SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
-----------
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended January 29, 2000
----------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------- -------
AMES DEPARTMENT STORES, INC.
------------------------------------------------------
(Exact Name of Registrant as Specified In its Charter)
DELAWARE 04-2269444
- ------------------------------ --------------------------------------
(State or Other Jurisdiction (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
--------------------
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ----------------------------- -------------------------------------------
Common Stock, $.01 par value NASDAQ
Series B Warrants None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 31, 2000, the aggregate market value of voting stock held by
non-affiliates of the Registrant was $722,130,388 based on the last reported
sale price of the Registrant's Common Stock on the NASDAQ National Market
System.
29,399,112 shares of Common Stock were outstanding on March 31, 2000.
Documents Incorporated by Reference: Portions of the Registrant's
definitive proxy statement to be filed pursuant to Regulation 14A within 120
days after the end of the Registrant's fiscal year are incorporated by reference
in Part III.
Page 1 of 57 pages (including Exhibits) Exhibit Index on page 52
<PAGE>
PART I
Item 1. Description of Business
Introduction
Ames Department Stores, Inc. is the largest regional discount retailer in
the United States. We currently operate 460 stores in 19 contiguous states in
the Northeast, Midwest and Mid-Atlantic regions, as well as the District of
Columbia. Our stores offer a wide range of both brand name and other quality
merchandise for the home and family at prices below those of conventional
department stores and specialty retailers. They are situated in rural
communities, small cities, the suburbs of larger metropolitan areas, and in
urban areas and are smaller and more customer friendly than the stores of most
competing "big box" retailers, including the national discount department store
chains.
Ames is a Delaware corporation organized in 1962 as a successor to a
business originally founded in 1958. Ames was reorganized in December 1992 under
Chapter 11 of the United States Bankruptcy Code. Its principal executive offices
are located at 2418 Main Street, Rocky Hill, Connecticut, 06067, its telephone
number is (860) 257-2000, and its web site is http://www.AmesStores.com.
Business Developments
The Hills Acquisition
On November 12, 1998, Ames entered into an agreement for the acquisition
of Hills Stores Company. Pursuant to that agreement, we began a tender offer for
all of Hills' outstanding common and convertible preferred stock. Concurrent
with that tender offer, we offered to purchase all of Hills' outstanding 12 1/2%
Senior Notes due 2003 and solicited consents from the holders of those notes to
eliminate and waive various provisions of the indenture governing those notes.
Following the expiration of those offers on December 31, 1998, we acquired
approximately 81.3% of Hills outstanding common stock and 74.4% of its
outstanding convertible preferred stock, in each case at a price of $1.50 per
share, or an aggregate of $13.7 million. On the same date, we purchased
approximately $144.1 million, or approximately 73.9%, of the $195.0 million of
outstanding Hills senior notes at a price of approximately $700 for each $1,000
principal amount of those notes, or an aggregate of $100.8 million. Pursuant to
the terms of those offers, holders of Hills' shares and senior notes who
tendered their securities for purchase also received a deferred contingent right
to receive a further cash payment out of, and based upon, Hills' ultimate net
recovery, if any, in a lawsuit brought by Hills in September 1995 against
certain of its former directors.
In March 1999, we consummated the merger of Hills into Ames. Shares of
Hills' common and convertible preferred stock not previously acquired by us were
automatically converted into the right to receive $1.50 per share (plus a
deferred contingent cash right as discussed above), and the $50.9 million of
outstanding Hills' senior notes not previously purchased by us became direct
obligations of Ames. The cost of acquiring the remaining outstanding common and
preferred shares of Hills was $3.3 million. We also incurred professional fees,
accounting, legal and other costs of approximately $11.0 million in connection
with the acquisition.
The total cost of the Hills acquisition was approximately $330.0 million,
inclusive of the approximately $50.9 million of the former Hills stores senior
notes that remained outstanding and $147.8 million of capitalized leasehold and
financing obligations related to the Hills Stores. Cash required for the
acquisition totaled approximately $129.0 million. Funds for these purposes were
derived from borrowings under our bank credit facility.
The acquisition has been recorded under the purchase method of accounting
and, accordingly, the results of operations of Hills are included since the date
of the acquisition in the accompanying consolidated financial statements. The
aggregate purchase price of $129.0 million was allocated to assets acquired and
liabilities assumed based on a final determination, made during Fiscal 1999, of
respective fair market values at the date of acquisition. The fair value of
tangible assets acquired and liabilities assumed were $568 million each. The
purchase price of $129.0 million was recorded as two components: an excess of
cost over net assets acquired (goodwill) of $70.0 million, which is being
amortized over 25 years on a straight-line basis, and beneficial lease rights of
$59.0 million, which is being amortized over the life of the respective leases
(which average approximately 25 years).
At the time of the acquisition, Hills operated 155 discount department
stores in twelve states within or contiguous to our existing geographic region.
The Hills stores had a sales area that was similar in size to that of the
typical Ames store. They were located in communities with demographics that were
similar to those of our locations in existence then and they served a similar
target customer. The Hills acquisition was particularly opportunistic for Ames,
since it permitted us to obtain 155 well-maintained stores in locations that
were complementary to, and to a large extent not competitive with, our existing
store locations. After a review of locations where a Hills store operated in the
same general market area as an existing Ames store, we determined that in only
eleven instances would store closings of one or the other be required. The
acquisition substantially increased our presence in five states and enabled us
to enter five new states. We also acquired a Hills distribution facility in
Columbus, Ohio that was complementary to, but not duplicative of, our then
existing distribution centers.
In February 1999, we began a program to remodel and convert 151 of the
acquired Hills stores to Ames stores. The four remaining Hills stores, as well
as seven Ames stores, were closed because they were in locations that were
either competitive with, or under-performing, other Hills or Ames stores. The
remodeling and conversion process was completed in three stages, each stage
involving approximately one third of the Hills stores. The first stage was
completed in April 1999; the second stage was completed in July 1999; and the
third stage was completed in September 1999.
The total cost of the remodeling and conversion was approximately $189.1
million and was funded primarily with proceeds from our liquidation of the Hills
merchandise inventories. The $189.1 million cost consists primarily of
expenditures for fixtures, signage, Point-Of-Sale (POS) systems, training of
employees and other labor costs, as well as other pre-opening costs.
Under an agreement with us, Gordon Brothers Retail Partners, LLC and The
Nassi Group, LLC were engaged to operate all of the acquired Hills stores and to
conduct inventory liquidation sales at each of those stores prior to its
scheduled remodeling or final closure. These liquidation sales were conducted in
three stages, the first having ended on February 20, 1999 and the second and
third having ended on May 21, 1999 and July 16, 1999, respectively. These two
firms were responsible for substantially all expenses associated with operating
the Hills stores and liquidating their inventory prior to their closure,
including compensation of all employees and rental payments under store leases.
Upon completion of each sale, they removed all unsold merchandise and turned
over the store in "broom clean" condition. Pursuant to the agreement, Ames was
entitled to retain from the liquidation proceeds a minimum sum equal to 40% of
the initial ticketed retail price of all items of Hills merchandise on hand and
on order as of January 2, 1999, irrespective of the actual sales proceeds. In
addition, Ames was entitled to share in that portion, if any, of the proceeds
from the sale of Hills merchandise in excess of 62% of the aggregate initial
retail ticketed price. Proceeds from the sales during the entire liquidation
period exceeded the targeted percentage. We received approximately $314 million
from the liquidation of the Hills inventories, representing the 40% minimum plus
our share of the portion exceeding the targeted percentage referenced above.
The Acquisition of Caldor Sites
We purchased the leases for nine stores and a distribution center from
Caldor Corporation during Fiscal 1999. During March 1999, we entered into two
agreements with Caldor to purchase seven of its stores in Connecticut, two
stores in Massachusetts and a 649,000 square foot distribution center in
Westfield, Massachusetts, for a total cash purchase price of $42.8 million.
Under the terms of the agreements, we 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 our right
to purchase the leases for the stores and the distribution center. All of the
transactions subsequently closed. We entered into a lease for and converted an
additional Caldor store in New Jersey during the last fiscal quarter bringing
the total of former Caldor store openings for Fiscal 1999 to ten.
The ten former Caldor stores, which range in size from 48,771 to 74,139
square feet of selling space, are in communities with similar demographics to
those in which our own stores are located. None of the stores is in a location
that is directly competitive with any of our existing stores, including the
former Hills stores. With the acquisition of these stores, we have become the
largest discount department store operator in Connecticut, with a total of 22
stores in that state.
Recent Developments
The Acquisition of Goldblatt's Department Store Sites
In February 2000 we entered into an agreement with Goldblatt's Department
Stores, Inc. to purchase the leases to six of their stores in Chicago, Illinois
and one store in Gary, Indiana for a cash purchase price of $7.6 million.
Completion of the purchase is expected in April 2000. Under the terms of the
agreement, we will assume Goldblatt's leases for the seven stores. Goldblatt's
will deliver the stores to us in "broom clean" condition.
Growth Strategy
Since 1994, we have pursued a program to improve our profitability through
vigorous cost containment initiatives, a highly-focused approach to
merchandising and the rationalization of our store base. Our efforts over the
past five years have resulted in an increase in our gross margins in our stores
from 26.7% to 28.8% (with respect to the former Hills stores, excluding the
period of time prior to their conversion to Ames stores) and a doubling of our
operating margin. During this time period we also acquired and successfully
integrated 193 stores, remodeled 65 of our existing stores and closed 48 stores.
Over the past two years, we have redirected our focus to enhancing our
revenues, expanding the breadth of our regional market and increasing our
penetration of that market. In addition to our on-going program of store
remodeling, we implemented merchandising and marketing initiatives that in
Fiscal 1999 resulted in a 6.2% increase in same-store sales over Fiscal 1998. At
the same time, we embarked on a program to acquire groups of stores located
primarily in states in which we currently operate or that are contiguous with
our existing regional market.
The Caldor and Hills acquisitions were representative of our growth
strategy. The acquisitions have significantly increased our revenue and enabled
us to leverage our administrative costs over a far larger operating base. In
fact, we experienced a 19% increase in operating margin rate (excluding the
results of operations for the former Hills stores during the period that these
stores were operated pursuant to the Agency Agreement and certain other
expenses) in Fiscal 1999 from Fiscal 1998, which is in part due to leveraging
our administrative costs over more stores. These acquisitions were particularly
opportunistic for Ames, since they permitted us to open 161 well-maintained
store sites in locations that were complementary to our existing locations. The
stores are located primarily in communities with demographics similar to those
of our existing locations. The acquisitions expanded our selling space by 75.7%,
substantially increased our presence in five states and enabled us to enter five
new states in which we foresee opportunities to add additional stores to
increase our market penetration. The Hills acquisition enabled us to achieve
significant economies of scale.
As a further step in the implementation of our growth strategy, we
recently agreed to acquire from Goldblatt's Department Stores, Inc., the leases
for seven stores that we will convert to Ames stores during Fiscal 2000.
Customers
Our customer base consists primarily of working women with families and
senior citizens. They have an average annual household income between $25,000
and $35,000 and their purchasing decisions are determined primarily by a desire
for low prices and shopping convenience. Our merchandise offerings, prices,
store design and focus on customer service are targeted to meet the needs of
these cost-conscious consumers, who we believe are generally underserved by
other large discount retailers. We reinforce our image and drive customer
traffic by employing a "high/low" pricing strategy that is supplemented by
weekly advertising circulars and recurring promotional programs. We believe that
our knowledge of and focus on our target customers have enabled us to develop an
advantage in an increasingly competitive discount retailing environment.
Merchandising and Customer Service
Our mission is to provide our customers a broad selection of quality
merchandise at prices they can afford in a shopping environment that is friendly
and convenient. Our merchandising strategy is targeted to our customer base, and
we believe that this merchandising strategy has enabled us to develop a distinct
competitive advantage in serving our targeted customer base.
Ames sells merchandise in three major categories: home lines, softlines
and hardlines. The following table sets forth the types of merchandise offered
within each of these three categories and the percentage of our total sales
(excluding leased department sales) in Fiscal 1999 attributable to each
category:
<TABLE>
Home Lines 41% Softlines 31% Hardlines 28%
--------------------------- ------------------------------- ------------------------
<S> <C> <C> <C>
o Domestics, such as sheets, o Women's apparel, consisting o Health and beauty care
towels and bath accessories primarily of non-fashion basic products
items, sportswear and intimates
o Window treatments o Toys
o Men's workwear, denims,
o Home entertainment fleece goods, hosiery and o Hardware and paints
products underwear
o Automotive supplies
o Small appliances o Children's apparel
o Sporting goods
o Housewares o Jewelry
o Stationery
o Ready-to-assemble
furniture o Seasonal items, such as
Christmas and other
o Patio furniture holiday decorations.
o Crafts
</TABLE>
In addition, all Ames stores include a shoe department, operated by a licensee,
that accounted for approximately 4% of our total sales in Fiscal 1999.
A significant portion of our net sales is derived from the sale of
products that bear readily-recognized brand names, including Cannon(R),
Coleman(R), Dickies(R), Fisher-Price(R), Fruit of the Loom(R), General
Electric(R), Hanes(R), Hasbro(R)Toy, Kodak(R), Magnavox(R), Mattel(R),
Proctor-Silex(R), Rider(R), Rubbermaid(R), Sunbeam(R), Timex(R) and Wrangler(R).
Women's apparel is the only product line that accounts for more than 10%
of our sales, generating approximately 11.7% of our Fiscal 1999 net sales. We
carry primarily staple, casual items of basic women's apparel, including
outerwear, sportswear and intimates, with a particularly broad selection of
merchandise in "plus" sizes for the larger woman. Similarly, our selection of
men's apparel is limited to staple, non-fashion items that women frequently
purchase for the men in their families and that are most commonly sought by men
within our target customer base. We believe that our focus on basic apparel
limits our exposure to risks associated with changing fashion trends.
Our hardlines merchandise also consists primarily of products that are
most frequently purchased by women, such as health and beauty care products,
toys, stationery, gift wrap and holiday decorations. We concentrate our hardware
offerings on basic home repair and maintenance items, many of which are
purchased by women. Although we sell a number of hardware items and automotive
supplies that are more commonly purchased by men, our offerings of these
products are more limited than those of other large discount retailers.
Our home lines, which also consist primarily of products that are
purchased by women, include a "Crafts and More" department that features the
largest selection of crafts offered by any non-specialty retailer in the United
States. The crafts department has become a destination shop for Ames' customers,
and accounted for approximately 3% of our Fiscal 1999 net sales.
In certain of our markets, we are able to customize or "localize" our
merchandising. We tailor our selection of discount products and customize each
store based on its demographics and purchasing patterns of our diverse customer
base.In our stores located in college towns, we offer a larger assortment of the
items most frequently desired by students for their dormitory rooms, as well as
stationery supplies, jeans, sweatshirts, athletic apparel and similar products.
In our stores located in resort or vacation communities we feature broader
selections of such seasonal items as beach and camping supplies, and we continue
to stock those items throughout the duration of the related vacation season.
This micromarketing strategy drives customer traffic at those stores and
develops and improves the loyalty of their customer base.
In addition to offering a merchandise selection that is specifically
tailored to the needs and preferences of our target customers, we strive to make
each customer's shopping experience pleasant and convenient. We offer an
extensive layaway program that accounted for approximately 6% of our Fiscal 1999
net sales. We have a fully staffed customer service desk at a location away from
the most heavily trafficked areas in the store to afford customers greater
privacy. We also have implemented an "A+ Customer Service Program" which
encourages our in-store personnel to enhance customer satisfaction with a
well-defined four-step method: smile, greet the customer, meet the customer's
needs and thank the customer for shopping at Ames. Since the introduction of
this program in 1995, our customer comment scores have consistently improved.
Marketing
We use a "high/low" promotional pricing strategy to attract customers to
our stores by periodically offering greater discounts on selected items or
categories of merchandise while maintaining our regular discount prices on all
other merchandise. In addition to increasing customer traffic, the "high/low"
strategy provides us greater control over margins and inventory levels by
allowing us to quickly adjust the number and mix of deeply discounted items and
increase or decrease our average pricing discount. We are also able to tailor
our selection of more heavily discounted products to customer demographics and
purchasing patterns in individual store locations.
Our main marketing theme, "Bargains by the Bagful(R)," is designed to
emphasize our value pricing. We support the "Bargains by the Bagful(R)" theme
through several promotional programs, including "Special Buy" and "55Gold(R)
Savings" programs, as well as periodic "event" sales:
o Our "Special Buy" program allows us to offer selected items of
recognizable brand name and other quality merchandise to consumers at deep
discounts, thereby providing the customer with readily recognizable values.
"Special Buy" items are generally not actively advertised. Instead, we use
special signage and fixtures to make "Special Buy" merchandise easily
recognizable to customers, who are often drawn to our stores as a result of
their desire to discover the latest "Special Buy" offerings. We are able to
offer these deep discounts because of our ability to react quickly to buying
opportunities for closeout and end-of-run products that are popular with our
customers. Apparel comprises approximately 95% of the merchandise offered
through our "Special Buy" program, although "Special Buy" items also are offered
in the hardlines and home lines product categories.
o Our "55Gold(R) Savings" program provides a 10% discount on all
merchandise, including sale and "Special Buy" items, for consumers aged 55 and
older who present a "55Gold(R) Savings" card when shopping on Tuesdays. Since
its inception in late 1994, on average, Tuesday has moved from being the lowest
to the highest selling day in the week. During Fiscal 1999, the "55Gold(R)
Savings" program generated sales of $336 million compared to $250 million in
Fiscal 1998 and the number of active cardholders increased to 2.3 million from
1.4 million over the same period.
o Our periodic "event" sales are heavily advertised, vendor-supported
promotions of selected categories of merchandise as well as promotions that are
intended to capitalize on seasonal shopping trends. Examples include our "Baby
Sale," "Housewares Spectacular," "Truckload Sale," "Patio Plaza," "Shoe Sale"
and "Underwear Fair." Our most successful special sale promotions include the
"March Magic Sale," the October "Home Sale" and the November "Ames Biggest Toy
Sale," which is designed to attract Christmas shoppers. Because of the
substantial increase in unit volume generated by these "event" sales, they are
supported by many of our major vendors, either through gross margin allowances
or cooperative advertising.
We reinforce Ames' "Bargains by the Bagful(R)" theme through extensive use
of weekly full-color newspaper circulars. We distributed 55 newspaper circulars
in Fiscal 1999, with an average weekly circulation of 16 million households.
These circulars generated approximately 48% of our net sales in Fiscal 1999.
Store Layout and Design
Ames' stores, which range from 27,736 to 85,743 square feet of selling
space and average approximately 55,500 square feet of selling space, are smaller
and we believe more customer friendly than those of most competing "big box"
retailers, particularly the national discount store chains. Their smaller size
appeals to Ames' target customer base of working mothers and senior citizens,
who prefer an easy-to-shop, convenient store environment. In 1994, we introduced
a new store prototype. The prototype features an open floor plan and wide aisles
that allow customers to see the entire store at a glance. Bright, attractive
signage and "soft" corners highlight key departments and make finding the right
department easy. The home lines department, our largest merchandise category,
typically spans the back wall of the store, with promotional pallet and bin
displays bordering the main aisle. Promotional items are placed throughout the
store near similar merchandise.
