<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 5, 1999
REGISTRATION NO. 333-[ ]
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
AMES DEPARTMENT STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 5331 04-2269444
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
2418 MAIN STREET
ROCKY HILL, CONNECTICUT 06067
(860) 257-2000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROLANDO DE AGUIAR,
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL AND ADMINISTRATIVE OFFICER
AMES DEPARTMENT STORE, INC.
2418 MAIN STREET
ROCKY HILL, CONNECTICUT
(860) 257-2000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
With a copy to:
STEPHEN H. COOPER, ESQ. ARNOLD B. PEINADO, III, ESQ.
WEIL, GOTSHAL & MANGES LLP MILBANK, TWEED, HADLEY & MCCLOY LLP
767 FIFTH AVENUE ONE CHASE MANHATTAN PLAZA
NEW YORK, NEW YORK 10153 NEW YORK, NEW YORK 10005
(212) 310-8000 (212) 530-5000
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered pursuant
to dividend or interest reinvestment plans, please check the following box. / /
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, please check the following box: / /
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED OFFERING PRICE (1) REGISTRATION FEE
<S> <C> <C>
Common Stock, par value $.01 per share.............................. $150,000,000 $41,700
</TABLE>
(1) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 5, 1999
PROSPECTUS
SHARES
[LOGO]
AMES DEPARTMENT STORES, INC.
COMMON STOCK
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Ames Department Stores, Inc. is offering shares of its common stock.
The common stock is traded on the NASDAQ Stock Market under the symbol
"AMES." On April , 1999, the last reported sale price of the
common stock was $ per share.
INVESTING IN THE SHARES INVOLVES RISKS. RISK FACTORS BEGIN ON PAGE 6.
<TABLE>
<CAPTION>
PER SHARE TOTAL
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<S> <C> <C>
Public Offering Price....................................................................... $ $
Underwriting Discount....................................................................... $ $
Proceeds to Ames............................................................................ $ $
</TABLE>
Ames has granted the underwriters a 30-day option to purchase up to
additional shares of common stock on the same terms and conditions as set forth
above solely to cover over-allotments.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
Lehman Brothers, on behalf of the underwriters, expects to deliver the shares on
or about , 1999.
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Book-Running Lead Manager Joint Lead Manager
LEHMAN BROTHERS NATIONSBANC MONTGOMERY SECURITIES LLC
JOHNSON RICE & COMPANY L.L.C. TUCKER ANTHONY
INCORPORATED
, 1999
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
TABLE OF CONTENTS
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PAGE
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Prospectus Summary............................. 1
Risk Factors................................... 6
Special Note Regarding Forward-Looking
Statements................................... 10
Recent Transactions............................ 11
Use of Proceeds................................ 13
Price Range of Common Stock.................... 14
Dividend Policy................................ 14
Capitalization................................. 15
Selected Historical Financial and Operating
Data......................................... 16
Unaudited Pro Forma Financial Data............. 17
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PAGE
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<S> <C>
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 19
Business....................................... 25
Management..................................... 32
Description of Capital Stock................... 35
U.S. Tax Considerations Applicable to Non-U.S.
Holders of the Common Stock.................. 38
Underwriting................................... 40
Legal Matters.................................. 41
Experts........................................ 41
Where You Can Find More Information............ 42
Index to Financial Statements.................. F-1
</TABLE>
ABOUT THIS PROSPECTUS
You should only rely on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
contained in this prospectus. We are offering to sell, and seeking offers to
buy, shares of common stock only in jurisdictions where offers and sales are
permitted. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of common stock.
This preliminary prospectus is subject to completion prior to this
offering. Among other things, this preliminary prospectus describes our company
as we currently expect it to exist at the time of the offering.
See the section of this prospectus entitled "Risk Factors" for a discussion
of certain factors that you should consider before investing in the common stock
offered in this prospectus.
Unless otherwise indicated, all information in this prospectus assumes no
exercise of the underwriters' over-allotment option.
i
<PAGE>
PROSPECTUS SUMMARY
Because this is only a summary, it does not contain all of the information
that may be important to you. Before deciding to invest in our common stock, you
should read this entire prospectus as well as our most recent Annual Report on
Form 10-K, which is incorporated in this prospectus by reference. Our fiscal
year, similar to that of most other retailers, ends on the Saturday nearest
January 31. Our most recent completed fiscal year, which for convenience we
refer to as "fiscal 1998," ended January 30, 1999. Unless otherwise indicated,
retail industry data contained in this prospectus are derived from publicly
available sources, including industry trade journals and Commission filings,
which we have not independently verified. You should pay special attention to
the "Risk Factors" section of this prospectus beginning on page 6 to determine
whether an investment in our common stock is appropriate for you.
OUR COMPANY
Ames is the largest regional discount retailer in the United States. We
currently operate 453 stores in 19 contiguous states in the Northeast, Midwest
and Mid-Atlantic regions, as well as the District of Columbia. Our stores offer
a wide range of both brand name and other quality merchandise for the home and
family at prices below those of conventional department stores and specialty
retailers. Ames' stores are situated in rural communities, small cities and the
suburbs of larger metropolitan areas and are smaller and more customer friendly
than the stores of most competing "big box" retailers, including the national
discount department store chains. On December 31, 1998, we acquired Hills Stores
Company, which operated a chain of 155 discount department stores in twelve
states. For fiscal 1998, after giving effect to the Hills acquisition as if it
had occurred at the beginning of the fiscal year, we had pro forma net sales of
$4.1 billion. Over the past four years, Ames, on a stand-alone basis, achieved
annual net income per share growth of 26.0%.
Our customer base consists primarily of working women with families and
senior citizens. They have an average annual household income between $25,000
and $35,000 and their purchasing decisions are determined primarily by a desire
for low prices and shopping convenience. Our merchandise offerings, prices,
store design and focus on customer service are targeted to meet the needs of
these cost-conscious consumers, who we believe are generally underserved by
other large discount retailers. We reinforce our image and drive customer
traffic by employing a "high/low" pricing strategy that is supplemented by
weekly advertising circulars and recurring promotional programs. We believe that
our knowledge of and focus on our target customers have enabled us to develop a
distinct competitive advantage.
We have significantly increased our cash flow and enhanced our
profitability over the past few years through an intensive focus on cost
containment. At the same time, we have gradually increased our market
penetration through selective acquisitions and new store openings. With the
recent Hills acquisition, we have begun implementing a growth strategy to
enhance our revenues by acquiring groups of stores located primarily in our
existing markets and in areas that are contiguous with those markets. Consistent
with that strategy, we recently agreed to acquire from Caldor nine stores that
we will convert to Ames stores as well as a state-of-the-art distribution
center.
The Hills acquisition will significantly increase our revenues and provide
us with substantial cost economies. This acquisition was particularly attractive
for us, since it permitted us to obtain 155 well-maintained stores in locations
complementary to our existing store base. The stores are situated primarily in
communities with similar demographics and a similar customer base to our
existing locations. The acquisition expanded our selling space by approximately
70%, substantially increased our presence in five states and enabled us to enter
five new states. It also enabled us to gain substantial economies of scale by
eliminating nearly all of Hills' administrative and buying functions. We believe
that these actions will produce annual cost savings in excess of $70.0 million,
of which approximately $60.0 million is expected to be realized in fiscal 1999
and the full benefit of which will be realized beginning in fiscal 2000.
We have begun a program to convert all but five of the acquired Hills
stores to Ames stores. The conversion process includes the liquidation of Hills'
existing inventory and a total redesign and remerchandising of the stores to
make them consistent with the Ames prototype. Upon completion of its conversion,
each store will have a grand opening under the Ames banner. We are implementing
the
1
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conversion process in three stages, each entailing approximately 50 stores. The
first stage will be completed by late April 1999 and the entire conversion is
scheduled for completion by the end of September 1999.
OUR COMPETITIVE STRENGTHS
We believe that we have a number of strengths that enable us to grow and
operate profitably and provide us with a distinct advantage in an increasingly
competitive discount retailing environment.
o WE SERVE A CLEARLY DEFINED CUSTOMER BASE THAT IS UNDERSERVED BY OTHER
LARGE DISCOUNT RETAILERS. Our customer base is primarily comprised of
working women with families and, to a lesser extent, senior citizens with
average annual household income ranging from $25,000 to $35,000. We
believe our customer base is generally underserved by national discount
retailers who have gradually redirected their merchandise offerings to
reach a broader and more "upscale" customer profile. We believe our
customers' purchasing decisions are determined primarily by a desire for
low prices and shopping convenience, and our merchandising, prices, store
design and customer service are intended to meet the needs of these
cost-conscious shoppers.
o OUR MERCHANDISE OFFERINGS ARE TARGETED TO OUR DISTINCT CUSTOMER
BASE. Ames offers a wide-range of brand name and other quality products
for the home and family, including a broad selection of basic,
non-fashion apparel for women, children and men, as well as jewelry,
domestics, housewares, appliances, home entertainment items, health and
beauty aids, crafts, toys, sporting goods, hardware, patio furniture and
ready-to-assemble indoor furniture. Because of our primary focus on women
shoppers, our stores carry a broader selection of women's basic apparel,
including many items in "plus" sizes, and a more limited selection of
hardware, tools, automotive supplies and lawn and garden products than
those of other major discount retailers. In addition, for the substantial
number of our stores located in vacation areas, college towns and
ethnically-concentrated communities, we tailor our merchandise offerings
to the specific preferences and needs of our customers in those
locations.
o WE OFFER EXCEPTIONAL VALUES TO DRIVE CUSTOMER TRAFFIC. We employ a
"high/low" promotional pricing strategy to increase customer traffic by
periodically offering greater discounts on selected items or categories
of merchandise while maintaining our regular discount prices on all other
merchandise. We implement this strategy through the use of weekly full
color newspaper supplements, which in fiscal 1998 generated approximately
45% of our net sales. Our extensive use of promotional advertising
enables us to better control our margins and inventory levels by rapidly
increasing or decreasing the number and types of discounted items we
offer. Ames' "55Gold(Registered) Savings" program attracts older
customers by offering them a 10% discount on all merchandise every
Tuesday. Our "Special Buy" program offers our customers closeout and
end-of-run brand name and other quality items at price points
significantly below the original retail price. Generally, we do not
advertise these bargains, but they are readily identifiable through
special signs in our stores. As a result, our customers recognize that
they must regularly visit our stores to obtain these outstanding values.
o OUR STORE DESIGN PROVIDES A CONVENIENT SHOPPING EXPERIENCE. Ames stores
are designed to make the shopping experience simple, fast and convenient.
Our stores, which typically range in size from 38,000 to 70,000 square
feet of selling space, are significantly smaller than those of the major
national discount store chains, which range from 80,000 to as much as
160,000 square feet of selling space. The smaller size of our stores,
which is particularly suitable to our more narrowly focused merchandise
offerings, is preferred by older customers, as well as women with small
children, who prefer to walk shorter distances to find the items they are
seeking and complete their purchases quickly. The stores have bright and
informative signage, conveniently located customer service "call boxes"
and "soft" corners that offer a clearer view of the merchandise in such
key departments as domestics, furniture and appliances.
o THE EXPERTISE OF OUR MANAGEMENT TEAM CONTINUES TO DRIVE PROFITABILITY
GROWTH. Three key executives contribute greatly to our successful
merchandising, store growth and profitability expansion strategies. Since
joining Ames in 1994, Joseph R. Ettore, our President and Chief Executive
Officer, and Denis T. Lemire, our Executive Vice President and Chief
Operating Officer, have established a
2
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proven merchandising model based on their substantial retail industry
experience as well as a detailed knowledge of our target customers and
their needs. Rolando de Aguiar, our Executive Vice President and Chief
Financial and Administrative Officer, joined Ames in April 1998 and has
been instrumental to the implementation of our new growth strategy,
particularly the recent Hills and Caldor acquisitions. Since joining
Ames, Messrs. Ettore and Lemire have engineered a significant improvement
in Ames' operating performance, as evidenced by the following:
o An increase in same-store sales during each of the past three fiscal
years, culminating in 7.2% same-store growth in fiscal 1998.
o Growth in net income per share from $0.79 in fiscal 1994 to $1.99 in
fiscal 1998, excluding the effects of the Hills acquisition.
o A reduction of selling, general and administrative expenses as a
percentage of net sales from 26.5% in fiscal 1994 to 25.3% in fiscal
1998 (excluding Hills operations for the month of January 1999 and
other acquisition related costs and charges).
o The integration of 30 new stores and the renovation and remodeling
of 60 additional stores, representing in the aggregate over
five million square feet of selling space.
OUR GROWTH STRATEGY
Our growth strategy is to open and acquire stores in markets that have
similar demographic characteristics to our existing markets and thus provide us
increased access to our target customers. We plan to continue concentrating our
stores in adjacent geographic areas in order to enhance our name recognition,
increase our market penetration and gain economies of scale in corporate
management, advertising and distribution. We believe we can grow our revenue
base and improve our operating margins and profitability through a combination
of increased same-store sales and the acquisition of additional stores while
further leveraging the costs of our administrative, distribution and buying
infrastructure.
3
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered.................................... shares
Common Stock outstanding after the offering............. shares(a)
Use of proceeds......................................... For working capital and general corporate purposes and
to reduce outstanding borrowings under our bank credit
facility. See "Use of Proceeds."
NASDAQ National Market System symbol.................... AMES
</TABLE>
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(a) Assumes no exercise of the over-allotment option by the underwriters.
4
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SUMMARY HISTORICAL AND AS ADJUSTED FINANCIAL AND OPERATING DATA
Set forth below are summary historical financial, operating and other data.
The summary historical statement of operations data for the years ended
January 25, 1997, January 31, 1998 and January 30, 1999 and the summary
historical balance sheet data as of January 30, 1999 have been derived from the
audited consolidated financial statements of Ames. You should read this summary
in conjunction with the audited consolidated financial statements of Ames and
accompanying notes as well as with "Unaudited Pro Forma Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------
JANUARY 25, 1997 JANUARY 31, 1998 JANUARY 30, 1999
---------------- ---------------- ----------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales................................................ $2,161.7 $2,233.1 $2,507.2
Cost of merchandise sold................................. 1,565.7 1,603.6 1,786.2
Gross profit............................................. 596.0 629.5 721.0
Selling, general and administrative expenses............. 564.4 581.7 660.6
Operating income......................................... 52.7 66.2 76.1
Net income............................................... 17.3(a) 34.5 33.8
Net income per common share:
Basic.................................................. 0.85 1.59 1.47
Diluted................................................ 0.79(a) 1.46 1.40
Adjusted net income per common share (b):
Basic.................................................. 2.09
Diluted................................................ 1.99
OTHER FINANCIAL DATA:
Gross margin............................................. 27.6% 28.2% 28.2%(c)
Selling, general and administrative expenses as a
percentage of net sales................................ 26.1% 26.0% 25.3%(c)
Same-store sales increase................................ 1.0% 2.1% 7.2%
Average sales per store.................................. $ 7.1 $ 7.5 $ 8.0(d)
Number of stores at end of period........................ 303 298 456
Total store square footage at end of period (000s)....... 18,487 17,600 31,500
</TABLE>
<TABLE>
<CAPTION>
AS OF JANUARY 30, 1999
-----------------------------
HISTORICAL AS ADJUSTED (E)
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(IN MILLIONS)
<S> <C> <C>
BALANCE SHEET DATA:
Cash................................................................................. $ 35.7 $ 278.8
Total assets......................................................................... 1,483.4 1,733.5
Total debt, including current maturities............................................. 305.5 460.6
Stockholders' equity................................................................. 324.0 419.0
</TABLE>
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(a) Includes an extraordinary loss, net of tax, of $1.4 million or $0.06 per
common share for the early extinguishment of debt.
(b) As adjusted to eliminate the results of operations of Hills for the month of
January 1999 and various other acquisition related costs and charges. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
(c) Data for the fiscal year ended January 30, 1999 exclude Hills operations for
the month of January 1999 and various other acquisition related costs and
charges. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
(d) Average sales per store excludes 155 Hills stores acquired in December 1998.
(e) As adjusted for our proposed sale of $200.0 million aggregate principal
amount of senior notes and the receipt and application of the net proceeds
therefrom and for our proposed sale of at least $100.0 million of our
common stock pursuant to this offering and the receipt and application of
the estimated net proceeds therefrom.
5
<PAGE>
RISK FACTORS
An investment in our common stock involves risks. You should carefully
consider the following risk factors in addition to all other information in this
prospectus before making a decision to purchase the common stock.
OUR CONVERSION, INTEGRATION AND OPERATION OF THE FORMER HILLS STORES MAY
NOT SUCCEED.
We are converting 150 of the former Hills stores to Ames stores and closing
the five remaining Hills stores that we acquired. The integration of the
converted Hills stores into the Ames retail chain will require substantial
management, logistical and financial resources which might otherwise be devoted
to our existing operations. The Hills acquisition is larger than any store
acquisition that we have made under our current management and represents a 50%
increase in the total number of our stores and a 50% increase in our employee
work force. Although we believe our management information, merchandise
purchasing and distribution systems are capable of accommodating this growth, a
failure of these systems to effectively accommodate the demands of the
additional stores could have a material adverse effect on our results of
operations. We will have to train approximately 14,800 former Hills employees to
adapt to our own operating procedures and systems. In addition, in the
approximately 94 communities previously served by Hills in which we have not
previously had a retail presence, we will have to establish consumer recognition
of Ames as a distinct and preferred source of value and customer service
superior to that previously associated with the Hills stores.
THE HILLS ACQUISITION WILL ADVERSELY IMPACT OUR NEAR TERM RESULTS.
Shortly after the acquisition of Hills, we began the first of a series of
liquidation sales in the Hills stores and, in February 1999, we began remodeling
50 of the 150 Hills stores that we are converting to Ames stores. An additional
54 Hills stores will be converted by July 1999 and the remaining 46 stores will
be converted by September 1999. A typical store conversion takes seven to eight
weeks, during which the store conducts no customer business. The operation of
the 155 acquired Hills stores prior to their conversion or final closure,
including the liquidation of their inventory, as well as the conversion of all
but five of those stores into Ames stores, will adversely affect our earnings at
least through the third quarter of fiscal 1999. We will incur approximately
$63.0 million of pre-opening expenses with respect to the 150 Hills stores that
we are converting to Ames stores. We expect the Hills acquisition to have a
positive impact on our earnings beginning in the fourth quarter of fiscal 1999,
but we cannot assure you that our expectations will prove to have been correct.
WE FACE SIGNIFICANT COMPETITION FROM OTHER DISCOUNT RETAILERS.
We operate in an extremely competitive environment. In recent years, many
large discount retailers, including Hills and Caldor, have succumbed to the
intense effects of competition from both national and regional chains. Although
Ames is the largest regional discount retailer in the United States, we are
still considerably smaller in terms of number of stores, sales and earnings than
the three leading national chains: Wal-Mart, Kmart and Target Stores. Each of
these chains, as well as other regional operators such as Bradlees, currently
operates stores within our regional market and competes with us for customers
and potential store locations. We anticipate a further increase in competition
from those national discount store chains. Our merchandising focus is primarily
directed to consumers who we believe are underserved by the major national
chains and our merchandising strategy and smaller store size are intended to
enable us to compete more effectively with these chains. Nevertheless, we remain
vulnerable to the marketing power and high level of consumer recognition of the
major national discount store chains.
OUR HIGH LEVEL OF DEBT MAY ADVERSELY AFFECT OUR FINANCIAL AND OPERATING
FLEXIBILITY.
We have substantial debt and debt service requirements, including
obligations under our bank credit facility, which permits us to borrow up to
$650.0 million on a revolving basis. The following chart shows
6
<PAGE>
basic financial information about us and gives pro forma effect to our proposed
sale of $200.0 million of senior notes and the application of the net proceeds
of that sale to reduce our outstanding bank borrowings:
<TABLE>
<CAPTION>
PRO FORMA AS OF
JANUARY 30, 1999
-------------------------
(DOLLARS IN MILLIONS,
UNAUDITED)
<S> <C>
Total debt....................................... $ 460.6
Stockholders' equity............................. $ 324.0
Net debt to equity ratio (inclusive of cash and
cash equivalents).............................. 0.85x
</TABLE>
Our highly leveraged financial position has important consequences for us,
including:
o our ability to borrow additional amounts for working capital, debt
service requirements, capital expenditures or acquisitions may be
limited;
o a substantial portion of our cash flow from operations will be required
to make debt service payments;
o our ability to capitalize on significant business opportunities may be
limited and our flexibility to react to changes in competitive pressures
and general economic conditions may be reduced;
o we could be at a competitive disadvantage with respect to less highly
leveraged companies with which we compete; and
o we may be more vulnerable in the event of a downturn in the economy or a
disruption in our business.
We expect to be able to repay the balance of our indebtedness and meet our
other obligations through cash generated from operations. However, we may need
to obtain new credit arrangements and other sources of financing in order to
meet our future obligations and working capital requirements and to fund our
future capital expenditures. You should be aware that our ability to repay or
refinance our outstanding debt and to fund our capital expenditures and other
obligations depends on our successful financial and operating performance,
including the future performance of the 150 former Hills stores that we are
converting to Ames stores. We cannot assure you of our future performance, which
depends upon a number of factors, many of which are beyond our control. These
factors include:
o deteriorating general economic conditions in the United States,
particularly in the regions in which our stores are located;
o decreased consumer spending, particularly among those consumers who
comprise our primary customer base;
o increased competition from other discount retailers, including major
national chains, as well as from merchandise offerings over the Internet;
o severe adverse weather conditions during the winter months, particularly
during the peak Christmas holiday shopping season; and
o failure of our merchandise suppliers to make their computer systems year
2000 compliant in a timely manner.
These and other factors, which are discussed more fully below, could have
an adverse effect on our ability to pay interest on and the principal of our
outstanding debt.
OUR SENIOR DEBT AGREEMENTS RESTRICT OUR FLEXIBILITY.
Our bank credit agreement and one of our two senior notes indentures
contain a number of significant provisions that, among other things, restrict
our ability to:
o sell assets outside the ordinary course of business;
o incur more indebtedness;
7
<PAGE>
o grant or incur liens on our assets;
o repay certain indebtedness;
o pay dividends;
o make certain investments or acquisitions;
o repurchase or redeem capital stock;
o engage in mergers or consolidations; and
o engage in certain transactions with our affiliates.
These restrictions could hurt our ability to finance our future operations
or capital needs or make acquisitions that may be in our interest. In addition,
our bank credit facility requires that we achieve a specified minimum level of
consolidated earnings before interest, taxes, depreciation and amortization for
the fiscal quarter ending April 29, 2000, and that for fiscal quarters beginning
after April 30, 2000, we achieve a specified minimum ratio of consolidated
earnings before interest, taxes, depreciation and amortization to fixed charges.
Our ability to comply with these financial requirements may be affected by
events beyond our control, and our inability to comply with them could result in
a default under the bank credit agreement in which event the lenders could elect
to:
o declare all our outstanding borrowings under that agreement, as well as
accrued interest and fees, to be due and payable;
o require us to apply all of our available cash to repay those borrowings.
If we were unable to repay those borrowings when due, the lenders under our
bank credit facility could proceed against their collateral, which includes a
first priority lien on substantially all of our assets and a first priority
security interest in the capital stock of our subsidiaries. A default under our
bank credit agreement, if not cured in a timely manner, would also result in a
default under our senior notes indentures.
WE ARE VULNERABLE TO ADVERSE WINTER WEATHER AND REGIONAL ECONOMIC
DOWNTURNS.
Our stores, including those acquired from Hills, are concentrated in a
geographic region that is subject to severe winter weather conditions. Frequent
or unusually heavy snow or ice storms in our markets, particularly during the
important Christmas selling season, could have a material adverse effect on our
sales and earnings and could adversely impact our ability to make scheduled
interest payments on our outstanding indebtedness, including the Notes.
In addition, the geographic concentration of our stores increases our
vulnerability to regional economic downturns. Although we believe our emphasis
on low prices and superior customer value makes us better able than most other
large retailers to withstand periods of increased unemployment, we cannot assure
you that we would not be materially impacted by a protracted or severe regional
economic downturn.
THE LOSS OF OUR KEY EXECUTIVES COULD HAVE A SIGNIFICANT IMPACT ON OUR
COMPANY.
Our success over the past five years has been the result of a merchandising
and marketing strategy conceived and implemented by our senior management team
and particularly our President and Chief Executive Officer, Joseph R. Ettore,
our Executive Vice President and Chief Operating Officer, Denis T. Lemire, and
our Executive Vice President and Chief Financial and Administrative Officer,
Rolando de Aguiar. The loss of the services of Messrs. Ettore, Lemire and de
Aguiar could have a material adverse effect on our company. We have employment
agreements with these executives that continue until May 2004, May 2003 and May
2003, respectively.
OUR ABILITY TO USE OUR NET OPERATING LOSS CARRYFORWARDS COULD BE LIMITED.
At January 30, 1999, we had net operating loss carryforwards totalling
approximately $444.0 million available to reduce our future federal income tax
liabilities. This amount is exclusive of net operating loss carryforwards of
Hills. Our ability to use these loss carryforwards to reduce our future federal
income tax liabilities could be limited if we were to experience more than a 50%
change in ownership over any three-
8
<PAGE>
year period, all as defined and governed by section 382 of the Internal Revenue
Code. For purposes of determining if a 50% change in ownership occurs within any
three-year period, any public stock offerings during that period (including this
offering) are taken into account in accordance with applicable regulations. If
the benefits of these loss carryforwards were so limited, our earnings and cash
resources could be materially and adversely affected.
In addition to Ames' loss carryforwards, Hills also has loss and tax credit
carryforwards for federal income tax purposes. However, the Hills carryforwards
are subject to severe limitations on their future utilization as a result of the
recent change in ownership of Hills. See Note 10 to Ames' audited consolidated
financial statements included in this prospectus.
SOME OF OUR VENDORS' COMPUTER SYSTEMS MAY NOT BE YEAR 2000 COMPLIANT.
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."
We have assessed our own business and management information systems and
believe that those of our systems that are material to our operations are, or
before the end of 1999 will be, year 2000 compliant, although we cannot assure
you that our assessment will prove to be correct. We also have taken steps to
determine whether our principal vendors are or expect to be year 2000 compliant
by the end of this year. Based on our inquiries, we are reasonably comfortable
that our major vendors, whose products collectively account for approximately
80% of our sales, are or will be year 2000 compliant. However, we cannot assure
you of the year 2000 compliance of the remaining vendors who do business with
us, and it is possible that a number of those vendors may encounter problems
with their systems after the end of this year. If, however, one or more of these
vendors is unable to produce or ship merchandise to us as a result of a computer
system malfunction, we believe that there are adequate alternative sources for
similar merchandise.
ANTI-TAKEOVER PROVISIONS COULD IMPEDE OR DISCOURAGE A THIRD-PARTY
ACQUISITION OF OUR COMPANY.
Ames is a Delaware corporation. Anti-takeover provisions of Delaware law
impose various impediments to the ability of a third party to acquire control of
our company, even if a change in control would be beneficial to our existing
stockholders. In addition, our board of directors has the power, without
shareholder approval, to designate the terms of one or more series of preferred
stock and issue shares of preferred stock, which could be used defensively if a
takeover is threatened. Lastly, we have adopted a rights plan, commonly known as
a "poison pill," that entitles our stockholders to acquire additional shares of
our company, or a potential acquiror of our company, at a substantial discount
from their market value in the event of an attempted takeover. Our incorporation
under Delaware law, our board's ability to create and issue a new series of
preferred stock and the existence of our rights plan could impede a merger,
takeover or other business combination involving our company or discourage a
potential acquiror from making a tender offer for our common stock, which, under
certain circumstances, could reduce the market value of our common stock.
9
<PAGE>
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
The statements contained or incorporated by reference in this prospectus
that are not historical facts are "forward-looking statements," as that term is
defined in the Private Securities Litigation Reform Act of 1995. Those
statements include all discussions of strategy as well as statements that
contain such forward-looking expressions as "believes," "estimates," "expects,"
"intends," "may," "will," "should," or "anticipates" or the negative thereof. In
addition, from time to time, we or our representatives have made or may make
forward-looking statements, orally or in writing. Furthermore, forward-looking
statements may be included in our filings with the Commission as well as in
press releases or oral presentations made by or with the approval of one of our
authorized executive officers.
We caution you to bear in mind that forward-looking statements, by their
very nature, involve assumptions and expectations and are subject to risks and
uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained in this prospectus are
reasonable, no assurance can be given that those assumptions or expectations
will prove to have been correct. Important factors that could cause actual
results to differ materially from our expectations are disclosed in this
prospectus, including, without limitation, under the caption "Risk Factors."
These factors include, but are not limited to, the following:
o deteriorating general economic conditions in the United States,
particularly in the regions in which our stores are located;
o decreased consumer spending, particularly among those consumers who
comprise our primary customer base;
o increased competition from other discount retailers, including major
national chains, as well as from merchandise offerings over the Internet;
o severe adverse weather conditions during the winter months, particularly
during the peak Christmas holiday shopping season; and
o failure of our suppliers to make their computer systems year 2000
compliant in a timely manner.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
these factors and the cautionary statements contained throughout this
prospectus.
10
<PAGE>
RECENT TRANSACTIONS
THE HILLS ACQUISITION
On November 12, 1998, we entered into an agreement for the acquisition of
Hills Stores Company. Pursuant to that agreement, we promptly began a tender
offer for all of Hills' outstanding common and convertible preferred stock.
Concurrently with that tender offer, we also offered to purchase all of Hills'
outstanding 12 1/2% Senior Notes due 2003 and solicited consents from the
holders of those notes to eliminate and waive various provisions of the
indenture governing those notes. Following the expiration of those offers on
December 31, 1998, we acquired approximately 81.3% of Hills' outstanding common
stock and 74.4% of its outstanding convertible preferred stock, in each case at
a price of $1.50 per share, or an aggregate of $13.7 million. On the same date,
we purchased approximately $144.1 million, or approximately 73.9%, of the
$195.0 million of outstanding Hills senior notes at a price of approximately
$700 for each $1,000 principal amount of those notes, or an aggregate of
$100.8 million. Pursuant to the terms of those offers, holders of Hills' shares
and senior notes who tendered their securities for purchase also received a
deferred contingent right to receive a further cash payment out of, and based
upon, Hills' ultimate net recovery, if any, in a lawsuit brought by Hills in
September 1995 against certain of its former directors.
In March 1999, we consummated the merger of Hills into a subsidiary of
Ames. Shares of Hills' common and convertible preferred stock not previously
acquired by us were automatically converted into the right to receive $1.50 per
share (plus a deferred contingent cash right as discussed above). Thereafter,
that subsidiary was merged into Ames and the $50.9 million of outstanding Hills'
senior notes not previously purchased by us became direct obligations of Ames.
The cost of acquiring the remaining outstanding common and preferred shares of
Hills was $3.3 million. We also incurred professional fees, accounting, legal
and other costs of approximately $12.2 million in connection with the
acquisition.
The total cost of the Hills acquisition was approximately $330.0 million,
inclusive of the approximately $50.9 million of Hills senior notes that remained
outstanding and $147.8 million of capitalized leasehold and financing
obligations related to the Hills stores. Cash required for the acquisition
totalled approximately $130.0 million. Funds for these purposes were derived
from borrowings under our bank credit facility.
At the time of the acquisition, Hills operated 155 discount department
stores in twelve states within or contiguous to our existing geographic region.
The Hills stores have a sales area that is similar in size to that of the
typical Ames store. They are located in communities with demographics that are
similar to those of our existing locations and they serve a similar target
customer. The Hills acquisition was particularly opportunistic for Ames, since
it permitted us to obtain 155 well-maintained stores in locations that were
complementary to and to a large extent not competitive with our existing store
locations. After a review of locations where a Hills store operated in the same
general market area as an existing Ames store, we determined that in only ten
instances would store closings be required. The acquisition substantially
increased our presence in five states and enabled us to enter five new states.
We also acquired a Hills distribution facility in Columbus, Ohio that is
complementary to but not duplicative of our two existing principal distribution
centers.
In February 1999, we began a program to remodel and convert 150 of the
acquired Hills stores to Ames stores. The five remaining Hills stores, as well
as seven Ames stores, are being closed because they are in locations that either
are competitive with, or are underperforming, our other stores. The remodeling
and conversion process is being conducted in three stages:
o the first stage, involving 50 stores, is scheduled to be completed on
April 22, 1999;
o the second stage, involving 54 stores, is scheduled to be completed in
July 1999; and
o the last stage, involving 46 stores, is scheduled to be completed in
September 1999.
