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 1, 1999
-------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
--------------------- --------------------------
Commission File Number 1-05380
AMES DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2269444
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2418 Main Street, Rocky Hill, Connecticut 06067
- ----------------------------------------- -------------
(Address of principal executive 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
--- ---
24,063,349 shares of Common Stock were outstanding on May 14, 1999.
Exhibit Index on page 15
Page 1 of 18 (including exhibits)
-1-
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED MAY 1, 1999
I N D E X
Page
Part I: Financial Information
Consolidated Condensed Statements of Operations 3
for the Thirteen Weeks ended May 1, 1999 and
May 2, 1998
Consolidated Condensed Balance Sheets as of 4
May 1, 1999, January 30, 1999, and May 2,
1998
Consolidated Condensed Statements of Cash Flows 5
for the Thirteen Weeks ended May 1, 1999 and May 2, 1998
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
Part II: Other Information
Submission of Matters to a Vote of Security Holders 15
Exhibits and Reports on Form 8-K 15
-2-
PART I
FINANCIAL INFORMATION
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
For the Thirteen
Weeks Ended
--------------------------------
May 1, May 2,
1999 1998
-------------- --------------
Ames net sales $581,602 $497,045
Hills net sales 247,467 -
-------------- --------------
Total net sales 829,069 497,045
Costs, expenses and (income):
Ames cost of merchandise sold 419,505 358,611
Hills cost of merchandise sold 167,450 -
Ames selling, general and administrative expenses 176,204 145,272
Hills operating expenses and agency fees 89,257 -
Leased department and other income (8,422) (6,186)
Depreciation and amortization expense, net 14,383 1,921
Interest and debt expense, net 11,922 2,054
-------------- --------------
Loss before income taxes (41,230) (4,627)
Income tax benefit 14,842 1,684
-------------- --------------
Net loss ($26,388) ($2,943)
============== ==============
Weighted average number of common shares outstanding 23,990 22,640
============== ==============
Basic net loss per share $ (1.10) $ (0.13)
============== ==============
<FN>
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
-3-
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
May 1, January 30, May 2,
1999 1999 1998
--------------- -------------- -------------
ASSETS
Current Assets:
Cash and short-term investments $46,315 $35,744 $22,348
Receivables 50,639 30,244 26,713
Merchandise inventories 687,693 621,509 499,911
Prepaid expenses and other current assets 39,488 16,075 14,244
--------------- -------------- -------------
Total current assets 824,135 703,572 563,216
Fixed Assets 471,916 437,834 141,887
Less - Accumulated depreciation and amortization (80,016) (66,205) (49,065)
--------------- -------------- -------------
Net fixed assets 391,900 371,629 92,822
Other assets and deferred charges 48,973 16,447 6,269
Deferred taxes, net 102,406 102,406 7,406
Beneficial lease rights, net 58,195 58,885 -
Goodwill, net 228,142 230,454 -
--------------- -------------- -------------
$1,653,751 $1,483,393 $669,713
=============== ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $275,552 $313,280 $182,258
Other 71,410 83,485 50,782
--------------- -------------- -------------
Total accounts payable 346,962 396,765 233,040
Short-term debt - - 54,256
Current portion of long-term debt, capital lease and financing obligations 17,799 17,799 12,306
Self-insurance reserves 29,176 29,115 14,983
Accrued expenses and other current liabilities 237,783 211,827 69,870
Store closing reserves 58,789 59,768 10,946
--------------- -------------- -------------
Total current liabilities 690,509 715,274 395,401
Long-term debt 333,486 95,810 -
Capital lease and financing obligations 184,901 191,904 29,823
Other long-term liabilities 124,175 132,376 44,303
Excess of revalued net assets over equity under fresh-start reporting 22,483 24,021 28,636
Commitments and contingencies
Stockholders' Equity:
Preferred stock - - -
Common stock 240 239 227
Additional paid-in capital 237,243 236,667 120,080
Retained earnings 61,628 88,016 51,243
Treasury stock, at cost (914) (914) -
--------------- -------------- -------------
Total stockholders' equity 298,197 324,008 171,550
--------------- -------------- -------------
$1,653,751 $1,483,393 $669,713
=============== ============== =============
<FN>
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
-4-
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the Thirteen
Weeks Ended
----------------------------------------
May 1, May 2,
1999 1998
---------------- ----------------
Cash flows from operating activities:
Net loss ($26,388) ($2,943)
