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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/x/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 30, 1999
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
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AMES DEPARTMENT STORES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 04-2269444
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
2418 MAIN STREET, ROCKY HILL, CONNECTICUT 06067
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(860) 257-2000
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common Stock, $.01 par value NASDAQ
Series B Warrants None
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
As of March 1, 1999, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $739,802,906 based on the last reported
sale price of the Registrant's Common Stock on the NASDAQ National Market
System.
24,009,441 shares of Common Stock were outstanding on March 1, 1999.
Documents Incorporated by Reference: Portions of the Registrant's definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
end of the Registrant's fiscal year are incorporated by reference in Part III.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
INTRODUCTION
Ames Department Stores, Inc. 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.
Ames is a Delaware corporation organized in 1962 as a successor to a
business originally founded in 1958. Its principal executive offices are located
at 2418 Main Street, Rocky Hill, Connecticut, 06067 and its telephone number is
(860) 257-2000.
RECENT DEVELOPMENTS
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). That
subsidiary will shortly be merged into Ames and the $50.9 million of outstanding
Hills' senior notes not previously purchased by us will become 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
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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.
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.
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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's 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.
CUSTOMERS
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.
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
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sales in fiscal 1998 (exclusive of sales in January attributable to the acquired
Hills stores) attributable to each category:
<TABLE>
<CAPTION>
HOME LINES (39%) SOFTLINES (30%) HARDLINES (27%)
- ------------------------------------ ------------------------------------ ------------------------------------
<S> <C> <C>
o Domestics, such as sheets, towels o Women's apparel, consisting o Health and beauty care products
and bath accessories primarily of non-fashion basic o Toys
o Window treatments items, sportswear and intimates o Hardware and paints
o Home entertainment products o Men's workwear, denims, fleece o Automotive supplies
o Small appliances goods, hosiery and underwear o Sporting goods
o Housewares o Children's apparel o Stationery
o Ready-to-assemble furniture o Jewelry o Seasonal items, such as Christmas
o Patio furniture and other holiday decorations.
o Crafts
</TABLE>
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 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.
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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 "March Mania 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 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 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
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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.
Our prototype store design 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.
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>
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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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 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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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.
PATENTS, TRADEMARKS AND LICENSES
The mark "Ames" is registered with the United States Patent and Trademark
Office. We consider this mark and the associated name recognition to be valuable
to our business. We have a number of other trademarks, trade names, and service
marks, including "Bargains by the Bagful(Registered)", which has become a key
marketing slogan. Other trademarks, such as "Crafts & More(Registered)" and
"Pawsitively Pets(Registered)" are used in connection with certain of our
specialty departments within the stores. Although we consider these additional
marks and our patents and licenses to be valuable in the aggregate, none of them
individually is currently considered to have a material impact on our business.
ITEM 2. PROPERTIES.
As of March 1, 1999, Ames' store lease obligations covered a total of
31.3 million square feet, including approximately 0.9 million square feet for
stores to be closed in 1999. The average store size is approximately
68,500 square feet, of which approximately 80% is selling area.
The construction of one store, located in Monroeville, Pennsylvania, was
financed with an industrial development bond. Ames has an option to purchase
this location at nominal cost at the expiration of the lease term in May, 2003.
Ames owns the building but leases the land occupied by the store in Mercerville,
New Jersey. The land and buildings for five other store locations are owned by
Ames. The remainder of Ames' stores are leased, with leases whose initial terms
expire at various times between 1999 and 2023. The leases generally have one or
more renewal options, each permitting an extension for at least five years. In
addition, the leases typically provide for fixed annual rentals, payment of
certain taxes, insurance and other charges, and additional rentals based on a
percentage of sales in excess of certain fixed amounts. Except for certain
point-of-sale equipment that is leased, vendor-owned greeting card equipment and
leased shoe department equipment, Ames owns the fixtures and equipment in Ames
stores, some of which is subject to various financing arrangements. Most of the
fixtures and equipment in the Hills stores are leased.
Ames' warehouse and distribution facilities in Leesport, Pennsylvania and
Mansfield, Massachusetts are owned and occupy approximately 1.7 million square
feet in the aggregate. Ames' warehouse and distribution facility in Elmira, New
York is leased until May 2000. The lease allows the amount of leased space to
increase and decrease based on our business needs. The average space used in
fiscal 1998 was approximately 365,000
9
<PAGE>
feet. In the acquisition of Hills, Ames acquired two additional warehouse and
distribution facilities in Columbus and Grove City, Ohio. The facility in
Columbus is approximately 1.2 million square feet. The facility in Grove City
will close in Spring 1999.
Ames leases approximately 386,000 square feet of space in Rochester, New
York under a lease expiring on December 31, 2007, with two ten-year renewal
options. These premises have been subleased to an unaffiliated tenant for the
remainder of the lease term.
Ames owns and occupies its 225,000 square foot corporate office in Rocky
Hill, Connecticut. Ames has a lease for 11,000 square feet for plan-o-gramming
in Rocky Hill, which expires in November, 2001, and a lease, which expires in
April, 2006, for 33,000 square feet in Rocky Hill, for an in-house photography
studio and print shop. In the Hills acquisition, Ames acquired three additional
leased properties, the buying and administrative office in Canton,
Massachusetts, which will close in Fall 1999, the Hills headquarters in
Aliquippa, Pennsylvania, which will close in April 1999, and a buying office in
New York, New York, which closed in March 1999.
ITEM 3. LEGAL PROCEEDINGS.
Wage and Hour Litigation
On March 21, 1995, a class action complaint was filed against Ames in the
Superior Court Department of the Trial Court, Suffolk County, Massachusetts
entitled David W. Abrams, Individually and On Behalf of All Other Persons
Similarly Situated v. Ames Department Stores, Inc. The complaint alleged that
Ames violated Massachusetts wage and hour law by failing to pay Abrams, and
other similarly situated Assistant Managers in Massachusetts, time and one-half
their regular rates of pay for hours worked in excess of 40 hours a week. The
complaint sought injunctive relief, treble damages, costs and attorney's fees.
On April 21, 1995, the case was removed to the United States District Court for
the District of Massachusetts. Ames denied the claims on the basis that Abrams
and other similarly situated Assistant Managers were exempt employees not
entitled to overtime pay. Ames further denied that the action was properly
maintainable as a class action and that the plaintiff was a proper
representative of the purported class.
On March 14, 1996, Abrams amended his complaint to include Richard Serrano
as name representative of all Replenishment Assistant Managers located
throughout Massachusetts. On November 22, 1996, the Court remanded the claims of
Serrano and the putative class of Replenishment Assistant Managers to State
Court because Serrano failed to satisfy the amount in controversy requirement
for federal jurisdiction. On January 3, 1997, the United States District Court
for the District of Massachusetts certified a class of Hardlines and Softlines
Assistant Managers employed by Ames in any Ames store in Massachusetts on or
after March 21, 1993, but limited the class to those Assistant Managers whose
claim satisfied the amount in controversy requirement for federal jurisdiction
as of April 21, 1995, the date the case was removed to federal court. Abrams
caused notice to be sent to the class apprising them of the pending action and
their right to opt-out of the action if they did not wish to participate in the
litigation. On January 21, 1999, the parties reached a settlement in this
action, which was preliminarily approved by the United States District Court for
the District of Massachusetts on January 22, 1999. Notice of the Abrams
settlement was sent to all class members on January 26, 1999. The Abrams
settlement, which was approved by the Court on March 30, 1999, provides that
each class member will receive a calculated amount of cash and scrip usable in
Ames stores based on the number of weeks worked and individual weekly salary
levels in exchange for a release of all claims against Ames. The total of the
Abrams settlement is not expected to exceed approximately $445,000 in cash and
$150,000 in scrip.