Our prototype store design has generally increased our return on investment
in our remodeled stores or, where the stores have been subject to increasing
competition, significantly enhanced their competitiveness. We continue to
remodel our remaining stores to this pattern on an as-needed basis.
Store Locations
We currently operate 460 stores located in the Northeast, Midwest and
Mid-Atlantic regions. The Hills acquisition extended our presence into Illinois,
Indiana, Kentucky, North Carolina and Tennessee, where we previously had no
stores, and substantially strengthened our market penetration in several states
in which we had existing operations, including New York, Ohio, Pennsylvania,
Virginia and West Virginia. The following table sets forth, as of March 31,
2000, the locations of our existing Ames stores:
Number of Stores
------------------
Ames
------
Pennsylvania 102
New York 92
Ohio 53
Massachusetts 35
Maryland 24
Maine 23
Connecticut 22
New Hampshire 20
West Virginia 19
Virginia 14
New Jersey 15
Vermont 12
Indiana 10
Rhode Island 8
Delaware 4
Tennessee 3
District of Columbia 1
Illinois 1
Kentucky 1
North Carolina 1
----
Total: 460
====
Purchasing
We buy merchandise from more than 3,200 vendors, approximately 90% of whom
are located in the United States. No single supplier accounted for more than 3%
of our purchases in Fiscal 1999 and there is no current or anticipated problem
with respect to the availability of merchandise. Merchandise is purchased
centrally for all stores by buyers who are based at Ames' headquarters.
We work actively with our vendors to reduce costs and improve the
efficiency of our supply chain. Nearly 1,900 vendors participate in our
electronic ordering and invoicing program, which is designed to automate the
inventory purchasing, delivery billing and payment process, reduce the number of
out-of-stock items and reduce the cycle time of product deliveries.
Distribution
We operate distribution centers in Leesport, Pennsylvania; Mansfield,
Massachusetts; and, as a result of the Hills and Caldor acquisitions, Columbus,
Ohio and Westfield, Massachusetts, which aggregate approximately 3.4 million
square feet. Merchandise is shipped by vendors either directly to our stores or
to our distribution centers, which then make deliveries to the stores using our
own fleet of trucks.
We have a 5:00 am delivery program to ensure that merchandise is delivered
to our stores before business hours. This delivery policy, together with our
investments in in-store automation, have increased the efficiency of our store
stocking and delivery and reduced the number of out-of-stock items.
Management Information Systems
In June 1999, we announced a five-year, strategic outsourcing agreement
with IBM to support core information technology systems for the corporate office
and the stores. Under the agreement, IBM Global Services is responsible for all
data center operations, which includes mainframe, midrange and client server
systems; support for midrange systems in Ames' four distribution centers; and
support for substantially all information systems equipment in all of the Ames
stores. We expect that this agreement will cost less in service delivery than
if we had not outsourced our information technology support.
In 1998, we invested approximately $35.0 million in state-of-the-art
technology for hardware, software and communications equipment to automate our
store operations. This investment included new point-of-sale devices, office
equipment to automate the office functions at each store as well as equipment to
improve the receipt and stocking of merchandise at the stores. In 1999, we
invested approximately $20.4 million in point-of-sale related technology and
equipment for the 163 stores that we opened during the fiscal year. Our
point-of-sale systems have significantly reduced the amount of time customers
spend on the checkout line, streamlined layaway and credit transactions,
facilitated our targeted promotional activities and increased employee
productivity.
We have developed and implemented a state-of-the-art target marketing tool
that will enable us to evaluate and use customer information derived from our
"55Gold(R) Savings" program to enhance our ability to selectively market to
these customer groups. This marketing vehicle, which was fully implemented in
January 2000, will enable us to perform direct mailings and identify customers
with cross-shop marketing opportunities.
Our new store office systems are being used to automate many previously
manual, labor intensive processes including cash counting, time keeping, store
opening and closing routines and other clerical tasks. In the receiving area,
the new systems are being used to speed the receipt of merchandise and its
movement to the sales floor. Additionally, these systems have significantly
improved the process by which we send customer returns to a central return
center in Eastern Pennsylvania.
Through these store automation systems we can capture valuable financial,
merchandising, logistics and shortage information and transmit this information
to our corporate headquarters on a daily basis, enabling us to more effectively
operate our business. These systems have been included in all of the former
Hills and Caldor stores that we converted to Ames stores.
Competition
We operate in an extremely competitive environment. Many of our stores are
located in smaller communities and, in some cases, are the largest non-food
retail store in their market area. We compete, however, with many smaller stores
offering a similar range of products. Although Ames is the largest regional
discount retailer in the United States, we are still considerably smaller in
terms of our total number of stores, sales and earnings than the three leading
national chains: Wal-Mart, Kmart and Target Stores. Each of these chains, as
well as other regional operators such as Bradlees, currently operates stores
within our regional market and competes with us for customers and potential
store locations. We currently anticipate a further increase in competition from
these national discount store chains.
Our merchandising focus is primarily directed to consumers who we believe
are underserved by the major national chains. Although this approach combined
with our smaller store size has enabled us to compete effectively with these
chains and operate profitably in proximity to their stores, we remain vulnerable
to the marketing power and high level of consumer recognition of the major
national discount chains.
Seasonality
Our business is seasonal in nature, with a large portion of our net sales
occurring in the second half of our fiscal year as a result of the
back-to-school and Christmas shopping seasons. Net sales are highest in the last
fiscal quarter (37% of our annual sales in Fiscal 1999). The demand for working
capital is heaviest in May, and from August through November, when sufficient
merchandise must be purchased for the spring, back-to-school and Christmas
seasons, respectively.
Employees
As of March 31, 2000, we employed approximately 35,300 people.
Approximately 31,300 of our employees work in various capacities within our
stores, approximately 3,000 are employed in our distribution centers and the
balance is based at our corporate and regional offices. With the exception of
approximately 2,250 employees at our distribution centers in Leesport,
Pennsylvania; Mansfield and Westfield, Massachusetts; and Columbus, Ohio who are
covered by collective bargaining agreements that expire at various times from
December 2000 to March 2003, none of our employees is represented by a union.
Patents, Trademarks and Licenses
The mark "Ames" is registered with the United States Patent and Trademark
Office. We consider this mark and the associated name recognition to be valuable
to our business. We have a number of other trademarks, trade names, and service
marks including "Bargains by the Bagful,(R)" "Crafts & More,(R)" and
"Pawsitively Pets.(R)" Although we consider these additional marks and licenses
to be valuable in the aggregate, none of them individually is currently
considered to have a material impact on our business.
Item 2. Properties.
As of March 31, 2000, the Company's store lease obligations for 460 stores
covered a total of approximately 32.0 million square feet, which includes
approximately 597,000 square feet in seven stores already opened as of that
date. The average store size is approximately 69,400 square feet, of which
approximately 80% is selling area.
The construction of one store, located in Monroeville, Pennsylvania, was
financed with an industrial development bond. Ames has an option to purchase
this location at nominal cost at the expiration of the lease term in May 2003.
Ames owns the building and leases the land occupied by the store in Mercerville,
New Jersey. The land and buildings for five other store locations are owned by
Ames. The remainder of Ames' stores is leased, with leases whose initial terms
expire at various times between 2001 and 2023. The leases generally have one or
more renewal options, each permitting an extension for at least five years. In
addition, the leases typically provide for fixed annual rentals, payment of
certain taxes, insurance and other charges, and additional rentals based on a
percentage of sales in excess of certain fixed amounts. Most of the fixtures and
equipment in the former Hills stores are leased. Except for vendor-owned
greeting card equipment and leased shoe department equipment, Ames owns the
fixtures and equipment in its other stores, some of which is subject to various
financing arrangements.
Ames' warehouse and distribution facilities in Leesport, Pennsylvania and
Mansfield, Massachusetts are owned by the Company and occupy approximately 1.7
million square feet in the aggregate. The former Caldor distribution center in
Westfield, Massachusetts is a leased property that comprises approximately
649,000 square feet. The former Hills warehouse and distribution facility in
Columbus, Ohio, a leased property, is approximately 1.1 million square feet. The
former Hills facility in Grove City, Ohio closed in Spring 1999.
Ames leases approximately 386,000 square feet of space in Rochester, New
York under a lease expiring on December 31, 2007, with two ten-year renewal
options. These premises have been subleased to an unaffiliated tenant for the
remainder of the lease term.
Ames owns and occupies its 225,000 square foot corporate office in Rocky
Hill, Connecticut. Ames has a lease for 11,000 square feet for its
plan-o-gramming facility in Rocky Hill, which expires in November 2001, and a
lease, which expires in April 2006 for a 33,000 square foot in-house photography
studio and print shop in Rocky Hill. Three additional former Hills leased
properties were closed in 1999: the buying and administrative office in Canton,
Massachusetts, the Hills regional office in Aliquippa, Pennsylvania, and a
buying office in New York, New York. The Aliquippa, Pennsylvania lease expired
on its own terms without any additional cost to the Company. The other two
leases were settled under terms that were favorable to Ames.
Item 3. Legal Proceedings.
On March 21, 1995, a class action complaint was filed against Ames in the
Superior Court Department of the Trial Court, Suffolk County, and Massachusetts
entitled David W. Abrams, Individually and On Behalf of All Other Persons
Similarly Situated v. Ames Department Stores, Inc. The complaint alleged that
Ames violated Massachusetts wage and hour law by failing to pay Abrams, and
other similarly situated Assistant Managers in Massachusetts, time and one-half
their regular rates of pay for hours worked in excess of 40 hours a week. The
complaint sought injunctive relief, treble damages, costs and attorneys' fees.
On April 21, 1995, the case was removed to the United States District Court for
the District of Massachusetts. Ames denied the claims on the basis that Abrams
and other similarly situated Assistant Managers were exempt employees not
entitled to overtime pay. Ames further denied that the action was properly
maintainable as a class action and that the plaintiff was a proper
representative of the purported class.
On March 14, 1996, Abrams amended his complaint to include Richard Serrano
as name representative of all Replenishment Assistant Managers located
throughout Massachusetts. On November 22, 1996, the Court remanded the claims of
Serrano and the putative class of Replenishment Assistant Managers to State
Court because Serrano failed to satisfy the amount in controversy requirement
for federal jurisdiction. On January 3, 1997, the United States District Court
for the District of Massachusetts certified a class of Hardlines and Softlines
Assistant Managers employed by Ames in any Ames store in Massachusetts on or
after March 21, 1993, but limited the class to those Assistant Managers whose
claim satisfied the amount in controversy requirement for federal jurisdiction
as of April 21, 1995, the date the case was removed to federal court. Abrams
caused notice to be sent to the class apprising them of the pending action and
their right to opt-out of the action if they did not wish to participate in the
litigation. On January 21, 1999, the parties reached a settlement in this
action, which was preliminarily approved by the United States District Court for
the District of Massachusetts on January 22, 1999. Notice of the Abrams
settlement was sent to all class members on January 26, 1999. On March 30, 1999,
the Court issued a Final Order approving the Abrams Settlement. Under the terms
of the settlement agreement, each class member received a calculated amount of
cash and scrip usable in any Ames store in exchange for a release of all claims
against the Company. The total cost to the Company was $440,255 in cash and
$146,752 in scrip. Payments have been made according to the terms of the
settlement agreement.
On December 13, 1995, a class action complaint was filed and on January
23, 1996 an amended class action complaint was filed in the United States
District Court for the District of Massachusetts entitled Colleen Austin, On
Behalf of Herself and Others Similarly Situated v. Ames Department Stores, Inc.
et al. The factual allegations in the Austin complaint were essentially the same
as those in the Abrams complaint referenced above. However, the Austin complaint
also included claims against Ames and certain of its officers and directors
under the Fair Labor Standards Act, ERISA and the wage and hours laws of each
state where Ames does business and purported to state claims on behalf of
Assistant Managers in each of those states. Ames asserted, among other things,
that the case was not properly maintainable as a class action suit and that the
plaintiff was not a proper class representative. Ames also denied liability on
the basis that Austin and other similarly situated Assistant Managers were
exempt employees and moved to dismiss the claims under ERISA and the laws of all
states except Massachusetts. On November 21, 1997, the Court granted Ames'
motion to dismiss the ERISA claims and denied the remainder of the motion. On
July 15, 1998, the Court approved a class action settlement that had been
reached by the parties. Notice of the Austin settlement was sent to all
potential class members on August 19, 1998. The Austin settlement provided that
in exchange for a release of all claims against Ames each class member who
elected to opt-in to the Austin settlement would receive a benefit, either cash
or discounts on future purchases at an Ames store, based on the number of days
worked for Ames during the class period. Individuals who wished to opt-in to the
Austin settlement were required to sign and return a consent and release form on
or before October 3, 1998. The total cost to the Company was $1,225,887 in cash
and $171,560 in discounts usable on purchases made at Company stores. Payments
have been made according to the terms of the settlement agreement.
On December 6, 1996, the remand referenced above from the United States
District Court for the District of Massachusetts of Abrams v. Ames Department
Stores, Inc. as to Richard Serrano and the putative class of Replenishment
Assistant Managers was docketed in the Superior Court Department of the Trial
Court, Suffolk County, Commonwealth of Massachusetts. This complaint alleged
that Ames violated General Laws, Chapter 151, ss. 1A by failing to pay Serrano
and other similarly situated Replenishment Assistant Managers located throughout
Massachusetts time and one-half their regular rates of pay for hours worked in
excess of 40 hours per week. Serrano agreed to a voluntary dismissal of the
action on behalf of himself and other similarly situated Replenishment Assistant
Managers pursuant to a class action settlement in a wage and hour case reached
between Ames and another former Replenishment Assistant Manager, David Root,
entered into and approved by the United States District Court for the District
of Massachusetts on January 31, 1997 (David Root, On Behalf of Himself and All
Other Persons Similarly Situated v. Ames Department Stores, Inc., Civil Action
No. 96-11301-GAO). Serrano and other former or then-current Replenishment
Assistant Managers employed by Ames in Massachusetts had the option to opt-in to
the Root settlement.
On March 18, 1997, the complaint was further amended to add Kristen Gould
as a named plaintiff to represent the putative class of Hardlines and Softlines
Assistant Managers employed by Ames in any Ames stores in Massachusetts whose
claim failed to satisfy the amount in controversy requirement for federal
jurisdiction in the Abrams case. Gould's substantive claims mirror those alleged
in the Abrams case for Massachusetts Hardlines and Softlines Assistant Managers.
Also, on March 18, 1997, the Court dismissed Serrano's action on behalf of
himself and other similarly situated Replenishment Assistant Managers pursuant
to the settlement reached between Ames and David Root described above. This case
has gone forward solely on behalf of the Hardlines and Softlines Assistant
Managers under the caption Kristen Gould v. Ames Department Stores, Inc., in the
Superior Court Department of the Trial Court, Suffolk County, Commonwealth of
Massachusetts. Ames responded to the Gould complaint and asserted the same
defenses as it did with regard to the Abrams complaint. Gould moved for class
certification and on February 5, 1998, the Superior Court certified a class of
Hardlines and Softlines Assistant Managers employed in any Ames store in
Massachusetts on or after March 21, 1993 whose claim did not satisfy the amount
in controversy requirement for federal jurisdiction as of April 21, 1995. On
June 12, 1998, the Superior Court stayed the proceedings in the Gould complaint
until the conclusion of the Abrams complaint in the United States District Court
for the District of Massachusetts. On April 7, 1999, the Company and Gould
reached a settlement of the Third Complaint, which adopted the terms of the
Abrams Settlement. On May 25, 1999, the Court preliminarily approved the class
action settlement, which had been reached by the parties (the "Gould
Settlement"), and Notice was sent to class members on June 4, 1999. On September
17, 1999, the Court entered final approval of the Gould Settlement. The total
cost to the Company was $261,987 in cash and $87,329 in scrip. Payments have
been made according to the terms of the settlement agreement.
On December 15, 1998, a class action complaint was filed in the United
States District Court for the District of Connecticut entitled Edmond Smoot, III
and Yousef S.A. Syed, Individually and On Behalf of All Others Similarly
Situated v. Ames Department Stores, Inc. The factual allegations in the Smoot
complaint are essentially the same as those in the Austin complaint referenced
above and are alleged on behalf of those Assistant Managers who did not opt-in
to the settlement of the Austin complaint, those who opted in and continued to
work for Ames and anyone who worked for Ames as an Assistant Manager after the
date of the Austin settlement notice, but who is not otherwise covered by the
previous categories. However, the Smoot complaint does not include claims
against Ames and certain of its officers and directors under ERISA. Ames
believes, among other things, that the case is not properly maintainable as a
class action suit. Ames has filed an answer in the case in which it has also
denied liability on the basis that Smoot and Syed and other similarly situated
Assistant Managers were exempt employees and, thus, not entitled to overtime
pay. On March 1, 1999, the plaintiffs moved for class certification of the state
law claims. On May 14, 1999, the plaintiff's moved for Leave to Send Notice and
Consent to Join pursuant to the Fair Labor Standards Act. Both motions were
allowed on December 13, 1999. As of this date, Notice of the action has not been
sent out to class members. The Company intends to defend this matter vigorously.
Other Matters
Ames is party to various claims and legal proceedings covering a wide
range of matters that arise in the ordinary course of its business. Ames
believes that its probable liability as to these matters will not have a
material adverse effect on its consolidated financial position or results of
operations.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of Fiscal 1999
to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5. Market for the Registrant's Common Stock and Related Matters
Concerning Security Holders.
Our common stock is traded on the NASDAQ National Market System under the
symbol "AMES." The following table provides the high and low last sale prices
for our common stock as reported on NASDAQ for the fiscal quarterly periods
indicated below. These prices do not include retail markups, markdowns or
commissions.
Fiscal 1999 Fiscal 1998
--------------------------- -------------------------
Low High Low High
1st Quarter $ 25 3/8 $ 38 3/4 $ 14 $25 1/2
2nd Quarter 34 13/16 48 7/8 21 1/8 29 5/8
3rd Quarter 27 5/8 42 10 1/2 25 3/8
4th Quarter 20 3/4 34 11/12 18 1/8 32 1/2
On March 31, 2000, there were approximately 6,200 holders of record of the
common stock. On that date, the reported sale price of our common stock was
$24.56.
We paid no quarterly dividends to the holders of our common stock during
these periods. Dividends cannot be declared under the terms of our bank credit
facility. Any future determination to pay cash dividends will be at the
discretion of the board of directors and will be dependent upon our financial
condition, operating results, capital requirements and such other factors as the
board of directors deems relevant.
On September 24, 1999, we adopted Amendment No. 1 to the Rights Agreement
dated as November 30, 1994 as described in Note 6 to the Consolidated Financial
Statements.
Item 6. Selected Financial Data.
The following selected financial data of Ames should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," as well as the Consolidated Financial Statements and
related Notes appearing elsewhere in this annual report on Form 10-K.
