SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 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
----- -----
23,156,391 shares of Common Stock were outstanding on November 13, 1998.
Exhibit Index on page 14
Page 1 of 16 (including exhibits)
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 31, 1998
I N D E X
Page
Part I: Financial Information
Consolidated Condensed Statements of Operations for the 3
Thirteen and Thirty-nine Weeks ended October 31, 1998
and October 25, 1997
Consolidated Condensed Balance Sheets as of 4
October 31, 1998, January 31, 1998, and
October 25, 1997
Consolidated Condensed Statements of Cash Flows for the 5
Thirty-nine Weeks ended October 31, 1998 and
October 25, 1997
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Part II: Other Information
Submission of Matters to a Vote of Security Holders 14
Exhibits and Reports on Form 8-K 14
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<CAPTION>
For the Thirteen For the Thirty-nine
Weeks Ended Weeks Ended
----------------------- --------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
TOTAL SALES $623,029 $550,235 $1,703,988 $1,528,869
Less: Leased department sales 23,841 22,662 69,455 65,128
----------- ----------- ------------ ------------
NET SALES 599,188 527,573 1,634,533 1,463,741
Cost of merchandise sold 436,094 379,492 1,176,165 1,049,954
----------- ----------- ------------ ------------
GROSS PROFIT 163,094 148,081 458,368 413,787
Selling, general and administrative expenses 152,525 143,360 441,264 409,294
Leased department and other operating income (6,768) (6,750) (20,443) (17,884)
Depreciation and amortization expense 5,082 3,915 13,051 10,102
Amortization of the excess of revalued net assets
over equity under fresh-start reporting (1,538) (1,538) (4,615) (4,615)
Interest and debt expense, net 3,847 3,758 9,093 9,359
----------- ----------- ------------ ------------
INCOME BEFORE INCOME TAXES 9,946 5,336 20,018 7,531
Income tax provision (3,738) (1,817) (7,523) (2,564)
----------- ----------- ------------ ------------
NET INCOME $6,208 $3,519 $12,495 $4,967
=========== =========== ============ ============
BASIC NET INCOME PER COMMON SHARE
Net income $0.27 $0.16 $0.55 $0.23
=========== =========== ============ ============
Weighted average number of common shares outstanding 23,087 22,114 22,885 21,510
=========== =========== ============ ============
DILUTED NET INCOME PER COMMON SHARE
Net income $0.26 $0.15 $0.52 $0.21
=========== =========== ============ ============
Weighted average common and common equivalent shares 24,145 23,893 24,141 23,545
=========== =========== ============ ============
<FN>
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
</TABLE>
<PAGE>
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands)
(Unaudited)
October 31, January 31, October 25,
<CAPTION> 1998 1998 1997
------------ ------------ ------------
ASSETS <C> <C> <C>
<S>
Current Assets:
Cash and short-term investments $28,421 $57,828 $18,748
Receivables 60,655 18,922 43,964
Merchandise inventories 611,216 423,836 585,239
Prepaid expenses and other current assets 18,807 12,060 17,685
------------- ------------ ------------
Total current assets 719,099 512,646 665,636
Fixed Assets 191,900 128,790 124,123
Less - Accumulated depreciation and amortization (58,382) (45,457) (41,778)
------------- ------------ ------------
Net fixed assets 133,518 83,333 82,345
Other assets and deferred charges 12,918 14,063 6,589
------------- ------------ ------------
$865,535 $610,042 $754,570
============= ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $256,130 $180,971 $239,147
Other 52,436 42,185 44,112
------------ ------------ ------------
Total accounts payable 308,566 223,156 283,259
Note payable - revolver 136,057 - 137,692
Current portion of long-term debt and capital lease obligations 6,277 4,177 6,617
Self-insurance reserves 32,092 31,657 33,001
Accrued expenses and other current liabilities 84,027 73,437 70,616
Store closing reserves 9,781 12,050 11,520
------------ ------------ ------------
Total current liabilities 576,800 344,477 542,705
Long-term debt - 9,340 9,311
Capital lease obligations 43,996 26,393 25,992
Other long-term liabilities 8,577 10,943 9,422
Unfavorable lease liability 14,261 15,333 15,690
Excess of revalued net assets over equity under
fresh-start reporting 25,559 30,174 31,712
Stockholders' Equity:
Common stock 231 225 223
Additional paid-in capital 130,344 118,971 94,908
Retained earnings 66,681 54,186 24,607
Treasury stock, at cost (914) - -
------------ ------------ ------------
