SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 30, 1999
-------------------------------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
------------------ ------------------
Commission File Number 1-05380
AMES DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 04-2269444
- ------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2418 Main Street, Rocky Hill, Connecticut 06067
- ----------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (860) 257-2000
----------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
29,134,401 shares of Common Stock were outstanding on November 15, 1999.
Exhibit Index on page 16
Page 1 of 24 (including exhibits)
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED OCTOBER 30, 1999
I N D E X
Page
Part I: Financial Information
Consolidated Condensed Statements of Operations 3
for the Thirteen and Thirty-Nine Weeks ended October 30,
1999 and October 31, 1998
Consolidated Condensed Balance Sheets as of 4
October 30, 1999, January 30, 1999 and October 31,
1998
Consolidated Condensed Statements of Cash Flows 5
for the Thirty-Nine Weeks ended October 30,
1999 and October 31, 1998
Notes to Consolidated Condensed Financial Statements 6
Management's Discussion and Analysis of 11
Financial Condition and Results of Operations
Quantitative and Qualitative Disclosure About Market Risk 15
Part II: Other information
Submission of Matters to a Vote of Security Holders 16
Exhibits and Reports on Form 8-K 16
<PAGE>
<TABLE>
PART I
FINANCIAL INFORMATION
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited) (Unaudited)
For the Thirteen For the Thirty-Nine
Weeks Ended Weeks Ended
-------------------------------- ----------------------------------
<CAPTION>
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
--------------- -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Ames net sales $ 941,794 $ 596,030 $ 2,251,419 $1,628,122
Hills net sales - - 375,642 -
--------------- -------------- ---------------- ---------------
Total net sales 941,794 596,030 2,627,061 1,628,122
Costs, expenses and (income):
Ames cost of merchandise sold 680,597 432,936 1,614,686 1,169,758
Hills cost of merchandise sold - - 251,212 -
Ames selling, general and administrative expenses 255,203 153,205 652,778 443,967
Hills operating expenses and agency fees 7,385 - 149,432 -
Leased department and other income (9,310) (6,768) (29,322) (20,443)
Depreciation and amortization expense, net 17,516 3,187 48,203 7,365
Interest and debt expense, net 17,736 3,847 43,279 9,093
--------------- -------------- ---------------- ---------------
Income (loss) before income taxes (27,333) 9,623 (103,207) 18,382
Income tax benefit (provision) 9,840 (3,623) 37,153 (6,939)
--------------- -------------- ---------------- ---------------
Net income (loss) ($17,493) $6,000 ($66,054) $11,443
=============== ============== ================ ===============
Basic net income (loss) per common share $ (0.60) $ 0.26 $ (2.44) $ 0.50
=============== ============== ================ ===============
Weighted average number of common shares outstanding 29,109 23,087 27,027 22,885
=============== ============== ================ ===============
Diluted net income (loss) per common share $ (0.60) $ 0.25 $ (2.44) $ 0.47
=============== ============== ================ ===============
Weighted average number of common and common
equivalent shares outstanding 29,109 24,145 27,027 24,141
=============== ============== ================ ===============
<FN>
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
</TABLE>
<PAGE>
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands, Except Share Amounts)
(Unaudited) (Unaudited)
October 30, January 30, October 31,
1999 1999 1998
------------- ------------ ------------
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and short-term investments $42,383 $35,744 $28,421
Receivables 114,030 30,244 56,259
Merchandise inventories 1,072,539 621,509 611,216
Prepaid expenses and other current assets 58,249 16,075 17,171
------------- ------------- ------------
Total current assets 1,287,201 703,572 713,067
Fixed Assets 615,379 437,834 191,900
Less - Accumulated depreciation and amortization (110,957) (66,205) (58,382)
------------- ------------- ------------
Net fixed assets 504,422 371,629 133,518
Other assets and deferred charges 59,451 16,447 5,512
Deferred taxes, net 102,406 102,406 7,406
Beneficial lease rights, net 56,817 58,885 -
Goodwill, net 195,449 230,454 -
------------- ------------- ------------
$2,205,746 $1,483,393 $859,503
============= ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $433,991 $313,280 $256,130
Other 73,142 83,485 52,436
------------- ------------- ------------
Total accounts payable 507,133 396,765 308,566
Short-term debt - - 136,057
Current portion of long-term debt, capital lease and financing obligations 20,999 17,799 6,277
Self-insurance reserves 28,385 29,115 16,148
Accrued expenses and other current liabilities 206,277 211,827 79,631
Store closing reserves 53,516 59,768 9,781
------------- ------------- ------------
Total current liabilities 816,310 715,274 556,460
Long-term debt 615,696 95,810 -
Capital lease and financing obligations 184,039 191,904 43,996
Other long-term liabilities 124,100 132,376 38,782
Excess of revalued net assets over equity under fresh-start reporting 19,406 24,021 25,559
Commitments and contingencies
Stockholders' Equity:
Preferred stock (3,000,000 shares authorized; no shares issued or
outstanding at October 30, 1999, January 30, 1999 and October 31, 1998,
respectively; par value per share $.01) - - -
Common stock (40,000,000 shares authorized; 29,210,662; 23,921,545 and
23,147,221 shares outstanding at October 30, 1999, January 30, 1999 and
October 31, 1998, respectively; par value per share $.01) 292 239 231
Additional paid-in capital 424,855 236,667 129,760
Retained earnings 21,962 88,016 65,629
Treasury stock (79,495 shares, at cost) (914) (914) (914)
------------- ------------- ------------
Total stockholders' equity 446,195 324,008 194,706
------------- ------------- ------------
$2,205,746 $1,483,393 $859,503
============= ============= ============
<FN>
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</FN>
</TABLE>
<PAGE>
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the Thirty-Nine
Weeks Ended
-------------------------------------------
October 30, October 31,
1999 1998
--------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) ($66,054) $11,443
Adjustments to reconcile net income (loss) to net cash
used for operating activities:
Income tax (benefit) provision (37,153) 6,939
Depreciation and amortization of fixed and other assets 54,704 9,118
Increase in accounts receivable (83,786) (41,447)
Increase in merchandise inventories (451,030) (187,380)
Increase in accounts payable 110,368 85,410
Increase (decrease) in accrued expenses and other current liabilities (6,280) 11,025
Increase (decrease) in other working capital and other, net 18,937 (7,656)
-------------- ----------------
Cash used for operations before store closing items (460,294) (112,548)
Payments of store closing costs (4,773) (1,875)
-------------- ----------------
Net cash used for operating activities (465,067) (114,423)
-------------- ----------------
Cash flows from investing activities:
Purchases of fixed assets (169,345) (39,919)
Purchase of leases (42,835) -
-------------- ----------------
Net cash used for investing activities (212,180) (39,919)
-------------- ----------------
Cash flows from financing activities:
Payments of debt, capital lease and financing obligations (17,026) (14,064)
Borrowings (payments) under the revolver, net 319,886 136,057
Proceeds from the issuance of senior notes 200,000 -
Proceeds from the issuance of common stock, net 187,216 -
Payments of deferred financing costs (7,215) -
Proceeds from the exercise of options and warrants 1,025 3,856
Purchase of treasury stock - (914)
-------------- ----------------
Net cash provided by financing activities 683,886 124,935
-------------- ----------------
Increase (decrease) in cash and short-term investments 6,639 (29,407)
Cash and short-term investments, beginning of period 35,744 57,828
-------------- ----------------
Cash and short-term investments, end of period $42,383 $28,421
============== ================
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest and debt fees not capitalized $25,535 $7,029
Income taxes 172 119
(The accompanying notes are an integral part of these consolidated condensed financial statements.)
