SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended April 29, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number 1-05380
AMES DEPARTMENT STORES, INC.
(Exact name of registrant as specified in its charter)
Delaware 4-2269444
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(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
2418 Main Street, Rocky Hill, Connecticut 06067
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code: (860) 257-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
29,404,587 shares of Common Stock were outstanding on May 26, 2000.
Exhibit Index on page 13
Page 1 of 17 (including exhibits)
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
FORM 10-Q
FOR THE QUARTER ENDED APRIL 29, 2000
<TABLE>
I N D E X
Page
<S> <C> <C>
Part I: Financial Information
Item 1. Consolidated Condensed Statements of Operations 3
for the Thirteen Weeks ended April 29, 2000 and
May 1, 1999
Consolidated Condensed Balance Sheets as of 4
April 29, 2000, January 30, 1999, and May 1,
1999
Consolidated Condensed Statements of Cash Flows 5
for the Thirteen Weeks ended April 29, 2000
and May 1, 1999
Notes to Consolidated Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial 10
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 12
Part II: Other Information
Item 1. Legal Proceedings 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 6. Exhibits and Reports on Form 8-K 13
</TABLE>
<PAGE>
PART I
Item 1.
FINANCIAL INFORMATION
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)
For the Thirteen
Weeks Ended
-------------------------------------
---------------- ---- ---------------
<S> <C> <C>
April 29, May 1,
2000 1999
---------------- ---------------
---------------- ---------------
Ames net sales $830,657 $567,217
Hills net sales - 248,942
---------------- ---------------
---------------- ---------------
Total net sales 830,657 816,159
Leased department and other income 9,259 8,400
---------------- ---------------
---------------- ---------------
Total revenue 839,916 824,559
Costs and expenses:
Ames cost of merchandise sold 602,924 409,250
Hills cost of merchandise sold - 168,323
Ames selling, general and administrative expenses 247,415 176,171
Hills operating expenses and agency fees - 89,257
Depreciation and amortization expense, net 17,697 14,383
Interest and debt expense, net 18,792 11,922
---------------- ---------------
---------------- ---------------
Loss before income taxes (46,912) (44,747)
Income tax benefit 17,827 16,108
---------------- ---------------
---------------- ---------------
Loss before cumulative effect of accounting change (29,085) (28,639)
Cumulative effect of accounting change, net of tax of $614 - (1,107)
---------------- ---------------
---------------- ---------------
Net loss ($29,085) ($29,746)
================ ===============
================ ===============
Basic and diluted net loss per share:
Before Cumulative Effect of Accounting Change ($0.99) ($1.19)
Cumulative Effect of Accounting Change, net of tax - (0.05)
---------------- ---------------
---------------- ---------------
Net loss ($0.99) ($1.24)
================ ===============
================ ===============
Weighted average number of common shares outstanding 29,336 23,990
================ ===============
</TABLE>
(The accompanying Notes are an integral part of these consolidated
condensed financial statements.)
