10-Q 1 q3fy2001final.txt Q3 FY2001 WGM_TrailerNY2:\1079784\01\N56001!.DOC\15079.0001 NY2:\1079784\01\N56001!.DOC\15079.0001 4 NY2:\1079784\01\N56001!.DOC\15079.0001 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended November 3, 2001 -------------------------------------------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------------------ -------------------------------------------- Commission File Number 1-05380 AMES DEPARTMENT STORES, INC. ---------------------------- (Exact name of registrant as specified in its charter) Delaware ---------------------------------------- 04-2269444 (State or other jurisdiction of --------------------------------------- incorporation or organization) (I.R.S. Employer Identification Number) 2418 Main Street, Rocky Hill, Connecticut 06067 ----------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (860) 257-2000 ------------------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- 29,408,057 shares of Common Stock were outstanding on December 1, 2001. Exhibit Index on page 21 Page 1 of 24

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED NOVEMBER 3, 2001 I N D E X Page Part I: FINANCIAL INFORMATION Item 1. Consolidated Condensed Statements of Operations 3 for the Thirteen Weeks and Thirty-Nine weeks ended November 3, 2001 and October 28, 2000 Consolidated Condensed Balance Sheets as of 4 November 3, 2001, February 3, 2001, and October 28, 2000 Consolidated Condensed Statements of Cash Flows 5 for the Thirty-Nine Weeks ended November 3, 2001 and October 28, 2000 Notes to Consolidated Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 12 Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 18 Part II: OTHER INFORMATION Item 1. Legal Proceedings 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K 19

PART I Item 1. FINANCIAL INFORMATION AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS (DEBTORS-IN-POSSESSION) (In Thousands, Except Per Share Amounts) (Unaudited) For the Thirteen For the Thirty-Nine Weeks Ended Weeks Ended ----------------------------------- --------------------------------- November 3, October 28, November 3, October 28, 2001 2000 2001 2000 ---------------- --------------- ---------------- ------------- Total net sales $676,892 $920,321 $2,276,593 $2,623,012 Leased department and other income 9,677 14,588 28,991 34,391 ---------------- --------------- ---------------- ------------- TOTAL REVENUE 686,569 934,909 2,305,584 2,657,403 COSTS AND EXPENSES Cost of merchandise sold 535,499 689,762 1,682,919 1,923,567 Selling, general and administrative expenses 229,039 261,856 704,051 757,437 Depreciation and amortization expense, net 26,193 19,252 64,665 54,189 Interest and debt expense, net 17,582 24,098 63,046 64,843 Closed Stores Income (24,098) - (24,098) - Reorganization expenses 25,674 - 25,674 - ---------------- --------------- ---------------- ------------- LOSS BEFORE INCOME TAXES (123,320) (60,059) (210,673) (142,633) Income tax (provision) benefit (212,856) 22,823 (429,662) 54,201 ---------------- --------------- ---------------- ------------- NET LOSS $(336,176) $(37,236) $(640,335) $(88,432) ================ =============== ================ ============= Weighted average number of common shares outstanding 29,408 29,407 29,405 29,378 ================ =============== ================ ============= Net loss per share $(11.43) $(1.27) $(21.78) $(3.01) ================ =============== ================ ============= (The accompanying Notes are an integral part of these consolidated condensed financial statements.)

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED BALANCE SHEETS (DEBTORS-IN-POSSESSION) (In Thousands, Except Shares and Per Share Amounts) (Unaudited) (Unaudited) ---------------- ----------------- ----------------- November 3, February 3, October 28, 2001 2001 2000 ---------------- ----------------- ----------------- ASSETS Current Assets: Cash and cash equivalents $34,628 $49,761 $41,876 Receivables 23,299 17,039 58,814 Merchandise inventories 749,452 744,132 1,045,847 Deferred taxes, net - 17,771 83,055 Prepaid expenses and other current assets 42,079 41,494 40,360 ---------------- --------------- ------------- Total current assets 849,458 870,197 1,269,952 ---------------- --------------- ------------- Fixed Assets 628,048 761,903 739,723 Less - Accumulated depreciation and amortization (239,422) (213,904) (188,188) ---------------- -------------------------------- Net fixed assets 388,626 547,999 551,535 ---------------- --------------- ------------- Other assets and deferred charges 60,121 56,490 59,835 Deferred taxes, net - 411,891 346,055 Beneficial lease rights, net 39,082 50,675 54,209 Goodwill, net 56,561 58,475 59,113 ---------------- --------------- ------------- $1,393,848 $1,995,727 $2,340,699 ================ =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable: Trade $131,678 $345,915 $420,730 Other 46,464 78,371 84,881 -------------- --------------- ------------- Total accounts payable 178,142 424,286 505,611 -------------- --------------- ------------- Current portion of capital lease and financing obligations 6,497 19,018 22,057 Self-insurance reserves 15,624 29,878 28,063 Accrued expenses and other current liabilities 86,230 114,205 135,474 Store closing reserves 12,846 179,365 51,242 Current portion of long term debt 496,534 - - -------------- --------------- ------------- Total current liabilities 795,873 766,752 742,447 -------------- --------------- ------------- Long-term debt - 606,057 820,068 Capital lease and financing obligations 64,575 165,365 166,095 Other long-term liabilities 27,932 49,256 50,874 Excess of revalued net assets over equity under fresh-start reporting 7,100 11,715 13,253 Liabilities subject to compromise 741,381 - - Commitments and contingencies (see Note 8) Stockholders' (Deficit) Equity Preferred stock - - - Common stock 295 295 296 Additional paid-in capital 533,394 532,654 531,879 (Accumulated deficit) Retained earnings (775,780) (135,445) 16,709 Treasury stock (922) (922) (922) -------------- --------------- ------------- Total stockholders' (deficit) equity (243,013) 396,582 547,962 -------------- --------------- ------------- $1,393,848 $1,995,727 $2,340,699 ============== =============== ============= (The accompanying Notes are an integral part of these consolidated condensed financial statements.)