</TABLE>
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation:
-----------------------
In the opinion of management, the accompanying unaudited
consolidated condensed financial statements of Ames Department Stores,
Inc. (a Delaware corporation) and subsidiaries (collectively "Ames" or
the "Company") contain all adjustments (consisting of normal recurring
adjustments) necessary for a fair presentation of such financial
statements for the interim periods. Due to the seasonality of the
Company's operations, the results of its operations for the interim
period ended October 30, 1999 may not be indicative of total results for
the full year. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to
the rules and regulations promulgated by the Securities and Exchange
Commission (the "SEC"). Certain prior year amounts have been reclassified
to conform to the presentation used for the current year. Pursuant to the
indenture governing the Ames Senior Notes (as defined in Note 5), all of
Ames' subsidiaries have jointly and severally guaranteed the Ames Senior
Notes on a full and unconditional basis. Separate financial statements of
those subsidiaries have not been included herein because management has
determined that they are not material to investors.
The consolidated condensed balance sheet at January 30, 1999 was
obtained from audited financial statements previously filed with the SEC
in the Company's Annual Report on Form 10-K for the fiscal year ended
January 30, 1999 (the "1998 Form 10-K"). The accompanying unaudited
consolidated condensed financial statements should be read in conjunction
with the financial statements and notes thereto included in the 1998 Form
10-K.
In the fourth quarter of the year ended January 30, 1999 ("Fiscal
1998"), the Company adopted SOP 98-5 "Reporting on the Costs of Start-Up
Activities" retroactively effective to the first quarter of Fiscal 1998.
Therefore, the consolidated condensed financial statements for the
thirteen and thirty-nine weeks ended October 31, 1998 have been adjusted
accordingly. Reference can be made to the 1998 Form 10-K for additional
discussion of the adoption of SOP 98-5 by the Company.
2. Acquisition and Agency Agreement:
----------------------------------
Acquisition of Hills Stores Company
On December 31, 1998, HSC Acquisition Corp. ("HSC"), a wholly
owned subsidiary of the Company, acquired in excess of 80% of the
outstanding voting stock of Hills Stores Company ("Hills") and
approximately 74% of the outstanding Hills 12 1/2% senior notes.
Subsequently, Hills was merged with HSC and became a wholly-owned
subsidiary of Ames Department Stores, Inc. In April 1999, Hills was
merged with and into Ames Department Stores, Inc.
Total cash consideration for the acquisition of Hills was $130
million. Reference can be made to the 1998 Form 10-K for
further discussion of the Hills acquisition.
The acquisition has been recorded under the purchase method of
accounting and, accordingly, the results of operations of Hills for the
quarter ended October 30, 1999 are included in the accompanying
consolidated condensed financial statements. The aggregate purchase price
of $130 million has been allocated to assets acquired and liabilities
assumed based on a preliminary determination of respective fair market
values at the date of acquisition and is subject to adjustment. The fair
value of tangible assets acquired and liabilities assumed was $477
million and $637 million, respectively. The balance of the purchase
price, $290 million, was recorded as two components: an excess of cost
over net assets acquired (goodwill) of $231 million, which is being
amortized over 25 years on a straight-line basis, and beneficial lease
rights of $59 million, which is being amortized over the life of the
respective leases (which average approximately 25 years). During the
quarter ended July 31, 1999, goodwill was reduced by $28.3 million due to
the completion of inventory liquidation sales at the Hills store
locations.
At the time of the acquisition, Hills operated 155 discount
department stores. During 1999, the Company remodeled and converted 151
of the Hills stores to Ames stores. The four remaining Hills stores along
with seven other Ames stores were closed because they were in locations
that were either competitive with, or were underperforming, other Hills
or Ames stores. The remodeling and conversion process was conducted in
three stages, each stage involving approximately one third of the Hills
stores. The first stage was completed in late April 1999; the second
stage was completed in late July 1999; and the third stage was completed
in late September 1999.
Agency Agreement Overview
Concurrent with the Hills acquisition, the Company entered into a
transition and agency agreement (the "Agency Agreement") with Gordon
Brothers Retail Partners, LLC and The Nassi Group, LLC (collectively the
"Agent"), which provided that the Agent serve for a period of time to
operate all of the acquired Hills stores and to conduct inventory
liquidation sales at each of those stores prior to its scheduled
remodeling or final closure. Accordingly, the Agent managed the sale of
the inventory acquired in the Hills acquisition as well as certain other
inventory identified in the Agency Agreement.
The Agency Agreement entitled the Company to receive out of the
sale proceeds a minimum amount equal to 40% of the initial retail value
or initial ticketed selling price of the merchandise (the "Guaranteed
Return"). Accordingly, the Company initially valued the acquired Hills
inventory at an amount equal to the Guaranteed Return. Because sale
proceeds exceeded the target percentage of the initial retail value, the
Company received an amount greater than the Guaranteed Return. The Agency
Agreement further entitled the Company to reimbursement of certain store
operating expenses (e.g., payroll, rent, advertising, etc.) out of the
sale proceeds during the agency period.
The Agent was paid a fee (the "Agency Fee") for its services
pursuant to the Agency Agreement. The Agency Fee was an amount equal to
the proceeds from the sales of Hills merchandise less a deduction for the
reimbursement of store operating expenses and the Guaranteed Return.
Agency Agreement Accounting
As discussed earlier, the results of operations of Hills for the
thirteen and thirty-nine weeks ended October 30, 1999 have been included
in the accompanying consolidated condensed financial statements. During
the thirteen and thirty-nine weeks ended October 30, 1999, the following
accounting treatment has been applied to recognize the results of the
Hills stores prior to their conversion to Ames stores during fiscal 1999.
Hills net sales have been recorded as "Hills Net Sales" and represent net
sales achieved by the Hills stores prior to their conversion to Ames
stores. "Hills Cost of Merchandise Sold" represents the cost of
merchandise sold in connection with the above referenced sales as
adjusted both for the Guaranteed Return amount and the amount based on
the excess sales performance referenced above. "Hills Operating Expenses
and Agency Fees" include the following: the associated store expenses
incurred while operating the Hills stores prior to their conversion to
Ames stores, which are reimbursable to the Company out of the proceeds of
Hills merchandise sales per the Agency Agreement; the Agency Fee due to
the Agent for the period presented; and other expenses (e.g., non-store
payroll, non-store rent, etc.) associated with supporting the Hills
stores prior to their conversion to Ames stores, which are not
reimbursable under the Agency Agreement.
