SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-KA
Amendment No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): March 16, 1999
(December 31, 1998)
Ames Department Stores, Inc.
(Exact Name of Registrant As Specified In Charter)
Delaware
(State Or Other Jurisdiction Of Incorporation)
1-5380 04-2269444
(Commission File Number) (IRS Employer Identification No.)
2418 Main Street; Rocky Hill, Connecticut 06067-2598
(Address Of Principal Executive Offices) (Zip Code)
(860) 257-2000
(Registrant's Telephone Number, Including Area Code)
Not Applicable
(Former Name Or Former Address, If Changed Since Last Report)
<PAGE>
Item 7: FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
(a) Financial Statements of the Business Acquired
The following financial statements for the acquired business are filed
herewith:
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
Notes to the Consolidated Financial Statements
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
Notes to the Condensed Consolidated Financial Statements
(b) Pro Forma Financial Information:
The following unaudited pro forma condensed consolidated financial
statements are filed herewith:
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
Notes to the Pro Forma Condensed Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of Hills Stores Company and
Subsidiaries:
We have audited the accompanying consolidated balance sheets of Hills Stores
Company and Subsidiaries as of January 31, 1998 and February 1, 1997 and the
related consolidated statements of operations, common shareholders' equity, and
cash flows for the years ended January 31, 1998, February 1, 1997 and February
3, 1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Companies as of January 31,
1998 and February 1, 1997 and the results of their operations and their cash
flows for the years ended January 31, 1998, February 1, 1997 and February 3,
1996 in conformity with generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 11, 1998
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars In Thousands)
<CAPTION>
January 31, February 1,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $37,523 $66,163
Accounts receivable, less allowance
for doubtful accounts of approximately
$5,500 and $4,500 21,869 24,346
Inventories 340,719 341,477
Deferred tax asset, net (Note 16) 26,933 32,991
Other current assets 5,542 5,115
------------ ------------
Total current assets 432,586 470,092
Property and equipment, net (Note 2) 183,112 173,701
Property under capital leases, net (Note 7) 102,350 112,201
Beneficial lease rights, net (Note 1) 6,081 6,848
Deferred tax asset, net (Note 16) 28,592 21,585
Reorganization value in excess of amounts allocable to
identifiable assets, net (Notes 1 and 3) 89,112 97,508
Other assets, net (Note 1) 40,748 18,418
------------ ------------
$882,581 $900,353
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of capital leases and financial
obligations (Note 7) $10,541 $7,255
Current portion of long-term debt (Note 6) 500 -
Accounts payable, trade 110,329 111,064
Other accounts payable and accrued expenses (Note 4) 77,803 81,752
------------ ------------
Total current liabilities 199,173 200,071
Long-term debt (Note 6) 204,500 195,000
Obligations under capital leases (Note 7) 113,919 120,539
Financing obligations - sale/leaseback (Note 7) 30,335 34,100
Other liabilities 98,467 105,917
Commitments and contingencies (Note 18) - -
Preferred stock, at mandatory redemption value (Note 9) 18,209 19,942
Common shareholders' equity (Notes 10 and 11):
Common stock, 50,000,000 shares of $0.01 par value
authorized, 10,446,287 and 10,337,761 shares issued
and outstanding 105 103
Additional paid-in capital 217,388 215,537
Retained earnings 927 9,942
Unearned compensation (Note 11) (442) (798)
------------ ------------
Total common shareholders' equity 217,978 224,784
------------ ------------
$882,581 $900,353
============ ============
<FN>
(See Notes to Consolidated Financial Statements)
</FN>
</TABLE>
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
(52 Weeks) (52 Weeks) (53 Weeks)
------------- ------------- -------------
<S> <C> <C> <C>
Net sales $1,768,274 $1,878,477 $1,900,104
Cost of sales 1,306,335 1,392,353 1,384,421
Selling and administrative expenses (Notes 7 and 8) 418,512 437,593 428,212
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 5,850 6,050 7,755
Impairment of long-lived assets and store closings (Note 15) - 33,706 -
Costs related to change in control (Note 19) - - 45,529
------------- ------------- -------------
Operating earnings 37,577 8,775 34,187
Interest expense, net (Note 1) 48,392 53,555 47,666
------------- ------------- -------------
Loss before income taxes (10,815) (44,780) (13,479)
Income tax benefit (provision) (Note 16) 1,800 14,000 (3,187)
------------- ------------- -------------
(9,015) (30,780) (16,666)
Extraordinary loss on early extinguishment of debt, net - 4,278 -
------------- ------------- -------------
Net loss ($9,015) ($35,058) ($16,666)
============= ============= =============
Basic and diluted loss per common share (Note 17):
Loss before extraordinary loss ($0.87) ($3.00) ($1.70)
Extraordinary loss - (0.42) -
-------------- ------------- -------------
Net loss ($0.87) ($3.42) ($1.70)
============== ============= =============
<FN>
(See Notes to Consolidated Financial Statements)
</FN>
</TABLE>
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<CAPTION>
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
(52 Weeks) (52 Weeks) (53 Weeks)
------------- ------------- -------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($9,015) ($35,058) ($16,666)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Depreciation and amortization 36,845 35,130 31,784
Amortization of deferred financing costs 2,538 5,942 4,847
Deferred income taxes (949) (12,332) (11,260)
Decrease in deferred tax assets recognized through a
reduction in reorganization value in excess of amounts
allocable to identifiable assets 2,546 2,592 9,496
Impairment of long-lived assets and store closings - 28,958 -
Extraordinary loss on extinguishment of debt - 4,278 -
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 5,850 6,050 7,755
Loss on disposal of fixed assets 78 998 54
Decrease (increase) in accounts receivable and other
current assets 2,050 1,078 (2,325)
Decrease (increase) in inventories 758 (15,080) (17,846)
Increase (decrease) in accounts payable and other
accrued expenses (12,134) 25,293 (24,464)
Other, net 96 (330) (1,962)
------------- ------------- ------------
Net cash provided by (used for) operating activities 28,663 47,519 (20,587)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (34,267) (32,858) (56,714)
Deferred software expenditures (24,828) - -
------------- ------------- ------------
Net cash used for investing activities (59,095) (32,858) (56,714)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from secured term loan 10,000 - -
Proceeds from issuance of 12 1/2% Senior Notes - 195,000 -
Fees incurred with the issuance of 12 1/2% Senior Notes - (8,100) -
Redemption of 10.25% Senior Notes - (160,000) -
Payment of premium on debt redemption - (1,749) -
Proceeds from sale/leaseback financing - 16,559 -
Principal payments under capital lease obligations (7,099) (6,467) (6,121)
Cash distributions pursuant to the Plan of Reorganization (84) (2,682) (5,297)
Shares repurchased per self-tender offer - - (75,000)
Deferred finance costs and other financing activities (1,025) (3,957) (10,857)
------------- ------------- ------------
Net cash provided by (used for) financing activities 1,792 28,604 (97,275)
------------- ------------- ------------
Net increase (decrease) in cash and cash equivalents (28,640) 43,265 (174,576)
Cash and cash equivalents:
Beginning of the period 66,163 22,898 197,474
------------- ------------- ------------
End of the period $37,523 $66,163 $22,898
============= ============= ============
</TABLE>
(See Notes to Consolidated Financial Statements)
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' EQUITY
(Dollars in Thousands)
<CAPTION>
Additional Common
Common Stock Paid-in Retained Unearned Shareholders'
Shares Amount Capital Earnings Compensation Equity
<S> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Balance at January 28, 1995 10,804,784 $108 $229,967 $76,666 $ - $306,741
Retirement of Common Stock (Note 20) (3,000,000) (30) (59,970) (15,000) - (75,000)
Conversion of Preferred Stock 1,975,400 20 39,488 - - 39,508
Exercise of stock options and warrants 4,387 - 80 - - 80
Exchange for Stock Rights (Note 12) 198,271 2 (2) - - -
Net loss - - - (16,666) - (16,666)
-----------------------------------------------------------------------
Balance at February 3, 1996 9,982,842 100 209,563 45,000 - 254,663
Conversion of Preferred Stock 234,674 2 4,692 - - 4,694
Restricted stock grants 120,000 1 1,202 - (1,203) -
Amortization of restricted stock grants - - - - 405 405
Other 245 - 7 - - 7
Stock options issued under compensatory
plan (Note 11) - - 73 - - 73
Net loss - - - (35,058) - (35,058)
-----------------------------------------------------------------------
Balance at February 1, 1997 10,337,761 103 215,537 9,942 (798) 224,784
Conversion of Preferred Stock 86,625 1 1,732 - - 1,733
Amortization of restricted stock grants - - - - 356 356
Issuance due to Associated Stock Purchase
Plan (Note 11) 21,901 1 58 - - 59
Stock options issued under compensatory
plan (Note 11) - - 61 - - 61
Net loss - - - (9,015) - (9,015)
-----------------------------------------------------------------------
Balance at January 31, 1998 10,446,287 $105 $217,388 $927 ($442) $217,978
=======================================================================
<FN>
(See Notes to Consolidated Financial Statements)
</FN>
</TABLE>
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
- -----------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
BASIS OF REPORTING
During fiscal year 1997, Hills Stores Company (HSC or the "Company")
operated, through its wholly-owned subsidiary Hills Department Store Company
("HDSC"), a chain of 155 discount department stores located primarily in the
Great Lakes and Ohio Valley regions of the United States. The consolidated
financial statements include the accounts of the Company and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have been
eliminated. Certain prior year amounts were reclassified to conform to the
current year presentation. The Company's fiscal year ends on the Saturday
closest to January 31. Fiscal year 1995 was a fifty-three week year; fiscal
years 1997 and 1996 were fifty-two week years.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of cash and highly liquid investments
with maturities of three months or less from the date of purchase and whose cost
approximates market value due to the short maturity of the investments. Interest
income of $0.7 million, $1.3 million and $1.8 million was included in interest
expense, net for fiscal years 1997, 1996 and 1995, respectively.
INVENTORIES
Inventories are valued using the retail method on the lower of last-in,
first-out (LIFO) cost or market basis. LIFO cost at January 31, 1998, February
1, 1997 and February 3, 1996 exceeded the cost of inventory on a first-in,
first-out basis; accordingly, there has been no LIFO charge.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization are provided on a straight-line basis over
the estimated useful lives of the related assets, which is 27 1/2 years for
buildings and range from five to eight years for fixtures and equipment.
Amortization of leasehold improvements is provided on a straight-line basis over
the shorter of the lease term, considering renewal options that are likely to be
exercised, or the estimated useful life of the related asset. Leasehold
improvements are amortized principally over 15 years. Capital lease assets are
depreciated over the lease term or the estimated useful life of the related
asset.