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS (DEBTORS-IN-POSSESSION) (In Thousands) (Unaudited) For the Thirty-Nine Weeks Ended ---------------------------------------- November 3, October 28, 2001 2000 ------------------ -------------------- Cash flows from operating activities: Net loss ($640,335) ($88,432) Expenses not requiring the outlay of cash: Income tax provision (benefit) 429,662 (54,201) Depreciation and amortization of fixed and other assets 70,312 60,195 Amortization of debt discounts and deferred financing costs 5,414 3,589 Store closing charge (income) (24,098) - Reorganization costs/ write off of deferred financing costs 21,938 - ------------------ -------------------- Cash used by operations before changes in working capital and store closing activities (137,107) (78,849) Changes in working capital: Increase in receivables (6,260) (33,512) Increase in merchandise inventories (5,320) (214,460) Increase in accounts payable 84,955 84,031 Increase (decrease)in accrued expenses and other liabilities (2,472) 600 Increase in other working capital and other, net (1,122) (9,318) Changes due to store closing activities: Payments of store closing costs (15,075) (4,226) ------------------ -------------------- Net cash used for operating activities (82,401) (255,734) ------------------ -------------------- Cash flows from investing activities: Purchases of fixed assets (22,893) (110,317) Purchases of leases - (7,054) ------------------ -------------------- Net cash used for investing activities (22,893) (117,371) ------------------ -------------------- Cash flows from financing activities: Borrowings under the revolving credit facilities, net 79,740 401,151 Borrowings under the Kimco DIP 55,000 - Payments on debt and capital lease obligations (13,059) (14,338) Repurchase of Hills Senior Notes - (2,852) Deferred financing costs (31,520) (723) Purchase of treasury stock - (8) Proceeds from the exercise of options and warrants, net - 1,139 ------------------ -------------------- Net cash provided by financing activities 90,161 384,369 ------------------ -------------------- (Decrease) increase in cash and cash equivalents (15,133) 11,264 Cash and cash equivalents, beginning of period 49,761 30,612 ------------------ -------------------- Cash and cash equivalents, end of period $34,628 $41,876 ================== ==================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest and debt fees not capitalized $59,991 $61,234 Income taxes 162 1,711 (The accompanying Notes are an integral part of these consolidated condensed financial statements.)

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS (DEBTORS-IN-POSSESSION) (Unaudited) 1. Basis of Presentation : In the opinion of management, the accompanying unaudited consolidated condensed financial statements of Ames Department Stores, Inc. (a Delaware corporation) and subsidiaries (collectively "Ames" or the "Company") contain all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of such financial statements for the interim periods. Due to the seasonality of the Company's operations, the results of its operations for the interim period ended November 3, 2001 may not be indicative of total results for the full year. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to the rules and regulations promulgated by the Securities and Exchange Commission (the "SEC"). Certain prior year amounts have been reclassified to conform to the presentation used for the current year. Pursuant to the indenture governing the Ames Senior Notes (as defined in Note 5), all of Ames' subsidiaries have jointly and severally guaranteed the Ames Senior Notes on a full and unconditional basis. Separate financial statements of those subsidiaries have not been included herein because management has determined that they are not material to investors. The consolidated condensed balance sheet at February 3, 2001 was obtained from audited financial statements previously filed with the SEC in the Company's Annual Report on Form 10-K for the fiscal year ended February 3, 2001 (the "2000 Form 10-K"). The accompanying unaudited consolidated condensed financial statements should be read in conjunction with the financial statements and Notes thereto included in the 2000 Form 10-K. The accompanying unaudited consolidated condensed financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities and commitments in the normal course of business and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The filing of the voluntary Chapter 11 petitions referred to below, losses from operations and negative cash flow from operations raise doubt about the Company's ability to continue as a going concern. The appropriateness of using a going concern basis is dependent upon, among other things, confirmation of a plan or plans of reorganization, future profitable operations and the ability to generate cash from operations and financing sources sufficient to meet obligations. As a result of the filing of the Chapter 11 cases and related circumstances, realization of assets and liquidation of liabilities is subject to significant uncertainty. While under the protection of Chapter 11, the Debtors (as defined below in Note 2) may sell or otherwise dispose of assets, and liquidate or settle liabilities for amounts other than those reflected in the consolidated condensed financial statements. Further, a plan or plans of reorganization could materially change the amounts reported in the accompanying consolidated condensed financial statements. The consolidated condensed financial statements do not include any adjustments relating to recoverability of the value of recorded asset amounts or the amount and classification of liabilities that might be necessary as a consequence of a plan of reorganization. The Company anticipates significant adjustments to the consolidated condensed financial statements as a result of applying the provisions of Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" during the proceedings. At this time, it is not possible to predict the outcome of the Chapter 11 cases or their effect on the Company's business, its financial position, results of operations or cash flows. If it is determined that the liabilities subject to compromise in the Chapter 11 cases exceed the fair value of the assets, unsecured claims may be satisfied at less than 100% of their face value and equity interests of the Company's stockholders may have no value. The Company believes the DIP Facilities (as defined below in Note 2), which received final approval from the Bankruptcy Court (as defined below in Note 2) on September 25, 2001, should provide the Company with adequate liquidity to conduct its business while it prepares a reorganization plan. However, the Company's liquidity, capital resources, results of operations and ability to continue as a going concern are subject to known and unknown risks and uncertainties, including those set forth in Item 2 below under "Forward Looking Statements." 