1)
Depreciation and amortization expense 0.7 0.7
Amortization of the excess of revalued net
assets over equity under fresh-start reporting (0.3) (0.4)
Interest and debt expense, net 0.4 0.6
------- -------
Income (loss) before income taxes (0.7) (2.1)
Income tax benefit 0.3 0.7
------- -------
Net income (loss) (0.4) % (1.4) %
======= =======
Net sales for the thirteen weeks ended May 2, 1998 increased $66.4
million or 15.4% from the prior-year's first quarter and comparable-store sales
increased 12.9%. These sales increases were attributable, in part, to
unseasonably warm weather and a successful 40th Anniversary promotion in March,
1998.
Gross margin for the first quarter increased $19.5 million, or 0.2% as a
percentage of net sales. The improvement in first quarter gross margin rate was
primarily attributable to lower markdowns.
Selling, general and administrative expenses for the first quarter
increased $14.7 million, but decreased 1.0% as a percentage of net sales. The
Company experienced percentage reductions in store and advertising expenses
partially offset by an increase in compensation related expenses during the
quarter.
Depreciation and amortization expense increased by $0.9 million, but
remained unchanged as a percentage of net sales, in the thirteen weeks ended May
2, 1998, compared to the same prior-year period. The adoption of fresh-start
reporting as of December 26, 1992 resulted in the write-off of all of the
Company's non-current assets at that date, and therefore depreciation and
amortization expense results only from capital additions after that date.
The amortization of the excess of revalued net assets over equity under
fresh-start reporting remained the same in the current periods presented as
compared to the prior year. The Company is amortizing this amount over a
ten-year period.
Interest and debt expense, net of interest income, declined by $0.3
million, or 0.2% as a percentage of net sales, in the thirteen weeks ended May
2, 1998. This decrease was due primarily to a reduction in short-term interest
expense as a result of lower average outstanding balances under the Credit
Agreement (from $34.1 to $18.4 million during the thirteen-week period).
The Company's estimated annual effective income tax rate for each year
was applied to the loss before income taxes for each period to compute a
non-cash income tax benefit. The income tax benefits are included in other
current assets in the balance sheet as of May 2, 1998 and April 26, 1997.
Liquidity and Capital Resources
- -------------------------------
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 (the "Credit Agreement").
The Credit Agreement is in effect until June 30, 2000. The Company was in
compliance with the financial covenants of the Credit Agreement through the
quarter ended May 2, 1998. Reference can be made to Note 4 of this Quarterly
Report and the latest Form 10-K for further descriptions of the Credit
Agreement.
Merchandise inventories, increased $38.1 million from April 26, 1997 to
May 2, 1998 due to planned increases and special buy opportunities available in
connection with the 40th Anniversary promotion. The increase in inventories of
$76.1 million from January 31, 1998 to May 2, 1998 was principally the result of
a normal seasonal build-up of inventories and the special buy opportunities
referenced above.
Trade accounts payable increased $28.1 million from April 26, 1997 to May
2, 1998 primarily due to the merchandise inventory increases referenced above.
The increase of $1.3 million from January 31, 1998 to May 2, 1998 was
principally the result of seasonal build-up of merchandise inventories
referenced above, partially offset by seasonal dating in effect as of January
31, 1998.
Capital expenditures for the thirteen weeks ended May 2, 1998 totaled
$9.0 million and for the balance of the year are estimated to be approximately
$76 million. The Company adjusts its plans for making such expenditures
depending on the amount of internally generated funds.
The net operating loss carryovers remaining after fiscal year 1997,
subject to any limitations pursuant to Internal Revenue Code Sec. 382, should
offset income on which taxes would otherwise be payable in future years.
The Company believes that available cash and expected cash flows from the
current fiscal year's operations and beyond, and the availability of its
financing facilities, will enable the Company to fund its expected needs for
working capital, capital expenditures and debt service requirements.
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
Reference can be made to Note 12 to the Consolidated
Financial Statements included in the Company's most recent Form
10-K for various litigation involving the Company, for which
there were no material changes since the filing date of the Form
10-K.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
On April 13, 1998, the Company sent a notice of the annual
meeting and a proxy statement to its stockholders. The notice of
meeting announced that the Annual Meeting of Stockholders would
be held Wednesday, May 27, 1998, to consider and act upon the
following matters: (a) the election of seven (7) directors for a
term of one year or until their successor(s) have been elected
and qualified; (b) the ratification and approval of the
appointment of Arthur Andersen LLP as independent certified
public accountants and auditors for the Company for the fiscal
year ending January 30, 1999; (c) the approval of the Ames
Department Stores, Inc. 1998 Management Stock Incentive Plan, as
described in the Company's Proxy Statement filed April 8, 1998;
(d) the approval of an amendment to the Ames Department Stores,
Inc. 1994 Non-Employee Directors Stock Option Plan to increase
the number of shares included in each option grant; and (e) the
transaction of such other business as may properly come before
the meeting or any adjournment(s) thereof.
The results of the meeting will be reported in the
Quarterly Report for the Company's fiscal quarter ending August
1, 1998.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Index to Exhibits
Exhibit No. Exhibit Page No.
----------- ------- --------
11 Schedule of computation of basic 13
and diluted net income (loss) per
share
(b) Reports on Form 8-K:
The following report on Form 8-K was filed with the Securities
and Exchange Commission during the first quarter:
Date of Report Date of Filing Item # Description
-------------- -------------- ------ -----------------------------
April 9, 1998 April 9, 1998 5 Disclosure of the Employment
Agreement dated April 1, 1998
between Ames Department Stores,
Inc. and Rolando de Aguiar.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMES DEPARTMENT STORES, INC.
(Registrant)
Dated: June 2, 1998 /s/ Joseph R. Ettore
--------------------------------------
Joseph R. Ettore, President, Director,
and Chief Executive Officer
Dated: June 2, 1998 /s/ Rolando de Aguiar
--------------------------------------
Rolando de Aguiar, Executive Vice
President and Chief Financial Officer
Dated: June 2, 1998 /s/ Gregory D. Lambert
--------------------------------------
Gregory D. Lambert
Senior Vice President - Finance
Exhibit 11
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(Amounts in thousands except per share amounts)
For the Thirteen
Weeks Ended
-----------------------------------
May 2, April 26,
1998 1997
-------------- --------------
Net income (loss) ($2,118) ($5,930)
============== ==============
For Basic Net Income (Loss) Per Share
Weighted average number of common shares
outstanding during the period 22,640 20,912
============== ==============
Basic net income (loss) per share ($0.09) ($0.28)
============== ==============
For Diluted Net Income (Loss) Per Share
Weighted average number of common shares
outstanding during the period 22,640 20,912
Add: Common stock equivalent shares represented by
- Series B Warrants (a) (a)
- Series C Warrants (a) (a)
- Options under 1994 Management Stock Option Plan (a) (a)
- Options under 1994 Non-Employee Directors
Stock Option Plan (a) (a)
-------------- --------------
Weighted average number of common and common equivalent
shares used in the calculation of diluted earnings per share 22,640 20,912
============== ==============
Diluted net income (loss) per share ($0.09) ($0.28)
============== ==============
<FN>
(a) Common stock equivalents have not been included because the effect would be anti-dilutive.
</FN>