Adjustments to reconcile net loss to net cash
used for operating activities:
Income tax benefit (14,842) (1,684)
Depreciation and amortization of fixed and other assets 16,183 2,104
Increase in accounts receivable (20,395) (7,791)
Increase in merchandise inventories (66,184) (76,075)
Increase (decrease) in accounts payable (49,803) 9,884
Increase (decrease) in accrued expenses and other current liabilities 24,899 (3,327)
Increase (decrease) in other working capital and other, net (15,098) 1,912
---------------- ----------------
Cash used for operations before store closing items (151,628) (77,920)
Payments of store closing costs (979) (710)
---------------- ----------------
Net cash used for operating activities (152,607) (78,630)
---------------- ----------------
Cash flows from investing activities:
Purchases of fixed assets (34,205) (8,957)
Purchase of leases (27,822) -
---------------- ----------------
Net cash used for investing activities (62,027) (8,957)
---------------- ----------------
Cash flows from financing activities:
Payments of debt, capital lease and financing obligations (7,003) (2,606)
Borrowings under the revolver, net 37,676 54,256
Proceeds from the issuance of senior notes 200,000 -
Payments of deferred financing costs (6,044) -
Proceeds from the exercise of options and warrants 576 457
---------------- ----------------
Net cash provided by financing activities 225,205 52,107
---------------- ----------------
Increase (decrease) in cash and short-term investments 10,571 (35,480)
Cash and short-term investments, beginning of period 35,744 57,828
---------------- ----------------
Cash and short-term investments, end of period $46,315 $22,348
================ ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest and debt fees not capitalized $8,271 $1,661
Income taxes 355 10
<FN>
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
- 5 -
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
-----------------------
In the opinion of management, the accompanying unaudited
consolidated condensed financial statements of Ames Department Stores,
Inc. (a Delaware Corporation) and subsidiaries (collectively "Ames"
or the "Company") contain all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of such
financial statements for the interim periods. Due to the seasonality
of the Company's operations, the results of its operations for the
interim period ended May 1, 1999 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 30, 1999 was
obtained from audited financial statements previously filed with the
SEC in the Company's Annual Report on Form 10-K for the fiscal year ended
January 30, 1999 (the "1998 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 1998 Form
10-K.
In the fourth quarter of the year ended January 30, 1999 ("Fiscal
1998"), the Company adopted SOP 98-5 "Reporting on the Costs of Start-Up
Activities" retroactively effective to the first quarter of Fiscal 1998.
Therefore, the consolidated condensed financial statements for the
quarter ended May 2, 1998 have been adjusted accordingly. Reference can
be made to the 1998 Form 10-K for additional discussion of the adoption
of SOP 98-5 by the Company.
2. Acquisition and Agency Agreement:
----------------------------------
Acquisition of Hills Stores Company
On December 31, 1998, HSC Acquisition Corp. ("HSC"), a wholly
owned subsidiary of the Company, acquired in excess of 80% of the
outstanding voting stock of Hills Stores Company ("Hills") and
approximately 74% of the outstanding Hills 12 1/2% senior notes.
Subsequently, Hills was merged with HSC and became a wholly-owned
subsidiary of Ames Department Stores, Inc. In April 1999, Hills was
merged with and into Ames Department Stores Inc.
Total cash consideration for the acquisition of Hills was $130
million. Reference can be made to the 1998 Form 10-K for further
discussion of the Hills acquisition.
The acquisition has been recorded under the purchase method of
accounting and, accordingly, the results of operations of Hills for the
quarter ended May 1, 1999 are included in the accompanying consolidated
condensed financial statements. The aggregate purchase price of $130
million has been allocated to assets acquired and liabilities assumed
based on a preliminary determination of respective fair market values at
the date of acquisition and is subject to adjustment. The fair value of
tangible assets acquired and liabilities assumed was $477 million and
$637 million, respectively. The balance of the purchase price, $290
million, was recorded as two components: an excess of cost over net
assets acquired (goodwill) of $231 million, which is being amortized over
25 years on a straight-line basis, and beneficial lease rights of $59
million, which is being amortized over the life of the respective leases
(which average approximately 25 years).