<TABLE>
Fiscal Year Fiscal Year Fiscal Year Fiscal Year Fiscal Year
Ended Ended Ended Ended Ended
Jan. 29, 2000 Jan. 30, 1999(b) Jan. 31, 1998(c) Jan. 25, 1997 Jan. 27, 1996
---------------- ----------------- ----------------- --------------- ---------------
(In millions, except per share data)
<S> <C> <C> <C> <C> <C>
Net sales...................... $3,836.9(a) $2,498.6(j) $2,225.5(j) $2,155.3(j) $2,088.5(j)
Net income (loss).............. 17.1(i) 33.8(g) 34.5(d) 17.3(e) (1.6)(f)
Diluted net income (loss) per
common share (h)............... 0.62(i) 1.40 1.46(d) 0.79(e) (0.08)(f)
Total assets................... 1,975.3 1,483.4 610.0 536.8 502.6
Long-term debt and capital
leases......................... 602.2 287.7 35.7 38.2 52.5
(a) Net sales reflects change in accounting for layaway sales pursuant to SAB
101.
(b) Includes Hills Stores Company financial results for January 1999.
(c) Fiscal year ended January 31, 1998 consisted of 53 weeks; all other years
presented consisted of 52 weeks.
(d) Includes charges of $1.6 million for the costs associated with the closing
of two (2) stores.
(e) Includes charges of $9.7 million for the costs associated with the closing
of thirteen (13) stores and an extraordinary loss, net of tax, of $1.4 million
for the early extinguishment of debt.
(f) Includes charges of $20.9 million for the costs associated with the closing
of seventeen (17) stores and property gains of $9.1 million.
(g) Includes $8.2 million for the costs associated with the closing of seven
stores.
(h) Net income (loss) per common share has been restated to conform to the
requirements of Statement of Financial Accounting Standards No. 128 "Earnings
per Share" ("SFAS No. 128"). See Note 1 to the Consolidated Financial
Statements included in this Form 10-K for a further description of the
provisions of SFAS No. 128.
(i) Includes cumulative effect adjustment for change in accounting for
layaway sales of $1.1 million, net of $0.6 million tax benefit, and the
recognition of approximately $38 million in tax benefits (see Note 8).
(j) Includes adjustment to sales to reflect the effect of recording
promotional coupons issued by Ames as markdowns, which conforms to the current
treatment for coupon accounting.
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
Overview
Ames changed its fiscal year from the last Saturday in January to the
Saturday nearest January 31, effective with the fiscal year ended January 30,
1999, which we refer to as "Fiscal 1998." We made this change so that our fiscal
year would coincide with the fiscal year of most other publicly-held retailers.
Our fiscal year ended January 29, 2000, which we refer to as "Fiscal 1999," and
Fiscal 1998 consisted of 52 weeks. Our fiscal year ended January 31, 1998, which
we refer to as "Fiscal 1997," consisted of 53 weeks.
You should read the discussion that follows in conjunction with the
consolidated financial statements and related notes appearing elsewhere in this
annual report on Form 10-K.
Results of Operations
Fiscal 1999 Compared to Fiscal 1998
During Fiscal 1999, the inventory in the 155 former Hills stores was
liquidated, and 151stores were remodeled and opened as Ames stores. This process
was completed in September 1999. During the liquidation period, professional
liquidators operated the former Hills stores under an agency agreement with
Ames. Under the agreement, Ames received a minimum guaranteed amount of 40% of
the initial ticketed retail price of the inventory sold and had the potential to
receive a greater return if the sale proceeds exceeded a specified percentage of
retail value. For financial reporting purposes in the charts that follow, Hills
net sales represent the actual sale proceeds from the merchandise liquidation
sales, its cost of merchandise sold represents the cost of merchandise sold as
adjusted for the guaranteed return amount, and its selling general and
administrative expenses include the portion of those proceeds that were to be
paid to the liquidators.
Upon completion of the liquidation and remodeling the Hills stores were
reopened and participated in grand opening promotions. Consequently we incurred
higher than normal pre-opening and promotion expenses in Fiscal 1999.
Because of the liquidation activity, the remodeling activity and the large
volume of grand openings with their associated expenses, the consolidated
operating results are not representative of those of a retailer operating in the
ordinary course of business and are not directly comparable to previously
published Ames results exclusive of Hills.
<TABLE>
Fiscal
1998 Fiscal 1999
---- --------------------------------------------------------------------------
Layaway
Ames Ames Hills Other Adj. Total
---- ---- ----- ----- ---- -----
(In millions, except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Total net sales $2,386.5 $3,465.6 $375.6 $-- $(4.4) $3,836.8
Leased department and
other income.............. 29.2 39.1 2.6 -- -- 41.7
---------------- ------------ ----------- ---------- ------------ ------------
Total revenue 2,415.7 3,504.7 378.2 -- (4.4) 3,878.5
Costs and expenses:
Cost of merchandise
sold...................... 1,711.3 2,467.8 251.2 -- (3.6) 2,715.4
Selling, general and
administrative expense.... 606.9 838.7 153.0 76.5 -- 1,068.2
Depreciation and
amortization
expense, net.............. 11.3 49.1 11.1 5.3 -- 65.5
Interest and debt expense,
net....................... 11.4 54.1 4.1 2.6 -- 60.8
---------------- ------------ ----------- ---------- ------------ ------------
Income (loss) before
income taxes.............. 74.8 95.0 (41.2) (84.4) (0.8) (31.4)
Income tax (provision)
benefit................... (26.7) (34.2) 14.8 68.7 0.3 49.6
---------------- ------------ ----------- ---------- ------------ ------------
Income (loss) before
cumulative effect adj. 48.1 60.8 (26.4) (15.7) (0.5) 18.2
Cumulative effect
adjustment, net of tax -- -- -- -- (1.1) (1.1)
---------------- ------------ ----------- ---------- ------------ ------------
Net income (loss) $48.1 $60.8 $(26.4) $(15.7) $(1.6) $17.1
================ ============ =========== ========== ============ ============
</TABLE>
<PAGE>
The "Ames" column for Fiscal 1998 (above) represents the results of the
Ames store base excluding (a) the results of operations for the Hills stores
acquired as of December 31, 1998 and (b) other costs and charges related to the
Hills acquisition. Including the effect of the Hills stores and other costs
related to the acquisition, we recorded consolidated net income of $33.8 million
for the fifty-two weeks ended January 30, 1999.
The "Ames" column for Fiscal 1999 (above) represents (a) the results of
the Ames store base, (b) the results of the former Hills stores after their
conversion to Ames stores and (c) certain expenses associated with the
acquisition of Hills, including the interest expense on the acquired Hills
senior notes and a prorata share of the amortization of the goodwill recorded in
connection with the acquisition.
The "Hills" column for Fiscal 1999 (above) represents (a) the results of
operations for the Hills stores during the period that these stores were
operated pursuant to an agency agreement, including depreciation and interest
expense directly associated with such stores and (b) Hills corporate overhead
expenses, principally the Canton, Massachusetts's corporate facility (see Note 2
to the accompanying consolidated financial statements for further discussion of
the agency agreement accounting).
The "Other" column for Fiscal 1999 (above) represents expenses incurred
during the period of remodeling the Hills stores (i.e., pre-opening expenses
incurred during the conversion or "dark" period) as well as certain other
expenses and tax benefits.
The above "Layaway Adj." column represents the impact of the change in the
method of accounting for layaway sales. We adopted the change in accounting for
layaway sales in the fourth quarter of Fiscal 1999 in consideration of the Staff
Accounting Bulletin No. 101 "Revenue Recognition" issued by the staff of the
Securities and Exchange Commission in December 1999.
The liquidation and remodeling activity in the former Hills stores
distorts any direct comparison of the principal components of Ames consolidated
results for Fiscal 1999 and Fiscal 1998 and prior years. Accordingly, in the
discussion that follows, Ames net sales, gross margin, selling, general and
administrative expenses, and its leased department and other income for Fiscal
1999 and Fiscal 1998 will be compared excluding the pre-conversion Hills results
and other charges. The comparison of depreciation and amortization expense as
well as interest and debt expense will be on a consolidated basis.
Net sales increased to $3.5 billion in Fiscal 1999 from $2.4 billion in
Fiscal 1998 due primarily to the sales contribution of the former Hills stores
after conversion to the Ames format and 6.2% growth in same store sales. We
experienced strong increases in our Ladies Sportswear, Toys and Home
Entertainment departments.
Gross margin increased $322.6 million in Fiscal 1999 compared to Fiscal
1998. The increase is primarily attributable to the inclusion of the former
Hills stores and an increase in the gross margin rate from 28.3% to 28.8% in
Fiscal 1999. The gross margin rate in Fiscal 1999 benefited from lower
markdowns.
Selling, general and administrative expenses increased $231.8 million in
Fiscal 1999 compared to Fiscal 1998, primarily as a result of the addition of
the former Hills stores. Selling general and administrative expenses decreased
as a percentage of net sales from 25.4% in Fiscal 1998 to 24.2% in Fiscal 1999.
The decrease resulted from the 6.2% comparable store sales gain and improved
efficiencies of scale due to the Hills acquisition.
Leased department and other income increased $9.9 million in Fiscal 1999
from Fiscal 1998. A substantial portion of the increase resulted from additional
leased sales originating in the former Hills stores, as well as an increase in
layaway fees, also originating in the former Hills stores.
Depreciation and amortization expense increased by $51.0 million in Fiscal
1999 compared to Fiscal 1998. The increase results from the additional
depreciation and amortization of the former Hills fixed assets and beneficial
lease rights and the amortization of goodwill. The beneficial lease rights and
goodwill related to the Hills acquisition are being amortized on a straight-line
basis over the term of the underlying lease (25 years on average) for the lease
rights and 25 years for goodwill. The amortization of the excess of our revalued
net assets over equity under fresh start reporting remained the same in Fiscal
1999 as in Fiscal 1998. We are amortizing this amount over a ten-year period,
which will conclude in January 2003.
Net interest expense increased $45.6 million in Fiscal 1999 compared to
Fiscal 1998. The increase was primarily attributable to interest expense
incurred for our 10% senior notes, the Hills capital lease and financing
obligations and a higher level of borrowings under our bank credit agreement.
During the year, we completed the issuance of our 10% senior notes to support
the conversion of the former Hills stores. See the liquidity and capital
resources section of this document for further discussion of these events.
We recorded a consolidated income tax benefit of $49.6 million in Fiscal
1999 compared to an $18.8 million provision in Fiscal 1998. The Fiscal 1999
benefit primarily represents the reduction of a valuation allowance of $38.1
million previously recorded against certain deferred tax assets, which reflects
our expectation of using the net operating loss carry-forwards and other
deferred tax assets in the foreseeable future. See Note 8 to the consolidated
financial statements for additional information.
Subsequent to the date of these financial statements, we announced the
purchase of the leases to seven Goldblatt's stores in the Chicago area, marking
our entry to this market.
Fiscal 1998 Compared to Fiscal 1997
On December 31, 1998, we acquired approximately 81.3% of the outstanding
voting stock of Hills Stores Company. Accordingly, the operations of Hills and
its subsidiaries during the month of January 1999 are included in our
consolidated results of operations for Fiscal 1998. Immediately following our
acquisition of Hills, we began implementing a series of initiatives to prepare
for the conversion of 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 or under-performing and the
engagement of two experienced liquidation firms, Gordon Brothers Retail Partners
LLC and The Nassi Group LLC, to operate the Hills stores until their closure and
to liquidate Hills' merchandise inventories.
Under our agreement with Gordon Brothers LLC and The Nassi Group LLC, we
were entitled to retain from the proceeds of the liquidation sales, as a minimum
guaranteed amount, 40% of the initial ticketed retail price of the inventory
sold, irrespective of the actual price at which it is 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 that proceeds exceeded specified targets. For
financial reporting purposes, Hills' net sales during the month of January
represent the actual sale proceeds from merchandise liquidation sales, its cost
of merchandise sold represents the guaranteed minimum amount that Ames is
entitled to retain, and its selling, general and administrative expenses include
the portion of those proceeds that were paid to the liquidators.
Because of the unique nature of our contractual arrangements with Gordon
Brothers LLC and The Nassi Group LLC, as well as the fact that the Hills stores
were in the process of liquidation, Hills' results for the month of January 1999
are not representative of those of a retailer operating in the ordinary course
of business and are not directly comparable to Ames' results exclusive of Hills.
The acquisition of Hills also resulted in various costs and charges during the
month of January 1999 that impacted Ames' consolidated results. These other
costs and charges consisted principally of costs associated with terminating
contracts that became obsolete with the acquisition of Hills, the write-off of
deferred financing costs related to a prior credit facility, interest expense
for borrowings incurred to finance the acquisition and a one-time charge for the
announced closing of the seven Ames stores. The following table illustrates the
separate contribution of Ames' full year of operations and Hills' one month of
operations to various components of the consolidated results of operations for
Fiscal 1998, as well as the impact on the consolidated results of the other
costs and charges described above:
<PAGE>
<TABLE>
Fiscal Fiscal 1998
1997 ----------------------------------------------
------ Ames Hills Other Total
---- ----- ----- -----
(In millions)
<S> <C> <C> <C> <C> <C>
Total net sales $2,225.5 $2,386.5 $112.1 $ - $2,498.6
Leased department and other income 25.0 29.2 1.0 - 30.2
----------- ---------- --------- -------- ---------
Total revenue 2,250.5 2,415.7 113.1 - 2,528.8
Costs and expenses:
Cost of merchandise sold 1,596.0 1,711.3 66.3 - 1,777.6
Selling, general, and administrative expense 581.7 606.9 52.0 1.7 660.6
Depreciation and amortization expense, net 6.6 11.3 3.2 - 14.5
Interest and debt expense, net 11.6 11.4 2.0 1.9 15.3
Store closing charge 1.0 - - 8.2 8.2
----------- ---------- --------- -------- ---------
Income (loss) before income taxes 53.6 74.8 (10.4) (11.8) 52.6
Income tax (provision) benefit (19.1) (26.7) 3.7 4.2 (18.8)
----------- ---------- --------- -------- ---------
Net income (loss) $34.5 $48.1 $(6.7) $(7.6) $33.8
=========== ========== ========= ======== =========
</TABLE>
The circumstances under which Hills' operations have been conducted since
December 31, 1998 and the accounting treatment accorded those operations as a
consequence of the agreement with Gordon Brothers and The Nassi Group distort
any direct comparison of the principal components of Ames' consolidated results
for Fiscal 1998 and Fiscal 1997. Accordingly, in the discussion that follows,
Ames' net sales, gross margin, selling, general and administrative expenses, and
its leased department and other income for Fiscal 1998 are presented and
compared exclusive of the Hills results. The impact of the Hills acquisition is
included in the comparison of depreciation and amortization expense and interest
and debt expense.
Ames' net sales increased 7.3%, to $2.40 billion in Fiscal 1998 from $2.23
billion in Fiscal 1997, due primarily to 7.2% growth in same-store sales. Ames
experienced particularly strong sales improvements in sales of domestics, toys,
ready to assemble furniture, and women's sportswear. In comparing results for
the two fiscal years, you should bear in mind that net sales in Fiscal 1997 were
favorably affected by the inclusion of a full or nearly full year of operations
of two stores that were closed in the beginning of Fiscal 1998 and by the fact
that Fiscal 1997 included one additional week of operations.
Ames' gross margin increased $45.7 million in Fiscal 1998 compared to
Fiscal 1997, but remained unchanged as a percentage of net sales at 28.2%. The
gross margin rate in Fiscal 1998 benefited from a higher average markup on
sales, which was partially offset by higher markdowns.
Ames' selling, general and administrative expenses increased $25.3 million
in Fiscal 1998, but decreased as a percentage of net sales from 26.0% in Fiscal
1997 to 25.3% in Fiscal 1998. The percentage decrease was primarily attributable
to a reduction in store related expenses and advertising expense, partially
offset by an increase in health and medical costs.
Ames' leased department and other income increased $4.1 million, or 16.3%,
in Fiscal 1998 compared to Fiscal 1997. The increase was due primarily to the
leased shoe department, layaway and vending income, as well as the receipt of
funds previously held in trust.
Ames' depreciation and amortization expense increased by $4.6 million, or
69.1%, in Fiscal 1998 compared to Fiscal 1997. The increase related primarily to
new point-of-sale systems and store automation equipment acquired under certain
capital leases. The Hills acquisition added a further $3.2 million of
depreciation and amortization expense associated with the additional
depreciation and amortization of its fixed assets and beneficial lease rights
and the amortization of goodwill relating to the excess of the Hills acquisition
cost over the value of the acquired assets. We are amortizing the beneficial
lease rights using the straight-line method over the terms of the related leases
(which average approximately 25 years) and are amortizing the Hills goodwill
over 25 years on a straight-line basis. The amortization of the excess of our
revalued net assets over equity under fresh-start reporting remained the same in
Fiscal 1998 as in Fiscal 1997. We are amortizing this amount over a ten-year
period that will conclude in January 2003.
The Hills acquisition resulted in a 31.5%, or $3.7 million, increase in
consolidated interest expense, net of interest income, in Fiscal 1998. Debt and
capital lease obligations of Hills accounted for $1.9 million of the increase.
Another $1.4 million of the increase was attributable to the non-cash write-off
of deferred financing costs under Ames' prior credit facility. The balance was
attributable to borrowings under our bank credit agreement to finance costs of
the acquisition.
In the fourth quarter of Fiscal 1998, we recorded charges of $8.2 million
in connection with the announced closing of seven Ames stores that were
scheduled to close in Fiscal 1999. Principal components of these charges were
lease costs and the write-down of fixed assets. We also planned for the closing
of four of the acquired Hills stores and, pursuant to the purchase method of
accounting, provided for these closings in the valuation of the acquired Hills
assets. In the fourth quarter of Fiscal 1997, we recorded charges of $1.6
million in connection with the closing of two stores, of which $1.0 million was
classified as a store closing charge and $0.6 million was recorded as part of
the cost of merchandise sold.
We recorded an income tax provision of $18.8 million in Fiscal 1998, of
which approximately $0.5 million was paid in cash. In Fiscal 1997, we recorded
an income tax provision of $19.1 million, of which approximately $0.3 million
was paid in cash. See Note 8 of the Notes to Consolidated Financial Statements.
Liquidity and Capital Resources
Ames' principal sources of liquidity are its bank credit agreement, cash
from operations and cash on hand. Our current bank credit agreement provides for
a revolving credit facility of up to $650 million expiring June 30, 2002.
Borrowings under the agreement are secured by substantially all of our assets
and we are required to meet certain financial covenants if our availability
under the credit agreement falls below specified levels. Our peak borrowing
level in Fiscal 1999 under the agreement was $414.9 million.
On April 27, 1999, we completed the sale of $200 million of Ames 10%
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 in 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 of approximately
$187.3 million, net of underwriting discounts, were used to reduce our
borrowings under the bank credit facility and for general corporate purposes.
Our cash position decreased $5.1 million during Fiscal 1999. The decrease
was due primarily to $209.6 million of capital expenditures, inventory
investments of $181.5 million and $25.8 million in debt and capital lease
payments, partially offset by $129.6 million of borrowings under our bank credit
agreement, $193.4 million from the issuance of the Ames senior notes and the net
amount of $187.3 million from the issuance of Common Stock. Our cash position
decreased by $22.1 million during Fiscal 1998. This decrease was due primarily
to $103.9 million paid out in the acquisition of Hills (net of cash acquired),
$51.6 million of capital expenditures and $16.3 million in debt and capital
lease payments partially offset by $111.6 million in cash from operations and
$44.9 million of borrowings under our bank credit facility.