On December 13, 1995, a class action complaint was filed and on January 23,
1996 an amended class action complaint was filed in the United States District
Court for the District of Massachusetts entitled Colleen Austin, On Behalf of
Herself and Others Similarly Situated v. Ames Department Stores, Inc. et al. The
factual allegations in the Austin complaint were essentially the same as those
in the Abrams complaint referenced above. However, the Austin complaint also
included claims against Ames and certain of its officers and directors under the
Fair Labor Standards Act, ERISA and the wage and hours laws of each state where
Ames does business and purported to state claims on behalf of Assistant Managers
in each of those states. Ames asserted, among other things, that the case was
not properly maintainable as a class action suit and that the plaintiff was not
a proper class representative. Ames also denied liability on the basis that
Austin and other similarly situated Assistant Managers
10
<PAGE>
were exempt employees and moved to dismiss the claims under ERISA and the laws
of all states except Massachusetts. On November 21, 1997, the Court granted
Ames' motion to dismiss the ERISA claims and denied the remainder of the motion.
On July 15, 1998, the Court approved a class action settlement that had been
reached by the parties. Notice of the Austin settlement was sent to all
potential class members on August 19, 1998. The Austin settlement provided that
in exchange for a release of all claims against Ames each class member who
elected to opt-in to the Austin settlement would receive a benefit, either cash
or discounts on future purchases at an Ames store, based on the number of days
worked for Ames during the class period. Individuals who wished to opt-in to the
Austin settlement were required to sign and return a consent and release form on
or before October 3, 1998. The total cost of the Austin settlement to Ames will
be approximately $1.2 million in cash and $167,000 in discounts usable on
purchases made at Ames stores.
On December 6, 1996, the remand referenced above from the United States
District Court for the District of Massachusetts of Abrams v. Ames Department
Stores, Inc. as to Richard Serrano and the putative class of Replenishment
Assistant Managers was docketed in the Superior Court Department of the Trial
Court, Suffolk County, Commonwealth of Massachusetts. This complaint alleged
that Ames violated General Laws, Chapter 151, ss. 1A by failing to pay Serrano
and other similarly situated Replenishment Assistant Managers located throughout
Massachusetts time and one-half their regular rates of pay for hours worked in
excess of 40 hours per week. Serrano agreed to a voluntary dismissal of the
action on behalf of himself and other similarly situated Replenishment Assistant
Managers pursuant to a class action settlement in a wage and hour case reached
between Ames and another former Replenishment Assistant Manager, David Root,
entered into and approved by the United States District Court for the District
of Massachusetts on January 31, 1997 (David Root, On Behalf of Himself and All
Other Persons Similarly Situated v. Ames Department Stores, Inc., Civil Action
No. 96-11301-GAO). Serrano and other former or then-current Replenishment
Assistant Managers employed by Ames in Massachusetts had the option to opt-in to
the Root settlement.
On March 18, 1997, the complaint was further amended to add Kristen Gould
as a named plaintiff to represent the putative class of Hardlines and Softlines
Assistant Managers employed by Ames in any Ames stores in Massachusetts whose
claim failed to satisfy the amount in controversy requirement for federal
jurisdiction in the Abrams case. Gould's substantive claims mirror those alleged
in the Abrams case for Massachusetts Hardlines and Softlines Assistants. Also,
on March 18, 1997, the Court dismissed Serrano's action on behalf of himself and
other similarly situated Replenishment Assistant Managers pursuant to the
settlement reached between Ames and David Root described above. This case has
gone forward solely on behalf of the Hardlines and Softlines Assistant Managers
under the caption Kristen Gould v. Ames Department Stores, Inc., in the Superior
Court Department of the Trial Court, Suffolk County, Commonwealth of
Massachusetts. Ames responded to the Gould complaint and asserted the same
defenses as it did with regard to the Abrams complaint. Gould moved for class
certification and on February 5, 1998, the Superior Court certified a class of
Hardlines and Softlines Assistant Managers employed in any Ames store in
Massachusetts on or after March 21, 1993 whose claim did not satisfy the amount
in controversy requirement for federal jurisdiction as of April 21, 1995. On
June 12, 1998, the Superior Court stayed the proceedings in the Gould complaint
until the conclusion of the Abrams complaint in the United States District Court
for the District of Massachusetts.
On February 18, 1997, a class action complaint was filed in the United
States District Court for the Northern District of New York entitled Michelle
Moschelle, Individually, and on Behalf of Herself and Others Similarly Situated
v. Ames Department Stores, Inc. et al. This complaint was substantially
identical to the Austin complaint except for the allegations regarding the named
plaintiff. Ames answered the Moschelle complaint, and asserted the same defenses
as it did with regard to the Austin complaint and moved to stay the Fourth
complaint on the ground it was duplicative of the Austin complaint. On
August 7, 1997, the District Court stayed the action pending the outcome of
Ames' partial motion to dismiss the Austin complaint. On November 19, 1998,
Moschelle agreed to a voluntary dismissal of the action on behalf of herself and
other similarly situated Hardlines and Softlines Assistant Managers pursuant to
the Austin settlement. Under the terms of the Austin settlement, Moschelle and
other former or current Hardlines and Softlines Assistant Managers employed by
Ames anywhere in the United States had the opportunity to opt-in to the Austin
settlement.
On December 15, 1998, a class action complaint was filed in the United
States District Court for the District of Connecticut entitled Edmond Smoot, III
and Yousef S.A. Syed, Individually and On Behalf of All Others Similarly
Situated v. Ames Department Stores, Inc. The factual allegations in the Smoot
complaint are essentially
11
<PAGE>
the same as those in the Austin complaint referenced above and are alleged on
behalf of those Assistant Managers who did not opt-in to the settlement of the
Austin complaint, those who opted in and continued to work for Ames and anyone
who worked for Ames as an Assistant Manager after the date of the Austin
settlement notice, but who is not otherwise covered by the previous categories.
However, the Smoot complaint does not include claims against Ames and certain of
its officers and directors under ERISA. Ames believes, among other things, that
the case is not properly maintainable as a class action suit. Ames has filed an
answer in the case in which it has also denied liability on the basis that Smoot
and Syed and other similarly situated Assistant Managers were exempt employees
and, thus, not entitled to overtime pay. On March 1, 1999, the plaintiffs moved
for class certification of the state law claims and on March 22, 1999, Ames
filed a partial objection. Discovery has commenced in this action which Ames
intends to defend vigoriously.
Other Matters
Ames is party to various claims and legal proceedings covering a wide range
of matters that arise in the ordinary course of its business. Ames 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There were no matters submitted during the fourth quarter of fiscal 1998 to
a vote of security holders, through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED MATTERS CONCERNING
SECURITY HOLDERS.
Our common stock is traded on the NASDAQ National Market System under the
symbol "AMES." The following table provides the high and low last sale prices
for our common stock as reported on NASDAQ for the fiscal quarterly periods
indicated below. These prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
FISCAL 1998 FISCAL 1997
-------------- ----------------
LOW HIGH LOW HIGH
----- ----- ----- -------
<S> <C> <C> <C> <C>
1st Quarter.......................................... $14 $25 1/2 $ 6 1/4 $10 1/4
2nd Quarter.......................................... 21 1/8 29 5/8 6 3/4 12 13/16
3rd Quarter.......................................... 10 1/2 25 3/8 12 5/8 18
4th Quarter.......................................... 18 1/8 32 1/2 12 3/8 19 5/8
</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 the
common stock.
