Item 1. Description of Business.
(a) General.
Ames Department Stores, Inc. and its subsidiaries (collectively, "Ames" or the "Company") are retail merchandisers. As of March 1, 1996, Ames operated 308 discount department stores under the Ames name in 14 states in the Northeast, Middle Atlantic and Mid-West regions and the District of Columbia. The Company's stores are located in rural communities, some of which are not served by other large retail stores, high-traffic suburban sites, small cities and several major metropolitan areas. The stores largely serve middle and lower-middle income customers.
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 ("Chapter 11"). The principal executive offices are located at 2418 Main Street, Rocky Hill, Connecticut 06067, and the telephone number is (860) 257-2000.
Fiscal 1995
The Company took several steps in the fiscal year ended January 27, 1996 ("Fiscal 1995") to improve operations and its long-term competitive position:
- Cost-Reduction Initiatives to Pursue Growth Opportunities
In January, 1996, the Company announced a series of cost- reduction initiatives including the closing of 17 underperforming stores and elimination of 71 positions at the Company's headquarters. The Company's actions were taken to position the Company for potential growth opportunities and increased sales and profits. On February 5, 1996, the Company announced that it successfully bid on ten locations previously operated by Jamesway Corporation. The Company was subsequently successful in acquiring an eleventh location. The Company expects to open nine of these locations by the end of April, 1996.
- Advertising and Marketing Programs
Introduced in Fall, 1994, the Company's 55 Gold Savings Card Program expanded to 1.2 million cardholders during Fiscal 1995. This program offers a 10% discount each Tuesday on all merchandise purchased by customers aged 55 or older. The 55 Gold Savings Program not only allows Ames to better serve this important and growing customer base, it also provides Ames with names and addresses for future targeted marketing. Ames also introduced its new marketing theme in Fiscal 1995: Bargains By The Bagful . This theme will emphasize brand-name merchandise that can be found at great prices in each of the Ames stores.
- Remodeling and New Stores
The Company opened two new stores in September, 1995: Mt. Olive, New Jersey and Dudley, Massachusetts. These stores feature Ames' latest "customer-friendly" design format, including "soft corners" that open up to highlight key departments such as domestics, furniture and electronics; an updated apparel presentation in the center of the store; and customer service "call boxes" located throughout the store to summon assistance. The Company also completed the full remodel of 24 stores in Fiscal 1995 incorporating many of the latest design formats featured in the new stores.
The Company believes its operating performance and the availability of its financing facilities will provide sufficient liquidity to allow the Company to meet its financial obligations. The Company continually reviews the profitability of its stores in the ordinary course of business and closes or sells stores whose performance is thought to be inadequate. The Company will consider relocating certain stores and opening new stores, particularly in selected markets that would reinforce marketing programs, enhance name recognition, and/or achieve market penetration. Twelve (12) new stores are expected to be opened by the Company in the fiscal year ending January 25, 1997 ("Fiscal 1996"), including eleven stores formerly operated by Jamesway Corporation.
(b) Financial Information about Industry Segments.
Ames operates self-service retail discount department stores selling a broad range of merchandise. There are no other reportable industry segments.
(c) Narrative Description of Business.
(i) Services, Markets and Distribution.
Ames sells primarily brand name general merchandise, including the following items: family apparel and accessories, shoes, housewares, home furnishings, crafts, hardware and automotive accessories, sporting goods, toys, small appliances and consumer electronics, pre-recorded tapes and compact discs, jewelry, health and beauty products, household products, camera and photographic supplies, pet products, party and paper products, and school and office supplies. Although Ames attempts to be competitive on everyday pricing, the Company primarily employs a high/low promotional pricing strategy with an emphasis on quality weekly circular advertising. The Company will continue to stress depth and breadth of products in selected merchandise categories; clean, neat and well-maintained facilities; appealing merchandise presentation; and customer service.
Merchandise is purchased centrally for all stores by Ames associates at the Rocky Hill, CT headquarters and is shipped by vendors either directly to individual stores or to Ames' distribution centers/warehouses in Massachusetts and Pennsylvania which then make deliveries to stores.
For the last three fiscal years, women's apparel has been the only class of product that exceeded 10% of total sales, accounting for an average of approximately 13% of total sales. An average of approximately 23% of sales for the last three fiscal years were made using third party credit cards and the remainder were made by cash or check.
The table below sets forth the number of retail stores in operation in each state at the end of each of the last three fiscal years.
(ii) New Products.
The introduction of new products was not significant to the business of the Company for Fiscal 1995.
(iii) Raw Materials.
The Company does not rely on any one or a few suppliers for a material portion of its purchases, and there is no current or anticipated problem with respect to the availability of merchandise.
(iv) Patents, Trademarks and Licenses.
The mark "Ames" is registered with the United States Patent and Trademark Office. The Company considers this mark and the associated name recognition to be valuable to its business. The Company has a significant number of other trademarks, trade names, and service marks, some of which, such as "Crafts & More," "Pawsitively Pets," and "Party Plaza," are used in connection with certain of the Company's specialty departments within the stores. Although the Company considers these additional marks and its patents and licenses to be valuable in the aggregate, none of them individually is currently considered to have a material impact on the Company's business.
(v) Seasonality of Business.
The Company's sales are greater during the second half of the fiscal year as a result of the back-to-school and Christmas shopping seasons. Sales are highest in the last fiscal quarter.
(vi) Working Capital.
As of January 27, 1996, the Company's current ratio (current assets divided by current liabilities) was 1.5 to 1. See Item 7(b) - Management's Discussion and Analysis - Liquidity and Capital Resources for discussion of liquidity and plans to meet future liquidity needs.
The demand for working capital is heaviest in April and May, and from August through November, when sufficient merchandise must be purchased for the spring, back-to-school and Christmas seasons, respectively.
(vii) Customers.
No material part of the Company's business is dependent upon a single customer or a few customers. During Fiscal 1995, Ames had no single customer or affiliated group of customers to whom sales were made in an amount which accounted for 10% or more of the Company's total sales for such period.
As is customary in the discount store industry, the Company's retail operations allow merchandise to be returned by customers. In addition, the Company has a program that allows for the matching of its sales prices to the advertised sales prices of its local competitors upon presentation of proper proof of the competitor's advertised price on the same item. Merchandise may also be purchased under the Ames' layaway plan.
(viii) Backlog.
Backlog is not a significant factor in the Company's business.
(ix) Government Contracts.
Ames has no material contracts with any government agency.
(x) Competition.
Ames operates in a highly competitive environment. Ames competes with other stores, including large national and regional chains, in the purchase and sale of merchandise, as well as for store locations. Ames currently anticipates a further increase in competition from other national discount store chains.
Many of the Company's stores are located in smaller communities and are, in some cases, the largest non-food retail store in their market area. They compete, however, with many smaller stores offering a similar range of products. The Company's stores located in suburban sites and urban areas are in direct competition with other discount stores, including other large national and regional chains.
(xi) Research and Development.
Research and development activities are not a material aspect of the Company's business.
(xii) Environmental Matters.
To date, compliance with federal, state and local laws and regulations enacted to regulate the discharge of materials into the environment has not had, and is not expected to have, a material effect upon the Company's business. See Note 12 to the Consolidated Financial Statements included in this Form 10-K for further discussion on environmental matters.
(xiii) Employees.
At March 1, 1996, Ames employed approximately 22,000 people.
(d) Foreign and Domestic Operations and Export Sales.
The information called for by this item is not relevant to the Company's business.
Item 2.

Item 2. Properties.
As of January 27, 1996, the Company's stores occupied a total of approximately 18.7 million square feet, including approximately 1.0 million square feet in the 17 stores which were in the process of closing. The average store size is approximately 61,000 square feet, of which approximately 82% is selling area.
The construction of one store, located in Monroeville, PA, 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. The land and buildings for five store locations are owned by Ames. The five owned locations (with operating stores) are: Woodsville, NH; Irwin, Ellwood City and Grove City, PA; and Lewiston, ME. The remainder of the Company's stores are leased, with the leases expiring at various times between 1996 and 2018. The leases generally have renewal options permitting extensions for at least five years. In addition, the leases typically provide for fixed annual rentals, payment of certain taxes, insurance and other charges, and additional rentals based on a percentage of sales in excess of certain fixed amounts. Except for certain point-of-sale equipment that is leased, vendor-owned greeting card equipment and leased department equipment, Ames owns the fixtures and equipment in its stores, some of which are subject to various financing arrangements.
The Company's warehouse and distribution facilities in Leesport, PA, and Mansfield, MA are owned and occupy an aggregate of approximately 1.7 million square feet. The Mansfield, MA facility is subject to a mortgage. Two former distribution centers - in Clinton, MA and in McKeesport, PA - were sold during Fiscal 1995.
Ames leases approximately 386,000 square feet of space in Rochester, NY under a lease expiring on December 31, 1997, with three 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 217,000 square foot corporate office in Rocky Hill, CT. The Company has a lease for 100,000 square feet of storage and printing space in East Hartford, CT expiring in July, 1998, and, in February, 1996, entered into a lease for 33,000 square feet in Rocky Hill, CT for an in-house photography studio and print shop.
Item 3.

Item 3. Legal Proceedings.
Ames is involved in various litigation as detailed in Note 12 to the Consolidated Financial Statements included in this Form 10-K.
Item 4.

Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted during the fourth quarter of Fiscal 1995 to a vote of security holders, through the solicitation of proxies or otherwise.
PART II
Item 5.

Item 5. Market for the Registrant's Common Stock and Related Matters Concerning Security Holders.
The Company's common stock is listed on the NASDAQ National Market System ("NASDAQ"; symbol: AMES). As of March 1, 1996, Ames had 6,457 stockholders of record. Certain restrictions had applied to the purchase and trading of the common stock from the Company's emergence from Chapter 11 protection through December, 1994. Low and high prices of the Company's common stock for Fiscal 1995 and for the fiscal year ended January 28, 1995 ("Fiscal 1994"), as reported on NASDAQ, are shown in the table below:
There were no quarterly dividends paid by Ames to the holders of its common stock during these periods. Dividends cannot be declared under the terms of the Company's revolving credit facility. On November 30, 1994, the Company adopted a Stock Purchase Rights Agreement as described in Note 7 to the Consolidated Financial Statements.
Item 6.

Item 6. Selected Financial Data.
The following selected financial data of Ames should be read in conjunction with the Consolidated Financial Statements and related Notes appearing elsewhere in this Form 10-K.
Item 7.

Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
(a) Results of Operations.
The following table sets forth the number of stores in operation during each fiscal year:
The rate of inflation did not have a significant effect on sales during these periods.
Results of Operations for Fiscal 1995 Compared to Fiscal 1994
Despite a decline in sales in Fiscal 1995, the Company recorded an improvement in income before restructuring charges, property gains and litigation settlements. The Company achieved this improvement primarily by reducing its selling, general and administrative expenses both in amount and as a percentage of net sales.
Total sales decreased 1.2% from Fiscal 1994 due to a decrease of 1.0% in comparable store net sales and a 4.4% decline in leased department (shoes) comparable store sales. The major causes for the decline in sales were a weak holiday selling season in the retail industry, additional new competition as well as a planned de-emphasis in jewelry, partially offset by the senior citizens discount program (the 55 Gold Savings Card program) and a continued improvement in the in-stock inventory position.
The following table sets forth the results of operations for Fiscal 1995 and Fiscal 1994 in millions and as a percentage of net sales:
Gross margin declined $8.1 million or 0.1% as a percentage of net sales in Fiscal 1995 compared to Fiscal 1994. The gross margin rate was negatively impacted by a lower markup on sales, reflecting a strategy of lowering prices, and the impact of the discounts related to the senior citizen discount program. These factors were partially offset by lower advertising and clearance markdowns in Fiscal 1995 compared to Fiscal 1994.
Selling, general and administrative expenses decreased $16.9 million or 0.5% as a percentage of net sales in Fiscal 1995 compared to Fiscal 1994. Reductions in advertising, home office, field support and store non-payroll expenses were partially offset by an increase in store payroll expense. The advertising expense decrease reflected a reduction in the distribution expense for advertising circulars resulting from more effective distribution and fewer circulars. The decrease in home office expenses was principally a reduction in home office payroll. The Company's insurance expense was lower by $5.2 million in Fiscal 1995 compared to Fiscal 1994 as a result of a reduction in the reserves for prior years' claims as well as the continued improved experience in workers' compensation and general liability claims, partially offset by an increase in health claims.
Leased department and other operating income declined $.6 million and remained the same as a percentage of net sales in Fiscal 1995 compared to Fiscal 1994. This decline was due primarily to the decline in leased department sales.