The total cost of the remodeling and conversion is expected to be
approximately $185.0 million and is being funded primarily with proceeds from
our liquidation of the Hills merchandise inventories. This cost consists
primarily of expenditures for fixtures, signage, point-of-sale register systems,
training of employees and other labor costs, as well as various pre-opening
expenses.
11
<PAGE>
Under a "turn-key" agreement with us, Gordon Brothers Retail Partners, LLC
and The Nassi Group, LLC have been engaged 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. These liquidation sales also are
being conducted in three stages, the first having ended on February 22, 1999 and
the second and third scheduled to be completed on May 21 and July 26, 1999,
respectively. These two firms are responsible for all expenses associated with
operating the Hills stores and liquidating their inventory prior to their
closure, including compensation of store employees and rental payments under
store leases. Upon completion of each sale, they must remove all unsold
merchandise and turn over the store in "broom clean" condition. Cash proceeds
from the liquidation sales are collected at the point of sale by Ames,
effectively minimizing Ames' financial risk. Pursuant to the agreement, Ames is
entitled to retain from the liquidation proceeds a minimum sum equal to 40% of
the initial ticketed retail price of all items of Hills merchandise on hand and
on order as of January 2, 1999, irrespective of the actual sales proceeds. In
addition, Ames is entitled to share in that portion, if any, of the proceeds
from the sale of Hills merchandise in excess of 62% of the aggregate initial
ticketed retail price of the merchandise. We have estimated that the aggregate
retail price of the Hills merchandise inventory is at least $670.0 million and,
therefore, we expect to realize a minimum of $268.0 million from the liquidation
of this inventory.
THE CALDOR STORES AND DISTRIBUTION CENTER
On March 4, 1999, we entered into an agreement with Caldor Corporation to
purchase seven of its stores in Connecticut, one store in Massachusetts and a
649,000 square foot state-of-the-art distribution center in Westfield,
Massachusetts for a cash purchase price of $40.0 million. Caldor is currently
winding up its business under the jurisdiction of the U.S. Bankruptcy Court for
the Southern District of New York and, therefore, the purchase was subject to
the court's review and approval. On March 26, 1999, the Bankruptcy Court
approved the transaction. Under the terms of the agreement, we will assume
Caldor's leases for the eight stores and the distribution center and will
acquire all of the store fixtures and all racking, sorting systems and materials
handling equipment in the distribution center. Caldor will deliver the stores
and distribution center to us in "broom clean" condition. We will then remodel
the stores in accordance with our prototype design and reopen them under the
Ames banner in late September 1999.
The eight Caldor stores, which range in size from 59,400 to 75,400 square
feet of selling space, are in communities with similar demographics to those in
which our own stores are located. None of the stores is in a location that is
directly competitive with any of our existing stores, including the former Hills
stores that we are currently converting. After giving effect to the acquisition
of these stores, we will become the largest discount department store operator
in Connecticut, with a total of 22 stores in that state.
On March 26, 1999, we entered into an agreement with Caldor for the
purchase of an additional store in Massachusetts for a cash purchase price of
$2.7 million. This agreement is subject to competing bids and the approval of
the Bankruptcy Court.
12
<PAGE>
USE OF PROCEEDS
We estimate the net proceeds from this offering to be approximately
$ million, after deducting the underwriting discount and expenses payable by
Ames. If the underwriters also purchase all of the additional shares that are
subject to their over-allotment option, the estimated net proceeds will increase
to approximately $ million.
We will apply the net proceeds for working capital and general corporate
purposes. Pending application for these purposes, we will use the net proceeds
to reduce any then outstanding revolving credit borrowings and will invest the
balance in U.S. government and short-term investment grade corporate debt
obligations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
Our common stock is traded on The NASDAQ Stock Market under the symbol
"AMES." The following table provides the high and low last sale prices for our
common stock on The NASDAQ Stock Market reported for the fiscal quarterly
periods indicated below. These prices do not include retail markups, markdowns
or commissions.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
Fiscal 1999
First Quarter (through March 31, 1999).......................................... $37 1/8 $25 3/8
Fiscal 1998
Fourth Quarter.................................................................. 32 1/2 18 1/8
Third Quarter................................................................... 25 3/8 10 1/2
Second Quarter.................................................................. 29 5/8 21 1/8
First Quarter................................................................... 25 1/2 14
Fiscal 1997
Fourth Quarter.................................................................. 19 5/8 12 3/8
Third
Quarter................................................................... 18 12 5/8
Second Quarter.................................................................. 12 13/16 6 3/4
First Quarter................................................................... 10 1/4 6 1/4
</TABLE>
On March 31, 1999, the last reported sale price of our common stock was
$37 1/8. On that date, there were approximately 6,487 holders of record of our
common stock.
DIVIDEND POLICY
We have not declared or paid any dividends on our common stock for more
than the past five fiscal years, and we do not anticipate paying any cash
dividends in the foreseeable future. We currently intend to retain our future
earnings to finance our operations and expand our business. In addition, our
ability to pay cash dividends is restricted by our bank credit agreement and the
indenture relating to the $200.0 million of senior notes that we propose to
issue. Any future determination to pay cash dividends will be at the discretion
of the board of directors and will be dependent upon our financial condition,
operating results, capital requirements and such other factors as the board of
directors deems relevant.
14
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of January 30, 1999.
Our capitalization is presented:
o on an actual basis;
o on an as adjusted basis to reflect our proposed sale of
$200.0 million aggregate principal amount of senior notes and our
receipt and application of the net proceeds therefrom and our sale
of the shares of common stock we are offering pursuant to this
prospectus and our receipt of the estimated net proceeds therefrom.
<TABLE>
<CAPTION>
AS OF JANUARY 30,
1999
---------------------
AS ADJUSTED
ACTUAL (UNAUDITED)
------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C>
Cash and temporary investments............................................................. $ 35.7 $ 278.8
------ -------
------ -------
Current maturities of capital lease obligations and long-term debt......................... $ 17.8 $ 17.8
------ -------
------ -------
Long-term debt:
Bank credit facility(a)............................................................... $ 44.9 $ --
12.5% Senior Notes due 2003........................................................... 50.9 50.9
% Senior Notes due 2006........................................................... -- 200.0
Capital leases and other debt (excluding current liabilities)......................... 191.9 191.9
------ -------
Total long-term debt............................................................. 287.7 442.8
------ -------
Stockholders' equity:
Preferred stock--authorized 3,000,000 shares; no shares issued or outstanding......... -- --
Common stock--authorized 40,000,000 shares; 23,921,545 shares issued and outstanding,
actual; shares issued and outstanding, as adjusted........................... 0.2 0.3
Additional paid-in capital............................................................ 236.7 331.6
Treasury stock--at cost--79,495 shares of common stock................................ (0.9) (0.9)
Retained earnings..................................................................... 88.0 88.0
------ -------
Total stockholders' equity....................................................... 324.0 419.0
------ -------
Total capitalization........................................................... $611.7 $ 861.8
------ -------
------ -------
</TABLE>
- ------------------
(a) As of March 31, 1999, outstanding borrowings under the bank credit facility
(exclusive of letters of credit) were approximately $231.1 million.
You should read this capitalization table in conjunction with the audited
consolidated financial statements and accompanying notes included elsewhere in
this prospectus and with the information set forth under the headings "Selected
Historical Financial and Operating Data" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
15
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The selected historical consolidated financial data for our fiscal years
ended January 25, 1997, January 31, 1998 and January 30, 1999 are derived from
our audited consolidated financial statements. The selected historical
consolidated financial data for our fiscal years ended January 28, 1995 and
January 27, 1996 are derived from our audited consolidated financial statements
which are not included herein. You should read this table in conjunction with
the audited consolidated financial statements and accompanying notes as well as
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this prospectus.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
--------------------------------------------------------------------------
JANUARY 28, JANUARY 27, JANUARY 25, JANUARY 31, JANUARY 30,
1995 1996 1997 1998 1999
----------- ----------- ----------- ------------- ----------------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales......................................... $ 2,142.8 $ 2,104.2 $ 2,161.7 $ 2,233.1 $2,507.2
Cost of merchandise sold.......................... 1,571.2 1,544.0 1,565.7 1,603.6 1,786.2
Gross profit...................................... 571.6 560.2 596.0 629.5 721.0
Selling, general and administrative expenses...... 568.9 552.7 564.4 581.7 660.6
Operating income.................................. 33.9 31.0 52.7 66.2 76.1
Net income (loss)................................. 17.0(a) (1.6) 17.3(b) 34.5 33.8
Net income (loss) per common share:
Basic........................................... 0.85 (0.08) 0.85 1.59 1.47
Diluted......................................... 0.79(a) (0.08) 0.79(b) 1.46 1.40
OTHER FINANCIAL DATA:
Gross margin...................................... 26.7% 26.6% 27.6% 28.2% 28.2%(c)
Selling, general and administrative expenses as a
percentage of net sales......................... 26.5% 26.3% 26.1% 26.0% 25.3%(c)
Same-store sales increase......................... 1.7% (1.0)% 1.0% 2.1% 7.2%
Average sales per store........................... $ 7.0 $ 6.9 $ 7.1 $ 7.5 $ 8.0(d)
Number of stores at end of period................. 306 307 303 298 456
Total store square footage at end of period
(000s).......................................... 18,670 18,700 18,487 17,600 31,500
BALANCE SHEET DATA (END OF PERIOD):
Cash.............................................. $ 30.4 $ 14.2 $ 46.1 $ 57.8 $ 35.7
Total assets...................................... 533.4 505.8 536.8 610.0 1,483.4
Total debt, including current maturities.......... 96.3 74.2 53.8 39.9 305.5
Stockholders' equity.............................. 84.9 83.3 108.2 173.4 324.0
</TABLE>
- ------------------
(a) Includes an extraordinary loss, net of tax, of $1.5 million or $0.07 per
common share for the early extinguishment of debt.
(b) Includes an extraordinary loss, net of tax, of $1.4 million or $0.06 per
common share for the early extinguishment of debt.
(c) Data for the fiscal year ended January 30, 1999 exclude Hills operations for
the month of January 1999 and various other acquisition related costs and
charges. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included elsewhere in this prospectus.
(d) Average sales per store excludes the acquired Hills stores.
16
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed consolidated statement
of operations data have been derived from the audited consolidated financial
statements of Ames for the fiscal year ended January 30, 1999, which include the
results of Hills for the month of January 1999, and from the unaudited
consolidated statement of operations of Hills for the 11 months ended December
31, 1998. The pro forma data give effect to the Hills acquisition as if it had
occurred at the beginning of the fiscal year ended January 30, 1999.
The pro forma data reflect pro forma adjustments that are based upon
available information and certain assumptions that Ames believes are reasonable.
These data are provided for informational purposes only and are not necessarily
indicative of what Ames' actual results of operations would have been had the
Hills acquisition been consummated at the beginning of fiscal 1998, or the
results of operations Ames may obtain in the future. In preparing these pro
forma data, Ames has utilized what it believes are reasonable methods to conform
the bases of presentation of Ames' and Hills' historical financial statements.
The Hills acquisition has been accounted for by the purchase method of
accounting. The purchase price 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. Ames does
not expect that differences between the preliminary and final allocations will
have a material impact on Ames' pro forma results of operations.
You should read the following table in conjunction with the historical
audited consolidated financial statements and accompanying notes of Ames and
Hills included elsewhere in this prospectus and with the information set forth
under the headings "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
UNAUDITED PRO FORMA COMBINED CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FISCAL YEAR ENDED JANUARY 30, 1999
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HILLS
11 MONTHS
AMES ENDED
FISCAL YEAR DECEMBER 31, PRO FORMA PRO FORMA
ENDED 1998 ADJUSTMENTS TOTAL
JANUARY 30, 1999 (UNAUDITED) (UNAUDITED) (UNAUDITED)
---------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
Net sales......................................... $2,507.2 $ 1,624.0 $ -- $ 4,131.2
Cost of merchandise sold.......................... 1,786.2 1,214.9 (9.6)(a) 2,991.5
Selling, general and administrative expenses...... 660.6 376.5 20.0 (b) 1,057.1
Depreciation and amortization expense, net........ 14.5 43.9 7.2 (c)(d) 65.6
Other (income) expense............................ (22.0) -- (10.4)(b) (32.4)(e)
Interest expense, net............................. 15.3 49.2 (6.9)(f) 57.6
-------- --------- ----- ---------
Income (loss) before income taxes................. 52.6 (60.5) (0.3) (8.2)
Income tax (provision) benefit.................... (18.8) (49.6) 21.7 (g) (46.7)
-------- --------- ----- ---------
Net income (loss)................................. $ 33.8 $ (110.1) $21.4 $ (54.9)(h)
-------- --------- ----- ---------
-------- --------- ----- ---------
Net loss per common share:
Basic and diluted net loss per common share..... $ (2.39)(h)
---------
---------
Shares outstanding used in basic and diluted net
loss per common share calculation (000s)..... 23,010
---------
---------
</TABLE>
- ------------------
(Footnotes appear on following page.)
17
<PAGE>
- ------------------
Footnotes:
(a) Approximately $9.6 million of Hills' buying expenses have been reclassified
from cost of merchandise sold to selling, general and administrative
expenses to conform to Ames' presentation. See footnote (b) below.
(b) Certain items of Hills' income have been reclassified from, and certain
items of Hills' expenses have been reclassified to, selling, general and
administrative expense to conform to Ames' presentation as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JANUARY 30, 1999
----------------
(IN MILLIONS)
<S> <C>
Leased department income reclassified to
leased department and other income....................
$ 10.4
Buying expenses reclassified from cost of
merchandise sold...................................... 9.6
------
Total adjustments.................................. $ 20.0
------
------
</TABLE>
(c) Depreciation and amortization expense, net has been adjusted to reflect the
fair market revaluation of Hills' capital leases and beneficial lease
rights.
(d) Hills' amortization of reorganization value in excess of revalued assets
has been eliminated and amortization of purchase price in excess of assets
acquired has been added, using a 25 year amortization period.
(e) Other income presented is net of Ames' store closing charges of $8.2
million.
(f) Interest expense has been adjusted as follows:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JANUARY 30, 1999
----------------
(IN MILLIONS)
<S> <C>
Interest eliminated on the $144.1 million of Hills
12 1/2% Senior Notes purchased by Ames................ ($16.7)
The elimination of amortized fees on the previous
revolving credit facilities of each of Hills and Ames
offset by the amortization of fees associated with
Ames' new bank credit facility........................ (0.5)
Additional interest costs recorded relating to the
purchase of Hills..................................... 11.1
Change in interest on revalued debt..................... (0.8)
------
Total adjustments.................................. $ (6.9)
------
------
</TABLE>
(g) Income taxes were adjusted to record a benefit on the pro forma combined
loss at Ames' historical rate, offset by a write-down of Hills deferred tax
assets of approximately $49.6 million (which is net of a reversal of
approximately $5.9 million of accrued tax liabilities). This net deferred
tax assets write-down was previously recorded by Hills, as of October 1998,
because Hills' management determined that these tax assets were not
realizable and, accordingly, recorded a write-down of the assets as a
component of the tax provision. The impact of recording the write-down of
these tax assets has not been eliminated for pro forma purposes.
(h) The pro forma net loss reflects the previously recorded write-down of Hills'
net deferred tax assets as discussed in note (g). Excluding the write-down
of the Hills' net deferred tax assets recorded as of October 31, 1998, pro
forma net loss and basic and diluted net loss per common share would have
been $5.3 million and $0.23, respectively.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Ames changed its fiscal year from the last Saturday in January to the
Saturday nearest January 31, effective with the fiscal year ended January 30,
1999, which we refer to as "fiscal 1998." We made this change so that our fiscal
year would coincide with the fiscal year of most other publicly-held retailers.
Fiscal 1998 consisted of 52 weeks. Our fiscal year ended January 31, 1998, which
we refer to as "fiscal 1997," consisted of 53 weeks. Our fiscal year ended
January 25, 1997, which we refer to as "fiscal 1996," consisted of 52 weeks.
You should read the discussion that follows in conjunction with the
consolidated financial statements and accompanying notes included elsewhere in
this prospectus.
RESULTS OF OPERATIONS
FISCAL 1998 COMPARED TO FISCAL 1997
On December 31, 1998, we acquired approximately 81.3% of the outstanding
voting stock of Hills Stores Company. Accordingly, the operations of Hills and
its subsidiaries during the month of January 1999 are included in our
consolidated results of operations for fiscal 1998. 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.
Under our agreement with Gordon Brothers and The Nassi Group, we are
entitled to retain from the proceeds of the liquidation 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 targets. For
financial reporting purposes, Hills' net sales during the month of January
represent the actual sale proceeds from merchandise liquidation sales, its cost
of merchandise sold represents the guaranteed minimum amount that Ames is
entitled to retain, and its selling, general and administrative expenses include
the portion of those proceeds that are to be paid over to the liquidators.
Because of the unique nature of our contractual arrangements with Gordon
Brothers and The Nassi Group, as well as the fact that 50 Hills stores were in
the process of liquidation, Hills' results for the month of January 1999 are not
representative of those of a retailer operating in the ordinary course of
business and are not directly comparable to Ames' results exclusive of Hills.
The acquisition of Hills also resulted in various costs and charges during the
month of January 1999 that impacted Ames' consolidated results. These other
costs and charges consisted principally of costs associated with terminating
contracts that became obsolete with the acquisition of Hills, the write-off of
deferred financing costs related to a prior credit facility, interest expense
for borrowings incurred to finance the acquisition and a one-time charge for the
announced closing of the seven Ames stores.
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<PAGE>
The following table illustrates the separate contribution of Ames' full
year of operations and Hills' one month of operations to various components of
the consolidated results of operations for fiscal 1998, as well as the impact on
these consolidated results of the other costs and charges described above:
<TABLE>
<CAPTION>
OTHER COSTS
AMES HILLS AND CHARGES CONSOLIDATED
-------- ------ ----------- ------------
(IN MILLIONS)
<S> <C> <C> <C> <C>
Net sales.............................................. $2,395.1 $112.1 $ -- $2,507.2
Costs and expenses (income)
Cost of merchandise sold............................. 1,719.9 66.3 -- 1,786.2
Selling, general and administrative expenses......... 606.9 51.9 1.8 660.6
Leased department and other income................... (29.2) (0.9) -- (30.1)
Depreciation and amortization expense, net........... 11.3 3.2 -- 14.5
Interest and debt expense, net....................... 11.4 1.9 1.9 15.2
Store closing charge................................. -- -- 8.2 8.2
-------- ------ ----- --------
Income (loss) before income taxes...................... 74.8 (10.3) (11.9) 52.6
Income tax (provision) benefit....................... (26.7) 3.7 4.2 (18.8)
-------- ------ ----- --------
Net income (loss)...................................... $ 48.1 $ (6.6) $(7.7) $ 33.8
-------- ------ ----- --------
-------- ------ ----- --------
</TABLE>
The unique circumstances under which Hills' operations have been conducted
since December 31, 1998 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 fiscal 1998 and fiscal 1997. Accordingly, in the discussion that
follows, Ames' net sales, gross margin, selling, general and administrative
expense, and its leased department and other income for fiscal 1998 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 (which exclude sales from leased shoe departments)
increased 7.3%, to $2.40 billion in fiscal 1998 from $2.23 billion in fiscal
1997, due primarily to 7.2% growth in same-store sales. Ames experienced
particularly strong improvements in sales of domestics, toys, ready-to-assemble
furniture and women's sportswear. In comparing results for the two fiscal years,
you should bear in mind that net sales in fiscal 1997 were favorably affected by
the inclusion of a full or nearly full year of operations of two stores that
were closed in the beginning of fiscal 1998 and by the fact that fiscal 1997
included one additional week of operations.
Ames' gross margin increased $45.7 million in fiscal 1998 compared to
fiscal 1997, but remained unchanged as a percentage of net sales at 28.2%. The
gross margin rate in fiscal 1998 benefitted from a higher average markup on
sales, which was partially offset by higher markdowns.
Ames' selling, general and administrative expenses increased $25.3 million
in fiscal 1998, but decreased as a percentage of net sales from 26.0% in fiscal
1997 to 25.3% in fiscal 1998. The percentage decrease was primarily attributable
to a reduction in store related expenses and advertising expense, partially
offset by an increase in health and medical costs.
Ames' leased department and other income increased $4.1 million, or 16.3%,
in fiscal 1998 compared to fiscal 1997. The increase was due primarily to the
leased shoe department, layaway and vending income, as well as the receipt of
funds held in a trust.
Ames' depreciation and amortization expense increased by $4.6 million, or
69.1%, in fiscal 1998 compared to fiscal 1997. The increase related primarily to
new point-of-sale systems and store automation equipment acquired under certain
capital leases. The Hills acquisition added a further $3.2 million of
depreciation and amortization expense associated with the additional
depreciation and amortization of its 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. We are amortizing the beneficial
lease rights using the straight-line method over the terms of the related leases
(which average approximately 25 years) and are amortizing the Hills goodwill
over 25 years on a straight-line basis. The amortization of the excess of our
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<PAGE>
revalued net assets over equity under fresh-start reporting remained the same in
fiscal 1998 as in fiscal 1997. We are amortizing this amount over a ten-year
period that will conclude in January 2003.
The Hills acquisition resulted in a 31.5%, or $3.7 million, increase in
consolidated interest expense, net of interest income, in fiscal 1998. Debt and
capital lease obligations of Hills accounted for $1.9 million of the increase.
Another $1.4 million of the increase was attributable to the non-cash write-off
of deferred financing costs under Ames' prior credit facility. The balance was
attributable to borrowings under our bank credit agreement to finance the costs
of the acquisition.
In the fourth quarter of fiscal 1998, we recorded charges of $8.2 million
in connection with the announced closing of seven Ames stores that are scheduled
to close in fiscal 1999. Principal components of these charges are for lease
costs and the write-down of fixed assets. We have also planned for the closing
of five of the acquired Hills stores and, pursuant to the purchase method of
accounting, have provided for these closings in the valuation of the acquired
Hills assets. In the fourth quarter of fiscal 1997, we recorded charges of
$1.6 million in connection with the closing of two stores, of which
$1.0 million was classified as a store closing charge and $0.6 million was
recorded as part of the cost of merchandise sold.
We recorded an income tax provision of $18.8 million in fiscal 1998, of
which approximately $0.5 million will be paid in cash. In fiscal 1997, we
recorded an income tax provision of $19.1 million, of which approximately
$0.3 million was paid in cash. See Note 10 of the Notes to Ames' audited
consolidated financial statements for an explanation of fresh-start reporting
and SFAS No. 109.
FISCAL 1997 COMPARED TO FISCAL 1996
We reported improvements in sales and net earnings for fiscal 1997 over
fiscal 1996. The improvements were due to the favorable impact of our opening 21
new stores in the preceding two fiscal years, our closing of 12 underperforming
stores at the beginning of fiscal 1997 and the continued improvement in our
gross margin rate. The following table sets forth various components of Ames'
results of operations for fiscal 1996 and 1997 expressed in dollars and as a
percentage of net sales:
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
----------------------------- -----------------------------
IN MILLIONS % OF NET SALES IN MILLIONS % OF NET SALES
----------- -------------- ----------- --------------
<S> <C> <C> <C> <C>
Net sales........................................ $ 2,161.7 100.0% $ 2,233.1 100.0%
Costs and expenses (income):
Cost of merchandise sold....................... 1,565.7 72.4 1,603.6 71.8
Selling, general and administrative expenses... 564.4 26.1 581.7 26.1
Leased department and other income............. (25.8) (1.2) (25.1) (1.1)
Depreciation and amortization expense, net..... 4.7 0.2 6.7 0.3
Interest and debt expense, net................. 19.0 0.9 11.6 0.5
Store closing charge........................... 6.9 0.3 1.0 --
--------- ------ --------- ------
Income before income taxes and extraordinary
item........................................ 26.8 1.3 53.6 2.4
Income tax (provision)........................... (8.1) (0.4) (19.1) (0.9)
--------- ------ --------- ------
Income before extraordinary item................. 18.7 0.9 34.5 1.5
Extraordinary loss, net.......................... 1.4 0.1 -- --
--------- ------ --------- ------
Net income.................................. $ 17.3 0.8% $ 34.5 1.5%
--------- ------ --------- ------
--------- ------ --------- ------
</TABLE>
Net sales increased 3.3%, from $2.16 billion in fiscal 1996 to
$2.23 billion in fiscal 1997, due to an increase of 2.1% in same-store sales,
the inclusion of 53 weeks of operations in fiscal 1997 and the opening of new
stores.
Gross margin increased $33.5 million, or 0.6% as a percentage of net sales,
in fiscal 1997. The gross margin rate was favorably impacted by a slightly
higher average markup on sales and a reduction in markdowns. These factors were
partially offset by higher volume of "55 Gold(Registered) Savings" senior
citizen markdowns in fiscal 1997. Cost of merchandise sold in fiscal 1997
included a $0.6 million charge for inventory write-downs associated with two
stores that were designated for closing in fiscal 1998. Cost of
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<PAGE>
merchandise sold in fiscal 1996 included a $2.8 million charge for inventory
write-downs associated with 13 stores that were designated for closing in fiscal
1997.
Selling, general and administrative expenses increased $17.3 million in
fiscal 1997, but remained unchanged as a percentage of net sales compared to
fiscal 1996. The increase was primarily attributable to higher payroll expenses,
a substantial portion of which was related to the inclusion of an additional
week of operations and to federal minimum wage increases. Insurance expense
increased due to a greater loss experience in fiscal 1997 compared to fiscal
1996.
Leased department and other income declined $0.7 million (or 2.7%) in
fiscal 1997 compared to fiscal 1996, due primarily to a decline in sales at
leased shoe departments.
Depreciation and amortization expense increased by $2.0 million, or 0.1% as
a percentage of net sales, in fiscal 1997. Depreciation and amortization expense
included impairment losses of $1.2 million in fiscal 1997 and $2.2 million in
fiscal 1996 that were recorded pursuant to the adoption of SFAS No. 121 in the
fourth quarter of fiscal 1995. Depreciation and amortization also included
depreciation on capital additions subsequent to December 26, 1992, the date on
which we wrote off all of our non-current assets in connection with the adoption
of fresh-start reporting. The amortization of the excess of revalued net assets
over equity under fresh-start reporting remained the same in fiscal 1997 as in
fiscal 1996. We are amortizing this amount over a ten-year period.
Interest and debt expense, net of interest income, declined $7.4 million,
or 0.4% as a percentage of net sales, in fiscal 1997. The reduction was
primarily due to a reduction in the amortization of deferred financing costs, a
reduction in short-term interest expense and the favorable impact of lower
outstanding long-term debt and capital lease balances. The decrease in
short-term interest expense reflected a decrease in short-term borrowings
(weighted average of $66.5 million in fiscal 1997 compared to $86.1 million in
fiscal 1996) and a decrease in interest rates under our revolving credit
facility. Our average outstanding long-term debt and capital lease balances
decreased to $41.3 million in fiscal 1997 from $56.3 million in fiscal 1996.
During fiscal 1997, we realized proceeds of $1.9 million from the sale of
our rights under a lease, which resulted in a deferred gain of $1.7 million to
be recognized over a 20-year period. During fiscal 1996, we sold our rights
under several leases for a total of $0.7 million in proceeds and recognized
gains totaling $0.4 million.
In the fourth quarter of fiscal 1997, we recorded charges of $1.6 million
in connection with the closing of two stores, of which $1.0 million was
classified as a store closing charge and $0.6 million was classified as part of
the cost of merchandise sold. Both of the stores closed in February 1998. In the
fourth quarter of fiscal 1996, we recorded charges of $9.7 million in connection
with the closing of 13 stores. The $9.7 million is classified in two line items:
$6.9 million as a store closing charge and $2.8 million as part of cost of
merchandise sold.
We recorded an income tax provision of $19.1 million in fiscal 1997, of
which approximately $0.3 million was paid in cash. In fiscal 1996, we recorded a
non-cash income tax provision of $8.1 million.
As a result of our termination of a revolving credit facility in December
1996, we recorded in fiscal 1996 a non-cash extraordinary charge of
$1.4 million, net of tax benefit of $0.6 million. The tax benefit was recorded
as a reduction of additional paid-in capital. The charge was for the write-off
of the deferred financing costs related to the facility.
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 we are required to meet certain financial covenants after February 2000. In
addition, we are required to maintain a minimum availability of at least
$100.0 million. Our peak borrowing level in fiscal 1998 under this bank credit
facility and a predecessor facility was
22
<PAGE>
$148.3 million. We believe we will have sufficient liquidity to meet our
financial obligations for the foreseeable future.
Our cash position decreased by $22.1 million during fiscal 1998. The
decrease was due primarily to $103.9 million paid out in the acquisition of
Hills (net of cash acquired), $51.6 million of capital expenditures and
$16.3 million in debt and capital lease payments, partially offset by
$111.6 million in cash from operations and $44.9 million of borrowings under our
bank credit facility. Our cash position increased by $11.7 million during fiscal
1997. This increase was primarily due to $56.8 million of cash from operations,
partially offset by $32.9 million of capital expenditures and $15.7 million of
debt and capital lease payments.
Merchandise inventories increased by $197.7 million in fiscal 1998 due to
planned increases and the inclusion of $169.1 million of merchandise inventories
of Hills. The Hills inventories 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 of the
merchandise. Our merchandise inventories increased by $32.8 million in fiscal
1997 as a result of planned increases as well as early receipts of additional
merchandise for our 40th anniversary promotion held in March 1998. We use the
first-in, first-out (FIFO) method of accounting for inventories.
Net fixed assets increased by $288.3 million during fiscal 1998 due to the
inclusion of $230.9 million in net fixed assets of Hills and $77.5 million of
capital expenditures, including $25.9 million in new point-of-sale information
equipment and related software acquired under capital leases. The Hills net
fixed assets were adjusted to their estimated fair value as of the acquisition
date. In fiscal 1997, our net fixed assets increased by $19.7 million.
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.
Accounts payable increased $173.6 million during fiscal 1998 due to
improved payment terms and the inclusion of Hills accounts payable of $127.8
million as of January 30, 1999. Accounts payable increased $34.2 million during
fiscal 1997 due to improved payment terms and an increase in merchandise
receipts in January 1998 over January 1997.
Long-term debt as of January 30, 1999 consisted of borrowings under our
bank credit facility of $44.9 million and $50.9 million of Hills senior notes
that remained outstanding after the acquisition.
Capital lease and financing obligations increased by $165.5 million during
fiscal 1998 due to the inclusion of $147.9 million of capital lease and
financing obligations of Hills and $25.9 million of new capital leases.
We have not paid any cash dividends during the past three fiscal years. The
payment of cash dividends is restricted under the terms of our bank credit
facility.
CAPITAL EXPENDITURES
Capital expenditures for fiscal 1998 were $77.5 million, including
$25.9 million in new point-of-sale information equipment and related software
acquired pursuant to capital leases. The capital expenditure amount also
included, among other items, the opening of six new stores, the remodeling of 22
stores and the upgrading of certain management information systems. Capital
expenditures for fiscal 1997 were $32.9 million and included, among other items,
the opening of nine new stores, the remodeling of nine stores and the upgrading
of certain management information systems, including the installation of new
point-of-sale systems in ten stores.
Capital expenditures are expected to be approximately $210.0 million for
fiscal 1999, primarily for the remodeling and conversion of 150 of the acquired
Hills stores and nine former Caldor stores. We expect to finance conversion
expenditures, including but not limited to, distribution center equipment
purchases, store fixtures and equipment and remodeling expenses, through
internally generated funds and borrowings under
23
<PAGE>
our bank credit facility. We expect to finance a substantial portion of new
point-of-sale systems through capital leases. Land, buildings and improvements
are financed principally through long-term leases.
SEASONALITY
Our business is seasonal in nature, with a large portion of our net sales
occurring in the second half of our fiscal year as a result of the
back-to-school and Christmas shopping seasons. Net sales are highest in the last
fiscal quarter (31.7% in fiscal 1998). The demand for working capital is
heaviest in May, and from August through November, when sufficient merchandise
must be purchased for the spring, back-to-school and Christmas seasons,
respectively.
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
$3.8 million on this program through the end of fiscal 1998 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 systems
development staff who are implementing our year 2000 initiatives to be
$3.5 million to $4.0 million over the life of the project.