Total Stockholders' Equity 196,342 173,382 119,738
------------ ------------ ------------
$865,535 $610,042 $754,570
============ ============ ============
<FN>
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
</TABLE>
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
<TABLE>
<CAPTION> For the Thirty-nine
Weeks Ended
------------------------------------
October 31, October 25,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $12,495 $4,967
Adjustments to reconcile net income to net cash
used for operating activities:
Income tax provision 7,523 2,564
Depreciation and amortization of fixed and other assets 13,733 10,553
Amortization of the excess of revalued net assets over equity (4,615) (4,615)
Increase in accounts receivable (41,447) (24,893)
Increase in merchandise inventories (187,380) (194,163)
Increase in accounts payable 85,410 94,342
Increase in accrued expenses and other current liabilities 11,025 3,497
Increase in other working capital and other, net (9,292) (5,596)
------------ ------------
Cash used for operations before store closing items (112,548) (113,344)
Payments of store closing costs (1,875) (13,385)
------------ ------------
Net cash used for operating activities (114,423) (126,729)
------------ ------------
Cash flows from investing activities:
Proceeds from sales of properties and leases - 1,900
Purchases of fixed assets (39,919) (28,031)
Purchase of leases - (2,861)
------------ ------------
Net cash used for investing activities (39,919) (28,992)
------------ ------------
Cash flows from financing activities:
Payments of debt and capital lease obligations (14,064) (13,363)
Short-term borrowings under the revolver, net 136,057 137,692
Proceeds from the excercise of options and warrants 3,856 4,021
Purchase of treasury stock (914) -
------------ ------------
Net cash provided by financing activities 124,935 128,350
------------ ------------
Decrease in cash and short-term investments (29,407) (27,371)
Cash and short-term investments, beginning of period 57,828 46,119
------------ ------------
Cash and short-term investments, end of period $28,421 $18,748
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest and debt fees not capitalized $7,029 $8,333
Income taxes 119 3
<FN>
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
</TABLE>
<PAGE>
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 October 31, 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 Per Common Share:
----------------------------
Net income per share was determined using the weighted average number
of common shares outstanding. 29,169 warrants were converted and 21,550
options were exercised during the quarter ended October 31, 1998. During
the quarter ended October 25, 1997, 376,949 warrants were converted and
273,650 options were exercised.
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 October 31, 1998.
<PAGE>
As of October 31, 1998, borrowings of $136.1 million were outstanding
under the Credit Agreement. In addition, $19.5 and $2.6 million of
standby and trade letters of credit, respectively, were outstanding under
the Credit Agreement. The weighted average interest rates on the
borrowings for the thirteen and thirty-nine weeks ended October 31, 1998
were 7.3% and 7.6% respectively. The peak borrowing level through October
31, 1998 was $148.3 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 three stock option plans (the "Option Plans"): the
1994 Management Stock Option Plan, the 1998 Management 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 establishes
a fair-value based method of accounting for stock-based compensation;
however, it allows 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
income and net income per diluted common share would have approximated
the pro forma amounts indicated below:
For the Thirteen For the Thirty-nine
Weeks Ended Weeks Ended
----------------------- -----------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
----------------------- -----------------------
Net Income (in thousands)
As reported $6,208 $3,519 $12,495 $4,967
Pro forma 5,279 3,363 10,741 4,494
Net Income per diluted
common share
As reported $0.26 $0.15 $0.52 $0.21
Pro forma 0.22 0.14 0.44 0.19
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.
<PAGE>
6. Income Taxes:
-------------
The Company's estimated annual effective income tax rate for each year
was applied to the income before income taxes for each period to compute
a non-cash income tax provision. The income tax provisions are included
as additions to paid-in capital on the balance sheet for all periods
presented.