At the time of the acquisition, Hills operated 155 discount
department stores. In 1999, the Company will remodel and convert 150 of
the Hills stores to Ames stores. The five remaining Hills stores along
with seven other Ames stores will be closed because they are in locations
that are either competitive with, or are underperforming, other Hills or
Ames stores. The remodeling and conversion process will be conducted in
three stages, each stage involving approximately one third of the Hills
stores. The first stage was completed in late April 1999; the second and
third stages are scheduled to be completed in July 1999, and September
1999, respectively.
-6-
Agency Agreement Overview
Concurrent with the Hills acquisition, the Company entered into a
transition and agency agreement (the "Agency Agreement") with Gordon
Brothers Retail Partners, LLC and The Nassi Group, LLC (collectively the
"Agent"), which provides that the Agent shall serve for a period of time
to operate all of the acquired Hills stores and to conduct inventory
liquidation sales at each of those stores prior to its scheduled
remodeling or final closure. Accordingly, the Agent is managing the sale
of the inventory acquired in the Hills acquisition as well as certain
other inventory identified in the Agency Agreement.
The Agency Agreement entitles the Company to receive out of the
sale proceeds a minimum amount equal to 40% of the initial retail value
or initial ticketed selling price of the merchandise (the "Guaranteed
Return"). Accordingly, the Company valued the acquired Hills inventory at
an amount equal to the Guaranteed Return. An additional payment may be
made to the Company if proceeds of sale exceed a target percentage of the
initial retail value. The Agency Agreement further entitles the Company
to reimbursement of certain store operating expenses (e.g., payroll,
rent, advertising, etc.) out of the sale proceeds during the agency
period.
The Agent will be paid a fee (the "Agency Fee") for its services
pursuant to the Agency Agreement. The Agency Fee will be an amount equal
to the proceeds from the sales of Hills merchandise less a deduction for
the reimbursement of store operating expenses and the Guaranteed Return.
Agency Agreement Accounting
As discussed earlier, the results of operations of Hills for the
quarter ended May 1, 1999 have been included in the accompanying
consolidated condensed financial statements. During the first quarter
ended May 1, 1999, and for the duration of the Agency Agreement, the
following accounting treatment has been, and will be, applied to
recognize the results of the Hills stores prior to their conversion to
Ames stores during fiscal 1999. Hills net sales will be recorded as
"Hills Net Sales" and represent net sales achieved by the Hills stores
prior to their conversion to Ames stores. "Hills Cost of Merchandise
Sold" represents the cost of merchandise sold in connection with the
above referenced sales as adjusted for the Guaranteed Return amount
mentioned above. "Hills Operating Expenses and Agency Fees" include the
following: the associated store expenses incurred while operating the
Hills stores prior to their conversion to Ames stores, which are
reimbursable to the Company out of the proceeds of Hills merchandise
sales per the Agency Agreement; the Agency Fee due to the Agent for the
period presented; and other expenses (e.g., non-store payroll, non-store
rent, etc.) associated with supporting the Hills stores prior to their
conversion to Ames stores, which are not reimbursable under the Agency
Agreement.
The Agency Fee of $26.2 million recorded for the first quarter was
determined based upon the Hills sales results for the period, less the
Guaranteed Return, reimbursable Hills store expenses and an allocation to
Ames based on sale proceeds in excess of specified levels. Because the
Company is entitled to a Guaranteed Return and reimbursement of Hills
store expenses during the term of the Agency Agreement, the Company may
realize the benefit of a reduction in the Agency Fee during the latter
stages of the Agency Agreement. As a result, any Agency Fee calculated on
an interim basis may not be indicative of the total fee to be remitted to
the Agent. The Agency Fee will only be determined after a final
accounting for all revenues and expenses earned/incurred during the
entire agency period. The final accounting will be completed during the
third quarter of fiscal 1999.