Merchandise inventories increased $210.1 million in Fiscal 1999 due to
the addition of twelve new stores, in addition to fully stocking the former
Hills stores and recording the inventory in the converted Hills stores at cost
in Fiscal 1999 as compared to liquidation value in Fiscal 1998. In Fiscal 1998,
the Hills inventories were valued at approximately 40% of the ticketed retail
price of the merchandise, representing the minimum amount we were entitled to
retain out of the proceeds from the liquidation of the merchandise. Merchandise
inventories increased by $197.7 million in Fiscal 1998 due to planned increases
and the inclusion of $169.1 million of Hills merchandise inventories.
Net fixed assets increased by $130.1 million during Fiscal 1999 due to
$209.6 million in capital expenditures, primarily relating to remodeling the
former Hills stores ($189.1 million), and opening twelve other stores. These
additions were partially offset by the additional writedown of $29.8 million in
fixed assets acquired from Hills and depreciation expense of $61.1 million
recorded during Fiscal 1999. Net fixed assets increased by $288.3 million during
Fiscal 1998 due to the inclusion of $230.9 million in net fixed assets of Hills
and $77.5 million of capital expenditures, including $25.9 million in new point
of sale equipment under capital leases. The Hills net fixed assets were adjusted
to their estimated fair value as of the acquisition date.
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 using the straight-line method.
Goodwill decreased $169.4 million as a result of the final determination of
the fair market value of the assets and liabilities acquired with the Hills
stores and a full year of amortization expense, which approximated $8.3 million.
The primary changes were the reduction of $114.1 million deferred tax asset
valuation allowance (see Note 8 to the Consolidated Financial Statements), a
reduction in accrued liabilities and reserves of $48.3 million as these
liabilities were no longer deemed to be required and the increase of $28.3
million to inventory values. When the Hills inventory was liquidated, proceeds
generated were greater than anticipated. These changes were partially offset by
an additional $29.8 million write-down of fixed assets (primarily fixtures)
acquired from Hills to recognize their deemed fair value. Goodwill is being
amortized over 25 years using the straight-line method.
Accounts payable increased $20.8 million due to an increase in merchandise
receipts in January 2000 over January 1999. Accounts payable increased $173.6
million during Fiscal 1998 due to improved payment terms, and the inclusion of
Hills accounts payable of $127.8 million as of January 30, 1999.
Long-term debt as of January 29, 2000 consisted of borrowings under our
bank credit agreement of $174.5 million, $47.2 million of Hills senior notes and
$200 million of Ames senior notes. Subsequent to fiscal year end we announced
that we had amended our $650 million credit facility. The amended agreement
provides Ames with a reduction in the interest rate charged and enhanced
flexibility as to the usage of the funds available under the credit facility.
Capital lease and financing obligations decreased by $7.2 million during
Fiscal 1999 as payments on capital lease obligations exceeded new capital
leases.
We have not paid any cash dividends during the past four fiscal years. The
payment of cash dividends is restricted under the terms of our bank credit
agreement.
Capital Expenditures
Capital expenditures for Fiscal 1999 were $209.6 million and included,
among other items, the opening of twelve new stores, the remodeling of the
former Hills stores and the upgrading of selected management information
systems, including the completion of our chain-wide installation of new
point-of-sale information equipment and related software in our stores. Capital
expenditures for Fiscal 1998 were $77.5 million and included the opening of six
new stores, the remodeling of twenty-two stores, and the upgrading of certain
management information systems.
Capital expenditures are expected to be approximately $140.0 million for
Fiscal 2000. These capital expenditures will be comprised of remodeling and
conversion of the former Goldblatt's stores, 25 new stores, and maintenance of
our existing stores. We expect to finance these expenditures through cash flow
from operations and borrowings under our bank credit agreement. Land, buildings
and improvements are financed principally through long-term leases.
Seasonality
Our business is seasonal in nature, with a large portion of our net sales
occurring in the second half of our fiscal year as a result of the
back-to-school and Christmas shopping seasons. Net sales are highest in the last
fiscal quarter (37% of our annual net sales in Fiscal 1999). The demand for
working capital is heaviest in May, and from August through November, when
sufficient merchandise must be purchased for the spring, back-to-school and
Christmas seasons, respectively.
Legal
We are party to various claims and legal proceedings on a wide range of
matters that arise in the ordinary course of business. Ames intends to defend
these issues vigorously and believes that the final outcome of the various
proceedings will not have a material adverse impact on its consolidated
financial position or results of operations (see Item 3 Legal Proceedings).
Impact of Year 2000
Ames completed its remediation and testing of systems for Year 2000
vulnerabilities in late 1999. No disruptions in mission critical information
technology and non-information technology systems were experienced during the
1999/2000 changeover and we believe those systems successfully responded to the
Year 2000 date change. Ames expensed approximately $2.9 million during 1999 in
connection with its Year 2000 remediation efforts. Our total cost for our Year
2000 effort was approximately $6.7 million. We are not aware of any material
problems resulting from Year 2000 issues, either with our products and internal
systems, or with the products and services of third parties. We will continue to
monitor mission critical computer applications and those of our suppliers and
vendors throughout the Year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
Accounting Policy Matters
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, " Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair market value.
The statement also requires that changes in derivatives fair market value be
recognized currently in earnings unless specific hedge accounting criteria are
met. SFAS No. 133 is effective for all fiscal quarters of all fiscal years
beginning after June 15, 2000, with early adoption at the beginning of any
fiscal quarter being permitted. We are currently analyzing the impact of this
new pronouncement on our financial position and result of operations.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101 "Revenue Recognition." Under SAB No. 101, we
are required to change the method in which we account for layaway sales. Prior
to the adoption of SAB No. 101, we recorded layaway sales when customers placed
merchandise on layaway. The pronouncement mandates that layaway sales be
recorded when the customer takes possession of the merchandise. We adopted SAB
No. 101 during the fourth quarter of Fiscal 1999, effective as of the beginning
of Fiscal 1999. The impact of adopting this pronouncement resulted in a
cumulative effect adjustment to current earnings for approximately $1.1 million,
net of $0.6 million tax benefit.
We adopted Statement of Position ("SOP") 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" effective the
beginning of Fiscal 1999. SOP 98-1 was effective for fiscal years beginning
after December 15, 1998. This SOP requires companies to capitalize certain costs
incurred in connection with an internal-use software project. Prior to Fiscal
1999, we expensed the costs of developing or obtaining internal use software as
incurred. The amount of internal use software costs capitalized in Fiscal 1999
was approximately $1.6 million.
Forward-Looking Statements
The statements contained or incorporated by reference in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations and elsewhere in this Annual Report that are not historical facts are
"forward-looking statements," as that term is defined in the Private Securities
Litigation Reform Act of 1995. Those statements include all discussions of
strategy as well as statements that contain such forward-looking expressions as
"believes," "estimates," "intends," "may," "will," "should," or "anticipates" or
the negative thereof. In addition, from time to time, our representatives or we
have made or may make forward-looking statements orally or in writing.
Furthermore, forward-looking statements may be included in our filings with the
Securities and Exchange Commission as well as in the press releases or oral
presentations made by or with the approval of one of our authorized executive
officers.
We caution you to bear in mind that forward-looking statements, by
their very nature, involve assumptions and expectations and are subject to risks
and uncertainties. Although we believe that the assumptions and expectations
reflected in the forward-looking statements contained herein are reasonable, no
assurance can be given that those assumptions or expectations will prove to have
been correct. Important factors that could cause actual results to differ
materially from our expectations include, but are not limited to, the following:
o Deteriorating economic conditions in the United States, particularly in
the regions in which our stores are located;
o Decreased consumer spending, particularly among those consumers who
compromise our primary customer base;
o Increased competition from other discount retailers, including the major
national chains, as well as from merchandise offerings on the Internet;
o Severe adverse weather conditions during the winter months, particularly
during the peak Christmas holiday shopping season.
All subsequent written and oral forward-looking statements attributable to
us or persons acting on our behalf are expressly qualified in their entirety by
these factors and the cautionary statements contained herein.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We have exposure to interest rate volatility primarily relating to
interest rate changes applicable to revolving loans under our bank credit
facility. These loans bear interest at rates which vary with changes in (i) the
London Interbank Offered Rate (LIBOR) or (ii) a rate of interest announced
publicly by Bank of America NT&SA.
We do not speculate on the future direction of interest rates. As of
the end of fiscal years 1999 and 1998 our exposure to changing market rates was
as follows:
January 29, January 30,
2000 1999
----------- ------------
Variable rate long term debt ($US) $174.5 million $44.9 million
Average interest rate 8.31% 8.38%
Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
None.
PART III
Item 10. Directors and Executives of the Registrant.
Information as to the officers and directors of the Company required by
Items 401 and 405 of Regulation S-K is incorporated herein by reference from the
information set forth under the caption "DIRECTORS AND EXECUTIVE OFFICERS" of
the Company's definitive proxy statement to be filed pursuant to Regulation 14A
under the Securities Exchange Act of 1934, as amended, (the "Exchange Act")
within 120 days after the close of its fiscal year.
Item 11. Executive Compensation.
The information required by Item 402 of Regulation S-K is incorporated
herein by reference from the information set forth under the sections titled
"Executive Compensation," "Board Meetings and Committees," "Compensation of
Directors," "Employment Contracts, Termination, Severance and Change-of-Control
Arrangements," "Additional Information with respect to Board of Directors
Interlocks and Insider Participation in Compensation Decisions," "The
Compensation Committee's Report on Executive Compensation," and "Stock
Performance Graph" of the Company's definitive proxy statement to be filed
pursuant to Regulation 14A under the Exchange Act within 120 days after the
close of its fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners
The information required by Item 403 of Regulation S-K is incorporated
herein by reference from the information set forth under the sections titled
"Security Ownership of Management" and "Security Ownership of Certain Beneficial
Owners" of the Company's definitive proxy statement to be filed pursuant to
Regulation 14A under the Exchange Act within 120 days after the close of its
fiscal year.
Item 13. Certain Relationships and Related Transactions.
The information required by Item 404 of Regulation S-K is incorporated
herein by reference from the information set forth under the section titled
"Transactions with Management and Others" of the Company's definitive proxy
statement to be filed pursuant to Regulation 14A under the Exchange Act within
120 days after the close of its fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) Documents Filed as Part of this Form 10-K
1. Financial Statements
The Financial Statements listed in the accompanying Index to
Consolidated Financial Statements are filed as part of this
Form 10-K.
2. Financial Statement Schedule
The Financial Statement Schedule listed in the accompanying
Index to Consolidated Financial Statements is filed as part of
this Form 10-K.
3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the
Exhibit Index immediately preceding such Exhibits, incorporated
herein by reference.
(b) There were no reports on Form 8-K filed during the last quarter of the
period covered by this report.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMES DEPARTMENT STORES, INC.
(Registrant)
Dated: April 10, 2000 /s/ Joseph R. Ettore
---------------------
Joseph R. Ettore,
Chairman, Chief Executive Officer, and Director
Dated: April 10, 2000 /s/ Rolando de Aguiar
----------------------
Rolando de Aguiar,
Senior Executive Vice President, Chief Financial
and Administrative Officer
Dated: April 10, 2000 /s/ Mark von Mayrhauser
------------------------
Mark von Mayrhauser,
Vice President, Controller
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Dated: April 10, 2000 /s/ Francis X. Basile
-----------------------
Francis X. Basile, Director
Dated: April 10, 2000 /s/ Paul M. Buxbaum
--------------------
Paul M. Buxbaum, Director
Dated: April 10, 2000 /s/ Alan Cohen
-------------------
Alan Cohen, Director
Dated: April 10, 2000 /s/ Richard M. Felner
----------------------
Richard M. Felner, Director
Dated: April 10, 2000 /s/ Sidney S. Pearlman
-----------------------
Sidney S. Pearlman, Director
<PAGE>
AMES DEPARTMENT STORES, INC.
AND SUBSIDIARIES
FINANCIAL STATEMENTS AND FINANCIAL
STATEMENT SCHEDULE
(FORM 10-K)
EXHIBITS
For the Fiscal Years Ended January 29, 2000,
January 30, 1999 and January 31, 1998
(With Report of Independent Public Accountants)
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial
Statement Schedule for the Fiscal Years Ended
January 29, 2000, January 30, 1999 and January 31, 1998
Consolidated Financial Statements:
Report of Independent Public Accountants.
Consolidated Statements of Operations for the fiscal years ended January
29, 2000, January 30, 1999 and January 31, 1998.
Consolidated Balance Sheets as of January 29, 2000 and January 30, 1999.
Consolidated Statements of Changes in Stockholders' Equity for the fiscal
years ended January 29, 2000, January 30, 1999 and January 31, 1998.
Consolidated Statements of Cash Flows for the fiscal years ended January
29, 2000, January 30, 1999 and January 31, 1998.
Notes to Consolidated Financial Statements.
Schedule:
II. Valuation and Qualifying Accounts for the fiscal years ended January
29, 2000, January 30, 1999 and January 31, 1998.
Schedules Omitted:
All other schedules are omitted as they are not applicable or the
information is shown in the consolidated financial statements or notes thereto.
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders and Board of Directors of
AMES DEPARTMENT STORES, INC.:
We have audited the accompanying consolidated balance sheets of Ames
Department Stores, Inc. (a Delaware corporation) and subsidiaries as of January
29, 2000 and January 30, 1999, and the related consolidated statements of
operations, changes in stockholders' equity and cash flows for the fifty-two
weeks ended January 29, 2000, and the fifty-two weeks ended January 30, 1999 and
the fifty-three weeks ended January 31, 1998. These consolidated financial
statements and the schedule referred to below are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Ames Department Stores, Inc.
and subsidiaries as of January 29, 2000 and January 30, 1999, and the results of
their operations and their cash flows for the fifty-two weeks ended January 29,
2000, and the fifty-two weeks ended January 30, 1999 and the fifty-three weeks
ended January 31, 1998 in conformity with accounting principles generally
accepted in the United States.
Our audits were performed for the purpose of forming an opinion on the
basic financial statements taken as a whole. The schedule listed in the index to
consolidated financial statements is presented for the purpose of complying with
the Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
-------------------------
New York, New York
March 13, 2000
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
<TABLE>
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 29, January 30, January 31,
2000 1999 1998
-------------- --------------- ----------------
<S> <C> <C> <C>
Ames net sales .................................................. $3,459,737 $2,386,522 $2,225,456
Hills net sales.................................................. 377,117 112,126 -
-------------- --------------- ----------------
Total net sales............................................. 3,836,854 2,498,648 2,225,456
Leased department and other income.......................... 41,690 30,164 25,069
-------------- --------------- ----------------
Total revenue.................................................... 3,878,544 2,528,812 2,250,525
Costs and expenses:
Ames cost of merchandise sold............................... 2,463,301 1,711,337 1,595,974
Hills cost of merchandise sold.............................. 252,085 66,324 -
Ames selling, general and administrative expenses..... ..... 915,213 608,653 581,659
Hills operating expenses and agency fees......... .......... 152,962 51,940 -
Depreciation and amortization expense, net.................. 65,495 14,478 6,659
Interest and debt expense, net.............................. 60,843 15,253 11,600
Store closing charge........................................ - 8,222 1,000
-------------- --------------- ----------------
Income (loss) before income taxes................................ (31,355) 52,605 53,633
Income tax benefit (provision)................................... 49,589 (18,775) (19,087)
-------------- --------------- ----------------
Income before Cumulative Effect of Accounting Change............. 18,234 33,830 34,546
Cumulative Effect of Accounting Change, net of tax of $614....... (1,107) - -
-------------- --------------- ----------------
Net income....................................................... $17,127 $33,830 $34,546
============== =============== ================
Basic net income per common share:
Before Cumulative Effect of Accounting Change............... $0.66 $1.47 $1.59
Cumulative Effect of Accounting Change, net of tax.......... (0.04) - -
-------------- --------------- ----------------
Net income.................................................. $0.62 $1.47 $1.59
============== =============== ================
Weighted average common shares........ ..................... 27,517 23,010 21,723
============== =============== ================
Diluted net income per common share:
Before Cumulative Effect of Accounting Change............... $0.66 $1.40 $1.46
Cumulative Effect of Accounting Change, net of tax.......... (0.04) - -
-------------- --------------- ----------------
Net income ................................................. $0.62 $1.40 $1.46
============== =============== ================
Weighted average common and common equivalent shares 27,658 24,216 23,649
============== =============== ================
<FN>
(The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
</TABLE>
<PAGE>
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
January 29, January 30,
2000 1999
-------------- --------------
ASSETS
<S> <C> <C>
Current Assets:
Cash and short-term investments..................................................... $30,612 $35,744
Receivables:
Trade............................................................................. 7,426 13,315
Other............................................................................. 17,876 16,929
-------------- --------------
Total receivables............................................................. 25,302 30,244
Merchandise inventories............................................................. 831,387 621,509
Prepaid expenses and other current assets........................................... 36,772 16,075
Deferred taxes, net................................................................. 28,854 -
-------------- --------------
Total current assets.......................................................... 952,927 703,572
-------------- --------------
Fixed Assets:
Land and buildings.................................................................. 25,388 22,319
Property under capital leases....................................................... 176,107 159,654
Fixtures and equipment.............................................................. 310,750 179,766
Leasehold improvements.............................................................. 117,734 76,095
-------------- --------------
629,979 437,834
Less - Accumulated depreciation and amortization.................................... (128,229) (66,205)
-------------- --------------
Net fixed assets..... ........................................................ 501,750 371,629
-------------- --------------
Other assets and deferred charges......................................................... 57,256 16,447
Deferred taxes, net.......... ............................................................ 346,055 102,406
Beneficial lease rights, net.............................................................. 56,280 58,885
Goodwill, net............................................................................. 61,026 230,454
-------------- --------------
Total Assets................................................................... $1,975,294 $1,483,393
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade.............................................................................. $325,356 $313,280
Other.............................................................................. 96,224 87,477
-------------- --------------
Total accounts payable......................................................... 421,580 400,757
-------------- --------------
Current portion of capital lease and financing obligations..... ..................... 22,086 17,799
Self-insurance reserves.............................................................. 29,827 29,115
Accrued compensation................................................................. 42,095 64,840
Accrued expenses................................................ .................... 91,015 160,449
Store closing reserves............................................................... 55,468 59,768
-------------- --------------
Total current liabilities...................................................... 662,071 732,728
-------------- --------------
Long-term debt............................................................................ 421,769 95,810
Capital lease and financing obligations................................................... 180,404 191,904
Other long-term liabilities............................................................... 57,916 114,922
Excess of revalued net assets over equity under fresh-start reporting..................... 17,868 24,021
Commitments and contingencies
Stockholders' Equity:
Preferred stock (3,000,000 shares authorized; no shares issued or
outstanding at January 29, 2000 and January 30, 1999, respectively; par
value per share $.01) ............................................................. - -
Common stock (40,000,000 shares authorized; 29,233,650 and 23,921,545 shares
outstanding at January 29, 2000 and January 30, 1999, respectively; par value per
share$.01)......................................................................... 293 239
Additional paid-in capital........................................................... 530,744 236,667
Retained earnings.................................................................... 105,143 88,016
Treasury stock (79,495 shares, at cost)............................................. (914) (914)
-------------- --------------
Total stockholders' equity..................................................... 635,266 324,008
-------------- --------------
Total Liabilities and Stockholders' Equity..................................... $1,975,294 $1,483,393
============== ==============
<FN>
(The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands)
Preferred Stock Common Stock Additional Treasury Stock
---------------------- ---------------- Paid-In Retained --------------------- Total
Shares Amount Shares Amount Capital Earnings Shares Amount Equity
---------- -------- --------- -------- ------------- ------------ ---------- ---------- ----------
Balance, January 25, 1997 - $ - 20,474 $205 $88,341 $19,640 - $ - $108,186
Exercise of warrants 1,260 13 1,386 1,399
Exercise of stock options, net 772 7 3,074 3,081
Utilization of tax attributes 26,170 26,170
Net income 34,546 34,546
---------- -------- --------- -------- ------------- ------------ ---------- ---------- ----------
Balance, January 31, 1998 - $ - 22,506 $225 $118,971 $54,186 $ - $173,382
Exercise of warrants 824 8 1,387 1,395
Exercise of stock options, net 331 3 1,106 1,109
Issuance of common stock pursuant
to executive employment
agreement 70 1 1,640 1,641
Issuance of restricted common
stock, net 190 2 2
Vesting of restricted common stock 788 788
Utilization of tax attributes 112,775 112,775
Acquisition of treasury shares (79) ($914) (914)
Net Income 33,830 33,830
---------- -------- --------- -------- ------------- ------------ ---------- ---------- ----------
Balance, January 30, 1999 - $ - 23,921 $239 $236,667 $88,016 (79) ($914) $324,008
Exercise of stock options, net 170 2 1,073 1,075
Issuance of common stock pursuant
to the equity offering 5,100 51 187,211 187,262
Issuance of restricted common
stock, net 30 1 1
Issuance of common stock to
Board of Directors 12 367 367
Utilization of tax attributes 105,426 105,426
Net Income 17,127 17,127
---------- -------- --------- -------- ------------- ------------ ---------- ---------- ----------
Balance, January 29, 2000 - $ - 29,233 $293 $530,744 $105,143 (79) ($914) $635,266
========== ======== ========= ======== ============= ============ ========== ========== ==========
<FN>
(The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
</TABLE>
<PAGE>
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 29, January 30, January 31,
2000 1999 1998
---------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.................................................. $17,127 $33,830 $34,546
Cumulative Effect of Accounting Change................... 1,107 - -
---------------- --------------- ---------------
Net income before cumulative effect adjustment 18,234 33,830 34,546
Expenses not requiring the outlay of cash:
Income tax (benefit) provision........................... (49,589) 18,275 18,764
Depreciation and amortization of fixed and other assets.. 65,495 15,487 6,884
Amortization of debt discounts and deferred financing
costs.................................................... 4,880 2,787 861
Other, net............................................... (1,841) (3,514) 1,834
---------------- --------------- ---------------
Cash provided by operations before changes in working capital
and store closing activities................................... 37,179 66,865 62,889
Changes in working capital:
Decrease (increase) in receivables.......................... 4,942 (6,787) 149
(Increase) decrease in merchandise inventories.............. (181,546) 12,259 (32,760)
(Increase) decrease in prepaid expenses and other current
assets...................................................... (20,697) (2,962) 109
Increase in accounts payable................................ 20,823 12,233 34,239
(Decrease) increase in accrued expenses and other
current liabilities......................................... (91,467) 24,302 5,033
Changes due to store closing activities:
Payments of store closing costs............................. (9,470) (2,547) (13,907)
Store closing charge........................................ - 8,222 1,000
---------------- --------------- ---------------
Net cash (used for) provided by operating activities (240,236) 111,585 56,752
---------------- --------------- ---------------
Cash flows from investing activities:
Acquisition costs, net of cash acquired.................... - (103,857) -
Proceeds from the disposition of properties................ - - 1,900
Purchases of fixed assets.................................. (209,606) (51,602) (32,875)
Purchases of leases........................................ (38,835) - (2,801)
---------------- --------------- ---------------
Net cash used for investing activities (248,441) (155,459) (33,776)
---------------- --------------- ---------------
Cash flows from financing activities:
Borrowings under the revolver credit facilities, net....... 129,609 44,935 -
Payments on debt and capital lease obligations............. (22,191) (16,262) (15,747)
Repurchase of Hills senior notes........................... (4,636) - -
Proceeds from the issuance of senior notes................. 200,000 - -
Proceeds from the issuance of common stock, net............ 187,262 - -
Deferred financing costs................................... (7,939) (10,902) -
Proceeds from the exercise of options and warrants......... 1,440 4,933 4,480
Purchase of treasury stock................................. - (914) -
---------------- --------------- ---------------
Net cash provided by (used for) financing activities.......... 483,545 21,790 (11,267)
---------------- --------------- ---------------
(Decrease) increase in cash and short-term investments........ (5,132) (22,084) 11,709
Cash and short-term investments, beginning of period.......... 35,744 57,828 46,119
---------------- --------------- ---------------
Cash and short-term investments, end of period................ $30,612 $35,744 $57,828
================ =============== ===============
<FN>
(The accompanying notes are an integral part of these consolidated financial statements.)