Depreciation and amortization expense increased by $7.1 million or 0.4% of net sales in Fiscal 1995 compared to Fiscal 1994. The Company elected to adopt FASB No. 121 during the fourth quarter of Fiscal 1995, resulting in the recording of an impairment loss of $3.4 million which was classified as part of depreciation and amortization expense (Note 20). Depreciation and amortization expense includes depreciation on capital additions subsequent to December 26, 1992, the date on which the Company wrote-off all of the Company's non- current assets in connection with the adoption of fresh-start accounting. The amortization of the excess of revalued net assets over equity under fresh-start reporting remained the same in Fiscal 1995 as in Fiscal 1994. The Company is amortizing this amount over a ten-year period.
Interest and debt expense, net of interest income, declined $1.3 million or 0.1% of net sales in Fiscal 1995 compared to Fiscal 1994. The favorable impact of lower outstanding long-term debt balances was partially offset by an increase in short-term interest expense and a reduction in interest income. In June, 1994, the Company prepaid approximately $69 million of debt utilizing a portion of the Credit Agreement (Note 5) and the funds that were no longer required to be restricted for the collateralization of letters of credit. From Fiscal 1994 to Fiscal 1995 the Company's average monthly outstanding long-term debt balance decreased from $78.9 million to $41.5 million due to the June, 1994, prepayment, certain other prepayments of debt made in connection with the sales of properties in Fiscal 1995 and debt payments made in the normal course of business. The increase in short-term interest expense reflected an increase in short-term borrowings (from a weighted average balance of $96.1 million in Fiscal 1994 to $101.7 million in Fiscal 1995) as well as an increase in interest rates. The decrease in interest income in Fiscal 1995 was the result of reduced restricted cash balances.
During Fiscal 1995, the Company sold or assigned several properties (Note 15) for a combined total of $11.6 million in proceeds and recognized gains totaling $9.1 million.
In January 1996, the Company announced its decision to close seventeen (17) underperforming stores and to eliminate 71 positions at its corporate headquarters. The Company recorded a $20.9 million restructuring charge to provide for the store closings and staff reductions. The store closings, which began in January 1996, were completed in March 1996.
Results of Operations for Fiscal 1994 Compared to Fiscal 1993
The Company reported improvements in Fiscal 1994 in sales and net earnings. The sales improvement reflected, in part, the beginning of the Company's efforts to generate customer excitement and sales through opportunistic purchases, targeted advertising and micro-marketing, remodeling, and maintaining an improved in-stock inventory position.
Total sales increased 0.6% from Fiscal 1993 due to an increase of 1.7% in comparable store sales, partially offset by the closing of three stores during Fiscal 1994 and a 4.1% decline in leased department (shoes) comparable store sales. The major causes for the improvement in comparable store sales were an improved in-stock inventory position, additional circular advertising, opportunistic purchases, and a new senior citizen discount program, partially offset by additional new discount store competition and a continued weak apparel sales market.
The following table sets forth the results of operations for Fiscal 1994 and Fiscal 1993 in millions and as a percentage of net sales:
Gross margin declined $14.5 million or 0.9% as a percentage of net sales in Fiscal 1994 compared to Fiscal 1993. Sales of certain higher-margin items, such as ladies apparel, accessories, and crafts, declined; distribution center inventory shortage was higher; and purchase discounts were significantly lower in Fiscal 1994. In addition, advertising and clearance markdowns were both higher in Fiscal 1994 compared to Fiscal 1993. These factors were partially offset by strong performances in childrens apparel, domestics and housewares in Fiscal 1994.
Selling, general and administrative expenses decreased $16.7 million or 1.0% as a percentage of net sales in Fiscal 1994 compared to Fiscal 1993. Reductions in store non-payroll, advertising, home office and field support expenses were partially offset by an increase in store payroll expense in Fiscal 1994. This reflects the Company's commitment to reduce expenses and invest in areas directly affecting customer service. The Company's self-insurance expense was lower in Fiscal 1994 compared to Fiscal 1993 due to a continued improved trend in claims experience.
Leased department and other operating income declined $4.1 million or 0.2% as a percentage of net sales in Fiscal 1994 compared to Fiscal 1993. This decline was due, in part, to the decline in leased department sales.
Depreciation and amortization expense increased $3.2 million or 0.1% as a percentage of net sales in Fiscal 1994 compared to Fiscal 1993. The adoption of fresh-start reporting at December 26, 1992 resulted in the write-off of all of the Company's noncurrent assets at that date, and therefore depreciation and amortization expense for Fiscal 1994 was for capital additions subsequent to December 26, 1992. The amortization of the excess of revalued net assets over equity under fresh-start reporting remained approximately the same. The Company is using a ten-year life for the period of amortization.
Interest and debt expense declined $1.0 million or 0.1% of net sales in Fiscal 1994 compared to Fiscal 1993. The Company had a daily weighted average of $96.1 million in outstanding debt under its revolving credit facilities during Fiscal 1994 compared to $89.3 million in Fiscal 1993. In June, 1994, the Company prepaid approximately $69 million of debt utilizing a portion of the Credit Agreement (Note 5) and the funds that were no longer required to be restricted for the collateralization of letters of credit. The favorable impact on interest expense from this prepayment has been partially offset by an increase in market interest rates and the amortization of the financing costs associated with the Credit Agreement.
During Fiscal 1994, the Company sold several properties (Note 15) for a combined total of $8.8 million in proceeds and recognized gains totalling $8.3 million.
The closing on the Wertheim Settlement Agreement (Note 12) occurred in June, 1994 and the Company recognized a nonrecurring gain for its $12 million portion of the settlement.
During Fiscal 1994, the Company announced its decision to close the Clinton, MA distribution center in June, 1995 and recorded a provision of $1.3 million in Fiscal 1994 for the estimated costs associated with the closing (Note 16). Transfer of the Clinton operations to the Company's Leesport, PA distribution center was completed in June, 1995. This consolidation was part of the Company's continuing productivity enhancement and expense-reduction efforts.
As a consequence of fresh-start reporting and SFAS No. 109 (Note 9), the Company recorded a non-cash income tax provision of $8.2 million for Fiscal 1994 with an associated increase of $8.2 million in additional paid-in capital.
As a result of the debt refinancing and associated prepayment of certain debt, the Company recorded a non-cash extraordinary charge of $1.5 million, net of tax benefit of $0.7 million, in Fiscal 1994. The charge was primarily for the write-off of deferred financing costs and debt discounts related to the debt that was prepaid.
(b) Liquidity and Capital Resources.
Credit Facilities - Fiscal 1995 and Fiscal 1994
The Company's principal sources of liquidity are certain available credit facilities, cash from operations, and cash on hand. On April 28, 1994, the Company entered into an agreement with BankAmerica Business Credit, Inc., as agent, and a syndicate consisting of seven other banks and financial institutions, for a secured revolving credit facility of up to $300 million (the "Credit Agreement"). The Credit Agreement is in effect until June 22, 1997, is secured by substantially all of the assets of the Company, and requires the Company to meet certain quarterly financial covenants. Ames is in compliance with the financial covenants, as amended, through the quarter ended January 27, 1996. Reference can be made to Note 5 for a further description of the Credit Agreement. The Company's peak borrowing level in Fiscal 1995 under the Credit Agreement was $195.4 million. Ames repaid all such borrowings by December, 1995, and fulfilled its "clean-up" requirement (Note 5) in January, 1996.
Review of Cash Flows, Liquidity and Financial Condition
The Company's unrestricted cash position decreased $14.2 million during Fiscal 1995. This decrease was primarily due to $27.2 million of capital expenditures and payments of $23.8 million on debt and capital lease obligations, partially offset by $19.2 million in net cash provided by operations and $11.6 million of proceeds from the sale of certain properties. Please see below and the Consolidated Financial Statements for further discussions of activities and details affecting cash and liquidity for Fiscal 1995.
The Company's unrestricted cash position increased $11.9 million during Fiscal 1994. This increase was primarily due to $83.5 million in net cash provided by operations and $53.9 million of restricted cash withdrawals, partially offset by $24.5 million of fixed asset purchases, the paydown of $15.4 million in the outstanding balance under revolving credit facilities, and the payments of $87.8 million on debt and capital lease obligations, including the prepayments of $67.7 million on certain debt described above. Please see below and the Consolidated Financial Statements for further discussions of activities and details affecting cash and liquidity for Fiscal 1994.
As of January 28, 1995, Ames restricted approximately $0.2 million of cash for expected payments of certain remaining administrative and priority claims under the plan of reorganization. This amount was also included in "Restricted cash and short-term investments." The associated liability was included in "Accrued expenses." The Company earned interest on invested segregated funds. As of January 28, 1995, the Company also had $1.8 million of cash received in escrow from the December, 1994 sale of a store's lease interest. The cash was released from escrow in February, 1995.
Merchandise inventories declined $28.0 million and $12.0 million during Fiscal 1995 and Fiscal 1994, respectively. The decrease in Fiscal 1995 was primarily a result of planned reductions and lower-than-planned merchandise purchases in January, 1996. The decline during Fiscal 1994 was primarily due to strong fourth quarter sales. The LIFO reserve as of December 26, 1992 was eliminated in connection with the adoption of fresh-start reporting. Ames remained on the LIFO method after emergence from Chapter 11, but there has been no LIFO charge or credit in Fiscal 1995 and Fiscal 1994 because inventory levels declined, the Company's merchandise mix continued to change, and inflation was insignificant during those periods.
Accounts payable declined $8.2 million during Fiscal 1995 primarily as a result of the decline in merchandise inventories. Accounts payable increased $54.4 million during Fiscal 1994, due primarily to longer payment terms. During Fiscal 1994, the Company began a concerted effort to return to normal industry payment terms by lengthening its payment terms with merchandise vendors. During Fiscal 1995 and Fiscal 1994, the Company paid its trade payables within the terms negotiated with vendors.
The Company and its pre-bankruptcy lenders agreed to a restructuring of the Company's obligations as part of the plan of reorganization. The new obligations consisted primarily of secured notes that certain banks elected to receive, which were prepaid in Fiscal 1994, and deferred cash distributions. The major component of the "Current portion of long-term debt" at January 27, 1996 and January 28, 1995 related primarily to cash distributions of $8.0 million paid on January 31, 1996 and January 31, 1995 pursuant to the plan of reorganization.
The "Note payable" of approximately $4.3 million at January 27, 1996 was the amount outstanding under the Credit Agreement. There were no outstanding borrowings under the Credit Agreement as of January 28, 1995. The "Unfavorable lease liability" was recorded as part of fresh-start reporting.
No dividends were paid while Ames was under the protection of Chapter 11, or since its emergence from Chapter 11. The Company is restricted from declaring dividends under the terms of the Credit Agreement.
Capital Expenditures
Capital expenditures for Fiscal 1995 were $27.2 million and included, among other things, the full scale remodel of 24 stores, the partial remodel of 38 stores and the opening of two new stores. Capital expenditures for Fiscal 1994 were $24.5 million and included, among other things, new apparel fixtures for all stores, partial remodeling of 52 stores, and the rollout of certain specialty departments to additional stores.
Capital spending is expected to be approximately $21.0 million for Fiscal 1996, primarily for the opening of twelve new stores, the full scale remodel of five stores and the purchase of equipment to improve the processing of merchandise through the Company's distribution centers. The Company expects to finance equipment purchases, new store fixtures and equipment, and the remodeling of existing stores through internally-generated funds. The Company adjusts the plans for making such expenditures depending on the amount of internally- generated funds available. Land, buildings and improvements are financed principally through long-term leases.
Summary
The Company believes the ability to meet its financial obligations and make planned capital expenditures will depend on the Company's future operating performance, which will be subject to financial, economic and other factors affecting the industry and operations of the Company, including factors beyond its control. The Company believes its operating performance and the availability of its financing facilities will provide sufficient liquidity to allow the Company to meet its financial obligations.
Ames currently anticipates the following investment and financing activities for Fiscal 1996: capital expenditures as described above, seasonal borrowings and payments under the Credit Agreement and planned payments of debt and capital lease obligations.
The Company believes the actions set forth above and the availability of its financing facilities, together with the Company's available cash and expected cash flows from Fiscal 1996 operations and beyond, will enable Ames to fund its expected needs for working capital, capital expenditures and debt service requirements. Achievement of expected cash flows from operations and compliance with the EBITDA covenant (Note 5) is dependent upon the Company's attainment of sales, gross profit, and expense levels that are reasonably consistent with its financial projections.
The Company expects from time to time to consider possible capital market transactions, debt refinancing, and other transactions to further enhance the Company's financial flexibility.
The significant net operating loss carryforwards remaining after Fiscal 1995, subject to limitations pursuant to Internal Revenue Code Sec. 382, should offset income on which taxes would otherwise be payable in future years.
Item 8.

Item 8. Financial Statements and Supplementary Data.
See Index to Consolidated Financial Statements.
Item 9.

Item 9. Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.

Item 10. Officers and Directors of the Registrant.