DEFERRED FINANCING COSTS
Net deferred financing costs of $9.9 million at January 31, 1998 and
$11.4 million at February 1, 1997 were included in other assets and are being
amortized on a straight-line basis over the estimated term of the related debt.
Accumulated amortization of deferred financing costs was $4.2 million at January
31, 1998 and $1.7 million at February 1, 1997.
DEFERRED SOFTWARE EXPENDITURES
In fiscal year 1997, the Company had $24.8 million of deferred software
expenditures relating to its information systems replacement program. These
expenditures primarily represent direct costs of obtaining and modifying
commercially available computer software and costs associated with developing
internally used computer software. Expenditures such as Company payroll,
contracted services, capitalized interest during the period that the software is
not in service and other costs relating to the installation and testing of such
software, are included in deferred software. When placed in service, these
assets are generally amortized on a straight-line basis over seven years.
INTANGIBLE ASSETS
Beneficial lease rights are amortized using the straight-line method over
the terms of the related leases. Accumulated amortization of beneficial lease
rights was $3.3 million at January 31, 1998 and $2.5 million at February 1,
1997.
Reorganization value in excess of amounts allocable to identifiable
assets is being amortized over twenty years on a straight-line basis. (See Notes
3 and 16)
PRE-OPENING COSTS
Pre-opening costs consist of direct costs of opening a store and are
charged to operations within the fiscal year that a new store opens. The Company
did not open any new stores in fiscal year 1997, opened 1 store in fiscal year
1996 and opened 10 stores during fiscal year 1995.
<PAGE>
INTEREST CAPITALIZATION
The Company capitalizes interest incurred in connection with the
construction and development of new stores, computer systems, and other major
assets for the Company's own use. The Company capitalized interest of $1.4
million in fiscal year 1997 and $0.5 million in fiscal year 1995. No interest
was capitalized during fiscal year 1996.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Significant estimates used in preparation of the consolidated financial
statements include, but are not limited to, income tax liabilities,
self-insurance liabilities for worker's compensation and general liability,
store closing liabilities, physical inventory shortage allowances, and the
estimated useful life of fixed and intangible assets.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" which are effective for the Company's financial statements
for the year end January 31, 1999. The Company believes that neither
pronouncement will have a material impact on its financial statements.
2. PROPERTY AND EQUIPMENT
------------------------
The components of property and equipment are listed below (in thousands):
January 31, February 1,
1998 1997
------------- ------------
Fixtures and Equipment $164,816 $152,731
Leasehold Improvements 66,247 56,802
Buildings 16,192 16,192
Land 3,430 3,430
Improvements in Progress 16,629 3,633
----------- -----------
267,314 232,788
Accumulated Depreciation
and Amortization (84,202) (59,087)
----------- ------------
$183,112 $173,701
=========== ============
3. REORGANIZATION VALUE IN EXCESS OF THE AMOUNTS ALLOCABLE TO IDENTIFIABLE
ASSETS
-------------------------------------------------------------------------
The activity for reorganization value is presented below (in thousands):
January 31, February 1,
1998 1997
----------- -----------
Balance at beginning of period $97,508 $107,514
Amortization (5,850) (6,050)
Tax Benefit Applied to Reduce
Reorganization Value (2,546) (2,592)
Impairment of Long-Lived
Assets and Store Closings - (1,364)
----------- -----------
Balance at end of period $89,112 $97,508
=========== ===========
Accumulated amortization was $32.0 million at January 31, 1998 and $26.2 million
at February 1, 1997.
4. OTHER ACCOUNTS PAYABLE AND ACCRUED EXPENSES
---------------------------------------------
Significant components of other accounts payable and accrued expenses are
presented below (in thousands):
January 31, February 1,
1998 1997
----------- -----------
Other Accounts Payable and
Accrued Expenses:
Accrued Payroll and Related Costs $20,880 $22,074
Taxes, Other than Income Tax 13,988 13,418
Other 42,935 46,260
--------- ---------
$77,803 $81,752
========= =========
5. SECURED CREDIT FACILITY
-------------------------
The Company, through its wholly-owned operating subsidiaries Hills
Department Store Company (HDSC), maintains a $300 million secured credit
facility (the "Facility"), which matures in February, 2001. Borrowings under the
Facility include revolving working capital borrowings on a seasonal need basis
and a $10 million term note. Maximum borrowings under the Facility are limited
by an inventory-based borrowing base, as defined, and outstanding letters of
credit; up to $200 million of the Facility is available to secure letters of
credit. Borrowings under the Facility bear interest, at the option of the
Borrowers, at either of (1) the Bank of America's "reference rate" plus a margin
ranging up to 0.75% or (2) LIBOR plus a margin ranging from 1.5% to 2.5% (2.25%
at January 31, 1998). The Company pays fees on the average undrawn letter of
credit amount at an annual rate ranging from 1.5% to 2.25%, and pays commitment
fees at an annual rate of 3/8% on the average daily unused portion of the
commitment. Interest rates and fees on undrawn letter of credit amounts are
determined quarterly by the Company's "excess cash flow", as defined. The
Facility is secured by a security interest in tangible and intangible assets of
HDSC, other than certain fixtures, equipment and real estate. The Facility is
also guaranteed by the parent Company (HSC).
The financial covenants under the secured credit agreement require that
the Company maintain levels of consolidated net worth and consolidated cash flow
in excess of certain defined or computed amounts. In addition, the Facility
requires the outstanding principal balance of revolving loans to be zero for at
least thirty consecutive days during the period from December 1 of each year to
March 31 of the next year. The Agreement prohibits the payment of dividends on
the Company's common stock and also contains, among other restrictions,
provisions limiting to varying degrees: business combinations, the issuance of
certain kinds of additional debt and the repurchase and prepayment of debt.
Under the Agreement, HDSC is only permitted to make payments or transfers to the
parent Company in the normal course of business as necessary for the parent
Company to service its Senior Note interest obligations and to otherwise conduct
its activities as a holding company. (Net assets of HDSC and its subsidiaries at
January 31, 1998 totaled $451 million.)
The term loan component of the secured credit Facility requires quarterly
payments of $500,000 beginning November 1998, and continuing until the earlier
of (1) full payoff or (2) agreement termination (whereupon a balloon payment for
the balance plus accrued and unpaid interest is payable.)
At January 31, 1998, the Company had $10 million of term loan borrowings
under the Facility, had no revolving borrowings, had outstanding letters of
credit totaling $40.3 million, had maintained its annual clean-up period for
more than the required thirty consecutive days, and was in compliance with all
covenants and restrictions.
In connection with replacing the prior Facility with the above Facility
in fiscal year 1996 with a new group of lenders, the Company recognized an
extraordinary after-tax loss for early extinguishment of debt of $2.3 million
($3.8 million pretax) from the write-off of deferred financing costs related to
the prior credit facility. Front-end fees in connection with the Facility were
$2.9 million. Additionally, $0.9 million of fees were paid in connection with
the two amendments during fiscal year 1997, which, among other things, extended
the maturity of the Facility. These fees are being amortized over the life of
the Facility.
6. LONG TERM DEBT
---------------
Long term debt at each year-end consisted of (in thousands):
January 31, February 1,
1998 1997
------------ -------------
12 1/2% Senior Notes, due 2003 $195,000 $195,000
Secured term note (see Note 5) 10,000 -
------------ ------------
205,000 195,000
Less current portion of
secured term note (500) -
------------ ------------
Net long term debt $204,500 $195,000
============ ============
The 12 1/2% unsecured Senior Notes (the "Senior Notes") pay interest
semiannually, are non-callable, and are unconditionally guaranteed by all the
subsidiaries of the Company. The subsidiary guarantees are subordinate to
borrowings under the secured credit facility (see Note 5). The Senior Notes
contain covenants regarding limitations on debt incurrence and the issuance of
preferred stock. Additionally, the Senior Notes place limitations on the Company
and its subsidiaries relative to the payment of dividends or distributions.
The estimated fair value of the Senior Notes was approximately $164
million at January 31, 1998 and $144 million at February 1, 1997. These values
were based on quoted market prices in effect at those dates.
In fiscal year 1996, in connection with the sale of the Senior Notes, the
Company offered to redeem all of its outstanding 10.25% Senior Notes due 2003
(the "Old Senior Notes") at a redemption price equal to 101% of principal, plus
accrued interest. Pursuant to this offer, the Company subsequently redeemed
approximately $155 million of its approximately $157.5 million of outstanding
Old Senior Notes. The Company later called for redemption of the approximately
$2.5 million of remaining outstanding Old Senior Notes at the indenture
specified price of 104% of principal plus accrued interest. In addition, the
Company deposited, in trust, funds sufficient to redeem, upon issuance,
approximately $2.5 million of Old Senior Notes yet to be issued under the terms
of the Company's 1993 Plan of Reorganization (the "POR"). As a result of these
transactions, the Company recognized an extraordinary after-tax loss for early
extinguishment of debt of $2.0 million ($3.5 million pre-tax). The extraordinary
loss included the redemption premiums and the write-off of the related deferred
financing costs.
Separate financial statements of the Company's subsidiary guarantors have
not been provided because (1) the subsidiary guarantors constitute all of the
Company's direct and indirect subsidiaries, (2) they have fully and
unconditionally guaranteed the New Senior Notes on a joint and several basis,
(3) their aggregate assets, liabilities, earnings and equity are substantially
equivalent to those of the Company on a consolidated basis, and (4) separate
financial statements are not deemed to be material to investors.
7. LEASE COMMITMENTS
------------------
The Company's operations are conducted predominantly in leased
properties, which consist principally of retail outlets. Leases are generally
for periods between twenty to thirty years plus renewal options and generally
includes fixed rentals and rentals based on sales in excess of predetermined
levels.
The composition of property under capital leases, net of accumulated
amortization, is shown below (in thousands):
January 31, February 1,
1998 1997
----------- -----------
Retail outlets $138,094 $138,094
Other 982 982
----------- -----------
139,076 139,076
Accumulated amortization (36,726) (26,875)
----------- -----------
Property under capital leases, net $102,350 $112,201
=========== ===========
Consolidated rental expense under operating leases and rental expense
based on sales in excess of predetermined levels under capital leases are
presented below (in thousands):
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
January 31, February 1, February 3,
1998 1997 1996
----------------------------------------------
Capital leases:
Rental based on sales $ 803 $ 801 $ 1,251
Operating leases:
Minimum facility rentals 28,415 29,125 26,133
Equipment and other rentals 12,905 14,647 17,706
Rental based on sales 1,533 1,511 1,244
-------- -------- --------
Consolidated rental expense $43,656 $46,084 $46,334
======== ======== ========
At January 31, 1998, the financing obligations represent sale/leaseback
arrangements. The related property associated with these transactions, which has
a net book value of $62.4 million at January 31, 1998, remains in property and
equipment on the Company's books and continues to be depreciated. The leases,
which have terms from 42 months to ten years, include options to purchase some
or all of the assets either at the end of the initial lease term or renewal
periods at an amount not greater than the then current fair market value of the
properties. During fiscal year 1996, the Company obtained $16.6 million of
financing through such arrangements.