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, except as follows:
With regard to the Second Complaint (the Austin matter), on July 15,
1998, the Court approved a class action settlement (the "Settlement")
which had been reached by the parties. Notices of the Settlement were
sent to all potential class members on August 19, 1998. The Settlement
provides that in exchange for a release of all claims against the Company
each class member who elected to opt-in to the Settlement will receive a
benefit, either cash or discounts on future purchases at an Ames store,
based on the number of days worked for the Company during the class
period. Individuals who wished to opt-in to the Settlement were required
to sign and return a Consent and Release Form on or before October 3,
1998. The maximum cost of the Settlement to the Company cannot exceed
$1.5 million in cash if all participants elect cash or $4.5 million in
discounts on purchases if all participants elect discounts. The Company
believes it has adequately reserved for the settlement.
With regard to the Fifth Complaint (the Moschelle matter), pursuant to
the terms of the Settlement, the parties jointly moved to dismiss this
action without prejudice to the rights of any class member who did not
elect to opt-in to the Settlement by the stated deadline and the court
has granted the motion.
8. Treasury Stock:
---------------
On August 10, 1998, the Company's Board of Directors approved a
stock repurchase program and authorized management to purchase up to 1.5
million common shares. During the quarter ended October 31, 1998, the
Company acquired 76,481 shares of its common stock. During the course of
the quarter, as a consequence of ongoing discussions with Hills Stores
Company, the Company was precluded from making further purchases.
9. Subsequent Event:
-----------------
On November 12, 1998, the Company announced that it had signed a
definitive agreement pursuant to which the Company, through a
wholly-owned subsidiary, HSC Acquisition Corp., would acquire Hills
Stores Company ("Hills"). Under the terms of the transaction, the Company
has commenced a tender offer for all 11.2 million outstanding shares of
Hills' stock, including the Series A convertible preferred stock, (the
"Equity"), at a price of $1.50 per share, and a separate tender offer at
$550 (including accrued interest and consent fees) per $1,000 principal
amount, for Hills' 12 1/2 % Senior Subordinated Notes due 2003 (the
"Notes"), of which there is $195 million in the aggregate outstanding.
The Company will also share with the holders of the Equity and the Notes
a potential recovery in the form of deferred contingent cash rights with
regard to litigation initiated by Hills against certain of Hills' former
directors. Any potential recovery will be divided as follows: 50%
noteholders, 25% equity holders, and 25% Ames.
<PAGE>
The transaction is contingent on each of the following: (i) the tender
of at least 60% of the Equity; (ii) the tender of at least 66 2/3% of the
Notes; (iii) the consent of at least 66 2/3% of the Notes to the
modification or elimination of certain covenants; and (iv) regulatory
approval and other customary closing conditions.
The acquisition, if consummated, will be accounted for under the
purchase method of accounting. In connection with the acquisition, the
Company has arranged for a new 42 month $650 million revolving credit
facility which will be used: (i) to refinance the secured debt
outstanding under the Company's and Hills' existing credit facilities;
(ii) to finance the purchase of the Equity and the Notes; (iii) to finance
the post-acquisition remodeling and pre-opening program for the Hills'
stores; and (iv) to provide for the ongoing working capital needs of the
Company subsequent to the acquisition.
<PAGE>
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FISCAL QUARTER ENDED OCTOBER 31, 1998
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
<CAPTION>
Results of Operations
- ---------------------
The following table sets forth the number of stores in operation as of the
dates indicated:
Number of Stores in Operation
------------------------------------
October 31, January 31, October 25,
1998 1998 1997
---------- ---------- ----------
301 298 298
The following discussion and analysis is based on the results of operations
for the thirteen and thirty-nine weeks ended October 31, 1998 and October 25,
1997. During fiscal 1998, six (6) stores were opened, two (2) stores were closed
and one (1) store was temporarily closed as a result of a fire. In the
comparable prior-year period, nine (9) stores were opened, thirteen (13) 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 Thirty-nine
Weeks Ended Weeks Ended
----------------------- ------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of merchandise sold 72.8 71.9 72.0 71.7
---------- ---------- ---------- ----------
Gross margin 27.2 28.1 28.0 28.3
Expenses and (income):
Selling, general and administrative expenses 25.5 27.2 27.0 28.0
Leased department and other operating income (1.1) (1.3) (1.3) (1.2)
Depreciation and amortization expense 0.8 0.8 0.8 0.7
Amortization of the excess of revalued net assets
over equity under fresh-start reporting (0.3) (0.3) (0.3) (0.3)
Interest and debt expense, net 0.6 0.7 0.6 0.6
---------- ---------- ---------- ----------
Income before income taxes 1.7 1.0 1.2 0.5
Income tax provision (0.7) (0.3) (0.4) (0.2)
---------- ---------- ---------- ----------
Net income 1.0% 0.7% 0.8% 0.3%
========== ========== ========== ==========
</TABLE>
<PAGE>
Net sales for the thirteen weeks ended October 31, 1998 increased
$71.6 million or 13.6% from the prior-year's third quarter due primarily
to an increase of 12.0% in comparable-store sales and the net addition of
three (3) stores. Net sales for the thirty-nine weeks ended October 31,
1998 increased $170.8 million or 11.7% as compared to the same prior-year
period. Comparable-store sales increased by 9.6% for the first
thirty-nine weeks.