The Agency Fee recorded for the third quarter and year-to-date was
$2.4 million and $41.7 million respectively, and was determined based
upon the Hills sales results for the period, less the Guaranteed Return,
reimbursable Hills store expenses and an allocation to Ames based on sale
proceeds in excess of specified levels.
The inventory liquidation sales at the Hills stores were completed
during the quarter ended July 31, 1999. Proceeds from the sales during
the entire agency period exceeded the targeted percentage referenced
above. The Company shared in the excess and thereby realized in excess of
the Guaranteed Return for the acquired Hills inventory. The $28.3 million
adjustment, recorded as of July 31, 1999, to recognize the increase in
inventory valuation concurrently reduced the original estimate of the
excess of cost over net assets acquired (goodwill).
Acquisition of Caldor Sites
During March 1999, the Company entered into two agreements with
Caldor Corporation to purchase seven of its stores in Connecticut, two
stores in Massachusetts and a 649,000 square foot distribution center in
Westfield, MA, for a total cash purchase price of $42.8 million. Under
the terms of the agreements, the Company assumed Caldor's leases for the
nine stores and the distribution center and acquired all of the store
fixtures in eight of the stores and all racking, sorting systems and
materials handling equipment in the distribution center. During March and
April 1999, the United States Bankruptcy Court for the Southern District
of New York approved the Company's right to purchase the leases for the
stores and the distribution center. All of the transactions subsequently
closed.
3. Net Income (Loss) Per Common Share:
------------------------------------
Net income (loss) per share was determined using the weighted
average number of common shares outstanding. Diluted net loss per share
was equal to basic net loss per share because inclusion of common stock
equivalents would have been anti-dilutive. During the quarter ended
October 30, 1999, 29,023 options were exercised. During the quarter ended
October 30, 1998, 21,550 options were exercised and 29,169 warrants were
converted.
4. Inventories:
-------------
Inventories are valued at the lower of cost, using the first-in,
first-out (FIFO) method, or market and include the capitalization of
transportation and distribution center costs.
5. Debt:
------
Credit Agreement
On December 31, 1998, in connection with the acquisition of Hills,
certain of the Company's subsidiaries entered into an agreement (the
"Credit Agreement") with a syndicate of other banks and financial
institutions for whom Bank of America NT&SA is serving as agent. The
Credit Agreement provides for a secured revolving credit facility of up
to $650 million, with a sublimit of $150 million for letters of credit.
The Credit Agreement replaced a $320 million secured revolving credit
facility.
The Credit Agreement is in effect until June 30, 2002 and is
secured by substantially all of the assets of the Company. Reference can
be made to the 1998 Form 10-K for additional discussion of the Credit
Agreement and for descriptions of the Company's other obligations not
discussed herein.
As of October 30, 1999, borrowings of $364.8 million were
outstanding under the Credit Agreement. These borrowings are included in
long-term debt in the accompanying consolidated condensed balance sheet
as of October 30, 1999. In addition, $20.0 and $1.9 million of standby
and trade letters of credit, respectively, were outstanding under the
Credit Agreement. The weighted average interest rate on the borrowings
for the thirteen and thirty-nine weeks ended October 30, 1999 were 8.6%
and 8.2%, respectively. The peak borrowing level through October 30, 1999
was $370.6 million and occurred in October 1999.
Ames Senior Notes
On April 27, 1999, the Company completed the sale of $200
million of its 10% seven-year senior notes (the "Ames Senior Notes"). The
net proceeds from the sale of the Ames Senior Notes, approximately $193.4
million, were used to reduce outstanding borrowings under the Credit
Agreement.
The Ames Senior Notes pay interest semi-annually in April and
October and mature April 2006. Prior to April 15, 2002, the Company may
redeem up to 35% of the Ames Senior Notes with the proceeds of one or
more public equity offerings at a redemption price of 110% of the
principal amount thereof. On or after April 15, 2003, the Company may
redeem some or all of the Ames Senior Notes outstanding at a redemption
price equal, initially, to 105% of the principal amount thereof. In both
cases, the accrued and unpaid interest will be added to the redemption
price on the applicable redemption date.
The Ames Senior Notes were issued under an indenture among Ames,
its existing subsidiaries and The Chase Manhattan Bank. The financial
covenants in the indenture restrict Ames' ability to: borrow money; pay
dividends on or purchase Ames' stock; make investments; use assets as
security in other transactions; sell certain assets or merge with other
companies; and enter into transactions with affiliates. If a Change of
Control occurs, each holder of the Ames Senior Notes has the right to
require the Company to purchase all or any part of that holder's Ames
Senior Notes for a payment in cash equal to 101% of the aggregate
principal amount of Ames Senior Notes purchased plus accrued and unpaid
interest.
6. Stock Options:
---------------
The Company has three stock option plans (the "Option Plans"): the
1994 Management Stock Option Plan, the 1998 Stock Incentive Plan and the
1994 Non-Employee Directors Stock Option Plan.
In October 1995, the Financial Accounting Standards Board issued
SFAS No. 123 "Accounting for Stock-Based Compensation." SFAS No. 123
established a fair-value based method of accounting for stock-based
compensation; however, it allowed entities to continue accounting for
employee stock-based compensation under the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees." The Company elected to account for the Option
Plans under APB Opinion No. 25, under which no compensation cost has been
recognized, and adopt SFAS No. 123 through disclosure.
If the Company had elected to recognize compensation cost for the
Option Plans based on the fair value at the grant dates for awards under
those plans, consistent with the method prescribed by SFAS No. 123, net
income (loss) and net income (loss) per diluted common share would have
approximated the pro forma amounts indicated below:
<TABLE>
<CAPTION>
For the Thirteen For the Thirty-Nine
Weeks Ended Weeks Ended
--------------------------------- --------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net Income (Loss) (in thousands)
As reported ($17,493) $6,000 ($66,054) $11,443
Pro forma (19,709) 5,071 (71,825) 9,689
Diluted Net Income (Loss)
Per Common Share
As reported ($0.60) (a) $0.25 ($2.44) (a) $0.47
Pro forma ($0.68) (a) $0.21 ($2.66) (a) $0.40
<FN>
(a) Common stock equivalent shares have not been included because the effect would be anti-dilutive.
</FN>
</TABLE>
The fair value of stock options used to compute pro forma
net income and net income per diluted common share is the estimated
present value at grant date using the Black-Scholes option-pricing
model with the following weighted average assumptions: no dividend
yield, expected option volatilities, a risk-free interest rate equal to
U.S. Treasury securities with a maturity equal to the expected life of
the option and an expected life from date of grant until option
expiration date.
7. Income Taxes:
--------------
The Company's estimated annual effective income tax rate for each
year was applied to the loss before income taxes for the thirteen and
thirty-nine weeks ended October 30, 1999 and to the income before income
taxes for the thirteen and thirty-nine weeks ended October 31, 1998 to
compute a non-cash income tax benefit in 1999 and a non-cash income tax
provision in 1998. The income tax benefit is included in other current
assets in the accompanying consolidated condensed balance sheet as of
October 30, 1999. The income tax provision is included as an addition to
paid-in capital in the accompanying consolidated condensed balance sheet
as of October 31, 1998.