Minimum future lease commitments under non-cancelable leases in effect at
January 31, 1998 are listed below (in thousands):
Capital Financing Operating
Fiscal years: Leases Obligations Leases Total
--------------------------------------------------
1998 $ 19,488 $ 8,369 $ 35,290 $ 63,147
1999 19,159 7,699 30,817 57,675
2000 17,396 7,789 27,742 52,927
2001 16,931 6,257 24,906 48,094
2002 16,546 8,393 21,926 46,865
Thereafter 151,754 17,389 122,674 291,817
--------------------------------------------------
Minimum rental commitments $241,274 $55,896 $263,355 $560,525
======== =========
Less amount representing
interest 120,579 21,796
---------- ---------
Present value of net minimum
lease payments 120,695 34,100
Current portion ( 6,776) ( 3,765)
----------- ----------
$113,919 $30,335
=========== ==========
8. EMPLOYEE PLAN BENEFITS
-----------------------
POST RETIREMENT BENEFITS
The Company accounts for post retirement benefits (such as health care)
in accordance with Statement of Financial Accounting Standards No. 106:
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("FAS
106"). This statement requires accrual of postretirement benefits during the
years an employee provides services. Under FAS 106, the Company recognized
expenses of $0.2 million in fiscal years 1997, 1996 and 1995, respectively. The
Company funds benefit costs principally on a pay-as-you-go basis. The status of
the plan is as follows (in thousands):
January 31, February 1,
1998 1997
----------- -----------
Accumulated postretirement benefit
obligation ("APBO") for:
Active employees $ 2,399 $ 2,212
Retirees 83 303
----------- ------------
2,482 2,515
Plan assets at fair value - -
----------- ------------
Unfunded APBO 2,482 2,515
Unrecognized actuarial gain 1,352 1,329
----------- -------------
Accrued postretirement benefit cost $ 3,834 $ 3,844
=========== =============
The assumed health care cost trend rate used in measuring the APBO was
10% in fiscal year 1997 (8% for Medicare eligible retirees); grading down to 5%
(5% for Medicare eligible retirees) by fiscal year 2002 and remaining at that
level thereafter. A one percentage point increase in the assumed health care
cost trend rate would increase the APBO at the end of fiscal year 1997 by
$367,400 (or by 15%) and the service and interest cost by $36,800 (or by 11%).
The assumed discount rate used in determining the APBO was 7% for both years.
401(k) PLAN
The Company offers a defined contribution 401(k) savings plan (the
"401(k)") for employees meeting certain employment conditions. In addition to
permitting employee contributions, the 401(k) plan provides for Company matching
contributions. Company matching contributions were $3.0 million in fiscal year
1997, $3.6 million in fiscal year 1996 and $3.9 million in fiscal year 1995.
9. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
--------------------------------------------------
The Company is authorized to issue 15,000,000 shares of preferred stock,
par value of $0.10 per share. Pursuant to the POR 5,000,000 of shares were
authorized to be issued as Hills Stores Series A Convertible Preferred Stock the
("Preferred Stock"). As of January 31, 1998, a total of 50,060 shares of the
5,000,000 shares of the Preferred Stock remain to be issued pending resolution
of pre-petition claims and interests pursuant to the POR.
The Preferred Stock is convertible by the holders, at any time, into
Hills Stores common stock at a rate of one share of Common Stock for each share
of the Preferred Stock, subject to antidilution adjustments. During fiscal year
1997, 86,625 shares of the Preferred Stock were converted to common stock on a
share for share basis. As of January 31, 1998 and February 1, 1997, 855,109 and
941,344 shares, respectively, were outstanding.
Each share of Preferred Stock has one vote per share in the same class as
the shares of common stock. The holders of the Preferred Stock are entitled to
dividends when and if declared by the Board of Directors; however, dividend
payments are restricted under the terms of the Facility and the New Senior
Notes. The Company does not expect to pay dividends in the foreseeable future.
The Company may redeem, at its option prior to October 4, 2008, all or
part of the outstanding Preferred Stock at $20 per share; and in any case shall
redeem all of the outstanding shares of Preferred Stock on October 4, 2008 at
$20 per share. Upon dissolution or liquidation of the Company, the holders of
the Preferred Stock will be entitled to receive $20 per share out of the assets
of the Company available for distribution to shareholders, in preference to the
holders of common stock and any other class or series of capital stock of the
Company that is junior to the Preferred Stock.
10. HILLS STORES COMMON STOCK
-------------------------
Each holder of common stock has one vote per share and is entitled
dividends when and if declared by the Board of Directors. However, dividend
payments are restricted under the terms of the Facility and the Senior Notes.
The Company does not expect to pay dividends in the foreseeable future. As of
January 31, 1998, a total of 58,151 shares of common stock remain to be issued
pending resolution of pre-petition claims and interests, pursuant to the POR.
11. STOCK COMPENSATION PLANS
-------------------------
In October 1995, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("FAS 123"). FAS 123 encourages, but does not require, the
recognition of compensation expense for the fair value of stock options and
other equity instruments issued to employees. This statement gives entities a
choice of recognizing related compensation expense by adopting the new fair
value method or to continue to measure compensation using the intrinsic value
approach under Accounting Principles Board Opinion No. 25 ("APB 25"), the former
standard. If the fair value provisions of FAS 123 are not adopted, companies are
required to disclose the pro forma amounts of net earnings and earnings per
share that would have been reported had these provisions been adopted. The
Company has chosen to continue to recognize compensation expense under APB 25.
Accordingly, no compensation cost has been recognized for its fixed stock option
plans, other than for options granted in connection with consulting services.
Such compensation expense was $61,000 and $73,000 for fiscal years 1997 and
1996, respectively.
The Company has stock-based compensation plans, which are described
below.
1993 STOCK OPTION PLAN
In October 1993, the Company established an incentive and nonqualified
stock option plan (the "Option Plan") providing for the grant of nonqualified
stock options or incentive stock options. The options are granted at prices
greater than or equivalent to the market price of the common stock on the date
of each grant. The options are generally subject to a five year vesting
schedule, with initial vesting beginning one year from the date of the grant,
and expire ten years from the date of the grant. A total of 1,303,763 shares of
common stock are reserved for grants of options under the Option Plan. During
fiscal years 1997, 1996 and 1995 eligible participants were allowed, for a
limited time, to exchange existing options for new options with an exercise
price of $5.00, $10.125 and $12.00, respectively. The 1997 repricing was for a
reduced number of new options. The options exchanged in 1997 were subject to
additional vesting restrictions, which prohibited exercise of any vested option
for one year and 50% of the vested options for two years from the date of the
repricing.
1996 DIRECTORS STOCK OPTION PLAN
During fiscal year 1996, the Company received shareholder approval of a
stock option plan for non-employee members of the Board of Directors. The plan
provided for an initial grant of 4,000 options to each non-employee member of
the Board of Directors with subsequent annual automatic grants of 2,000 options.
All options are granted at prices greater than or equivalent to the market price
of the common stock on the date of each grant. The options are subject to a
three year vesting schedule with vesting beginning from the date of the grant. A
total of 100,000 shares of common stock are reserved for grants under the plan.
In March 1997, participants were allowed to exchange existing options for a
reduced number of new options with an exercise price of the greater of $5.00 or
the closing share price on the date of acceptance. The repriced options were
subject to additional vesting restrictions, which prohibited exercise of any
vested option for one year and 50% of the vested options for two years from the
date of the repricing.
RESTRICTED STOCK AGREEMENTS
In fiscal year 1996, the Company entered into restricted stock agreements
with the Chairman of the Board and the President and Chief Executive Officer.
Pursuant to the agreements, the Company issued 120,000 shares of common stock
subject to certain restrictions. Unearned compensation was charged for the
market value of the restricted shares, shown as a reduction of common
shareholders' equity in the accompanying consolidated balance sheet, and is
being amortized ratably over the restricted period. The weighted-average fair
value of shares granted during fiscal year 1996 was approximately $10.00 per
share. During fiscal years 1997 and 1996, approximately $356,000 and $405,000
respectively, was charged to expense.
PRO FORMA INFORMATION
Had compensation cost for the Company's two fixed stock option plans and
the associate stock purchase plan been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of FAS 123,
the Company's net loss and loss per share would have increased to the pro forma
amounts indicated below:
1997 1996 1995
--------- --------- ---------
Net loss As reported ($ 9,015) ($35,058) ($16,666)
Pro forma ($10,264) ($36,349) ($18,244)
Basic and diluted loss
per share As reported ($ 0.87) ($ 3.42) ($ 1.70)
Pro forma ($ 0.99) ($ 3.55) ($ 1.86)
The effects of applying FAS 123 in this pro forma disclosure are not
indicative of future amounts. The pro forma disclosure does not include awards
prior to 1995 or additional awards, which are anticipated to be made in future
years.
The fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in fiscal years 1997, 1996 and 1995: dividend yield
of zero; expected volatility of 50%, risk-free interest rate of 6.22%, 5.83% and
5.77% respectively; and expected lives of five years.