Information as to the directors of the registrant required by Item 10 is incorporated herein by reference from the information set forth under the caption "ELECTION OF DIRECTORS" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its fiscal year.
The following table indicates the names of all executive officers of Ames and the offices held by each. Other than the employment contracts with Mr. Ettore and Mr. Lemire described in the Company's proxy statement, there are no other arrangements or understandings between any officer below and any other person pursuant to which he was selected as an officer.
Joseph R. Ettore ............. President, Chief Executive Officer, and Director
John F. Burtelow ............. Executive Vice President, Chief Financial Officer
Denis T. Lemire .............. Executive Vice President, Merchandising
Eugene E. Bankers ............ Senior Vice President, Marketing
Richard L. Carter ............ Senior Vice President, Human Resources
Paul Lanham .................. Senior Vice President, Management Information Systems
David H. Lissy ............... Senior Vice President, General Counsel and Corporate Secretary
William C. Najdecki .......... Senior Vice President, Finance
Alfred B. Petrillo, Jr. ...... Senior Vice President, Store Planning
Grant C. Sanborn ............. Senior Vice President, Store Operations
James A. Varhol .............. Senior Vice President, Asset Protection
Joseph R. Ettore, age 56, joined Ames as President, Chief Executive Officer and Director in June, 1994. Prior to joining Ames, he was President, Chief Executive Officer and Director of Jamesway Corporation("Jamesway") from July, 1993 to June, 1994; President, Chief Operating Officer and Director of Jamesway in June, 1993; Chairman of the Board and Chief Executive Officer of Stuarts Department Stores, Inc.("Stuarts") from October, 1992 to June, 1993; and President, Chief Operating Officer and Director of Stuarts from October, 1989 to October, 1992. He remained a Director of Stuarts until May, 1994. Jamesway filed for protection under Chapter 11 of the Bankruptcy Code ("Chapter 11") in July, 1993; emerged from the Chapter 11 case in January, 1995; and re-filed for protection under Chapter 11 in October, 1995. Stuarts filed under Chapter 11 in December, 1990; emerged from the Chapter 11 case in October, 1992; and re-filed for protection under Chapter 11 in May, 1995.
John F. Burtelow, age 48, joined Ames as Executive Vice President, Chief Financial Officer in August, 1994. Prior to joining Ames, he was Senior Vice President, Chief Financial Officer of Venture Stores, Inc. from March, 1989 to May, 1994. He held a number of increasingly senior financial positions with The May Department Stores Company between 1979 and 1989.
Denis T. Lemire, age 48, joined Ames as Executive Vice President, Merchandising in August, 1994. Prior to joining Ames, he was President and Chief Operating Officer of Stuarts from November, 1993 to August, 1994 and Senior Vice President, Merchandising for Stuarts from April, 1990 to November, 1993. Stuarts filed for protection under Chapter 11 in December, 1990; emerged from the Chapter 11 case in October, 1992; and re-filed for protection under Chapter 11 in May, 1995.
Eugene E. Bankers, age 56, joined Ames as Senior Vice President, Marketing in December, 1993. Prior to joining Ames, he was Vice President, Communications and Investor Relations at Shopko Stores, Inc. from 1991 to 1993, and Vice President of Advertising, Sales Promotions, Special Events and Public Relations from 1982 to 1991.
Richard L. Carter, age 47, joined Ames as Senior Vice President, Human Resources in February, 1993. Prior to joining Ames, he was Senior Vice President, Human Resources at G. Fox & Co., Inc. from 1989 to 1993.
Paul Lanham, age 38, became Senior Vice President, Management Information Systems, in March, 1996. He joined Ames in October, 1994 as Vice President, Allocation and Planning. Prior to joining Ames he was employed at Brookstone Stores from 1989 in various capacities related to inventory systems and inventory planning and allocation, most recently as Director of Inventory Management.
David H. Lissy, age 52, became Senior Vice President, General Counsel and Corporate Secretary in December, 1992. He began work on the Ames Chapter 11 cases in June, 1990, and in July, 1990 was named Vice President, Legal Services. He was appointed Vice President, General Counsel and Corporate Secretary in October, 1991. He has been owner of Samuel Lehrer & Co., Inc., a wholesaler of fine quality fabrics, since 1988.
William C. Najdecki, age 45, became Senior Vice President, Finance in April, 1995. He joined Ames in April, 1991 as Vice President, Bankruptcy Administration and became Vice President, Controller in July, 1991 and Senior Vice President, Chief Accounting Officer in December, 1992. Prior to joining Ames, he was Hardlines Controller for Montgomery Ward from 1989 to 1991.
Alfred B. Petrillo, Jr., age 53, joined Ames as Senior Vice President, Store Planning in October, 1995. Prior to joining Ames, he was employed at Jamesway as Vice President, Store Planning, Construction, Maintenance and Energy from 1976 to 1995 when he was appointed Senior Vice President, Store Planning, Construction, Visual Merchandising, Planogramming, Maintenance and Energy.
Grant C. Sanborn, age 44, became Senior Vice President, Store Operations in January, 1995. Since joining Ames in 1971, he has served in a number of store operations positions, including Assistant Regional Manager from July, 1989 to May, 1991; Regional Director from May, 1991 to July, 1991; Director, Store Operations from July, 1991 to October, 1993; and Vice President, Store Operations from October, 1993 to January, 1995.
James A. Varhol, age 40, joined Ames as Senior Vice President, Asset Protection in August, 1995. Prior to joining Ames, he was Vice President, Loss Prevention at Jamesway from 1987 to 1995.
Item 11.

Item 11. Executive Compensation.
The information required by Item 11 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 Board of Directors Report on Executive Compensation," and "Performance Graph" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its fiscal year.
Item 12.

Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 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 within 120 days after the close of its fiscal year.
Item 13.

Item 13. Certain Relationships and Related Transactions.
The information required by Item 13 is incorporated herein by reference from the information set forth under the section titled "Transactions with Management" of the Company's definitive proxy statement to be filed pursuant to Regulation 14A within 120 days after the close of its fiscal year.
PART IV
Item 14.

Item 14. Exhibits, Financial Statement Schedule and Reports on Form 8-K.
(a) Documents Filed as Part of this Form 10-K
1. Financial Statements
The Financial Statements listed in the accompanying Index to Consolidated Financial Statements are filed as part of this Form 10-K.
2. Financial Statement Schedule
The Financial Statement Schedule listed in the accompanying Index to Consolidated Financial Statements is filed as part of this Form 10-K.
3. Exhibits
The Exhibits filed as part of this Form 10-K are listed on the Exhibit Index immediately preceding such Exhibits, incorporated herein by reference.
(b) Reports on Form 8-K
Reports on Form 8-K were filed with the Securities and Exchange Commission during the fourth quarter as follows:
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: March 29, 1996 /s/ Joseph R. Ettore ------------------------------------ Joseph R. Ettore, President, Chief Executive Officer and Director
Dated: March 29, 1996 /s/ John F. Burtelow ------------------------------------ John F. Burtelow, Executive Vice President, Chief Financial Officer
Dated: March 29, 1996 /s/ William C. Najdecki ------------------------------------ William C. Najdecki, Senior Vice President, Finance
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: March 29, 1996 /s/ Paul M. Buxbaum ------------------------------------ Paul M. Buxbaum, Director and Chairman
Dated: March 29, 1996 /s/ Francis X. Basile ------------------------------------ Francis X. Basile, Director
Dated: March 29, 1996 /s/ Alan Cohen ------------------------------------ Alan Cohen, Director
Dated: March 29, 1996 /s/ Richard M. Felner ------------------------------------ Richard M. Felner, Director
Dated: March 29, 1996 /s/ Sidney S. Pearlman ------------------------------------ Sidney S. Pearlman, Director
Dated: March 29, 1996 /s/ Laurie M. Shahon ------------------------------------ Laurie M. Shahon, Director
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
-------------------------------
FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE (FORM 10-K)
EXHIBITS
For the Fiscal Years Ended January 27, 1996, January 28, 1995 and January 29, 1994
(With Report of Independent Public Accountants)
-------------------------------------
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES
Index to Consolidated Financial Statements and Financial Statement Schedule for the Fiscal Years Ended January 27, 1996, January 28, 1995 and January 29, 1994
Financial Statements:
Report of Independent Public Accountants.
Consolidated Statements of Operations for the fiscal years ended January 27, 1996, January 28, 1995 and January 29, 1994.
Consolidated Balance Sheets as of January 27, 1996 and January 28, 1995.
Consolidated Statements of Changes in Stockholders' Equity for the fiscal years ended January 27, 1996, January 28, 1995 and January 29, 1994.
Consolidated Statements of Cash Flows for the fiscal years ended January 27, 1996, January 28, 1995 and January 29, 1994.
Notes to Consolidated Financial Statements.
Schedule:
II. Valuation and Qualifying Accounts for the fiscal years ended January 27, 1996, January 28, 1995 and January 29, 1994.
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.
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 27, 1996 and January 28, 1995, and the related consolidated statements of operations, changes in stockholders' equity and cash flows for the fifty-two weeks ended January 27, 1996, January 28, 1995 and January 29, 1994. These consolidated financial statements and the schedule referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Ames Department Stores, Inc. and subsidiaries as of January 27, 1996 and January 28, 1995, and the results of their operations and their cash flows for the fifty-two weeks ended January 27, 1996, January 28, 1995 and January 29, 1994 in conformity with generally accepted accounting principles.
As discussed in Note 20 to the consolidated financial statements, in the quarter ended January 27, 1996 the Company changed its method of accounting for long-lived assets to conform with SFAS No. 121, and in connection therewith, recorded an impairment loss of $3.4 million for long-lived assets to be held and used.
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 the consolidated financial statements is presented for the purposes of complying with the Securities and Exchange Commission's rules and is not a 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 5, 1996
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies: ------------------------------------------
(a) Nature of operations:
Ames Department Stores, Inc. (a Delaware corporation) and its subsidiaries (collectively, "Ames" or the "Company") are retail merchandisers. As of March 1, 1996, Ames operated 308 discount department stores under the Ames name in 14 states in the Northeast, Middle Atlantic and Mid-West regions and the District of Columbia. The Company's stores are located in rural communities, some of which are not served by other large retail stores, high-traffic suburban sites, small cities and several major metropolitan areas. The stores largely serve middle and lower-middle income customers.
(b) Basis of presentation:
The Company filed petitions under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11") on April 25, 1990. From that time until December 30, 1992, Ames operated its business as a debtor-in-possession subject to the jurisdiction of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). On December 30, 1992, Ames emerged from bankruptcy (Note 2).
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Certain prior year items have been reclassified to conform to the current year presentation.
(c) Fiscal year:
The Company's fiscal year ends on the last Saturday in January. The fiscal years ended January 27, 1996 (Fiscal 1995), January 28, 1995 (Fiscal 1994) and January 29, 1994 (Fiscal 1993) each included 52 weeks.
(d) Principles of consolidation:
The consolidated financial statements include the accounts of Ames and its subsidiaries, all of which are wholly-owned. All material intercompany accounts and transactions have been eliminated.
(e) Cash and short-term investments:
Ames considers all highly liquid investments with a maturity of three months or less when purchased to be cash and short-term investments.
(f) Inventory valuation:
Substantially all inventories are stated at the lower of cost, using the retail last-in, first-out (LIFO) method, or market and include the capitalization of transportation and distribution center costs.
(g) Fixed assets:
Land and buildings, fixtures and equipment, and leasehold improvements are recorded at cost. All fixed assets at December 26, 1992 were written-off under fresh-start reporting (Note 2). 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) Depreciation and amortization:
Land and buildings, fixtures and equipment are recorded at cost and are depreciated on a straight-line basis over their estimated useful lives. Property under capital leases and leasehold improvements are depreciated over the shorter of their estimated useful lives or their related lease terms.
The unfavorable lease liability (recorded under fresh-start reporting) is being amortized on a straight-line basis over the applicable lease terms.
The excess of revalued net assets over equity under fresh-start reporting is being amortized over a 10 year period (Note 2).
(i) Deferred charges:
Expenses related to new store openings are expensed in the fiscal year in which the store opens.
Debt transaction costs and related issue expenses are deferred and amortized over the term of the associated debt.
(j) Income taxes:
Ames and its subsidiaries file a consolidated federal income tax return. 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 enacted 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.
(k) 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 each individual claim's circumstances and estimates its liability for claims incurred but not yet reported based on historical experience.
As of January 27, 1996 and January 28, 1995, Ames had established self-insurance reserves of $39.0 million and $46.4 million, respectively. Major portions of these reserves may not be paid within a year and are subject to changes in estimates as claims are settled or continue to remain outstanding. The Company's insurance expense was lower by $5.2 million in Fiscal 1995 compared to Fiscal 1994 as a result of a reduction in the reserves for prior years' claims as well as the continued improved experience in workers' compensation and general liability claims, partially offset by an increase in health claims.