8. Commitments and Contingencies:
-------------------------------
Reference can be made to the 1998 Form 10-K (Item 3 - Legal
Proceedings) for various litigation involving the Company, for which
there were no material changes since the filing date of the 1998 Form
10-K except as follows:
With regard to the Gould matter, on September 17, 1999, the Court
entered final approval of the settlement. Payments have since been made
in accordance with the terms of the Settlement Agreement.
9. Equity Offering:
-----------------
On May 24, 1999, the Company completed the public offering of 5.1
million shares of Common Stock at a price of $38.75 per share. The
proceeds, net of underwriting discounts, of approximately $187.9 million,
were used to reduce borrowings under the Credit Agreement and for general
corporate purposes.
10. Recently Issued Accounting Pronouncements:
-------------------------------------------
On December 3, 1999, the SEC issued SAB No. 101, "Revenue
Recognition in Financial Statements," which, among other items, prohibits
the recognition of revenue from layaway sales prior to merchandise
delivery. SAB No. 101 is effective for financial statements for the first
fiscal quarter of the fiscal year beginning after December 15, 1999.
SAB No. 101 will require the Company to modify its method of
accounting for layaway sales. The Company's timing and method of adoption
has not been determined. The Company expects that the annual impact on
the Company's financial statements of adopting SAB No. 101 will not be
material.
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FISCAL QUARTER ENDED OCTOBER 30, 1999
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
-----------------------
On December 31, 1998, we acquired in excess of 80% of the
outstanding voting stock of Hills Stores Company. Accordingly, the
operations of Hills and its subsidiaries are included in our consolidated
results of operations for the thirteen and thirty-nine weeks ended
October 30, 1999. Immediately following our acquisition of Hills, we
began implementing a series of initiatives to prepare for the conversion
of 151 of the Hills stores into Ames stores and the permanent closure of
the four remaining Hills stores. These initiatives included the
termination of most of Hills' corporate and administrative operations and
personnel, the announced closure of seven Ames stores that we considered
to be directly competitive with acquired Hills stores and the engagement
of two experienced liquidation firms, Gordon Brothers Retail Partners and
The Nassi Group, to operate the Hills stores until their closure and to
liquidate Hills' merchandise inventories.
We completed the merchandise liquidation of the Hills stores in the
second quarter. During the third quarter, we re-opened the remaining 47
Hills stores, bringing the total number of former Hills stores opened
during 1999 to 151. In addition to the Hills stores, we opened 11 other
new stores during the third quarter, which along with 1 other store
opened earlier in the year brought the year-to-date total of new stores
opened to 163.
Under our agreement with Gordon Brothers and The Nassi Group, we
were entitled to retain from the proceeds of the merchandise inventory
sales, as a minimum guaranteed amount, 40% of the initial ticketed retail
price of the inventory being sold. The remaining sale proceeds, net of
the expenses of operating the stores, were payable to the liquidators as
compensation for their services, subject to additional allocations to
Ames to the extent the proceeds exceed specified levels. For financial
reporting purposes, Hills' net sales represent the actual sale proceeds
from merchandise liquidation sales, its cost of merchandise sold
represents the minimum guaranteed amount adjusted for proceeds in excess
of specified targets, and its selling, general and administrative
expenses include the portion of those proceeds that are to be paid over
to the liquidators.
<PAGE>
<TABLE>
The following table illustrates the separate contribution of Ames' and Hills' operations to various components of the
consolidated results of operations, as described below, for the thirteen and thirty-nine weeks ended October 30, 1999, as
well as the impact on these consolidated results of the other costs described below:
For the Thirteen
Weeks Ended For the Thirteen Weeks Ended October 30, 1999
October 31, 1998 ----------------------------------------------------------
------------------ Ames Hills Other Total
------------ ---------- ---------- ------------
<CAPTION>
<S> <C> <C> <C> <C> <C>
TOTAL NET SALES $596,030 $941,794 $ - $ - $941,794
COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold 432,936 680,597 - - 680,597
Selling, general and administrative expenses 153,205 227,643 7,385 27,560 262,588
Leased department and other income (6,768) (10,101) 791 - (9,310)
Depreciation and amortization expense, net 3,187 15,309 643 1,564 17,516
Interest and debt expense, net 3,847 17,114 17 605 17,736
------------------ ------------ ---------- ---------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 9,623 11,232 (8,836) (29,729) (27,333)
Income tax benefit (provision) (3,623) (4,044) 3,181 10,703 9,840
------------------ ------------ ---------- ---------- ------------
NET INCOME (LOSS) $6,000 $7,188 ($5,655) ($19,026) ($17,493)
================== ============ ========== ========== ============
Weighted average number of common shares 29,109 29,109 29,109 29,109
outstanding ============ ========== ========== ============
Basic net income (loss) per share $0.25 ($0.20) ($0.65) ($0.60)
============ ========== ========== ============
Weighted average number of common and
common equivalent shares outstanding 24,145
==================
Diluted net income (loss) per share $0.25
==================
For the Thirty-Nine
Weeks Ended For the Thirty-Nine Weeks Ended October 30, 1999
October 31, 1998 ----------------------------------------------------------
------------------ Ames Hills Other Total
------------ ---------- ---------- ------------
TOTAL NET SALES $1,628,122 $2,251,419 $375,642 $ - $2,627,061
COSTS, EXPENSES AND (INCOME):
Cost of merchandise sold 1,169,758 1,614,686 251,212 - 1,865,898
Selling, general and administrative expenses 443,967 578,546 149,432 74,232 802,210
Leased department and other income (20,443) (26,745) (2,577) - (29,322)
Depreciation and amortization expense, net 7,365 31,832 11,036 5,335 48,203
Interest and debt expense, net 9,093 36,531 4,179 2,569 43,279
------------------ ------------ ---------- ---------- ------------
INCOME (LOSS) BEFORE INCOME TAXES 18,382 16,569 (37,640) (82,136) (103,207)
Income tax benefit (provision) (6,939) (5,965) 13,549 29,569 37,153
------------------ ------------ ---------- ---------- ------------
NET INCOME (LOSS) $11,443 $10,604 ($24,091) ($52,567) ($66,054)
================== ============ ========== ========== ============
Weighted average number of common shares 27,027 27,027 27,027 27,027
outstanding ============ ========== ========== ============
Basic net income (loss) per share $0.39 ($0.89) ($1.94) ($2.44)
============ ========== ========== ============
Weighted average number of common and
common equivalent shares outstanding 24,141
==================
Diluted net income (loss) per share $0.47
==================
</TABLE>
<PAGE>
For the thirteen and thirty-nine weeks ended October 30, 1999, the
Ames results reflect (a) the results of the pre-Hills acquisition Ames
base, (b) the post re-opening results of the 151 converted Hills stores,
(c) the results of the 12 other new stores opened at various times during
the year and (d) certain expenses associated with the acquisition of
Hills, including the interest expense on the acquired Hills senior notes
and a pro rata share of the amortization of the goodwill recorded in
connection with the acquisition. The Hills results represent (a) the
results of operations for the Hills stores during the period that these
stores were operated pursuant to the agreement with Gordon Brothers and
The Nassi Group, including the fee due Gordon and Nassi and the
depreciation and interest expense directly associated with such stores
and (b) Hills corporate overhead expenses, principally the Canton, MA
corporate facility. The other costs primarily represent the expenses
incurred during the period of remodeling the Hills stores that re-opened
as Ames stores and the other new stores opened during the year.