2. Chapter 11 Filing On August 20, 2001, the Company and each of its four subsidiaries (collectively, the "Debtors") filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Chapter 11 cases Nos. 01-42217 (REG) through 01-42221 (REG) (the "Chapter 11 Cases") have been consolidated for the purpose of joint administration. As of August 20, 2001, the Debtors are continuing to operate their business as debtors-in-possession under Chapter 11 of the Bankruptcy Code and are subject to the jurisdiction of the Bankruptcy Court. As a result of these filings, actions to collect pre-petition indebtedness are stayed and other contractual obligations against the Debtors may not be enforceable. In addition, under the Bankruptcy Code, the Debtors may assume or reject executory contracts, including real estate leases, employment contracts, personal property leases, service contracts and other unexpired executory pre-petition contracts, subject to Bankruptcy Court approval. Parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the Bankruptcy Code. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from the filing of claims for all contracts that may be rejected. Substantially all pre-petition liabilities are subject to settlement under a plan of reorganization to be voted on by the creditors and equity holders and approved by the Bankruptcy Court. Although the Debtors expect to file a reorganization plan or plans that provide for emergence from bankruptcy sometime during Fiscal Year 2002, there can be no assurance that a reorganization plan or plans will be proposed by the Debtors or confirmed by the Bankruptcy Court or that any such plan will be consummated. As provided by the Bankruptcy Code, the Debtors have the exclusive right to submit a plan of reorganization for 120 days from the date of the filing of the voluntary petitions On December 5, 2001 the Company filed a motion with the Bankruptcy Court to extend the period of exclusivity. If the Debtors fail to file a plan of reorganization during such period or if such plan is not accepted by the required number of creditors and equity holders within the required period, any party in interest may subsequently file its own plan of reorganization for the Debtors. A plan of reorganization must be confirmed by the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a plan of reorganization notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. A plan of reorganization also could result in holders of the Company's common stock receiving no value for their interest. The Chapter 11 filing, the uncertainty regarding the eventual outcome of the reorganization case and the effect of other unknown adverse factors could threaten the Company's existence as a going concern. At the first day hearing held on August 20, 2001 before Judge Robert E. Gerber, the Bankruptcy Court entered its first day orders granting authority to the Debtors to, among other things, pay pre-petition and post-petition employee wages, salaries, benefits and other employee obligations, pay certain administrative fees and insurance related obligations and honor customer service programs, including warranties, returns, layaways and gift certificates. Schedules will be filed with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the filing date as shown by the Company's accounting records. Differences between amounts shown by the Company and claims filed by creditors will be investigated and, if necessary, unresolved diputes will be determined by the Bankruptcy Court. The ultimate settlement terms for such liabilities are subject to a plan of reorganization, and accordingly, are not presently determinable. . 3. Net Loss Per Common Share: Net loss per share was determined using the weighted average number of common shares outstanding. Diluted net loss per share was equal to basic net loss per share because inclusion of common stock equivalents would have been anti-dilutive. During the quarter ended November 3, 2001, no options were exercised. During the quarter ended October 28, 2000, options representing 3,470 shares of Common Stock were exercised. 4. Inventories: Inventories are valued at the lower of cost, using the first-in, first-out (FIFO) method, or market and include the capitalization of transportation and distribution center costs. 5. Debt: As a result of the Chapter 11 filing (see Note 2), the Ames Senior Notes and the Hills Senior Notes (see below) will be classified as "liabilities subject to settlement under the reorganization case." No principal or interest payments will be made without Bankruptcy Court approval until a reorganization plan defining the repayment terms has been approved. During the quarter ended November 3, 2001, the Company wrote off deferred financing costs of approximately $21.9 million associated with this long-term debt as well as the Prior Credit Facility (see below). Debtor-In-Possession Credit Facilities On August 20, 2001, the Company entered into a $700 million Debtor-In-Possession Credit Agreement, dated as of August 20, 2001 (the "GECC DIP Facility"), with General Electric Capital Corporation ("GE Capital"). The Company also entered into a $55 million Credit Agreement, dated as of August 20, 2001 (the "Kimco DIP Facility" and together with the GECC DIP