(l) Leased department sales and 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.
(m) Earnings per common share:
Net income (loss) per common share for Fiscal 1995, 1994 and 1993 was determined by using the weighted average number of common and common equivalent shares outstanding during each fiscal year. Primary and fully-diluted earnings per share were the same in each year. Common stock equivalents represented the assumed exercise of the outstanding Series C Warrants.
2. Reorganization Case and Fresh-Start Reporting: ---------------------------------------------
Reorganization Case
As discussed in Note 1, Ames and its subsidiaries filed petitions for reorganization under Chapter 11 on April 25, 1990 (the "Filing Date"). The Company's disclosure statement relating to its Third Amended and Restated Joint Plan of Reorganization dated October 23, 1992 (the "Amended Plan") was approved by the Bankruptcy Court on October 29, 1992. The Amended Plan was confirmed by the Bankruptcy Court on December 18, 1992 and consummated on December 30, 1992 (the "Consummation Date").
The Amended Plan provided for, among other things, the payment of $303.5 million of cash (including $46.5 million in deferred cash distributions), $68.9 million in secured notes (the "POR Term Notes"), the reinstatement of certain obligations, and the distribution of all of the new common stock of the reorganized Ames to creditors to settle approximately $1.6 billion of total estimated claims against the Company that existed as of the Filing Date.
Fresh-Start Reporting
Pursuant to the guidance provided by the American Institute of Certified Public Accountants in Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"), the Company adopted fresh-start reporting and reflected the consummation distributions in the consolidated balance sheet as of December 26, 1992 (the fiscal month-end for December, 1992). Under fresh-start reporting, the reorganization value of the Company was allocated to the emerging Company's net assets on the basis of the purchase method of accounting.
The Company's reorganization value was less than the fair value of the current assets at the Consummation Date. In accordance with the purchase method of accounting, the excess of book value over fair value was allocated to reduce proportionately the values assigned to non-current assets in determining their fair values. Because this allocation reduced the non-current assets to zero value, the remainder was classified as a deferred credit ("Excess of revalued net assets over equity under fresh-start reporting" or "negative goodwill") and is being amortized systematically to income over the period estimated to be benefited (ten years). Depreciation and amortization of fixed assets is for capital additions after December 26, 1992.
3. Cash and Short-Term Investments: -------------------------------
As of January 27, 1996, the Company had no restricted cash balances. As of January 28, 1995, the Company had $1.8 million of cash received in escrow from the December, 1994 sale of a store's lease interest. This cash was included in "Restricted cash and short-term investments" at January 28, 1995 and was released from escrow in February, 1995. In addition, as of January 28, 1995, Ames restricted approximately $0.2 million of cash for expected payments of certain remaining administrative and priority claims under the Amended Plan. These amounts are also included in "Restricted cash and short-term investments." The associated liability is included in "Accrued expenses."
4. Inventories: -----------
Substantially all inventories are valued at the lower of cost or market. Cost is determined by the retail last-in, first-out (LIFO) cost method for all merchandise inventories and includes the capitalization of transportation and distribution center costs. No LIFO reserve was necessary as of January 27, 1996, January 28, 1995 and January 29, 1994.
5. Debt: ----
The Credit Agreement
On April 28, 1994, the Company entered into an agreement with BankAmerica Business Credit, Inc., as agent, two financial institutions as co-agents (together with the agent, the "Agents"), and a syndicate consisting of five other banks and financial institutions, for a secured revolving credit facility of up to $300 million, with a sublimit of $100 million for letters of credit (the "Credit Agreement"). The Credit Agreement is in effect until June 22, 1997, is secured by substantially all of the assets of the Company, and requires the Company to meet certain quarterly financial covenants which were amended in January, 1996. The Credit Agreement has no requirement for cash collateralization of letters of credit, except in limited instances. The funds under the Credit Agreement may only be used for working capital and for the payment of certain debt described below. The interest rate per annum on the Credit Agreement is equal to the Reference Rate (as defined in the Credit Agreement) plus 2% of the first $270 million of Advances (subject to downward adjustments) or 5% of the last $30 million of Advances. Alternatively, the first $270 million of Advances under the Credit Agreement may be made at the interest rate per annum equal to the Eurodollar Rate (as defined in the Credit Agreement) plus 3.75% (subject to downward adjustments).
As of January 27, 1996, the interest rate on the Credit Agreement was 10.5%. For Fiscal 1995, the weighted average interest rate on the Company's revolving credit facilities was 10.1%. The peak borrowing level under the Credit Agreement during Fiscal 1995 was $195.4 million. As of January 27, 1996, approximately $1.9 and $27.5 million was outstanding in trade and standby letters of credit, respectively, under the Credit Agreement.
The amount of borrowing under the Credit Agreement shall not exceed the sum of (i) an amount equal to 55% of inventory not covered by any outstanding letter of credit plus (ii) an amount equal to 50% of inventory covered by any outstanding letter of credit less (iii) a reserve for reinstated debt ($14.6 million as of January 27, 1996). In addition, the Credit Agreement provides for the potential establishment of other reserves contingent upon the Company's financial performance. Each 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 quarterly financial covenants under the Credit Agreement are limited to: capital expenditure limits; minimum EBITDA (as defined below); and minimum EBITDA to cash interest expense. The definition of EBITDA, as modified by Amendment No. 4 to the Credit Agreement which was effective January 12, 1996 and was filed in a Form 8-K dated January 26, 1996, is: income before (a) interest expense, (b) income tax expense or benefit, (c) depreciation and amortization expense, LIFO expense, stock appreciation rights accruals, restructuring charges and other noncash charges, (d) certain pre-opening expenses incurred in connection with the opening of the locations formerly operated by Jamesway Corporation and (e) gain or losses on properties sold after January 28, 1996.
Compliance with the EBITDA covenant will be dependent upon the Company's attainment of results that are reasonably consistent with its financial projections reported on Form 8-K dated February 21, 1996. In addition, each year Ames must have no outstanding borrowings (other than borrowings, not to exceed $20 million, related to certain expenditures) under the Credit Agreement for a consecutive 30-day period between November 15th and February 15th of the following year (the "clean-up" requirement). The Company is in compliance with the financial covenants, as amended, through the quarter ended January 27, 1996.
Fees required under the Credit Agreement include: (1) quarterly commitment fees of .5% per annum on the unused portion of the facility during each quarter, (2) an initial facility fee of $5.4 million paid on the closing date and an additional facility fee of $3.0 million ($1.0 million paid at closing and the remainder due in quarterly installments of $250,000 each beginning in the second year), and (3) prepayment fees of 3.0%, 2.0%, and 1.0% of the amount of the Tranche A portion (as defined in the Credit Agreement) reduced or terminated prior to the first, second, and third (six months or more prior to the maturity date) anniversary of the Credit Agreement, respectively.
In June, 1994, the Company utilized the funds that were no longer restricted for the collateralization of letters of credit, and funds from the Credit Agreement, to prepay the POR Term Notes, a $1.2 million term note, and the outstanding borrowings under the credit agreement in effect immediately prior to the prepayment. As a result of the refinancing and associated commitment to prepay the above debt, a non-cash extraordinary charge of $1.5 million, net of tax benefit of $0.7 million, was recorded in the quarter ended April 30, 1994, primarily for the write-off of deferred financing costs and debt discounts related to the debt to be prepaid.
Other Debt
The Company's outstanding debt as of January 27, 1996 and January 28, 1995 is listed and described below. Pursuant to the Amended Plan, the Company and its lenders agreed to a restructuring of the Company's obligations at December 26, 1992.
New and reinstated debt obligations that carried face interest rates significantly lower than market rates (for financing of a similar nature) as of the Consummation Date were discounted to their present values using estimated market rates. The discount amounts are being amortized to interest expense over the terms of the related obligations using the effective interest method. The market interest rates used to determine the present values at December 26, 1992 are shown in the table below.
As of January 27, 1996, payments due on long-term debt for the next five years and thereafter were as follows:
(000's Omitted) Fiscal Year Ending January Amount -------------------------- ---------------
1997 $13,682 1998 12,097 1999 2,770 2000 9,500 2001 -0- Thereafter -0-
Outstanding debt at January 27, 1996 and January 28, 1995 is listed below. Further explanations of certain of the obligations follow the table.
Allowed Priority Tax Obligations
Allowed priority tax obligations consist of remaining claims entitled to priority status under the Bankruptcy Code, including claims based on retail sales made by Ames (the proceeds of which are deemed to be held in trust by Ames for the benefit of various state taxing authorities). Unless otherwise agreed to in writing with Ames, the holder of an allowed priority tax claim receives deferred cash payments in a principal amount equal to the amount of such claim over a period not exceeding six years from the date of assessment of the tax on which the claim is based. The deferred cash payments may be made in annual installments equal to 10% of the allowed priority tax claim together with simple interest at the rate of 5% per annum. The remaining unpaid principal and accrued interest thereon will be paid on the first business day following the date that is the sixth anniversary of the date of assessment of the tax on which the claim is based. During Fiscal 1993, the Company paid approximately $1.9 million to certain state taxing authorities in early settlement of approximately $2.8 million of tax obligations (Note 19).
Deferred Cash Distributions
The Amended Plan provided that approximately $46.5 million of cash distributions in respect to several classes of claims would be paid subsequent to the Consummation Date. On January 31, 1993, January 31, 1994, January 31, 1995 and January 31, 1996, $15.0, $8.0, $8.0 and $8.0 million, respectively, of these deferred cash distributions were paid as scheduled, and the remaining unsecured amount of $7.5 million is due January 31, 1997, with interest that began on February 1, 1994 at 5% per annum.
6. Lease Commitments and Unfavorable Lease Liability: -------------------------------------------------
Ames is committed under long-term leases for various retail stores, warehouses and equipment expiring at various dates through 2018 with varying renewal options and escalating lease clauses. Some leases are classified as capital leases under Statement of Financial Accounting Standards No. 13. Capital lease obligations were revalued under fresh-start reporting. Ames generally pays for real estate taxes, insurance, and specified maintenance costs under real property leases. Certain leases also provide for contingent rentals based on percentages of sales in excess of specified amounts.
Future minimum lease payments for leases as of January 27, 1996 were as follows:
Total payments have not been reduced by minimum sublease rentals to be received in the aggregate under noncancellable subleases of capital leases and operating leases of approximately $2.6 and $2.0 million, respectively, as of January 27, 1996.
Amortization of capital lease assets was approximately $0.2, $0.1 and $0.0 million for Fiscal 1995, Fiscal 1994 and Fiscal 1993, respectively.
Rent expense (income), excluding the benefit from the amortization of the unfavorable lease liability, was as follows:
The unfavorable lease liability in the Consolidated Balance Sheets was recorded as part of fresh-start reporting and represents the estimated liability related to lease commitments that exceeded market rents for similar locations. This liability is being amortized as a reduction of rent expense in the Consolidated Statements of Operations over the remaining lease terms.
7. Stockholders' Equity: --------------------
Common Stock and Priority Common Stock
As provided under the Amended Plan, the authorized capital stock of the reorganized Ames consisted of 40,000,000 shares of common stock (20,472,269 and 20,127,269 shares outstanding as of January 27, 1996 and January 28, 1995, respectively), par value $.01 per share (the "Common Stock"), and 12,000,000 shares of priority common stock (0 shares outstanding as of January 27, 1996 and January 28, 1995, respectively), par value $.01 per share (the "Priority Common Stock"). The outstanding shares of the Priority Common Stock as of December 30, 1994 were automatically converted into an equal number of fully paid and nonassessable shares of Common Stock. Such conversion was deemed to have occurred on such date without any notice or other action on the part of the Company or the holder of such Priority Common Stock.
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.
All equity interests existing immediately prior to the consummation of the Amended Plan were cancelled pursuant to the Amended Plan and the accumulated deficit was eliminated under fresh-start reporting.
Warrants
An aggregate of 200,000 Series B Warrants were issued under the Amended Plan. Each such warrant entitles the holder to purchase one share of the Common Stock at any time from six months after the Consummation Date through the eighth anniversary of the Consummation Date. The exercise price is $5.92 per share. No Series B Warrants have yet been exercised.
An aggregate of 2,120,000 Series C Warrants were issued (1,992,715 outstanding as of January 27, 1996) under the Amended Plan. Each such warrant entitles the holder to purchase one share of the Common Stock at any time from six months after the Consummation Date through January 31, 1999. The exercise price is $1.11 per share. There were no exercises of the Series C Warrants during Fiscal 1995 and Fiscal 1994.