24
<PAGE>
BUSINESS
OVERVIEW
Ames is the largest regional discount retailer in the United States. We
currently operate 453 stores in 19 contiguous states in the Northeast, Midwest
and Mid-Atlantic regions, as well as the District of Columbia. Our stores offer
a wide range of both brand name and other quality merchandise for the home and
family at prices below those of conventional department stores and specialty
retailers. They are situated in rural communities, small cities and the suburbs
of larger metropolitan areas and are smaller and more customer friendly than the
stores of most competing "big box" retailers, including the national discount
department store chains.
Our customer base consists primarily of working women with families and
senior citizens. They have an average annual household income between $25,000
and $35,000 and their purchasing decisions are determined primarily by a desire
for low prices and shopping convenience. Our merchandise offerings, prices,
store design and focus on customer service are targeted to meet the needs of
these cost-conscious consumers, who we believe are generally underserved by
other large discount retailers. We reinforce our image and drive customer
traffic by employing a "high/low" pricing strategy that is implemented through
weekly advertising circulars and recurring promotional programs. We believe that
our knowledge of and focus on our target customers have enabled us to develop a
distinct advantage in an increasingly competitive discount retailing
environment.
On December 31, 1998, we acquired Hills Department Stores. Our financial
results for fiscal 1998 include the operations of the 155 acquired Hills stores
for the month of January 1999. In the discussion that follows, however,
references to various percentages of our fiscal 1998 net sales reflect only the
operations and sales of our existing Ames stores.
GROWTH STRATEGY
Since 1994, we have pursued a program to improve our profitability through
vigorous cost containment initiatives, a highly-focused approach to
merchandising and the rationalization of our store base. Our efforts over the
past four years have resulted in an increase in our gross margins from 26.7% to
28.2% and a doubling of our operating margin. During this time period, we also
acquired and successfully integrated 30 new stores, remodeled 60 of our existing
stores and closed 37 stores.
During the past 18 months, we have redirected our focus to enhancing our
revenues, expanding the breadth of our regional market and increasing our
penetration of that market. In addition to our on-going program of store
remodeling, we implemented merchandising and marketing initiatives that in
fiscal 1998 resulted in a 7.2% increase in same-store sales. At the same time,
we embarked on an accelerated program to acquire groups of stores located in
states in which we currently operate or that are contiguous with our existing
regional market.
The Hills acquisition is representative of our growth strategy. It will
significantly increase our revenue and enable us to leverage our administrative
costs over a far larger operating base. This acquisition was particularly
opportunistic for Ames, since it permitted us to obtain 155 well-maintained
store sites in locations that were complementary to our existing locations. The
Hills stores are located primarily in communities with demographics similar to
those of our existing locations. The acquisition expands our selling space by
approximately 70%, substantially increases our presence in five states and
enables us to enter five new states in which we foresee opportunities to add
additional stores to increase our market penetration. The Hills acquisition
enables us to achieve significant economies of scale. By eliminating
substantially all of Hills' administrative and buying functions, we expect to
generate annual savings in excess of $70.0 million, of which approximately
$60.0 million is expected to be realized in fiscal 1999 and the full benefit of
which will be realized beginning in fiscal 2000.
As a further step in the implementation of our growth strategy, we recently
agreed to acquire from Caldor nine stores that we will convert to Ames stores,
as well as a state-of-the-art distribution center.
25
<PAGE>
MERCHANDISING AND CUSTOMER SERVICE
Our mission is to provide our customers a broad selection of quality
merchandise at prices they can afford in a shopping environment that is friendly
and convenient. Our merchandising strategy is targeted to our customer base, and
we believe that this merchandising strategy has enabled us to develop a distinct
competitive advantage in serving our targeted customer base.
Ames sells merchandise in three major categories: home lines, softlines and
hardlines. The following table sets forth the types of merchandise offered
within each of these three categories and the percentage of our total sales in
fiscal 1998 (exclusive of sales in January attributable to the acquired Hills
stores) attributable to each category:
HOME LINES (39%)
o Domestics, such as sheets, towels and bath accessories
o Window treatments
o Home entertainment products
o Small appliances
o Housewares
o Ready-to-assemble furniture
o Patio furniture
o Crafts
SOFTLINES (30%)
o Women's apparel, consisting primarily of non-fashion basic items, sportswear
and intimates
o Men's workwear, denims, fleece goods, hosiery and underwear
o Children's apparel
o Jewelry
HARDLINES (27%)
o Health and beauty care products
o Toys
o Hardware and paints
o Automotive supplies
o Sporting goods
o Stationery
o Seasonal items, such as Christmas and other holiday decorations
In addition, all Ames stores include a shoe department, operated by a licensee,
that accounted for approximately 4% of our total sales in fiscal 1998.
A significant portion of our net sales is derived from the sale of products
that bear readily-recognized brand names, including Cannon(Registered),
Coleman(Registered), Dickies(Registered), Fisher-Price(Registered), Fruit of the
Loom(Registered), General Electric(Registered), Hanes(Registered),
Hasbro(Registered), Kodak(Registered), Magnavox(Registered), Mattel(Registered),
Proctor-Silex(Registered), Rider(Registered), Rubbermaid(Registered),
Sunbeam(Registered), Timex(Registered) and Wrangler(Registered).
Women's apparel is the only product line that accounts for more than 10% of
our sales, generating approximately 13% of our fiscal 1998 net sales. We carry
predominantly staple, non-fashion items of basic women's apparel, including
outerwear, sportswear and intimates, with a particularly broad selection of
merchandise in "plus" sizes for the larger woman. Similarly, our selection of
men's apparel is predominantly staple, non-fashion items that women frequently
purchase for the men in their families and that are most commonly sought by men
within our target customer base. We believe that our focus on basic apparel
limits our exposure to risks associated with changing fashion trends.
Our hardlines merchandise also consists primarily of products that are most
frequently purchased by women, such as health and beauty care products, toys,
stationery, gift wrap and holiday decorations. We concentrate our hardware
offerings on basic home repair and maintenance items, many of which are
purchased by women. Although we sell a number of hardware items and automotive
supplies that are more commonly purchased by men, our offerings of these
products are more limited than those of other large discount retailers.
Our home lines, which also consist primarily of products that are purchased
by women, include a "Crafts & More(Registered)" department that features what we
believe is the largest selection of crafts offered by any non-specialty retailer
in the United States. The crafts department has become a destination shop for
Ames' customers, and accounted for approximately 4% of our fiscal 1998 net
sales.
In certain of our markets, we are able to customize or "localize" our
merchandising. In our stores located in college towns, we offer a larger
assortment of the items most frequently desired by students for
26
<PAGE>
their dormitory rooms, as well as stationery supplies, jeans, sweatshirts,
athletic apparel and similar products. In our stores located in resort or
vacation communities, we feature broader selections of such seasonal items as
beach and camping supplies, and we continue to stock those items throughout the
duration of the related vacation season. This micromarketing strategy drives
customer traffic at those stores and develops and improves the loyalty of their
customer base.
In addition to offering a merchandise selection that is specifically
tailored to the needs and preferences of our target customers, we strive to make
each customer's shopping experience pleasant and convenient. We offer an
extensive layaway program that accounted for approximately 6% of our fiscal 1998
net sales. We have a fully-staffed customer service desk at a location away from
the most heavily trafficked areas in the store to afford customers greater
privacy. We also have implemented an "A+ Customer Service Program," which
encourages our in-store personnel to enhance customer satisfaction with a
well-defined four-step method: smile, greet the customer, meet the customer's
needs and thank the customer for shopping at Ames. Since the introduction of
this program in 1995, our customer comment scores have consistently improved.
MARKETING
We use a "high/low" promotional pricing strategy to attract customers to
our stores by periodically offering greater discounts on selected items or
categories of merchandise while maintaining our regular discount prices on all
other merchandise. In addition to increasing customer traffic, the "high/low"
strategy provides us greater control over margins and inventory levels by
allowing us to quickly adjust the number and mix of deeply discounted items and
increase or decrease our average pricing discount. We are also able to tailor
our selection of more heavily discounted products to customer demographics and
purchasing patterns in individual store locations.
Our main marketing theme, "Bargains by the Bagful(Registered)," is designed
to emphasize our value pricing. We support the "Bargains by the
Bagful(Registered)" theme through several promotional programs, including
"Special Buy" and "55Gold(Registered) Savings" programs, as well as periodic
"event" sales.
o Our "Special Buy" program allows us to offer selected items of
recognizable brand name and other quality merchandise to consumers at
deep discounts, thereby providing the customer with readily recognizable
values. "Special Buy" items are generally not actively advertised.
Instead, we use special signage and fixtures to make "Special Buy"
merchandise easily recognizable to customers, who are often drawn to our
stores as a result of their desire to discover the latest "Special Buy"
offerings. We are able to offer these deep discounts because of our
ability to react quickly to buying opportunities for close-out and
end-of-run products that are popular with our customers. Apparel
comprises approximately 90% of the merchandise offered through our
"Special Buy" program, although "Special Buy" items also are offered in
the hardlines and home lines product categories. Sales of "Special Buy"
merchandise accounted for approximately 4% of Ames' net sales in fiscal
1998.
o Our "55Gold(Registered) Savings" program provides a 10% discount on all
merchandise, including sale and "Special Buy" items, for consumers aged
55 and older who present a "55Gold(Registered) Savings" card when
shopping on Tuesdays. Since its inception in late 1994, over two million
people have joined the program and Tuesday has moved from being the
lowest to the second highest selling day in the week. During fiscal 1998,
the "55Gold(Registered) Savings" program generated sales of approximately
$250.0 million compared to approximately $238.0 million in fiscal 1997
and the number of active cardholders increased to 1.4 million from
1.2 million over the same period. We expect an additional 1.3
million cardholders by September 1999, as a result of the Hills and
Caldor acquisitions as well as the increasing popularity of this program.
o Our periodic "event" sales are heavily advertised, vendor-supported
promotions of selected categories of merchandise as well as promotions
that are intended to capitalize on seasonal shopping trends. Examples
include our "Baby Sale," "Housewares Spectacular," "Truckload Sale,"
"Patio Plaza," "Shoe Sale" and "Underwear Fair." Our most successful
special sale promotions include the "MarchMania Sale," the October "Home
Sale" and the November "Ames Biggest Toy Sale," which is designed to
attract Christmas shoppers. Because of the substantial increase in unit
volume generated
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<PAGE>
by these "event" sales, they are supported by many of our major vendors,
either through gross margin allowances or cooperative advertising.
We reinforce Ames' "Bargains by the Bagful(Registered)" theme through
extensive use of weekly full-color newspaper circulars. We have found that our
customers tend to compare merchandise offerings in different Sunday newspaper
circulars. They effectively "shop on the kitchen table," deciding what they are
going to buy and where they will buy it before they leave their homes. We
distribute 53 newspaper circulars per year, with an average weekly circulation
of 10.2 million households in 1998. Upon completion of our conversion of the
Hills and Caldor stores, we expect our weekly circulars to reach approximately
17.0 million households by September 1999. We estimate that approximately 45% of
our net sales in fiscal 1998 were generated by these circulars.
STORE LAYOUT AND DESIGN
Ames' stores, which range from 38,000 to 70,000 square feet of selling
space, are smaller and we believe more customer friendly than those of most
competing "big box" retailers, particularly the national discount store chains.
Their smaller size appeals to Ames' target customer base of working mothers and
senior citizens, who prefer an easy-to-shop, convenient store environment. In
1994, we introduced a new store prototype. The prototype features an open floor
plan and wide aisles that allow customers to see the entire store at a glance.
Bright, attractive signage and "soft" corners highlight key departments and make
finding the right department easy. The home lines department, our largest
merchandise category, typically spans the back wall of the store, with
promotional pallet and bin displays bordering the main aisle. Promotional items
are placed throughout the store near similar merchandise.
Set forth below is the prototype floor plan of our new and remodeled
stores:
[FLOOR PLAN GRAPHIC]
This prototype has generally increased our return on investment in our
remodeled stores or, where the stores have been subject to increasing
competition, significantly enhanced their competitiveness. Approximately 90 of
our existing stores currently feature this design format and we are continuing
to remodel our remaining stores to this pattern on an as-needed basis. All of
the acquired Hills stores that we are converting to Ames stores, as well as the
nine Caldor stores that we expect to acquire, will incorporate this layout, and,
by the end of fiscal 1999, approximately two-thirds of our total square footage
of selling space will be in this format.
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<PAGE>
STORE LOCATIONS
After having already closed two of the acquired Hills stores, we currently
operate 453 stores located in the Northeast, Midwest and Mid-Atlantic regions.
The Hills acquisition extended our presence into Illinois, Indiana, Kentucky,
North Carolina and Tennessee, where we previously had no stores, and
substantially strengthened our market penetration in several states in which we
had existing operations, including New York, Ohio, Pennsylvania, Virginia and
West Virginia.
The following table sets forth the locations of our stores after giving
prospective effect to our previously announced closing of seven Ames stores and
an additional three Hills stores and our acquisition of nine Caldor stores:
<TABLE>
<CAPTION>
NUMBER OF STORES
--------------------------------------------------
AMES HILLS CALDOR COMBINED
---- ----- ------ --------
<S> <C> <C> <C> <C>
Pennsylvania 54 45 -- 99
New York 70 21 -- 91
Ohio 7 46 -- 53
Massachusetts 33 1 2 36
Maryland 23 1 -- 24
Maine 23 -- -- 23
Connecticut 15 -- 7 22
New Hampshire 19 -- -- 19
West Virginia 6 13 -- 19
Virginia 6 8 -- 14
New Jersey 12 -- -- 12
Vermont 12 -- -- 12
Indiana -- 9 -- 9
Rhode Island 8 -- -- 8
Delaware 4 -- -- 4
Tennessee -- 3 -- 3
District of Columbia 1 -- -- 1
Illinois -- 1 -- 1
Kentucky -- 1 -- 1
North Carolina -- 1 -- 1
---- --- -- ----
Total: 293 150 9 452
</TABLE>
All but seven of our stores are leased. The store leases expire at various
dates through 2023 with an average remaining lease term of approximately
26 years, inclusive of renewal options. The leases generally have one or more
renewal options, each permitting an extension for at least five years. The
leases typically provide for fixed annual rentals, payment of certain taxes,
insurance and other charges and the payment of additional rentals based on a
percentage of sales in excess of certain fixed amounts.
PURCHASING
We buy merchandise from approximately 3,200 vendors, 93% of which are
located in the United States. No single vendor accounted for more than 1.3% of
our purchases in fiscal 1998 and there is no current or anticipated problem with
respect to the availability of merchandise. Merchandise is purchased centrally
for all stores by buyers who are based at Ames' headquarters.
We work actively with our vendors to reduce costs and improve the
efficiency of our supply chain. Nearly 1,600 vendors participate in our
electronic ordering and invoicing program, which is designed to automate the
inventory purchasing, delivery billing and payment process, reduce the number of
out-of-stock items and reduce the cycle time of product deliveries.
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<PAGE>
DISTRIBUTION
We operate distribution centers in Leesport, Pennsylvania, Mansfield,
Massachusetts, and, as a result of the Hills acquisition, Columbus, Ohio, which
aggregate approximately three million square feet. In addition, we will shortly
acquire Caldor's state-of-the-art 649,000 square foot distribution facility in
Westfield, Massachusetts. We also are using, on a short term basis, warehouse
space in Elmira, New York. Merchandise is shipped by vendors either directly to
our stores or to our distribution centers, which then make deliveries to the
stores using our own fleet of trucks.
We have a 5:00 am delivery program to ensure that merchandise is delivered
to our stores before business hours. This delivery policy, together with our
investments in in-store automation, has increased the efficiency of our store
stocking and delivery and reduced the number of our out-of-stock items. An
improved in-stock position enables us to consistently provide customers with
merchandise in our stores upon demand.
MANAGEMENT INFORMATION SYSTEMS
In fiscal 1998, we invested approximately $35.0 million in state-of-the-art
technology for hardware, software and communications equipment to automate our
store operations. This investment included new point-of-sale devices, office
equipment to automate the office functions at each store as well as equipment to
improve the receipt and stocking of merchandise at the stores.
Our point-of-sale systems have significantly reduced the amount of time
customers spend on the checkout line, streamlined layaway and credit
transactions, facilitated our targeted promotional activities and increased
employee productivity. We are working on development of programs and tools to
evaluate and use customer information derived from our "55Gold(Registered)
Savings" program to enhance our ability to selectively market to these customer
groups.
Our new store office systems are being used to automate many manual, labor
intensive processes including cash counting, time keeping, store opening and
closing routines and other clerical tasks. In the receiving area, the new
systems are being used to speed the receipt of merchandise and its movement to
the sales floor. Additionally, these systems have significantly improved the
process by which we send customer returns to a central return center in eastern
Pennsylvania.
Through these store automation systems we can capture valuable financial,
merchandising, logistics and shrinkage information and transmit this information
to our corporate headquarters on a daily basis, enabling us to more effectively
operate our business. These systems are being included in all of the former
Hills and Caldor stores that we are converting to Ames stores.
COMPETITION
We operate in an extremely competitive environment. Many of our stores are
located in smaller communities and, in some cases, are the largest non-food
retail store in their market area. They compete, however, with many smaller
stores offering a similar range of products. Although Ames is the largest
regional discount retailer in the United States, we are still considerably
smaller in terms of our total number of stores, sales and earnings than the
three leading national chains: Wal-Mart, Kmart and Target Stores. Each of these
chains, as well as other regional operators, currently operates stores within
our regional market and competes with us for customers and potential store
locations. We currently anticipate a further increase in competition from these
national discount store chains. The following table illustrates the proximity
between the Ames and Hills stores and stores that are operated by various of our
major competitors.
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<PAGE>
COMPETING STORE LOCATIONS
<TABLE>
<CAPTION>
DISTANCE FROM NEAREST AMES STORE
3 MILES 5 MILES 10 MILES
------- ------- --------
<S> <C> <C> <C>
Wal-Mart....................................... 73 214 349
Kmart.......................................... 84 261 320
Bradlees....................................... 16 21 35
Value City..................................... 2 32 32
Target......................................... 12 23 37
Meijer......................................... 15 17 17
</TABLE>
Our merchandising focus is primarily directed to consumers who we believe
are underserved by the major national chains. Although this approach combined
with our smaller store size has enabled us to compete effectively with these
chains and operate profitably in proximity to their stores, we remain vulnerable
to the marketing power and high level of consumer recognition of the major
national discount chains.
EMPLOYEES
At March 31, 1999, we employed approximately 36,400 people (including
approximately 14,800 former Hills employees). Approximately 32,000 of our
employees work in various capacities within our stores, approximately 2,400 are
employed in our distribution centers and the balance is based at our corporate
and regional offices. With the exception of approximately 1,350 employees at our
distribution centers in Leesport, Pennsylvania, and Mansfield, Massachusetts,
who are covered by collective bargaining agreements that expire in December 1999
and December 2000, respectively, none of our employees is represented by a
union.
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<PAGE>
MANAGEMENT
The following table sets forth information with respect to the executive
officers and directors of Ames:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------- --- ----------------------------------------------------------------------
<S> <C> <C>
Joseph R. Ettore............. 59 President and Chief Executive Officer
Denis T. Lemire.............. 51 Executive Vice President and Chief Operating Officer
Rolando de Aguiar............ 50 Executive Vice President and Chief Financial and Administrative
Officer
James J. Aglio, Jr........... 46 Senior Vice President and General Merchandise Manager, Home Lines
Lisa Bachmann................ 37 Senior Vice President, Allocation and Planning
Eugene E. Bankers............ 59 Senior Vice President, Marketing
Richard L. Carter............ 50 Senior Vice President, Human Resources
David S. Covitz.............. 57 Senior Vice President and General Merchandise Manager, Hardlines
Paul C. Lanham............... 41 Senior Vice President, Chief Information Officer
David H. Lissy............... 55 Senior Vice President, General Counsel and Corporate Secretary
Alfred B. Petrillo, Jr....... 56 Senior Vice President, Store Planning
Grant C. Sanborn............. 47 Senior Vice President, Store Operations
Sanford H. Sansavera......... 50 Senior Vice President and General Merchandise Manager, Softlines
John Tempesta................ 50 Senior Vice President, Logistics
James A. Varhol.............. 43 Senior Vice President, Asset Protection
Paul M. Buxbaum.............. 44 Director and Chairman of the Board
Francis X. Basile............ 66 Director
Alan Cohen................... 62 Director
Richard M. Felner............ 63 Director
Sidney S. Pearlman........... 67 Director
Laurie M. Shahon............. 47 Director
</TABLE>
Joseph R. Ettore has been President, Chief Executive Officer and a director
of Ames since he joined our company in June 1994. Mr. Ettore has nearly
30 years of experience in the retailing industry. From July 1993 to June 1994,
he was President, Chief Executive Officer and a director of Jamesway Corp., a
regional discount store chain based in Secaucus, New Jersey, where he had
previously served in various merchandise management positions from 1982 to 1989.
He served as President, Chief Operating Officer and a director of Stuarts
Department Stores Inc., a regional discount store chain based in Franklin,
Massachusetts, from October 1989 until October 1992, when he was promoted to
President, Chief Executive Officer and Chairman of the Board of that company.
Mr. Ettore remained a director of Stuarts until May 1994.
Denis T. Lemire joined Ames in August 1994 as Executive Vice President,
Merchandising and was promoted to Executive Vice President and Chief Operating
Officer in March 1999. Mr. Lemire has nearly 25 years of retailing experience.
He served as President and Chief Operating Officer of Stuarts Department Stores
Inc. from November 1993 to August 1994 and as Senior Vice President,
Merchandising, of Stuarts from April 1990 to November 1993. From 1989 to 1990,
Mr. Lemire was a General Merchandise Manager at American Eagle Outfitters, Inc.,
a subsidiary of Retail Ventures, Inc. From 1987 to 1989, he served as President
of the Buying Network. Prior thereto, Mr. Lemire served for twelve years with
Marshalls, formerly a division of Melville Corp., including as Vice President
and General Merchandise Manager, Women's Apparel, from 1983 to 1987 and as
Merchandising Manager from 1978 to 1983.
Rolando de Aguiar joined Ames as Executive Vice President and Chief
Financial Officer in April 1998 and was promoted to Executive Vice President and
Chief Financial and Administrative Officer in March 1999. From March 1997 to
March 1998, he was President of Aguiar Associates, a retailing consulting firm.
From October 1994 to January 1997, he served as Executive Vice President and
Chief Administrative Officer of Gruma S.A. de C.V., a leading packaged food
producer in Mexico, and from September 1991 to August 1994, he held senior
financial positions at Sears, Roebuck & Co., including Vice President and
Controller--
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<PAGE>
Merchandise Group for Sears' U.S. operations and, prior thereto, Vice President,
Planning and Development at Sears in Mexico. Mr. de Aguiar previously served for
ten years at Occidental Petroleum Corporation in various management positions,
including Manager of Mergers and Acquisitions, Chief Financial Officer of the
Minerals Division and Director of Internal Audit for Occidental Petroleum's
worldwide operations.
James J. Aglio, Jr. became Senior Vice President, General Merchandise
Manager, of Ames' Home Lines Division in June 1998. Since joining Ames in July
1974, he has served in various merchandising positions, including as a buyer, a
Divisional Merchandise Manager, Assistant Vice President, and Vice President of
the Home Lines Division.
Lisa Bachmann joined Ames in August 1997 as Vice President, Allocation and
Planning, and was named Senior Vice President, Allocation and Planning, in
December 1998, when she also assumed responsibility for the Merchandising
Information Office. From 1983 to 1997, she held several management positions
with the Casual Corner Group, Inc., including Senior Merchandise Planner at Ups
N' Downs, Director--Planning & Allocation at the Capezio Division, Vice
President--Planning & Allocation, Casual Corner Division, and Vice
President--Planning & Allocation for the Casual Corner and Petite Sophisticate
Divisions.
Eugene E. Bankers joined Ames as Senior Vice President, Marketing, in
January 1994. Prior to joining Ames, he served for nearly 14 years in several
capacities at ShopKo Stores, Inc., including Vice President, Communications and
Investor Relations from 1991 to 1993, Vice President of Advertising, Public
Relations and Sales Promotion from 1986 to 1990, Vice President Planning and
Real Estate from 1984 to 1986 and Divisional Merchandise Manager from 1981 to
1984.
Richard L. Carter joined Ames in February 1993 as Senior Vice President,
Human Resources. From May 1978 to 1993 Mr. Carter held a variety of senior
management positions with The May Department Stores Company, most recently as
Senior Vice President, Human Resources for G. Fox Department Stores in Hartford,
Connecticut. While with May, he also served as Senior Vice President, Human
Resources, for Hahne's Department Stores in New Jersey and as Director of
Executive Development at May's corporate headquarters in St. Louis, Missouri.
Mr. Carter began his career in 1978 at O'Neil's Department Stores, where he
served in a variety of Human Resources positions.
David S. Covitz joined Ames in November 1989 as Divisional Merchandise
Manager and subsequently was promoted to the position of Vice President, General
Merchandise Manager. Mr. Covitz was named to his current position as Senior Vice
President and General Merchandise Manager, Hardlines, in June 1998. Prior to
joining Ames he held positions in the buying division at Filene's and as Vice
President/Divisional Merchandise Manager at Gold Circle Stores.
Paul C. Lanham joined Ames in October 1994 as Vice President, Planning and
Allocation. He was named Senior Vice President, Management Information Systems,
in March 1995, and assumed his current position as Senior Vice President and
Chief Information Officer in March 1996. Prior to joining Ames Mr. Lanham held a
variety of positions in the retailing industry, including Director of Inventory
Management at Brookstone, Inc., Distribution Manager and Regional Merchandise
Manager at Payless Shoesource, Inc., and Systems Analyst, Distributor and Store
Manager at The Gap Inc.
David H. Lissy joined Ames in June 1990 and was named Senior Vice
President, General Counsel and Corporate Secretary in December 1992. Prior to
joining Ames, Mr. Lissy served in senior positions in a number of other major
corporations, including United Brands and Gulf & Western, and in the federal
government, where from 1969 to 1977 he held positions including Special
Assistant to the President, Special Assistant to the Secretary of State and
Executive Secretary of the Department of Health Education and Welfare. Mr. Lissy
has also owned Samuel Lehrer & Co., Inc., a wholesaler of fine quality fabrics,
since 1988.
Alfred B. Petrillo, Jr. joined Ames in October 1995 as Senior Vice
President, Store Planning. Prior to joining Ames, Mr. Petrillo was Senior
Vice-President, Store Planning, Construction, Visual Merchandising,
Planogramming, Maintenance and Energy at Jamesway. He joined Jamesway in 1969 as
Director of Store Planning and Construction. He was promoted to Assistant Vice
President, Store Planning and Construction in 1973 and served as Vice President,
Store Planning, Construction, Maintenance and Energy from 1976 to 1995.
Mr. Petrillo began his career in 1962 as an architectural designer and draftsman
at the firm of John Scacchetti, AIA.
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<PAGE>
Grant C. Sanborn joined Ames in April 1971 as an assistant manager and was
named Senior Vice President, Store Operations, in January 1995. Since joining
Ames, Mr. Sanborn has held a wide variety of field store operations positions,
including Store Manager at seven locations, District Manager in both northern
Maine and Syracuse, New York, Assistant Regional Director and Regional
Operations Director. In July 1991, Mr. Sanborn joined Ames' corporate
headquarters as Director of Operations, with responsibility for remodelling,
merchandise presentation and store planning, construction and facilities. In
October 1993, he was promoted to Vice President, Store Operations. In January
1995 he became responsible for Ames' entire field organization.
Sanford H. Sansavera joined Ames in May 1993 as Divisional Merchandise
Manager--Jewelry and assumed additional responsibility for Accessories in August
1994. He was promoted to Senior Vice President, General Merchandise
Manager--Softlines, in June 1998. Prior to joining Ames, Mr. Sansavera spent
21 years with The May Department Stores Company in a variety of positions,
including General Manager--Merchandise, Branch Store Divisional Manager,
Department Manager and Store Manager.
John Tempesta joined Ames in February 1999 as Senior Vice President,
Logistics, and is responsible for all aspects of Ames' logistics and
distribution network. From 1994 to 1999, Mr. Tempesta was with Caldor
Corporation, most recently as Senior Vice President, Distribution/Logistics.
From 1988 to 1993, Mr. Tempesta was a Senior Vice President, Catalogue
Operations, at Chadwick's of Boston, a division of TJX Companies, Inc. From 1983
to 1988, he was Senior Vice President, Operations, at Filene's Basement. He also
has held management positions at Hit or Miss and Zayre Corporation.
James A. Varhol joined Ames in August 1995 as Senior Vice President, Asset
Protection, and is responsible for all aspects of corporate, store and
distribution center loss prevention and safety initiatives. From 1977 to 1995,
Mr. Varhol was employed at Jamesway Corp., where he served in various positions,
including eight years as Vice President of Loss Prevention.
Paul M. Buxbaum became a director of Ames in 1992 and Chairman of its Board
of Directors in 1993. He has been President of Buxbaum Group & Associates, Inc.,
a nationwide retail consulting company since 1984, and since 1998 has been Chief
Executive Officer of Global Health Sciences, Inc., a developer, manufacturer and
packager of vitamins, herbs, dietary supplements and protein powders. He is also
a director of Lamonts Apparel, Inc. and was formerly a director of Herbalife
International, Inc. and Richmond Gordman 1/2 Price Stores.
Francis X. Basile has been a director of Ames since 1992. Prior to his
retirement in January 1992, he served as Chairman and Chief Executive Officer of
the CIT Group/Factoring, Inc. from 1986. He also served as a director and
Chairman of the National Commercial Finance Association and a member of its
Executive Committee.
Alan Cohen has been a director of Ames since 1992. He has been Chairman of
Alco Capital Group, Inc., a diversified financial service and investment
company, since 1975, and Chief Executive Officer of Russ Toggs, Inc., since
November 1993. He also serves as Chairman of the Board of Alco Cadillac-Pontiac
Sales Corp., and formerly served as court-appointed trustee of Tower Financial
Corporation and as Chief Executive Officer of Health-Tex, Inc.
Richard M. Felner has been a director of Ames since 1994. Since 1991, he
has been the head of Richard M. Felner Associates, a consulting firm
specializing in retail and commercial real estate. From 1985 to 1991, he was
Vice President of Real Estate and Corporate Development, and a director of Worth
Stores Corporation, a subsidiary of Reitmans Ltd., Canada's largest women's
apparel retailer.
Sidney S. Pearlman has been a director of Ames since 1992. He has been
retired since May 1991, after 40 years in the retailing industry, including
service as President of three department store chains and as Senior Vice
President/General Merchandise Manager of Younkers, Inc. from 1987 to March 1991.
Laurie M. Shahon has been a director of Ames since 1995. Since January
1994, she has served as President of the Wilton Capital Group, which invests as
a principal in later-stage venture capital companies and medium-sized management
buyouts. From April 1988 to December 1993, she served as a Managing Director of
"21" International Holdings, Inc., a privately-owned holding company. She is
also a director of One Price Clothing Stores, Inc. and Homeland Holdings
Corporation. Ms. Shahon has informed Ames that she will not stand for reelection
at the 1999 annual meeting.
34
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
The current certificate of incorporation of Ames authorizes 40,000,000
shares of common stock, par value $.01 per share. As of March 31, 1999, the
outstanding capital stock of Ames consisted of 24,021,149 shares of common stock
held by 6,487 stockholders of record. The following summaries of certain
provisions of the common stock do not purport to be complete and are subject to,
and qualified in their entirety by, the provisions of the certificate of
incorporation and bylaws of Ames, which are incorporated by reference as
exhibits to the Registration Statement of which this prospectus forms a part,
and by applicable law. Ames is a Delaware corporation and is subject to the
Delaware General Corporation Law (the "DGCL").
COMMON STOCK
Holders of common stock are entitled to one vote per share on all matters
to be voted upon by the stockholders of Ames, and the holders of common stock
vote together as a single class on all matters to be voted upon by the
stockholders. The holders of common stock are entitled to receive ratably such
dividends when, as and if declared from time to time by the Board of Directors
out of the assets of Ames available for the payment of dividends to the extent
permitted by law, subject to preferences that may be applicable to any
outstanding preferred stock and any other provisions of Ames' certificate of
incorporation. Ames does not, however, anticipate paying any cash dividends in
the foreseeable future.
Holders of common stock have no preemptive or other rights to subscribe for
additional shares. No shares of common stock are subject to redemption or a
sinking fund. Holders of common stock also do not have cumulative voting rights,
which means the holder or holders of more than half of the shares voting for the
election of directors can elect all the directors then being elected. In the
event of any liquidation, dissolution or winding up of Ames, whether voluntary
or involuntary, after payment of the debts and other liabilities of Ames, and
subject to the rights of holders of shares of preferred stock, holders of common
stock are entitled to share pro rata in any distribution of remaining assets to
the stockholders. All of the outstanding shares of common stock are, and the
shares offered hereby will be, fully paid and nonassessable. See the information
set forth elsewhere in this prospectus under the heading "Dividend Policy."