We paid no quarterly dividends to the holders of our common stock during
these periods. Dividends cannot be declared under the terms of our bank credit
facility. 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.
On November 30, 1994, Ames adopted a Stock Purchase Rights Agreement as
described in Note 8 to the Consolidated Financial Statements.
12
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA.
The following selected financial data of Ames should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations,"as well as the Consolidated Financial Statements and related notes
appearing elsewhere in this Annual Report.
<TABLE>
<CAPTION>
FISCAL YEAR FISCAL YEAR FISCAL YEAR FISCAL YEAR
ENDED ENDED ENDED ENDED
JAN. 30, 1999(a) JAN. 31, 1998(g) JAN. 25, 1997 JAN. 27, 1996
---------------- ---------------- ------------- -------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Net sales................................ $2,507,218 $2,233,118 $2,161,680 $2,104,231
Net income (loss)........................ 33,830(h) 34,546(b) 17,301(c) (1,618)(d)
Net income (loss) per common share(f).... 1.40 1.46(b) 0.79(c) (0.08)(d)
Total assets............................. 1,483,393 610,042 536,793 502,582
Long-term debt and capital leases........ 287,714 35,733 38,220 52,531
<CAPTION>
FISCAL YEAR
ENDED
JAN. 28, 1995
-------------
<S> <C>
Net sales................................ $ 2,142,827
Net income (loss)........................ 17,026(e)
Net income (loss) per common share(f).... .79(e)
Total assets............................. 533,388
Long-term debt and capital leases........ 77,095
</TABLE>
- ------------------
(a) Includes Hills financial results for the month of January 1999.
(b) Includes charges of $1.6 million for the costs associated with the closing
of two stores.
(c) Includes charges of $9.7 million for the costs associated with the closing
of thirteen stores and an extraordinary loss, net of tax, of $1.4 million
for the early extinguishment of debt.
(d) Includes charges of $20.9 million for the costs associated with the closing
of seventeen stores and property gains of $9.1 million.
(e) Includes an extraordinary loss, net of tax, of $1.5 million for the early
extinguishment of debt; property gains of $7.5 million; and a non-recurring
gain of $12.0 million for a litigation settlement.
(f) Net income (loss) per common share has been restated to conform to the
requirements of Statement of Financial Accounting Standards No. 128
"Earnings per Share" ("SFAS No. 128"). See Note 1 to the Consolidated
Financial Statements included in this Form 10-K for a further description of
the provisions of SFAS No. 128.
(g) Fiscal year ended January 31, 1998 consisted of 53 weeks; all other years
presented consisted of 52 weeks.
(h) Includes $8.2 million for the costs associated with the closing of seven
stores.
ITEM 7. 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 Annual Report.
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
<PAGE>
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. 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.
14
<PAGE>
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 previously 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
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 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.
15
<PAGE>
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 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.
16
<PAGE>
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 $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.
17
<PAGE>
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 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 system development
staff who are implementing our year 2000 initiatives to be $3.5 million to
$4.0 million over the life of the project.
18
<PAGE>
FORWARD-LOOKING STATEMENTS
The statements contained or incorporated by reference in this Management's
Discussion and Analysis of Financial Condition and Results of Operations and
elsewhere in this Annual Report 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 Securities and Exchange 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 herein 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 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 on 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 herein.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We have exposure to interest rate volatility primarily relating to interest
rate changes applicable to revolving loans under our bank credit facility. These
loans bear interest at rates which vary with changes in (i) the London Interbank
Offered Rate (LIBOR) or (ii) a rate of interest announced publicly by Bank of
America NT&SA.
We do not speculate on the future direction of interest rates. As of
January 30, 1999, approximately $44.9 million of our debt bore interest at
variable rates. We believe that the effect, if any, of reasonably possible near
term changes in interest rates on our consolidated financial position, results
of operations or cash flows would not be significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Index to Consolidated Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
19
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVES OF THE REGISTRANT.
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. Jamesway filed for
protection under chapter 11 of the Bankruptcy Code in July 1993, emerged from
the chapter 11 case in January 1995 and re-filed for protection under chapter 11
in October 1995. Stuarts filed under chapter 11 in December 1990, emerged from
the chapter 11 case in October 1992 and re-filed for protection under chapter 11
in May 1995.
Denis T. Lemire 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. Stuarts filed under chapter 11 in
December 1990, emerged from the chapter 11 case in October 1992 and re-filed for
protection under chapter 11 in May 1995.
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
20
<PAGE>
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--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,
21
<PAGE>
AIA. Jamesway filed for protection under chapter 11 of the Bankruptcy Code in
July 1993, emerged from the chapter 11 case in January 1995 and re-filed for
protection under chapter 11 in October 1995.
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. Caldor filed
for protection under chapter 11 in September 1995.
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. Jamesway filed for
protection under chapter 11 of the Bankruptcy Code in July 1993, emerged from
the chapter 11 case in January 1995 and re-filed for protection under
chapter 11 in October 1995.
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.
22
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth each item of compensation paid, earned or awarded
over each of the preceding three years to the Chief Executive Officer and the
four other most highly paid executive officers serving at January 30, 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
----------------------------------------
ANNUAL COMPENSATION AWARDS
------------------------------- ------------ (#) SECURITIES
OTHER RESTRICTED UNDERLYING
FISCAL ANNUAL STOCKS OPTIONS ALL OTHER
NAME & PRINCIPAL POSITION YEAR SALARY BONUS(a) COMP.(g) AWARDS(b) SARS(c) COMP.(d)
- ----------------------------------------- ------ -------- -------- ---------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Joseph R. Ettore ........................ 1998 $939,423 $750,000 $2,311,675(f) $ 0 325,000(f) $2,840,538(f)
President & Chief 1997 866,346 425,000 (e) 0 0 39,589
Executive Officer 1996 815,385 575,000 (e) 0 300,000(f) 39,938
Denis T. Lemire ......................... 1998 387,500 160,000 387,575 695,700 15,000 6,900
Executive Vice President and 1997 369,712 150,000 (e) 0 0 7,860
Chief Operating Officer 1996 324,038 140,000 (e) 0 59,000 6,017
Eugene E. Bankers ....................... 1998 245,654 99,360 268,325 347,850 7,500 8,419
Senior Vice President, 1997 240,161 96,000 (e) 0 0 6,833
Marketing 1996 224,473 90,853 (e) 0 6,300 8,016
David H. Lissy .......................... 1998 234,844 94,995 268,325 347,850 7,500 7,222
Senior Vice President, 1997 231,183 91,783 (e) 0 0 6,559
General Counsel and Corporate Secretary 1996 220,193 88,679 (e) 0 6,300 6,881
Richard L. Carter ....................... 1998 227,049 91,835 268,325 347,850 7,500 5,689
Senior Vice President, 1997 223,853 88,729 (e) 0 0 7,806
Human Resources 1996 205,634 71,788 (e) 0 6,300 5,746
</TABLE>
- ------------------
(a) Includes certain signing bonuses and bonuses earned under the Annual
Incentive Compensation Plan (see below).
(b) Pursuant to the 1998 Stock Incentive Plan (the "1998 Incentive Plan") and
the 1995 Long Term Incentive Plan (the "1995 Incentive Plan"; see below), a
total of 215,000 shares of Restricted Stock in the aggregate were awarded in
Fiscal 1998. The awards were made to each Executive Vice President and each
Senior Vice President. The dollar value of the Restricted Stock award shown
in the table was calculated by multiplying the share price of Ames' common
stock on the date of the award by the number of shares awarded. As of
January 30, 1999, a total of 240,000 shares of the Restricted Stock that had
been awarded under the 1998 Incentive Plan and the 1995 Incentive Plan
remained outstanding and unvested. The total aggregate value of these shares
was $7,380,000, based on a market price of Ames' common stock of $30.75 as
of January 30, 1999.