<PAGE>
11. STOCK COMPENSATION PLANS (CONTINUED)
------------------------------------
A summary of the status of the Company's fixed stock option plans as of January
31, 1998, February 1, 1997 and February 3, 1996, and changes during the years
ending on those dates, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------- -------------------------- ---------------------------
Weighted-Average Weighted-Average Weighted-Average
Fixed Options Shares Exercise Price Shares Exercise Price Shares Exercise Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 871,580 $10.64 416,797 $12.36 1,014,021 $18.48
Granted 317,950 4.22 678,751 11.08 203,000 12.75
Exchanged November 4, 1995 - - - - (337,200) 18.26
Issued in exchange on November 4, 1995 - - - - 224,797 12.00
Exchanged on March 8, 1996 - - (330,000) 12.00 - -
Issued in exchange on March 8, 1996 - - 330,000 10.12 - -
Exchanged on March 11, 1997 (687,482) 10.58 - - - -
Issued in exchange on March 11, 1997 453,305 5.00 - - - -
Exercised - - - - (4,300) 18.25
Forfeited (106,739) 7.26 (223,968) 12.42 (683,521) 18.49
---------- ----------- ------------
Outstanding at end of year 848,614 5.69 871,580 10.64 416,797 12.36
========== =========== ============
Options exercisable at year-end 200,715 141,961 231,894
Weighted-average fair value of
options granted during the year $2.18 $5.60 $6.40
The following table summarizes information about fixed stock options outstanding at January 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------------------- ---------------------------------
Range of Number Weighted-Average Weighted-Average Number Weighted Average
Exercise Outstanding Remaining Average Exercisable at Exercise Price
Prices at 1/31/98 Contractual Life Exercise Price 1/31/98
$2.75-$3.75 74,500 9.5 years $3.08 2,000 $3.00
$3.88-$4.63 206,450 9.0 years $4.43 0 $0.00
$5.00-$5.13 438,214 7.9 years $5.01 136,844 $5.00
$7.63-$18.25 129,450 7.3 years $11.52 61,871 $12.21
------------------ ----------------
848,614 200,715
================== ================
</TABLE>
<PAGE>
ASSOCIATE STOCK PURCHASE PLAN
Under the Associate Stock Purchase Plan, the Company is authorized to
issue up to 500,000 shares of common stock to its full-time employees. Under the
terms of the Plan, during each semiannual subscription period associates can
choose to have up to 10 percent of their annual base earnings, up to $25,000,
withheld to purchase the Company's common stock. The purchase price of the stock
is 85 percent of the lower of its market price at the commencement date or at
the termination date of each offering period. During fiscal year 1997, the
Company issued 21,901 shares pursuant to this plan. The Company anticipates
issuing approximately 25,000 shares for the subscription period ending on June
30, 1998.
12. SERIES 1993 STOCK RIGHTS
-------------------------
Each Series 1993 Stock Right (the "Stock Right") entitles the holder to
acquire, at $0.01 per share, shares of common stock, subject to antidilution
adjustments, as determined pursuant to a formula which is based on the Company's
pro forma utilization of certain tax benefits as defined in the Stock Right
Agreements. Shares under the Stock Right Agreements are not available for
issuance until vested. During 1995, the Company repurchased 693,949 of its
700,000 outstanding stock rights in exchange for 198,271 shares of newly issued
common stock. The aggregate par value of the newly issued common stock was
reclassified from additional paid-in capital to common stock. As of January 31,
1998 and February 1, 1997, 6,051 rights were outstanding.
13. SERIES 1993 WARRANTS
---------------------
Each Series 1993 Warrant entitles the holder to purchase, subject to
antidilution adjustments, one share of common stock at $30 per share. The
Warrants are callable by the Company at $.01 per Warrant at any time after
October 4, 1998 if the average closing price of common stock, subject to
antidilution adjustments, for a period of thirty consecutive trading days is
equal to or greater than $35 per share. The Warrants expire on October 4, 2000.
During fiscal year 1995, 87 warrants were exercised. None were exercised during
fiscal years 1997 and 1996. As of January 31, 1998 and February 1, 1997, 432,903
warrants were outstanding and 432,903 shares of common stock were reserved for
issuance upon exercise of the warrants.
14. RIGHTS AGREEMENT
-----------------
Pursuant to a Rights Agreement adopted on August 16, 1994, the Company
declared a distribution of one purchase right (the "Right") for each share of
Common Stock and Preferred Stock then outstanding. Each Right would initially
entitle the holder to purchase, subject to adjustment, one one-thousandth share
of the Company's Series B Participating Cumulative Preferred Stock, consisting
of 55,000 shares authorized, $.10 par value per share, at an exercise price of
$75 per one one-thousandth share. Each share of Common Stock and Preferred Stock
issued after August 16, 1994 will also have one Right attached. The Rights
expire August 16, 2004 and, under certain conditions, may be redeemed by the
Company at a price of $.01 per Right. The Rights have no voting or dividend
privileges and are not currently separable from the capital stock. The Rights
would become exercisable if certain events occurred relating to a person or
group (the "Acquiring Person") acquiring or attempting to acquire 20% or more of
the outstanding shares of capital stock other than through a qualifying tender
offer. Upon the occurrence of such an event, each Right (except the Rights
beneficially owned by the Acquiring Person, which become null and void) entitles
its holder to purchase for $75 the economic equivalent of Common Stock, or in
certain circumstances, securities of the Acquiring Person, or its affiliate,
worth twice as much. After there is an Acquiring Person, the Rights may be
exchanged, at the election of the Company, for consideration per Right
consisting of one-half of the securities that would otherwise be issuable at
that time.
15. IMPAIRMENT OF LONG-LIVED ASSETS AND STORE CLOSINGS
---------------------------------------------------
Effective February 4, 1996, the Company adopted Statement of Financial
Accounting Standards No. 121: "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of" ("FAS 121"). FAS 121
requires that the carrying value of long-lived tangible and certain intangible
assets be evaluated periodically in relation to the operating performance and
estimated future cash flows of the underlying assets. In accordance with FAS
121, the Company recognized a pre-tax charge of $23.6 ($11.7 million in the
first quarter of fiscal 1996 and $11.9 million in fourth quarter of fiscal 1996,
in connection with the store closings and impairments) to reduce the carrying
value of certain of its long-lived tangible and intangible assets to their
estimated fair market value. The impaired assets include property and equipment,
beneficial lease rights and reorganization value related to under performing
stores. The fair value was based on estimated future cash flows to be generated
by these stores, discounted at a rate commensurate with the risks involved.
In January 1997, the Company announced plans to close ten stores during
the first quarter of fiscal year 1997 as part of its initiatives to improve
profitability. In connection with these closures, the Company recorded in fiscal
year 1996 a pretax charge of $10.1 million to cover costs for disposal of
inventories ($5.3 million), lease terminations, net ($3.2 million), and other
related costs ($1.6 million).
During fiscal year 1997, approximately $4.8 million was incurred and
charged against the accrual for store closings, consisting primarily of cash
payments relating to lease terminations. The majority of the January 31, 1998
liability totaling $6.9 million is expected to be paid during fiscal years 1998
and 1999.
These 10 stores generated 4.6% and 3.9% of the total net sales of the
Company during fiscal years 1996 and 1995, respectively. In addition, these
stores had operating losses, excluding corporate overhead allocations, of $4.3
million and $1.7 million for fiscal years 1996 and 1995.
16. INCOME TAXES
-------------
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109: "Accounting for Income Taxes" ("FAS
109"). Under FAS 109, deferred taxes are computed on the difference between the
bases of assets and liabilities for tax reporting purposes and their
corresponding bases for financial reporting purposes. Deferred tax assets, net
of appropriate valuation reserves, may be recorded.
Temporary differences and carry forwards which give rise to significant
deferred tax assets and liabilities are as follows (in thousands):
January 31, 1998 February 1, 1997
Deferred Deferred Deferred Deferred
Tax Tax Tax Tax
Asset Liability Asset Liability
-------- --------- -------- ---------
Net operating loss and
tax credit carry forwards $74,369 $ - $ 58,307 $ -
Capital lease obligations 46,943 - 49,959 -
Assets under capital leases - 39,303 - 45,544
Accrued expenses 33,144 - 37,102 -
Beneficial lease rights 14,800 - 17,161 -
Property and equipment - 21,155 - 15,359
Inventories 5,356 - 11,922 -
Financing obligation-sale/
leaseback 8,984 - 11,717 -
Other 10,421 - 10,629 -
---------- ---------- ---------- ---------
Total deferred taxes 194,017 60,458 196,797 60,903
Valuation allowance ( 78,034) - ( 81,318) -
---------- ---------- ---------- ---------
Net deferred taxes $115,983 $ 60,458 $115,479 $60,903
========== ========== ========== =========
The consummation of the POR resulted in a change in ownership for federal
income tax purposes. Subsequent to the POR, a second change in ownership
occurred for federal income tax purposes. As a result, the Company's ability to
utilize its net operating loss and tax credit carry forwards is subject to an
annual limitation of $15.8 million. This limitation may be changed if additional
changes in ownership (generally determined by the creation of new 5% equity
ownership blocks, accumulating to 50%, over a rolling three year period) are
deemed to occur subsequent to the second ownership change. For fiscal years 1996
and 1997, the Company generated estimated net operating tax loss carry forwards
of $19.7 million. Total deferred tax assets as of January 31, 1998, include
$78.0 million of deferred tax assets which arose before Company's emergence from
bankruptcy and which have been fully reserved. For financial reporting purposes,
any benefit derived from the reduction of the valuation allowance related to
deferred tax assets in existence at October 4, 1993 will not be credited to the
tax provision, but instead will ultimately reduce Reorganization Value.
Federal income tax carry forwards at January 31, 1998 consisted of $3.0
million of Alternative Minimum Tax credits which do not expire, and net
operating losses and general business credits which expire as follows (in
thousands):
Net Operating Tax
Losses Credits
-------------------------------------
Fiscal years:
2000 $ - $ 413
2001 - 797
2002 - 664
2003 - 1,369
2004 329 2,196
2005 - 1,547
2006 60,901 949
2007 56,848 797
2008 10,954 944
2009 - 174
2010 - 492
2011 21,519 -
2012 19,661 -
-------------------------------------
$170,212 $10,342
========= ========
The provision (benefit) for income taxes consists of the following
components (in thousands):
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
-------------------------------------------------
Current provision:
Federal ($ 3,096) ($ 3,673) $ 227
State and local ( 301) ( 587) 23
-------------- --------------- ---------------
( 3,397) ( 4,260) 250
Deferred provision:
Federal ( 865) ( 9,159) ( 9,986)
State and local ( 84) ( 3,173) ( 1,274)
-------------- --------------- ---------------
( 949) ( 12,332) ( 11,260)
Amount to be applied to
reorganization value 2,546 2,592 14,197
-------------- --------------- ---------------
Total tax provision (benefit) ($ 1,800) ($14,000) $ 3,187
============== =============== ===============
The income tax provision in each of the periods presented reflects an
effective tax rate that differs from the statutory federal income tax rate for
those periods. For net earnings (loss) from operations before extraordinary
items, the table below reconciles the federal statutory rate to the effective
tax rate.