PREFERRED STOCK
The Board of Directors is authorized, without further vote or action by the
holders of common stock, to issue an aggregate of 3,000,000 shares of preferred
stock, par value $.01 per share, in one or more series and to designate the
voting powers (but no greater than one vote per share), preferences,
designations, limitations and relative participating, optional, redemption,
conversion, exchange or other special rights, qualifications, limitations or
restrictions of each series, and the number of shares in each series, to the
full extent permitted by law. The Board of Directors may also designate dividend
rights and preferences in liquidation.
No shares of preferred stock are outstanding and Ames has no plans to issue
a new series of preferred stock. It is not possible to state the effect of the
authorization and issuance of any series of preferred stock upon the rights of
the holders of common stock until the Board of Directors determines the specific
terms, rights and preferences of such a series of preferred stock. However, such
effects might include, among other things, restricting dividends on the common
stock, diluting the voting power of the common stock or impairing the
liquidation rights of such shares without further action by holders of common
stock. In addition, under certain circumstances, the issuance of preferred stock
may render more difficult or tend to discourage a merger, tender offer or proxy
contest, the assumption of control by a holder of a large block of Ames'
securities or the removal of incumbent management, which could thereby depress
the market price of Ames' common stock.
COMMON STOCK WARRANTS
As of March 31, 1999, we had outstanding 100,000 warrants for the purchase
of shares of common stock. Each warrant entitles the holder to purchase one
share of common stock at any time prior to December 30, 2000. The exercise price
is $5.92 per share. During fiscal 1998, 100,000 warrants were exercised.
35
<PAGE>
The exercise price of the warrants is subject to adjustment upon the
occurrence of certain events, including, among other things, the payment of a
stock dividend, a merger or consolidation and the issuance for consideration of
rights, options or warrants (other than rights to purchase common stock issued
to stockholders generally) to acquire our common stock. A holder of any of the
warrants described above will not be entitled to any rights as a stockholder of
Ames, including, without limitation, the right to vote with respect to the
shares of our common stock, until such holder has exercised the warrants.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the DGCL provides the power to indemnify any director or
officer acting in his capacity as our representative who was, is or is
threatened to be made a party to any action or proceeding for expenses,
judgments, penalties, fines and amounts paid in settlement in connection with
that action or proceeding. The indemnity provisions apply whether the action was
instituted by a third party or arose by or in our right. Generally the only
limitations on our ability to indemnify our director or officer is that the
director or officer acted in good faith in a manner reasonably believed to be
in, or not opposed to, the best interests of the corporation and, with respect
to any criminal action, that the director or officer has no reasonable cause to
believe that his conduct was unlawful.
Our bylaws provide a right to indemnification to the full extent permitted
by law for expenses, attorney's fees, judgments, fines and amounts paid in
settlement actually and reasonably incurred by any director or officer whether
or not the indemnified liability arises or arose from any threatened, pending or
completed proceeding by or in our right by reason of the fact that such director
or officer is or was serving as our director or officer at our request, as a
director, officer, partner, fiduciary or trustee of another corporation,
partnership, joint venture, trust, employee benefit plan or other enterprise,
unless a court finally determines that the director or officer did not act in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation and, with respect to any criminal action, that the
director or officer has no reasonable cause to believe that his conduct was
unlawful. Our bylaws provide for the advancement of expenses to an indemnified
party upon receipt of an undertaking by the party to repay those amounts if it
is finally determined that the indemnified party is not entitled to
indemnification.
Our bylaws authorize us to take steps to ensure that all persons entitled
to indemnification are properly indemnified, including, if the board of
directors so determines, purchasing and maintaining insurance.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers or persons controlling the
registrant pursuant to the foregoing provisions, the registrant has been
informed that in the opinion of the Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
LIMITATION OF LIABILITY
Our certificate of incorporation provides that none of our directors shall
be personally liable to us or our stockholders for monetary damages for a breach
of fiduciary duty as a director, except for liability:
o for any breach of that person's duty of loyalty;
o for acts or omissions not in good faith or involving intentional
misconduct or a knowing violation of law;
o for the payment of unlawful dividends and certain other actions
prohibited by Delaware corporate law; and
o for any transaction resulting in receipt by that person of an
improper personal benefit.
We maintain directors and officers' liability insurance to provide
directors and officers with insurance coverage for losses arising from claims
based on breaches of duty, negligence, error and other wrongful acts. At
present, there is no pending litigation or proceeding, and we are not aware of
any threatened litigation or proceeding, involving any director or officer where
indemnification will be required or permitted under our certificate of
incorporation or our bylaws.
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<PAGE>
SECTION 203 OF THE DELAWARE GENERAL CORPORATION LAW
Ames is a Delaware corporation subject to Section 203 of the DGCL
("Section 203"). Section 203 provides in general that a stockholder acquiring
more than 15% of the outstanding voting stock of a corporation subject to
Section 203 (an "Interested Stockholder") but less than 85% of such stock may
not engage in certain Business Combinations (as defined in Section 203) with the
corporation for a period of three years subsequent to the date on which the
stockholder became an Interested Stockholder unless (i) prior to such date the
corporation's board of directors approved either the Business Combination or the
transaction in which the stockholder became an Interested Stockholder or (ii)
the Business Combination is approved by the corporation's board of directors and
authorized by a vote of at least 66 2/3% of the outstanding voting stock of the
corporation not owned by the Interested Stockholder. A "Business Combination"
includes mergers, asset sales and other transactions resulting in financial
benefit to a stockholder. Section 203 could prohibit or delay mergers or other
takeover or change of control attempts with respect to Ames and, accordingly,
may discourage attempts that might result in a premium over the market price for
the shares held by stockholders.
CERTAIN ANTI-TAKEOVER PROVISIONS
The ability of the Board of Directors to establish the rights of, and to
issue, substantial amounts of preferred stock without the need for stockholder
approval, may have the effect of discouraging, delaying or preventing a change
of control. Newly created preferred stock may be used, among other things, to
establish voting impediments to a change of control or to dilute the stock
ownership of holders of common stock who are seeking to obtain control.
Ames also has a stock purchase rights agreement, commonly known as a
"poison pill." Under the terms of the rights agreement, one purchase right, with
an initial exercise price of $14.00, is attached to each share of Ames' common
stock outstanding as of, or issued subsequent to, November 30, 1994 but prior to
the occurrence of certain events. The rights become exercisable in the event
that a person or group either acquires 15% or more of Ames' outstanding voting
stock or announces an intention to acquire 20% or more of such stock. Once
exercisable, each right will, depending on the circumstances, entitle a holder,
other than the potential acquiror, to purchase shares of either Ames or an
acquiring company having a market value equal to twice the exercise price. The
rights agreement was adopted to assure that all of Ames' stockholders receive
full value for their investment in the event of stock accumulation by a
potential acquiror. Unless previously redeemed by Ames, the rights will expire
on November 29, 2004.
These anti-takeover measures are among the special risks identified under
the heading "Risk Factors" elsewhere in this prospectus.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is ChaseMellon
Shareholder Services, L.L.C.
37
<PAGE>
U.S. TAX CONSIDERATIONS APPLICABLE
TO NON-U.S. HOLDERS OF THE COMMON STOCK
The following is a general discussion of certain U.S. federal income and
estate tax consequences of the ownership and disposition of common stock
applicable to Non-U.S. Holders who acquire and own shares of common stock as
capital assets within the meaning of section 1221 of the Internal Revenue Code
of 1986, as amended (the "Code"). A "Non-U.S. Holder" is any person other than
(i) a citizen or resident of the United States, (ii) a corporation or
partnership created or organized in the United States under the laws of the
United States or of any state, (iii) an estate whose income is includable in
gross income for United States federal income tax purposes regardless of its
source, or (iv) a trust if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the trust.
The discussion does not consider specific facts and circumstances that may
be relevant to a particular Non-U.S. Holder's tax position (including the fact
that, in the case of a Non-U.S. Holder that is a partnership, the U.S. tax
consequences of holding and disposing of shares of common stock may be affected
by certain determinations made at the partner level) and does not consider U.S.
state and local or non-U.S. tax consequences. Further, it does not consider
Non-U.S. Holders subject to special tax treatment under the federal income tax
laws (including banks and insurance companies, dealers in securities, and
holders of securities held as part of a "straddle," "hedge," or "conversion
transaction"). The following discussion is based on provisions of the Code and
administrative and judicial interpretations as of the date hereof, all of which
are subject to change, possibly on a retroactive basis, and any change could
affect the continuing validity of this discussion.
THE FOLLOWING SUMMARY IS INCLUDED HEREIN FOR GENERAL INFORMATION.
ACCORDINGLY, EACH PROSPECTIVE NON-U.S. HOLDER IS URGED TO CONSULT A TAX ADVISOR
WITH RESPECT TO THE U.S. FEDERAL TAX CONSEQUENCES OF HOLDING AND DISPOSING OF
COMMON STOCK, AS WELL AS ANY TAX CONSEQUENCES THAT MAY ARISE UNDER THE LAWS OF
ANY U.S. STATE, LOCAL OR NON-U.S. TAXING JURISDICTION.
NON-U.S. HOLDERS
For purposes of the following discussion, dividends and gain on the sale,
exchange or other disposition of common stock will be considered to be "U.S.
trade or business income" if such income or gain is (i) effectively connected
with the conduct of a U.S. trade or business or (ii) in the case of a treaty
resident, attributable to a permanent establishment (or, in the case of an
individual, a fixed base) in the United States.
Dividends
In general, dividends paid to a Non-U.S. Holder of common stock will be
subject to withholding of U.S. federal income tax at a 30% rate unless such rate
is reduced by an applicable tax treaty. The tax treaty between the United States
and Canada reduces the rate of withholding to 15% in the case of dividends paid
to some Canadian residents. Dividends that are U.S. trade or business income are
generally subject to U.S. federal income tax on a net basis at regular income
tax rates, and are not generally subject to the 30% withholding tax if the Non-
U.S. Holder provides a Form 4224 or successor form to the payor. Any U.S. trade
or business income received by a Non-U.S. Holder that is a corporation may also,
under certain circumstances, be subject to an additional "branch profits tax" at
a 30% rate or such lower rate as may be applicable under a tax treaty (generally
a 5% rate under the tax treaty between the United States and Canada). Dividends
paid to an address in a foreign country generally are presumed (absent actual
knowledge to the contrary) to be paid to a resident of such country for purposes
of the withholding discussed above and for purposes of determining the
applicability of a tax treaty rate. Under U.S. Treasury Regulations generally
effective January 1, 2000 (the "Final Regulations"), a Non-U.S. Holder of common
stock who wishes to claim the benefit of an applicable treaty rate will be
required to satisfy certain certification and other requirements, which will
include the requirement that the Non-U.S. Holder file a Form W-8 containing the
holder's name and address and may require the Non-U.S. Holder to provide certain
documentary evidence issued by foreign governmental authorities as proof of
residence in the foreign country.
A Non-U.S. Holder of common stock that is eligible for a reduced rate of
U.S. withholding tax pursuant to a tax treaty may obtain a refund of any excess
amounts currently withheld by filing an appropriate claim for a refund with the
IRS.
38
<PAGE>
Sale, Exchange, Redemption or Other Disposition
Except as described below and subject to the discussion concerning backup
withholding, any gain realized by a Non-U.S. Holder on the sale, exchange,
redemption or other disposition of common stock generally will not be subject to
U.S. federal income tax, unless (i) such gain is U.S. trade or business income,
(ii) subject to certain exceptions, the Non-U.S. Holder is an individual who is
present in the United States for 183 days or more during the taxable year of the
disposition, and certain other conditions are present, (iii) the Non-U.S. Holder
is subject to tax under U.S. tax law provisions applicable to certain U.S.
expatriates (including certain former citizens or residents of the United
States) or (iv) Ames is or has been a "United States real property holding
corporation" (a "USRPHC") for federal income tax purposes and such Non-U.S.
Holder has held, directly or constructively, more than 5% of the outstanding
common stock within the five-year period ending on the date of the sale or
exchange. No assurance can be given that Ames is not, or will not be, a United
States real property holding corporation when a Non-U.S. Holder sells its shares
of common stock.
Federal Estate Tax
Common stock owned or treated as owned by an individual Non-U.S. Holder who
is not a citizen or resident of the United States for U.S. federal estate tax
purposes will be included in such individual's gross estate for U.S. federal
estate tax purposes unless an applicable estate tax treaty otherwise provides.
Information Reporting and Backup Withholding
Ames must report annually to the IRS and to each Non-U.S. Holder any
dividend income that is subject to withholding, or that is exempt from U.S.
withholding tax pursuant to a tax treaty. Copies of these information returns
may also be made available under the provisions of a specific treaty or
agreement to the tax authorities of the country in which the Non-U.S. Holder
resides.
Under current law, backup withholding at the rate of 31% generally will not
apply to dividends paid to a Non-U.S. Holder at an address outside the United
States (absent actual knowledge that the payee is a U.S. person). Under the
Final Regulations, however, a Non-U.S. Holder will be subject to backup
withholding unless a Form W-8 is provided and certain other requirements are
met.
The payment of proceeds from the disposition of common stock to or through
the United States office of any broker, U.S. or foreign, will be subject to
information reporting and possible backup withholding unless the owner certifies
as to its non-U.S. status under penalty of perjury or otherwise establishes its
entitlement to an exemption from information reporting and backup withholding,
provided that the broker does not have actual knowledge that the holder is a
U.S. person or that the conditions of an exemption are not, in fact, satisfied.
The payment of proceeds from the disposition of common stock to or through a
non-U.S. office of a non-U.S. broker that is not a "U.S. related person" will
not be subject to information reporting or backup withholding. For this purpose,
a "U.S. related person" is a foreign person with one or more enumerated
relationships with the United States.
In the case of the payment of proceeds from the disposition of common stock
to or through a non-U.S. office of a broker that is either a U.S. person or a
U.S. related person, the regulations require information reporting on the
payment unless the broker has documentary evidence in its files that the owner
is a Non-U.S. Holder and the broker has no knowledge to the contrary. Backup
withholding will not apply to payments made through the foreign office of a
broker that is a U.S. person or a U.S. related person (absent actual knowledge
that the payee is a U.S. person).
Any amounts withheld under the backup withholding rules from a payment of a
Non-U.S. Holder will be allowed as a refund or a credit against such Non-U.S.
Holder's U.S. federal income tax liability provided the requisite procedures are
followed.
39
<PAGE>
UNDERWRITING
Under their underwriting agreement with us, each of the underwriters named
below, for whom Lehman Brothers Inc., NationsBanc Montgomery Securities LLC,
Johnson Rice & Company L.L.C. and Tucker Anthony Incorporated are acting as
representatives, has agreed severally to purchase from us the number of shares
of common stock shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- ---------------------------------------------------------- ------------
<S> <C>
Lehman Brothers Inc.......................................
NationsBanc Montgomery Securities LLC.....................
Johnson Rice & Company L.L.C..............................
Tucker Anthony Incorporated...............................
----------
Total...................................................
----------
----------
</TABLE>
The underwriting agreement provides that the underwriters' obligations to
purchase shares of common stock depend on the satisfaction of the conditions
contained in the underwriting agreement, and that if any shares of common stock
are purchased by the underwriters under the underwriting agreement, then all of
the shares of common stock that they have agreed to purchase under the
underwriting agreement, must be purchased. The conditions contained in the
underwriting agreement include the requirement that, at the date of closing, our
representations and warranties to the underwriters will be true, that there will
have been no material change in the financial markets and that we deliver to the
underwriters customary closing documents. A copy of the underwriting agreement
has been filed with the Commission as an exhibit to the registration statement
of which this prospectus constitutes a part.
The representatives have advised us that the underwriters propose to offer
the shares of common stock directly to the public initially at the public
offering price set forth on the cover page of this prospectus, and to dealers,
who may include the underwriters, at that price less a selling concession not in
excess of $
per share. The underwriters may allow, and the dealers may re-allow, a
concession not in excess of $
per share to brokers and dealers. After the offering, the underwriters may
change the offering price and other selling terms.
We have granted to the underwriters an option to purchase up to an
aggregate of additional shares of common stock, solely for the purpose
of covering over-allotments, if any, in the sale of the shares that we
are offering. The option price for the additional shares is the same as the
price to be paid by the underwriters for the shares we are offering. The
underwriters may exercise this option at any time within 30 days after the date
of this prospectus. If this option is exercised, each underwriter will be
committed, so long as the conditions of the underwriting agreement are
satisfied, to purchase, and we will be obligated to issue and sell, a number of
additional shares of common stock that is proportionate to that underwriter's
initial commitment as indicated in the preceding table.
We have agreed that, without the prior consent of Lehman Brothers, we will
not, except for limited exceptions, directly or indirectly, offer, sell or
otherwise dispose of any shares of common stock or any securities that may be
converted into or exchanged for shares of common stock for a period of 90 days
from the date of this prospectus. Except for limited exceptions, all of our
executive officers and directors have agreed under lock-up agreements that,
without the prior written consent of Lehman Brothers, they will not, directly or
indirectly, offer, sell or otherwise dispose of any shares of common stock or
any securities which may be converted into or exchanged for any such shares of
the period ending 90 days after the date of this prospectus.
We have agreed to indemnify the underwriters against liabilities, including
liabilities under the Securities Act and liabilities arising from breaches of
the representations and warranties contained in the underwriting agreement, and
to contribute to payments that the underwriters may be required to make for
these liabilities.
40
<PAGE>
Until the distribution of the common stock is completed, rules of the
Commission may limit the ability of the underwriters and selling group members
to bid for and purchase shares of common stock. As an exception to these rules,
the representatives, acting on behalf of the underwriters, are permitted to
engage in transactions that stabilize the price of the common stock. These
transactions may consist of bids or purchases for the purposes of pegging,
fixing or maintaining the price of the common stock.
In addition, the underwriters may create a short position in the common
stock in connection with the offering, which means that they may sell more
shares than are set forth on the cover page of this prospectus. This is referred
to as over-allotting. If the underwriters create a short position, then the
representatives may reduce that short position by purchasing common stock in the
open market. The representatives also may elect to reduce any short position by
exercising all or part of the over-allotment option.
The representatives also may impose a penalty bid on underwriters and
selling group members. This means that if the representatives purchase shares of
common stock in the open market to reduce the underwriters' short position or to
stabilize the price of the common stock, they may reclaim the amount of the
selling concession from the underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
an offering.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the representatives
will engage in these transactions or that these transactions, once commenced,
will not be discontinued without notice.
Any offers and sales in Canada will be made only under an exemption from
the requirements to file a prospectus in the relevant province of Canada in
which the offer or sale is made.
The representatives have informed us that they do not intend to confirm the
sales of common stock to accounts over which they exercise discretionary
authority that exceed 5% of the total number of shares we are offering.
Lehman Brothers and NationsBanc Montgomery Securities acted as initial
purchasers in connection with Ames' proposed offering of senior notes. Bank of
America NT&SA, an affiliate of NationsBanc Montgomery Securities LLC, acts as
the administrative agent and a lender under a credit agreement dated as of
December 31, 1998 to which Ames and several of its principal subsidiaries are
parties. Bank of America NT&SA may receive a portion of the net proceeds of this
offering in repayment of indebtedness outstanding under that credit agreement.
In the future, one or more of the underwriters may provide investment banking,
finanical advisory and other services to Ames and certain of its subsidiaries
and affiliates for which they will receive customary fees.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for us by David H. Lissy, Esq., our General Counsel, and by Weil, Gotshal &
Manges LLP, New York, New York. Certain legal matters in connection with the
offering will be passed upon for the underwriters by Milbank, Tweed, Hadley &
McCloy LLP, New York, New York. From time to time Milbank also renders legal
services to Ames.
EXPERTS
The consolidated balance sheets of Ames Department Stores, Inc. and
subsidiaries as of January 30, 1999 and January 31, 1998 and the related
consolidated statements of operations, shareholders' equity and cash flows for
the fifty-two weeks ended January 30, 1999, the fifty-three weeks ended January
31, 1998 and the fifty-two weeks ended Janaury 25, 1997 have been included in
and incorporated by reference into this
41
<PAGE>
prospectus and the registration statement in reliance on the report of Arthur
Andersen LLP, independent public accountants, given on their authority as
experts in accounting and auditing.
The consolidated balance sheets of Hills Stores Company and subsidiaries as
of January 31, 1998 and February 1, 1997 and the related consolidated statements
of operations, shareholders' equity and cash flows for the years ended January
31, 1998, February 1, 1997 and February 3, 1996 included in this prospectus have
been audited by Deloitte & Touche LLP, independent auditors as stated in their
report appearing herein and have been so included in reliance upon the report of
such firm, given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and other
documents with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. You may read and copy any of those reports, proxy
statements or other documents at the public reference facilities maintained by
the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at its regional offices located at 7 World Trade
Center, New York, New York 10048 and Northwest Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Please call the Commission at
1-800-SEC-0330 for further information on its public reference facilities. These
filings are also available to the public from commercial document retrieval
services and at the Commission's Web site at "http://www.sec.gov."
Our common stock is quoted on The NASDAQ National Market System. Reports,
proxy statements and other information concerning Ames can be inspected at the
National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006. In addition, we maintain a Web site at
"http://www.amesstores.com" that contains additional information, including news
releases, about our business and operations.
You may also request a copy of any of our filings with the Commission, or
any of the agreements or other documents that constitute exhibits to those
filings, at no cost, by writing or telephoning us at the following address or
phone number:
Ames Department Stores, Inc.
2418 Main Street
Rocky Hill, CT 06067
(860) 257-2000
Attention: Investor Relations
The Commission allows us to "incorporate by reference" in this prospectus
reports that we file with them, which means that we can disclose important
information to you by referring you to those reports. Accordingly, we are
incorporating by reference in this prospectus our Annual Report on Form 10-K for
the fiscal year ended January 30, 1999 and any future filings made by us with
the Commission under the applicable sections of the Securities Exchange Act of
1934. Any information that we file later with the Commission will automatically
update and supercede this information.
This prospectus constitutes a part of a registration statement on Form S-3
filed by us with the Commission under the Securities Act, with respect to the
common stock that we are offering in this prospectus. This prospectus does not
contain all the information that is contained in the registration statement,
some of which we are allowed to omit in accordance with the rules and
regulations of the Commission. We refer to the registration statement and to the
exhibits filed with the registration statement for further information with
respect to Ames. Copies of the registration statement and the exhibits to such
registration statement are on file at the offices of the Commission and may be
obtained upon payment of the prescribed fee or may be examined without charge at
the public reference facilities of the Commission described above. Statements
contained in this prospectus concerning the provisions of documents are
summaries of the material provisions of those documents, and each of those
statements is qualified in its entirety by reference to the copy of the
applicable document filed with the Commission. Since this prospectus may not
contain all of the information that you may find important, you should review
the full text of these documents.
42
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AUDITED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
AMES DEPARTMENT STORES, INC.
Report of Independent Public Accountants................................................................... F-2
Consolidated Statements of Operations for the fiscal years ended January 30, 1999,
January 31, 1998 and January 25, 1997.................................................................... F-3
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998.................................... F-4
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended
January 30, 1999, January 31, 1998 and January 25, 1997.................................................. F-5
Consolidated Statements of Cash Flows for the fiscal years ended January 30, 1999,
January 31, 1998 and January 25, 1997.................................................................... F-6
Notes to Consolidated Financial Statements................................................................. F-7
SCHEDULE:
II. Valuation and Qualifying Accounts for the fiscal years ended January 30, 1999, January 31, 1998 and
January 25, 1997...................................................................................... F-28
HILLS STORES COMPANY
Independent Auditors' Report............................................................................... F-29
Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997.................................... F-30
Consolidated Statements of Operations for the fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996.................................................................... F-31
Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998,
February 1, 1997 and February 3, 1996.................................................................... F-32
Consolidated Statements of Common Shareholders' Equity for the fiscal years ended
January 31, 1998, February 1, 1997 and February 3, 1996.................................................. F-33
Notes to Consolidated Financial Statements................................................................. F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
Ames Department Stores, Inc.:
We have audited the accompanying consolidated balance sheets of Ames Department
Stores, Inc. (a Delaware corporation) and subsidiaries as of January 30, 1999
and January 31, 1998, and the related consolidated statements of operations,
changes in stockholders' equity and cash flows for the fifty-two weeks ended
January 30, 1999, and the fifty-three weeks ended January 31, 1998 and the
fifty-two weeks ended January 25, 1997. These consolidated financial statements
and the schedule referred to below are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Ames Department Stores, Inc.
and subsidiaries as of January 30, 1999 and January 31, 1998, and the results of
their operations and their cash flows for the fifty-two weeks ended January 30,
1999, and the fifty-three weeks ended January 31, 1998 and the fifty-two weeks
ended January 25, 1997 in conformity with generally accepted accounting
principles.
Our audits were performed for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
ARTHUR ANDERSEN LLP
New York, New York
March 15, 1999
F-2
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 30, JANUARY 31, JANUARY 25,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Ames net sales.......................................................... $ 2,395,092 $ 2,233,118 $ 2,161,680
Hills net sales......................................................... 112,126 -- --
----------- ----------- -----------
Total net sales......................................................... 2,507,218 2,233,118 2,161,680
Costs, expenses and (income):
Ames cost of merchandise sold......................................... 1,719,907 1,603,636 1,565,653
Hills cost of merchandise sold........................................ 66,324 -- --
Ames selling, general and administrative expenses..................... 608,653 581,659 564,432
Hills operating expenses and agency fees.............................. 51,940 -- --
Leased department and other income.................................... (30,164) (25,069) (25,811)
Depreciation and amortization expense, net............................ 14,478 6,659 4,701
Interest and debt expense, net........................................ 15,253 11,600 19,043
Store closing charge.................................................. 8,222 1,000 6,858
----------- ----------- -----------
Income before income taxes and extraordinary item....................... 52,605 53,633 26,804
Income tax provision.................................................... (18,775) (19,087) (8,149)
----------- ----------- -----------
Income before extraordinary item........................................ 33,830 34,546 18,655
Extraordinary item--loss on early extinguishment of debt (net of tax
benefit of $571)...................................................... -- -- (1,354)
----------- ----------- -----------
Net income.............................................................. $ 33,830 $ 34,546 $ 17,301
----------- ----------- -----------
----------- ----------- -----------
Basic net income per common share:
Income before extraordinary item...................................... $ 1.47 $ 1.59 $ 0.91
Extraordinary item.................................................... -- -- (0.06)
----------- ----------- -----------
Net income............................................................ $ 1.47 $ 1.59 $ 0.85
----------- ----------- -----------
----------- ----------- -----------
Weighted average common shares........................................ 23,010 21,723 20,467
----------- ----------- -----------
----------- ----------- -----------
Diluted net income per common share:
Income before extraordinary item...................................... $ 1.40 $ 1.46 $ 0.85
Extraordinary item.................................................... -- -- (0.06)
----------- ----------- -----------
----------- ----------- -----------
Net income............................................................ $ 1.40 $ 1.46 $ 0.79
----------- ----------- -----------
----------- ----------- -----------
Weighted average common and common equivalent shares.................... 24,216 23,649 21,812
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements.)
F-3
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
<S> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments....................................................... $ 35,744 $ 57,828
Receivables:
Trade.............................................................................. 13,315 8,977
Other.............................................................................. 16,929 9,945
----------- ---------
Total receivables............................................................. 30,244 18,922
Merchandise inventories............................................................... 621,509 423,836
Prepaid expenses and other current assets............................................. 16,075 12,060
----------- ---------
Total current assets.......................................................... 703,572 512,646
----------- ---------
Fixed Assets:
Land and buildings.................................................................... 22,319 3,694
Property under capital leases......................................................... 159,654 7,115
Fixtures and equipment................................................................ 179,766 83,335
Leasehold improvements................................................................ 76,095 34,646
----------- ---------
437,834 128,790
Less--Accumulated depreciation and amortization....................................... (66,205) (45,457)
----------- ---------
Net fixed assets.............................................................. 371,629 83,333
----------- ---------
Other assets and deferred charges....................................................... 16,447 6,657
Deferred taxes, net..................................................................... 102,406 7,406
Beneficial lease rights, net............................................................ 58,885 --
Goodwill, net........................................................................... 230,454 --
----------- ---------
$ 1,483,393 $ 610,042
----------- ---------
----------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade.............................................................................. $ 313,280 $ 180,971
Other.............................................................................. 83,485 42,185
----------- ---------
Total accounts payable........................................................ 396,765 223,156
----------- ---------
Current portion of long-term debt..................................................... -- 2,000
Current portion of capital lease and financing obligations............................ 17,799 2,177
Self-insurance reserves............................................................... 29,115 16,059
Accrued compensation.................................................................. 48,408 31,789
Accrued expenses...................................................................... 163,419 41,648
Store closing reserves................................................................ 59,768 12,050
----------- ---------
Total current liabilities..................................................... 715,274 328,879
----------- ---------
Long-term debt.......................................................................... 95,810 9,340
Capital lease and financing obligations................................................. 191,904 26,393
Other long-term liabilities............................................................. 132,376 41,874
Excess of revalued net assets over equity under fresh-start reporting................... 24,021 30,174
Commitments and contingencies
Stockholders' Equity:
Preferred stock (3,000,000 shares authorized; no shares issued or outstanding at
January 30, 1999 and January 31, 1998, respectively; par value per share $.01)..... -- --
Common stock (40,000,000 shares authorized; 23,921,545 and 22,506,108 shares
outstanding at January 30, 1999 and January 31, 1998, respectively; par value per
share $.01)........................................................................ 239 225
Additional paid-in capital............................................................ 236,667 118,971
Retained earnings..................................................................... 88,016 54,186
Treasury stock (79,495 shares, at cost)............................................... (914) --
----------- ---------
Total stockholders' equity.................................................... 324,008 173,382
----------- ---------
$ 1,483,393 $ 610,042
----------- ---------
----------- ---------
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements.)
F-4
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK ADDITIONAL TREASURY STOCK
--------------- --------------- PAID-IN RETAINED --------------- TOTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT EQUITY
------ ------ ------ ------ ---------- -------- ------ ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 27, 1996.......... -- $ -- 20,472 $205 $ 80,759 $ 2,339 $ -- $ 83,303
Exercise of stock options.......... 2 -- 4 4
Utilization of tax attributes...... 7,578 7,578
Net income......................... 17,301 17,301
------ ---- ------ ---- -------- -------- ---- ------ --------
Balance, January 25, 1997.......... -- $ -- 20,474 $205 $ 88,341 $ 19,640 -- $ -- $108,186
Exercise of stock options, net..... 772 7 3,074 3,081
Exercise of warrants............... 1,260 13 1,386 1,399
Utilization of tax attributes...... 26,170 26,170
Net income......................... 34,546 34,546
------ ---- ------ ---- -------- -------- ---- ------ --------
Balance, January 31, 1998.......... -- $ -- 22,506 $225 $118,971 $ 54,186 -- $ -- $173,382
Exercise of warrants............... 824 8 1,387 1,395
Exercise of stock options, net..... 331 3 1,106 1,109
Issuance of common stock pursuant
to executive employment
agreement........................ 70 1 1,640 1,641
Issuance of restricted common
stock, net....................... 190 2 2
Vesting of restricted common
stock............................ 788 788
Utilization of tax attributes...... 112,775 112,775
Acquisition of treasury shares..... (79) (914) (914)
Net income......................... 33,830 33,830
------ ---- ------ ---- -------- -------- ---- ------ --------
Balance, January 30, 1999.......... -- $ -- 23,921 $239 $236,667 $ 88,016 (79) $(914) $324,008
------ ---- ------ ---- -------- -------- ---- ------ --------
------ ---- ------ ---- -------- -------- ---- ------ --------
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements.)