(c) Stock options were granted to certain members of management pursuant to the
1998 Incentive Plan and the 1994 Option Plan (see below).
(d) Includes Ames' matching contributions under the Retirement and Savings Plan
(see below), excess paid life insurance; and for J. Ettore, $40,112, $31,629
and $31,943 of paid disability and life insurance coverage in fiscal years
1998, 1997 and 1996, respectively.
(e) Includes a car allowance and/or living allowance (for J. Ettore and D.
Lemire) that aggregated to the lesser of $50,000 or 10% of the individual
executive's total salary and bonus.
(f) Pursuant to the terms of an employment agreement entered into between Ames
and Mr. Ettore on June 1, 1998, Mr. Ettore surrendered rights with regard to
300,000 shares of common stock. In consideration therefor, Mr. Ettore
received (i) 70,200 shares of common stock, (ii) 125,000 stock appreciation
rights, and (iii) $2,666,100 in cash (including $1,514,700 for the payment
of taxes by Mr. Ettore on the 70,200 shares of common stock). See
"Employment Contracts" below.
(g) Amounts shown primarily represent the Cash Payment made on the Vesting Date
for the Restricted Stock (as each such term is defined below) awarded
pursuant to the 1995 Incentive Plan: Mr. Ettore ($759,375), Mr. Lemire
($354,375), Mr. Bankers, Mr. Lissy and Mr. Carter ($253,125 each). In
addition, Mr. Ettore's amount includes $1,514,700 for the payment of taxes
referenced in (f) above.
23
<PAGE>
OPTION AND SAR GRANTS IN LAST FISCAL YEAR
The table below discloses information regarding grants of stock options and
stock appreciation rights (SARs) to the named executive officers during fiscal
1998:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED
------------------------------------------------------ ANNUAL
NUMBER OF % OF RATE OF STOCK
SECURITIES TOTAL PRICE
UNDERLYING OPTIONS/SARS EXERCISE APPRECIATION
OPTIONS/SARS GRANTED TO OR BASE FOR OPTION TERM
GRANTED EMPLOYEES IN PRICE EXPIRATION ------------------------
NAME (#) FISCAL 1998 ($/SH) DATE 5% 10%
- -------------------------------- ------------ ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Joseph R. Ettore................ 200,000 35.5% $ 23.38 5/31/08 $2,942,000 $7,452,000
125,000(a) 22.2% $ 2.00(b) 5/31/08 $1,838,750 $4,657,500
Denis T. Lemire................. 15,000 2.7% $ 15.00 10/9/03 $ 62,250 $ 137,550
Eugene E. Bankers............... 7,500 1.3% $ 15.00 10/9/03 $ 31,125 $ 68,775
Richard Carter.................. 7,500 1.3% $ 15.00 10/9/03 $ 31,125 $ 68,775
David H. Lissy.................. 7,500 1.3% $ 15.00 10/9/03 $ 31,125 $ 68,775
</TABLE>
(a) Pursuant to the terms of an employment agreement entered into between the
Company and Mr. Ettore on June 1, 1998, Mr. Ettore surrendered certain
rights with regard to 300,000 shares of common stock. In consideration
therefor, Mr. Ettore received (i) 70,200 shares of common stock,
(ii) 125,000 stock appreciation rights, and (iii) $2,666,100 in cash
(including $1,514,700 for the payment of taxes by Mr. Ettore on the 70,200
shares of common stock). See "Employment Contracts" below.
(b) Equals the exercise price of the rights surrendered by Mr. Ettore as
described in footnote (a) above. The market price of the common stock on
June 1, 1998 was $23.38.
Pursuant to the 1994 Management Stock Option Plan (the "1994 Option Plan"),
Ames may grant options with respect to an aggregate of up to 1,700,000 shares of
common stock, provided that no individual optionee may receive in excess of
200,000 shares of common stock upon exercise of options granted under the 1994
Option Plan. During fiscal year 1998, options with respect to a total of 65,000
shares of common stock were issued under the 1994 Option Plan to members of
management. After terminations and exercises, options with respect to a total of
520,251 shares of common stock were outstanding as of January 30, 1999. The
exercise prices of the options are equal to the fair market value of the common
stock on the date the options were granted. Except as noted below, one-third of
the shares underlying the options may be purchased annually for each of three
years, beginning one year from the grant date. For options granted to J. Ettore
in June 1994, one-fifth of the shares underlying the options may be purchased
annually for each of five years, beginning one year after the grant date. For
all options granted on May 21, 1996 and all options granted after May 1, 1997,
100% of the shares underlying the options may be purchased one year after the
grant date. The unexercised portion of the options granted under the 1994 Option
Plan will terminate upon the expiration of five years from the grant date,
except as follows: the options granted to J. Ettore in June, 1994 terminate six
years from grant date; and the options granted to D. Lemire in August 1996
terminate ten years from grant date.
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 may be granted (or
measured) to any individual participant may not exceed 300,000. During fiscal
1998, options with respect to a total of 497,600 shares of common stock were
issued under the 1998 Incentive Plan to members of management. As of
January 30, 1999, 10,250 shares had been forfeited and the remaining 487,350
were unvested. The exercise prices are equal to the fair market value of the
common stock on the date the stock option is granted. Options issued under the
1998 Incentive Plan may be exercised one year after the grant date. This Plan
will terminate in May 2008.
24
<PAGE>
AGGREGATED SAR EXERCISES IN LAST FISCAL YEAR AND FY-END SAR/OPTION VALUES
The table below discloses information regarding aggregated exercises of
stock options and SARs by the named executive officers during Fiscal 1998 and
stock options and SARs held by the named executive officers as of January 30,
1999. There were no stock options or SARs repriced during Fiscal 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END SAR/OPTION VALUES
<TABLE>
<CAPTION>
# OF SHARES VALUE OF
UNDERLYING UNEXERCISED
UNEXERCISED IN-THE-MONEY
SARS/OPTIONS SARS/OPTIONS
AT 1/30/99 AT 1/30/99($)
# SHARES ($) VALUE EXERCISABLE/ EXERCISABLE/
NAME EXERCISED REALIZED(a) UNEXERCISABLE UNEXERCISABLE
- -------------------------------------------- --------- ----------- --------------- ---------------------
<S> <C> <C> <C> <C>
Joseph R. Ettore............................ 0 $ 0 160,000/365,000(b) $4,320,000/$5,897,625(b)
Denis T. Lemire............................. 29,000 625,710 33,333/31,667 947,657/710,093
Eugene E. Bankers........................... 27,300 546,544 0/7,500 0/118,125
David H. Lissy.............................. 27,300 522,656 0/7,500 0/118,125
Richard L. Carter........................... 0 0 17,300/7,500 444,385/118,125
</TABLE>
- ------------------
(a) Dollar value realized represents the number of options exercised multiplied
by the difference between the market price of Ames' common stock at date of
exercise and the strike price of the options.
(b) Includes 125,000 SARs granted to J. Ettore pursuant to an employment
contract which is more fully described below. The dollar value of the SARs
in the table is calculated by multiplying the number of SARs times the
difference between (i) $2.00 (representing the exercise price of certain
rights surrendered by Mr. Ettore in connection with the Ettore Agreement (as
defined)) and (ii) $28.741, the average closing price of a share of common
stock during the twenty trading days prior to January 30, 1999.
All SARs granted to members of management in connection with the Ames'
emergence from Chapter 11 protection in 1992 expired as of December 30, 1997.