Fiscal Year Ended
January 31, February 1, February 3,
1998 1997 1996
----------------------------------------
Statutory tax rate (35.0%) (35.0%) (35.0%)
State and local income taxes,
net of federal tax benefit ( 0.6 ) ( 2.7 ) 3.7
Goodwill 18.9 5.8 20.1
Targeted jobs credit
and other, net 0.1 0.6 0.7
Change in control costs - - 34.2
------- ------- -------
Effective tax rate (16.6%) (31.3%) 23.7%
======= ======= =======
The IRS is nearing completion of its audit of fiscal years 1991, 1992 and
1993. The Company has filed a Protest to certain adjustments proposed by the
IRS. The Company does not believe the final adjustments resulting from this
examination would have a material adverse effect on the Company's financial
condition.
17. EARNINGS PER SHARE
-------------------
In fiscal year 1997, the Company adopted Statement of Financial
Accounting Standards Number 128, "Earnings per Share" ("FAS 128"). FAS 128
requires the presentation of "basic" earnings per share (income applicable to
common shareholders divided by the weighted-average number of common shares
outstanding during the period) and "diluted" earnings per share (which gives
effect to all dilutive potential common shares that were outstanding during the
period). All prior-period earnings per share data have been restated to conform
to FAS 128. Basic and diluted earnings per share are the same for the periods
ended January 31, 1998, February 1, 1997 and February 3, 1996, as all common
stock equivalents are antidilutive, due to the net loss incurred during these
periods.
Basic earnings per share was computed based on the weighted average
number of common shares assumed to be outstanding during each period. Such
shares amounted to 10,387,080, 10,252,022 and 9,809,675 for fiscal years 1997,
1996 and 1995, respectively.
If the impact would be dilutive, the following securities would be
included in the calculation of diluted earnings per share: preferred stock,
stock options, series 1993 Warrants and stock rights (contingently issuable as
described in Note 14).
18. COMMITMENTS AND CONTINGENCIES
------------------------------
In September 1995, the Company and HDSC filed a suit in the Court of
Chancery of the State of Delaware against the former members of the Board of
Directors (the "Former Directors") of the Company. That action seeks, among
other things, recovery of damages caused by the breach by the Former Directors
of their fiduciary duties to shareholders arising from the refusal of the Former
Directors to approve the change in control which took place on July 5, 1995 (the
"1995 Change of Control") following the election of seven replacement directors
by the shareholders of the Company. In October 1995 the defendants filed a
motion to dismiss the suit. In February 1996, the court granted a motion of the
Former Directors to stay discovery pending the outcome of their motion to
dismiss. In March 1997, the court denied the Former Directors' motion to
dismiss.
In April 1997, three of the Former Directors, Michael Bozic, Norman S.
Matthews and John G. Reen, filed a counterclaim against the Company and the
seven replacement directors seeking damages of not less than $2.5 million for
breach of contract, unjust enrichment and intentional interference with
contractual relations arising out of allegations that the Company improperly
failed to honor their request to exercise stock options. The Company believes
the counterclaim is without merit and has denied the allegations and asserted
various defenses. Discovery is ongoing in the case.
In August 1995, in the Court of Chancery of the State of Delaware, three
shareholders of the Company, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss,
filed a class action lawsuit against the seven new directors of the Company
elected at the 1995 annual meeting, Dickstein Partners Inc. ("Dickstein
Partners") and the Company. In November 1995, the plaintiffs amended their
complaint to include a shareholder's derivative cause of action against the
Former Directors for breach of their fiduciary duties to the Company and its
shareholders. In the amended complaint, the plaintiffs claim (under Section 225
of the Delaware Corporation Code) that in connection with Dickstein Partners
effort to solicit proxies in support of the election of its nominees for
directors of the Company, Dickstein Partners issued a number of false and
misleading statements regarding its offer to acquire all of the Company's shares
it did not already own. On the Section 225 claim, the plaintiffs seek an order
nullifying the election of directors and declaring there has been "no change of
control" of the Company. The derivative cause of action seeks damages against
the Former Directors. In January 1996 in the same Delaware Chancery Court,
another shareholder, Peter M. Fusco, filed a substantially similar class action
and shareholder derivative suit against the parties named in the Dolowich suit.
The Former Directors filed a motion to dismiss the Dolowich and Fusco suits, and
in March 1997 the court denied that motion.
The Company is also involved in various suits and claims in the ordinary
course of business.
Management does not believe that the disposition of such suits and claims
will have a material adverse effect upon the continuing operations and financial
position of the Company.
19. CHANGE IN CONTROL
------------------
On July 5, 1995, following a proxy contest in connection with the annual
meeting of shareholders held on June 23, 1995, nominees of Dickstein Partners
were certified as being elected to the Board of Directors. The Company
reimbursed Dickstein Partners for, or directly paid, approximately $1.9 million
in third-party fees and expenses incurred or committed to by Dickstein Partners
in connection with the proxy contest and the related acquisition proposal of
Dickstein Partners. This amount included $1.0 million paid by the Company to the
financial advisor of Dickstein Partners, in respect of the advisor's proposal to
refinance the indebtedness of the Company accelerated as a result of the
election of the Dickstein Partners nominees. These costs are included in the
Consolidated Statements of Operations in costs related to change in control.
In connection with the change in control, the Company recognized $45.5
million in expense, including $31.0 million related to severance and retirement
payments, including certain taxes attributable thereto, to six senior
executives, a consultant to the Company and approximately twenty associates of
the Company, $6.0 million paid to holders of the Senior Notes, and legal and
other miscellaneous change in control costs.
20. SELF-TENDER FOR COMMON STOCK
-----------------------------
In August 1994, Dickstein Partners, L.P., et al. ("Dickstein") commenced
a consent solicitation to replace four members of the then current Board of
Directors with Dickstein nominees. In response to the Dickstein consent
solicitation, the Company's Board of Directors announced a program to enhance
shareholder value, including the approval of a self-tender to purchase up to
3,000,000 common shares at $25 per share in cash. Effective February 21, 1995,
the Company accepted for payment 3,000,000 shares of Common Stock which were
validly tendered pursuant to the Company's offer, and for which payment of
$75,000,000 was made in March 1995. The excess of the purchase price over the
original issue price of the Common Stock, or $15,000,000, was charged to
retained earnings. In connection with this offer, 561,863 shares of Preferred
Stock were converted to Common Stock.
21. STATEMENTS OF CASH FLOWS
-------------------------
Supplemental disclosures of cash flow information are presented in the table
below:
Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended
January 31, February 1, February 3,
(in thousands) 1998 1997 1996
---------------------------------------------
NONCASH INVESTING AND
FINANCING ACTIVITIES:
Preferred stock conversions
to common stock $ 1,733 $ 4,694 $39,508
Capital lease obligations, net - 3,735 -
CASH PAID:
Interest 50,059 50,122 38,655
Income taxes ( 834) ( 8,956) 17,877
22. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
-------------------------------------------
(in thousands, First Second Third Fourth
except per share amounts) Quarter Quarter Quarter Quarter
--------------------------------------------------
FISCAL YEAR 1997
- ----------------
Net sales $353,504 $349,269 $434,555 $630,946
========= ========= ========= =========
Gross profit $ 96,784 $ 86,148 $115,101 $163,906
========= ========= ========= =========
Net earnings (loss) (2) ($ 9,820) ($16,119) ($3,946) $ 20,870 (1)
========= ========= ========= =========
Basic earnings (loss)
per common share ($ 0.95) ($ 1.56) ($ 0.38) $ 2.00
========== ========= ========== =========
Diluted earnings (loss)
per common share (3) ($ 0.95) ($ 1.56) ($ 0.38) $ 1.84
========== ========= ========== ==========
FISCAL YEAR 1996
- ----------------
Net sales $370,248 $388,600 $460,983 $658,646
========= ========= ========= =========
Gross profit $ 99,263 $ 97,691 $120,831 $168,339
========= ========= ========= =========
Loss before
extraordinary loss ($ 14,738) ($ 10,321) ($ 2,804) ($ 2,917)
========= ========= ========= =========
Net loss (2) ($ 14,738) ($ 12,367) ($ 5,036) ($ 2,917)
========= ========== ========= =========
Basic loss per common share:
Loss before
extraordinary loss ($ 1.45) ($ 1.01) ($ 0.27) ($ 0.28)
Extraordinary loss - ( 0.20) ( 0.22) -
----------- ------------ ----------- ----------
Net loss ($ 1.45) ($ 1.21) ($ 0.49) ($ 0.28)
=========== ============ =========== ==========
Diluted loss per common share:
Loss before
extraordinary loss ($ 1.45) ($ 1.01) ($ 0.27) ($ 0.28)
Extraordinary loss - ( 0.20) ( 0.22) -
------------ ------------ ------------ ----------
Net loss ($ 1.45) ($ 1.21) ($ 0.49) ($ 0.28)
============ ============ ============ ==========
(1) Operating expenses for the fourth quarter and fiscal year ended January
31, 1998 included approximately $0.5 million of business process
reengineering costs, incurred primarily during fiscal year 1997 in
connection with the Company's systems replacement initiatives, and
charged to earnings as required by Emerging Issues Task Force Issue 97-13
"Accounting for Costs Incurred in Connection with a Consulting Contract
or an Internal Project That Combines Business Process Reengineering and
Information Technology Transformation".
(2) In fiscal year 1997, the Company modified its approach to calculate the
interim income tax benefit compared with the approach used in fiscal year
1996. The Company believes the approach used more appropriately reflects
income taxes on a quarterly basis for 1997. Had the 1997 approach been
used in 1996, the income tax provision for the fourth quarter would have
been reduced, and the net loss decreased, by approximately $9.9 million
or $0.96 per share, respectively.
In the fourth quarter of fiscal year 1996, income tax expense included a
charge of $22.8 million as the result of a lower full year effective rate
than the estimated used in the first three-quarters of the fiscal year.
(3) Diluted average shares outstanding used in the quarterly earnings per
share calculations, excluding the fourth quarter in fiscal year 1997, do
not include Preferred Shares, as the effect of the inclusion of such
additional shares would be anti-dilutive.