F-5
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 53 WEEKS ENDED 52 WEEKS ENDED
JANUARY 30, 1999 JANUARY 31, 1998 JANUARY 25, 1997
----------------- ---------------- ----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income................................................ $ 33,830 $ 34,546 $ 17,301
Expenses not requiring the outlay of cash:
Extraordinary loss on early extinguishment of debt..... -- -- 1,354
Income tax provision................................... 18,275 18,764 8,149
Depreciation and amortization of fixed and other
assets............................................... 15,487 6,884 5,201
Amortization of debt discounts and deferred financing
costs................................................ 2,787 861 3,037
Gain on disposition of properties...................... -- -- (395)
Other, net............................................. (3,514) 1,834 1,141
--------- -------- --------
Cash provided by operations before changes in working
capital and store closing activities...................... 66,865 62,889 35,788
Changes in working capital:
(Increase) decrease in receivables........................ (6,787) 149 (4,593)
(Increase) decrease in merchandise inventories............ 12,259 (32,760) 7,857
(Increase) decrease in prepaid expenses and other current
assets................................................. (2,962) 109 624
Increase in accounts payable.............................. 12,233 34,239 32,599
Increase in accrued expenses and other current
liabilities............................................ 24,302 5,033 6,516
Changes due to store closing activities:
Payments of store closing costs........................... (2,547) (13,907) (7,621)
Store closing charge...................................... 8,222 1,000 6,858
--------- -------- --------
Net cash provided by operating activities................... 111,585 56,752 78,028
--------- -------- --------
Cash flows from investing activities:
Acquisition costs, net of cash acquired................... (103,857) -- --
Proceeds from the disposition of properties............... -- 1,900 690
Purchases of fixed assets................................. (51,602) (32,875) (19,805)
Purchases of leases....................................... -- (2,801) (3,211)
--------- -------- --------
Net cash used for investing activities...................... (155,459) (33,776) (22,326)
--------- -------- --------
Cash flows from financing activities:
Borrowings (payments) under the revolving credit
facilities, net........................................ 44,935 -- (4,284)
Proceeds from option exercises............................ 4,933 4,480 4
Payments on debt and capital lease obligations............ (16,262) (15,747) (17,388)
Purchase of treasury stock................................ (914) -- --
Deferred financing costs.................................. (10,902) -- (2,100)
--------- -------- --------
Net cash provided by (used for) financing activities........ 21,790 (11,267) (23,768)
--------- -------- --------
Increase (decrease) in cash and short-term investments...... (22,084) 11,709 31,934
Cash and short-term investments, beginning of period........ 57,828 46,119 14,185
--------- -------- --------
Cash and short-term investments, end of period.............. $ 35,744 $ 57,828 $ 46,119
--------- -------- --------
--------- -------- --------
</TABLE>
(The accompanying notes are an integral part of these consolidated financial
statements.)
F-6
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(a) Nature of operations:
Ames Department Stores, Inc. (a Delaware corporation) and its subsidiaries
(collectively, "Ames" or the "Company") are retail merchandisers. As of
March 1, 1999, Ames operated 453 discount department stores in 19 states in the
Northeast, Midwest and Mid-Atlantic regions, as well as the District of
Columbia. The stores are located in rural communities, small cities and the
suburbs of larger metropolitan areas.
In 1999, the Company will remodel and convert substantially all of the
acquired Hills stores to Ames stores. The remodeling and conversion process is
being conducted in three stages, each stage involving approximately one-third of
the Hills stores. The first stage is scheduled to be completed in late April
1999; the second and third stages are scheduled to be completed in July 1999 and
September 1999, respectively.
(b) Basis of presentation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Certain prior year items have been reclassified to conform to the current
year presentation.
(c) Change in fiscal year:
The Company changed its fiscal year from the last Saturday in January to
the Saturday nearest January 31, effective with the fiscal year ended January
30, 1999. This change was made so that the Company's fiscal year would coincide
with the fiscal year of most other publicly-held retailers. There was no impact
on the current year period as a result of this change. The fiscal year ended
January 30, 1999 ("Fiscal 1998" or "1998") included 52 weeks. The fiscal year
ended January 31, 1998 ("Fiscal 1997" or "1997") included 53 weeks. The fiscal
year ended January 25, 1997 ("Fiscal 1996" or "1996") included 52 weeks.
(d) Principles of consolidation:
The consolidated financial statements include the accounts of Ames and its
subsidiaries, all of which are wholly-owned. All intercompany accounts and
transactions have been eliminated.
(e) Cash and short-term investments:
Ames considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash and short-term investments.
(f) Inventory valuation:
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.
(g) Fixed assets:
Land and buildings, fixtures and equipment, and leasehold improvements are
recorded at cost. Major replacements and betterments are capitalized.
Maintenance and repairs are charged to earnings as incurred. The cost of assets
sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of disposal, with the resulting gain or
loss included in earnings.
F-7
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(h) Intangible assets:
Beneficial lease rights represent the excess of fair market value over
contract value of certain of the leases acquired in the Hills Acquisition (as
defined in Note 2 below). Goodwill represents the excess of cost over the fair
value of net tangible assets acquired at the date of the Hills Acquisition. See
Note 2 for further explanation.
(i) Depreciation and amortization:
Land and buildings and fixtures and equipment are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives. Property
under capital leases and leasehold improvements are depreciated over the shorter
of their estimated useful lives or their related lease terms.
Beneficial lease rights are being amortized over the terms of the related
leases (which average approximately 25 years). Goodwill is being amortized over
a 25-year period.
The excess of revalued net assets over equity under fresh-start reporting
is being amortized over a 10-year period. The amount recorded as a credit to
depreciation and amortization was $6.2 million in each of Fiscal 1998, Fiscal
1997 and Fiscal 1996.
The unfavorable lease liability is being amortized on a straight-line basis
over the applicable lease terms.
Depreciation and amortization includes adjustments recorded pursuant to the
application of Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." The Company did not record an impairment loss during Fiscal 1998. During
Fiscal 1997 and Fiscal 1996, the Company recorded impairment losses of
$1.2 million and $2.2 million, respectively.
(j) Deferred charges:
Pursuant to SOP 98-5, "Reporting on the Costs of Start-Up Activities,"
expenses related to new store openings are expensed when incurred. See
Note 18--Recently Issued Accounting Standards.
Debt transaction costs and related issue expenses are deferred and
amortized over the term of the associated debt. Lease acquisition and related
costs are deferred and amortized over the term of the lease.
(k) Income taxes:
Ames files a consolidated federal income tax return. In December 1992, Ames
adopted Statement of Financial Accounting Standards No. 109, "Accounting for
Income Taxes" ("SFAS No. 109") under fresh-start reporting. Under this method,
any deferred income taxes recorded are provided for at currently effective
statutory rates on the differences in the basis of assets and liabilities for
tax and financial reporting purposes. If recorded, deferred income taxes are
classified in the balance sheet as current or non-current based upon the
expected future period in which such deferred income taxes are anticipated to
reverse.
(l) Self-insurance reserves:
The Company is self-insured for workers' compensation, general liability,
property and casualty, and accident and health insurance claims, subject to
certain limitations. The Company has insurance coverage for losses that may
occur above certain levels. The Company determines its liability for claims
based on the circumstances of each individual claim and estimates its liability
for claims incurred but not yet reported based on historical experience. As of
January 30, 1999 and January 31, 1998, Ames had established self-insurance
reserves of $66.3 million and $31.7 million, respectively. The long-term portion
of these reserves is classified as part of other long-term liabilities in the
Consolidated Balance Sheets. These reserves are subject to changes in estimates
as claims are settled or continue to remain outstanding.
F-8
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:--(CONTINUED)
(m) Leased department and other income:
Ames has an agreement with an independent contractor that allows the
independent contractor to operate shoe departments within the Ames stores. Ames
receives a percentage of the sales under the agreement.
(n) Earnings per common share:
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
No. 128"). Under SFAS No. 128, the presentation of Primary and Fully Diluted
Earnings per Share was replaced by Basic and Diluted Earnings per Share. The
Company adopted the provisions of SFAS No. 128 effective January 31, 1998, and
has restated all periods presented.
Net income per common share for each of Fiscal 1998, 1997 and 1996 was
determined by using the weighted average number of common and common equivalent
shares outstanding during that fiscal year. Common equivalent shares represented
the assumed exercise of the Company's outstanding Series B and Series C Warrants
and stock options.
(o) Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB Opinion No. 25") and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
exercise price of the options.
2. 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 81.3% of the outstanding common stock and
74.4% of the outstanding convertible preferred stock of Hills Stores Company
("Hills") pursuant to a tender offer made in implementation of an Agreement and
Plan of Merger (the "Merger Agreement"), dated as of November 12, 1998, by and
among the Company, HSC and Hills. At the closing of that acquisition (the "Hills
Acquisition"), a total of $114.5 million was disbursed as follows:
o $12.7 million to Hills common shareholders for 81.3% of the shares
outstanding
o $1.0 million to holders of Hills Series A convertible preferred stock for
74.4% of the shares outstanding
o $100.8 million to holders of Hills 12 1/2% senior notes for 73.9% of the
notes outstanding
The amount paid to the holders of the Hills senior notes represented a
discount of approximately 30% from the face value of the acquired notes.
Holders of the Hills shares and senior notes who tendered their securities
for purchase also received a deferred contingent right to receive a further cash
payment out of, and based upon, Hills ultimate net recovery, if any, in a
lawsuit brought by Hills in September 1995 against certain of its former
directors. The outcome of this lawsuit, whether favorable or unfavorable, would
result in a corresponding adjustment to goodwill recorded in connection with the
Hills Acquisition.
F-9
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION AND AGENCY AGREEMENT:--(CONTINUED)
Subsequent to the acquisition date, Hills was merged with HSC. Upon the
effectiveness of that merger, the Company paid $3.3 million to retire the
remaining common and preferred shares of Hills. The Company also incurred
professional fees, accounting, legal and other costs of approximately
$12.2 million in connection with the acquisition. These costs have been
accounted for as part of the purchase price. The Hills Acquisition was funded by
cash provided by operations and borrowings under the Company's 1998 Credit
Agreement. (See Note 6.)
The acquisition has been recorded under the purchase method of accounting
and, accordingly, the results of operations of Hills for the period from
December 31, 1998 through January 30, 1999 are included in the accompanying
consolidated 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).
In connection with the acquisition, management determined that certain
previously capitalized technology costs, intangible assets, property and
equipment and other assets of Hills had no future use to the Company. As a
result, these assets have been effectively written-off in connection with the
acquisition, and have been reflected at "zero value" (or adjusted estimated fair
value where appropriate) in the above summary of fair value of assets assumed.
In addition, due to the agency agreement discussed below, certain fair value
adjustments were recorded to inventory and related accounts.
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 will be closed because they are in
locations that are either competitive with other Ames stores or are
underperforming. The remodeling and conversion process will be conducted in
three stages, each stage involving approximately one third of the Hills stores.
The first stage is scheduled to be completed in late April 1999; the second and
third stages are scheduled to be completed in July 1999, and September 1999,
respectively.
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 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 (collectively the "Merchandise").
The Agency Agreement is based upon the Company providing Hills merchandise
having a minimum initial retail value or selling price of $625.0 million for the
Agent to manage, including both store merchandise and distribution center
merchandise, on-hand at the time of the acquisition, as well as committed
on-order merchandise. The Agency Agreement entitles the Company to receive out
of the sale proceeds a minimum amount (the "Guaranteed Amount") equal to 40% of
the initial retail value or initial ticketed selling price of the merchandise
(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.
F-10
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. ACQUISITION AND AGENCY AGREEMENT:--(CONTINUED)
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.
As a result of the above terms and provisions, the Company valued the
acquired Hills inventory at an amount equal to the Guaranteed Return, which
resulted in an opening balance sheet adjustment to reduce inventory by
approximately $131.0 million. In addition, the Company has recorded a purchase
commitment valuation liability of approximately $37.5 million with respect to
the prior purchase commitments of Hills for merchandise ordered prior to the
Hills Acquisition which the Company is legally required to honor. The recording
of this valuation liability will result in an inventory valuation for these
committed purchases that approximates 40% of initial retail value.
Agency Agreement Accounting
As discussed earlier, the results of operations of Hills since the date of
the Hills Acquisition have been included in the accompanying consolidated
financial statements. For the month of January 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 Hills net 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 amount was determined based upon the Hills sales results for
the period, less the Guaranteed Return and reimbursable Hills store expenses, as
specified in the Agency Agreement. Because the Company is entitled to a
Guaranteed Return and reimbursement of Hills store expenses during the term of
the Agency Agreement, it is anticipated that the Company will realize "Agency
Income" during the latter stages of the Agency Agreement after the sale proceeds
from the liquidation of Hills merchandise decrease as a percentage of the
initial retail value. 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.
F-11
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SUPPLEMENTAL INFORMATION:
The following table illustrates the separate contribution to the Company's
consolidated results of operations for Fiscal 1998 of (i) the operations of Ames
stores during that year, (ii) the operation of the Hills stores during January
1999 and various other costs and charges discussed below:
<TABLE>
<CAPTION>
FISCAL 1998
---------------------------------------------------
OTHER COSTS
AMES HILLS AND CHARGES TOTAL
---------- -------- ----------- ----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales.................................................... $2,395,092 $112,126 $ -- $2,507,218
Costs, expenses and (income):
Cost of merchandise sold................................... 1,719,907 66,324 -- 1,786,231
Selling, general and administrative expenses............... 606,912 51,940 1,741 660,593
Leased department and other income......................... (29,160) (1,004) -- (30,164)
Depreciation and amortization expense, net................. 11,261 3,217 -- 14,478
Interest and debt expense, net............................. 11,423 1,935 1,895 15,253
Store closing charge....................................... -- -- 8,222 8,222
---------- -------- --------- ----------
Income (loss) before income taxes............................ 74,749 (10,286) (11,858) 52,605
Income tax (provision) benefit............................... (26,680) 3,672 4,233 (18,775)
---------- -------- --------- ----------
Net income (loss)............................................ $ 48,069 $ (6,614) $ (7,625) $ 33,830
---------- -------- --------- ----------
---------- -------- --------- ----------
Diluted net income (loss) per common share................... $ 1.99 $ (0.27) $ (0.32) $ 1.40
---------- -------- --------- ----------
---------- -------- --------- ----------
Weighted average common and common equivalent shares......... 24,216 24,216 24,216 24,216
---------- -------- --------- ----------
---------- -------- --------- ----------
</TABLE>
In January 1999, the Hills stores were being operated pursuant to the terms
and conditions of the Agency Agreement (see Note 2). Approximately one-third of
the Hills stores were conducting liquidation sales during January 1999 in order
to prepare these stores for their conversion to Ames stores. The cost of
merchandise for Hills represents the merchandise sold during January 1999
adjusted for the Guaranteed Return (see Note 2). The selling, general and
administrative expenses for Hills include reimbursable store operating expenses
of $25.4 million; Agency Fee of $21.7 million; and other non-reimbursable
expenses of $4.8 million. The depreciation and amortization expense for Hills
includes the depreciation and amortization of the revalued fixed assets, the
amortization of the beneficial lease rights and the goodwill recorded in the
Hills Acquisition. The interest expense reflects interest on the debt, capital
lease and financing obligations assumed in the Hills Acquisition.
The "Other Costs and Charges" column in the foregoing table consists of:
the cost to exit certain Ames contractual obligations rendered obsolete by the
Hills Acquisition; the write-off of the deferred financing costs related to the
Company's 1996 Credit Agreement; the incremental interest expense incurred in
January in connection with financing the purchase price of Hills and the charge
recorded in connection with the announced closing of seven Ames stores that are
scheduled to close in 1999. The closings are part of planned closings resulting
from the overlap in certain Ames and Hills locations.
4. CASH AND SHORT-TERM INVESTMENTS:
As of January 30, 1999 there were no short-term investments. As of January
31, 1998 short-term investments totaled $37.9 million. These investments
consisted of time deposits, certificates of deposit, bankers acceptances,
repurchase agreements and high grade commercial paper.
5. 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.
F-12
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT:
The Company's outstanding long-term debt as of January 30, 1999 and January
31, 1998 is listed and described below:
<TABLE>
<CAPTION>
1/30/99 1/31/98
------- -------
(000S OMITTED)
<S> <C> <C>
Secured Debt:
Borrowings under the Credit Agreement..................................................... $44,935 $ --
9.5% Guaranteed First Mortgage Notes, due March 1997 through March 1999,
discount rate of 11%................................................................... -- 11,500
Unsecured Debt:
12.5% Senior Notes, due July 2003......................................................... 50,875 --
------- -------
Total Face Value of Debt.................................................................... $95,810 $11,500
Less: Current Portion..................................................................... -- 2,000
Debt Discount....................................................................... -- 160
------- -------
Amount Due After One Year................................................................... $95,810 $ 9,340
------- -------
------- -------
</TABLE>
THE CREDIT AGREEMENT
On December 31, 1998, in connection with the Hills Acquisition (see Note
2), 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 1996 Credit Agreement).
The Credit Agreement is in effect until June 30, 2002 and is secured by
substantially all of the assets of the Company. The interest rate per annum on
borrowings under the Credit Agreement is equal to the Base Rate (as defined in
the Credit Agreement) plus 0.625% (subject to downward adjustments).
Alternatively, the interest rate per annum may be equal to LIBOR Rate (as
defined in the Credit Agreement) plus 2.25% (subject to downward adjustments).
Fees required under the Credit Agreement include: (a) monthly commitment
fees on the unused portion of the facility; (b) an initial closing fee and
(c) an initial agency fee and annual collateral management fees for the account
of the agent.
For Fiscal 1998, the weighted average interest rate on the Company's
revolving credit facilities was 7.57% and the peak borrowing level was $148.3
million. As of January 30, 1999, borrowings under the Credit Agreement were
$44.9 million (at a weighted average interest rate per annum of 7.57%) and $3.3
million and $11.0 million was outstanding in trade and standby letters of
credit, respectively.
The amount of borrowing under the Credit Agreement may not exceed the sum
of (a) an amount equal to 70% or 75% of certain inventory in the possession of
the Company (depending on the period of year as provided for in the Credit
Agreement) plus (b) an amount equal to 50% of certain inventory not in the
possession of the Company, but covered by any outstanding letter of credit. The
agent, in addition, reserves the right to adjust the total available to be
borrowed by establishing reserves, making determinations of eligible inventory,
revising standards of eligibility or decreasing from time to time the
percentages set forth above.
The financial covenants under the Credit Agreement are limited to: minimum
borrowing availability; for the quarter ended April 2000, minimum EBITDA (as
defined below) and, thereafter, a minimum fixed charge coverage ratio (as
defined in the Credit Agreement). EBITDA is defined as: income before
(a) interest expense, (b) income tax expense or benefit, (c) depreciation and
amortization expense, stock appreciation rights accruals, certain restructuring
charges and other non-cash charges.
F-13
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT: (continued)
GUARANTEED FIRST MORTGAGE NOTES
The Guaranteed First Mortgage Notes were prepaid at par by the Company in
June 1998. This debt had been secured by the Company's distribution center in
Mansfield, Massachusetts.
SENIOR NOTES DUE 2003
The 12.5% Senior Notes due 2003 (the "Senior Notes") were, at the time of
the Hills Acquisition (see Note 2), an unsecured obligation of Hills.
Pursuant to the Merger Agreement, the Company, in November 1998, made a
tender offer to purchase at a stated discount all of Hills' outstanding Senior
Notes, which at the time totaled $195.0 million. Upon expiration of the tender
offer, the Company on December 31, 1998, paid cash of $100.8 million (including
the related accrued interest) to acquire Senior Notes having a face value of
$144.1 million. Senior Notes with a face value balance of $50.9 million remain
outstanding.
The tendering holders of the Senior Notes, representing 73.9% of the then
outstanding Senior Notes, consented to certain modifications to the indenture
governing the Senior Notes. Included among the modifications were the deletion
of the sections covering reporting requirements, debt and lien incurrence and
asset sales and additional subsidiary guarantees.
As of January 30, 1999, the payments due on long-term debt for the next
five years and thereafter were as follows:
<TABLE>
<CAPTION>
FISCAL YEARS
ENDING JANUARY AMOUNT
- ------------------------------------------------------------------------------- --------------
(000S OMITTED)
<S> <C>
2000........................................................................... $ --
2001........................................................................... --
2002........................................................................... --
2003........................................................................... 44,935
2004........................................................................... 50,875
Thereafter..................................................................... --
</TABLE>
7. LEASE COMMITMENTS, BENEFICIAL LEASES AND UNFAVORABLE LEASE LIABILITY:
Ames is committed under long-term leases for various retail stores,
warehouses and equipment expiring at various dates through 2023 with varying
renewal options and escalating rent clauses. Some leases are classified as
capital leases under Statement of Financial Accounting Standards No. 13. Ames
generally pays for real estate taxes, insurance, and specified maintenance costs
under real property leases. Most leases also provide for contingent rentals
based on percentage of sales in excess of specified amounts.
F-14
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS, BENEFICIAL LEASES AND UNFAVORABLE LEASE
LIABILITY:--(CONTINUED)
Future minimum lease payments for leases as of January 30, 1999 were as
follows:
<TABLE>
<CAPTION>
LEASE PAYMENTS
------------------------------------
CAPITAL FINANCING OPERATING
FISCAL YEAR ENDING JANUARY LEASES OBLIGATIONS LEASES
- ------------------------------------------------------------------- -------- ----------- ---------
(000'S OMITTED)
<S> <C> <C> <C>
2000............................................................... $ 31,949 $ 8,006 $ 77,252
2001............................................................... 30,815 8,096 71,564
2002............................................................... 29,346 7,988 64,756
2003............................................................... 27,111 4,678 57,746
2004............................................................... 24,781 5,081 51,732
Thereafter......................................................... 172,488 12,321 279,686
-------- ------- ---------
Total minimum lease payments....................................... 316,490 46,170 $ 602,736
---------
---------
Less: amount representing estimated executory costs................ 1,701 --
-------- -------
Net minimum lease payments......................................... 314,789 46,170
Less: amount representing interest................................. 138,273 12,983
-------- -------
Present value of net minimum lease payments........................ 176,516 33,187
Less: currently payable............................................ 13,409 4,390
-------- -------
Long-term lease obligations........................................ $163,107 $28,797
-------- -------
-------- -------
</TABLE>
At January 30, 1999, the financing obligations represent sale/leaseback
arrangements. These lease arrangements, which have terms from 42 months to ten
years, include options to purchase some or all of the assets either at the end
of the initial lease term or renewal periods at an amount not greater than the
then current fair market value of the properties.
Total payments have not been reduced by minimum sublease rentals to be
received in the aggregate under noncancellable subleases of capital leases and
operating leases of approximately $0.0 and $9.3 million, respectively, as of
January 30, 1999. Amortization of capital lease assets was approximately
$2.5 million, $0.4 million and $0.4 million for Fiscal 1998, Fiscal 1997 and
Fiscal 1996, respectively. Rent expense (income) was as follows:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1998 1997 1996
------- ------- -------
(000'S OMITTED)
<S> <C> <C> <C>
Minimum rent on operating leases....................................... $55,566 $48,577 $43,856
Contingent rental expense.............................................. 7,797 6,651 5,768
Sublease rental income................................................. (1,609) (1,730) (1,988)
</TABLE>
An unfavorable lease liability was recorded in December 1992 under fresh
start reporting and represents the estimated liability related to lease
commitments that exceeded market rents for similar locations. As of January 30,
1999 and January 31, 1998, the unfavorable lease liability is $13.7 million and
$15.3 million, respectively, and is classified as part of other long-term
liabilities in the Consolidated Balance Sheets. This liability is being
amortized as a reduction to depreciation and amortization in the Consolidating
Statements of Operations over the remaining lease terms. The amortization,
recorded as a reduction to depreciation and amortization, was $1.4 million,
$1.4 million and $1.6 million in Fiscal 1998, Fiscal 1997 and Fiscal 1996,
respectively.
Beneficial lease rights were recorded in connection with the Hills
Acquisition and represent the excess of fair market value over contract value of
certain of the Hills leases. Beneficial lease rights are being amortized as part
of depreciation and amortization in the Consolidated Statements of Operations
over the terms of the related leases (which average approximately 25 years).
F-15
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY:
PREFERRED STOCK AND COMMON STOCK
As provided under the Amended and Restated Certificate of Incorporation,
the authorized capital stock of Ames consisted of 43,000,000 shares divided into
two classes: (i) 3,000,000 shares of preferred stock, par value of $.01 per
share (the "Preferred Stock"), and (ii) 40,000,000 shares of common stock, par
value $.01 per share (the "Common Stock").
There were no shares of Preferred Stock outstanding as of January 30, 1999
and January 31, 1998. There were 23,921,545 and 22,506,108 shares of Common
Stock outstanding as of January 30, 1999 and January 31, 1998, respectively.
The Board of Directors of the Company may authorize the issuance of one or
more series of Preferred Stock and specify for each such series the voting
powers (but no greater than one vote per share), designations, preferences, and
relative, participating, optional, redemption, conversion, exchange or other
special rights, qualifications, limitations or restrictions of such series, and
the number of shares in each series.
Holders of shares of Common Stock are entitled to one vote per share on all
matters to be voted upon by stockholders and are entitled to receive dividends
when, as and if declared by the Board of Directors. Dividends cannot be declared
under the terms of the Credit Agreement.
The Common Stock does not have any preemptive right or subscription or
redemption privilege. The Common Stock also does not have cumulative voting
rights, which means the holder or holders of more than half of the shares voting
for the election of directors can elect all the directors then being elected.
All of the shares of Common Stock are fully paid and nonassessable.
TREASURY STOCK
In August 1998, the Company's Board of Directors approved a stock
repurchase program and authorized management to purchase up to 1.5 million
shares of Common Stock. During Fiscal 1998, the Company acquired 79,495 shares
of its Common Stock. During the course of the third and fourth quarters of
Fiscal 1998, the Company suspended further purchases due to the pending
acquisition of Hills.
WARRANTS
An aggregate of 200,000 Series B Warrants were issued on December 30, 1992.
Each such warrant entitles the holder to purchase one share of Common Stock at
any time from June 30, 1993 through December 30, 2000. The exercise price is
$5.92 per share. During Fiscal 1998, 100,000 Series B Warrants were exercised.
An aggregate of 2,120,000 Series C Warrants were issued on December 30,
1992. Each such warrant entitled the holder to purchase one share of Common
Stock at any time from June 30, 1993 through January 31, 1999. The exercise
price was $1.11 per share. During Fiscal 1998, 723,867 Series C Warrants were
exercised. On January 31, 1999, 8,635 Series C Warrants expired.
The exercise prices of the above warrants are subject to adjustment upon
the occurrence of certain events, including, among other things, the payment of
a stock dividend, a merger or consolidation and the issuance for consideration
of rights, options or warrants (other than rights to purchase Common Stock
issued to shareholders generally) to acquire Common Stock.
A holder of any of the warrants described above will not be entitled to any
rights as a stockholder of the Company, including, without limitation, the right
to vote the underlying shares of Common Stock, until the holder has exercised
the warrants.
F-16
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. STOCKHOLDERS' EQUITY:--(CONTINUED)
STOCK PURCHASE RIGHTS AGREEMENT
On November 30, 1994, the Company adopted a Stock Purchase Rights Agreement
(the "Rights Agreement"). Under the terms of the Rights Agreement, one purchase
right ("Right"), with an exercise price of $14.00, is attached to each share of
Common Stock outstanding as of, or issued subsequent to, November 30, 1994 but
prior to the occurrence of certain events (as more fully described in the Rights
Agreement). The Rights become exercisable in the event that a person or group
(an "Acquiring Person") either acquires 15% or more of the Company's outstanding
voting stock or announces an intention to acquire 20% or more of such stock.
Once exercisable, each Right will, depending on the circumstances, entitle a
holder, other than an Acquiring Person, to purchase shares of either the Company
or an acquiring company having a market value equal to twice the exercise price.
The Rights Agreement was adopted to assure that all of the Company's
stockholders receive full value for their investment in the event of stock
accumulation by an Acquiring Person. Unless previously redeemed by the Company,
the Rights will expire on November 29, 2004.
9. STOCK OPTIONS:
The 1998 Stock Incentive Plan (the "1998 Incentive Plan"), approved by
stockholders in May 1998, provides for the grant of Awards (as defined in the
1998 Incentive Plan) and makes available for Awards an aggregate amount of
1,800,000 shares of Common Stock. The maximum number of shares of Common Stock
with respect to which awards (as defined in the 1998 Incentive Plan) may be
granted (or measured) to any individual may not exceed 300,000. With respect to
such Awards under the 1998 Incentive Plan, the Company may grant awards in the
form of options to purchase Common Stock provided that the exercise price shall
not be less than 100% of the fair market value of the Common Stock on the date
the stock option is granted.
Pursuant to the 1994 Management Stock Option Plan (the "1994 Option Plan")
approved by stockholders in June 1994, the Company may grant options with
respect to an aggregate of up to 1,700,000 shares of Common Stock, with no
individual optionee to receive in excess of 200,000 shares of Common Stock upon
exercise of options granted. The exercise prices of the options are equal to the
fair market value of the Common Stock on the date the options are granted. The
options become exercisable over one to five years and terminate after five to
ten years from the grant date.
Pursuant to the 1994 Non-Employee Directors Stock Option Plan (the
"Non-Employee Plan") approved by stockholders in May 1995, the Company may grant
to non-employee directors options to purchase up to an aggregate of 200,000
shares of Common Stock. The exercise prices of the options are equal to the fair
market value of the Common Stock on the date the options are granted. The
options become exercisable in full six months after date of grant and terminate
ten years after date of grant. Effective on the date of each annual meeting of
stockholders of the Company commencing with the 1996 Annual Meeting, each
non-employee director of the Company then in office was granted an option to
purchase 2,500 shares, with the date of grant to be the date of such meeting. At
the 1998 Annual Meeting, the stockholders approved an amendment to the Non-
Employee Plan increasing the number of options granted on the date of each
Annual Meeting from 2,500 to 7,500 effective as of the May 27, 1998 grant. As of
January 30, 1999, 120,000 options had been granted under the Non-Employee Plan;
all were exercisable.
F-17
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. STOCK OPTIONS:--(CONTINUED)
The following table sets forth the stock option activity for all stock
option plans for Fiscal 1998, Fiscal 1997 and Fiscal 1996 (shares in thousands):
<TABLE>
<CAPTION>
1998 1997 1996
------------------ ------------------ ------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF EXERCISE OF EXERCISE OF EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year................... 914 $ 3.97 1,664 $ 3.73 1,320 $ 4.15
Granted............................................ 608 19.09 76 9.43 538 2.82
Exercised.......................................... (375) 3.90 (775) 4.03 (2) 1.76
Forfeited.......................................... (19) 12.42 (51) 3.59 (192) 4.07
------ ------ ------
Outstanding at end of year......................... 1,128 12.00 914 3.97 1,664 3.73
------ ------ ------
------ ------ ------
Options exercisable at year-end.................... 490 5.79 640 3.77 691 4.27
------ ------ ------
------ ------ ------
Weighted average fair value of options granted..... $13.56 $7.09 $1.80
------ ------ ------
------ ------ ------
</TABLE>
The fair value of options granted per the above table was estimated on the
date of grant using the Black-Scholes pricing model with the following
assumptions: no dividend yield, expected option volatilities, a risk-free
interest rate equal to U.S. Treasury securities with a maturity equal to the
expected life of the option (weighted average interest rate of 5.2%, 6.4% and
6.4% for 1998, 1997 and 1996, respectively) and an expected life from date of
grant until option expiration date (weighted average expected life of 5.4, 6.0
and 5.6 years for 1998, 1997 and 1996, respectively).
The following table summarizes information about stock options outstanding
as of January 30, 1999:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------- OPTIONS EXERCISEABLE
WEIGHTED ---------------------------------
AVERAGE WEIGHTED
NUMBER REMAINING WEIGHTED NUMBER WEIGHTED
OUTSTANDING CONTRACTUAL AVERAGE EXERCISABLE AT AVERAGE
RANGE OF EXERCISE PRICES AT 1/30/99 LIFE EXERCISE PRICE 1/30/99 EXERCISE PRICE
- ----------------------------------------- ----------- ----------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$1.50- 3.00.............................. 167 4.1 $ 2.34 137 $ 2.37
$3.13- 4.38.............................. 270 2.1 3.70 223 3.67
$5.06-15.56.............................. 378 4.1 13.12 85 7.69
$18.38-24.75............................. 313 4.3 22.94 45 23.19
----- ---
1,128 3.7 12.00 490 5.79
----- ---
----- ---
</TABLE>
The Company accounts for its stock option plans under APB Opinion No. 25.
Had compensation cost for the Company's 1998, 1997 and 1996 stock option grants
been determined in accordance with SFAS No. 123, the Company's net income and
net income per common share for Fiscal 1998, Fiscal 1997 and Fiscal 1996 would
have approximated the proforma amounts below:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
-------------------- -------------------- --------------------
AS AS AS
REPORTED PROFORMA REPORTED PROFORMA REPORTED PROFORMA
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Net income..................................... $ 33,830 $32,065 $ 34,546 $34,147 $ 17,301 $ 16,700
Net income per common share
--basic...................................... $ 1.47 $ 1.39 $ 1.59 $ 1.57 $ .85 $ .82
--diluted.................................... $ 1.40 $ 1.32 $ 1.46 $ 1.44 $ .79 $ .77
</TABLE>
SFAS No. 123 does not apply to stock options granted prior to 1995.