Facility, the "DIP Facilities"), with Kimco Funding, LLC ("Kimco"). The GECC DIP Facility consists of a $575 million Tranche A Revolver (including a Swing Line Commitment of $30 million as a subfacility thereof), a $50 million fully drawn Tranche B Revolver and a $75 million Term Loan. The GECC DIP Facility has a sublimit of $75 million for the issuance of letters of credit. Amounts borrowed under the Tranche A and Tranche B Revolvers bear interest at the Index Rate plus 1.50% per annum or, at the election of the Company, the applicable LIBOR Rate plus 2.75% per annum. Amounts borrowed under the Term Loan bear interest at the Index Rate plus 5.25% per annum. The Company must also pay an unused commitment fee equal to 0.35% per annum multiplied by the average unused daily balance of the Revolving Loan and the Swing Line Loan. The GECC DIP Facility terminates on the earliest of, among other dates, August 20, 2003 and the effective date of a plan of reorganization in the Chapter 11 Cases. Proceeds from the GECC DIP Facility were used to repay in full the Prior Credit Facility (as defined below), and will be used to pay such transaction costs and expenses related to the Chapter 11 Cases, to provide working capital and for other general corporate purposes. The GECC DIP Facility replaced the Company's former credit facility under the Credit Agreement dated as of March 2, 2001 (the "Prior Credit Facility") with GE Capital, as agent, and a syndicate of other banks and financial institutions. The Prior Credit Facility provided for a secured revolving credit facility of up to $750 million, with a sub-limit of $50 million for letters of credit, and a secured term facility for $50 million. On August 20, 2001, as part of its Interim Order, the Bankruptcy Court authorized the Company to use the proceeds of the GECC DIP Facility to repay the Company's outstanding indebtedness under the Prior Credit Facility. The lenders under the GECC DIP Facility have a super-priority claim against the estates of the Debtors (except with respect to the Company's right, title and interest in all real property leases in which the lenders under the Kimco DIP Facility, as defined below, have a first priority lien). The Kimco DIP Facility consists of a $55 million term loan. Amounts borrowed under the Kimco DIP Facility bear interest at the Index Rate plus 6.00% per annum. The Company must also pay an additional fee on or prior to July 31, 2002 and each anniversary date thereof occurring on or prior to the maturity date equal to 0.33% multiplied by the aggregate principal amount of loans outstanding on such date. The Kimco DIP Facility terminates on the earliest of, among other dates, August 20, 2003 and the effective date of a plan of reorganization in the Chapter 11 Cases. The lenders under the Kimco DIP Facility have a priority claim against the estates of the Debtors, which ranks junior to the super-priority claims of the lenders under the GECC DIP Facility (except with respect to the Company's right, title and interest in all real property leases in which the lenders under the Kimco DIP Facility have a first priority lien). As of November 3, 2001, borrowings of $441.5 million were outstanding under the GECC DIP Facility. These borrowings are included in the current portion of long-term debt in the accompanying consolidated condensed balance sheet as of November 3, 2001. In addition, $28.9 and $9.4 million of standby and trade letters of credit, respectively, were outstanding under the GECC DIP Facility. The weighted average interest rate on the borrowings under the Prior Credit Facility and the GECC DIP Facility for the thirteen weeks ended November 3, 2001 was 8.52%. The peak borrowing level under the Prior Credit Facility and the GECC DIP Facility through November 3, 2001 was $573.4 million and occurred in the fiscal month of May, 2001. Senior Notes due 2003 The 12.5% Senior Notes due 2003 (the "Hills Senior Notes") were, at the time of the acquisition of Hills Stores Company ("Hills"), an unsecured obligation of Hills. The Company had Hills Senior Notes with a recorded value of $44.1 million outstanding as of August 4, 2001. The Hills Senior Notes pay interest in January and June and mature July 2003. No principal or interest payments will be made without Bankruptcy Court approval until a reorganization plan defining the repayment terms has been approved. Senior Notes due 2006 The Company had $200.0 million of its 10% seven-year senior notes (the "Ames Senior Notes") outstanding as of August 4, 2001. The Ames Senior Notes pay interest semi-annually in April and October and mature April, 2006. The Company did not pay interest on the Ames Senior notes in October, 2001, and no principal or interest payments will be made without Bankruptcy Court approval until a reorganization plan defining the repayment terms has been approved. 6. Stock Options: The Company has four stock option plans (the "Option Plans"): the 1994 Management Stock Option Plan, the 1994 Non-Employee Directors Stock Option Plan (as amended), the 1998 Management Stock Incentive Plan, as amended and restated, and the 2000 Store Manager Stock Option Plan. The Company accounts for its stock option plans under Accounting Principles Board ("APB") Opinion No. 25. Had compensation cost for the Company's stock option grants been determined in accordance with SFAS No. 123, the Company's net income and net income per common share for quarters ended November 3, 2001 and October 28, 2000 would have approximated the pro forma amounts below: For the Thirteen For the Thirty-nine Weeks Weeks Ended ended -------------------------------- ----------------------------- (In Thousands) November 3, October 28, November3, October 28, 2001 2000 2001 2000 -------------- ------------ ------------- ------------ Net loss: As reported ($336,176) ($37,236) ($640,335) ($88,432) Pro forma ($337,839) ($39,830) ($646,403) ($95,586) Basic net loss per common share: (a) As reported ($11.43) ($1.27) ($21.78) ($3.01) Pro forma ($11.49) ($1.35) ($21.98) ($3.25) (a) Common stock equivalent shares have not been included because the effect would be anti-dilutive.