Acquisition of Caldor Sites
During March 1999, the Company entered into two agreements with
Caldor Corporation to purchase seven of its stores in Connecticut, two
stores in Massachusetts and a 649,000 square foot distribution center in
Westfield, MA, for a total cash purchase price of $42.7 million. Under
the terms of the agreements, the Company assumed Caldor's leases for the
nine stores and the distribution center and acquired all of the store
fixtures in eight of the stores and all racking, sorting systems and
materials handling equipment in the distribution center. During March and
April 1999, the United States Bankruptcy Court for the Southern District
of New York approved the Company's right to purchase the leases for the
stores and the distribution center. All of the transactions subsequently
closed.
-7-
3. Basic Net Loss Per Common Share:
---------------------------------
Basic net loss per share was determined using the weighted average
number of common shares outstanding. Diluted net loss per share was equal
to basic net loss per share because inclusion of common stock equivalents
would have been anti-dilutive. During the quarter ended May 1, 1999,
103,981 options were exercised and no warrants were converted. During the
quarter ended May 2, 1998, 61,760 options were exercised and 188,135
warrants were converted.
4. Inventories:
-------------
Inventories are valued at the lower of cost, using the first-in,
first-out (FIFO) method, or market and include the capitalization of
transportation and distribution center costs.
5. Debt:
------
Credit Agreement
On December 31, 1998, in connection with the Hills Acquisition,
certain of the Company's subsidiaries entered into an agreement (the
"Credit Agreement") with a syndicate of other banks and financial
institutions for whom Bank of America NT&SA is serving as agent. The
Credit Agreement provides for a secured revolving credit facility of up
to $650 million, with a sublimit of $150 million for letters of credit.
The Credit Agreement replaced a $320 million secured revolving credit
facility.
The Credit Agreement is in effect until June 30, 2002 and is
secured by substantially all of the assets of the Company. Reference can
be made to the 1998 Form 10-K for additional discussion of the Credit
Agreement and for descriptions of the Company's other obligations not
discussed herein.
As of May 1, 1999, borrowings of $82.6 million were outstanding
under the Credit Agreement. These borrowings are included in long-term
debt in the accompanying consolidated condensed balance sheet as of May
1, 1999. In addition, $28.2 and $9.0 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 1, 1999 was 7.7%. The peak borrowing level through May 1,
1999 was $281.8 million.
Ames Senior Notes
On April 27, 1999, the Company completed the sale of $200
million of its 10% seven-year senior notes (the "Ames Senior Notes"). The
net proceeds from the sale of the Ames Senior Notes, approximately $193.4
million, were used to reduce outstanding borrowings under the Credit
Agreement.
The Ames Senior Notes pay interest semi-annually in April and
October and mature April 2006. Prior to April 15, 2002, the Company may
redeem up to 35% of the Ames Senior Notes with the proceeds of one or
more public equity offerings at a redemption price of 110% of the
principal amount thereof. On or after April 15, 2003, the Company may
redeem some or all of the Ames Senior Notes outstanding at a redemption
price equal, initially, to 105% of the principal amount thereof. In both
cases, the accrued and unpaid interest will be added to the redemption
price on the applicable redemption date.
The Ames Senior Notes were issued under an indenture among Ames, its
existing subsidiaries and The Chase Manhattan Bank. The financial
covenants in the indenture restrict Ames' ability to: borrow money; pay
dividends on or purchase Ames' stock; make investments; use assets as
security in other transactions; sell certain assets or merge with other
companies; and enter into transactions with affiliates. If a Change of
Control occurs, each holder of the Ames Senior Notes has the right to
require the Company to purchase all or any part of that holder's Ames
Senior Notes for a payment in cash equal to 101% of the aggregate
principal amount of Ames Senior Notes purchased plus accrued and unpaid
interest.
-8-
6. Stock Options:
---------------
The Company has three stock option plans (the "Option Plans"):
the 1994 Management Stock Option Plan, the 1998 Stock Incentive Plan and
the 1994 Non-Employee Directors Stock Option Plan.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123
established a fair-value based method of accounting for stock-based
compensation; however, it allowed entities to continue accounting
for employee stock-based compensation under the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting
for Stock Issued to Employees." The Company elected to account for the
Option Plans under APB Opinion No. 25, under which no compensation cost
has been recognized, and adopt SFAS No. 123 through disclosure.