F-18
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES:
The Company adopted SFAS No. 109 in conjunction with the adoption of
fresh-start reporting in December 1992. Under SFAS No. 109, deferred income
taxes are recognized by applying the enacted statutory tax rates in future years
to the changes in "cumulative temporary differences" (the differences between
financial statement carrying values and the tax basis of assets and
liabilities).
As a consequence of the adoption of fresh-start reporting and SFAS No. 109,
any tax benefits realized for tax purposes after the Consummation Date for
pre-consummation cumulative temporary differences, as well as for the
pre-consummation net operating loss carryovers, are reported as additions to
paid-in capital (see Consolidated Statements of Changes in Stockholders' Equity)
rather than as reductions in the tax provisions in the Consolidated Statements
of Operations. Tax benefits or liabilities realized for book purposes after the
Consummation Date will be segregated from the pre-consummation deferred tax
assets. The utilization of post-consummation deferred tax assets may reduce
future income tax provisions. Such income tax provisions have no impact on the
Company's taxes payable or cash flows.
On December 31, 1998, the Company completed its acquisition of
approximately 81.3% of the outstanding common stock of Hills. Accordingly, the
tax data presented for Fiscal 1998 reflects the tax effects of the acquisition,
including the temporary differences created by the application of purchase
accounting.
For Fiscal 1998, the Company recorded an income tax provision of $18.8
million, of which approximately $0.5 million will be paid in cash. For Fiscal
1997, the Company recorded an income tax provision of approximately $19.1
million of which $0.3 million was paid in cash.
The provision for income taxes is comprised of the following:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997 FISCAL 1996
----------- ----------- -----------
(IN MILLIONS)
<S> <C> <C> <C>
Currently Payable: Federal Alternative Minimum Tax................ $ 0.5 $ 0.3 $ --
Deferred Non-cash Pre-emergence Tax Provision..................... 18.3 18.8 8.1
----- ----- -----
Total Income Tax Provision...................................... $18.8 $19.1 $ 8.1
----- ----- -----
----- ----- -----
</TABLE>
Ames has the following deferred tax assets (liabilities) from
pre-consummation periods and the Hills Acquisition, as of the following dates:
<TABLE>
<CAPTION>
AS OF JANUARY 30, 1999 AS OF JANUARY 31, 1998
---------------------- ----------------------
(IN MILLIONS)
<S> <C> <C>
Fixed assets.............................................. $ 47 $ 31
Self insurance reserves................................... 13 13
Store closing reserves.................................... 16 9
Leases.................................................... 36 15
Inventory reserves........................................ 57 --
Vacation pay reserve and other............................ 52 16
Other purchase accounting liabilities..................... 20 --
Net operating loss carryovers............................. 162 172
------ ------
Total deferred tax assets................................. 403 256
Valuation allowances...................................... (301) (249)
------ ------
Net deferred tax assets................................... $ 102 $ 7
------ ------
------ ------
</TABLE>
The Company has reduced its valuation allowance on its deferred tax assets
by $95.0 million, after consideration for recording additional valuation
allowances to offset net deferred tax assets recorded in connection with the
Hills Acquisition, during Fiscal 1998, which reflects the Company's expectation
of utilization of net operating loss carryforwards and other deferred tax assets
in the foreseeable future (2 years)
F-19
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. INCOME TAXES:--(CONTINUED)
after considering an adjustment for unusual activity and potential
contingencies. The reduction of the valuation allowance resulted in a
corresponding addition to paid-in-capital.
A significant portion of the Ames deferred tax assets (including those
created by the Hills Acquisition) continue to require a valuation allowance
because of the uncertainty of future recognition of such deductions. In
subsequent periods, Ames may further reduce the valuation allowances, provided
that the possibility of utilization of the deferred tax asset is more likely
than not to occur, as defined by SFAS No. 109. Any such reduction in the
valuation allowance in the near future will result in a corresponding addition
to paid-in-capital for the Ames component of the deferred asset and to goodwill
for the Hills components.
The Company has treated "pre-emergence net operating losses" (qualified
losses incurred prior to the Consummation Date) under Section 382(1) (5) of the
Internal Revenue Code ("IRC"). There is approximately $409.0 million of
pre-emergence and approximately $35.0 million of post-emergence net operating
losses currently available as carryovers without any annual limitation. These
losses will expire between 2007 and 2012. Additionally, the Company has filed a
$20 million refund claim under Section 172(f) of the Internal Revenue Code. The
claim represents a 10-year carryback of qualified expenses and is currently
under review by the Internal Revenue Service ("IRS"). The claim, if successful,
will reduce net operating losses by approximately $47.0 million.
In addition, Ames has targeted jobs tax credit carryovers of approximately
$7.0 million, which will expire in 2007, and alternative minimum tax credit
carryovers of approximately $4.0 million, which have no expiration period.
Federal net operating loss carryovers for fiscal years subsequent to
January 27, 1990 are subject to future adjustments, if any, by the IRS.
As a result of the acquisition of the common stock of the Hills Stores
Company, Ames has succeeded to the tax attributes of Hills, including net
operating losses of $178.0 million and general business credits of
$11.0 million. These tax attributes expire between 2000 and 2013. Ames also has
succeeded to minimum tax credit carryforwards of $5.0 million, which do not
expire. These tax attributes are significantly limited under Internal Revenue
Code Sections 382 and 383, respectively, as a result of the change in control
caused by the Hills Acquisition and the resulting deferred tax asset has been
reduced accordingly.
Ames and Hills have substantial potential state net operating loss
carryovers. It is difficult, however, to quantify the utilizable amounts of such
state operating losses because of the uncertainty related to the mix of future
profits in specific states.
The IRS has completed its audit of Hills for the 1991, 1992 and 1993 fiscal
years. The final outcome of this examination will not have an adverse effect on
the Company. Hills has filed a claim for a refund of federal taxes for the
subsequent years. The refund claim, if successful, is approximately
$7.0 million. If the Company receives this refund amount, there will be a
corresponding adjustment to reduce goodwill recorded in connection with the
Hills Acquisition.
11. BENEFIT AND COMPENSATION PLANS:
RETIREMENT AND SAVINGS PLANS
Ames Plan
Ames has a defined contribution retirement and savings plan (the "Ames
Retirement and Savings Plan") that is qualified under Sections 401(a) and 401(k)
of the Internal Revenue Code of 1986, as amended, for employees who, after one
year of service, have reached the age of 21 and have completed at least 1,000
hours of service in a 12-month period. For each participant's contribution (up
to a maximum of 5% of such participant's total compensation), the Company
contributes to the Retirement and Savings Plan an amount equal to 50% of
F-20
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. BENEFIT AND COMPENSATION PLANS:--(CONTINUED)
such contribution. Ames funds all administrative costs incurred by the plan.
Ames' expense associated with this plan amounted to approximately $3.3 million,
$3.0 million and $2.9 million, in 1998, 1997 and 1996, respectively.
Hills Plan
Hills has a defined contribution retirement and savings plan (the "Hills
Retirement and Savings Plan ") that is qualified under sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as amended, for full-time employees
who are eligible to participate at the first of each calendar quarter and for
all regular and part-time employees who, after one year of service have
completed at least 1,000 hours of service in a 12-month period. For each
participant's contribution (after one year of service) Hills contributes 100% of
the first 2% from service years 1-3 and 100% of the first 4% for service years 4
and over. Hills funds all administrative costs incurred by the plan with certain
exceptions. The expense associated with this plan was $0.3 million for January
1999.
The Company intends to merge the two retirement and savings plans after
further review and consideration of how to structure the merged plan and how to
transition to the merged plan.
RETIREMENT PLAN
Ames has an unfunded Retirement Plan for Officers/Directors (the
"Retirement Plan"). It provides that every person who is employed by Ames when
he or she retires, dies or becomes disabled and who serves as both a full-time
officer and a director of Ames and has completed five years of service, not
necessarily consecutive, in both of these capacities, is eligible for benefits
under the Retirement Plan.
The maximum annual benefit under the Retirement Plan is $100,000, reduced
by certain of each participant's annual Social Security benefits. Each
participant in the Retirement Plan is entitled to benefits for a period of 10
years. The Company has a reserve established for potential payments under the
Retirement Plan. No payments were made under this plan during the periods
presented.
THE G.C. MURPHY COMPANY LIFE INSURANCE PLAN
The G.C. Murphy Company Life Insurance Plan (the "GCM Plan") granted a flat
dollar amount (defined benefit) of group term life insurance at no cost to
certain retired employees. This plan excludes G.C. Murphy Co. employees who
retired from Ames after January 31, 1986. The amount of coverage varies by
retiree, is payable only upon death, and has no loan or cash value. During 1997,
the Company entered into a contract with an insurance company which effectively
transferred to the insurance company all future liabilities associated with the
GCM Plan in exchange for fixed annual payments over ten years.
ANNUAL INCENTIVE COMPENSATION PLAN
The Company has an Annual Incentive Compensation Plan (the "Annual Bonus
Plan") that is subject to annual review by the Board of Directors. The Annual
Bonus Plan provides annual incentive cash bonuses based on the achievement of
the Company's financial goals for the year (and customer service goals for store
and field management). There are approximately 1,500 members of management
eligible under the plan. Bonus expense recorded under the plan was $8.3 million,
$6.3 million, and $7.9 million for Fiscal 1998, 1997 and 1996, respectively.
F-21
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
RESTRICTED STOCK AWARDS
1995 Long Term Incentive Plan
Pursuant to the Company's 1995 Long Term Incentive Plan (the "1995
Incentive Plan"), approved by the stockholders in May, 1995, the Company may
make awards of an aggregate of up to 500,000 shares of Common Stock and cash
payment in an amount up to 50% of the fair market value (as defined in the 1995
Incentive Plan) of the Common Stock awarded, determined as of and paid on the
vesting date. Each award under the 1995 Incentive Plan vests in full on the
third anniversary of the date of grant of such award. Awards may be made to the
Chief Executive Officer, any Executive Vice President and any Senior Vice
President of the Company. Other than for death or disability, awards which have
not yet vested are forfeited upon the termination of the employment of the
executive.
As of January 30, 1999, awards aggregating to 355,000 shares of Common
Stock had been made to certain executives of the Company, 60,000 of which remain
unvested.
1998 Incentive Plan
Pursuant to the Company's 1998 Incentive Plan (as defined in Note 9),
awards aggregating 195,000 shares of Common Stock were made to certain
executives during Fiscal 1998. Fifty percent (50%) of each stock award under the
1998 Incentive Plan vests on the fourth anniversary from the date of grant and
50% on the fifth anniversary. There is no cash payment to be made relative to
the vesting of the grant.
The shares for the outstanding awards under both the 1995 Incentive Plan
and the 1998 Incentive Plan have been issued and are being held in custody by
the Company on behalf of the grantees thereof. A portion of the estimated market
value of the awards, including the cash, has been accrued as compensation
expense as of January 30, 1999. The Company recorded as compensation expense for
the 1995 Incentive Plan and the 1998 Incentive Plan $1.9 million, $2.0 million,
and $1.1 million during 1998, 1997 and 1996, respectively.
STOCK APPRECIATION RIGHTS
All stock appreciation rights ("SARs") granted to certain members of
management in connection with the Company's emergence from Chapter 11 protection
in 1992 expired as of December 30, 1997. During Fiscal 1997, a total of 166,683
SARs were exercised. The Company recorded an expense of $0.1 million and $0.8
million in 1997 and 1996, respectively. In June 1998, the Company extended the
employment agreement with Joseph R. Ettore, Chief Executive Officer and
President. In connection therewith, Mr. Ettore was granted 125,000 SARs which
entitle Mr. Ettore to receive in cash upon exercise the excess of (a) the
average closing price of a share of Common Stock during the twenty trading days
prior to the exercise date over (b) $2.00 (representing the exercise price of
certain rights surrendered by Mr. Ettore). Mr. Ettore's SARs are exercisable on
or after May 31, 1999.
INCOME CONTINUATION PLAN
Certain officers of Ames participate in an Income Continuation Plan
("ICP"), which guarantees up to one year's salary in the event of termination
other than for cause. As of January 30, 1999, the Company had no obligations
under the ICP.
KEY EMPLOYEE CONTINUITY BENEFIT PLAN
Ames has a Key Employee Continuity Benefit Plan (the "Continuity Plan")
that covers all officers, Vice President and above, and certain other employees
of Ames. If the employment of any participant in the Continuity Plan is
terminated, other than for death, disability, cause (as defined in the
Continuity Plan) or by the participant other than for good reason (as defined in
the Continuity Plan), within 18 months after a change of control of Ames, the
participant will receive a lump sum cash severance payment. The severance
payment is 2.99 times Base Compensation for the President and Executive Vice
Presidents, two times Base Compensation for
F-22
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Senior Vice Presidents and selected Vice Presidents and one times Base
Compensation for other Vice Presidents. Base Compensation is defined generally
as the sum of the participant's annual base compensation in effect immediately
prior to the participant's termination plus one-third of the value of the cash
and stock bonuses paid to the participant during the 36 months ending on the
date of termination. For purposes of the Continuity Plan, a change of control
includes but is not limited to the acquisition by any person of beneficial
ownership of 20% or more of Ames outstanding voting securities or the failure of
the individuals who constituted the Board of Directors at the beginning of any
period of 12 consecutive months to continue to constitute a majority of the
Board during such period.
HILLS POST RETIREMENT BENEFITS
Hills has a retiree medical plan that provides medical benefits to eligible
retirees of Hills. This plan is accounted for in accordance with Statement of
Financial Accounting Standards No. 106: "Employers' Accounting for
Postretirement Benefits Other Than Pensions" ("FAS 106"). This statement
requires accrual of postretirement benefits during the years an employee
provides services. Hills has historically funded benefit costs principally on a
pay-as-you-go basis. The status of the plan is as follows:
<TABLE>
<CAPTION>
JANUARY 30,
1999
-------------
(IN
THOUSANDS)
<S> <C>
Accumulated post retirement benefit obligation ("APBO") for:
Active employees...................................................................... $ 2,293
Retirees.............................................................................. 61
-------
2,354
Plan assets at fair value............................................................... --
-------
Unfunded APBO........................................................................... 2,354
Unrecognized actuarial gain............................................................. 1,442
-------
Accrued post retirement benefit cost.................................................... $ 3,796
-------
-------
</TABLE>
The assumed health care cost trend rate used in measuring the APBO was 9%
in fiscal year 1998 (7% for Medicare eligible retirees); grading down to 5% (5%
for Medicare eligible retirees) by fiscal year 2002 and remaining at that level
thereafter. A one percentage point increase in the assumed health care cost
trend rate would increase the APBO at the end of fiscal year 1998 by $348,300
(or by 15%) and the service and interest cost by $34,100 (or by 11%).
Conversely, a one percentage point decrease in the assumed healthcare cost trend
rate would decrease the APBO at the end of fiscal year 1998 by $278,600 (or by
12%) and the service and interest cost by $27,200 (or by 9%). The assumed
discount rate used in determining the APBO was 7%.
12. COMMITMENTS AND CONTINGENCIES:
Wage and Hour Litigation
Since March 1995, the Company has been named as a defendant in several
class action complaints which allege that the Company was obligated to pay
overtime to its hardlines and softlines assistant store managers. The Company
has consistently stated its belief that these positions are appropriately
designated as exempt positions not calling for overtime pay. The Company has
settled several of these cases. These settlements have not required any change
in the Company's treatment of the status of its hardlines and softlines
assistant managers. The Company is vigorously defending one remaining case which
it does not believe represents a material exposure.
F-23
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Other Matters
The Company is party to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business. The
Company believes that its probable liability as to these matters will not have a
material adverse effect on its consolidated financial position or results of
operations.
13. SUPPLEMENTAL CASH FLOW INFORMATION:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
1998 1997 1996
-------- ------- --------
(000'S OMITTED)
<S> <C> <C> <C>
Cash paid for interest and income taxes were as follows:
Interest............................................................. $ 12,166 $11,655 $ 15,149
Income taxes......................................................... 125 73 2
Ames entered into other non-cash investing
and financing activities as follows:
New capital lease obligations........................................ $ 25,859 $ 2,940 $ 375
Issuance of Common Stock under the 1998 Incentive Plan............... 2 -- --
</TABLE>
14. FAIR VALUES OF FINANCIAL INSTRUMENTS:
The Financial Accounting Standards Board requires disclosure of the fair
value of financial instruments under Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments". The following
methods and assumptions were used by the Company in estimating the fair value
disclosures for its financial instruments.
The Company's financial instruments as of January 30, 1999 and January 31,
1998 were cash and short-term investments, long-term debt, and the Series C
Warrants, which expired on January 30, 1999. For cash and short-term
investments, the carrying amounts reported in the Consolidated Balance Sheets
approximated fair values. For long-term debt obligations, the fair values were
estimated using a discounted cash flow analysis (based upon the Company's
incremental borrowing rates for similar types of borrowing arrangements). The
fair value of the Series C Warrants was based on the market trading price at
year-end times the number of such warrants that were outstanding.
The carrying amounts and fair values of the Company's financial instruments
at January 30, 1999 and January 31, 1998 were as follows:
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(000'S OMITTED)
<S> <C> <C> <C> <C>
Cash and short-term investments............................. $ 35,744 $35,744 $ 57,828 $57,828
Long-term debt
Secured debt.............................................. 44,935 44,935 11,340 11,500
Unsecured debt............................................ 50,875 50,875 -- --
Series C Warrants........................................... -- -- -- 9,065
</TABLE>
15. STORE CLOSING CHARGES:
In the fourth quarter of 1998, the Company recorded charges of $8.2 million
in connection with the closing of seven stores that overlap markets with
acquired Hills stores. Four stores are expected to close in August 1999, and
three stores are expected to close in October 1999.
F-24
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. STORE CLOSING CHARGES:--(CONTINUED)
In the fourth quarter of 1997, the Company recorded charges of $1.6 million
in connection with the closing of two stores. The $1.6 million is classified in
two line items: $1.0 million as store closing charge and $0.6 million as part of
cost of merchandise sold.
In the fourth quarter of 1996, the Company recorded charges of $9.7 million
in connection with the closing of thirteen stores. The $9.7 million is
classified in two line items: $6.9 million as store closing charge and $2.8
million as part of cost of merchandise sold.
The following items represent the major components of the total charges
recorded in January 1999, January 1998 and January 1997 in connection with store
closings:
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
ITEM 1998 1997 1996
- --------------------------------------------------------------------------- ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease costs................................................................ $6,254 $ 363 $3,535
Net fixed asset write-down................................................. 1,161 394 1,149
Severance costs............................................................ 370 113 773
Other...................................................................... 437 130 1,401
------ ------ ------
Store closing charge..................................................... 8,222 1,000 6,858
Inventory write-down..................................................... -- 560 2,860
------ ------ ------
Total charges......................................................... $8,222 $1,560 $9,718
------ ------ ------
------ ------ ------
</TABLE>
The lease costs provided for in the store closing charge include all
projected occupancy costs from date of closing until estimated lease disposition
date.
16. LEASED DEPARTMENT AND OTHER INCOME:
The following is a summary of the major components of the "Leased
department and other income":
<TABLE>
<CAPTION>
FISCAL FISCAL FISCAL
ITEM 1998 1997 1996
- ----------------------------------------------------------------------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Leased department income............................................... $17,914 $16,592 $16,932
Concession and vending income.......................................... 1,508 1,252 1,148
Layaway service fees................................................... 2,644 2,605 2,382
Various other.......................................................... 8,098 4,620 5,349
------- ------- -------
$30,164 $25,069 $25,811
------- ------- -------
------- ------- -------
</TABLE>
17. EXTRAORDINARY ITEMS:
In December 1996, the Company terminated a prior credit agreement (Note 6)
and recorded a non-cash extraordinary charge of $1.4 million, net of tax benefit
of $0.6 million, for the write-off of deferred financing costs.
18. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In April 1998, AICPA issued SOP 98-5, "Reporting on the Costs of Start-Up
Activities" which requires start-up costs, as defined, to be expensed as
incurred. Pursuant to SOP 98-5, previously capitalized start-up costs are
required to be written-off as a cumulative effect of a change in accounting
principle. SOP 98-5 is effective for financial statements for fiscal years
beginning after December 15, 1998.
F-25
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS--(CONTINUED)
The Company elected early adoption of SOP 98-5 during the fourth quarter of
Fiscal 1998, retroactively effective to the first quarter of Fiscal 1998. The
Company's previous policy was to expense all store pre-opening costs in the year
of opening, amortizing them from the date of opening through the balance of the
fiscal year. No cumulative effect has been recorded on the Company's
Consolidated Statement of Operations. However, the quarterly financial data
presented in Note 19 has been restated to properly reflect the effect of the SOP
in each of the presented quarterly results.
In February 1998, the Financial Accounting Standards Board released
Statement No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" ("SFAS No. 132"). This statement, which is effective
for fiscal years beginning after December 15, 1997, modifies and expands
disclosure requirements. Adoption of SFAS No. 132 will have no impact on the
Company's consolidated financial condition or results of operations.
19. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly financial data (in thousands except for per
share amounts) for the last three fiscal years are shown below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Fiscal 1998:
Net sales................................................... $499,048 $536,297 $599,188 $ 872,685(d)
Gross margin................................................ 138,434 156,836 163,094 262,619(d)
Net income (loss) (a)....................................... (3,401) 8,375 5,885 22,981(d)
Net income (loss) per share--basic.......................... (0.15) 0.37 0.28 0.98(d)
--diluted....................... (0.15) 0.35 0.27 0.94(d)
Fiscal 1997:
Net sales................................................... $432,601 $503,567 $527,573 $ 769,377
Gross margin................................................ 118,366 146,348 148,231 215,809
Income (loss) before extraordinary item..................... (5,930) 7,378 3,519 29,579(b)
Income (loss) per share before extraordinary item........... (0.28) 0.31 0.15 1.23
Net income (loss)........................................... (5,930) 7,378 3,519 29,579(b)
Net income (loss) per share--basic.......................... (0.28) 0.34 0.16 1.32
--diluted....................... (0.28) 0.31 0.15 1.23
Fiscal 1996:
Net sales................................................... $438,667 $499,107 $516,876 $ 707,030
Gross margin................................................ 117,402 139,725 141,224 194,355
Income (loss) before extraordinary item..................... (6,998) 4,514 421 20,718(c)
Income (loss) per share before extraordinary item........... (0.34) 0.21 0.02 0.93
Net income (loss)........................................... (6,998) 4,514 421 19,364(c)
Net income (loss) per share--basic.......................... (0.34) 0.22 0.02 0.95
--diluted....................... (0.34) 0.21 0.02 0.87
</TABLE>
- ------------------
(a) First three quarters restated according to SOP 98-5 (Note 18).
(b) Includes charges of $1.6 million related to the closing of two (2) stores
(Note 15).
(c) Includes charges of $9.7 million related to the closing of thirteen
(13) stores (Note 15).
(d) Includes the financial results of Hills Stores Company for January 1999.
F-26
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
20. PRO FORMA INFORMATION (UNAUDITED):
The following table reflects unaudited pro forma combined results of
operations of the Company and Hills on the basis that the Hills Acquisition had
taken place at the beginning of each of the fiscal years presented:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
JANUARY 30, 1999 JANUARY 31, 1998
------------------- -------------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C>
Net sales...................................................... $ 4,131,194 $ 4,001,392
Net income (loss).............................................. (54,903) 27,635
Earnings (loss) per Common Share............................... $ (2.39) $ 1.27
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of operations
which actually would have resulted had the Hills Acquisition been consummated at
the beginning of fiscal 1997 or fiscal 1998, or of future results of operations
of the consolidated entities.
The above pro forma net income and earnings per common share amounts for
the year ended January 30, 1999 reflect the previously recorded write-down of
Hills deferred tax assets of approximately $49.6 million (which is net of a
reversal of approximately $5.9 million of accrued tax liabilities). Excluding
the write-down of the Hills deferred tax assets recorded as of October 31, 1998,
pro forma net loss and loss per common share would have been $5.3 million and
$0.23, respectively for the year ended January 30, 1999.
21. SUBSEQUENT EVENTS:
On March 4, 1999, the Company entered into an agreement with Caldor
Corporation to purchase seven of its stores in Connecticut, one store in
Massachusetts and a 649,000 square foot distribution center in Westfield,
Massachusetts, for a cash purchase price of $40.0 million. Under the terms of
the agreement, the Company will assume Caldor's leases for the eight stores and
the distribution center and will acquire all of the store fixtures and all
racking, sorting systems and materials handling equipment in the distribution
center.
On March 26, 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.
On March 26, 1999, the Company entered into an agreement with Caldor
Corporation for the purchase of an additional store in Massachusetts for a cash
purchase price of $2.7 million. This agreement is subject to competing bids and
the approval of the Bankruptcy Court.
F-27
<PAGE>
SCHEDULE II
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING OF COST AND END OF
DESCRIPTION PERIOD EXPENSE RECLASSIFICATIONS DEDUCTIONS PERIOD
- ---------------------------------------------- ------------ ---------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fiscal 1998:
Store Closing Reserve......................... $ 12,050 $8,222 $41,957 (a) $ (2,461) $ 59,768
Fiscal 1997:
Store Closing Reserve......................... $ 24,438 $1,000 $ 519 (b) $(13,907) $ 12,050
Fiscal 1996:
Store Closing Reserve......................... $ 27,379 $6,858 $(2,178)(b) $ (7,621) $ 24,438
Distribution Center Closing Reserve included
in Accrued Expenses......................... $ 123 $ -- $ (122)(b) $ (1) $ --
</TABLE>
- ------------------
(a) Represents the store (and other facilities) closing reserve assumed and
recorded in connection with the Hills Acquisition.
(b) Represents reclassifications of liabilities associated with closed stores
and other reclassifications.
F-28
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Hills Stores Company and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hills Stores
Company and Subsidiaries as of January 31, 1998 and February 1, 1997 and the
related consolidated statements of operations, common shareholders' equity, and
cash flows for the years ended January 31, 1998, February 1, 1997 and
February 3, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Companies as of January 31,
1998 and February 1, 1997 and the results of their operations and their cash
flows for the years ended January 31, 1998, February 1, 1997 and February 3,
1996 in conformity with generally accepted accounting principles.
Deloitte & Touche LLP
Boston, Massachusetts
March 11, 1998
F-29
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents............................................................. $ 37,523 $ 66,163
Accounts receivable, less allowance for
doubtful accounts of approximately $5,500 and $4,500............................... 21,869 24,346
Inventories........................................................................... 340,719 341,477
Deferred tax asset, net (Note 16)..................................................... 26,933 32,991
Other current assets.................................................................. 5,542 5,115
--------- ---------
Total current assets............................................................. 432,586 470,092
Property and equipment, net (Note 2).................................................. 183,112 173,701
Property under capital leases, net (Note 7)........................................... 102,350 112,201
Beneficial lease rights, net (Note 1)................................................. 6,081 6,848
Deferred tax asset, net (Note 16)..................................................... 28,592 21,585
Reorganization value in excess of amounts allocable to
identifiable assets, net (Notes 1 and 3)........................................... 89,112 97,508
Other assets, net (Note 1)............................................................ 40,748 18,418
--------- ---------
$ 882,581 $ 900,353
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases and financial obligations (Note 7).................. $ 10,541 $ 7,255
Current portion of long term debt (Note 6)............................................ 500 --
Accounts payable, trade............................................................... 110,329 111,064
Other accounts payable and accrued expenses (Note 4).................................. 77,803 81,752
--------- ---------
Total current liabilities........................................................ 199,173 200,071
Long term debt (Note 6)................................................................. 204,500 195,000
Obligations under capital leases (Note 7)............................................... 113,919 120,539
Financing obligations--sale/leaseback (Note 7).......................................... 30,335 34,100
Other liabilities....................................................................... 98,467 105,917
Commitments and contingencies (Note 18)................................................. -- --
Preferred stock, at mandatory redemption value (Note 9)................................. 18,209 19,942
Common shareholders' equity (Notes 10 and 11):
Common stock, 50,000,000 shares of $0.01 par value
authorized, 10,446,287 and 10,337,761 shares issued and
outstanding........................................................................ 105 103
Additional paid-in capital............................................................ 217,388 215,537
Retained earnings..................................................................... 927 9,942
Unearned compensation (Note 11)....................................................... (442) (798)
--------- ---------
Total common shareholders' equity....................................................... 217,978 224,784
--------- ---------
$ 882,581 $ 900,353
--------- ---------
--------- ---------
</TABLE>
(See Notes to Consolidated Financial Statements)
F-30
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
(52 WEEKS) (52 WEEKS) (53 WEEKS)
----------- ----------- -----------
<S> <C> <C> <C>
Net sales..................................................... $ 1,768,274 $ 1,878,477 $ 1,900,104
Cost of sales................................................. 1,306,335 1,392,353 1,384,421
Selling and administrative expenses (Notes 7 and 8)........... 418,512 437,593 428,212
Amortization of reorganization value in excess of amounts
allocable to identifiable assets............................ 5,850 6,050 7,755
Impairment of long-lived assets and store closings
(Note 15)................................................... -- 33,706 --
Costs related to change in control (Note 19).................. -- -- 45,529
----------- ----------- -----------
Operating earnings............................................ 37,577 8,775 34,187
Interest expense, net (Note 1)................................ 48,392 53,555 47,666
----------- ----------- -----------
Loss before income taxes...................................... (10,815) (44,780) (13,479)
Income tax benefit (provision) (Note 16)...................... 1,800 14,000 (3,187)
----------- ----------- -----------
(9,015) (30,780) (16,666)
Extraordinary loss on early extinguishment of debt, net....... -- 4,278 --
----------- ----------- -----------
Net loss...................................................... $ (9,015) $ (35,058) $ (16,666)
----------- ----------- -----------
----------- ----------- -----------
Basic and diluted loss per common share (Note 17):
Loss before extraordinary loss.............................. $ (0.87) $ (3.00) $ (1.70)
Extraordinary loss -- (0.42) --
----------- ----------- -----------
Net loss................................................. $ (0.87) $ (3.42) $ (1.70)
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
(See Notes to Consolidated Financial Statements)
F-31
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
(52 WEEKS) (52 WEEKS) (53 WEEKS)
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................................... $(9,015) $ (35,058) $ (16,666)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization............................................ 36,845 35,130 31,784
Amortization of deferred financing costs................................. 2,538 5,942 4,847
Deferred income taxes.................................................... (949) (12,332) (11,260)
Decrease in deferred tax assets recognized through a reduction in
reorganization value in excess of amounts allocable to identifiable
assets................................................................ 2,546 2,592 9,496
Impairment of long-lived assets and store closings....................... -- 28,958 --
Extraordinary loss on extinguishment of debt............................. -- 4,278 --
Amortization of reorganization value in excess of amounts allocable to
identifiable assets................................................... 5,850 6,050 7,755
Loss on disposal of fixed assets......................................... 78 998 54
Decrease (increase) in accounts receivable and other current
assets................................................................ 2,050 1,078 (2,325)
Decrease (increase) in inventories....................................... 758 (15,080) (17,846)
Increase (decrease) in accounts payable and other accrued
expenses.............................................................. (12,134) 25,293 (24,464)
Other, net............................................................... 96 (330) (1,962)
------- --------- ---------
Net cash provided by (used for) operating activities.................. 28,663 47,519 (20,587)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (34,267) (32,858) (56,714)
Deferred software expenditures........................................... (24,828) -- --
------- --------- ---------
Net cash used for investing activities................................ (59,095) (32,858) (56,714)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured term loan.......................................... 10,000 -- --
Proceeds from issuance of 12 1/2% Senior Notes........................... -- 195,000 --
Fees incurred with the issuance of 12 1/2% Senior Notes.................. -- (8,100) --
Redemption of 10.25% Senior Notes........................................ -- (160,000) --
Payment of premium on debt redemption.................................... -- (1,749) --
Proceeds from sale/leaseback financing................................... -- 16,559 --
Principal payments under capital lease obligations....................... (7,099) (6,467) (6,121)
Cash distributions pursuant to the Plan of Reorganization................ (84) (2,682) (5,297)
Shares repurchased per self-tender offer................................. -- -- (75,000)
Deferred finance costs and other financing activities.................... (1,025) (3,957) (10,857)
------- --------- ---------
Net cash provided by (used for) financing activities.................. 1,792 28,604 (97,275)
------- --------- ---------
Net increase (decrease) in cash and cash equivalents..................... (28,640) 43,265 (174,576)
Cash and cash equivalents:
Beginning of the period............................................... 66,163 22,898 197,474
------- --------- ---------
End of the period..................................................... $37,523 $ 66,163 $ 22,898
------- --------- ---------
------- --------- ---------
</TABLE>
(See Notes to Consolidated Financial Statements)
F-32
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL COMMON
------------------- PAID-IN RETAINED UNEARNED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS COMPENSATION EQUITY
---------- ------ ---------- -------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 28, 1995............... 10,804,784 $108 $229,967 $ 76,666 $ -- $ 306,741
Retirement of Common Stock (Note 20)...... (3,000,000) (30) (59,970) (15,000) -- (75,000)
Conversion of Preferred Stock............. 1,975,400 20 39,488 -- -- 39,508
Exercise of stock options and warrants.... 4,387 -- 80 -- -- 80
Exchange for Stock Rights (Note 12)....... 198,271 2 (2) -- -- --
Net loss.................................. -- -- -- (16,666) -- (16,666)
---------- ---- -------- -------- -------- ---------
Balance at February 3, 1996............... 9,982,842 100 209,563 45,000 -- 254,663
Conversion of Preferred Stock............. 234,674 2 4,692 -- -- 4,694
Restricted stock grants................... 120,000 1 1,202 -- (1,203) --
Amortization of restricted stock grants... -- -- -- -- 405 405
Other..................................... 245 -- 7 -- -- 7
Stock options issued under compensatory
plan (Note 11).......................... -- -- 73 -- -- 73
Net loss.................................. -- -- -- (35,058) -- (35,058)
---------- ---- -------- -------- -------- ---------
Balance at February 1, 1997............... 10,337,761 103 215,537 9,942 (798) 224,784
Conversion of Preferred Stock............. 86,625 1 1,732 -- -- 1,733
Amortization of restricted stock grants... -- -- -- -- 356 356
Issuance due to Associated Stock Purchase
Plan (Note 11).......................... 21,901 1 58 -- -- 59
Stock options issued under compensatory
plan (Note 11).......................... -- -- 61 -- -- 61
Net loss.................................. -- -- -- (9,015) -- (9,015)
---------- ---- -------- -------- -------- ---------
Balance at January 31, 1998............... 10,446,287 $105 $217,388 $ 927 $ (442) $ 217,978
---------- ---- -------- -------- -------- ---------
---------- ---- -------- -------- -------- ---------
</TABLE>
(See Notes to Consolidated Financial Statements.)