<PAGE>
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(In Thousands, Except Per Share Amounts)
(Unaudited)
<S> <C> <C> <C>
April 29, January 29, May 1,
2000 2000 1999
------------ -------------- -------------
ASSETS
Current Assets:
Cash and short-term investments $44,045 $30,612 $46,315
Receivables 26,911 25,302 33,987
Merchandise inventories 987,919 831,387 702,288
Deferred taxes, net 46,681 28,854 16,108
Prepaid expenses and other current assets 32,367 36,772 26,333
------------ -------------- -------------
------------ -------------- -------------
Total current assets 1,137,923 952,927 825,031
Fixed Assets 669,316 629,979 471,916
Less - Accumulated depreciation and amortization (147,884) (128,229) (80,016)
------------ -------------- -------------
------------ -------------- -------------
Net fixed assets 521,432 501,750 391,900
------------ -------------- -------------
------------ -------------- -------------
Other assets and deferred charges 62,557 57,256 48,973
Deferred taxes, net 346,055 346,055 102,406
Beneficial lease rights, net 55,589 56,280 58,195
Goodwill, net 60,388 61,026 228,142
------------ -------------- -------------
------------ -------------- -------------
$2,183,944 $1,975,294 $1,654,647
============ ============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable:
Trade $328,441 $325,356 $275,552
Other 86,113 96,224 75,767
------------ -------------- -------------
------------ -------------- -------------
Total accounts payable 414,554 421,580 351,319
------------ -------------- -------------
Current portion of capital lease and financing
obligations 22,057 22,086 17,799
Self-insurance reserves 26,489 29,827 29,176
Accrued expenses and other current liabilities 136,405 133,110 256,011
Store closing reserves 54,303 55,468 58,789
------------ -------------- -------------
------------ -------------- -------------
Total current liabilities 653,808 662,071 713,094
------------ -------------- -------------
------------ -------------- -------------
Long-term debt 673,782 421,769 333,486
Capital lease and financing obligations 176,020 180,404 184,901
Other long-term liabilities 56,708 57,916 105,844
Excess of revalued net assets over equity under fresh start reporting 16,329 17,868 22,483
Commitments and contingencies (see Note 8) - - -
Stockholders' Equity:
Preferred stock (3,000,000 shares authorized; no shares issued or
outstanding at April 29, 2000, January 29, 2000 and May 1, 1999;
par value per share $.01) - - -
Common stock (40,000,000 shares authorized; 29,403,987; 29,233,650
and 24,013,454 shares outstanding at April 29, 2000, January 29, 2000
and May 1, 1999, respectively; par value per share $.01) 296 293 240
Additional paid-in capital 531,857 530,744 237,243
Retained earnings 76,058 105,143 58,270
Treasury stock, at cost (914) (914) (914)
------------ -------------- -------------
------------ -------------- -------------
Total stockholders' equity 607,297 635,266 294,839
------------ -------------- -------------
------------ -------------- -------------
$2,183,944 $1,975,294 $1,654,647
============ ============== =============
</TABLE>
(The accompanying Notes are an integral part of these consolidated
condensed financial statements.)
<PAGE>
<TABLE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In Thousands)
(Unaudited)
For the Thirteen
Weeks Ended
----------------------------------------
----------------------------------------
April 29, May 1,
2000 1999
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<S> <C> <C>
------------------ --------------------
Cash flows from operating activities:
Net loss ($29,085) ($29,746)
Expenses not requiring the outlay of cash:
Income tax benefit (17,827) (16,724)
Depreciation and amortization of fixed and other assets 19,640 16,183
Amortization of debt discounts and deferred financing costs 1,200 969
------------------ --------------------
Cash used by operations before changes in working capital and
store closing activities (26,072) (29,318)
Changes in working capital:
Increase in receivables (1,609) (3,743)
Increase in merchandise inventories (156,532) (80,779)
Decrease in accounts payable (7,026) (49,438)
Increase in accrued expenses and other current liabilities 3,295 30,722
Decrease (increase) in other working capital and other, net 1,094 (19,072)
Changes due to store closing activities:
Payments of store closing costs (1,165) (979)
------------------ --------------------
------------------ --------------------
Net cash used for operating activities (188,015) (152,607)
------------------ --------------------
Cash flows from investing activities:
Purchases of fixed assets (40,249) (34,205)
Purchases of leases (7,019) (27,822)
------------------ --------------------
------------------ --------------------
Net cash used for investing activities (47,268) (62,027)
------------------ --------------------
Cash flows from financing activities:
Borrowings under the revolving credit facility, net 254,751 37,676
Payments on debt and capital lease obligations (4,413) (7,003)
Repurchase of Hills Senior Notes (2,738) -
Proceeds from the issuance of senior notes - 200,000
Deferred financing costs - (6,044)
Proceeds from the exercise of options and warrants 1,116 576
------------------ --------------------
------------------ --------------------
Net cash provided by financing activities 248,716 225,205
------------------ --------------------
------------------ --------------------
Increase in cash and short-term investments 13,433 10,571
Cash and short-term investments, beginning of period 30,612 35,744
------------------ --------------------
------------------ --------------------
Cash and short-term investments, end of period $44,045 $46,315
================== ====================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest and debt fees not capitalized $20,206 $8,271
Income taxes 1,234 355
</TABLE>
(The accompanying Notes are an integral part of these consolidated
condensed financial statements.)