If the Company had elected to recognize compensation cost for the
Option Plans based on the fair value at the grant dates for awards under
those plans, consistent with the method prescribed by SFAS No. 123, net
loss and basic net loss per common share would have approximated the pro
forma amounts indicated below:
For the Thirteen
Weeks Ended
May 1, May 2,
1999 1998
------- -------
Net Loss (in thousands)
As reported ($26,388) ($2,943)
Pro forma ($27,971) ($3,080)
Basic Net Loss Per Common Share
As reported ($1.10) ($0.13)
Pro forma ($1.17) ($0.14)
The fair value of stock options used to compute pro forma net
income and net income per diluted common share is the estimated present
value at grant date using the Black-Scholes option-pricing model
with the following weighted average assumptions: no dividend yield,
expected option volatilities, a risk-free interest rate equal to U.S.
Treasury securities with a maturity equal to the expected life of the
option and an expected life from date of grant until option expiration
date.
7. Income Taxes:
--------------
The Company's estimated annual effective income tax rate for each
year was applied to the loss before income taxes for the thirteen weeks
ended May 1, 1999 and May 2, 1998 to compute a non-cash income tax
benefit. The income tax benefit is included in other current assets in
the accompanying consolidated condensed balance sheet as of May 1, 1999
and May 2, 1998.
8. Commitments and Contingencies:
-------------------------------
Reference can be made to the 1998 Form 10-K (Item 3 - Legal
Proceedings) for various litigation involving the Company, for which
there were no material changes since the filing date of the 1998 Form
10-K except as follows:
With regard to the Gould matter, on May 25, 1999, the Court
preliminarily approved a class action settlement that had been reached by
the parties. The terms and conditions of the Gould settlement mirror the
Abrams settlement. Notice of the proposed class action settlement was
sent to class members on June 4, 1999 and a hearing on the Final Approval
of the Settlement is scheduled for September 15, 1999. If approved, the
settlement provides that each class member will receive a calculated
amount of cash and scrip usable in Ames stores 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 amount of the
settlement is not expected to exceed $265,000 in cash and $90,000 in
scrip usable in Ames stores.
-9-
9. Subsequent Events:
-------------------
On May 24, 1999, the Company completed the public offering of 5.1
million shares of Common Stock at a price of $38.75 per share by a
syndicate of underwriters managed by Lehman Brothers with a co-lead
manager and three other co-managers. The proceeds, net of underwriting
discounts, of approximately $187.9 million were used to reduce borrowings
under the Credit Agreement and for general corporate purposes.
-10-
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FISCAL QUARTER ENDED MAY 1, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
-----------------------
On December 31, 1998, we acquired approximately 80.8% of the
outstanding voting stock of Hills Stores Company. Accordingly, the
operations of Hills and its subsidiaries during the quarter are
included in our consolidated results of operations for the quarter
ended May 1, 1999. Immediately following our acquisition of Hills, we
began implementing a series of initiatives to prepare for the conversion
of 150 of the Hills stores into Ames stores and the permanent closure of
the five remaining Hills stores. These initiatives included the
termination of most of Hills' corporate and administrative operations
and personnel, the announced closure of seven Ames stores that we
considered to be directly competitive with acquired Hills stores and
the engagement of two experienced liquidation firms, Gordon Brothers
Retail Partners and The Nassi Group, to operate the Hills stores until
their closure and to liquidate Hills' merchandise inventories.
During the quarter ended May 1, 1999, Gordon Brothers and The
Nassi Group completed the merchandise liquidation sales in 50 of the
Hills stores. Subsequent to the liquidation sales, we remodeled these
stores during an eight-week period and, on April 19, 1999, we re-opened
them as Ames stores. In addition, Gordon Brothers and The Nassi Group
initiated the liquidation sales in 54 Hills stores in late March and the
final liquidation sales in 46 Hills stores in early May.