The exercise prices of the above warrants are subject to adjustment upon the occurrence of certain events, including, among other things, the payment of a stock dividend with respect to the Company's Common Stock, the subdivision, combination or reclassification of Common Stock, the merger or consolidation of the reorganized Company, 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 of the Company. Rights, options or warrants distributed to holders of Common Stock prior to the warrant expiration dates will be distributed to holders of such warrants as if the warrants had been exercised immediately prior to the record date for such distribution. Upon the exercise of warrants, a holder of such warrants is entitled to receive any distributions (other than distributions described above, distributions in connection with the total liquidation, dissolution, or winding-up of the Company or dividends payable out of current earnings) made to holders of Common Stock prior to expiration of such warrants as if the holder had exercised such warrants prior to the record date of such distribution. In this case, the holder, upon conversion, would also receive interest at a rate of 10% per annum on any cash payable, as well as any income earned on distributed assets, property or securities from the distribution date to the date of exercise. The exercise prices and number of shares issuable upon exercise will also be adjusted in certain circumstances if the Company issues certain securities at below market prices.
A holder of any of the warrants described above as such will not be entitled to any rights as a stockholder of the Company, including without limitation the right to vote with respect to the shares of Common Stock of the Company, until such holder has properly exercised the warrants in accordance with the terms of the respective warrant agreement.
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 the Company's 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.
8. Stock Options: -------------
Pursuant to the 1994 Management Stock Option Plan (the "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 under the Option Plan. 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 three to five years and terminate after five to six 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 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 or date of stockholder approval, whichever is later, and will terminate July 21, 2004. Effective on the date of each annual meeting of stockholders of the Company commencing with the 1996 Annual Meeting of Stockholders, each non-employee director of the Company then in office will be granted an option to purchase 2,500 shares, with the date of grant to be the date of such meeting. As of January 27, 1996, 45,000 options had been granted under the Non-Employee Plan at prices ranging from $2.75 to $3.13; all were exercisable.
The following table sets forth the stock option activity for both stock option plans for Fiscal 1995 and Fiscal 1994.
9. Income Taxes: ------------
The Company had no income tax provision for Fiscal 1995. For Fiscal 1994 and Fiscal 1993, the Company recorded non-cash income tax provisions of approximately $8.2 and $3.3 million, respectively.
The Company adopted SFAS No. 109 in conjunction with the adoption of fresh-start reporting. Under SFAS No. 109, deferred income taxes are recognized by applying the enacted statutory tax rates in future years to the changes in "cumulative temporary differences" (the differences between financial statement carrying values and the tax basis of assets and liabilities).
As a consequence of the adoption of fresh-start reporting and SFAS No. 109, any tax benefits realized for tax purposes after the Consummation Date for pre-consummation cumulative temporary differences, as well as for the pre-consummation net operating loss carryovers, are reported as additions to paid-in-capital (see Consolidated Statements of Changes in Stockholders' Equity) rather than as reductions in the tax provisions in the Consolidated Statements of Operations. Tax benefits or liabilities realized for book purposes after the Consummation Date will be segregated from the pre-consummation deferred tax assets. Ames, although not likely to pay income taxes in the near future, may be required to record tax provisions on book income. However, the utilization of post- consummation deferred tax assets may reduce future income tax provisions. Such income tax provisions have no impact on the Company's taxes payable or cash flows.
Ames has the following deferred tax assets from pre-consummation ("Pre") and post-consummation ("Post") periods, as of the following dates ($ in millions):
The Company has fully reserved for its deferred tax assets because of the current uncertainty of the future recognition of such deductions. In subsequent periods, Ames may reduce the valuation allowances, provided that the possibility of utilization of the deferred tax asset is more likely than not, as defined by SFAS No. 109. Any such reduction in the pre- consummation valuation allowance in the near future will result in a corresponding addition to paid-in-capital.
The Company has treated "pre-emergence net operating losses" (qualified losses incurred prior to the Consummation Date) under Section 382(l)(5) of the Internal Revenue Code (hereafter "L-5"). Under "L-5," there is approximately $295 million in pre-emergence net operating losses currently available as carryovers without any annual limitation. The Company has filed a $20 million refund claim under Section 172(f) of the Internal Revenue Code. The claim represents a 10 year carryforward of qualified expenses and is currently under review by the Internal Revenue Service ("IRS"). The claim will reduce pre-emergence net operating losses by approximately $43.5 million.
Ames also has a "post-emergence net operating loss" carryover (incurred after the Consummation Date) of approximately $189 million. Both pre- and post-emergence net operating loss carryovers will expire between 2007 and 2011. In addition, Ames has targeted jobs tax credit carryovers of approximately $7 million and alternative minimum tax credit carryovers of approximately $3 million, which will expire in 2007 and 2004, respectively. Federal net operating loss carryovers for fiscal years subsequent to January 27, 1990 are subject to future adjustments, if any, by the IRS.
Ames has substantial potential state net operating loss carryovers. It is difficult, however, to quantify the utilizable amounts of such state operating losses because of the uncertainty related to the mix of future profits in specific states.
10. Benefit and Compensation Plans: ------------------------------
Retirement and Savings Plan
Ames has a defined contribution retirement and savings plan (the "Retirement and Savings Plan") that is qualified under Sections 401(a) and 401(k) of the Internal Revenue Code of 1986, as amended, for employees who, after one year of service, have reached the age of 21 and have completed at least 1,000 hours of service in a 12-month period. For each participant's contribution (up to a maximum of 5% of such participant's total compensation), the Company contributes to the Retirement and Savings Plan an amount equal to 50% of such contribution. A participant may contribute to the plan from 1% to 18% of annual compensation on a pre-tax or after-tax basis, or a combination of both. Participants who terminate their employment with the Company are entitled to receive the full amount of their contributions and, depending on the length of the participant's service to Ames, a portion of the Company's matching contributions. Ames funds all administrative costs incurred by the plan. Ames' expense associated with this plan amounted to approximately $3.0, $3.1, and $2.6 million, in Fiscal 1995, Fiscal 1994 and Fiscal 1993, respectively.
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 27, 1996, the Company had reserved for its known obligations under the ICP.
Stock Appreciation Rights
In connection with the Amended Plan, stock appreciation rights ("SARs") exercisable only for cash, equivalent to 1.2 million shares of the new Common Stock, were granted to certain members of management as compensation for their efforts in restructuring Ames and enabling it to emerge from Chapter 11. After exercises and terminations, SARs equivalent to 183,350 shares were outstanding at January 27, 1996. One-third of the SARs vested on the Consummation Date, one-third vested on December 30, 1993, and the remaining one-third vested on December 30, 1994. Each SAR entitles the recipient, upon exercise (which may not be later than five years after the Consummation Date), to receive in cash the excess of the average closing price of a share of Common Stock during the ten trading days prior to the exercise date, over the average closing price of a share of Common Stock during the 60 trading days after the Consummation Date ($2.96). The average closing price for the last 10 trading days of Fiscal 1995 was $1.47 per share. During Fiscal 1995, no SARs were exercised.
Long Term Incentive Plan
On May 24, 1995, the stockholders approved the Company's 1995 Long Term Incentive Plan (the "Long Term Plan") under which 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 Long Term Plan) of the Common Stock awarded, determined as of and paid on the vesting date. Each award under the Long Term Plan vests in full on the third anniversary of the date of grant of such award. Awards may be made to the Chief Executive Officer, any Executive Vice President and any Senior Vice President of the Company. Other than for death or disability, awards which have not yet vested are forfeited upon the termination of the employment of the executive.
As of January 27, 1996, awards aggregating to 345,000 shares of Common Stock had been made to certain executives of the Company. The shares for these awards 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 27, 1996.
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, 2 times Base Compensation for Senior Vice Presidents and selected Vice Presidents and 1 times Base Compensation for other Vice Presidents. Base Compensation is defined generally as the sum of the participant's annual base compensation in effect immediately prior to the participant's termination plus one-third of the value of the cash and stock bonuses paid to the participant during the 36 months ending on the date of termination. For purposes of the Continuity Plan, a change of control includes but is not limited to the acquisition by any person of beneficial ownership of 20% or more of 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.
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). Bonus expense recorded under the plan was $1.5, $1.6 and $2.8 million for Fiscal 1995, 1994 and 1993, respectively.
Retirement Plan
Through the end of Fiscal 1995, Ames had an unfunded Retirement Plan for Officers/Directors (the "Retirement Plan"). It provided that every person who was employed by Ames when he or she retired, died or became disabled and who (i) served as both a full-time officer and a director of Ames and had completed five years of service, not necessarily consecutive, in both of these capacities, or (ii) served as a director of Ames and had completed 10 years, not necessarily consecutive, of service to Ames, was eligible for benefits under the Retirement Plan.
Benefits under the Retirement Plan were payable upon termination of employment due to retirement, death or disability. The annual benefit was equal to two-thirds of the participant's average annual base salary during the five-year period of highest compensation preceding such termination of employment. The maximum annual benefit under the Retirement Plan was $100,000, reduced by an amount equal to certain of such participant's annual Social Security benefits. Each participant in the Retirement Plan was entitled to benefits for a period of 10 years. Upon the earlier death of the participant, at the Company's option, the future payments as scheduled or the then present value of all unpaid benefits would be paid to the participant's estate. 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 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. There were 2,128 retirees covered by this plan as of January 27, 1996. The Company has a reserve established for the projected payments under this plan.
11. Commitments and Contingencies: -----------------------------
As part of the Company's settlement with TJX Companies, Inc. ("TJX") under the Amended Plan, Ames must reimburse TJX for various obligations, fees, and expenses that may be paid by TJX relating to various properties that were under leases rejected by Ames. The obligations, fees, and expenses are subject to certain maximum amounts and the total reimbursement may not exceed $2.7 million and will be in the form of an unsecured note payable due on January 31, 1998 (the "TJX Expense Note"). TJX provides Ames with the amounts paid, if any, during each quarter and those amounts, after appropriate review, become the principal due under the TJX Expense Note. As of January 27, 1996, the amount claimed as due by TJX and recorded by Ames as the TJX Expense Note was approximately $.8 million (see Note 5). Interest is being accrued on the principal amounts due at 10% per annum and will be payable on January 31, 1998.
The Amended Plan states that portions of any "Excess cash flow amount" must be distributed to holders of claims in certain classes in the order set forth in the Amended Plan. "Excess cash flow amount" is defined as, with respect to the fiscal years ending January 27, 1996 and January 25, 1997, 50% of the excess of (i) EBITDA (as defined in the Company's credit agreement in effect on Consummation Date) of reorganized Ames for such fiscal year over (ii)(a) $99.1 million with respect to the fiscal year ending January 27, 1996 and (b) $114.7 million with respect to the fiscal year ending January 25, 1997; provided, however, that excess cash flow amounts shall not be paid with respect to any fiscal year after the fiscal year ending January 25, 1997. There are a number of events that must occur before these classes will receive any payments from the excess cash flow amount. First, Ames must realize cash flows that exceed the level of projected cash flows in the Amended Plan. Second, if there is cash flow exceeding those projections, it will be allocated to pay the other distributions scheduled under the Amended Plan before any of the classes entitled to receive excess cash flow payments will receive any payments from the excess cash flow amount. Thus, if Ames has excess cash flow, some of the deferred distributions provided in the Amended Plan may be paid earlier than otherwise scheduled. Third, the excess will be measured at the end of each fiscal year through January 25, 1997. This means that if the required earnings levels are not reached during those years, no excess cash flow amount will ever be paid. There were no excess cash flow amounts through January 27, 1996 and none are anticipated in the Company's latest projections.
The Amended Plan further states that portions of any Wertheim Claim Proceeds (Note 12) and Litigation Claims (as defined in the Amended Plan) must be distributed to certain classes of claims. As to the Wertheim Claim Proceeds received in June, 1994, after distribution of $7 million to the Class AG-6A Trust, Ames retained the remaining $12 million. To the Company's knowledge, the relevant creditor groups have not formed the Litigation Trust which would be responsible for pursuing any Litigation Claims. Any future net proceeds from Litigation Claims would be distributed pursuant to the Amended Plan.
12. Litigation: ----------
On April 25, 1990 (the "Filing Date"), Ames filed for protection under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Southern District of New York ("the Bankruptcy Court"), Case Nos. 90B11233 through 11285. By Order dated as of December 18, 1992 (and modified subsequently) (the "Confirmation Order"), the Bankruptcy Court confirmed the Amended Plan. The Amended Plan was consummated on December 30, 1992.
The Confirmation Order, among other things, dismissed with prejudice all pending litigation, and released all claims that could have been brought in litigation, between the Company and the Citibank Group, TJX (to the extent provided in the Ames-TJX Release), and the creditors of the Company, including but not limited to Claims arising in (a) the Tax Refund Motion, (b) the Citibank Lift Stay Motion, (c) the Ames Declaratory Judgment Action, (d) the Substantive Consolidation Motion (as terms (a) through (d) are defined on pages 24 and 25 of the October 23, 1992 Disclosure Statement and Restated Joint Plan of Reorganization of Ames Department Stores, Inc. and Other Members of the Ames Group), and (e) an action filed under seal in the Bankruptcy Court on April 24, 1992 by the members of the Ames Group as Adversary Proceeding No. 92-9016A (JAG).