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)
<CAPTION>
October 31, November 1,
1998 1997
------------- -------------
(unaudited) (unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $17,070 $20,078
Accounts receivable, net 47,513 63,737
Inventories 552,079 522,118
Deferred and interim tax assets - 57,372
Other current assets 5,847 5,184
------------ ------------
Total current assets 622,509 668,489
Property and equipment, net 176,231 175,201
Property under capital leases, net 102,178 104,791
Beneficial lease rights, net 5,506 6,273
Other assets, net 64,296 35,462
Deferred tax asset - 13,289
Reorganization value in excess of amounts allocable to
identifiable assets, net 84,846 93,110
------------ ------------
$1,055,566 $1,096,615
============ ============
LIABILITIES AND SHAREHOLDERS'EQUITY
Current liabilities:
Current portion of capital leases $11,693 $8,580
Borrowings under secured credit facility (Note 3) 224,000 136,000
Accounts payable, trade 188,128 202,556
Other accounts payable and accrued expenses 91,732 86,398
------------ ------------
Total current liabilities 515,553 433,534
Long-term debt 195,000 195,000
Capital lease and other financing obligations 143,900 148,608
Other liabilities 90,456 104,366
Preferred stock, at mandatory redemption value (Note 4) 18,086 18,317
Common shareholders' equity: 92,571 196,790
------------ ------------
$1,055,566 $1,096,615
============ ============
<FN>
(See Notes to Condensed Consolidated Financial Statements)
</FN>
</TABLE>
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In Thousands, Except Per Share Amounts)
<CAPTION>
Thirty-nine
Weeks Ended
----------------------------------
October 31, November 1,
1998 1997
------------- -------------
<S> <C> <C>
Net sales $1,119,879 $1,137,328
Cost of sales 828,940 839,295
Selling and administrative expenses 323,678 304,172
Amortization of reorganization value in excess of
amounts allocable to identifiable assets 4,266 4,388
------------- ------------
Operating earnings (loss) (37,005) (10,527)
Interest expense, net (Note 5) (39,406) (36,558)
------------- ------------
Loss before income taxes ($76,411) ($47,085)
Income tax benefit (provision) (Note 6) (49,600) 17,200
------------- ------------
Net loss ($126,011) ($29,885)
============= ============
Basic and diluted loss per common share (Note 7): ($12.04) ($2.87)
============= ============
<FN>
(See Notes to Condensed Consolidated Financial Statements)
</FN>
</TABLE>
<PAGE>
<TABLE>
HILLS STORES COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In Thousands)
<CAPTION>
Thirty-nine
Weeks Ended
--------------------------------
October 31, November 1,
1998 1997
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ($126,011) ($29,885)
Adjustments to reconcile net loss to net cash used for operating activities:
Depreciation and amortization 30,666 27,523
Amortization of deferred financing costs 1,129 1,883
Amortization of reorganization value in excess of amounts
allocable to identifiable assets 4,266 4,388
Deferred and interim income taxes 55,525 (16,085)
Loss on disposal of fixed assets - 67
Increase in accounts receivable and other
current assets (25,949) (39,460)
Increase in inventories (211,360) (180,641)
Increase in accounts payable,
accrued expenses and other liabilities 83,984 94,749
Other, net 489 82
-------------- --------------
Net cash used for operating activities (187,261) (137,379)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (14,765) (20,298)
Deferred software expenditures (26,228) (19,018)
-------------- --------------
Net cash used for investing activities (40,993) (39,316)
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under revolving credit facility, net 224,000 136,000
Principal payments under capital lease and other financing obligations (6,199) (4,706)
Payment of term note (10,000) -
Other financing activities - (684)
-------------- --------------
Net cash provided by financing activities 207,801 130,610
-------------- --------------
Net decrease in cash and cash equivalents (20,453) (46,085)
Cash and cash equivalents at beginning of period 37,523 66,163
-------------- --------------
Cash and cash equivalents at end of period $17,070 $20,078
============== ==============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Capital lease investments and obligations $6,998 $ -
============== ==============
<FN>
(See Notes to Condensed Consolidated Financial Statements)
</FN>
</TABLE>
<PAGE>
HILLS STORES COMPANY AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THIRTY-NINE WEEKS ENDED OCTOBER 31, 1998 AND NOVEMBER 1, 1997
- --------------------------------------------------------------------------------
1. BASIS OF PRESENTATION
-----------------------
During the thirty-nine weeks ended October 31, 1998, Hills Stores Company
(the "Company") operated, through its wholly owned subsidiary Hills Department
Store Company ("HDSC"), a chain of 155 discount department stores located
primarily in the Great Lakes and Ohio Valley regions of the United States. The
condensed consolidated financial statements include the accounts of the Company
and its wholly owned subsidiaries. All significant inter-company transactions
and balances have been eliminated. The information furnished reflects all normal
recurring adjustments that are, in the opinion of management, necessary to
present a fair statement of the results for the interim period.
The accompanying unaudited condensed consolidated financial statements
are presented in accordance with the requirements of Form 10-Q and consequently
do not include all the disclosures normally required by generally accepted
accounting principles nor those normally made in the Company's annual Form 10-K
filing. Reference should be made to the Company's Annual Report on Form 10-K for
additional disclosures, including a summary of the Company's accounting
policies. Certain prior year amounts have been reclassified to conform to the
current year presentation. The Company's business is seasonal in nature and the
results of operations for the interim periods presented are not necessarily
indicative of the results to be expected for the full fiscal year. The fourth
quarter of each fiscal year provides the most significant portion of the
Company's annual sales and most or all of its operating earnings, with operating
earnings particularly concentrated in the Christmas selling season.
2. TENDER OFFER AND PROPOSED MERGER
---------------------------------
On November 12, 1998, the Company signed a definitive agreement with HSC
Acquisition Corp. and Ames Department Stores, Inc. (Ames) providing for the
acquisition of the Company by Ames. That transaction is contingent on Ames'
successful completion of its tender offer to the Company's shareholders and
noteholders, and on Ames successfully obtaining final financing, and on
regulatory approval and other customary closing conditions. The Board of
Directors of the Company has recommended that the Company's stockholders tender
their shares to Ames in the offer.
3. SECURED CREDIT FACILITY AND RECENT DEVELOPMENTS
------------------------------------------------
On September 30, 1998, the Company and its lenders modified the terms of
its secured credit facility increasing the facility to $340 million from $300
million. Other enhancements include an increased advance rate, improvements in
the calculation of eligible assets on which to base maximum borrowings, the
elimination of the annual "clean-up" requirement, and a modest improvement in
interest rate brackets.
Effective October 31, 1998, the Company and its lenders further modified
the terms of its secured credit facility to amend the definition of actual
"adjusted tangible net worth" to increase the calculation of actual adjusted
tangible net worth by the amount of non-cash valuation reserves applicable to
deferred and interim tax assets.
The Company has since mid-1998 experienced a substantial erosion in sales
and a resulting substantial erosion in operating results and cash flow. Sales in
the third quarter of fiscal year 1998 declined by approximately 8%, sales for
November declined by approximately 10%, and sales in the first two weeks of
December declined by approximately 13%. These declines have resulted in the need
to increase substantially the Company's use of and reliance on its secured
credit facility, made possible, in part, through the recent agreed modifications
to the facility.
Based on recent operating trends, the Company expects that it will fail
the rolling twelve months cash flow maintenance covenant effective as of the end
of the current fiscal year on January 30, 1999, as required by its secured
credit facility. Such non-compliance, absent a waiver by the secured lenders,
would constitute an event of default under the agreement. The prospect of such
non-compliance could also be deemed to constitute a material adverse effect,
resulting in an event of default. An event of default would result in potential
acceleration of repayment by the lenders, among other remedies available.
The Company's Senior Notes indenture and certain other obligations of the
Company contain cross-default provisions, which might also cause repayment
acceleration of the Senior Notes or other obligations due to an event of default
under the secured credit facility.
If the Ames tender offer is not successful (see Note 2 above), and the
Company's recent operating trends continue, there is a substantial prospect that
the Company would be required to seek protection under federal bankruptcy laws
in the near term.
4. HILLS STORES SERIES A CONVERTIBLE PREFERRED STOCK
--------------------------------------------------
During the thirty-nine weeks ended October 31, 1998, 6,178 shares of the
Company's Series A Convertible Preferred Stock ($20 mandatory redemption value)
were converted to the Company's Common Stock on a share for share basis.
5. INTEREST EXPENSE
-----------------
Interest expense is stated net of the following (in thousands):
Thirty-Nine Weeks Ended
---------------------------
October 31, November 1,
1998 1997
Interest income $ 77 $ 467
Capitalized interest 1,427 699
------- -------
Total for each period $1,504 $1,166
======= =======
Capitalized interest relates to the Company's program to replace its
primary information systems occurring in fiscal years 1997 through 1999.
6. INCOME TAXES
------------
Income tax benefit (provision) consisted of the following (in thousands):
Thirty-Nine Weeks Ended
------------------------
October 31, November 1,
1998 1997
Interim tax benefit
related to losses
before income taxes $29,900 $17,200
Reversal of accrued tax
liabilities 5,925 -
Valuation allowances on
deferred and interim tax
assets ( 85,425) -
------------ -----------
Total ($49,600) $17,200
============ ===========
As the result of substantial resolution of a federal tax audit covering
fiscal years 1991-1993, the Company has determined that certain previously
recorded tax liabilities are no longer required. Accordingly, effective October
31, 1998, the Company reversed approximately $5.9 million of accrued tax
liabilities (previously included in Other liabilities - non current) that had
been established after October 4, 1993, the effective date of confirmation of
the Company's Plan of Reorganization in its Chapter 11 bankruptcy proceedings
("Emergence Date").
Effective October 31, 1998, the Company recorded valuation allowances of
approximately $85.4 million on all post-emergence deferred and interim tax
assets. These allowances were established to reflect the Company's opinion that
the realization of the deferred tax assets is uncertain as a result of
continuing sales declines and related pre-tax losses.
The Company calculates its provision for interim income taxes (before
valuation allowance) in accordance with Accounting Principles Board Opinion No.
28. This usually calls for the application of the estimated full year tax rate
to interim pretax accounting income. In circumstances when the usual approach
would cause an unrealistically high interim tax benefit rate or other
unreasonable tax results (which is the case for the interim periods of fiscal
years 1997 and 1998), the interim tax provision is calculated by applying the
appropriate Federal and State statutory tax rates to taxable book income. The
Company expects to employ this approach until it is no longer reasonably
possible that an unreasonably large interim tax benefit (before valuation
allowance) rate would occur. The measurement of interim income taxes has no
effect on the amount of income tax expense for the full year.
7. EARNINGS PER SHARE
-------------------
Statement of Financial Accounting Standards Number 128, "Earnings per
Share" ("FAS 128") requires the presentation of "basic" earnings per share
(income applicable to common shareholders divided by the weighted-average number
of common shares outstanding during the period) and "diluted" earnings per share
(which gives effect to all dilutive potential common shares that were
outstanding during the period). All prior-period earnings per share data have
been restated to conform to FAS 128. Basic and diluted earnings per share are
the same for the thirty-nine week periods ended October 31, 1998 and November 1,
1997, as all common stock equivalents are antidilutive, due to the net loss
incurred during these periods.
Basic loss per share for the thirty-nine week periods ended October 31,
1998 and November 1, 1997 was computed based on the weighted average number of
common shares assumed to be outstanding during the period of 10,464,345 and
10,373,499 shares, respectively.