F-33
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Reporting
During fiscal year 1997, Hills Stores Company (HSC or the "Company")
operated, through its wholly-owned subsidiary Hills Department Store Company
("HDSC"), a chain of 155 discount department stores located primarily in the
Great Lakes and Ohio Valley regions of the United States. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated. Certain prior year amounts were reclassified to conform to the
current year presentation. The Company's fiscal year ends on the Saturday
closest to January 31. Fiscal year 1995 was a fifty-three week year; fiscal
years 1997 and 1996 were fifty-two week years.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less from the date of purchase and whose cost
approximates market value due to the short maturity of the investments. Interest
income of $0.7 million, $1.3 million and $1.8 million was included in interest
expense, net for fiscal years 1997, 1996 and 1995, respectively.
Inventories
Inventories are valued using the retail method on the lower of last-in,
first-out (LIFO) cost or market basis. LIFO cost at January 31, 1998, February
1, 1997 and February 3, 1996 exceeded the cost of inventory on a first-in,
first-out basis; accordingly, there has been no LIFO charge.
Depreciation and Amortization
Depreciation and amortization are provided on a straight-line basis over
the estimated useful lives of the related assets, which is 27 1/2 years for
buildings and range from five to eight years for fixtures and equipment.
Amortization of leasehold improvements is provided on a straight-line basis over
the shorter of the lease term, considering renewal options that are likely to be
exercised, or the estimated useful life of the related asset. Leasehold
improvements are amortized principally over 15 years. Capital lease assets are
depreciated over the lease term or the estimated useful life of the related
asset.
Deferred Financing Costs
Net deferred financing costs of $9.9 million at January 31, 1998 and
$11.4 million at February 1, 1997 were included in other assets and are being
amortized on a straight-line basis over the estimated term of the related debt.
Accumulated amortization of deferred financing costs was $4.2 million at
January 31, 1998 and $1.7 million at February 1, 1997.
Deferred Software Expenditures
In fiscal year 1997, the Company had $24.8 million of deferred software
expenditures relating to its information systems replacement program. These
expenditures primarily represent direct costs of obtaining and modifying
commercially available computer software and costs associated with developing
internally used computer software. Expenditures such as Company payroll,
contracted services, capitalized interest during the period that the software is
not in service and other costs relating to the installation and testing of such
software, are included in deferred software. When placed in service, these
assets are generally amortized on a straight-line basis over seven years.
Intangible Assets
Beneficial lease rights are amortized using the straight-line method over
the terms of the related leases. Accumulated amortization of beneficial lease
rights was $3.3 million at January 31, 1998 and $2.5 million at February 1,
1997.
F-34
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
Reorganization value in excess of amounts allocable to identifiable assets
is being amortized over twenty years on a straight-line basis. (See Notes 3 and
16)
Pre-opening Costs
Pre-opening costs consist of direct costs of opening a store and are
charged to operations within the fiscal year that a new store opens. The Company
did not open any new stores in fiscal year 1997, opened 1 store in fiscal year
1996 and opened 10 stores during fiscal year 1995.
Interest Capitalization
The Company capitalizes interest incurred in connection with the
construction and development of new stores, computer systems, and other major
assets for the Company's own use. The Company capitalized interest of $1.4
million in fiscal year 1997 and $0.5 million in fiscal year 1995. No interest
was capitalized during fiscal year 1996.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates used in preparation of the consolidated financial
statements include, but are not limited to, income tax liabilities,
self-insurance liabilities for worker's compensation and general liability,
store closing liabilities, physical inventory shortage allowances, and the
estimated useful life of fixed and intangible assets.
New Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which are effective for the Company's financial statements
for the year ended January 31, 1999. The Company believes that neither
pronouncement will have a material impact on its financial statements.
2. PROPERTY AND EQUIPMENT
The components of property and equipment are listed below (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Fixtures and equipment.............................................. $ 164,816 $ 152,731
Leasehold improvements.............................................. 66,247 56,802
Buildings........................................................... 16,192 16,192
Land................................................................ 3,430 3,430
Improvements in progress............................................ 16,629 3,633
--------- ---------
267,314 232,788
Accumulated depreciation and amortization........................... (84,202) (59,087)
--------- ---------
$ 183,112 $ 173,701
--------- ---------
--------- ---------
</TABLE>
F-35
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. REORGANIZATION VALUE IN EXCESS OF THE AMOUNTS ALLOCABLE TO IDENTIFIABLE
ASSETS
The activity for reorganization value is presented below (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Balance at beginning of period...................................... $ 97,508 $ 107,514
Amortization...................................................... (5,850) (6,050)
Tax benefit applied to reduce reorganization value................ (2,546) (2,592)
Impairment of long-lived assets and store closings................ -- (1,364)
--------- ---------
Balance at end of period............................................ $ 89,112 $ 97,508
--------- ---------
--------- ---------
</TABLE>
Accumulated amortization was $32.0 million at January 31, 1998 and $26.2
million at February 1, 1997.
4. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Significant components of other accounts payable and accrued expenses are
presented below (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Other accounts payable and accrued expenses:
Accrued payroll and related costs................................. $ 20,880 $ 22,074
Taxes, other than income tax...................................... 13,988 13,418
Other............................................................. 42,935 46,260
--------- ---------
$ 77,803 $ 81,752
--------- ---------
--------- ---------
</TABLE>
5. SECURED CREDIT FACILITY
The Company, through its wholly-owned operating subsidiary Hills Department
Store Company (HDSC), maintains a $300 million secured credit facility (the
"Facility"), which matures in February, 2001. Borrowings under the Facility
include revolving working capital borrowings on a seasonal need basis and a
$10 million term note. Maximum borrowings under the Facility are limited by an
inventory-based borrowing base, as defined, and outstanding letters of credit;
up to $200 million of the Facility is available to secure letters of credit.
Borrowings under the Facility bear interest, at the option of the Borrowers, at
either of (1) the Bank of America's "reference rate" plus a margin ranging up to
0.75% or (2) LIBOR plus a margin ranging from 1.5% to 2.5% (2.25% at
January 31, 1998). The Company pays fees on the average undrawn letter of credit
amount at an annual rate ranging from 1.5% to 2.25%, and pays commitment fees at
an annual rate of 3/8% on the average daily unused portion of the commitment.
Interest rates and fees on undrawn letter of credit amounts are determined
quarterly by the Company's "excess cash flow", as defined. The Facility is
secured by a security interest in tangible and intangible assets of HDSC, other
than certain fixtures, equipment and real estate. The Facility is also
guaranteed by the parent Company (HSC).
The financial covenants under the secured credit agreement require that the
Company maintain levels of consolidated net worth and consolidated cash flow in
excess of certain defined or computed amounts. In addition, the Facility
requires the outstanding principal balance of revolving loans to be zero for at
least thirty consecutive days during the period from December 1 of each year to
March 31 of the next year. The Agreement prohibits the payment of dividends on
the Company's common stock and also contains, among other restrictions,
provisions limiting to varying degrees: business combinations, the issuance of
certain kinds of additional debt and the repurchase and prepayment of debt.
Under the Agreement, HDSC is only permitted to make payments or transfers to the
parent Company in the normal course of business as necessary for the parent
Company to service its Senior Note interest obligations and to otherwise conduct
its activities as a holding company. (Net assets of HDSC and its subsidiaries at
January 31, 1998 totaled $451 million.)
F-36
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SECURED CREDIT FACILITY--(CONTINUED)
The term loan component of the secured credit Facility requires quarterly
payments of $500,000 beginning November 1998, and continuing until the earlier
of (1) full payoff or (2) agreement termination (whereupon a balloon payment for
the balance plus accrued and unpaid interest is payable).
At January 31, 1998, the Company had $10 million of term loan borrowings
under the Facility, had no revolving borrowings, had outstanding letters of
credit totaling $40.3 million, had maintained its annual clean-up period for
more than the required thirty consecutive days, and was in compliance with all
covenants and restrictions.
In connection with replacing the prior Facility with the above Facility in
fiscal year 1996 with a new group of lenders, the Company recognized an
extraordinary after-tax loss for early extinguishment of debt of $2.3 million
($3.8 million pretax) from the write-off of deferred financing costs related to
the prior credit facility. Front-end fees in connection with the Facility were
$2.9 million. Additionally, $0.9 million of fees were paid in connection with
the two amendments during fiscal year 1997, which, among other things, extended
the maturity of the Facility. These fees are being amortized over the life of
the Facility.
6. LONG-TERM DEBT
Long-term debt at each year-end consisted of (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
12 1/2% Senior Notes, due 2003...................................... $ 195,000 $ 195,000
Secured term note (see Note 5)...................................... 10,000 --
--------- ---------
205,000 195,000
Less current portion of secured term note........................... (500) --
--------- ---------
Net long-term debt.................................................. $ 204,500 $ 195,000
--------- ---------
--------- ---------
</TABLE>
The 12 1/2% unsecured Senior Notes (the "Senior Notes") pay interest
semiannually, are non-callable, and are unconditionally guaranteed by all the
subsidiaries of the Company. The subsidiary guarantees are subordinate to
borrowings under the secured credit facility (see Note 5). The Senior Notes
contain covenants regarding limitations on debt incurrence and the issuance of
preferred stock. Additionally, the Senior Notes place limitations on the Company
and its subsidiaries relative to the payment of dividends or distributions.
The estimated fair value of the Senior Notes was approximately $164 million
at January 31, 1998 and $144 million at February 1, 1997. These values were
based on quoted market prices in effect at those dates.
In fiscal year 1996, in connection with the sale of the Senior Notes, the
Company offered to redeem all of its outstanding 10.25% Senior Notes due 2003
(the "Old Senior Notes") at a redemption price equal to 101% of principal, plus
accrued interest. Pursuant to this offer, the Company subsequently redeemed
approximately $155 million of its approximately $157.5 million of outstanding
Old Senior Notes. The Company later called for redemption of the approximately
$2.5 million of remaining outstanding Old Senior Notes at the indenture
specified price of 104% of principal plus accrued interest. In addition, the
Company deposited, in trust, funds sufficient to redeem, upon issuance,
approximately $2.5 million of Old Senior Notes yet to be issued under the terms
of the Company's 1993 Plan of Reorganization (the "POR"). As a result of these
transactions, the Company recognized an extraordinary after-tax loss for early
extinguishment of debt of $2.0 million ($3.5 million pre-tax). The extraordinary
loss included the redemption premiums and the write-off of the related deferred
financing costs.
Separate financial statements of the Company's subsidiary guarantors have
not been provided because (1) the subsidiary guarantors constitute all of the
Company's direct and indirect subsidiaries, (2) they have fully and
unconditionally guaranteed the Senior Notes on a joint and several basis,
(3) their aggregate assets, liabilities, earnings and equity are substantially
equivalent to those of the Company on a consolidated basis, and (4) separate
financial statements are not deemed to be material to investors.
F-37
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS
The Company's operations are conducted predominantly in leased properties,
which consist principally of retail outlets. Leases are generally for periods
between twenty to thirty years plus renewal options and generally includes fixed
rentals and rentals based on sales in excess of predetermined levels.
The composition of property under capital leases, net of accumulated
amortization, is shown below (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Retail outlets...................................................... $ 138,094 $ 138,094
Other............................................................... 982 982
--------- ---------
139,076 139,076
Accumulated amortization............................................ (36,726) (26,875)
--------- ---------
Property under capital leases, net.................................. $ 102,350 $ 112,201
--------- ---------
--------- ---------
</TABLE>
Consolidated rental expense under operating leases and rental expense based
on sales in excess of predetermined levels under capital leases are presented
below (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Capital leases:
Rental based on sales........................................ $ 803 $ 801 $ 1,251
Operating leases:
Minimum facility rentals..................................... 28,415 29,125 26,133
Equipment and other rentals.................................. 12,905 14,647 17,706
Rental based on sales........................................ 1,533 1,511 1,244
-------- -------- --------
Consolidated rental expense.................................... $ 43,656 $ 46,084 $ 46,334
-------- -------- --------
-------- -------- --------
</TABLE>
At January 31, 1998, the financing obligations represent sale/leaseback
arrangements. The related property associated with these transactions, which has
a net book value of $62.4 million at January 31, 1998, remains in property and
equipment on the Company's books and continues to be depreciated. The leases,
which have terms from 42 months to ten years, include options to purchase some
or all of the assets either at the end of the initial lease term or renewal
periods at an amount not greater than the then current fair market value of the
properties. During fiscal year 1996, the Company obtained $16.6 million of
financing through such arrangements.
F-38
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
7. LEASE COMMITMENTS--(CONTINUED)
Minimum future lease commitments under non-cancelable leases in effect at
January 31, 1998 are listed below (in thousands):
<TABLE>
<CAPTION>
CAPITAL FINANCING OPERATING
FISCAL YEARS: LEASES OBLIGATIONS LEASES TOTAL
- ------------------------------------------------------ -------- ----------- --------- --------
<S> <C> <C> <C> <C>
1998.................................................. $ 19,488 $ 8,369 $ 35,290 $ 63,147
1999.................................................. 19,159 7,699 30,817 57,675
2000.................................................. 17,396 7,789 27,742 52,927
2001.................................................. 16,931 6,257 24,906 48,094
2002.................................................. 16,546 8,393 21,926 46,865
Thereafter............................................ 151,754 17,389 122,674 291,817
-------- ------- --------- --------
Minimum rental commitments............................ $241,274 $55,896 $ 263,355 $560,525
--------- --------
--------- --------
Less amount representing interest..................... 120,579 21,796
-------- -------
Present value of net minimum lease payments........... 120,695 34,100
Current portion....................................... (6,776) (3,765)
-------- -------
$113,919 $30,335
-------- -------
-------- -------
</TABLE>
8. EMPLOYEE PLAN BENEFITS
Post Retirement Benefits
The Company accounts for post retirement benefits (such as health care) in
accordance with Statement of Financial Accounting Standards No. 106: "Employers'
Accounting for Postretirement Benefits Other Than Pensions" ("FAS 106"). This
statement requires accrual of postretirement benefits during the years an
employee provides services. Under FAS 106, the Company recognized expenses of
$0.2 million in fiscal years 1997, 1996 and 1995, respectively. The Company
funds benefit costs principally on a pay-as-you-go basis. The status of the plan
is as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, FEBRUARY 1,
1998 1997
----------- -----------
<S> <C> <C>
Accumulated postretirement benefit obligation ("APBO") for: Active
employees......................................................... $ 2,399 $ 2,212
Retirees.......................................................... 83 303
--------- ---------
2,482 2,515
Plan assets at fair value........................................... -- --
--------- ---------
Unfunded APBO....................................................... 2,482 2,515
Unrecognized actuarial gain......................................... 1,352 1,329
--------- ---------
Accrued postretirement benefit cost................................. $ 3,834 $ 3,844
--------- ---------
--------- ---------
</TABLE>
The assumed health care cost trend rate used in measuring the APBO was 10%
in fiscal year 1997 (8% for Medicare eligible retirees); grading down to 5% (5%
for Medicare eligible retirees) by fiscal year 2002 and remaining at that level
thereafter. A one percentage point increase in the assumed health care cost
trend rate would increase the APBO at the end of fiscal year 1997 by $367,400
(or by 15%) and the service and interest cost by $36,800 (or by 11%). The
assumed discount rate used in determining the APBO was 7% for both years.
401(k) Plan
The Company offers a defined contribution 401(k) savings plan (the
"401(k)") for employees meeting certain employment conditions. In addition to
permitting employee contributions, the 401(k) plan provides for Company matching
contributions. Company matching contributions were $3.0 million in fiscal year
1997, $3.6 million in fiscal year 1996 and $3.9 million in fiscal year 1995.
F-39
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
9. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
The Company is authorized to issue 15,000,000 shares of preferred stock,
par value of $0.10 per share. Pursuant to the POR 5,000,000 of shares were
authorized to be issued as Hills Stores Series A Convertible Preferred Stock the
("Preferred Stock"). As of January 31, 1998, a total of 50,060 shares of the
5,000,000 shares of the Preferred Stock remain to be issued pending resolution
of pre-petition claims and interests pursuant to the POR.
The Preferred Stock is convertible by the holders, at any time, into Hills
Stores common stock at a rate of one share of Common Stock for each share of the
Preferred Stock, subject to antidilution adjustments. During fiscal year 1997,
86,625 shares of the Preferred Stock were converted to common stock on a share
for share basis. As of January 31, 1998 and February 1, 1997, 855,109 and
941,344 shares, respectively, were outstanding.
Each share of Preferred Stock has one vote per share in the same class as
the shares of common stock. The holders of the Preferred Stock are entitled to
dividends when and if declared by the Board of Directors; however, dividend
payments are restricted under the terms of the Facility and the Senior Notes.
The Company does not expect to pay dividends in the foreseeable future.
The Company may redeem, at its option prior to October 4, 2008, all or part
of the outstanding Preferred Stock at $20 per share; and in any case shall
redeem all of the outstanding shares of Preferred Stock on October 4, 2008 at
$20 per share. Upon dissolution or liquidation of the Company, the holders of
the Preferred Stock will be entitled to receive $20 per share out of the assets
of the Company available for distribution to shareholders, in preference to the
holders of common stock and any other class or series of capital stock of the
Company that is junior to the Preferred Stock.
10. HILLS STORES COMMON STOCK
Each holder of common stock has one vote per share and is entitled
dividends when and if declared by the Board of Directors. However, dividend
payments are restricted under the terms of the Facility and the Senior Notes.
The Company does not expect to pay dividends in the foreseeable future. As of
January 31, 1998, a total of 58,151 shares of common stock remain to be issued
pending resolution of pre-petition claims and interests, pursuant to the POR.
11. STOCK COMPENSATION PLANS
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 encourages, but does not require, the
recognition of compensation expense for the fair value of stock options and
other equity instruments issued to employees. This statement gives entities a
choice of recognizing related compensation expense by adopting the new fair
value method or to continue to measure compensation using the intrinsic value
approach under Accounting Principles Board Opinion No. 25 ("APB 25"), the former
standard. If the fair value provisions of FAS 123 are not adopted, companies are
required to disclose the pro forma amounts of net earnings and earnings per
share that would have been reported had these provisions been adopted. The
Company has chosen to continue to recognize compensation expense under APB 25.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans, other than for options granted in connection with consulting services.
Such compensation expense was $61,000 and $73,000 for fiscal years 1997 and
1996, respectively.
The Company has stock-based compensation plans, which are described below.
1993 Stock Option Plan
In October 1993, the Company established an incentive and nonqualified
stock option plan (the "Option Plan") providing for the grant of nonqualified
stock options or incentive stock options. The options are granted at prices
greater than or equivalent to the market price of the common stock on the date
of each grant. The options
F-40
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STOCK COMPENSATION PLANS--(CONTINUED)
are generally subject to a five year vesting schedule, with initial vesting
beginning one year from the date of the grant, and expire ten years from the
date of the grant. A total of 1,303,763 shares of common stock are reserved for
grants of options under the Option Plan. During fiscal years 1997, 1996 and 1995
eligible participants were allowed, for a limited time, to exchange existing
options for new options with an exercise price of $5.00, $10.125 and $12.00,
respectively. The 1997 repricing was for a reduced number of new options. The
options exchanged in 1997 were subject to additional vesting restrictions, which
prohibited exercise of any vested option for one year and 50% of the vested
options for two years from the date of the repricing.
1996 Directors Stock Option Plan
During fiscal year 1996, the Company received shareholder approval of a
stock option plan for non-employee members of the Board of Directors. The plan
provided for an initial grant of 4,000 options to each non-employee member of
the Board of Directors with subsequent annual automatic grants of 2,000 options.
All options are granted at prices greater than or equivalent to the market price
of the common stock on the date of each grant. The options are subject to a
three year vesting schedule with vesting beginning from the date of the grant. A
total of 100,000 shares of common stock are reserved for grants under the plan.
In March 1997, participants were allowed to exchange existing options for a
reduced number of new options with an exercise price of the greater of $5.00 or
the closing share price on the date of acceptance. The repriced options were
subject to additional vesting restrictions, which prohibited exercise of any
vested option for one year and 50% of the vested options for two years from the
date of the repricing.
Restricted Stock Agreements
In fiscal year 1996, the Company entered into restricted stock agreements
with the Chairman of the Board and the President and Chief Executive Officer.
Pursuant to the agreements, the Company issued 120,000 shares of common stock
subject to certain restrictions. Unearned compensation was charged for the
market value of the restricted shares, shown as a reduction of common
shareholders' equity in the accompanying consolidated balance sheet, and is
being amortized ratably over the restricted period. The weighted-average fair
value of shares granted during fiscal year 1996 was approximately $10.00 per
share. During fiscal years 1997 and 1996, approximately $356,000 and $405,000
respectively, was charged to expense.
Pro Forma Information
Had compensation cost for the Company's two fixed stock option plans and
the associate stock purchase plan been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FAS 123,
the Company's net loss and loss per share would have increased to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Net loss
As reported.......................................... ($ 9,015) ($35,058) ($16,666)
Pro forma............................................ ($10,264) ($36,349) ($18,244)
Basic and diluted loss per share
As reported.......................................... ($ 0.87) ($ 3.42) ($ 1.70)
Pro forma............................................ ($ 0.99) ($ 3.55) ($ 1.86)
</TABLE>
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. The pro forma disclosure does not include awards
prior to 1995 or additional awards, which are anticipated to be made in future
years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal years 1997, 1996 and 1995:
F-41
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
11. STOCK COMPENSATION PLANS--(CONTINUED)
dividend yield of zero; expected volatility of 50%, risk-free interest rate of
6.22%, 5.83% and 5.77% respectively; and expected lives of five years.
A summary of the status of the Company's fixed stock option plans as of
January 31, 1998, February 1, 1997 and February 3, 1996, and changes during the
years ending on those dates, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
---------------------------- ---------------------------- ------------------------------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE WEIGHTED-AVERAGE
FIXED OPTIONS SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------------- -------- ---------------- -------- ---------------- ---------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year.... 871,580 $10.64 416,797 $12.36 1,014,021 $ 18.48
Granted................ 317,950 4.22 678,751 11.08 203,000 12.75
Exchanged November 4,
1995................. -- -- -- -- (337,200) 18.26
Issued in exchange on
November 4, 1995..... -- -- -- -- 224,797 12.00
Exchanged on March 8,
1996................. -- -- (330,000) 12.00 -- --
Issued in exchange on
March 8, 1996........ -- -- 330,000 10.12 -- --
Exchanged on March 11,
1997................. (687,482) 10.58 -- -- -- --
Issued in exchange on
March 11, 1997....... 453,305 5.00 -- -- -- --
Exercised.............. -- -- -- -- (4,300) 18.25
Forfeited.............. (106,739) 7.26 (223,968) 12.42 (683,521) 18.49
-------- -------- ----------
Outstanding at end of
year................. 848,614 5.69 871,580 10.64 416,797 12.36
-------- -------- ----------
-------- -------- ----------
Options exercisable at
year-end............. 200,715 141,961 231,894
Weighted-average fair
value of options
granted during the
year................. $ 2.18 $ 5.60 $ 6.40
</TABLE>
The following table summarizes information about fixed stock options
outstanding at January 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- ----------------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER
OUTSTANDING REMAINING AVERAGE EXERCISABLE AT WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICE AT 1/31/98 CONTRACTUAL LIFE EXERCISEPRICES 1/31/1998 EXERCISE PRICE
- ---------------------------- ----------- ----------------- ---------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
$2.75-$3.75................. 74,500 9.5 years $ 3.08 2,000 $ 3.00
$3.88-$4.63................. 206,450 9.0 years $ 4.43 0 $ 0.00
$5.00-$5.13................. 438,214 7.9 years $ 5.01 136,844 $ 5.00
$7.63-$18.25................ 129,450 7.3 years $ 11.52 61,871 $ 12.21
--------- ----------
848,614 200,715
--------- ----------
--------- ----------
</TABLE>
F-42
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Associate Stock Purchase Plan
Under the Associate Stock Purchase Plan, the Company is authorized to issue
up to 500,000 shares of common stock to its full-time employees. Under the terms
of the Plan, during each semiannual subscription period associates can choose to
have up to 10 percent of their annual base earnings, up to $25,000, withheld to
purchase the Company's common stock. The purchase price of the stock is 85
percent of the lower of its market price at the commencement date or at the
termination date of each offering period. During fiscal year 1997, the Company
issued 21,901 shares pursuant to this plan. The Company anticipates issuing
approximately 25,000 shares for the subscription period ending on June 30, 1998.
12. SERIES 1993 STOCK RIGHTS
Each Series 1993 Stock Right (the "Stock Right") entitles the holder to
acquire, at $0.01 per share, shares of common stock, subject to antidilution
adjustments, as determined pursuant to a formula which is based on the Company's
pro forma utilization of certain tax benefits as defined in the Stock Right
Agreements. Shares under the Stock Right Agreements are not available for
issuance until vested. During 1995, the Company repurchased 693,949 of its
700,000 outstanding stock rights in exchange for 198,271 shares of newly issued
common stock. The aggregate par value of the newly issued common stock was
reclassified from additional paid-in capital to common stock. As of January 31,
1998 and February 1, 1997, 6,051 rights were outstanding.
13. SERIES 1993 WARRANTS
Each Series 1993 Warrant entitles the holder to purchase, subject to
antidilution adjustments, one share of common stock at $30 per share. The
Warrants are callable by the Company at $.01 per Warrant at any time after
October 4, 1998 if the average closing price of common stock, subject to
antidilution adjustments, for a period of thirty consecutive trading days is
equal to or greater than $35 per share. The Warrants expire on October 4, 2000.
During fiscal year 1995, 87 warrants were exercised. None were exercised during
fiscal years 1997 and 1996. As of January 31, 1998 and February 1, 1997, 432,903
warrants were outstanding and 432,903 shares of common stock were reserved for
issuance upon exercise of the warrants.
14. RIGHTS AGREEMENT
Pursuant to a Rights Agreement adopted on August 16, 1994, the Company
declared a distribution of one purchase right (the "Right") for each share of
Common Stock and Preferred Stock then outstanding. Each Right would initially
entitle the holder to purchase, subject to adjustment, one one-thousandth share
of the Company's Series B Participating Cumulative Preferred Stock, consisting
of 55,000 shares authorized, $.10 par value per share, at an exercise price of
$75 per one one-thousandth share. Each share of Common Stock and Preferred Stock
issued after August 16, 1994 will also have one Right attached. The Rights
expire August 16, 2004 and, under certain conditions, may be redeemed by the
Company at a price of $.01 per Right. The Rights have no voting or dividend
privileges and are not currently separable from the capital stock. The Rights
would become exercisable if certain events occurred relating to a person or
group (the "Acquiring Person") acquiring or attempting to acquire 20% or more of
the outstanding shares of capital stock other than through a qualifying tender
offer. Upon the occurrence of such an event, each Right (except the Rights
beneficially owned by the Acquiring Person, which become null and void) entitles
its holder to purchase for $75 the economic equivalent of Common Stock, or in
certain circumstances, securities of the Acquiring Person, or its affiliate,
worth twice as much. After there is an Acquiring Person, the Rights may be
exchanged, at the election of the Company, for consideration per Right
consisting of one-half of the securities that would otherwise be issuable at
that time.
15. IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSINGS
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121: "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS 121
requires that the carrying value of long-lived tangible and certain intangible
assets be evaluated
F-43
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSINGS--(CONTINUED)
periodically in relation to the operating performance and estimated future cash
flows of the underlying assets. In accordance with FAS 121, the Company
recognized a pre-tax charge of $23.6 million ($11.7 million in the first quarter
of fiscal 1996 and $11.9 million in fourth quarter of fiscal 1996, in connection
with the store closings and impairments) to reduce the carrying value of certain
of its long-lived tangible and intangible assets to their estimated fair market
value. The impaired assets include property and equipment, beneficial lease
rights and reorganization value related to under performing stores. The fair
value was based on estimated future cash flows to be generated by these stores,
discounted at a rate commensurate with the risks involved.
In January 1997, the Company announced plans to close ten stores during the
first quarter of fiscal year 1997 as part of its initiatives to improve
profitability. In connection with these closures, the Company recorded in fiscal
year 1996 a pretax charge of $10.1 million to cover costs for disposal of
inventories ($5.3 million), lease terminations, net ($3.2 million), and other
related costs ($1.6 million).
During fiscal year 1997, approximately $4.8 million was incurred and
charged against the accrual for store closings, consisting primarily of cash
payments relating to lease terminations. The majority of the January 31, 1998
liability totaling $6.9 million is expected to be paid during fiscal years 1998
and 1999.
These 10 stores generated 4.6% and 3.9% of the total net sales of the
Company during fiscal years 1996 and 1995, respectively. In addition, these
stores had operating losses, excluding corporate overhead allocations, of $4.3
million and $1.7 million for fiscal years 1996 and 1995.
16. INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109: "Accounting for Income Taxes" ("FAS
109"). Under FAS 109, deferred taxes are computed on the difference between the
bases of assets and liabilities for tax reporting purposes and their
corresponding bases for financial reporting purposes. Deferred tax assets, net
of appropriate valuation reserves, may be recorded.