<PAGE>
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation :
In the opinion of management, the accompanying unaudited consolidated
condensed financial statements of Ames Department Stores, Inc. (a Delaware
corporation) and subsidiaries (collectively "Ames" or the "Company") contain all
adjustments (consisting of normal recurring adjustments) necessary for a fair
presentation of such financial statements for the interim periods. Due to the
seasonality of the Company's operations, the results of its operations for the
interim period ended April 29, 2000 may not be indicative of total results for
the full year. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and regulations
promulgated by the Securities and Exchange Commission (the "SEC"). Certain prior
year amounts have been reclassified to conform to the presentation used for the
current year. Pursuant to the indenture governing the Ames Senior Notes (as
defined in Note 5), all of Ames' subsidiaries have jointly and severally
guaranteed the Ames Senior Notes on a full and unconditional basis. Separate
financial statements of those subsidiaries have not been included herein because
management has determined that they are not material to investors.
The consolidated condensed balance sheet at January 29, 2000 was obtained
from audited financial statements previously filed with the SEC in the Company's
Annual Report on Form 10-K for the fiscal year ended January 29, 2000 (the "1999
Form 10-K"). The accompanying unaudited consolidated condensed financial
statements should be read in conjunction with the financial statements and Notes
thereto included in the 1999 Form 10-K.
In the fourth quarter of the year ended January 29, 2000 ("Fiscal 1999"),
the Company adopted Staff Accounting Bulletin ("SAB") No. 101 "Revenue
Recognition" as promulgated by the staff of the SEC effective retroactively to
the first quarter of Fiscal 1999. Therefore, the consolidated condensed
financial statements for the thirteen weeks ended May 1, 1999 have been adjusted
accordingly. Reference can be made to the 1999 Form 10-K for additional
discussion of the adoption of SAB No. 101 by the Company.
2. Acquisition and Agency Agreement:
Acquisition of Hills Stores Company
On December 31, 1998, HSC Acquisition Corp. ("HSC"), a wholly owned
subsidiary of the Company, acquired in excess of 80% of the outstanding voting
stock of Hills Stores Company ("Hills") and approximately 74% of the outstanding
Hills 12.5% senior notes. Subsequently, Hills was merged with HSC and became a
wholly owned subsidiary of Ames Department Stores, Inc. In April 1999, Hills was
merged with and into Ames Department Stores, Inc. The acquisition has been
recorded under the purchase method of accounting.
Total cash consideration for the acquisition of Hills was $129 million.
Reference can be made to the 1999 Form 10-K for further discussion of the Hills
acquisition.
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
late April 1999; the second stage was completed in late July 1999; and the third
stage was completed in late September 1999.
Concurrent with the Hills acquisition, the Company entered into a
transition and agency agreement (the "Agency Agreement") with Gordon Brothers
Retail Partners, LLC and The Nassi Group, LLC (collectively the "Agent"), which
provided that the Agent serve for a period of time to operate all of the
acquired Hills stores and to conduct inventory liquidation sales at each of
those stores prior to its scheduled remodeling or final closure. Accordingly,
the Agent managed the sale of the inventory acquired in the Hills acquisition as
well as certain other inventory identified in the Agency Agreement. The Agency
Agreement entitled the Company to receive out of the sale proceeds a minimum
amount equal to 40% of the initial retail value or ticketed selling price of the
merchandise (the "Guaranteed Return"), with the possibility of a greater return
if the sale proceeds exceeded a target percentage of initial retail value.
>
The results of operations of Hills for the thirteen weeks ended May 1, 1999
have been included in the accompanying consolidated condensed financial
statements. During the thirteen weeks ended May 1, 1999, the following
accounting treatment has been applied to recognize the results of the Hills
stores prior to their conversion to Ames stores during Fiscal 1999. Hills net
sales have been recorded as "Hills Net Sales" and represent net sales achieved
by the Hills stores prior to their conversion to Ames stores. "Hills Cost of
Merchandise Sold" represents the cost of merchandise sold in connection with the
above referenced sales as adjusted for the Guaranteed Return. "Hills Operating
Expenses and Agency Fees" include the following: the associated store expenses
incurred while operating the Hills stores prior to their conversion to Ames
stores, which are reimbursable to the Company out of the proceeds of Hills
merchandise sales per the Agency Agreement; the Agency Fee due to the Agent for
the period presented; and other expenses (e.g. non-store payroll, non-store
rent, etc.) associated with supporting the Hills stores prior to their
conversion to Ames stores, which are not reimbursable under the Agency
Agreement.