The unique circumstances under which Hills' operations have been
conducted and the accounting treatment accorded those operations as a
consequence of our agreement with Gordon Brothers and The Nassi Group
distort any direct comparison of the principal components of Ames'
consolidated results for the thirteen and thirty-nine weeks ended October
30, 1999 and October 31, 1998. In the discussion that follows, Ames' net
sales, gross margin, and selling, general and administrative expenses for
the thirteen and thirty-nine weeks ended October 30, 1999 are presented
and compared exclusive of the Hills results. The impact of the Hills
acquisition is included in the comparison of depreciation and
amortization expense and interest and debt expense.
Ames' net sales for the thirteen weeks ended October 30, 1999
increased $345.8 million or 58.0% from the prior-year's third quarter and
comparable store sales increased 4.3%. These sales increases were
attributable, in part, to the Grand Openings of 47 converted Hills stores
and 9 former Caldor sites on September 23, 1999 and the 2 other new
stores opened on October 28, 1999 as well as the openings of 104
converted Hills stores and 1 other new Ames store earlier in the year.
Ames' net sales for the thirty-nine weeks ended October 30, 1999
increased $623.3 million or 38.3% from the same prior-year period and
comparable-store sales increased 7.5%. These sales increases were
attributable, in part, to the openings of 151 converted Hills stores and
12 other new stores during the first three quarters of 1999. Net sales
for last year have been restated to reflect the effect of recording
promotional coupons issued by Ames as markdowns, which conforms to the
current year treatment.
Ames' gross margin in the third quarter of 1999 increased $98.1
million or .4% as a percentage of net sales compared to the third
quarter of 1998. Ames' gross margin for the thirty-nine weeks ended
October 30, 1999 increased $178.4 million or .1% as a percentage of net
sales compared to the same prior-year period. The quarter and year-to-
date gross margin rates benefited from a favorable purchase mark-up.
Ames' selling, general and administrative expenses increased $74.4
million for the thirteen weeks ended October 30, 1999 compared to the
same prior-year period, but decreased as a percentage of net sales from
25.7% in 1998 to 24.2% in 1999. The percentage decrease was primarily
attributable to a reduction in store related expenses as a percentage of
sales. Ames' selling, general and administrative expenses increased
$134.6 million for the thirty-nine weeks ended October 30,1999 compared
to the same prior-year period, but decreased as a percentage of net sales
from 27.3% in 1998 to 25.7% in 1999. The percentage decrease was
primarily attributable to a reduction in store related expenses as a
percentage of sales.
Depreciation and amortization expense increased by $14.3 million
for the thirteen weeks ended October 30, 1999 compared to the same
prior-year period. For the thirty-nine weeks ended October 30, 1999,
depreciation and amortization expense increased by $40.8 million compared
to the same prior-year period. In both periods, the increase was due to
the additional depreciation and amortization of the Hills fixed assets
and beneficial lease rights and the amortization of goodwill relating to
the excess of the Hills acquisition cost over the value of the acquired
assets.
Interest expense increased by $13.9 million and $34.2 million for
the thirteen and thirty-nine weeks ended October 30, 1999, respectively,
compared to the same prior-year periods. The increase was primarily
attributable to the interest expense incurred for the Ames senior notes,
the Hills senior notes, the Hills capital lease and financing obligations
and the higher average level of bank borrowings.
Our estimated annual effective income tax rate for each year was
applied to the loss before income taxes for the thirteen and thirty-nine
weeks ended October 30, 1999 and to the income before income taxes for
the thirteen and thirty-nine weeks ended October 31, 1998 to compute a
non-cash income tax benefit in 1999 and a non-cash income tax provision
in 1998. The income tax benefit is included in other current assets in
the accompanying consolidated condensed balance sheet as of October 30,
1999. The income tax provision is included as an addition to paid-in
capital in the accompanying consolidated condensed balance sheet as of
October 31, 1998.
Liquidity and Capital Resources
---------------------------------
Our principal sources of liquidity are our bank credit facility,
cash from operations and cash on hand. Our current bank credit facility
consists of a revolving credit facility of up to $650.0 million, with a
sublimit of $150.0 million for letters of credit, which expires June 30,
2002. Borrowings under the bank credit facility are secured by
substantially all of our assets and after February 2000, we are required
to meet certain financial covenants. In addition, we are required to
maintain a minimum availability of at least $100.0 million. Our peak
borrowing level during the quarter ended October 30, 1999 under this bank
credit facility was $370.6 million. We believe we will have sufficient
liquidity to meet our financial obligations for the foreseeable future.
On April 27, 1999, we completed the sale of $200 million of Ames
senior notes. The net proceeds from the sale of the Ames senior notes,
approximately $193.4 million, were used to reduce outstanding borrowings
under our bank credit facility. The Ames senior notes pay interest
semi-annually in April and October and mature April 2006.
On May 24, 1999, we completed the public offering of 5.1 million
shares of common stock at a price of $38.75 per share. The proceeds, net
of underwriting discounts, of approximately $187.9 million were used to
reduce our borrowings under the bank credit facility and for general
corporate purposes.
Merchandise inventories increased $461.3 million from October 31,
1998 to October 30, 1999 due to the increases for the opening of the
converted Hills stores and the other new store locations. Our
merchandise inventories increased $451.0 million from January 30, 1999 to
October 30, 1999 due primarily to the increases for the opening of the
converted Hills stores and the other new store locations along with the
normal seasonal build-up of inventories.
Trade accounts payable increased $177.9 million from October 31,
1998 to October 30, 1999 primarily due to the merchandise inventory
increases referenced above. The increase of $120.7 million from January
30, 1999 to October 30, 1999 was principally the result of the
merchandise inventory increases referenced above, partially offset by the
seasonal dating of inventories in effect as of January 30, 1999.
Capital expenditures for the thirty-nine weeks ended October 30,
1999 totaled $169.3 million and for the balance of the year are estimated
to be approximately $40.0 million. We adjust our plans for making such
expenditures depending on the amount of internally generated funds
available.
Net fixed assets increased by $370.9 million from October 31,
1998 to October 30, 1999 due primarily to the inclusion of $226.4 million
in net fixed assets of Hills. Our net fixed assets increased $132.8
million from January 30, 1999 to October 30, 1999 due primarily to the
capital expenditures associated with the newly converted Hills stores.