During Fiscal 1997, a total of 166,683 such SARs were exercised.
LONG-TERM INCENTIVE PLAN AWARDS
There were 215,000 shares of Restricted Stock (35,000 pursuant to the 1995
Incentive Plan and 180,000 pursuant to the 1998 Incentive Plan as defined
previously) awarded to certain executive officers during fiscal year 1998.
Ames' 1995 Incentive Plan was approved by the stockholders on May 24, 1995.
The purpose of the 1995 Incentive Plan is to promote Ames' long term success by
affording certain officers with an opportunity to acquire an ownership interest
in Ames in order to incentivize such persons and to align their financial
interests with Ames' stockholders. Pursuant to the 1995 Incentive Plan, Ames may
make awards ("Awards") of an aggregate of up to 500,000 shares of common stock
that are subject to restrictions on transfer thereof ("Restricted Stock") and a
cash payment (a "Cash Payment") in an amount up to 50% of the Fair Market Value
(as defined in the 1995 Incentive Plan) of the Restricted Stock determined as
of, and paid on, the third anniversary of the date of grant (the "Vesting
Date"). The Cash Payment is intended to defray a substantial portion of an Award
recipient's federal and state income tax liabilities on the Award (including the
Cash Payment) in order to allow the recipient to receive the Restricted Stock
substantially free and clear on the Vesting Date.
Officers eligible for Awards under the 1995 Incentive Plan are the Chief
Executive Officer, each Executive Vice President and each Senior Vice President.
The Compensation Committee administers the 1995 Incentive Plan. During 1998,
there were 35,000 shares of Restricted Stock issued pursuant to the 1995
Incentive Plan. As of January 30, 1999, 295,000 shares in the aggregate had
vested, and 60,000 shares remain unvested.
The 1998 Incentive Plan (as defined above) was approved by the stockholders
in May 1998. The purpose of the 1998 Incentive Plan is intended to provide
incentives which will attract, retain and motivate highly competent persons as
key employees by providing them opportunities to acquire shares of common stock
or receive
25
<PAGE>
monetary payments based on the value of such shares. The 1998 Incentive Plan
makes available for Awards (as defined in the 1998 Incentive Plan) 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 participant may not exceed
300,000. Common stock awarded under the 1998 Incentive Plan vests 50% on the
fourth anniversary from the date of grant and 50% on the fifth anniversary.
There is no cash payment to be made related to the vesting of the grant.
Officers eligible for Awards under the 1998 Incentive Plan are such key
employees of Ames as the Board of Directors in its sole discretion determines to
be significantly responsible for the success, future growth and profitability of
Ames. During 1998, there were 195,000 shares of Restricted Stock issued pursuant
to the 1998 Incentive Plan and as of January 30, 1999, all 180,000 shares remain
unvested.
ANNUAL INCENTIVE COMPENSATION PLAN
Ames has an Annual Incentive Compensation Plan (the "Annual Bonus Plan")
that is subject to annual review by the Compensation Committee and the Board of
Directors. The Annual Bonus Plan provides annual incentive cash bonuses based on
the achievement of Ames' financial goals for the year (as well as customer
service goals for store and field management). Pursuant to the Annual Bonus
Plan, bonuses for fiscal year 1998 will be paid in May 1999. Participants must
be active Ames employees at the time the bonus payments are made to earn a
bonus.
RETIREMENT AND SAVINGS PLAN
Ames has a defined contribution retirement and savings plan (the
"Retirement and Savings Plan") that is qualified under Sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as amended. Employees who have
reached the age of 21 are eligible to participate after one year of service
provided they 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), Ames contributes to the Retirement and
Savings Plan an amount equal to 50% of such contribution. A participant may
contribute to the plan from 1% to 18% of annual compensation on a pre-tax or
after-tax basis, or a combination of both. Participants who terminate their
employment with Ames are entitled to receive the full amount of their
contributions and, depending on the length of the participant's service to Ames,
a portion of Ames' matching contributions.
The following table sets forth as to the named executive officers (those
listed in the Summary Compensation Table), and all other officers and employees
of Ames as a group, the aggregate matching contributions by Ames under the
Retirement and Savings Plan during fiscal year 1998:
<TABLE>
<CAPTION>
AGGREGATE MATCHING
CONTRIBUTIONS
------------------
<S> <C>
Joseph R. Ettore................................ $ 4,952
Denis T. Lemire................................. 4,880
Eugene E. Bankers............................... 5,270
David H. Lissy.................................. 5,016
Richard L. Carter............................... 4,470
All other employees and officers................ $3,130,783
</TABLE>
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.
Benefits under the Retirement Plan are payable upon termination of
employment due to retirement, death or disability. The annual benefit is equal
to two-thirds of the participant's average annual base salary during the
five-year period of highest compensation preceding such termination of
employment. The maximum annual benefit under the Retirement Plan is $100,000,
reduced by an amount equal to certain of such participant's annual
26
<PAGE>
Social Security benefits. Each participant in the Retirement Plan is entitled to
benefits for a period of 10 years. Upon the earlier death of the participant, at
Ames' option, the future payments as scheduled or the then present value of all
unpaid benefits would be paid to the participant's estate. Joseph Ettore,
current President, Chief Executive Officer and Director, potentially qualifies
for benefits under this plan. As of January 30, 1999, Mr. Ettore had completed
approximately fifty-six months of credited service as a full-time officer and
director of Ames. No payments were made under this plan in fiscal year 1998.
COMPENSATION OF DIRECTORS
Ames' directors who are not full-time Ames employees (the "Outside
Directors") receive a base fee of $40,000 in director's fees ($80,000 per year
for the Chairman) for six regular meetings and $3,000 for each additional Board
meeting and are reimbursed for their expenses. Directors are also compensated at
the rate of $10,000 per year for up to four meetings for each committee on which
they serve and $2,500 for each additional committee meeting. For fiscal year
1998, Board activity and meetings exceeded the anticipated number of regular
meetings. The directors, however, determined to limit their compensation for
fiscal year 1998 to the base fee, and to forego any additional compensation for
additional meetings.
Pursuant to Ames' 1994 Non-Employee Directors Stock Option Plan, as amended
(the "Amended Non-Employee Plan"), directors who are not full-time Ames
employees are granted options to purchase common stock of Ames on the date of
each annual meeting of stockholders of the Company. Commencing with the May 27,
1998 Annual Meeting, the number of shares granted on the date of each annual
meeting is 7,500. All options terminate ten years after date of grant. The
exercise prices of the options are equal to the fair market value of the Common
Stock on the date of grant. The options become exercisable in full six months
after date of grant. As of January 30, 1999, Messrs. Basile, Buxbaum, Cohen and
Pearlman had been granted 22,500 options each and Mr. Felner and Ms. Shahon had
been granted 15,000 options each.
EMPLOYMENT CONTRACTS
Set forth below are descriptions of the material features of the employment
contracts between Ames and Joseph R. Ettore, President and Chief Executive
Officer, Denis T. Lemire, Executive Vice President and Chief Operating Officer,
and Rolando de Aguiar, Executive Vice President and Chief Financial and
Administrative Officer.
Ames is party to an employment agreement with Joseph Ettore dated June 1,
1998 and expiring May 31, 2004 (the "Ettore Agreement"), pursuant to which
Mr. Ettore serves as President and Chief Executive Officer of Ames. Under the
Ettore Agreement, Mr. Ettore is entitled to a base salary of $1,000,000 per year
through May 31, 2002, and $1,250,000 thereafter; an annual bonus of up to 75% of
his base salary then in effect; an option to acquire up to 200,000 shares of
common stock, which will vest and become exercisable on May 31, 2003; a bonus of
$450,000 and $550,000, payable on June 30, 1999, and at the end of the term of
Mr. Ettore's employment, respectively; and an annual automobile allowance,
payable in equal monthly installments of not less $1,800 per month.