If the impact would be dilutive, the following securities would be
included in the calculation of diluted earnings per share: preferred stock,
stock options, series 1993 Warrants and stock rights.
8. COMMITMENTS AND CONTINGENCIES
------------------------------
In September 1995, the Company and HDSC filed a suit in the Court of
Chancery of the State of Delaware against the former members of the Board of
Directors (the "Former Directors") of the Company. That action seeks, among
other things, recovery of damages caused by the breach by the Former Directors
of their fiduciary duties to shareholders arising from the refusal of the Former
Directors to approve the change in control which took place on July 5, 1995
following the election of seven replacement directors by the shareholders of the
Company. In October 1995, the defendants filed a motion to dismiss the suit. In
February 1996, the court granted a motion of the Former Directors to stay
discovery pending the outcome of their motion to dismiss. In March 1997, the
court denied the Former Directors' motion to dismiss.
In April 1997, three of the Former Directors, Michael Bozic, Norman S.
Matthews and John G. Reen, filed a counterclaim against the Company and the
seven replacement directors seeking damages of not less than $2.5 million for
breach of contract, unjust enrichment and intentional interference with
contractual relations arising out of allegations that the Company improperly
failed to honor their request to exercise stock options. The Company believes
the counterclaim is without merit and has denied the allegations and asserted
various defenses. Discovery is ongoing in the case.
In August 1995, in the Court of Chancery of the State of Delaware, three
shareholders of the Company, Gayle Dolowich, Ivan J. Dolowich and Joseph Weiss,
filed a class action lawsuit (the "Dolowich suit") against the seven new
directors of the Company elected at the 1995 annual meeting, Dickstein Partners
Inc. ("Dickstein Partners") and the Company. In November 1995, the plaintiffs
amended their complaint to include a shareholder's derivative cause of action
against the Former Directors for breach of their fiduciary duties to the Company
and its shareholders. In the amended complaint, the plaintiffs claim (under
Section 225 of the Delaware Corporation Code) that in connection with Dickstein
Partners effort to solicit proxies in support of the election of its nominees
for directors of the Company, Dickstein Partners issued a number of false and
misleading statements regarding its offer to acquire all of the Company's shares
it did not already own. On the Section 225 claim, the plaintiffs seek an order
nullifying the election of directors and declaring there has been "no change of
control" of the Company. The derivative cause of action seeks damages against
the Former Directors. In January 1996, in the same Delaware Chancery Court,
another shareholder, Peter M. Fusco, filed a substantially similar class action
and shareholder derivative suit (the "Fusco suit") against the parties named in
the Dolowich suit. The Former Directors filed a motion to dismiss the Dolowich
and Fusco suits, and in March 1997 the court denied that motion.
The Company is also involved in various suits and claims in the ordinary
course of business. Management does not believe that the disposition of such
suits and claims will have a material adverse effect upon the continuing
operations and financial position of the Company.
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma combined condensed financial statements
give effect to the acquisition of Hills Stores Company ("Hills") by Ames
Department Stores, Inc. (the "Company"), through its wholly-owned subsidiary,
HSC Acquisition Corp. ("HSC"). The acquisition of Hills by the Company (the
"Hills Acquisition") was consummated pursuant to an Agreement and Plan of
Merger, dated as of November 12, 1998, by and among the Company, HSC, and Hills.
In consummation of the acquisition, a total of $114.5 million was disbursed
as follows:
i) $12.7 million to common shareholders representing 81.3% of shares
outstanding
ii) $1.0 million to shareholders of Series A preferred stock representing
74.4% of shares outstanding
iii)$100.8 million to holders of senior subordinated notes of Hills
representing 73.9% of the notes outstanding
The Hills Acquisition was funded by cash provided by operations and by
the Amended and Restated Credit Agreement dated December 31, 1998 between
BankAmerica Business Credit, Inc., as Agent, the lenders party thereto, and the
Company.
The Hills Acquisition will be accounted for under the purchase method of
accounting, and as such, the final calculated purchase price will be allocated
to the fair value of tangible assets and the excess of cost over net assets
acquired.
The pro forma condensed consolidated balance sheet as of October 31, 1998
assumes the acquisition took place on that date and is based on the respective
unaudited historical condensed consolidated balance sheets, reported on both the
Company's and Hills' Form 10-Q, filed with the SEC. The pro forma adjustments
record the pro forma purchase price of $130.0 million, which includes
professional fees and other costs, and allocate the pro forma purchase price to
the assets acquired and the liabilities assumed based on their preliminary
estimated fair market values on the date of acquisition.
The pro forma condensed consolidated statements of operations for the
thirty-nine weeks ended October 31, 1998 and for the fiscal year ended January
31, 1998 ("Fiscal 1997") assume that the transaction was consummated at the
beginning of Fiscal 1997, and are based on the respective historical
consolidated statements of operations, reported on both the Company's and Hills'
Form 10-Q and Form 10-K.
The unaudited pro forma financial information and related notes are
provided for informational purposes only and are not necessarily indicative of
what the Company's actual financial position or results of operations would have
been had the foregoing transaction been consummated on such dates, nor does it
give effect to the synergies, cost savings and other charges expected to result
from the Hills Acquisition. Accordingly, the pro forma financial information
does not purport to be indicative of the Company's financial position or results
of operations as of the date hereof or for any period ended on the date hereof
or as of or for any other future dates or periods.
<PAGE>
<TABLE>
Ames Department Stores, Inc. and Hills Stores Company
Unaudited Pro Forma Combined Condensed Consolidated Balance Sheet
As Of October 31, 1998
(In thousands)
<CAPTION>
Historical Proforma Adjustments Pro Forma
-------------------------- ----------------------------
Ames Hills Conforming (1)*Acquisition Combined
ASSETS
<S> <C> <C> <C> <C> <C>
Current Assets:
Cash and short-term investments $ 28,421 $ 17,070 $ - $ - $ 45,491
Receivables 60,655 47,513 - (a) (3,600) 104,568
Merchandise inventories 611,216 552,079 - (b) (219,560) 943,735
Prepaid expenses and other current assets 18,807 5,847 - - 24,654
--------- ---------- --------- ---------- ----------
Total current assets 719,099 622,509 - (223,160) 1,118,448
Fixed assets, net 133,518 278,409 - (c) (39,134) 372,793
Beneficial lease rights, net - 5,506 - (d) 70,800 76,306
Other assets and deferred charges 12,918 64,296 - (e) (49,358) 27,856
Reorganization value in excess of revalued net assets - 84,846 - (f) (84,846) -
Purchase price in excess of fair market value of
assets acquired - - - (g) 287,286 287,286
--------- ----------- -------- ---------- ----------
Total Assets $ 865,535 $ 1,055,566 $ - $ (38,412) $ 1,882,689
========= =========== ======== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable, trade $ 256,130 $ 188,128 $ - $ - $ 444,258
Note payable - revolver 136,057 224,000 - (h) (360,057) -
Current portion of long-term debt and capital
lease obligations 6,277 11,693 - - 17,970
Self-insurance reserves 32,092 - 32,710(i) - 64,802
Other accounts payable and accrued expenses 136,463 91,732 42,598(j) 37,566 308,359
Store and other facilities closing reserves 9,781 - 6,692(k) 48,181 64,654
--------- --------- --------- --------- ----------
Total current liabilities 576,800 515,553 82,000 (274,310) 900,043
Note payable - revolver - - - (h) 484,830 484,830
Long term debt - 195,000 - (l) (144,125) 50,875
Capital lease and other financing obligations 43,996 143,900 - (m) 5,850 193,746
Other long-term obligations 8,577 90,456 (82,000)(n) - 17,033
Unfavorable lease liability 14,261 - - - 14,261
Excess of revalued net assets over equity under
fresh-start reporting 25,559 - - - 25,559
Stockholders' Equity 196,342 110,657 - (o) (110,657) 196,342
--------- --------- -------- ---------- ------------
Total Liabilities and Stockholders' Equity $ 865,535 $ 1,055,566 $ - $ (38,412) $ 1,882,689
========= ========== ======== ========== ============
* All letter references correspond to Note 1.
</TABLE>
<PAGE>
<TABLE>
Ames Department Stores, Inc. and Hills Stores Company
Unaudited Pro Forma Combined Condensed Consolidated Statement of Operations
For The Nine Months Ended October 31, 1998
(In thousands, except per share data)
Historical Pro Forma Adjustments Proforma
--------------------------- ---------------------------
Ames Hills Conforming(2)* Acquisition Combined
---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
39 weeks 39 weeks
----------- -----------
NET SALES $ 1,634,533 $ 1,119,879 $ - $ - $ 2,754,412
COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold 1,176,165 828,940 (8,813) (a) - 1,996,292
Selling, general and administrative expenses 441,264 323,678 (11,492) (b) - 753,450
Leased department and other operating income (20,443) - (10,361) (b) - (30,804)
Depreciation and amortization expense 13,051 - 30,666 (abc) 3,576 47,293
Amortization of the excess of revalued net assets over equity
under fresh-start reporting (4,615) - - - (4,615)
Amortization of reorganization value in excess
of reval. net assets - 4,266 - (d) (4,266) -
Amortization of purchase price in excess of revalued assets acquired - - - (d) 8,619 8,619
Interest and debt expense, net 9,093 39,406 - (e) (6,020) 42,479
-------------- ----------- ---------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES $ 20,018 $ (76,411) - (1,909) (58,302)
Income tax benefit (provision) (7,523) (49,600) - (f) 29,433 (27,690)
-------------- ----------- ---------- ----------- -----------
NET INCOME (LOSS) $ 12,495 $ (126,011) $ - $ 27,525 $ (85,991)
============== =========== ========== =========== ===========
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income (loss) $ 0.55 $ (12.04) $ (3.76)
Weighted average common shares 22,885 10,464 22,885
============== =========== ===========
DILUTED NET INCOME (LOSS) PER COMMON SHARE**
Income (loss) $ 0.52
Weighted average common and common equivalent shares 24,141
==============
</TABLE>
* All letter references correspond to Note 2.
** The Pro forma Combined Company and Hills diluted loss per share is the same
as basic loss per share due to the net loss incurred during the period.