The fair value of stock options used to compute pro forma net income and net income per diluted common share is the estimated present value as of the grant date using the Black-Scholes option-pricing model with the following weighted average assumptions: no dividend yield, expected option volatilities, a risk-free interest rate equal to U.S. Treasury securities with a maturity equal to the expected life of the option and an expected life from date of grant until option expiration date. 7. Income Taxes: The Company's estimated annual effective income tax rate was applied to the loss before income taxes for the thirteen and thirty nine weeks ended October 28, 2000 to compute a non-cash income tax benefit. The income tax benefit was included in current deferred taxes in the accompanying consolidated condensed balance sheet as of October 28, 2000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred taxes will be realized. Based on a number of factors, including the Company's filing for Chapter 11 bankruptcy protection on August 20,2001, as previously discussed, and management's current financial forecasts, the Company recorded an increase to the valuation allowance of $212.9 million and $429.7 million during the thirteen and thirty-nine weeks ended November 3, 2001, respectively. 8. Commitments and Contingencies: Reference can be made to the 2000 Form 10-K (Item 3 - Legal Proceedings) for various litigation involving the Company, for which there were no material changes since the filing date of the 2000 Form 10-K. On August 20, 2001, the Debtors filed their voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York, Case Nos. 01-42217 through 01-42221 (REG). All civil litigation commenced against the Debtors prior to that date has been stayed by operation of law. The Company may agree from time to time to proceed with the resolution of certain litigation or the Court may allow certain litigation to proceed. Any judgements against the Company, however, ultimately may be paid only pursuant to a confirmed plan of reorganization. 9. Closed Store Reserves and Inventory Charges: On August 16, 2001 the Company announced that it would close 47 store locations. The stores began liquidation sales immediately and closed in October, 2001. In connection with these closings, the Company recorded a $75.9 million charge in the third quarter. The charge includes provisions for the write off of long term assets ($42.7 million), the estimated cost of leases to be rejected in the chapter 11 proceedings ($29.2 million), employee severance costs ($2.7 million) and other costs ($1.3 million). The Company also recorded a $13.3 million charge to cost of merchandise sold for the impairment of inventory value in these stores. As a result of the Chapter 11 filing, the Company rejected many of the real estate leases for the stores closed prior to August 20, 2001. The Company's estimate for the rejection claim associated with these leases was well below the amounts previously reserved for these lease obligations. Accordingly, the Company recorded a reduction of $100 million to its closed store reserve during the quarter ended November 3, 2001. The Company has established reserves against the costs associated with the closure of a number of stores. The following items represent the major components of the change in the closed store reserves. (in thousands) ---------------- Balance 2/3/01 $179,365 Lease costs (7,078) Fixed asset write-downs (61,805) Other occupancy costs (7,050) Severance (2,041) 47 store closing charge 75,902 Reduction of reserves (100,000) Transferred to Liabilities Subject to Compromise (64,447) ---------------- Balance 11/3/01 $12,846 ================

During the third quarter, the Company recorded a charge of $17.8 million to cost of merchandise sold to reserve for anticipated additional markdowns. 10. Liabilities Subject to Compromise Liabilities subject to compromise consist of various obligations of the Company as of the August 20, 2001 Chapter 11 filing date. As of November 3, 2001 liabilities subject to compromise was composed of: (in thousands) Balance at November 3, 2001 --------------------- Accounts payable trade $258,807 Accounts payable other 74,098 Lease rejection claims 64,447 Capital leases and financing obligations 42,359 Senior notes 244,147 Accrued taxes, general liability and other prepetition obligations 57,523 --------------------- Total $741,381 =====================

11. Subsequent Events On November 14, 2001, the Company announced that it would close 16 store locations. The stores began liquidation sales immediately and are expected to close in January, 2002. On November 27, 2001, the Company announced that it would close its distribution center in Columbus, Ohio. The distribution center is expected to close in March, 2002. The Company will record a charge of up to $60 million related to these closings in the fourth quarter. On December 5, 2001, the Company announced that it will close 54 locations. The stores will begin liquidation sales in late December, 2001 and are expected to close by March, 2002. The Company will record a charge related to these store closings in the fourth quarter of fiscal 2001. 12. Recently Issued Accounting Pronouncements: In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," an amendment of SFAS No. 133. These statements establish accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The statements also require that changes in a derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. The statements are effective, prospectively, for all fiscal quarters of all fiscal years beginning after June 15, 2000. The Company adopted SFAS No. 133, as amended by SFAS No. 138, effective the beginning of Fiscal 2001. The impact of adopting this standard was not significant. During June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 141 " Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." In addition to requiring the use of the purchase method for all business combinations, SFAS 141 requires intangible assets that meet certain criteria to be recognized as assets apart from gooodwill. SFAS 142 addresses accounting and reporting standards for acquired goodwill and other intangible assets, and generally, requires that goodwill and indefinite life intangible assets no longer be amortized but be tested for impairment annually. Finite life intangible assets will continue to be amortized over their useful lives. The impact of these