Beneficial lease rights represent the excess of the fair market
value of the acquired Hills leases over contract value of those leases.
We are amortizing this amount over the terms of the related leases
(which average approximately 25 years) using the straight-line method.
Goodwill is being amortized over 25 years using the straight-line method.
Long-term debt as of October 30, 1999 consisted of borrowings
under our bank credit facility of $364.8 million, $200.0 million of the
Ames senior notes issued in April 1999, and $50.9 million of the Hills
senior notes that remained outstanding after the acquisition. The Hills
senior notes became direct obligations of Ames as a result of the merger
of Hills into Ames.
Capital lease and financing obligations increased $154.8 million
from October 31, 1998 to October 30, 1999 due primarily to the inclusion
of $144.5 million of capital lease and financing obligations of Hills.
Capital lease and financing obligations decreased by $4.7 million from
January 30, 1999 to October 30, 1999 due to payments made on capital
lease obligations.
The net operating loss carryovers remaining after fiscal year
1998, subject to any limitations pursuant to Internal Revenue Code Sec.
382, should offset income on which taxes would otherwise be payable in
the next several years.
Year 2000 Readiness
---------------------
In operating our business, we are dependent on information
technology and process control systems that employ computers as well as
embedded microprocessors. We also depend on the proper functioning of the
business systems of third parties, particularly the more than 3,200
vendors from whom we purchase the merchandise sold in our stores. Many
computer systems and microprocessors can only process dates in which the
year is represented by two digits. As a result, some of these systems and
processors may interpret "00" incorrectly as the year 1900 instead of the
year 2000, in which event they could malfunction or become inoperable
after December 31, 1999. Systems and processors that can properly
recognize the year 2000 are referred to as "year 2000 compliant."
As previously reported, we initiated a comprehensive program to
prepare our computer systems and applications for the year 2000. We
spent approximately $6.0 million on this program through the end of
third quarter of fiscal 1999 and expect full implementation of the
program will involve an additional $0.5 million to $1.0 million,
including expenditures for software and consulting services.
Additionally, we estimate the allocated costs of our internal system
development staff who are implementing our year 2000 initiatives to be
$3.5 million to $4.0 million over the life of the project.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
-----------------------------------------------------------
We have exposure to interest rate volatility primarily relating to
interest changes applicable to revolving loans under our bank credit
facility. These loans bear interest at rates which vary with changes in
(i) the London Interbank Offered Rate (LIBOR) or (ii) a rate of interest
announced publicly by Bank of America NT&SA.
We do not speculate on the future direction of interest rates.
As of October 30, 1999, approximately $364.8 million of our debt bore
interest at variable rates. We believe that the effect, if any, of
reasonably possible near term changes in interest rates on our
consolidated financial position, results of operations or cash flows
would not be significant.
<PAGE>
Part II
OTHER INFORMATION
Item 1. Legal Proceedings
-------------------
Reference can be made to Item 3 - Legal Proceedings
included in the 1998 Form 10-K for various litigation involving
the Company, for which there were no material changes since the
filing date of the 1998 Form 10-K except as set forth in Note 8.
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------
There were no matters submitted to a vote of security
holders during the third quarter ended October 30, 1999, through
the solicitation of proxies or otherwise.
Item 5. Other Information
-------------------
On August 31, 1999, the Board of Directors of the Company
adopted Amended and Restated By-Laws.
On September 24, 1999, Ames Department Stores,
Inc. (the "Company") and ChaseMellon Shareholder Services, L.L.C.
as successor to Chemical Bank as Rights Agent, entered into
Amendment No. 1 (the "Amendment") to the Rights Agreement, dated
as of November 30, 1994 (the "Rights Agreement"), by and between
the Company and Chemical Bank, as Rights Agent, which amendment
was previously approved by the Company's Board of Directors.
Among other things, the Amendment (x) amends the exercise price
of a right issued pursuant to the Rights Agreement to $180.00,
subject to adjustment, and (y) makes certain other technical
amendments to the Rights Agreement, most notably the elimination
of certain provisions commonly known as "continuing director"
provisions.
Item 6. Exhibits and Reports on Form 8-K
----------------------------------
(a) Index to Exhibits
-------------------
Exhibit No. Exhibit Page No.
------------ ---------------------------------------- ----------
4 Amendment No. 1, dated as of 18
September 24, 1999, to the Rights
Agreement dated as of November 30, 1994,
by and between Ames Department Stores,
Inc. and ChaseMellon Shareholder
Services, L.L.C as successor to Chemical
Bank as Rights Agent
11 Schedule of computation of basic 24
and diluted net income (loss) per
share
(b) Reports on Form 8-K:
---------------------
There were no reports on Form 8-K filed with the Securities and
Exchange Commission during the third quarter:
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
AMES DEPARTMENT STORES, INC.
(Registrant)
Dated: December 13, 1999 /s/ Joseph R. Ettore
--------------------------------------
Joseph R. Ettore, Chairman,
President and Chief Executive Officer
Dated: December 13, 1999 /s/ Rolando de Aguiar
--------------------------------------
Rolando de Aguiar, Executive Vice
President and Chief Financial and
Administrative Officer
<PAGE>
Exhibit 4.1
AMENDMENT NO. 1 TO RIGHTS AGREEMENT
AMENDMENT NO. 1 to Rights Agreement (this "Amendment") dated
as of September 24, 1999 by and between Ames Department Stores, Inc., a Delaware
corporation (the "Company") and ChaseMellon Shareholder Services, L.L.C., a New
Jersey limited liability company, as successor to Chemical Bank, as Rights
Agent.
W I T N E S S E T H:
WHEREAS, the Company and the Rights Agent entered into a
Rights Agreement dated as of November 30, 1994 (the "Rights Agreement"); and
WHEREAS, pursuant to Section 26 of the Rights Agreement, the
Board of Directors of the Company has authorized this Amendment, which will
amend the Rights Agreement as set forth herein.
NOW THEREFORE, in consideration of the premises and the mutual
agreements herein set forth, the parties hereto hereby agree as follows:
Section 1. Certain Definitions. Unless otherwise specifically
defined herein, each term used herein which is defined in the Rights Agreement
has the meaning assigned to such term in the Rights Agreement.
Section 2. Amendments.