A number of claims filed in connection with the Ames Chapter 11 cases remain unresolved, only a few of which are asserted to be administrative, priority or secured claims. To the extent that such claims are properly asserted or found to be unpaid administrative, priority or secured claims, they would be the responsibility of the Company. Based on its continuing review of these claims, the Company believes that some have, in fact, already been fully satisfied, others are pre-petition unsecured claims which are not the responsibility of the Company, and some will be without any validity. In the aggregate, the Company does not believe the remaining pre- petition claims for which it will be liable under the Amended Plan will be material.
On March 21, 1995, a Class Action Complaint (the "Complaint") was filed against the Company in the Superior Court Department of the Trial Court, Suffolk County, Massachusetts entitled David W. Abrams, Individually and On Behalf of All Other Persons Similarly Situated v. Ames Department Stores, Inc. The Complaint alleged that Ames violated Massachusetts wage and hour law by failing to pay Abrams, and others similarly situated Assistant Managers in Massachusetts, time and one-half their regular rates of pay for hours worked in excess of 40 a week. The Complaint sought injunctive relief, treble damages, costs and attorney's fes. On April 21, 1995, the case was removed to the United States District Court for the District of Massachusetts. The Company has denied the claims on the basis that Abrams and other similarly situated Assistant Managers were exempt employees not entitled to overtime pay. The Company has further denied that the action is properly maintainable as a class action and that the plaintiff is not a proper representative of the purported class. Discovery on whether a class should be certified is ongoing and a hearing on this question will likely occur later this year.
On December 13, 1995, a Class Action Complaint was filed and on January 23, 1996 and Amended Class Action Complaint was filed (the "Second Complaint") 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 Second Complaint are essentially the same as in the Abrams Complaint referenced above. However, the Second Complaint also includes claims against the Company 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 purports to state cliams on behalf of Assistant Managers in each of those states. The Company believes, among other things, that the case is not properly maintainable as a class action suit and that the plaintiff is not a proper class representative. The Company also denies liability on that basis that Austin and other similarly situated Assistant Managers were exempt employees and has moved to dismiss the claims under ERISA and the laws of all states except Massachusetts. Discovery has not yet commenced in this matter.
On September 15, 1995, the Company commenced an adversary proceeding in the Bankruptcy Court entitled Ames Department Stores, Inc. v Argonaut Insurance Company (the "Adversary Proceeding"). The reason for this filing was a September 1995 assertion by Argonaut Insurance Company ("Argonaut") that an evergreen letter of credit issued to the benefit of Argonaut at the request of Ames in May 1990 (the "Letter of Credit") could be drawn upon to satisfy Argonaut's pre-petition claim against Ames under an insurance policy issued by Argonaut to Ames in October 1989 (the "Insurance Policy"). The Letter of Credit is in the amount of $5 million and Ames has an obligation to reimburse the issuing bank for any draw down on the Letter of Credit.
The Adversary Proceeding against Argonaut seeks, among other things, to enjoin Argonaut from drawing down the Letter of Credit to satisfy its pre-petition claims. The Company asserts, among other things, that the Letter of Credit was not intended to cover pre-petition claims and, in any event, could not do so under relevant bankruptcy law. The Company also asserts that in the event Argonaut is permitted to draw down on the Letter of Credit, the proper interpretation of the aggregate deductible provision in the Insurance Policy means that the maximum draw down amount is substantially less than $5 million.
On November 14, 1995 Argonaut filed a motion to dismiss the Complaint in the Adversary Proceeding. Ames filed its First Amended Complaint on November 28, 1995. Argonaut's motion to dismiss was denied by order of the Bankruptcy Court dated January 19, 1996. Argonaut appealed to the District Court from the Bankruptcy Court's denial of the motion to dismiss and Argonaut's motion for leave to appeal from an interlocutory order is currently pending. Because Argonaut refused to consent to any additional amendments, Ames moved on January 18, 1996 for leave to file its Second Amended Complaint. On February 14, 1996, Argonaut filed its objection to this motion.
The Company believes the positions it has asserted in the Complaint and the Amended Complaints have a strong basis in fact and law. The Company has recorded a liability for what it believes its maximum exposure to be. Discovery in the Adversary Proceeding is currently underway and is scheduled to end on June 1, 1996.
Wertheim Proceeding
On October 13, 1992, Ames commenced an adversary proceeding against Wertheim Schroder & Co., Inc. ("Wertheim") and James A. Harmon ("Harmon") (Wertheim & Harmon, collectively the "Defendants"). In this proceeding (the "Wertheim Proceeding"), Ames sought damages and equitable relief for breach of fiduciary duty, professional malpractice, fraudulent conveyance and transfer pursuant to the Bankruptcy Code and New York law, and other improper conduct relating to Ames' acquisition from Zayre Corporation ("Zayre") of Zayre's discount stores division in October 1988 (the "Zayre Acquisition"). Wertheim was investment advisor to both Ames and Zayre in connection with the Zayre Acquisition; Harmon at the time of the Zayre Acquisition served as Chairman of the Board of Directors of Ames and as Chairman of Wertheim.
On November 20, 1992, the Defendants answered the complaint, denied its material allegations and interposed ten counterclaims against Ames, asserting (i) contribution claims under common law and the 1933 Securities Act, and (ii) claims for indemnity under Ames' articles of incorporation, Ames' engagement letter with Wertheim, other agreements between Wertheim and Ames, Delaware law and common law.
On March 31, 1994, Ames entered into a settlement agreement with the Defendants (the "Settlement Agreement"), which was subject to the approval of the Bankruptcy Court. In summary, the Settlement Agreement provided for a $19 million settlement payment by the Defendants and dismissal of all claims and counterclaims in the Wertheim Proceeding. The Settlement Agreement also provided for the Bankruptcy Court to enter an order (the "Bar Order") barring the assertion of further claims arising out of the Zayre Acquisition against the Defendants by Ames and holders of Allowed Claims (as defined in the Amended Plan). The Settlement Agreement also required Ames to indemnify the Defendants in the event that the assertion of Zayre-related claims by Ames against any third party results in that third party bringing a claim over against either of the Defendants. A hearing on the motion to approve the Settlement Agreement and enter the Bar Order was held on April 26, 1994.
Subsequent to the hearing, the Bankruptcy Court entered an order approving the Settlement Agreement, and the closing on the Wertheim Settlement Agreement took place in June, 1994. At that time, the Company recorded a nonrecurring gain for its $12 million portion of the settlement. The Class AG-6A Trust received $7 million for its portion of the settlement.
Other Matters:
Both prior and subsequent to the Filing Date, various class action suits were commenced on behalf of certain prior stockholders and debenture holders of Ames Department Stores, Inc. A settlement of these class actions, dated May 14, 1993, was reached between the plaintiffs and defendants and was approved by the United States District Court, Southern District of New York, on July 14, 1993. Any claim against Ames arising out of these suits were discharged as part of and in accordance with the terms of the Amended Plan which was confirmed on December 18, 1992. Accordingly, the settlement of these cases has no financial impact on Ames beyond the terms of the Amended Plan.
Ames has owned and/or leased current and former facilities that are subject to several environmental laws relating to the operation and maintenance of those facilities, particularly with respect to the facilities' 200 or more underground storage tanks. The vast majority of those tanks have been cleanly removed. Some residual contamination exists at a limited number of facilities, the extent of which has not been determined at this time. Environmental liabilities associated with these facilities may be shared with facility landlords, tenants, subtenants, or other third parties. In some states, clean-ups may be eligible for financing from state funds. Based on currently available information, no liabilities material to the Company will result from any underground storage tank residual contamination. The Company believes that adequate liabilities have been recorded related to any potential costs.
Under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 as amended by the Superfund Amendments and Reauthorization Act of 1986 ("Superfund"), liability may be imposed on waste generators, site owners and operators, and others regardless of fault or the legality of the original waste disposal activity. Ames may be liable for costs at several sites under Superfund or similar state laws either for generating wastes, including waste oils disposed of at those sites, or in connection with the assumption by Ames of certain Zayre Discount Division liabilities. Ames believes that it has been connected to most of these sites based on relatively small amounts of wastes and that many other parties are involved at these sites and may share in the ultimate liability. Ames does not have sufficient information to determine its relative responsibility for, or contribution to (if any), all of these sites at this time.
The Company is a party to various claims and legal proceedings covering a wide range of matters that arise in the ordinary course of its business activities. The Company believes that its likely liability as to these matters will not have a material adverse effect on the consolidated financial position or results of operations of the Company.
13. Supplemental Cash Flow Information: ----------------------------------
Cash paid for interest and income taxes were as follows:
14. Fair Values of Financial Instruments: ------------------------------------
The Financial Accounting Standards Board requires disclosure of the fair value of financial instruments under Statement of Financial Accounting Standards No. 107, "Disclosures About Fair Value of Financial Instruments" ("SFAS No. 107"). 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 27, 1996 and January 28, 1995 were cash and short-term investments, long-term debt, and the Series C Warrants. For cash and short-term investments, the carrying amounts reported in the Consolidated Balance Sheets approximated fair values. For long-term debt obligations, the fair values were estimated using a discounted cash flow analysis (based upon the Company's incremental borrowing rates for similar types of borrowing arrangements). The fair value of the Series C Warrants was based on the market trading price at year-end times the number of such warrants that were outstanding.
The carrying amounts and fair values of the Company's financial instruments at January 27, 1996 and January 28, 1995 were as follows:
15. Gain on Disposition of Properties: ---------------------------------
The following is a summary of the major components of the "Gain on disposition of properties":
16. Distribution Center Closing Costs: ---------------------------------
On November 1, 1994, the Company announced it would close the distribution center in Clinton, Massachusetts in June, 1995 and recorded a provision of $2.5 million in the third quarter for the estimated costs associated with closing the facility. By the end of Fiscal 1994, the Company had entered into an agreement to sell the Clinton facility in the second quarter of Fiscal 1995, earlier than originally anticipated. Due to this earlier-than-expected sale, the Company reduced the provision to $1.3 million in the fourth quarter of Fiscal 1994 to eliminate the reserve amounts established for real estate taxes and other estimated property holding costs. Transfer of the Clinton operations to the Company's distribution center in Leesport, Pennsylvania and the sale of the Clinton facility were completed in June, 1995. In conjunction with the sale of the Clinton facility, the Company was required to prepay the 8.5% Industrial Development Bonds which had secured the facility.
Approximately $0.6 million of estimated termination benefits was included in the provision. Approximately 330 employees were affected by the closing. The following items represent the major components (in thousands) of the total provision for the Clinton closing costs:
Through January 27, 1996, $1,250,000 of costs have been charged to the provision and minimal future expenses are expected.
17. Restructuring: -------------
The Company announced in January, 1996 that it would close 17 stores in March, 1996 and that it eliminated 71 positions in the corporate headquarters. In connection with the 17 store closings and related headquarter reductions, the Company recorded a restructuring charge of $20.9 million in January, 1996.
The following items represent the major components of the total restructuring charge recorded in January, 1996:
The lease costs provided for in the restructuring charge include all projected occupancy costs from date of closing until estimated lease disposition date. Termination benefits and other human resource costs include severance to be paid under the Company's severance policy to terminated associates in the 17 stores and in corporate headquarters. Other exit costs related to the closings include, among other items, incremental cleaning and security costs as well as costs to remove or transfer retained assets.
18. Leased Department and Other Operating Income: --------------------------------------------
19. Extraordinary Items: -------------------
The Company prepaid certain debt (Note 5) during Fiscal 1994 and recorded a non-cash extraordinary charge of $1.5 million, net of tax benefit of $0.7 million, primarily for the write-off of deferred financing costs and debt discounts.
During Fiscal 1993, the Company paid $1.9 million to certain state taxing authorities in early settlement of $2.8 million of tax obligations and recorded the difference of $0.9 million as an extraordinary gain.
20. Recently Issued Accounting Standards: ------------------------------------
Effective January 27, 1996, the Company has elected early adoption 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." As a result, the Company recorded an impairment loss of $3.4 million in the quarter ended January 27, 1996. The impairment loss, classified as part of "Depreciation and amortization expense," was equivalent to the current carrying value of fixtures and equipment and leasehold improvements for specific stores where historical and projected operating performance indicated an impairment. The Company will continue to operate these stores until such time that the estimated closing costs are less than any current cash losses.
In November 1995, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"). This statement establishes a fair value based method of accounting for an employee stock option or similar equity instrument but allows companies to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by APB Opinion No. 25, "Accounting for Stock Issued to Employees". Companies electing to remain with the accounting under APB Opinion No. 25 must, however, make pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in SFAS No. 123 had been applied. These disclosure requirements are effective for years beginning after December 15, 1995.