In addition, in consideration of Mr. Ettore's surrender of options to
purchase an aggregate of 300,000 shares of common stock, which right was granted
to Mr. Ettore pursuant to his prior employment agreement, Mr. Ettore received
(a) a stock award of 70,200 shares of common stock in accordance with Ames' 1998
Incentive Plan, (b) $2,666,100 in cash and (c) 125,000 fully vested stock
appreciation rights ("SARs"), which entitle Mr. Ettore to receive, in the
aggregate, an amount equal to (x) the number of SARs which Mr. Ettore elects to
exercise on or after May 31, 1999 multiplied by (y) the difference between
(i) $2.00 (representing the exercise price of certain rights surrendered by Mr.
Ettore in connection with the Ettore Agreement) and (ii) the Average Stock Price
(as defined in the Ettore Agreement) as of the date of such election.
During the term of the Ettore Agreement, Ames is required to reimburse
Mr. Ettore $12,000 per year for the cost of maintaining a policy insuring the
life of Mr. Ettore with a face amount of $500,000; provide additional life
insurance in the face amount of $500,000 and maintain a disability insurance
policy that will pay Mr. Ettore 60% of his base salary during any period of
disability up to age 65. In addition, Ames will maintain customary directors'
and officers' liability insurance for Mr. Ettore if such insurance is available
to Ames at reasonable cost.
27
<PAGE>
In the event that Ames terminates the employment of Mr. Ettore without
cause (as such term is defined in the Ettore Agreement), or if Mr. Ettore
terminates his employment for Good Reason (as such term is defined in the Ettore
Agreement) Mr. Ettore will be entitled to (a) his base salary for the remaining
term of the Ettore Agreement when it would otherwise be payable; (b) any annual
bonus prorated to the effective date of termination; (c) immediate vesting of
his stock options as of the date of termination; and (d) coverage under Ames'
medical plan for one year after the date of termination. If Mr. Ettore's
employment is terminated by Ames for cause or if Mr. Ettore terminates his
employment without Good Reason, he will receive no further compensation or other
benefits under the Ettore Agreement except for any amounts to which he was
entitled prorated to the effective date of termination.
Ames is party to an employment agreement with Denis Lemire dated as of
March 23, 1999 and expiring May 31, 2003 (the "Lemire Agreement"), pursuant to
which Mr. Lemire serves as Executive Vice President and Chief Operating Officer
of Ames. Under the Lemire Agreement, Mr. Lemire is entitled to an initial base
salary of $500,000 per year increasing to $600,000 per year over the term of the
contract; an annual bonus under the Ames' Annual Bonus Plan; a sign-on bonus of
$100,000 payable at the end of the Term of Employment (as such term is defined
in the Lemire Agreement); an option to acquire 100,000 shares of common stock
under the 1998 Incentive Plan; an annual automobile allowance; and other
compensation and benefits in effect from time to time for Ames' senior executive
officers.
During the term of the Lemire Agreement, Ames is required to provide a
policy insuring the life of Mr. Lemire in the face amount of Mr. Lemire's base
salary then in effect, and maintain a disability insurance policy that will pay
Mr. Lemire 60% of his base salary during any period of disability up to age 65.
In the event that Ames terminates the employment of Mr. Lemire without
cause (as such term is defined in the Lemire Agreement), or if Mr. Lemire
terminates his employment for Good Reason (as such term is defined in the Lemire
Agreement), Mr. Lemire would be entitled to (a) his base salary for the
remaining term of the Lemire Agreement when it would otherwise be payable;
(b) any annual bonus prorated to the effective date of termination;
(c) immediate vesting of his stock options as of the date of termination; and
(d) coverage under the Ames' medical plan for one year after the date of
termination. If Mr. Lemire's employment is terminated by Ames for cause, or if
Mr. Lemire terminates his employment without Good Reason, he shall receive no
further compensation or other benefits under the Lemire Agreement except for any
amounts to which he was entitled prorated to the effective date of termination.
If Mr. Lemire teminates his employment upon a Change in Control of the Company
(as such term is defined in the Continuity Plan referred to below) or any
successor or replacement plan, he will be entitled to the greater of the
benefits provided by (x) the Continuity Plan, and (y) any such successor or
replacement plan and (z) the benefits provided by the Lemire Agreement.
Ames is party to an employment agreement with Rolando de Aguiar dated as of
March 23, 1999 and expiring May 31, 2003 (the "de Aguiar Agreement"), pursuant
to which Mr. de Aguiar serves as Executive Vice President and Chief Financial
and Administrative Officer of Ames. Under the de Aguiar Agreement, Mr.
de Aguiar is entitled to an initial base salary of $400,000 per year increasing
to $500,000 per year over the term of the contract; an annual bonus under Ames'
Annual Bonus Plan; a sign-on bonus of $75,000 payable at the end of the Term of
Employment (as such term is defined in the de Aguiar Agreement); an option to
acquire 75,000 shares of common stock under the 1998 Incentive Plan; an annual
automobile allowance; and other compensation and benefits in effect from time to
time for Ames' senior executive officers.
During the term of the de Aguiar Agreement, Ames is required to: provide a
policy insuring the life of Mr. de Aguiar in the face amount of Mr. de Aguiar's
base salary then in effect, and maintain a disability insurance policy that will
pay Mr. de Aguiar 60% of his base salary during any period of disability up to
age 65.
In the event that Ames terminates the employment of Mr. de Aguiar without
cause (as such term is defined in the de Aguiar Agreement), or if Mr. de Aguiar
terminates his employment for Good Reason (as such term is defined in the
de Aguiar Agreement), Mr. de Aguiar would be entitled to (a) his base salary for
the remaining term of the de Aguiar Agreement when it would otherwise be
payable; (b) any annual bonus prorated to the effective date of termination;
(c) immediate vesting of his stock options as of the date of termination; and
(d) coverage under Ames' medical plan for one year after the date of
termination. If Mr. de Aguiar's employment is terminated by Ames for cause, or
if Mr. de Aguiar terminates his employment without Good Reason, he shall receive
no further compensation or other benefits under the de Aguiar Agreement except
for any amounts to
28
<PAGE>
which he was entitled prorated to the effective date of termination. If Mr.
de Aguiar terminates his employment upon a Change in Control of Ames (as such
term is defined in the Continuity Plan referred to below) or any successor or
replacement plan, he will be entitled to the greater of the benefits provided by
(x) the Continuity Plan, and (y) any such successor or replacement plan and
(z) the benefits provided by the de Aguiar Agreement.
INCOME CONTINUATION PLAN
The named executive officers of Ames (those listed in the Summary
Compensation Table), except for Mr. Ettore and Mr. Lemire, who have separate
contracts (see above), participate in an Income Continuation Plan that
guarantees up to one year's salary in the event of termination other than for
cause. Certain other officers of Ames also participate in the plan.
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 by the Company other than for death, disability, cause (as defined in
the Continuity Plan) or by the participant for good reason (as defined in the
Continuity Plan) within 18 months after a change of control of Ames, the
participant will receive a lump sum cash severance payment. The severance
payment is 2.99 times Base Compensation for the President and Executive Vice
Presidents, 2 times Base Compensation for Senior Vice Presidents and selected
Vice Presidents, and 1 times Base Compensation for other Vice Presidents. Base
Compensation is defined generally as the sum of the participant's annual base
compensation in effect immediately prior to the participant's termination plus
one-third of the value of the cash and stock bonuses paid to the participant
during the 36 months ending on the date of termination. For purposes of the
Continuity Plan, a change of control includes, but is not limited to, the
acquisition by any person of beneficial ownership of 20% or more of the
Company's 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.