statements on the Company's consolidated financial statements is currently being evaluated. During August, 2001, the Financial Accounting Standards Board issued SFAS No. 144 " Accounting for the impairment or disposal of long lived assets". The statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets and supersedes SFAS No. 121 "Accounting for the impairment of long-lived assets and for long-lived assets to be disposed of" and the accounting and reporting provisions of Accounting Principles Board No. 30 "Reporting the results of operations- Reporting the effects of disposal of a segment of business, and extraordinary, unusual and infrequently occurring events and transactions for the disposal of a segment of a business". SFAS no. 144 excludes goodwill and other intangibles that are not amortized. The statement is effective for fiscal years beginning after December 15, 2001. The impact of this statement on the Company's consolidated financial statements is currently being evaluated. Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis should be read in conjunction with the consolidated condensed financial statements and footnotes presented in this report. Chapter 11 Filing On August 20, 2001, the Company and each of its four subsidiaries (collectively, the "Debtors") filed voluntary petitions under Chapter 11 of the U.S. Bankruptcy Code (the "Bankruptcy Code") with the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). The Chapter 11 cases Nos. 01-42217 (REG) through 01-42221 (REG) (the "Chapter 11 Cases") have been consolidated for the purpose of joint administration. As of August 20, 2001, the Debtors are continuing to operate their business as debtors-in-possession under Chapter 11 of the Bankruptcy Code and are subject to the jurisdiction of the Bankruptcy Court. As a result of these filings, actions to collect pre-petition indebtedness are stayed and other contractual obligations against the Debtors may not be enforceable. In addition, under the Bankruptcy Code, the Debtors may assume or reject executory contracts, including real estate leases, employment contracts, personal property leases, service contracts and other unexpired executory pre-petition contracts, subject to Bankruptcy Court approval. Parties affected by these rejections may file claims with the Bankruptcy Court in accordance with the Bankruptcy Code. The Debtors cannot presently determine or reasonably estimate the ultimate liability that may result from the filing of claims for all contracts that may be rejected. Substantially all pre-petition liabilities are subject to settlement under a plan of reorganization to be voted on by the creditors and equity holders and approved by the Bankruptcy Court. Although the Debtors expect to file a reorganization plan or plans that provide for emergence from bankruptcy sometime during Fiscal Year 2002, there can be no assurance that a reorganization plan or plans will be proposed by the Debtors or confirmed by the Bankruptcy Court or that any such plan will be consummated. As provided by the Bankruptcy Code, the Debtors have the exclusive right to submit a plan of reorganization for 120 days from the date of the filing of the voluntary petitions. On December 5, 2001 the Company filed a motion with the Bankruptcy Court to extend the exclusivity period. If the Debtors fail to file a plan of reorganization during such period or if such plan is not accepted by the required number of creditors and equity holders within the required period, any party in interest may subsequently file its own plan of reorganization for the Debtors. A plan of reorganization must be confirmed by the Bankruptcy Court, upon certain findings being made by the Bankruptcy Court which are required by the Bankruptcy Code. The Bankruptcy Court may confirm a plan of reorganization notwithstanding the non-acceptance of the plan by an impaired class of creditors or equity holders if certain requirements of the Bankruptcy Code are met. A plan of reorganization also could result in holders of the Company's common stock receiving no value for their interest. The Chapter 11 filing, the uncertainty regarding the eventual outcome of the reorganization case and the effect of other unknown adverse factors could threaten the Company's existence as a going concern. At the first day hearing held on August 20, 2001 before Judge Robert E. Gerber, the Bankruptcy Court entered its first day orders granting authority to the Debtors to, among other things, pay pre-petition and post-petition employee wages, salaries, benefits and other employee obligations, pay certain administrative fees and insurance related obligations and honor customer service programs, including warranties, returns, layaways and gift certificates. Schedules will be filed with the Bankruptcy Court setting forth the assets and liabilities of the Debtors as of the filing date as shown by the Company's accounting records. Differences between amounts shown by the Company and claims filed by creditors will be investigated and if necessary, unresolved disputes will be determined by the Bankruptcy Court. The ultimate settlement terms for such liabilities are subject to a plan of reorganization, and accordingly, are not presently determinable. Forward-looking Statements The statements contained or incorporated by reference under the captions "Business," "Legal Proceedings," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Quantitative and Qualitative Disclosures about Market Risk" and elsewhere in this Form 10-Q that are not historical facts are "forward-looking statements," as that term is defined in the Private Securities Litigation Reform Act of 1995. Those statements include all discussions of strategy as well as statements that contain such forward-looking expressions as "believes," "estimates," "intends," "may," "will," "should," or "anticipates" or the negative thereof. In addition, from time to time, our representatives or we have made or may make forward-looking statements orally or in writing. Furthermore, forward-looking statements may be included in our filings with the Securities and Exchange Commission as well as in the press releases or oral presentations made by or with the approval of one of our authorized executive officers. We caution you to bear in mind that forward-looking statements, by their very nature, involve assumptions and expectations and are subject to risks and uncertainties. Although we believe that the assumptions