Under our agreement with Gordon Brothers and The Nassi Group,
we are entitled to retain from the proceeds of the merchandise inventory
sales, as a minimum guaranteed amount, 40% of the initial ticketed retail
price of the inventory being sold, irrespective of the actual price at
which it is sold. The remaining sale proceeds, net of the expenses of
operating the stores, are payable to the liquidators as compensation
for their services, subject to additional allocations to Ames to the
extent the proceeds exceed specified levels. For financial reporting
purposes, Hills' net sales represent the actual sale proceeds from
merchandise liquidation sales, its cost of merchandise sold represents
the minimum guaranteed amount adjusted for proceeds in excess of
specified targets, and its selling, general and administrative expenses
include the portion of those proceeds that are to be paid over to the
liquidators.
-11-
The following table illustrates the separate contribution of
Ames' and Hills' operations to various components of the consolidated
results of operations, as described below, for the quarter ended May 1,
1999, as well as the impact on these consolidated results of the other
costs described below:
For the
Thirteen Weeks
Ended For the Thirteen Weeks Ended May 1, 1999
May 2, 1998 ------------------------------------------
--------------- Ames Hills Other Total
------ ------- ------- -------
NET SALES $497,045 $581,602 $247,467 $ - $829,069
COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold 358,611 419,505 167,450 - 586,955
Selling, general and administrative expenses 145,272 159,632 89,257 16,572 265,461
Leased department and other income (6,186) (6,396) (2,026) - (8,422)
Depreciation and amortization expense, net 1,921 5,917 6,580 1,886 14,383
Interest and debt expense, net 2,054 7,978 2,774 1,170 11,922
-------------- ----------- ----------- ----------- -----------
LOSS BEFORE INCOME TAXES (4,627) (5,034) (16,568) (19,628) (41,230)
Income tax benefit 1,684 1,812 5,964 7,066 14,842
-------------- ----------- ----------- ----------- -----------
NET LOSS ($2,943) ($3,222) ($10,604) ($12,562) ($26,388)
======== ======== ========= ========= =========
For the quarter ended May 1, 1999, the Ames results reflect (a)
the results of the pre-Hills acquisition Ames base, (b) the post
re-opening results of the 50 converted Hills stores and (c) certain
expenses associated with the acquisition of Hills, including the interest
expense on the acquired Hills senior notes and a pro rata share of the
amortization of the goodwill recorded in connection with the acquisition.
The Hills results represent (a) the results of operations for the Hills
stores during the period that these stores were operated pursuant to the
agreement with Gordon Brothers and The Nassi Group, including the fee due
Gordon and Nassi and the depreciation and interest expense directly
associated with such stores and (b) Hills corporate overhead expenses,
principally the Canton, MA corporate facility. The other costs represent
the expenses incurred during the period of remodeling the 50 Hills stores
that re-opened as Ames stores on April 19, 1999.
The unique circumstances under which Hills' operations have
been conducted through the first quarter ended May 1, 1999 and the
accounting treatment accorded those operations as a consequence of our
agreement with Gordon Brothers and The Nassi Group distort any direct
comparison of the principal components of Ames' consolidated results for
the quarters ended May 1, 1999 and May 2, 1998. In the discussion that
follows, Ames' net sales, gross margin, and selling, general and
administrative expenses for the quarter ended May 1, 1999 are presented
and compared exclusive of the Hills results. The impact of the Hills
acquisition is included in the comparison of depreciation and
amortization expense and interest and debt expense.
Ames' net sales for the thirteen weeks ended May 1, 1999
increased $84.6 million or 17.0% from the prior-year's first quarter and
comparable-store sales increased 9.1%. These sales increases were
attributable, in part, to the Grand Openings of 50 converted Hills
stores and 1 other new Ames store in April 1999 and a successful month
long promotion in March 1999. Net sales for last year have been restated
to reflect the effect of recording promotional coupons issued by Ames as
markdowns, which conforms with the current year treatment.
-12-
Ames' gross margin increased $23.7 million in the first quarter
of 1999 compared to the first quarter of 1998, but remained unchanged as
a percentage of net sales at 27.9%. The gross margin rate for the first
quarter benefited from a higher average markup on sales, which was offset
by higher markdowns.
Ames' selling, general and administrative expenses increased
$14.4 million in the first quarter of 1999 compared to the first
quarter of 1998, but decreased as a percentage of net sales from 29.2%
in 1998 to 27.4% in 1999. The percentage decrease was primarily
attributable to a reduction in store related expenses as a percentage of
sales.