ADDITIONAL INFORMATION WITH RESPECT TO BOARD OF DIRECTORS INTERLOCKS AND INSIDER
PARTICIPATION IN COMPENSATION DECISIONS
Joseph Ettore has been a member of the Board of Directors and an executive
officer of Ames since June, 1994. However, he did not participate as a Board
member in Board deliberations in fiscal year 1998 relating to his own executive
compensation.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Ames is not aware of any person or group of persons who is known to have
beneficially owned more than 5% of the total outstanding shares of the common
stock as of March 1, 1999.
SECURITY OWNERSHIP OF MANAGEMENT
As of March 1, 1999, Ames' directors and officers as a group were
beneficial owners of 1,145,892 shares of its common stock. As used herein,
"beneficial ownership" means the sole or shared power to vote or invest either
common stock or warrants of Ames, or the right to acquire common stock or
warrants within sixty days.
Ames is not aware of any arrangements, including any pledge by any person
of securities of Ames, which may at a subsequent date result in a change of
control of Ames.
29
<PAGE>
Listed below are the number of shares of common stock beneficially owned by
the named executive officers (those listed in the Summary Compensation Table)
and all executive officers as a group as of March 1, 1999:
<TABLE>
<CAPTION>
TOTAL SHARES
OF COMMON
SHARES OF EXERCISABLE STOCK
COMMON STOCK STOCK BENEFICIALLY PERCENT OF
NAME OF BENEFICIAL OWNER OWNED(a) OPTIONS(b) OWNED CLASS
- --------------------------------------------------------- ------------ ----------- ------------ ----------
<S> <C> <C> <C> <C>
J. Ettore................................................ 160,200 160,000 320,200 1.3%
D. Lemire................................................ 99,000 33,333 132,333 *
E. Bankers............................................... 62,750 0 62,750 *
D. Lissy................................................. 62,264 0 62,264 *
R. Carter................................................ 50,000 17,300 67,300 *
All executive officers as a group........................ 732,875 256,633 989,508 4.0%
</TABLE>
- ------------------
(a) The shares listed include 195,000 shares of Restricted Stock awarded under
the 1998 Incentive Plan. These shares vest 50% each on the fourth and fifth
anniversaries of the date of grant. Except as noted in the following
sentence, each named executive has sole voting and investment power in the
shares listed. Mr. Lemire holds 40,000 of his shares jointly with his wife
and Mr. Lissy holds 47,736 of his shares jointly with his wife.
(b) Represents shares of common stock that may be acquired within 60 days
through the exercise of stock options under the 1994 Management Stock Option
Plan.
* Percentage is less than 1%
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Since 1996, Mr. Buxbaum has owned a 50% equity interest in Dealco, Inc., an
entity that has assisted Ames in identifying opportunities for close-out and
other off price purchases in exchange for commissions. In fiscal 1998, Ames paid
approximately $135,198 and $4,056 for direct purchases and commissions,
respectively, to Dealco, Inc.
During fiscal 1998, Grant Sanborn, Senior Vice President, Store Operations
and Gregory Lambert, former Senior Vice President, Finance received loans from
Ames each in the amount of $100,000. Mr. Lambert's loan was forgiven by Ames in
connection with his termination in January 1999. Mr. Sanborn's loan remains
outstanding and bears interest at the annual rate of 5.51%. To the knowledge of
Ames, there were no other related transactions or business relationships, with
directors or executive officers of Ames during fiscal 1998, or any currently
proposed, that would require disclosure.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires Ames'
officers and directors and persons who own more than ten percent of Ames' common
stock, to file initial reports of ownership and changes in ownership with the
Securities and Exchange Commission and NASDAQ. Additionally, Item 405 of
Regulation S-K under the Exchange Act requires Ames to identify those
individuals for whom one of the above referenced reports was not filed on a
timely basis during the most recent fiscal year or prior fiscal years.
To the knowledge of Ames, there were no director or officer reporting
delinquencies except for a filing of a Form 4 by Paul Lanham regarding a sale of
stock and a filing of a Form 5 by Paul Buxbaum reflecting an acquisition (by
gift) of shares of common stock.
30
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) Documents Filed as Part of this Form 10-K
1. Financial Statements
The Financial Statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Form 10-K.
2. Financial Statement Schedule
The Financial Statement Schedule listed in the accompanying Index
to Consolidated Financial Statements is filed as part of this
Form 10-K.
3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the
Exhibit Index immediately preceding such Exhibits, incorporated
herein by reference.
(b) Reports on Form 8-K
Ames filed a Current Report on Form 8-K dated January 15, 1999 (and a
related Form 8-KA dated March 16, 1999) regarding the consummation of the
acquisition of Hills Stores Company. The following financial statements were
filed with the Form 8-KA:
Independent Auditors' Report on Hills Stores Company and Subsidiaries
Consolidated Financial Statements for the Fiscal Years ended January 31,
1998, February 1, 1997, and February 3, 1996
Hills Stores Company and Subsidiaries: Consolidated Balance Sheets as of
January 31, 1998 and February 1, 1997
Hills Stores Company and Subsidiaries: Consolidated Statements of
Operations, Consolidated Statements of Cash Flows, and Consolidated
Statements of Common Shareholders' Equity for the Fiscal Years ended
January 31, 1998, February 1, 1997, and February 3, 1996
Hills Stores Company and Subsidiaries: Unaudited Condensed Consolidated
Balance Sheets as of October 31, 1998 and November 1, 1997
Hills Stores Company and Subsidiaries: Unaudited Condensed Consolidated
Statements of Operations and Condensed Consolidated Statements of Cash Flows
for the thirty-nine weeks ended October 31, 1998 and November 1, 1997
Pro Forma Condensed Consolidated Balance Sheet as of October 31, 1998
Pro Forma Condensed Consolidated Statement of Operations for the Fiscal Year
ended January 31, 1998
Pro Forma Condensed Consolidated Statement of Operations for the thirty-nine
weeks ended October 31, 1998
31
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
AMES DEPARTMENT STORES, INC.
(Registrant)
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------------------------- -------------------------------------------- -------------
<S> <C> <C>
/s/ JOSEPH R. ETTORE President, Chief Executive Officer April 1, 1999
---------------------- and Director
Joseph R. Ettore
/s/ ROLANDO DE AGUIAR Executive Vice President, April 1, 1999
---------------------- Chief Financial and Administrative Officer
Rolando de Aguiar
/s/ MARK VON MAYRHAUSER Vice President, Controller April 1, 1999
----------------------
Mark von Mayrhauser
</TABLE>
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
<TABLE>
<CAPTION>
NAME TITLE DATE
- -------------------------------------------- -------------------------------------------- -------------
<S> <C> <C>
/s/ PAUL M. BUXBAUM Director and Chairman April 1, 1999
----------------------
Paul M. Buxbaum
/s/ FRANCIS X. BASILE Director April 1, 1999
----------------------
Francis X. Basile
/s/ ALAN COHEN Director April 1, 1999
----------------------
Alan Cohen
/s/ RICHARD M. FELNER Director April 1, 1999
----------------------
Richard M. Felner
/s/ SIDNEY S. PEARLMAN Director April 1, 1999
----------------------
Sidney S. Pearlman
/s/ LAURIE M. SHAHON Director April 1, 1999
----------------------
Laurie M. Shahon
</TABLE>
32
<PAGE>
AMES DEPARTMENT STORES, INC.