Gross margin increased $15.0 million and $44.6 million for the
thirteen and thirty-nine weeks ended October 31, 1998, respectively, as
compared to the same prior-year periods. Gross margin rates, as a
percentage of net sales, decreased 90 and 30 basis points for the
thirteen and thirty-nine weeks ended October 31, 1998, respectively, as
compared to the same prior-year periods. Gross margin rates were
unfavorably impacted by a higher percentage of sales consisting of lower
margin items.
Selling, general and administrative expenses for the thirteen weeks
ended October 31, 1998 increased $9.2 million, but decreased 170 basis
points as a percentage of net sales compared to the same prior-year
period due primarily to net sales increases. The percentage decrease also
reflected a favorable performance in advertising and lower
compensation-related expenses partially offset by increases in health
insurance and volume-related expenses compared to the same prior-year
period. For the thirty-nine week period, selling, general and
administrative expenses increased $31.9 million, but decreased 100 basis
points as a percentage of net sales as compared to the same prior-year
period due primarily to favorable performances in store and advertising
expenses.
Depreciation and amortization expense increased by $1.2 million but
remained flat as a percentage of net sales, in the thirteen weeks ended
October 31, 1998, compared to the same prior-year period. For the
thirty-nine weeks ended October 31, 1998, depreciation and amortization
increased $2.9 million or 10 basis points as a percentage of net sales,
compared with 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, increased $0.1
million, but decreased 10 basis points as a percentage of net sales, for
the thirteen weeks ended October 31, 1998 as compared to the period ended
October 31, 1997. The increase in interest and debt expenses was due
primarily to the addition of capital lease obligations incurred in
connection with the Company's installation of new store automation
systems and point-of-sale terminals (the "POS Capital Leases"), partially
offset by lower short-term borrowing rates and the payment of the
mortgage on the distribution center in Mansfield, MA, (the "Mansfield
Mortgage"). For the thirty-nine weeks ended October 31, 1998, interest
and debt expense decreased $0.3 million but remained flat as a percentage
of net sales, compared with the same prior-year period. The reduction in
year-to-date interest and debt expense was attributable, in part, to
lower short-term interest rates and the payment of the Mansfield
Mortgage, partially offset by the addition of the POS Capital Leases.
The Company's estimated annual effective income tax rate for each year
was applied to the income before income taxes for each period to compute
a non-cash income tax provision. The income tax provisions are included
as additions to paid-in capital on the balance sheet for all periods
presented.
<PAGE>
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 October 31, 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 $26.0 million from October 25, 1997
to October 31, 1998 due primarily to planned increases and the net
addition of three new stores. The increase in inventories of $187.4
million from January 31, 1998 to October 31, 1998 was principally the
result of the normal seasonal build-up of inventories.
Trade accounts payable increased $17.0 million from October 25, 1997
to October 31, 1998 primarily due to planned merchandise inventory
increases, the net addition of three new stores and improved trade
payment terms. The increase of $75.2 million from January 31, 1998 to
October 31, 1998 was principally the result of the normal seasonal
build-up of merchandise inventories referenced above, the net addition of
three new stores and improved trade payment terms.
Capital expenditures totaled $64.2 million (including $24.3 million in
POS Capital Leases) for the thirty-nine weeks ended October 31, 1998. For
the balance of the year, capital expenditures are estimated to be
approximately $21 million.