Depreciation and amortization expense increased by $12.5
million. The Hills acquisition added $6.6 million of depreciation and
amortization expense associated with the additional depreciation and
amortization of the Hills fixed assets and beneficial lease rights and
the amortization of goodwill relating to the excess of the Hills
acquisition cost over the value of the acquired assets. The
increase in depreciation and amortization expense also related to new
point-of-sale systems installed in the Ames stores in 1998 and fixtures
purchased for the six new Ames stores opened during fiscal 1998.
Interest expense increased by $9.9 million. The increase was
primarily attributable to increased interest on bank borrowings and the
interest expense incurred for the Hills senior notes that were not
tendered during the Hills acquisition.
Our estimated annual effective income tax rate for each year was
applied to the loss before income taxes for each period to compute a
non-cash income tax benefit. The income tax benefits are included in
other current assets in the balance sheet as of May 1, 1999 and
May 2, 1998.
Liquidity and Capital Resources
---------------------------------
Our principal sources of liquidity are our bank credit facility,
cash from operations and cash on hand. Our current bank credit facility
consists of a revolving credit facility of up to $650.0 million, with a
sublimit of $150.0 million for letters of credit, which expires June 30,
2002. Borrowings under the bank credit facility are secured by
substantially all of our assets and after February 2000 we are required
to meet certain financial covenants. In addition, we are required to
maintain a minimum availability of at least $100.0 million. Our peak
borrowing level during the quarter ended May 1, 1999 under this bank
credit facility was $281.8 million. We believe we will have sufficient
liquidity to meet our financial obligations for the foreseeable future.
On April 27, 1999, we completed the sale of $200 million of
Ames senior notes. The net proceeds from the sale of the Ames senior
notes, approximately $193.4 million, were used to reduce outstanding
borrowings under our bank credit facility. The Ames senior notes pay
interest semi-annually in April and October and mature April 2006.
On May 24, 1999, we completed the public offering of 5.1 million
shares of Common Stock at a price of $38.75 per share. The proceeds,
net of underwriting discounts, of approximately $187.9 million were
used to reduce our borrowings under the bank credit facility and for
general corporate purposes.
Merchandise inventories increased $187.8 million from May 2, 1998
to May 1, 1999 due to planned increases for the opening of the converted
Hills stores as well as the inclusion of $82.9 million of
merchandise inventories from the Hills locations in liquidation as of the
end of the quarter. The inventories in the Hills stores in liquidation
have been valued at approximately 40% of the initial ticketed retail
price of the merchandise, which represents the minimum amount we are
entitled to retain out of the proceeds from the liquidation. Our
merchandise inventories increased $66.2 from January 30, 1999 to May
1, 1999 due primarily to the normal seasonal build-up of inventories.
Trade accounts payable increased $93.3 million from May 2, 1998 to
May 1, 1999 primarily due to the merchandise inventory increases
referenced above and the inclusion of $20.8 million of Hills' trade
payables. The decrease of $37.7 million from January 30, 1999 to
May 1, 1999 was principally the result of seasonal dating in effect as
of January 30, 1999, partially offset by the seasonal build-up of
inventories referenced above.
-13-
Capital expenditures for the thirteen weeks ended May 1, 1999
totaled $34.2 million and for the balance of the year are estimated
to be approximately $185.0 million. We adjust our plans for making
such expenditures depending on the amount of internally generated funds.
Net fixed assets increased by $299.1 million from May 2, 1998 to
May 1, 1999 due primarily to the inclusion of $226.4 million in net fixed
assets of Hills. Our net fixed assets increased $20.3 million from
January 30, 1999 to May 1, 1999 due primarily to the capital expenditures
associated with the newly converted Hills stores.
Beneficial lease rights represent the excess of the fair market
value of the acquired Hills leases over contract value of those leases.
We are amortizing this amount over the terms of the related leases
(which average approximately 25 years) using the straight-line method.
Goodwill is being amortized over 25 years using the straight-line method.
Long-term debt as of May 1, 1999 consisted of borrowings under
our bank credit facility of $82.6 million, $200.0 million of the Ames
senior notes issued in April 1999, and $50.9 million of the Hills
senior notes that remained outstanding after the acquisition. The Hills
senior notes became direct obligations of Ames as a result of the merger
of Hills into Ames.