AND SUBSIDIARIES
------------------------
FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
(FORM 10-K)
EXHIBITS
FOR THE FISCAL YEARS ENDED JANUARY 30, 1999,
JANUARY 31, 1998 AND JANUARY 25, 1997
(WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS)
------------------------
33
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE FOR THE FISCAL YEARS ENDED
JANUARY 30, 1999, JANUARY 31, 1998 AND JANUARY 25, 1997
FINANCIAL STATEMENTS:
Report of Independent Public Accountants.
Consolidated Statements of Operations for the fiscal years ended January 30,
1999, January 31, 1998 and January 25, 1997.
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998.
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended January 30, 1999, January 31, 1998 and January 25, 1997.
Consolidated Statements of Cash Flows for the fiscal years ended
January 30, 1999, January 31, 1998 and January 25, 1997.
Notes to Consolidated Financial Statements.
SCHEDULE:
II. Valuation and Qualifying Accounts for the fiscal years ended January
30, 1999, January 31, 1998 and January 25, 1997.
SCHEDULES OMITTED:
All other schedules are omitted as they are not applicable or the
information is shown in the consolidated financial statements or notes thereto.
34
<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.
/s/ ARTHUR ANDERSEN LLP
New York, New York
March 15, 1999
35
<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.)
36
<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.)
37
<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.)
38
<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.)
39
<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.
40
<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.
41
<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.
42
<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.
43
<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.
44
<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.
45
<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.
46
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(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
- ------------------------------------------------------------------------------- --------------
(000'S 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.
47
<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).
48
<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.
49
<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.
50
<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.
51
<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)
52
<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
53
<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.
54
<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
55
<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.
56
<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.
57
<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.
58
<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.
59
<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.
60
<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.
61
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ---------- ------------------------------------------------------------------------------
<S> <C>
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 By-laws of Ames Department Stores, Inc. as amended February 23, 1995
(incorporated herein by reference to Exhibit 3(b) of the Registrant's Annual
Report on Form 10-K for the fiscal year ended January 28, 1995).
4.1 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).
4.2 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).
10.1 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).
10.2 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).
10.3 1994 Management Stock Option Plan (incorporated herein by reference to the
Registrant's definitive proxy statement filed with the Commission on May 5,
1994).
10.4 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).
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NUMBER EXHIBIT
- ---------- ------------------------------------------------------------------------------
<S> <C>
10.5 1995 Long Term Incentive Plan (incorporated by reference to the Registrant's
definitive proxy statement filed with the Commission on April 10, 1995).
10.6 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).
10.7 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).
10.8 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).
10.9 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 Stores 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).
10.10 Post Merger Transition and Agency Agreement, dated as of December 31, 1998,
among the Gordon Brothers Retail Partners, LLC and The Nassi Group, LLC, Hills
Stores Company, Hills Department Store 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).
10.11 1998 Stock Incentive Plan (incorporated herein by reference to the
Registrant's definitive proxy statement filed with the Commission on April 8,
1998).
11 Schedule of computation of basic and diluted net earnings per share.
21 Subsidiaries of the Registrant.
27 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 11
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED
NET EARNINGS PER SHARE
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED
JANUARY 30, JANUARY 31, JANUARY 25,
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Income before extraordinary item......................................... $33,830 $34,546 $18,655
Extraordinary loss, net.................................................. -- -- (1,354)
------- ------- -------
Basic and diluted net income........................................ $33,830 $34,546 $17,301
------- ------- -------
------- ------- -------
For Basic Earnings Per Share:
Weighted average number of common shares outstanding during the
period.............................................................. 23,010 21,723 20,467
Basic earnings per share:
Basic income per share before extraordinary item....................... $ 1.47 $ 1.59 $ 0.91
Extraordinary loss..................................................... -- -- (0.06)
------- ------- -------
Basic net income per share.......................................... $ 1.47 $ 1.59 $ 0.85
------- ------- -------
------- ------- -------
For Diluted Earnings Per Share:
Weighted average number of common shares outstanding during the
period.............................................................. 23,010 21,723 20,467
Add: Common stock equivalent shares represented by
-- Series B Warrants............................................. 98 95 (a)
-- Series C Warrants............................................. 440 1,018 1,191
-- Options under 1994 Management Stock Option Plan and 1998 Stock
Incentive Plan................................................ 606 47 147
-- Options under 1994 Non-Employee Director Stock Option Plan.... 62 766 7
------- ------- -------
Weighted average number of common and common equivalent shares used in
the calculation of diluted earnings per share....................... 24,216 23,649 21,812
------- ------- -------
------- ------- -------
Diluted earnings per share:
Diluted income per share before extraordinary item..................... $ 1.40 $ 1.46 $ 0.85
Extraordinary loss..................................................... -- -- (0.06)
------- ------- -------
Diluted net income per share........................................... $ 1.40 $ 1.46 $ 0.79
------- ------- -------
------- ------- -------
</TABLE>
- ------------------
(a) These options/warrants were not considered common stock equivalent shares
because the exercise price exceeded the market price of the common stock for
all or substantially all of the period.
<PAGE>
EXHIBIT 21
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
As of January 30, 1999, the subsidiaries of the Company were as follows:
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
-------------
<S> <C>
Ames Transportation Systems, Inc................................................................. Delaware
Ames Realty II, Inc.............................................................................. Delaware
HSC Acquisition Corp............................................................................. Delaware
Hills Stores Company........................................................................... Delaware
Hills Department Store Company.............................................................. Delaware
Canton Advertising, Inc................................................................... Massachusetts
HDS Transport, Inc........................................................................ Ohio
Corporate Vision, Inc..................................................................... Massachusetts
Hills Distributing Company................................................................ Delaware
Ames FS, Inc..................................................................................... Delaware
AMD, Inc....................................................................................... Delaware
Ames Merchandising Corporation.............................................................. Delaware
</TABLE>
As of March 31, 1999, the subsidiaries of the Company were restructured as
follows:
<TABLE>
<CAPTION>
STATE OF
NAME INCORPORATION
-------------
<S> <C>
Ames Transportation Systems, Inc................................................................. Delaware
Ames Realty II, Inc.............................................................................. Delaware
Hills Stores Company............................................................................. Delaware
Hills Department Store Company................................................................. Delaware
Canton Advertising, Inc..................................................................... Massachusetts
HDS Transport, Inc.......................................................................... Ohio
Corporate Vision, Inc....................................................................... Massachusetts
Hills Distributing Company.................................................................. Delaware
Ames FS, Inc..................................................................................... Delaware
AMD, Inc....................................................................................... Delaware
Ames Merchandising Corporation.............................................................. Delaware
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 35,744
<SECURITIES> 0
<RECEIVABLES> 30,244
<ALLOWANCES> 0
<INVENTORY> 621,509
<CURRENT-ASSETS> 703,572
<PP&E> 437,834
<DEPRECIATION> 66,205
<TOTAL-ASSETS> 1,483,393
<CURRENT-LIABILITIES> 715,274
<BONDS> 50,875
0
0
<COMMON> 239
<OTHER-SE> 323,769
<TOTAL-LIABILITY-AND-EQUITY> 1,483,393
<SALES> 2,507,218
<TOTAL-REVENUES> 2,537,382
<CGS> 1,786,231
<TOTAL-COSTS> 1,786,231
<OTHER-EXPENSES> 683,293
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,253
<INCOME-PRETAX> 52,605
<INCOME-TAX> 18,775
<INCOME-CONTINUING> 33,830
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 33,830
<EPS-PRIMARY> 1.47
<EPS-DILUTED> 1.40
</TABLE>