On August 10, 1998, the Company's Board of Directors approved a
stock repurchase program and authorized management to purchase up
to 1.5 million common shares. During the quarter ended October 31, 1998,
the Company acquired 76,481 shares of its common stock. During the course
of the quarter, as a consequence of ongoing discussions with Hills Stores
Company, the Company was precluded from making further purchases.
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.
Accounting Pronouncements
- -------------------------
In April 1998, the Accounting Standards Executive Committee (AcSEC)
issued Statement of Position (SOP) 98-5, "Reporting on the Costs of
Start-Up Activities." The SOP is effective for fiscal years beginning
after December 15, 1998 although earlier adoption is allowed. The SOP
will require that the costs of start-up activities, excluding capital
expenditures, be expensed as incurred. The Company currently expenses the
costs associated with the opening of new stores in the year they are
opened. These costs are carried as prepaid expenses prior to the opening
of the new stores. The Company expects to adopt SOP 98-5 as of January
30, 1999 and does not anticipate the adoption will materially affect the
Company's results of operations or financial position.
<PAGE>
Year 2000
- ---------
As previously reported, the Company has initiated a comprehensive
program to prepare its computer systems and applications for the year
2000. The assessment phase of the Company's remediation program is
complete and the systems development and testing stages are in progress.
The Company has spent approximately $3.1 million on its Year 2000
initiatives to date and expects that full implementation of the program
will involve an additional $2 to $3 million for conversion and testing of
systems. These costs include incremental expenses such as software,
outside consulting and other expenses. Additionally, the Company has
allocated existing systems development staff to Year 2000 initiatives and
estimates these internal costs to be $3 to $4 million over the life of
the project.
The Company has formally communicated with all of its vendors and
suppliers to determine the extent to which the Company may be vulnerable
to any third parties' failure to remediate their own Year 2000 issues. As
previously disclosed, the first phase, which included sending Year 2000
surveys and questionnaires, is complete and the response evaluation phase
is currently in progress. The Company has not had sufficient response
from vendors to provide an estimate of the potential impact of
non-compliance on the part of such vendors. Management is currently in
the final stages of developing contingency plans which include, but are
not limited to, securing alternative vendors who are Year 2000 compliant,
developing manual merchandise ordering processes, and evaluating
alternative merchandise assortments. It is too early to determine to what
extent, if any, these contingency plans will have to be implemented.
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. Furthermore, the
Company's estimates of future remediation costs and completion dates are
based on presently available information and may be updated as additional
information becomes available.
Subsequent Event
- ----------------
On November 12, 1998, the Company announced that it had signed a
definitive agreement pursuant to which the Company, through a
wholly-owned subsidiary, HSC Acquisition Corp., would acquire Hills
Stores Company ("Hills"). Under the terms of the transaction, the Company
has commenced a tender offer for all 11.2 million outstanding shares of
Hills' stock, including the Series A convertible preferred stock, (the
"Equity"), at a price of $1.50 per share, and a separate tender offer at
$550 (including accrued interest and consent fees) per $1,000 principal
amount, for Hills' 12 1/2 % Senior Subordinated Notes due 2003 (the
"Notes"), of which there is $195 million in the aggregate outstanding.
The Company will also share with the holders of the Equity and the Notes
a potential recovery in the form of deferred contingent cash rights with
regard to litigation initiated by Hills against certain of Hills' former
directors. Any potential recovery will be divided as follows: 50%
noteholders, 25% equity holders, and 25% Ames.
The transaction is contingent on each of the following: (i) the tender
of at least 60% of the Equity; (ii) the tender of at least 66 2/3% of the
Notes; (iii) the consent of at least 66 2/3% of the Notes to the
modification or elimination of certain covenants; and (iv) regulatory
approval and other customary closing conditions.
The acquisition, if consummated, will be accounted for under the
purchase method of accounting. In connection with the acquisition, the
Company has arranged for a new 42 month $650 million revolving credit
facility which will be used: (i) to refinance the secured debt
outstanding under the Company's and Hills' existing credit facilities;
(ii) to finance the purchase of the Equity and the Notes; (iii) to finance
the post-acquisition remodeling and pre-opening program for the Hills'
stores; and (iv) to provide for the ongoing working capital needs of the
Company subsequent to the acquisition.