Acquisition of Goldblatt's Leases
In April 2000, the Company consummated its purchase of the leases for seven
stores from Goldblatt's Department Stores, Inc. for a cash purchase price of
$7.6 million.
Reference can be made to the Fiscal 1999 Form 10-K for additional
discussion of the Hills and Goldblatt's acquisitions.
3. Net Income (Loss) Per Common Share:
Net income (loss) per share was determined using the weighted average
number of common shares outstanding. Diluted net loss per share was equal to
basic net loss per share because inclusion of common stock equivalents would
have been anti-dilutive. During the quarter ended April 29, 2000, 139,382
options were exercised and 100,000 Series B Warrants were converted. During the
quarter ended May 1, 1999, 103,981 options were exercised and no warrants were
converted.
4. Inventories:
Inventories are valued at the lower of cost, using the first-in, first-out
(FIFO) method, or market and include the capitalization of transportation and
distribution center costs.
5. Debt:
Credit Agreement
On December 31, 1998, in connection with the acquisition of Hills, certain
of the Company's subsidiaries entered into an agreement (the "Credit Agreement")
with a syndicate of banks and financial institutions for whom Bank of America
NT&SA is serving as agent. The Credit Agreement provides for a secured revolving
credit facility of up to $650 million.
The Credit Agreement is in effect until June 30, 2002 and is secured by
substantially all of the assets of the Company. Reference can be made to the
1999 Form 10-K for additional discussion of the Credit Agreement and for
descriptions of the Company's other obligations not discussed herein.
As of April 29, 2000, borrowings of $429.3 million were outstanding under
the Credit Agreement. These borrowings are included in long-term debt in the
accompanying consolidated condensed balance sheet as of April 29, 2000. In
addition, $21.5 and $4.2 million of standby and trade letters of credit,
respectively, were outstanding under the Credit Agreement. The weighted average
interest rate on the borrowings for the thirteen weeks ended April 29, 2000 was
7.8%. The peak borrowing level through April 29, 2000 was $429.3 million and
occurred in April 2000.
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.
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 Hills Senior Notes pay interest in January and June and mature July
2003. During the quarter ended April 29, 2000 the Company repurchased on the
open market approximately $2.7 million face value of these notes.
Reference can be made to the Fiscal 1999 Form 10-K for additional
discussion of the Ames Senior Notes and Hills Senior Notes.
6. Stock Options:
The Company has three stock option plans (the "Option Plans"): the 1994
Management Stock Option Plan, the 1998 Stock Incentive Plan and the 1994
Non-Employee Directors Stock Option Plan.
In October 1995, the Financial Accounting Standard Board issued SFAS No.
123 "Accounting for Stock Based Compensation." SFAS No. 123 established a
fair-value based method of accounting for stock-based compensation; however, it
allowed entities to continue accounting for employee stock based compensation
under the intrinsic value method prescribed by Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." The Company elected
to account for the Option Plans under APB Opinion No. 25, under which no
compensation cost has been recognized and adopt SFAS No. 123 through disclosure.
If the Company had elected to recognize compensation cost for the Option
Plans based on the fair value at the grant dates for awards under those plans,
consistent with the method prescribed by SFAS No. 123, net loss and basic net
loss per common share would have approximated the pro forma amounts indicated
below:
<TABLE>
For the Thirteen Weeks Ended
-------------------------------------
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(In Thousands) April 29, May 1,
2000 1999
-------------- ---------------
<S> <C> <C>
-------------- ---------------
Net loss:
As reported ($29,085) ($29,746)
Pro forma ($31,482) ($31,329)
Basic net loss per common share: (a)
As reported ($0.99) ($1.24)
Pro forma ($1.07) ($1.31)
</TABLE>
[FN]
(a) Common stock equivalent shares have not been included because the
effect would be anti-dilutive.