The Company has elected to continue to account for stock options under APB Opinion No. 25 and, in Fiscal 1996, will be making pro forma disclosures of net income and earnings per share as if the method defined in SFAS No. 123 had been applied.
21. Subsequent Event: ----------------
On February 5, 1996, the Company announced that its $2.8 million bid to acquire 10 locations previously operated as Jamesway stores had been approved by the bankruptcy court supervising the Jamesway liquidation. The Company was subsequently successful in acquiring an eleventh location. The Company expects to open nine of the eleven locations by the end of April, 1996.
22. 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. The quarterly gross margin results for Fiscal 1994 and Fiscal 1993 have been restated to conform to the presentation adopted in fourth quarter of Fiscal 1994.
Exhibit 4(d)
FIRST AMENDMENT, dated as of June 30, 1994 (this "Amendment"), to the Credit Agreement, dated as of April 28, 1994 (as heretofore amended, supplemented or otherwise modified, the "Credit Agreement") among Ames Department Stores, Inc., Ames Stores, Zayre New England Corp. and certain Affiliates thereof, the lenders listed on the signature pages hereto, who are parties to the Credit Agreement (the "Lenders"), and BankAmerica Business Credit, Inc. as administrative agent (the "Agent") and General Electric Capital Corporation and Congress Financial Corporation, each as co-agent (the "Co-Agents") (the Agent and Co-Agents are hereafter collectively referred to as the "Agents").
W I T N E S S E T H :
WHEREAS, the Borrowers (as that term is defined in the Credit Agreement), the Lenders and the Agents are parties to the Credit Agreement;
WHEREAS, the Borrowers have requested that the Credit Agreement be amended and the Lenders are willing to amend the Credit Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein have the meanings set forth in the Credit Agreement.
2. Amendment to Schedule 5.3A. Schedule 5.3A to the Credit Agreement is hereby deleted in its entirety and Schedule 5.3A annexed hereto is hereby substituted therefor.
3. Representations and Warranties. To induce Agents and Lenders to enter into this Amendment, each of the Credit Parties hereby represents and warrants as follows, with the same effect as if such representations and warranties were set forth in the Credit Agreement:
(a) Each Credit Party has the power and authority to enter into this Amendment, and has taken all corporate action required to authorize its execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered by such Credit Party and the Credit Agreement, as amended hereby, constitutes the valid and binding obligation of such Credit Party, enforceable against Borrower in accordance with its terms. The execution, delivery, and performance of this Amendment and the Credit Agreement, as amended hereby, by such Credit Party, will not violate its certificate of incorporation or by-laws or any agreement or legal requirement binding on such Credit Party.
(b) On the date hereof and after giving effect to the terms of this Amendment, (i) the Credit Agreement and the other Loan Documents are in full force and effect and, to the extent that a Credit Party is a party thereto, constitutes its binding obligation, enforceable against in accordance with their respective terms; (ii) no Default or Event of Default has occurred and is continuing; and (iii) no Credit Party has any defense to or setoff, counterclaim or claim against payment of the Lender Debt and enforcement of the Loan Documents based upon a fact or circumstance existing or occurring on or prior to the date hereof.
(c) Each of the Credit Parties hereby restates, repeats, and reaffirms each of the representations and warranties contained in the Credit Agreement, provided that each reference in such representations and warranties to "this Agreement" shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.
4. Limited Effect. Except as expressly amended hereby, all of the terms, covenants and provisions of the Credit Agreement and all liens, security interests and collateral granted by the Credit Parties are and shall continue to be unmodified and in full force and effect.
5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW Y0RK.
6. Counterparts; Effectiveness. This Amendment may be executed by the parties hereto in any number of separate counterparts, each of which shall be an original, and all of which taken together shall be deemed to constitute one and the same instrument. This Amendment shall not be effective unless and until Agent has received an executed counterpart of this Amendment from each of the Credit Parties and each of the Lenders.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written.
ZAYRE NEW ENGLAND CORP.
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Treasurer & Asst. Secretary
By: /s/ Mark von Mayrhauser -------------------------- Name: Mark von Mayrhauser Title: Vice President
AMES STORES
By: Zayre New England Corp., its general partner
By: /s/ Angelina M. Spoto -------------------------- Name: Angelina M. Spoto Title: Treasurer & Asst. Secretary
By: /s/ Mark von Mayrhauser -------------------------- Name: Mark von Mayrhauser Title: Vice President
By: Zayre Central Corp. its general partner
By: /s/ Angelina M. Spoto -------------------------- Name: Angelina M. Spoto Title: Treasurer & Asst. Secretary
By: /s/ Mark von Mayrhauser -------------------------- Name: Mark von Mayrhauser Title: Vice President
AMES DEPARTMENT STORES, INC.
By: /s/ Angelina M. Spoto -------------------------- Name: Angelina M. Spoto Title:
By: /s/ Mark von Mayrhauser -------------------------- Name: Mark von Mayrhauser Title: Assistant Treasurer
ZAYRE CENTRAL CORP.
By: /s/ Angelina M. Spoto -------------------------- Name: Angelina M. Spoto Title: Treasurer & Asst. Secretary
By: /s/ Mark von Mayrhauser -------------------------- Name: Mark von Mayrhauser Title: Vice President
AMD, INC.
By: /s/ Angelina M. Spoto -------------------------- Name: Angelina M. Spoto Title: Asst. Treasurer & Asst. Secretary
By: /s/ Mark von Mayrhauser -------------------------- Name: Mark von Mayrhauser Title: Asst. Treasurer & Asst. Secretary
AMES REALTY II, INC.
By: /s/ Angelina M. Spoto -------------------------- Name: Angelina M. Spoto Title: Asst. Treasurer & Asst. Secretary
By: /s/ Mark von Mayrhauser -------------------------- Name: Mark von Mayrhauser Title: Asst. Treasurer & Asst. Secretary
AMES TRANSPORTATION SYSTEMS, INC.
By: /s/ Angelina M. Spoto -------------------------- Name: Angelina M. Spoto Title: Asst. Treasurer & Asst. Secretary
By: /s/ Mark von Mayrhauser -------------------------- Name: Mark von Mayrhauser Title: Asst. Treasurer & Asst. Secretary
BANKAMERICA BUSINESS CREDIT, INC. (Individually and as Administrative Agent)
By: /s/ George Markowsky -------------------------- Name: George Markowsky Title: V.P.
GENERAL ELECTRIC CREDIT CORPORATION (Individually and as Co-Agent)
By: /s/ Timothy Morris -------------------------- Name: Timothy Morris Title: Duly Authorized Signatory
CONGRESS FINANCIAL CORPORATION (Individually and as Co-Agent)
By: /s/ Eugene Seip -------------------------- Name: Eugene Seip Title: A V P
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Peter L. Skauh -------------------------- Name: Peter L. Skauh Title: Vice President
CHEMICAL BANK, N.A.
By: /s/ Jeffrey S. Ackerman -------------------------- Name: Jeffrey S. Ackerman Title: V. P.
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Michael Burns -------------------------- Name: Michael Burns Title: V. P.
LASALLE BUSINESS CREDIT, INC.
By: /s/ Mary Ellen Nixon-Moore -------------------------- Name: Mary Ellen Nixon-Moore Title: Vice President
SHAWMUT BANK CONNECTICUT, N.A.
By: /s/ John Behan -------------------------- Name: John Behan Title: V. P.
Exhibit 4(e)
SECOND AMENDMENT, dated as of November 1, 1994 (this "Amendment"), to the Credit Agreement, dated as of April 28, 1994 (as heretofore amended, supplemented or otherwise modified, the "Credit Agreement") among Ames Department Stores, Inc., Ames Stores, Zayre New England Corp. and certain Affiliates thereof, the lenders listed on the signature pages hereto, who are parties to the Credit Agreement (the "Lenders"), and BankAmerica Business Credit, Inc. as administrative agent (the "Agent") and General Electric Credit Corporation and Congress Financial Corporation, each as co-agent (the "Co-Agenas ts") (the Agent and Co-Agents are hereafter collectively referred to the "Agents").
W I T N E S S E T H
WHEREAS, the Borrowers (as that term is defined in the Credit Agreement), the Lenders and the Agents are parties to the Credit Agreement;
WHEREAS, the Borrowers have requested that the Credit Agreement be amended and the Lenders are willing to amend the Credit Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein have the meanings set forth in the Credit Agreement.
2. Amendment to Section 1.1 (Definitions). Section 1.1 of the Credit Agreement is hereby amended by deleting the definition of "Reinstated Debt Reserve" set forth therein and substituting the following therefor:
"'Reinstated Debt Reserve' shall mean at any time an amount equal to (i) $36,000,000, less (ii) the aggregate amount of all regularly scheduled principal installments paid after April 30, 1994 (as and when such installments become due and payable in accordance with the Reinstated Debt Documents) by one or more of the Borrowers in respect of the unpaid principal balance of the Indebtedness described on Schedule 1.1(b) hereto to the extent such payments are permitted to be paid hereunder, less (iii) the aggregate amount of principal paid after April 30, 1994 by one or more of the Borrowers in respect of the unpaid principal balance of the Indebtedness described on Schedule 1.1(b) hereto to the extent such payments represent proceeds from the sale of Store No. 547 (Irwin, Pennsylvania) or the Clinton Warehouse in Clinton, Massachusetts but not to exceed, in each case, the lesser of the amount of scheduled principal installments that would have been payable from the date of sale to the Maturity Date on account of the Reinstated Debt relating to such asset or the proceeds of sale applied to the Reinstated Debt relating to such assets; and subject to the Agents' receipt of satisfactory evidence of such payments."
3. Representations and Warranties. To induce Agents and Lenders to enter into this Amendment, each of the Credit Parties hereby represents and warrants as follows, with the same effect as if such representations and warranties were set forth in the Credit Agreement:
(a) Each Credit Party has the power and authority to enter into this Amendment, and has taken all corporate action required to authorize its execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered by such Credit Party and the Credit Agreement, as amended hereby, constitutes the valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its terms. The execution, delivery, and performance of this Amendment and the Credit Agreement, as amended hereby, by such Credit Party, will not violate its certificate of incorporation or by-laws or any agreement or legal requirement binding on such Credit Party.
(b) On the date hereof and after giving effect to the terms of this Amendment, (i) the Credit Agreement and the other Loan Documents are in full force and effect and, to the extent that a Credit Party is a party thereto, constitutes its binding obligation, enforceable against it in accordance with their respective terms; (ii) no Default or Event of Default has occurred and is continuing; and (iii) no Credit Party has any defense to or setoff, counterclaim or claim against payment of the Lender Debt and enforcement of the Loan Documents based upon a fact or circumstance existing or occurring on or prior to the date hereof.
(c) Each of the Credit Parties hereby restates, repeats, and reaffirms each of the representations and warranties contained in the Credit Agreement, provided that each reference in such representations and warranties to "this Agreement" shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.
4. Limited Effect. Except as expressly amended hereby, all of the terms, covenants and provisions of the Credit Agreement and all liens, security interests and collateral granted by the Credit Parties are and shall continue to be unmodified and in full force and effect.
5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK.
6. Counterparts; Effectiveness. This Amendment may be executed by the parties hereto in any number of separate counterparts, each of which shall be an original, and all of which taken together shall be deemed to constitute one and the same instrument. This Amendment shall not become effective unless and until Agent has received an executed counterpart of this Amendment from each of the Credit Parties and each of the Lenders.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written.
ZAYRE NEW ENGLAND CORP.
By: /s/ Cornelius F. Moses III ----------------------------- Name: Cornelius F. Moses III Title: President
By: /s/ Angelina M. Spoto ----------------------------- Name: Angelina M. Spoto Title: Treasurer & Assistant Secretary
AMES STORES
By: Zayre New England Corp., its general partner
By: /s/ Cornelius F. Moses III ----------------------------- Name: Cornelius F. Moses III Title: President
By: /s/ Angelina M. Spoto ----------------------------- Name: Angelina M. Spoto Title:Treasurer & Assistant Secretary
By: Zayre Central Corp., its general partner
By: /s/ Cornelius F. Moses III ----------------------------- Name: Cornelius F. Moses III Title: President
By: /s/ Angelina M. Spoto ----------------------------- Name: Angelina M. Spoto Title: Treasurer & Assistant Secretary
AMES DEPARTMENT STORES, INC.
By: /s/ Cornelius F. Moses III ----------------------------- Name: Cornelius F. Moses III Title: Senior Vice President, Treasury
By: /s/ Angelina M. Spoto ----------------------------- Name: Angelina M. Spoto Title: Vice President, Treasury Operations
ZAYRE CENTRAL CORP.
By: /s/ Cornelius F. Moses III ----------------------------- Name: Cornelius F. Moses III Title: President
By: /s/ Angelina M. Spoto ----------------------------- Name: Angelina M. Spoto Title: Treasurer & Assistant Secretary
AMD, INC.