<PAGE>
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, except as set forth in Note 7 of this Quarterly Report.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
There were no matters submitted to a vote of security
holders during the third quarter ended October 31, 1998, through
the solicitation of proxies or otherwise.
Item 5. Other Information
-----------------
Any notice of a proposal submitted by a stockholder outside
of the process of Rule 14a-8 after February 22, 1999 will be
considered untimely. Therefore, the proxy solicited on behalf of
the Company's Board of Directors will confer discretionary
authority to vote on any such proposal properly coming before the
1999 Annual Meeting.
Stock options granted to many of the Company's senior
executives pursuant to the 1994 Management Stock Option Plan will
expire in March 1999. As previously reported, the Company
anticipates that in the normal course of business some senior
executives may sell some shares of Ames Common Stock during the
fourth quarter of 1998 and the first quarter of 1999, in part to
cover the cost of option exercises or for the payment of taxes
associated with prior stock grants.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Index to Exhibits
-----------------
Exhibit No. Exhibit Page No.
----------- ------- --------
11 Schedule of computation of basic 16
and diluted earnings per share
(b) Reports on Form 8-K:
--------------------
There were no reports on Form 8-K filed with the Securities and
Exchange Commission during the third quarter.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMES DEPARTMENT STORES, INC.
(Registrant)
Dated: December 9, 1998 /s/ Joseph R. Ettore
-------------------------------------
Joseph R. Ettore, President, Director,
and Chief Executive Officer
Dated: December 9, 1998 /s/ Rolando de Aguiar
-------------------------------------
Rolando de Aguiar, Executive Vice
President and Chief Financial Officer
Dated: December 9, 1998 /s/ Mark von Mayrhauser
-------------------------------------
Mark von Mayrhauser
Vice President and Controller
<PAGE>
<TABLE>
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)
<CAPTION> For the Thirteen For the Thirty-nine
Weeks Ended Weeks Ended
------------------------------- -------------------------------
October 31, October 25, October 31, October 25,
1998 1997 1998 1997
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net income $6,208 $3,519 $12,495 $4,967
============== ============== ============== ==============
For Basic Net Income Per Share
- ------------------------------
Weighted average number of common shares
outstanding during the period 23,087 22,114 22,885 21,510
============== ============== ============== ==============
Basic net income per share $0.27 $0.16 $0.55 $0.23
============== ============== ============== ==============
For Diluted Net Income Per Share
- --------------------------------
Weighted average number of common shares
outstanding during the period 23,087 22,114 22,885 21,510
Add: Common stock equivalent shares represented by
-Series B Warrants 63 121 106 83
-Series C Warrants 403 859 481 1,113
-Options under 1994 Management Stock Option Plan
and 1998 Management Stock Incentive Plan 536 745 608 795
-Options under 1994 Non-Employee Directors
Stock Option Plan 56 54 61 44
-------------- -------------- -------------- --------------
Weighted average number of common and common
equivalent shares used in the calculation of
diluted net income per share 24,145 23,893 24,141 23,545
============== ============== ============== ==============
Diluted net income per share $0.26 $0.15 $0.52 $0.21
============== ============== ============== ==============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-END> OCT-31-1998
<CASH> 28421
<SECURITIES> 0
<RECEIVABLES> 60655
<ALLOWANCES> 0
<INVENTORY> 611216
<CURRENT-ASSETS> 719099
<PP&E> 191900
<DEPRECIATION> 58382
<TOTAL-ASSETS> 865535
<CURRENT-LIABILITIES> 576800
<BONDS> 43996
0
0
<COMMON> 231
<OTHER-SE> 196111
<TOTAL-LIABILITY-AND-EQUITY> 865535
<SALES> 599188
<TOTAL-REVENUES> 605956
<CGS> 436094
<TOTAL-COSTS> 436094
<OTHER-EXPENSES> 156069
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3847
<INCOME-PRETAX> 9946
<INCOME-TAX> 3738
<INCOME-CONTINUING> 6208
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6208
<EPS-PRIMARY> .27
<EPS-DILUTED> .26
</TABLE>