(a) Section 1(a) is hereby amended to read in its entirety
as follows:
"(a) "Acquiring Person" shall mean any Person (as
such term is hereinafter defined) who or which, together with
all Affiliates (as such term is hereinafter defined) and
Associates (as such term is hereinafter defined) of such
Person, shall be the Beneficial Owner (as such term is
hereinafter defined) of 15% or more of the shares of Voting
Stock (as such term is hereinafter defined) of the Company
then outstanding; provided, however, that an Acquiring Person
shall not include (i) an Exempt Person (as such term is
hereinafter defined), or (ii) any Person who or which,
together with all Affiliates and Associates of such Person,
would be an Acquiring Person solely by reason of (A) being the
Beneficial Owner of shares of Voting Stock of the Company, the
Beneficial Ownership of which was acquired by such Person
pursuant to any action or transaction or series of related
actions or transactions approved by the Board of Directors
before such Person otherwise became an Acquiring Person or (B)
a reduction in the number of issued and outstanding shares of
Voting Stock of the Company pursuant to a transaction or a
series of related transactions approved by the Board of
Directors; provided, further, however, that in the event that
such Person described in the foregoing clause (ii) does not
become an Acquiring Person by reason of subclause (A) or (B)
of said clause (ii), such Person shall nonetheless become an
Acquiring Person in the event such Person thereafter acquires
Beneficial Ownership of an additional 1% of the Voting Stock
of the Company, unless the acquisition of such additional
Voting Stock would not result in such Person becoming an
Acquiring Person by reason of subclause (A) or (B) of said
clause (ii). Notwithstanding the foregoing, if the Board of
Directors of the Company determines in good faith that a
Person who would otherwise be an "Acquiring Person" as defined
pursuant to the foregoing provisions of this paragraph (a) has
become such inadvertently, and such Person divests as promptly
as practicable (as determined in good faith by the Board of
Directors) a sufficient number of shares of Common Stock so
that such Person would no longer be an "Acquiring Person" as
defined pursuant to the foregoing provisions of this paragraph
(a), then such Person shall not be deemed an "Acquiring
Person" for any purposes of this Agreement."
(b) Section 1(d) is hereby amended by deleting the last
paragraph thereof in its entirety and replacing it with the following:
"Notwithstanding anything in this paragraph (d) to
the contrary, a Person engaged in the business of underwriting
securities shall not be deemed the "Beneficial Owner" of, or
to "Beneficially Own," any securities acquired or otherwise
beneficially owned in good faith in a firm commitment
underwriting until the expiration of forty (40) days after the
date of the sale of securities to the public pursuant to such
firm commitment underwriting."
(c) The definition of "Continuing Director" appearing in
Section 1(h) is hereby amended by deleting it in its entirety and replacing it
with the phrase "Intentionally Omitted."
(d) The definition of "Qualifying Tender Offer" appearing
in Section 1(r) is hereby deleted in its entirety.
(e) Sections 1(k) through 1(q) are hereby renumbered as
Sections 1(l) through 1(r), respectively.
(f) A new Section 1(k) is hereby added, as follows:
"(k) "Exchange Consideration" shall have the meaning
set forth in Section 27 hereof."
(g) Sections 1(u) through 1(z) are hereby renumbered as
Sections 1(v) through 1(aa), respectively.
(h) A new Section 1(u) is hereby added, as follows:
"(u) "Spread" shall mean the excess of (1) the value
of the shares of Common Stock issuable upon the exercise of a
Right in accordance with Section 11(a)(ii) over (2) the
Exercise Price in effect at the time of determination of the
Spread."
(i) Section 1(v) is hereby amended to read in its entirety
as follows:
"(v) "Stock Acquisition Date" shall mean the first
date on which there shall be a public announcement by the
Company or an Acquiring Person that an Acquiring Person has
become such (which, for purposes of this definition, shall
include, without limitation, a report filed pursuant to
Section 13(d) of the Exchange Act) or such earlier date as a
majority of the Directors of the Company shall become aware of
the existence of an Acquiring Person."
(j) Section 3(b) is hereby amended by deleting the
following parenthetical from the first sentence thereof:
"(but only if at the time of such determination by
the Board of Directors there are then in office not less than
two Continuing Directors and such action is approved by a
majority of the Continuing Directors then in office)"
(k) Section 3(c) is hereby amended by adding the following
at the end thereof:
"With respect to such certificates containing the
foregoing legend, until the Distribution Date the Rights
associated with the Common Stock represented by such
certificates shall be evidenced by such certificates alone,
and the surrender for transfer of any such certificate, except
as otherwise provided herein, shall also constitute the
transfer of the Rights associated with the Common Stock
represented thereby. In the event that the Company purchases
or otherwise acquires any Common Stock after the Record Date
but prior to the Distribution Date, any Rights associated with
such Common Stock shall be deemed canceled and retired so that
the Company shall not be entitled to exercise any Rights
associated with the Common Stock which are no longer
outstanding.
Notwithstanding this paragraph (c), the omission of a
legend shall not affect the enforceability of any part of this
Agreement or the rights of any holder of the Rights."
(l) Section 7(a) is hereby amended by deleting in its
entirety clauses (i) and (ii) in the second sentence thereof and replacing it
with the following:
"(i) November 29, 2004 (the "Final Expiration Date")
or (ii) the date on which the Rights are redeemed as provided
in Section 23 hereof or the date on which the Rights are
exchanged as provided in Section 27 hereof (such earlier date
being herein referred to as the "Expiration Date")."
(m) The first sentence of Section 7(b) is hereby amended
to read in its entirety as follows:
"(b) The Exercise Price shall initially be $180.00."
(n) Section 7(e) is hereby amended by deleting the phrase
"other than pursuant to a Qualifying Tender Offer," from the first sentence
thereof.
(o) Section 11(a)(ii) is hereby amended to read in its
entirety as follows:
"(ii) Subject to Section 27 of this Agreement, in the
event that any Person, alone or together with its Affiliates
and Associates, shall become an Acquiring Person, then,
subject to the last sentence of Section 23(a) and except as
otherwise provided in this Section 11, each holder of a Right,
except as provided in Section 7(e) hereof, shall thereafter
have the right to receive upon exercise of a Right in
accordance with the terms of this Rights Agreement and payment
of the Exercise Price with respect to the total number of
shares of Common Stock for which a Right was exercisable
immediately prior to the first occurrence of the event
described in this Section 11(a)(ii), such number of shares of
Common Stock as shall equal the result obtained by (x)
multiplying the then current Exercise Price by the number of
shares of Common Stock for which a Right was exercisable
immediately prior to the first occurrence of the event
described in this Section 11(a)(ii) and (y) dividing that
product by 50% of the then current per share Fair Market Value
of the Common Stock (determined pursuant to Section 11(d)
hereof) on the date of such first occurrence."
(p) Section 12 is hereby amended by replacing the first
sentence thereof with the following:
"Whenever an adjustment is made as provided in
Sections 11, 13, 23(c) or 27, the Company shall (a) promptly
prepare a certificate setting forth such adjustment, and a
brief statement of the facts giving rise to such adjustment,
(b) promptly file with the Rights Agent and with each transfer
agent for the Common Stock a copy of such certificate and (c)
mail a brief summary thereof to each holder of a Right
Certificate in accordance with Section 25."
(q) Section 13(a) is hereby amended by deleting the phrase
"(other than pursuant to a Qualifying Tender Offer)" from the first sentence
thereof.
(r) Section 23(a) is hereby amended by deleting in its
entirety the proviso contained in the first sentence thereof.
(s) Section 23(d) is hereby deleted in its entirety.
(t) Section 26 is hereby amended by deleting the last
sentence thereof and replacing it with the following:
"Notwithstanding anything contained in this Rights
Agreement to the contrary, no supplement or amendment shall be
made which changes the Redemption Price."