Temporary differences and carry forwards which give rise to significant
deferred tax assets and liabilities are as follows (in thousands):
<TABLE>
<CAPTION>
JANUARY 31, 1998 FEBRUARY 1, 1997
-------------------- --------------------
DEFERRED DEFERRED DEFERRED DEFERRED
TAX TAX TAX TAX
ASSET LIABILITY ASSET LIABILITY
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Net operating loss and tax credit carry forwards......... $ 74,369 $ -- $ 58,307 $ --
Capital lease obligations................................ 46,943 -- 49,959 --
Assets under capital leases.............................. -- 39,303 -- 45,544
Accrued expenses......................................... 33,144 -- 37,102 --
Beneficial lease rights.................................. 14,800 -- 17,161 --
Property and equipment................................... -- 21,155 -- 15,359
Inventories.............................................. 5,356 -- 11,922 --
Financing obligation--sale/leaseback..................... 8,984 -- 11,717 --
Other.................................................... 10,421 -- 10,629 --
-------- -------- -------- --------
Total deferred taxes..................................... 194,017 60,458 196,797 60,903
Valuation allowance...................................... (78,034) -- (81,318) --
-------- -------- -------- --------
Net deferred taxes....................................... $115,983 $ 60,458 $115,479 $ 60,903
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The consummation of the POR resulted in a change in ownership for federal
income tax purposes. Subsequent to the POR, a second change in ownership
occurred for federal income tax purposes. As a result, the Company's ability to
utilize its net operating loss and tax credit carry forwards is subject to an
annual limitation of $15.8 million. This limitation may be changed if additional
changes in ownership (generally determined by the
F-44
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. INCOME TAXES--(CONTINUED)
creation of new 5% equity ownership blocks, accumulating to 50%, over a rolling
three year period) are deemed to occur subsequent to the second ownership
change. For fiscal years 1996 and 1997, the Company generated estimated net
operating tax loss carry forwards of $19.7 million. Total deferred tax assets as
of January 31, 1998, include $78.0 million of deferred tax assets which arose
before the Company's emergence from bankruptcy and which have been fully
reserved. For financial reporting purposes, any benefit derived from the
reduction of the valuation allowance related to deferred tax assets in existence
at October 4, 1993 will not be credited to the tax provision, but instead will
ultimately reduce Reorganization Value.
Federal income tax carry forwards at January 31, 1998 consisted of $3.0
million of Alternative Minimum Tax credits which do not expire, and net
operating losses and general business credits which expire as follows (in
thousands):
<TABLE>
<CAPTION>
NET OPERATING TAX
LOSSES CREDITS
------------- -------
<S> <C> <C>
FISCAL YEARS:
2000...................................................... $ -- $ 413
2001...................................................... -- 797
2002...................................................... -- 664
2003...................................................... -- 1,369
2004...................................................... 329 2,196
2005...................................................... -- 1,547
2006...................................................... 60,901 949
2007...................................................... 56,848 797
2008...................................................... 10,954 944
2009...................................................... -- 174
2010...................................................... -- 492
2011...................................................... 21,519 --
2012...................................................... 19,661 --
--------- -------
$ 170,212 $10,342
--------- -------
--------- -------
</TABLE>
The provision (benefit) for income taxes consists of the following
components (in thousands):
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Current provision:
Federal.............................................. ($3,096) ($ 3,673) $ 227
State and local...................................... (301) (587) 23
------- --------- ---------
(3,397) (4,260) 250
Deferred provision:
Federal.............................................. (865) (9,159) (9,986)
State and local...................................... (84) (3,173) (1,274)
------- --------- ---------
(949) (12,332) (11,260)
Amount to be applied to reorganization value........... 2,546 2,592 14,197
------- --------- ---------
Total tax provision (benefit).......................... ($1,800) ($ 14,000) $ 3,187
------- --------- ---------
------- --------- ---------
</TABLE>
F-45
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
16. INCOME TAXES--(CONTINUED)
The income tax provision in each of the periods presented reflects an
effective tax rate that differs from the statutory federal income tax rate for
those periods. For net earnings (loss) from operations before extraordinary
items, the table below reconciles the federal statutory rate to the effective
tax rate.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Statutory tax rate............................................... (35.0%) (35.0%) (35.0%)
State and local income taxes, net of federal tax benefit......... (0.6) (2.7) 3.7
Goodwill......................................................... 18.9 5.8 20.1
Targeted jobs credit and other, net.............................. 0.1 0.6 0.7
Change in control costs.......................................... -- -- 34.2
----- ----- -----
Effective tax rate............................................... (16.6%) (31.3%) 23.7%
----- ----- -----
----- ----- -----
</TABLE>
The IRS is nearing completion of its audit of fiscal years 1991, 1992 and
1993. The Company has filed a Protest to certain adjustments proposed by the
IRS. The Company does not believe the final adjustments resulting from this
examination would have a material adverse effect on the Company's financial
condition.
17. EARNINGS PER SHARE
In fiscal year 1997, the Company adopted Statement of Financial Accounting
Standards Number 128, "Earnings per Share" ("FAS 128"). FAS 128 requires the
presentation of "basic" earnings per share (income applicable to common
shareholders divided by the weighted-average number of common shares outstanding
during the period) and "diluted" earnings per share (which gives effect to all
dilutive potential common shares that were outstanding during the period). All
prior-period earnings per share data have been restated to conform to FAS 128.
Basic and diluted earnings per share are the same for the periods ended
January 31, 1998, February 1, 1997 and February 3, 1996, as all common stock
equivalents are antidilutive, due to the net loss incurred during these periods.
Basic earnings per share was computed based on the weighted average number
of common shares assumed to be outstanding during each period. Such shares
amounted to 10,387,080, 10,252,022 and 9,809,675 for fiscal years 1997, 1996 and
1995, respectively.
If the impact would be dilutive, the following securities would be included
in the calculation of diluted earnings per share: preferred stock, stock
options, Series 1993 Warrants and stock rights (contingently issuable as
described in Note 14).
18. COMMITMENTS AND CONTINGENCIES
In September 1995, the Company and HDSC filed a suit in the Court of
Chancery of the State of Delaware against the former members of the Board of
Directors (the "Former Directors") of the Company. That action seeks, among
other things, recovery of damages caused by the breach by the Former Directors
of their fiduciary duties to shareholders arising from the refusal of the Former
Directors to approve the change in control which took place on July 5, 1995 (the
"1995 Change of Control") following the election of seven replacement directors
by the shareholders of the Company. In October 1995 the defendants filed a
motion to dismiss the suit. In February 1996, the court granted a motion of the
Former Directors to stay discovery pending the outcome of their motion to
dismiss. In March 1997, the court denied the Former Directors' motion to
dismiss.
In April 1997, three of the Former Directors, Michael Bozic, Norman S.
Matthews and John G. Reen, filed a counterclaim against the Company and the
seven replacement directors seeking damages of not less than $2.5 million for
breach of contract, unjust enrichment and intentional interference with
contractual relations arising out of allegations that the Company improperly
failed to honor their request to exercise stock options. The
F-46
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
18. COMMITMENTS AND CONTINGENCIES--(CONTINUED)
Company believes the counterclaim is without merit and has denied the
allegations and asserted various defenses. Discovery is ongoing in the case.
In August 1995, in the Court of Chancery of the State of Delaware, three
shareholders of the Company, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss,
filed a class action lawsuit against the seven new directors of the Company
elected at the 1995 annual meeting, Dickstein Partners Inc. ("Dickstein
Partners") and the Company. In November 1995, the plaintiffs amended their
complaint to include a shareholder's derivative cause of action against the
Former Directors for breach of their fiduciary duties to the Company and its
shareholders. In the amended complaint, the plaintiffs claim (under Section 225
of the Delaware Corporation Code) that in connection with Dickstein Partners
effort to solicit proxies in support of the election of its nominees for
directors of the Company, Dickstein Partners issued a number of false and
misleading statements regarding its offer to acquire all of the Company's shares
it did not already own. On the Section 225 claim, the plaintiffs seek an order
nullifying the election of directors and declaring there has been "no change of
control" of the Company. The derivative cause of action seeks damages against
the Former Directors. In January 1996 in the same Delaware Chancery Court,
another shareholder, Peter M. Fusco, filed a substantially similar class action
and shareholder derivative suit against the parties named in the Dolowich suit.
The Former Directors filed a motion to dismiss the Dolowich and Fusco suits, and
in March 1997 the court denied that motion.
The Company is also involved in various suits and claims in the ordinary
course of business.
Management does not believe that the disposition of such suits and claims
will have a material adverse effect upon the continuing operations and financial
position of the Company.
19. CHANGE IN CONTROL
On July 5, 1995, following a proxy contest in connection with the annual
meeting of shareholders held on June 23, 1995, nominees of Dickstein Partners
were certified as being elected to the Board of Directors. The Company
reimbursed Dickstein Partners for, or directly paid, approximately $1.9 million
in third-party fees and expenses incurred or committed to by Dickstein Partners
in connection with the proxy contest and the related acquisition proposal of
Dickstein Partners. This amount included $1.0 million paid by the Company to the
financial advisor of Dickstein Partners, in respect of the advisor's proposal to
refinance the indebtedness of the Company accelerated as a result of the
election of the Dickstein Partners nominees. These costs are included in the
Consolidated Statements of Operations in costs related to change in control.
In connection with the change in control, the Company recognized $45.5
million in expense, including $31.0 million related to severance and retirement
payments, including certain taxes attributable thereto, to six senior
executives, a consultant to the Company and approximately twenty associates of
the Company, $6.0 million paid to holders of the Senior Notes, and legal and
other miscellaneous change in control costs.
20. SELF-TENDER FOR COMMON STOCK
In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced a
consent solicitation to replace four members of the then current Board of
Directors with Dickstein nominees. In response to the Dickstein consent
solicitation, the Company's Board of Directors announced a program to enhance
shareholder value, including the approval of a self-tender to purchase up to
3,000,000 common shares at $25 per share in cash. Effective February 21, 1995,
the Company accepted for payment 3,000,000 shares of Common Stock which were
validly tendered pursuant to the Company's offer, and for which payment of
$75,000,000 was made in March 1995. The excess of the purchase price over the
original issue price of the Common Stock, or $15,000,000, was charged to
retained earnings. In connection with this offer, 561,863 shares of Preferred
Stock were converted to Common Stock.
F-47
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
21. STATEMENTS OF CASH FLOWS
Supplemental disclosures of cash flow information are presented in the
table below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-----------------------------------------
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
(IN THOUSANDS) 1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
NONCASH INVESTING AND FINANCING ACTIVITIES:
Preferred stock conversions to common stock.................... $ 1,733 $ 4,694 $39,508
Capital lease obligations, net................................. -- 3,735 --
CASH PAID:
Interest....................................................... 50,059 50,122 38,655
Income taxes................................................... (834) (8,956) 17,877
</TABLE>
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS, FIRST SECOND THIRD FOURTH
EXCEPT PER SHARE AMOUNTS) QUARTER QUARTER QUARTER QUARTER
-------- -------- -------- --------
<S> <C> <C> <C> <C>
FISCAL YEAR 1997
Net sales.............................................. $353,504 $349,269 $434,555 $630,946
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit........................................... $ 96,784 $ 86,148 $115,101 $163,906
-------- -------- -------- --------
-------- -------- -------- --------
Net earnings (loss)(2) $ (9,820) $(16,119) $ (3,946) $ 20,870(1)
-------- -------- -------- --------
-------- -------- -------- --------
Basic earnings (loss) per common share................. $ (0.95) $ (1.56) $ (0.38) $ 2.00
-------- -------- -------- --------
-------- -------- -------- --------
Diluted earnings (loss) per common share(3)............ $ (0.95) $ (1.56) $ (0.38) $ 1.84
-------- -------- -------- --------
-------- -------- -------- --------
FISCAL YEAR 1996
Net sales.............................................. $370,248 $388,600 $460,983 $658,646
-------- -------- -------- --------
-------- -------- -------- --------
Gross profit........................................... $ 99,263 $ 97,691 $120,831 $168,339
-------- -------- -------- --------
-------- -------- -------- --------
Loss before extraordinary loss......................... $(14,738) $(10,321) $ (2,804) $ (2,917)
-------- -------- -------- --------
-------- -------- -------- --------
Net loss(2)............................................ $(14,738) $(12,367) $ (5,036) $ (2,917)
-------- -------- -------- --------
-------- -------- -------- --------
Basic loss per common share:
Loss before extraordinary loss....................... $ (1.45) $ (1.01) $ (0.27) $ (0.28)
Extraordinary loss................................... -- ( 0.20) ( 0.22) --
-------- -------- -------- --------
Net loss............................................. $ (1.45) $ (1.21) $ (0.49) $ (0.28)
-------- -------- -------- --------
-------- -------- -------- --------
Diluted loss per common share:
Loss before extraordinary loss....................... $ (1.45) $ (1.01) $ (0.27) $ (0.28)
Extraordinary loss................................... -- (0.20) (0.22) --
-------- -------- -------- --------
Net loss............................................. $ (1.45) $ (1.21) $ (0.49) $ (0.28)
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
- ------------------
(1) Operating expenses for the fourth quarter and fiscal year ended January 31,
1998 included approximately $0.5 million of business process reengineering
costs, incurred primarily during fiscal year 1997 in connection with the
Company's systems replacement initiatives, and charged to earnings as
required by Emerging Issues Task Force Issue 97-13 "Accounting for Costs
Incurred in Connection with a Consulting Contract or an Internal Project
That Combines Business Process Reengineering and Information Technology
Transformation".
(Footnotes continued on next page)
F-48
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
QUARTERLY FINANCIAL INFORMATION (UNAUDITED)--(CONTINUED)
(Footnotes continued from previous page)
(2) In fiscal year 1997, the Company modified its approach to calculate the
interim income tax benefit compared with the approach used in fiscal year
1996. The Company believes the approach used more appropriately reflects
income taxes on a quarterly basis for 1997. Had the 1997 approach been used
in 1996, the income tax provision for the fourth quarter would have been
reduced, and the net loss decreased, by approximately $9.9 million or $0.96
per share, respectively.
In the fourth quarter of fiscal year 1996, income tax expense included a
charge of $22.8 million as the result of a lower full year effective rate
than the estimated used in the first three-quarters of the fiscal year.
(3) Diluted average shares outstanding used in the quarterly earnings per share
calculations, excluding the fourth quarter in fiscal year 1997, do not
include Preferred Shares, as the effect of the inclusion of such additional
shares would be anti-dilutive.
F-49
<PAGE>
APPENDIX FOR GRAPHIC AND IMAGE MATERIAL
Pursuant to Rule 304 of Regulation S-T, the following information presents fair
and accurate narrative descriptions of graphic and image material omitted from
the EDGAR filing due to ASCII-incompatibility and cross-references this material
to the location of each occurrence in the text.
ILLUSTRATION PAGE
A map of the 19 contiguous states and the District of Inside front cover
Columbia in which Ames operates stores; also shown are
locations of the Ames headquarters and distribution
centers. CAPTION: Ames operates over 450 stores in 19
contiguous states, as well as the District of Columbia.
A photograph of the outside of an Ames store. CAPTION: Inside front cover
Ames stores are designed to make the shopping experience
simple, fast and convenient.
A photograph of a shopper inside an Ames store. Inside back cover
CAPTION: We carry a broad selection of basic apparel.
A photograph of a page from an Ames promotional Inside back cover
circular. CAPTION: As a result of our acquisitions, we
expect our distribution of weekly promotional circulars
to increase from 10 million to 17 million.
A photograph of a product display inside an Ames store. Inside back cover
CAPTION: Our main marketing theme "Bargains by the
Bagful(Registered)" emphasizes our value pricing.
A photograph of a customer service counter inside an Inside back cover
Ames store. CAPTION: Our "A+ Customer Service Program"
enhances customer satisfaction.
<PAGE>
SHARES
AMES DEPARTMENT STORES, INC.
Common Stock
---------------------------
PROSPECTUS
, 1999
---------------------------
LEHMAN BROTHERS
NATIONSBANC MONTGOMERY SECURITIES LLC
JOHNSON RICE & COMPANY L.L.C.
TUCKER ANTHONY
INCORPORTED
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the estimated costs and expenses, other than
the underwriting discounts and commissions, payable by Ames Department Stores,
Inc. (the "Registrant") in connection with the sale of the common stock being
registered, all of which will be paid by the Registrant.
<TABLE>
<CAPTION>
AMOUNT TO
BE PAID
---------
<S> <C>
SEC registration fee.......................................... $ 41,700
NASD filing fee............................................... 30,500
NASDAQ Stock Market listing fee............................... *
Legal fees and expenses....................................... *
Accounting fees and expenses.................................. *
Printing and engraving........................................ *
Transfer agent fees........................................... *
Miscellaneous................................................. *
---------
Total.................................................... $ *
---------
---------
</TABLE>
- ------------------------
* To be provided by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant is a Delaware corporation. Subsection (b)(7) of Section 102
of the Delaware General Corporation Law (the "DGCL") enables a corporation in
its original certificate of incorporation or an amendment thereto to eliminate
or limit the personal liability of a director to the corporation or its
stockholders for monetary damages for violations of the director's fiduciary
duty, except (i) for any breach of the director's duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law,
(iii) pursuant to Section 174 of the DGCL (providing for liability of directors
for unlawful payment of dividends or unlawful stock purchases or redemptions) or
(iv) for any transaction from which a director derived an improper personal
benefit. Article Fifth of the Amended and Restated Certificate of Incorporation
of the Registrant provides that, to the fullest extent permitted by the DGCL, no
director of the Registrant shall be personally liable to the corporation or any
of its stockholders for monetary damages for breach of fiduciary duty as a
director.
The bylaws of the Registrant provide for the indemnification of directors
and officers to the extent permitted by the DGCL. Subsection (a) of Section 145
of the DGCL empowers a corporation to indemnify any director or officer, or
former director or officer, who was or is a party or is threatened to be made a
party to any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative (other than an action
by or in the right of the corporation) by reason of the fact that such person is
or was a director or officer of the corporation or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise, against
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred in connection with such action, suit
or proceeding provided that such director or officer acted in good faith in a
manner reasonably believed to be in, or not opposed to, the best interests of
the corporation, and, with respect to any criminal action or proceeding,
provided further that such director or officer has no reasonable cause to
believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
director or officer, or former director or officer, who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the corporation to procure a judgment in its favor by
reason of the fact that such person acted in any of the capacities set forth
above, against expenses (including attorneys' fees) actually and reasonably
incurred in connection with the defense or settlement of such action or suit
provided that such director or officer acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the
II-1
<PAGE>
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such director or officer shall
have been adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery or the court in which such action or suit was brought
shall determine upon application that despite the adjudication of liability but
in view of all of the circumstances of the case, such director or officer is
fairly and reasonably entitled to indemnity for such expenses which the Court of
Chancery or such other court shall deem proper.
Section 145 further provides that (i) to the extent a director or officer
of a corporation has been successful in the defense of any action, suit or
proceeding referred to in subsections (a) and (b) or in the defense of any
claim, issue or matter therein, he shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection therewith; and (ii) indemnification and advancement of expenses
provided for, by, or granted pursuant to, Section 145 shall not be deemed
exclusive of any other rights to which the indemnified party may be entitled. In
addition, Section 145 empowers the corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer of the
corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against any liability asserted against him or
incurred by him in any such capacity, or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
**1.1 -- Form of Underwriting Agreement.
2.1 -- Third Amended and Restated Plan of Reorganization of Ames Department Stores, Inc. and the other
members of the Ames Group, Citibank, N.A., as Agent, the Parent Creditor's Committee, the
Subsidiaries Creditor's Committee, the Bondholders' Committee and the Employees' Committee dated
October 23, 1992 (incorporated herein by reference to Exhibit 2 of the Registrant's Report on
Form 8-K filed with the Commission on December 31, 1992).
2.2 -- Statement of the Ames Group with respect to conditions to Consummation of Third Amended and
Restated Joint Plan of Reorganization of Ames Department Stores, Inc. and the other members of the
Ames Group, Citibank, N.A., the Parent Creditor's Committee, Subsidiaries Creditors' Committee,
Bondholders' Committee and Employees' Committee dated December 28, 1992 (incorporated herein by
reference to Exhibit 2B of the Registrant's Report on Form 8-K filed with the Commission on
December 31, 1992).
2.3 -- Ames Department Stores, Inc. Information Supplementing Disclosure Statement dated December 29,
1992 (incorporated herein by reference to Exhibit 2C of the Registrant's Report on Form 8-K filed
with the Commission on December 31, 1992).
2.4 -- Agreement and Plan of Merger, dated as of November 12, 1998, among Ames Department Stores, Inc.,
HSC Acquisition Corporation and Hills Stores Company (incorporated herein by reference to
Exhibit 99(c)(1) of the Registrant's Schedule 14D-1 filed with the Commission on November 12,
1998).
3.1 -- Amended and Restated Certificate of Incorporation of Ames Department Stores, Inc. (incorporated
herein by reference to the Registrant's definitive proxy filed with the Commission on April 8,
1996).
3.2 -- Bylaws of Ames Department Stores, Inc. as amended February 23, 1995 (incorporated by reference to
Exhibit 3(b) of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28,
1995 filed with the Commission on April 10, 1995).
**4.1 -- Specimen Certificate for shares of Common Stock, $.01 par value, of Ames Department Stores, Inc.
4.2 -- Series B Warrant Certificate for Purchase of New Common Stock of Ames Department Stores, Inc.
(incorporated herein by reference to Form 8-A filed with the Commission on December 11, 1992).
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
4.3 -- Rights Agreement, dated as of November 30, 1994, between Ames Department Stores, Inc. and Chemical
Bank, as Rights Agent (incorporated herein by reference to Exhibit 4 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended October 29, 1994 filed with the Commission on
December 13, 1994).
**5 -- Opinion of Weil, Gotshal & Manges LLP with respect to the validity of securities being offered.
**10.1 -- Indenture, dated as of , 1999 relating to Ames Department Stores, Inc.'s %
Senior Notes due 2006.
10.2 -- Retirement and Savings Plan as restated December 27, 1984, and Amendment No. 1 (incorporated
herein by reference to Exhibit 10(n) of the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 26, 1985 filed with the Commission on April 24, 1985).
10.3 -- Settlement Agreement, dated March 31, 1994, between Ames Department Stores, Inc. and Subsidiaries
and Wertheim Schroder & Co. Incorporated and James A. Harmon (incorporated herein by reference to
Exhibit 10 of the Registrant's Report on Form 8-K filed with the Commission on April 8, 1994).
10.4 -- 1994 Management Stock Option Plan (incorporated herein by reference to the Registrant's definitive
proxy statement filed with the Commission on May 5, 1994).
10.5 -- 1994 Non-Employee Directors Stock Option Plan, as amended (incorporated by reference to the
Registrant's definitive proxy statement filed with the Commission on April 13, 1998).
10.6 -- 1995 Long Term Incentive Plan (incorporated by reference to the Registrant's definitive proxy
statement filed with the Commission on April 10, 1995).
10.7 -- Employment Agreement, dated March 23, 1999, between Ames Department Stores, Inc. and Denis Lemire
(incorporated herein by reference to Exhibit 10 of the Registrant's Report on Form 8-K filed with
the Commission on April 2, 1999).
10.8 -- Employment Agreement, dated March 23, 1999, between Ames Department Stores, Inc. and Rolando de
Aguiar (incorporated herein by reference to Exhibit 10 of the Registrant's Report on Form 8-K
filed with the Commission on April 2, 1999).
10.9 -- Employment Agreement, dated June 1, 1998, between Ames Department Stores, Inc. and Joseph R.
Ettore (incorporated herein by reference to Exhibit 10(j) of the Registrant's Report on Form 8-K
filed with the Commission on June 30, 1998).
10.10 -- Second Amended and Restated Credit Agreement, dated December 31, 1998, among certain financial
institutions, as Lenders, Bank of America NT&SA, as the Administrative Agent, and Ames FS, Inc.,
Ames Merchandising Corporation and Hills Department Store Company (incorporated herein by
reference to Exhibit 10(k) of the Registrant's Report on Form 8-K filed with the Commission on
January 15, 1999).
10.11 -- Post Merger Transition and Agency Agreement, dated as of December 31, 1998, among the Gordon
Brothers Retail Partners, LLC, The Nassi Group, LLC, Hills Stores Company, Hills Department Stores
Company and Ames Merchandising Corporation (incorporated herein by reference to Exhibit 10(l) of
the Registrant's Report on Form 8-K filed with the Commission on January 15, 1999).
**21 -- Subsidiaries of Ames Department Stores, Inc.
**23.1 -- Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5).
*23.2 -- Consent of Arthur Andersen LLP.
*23.3 -- Consent of Deloitte & Touche LLP.
24 -- Power of Attorney (included on the signature page of this Registration Statement).
</TABLE>
- ------------------
* Filed herewith.
** To be filed by amendment.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4), or
497(h) under the Securities Act of 1933, shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Commission such indemnification is
against public policy as expressed in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a director,
officer or controlling person of the Registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the Registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement, to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Rocky Hill, State of Connecticut, on April 2, 1999.
AMES DEPARTMENT STORES, INC.
By: /s/ ROLANDO DE AGUIAR
-----------------------
Name: Rolando de Aguiar
Title: Executive Vice President and
Chief Financial and
Administrative Officer
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated. Each person whose name appears below hereby constitutes and
appoints each of Joseph R. Ettore, Rolando de Aguiar and David H. Lissy, or any
of them, each acting alone, such person's true and lawful attorney-in-fact, with
full power of substitution to sign for such person and in such person's name and
capacity indicated below, in connection with this Registrant's Registration
Statement on Form S-3, including to sign this Registration Statement and any and
all amendments to this Registration Statement, including Post-Effective
Amendments, and to file the same with the Securities and Exchange Commission,
hereby ratifying and confirming such person's signature as it may be signed by
said attorneys-in-fact to any and all amendments.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------------- -------------------------------------------- --------------
<S> <C> <C>
/s/ JOSEPH R. ETTORE President, Chief Executive Officer April 2, 1999
----------------------- and Director
Joseph R. Ettore
/s/ ROLANDO DE AGUIAR Executive Vice President April 2, 1999
----------------------- and Chief Financial and Administrative
Rolando de Aguiar Officer
/s/ FRANCIS X. BASILE Director April 2, 1999
-----------------------
Francis X. Basile
/s/ PAUL BUXBAUM Chairman of the Board April 2, 1999
-----------------------
Paul Buxbaum
/s/ ALAN COHEN Director April 2, 1999
-----------------------
Alan Cohen
/s/ RICHARD M. FELNER Director April 2, 1999
-----------------------
Richard M. Felner
/s/ SIDNEY S. PEARLMAN Director April 2, 1999
-----------------------
Sidney S. Pearlman
/s/ LAURIE M. SHAHON Director April 2, 1999
-----------------------
Laurie M. Shahon
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
**1.1 -- Form of Underwriting Agreement.
2.1 -- Third Amended and Restated Plan of Reorganization of Ames Department Stores, Inc. and other
members of the Ames Group, Citibank, N.A., as Agent, the Parent Creditor's Committee, the
Subsidiaries Creditor's Committee, the Bondholders' Committee and the Employees' Committee dated
October 23, 1992 (incorporated herein by reference to Exhibit 2 of the Registrant's Report on
Form 8-K filed with the Commission on December 31, 1992).
2.2 -- Statement of the Ames Group with respect to conditions to Consummation of Third Amended and
Restated Joint Plan of Reorganization of Ames Department Stores, Inc. and other members of the
Ames Group, Citibank, N.A., the Parent Creditor's Committee, Subsidiaries Creditors' Committee,
Bondholders' Committee and Employees' Committee dated December 28, 1992 (incorporated herein by
reference to Exhibit 2B of the Registrant's Report on Form 8-K filed with the Commission on
December 31, 1992).
2.3 -- Ames Department Stores, Inc. Information Supplementing Disclosure Statement dated December 29,
1992 (incorporated herein by reference to Exhibit 2C of the Registrant's Report on Form 8-K filed
with the Commission on December 31, 1992).
2.4 -- Agreement and Plan of Merger, dated as of November 12, 1998, among Ames Department Stores, Inc.,
HSC Acquisition Corporation and Hills Stores Company (incorporated herein by reference to
Exhibit 99(c)(1) of the Registrant's Schedule 14D-1 filed with the Commission on November 12,
1998).
3.1 -- Amended and Restated Certificate of Incorporation of Ames Department Stores, Inc. (incorporated
herein by reference to the Registrant's definitive proxy filed with the Commission on April 8,
1996).
3.2 -- Bylaws of Ames Department Stores, Inc. as amended February 23, 1995 (incorporated by reference to
Exhibit 3(b) of the Registrant's Annual Report on Form 10-K for the fiscal year ended January 28,
1995 filed with the Commission on April 10, 1995).
**4.1 -- Specimen Certificate for shares of Common Stock, $.01 par value, of Ames Department Stores, Inc.
4.2 -- Series B Warrant Certificate for Purchase of New Common Stock of Ames Department Stores, Inc.
(incorporated herein by reference to Form 8-A filed with the Commission on December 11, 1992).
4.3 -- Rights Agreement, dated as of November 30, 1994, between Ames Department Stores, Inc. and Chemical
Bank, as Rights Agent (incorporated herein by reference to Exhibit 4 of the Registrant's Quarterly
Report on Form 10-Q for the quarterly period ended October 29, 1994 filed with the Commission on
December 13, 1994).
**5 -- Opinion of Weil, Gotshal & Manges LLP with respect to the validity of securities being offered.
**10.1 -- Indenture, dated as of , 1999 relating to Ames Department Stores, Inc.'s %
Senior Notes due 2006.
10.2 -- Retirement and Savings Plan as restated December 27, 1984, and Amendment No. 1 (incorporated
herein by reference to Exhibit 10(n) of the Registrant's Annual Report on Form 10-K for the fiscal
year ended January 26, 1985 filed with the Commission on April 24, 1985).
10.3 -- Settlement Agreement, dated March 31, 1994, between Ames Department Stores, Inc. and Subsidiaries
and Wertheim Schroder & Co. Incorporated and James A. Harmon (incorporated herein by reference to
Exhibit 10 of the Registrant's Report on Form 8-K filed with the Commission on April 8, 1994).
10.4 -- 1994 Management Stock Option Plan (incorporated herein by reference to the Registrant's definitive
proxy statement filed with the Commission on May 5, 1994).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT DESCRIPTION
- ---------- --------------------------------------------------------------------------------------------------------
<S> <C>
10.5 -- 1994 Non-Employee Directors Stock Option Plan, as amended (incorporated by reference to the
Registrant's definitive proxy statement filed with the Commission on April 13, 1998).
10.6 -- 1995 Long Term Incentive Plan (incorporated by reference to the Registrant's definitive proxy
statement filed with the Commission on April 10, 1995).
10.7 -- Employment Agreement, dated March 23, 1999, between Ames Department Stores, Inc. and Denis Lemire
(incorporated herein by reference to Exhibit 10 of the Registrant's Report on Form 8-K filed with
the Commission on April 2, 1999).
10.8 -- Employment Agreement, dated March 23, 1999, between Ames Department Stores, Inc. and Rolando de
Aguiar (incorporated herein by reference to Exhibit 10 of the Registrant's Report on Form 8-K
filed with the Commission on April 2, 1999).
10.9 -- Employment Agreement, dated June 1, 1998, between Ames Department Stores, Inc. and Joseph R.
Ettore (incorporated herein by reference to Exhibit 10(j) of the Registrant's Report on Form 8-K
filed with the Commission on June 30, 1998).
10.10 -- Second Amended and Restated Credit Agreement, dated December 31, 1998, among certain financial
institutions, as Lenders, Bank of America NT&SA, as the Administrative Agent, and Ames FS, Inc.,
Ames Merchandising Corporation and Hills Department Store Company (incorporated herein by
reference to Exhibit 10(k) of the Registrant's Report on Form 8-K filed with the Commission on
January 15, 1999).
10.11 -- Post Merger Transition and Agency Agreement, dated as of December 31, 1998, among the Gordon
Brothers Retail Partners, LLC, The Nassi Group, LLC, Hills Stores Company, Hills Department Stores
Company and Ames Merchandising Corporation (incorporated herein by reference to Exhibit 10(l) of
the Registrant's Report on Form 8-K filed with the Commission on January 15, 1999).
**21 -- Subsidiaries of Ames Department Stores, Inc.
**23.1 -- Consent of Weil, Gotshal & Manges LLP (included in Exhibit 5).
*23.2 -- Consent of Arthur Andersen LLP.
*23.3 -- Consent of Deloitte & Touche LLP.
24 -- Power of Attorney (included on the signature page of this Registration Statement).
</TABLE>
- ------------------
* Filed herewith.
** To be filed by amendment.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report included in this registration statement and to the incorporation by
reference in this registration statement of our report dated March 15, 1999
included in Ames Department Stores, Inc. and subsidiaries' Form 10-K for the
year ended January 30, 1999 and to all references to our Firm included in this
registration statement.
ARTHUR ANDERSEN LLP
New York, New York
April 1, 1999
<PAGE>
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Ames Department
Stores, Inc. on Form S-3 of our report dated March 11, 1998 on Hills Stores
Company and subsidiaries' consolidated financial statements, appearing in this
Prospectus, which is part of this Registration Statement and to the reference to
us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
April 1, 1999