</FN>
</TABLE>
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies:
(a) Nature of operations:
Ames Department Stores, Inc. (a Delaware corporation) and its subsidiaries
(collectively, "Ames" or the "Company") are retail merchandisers. As of March
31, 2000, Ames operated 460 discount department stores in 19 states in the
Northeast, Midwest and Mid-Atlantic regions, as well as the District of
Columbia. The stores are located in rural communities, small cities and urban
areas, and the suburbs of larger metropolitan areas.
(b) Basis of presentation and principles of consolidation:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The consolidated financial statements include the accounts of Ames and its
subsidiaries, all of which are wholly-owned. All intercompany accounts and
transactions have been eliminated.
Certain prior year items have been reclassified to conform to the current
year presentation.
(c) Fiscal year:
The Company changed its fiscal year from the last Saturday in January to
the Saturday nearest January 31, effective with the fiscal year ended January
30, 1999. This change was made so that the Company's fiscal year would coincide
with the fiscal year of most other publicly-held retailers. There was no impact
on the current year period as a result of this change. The fiscal year ended
January 29, 2000 ("Fiscal 1999" or "1999") included 52 weeks. The fiscal year
ended January 30, 1999 ("Fiscal 1998" or "1998") included 52 weeks. The fiscal
year ended January 31, 1998 ("Fiscal 1997" or "1997") included 53 weeks.
(d) Cash and short-term investments:
Ames considers all highly liquid investments with an original maturity of
three months or less when purchased to be cash and short-term investments. As of
January 29, 2000 and January 30, 1999 there were no short-term investments.
(e) Inventory valuation:
Inventories are valued at the lower of cost, using the first-in, first-out
(FIFO) method, or market and include the capitalization of transportation and
distribution center costs.
(f) Internal use software:
The Company adopted Statement of Position ("SOP") 98-1 "Accounting
for the Costs of Computer Software Developed or Obtained for Internal Use"
effective the beginning of Fiscal 1999. SOP 98-1 was effective for fiscal years
beginning after December 15, 1998. This SOP requires companies to capitalize
certain costs incurred in connection with an internal-use software project.
Prior to Fiscal 1999, the Company expensed the costs of developing or obtaining
internal use software as incurred. The amount of internal use software costs
capitalized in 1999 was approximately $1.6 million.
(g) Fixed assets:
Land and buildings, fixtures and equipment, and leasehold improvements are
recorded at cost. Major replacements and betterments are capitalized.
Maintenance and repairs are charged to earnings as incurred. The cost of assets
sold or retired and the related amounts of accumulated depreciation are
eliminated from the accounts in the year of disposal, with the resulting gain or
loss included in earnings.
(h) Intangible assets:
Beneficial lease rights represent the excess of fair market value over
contract value of certain of the leases acquired in the Hills Acquisition (as
defined in Note 2 below). Goodwill represents the excess of cost over the fair
value of net tangible assets acquired at the date of acquisition. Accumulated
amortization of goodwill and beneficial lease rights at January 29, 2000 was
$9.0 million and $2.8 million respectively. See Note 2 for further explanation.
(i) Depreciation and amortization:
Buildings and fixtures and equipment are recorded at cost and are
depreciated on a straight-line basis over their estimated useful lives.
Buildings are depreciated over 31.5 years, furniture and fixtures over ten (10)
years, equipment over seven (7) years, motor vehicles over five (5) years, and
computer software and hardware over three (3) to five (5) years. Property under
capital leases and leasehold improvements are depreciated over the shorter of
their estimated useful lives or their related lease terms.
Beneficial lease rights are being amortized over the terms of the related
leases (which average approximately 25 years). Goodwill is being amortized over
a 25-year period.
The excess of revalued net assets over equity under fresh-start reporting
is being amortized over a 10-year period. The amount recorded as a credit to
depreciation and amortization was $6.2 million in each of Fiscal 1999, Fiscal
1998 and Fiscal 1997.
The unfavorable lease liability is being amortized on a straight-line
basis over the applicable lease terms (see Note 5).
Depreciation and amortization includes adjustments recorded pursuant to
the application of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The Company did not record an impairment loss during Fiscal
1999 and 1998. During Fiscal 1997 the Company recorded an impairment loss of
$1.2 million.
(j) Deferred charges:
Pursuant to SOP 98-5, "Reporting on the Costs of Start-Up Activities,"
expenses related to new store openings are expensed when incurred.
Debt transaction costs and related issue expenses are deferred and
amortized over the term of the associated debt. Lease acquisition and related
costs are deferred and amortized over the term of the lease.
(k) Income taxes:
Ames files a consolidated federal income tax return. In December 1992,
Ames adopted Statement of Financial Accounting Standards No. 109, "Accounting
for Income Taxes" ("SFAS No. 109") under fresh-start reporting. Under this
method, any deferred income taxes recorded are provided for at currently
effected statutory rates on the differences in the basis of assets and
liabilities for tax and financial reporting purposes. If recorded, deferred
income taxes are classified in the balance sheet as current or non-current based
upon the expected future period in which such deferred income taxes are
anticipated to reverse.
(l) Self-insurance reserves:
The Company is self-insured for workers' compensation, general liability,
property and casualty, and accident and health insurance claims, subject to
certain limitations. The Company has insurance coverage for losses that may
occur above certain levels. The Company determines its liability for claims
based on the circumstances of each individual claim and estimates its liability
for claims incurred but not yet reported based on historical experience. As of
January 29, 2000 and January 30, 1999, Ames had established self-insurance
reserves of $66.8 million and $66.3 million, respectively. The long-term portion
of these reserves is classified as part of other long-term liabilities in the
Consolidated Balance Sheets. These reserves are subject to changes in estimates
as claims are settled or continue to remain outstanding.
(m) Leased department and other income:
Ames has an agreement with an independent contractor that allows the
independent contractor to operate shoe departments within the Ames stores. Ames
receives a percentage of the sales under the agreement.
(n) Earnings per common share:
In February 1997 the Financial Accounting Standards Board issued Statement
Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128").
Under SFAS No. 128, the presentation of Primary and Fully Diluted Earnings per
Share was replaced by Basic and Diluted Earnings per Share. The Company adopted
the provisions of SFAS No. 128 effective January 31, 1998, and has restated all
periods presented.
Net income per common share for each of Fiscal 1999, 1998 and 1997 was
determined by using the weighted average number of common and common equivalent
shares outstanding during that fiscal year. Common equivalent shares represented
the assumed exercise of the Company's outstanding Series B and Series C Warrants
and stock options.
(o) Stock-based compensation:
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," ("SFAS No. 123") encourages, but does not require
companies to record compensation cost for stock-based employee compensation
plans at fair value. The Company has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," ("APB Opinion No. 25") and related interpretations. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Company's stock at the date of grant over the
exercise price of the options.
(p) Revenue Recognition:
The Company recognizes revenue when its customer takes possession of
merchandise. An appropriate return for estimated sales returns is recorded and
is reflected in accrued expenses in the accompanying Consolidated Balance
Sheets.
In December 1999 the Securities and Exchange Commission issued Staff
Accounting Bulletin "SAB" No. 101 "Revenue Recognition". Under SAB No. 101, the
Company is required to change the method in which it accounts for layaway sales.
Prior to the adoption of SAB No. 101, the Company recorded layaway sales when
customers placed merchandise on layaway. SAB No. 101 mandates that layaway sales
be recorded when the customer takes possession of the merchandise. The Company
adopted SAB No. 101 during the fourth quarter of Fiscal 1999, effective as of
the beginning of Fiscal 1999. The impact of adopting this SAB resulted in a
cumulative effect adjustment to current earnings for approximately $1.1 million,
net of $0.6 million tax benefit.
(q) Advertising Expense:
The Company participates in cooperative advertising programs supported by
our vendors. Advertising costs are expensed as incurred and are presented net of
any funds received from vendors for these programs. The Company expensed $123.9
million, $79.7 million, and $79.3 million for Fiscal 1999, Fiscal 1998, and
Fiscal 1997, respectively.
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 12.5% senior notes. In April 1999, Hills was merged with and into Ames
Department Stores, Inc. Total cash consideration for the acquisition of Hills
was approximately $129 million.
The acquisition was recorded under the purchase method of accounting and,
accordingly, the results of operations of Hills since the acquisition date are
included in the accompanying consolidated financial statements. The aggregate
purchase price of $129 million has been allocated to assets acquired and
liabilities assumed based on a determination of respective fair market values at
the date of acquisition. The fair value of tangible assets acquired and
liabilities assumed were $568 million each. The balance of the purchase price,
$129 million, was recorded as two components: an excess of cost over net assets
acquired (goodwill) of $70 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 averaged approximately
25 years).
Initially, the estimate of the fair market value of assets acquired and
liabilities assumed had resulted in a valuation of goodwill of approximately
$231 million. The final determination of the fair market values decreased
goodwill by $161 million. The primary changes were a reduction of $114.1 million
in deferred tax asset valuation allowances (see Note 8 to the Consolidated
Financial Statements); a reduction in accrued liabilities and reserves of $48.3
million as these liabilities were no longer deemed to be required; and an
increase of $28.3 million to inventory values as a result of the higher than
expected proceeds upon liquidation of the Hills inventory. These changes were
partially offset by an additional $29.8 million write-down of fixed assets
(primarily fixtures) acquired from Hills to recognize their deemed fair market
value. Since the date of acquisition, goodwill has been reduced by $9.0 million
of amortization expense.
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 under-performing, 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
April 1999; the second was completed in July 1999; and the third stage was
completed in 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 shall 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 ticketed
selling price of the merchandise (the "Guaranteed Return"). The Company was also
entitled to an additional payment if the proceeds of the sale exceeded a target
percentage of the initial retail value. Finally, the Agency Agreement 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.
Agency Agreement Accounting
As discussed earlier, the results of operations of Hills since the date of
the acquisition have been included in the accompanying consolidated financial
statements. For the month of January 1999, and for the duration of the Agency
Agreement, the following accounting treatment was applied to recognize the
results of the Hills stores prior to their conversion to Ames stores during
Fiscal 1999: Hills net sales were 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 for the Guaranteed Return
amount mentioned above. "Hills Operating Expenses and Agency Fees " includes the
following: the associated store expenses incurred while operating the Hills
stores prior to their conversion to Ames stores, which were reimbursable to the
Company out of the proceeds of Hills merchandise sales per the Agency Agreement;
the Agency Fee (defined below) 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 were
not reimbursable under the Agency Agreement.
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, the Guaranteed Return and an allocation to the Company based
on sale proceeds in excess of specified levels. The Agency Fee recorded during
Fiscal 1999 and 1998 was $41.7 million and $21.7 million, respectively.
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.
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,
Massachusetts, 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.
A component of the $42.8 million purchase price was recorded as fixtures
and equipment in the Westfield distribution center. The balance of the purchase
price was recorded under other assets and deferred charges, and is being
amortized over the remaining term of the leases.
3. Supplemental Information
The following table illustrates the separate contribution to the Company's
consolidated results of operations for Fiscal 1999 of (i) the operations of Ames
stores during that year, (ii) the operation of the former Hills stores during
that year and various other costs and charges discussed below:
<TABLE>
Fiscal 1999
---------------------------------------------------------------------------------
Layaway
Ames Hills Other Adj. Total
---- ----- ----- ---- -----
(In millions, except per share amounts)
<S> <C> <C> <C> <C> <C>
Net sales............................... $3,465.6 $375.6 $ -- $(4.4) $3,836.8
Leased department and other
income.................................. 39.1 2.6 -- -- 41.7
------------- ----------- -------------- ------------ -------------
Total revenue........................... 3,504.7 378.2 -- (4.4) 3,878.5
Costs and expenses:
Cost of merchandise sold............. 2,467.8 251.2 -- (3.6) 2,715.4
Selling, general and
administrative expenses.............. 838.7 153.0 76.5 -- 1,068.2
Depreciation and amortization
expense, net......................... 49.1 11.1 5.3 -- 65.5
Interest and debt expense, net....... 54.1 4.1 2.6 -- 60.8
------------- ----------- -------------- ------------ -------------
Income (loss) before income taxes and
cumulative effect....................... 95.0 (41.2) (84.4) (0.8) (31.4)
Income tax (provision) benefit.......... (34.2) 14.8 68.7 0.3 49.6
------------- ----------- -------------- ------------ -------------
Income (loss) before Cumulative
Effect.................................. 60.8 (26.4) (15.7) (0.5) 18.2
Cumulative Effect of Accounting
Change, net of tax...................... -- -- -- (1.1) (1.1)
------------- ----------- -------------- ------------ -------------
Net income (loss)....................... $60.8 $(26.4) $(15.7) $(1.6) $17.1
============= =========== ============== ============ =============
Diluted net income (loss) per common
share................................... $2.20 $(0.95) $(0.57) $(0.06) $0.62
============= =========== ============== ============ =============
Weighted average common and common
equivalent shares....................... 27.7 27.7 27.7 27.7 27.7
============= =========== ============== ============ =============
</TABLE>
The "Ames" column represents (a) the results of the Ames store base, (b)
the results of the former Hills stores after their conversion to Ames stores,
and (c) 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" column represents (a) the results of operations for the Hills
stores during the period that these stores were operated pursuant to the Agency
Agreement including depreciation and interest expense directly associated with
such stores and (b) Hills corporate overhead expenses, principally the Canton,
Massachusetts facility. The cost of merchandise for Hills represents the
merchandise sold during this liquidation period adjusted for the Guaranteed
Return (see Note 2). The selling, general and administrative expenses for former
Hills include the reimbursable store operating expenses of $84.8 million; the
Agency Fee of $41.7 million; and other non-reimbursable expenses of $26.5
million. The depreciation and amortization expense for Hills includes the
depreciation and amortization of the revalued fixed assets; the amortization of
the beneficial lease rights and the goodwill recorded in the Hills Acquisition.
The interest expense reflects interest on the debt, capital lease and financing
obligations assumed in the Hills Acquisition.
The "Other" column represents expenses incurred during the period of
remodeling the Hills stores (i.e., pre-opening expenses incurred during the
conversion or "dark" period) as well as certain other expenses; and tax
benefits.