</FN>
The fair value of stock options used to compute pro forma net income and
net income per diluted common share is the estimated present value as of the
grant date using the Black-Scholes option-pricing model with the following
weighted average assumptions: no dividend yield, expected option volatilities, a
risk-free interest rate equal to U.S. Treasury securities with a maturity equal
to the expected life of the option and an expected life from date of grant until
option expiration date.
7. Income Taxes:
The Company's estimated annual effective income tax rate for each year was
applied to the loss before income taxes for the thirteen weeks ended April 29,
2000 and May 1, 1999 to compute a non-cash income tax benefit. The income tax
benefit is included in other current assets in the accompanying consolidated
condensed balance sheet as of April 29, 2000 and May 1, 1999.
8. Commitments and Contingencies:
Reference can be made to the 1999 Form 10-K (Item 3 - Legal Proceedings)
for various litigation involving the Company, for which there were no material
changes since the filing date of the 1999 Form 10-K.
9. Recently Issued Accounting Pronouncements:
In June 1998, the Financial Accounting Standard 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 a derivative's 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 results of
operations.
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the consolidated condensed financial statements and Notes presented in this
report.
Results of Operations
The consolidated results of operations for the quarter ended May 1, 1999
include the results of the former Hills stores during the period they were
operated by Gordon Brothers and The Nassi Group under an agency agreement. These
firms were engaged to operate the Hills stores until their closure and to
liquidate the merchandise inventories.
During the quarter ended May 1, 1999, Gordon Brothers and The Nassi Group
completed the merchandise liquidation sales in 52 of the former Hills stores.
Subsequent to the liquidation sales, the Company remodeled 50 of these stores
during an eight-week period and, on April 19, 1999, the Company re-opened the
remodeled stores as Ames stores. In addition, Gordon Brothers and The Nassi
Group initiated the liquidation sales in 55 former Hills stores in late March
and the final liquidation sales in 48 former Hills stores in early May.
The following table illustrates the results of Ames' operations for the
quarter ended April 29, 2000, as compared to the separate contributions of Ames'
and Hills' operations and the other costs described below to the consolidated
results of operations for the quarter ended May 1, 1999.
<TABLE>
------------------------------------------------
For The Thirteen Weeks Ended May 1, 1999
------------------------------------------------
For the ------------------------------------------------
Thirteen
(In Thousands) Weeks Ended
April 29, 2000 Ames Hills Other Total
-------------- ---- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales $830,657 $567,217 $248,942 - $816,159
Leased department and other income 9,259 6,374 2,026 - 8,400
------------------------------------------------------------------
Total revenue $839,916 $573,591 $250,968 - $824,559
Cost and expenses:
Cost of merchandise sold 602,924 409,250 168,323 - 577,573
Selling, general and administrative expenses 247,415 159,599 89,257 16,572 265,428
Depreciation and amortization expenses, net 17,697 5,917 6,580 1,886 14,383
Interest and debt expense, net 18,792 7,978 2,774 1,170 11,922
------------------------------------------------------------------
Loss before income taxes and cumulative effect (46,912) (9,153) (15,966) (19,628) (44,747)
Income tax benefit 17,827 3,295 5,747 7,066 16,108
------------------------------------------------------------------
Loss before cumulative effect of accounting
change (29,085) (5,858) (10,219) (12,562) (28,639)
Cumulative effect of accounting change, net of
tax - - - (1,107) (1,107)
------------------------------------------------------------------
Net loss ($29,085) ($5,858) ($10,219) ($13,669) ($29,746)
==================================================================
</TABLE>
The Ames column represents (a) the results of the Ames store base, (b) the
results of the converted Hills stores after their re-opening as Ames stores and
(c) certain expenses associated with the acquisition of Hills, including
interest expense on the acquired Hills senior notes and a pro rata share of the
amortization of 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 Gordon
Brothers/Nassi Agency Agreement, including depreciation and interest expense
directly associated with such stores and (b) Hills corporate overhead expenses,
principally the Canton, MA facility.