Capital lease and financing obligations increased $155.1 million
from May 2, 1998 to May 1, 1999 due primarily to the inclusion of $144.5
million of capital lease and financing obligations of Hills. Capital
lease and financing obligations decreased by $7.0 million from January
30, 1999 to May 1, 1999 due to payments made on capital lease
obligations.
The net operating loss carryovers remaining after fiscal year
1998, subject to any limitations pursuant to Internal Revenue Code Sec.
382, should offset income on which taxes would otherwise be payable in
the next several years.
Year 2000 Readiness
---------------------
In operating our business, we are dependent on information
technology and process control systems that employ computers as well
as embedded microprocessors. We also depend on the proper functioning of
the business systems of third parties, particularly the more than 3,200
vendors from whom we purchase the merchandise sold in our stores.
Many computer systems and microprocessors can only process dates in
which the year is represented by two digits. As a result, some of
these systems and processors may interpret "00" incorrectly as the year
1900 instead of the year 2000, in which event they could malfunction or
become inoperable after December 31, 1999. Systems and processors
that can properly recognize the year 2000 are referred to as "year 2000
compliant."
As previously reported, we initiated a comprehensive program to
prepare our computer systems and applications for the year 2000. We
have spent approximately $4.6 million on this program through the end of
the first quarter of fiscal 1999 and expect that full implementation of
the program will involve an additional $2.0 million to $2.5 million,
including expenditures for software and consulting services.
Additionally, we estimate the allocated costs of our internal system
development staff who are implementing our year 2000 initiatives to
be $3.5 million to $4.0 million over the life of the project.
-14-
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
-------------------
Reference can be made to Item 3 - Legal Proceedings
included in the Company's most recent Form 10-K for various
litigation involving the Company, for which there were no
material changes since the filing date of the Form 10-K except as
set forth in Note 8.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------
On May 14, 1999, 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, June 16, 1999, to consider and act upon the
following matters: (a) the election of six (6) 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 29, 2000; and (c) 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 July 31,
1999.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------
(a) Index to Exhibits
-------------------
Exhibit No. Exhibit Page No.
------------- --------- ----------
11 Schedule of computation of basic 18
and diluted net income (loss) per
share
-15-
(b) Reports on Form 8-K:
----------------------
The following reports on Form 8-K were filed with the Securities
and Exchange Commission during the first quarter:
Date of Report Date of Filing Item # Description
---------------- ---------------- -------- -------------
March 16, 1999 March 16, 1999 7 Disclosure of Hills Stores Company historical
financial statements and combined pro forma
historical statements to fulfill reporting
requirements.
April 2, 1999 April 2, 1999 5 Disclosure of the Employment Agreement dated
March 23, 1999 between Ames Department Stores,
Inc. and Rolando de Aguiar.
April 2, 1999 April 2, 1999 5 Disclosure of the Employment Agreement dated
March 23, 1999 between Ames Department Stores,
Inc. and Denis T. Lemire.
-16-
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 11, 1999 /s/ Joseph R. Ettore
---------------------------------------
Joseph R. Ettore, President, Director,
and Chief Executive Officer
Dated: June 11, 1999 /s/ Rolando de Aguiar
---------------------------------------
Rolando de Aguiar, Executive Vice
President and Chief Financial and
Administrative Officer
-17-
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 1, May 2,
1999 1998
------------- -------------
Net loss ($26,338) ($2,943)
============= =============
For Basic Net Loss Per Share
- -----------------------------
Weighted average number of common shares
outstanding during the period 23,990 22,640
============= =============
Basic net loss per share ($1.10) ($0.13)
============= =============
For Diluted Net Loss Per Share
- -------------------------------
Weighted average number of common shares
outstanding during the period 23,990 22,640
Add: Common stock equivalent shares represented by
- Series B Warrants (a) (a)
- Options under 1994 Management Stock Option Plan &
1998 Stock Incentive 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 net loss per share 23,990 22,640
============= =============
Diluted net loss per share ($1.10) ($0.13)
============= =============
(a) Common stock equivalents have not been included because the effect would be anti-dilutive.
-18-