The "Layaway Adj." column represents the impact of the change in the
method of accounting for layaway sales. The Company adopted the change in
accounting for layaway sales in the fourth quarter of Fiscal 1999 in
consideration of the Staff Accounting Bulletin No. 101 "Revenue Recognition"
issued by the staff of the Securities and Exchange Commission in December 1999
(see Note 1).
The following table illustrates the separate contribution to the Company's
consolidated results of operations for Fiscal 1998 of (i) the operations of Ames
stores during that year and (ii) the operation of the Hills stores during
January 1999 and various other costs and charges discussed below:
<TABLE>
Fiscal 1998
--------------------------------------------------------------------
Other Costs
and
Ames Hills Charges Total
---- ----- ------- -----
(In millions, except per share amounts)
<S> <C> <C> <C> <C>
Net sales.......................................... $2,386.5 $112.1 $ -- $2,498.6
Leased department and other income................. 29.2 1.0 -- 30.2
--------------- ------------- -------------- -------------
Total revenue...................................... 2,415.7 113.1 -- 2,528.8
Costs and expenses:
Cost of merchandise sold........................ 1,711.3 66.3 -- 1,777.6
Selling, general and administrative expenses.... 606.9 52.0 1.7 660.6
Depreciation and amortization expense, net...... 11.3 3.2 -- 14.5
Interest and debt expense, net.................. 11.4 2.0 1.9 15.3
Store closing charge............................ -- -- 8.2 8.2
--------------- ------------- -------------- -------------
Income (loss) before income taxes.................. 74.8 (10.4) (11.8) 52.6
Income tax (provision) benefit..................... (26.7) 3.7 4.2 (18.8)
--------------- ------------- -------------- -------------
Net income (loss).................................. $48.1 $(6.7) $(7.6) $33.8
=============== ============= ============== =============
Diluted net income (loss) per common share......... $1.99 $(0.27) $(0.32) $1.40
=============== ============= ============== =============
Weighted average common and
common equivalent shares........................... 24.2 24.2 24.2 24.2
=============== ============= ============== =============
</TABLE>
In January 1999, the Hills stores were being operated pursuant to the terms
and conditions of the Agency Agreement (see Note 2). Approximately one-third of
the Hills stores were conducting liquidation sales during January 1999 in order
to prepare these stores for their conversion to Ames stores. The cost of
merchandise for Hills represents the merchandise sold during January 1999
adjusted for the Guaranteed Return. The selling, general and administrative
expenses for Hills include the reimbursable store operating expenses of $25.4
million; Agency Fee of $21.7 million; and other non-reimbursable expenses of
$4.8 million. The depreciation and amortization expense for Hills includes the
depreciation and amortization of the revalued fixed assets; the amortization of
the beneficial lease rights and the goodwill recorded in the Hills Acquisition.
The interest expense reflects interest on the debt, capital lease and financing
obligations assumed in the Hills Acquisition.
The "Other Costs and Charges" column in the foregoing table consists of:
the cost to exit certain Ames contractual obligations rendered obsolete by the
Hills Acquisition; the write-off of the deferred financing costs related to the
Company's 1996 credit agreement; the incremental interest expense incurred in
January in connection with financing the purchase price of Hills and the charge
recorded in connection with the announced closing of seven Ames stores that
closed in 1999. The closings were part of planned closings resulting from the
overlap in certain Ames and Hills locations.
4. Long-Term Debt:
The Company's outstanding long-term debt as of January 29, 2000 and January 30,
1999 is listed and described below:
<TABLE>
1/29/00 1/30/99
----------------- ----------------
(000's omitted)
<S> <C> <C>
Secured Debt:
Borrowings under the Credit Agreement........................................ $174,544 $44,935
Unsecured Debt:
12.5% Senior Notes, due July 2003, discount rate of 11.79%................... 46,295 50,875
10% Senior Notes, due April 2006............................................. 200,000 ---
----------------- ----------------
Total Face Value of Debt........................................................ $420,839 $95,810
Add: Premium................................................................. 930 -
----------------- ----------------
Amount Due After One Year....................................................... $421,769 $95,810
================= ================
</TABLE>
The Credit Agreement
On December 31, 1998, in connection with the Hills Acquisition (see Note
2), certain of the Company's subsidiaries entered into an agreement (the "Credit
Agreement") with a syndicate of other banks and financial institutions for whom
BankAmerica Business Credit, Inc., is serving as agent. The Credit Agreement
provides for a secured revolving credit facility of up to $650 million.
The Credit Agreement replaced a $320 million secured revolving credit
facility.
The Credit Agreement is in effect until the earlier of June 30, 2002 or
its earlier termination pursuant to its terms and is secured by substantially
all of the assets of the Company. The interest rate per annum on borrowings
under the Credit Agreement is equal to the Base Rate (as defined on the Credit
Agreement) plus 0% (subject to upward adjustments). Alternatively, the interest
rate per annum may be equal to LIBOR Rate (as defined in the Credit Agreement)
plus 1.50% (subject to upward adjustments).
Fees required under the Credit Agreement include: (a) monthly commitment
fees on the unused portion of the facility; (b) an initial closing fee and (c)
an initial agency fee and annual collateral management fees for the account of
the agent.
For Fiscal 1999 and Fiscal 1998, the weighted average interest rate on the
Company's revolving credit facilities was 8.12% and 7.57%, respectively, and
the peak borrowing levels for the two fiscal years were $414.9 million and
$148.3 million, respectively. As of January 29, 2000, borrowings under the
Credit Agreement were $174.5 million and $2.1 million and $20.0 million was
outstanding in trade and standby letters of credit, respectively.
The amount of borrowing under the Credit Agreement may not exceed the sum
of (a) an amount equal to 70% of certain inventory in the possession of the
Company (depending on the period of year as provided for in the Credit
Agreement) plus (b) an amount equal to 50% of certain inventory not in the
possession of the Company, but covered by any outstanding letter of credit. The
agent, in addition, reserves the right to adjust the total available to be
borrowed by establishing reserves, making determinations of eligible inventory,
revising standards of eligibility or decreasing from time to time the
percentages set forth above.
The financial covenant under the Credit Agreement is only in effect if
Combined Availability (as defined in the Credit Agreement) falls below specified
levels in any month and is limited to a minimum fixed charge coverage ratio (as
defined in the Credit Agreement). As of January 29, 2000, the Company's Combined
Availability was not below the specified level.
Senior Notes due 2003
The 12.5% Senior Notes due 2003 (the "Hills Senior Notes") were, at the
time of the acquisition of Hills, an unsecured obligation of Hills.
The Company, in November 1998, made a tender offer to purchase at a stated
discount all of the Hills' Senior Notes, which at the time totaled $195.0
million. Upon expiration of the tender offer, the Company on December 31, 1998,
paid cash of $100.8 million (including the related accrued interest) to acquire
Hills Senior Notes having a face value of $144.1 million.
The tendering holders of the Senior Notes, representing 73.9% of the then
outstanding Senior Notes, consented to certain modifications to the indenture
governing the Senior Notes. Included among the modifications were the deletion
of the sections covering reporting requirements, debt and lien incurrence and
asset sales and additional subsidiary guarantees.
During Fiscal 1999, the Company, through open market purchases, acquired
Hills Senior Notes having a face value of $4.6 million. In addition, during
Fiscal 1999, as part of the final valuation of the fair market value of all
assets and liabilities acquired in the Hills Acquisition, the Company revalued
the Hills Senior Notes at a discounted rate of 11.79%. As of January 29, 2000,
Hills Senior Notes with a face value of $46.3 million and a recorded value of
$47.2 million remained outstanding.
Senior Notes due 2006
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 (as defined in the
indenture) 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.
As of January 29, 2000, the payments due on long-term debt for the next
five years and thereafter were as follows:
Fiscal Years Amount
Ending January ---------------
---------------- (000's omitted)
2001..................................... $ ---
2002..................................... ---
2003..................................... 174,544
2004..................................... 46,295
2005..................................... ---
Thereafter............................... 200,000
5. Lease Commitments, Beneficial Leases and Unfavorable Lease Liability:
Ames is committed under long-term leases for various retail stores,
warehouses and equipment expiring at various dates through 2023 with varying
renewal options and escalating rent clauses. Some leases are classified as
capital leases under Statement of Financial Accounting Standards No. 13. Ames
generally pays for real estate taxes, insurance, and specified maintenance costs
under real property leases. Most leases also provide for contingent rentals
based on percentage of sales in excess of specified amounts.
<TABLE>
Future minimum lease payments for leases as of January 29, 2000 were as follows:
Lease Payments
-------------------------------------------------
Capital Financing Operating
Fiscal Year Ending January Leases Obligations Leases
(000's omitted)
<S> <C> <C> <C>
2001...................................................... $33,982 $ 8,081 $69,391
2002...................................................... 33,305 6,434 64,820
2003...................................................... 30,287 4,678 56,111
2004...................................................... 27,202 5,081 49,498
2005...................................................... 21,146 12,309 42,846
Thereafter................................................ 154,045 --- 183,924
------------ --------------- -------------
Total minimum lease payments.............................. 299,967 36,583 $466,590
=============
Less: amount representing estimated executory costs....... 2,064 ---
------------ ---------------
Net minimum lease payments................................ 297,903 36,583
Less: amount representing interest........................ 122,961 9,036
------------ ---------------
Present value of net minimum lease payments............... 174,942 27,547
Less: currently payable................................... 16,678 5,408
------------ ---------------
Long-term lease obligations............................... $158,264 $22,139
============ ===============
</TABLE>
At January 29, 2000, the financing obligations represent sale/leaseback
arrangements. 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.
Total payments have not been reduced by minimum sublease rentals to be
received in the aggregate under non-cancellable subleases of operating leases of
approximately $7.3 million as of January 29, 2000. Amortization of capital lease
assets was approximately $19.8, $2.8 and $0.4 million for Fiscal 1999, Fiscal
1998 and Fiscal 1997, respectively. Accumulated amortization of capital lease
assets at January 29, 2000 was $23.6 million. Rent expense (income) was as
follows:
<TABLE>
Fiscal Fiscal Fiscal
1999 1998 1997
---- ---- ----
(000's omitted)
<S> <C> <C> <C>
Minimum rent on operating leases.............................. $78,946 $55,566 $48,577
Contingent rental expense..................................... 8,812 7,797 6,651
Sublease rental income........................................ (1,423) (1,609) (1,730)
</TABLE>
An unfavorable lease liability was recorded in December 1992 under fresh
start reporting and represents the estimated liability related to lease
commitments that exceeded market rents for similar locations. As of January 29,
2000 and January 30, 1999, the unfavorable lease liability is $11.2 million and
$13.7 million, respectively, and is classified as part of other long-term
liabilities in the Consolidated Balance Sheets. This liability is being
amortized as a reduction to depreciation and amortization expense in the
Consolidating Statements of Operations over the remaining lease terms. The
amortization, recorded as a reduction to depreciation and amortization expense,
was $1.4 million in each of Fiscal years 1999, 1998 and 1997.
Beneficial lease rights were recorded in connection with the Hills
Acquisition and represent the excess of fair market value over contract value of
certain of the Hills leases. Beneficial lease rights are being amortized as part
of depreciation and amortization in the Consolidated Statements of Operations
over the terms of the related leases (which average approximately 25 years).
6. Stockholders' Equity:
Common Stock
As provided under the Restated Certificate of Incorporation, the
authorized capital stock of Ames consists of 43,000,000 shares divided into two
classes: (i) 3,000,000 shares of preferred stock, par value of $.01 per share
(the "Preferred Stock"), and (ii) 40,000,000 shares of common stock, par value
$.01 per share (the "Common Stock").
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 $187.3 million, were used to reduce
borrowings under the Credit Agreement and for general corporate purposes.
There were no shares of Preferred Stock outstanding as of January 29, 2000
and January 30, 1999. There were 29,233,650 and 23,921,545 shares of Common
Stock outstanding as of January 29, 2000 and January 30, 1999, respectively.
The Board of Directors of the Company may authorize the issuance of one or
more series of Preferred Stock and specify for each such series the voting
powers (but no greater than one vote per share), designations, preferences, and
relative, participating, optional, redemption, conversion, exchange, or other
special rights, qualifications, limitations, or restrictions of such series, and
the number of shares in each series.
Holders of shares of Common Stock are entitled to one vote per share on
all matters to be voted upon by stockholders and are entitled to receive
dividends when, as and if declared by the Board of Directors. Dividends cannot
be declared under the terms of the Credit Agreement.
The Common Stock does not have any preemptive right or subscription or
redemption privilege. The Common Stock also does not have cumulative voting
rights, which means the holder or holders of more than half of the shares voting
for the election of directors can elect all the directors then being elected.
All of the shares of Common Stock are fully paid and nonassessable.
Treasury Stock
In August 1998, the Company's Board of Directors approved a stock
repurchase program and authorized management to purchase up to 1.5 million
shares of Common Stock. During Fiscal 1998, the Company acquired 79,495 shares
of its Common Stock. During the course of the third and fourth quarters of
Fiscal 1998, the Company suspended further purchases due to the pending
acquisition of Hills. The Company did not repurchase any of its Common Stock
during Fiscal 1999.
Warrants
An aggregate of 200,000 Series B Warrants were issued on December 30,
1992. Each such warrant entitles the holder to purchase one share of Common
Stock at any time from June 30, 1993 through December 30, 2000. The exercise
price is $5.92 per share. During Fiscal 1998, 100,000 Series B Warrants were
exercised. No Series B Warrants were exercised during Fiscal 1999.
An aggregate of 2,120,000 Series C Warrants were issued on December 30,
1992. Each such warrant entitled the holder to purchase one share of Common
Stock at any time from June 30, 1993 through January 31, 1999. The exercise
price was $1.11 per share. On January 31, 1999, the remaining outstanding 8,635
Series C Warrants expired. There were no outstanding Series C Warrants at
January 29, 2000.
The exercise price of the Series B Warrants are subject to adjustment upon
the occurrence of certain events, including, among other things, the payment of
a stock dividend, a merger or consolidation and the issuance for consideration
of rights, options or warrants (other than rights to purchase Common Stock
issued to shareholders generally) to acquire Common Stock.
A holder of Series B Warrants is not entitled to any rights as a
stockholder of the Company, including, without limitation, the right to vote the
underlying shares of Common Stock, until the holder has exercised the warrants.
Stock Purchase Rights Agreement
On November 30, 1994, the Company adopted a Stock Purchase Rights
Agreement (the "Rights Agreement"). Under the terms of the Rights Agreement, one
purchase right ("Right"), with an exercise price of $14.00, is attached to each
share of Common Stock outstanding as of, or issued subsequent to, November 30,
1994 but prior to the occurrence of certain events (as more fully described in
the Rights Agreement). The Rights become exercisable in the event that a person
or group (an "Acquiring Person") either acquires 15% or more of the Company's
outstanding voting stock or announces an intention to acquire 20% or more of
such stock. Once exercisable, each Right will, depending on the circumstances,
entitle a holder, other than an Acquiring Person, to purchase shares of either
the Company or an acquiring company having a market value equal to twice the
exercise price. The Rights Agreement was adopted to assure that all of the
Company's stockholders receive full value for their investment in the event of
stock accumulation by an Acquiring Person. Unless previously redeemed by the
Company, the Rights will expire on November 29, 2004.
On September 24, 1999, the Company amended the Rights Agreement (the
"Amendment"), which was approved by the Company's Board of Directors. Among
other things, the Amendment amends the exercise price of a right issued pursuant
to the Rights Agreement to $180.00, subject to adjustment, and makes certain
other technical amendments to the Rights Agreement, most notably the elimination
of certain provisions commonly known as "continuing director" provisions.
7. Stock Options:
The 1998 Stock Incentive Plan (the "1998 Incentive Plan"), approved by
stockholders in May 1998, provides for the grant of Awards (as defined in the
1998 Incentive Plan) and makes available for Awards an aggregate amount of
1,800,000 shares of Common Stock, with no individual awardee to receive in
excess of 300,000 shares of Common Stock. With respect to such Awards under the
1998 Incentive Plan, the Company may grant awards in the form of options to
purchase Common Stock provided that the exercise price shall not be less than
100% of the fair market value of the Common Stock on the date the stock option
is granted.
Pursuant to the 1994 Management Stock Option Plan (the "1994 Option Plan")
approved by stockholders in June 1994, the Company may grant options with
respect to an aggregate of up to 1,700,000 shares of Common Stock, with no
individual optionee to receive in excess of 200,000 shares of Common Stock upon
exercise of options granted. The exercise prices of the options are equal to the
fair market value of the Common Stock on the date the options are granted. The
options become exercisable over one to five years and terminate after five to
ten years from the grant date.
Pursuant to the 1994 Non-Employee Directors Stock Option Plan (the
"Non-Employee Plan") approved by stockholders in May 1995, the Company may grant
to non-employee directors options to purchase up to an aggregate of 200,000
shares of Common Stock. The exercise prices of the options are equal to the fair
market value of the Common Stock on the date the options are granted. The
options become exercisable in full six months after date of grant and terminate
ten years after date of grant. Effective on the date of each annual meeting of
stockholders of the Company commencing with the 1996 Annual Meeting, each
non-employee director of the Company then in office was granted an option to
purchase 2,500 shares, with the date of grant to be the date of such meeting. At
the 1998 Annual Meeting, the stockholders approved an amendment to the
Non-Employee Plan increasing the number of options granted on the date of each
Annual Meeting from 2,500 to 7,500 effective as of the May 27, 1998 grant. As of
January 29, 2000, 157,500 options had been granted under the Non-Employee Plan;
137,500 options were exercisable.
The following table sets forth the stock option activity for all stock
option plans for Fiscal 1999, Fiscal 1998 and Fiscal 1997 (shares in thousands):
<TABLE>
1999 1998 1997
---- ---- ----
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year......................... 1,128 $12.00 914 $3.97 1,664 $3.73
Granted............................. 744 35.51 608 19.09 76 9.43
Exercised........................... (173) 6.48 (375) 3.90 (775) 4.03
Forfeited........................... (81) 21.46 (19) 12.42 (51) 3.59
------ ------ ------
Outstanding at end of year.......... 1,618 22.88 1,128 12.00 914 3.97
====== ====== ======
Options exercisable at
year-end........................ 559 10.93 490 5.79 640 3.77
====== ====== ======
Weighted average fair
value of options granted........ $24.90 $13.56 $7.09
====== ====== =====
</TABLE>
The fair value of options granted per the above table was estimated on the
date of grant using the Black-Scholes pricing model with the following
assumptions: no dividend yield, expected option volatilities, a risk-free
interest rate equal to U.S. Treasury securities with a maturity equal to the
expected life of the option (weighted average interest rate of 5.3%, 5.2% and
6.4% for 1999, 1998 and 1997, respectively) and an expected life from date of
grant until option expiration date (weighted average expected life of 5.3, 5.4
and 6.0 years for 1999, 1998 and 1997, respectively).