The Other column represents the expenses incurred during the period of
remodeling the Hills stores (for example, pre-opening expenses incurred during
the conversion or "dark" period) as well as certain other expenses.
The unique circumstances under which Hills' operations were conducted
through the quarter ended May 1, 1999 distort any direct comparison of the
principal components of Ames' consolidated results for the quarters ended April
29, 2000 and May 1, 1999. In the discussion that follows, Ames' net sales, gross
margin, and selling, general and administrative expenses for the quarter ended
April 29, 2000 are compared to the Ames' results for the quarter ended May 1,
1999, exclusive of the Hills results and other expenses. The comparison of
depreciation and amortization expense and interest and debt expense will be on a
consolidated basis.
Ames' net sales increased $263.4 million or 46% in the first quarter of
2000 compared to the prior year's first quarter. This increase is primarily a
result of the inclusion of all 151 of the converted Hills stores in the Ames
store base for the entire quarter compared to only 51 stores for two weeks
during the quarter ended May 1, 1999. Comparable store sales increased 1.2%
during the first quarter.
Gross margin increased $69.8 million or 44% in the first quarter of 2000
from the first quarter of 1999. The increase is a result of the increased number
of Ames stores, as previously discussed. Gross margin as a percentage of sales
declined slightly from 27.8% to 27.4%. The decrease was mainly the result of
slightly higher markdowns and changes in merchandise mix.
Selling, general and administrative expenses increased $87.8 million or 55%
as a result of the expanded Ames store base. Expenses as a percentage of sales
increased from 27.8% to 29.5% primarily as a result of sales falling short of
planned levels.
Depreciation and amortization expense increased $3.3 million or 23%. The
increase resulted primarily from a full quarter of additional depreciation on
the remodeling expenditures associated with conversion of the former Hills
stores.
Interest expense increased $6.9 million or 58%. The increase is mainly
attributed to a higher level of borrowings under our revolving credit facility
as well as a full quarter's interest expense for the Ames Senior Notes issued in
April of 1999.
Our estimated annual effective income tax rate for each year was applied to
the loss before income taxes for each period to compute a non-cash income tax
benefit. The income tax benefits are included in current assets in the balance
sheet as of April 29, 2000 and May 1, 1999.
Liquidity and Capital Resources
Our principal sources of liquidity are our revolving credit facility, cash
from operations and cash on hand. Our revolving credit facility, which expires
June 20, 2002, provides credit of up to $650 million. Borrowings under the
revolving credit facility are secured by substantially all of our assets. In
addition, we are required to meet certain financial covenants if our
availability under the credit facility falls below a specified level. During the
first quarter we increased our drawings on the credit facility approximately
$254.8 million but our availability did not fall below the specified level. Our
peak borrowing level under the facility during the quarter ended April 29, 2000
was $429.3 million. We believe we will have sufficient liquidity to meet our
financial obligations for the foreseeable future.
Merchandise inventories increased $156.5 million from January 29, 2000 due
primarily to an unexpected sales shortfall during the first quarter and a
seasonal merchandise build up. Merchandise inventories increased $285.6 million
from May 1, 1999 primarily as a result of fully stocking the converted Hills
stores and changing inventory valuation in approximately two-thirds of those
stores from liquidation value to cost.
Trade accounts payable decreased approximately $7 million from January 29,
2000 primarily as a result of a slowdown in merchandise purchases in response to
the first quarter sales shortfall. Trade accounts payable increased $63.2
million from May 1, 1999 due to the increase in merchandise inventories
referenced above.
Capital expenditures for the thirteen weeks ended April 29, 2000 totaled
$40.2 million and for the balance of the year are estimated to be approximately
$80.0 million. We adjust our plans for making such expenditures depending on the
amount of internally generated funds.
Net fixed assets increased $19.7 million from January 29, 2000 primarily
due to $40.2 million in capital expenditures offset by $19.7 million in
depreciation expense.
In April 2000, the Company consummated its purchase of the leases for seven
stores from Goldblatt's Department Stores, Inc. for a cash purchase price of
$7.6 million. Six of the stores are located in Chicago, Illinois and one is in
Gary, Indiana.