<PAGE>
<TABLE>
Ames Department Stores, Inc. and Hills Stores Company
Unaudited Pro Forma Combined Condensed Consolidated Statement of Operations
For The Year Ended January 31, 1998
(In thousands, except per share data)
<CAPTION>
Historical Pro Forma Adjustments Proforma
--------------------------- ---------------------------
Ames Hills Conforming (2)* Acquisition Combined
----------------------------- -----------
53 weeks 52 weeks
---------------------------
<S> <C> <C> <C> <C> <C>
NET SALES $ 2,233,118 $ 1,768,274 $ - $ - $ 4,001,392
COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold 1,604,364 1,306,335 (11,224) (a) - 2,899,475
Selling, general and administrative expenses 580,918 418,512 (10,875) (b) - 988,555
Leased department and other operating income (26,494) - (14,746) (b) - (41,240)
Depreciation and amortization expense 14,250 - 36,845 (abc) 4,805 55,900
Amortization of the excess of revalued net assets over equity
under fresh-start reporting (6,153) - - - (6,153)
Amortization of reorganization value in excess of
revalued net assets - 5,850 - (d) (5,850) -
Amortization of purchase price in excess of revalued
assets acquired - - - (d) 11,491 11,491
Interest and debt expense, net 11,600 48,392 - (e) (8,246) 51,746
Store closing charge 1,000 - - - 1,000
------------- ----------- ----------- ---------- -----------
INCOME (LOSS) BEFORE INCOME TAXES 53,633 (10,815) - (2,201) 40,617
Income tax benefit (provision) (19,087) 1,800 - (g) 2,832 (14,455)
------------- ----------- ----------- ---------- -----------
NET INCOME (LOSS) $ 34,546 $ (9,015) $ - $ 631 $ 26,162
============= =========== =========== ========== ===========
BASIC NET INCOME (LOSS) PER COMMON SHARE
Income (loss) $ 1.59 $ (0.87) $ 1.20
Weighted average common shares 21,723 10,387 21,723
============= =========== ===========
DILUTED NET INCOME (LOSS) PER COMMON SHARE**
Income (loss) $ 1.46 $ 1.11
Weighted average common and common equivalent shares 23,649 23,649
============= ===========
<FN>
* All letter references correspond to Note 2.
** Hills diluted loss per share is the same as basic loss per share due to the
net loss incurred during the period.
</FN>
</TABLE>
<PAGE>
Notes to accompany the unaudited pro forma combined condensed financial
statements.
Note 1 - Pro forma adjustments as of October 31, 1998
The pro forma adjustments to the unaudited pro forma combined condensed balance
sheet reflect the purchase of Hills and the allocation of the pro forma purchase
price to the acquired assets and the assumed liabilities based on the
preliminary estimate of their fair market value at the date of acquisition. The
pro forma adjustments include the impact of conforming Hills accounting policies
to those of the Company.
(a) Receivables - The adjustment reflects a write down for anticipated
unrealizable receivables that are not expected to be collected post
acquisition as a result of discontinued business relationships.
(b) Merchandise inventories - The adjustment reflects the write down of
inventory to the net value expected to be realized in liquidating the
inventory in the acquired Hills stores, pursuant to the Post Merger
Transition and Agency Agreement.
(c) Fixed assets, net - The net adjustment includes a write down of fixtures,
computer equipment and leasehold improvements to fair market value,
partially offset by the increase in value assigned to capital leases.
(d) Beneficial lease rights, net - The adjustment reflects a preliminary
estimated increase in the value assigned to the Hills leases (amortized
over the remaining life of the leases at an average of 25 years).
(e) Other assets and deferred charges - The adjustment reflects the elimination
of deferred software expenditures for technology not to be used by the
Company, the elimination of historical deferred financing fees and the
recording of the fees associated with the new $650 million credit facility
of the combined Company.
(f) Reorganization value in excess of revalued net assets - The adjustment
reflects the elimination of the asset that was established at the time of
Hills emergence from Chapter 11.
(g) Purchase price in excess of fair market value of assets acquired - The
adjustment reflects the goodwill recorded in connection with the Hills
Acquisition.
(h) Note payable, revolver - The adjustment reflects the reclassification of
the outstanding revolver balance to long-term debt consistent with the
treatment afforded by the new credit agreement. The balance was increased
for borrowings necessary to fund $114.5 million distributed in consummation
of the acquisition and $10.3 million of bank fees on the new credit
facility.
(i) Self-insurance reserves - The adjustment reflects the effect of conforming
Hills financial statement presentation to that of the Company by
reclassifying self-insurance reserves from "other long-term liabilities"
and "accrued expenses" to "self-insurance reserves."
(j) Other accounts payable and accrued expenses - The adjustment reflects
recording an incremental liability for impaired inventory which the
Company is legally obligated to fulfill existing purchase commitments, a
liability for the value of the Hills stock that was not tendered, a
liability for acquisition fees not yet paid, offset by the elimination of
accrued interest on the senior notes purchased at discount. Certain
accounts were reclassified to conform Hills financial statement
presentation to that of the Company.
(k) Store and other facilities closing reserves - The adjustment reflects the
anticipated costs associated with the closing of certain Hills stores, the
closing of other Hills facilities and the revaluation of Hills historical
closed store reserves to conform with the Company's accounting practices.
The Hills historical store closing reserve was reclassified from accrued
expenses and other long-term obligations to its own line on the face of the
balance sheet consistent with the Company's presentation.
(l) Long-term debt - The adjustment reflects the impact of retiring $144.1
million or 73.9% of Hills outstanding senior notes at a 30% discount.
(m) Capital lease and other financing obligations - The adjustment reflects the
effect of using the Company's incremental borrowing rate to compute the
present value of the acquired capital lease obligation and the present
value of the financing obligations on property that was sold and leased
back to Hills.
(n) Other long-term obligations - The adjustment reflects the reclassification
of certain liabilities to other lines on the balance sheet to be consistent
with the Company's historical financial statement presentation.
(o) Stockholders' Equity - The adjustment reflects the elimination of the
historical stockholders' equity of Hills.
Note 2 - Pro forma adjustments for the nine months ended October 31, 1998 and
the fiscal year ended January 31, 1998.
The adjustments to the unaudited pro forma combined condensed consolidated
income statement reflect the purchase of Hills and the conforming of Hills
financial statement presentation to that of the Company.
(a) Certain expenses were reclassified from Cost of Goods Sold to conform to
the Company's presentation as follows:
<TABLE>
Nine Months Fiscal Year
Ended 10/31/98 Ended 1/31/98
---------------- ---------------
<S> <C> <C>
Buying Expenses reclassified to Selling,
General and Administrative Expenses (7,830) ( 9,996)
Depreciation reclassified to Depreciation
and Amortization Expense (983) (1,228)
--------- ---------
Total Adjustments (8,813) (11,224)
========= =========
(b) Certain expenses and income were reclassified from Selling, General and
Administrative Expense to conform to the Company's presentation as
follows:
Nine Months Fiscal Year
Ended 10/31/98 Ended 1/31/98
---------------- ---------------
Leased Department Income reclassified to
Leased Department and Other Income 10,361 14,746
Depreciation reclassified to Depreciation
and Amortization Expense (29,683) (35,617)
Buying Expenses reclassified from Cost of
Goods Sold 7,830 9,996
---------- ----------
Total Adjustments (11,492) (10,875)
========== ==========
</TABLE>
(c) In addition to the reclassifications of depreciation noted above,
Depreciation and Amortization Expense was adjusted to reflect the fair
market revaluation of Hills capital leases and beneficial lease rights.
(d) Hills amortization of reorganization value in excess of revalued assets was
eliminated and amortization of purchase price in excess of assets acquired
was added (25 year amortization period).
(e) Interest expense was adjusted as follows:
<TABLE>
Nine Months Fiscal Year
Ended 10/31/98 Ended 1/31/98
---------------- ---------------
<S> <C> <C>
Interest eliminated on the Senior Notes
purchased (13,511) (18,016)
The elimination of amortized fees on the previous
revolvers of Hills and the Company offset by the
amortization of fees associated with the new credit
facility. (392) (328)
Additional interest costs recorded relating to the
purchase of Hills 8,037 10,175
Change in interest on revalued debt (154) (77)
---------- ----------
Total Adjustments (6,020) (8,246)
========== ==========
(f) For the period ended October 31, 1998, income taxes were adjusted to record
a benefit on the pro forma combined loss at the Company's historical rate,
offset by a write down of Hills deferred tax assets of approximately $49.6
million which were previously recorded by Hills. As of October 31, 1998,
Hills management determined that this tax asset was not realizable, and as
such,recorded a write down of the asset as a component of the tax provision.
The impact of recording the write down of this tax asset has not been
eliminated for the pro forma purposes.
(g) For the fiscal year ended January 31, 1998,income taxes were adjusted at the
Company's historical rate.
</TABLE>
Note 3
The costs of closing certain Hills stores and other Hills facilities have been
reserved for in the pro forma combined condensed consolidated balance sheet. The
pro forma combined condensed consolidated income statement has not been adjusted
to reflect the impact that closing the stores or consolidating the facilities
and reducing overhead will have on ongoing operations. The Company anticipates
closing seven Ames stores that overlap markets with Hills stores. The charge,
the restructuring reserve and the impact of the closings on ongoing operations
have not been reflected in the pro forma combined condensed consolidated
financial statements.
INDEX TO EXHIBITS
Exhibit No. Exhibit
- ------------ ---------
2(d) Agreement and Plan of Merger, dated as of November 12, 1998,
by and among Ames Department Stores, Inc., its wholly-owned
subsidiary, HSC Acquisition Corporation, and Hills Stores
Company (Incorporated by reference to Exhibit 99(c)(1) of the
Company's Schedule 14D-1 filed on November 12, 1998)
10(k) Second Amended and Restated Credit Agreement, dated December
31, 1998, among certain financial institutions, as Lenders,
BankAmerica Business Credit, as the Administrative Agent, and
Ames FS, Inc., Ames Merchandising Corporation, and Hills
Department Store Company (Incorporated by reference to Exhibit
10(k) of the Company's Form 8-K filed on January 15, 1999)
10(l) Post Merger Transition and Agency Agreement by and among the
Gordon Brothers Retail Partners, LLC and The Nassi Group, LLC,
(collectively, the "Agent") and Hills Stores Company, Hills
Department Stores Company, and Ames Merchandising Corporation
(collectively, and as applicable to the operator of the
particular store, the "Merchant") dated as of December 31,
1998 (Incorporated by reference to Exhibit 10(l) of the
Company's Form 8-K filed on January 15, 1999)
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMES DEPARTMENT STORES, INC.
Registrant
Dated: March 15, 1999 By: /s/ Joseph R. Ettore
--------------------
Joseph R. Ettore
President, Director, and
Chief Executive Officer
Dated: March 15, 1999 By: /s/ Rolando de Aguiar
---------------------
Rolando de Aguiar
Executive Vice President,
Chief Financial Officer