The following table summarizes information about stock options outstanding
as of January 29, 2000 (options in thousands):
<TABLE>
Options Outstanding Options Exercisable
------------------------------------------------- --------------------------------
Weighted
Number Average Weighted
of Options Remaining Weighted Number Weighted
Range of Outstanding Contractual Average Exercisable Average
Exercise Prices at 1/29/00 Life Exercise Price at 1/29/00 Exercise Price
- ----------------- ------------- ------------- ----------------- ------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.50-3.00.......... 99 4.4 $2.46 99 $2.46
$3.13-4.38.......... 241 1.0 3.68 241 3.68
$5.06-15.56......... 273 3.6 14.33 104 13.85
$18.38-24.75........ 302 3.3 22.89 77 22.27
$29.00-41.00........ 703 4.5 35.65 38 48.50
------ ----- ------- ----- -------
1,618 3.6 22.88 559 10.93
====== =======
</TABLE>
The Company accounts for its stock option plans under APB Opinion No. 25.
Had compensation cost for the Company's 1999, 1998 and 1997 stock option grants
been determined in accordance with SFAS No. 123, the Company's net income and
net income per common share for Fiscal 1999, Fiscal 1998 and Fiscal 1997 would
have approximated the pro-forma amounts below:
<TABLE>
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
As As As
Reported Proforma Reported Proforma Reported Proforma
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Net income............... $17,127 $10,747 $33,830 $32,065 $34,546 $34,147
Net income per common share:
- - basic..................... $0.62 $0.39 $1.47 $1.39 $1.59 $1.57
- - diluted................... $0.62 $0.39 $1.40 $1.32 $1.46 $1.44
SFAS 123 does not apply to stock options granted prior to 1995.
</TABLE>
8. Income Taxes:
The Company adopted SFAS No. 109 in conjunction with the adoption of
fresh-start reporting in December 1992. Under SFAS No. 109, deferred income
taxes are recognized by applying the enacted statutory tax rates in future years
to the changes in "cumulative temporary differences" (the differences between
financial statement carrying values and the tax basis of assets and
liabilities).
As a consequence of the adoption of fresh-start reporting and SFAS No. 109,
any tax benefits realized for tax purposes after the Consummation Date for
pre-consummation cumulative temporary differences, as well as for the
pre-consummation net operating loss carryovers, are reported as additions to
paid-in capital (see Consolidated Statements of Changes in Stockholders' Equity)
rather than as reductions in the tax provisions in the Consolidated Statements
of Operations. Tax benefits or liabilities realized for book purposes after the
Consummation Date will be segregated from the pre-consummation deferred tax
assets. Such tax benefits or liabilities of post-consummation will impact future
income tax provisions. Such income tax provisions will have no significant
impact on the Company's taxes payable or cash flows.
For Fiscal 1999, the Company recorded an income tax benefit of $49.6
million. Included in that benefit is a provision for state income taxes of
approximately $1.2 million, which will be paid in cash. The above tax benefit
amount includes an income tax benefit of $12.7 million, related to current year
operations and a benefit of $38.1 million in connection with the reduction of
the valuation allowance for post-consummation net deferred tax assets, as
discussed below.
The (benefit) provision for income taxes is comprised of the following:
<TABLE>
Fiscal Fiscal Fiscal
1999 1998 1997
---- ---- ----
(In millions)
<S> <C> <C> <C>
Federal income tax......................................... $ - $ 0.5 $ 0.3
State income tax........................................... 1.2 - -
Deferred tax (benefit) provision........................... (12.7) 18.3 18.8
Valuation allowance reduction.............................. (38.1) - -
------------ ------------- -------------
Total income tax (benefit) provision.................. $(49.6) $ 18.8 $ 19.1
============ ============= =============
</TABLE>
Significant components of the Company's deferred tax assets (liabilities)
are as follows:
<TABLE>
January 29, January 30,
2000 1999
---- ----
(In millions)
<S> <C> <C>
Fixed assets.............................................................. $ 4 $ 47
Self insurance reserves................................................... 23 13
Store closing reserves.................................................... 22 20
Leases.................................................................... 2 36
Inventory reserves........................................................ 1 57
Vacation pay reserve and other............................................ 37 72
Net operating loss carryovers............................................. 327 158
-------------- --------------
Total deferred tax assets................................................. 416 403
Valuation allowances...................................................... (41) (301)
-------------- --------------
Net deferred tax assets................................................... $ 375 $102
============== ==============
</TABLE>
The Company's provision for income taxes resulted in effective rates that
varied from the statutory federal income tax rate as follows:
<TABLE>
Fiscal 1999 Fiscal 1998 Fiscal 1997
----------- ----------- -----------
<S> <C> <C> <C>
Statutory federal income tax (benefit) rate............................... (35.0%) 35.0% 35.0%
State and local taxes, net of federal benefit............................. (3.7%) 2.9% 2.8%
Goodwill amortization..................................................... 2.3% (3.4%) (4.0%)
Other..................................................................... 0.4% 1.1% 1.7%
----------- ----------- -----------
Effective tax rate before valuation allowance reduction................... (36.0%) 35.6% 35.5%
Valuation allowance reduction............................................. (122.1%) - -
----------- ----------- -----------
Total effective tax (benefit)rate ........................................ (158.1%) 35.6% 35.5%
=========== =========== ===========
</TABLE>
The Company has reduced its valuation allowance on its deferred tax assets
by $259 million during Fiscal 1999, which reflects the Company's expectation of
utilization of net operating loss carryforwards and other deferred tax assets in
the foreseeable future after considering the adjustments for potential
contingencies. The Company has revised it's policy in determining its potential
to utilize net operating loss carryforward and other deferred tax assets. The
reduction of the valuation allowance resulted in a corresponding addition to
paid-in-capital of $107 million, income tax benefit of $38 million and a
reduction of goodwill, recorded in connection with the Hills Acquisition, of
$114 million.
The addition to paid-in-capital is attributable to the valuation allowance
reduction on $107 million of Ames pre-consummation net operating losses and
temporary differences, which were originally established by the Company as part
of the adoption of fresh-start reporting in December 1992. The recognition of
income tax benefit of $38.1 million is attributable to the reduction of the
valuation allowance amounts previously recorded against post-consummation net
operating losses and temporary differences. The remaining valuation allowance
reduction of $114 million is a result of the recognition of certain deferred tax
assets realized in connection with the Hills Acquisition and therefore resulted
in a corresponding reduction to goodwill previously recorded. The above
referenced increase to paid-in-capital was reduced by a corresponding adjustment
for approximately $1.6 million relating to certain prior year state income tax
liabilities.
A portion of the Ames deferred tax assets (including those created by the
Hills Acquisition) continue to require a valuation allowance because of the
uncertainty of future recognition of such deferred tax assets. In subsequent
periods, Ames may further reduce the valuation allowance, provided that the
possibility of utilization of the deferred tax asset is more likely than not
expected to occur, as defined by SFAS No. 109.
The Company has net operating loss carryovers of approximately $816
million, which are currently available without any annual limitation. These
losses will expire between 2007 and 2020. Additionally, the Company has filed a
$20 million refund claim under Section 172(f) of the Internal Revenue Code. The
claim represents a 10-year carryback of qualified expenses and is currently
under review by the Internal Revenue Service ("IRS"). The claim, if successful,
will reduce net operating losses by approximately $47 million.
In addition, Ames has targeted jobs tax credit carryovers of approximately
$7 million, which will expire in 2007, and alternative minimum tax credit
carryovers of approximately $4 million, which have no expiration period. Federal
net operating loss carryovers for fiscal years subsequent to January 27, 1990
are subject to future adjustments, if any, by the IRS.
As a result of the acquisition of the common stock of the Hills Stores
Company, Ames has succeeded to the tax attributes of Hills, including net
operating losses of $241 million and general business credits of $11 million.
These tax attributes expire between 2000 and 2018. Ames also has succeeded to
minimum tax credit carryforwards of $3 million, which do not expire. These tax
attributes are significantly limited under Internal Revenue Code Sections 382
and 383, respectively, as a result of the change in control caused by the Hills
Acquisition. The resulting deferred tax asset has been reduced accordingly.
Ames has substantial potential state net operating loss carryovers. The
utilizable amounts of such state operating losses have not been quantified
because of the uncertainty related to the mix of future profits in specific
states.
The IRS has completed its audit of Hills for the 1991, 1992 and 1993
fiscal years. The final outcome of this examination did not have an adverse
effect on the Company. Hills filed a claim for a refund of federal taxes for the
subsequent years. The refund claim, which is pending from the IRS, could result
in a refund of approximately $7.0 million. If the Company receives this refund
amount, there will be a corresponding adjustment to goodwill recorded in
connection with the Hills Acquisition.
9. Benefit and Compensation Plans:
Retirement and Savings Plans
Ames Plan
Ames has a defined contribution retirement and savings plan (the "Ames
Retirement and Savings Plan") that is qualified under Sections 401(a) and 401(k)
of the Internal Revenue Code of 1986, as amended, for employees who are
classified as full-time and have at least 60 days of service, or who are
part-time and have one year of service, and have completed at least 1,000 hours
of service in a 12-month period. For each participant's contribution (up to a
maximum of 5% of such participant's total compensation), the Company contributes
to the Retirement and Savings Plan an amount equal to 50% of the first 4% and
100% of the next 1% contribution. Ames funds all administrative costs incurred
by the plan. Ames' expense associated with this plan amounted to approximately
$3.4 million, $3.3 million, and $3.0 million, in 1999, 1998 and 1997,
respectively.
Hills Plan
Hills has a defined contribution retirement and savings plan (the "Hills
Retirement and Savings Plan ") that is qualified under Sections 401(a) and
401(k) of the Internal Revenue Code of 1986, as amended, for employees who are
classified as full-time and have at least 60 days of service, or who are
part-time and have one year of service and have completed at least 1,000 hours
of service in a 12-month period. For each participant's contribution (up to a
maximum of 5% of such participant's total compensation) Ames contributes an
amount equal to 50% of the first 4% and 100% of the next 1% of contribution.
Ames funds all administrative costs incurred by the plan. The expenses
associated with this plan were $2.6 million for Fiscal 1999 and $0.3 million for
Fiscal 1998.
Retirement Plan
Ames has an unfunded Retirement Plan for Officers/Directors (the
"Retirement Plan"). It provides that every person who is employed by Ames when
he or she retires, dies or becomes disabled and who serves as both a full-time
officer and a director of Ames and has completed five years of service, not
necessarily consecutive, in both of these capacities, is eligible for benefits
under the Retirement Plan.
The maximum annual benefit under the Retirement Plan is $100,000, reduced
by certain of each participant's annual Social Security benefits. Each
participant in the Retirement Plan is entitled to benefits for a period of 10
years. The Company has a reserve established for potential payments under the
Retirement Plan. No payments were made under this plan during the periods
presented.
The G.C. Murphy Company Life Insurance Plan
The G.C. Murphy Company Life Insurance Plan (the "GCM Plan") granted a
flat dollar amount (defined benefit) of group term life insurance at no cost to
certain retired employees. This plan excludes G.C. Murphy Co. employees who
retired from Ames after January 31, 1986. The amount of coverage varies by
retiree, is payable only upon death, and has no loan or cash value. During 1997,
the Company entered into a contract with an insurance company, which effectively
transferred to the insurance company all future liabilities associated with the
GCM Plan in exchange for fixed annual payments over ten years.
Annual Incentive Compensation Plan
The Company has an Annual Incentive Compensation Plan (the "Annual Bonus
Plan") that is subject to annual review by the Board of Directors. The Annual
Bonus Plan provides annual incentive cash bonuses based on the achievement of
the Company's financial goals for the year (and customer service goals for store
and field management). There are approximately 1,500 members of management
eligible under the plan. Bonus expense recorded under the plan was $9.4 million,
$8.3 million, and $6.3 million for Fiscal 1999, 1998 and 1997, respectively.
Restricted Stock Awards
1995 Long Term Incentive Plan
Pursuant to the Company's 1995 Long Term Incentive Plan (the "1995
Incentive Plan"), approved by the stockholders in May 1995, the Company may
make awards of an aggregate of up to 500,000 shares of Common Stock and cash
payment in an amount up to 50% of the fair market value (as defined in the 1995
Incentive Plan) of the Common Stock awarded, determined as of and paid on the
vesting date. Each award under the 1995 Incentive Plan vests in full on the
third anniversary of the date of grant of such award. Awards may be made to the
Chief Executive Officer, any Executive Vice President and any Senior Vice
President of the Company. Other than for death or disability, awards, which have
not vested, are forfeited upon the termination of the employment of the
executive.
As of January 29, 2000, awards aggregating to 355,000 shares of Common
Stock had been made to certain executives of the Company, 35,000 of which remain
unvested.
1998 Incentive Plan
Pursuant to the Company's 1998 Incentive Plan (as defined in Note 7),
awards aggregating 180,000 shares of Common Stock were made to certain
executives during Fiscal 1998. Awards aggregating 30,000 shares of Common Stock
were made to certain executives during Fiscal 1999. Fifty percent (50%) of each
stock award under the 1998 Incentive Plan vests on the fourth anniversary from
the date of grant and 50% on the fifth anniversary. There is no cash payment to
be made relative to the vesting of the grant.
The shares for the outstanding awards under both the 1995 Incentive Plan
and the 1998 Incentive Plan have been issued and are being held in custody by
the Company on behalf of the grantees thereof. A portion of the estimated market
value of the awards, including the cash, has been accrued as compensation
expense as of January 30, 1999. The Company recorded as compensation expense for
the 1995 Incentive Plan and the 1998 Stock Incentive Plan $1.3 million, $1.9
million, and $2.0 million during Fiscal 1999, 1998 and 1997, respectively.
Stock Appreciation Rights
In June 1998, the Company extended the employment agreement with Joseph R.
Ettore, Chief Executive Officer and President. In connection therewith, Mr.
Ettore was granted 125,000 stock appreciation rights (SARs) which entitle Mr.
Ettore to receive in cash upon exercise the excess of (a) the average closing
price of a share of Common Stock during the twenty trading days prior to the
exercise date over (b) $2.00. Mr. Ettore's SARs were exercisable on or after May
31, 1999.
In August 1999, Mr. Ettore exercised 125,000 SARs. There are no remaining
SARs issued or outstanding as of January 29, 2000.
Income Continuation Plan
Certain officers of Ames participate in an Income Continuation Plan
("ICP"), which guarantees up to one year's salary in the event of termination
other than for cause. As of January 29, 2000, the Company had no obligations
under the ICP.
Key Employee Continuity Benefit Plan
Ames has a Key Employee Continuity Benefit Plan (the "Continuity Plan")
that covers all officers, Vice President and above, and certain other employees
of Ames. If the employment of any participant in the Continuity Plan is
terminated, other than for death, disability, cause (as defined in the
Continuity Plan), or by the participant other than for good reason (as defined
in the Continuity Plan), within 18 months after a change of control of Ames, the
participant will receive a lump sum cash severance payment. The severance
payment is 2.99 times Base Compensation for the President and Executive Vice
Presidents, two times Base Compensation for Senior Vice Presidents and selected
Vice Presidents and 1 times Base Compensation for other Vice Presidents. Base
Compensation is defined generally as the sum of the participant's annual base
compensation in effect immediately prior to the participant's termination plus
one-third of the value of the cash and stock bonuses paid to the participant
during the 36 months ending on the date of termination. For purposes of the
Continuity Plan, a change of control includes but is not limited to the
acquisition by any person of beneficial ownership of 20% or more of Ames
outstanding voting securities or the failure of the individuals who constituted
the Board of Directors at the beginning of any period of 12 consecutive months
to continue to constitute a majority of the Board during such period.
Hills Post Retirement Benefits
Hills has a retiree medical plan that provides medical benefits to
eligible retirees of Hills. This plan is accounted for in accordance with
Statement of Financial Accounting Standards No. 106: "Employers' Accounting for
Post retirement Benefits Other Than Pensions" ("FAS 106"). This statement
requires accrual of post retirement benefits during the years an employee
provides services. Benefit costs were historically funded principally on a
pay-as-you-go basis. During Fiscal 1999, the Plan was amended to restrict
eligibility to employees who had attained age 61 with nine (9) years of service
as of December 31, 1999. This change reduced the Company's liability for Post
Retirement Benefit Costs by $2.6 million. The status of the plan is as follows:
<TABLE>
January 29, January 30,
2000 1999
-------------- --------------
(000's omitted)
<S> <C> <C>
Accumulated post retirement benefit obligation ("APBO") for:
Active employees....................................................... $1,478 $2,293
Retirees............................................................... 310 61
-------------- --------------
1,788 2,354
Plan assets at fair value................................................. - -
Unfunded APBO............................................................. 1,788 2,354
Unrecognized actuarial gain............................................... - 1,442
-------------- --------------
Accrued post retirement benefit cost...................................... $1,788 $3,796
============== ==============
</TABLE>
The assumed health care cost trend rate used in measuring the APBO was 7%
in fiscal year 1999 grading down to 5% 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 1999 by
$52,300 (or by 3%) and the service and interest cost by $35,200 (or by 11%).
Conversely, a one percentage point decrease in the assumed health care cost
trend rate would decrease the APBO at the end of the fiscal year 1999 by $50,700
(or by 3%) and the service and interest cost by $28,800 (or by 9%). The assumed
discount rate used in determining the APBO was 7%.
10. Commitments and Contingencies:
Wage and Hour Litigation
Since March 1995, the Company has been named as a defendant in several
class action complaints which, allege that the Company was obligated to pay
overtime to its hardlines and softlines assistant store managers. The Company
has consistently stated its belief that these positions are appropriately
designated as exempt positions not calling for overtime pay. The Company has
settled several of these cases. These settlements have not required any change
in the Company's treatment of the status of its hardlines and softlines
assistant managers. The Company is vigorously defending one remaining case,
which it does not believe represents a material exposure.
Other Matters
In June 1999, the Company announced a $112 million, five-year, strategic
outsourcing agreement with IBM to support core information technology systems
for the corporate office and the stores. Under the agreement, IBM Global
Services is responsible for all data center operations, which includes
mainframe, midrange and client server systems; support for midrange systems in
Ames' four distribution centers; and support for substantially all information
systems equipment in all of the Ames stores. The Company expects that this
agreement will cost less in service delivery than if it had not outsourced
its information technology support.
The Company is party to various claims and legal proceedings covering a
wide range of matters that arise in the ordinary course of its business. The
Company believes that its likely liability as to these matters will not have a
material adverse effect on its consolidated financial position or results of
operations.
11. Supplemental Cash Flow Information:
<TABLE>
Fiscal Fiscal Fiscal
1999 1998 1997
---- ---- ----
(000's omitted)
Cash paid for interest and income taxes were as follows:
<S> <C> <C> <C>
Interest............................................................... $51,485 $12,166 $11,655
Income taxes........................................................... 3,646 125 73
Ames entered into other non-cash investing and
financing activities as follows:
New capital lease obligations.......................................... $14,942 $25,859 $ 2,940
Issuance of Common Stock under the 1998
Incentive Plan......................................................... - 2 -
</TABLE>
Inventory increased $28.3 million in Fiscal 1999 when a purchase
accounting valuation adjustment related to the Hills Acquisition was deemed to
be no longer necessary and was eliminated, resulting in a corresponding
reduction of goodwill. This increase in inventory is properly not reflected as a
use of cash in the Consolidated Statement of Cash Flows.
12. Fair Values of Financial Instruments:
The Financial Accounting Standards Board requires disclosure of the fair
value of financial instruments under Statement of Financial Accounting Standards
No. 107, "Disclosures About Fair Value of Financial Instruments." The following
methods and assumptions were used by the Company in estimating the fair value
disclosures for its financial instruments.