Beneficial lease rights represent the excess of the fair market value of
the acquired Hills leases over contract value of those leases. We are amortizing
this amount over the terms of the related leases (which average approximately 25
years) using the straight-line method. Goodwill is being amortized over 25 years
using the straight-line method.
Long-term debt as of April 29, 2000 consisted of borrowings under our bank
credit facility of $429.3 million, $200.0 million of the Ames senior notes
issued in April 1999 and $44.5 million of the Hills senior notes that remained
outstanding after the acquisition. The Hills senior notes became direct
obligations of Ames as a result of the merger of Hills into Ames.
Capital lease and financing obligations decreased $4.4 million from January
29, 2000 to April 29, 2000 due primarily to payments made on capital lease
obligations. Capital lease and financing obligations decreased $4.6 million from
May 1, 1999 to April 29, 2000 primarily as result of payments slightly exceeding
new capital lease commitments.
The net operating loss carryovers remaining after fiscal 1999, subject to
any limitations pursuant to Internal Revenue code Sec 382, should offset income
on which taxes would otherwise be payable in the next several years.
Note Concerning Forward-looking Statements
Statements, other than those based on historical facts which address
activities, events, or developments that the Company expects or anticipates may
occur in the future are forward-looking statements which are based upon a number
of assumptions concerning further conditions that may ultimately prove to be
inaccurate. Actual events and results may materially differ from anticipated
results described in any forward-looking statements. The Company's ability to
achieve such results is subject to certain risks and uncertainties.
Consequently, these cautionary statements qualify all of the forward-looking
statements and there can be no assurance that the results or developments
anticipated by the Company will be realized or that they will have the expected
effects on the Company or its business or operations.
Item 3. Quantitative and Qualitative Disclosures 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 April
29, 2000, approximately $429.3 million of our debt bore interest at variable
rates. We believe that the effect, if any, of reasonably possible near-term
changes in interest rates on our consolidated financial position, results of
operations or cash flows would not be significant.
<PAGE>
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Reference can be made to Item 3 - Legal Proceedings included in the
Company's most recent Form 10-K for various litigation involving the Company,
for which there were no material changes since the filing date of the Form 10-K.
Item 4. Submission of Matters to a Vote of Security Holders.
On May 15, 2000, the Company sent a notice of the annual meeting and a
proxy statement to its stockholders. The notice of meeting announced that the
Annual Meeting of Stockholders would be held Wednesday, June 21, 2000, to
consider and act upon the following matters: (a) the election of six (6)
directors for a term of one year or until their successor(s) have been elected
and qualified; (b) the ratification and approval of the Associate Stock Purchase
Plan; (c) the ratification and approval of the amended and restated 1998
Management Stock Incentive Plan; (d) the ratification and approval of the
appointment of Arthur Andersen LLP as independent certified public accountants
and auditors for the Company for the fiscal year ending February 03, 2001; and
(e) the transaction of such other business as may properly come before the
meeting or any adjournment(s) thereof.
The results of the meeting will be reported in the Quarterly Report for the
Company's fiscal quarter ending July 29, 2000.
Item 6. Exhibits and Reports on Form 8-K.
(a) Index to Exhibits
<TABLE>
<S> <C> <C> <C>
Exhibit No. Exhibit Page No.
----------- ------- --------
11 Schedule of computation of basic and diluted net income (loss) per share 15
12 Ratio of Earnings to Fixed Charges 16
21 Subsidiaries of the Registrant 17
(b) Reports on Form 8-K
Date of Report Date of Filing Item No. Description
-------------- -------------- -------- -----------
May 19, 2000 May 19, 2000 5 Disclosure of the Employment Agreement
dated February 28, 2000 between Ames
Department Stores, Inc. and Grant
Sanborn.
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
AMES DEPARTMENT STORES, INC.