(u) Sections 27 through 32 are hereby renumbered as
Sections 28 through 33, respectively.
(v) A new Section 27 is hereby added, as follows:
"Section 27. Exchange. (a) The Board of Directors of
the Company may, at its option, at any time after any Person
becomes an Acquiring Person, exchange all or part of the then
outstanding and exercisable Rights (which shall not include
Rights that have become null and void pursuant to the
provisions of Section 7(e) hereof) by exchanging for each such
Right a number of shares of Common Stock having an aggregate
Fair Market Value on the date such Person becomes an Acquiring
Person equal to the Spread, appropriately adjusted to reflect
any stock split, stock dividend or similar transaction
occurring after the date such Person becomes an Acquiring
Person (such amount per Right being hereinafter referred to as
the "Exchange Consideration"). Notwithstanding the foregoing,
the Board of Directors shall not be empowered to effect such
exchange at any time after any Person (other than an Exempt
Person), together with all Affiliates and Associates of such
Person, becomes the Beneficial Owner of 50% or more of the
Voting Stock then outstanding. From and after the occurrence
of an event specified in Section 13(a) hereof, any Rights that
theretofore have not been exchanged pursuant to this Section
27(a) shall thereafter be exercisable only in accordance with
Section 13 and may not be exchanged pursuant to this Section
27(a).
(b) Immediately upon the action of the Board of
Directors of the Company ordering the exchange of any Rights
pursuant to paragraph (a) of this Section 27 and without any
further action and without any notice, the right to exercise
such Rights shall terminate and the only right thereafter of a
holder of such Rights shall be to receive the Exchange
Consideration in respect of each Right held. The Company shall
promptly give notice to the Rights Agent and public notice of
any such exchange; provided, however, that the failure to
give, or any defect in, such notice shall not affect the
validity of such exchange. The Company promptly shall mail a
notice of any such exchange to all of the holders of such
Rights at their last addresses as they appear upon the
registry books of the Rights Agent. Any notice which is mailed
in the manner herein provided shall be deemed given, whether
or not the holder receives the notice. Each such notice of
exchange will state the method by which the exchange of the
shares of Common Stock for Rights will be effected and, in the
event of any partial exchange, the number of Rights which will
be exchanged. Any partial exchange shall be effected pro rata
based on the number of Rights (other than Rights which have
become null and void pursuant to the provisions of Section
7(e) hereof) held by each holder of Rights.
(c) The Company shall not be required to issue
fractions of shares of Common Stock or to distribute
certificates which evidence fractional shares. In lieu of such
fractional shares, the Company shall pay to the registered
holders of the Right Certificates with regard to which such
fractional shares of Common Stock would otherwise be issuable
an amount in cash equal to the same fraction of the current
market value of a whole share of Common Stock. For the
purposes of this paragraph (c), the current market value of a
whole share of Common Stock shall be the closing price of a
share of Common Stock for the Trading Day immediately prior to
the date of exchange pursuant to this Section 27."
(w) Exhibits A and B to the Rights Agreement shall be
amended in a manner consistent with this Agreement.
Section 3. Counterparts. This Amendment may be executed in any
number of counterparts, each of which shall for all purposes be deemed to be an
original, and all such counterparts shall together constitute but one and the
same instrument.
Section 4. Descriptive Headings. Descriptive headings of the
several Sections of this Amendment are inserted for convenience only and shall
not control or affect the meaning or construction of any of the provisions of
this Amendment.
Section 5. Effectiveness. This Amendment shall be effective as
of the Close of Business on the date hereof, as if executed on such date, and
all references to the Rights Agreement shall, from and after such time, be
deemed to be references to the Rights Agreement as amended hereby.
Section 6. Officer's Certification. The undersigned officer
of the Company certifies by execution hereof that this Amendment is in
compliance with the terms of Section 26 of the Rights Agreement.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed and attested, all as of the day and year first
above written.
AMES DEPARTMENT STORES, INC.
By: /s/ David H. Lissy
---------------------------------
Name: David H. Lissy
Title: Senior Vice President, General
Counsel and Corporate Secretary
By: /s/ Lynore LeConche
---------------------------------
Name: Lynore LeConche
Title: Vice President
CHASEMELLON SHAREHOLDER SERVICES, L.L.C.,
as successor to Chemical Bank
<PAGE>
<TABLE>
Exhibit 11
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(Amounts in thousands except per share amounts)
For the Thirteen For the Thirty-Nine
Weeks Ended Weeks Ended
----------------------------- -------------------------------
October 30, October 31, October 30, October 31,
1999 1998 1999 1998
------------- ------------- ------------ --------------
<CAPTION>
<S> <C> <C> <C> <C>
Net income (loss) ($17,493) $6,000 ($66,054) $11,443
============= ============= ============ ==============
For Basic Net Income (Loss) Per Common Share
- ---------------------------------------------
Weighted average number of common shares
outstanding during the period 29,109 23,087 27,027 22,885
============= ============= ============ ==============
Basic net income (loss) per common share ($0.60) $0.26 ($2.44) $0.50
============= ============= ============ ==============
For Diluted Net Income (Loss) Per Common Share
- -----------------------------------------------
Weighted average number of common shares
outstanding during the period 29,109 23,087 27,027 22,885
Add: Common stock equivalent shares represented by
- Series B Warrants (a) 63 (a) 106
- Series C Warrants (a) 403 (a) 481
- Options under 1994 Management Stock Option Plan &
1998 Stock Incentive Plan (a) 536 (a) 608
- Options under 1994 Non-Employee Directors
Stock Option Plan (a) 56 (a) 61
------------- ------------- ------------ --------------
Weighted average number of common and common equivalent
shares used in the calculation of diluted net
income (loss) per share 29,109 24,145 27,027 24,141
============= ============= ============ ==============
Diluted net income (loss) per common share ($0.60) $0.25 ($2.44) $0.47
============= ============= ============ ==============
<FN>
(a) Common stock equivalents have not been included because the effect would be anti-dilutive.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000006071
<NAME> AMES DEPARTMENT STORES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> OCT-30-1999
<CASH> 42383
<SECURITIES> 0
<RECEIVABLES> 114030
<ALLOWANCES> 0
<INVENTORY> 1072539
<CURRENT-ASSETS> 1287201
<PP&E> 615379
<DEPRECIATION> 110957
<TOTAL-ASSETS> 2205746
<CURRENT-LIABILITIES> 816310
<BONDS> 250875
0
0
<COMMON> 292
<OTHER-SE> 445903
<TOTAL-LIABILITY-AND-EQUITY> 2205746
<SALES> 2627061
<TOTAL-REVENUES> 2656383
<CGS> 1865898
<TOTAL-COSTS> 1865898
<OTHER-EXPENSES> 850413
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 43279
<INCOME-PRETAX> (103207)
<INCOME-TAX> 37153
<INCOME-CONTINUING> (66054)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (66054)
<EPS-BASIC> (2.44)
<EPS-DILUTED> (2.44)
</TABLE>