The Company's financial instruments as of January 29, 2000 and January 30,
1999 were cash and short-term investments, and long-term debt. For cash and
short-term investments, the carrying amounts reported in the Consolidated
Balance Sheets approximated fair values. For long-term debt obligations, the
fair values were estimated using a discounted cash flow analysis (based upon the
Company's incremental borrowing rates for similar types of borrowing
arrangements).
The carrying amounts and fair values of the Company's financial
instruments at January 29, 2000 and January 30, 1999 were as follows:
<TABLE>
Fiscal 1999 Fiscal 1998
----------- -----------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- ---------
(000's omitted)
<S> <C> <C> <C> <C>
Cash and short-term investments............ $30,612 $30,612 $35,744 $35,744
Long-term debt:
Secured debt............................ 174,544 174,544 44,935 44,935
Unsecured debt.......................... 247,225 236,758 50,875 50,875
</TABLE>
13. Store Closing Charges:
The Company did not record any charges in connection with the closing of
stores during Fiscal 1999. The Company spent approximately $9.5 million, $2.5
million and $13.9 million in Fiscal 1999, 1998 and 1997, respectively, related
to store closing costs.
In the fourth quarter of 1998, the Company recorded charges of $8.2
million in connection with the closing of seven stores that overlap markets with
acquired Hills stores. The seven stores were closed during Fiscal 1999.
In the fourth quarter of 1997, the Company recorded charges of $1.6
million in connection with the closing of two stores. The $1.6 million is
classified in two line items: $1.0 million as store closing charge and $0.6
million as part of cost of merchandise sold.
The following items represent the major components of the total charges
recorded in January 1999 and 1998 in connection with store closings:
<TABLE>
Fiscal Fiscal Fiscal
Item 1999 1998 1997
---- ---- ---- ----
(000's omitted)
<S> <C> <C> <C>
Lease costs................................................. $ - $ 6,254 $ 363
Net fixed asset write-down.................................. - 1,161 394
Severance costs............................................. - 370 113
Other....................................................... - 437 130
----------- --------------- ------------
Store closing charge........................................ - 8,222 1,000
Inventory write-down........................................ - - 560
----------- --------------- ------------
Total charges - $ 8,222 $1,560
=========== =============== ============
<FN>
The lease costs provided for in the store closing charge include all
projected occupancy costs from date of closing until estimated lease disposition
date.
The remaining closed store reserve recorded at the end of Fiscal 1999
primarily reflects the anticipated costs of ongoing property lease commitments
for previously announced closed stores and other related facility exit costs.
</FN>
</TABLE>
14. Leased Department and Other Income:
The following is a summary of the major components of the "Leased
department and other income":
<TABLE>
Fiscal Fiscal Fiscal
Item 1999 1998 1997
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C>
Leased department income................................. $25,378 $17,914 $16,592
Concession and vending income............................ 1,991 1,508 1,252
Layaway service fees..................................... 3,736 2,644 2,605
Gain on sale of assets, net.............................. 2,479 1,350 1,084
Various other............................................ 8,106 6,748 3,536
-------------- -------------- -------------
$41,690 $30,164 $25,069
============== ============== =============
</TABLE>
15. Recently Issued Accounting Pronouncements:
In June 1998 the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, " Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair value. The
Statement also requires that changes in derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. SFAS
No. 133 is effective, prospectively, for all fiscal quarters of all fiscal years
beginning after June 15, 2000, with early adoption at the beginning of any
fiscal quarter being permitted. Management is currently analyzing the impact of
this new pronouncement on the Company's financial position and result of
operations.
16. Quarterly Financial Data (Unaudited):
Summarized unaudited quarterly financial data (in thousands except for per
share amounts) for the last three fiscal years are shown below.
<TABLE>
First Second Third Fourth
---------- ---------- ---------- ----------
(In thousands, except per share data)
Fiscal 1999: (a)
<S> <C> <C> <C> <C>
Net sales....................................... $ 816,159 $ 859,975 $883,500 $1,277,220
Gross margin.................................... 238,586 258,953 245,045 378,884
Income (loss) before cumulative effect
adjustment...................................... (28,639) (21,478) (27,700) 96,051
Income (loss) per diluted share before
cumulative effect adjustment.................... (1.19) (0.78) (0.95) 3.23
Net income (loss)............................... (29,746) (21,478) (27,700) 96,051
Net income (loss) per share-basic............... (1.23) (0.78) (0.95) 3.30
diluted............. (1.23) (0.78) (0.95) 3.23
Fiscal 1998:
Net sales....................................... $ 497,045(b) $ 535,047(b) $596,030(b) $870,526(b)
Gross margin.................................... 138,434 156,836 163,094 262,623
Net income (loss)............................... (2,943) 8,386 6,000 22,387
Net income (loss) per share-basic............... (0.13) 0.37 0.26 0.96
diluted............. (0.13) 0.35 0.25 0.92
Fiscal 1997:
Net sales....................................... $ 430,629(b) $ 502,414(b) $524,864(b) $767,549(b)
Gross margin.................................... 118,984 146,863 148,081 215,554
Net income (loss)............................... (5,930) 7,378 3,519 29,579
Net income (loss) per share-basic............... (0.28) 0.34 0.16 1.32
diluted............. (0.28) 0.31 0.15 1.23
<FN>
(a) First three quarters restated to reflect the adoption of SAB No. 101 as
of the beginning of Fiscal 1999 (see Note 1).
(b) Restated to reflect the effect of recording promotional coupons issued by
Ames as markdowns, which conforms to current treatment for coupon
accounting.
</FN>
</TABLE>
17. Pro Forma Information (Unaudited):
The following table reflects unaudited pro forma combined results of
operations of the Company and Hills on the basis that the Hills Acquisition had
taken place at the beginning of each of the fiscal years presented:
<TABLE>
Year Ended
January 30, 1999 January 31, 1998
------------------ ------------------
(In Thousands, except per share amounts)
<S> <C> <C>
Net sales.................................... $4,131,194 $4,001,392
Net income (loss)............................ (54,903) 27,635
Earnings (loss) per common share............. $(2.39) $1.27
</TABLE>
These unaudited pro forma results have been prepared for comparative
purposes only. They do not purport to be indicative of the results of operations
which actually would have resulted had the acquisition been consummated at the
beginning of Fiscal 1997 or Fiscal 1998, or of future results of operations of
the consolidated entities.
The above pro forma net income and earnings per common share amounts for
the year ended January 30, 1999 reflect the previously recorded write-down of
Hills deferred tax assets of approximately $49.6 million (which is net of a
reversal of approximately $5.9 million of accrued tax liabilities). Excluding
the write-down of the Hills deferred tax assets recorded as of October 31, 1998,
pro forma net loss and loss per common share would have been $5.3 million and
$0.23, respectively for the year ended January 30, 1999.
18. Subsequent Events:
In February 2000 the Company entered into an agreement with Goldblatt's
Department Stores, Inc. to purchase the leases to six of their stores in
Chicago, Illinois and one store in Gary, Indiana for a cash purchase price of
$7.6 million. Completion of the purchase is expected in April 2000. Under the
terms of the agreement, the Company will assume Goldblatt's leases for the seven
stores. Goldblatt's will deliver the stores to the Company in "broom clean"
condition.
<PAGE>
<TABLE>
SCHEDULE II
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
(In Thousands)
Balance at Charged to Balance
Beginning Cost and at End
Description of Period Expense Reclassifications Deductions of Period
- ----------- --------- ------- ----------------- ---------- -----------
Fiscal 1999:
<S> <C> <C> <C> <C>
Store Closing Reserve $59,768 - $5,170 (a) ($9,470) $55,468 (d)
Fiscal 1998:
Store Closing Reserve $12,050 $8,222 $42,043 (b) ($2,547) $59,768
Fiscal 1997:
Store Closing Reserve $24,438 $1,000 $519 (c) ($13,907) $12,050
(a) Represents an adjustment to the fair market value of assumed Hills
store closing liabilities recorded in connection with the
finalization of the Hills Acquisition accounting and reclassification
of other liabilities associated with closed stores.
(b) Represents the store (and other facilities) closing reserve assumed and
recorded in connection with the Hills Acquisition.
(c) Represents reclassifications of liabilities associated with closed stores
and other reclassifications.
(d) The majority of this reserve relates to ongoing property lease
commitments for stores closed through Fiscal 1999.
</TABLE>
<PAGE>
E X H I B I T I N D E X
<TABLE>
Cross-reference
Exhibit Or page number
Number Exhibit In Form 10-K
- ------- --------- --------------
<S> <C> <C>
2.1 Third Amended and Restated Plan of Reorganization of the Ames
Department Stores, Inc. and other members of the Ames Group,
Citibank, N.A. as Agent, the Parent Creditor's Committee, the
Subsidiaries Creditor's Committee, the Bond-holders' Committee
and the Employees' Committee dated October 23, 1992
(incorporated herein by reference to Exhibit 2 of the
Registrant's Report on Form 8-K filed with the Commission on
December 31, 1992).
2.2 Statement of Ames Group with respect to conditions to
Consummation of Third Amended and Restated Joint Plan of
Reorganization of Ames Department Stores, Inc. other members of
Ames Group, Citibank, N.A., the Parent Creditor's Committee,
Subsidiaries Creditors' Committee, Bondholders' Committee and
Employees' Committee dated December 28, 1992 (incorporated
herein by reference to Exhibit 2B of the Registrant's Report on
Form 8-K filed with the Commission on December 31, 1992).
2.3 Ames Department Stores, Inc. Information Supplementing
Disclosure Statement dated December 29, 1992 (incorporated
herein by reference to Exhibit 2C of the Registrant's Report on
Form 8-K filed with the Commission on December 31, 1992).
2.4 Agreement and Plan of Merger, dated as of November 12, 1998,
among Ames Department Stores, Inc., HSC Acquisition Corporation
and Hills Stores Company (incorporated herein by reference to
Exhibit 99(c)(1) of the Registrant's Schedule 14D-1 filed
with the Commission on November 12, 1998).
3.1 Amended and Restated Certificate of Incorporation of Ames
Department Stores, Inc. (incorporated herein by reference to
the Registrant's definitive proxy filed with the Commission on
April 8, 1996).
3.2 Form of By-laws of Ames Department Stores, Inc. as amended
February 23, 1995 (incorporated herein by reference to
Exhibit 3(b) of the Registrant's Annual Report on Form 10-K
for the fiscal year ended January 28, 1995).
4.1 Specimen Certificate for shares of Common Stock, $.01 par value,
of Ames Department Stores, Inc.
4.2 Series B Warrant Certificate for Purchase of New Common Stock
of Ames Department Stores, Inc. (incorporated herein by
reference to Form 8-A filed with the Commission on December 11,
1992).
<PAGE>
E X H I B I T I N D E X
Cross-reference
Exhibit Or page number
Number Exhibit In Form 10-K
- ------- -------- -----------------
4.3 Rights Agreement, dated as of November 30, 1994, between
Ames Department Stores, Inc. and Chemical Bank, as
Rights Agent (incorporated herein by reference to Exhibit 4
of the Registrant's Quarterly Report on Form 10-Q for the
quarterly period ended October 29, 1994).
10.1 Retirement and Savings Plan as restated December 27, 1984, and
Amendment No. 1 (incorporated herein by reference to Exhibit
10(n) of the Registrant's Annual Report on Form 10-K for the
fiscal year ended January 26, 1985).
10.2 Settlement Agreement, dated March 31, 1994, between Ames
Department Stores, Inc. and Subsidiaries and Wertheim Schroder
& Co. Incorporated and James A. Harmon (incorporated herein by
reference to Exhibit 10 of the Registrant's Report on Form 8-K
filed with the Commission on April 8, 1994).
10.3 1994 Management Stock Option Plan (incorporated herein by
reference to the Registrant's definitive proxy statement filed
with the Commission on May 5, 1994).
10.4 1994 Non-Employee Directors Stock Option Plan (incorporated by
reference to the Registrant's definitive Proxy statement filed
with the Commission on April 10, 1995).
10.5 1995 Long Term Incentive Plan (incorporated by reference to the
Registrant's definitive proxy statement filed with the Commission
on April 10, 1995).
10.6 Employment Agreement, dated June 1, 1998, between Ames
Department Stores, Inc. and Joseph R. Ettore, (incorporated
herein by reference to Exhibit 10(j) of the Registrant's Report
on Form 8-K filed with the Commission on June 30, 1998).
E X H I B I T I N D E X
Cross-reference
Exhibit Or page number
Number Exhibit In Form 10-K
- -------- --------- ---------------
10.7 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 herein by reference to
Exhibit 10(k) of the Registrant's Report on Form 8-K filed with
the Commission on January 15, 1999).
10.8 Post Merger Transition and Agency Agreement, dated as of
December 31, 1998, among the Gordon Brothers Retail Partners,
LLC and The Nassi Group, LLC, Hills Stores Company, Hills
Department Stores Company and Ames Merchandising Corporation
(incorporated herein by reference to Exhibit 10(l) of the
Registrant's Report on Form 8-K filed with the Commission on
January 15, 1999).
10.9 1998 Stock Incentive Plan (incorporated herein by reference
to the Registrant's definitive proxy statement filed with the
Commission on April 8, 1998).
10.10 Employment Agreement, dated March 23, 1999, between Ames
Department Stores, Inc. and Denis Lemire (incorporated herein by
reference to Exhibit 10 of the Registrant's Report on Form 8-K
filed with the Commission on April 2, 1999).
10.11 Employment Agreement, dated March 23, 1999, between Ames
Department Stores, Inc. and Rolando de Aguiar, (incorporated
herein by reference to Exhibit 10 on Form 8-K filed with the
Commission on April 2, 1999).
11 Schedule of computation of basic and diluted net earnings per
share. 55
12 Ratio of Earnings to Fixed Charges 56
21 Subsidiaries of the Registrant. 57
</TABLE>
<PAGE>
<TABLE>
Exhibit 11
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED
NET EARNINGS PER SHARE
(In thousands, except per share amounts)
52 Weeks 52 Weeks 53 Weeks
Ended Ended Ended
January 29, January 30, January 31,
2000 1999 1998
--------------- -------------- --------------
<S> <C> <C> <C>
Income before Cumulative Effect adjustment...................... $18,234 $33,830 $34,546
Cumulative Effect adjustment, net of tax........................ (1,107) - -
--------------- -------------- --------------
Basic and diluted net income............................... $17,127 $33,830 $34,546
=============== ============== ==============
For Basic Earnings Per Share:
- -----------------------------
Weighted average number of common shares outstanding during
the period...................................................... 27,517 (a) 23,010 21,723
Basic earnings per share:
Basic income per share before Cumulative Effect
adjustment...................................................... $0.66 $1.47 $1.59
Cumulative Effect adjustment, net of tax........................ (0.04) - -
--------------- -------------- --------------
Basic net income per share...................................... $0.62 $1.47 $1.59
=============== ============== ==============
For Diluted Earnings Per Share:
- -------------------------------
Weighted average number of common shares outstanding during
the period...................................................... 27,517 (a) 23,010 21,723
Add Common stock equivalent shares represented by:
Series B Warrants.......................................... 20 98 95
Series C Warrants.......................................... - 440 1,018
Options under 1994 Management Stock Option
Plan and 1998 Stock Incentive Plan......................... 106 606 47
Options under 1994 Non-Employee Director
Stock Option Plan.......................................... 15 62 766
--------------- -------------- --------------
Weighted average number of common and common equivalent
shares.......................................................... 27,658 24,216 23,649
=============== ============== ==============
Diluted earnings per share:
Diluted income per share before Cumulative Effect
adjustment...................................................... 0.66 1.40 1.46
Cumulative Effect adjustment, net of tax........................ (0.04) - -
--------------- -------------- --------------
Diluted net income per share............................... $0.62 $1.40 $1.46
=============== ============== ==============
<FN>
(a) The weighted average number of common shares outstanding is net of Treasury Stock.
</FN>
</TABLE>
<PAGE>
<TABLE>
Exhibit 12
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(In thousands, except ratio data)
Fiscal Year Ended
-------------------------------------------------------------------------
January 29, January 30, January 31, January 25, January 27,
2000 1999 1998 1997 1996
------------ ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Income (loss) before income taxes,
extraordinary item and cumulative
effect adjustment................... (31,355) 52,605 53,633 26,804 (1,618)
Add:
Interest expense.................... 60,843 15,253 11,600 19,043 24,116
Interest component of rental
expense............................. 29,253 21,121 18,409 16,541 16,208
------------ ------------ ------------- ------------ ------------
Earnings available for fixed charges...... 58,741 88,979 83,642 62,388 38,706
Fixed Charges:
Interest expense.................... 60,843 15,253 11,600 19,043 24,116
Interest component of rental expense 29,253 21,121 18,409 16,541 16,208
------------ ------------ ------------- ------------ ------------
Total fixed charges....................... 90,096 36,374 30,009 35,584 40,324
Ratio of earnings to fixed charges........ 0.7x 2.4x 2.8x 1.8x 1.0x
</TABLE>
For the purpose of calculating the ratio of earnings to fixed charges, earnings
consist of income before income taxes, extraordinary item and cumulative effect
adjustment plus fixed charges (net of capitalized interest). Fixed charges
consist of interest expense on all indebtedness and capitalized interest,
amortized premiums, discounts and capitalized expenses related to indebtedness,
and one-third of rent expense on operating leases representing that portion of
rent expense deemed by us to be attributable to interest. For the fiscal year
ended January 29, 2000, the amount of additional earnings that would have been
required to cover fixed charges for this period was $31.4 million.
<PAGE>
EXHIBIT 21
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
As of January 29, 2000, the subsidiaries of the Company were as follows:
Name State of Incorporation
------ --------------------------
Ames Transportation Systems, Inc.............................. Delaware
Ames Realty II, Inc........................................... Delaware
Ames FS, Inc.................................................. Delaware
AMD, Inc., a subsidiary of Ames FS, Inc................... Delaware
Ames Merchandising Corporation, a subsidiary of AMD, Inc. Delaware
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000006071
<NAME> AMES DEPARTMENT STORES, INC.
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-29-2000
<PERIOD-START> JAN-31-1999
<PERIOD-END> JAN-29-2000
<CASH> 30,612
<SECURITIES> 0
<RECEIVABLES> 25,302
<ALLOWANCES> 0
<INVENTORY> 831,387
<CURRENT-ASSETS> 952,927
<PP&E> 629,979
<DEPRECIATION> 128,229
<TOTAL-ASSETS> 1,975,294
<CURRENT-LIABILITIES> 662,071
<BONDS> 247,225
0
0
<COMMON> 293
<OTHER-SE> 634,973
<TOTAL-LIABILITY-AND-EQUITY> 1,975,294
<SALES> 3,836,854
<TOTAL-REVENUES> 3,878,544
<CGS> 2,715,386
<TOTAL-COSTS> 2,715,386
<OTHER-EXPENSES> 1,133,670
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 60,843
<INCOME-PRETAX> (31,355)
<INCOME-TAX> 49,589
<INCOME-CONTINUING> 18,234
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (1,107)
<NET-INCOME> 17,127
<EPS-BASIC> 0.62
<EPS-DILUTED> 0.62
</TABLE>