(Registrant)
Dated: June 12, 2000 /s/ Joseph R. Ettore
----------------------------------------------------
Joseph R. Ettore, Chairman, Chief Executive
Officer, and Director
Dated: June 12, 2000 /s/ Rolando de Aguiar
----------------------------------------------------
Rolando de Aguiar, Senior Executive Vice President,
Chief Financial and Administrative Officer
</TABLE>
<PAGE>
<TABLE>
Exhibit 11
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE
(In Thousands, Except Per Share Amounts)
<S> <C> <C> <C>
For the Thirteen Weeks Ended
----------------------------
April 29, 2000 May 1, 1999
-------------- -----------
Loss before Cumulative Effect adjustment ($29,085) ($28,639)
Cumulative Effect adjustment, net of tax - (1,107)
-------------------- -------------------
-------------------- -------------------
Net loss (29,085) (29,746)
==================== ===================
==================== ===================
For Basic Earnings Per Share:
-----------------------------
Weighted average number of common shares
outstanding during the period 29,336 (b) 23,990 (b)
Basic net loss per share:
Basic net loss per share before Cumulative Effect adjustment ($0.99) ($1.19)
Cumulative Effect Adjustment, net of tax - (0.05)
-------------------- -------------------
-------------------- -------------------
Basic net loss per share ($0.99) ($1.24)
==================== ===================
==================== ===================
For Diluted Earnings Per Share:
-------------------------------
Weighted average number of common shares
outstanding during the period 29,336 (b) 23,990
Add common stock equivalent shares represented by:
Series B Warrants (a) (a)
Series C Warrants (a) (a)
Options under 1994 Management Stock Option Plan and 1998
Stock Incentive Plan (a) (a)
Options under 1994 Non-Employee Director Stock
Option Plan (a) (a)
-------------------- -------------------
-------------------- -------------------
Weighted average number of common and common equivalent shares 29,336 23,990
==================== ===================
==================== ===================
Diluted net loss per share before Cumulative Effect adjustment ($0.99) ($1.19)
Cumulative Effect Adjustment, net of tax - (0.05)
-------------------- -------------------
-------------------- -------------------
Diluted net loss per share ($0.99) ($1.24)
==================== ===================
==================== ===================
</TABLE>
[FN]
(a) Common stock equivalents have not been included, because the effect
would be anti-dilutive.
(b) The weighted average number of common shares outstanding is net of
Treasury Stock.
</FN>
<PAGE>
<TABLE>
Exhibit 12
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
(In Thousands, Except Ratio Data)
<S> <C> <C> <C> <C> <C> <C>
Quarter
Ended Fiscal Year Ended
------------- -------------------------------------------------------------------------
------------- -------------------------------------------------------------------------
April 29, January 29, January 30, January 31, January 25, January 27,
2000 2000 1999 1998 1997 1996
------------- ------------ ------------ ------------- ------------ ------------
------------- ------------ ------------ ------------- ------------ ------------
Income (loss) before income
taxes, extraordinary
item and cumulative
effect adjustment (46,912) (31,355) 52,605 53,633 26,804 (1,618)
Add:
Interest expense 18,792 60,843 15,253 11,600 19,043 24,116
Interest component of
rental expense 9,493 29,253 21,121 18,409 16,541 16,208
------------- ------------ ------------ ------------- ------------ ------------
------------- ------------ ------------ ------------- ------------ ------------
Earnings available for fixed
charges (18,627) 58,741 88,979 83,642 62,388 38,706
Fixed Charges:
Interest expense 18,792 60,843 15,253 11,600 19,043 24,116
Interest component of
rental expense 9,493 29,253 21,121 18,409 16,541 16,208
------------- ------------ ------------ ------------- ------------ ------------
------------- ------------ ------------ ------------- ------------ ------------
Total fixed charges 28,285 90,096 36,374 30,009 35,584 40,324
Ratio of earnings to fixed
charges (0.7x) 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 quarter ended April 29, 2000 and the fiscal year ended January 29, 2000, the
amount of additional earnings that would have been required to cover fixed
charges for these periods was $46.9 million and $31.4 million, respectively.
<PAGE>
<TABLE>
Exhibit 21
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
SUBSIDIARIES OF THE REGISTRANT
As of April 29, 2000, the subsidiaries of the Company were as follows:
<S> <C>
Name State of Incorporation
---- ----------------------
AmesPlace.com, Inc. (f/k/a AmesMarketplace.com, Inc.) Delaware
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>