By: /s/ Cornelius F. Moses III ----------------------------- Name: Cornelius F. Moses III Title: President and Treasurer
By: /s/ Angelina M. Spoto ----------------------------- Name: Angelina M. Spoto Title: Assistant Treasurer & Assistant Secretary
AMES REALTY II, INC.
By: /s/ Cornelius F. Moses III ----------------------------- Name: Cornelius F. Moses III Title: Vice President and Treasurer
By: /s/ Angelina M. Spoto ----------------------------- Name: Angelina M. Spoto Title: Assistant Treasurer & Assistant Secretary
AMES TRANSPORTATION SYSTEMS, INC.
By: /s/ Cornelius F. Moses III ----------------------------- Name: Cornelius F. Moses III Title: Vice President and Treasurer
By: /s/ Angelina M. Spoto ----------------------------- Name: Angelina M. Spoto Title: Assistant Treasurer & Assistant Secretary
BANKAMERICA BUSINESS CREDIT, INC. (Individually and as Administrative Agent)
By: /s/ George Markowsky ----------------------------- Name: George Markowsky Title: V.P.
GENERAL ELECTRIC CAPITAL CORPORATION (Individually and as Co-Agent)
By: /s/ Timothy Morris ----------------------------- Name: Timothy Morris Title: Duly Authorized Signatory
CONGRESS FINANCIAL CORPORATION (Individually and as Co-Agent)
By: /s/ Eugene Seip ----------------------------- Name: Eugene Seip Title: A V P
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Peter L. Skauh ----------------------------- Name: Peter L. Skauh Title: Vice President
CHEMICAL BANK, N.A.
By: /s/ George McKinley ----------------------------- Name: George McKinley Title: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Michael Burns ----------------------------- Name: Michael Burns Title: Vice President
LASALLE BUSINESS CREDIT, INC.
By: /s/ Mary Ellen Nixon-Moore ----------------------------- Name: Mary Ellen Nixon-Moore Title: Vice President
SHAWMUT BANK CONNECTICUT, N.A.
By: /s/ John Behan ----------------------------- Name: John Behan Title: V. P.
Exhibit 4(f)
THIRD AMENDMENT, dated as of July 11, 1995 (this "Amendment"), to the Credit Agreement, dated as of April 28, 1994 (as heretofore amended, supplemented or otherwise modified, the "Credit Agreement") among Ames Department Stores, Inc., Ames Stores, Zayre New England Corp. and certain Affiliates thereof, the lenders listed on the signature pages hereto, who are parties to the Credit Agreement (the "Lenders"), and BankAmerica Business Credit, Inc. as administrative agent (the "Agent") and General Electric Capital Corporation and Congress Financial Corporation, each as co-agent (the "Co-Agents") (the Agent and Co-Agents are hereafter collectively referred to as the "Agents").
W I T N E S S E T H
WHEREAS, the Borrowers (as that term is defined in the Credit Agreement), the Lenders and the Agents are parties to the Credit Agreement;
WHEREAS, the Borrowers have requested that the Credit Agreement be amended and the Lenders are willing to amend the Credit Agreement as hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and for other good and valuable consideration, the receipt of which is hereby acknowledged, the parties hereto hereby agree as follows:
1. Defined Terms. Unless otherwise defined herein, capitalized terms used herein have the meanings set forth in the Credit Agreement.
2. Amendment to Section 4.1(d) (Payments and Prepayments). Section 4.1(d) of the Credit Agreement is hereby amended in its entirety to read as follows:
"(d) (i) The Borrowers shall designate, upon prior Written Notice to the Administrative Agent, a period of at least thirty (30) consecutive days during each three month period which commences on November 15 and ends on February 15 (any such thirty day period so designated, a "Cleanup Period"). Each Written Notice under this paragraph shall be given prior to January 10 for the three month period ending on the immediately following February 15. At all times during each Cleanup Period the Borrowers shall cause the aggregate outstanding principal balance of the Revolving Loan to not exceed the lesser of (i) $20,000,000 or (ii) the aggregate amount actually expended by the Borrowers (the "Acquisition Costs") after June 30, 1995 in connection with the acquisition ( a "Qualified Acquisition") of one or more additional store locations (exclusive of annual "planned" or forecasted additional store locations) including, but not limited to, lease assumption payments, remodeling expenditures, the cost of initial stocking of inventory (including the cost of inventory located at such store locations and acquired in connection with the acquisition of such store locations; provided; however that (a) the acquisition of such inventory is otherwise permitted under this Agreement and (b) the Agent has received evidence satisfactory to it that the Borrowers will have good and undisputed title to such inventory upon its acquisition and such inventory shall not be subject to any Lien or claim other than Liens permitted under Section 10.2 hereof) and transaction costs; provided, however, that any Revolving Advance made under Section 3.4 hereof may remain outstanding for up to one Business Day during any Cleanup Period.
(ii)The Borrowers shall give the Administrative Agent at least ten (10) days prior Written Notice (the "QA Notice") before making a Qualified Acquisition, along with a good faith estimate of the Acquisition Costs in such reasonable detail as requested by the Administrative Agent (the "QA Cost Estimate"). The QA Cost Estimate shall also include the cumulative amount of all Acquisition Costs as of the date of such QA Cost Estimate and the cumulative amount, if any, of other QA Cost Estimates for Qualified Acquisitions pending or not completed as of such date (the "QA Re-Cap").
(iii) Within 45 days of the completion of a Qualified Acquisition (i.e. the opening for business of the store or stores acquired pursuant to such Qualified Acquisition), the Borrowers shall provide the Administrative Agent with a report of the actual expenditures made by the Borrowers in connection with such Qualified Acquisition in such detail as reasonably requested by the Administrative Agent (the "QA Cost Report") including a QA Re-Cap as of the date of such QA Cost Report.
(iv) If a Cleanup Period commences during the pendency of a Qualified Acquisition, the Borrowers may provide the Administrative Agent with a report as of the commencement date of the Cleanup Period (the "QA Interim Report") of actual expenditures in connection with such pending Qualified Acquisition (including a QA Re-Cap). After the Commencement of the Cleanup Period, the Borrowers may provide the Administrative Agent with periodic updated QA Interim Reports with respect to such pending Qualified Acquisition detailing the Borrowers actual expenditures since the commencement of such Cleanup Period.
(v) If a Qualified Acquisition is completed prior to the commencement of a Cleanup Period or during a Cleanup Period but before a QA Cost Report is available or due hereunder, the Borrowers may provide the Administrative Agent with a good faith estimate of the QA Cost Report and such good faith estimate shall be used by the Administrative Agent, on an interim basis, to determine the Borrowers' compliance with this Section 4.1(d) until the QA Cost Report is delivered to the Administrative Agent, at which time the Administrative Agent will determine the Borrowers' actual compliance or non-compliance with this Section 4.1(d).
(vi) All reports or estimates referred to in this Section 4(d) shall be in such form and contain such detail as is reasonably requested by the Administrative Agent and at any time that the Borrowers have actual knowledge that a report or estimate given to the Administrative Agent hereunder is incorrect in any material way, the Borrowers shall promptly notify the Administrative Agent and supply the Administrative Agent with a corrected or updated report or estimate and such details as the Administrative Agent shall reasonably require."
3. Representations and Warranties. To induce Agents and Lenders to enter into this Amendment, each of the Credit Parties hereby represents and warrants as follows, with the same effect as if such representations and warranties were set forth in the Credit Agreement:
(a) Each Credit Party has the power and authority to enter into this Amendment, and has taken all corporate action required to authorize its execution, delivery and performance of this Amendment. This Amendment has been duly executed and delivered by such Credit Party and the Credit Agreement, as amended hereby, constitutes the valid and binding obligation of such Credit Party, enforceable against such Credit Party in accordance with its terms. The execution, delivery, and performance of this Amendment and the Credit Agreement, as amended hereby, by such Credit Party, will not violate its certificate of incorporation or by-laws or any agreement or legal requirement binding on such Credit Party.
(b) On the date hereof and after giving effect to the terms of this Amendment, (i) the Credit Agreement and the other Loan Documents are in full force and effect and, to the extent that a Credit Party is a party thereto, constitutes its binding obligation, enforceable against it in accordance with their respective terms; (ii) no Default or Event of Default has occurred and is continuing; and (iii) no Credit Party has any defense to or setoff, counterclaim or claim against payment of the Lender Debt and enforcement of the Loan Documents based upon a fact or circumstance existing or occurring on or prior to the date hereof.
(c) Each of the Credit Parties hereby restates, repeats, and reaffirms each of the representations and warranties contained in the Credit Agreement, provided that each reference in such representations and warranties to "this Agreement" shall be deemed to be a reference to the Credit Agreement as amended by this Amendment.
4. Limited Effect. Except as expressly amended hereby, all of the terms, covenants and provisions of the Credit Agreement and all liens, security interests and collateral granted by the Credit Parties are and shall continue to be unmodified and in full force and effect.
5. GOVERNING LAW. THIS AMENDMENT SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE INTERNAL LAWS (AS OPPOSED TO THE CONFLICT OF LAWS PROVISIONS) OF THE STATE OF NEW YORK.
6. Counterparts; Effectiveness. This Amendment may be executed by the parties hereto in any number of separate counterparts, each of which shall be an original, and all of which taken together shall be deemed to constitute one and the same instrument. This Amendment shall not become effective unless and until Agent has received an executed counterpart of this Amendment from each of the Credit Parties and each of the Lenders.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered by their respective proper and duly authorized officers as of the day and year first above written.
ZAYRE NEW ENGLAND CORP.
By: /s/ John F. Burtelow ------------------------- Name: John F. Burtelow Title: Vice President
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Treasurer & Assistant Secretary
AMES STORES
By: Zayre New England Corp., its general partner
By: /s/ John F. Burtelow ------------------------- Name: John F. Burtelow Title: Vice President
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Treasurer & Assistant Secretary
By: Zayre Central Corp., its general partner
By: /s/ John F. Burtelow ------------------------- Name: John F. Burtelow Title: Vice President
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Treasurer & Assistant Secretary
AMES DEPARTMENT STORES, INC.
By: /s/ John F. Burtelow ------------------------- Name: John F. Burtelow Title: EVP, Chief Financial Officer
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Vice President, Treasury Operations
ZAYRE CENTRAL CORP.
By: /s/ John F. Burtelow ------------------------- Name: John F. Burtelow Title: Vice President
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Treasurer & Assistant Secretary
AMD, INC.
By: /s/ John F. Burtelow ------------------------- Name: John F. Burtelow Title: Vice President
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Asst. Treasurer & Asst. Secretary
AMES REALTY II, INC.
By: /s/ John F. Burtelow ------------------------- Name: John F. Burtelow Title: Vice President
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Asst. Treasurer & Asst. Secretary
AMES TRANSPORTATION SYSTEMS, INC.
By: /s/ John F. Burtelow ------------------------- Name: John F. Burtelow Title: Vice President
By: /s/ Angelina M. Spoto ------------------------- Name: Angelina M. Spoto Title: Asst. Treasurer & Asst. Secretary
BANKAMERICA BUSINESS CREDIT, INC. (Individually and as Administrative Agent)
By: /s/ Louis Alexander ------------------------- Name: Louis Alexander Title: Senior Account Executive
GENERAL ELECTRIC CAPITAL CORPORATION (Individually and as Co-Agent)
By: /s/ Timothy Morris ------------------------- Name: Timothy Morris Title: Duly Authorized Signatory
CONGRESS FINANCIAL CORPORATION (Individually and as Co-Agent)
By: /s/ Anna M. Karcinsky ------------------------- Name: Anna M. Karcinsky Title: Assistant Vice President
SANWA BUSINESS CREDIT CORPORATION
By: /s/ Peter L. Skauh ------------------------- Name: Peter L. Skauh Title: Vice President
CHEMICAL BANK, N.A.
By: /s/ George Louis McKinley ---------------------------- Name: George Louis McKinley Title: Vice President
TRANSAMERICA BUSINESS CREDIT CORPORATION
By: /s/ Michael Burns ------------------------- Name: Michael Burns Title: Vice President
LASALLE BUSINESS CREDIT, INC.
By: /s/ Mary Ellen Nixon-Moore ---------------------------- Name: Mary Ellen Nixon-Moore Title:Vice President
SHAWMUT BANK CONNECTICUT, N.A.
By: /s/ John Behan ------------------------- Name: John Behan Title: V. P.
EXHIBIT 22
AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES SUBSIDIARIES OF THE REGISTRANT
Name State of Incorporation - ---------------------------------------- ----------------------
Ames Transportation Systems, Inc. Delaware AMD, Inc. Delaware Ames Realty II, Inc. Delaware Zayre New England Corp. * Delaware Zayre Central Corp.* Delaware
* Holds a 50% interest in Ames Stores, a partnership.
/TABLE