and expectations reflected in the forward-looking statements contained herein are reasonable, no assurance can be given that those assumptions or expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the ones discussed below. The filing of the voluntary Chapter 11 petitions referred to above, losses from operations and negative cash flow from operations raise doubt about the Company's ability to continue as a going concern. In addition, the Company is subject to the risks associated with (i) the ability of the Company to operate pursuant to the terms of the DIP Facilities (defined below), (ii) the ability of the Company to operate successfully under the Chapter 11 proceedings, (iii) the approval of plans and activities by the Bankruptcy Court and (iv) the ability of the Company to create and have approved a reorganization plan in the Chapter 11 cases. Our financial performance is sensitive to changes in overall economic conditions that impact consumer spending, particularly discretionary spending. Future economic conditions affecting disposable consumer income such as employment levels, business conditions, fuel and energy costs, interest rates, and tax rates could reduce consumer spending or cause consumers to shift their spending to other products. A general slowdown in the United States' economy or an uncertain economic outlook would adversely affect consumer spending habits, which would likely result in lower net sales than expected on a quarterly or annual basis. A general reduction in the level of discretionary spending or shifts in consumer discretionary spending to other products could adversely affect our growth, net sales, and profitability. Our operating results may be adversely affected by unfavorable local, regional or national economic conditions, especially those affecting the Northeast, Midwest or Mid-Atlantic Regions where our stores are currently located. Our business is affected by the pattern of seasonality common to most retailers. Our net sales and net income are generally weakest during the first two fiscal quarters and strongest during the third and fourth quarters. Historically, we have generated a significant portion of our net sales and profits during our fourth fiscal quarter, which includes the Christmas selling season, and have experienced losses or minimal earnings in the first, second, and third fiscal quarters. We realize a disproportionately large amount of our net sales and net income during the Christmas selling season. In anticipation of the holidays, we purchase substantial amounts of seasonal inventory and hire many temporary employees. If for any reason our net sales during the Christmas selling season were below seasonal norms, we could have excess inventory, necessitating mark-downs to minimize this excess, which would reduce our profitability and adversely affect our operating results. We continually change our mix of seasonal merchandise, non-seasonal merchandise, and consumable products. Our gross profit margins may fluctuate from quarter to quarter. Our quarterly and annual results of operations, including comparable store net sales and income, also fluctuate for a variety of other reasons, including adverse weather conditions, particularly during the peak Christmas season, and difficulties in obtaining sufficient quantities of merchandise from our suppliers. The retail industry is highly competitive and we expect competition to increase in the future. We compete with many smaller stores offering a similar range of products. Although Ames is a large regional discount retailer, we are still considerably smaller in terms of our total number of stores, sales and earnings than the three leading national chains: Wal-Mart, Kmart, and Target Stores. Each of these chains, as well as other regional operators, currently operates stores within our regional market and competes with us for customers and potential store locations. We anticipate a further increase in competition from these national discount store chains. Our merchandising focus is primarily directed to consumers who, we believe, are underserved by the major national chains. Although this approach, combined with our smaller store size, has enabled us to compete effectively with these chains and operate profitably in proximity to their stores, we remain vulnerable to the marketing power and high level of consumer recognition of the major national discount chains. We expect to face increased competition in the future which could adversely affect our business, results of operations, and financial condition. The efficient operation of our business is heavily dependent on our information systems. We depend on others to maintain and periodically upgrade many of these systems so that they can continue to support our business. The software programs supporting many of our systems were licensed to us by independent software developers. The inability of these developers to continue to maintain and upgrade these information systems and software programs would disrupt our operations if we were unable to convert to alternate systems in an efficient and timely manner. Our business is dependent on continued good relations with our vendors. In particular, we believe that we generally are able to obtain attractive pricing and other terms from vendors because we are perceived as a desirable customer. Our failure to maintain good relations with our vendors could increase our exposure to shifts in market demand, which may in turn lead to improper inventory levels and increased inventory markdown rates. Substantially all of our assets are encumbered by debt incurred through our credit agreement borrowings. At November 3, 2001, the amount of credit agreement debt outstanding was $441.5 million. Our leveraged position impairs our ability to obtain additional financing to fund working capital requirements, capital expenditures or other purposes. The amount of our credit facility available for cash borrowings and letters of credit is based on specified percentages of our inventory on hand as well as in-transit inventory from overseas, certain receivables and certain of our owned real estate. Our borrowing availability under the credit facility fluctuates relative to this borrowing base. This borrowing base varies in value as a result of sales, merchandise purchases, and profitability. Lack of short-term liquidity due to reaching the limits of our borrowing availability would adversely affect our business, results of operations, and financial condition. We incurred a year-to-date net pre-tax loss of $210.7 million through the end of the quarter ended November 3, 2001. There can be no assurance that losses will not continue in the future. If losses do continue to occur, we will likely need to obtain additional capital to continue our operations. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these factors and the cautionary statements contained herein. Basis of Presentation The accompanying unaudited consolidated condensed financial statements have been prepared on a going concern basis, which contemplates continuity of operations, realization of assets and liquidation of liabilities and commitments in the normal course of business and do not reflect any adjustments that might result if the Company is unable to continue as a going concern. The filing of the voluntary Chapter 11 petitions referred to above, losses from operations and negative cash flow from operations raise doubt about the Company's ability to continue as a going concern. The appropriateness of using a going concern basis is dependent upon, among other things, confirmation of a plan or plans of reorganization, future profitable operations and the ability to generate cash from operations and financing sources sufficient to meet obligations. As a result of the filing of the Chapter 11 cases and related circumstances, realization of assets and liquidation of liabilities is subject to significant uncertainty. While under the protection of Chapter 11, the Debtors may sell or otherwise dispose of assets, and liquidate or settle liabilities for amounts other than those reflected in the consolidated condensed financial statements. Further, a plan or plans of reorganization could materially change the amounts reported in the accompanying consolidated condensed financial statements. The consolidated financial statements do not include any adjustments relating to recoverability of the value of recorded asset amounts or the amount and classification of liabilities that might be necessary as a consequence of a plan of reorganization. The Company anticipates significant adjustments to the consolidated condensed financial statements as a result of applying the provisions of Statement of Position 90-7 "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" during the proceedings. At this time, it is not possible to predict the outcome of the Chapter 11 cases or their effect on the Company's business, its financial position, results of operations or cash flows. If it is determined that the liabilities subject to compromise in the Chapter 11 cases exceed the fair value of the assets, unsecured claims may be satisfied at less than 100% of their face value and equity interests of the Company's stockholders may have no value. The Company believes the DIP Facilities (as defined below in "Liquidity and Capital Resources"), should provide the Company with adequate liquidity to conduct its business while it prepares a reorganization plan. However, the Company's liquidity, capital resources, results of operations and ability to continue as a going concern are subject to known and unknown risks and uncertainties, including those set forth above under "Forward-looking Statements." Store Closings In our annual report on Form 10-K for the year ended February 3, 2001 ("Fiscal 2000") we disclosed the planned closing of thirty-two stores. We completed the closing of the thirty-two stores by the end of March 2001. All but one of the stores were under-performing stores that were acquired in the Hills Stores Company acquisition in December 1998; the other store was closed as a result of the expiration of its lease. On August 16, 2001, the Company announced that it would close 47 store locations. The stores began liquidation sales immediately and completed closing in October 2001. In connection with these closings the Company recorded a $75.9 million charge in the third quarter. On November 14, 2001 the Company announced that it would close 16 store locations. The stores began liquidation sales immediately and are expected to close in January, 2002. On November 27, 2001 the Company announced that it would close its distribution center in Columbus, Ohio. The distribution center is expected to close in March of 2002. The Company will record a charge in the fourth quarter of fiscal 2001 up to $60 million related to these closings. On December 5, 2001 the Company announced that it will close 54 store locations. The stores will begin liquidation sales in late December, 2001 and are expected to close by March, 2002. The Company will record a charge in the fourth quarter of fiscal 2001 related to these store closings. Results of Operations A significant factor affecting the Company's results of operations and financial condition for the quarter ended November 3, 2001, was the continued deterioration of its liquidity position caused by declining sales volume and the reduced number of merchandise shipments from suppliers. The following tables illustrate the consolidated results of operations for the thirteen and thirty-nine weeks ended November 3, 2001, as compared to the consolidated results of operations for the thirteen and thirty-nine weeks ended October 28, 2000. November 3, October 28, Percentage For the thirteen weeks ended 2001 2000 Change ---------------- -------------- ---------------- (In thousands) Net sales $676,892 $920,321 (26.5)% Leased department and other income 9,677 14,588 (33.7)% -------------- -------------- Total revenue 686,569 934,909 (26.6)% Costs and expenses: Cost of merchandise sold 535,499 689,762 (22.4)% Selling, general, and administrative expense 229,039 261,856 (12.5)% Depreciation and amortization expense, net 26,193 19,252 36.1% Interest and debt expense, net 17,582 24,098 (27.0)% Closed stores income (24,098) - Reorganization expenses 25,674 - -------------- -------------- Loss before income taxes (123,320) (60,059) Income tax (provision) benefit (212,856) 22,823 -------------- -------------- Net loss ($336,176) ($37,236) ============== ==============

November 3, October 28, Percentage For the thirty-nine weeks ended 2001 2000 Change ---------------- -------------- ----------------- (In thousands) Net sales 2,276,593 2,623,012 (13.2)% Leased department and other income 28,991 34,391 (15.7)% -------------- -------------- Total revenue 2,305,584 2,657,403 (13.2)% Costs and expenses: Cost of merchandise sold 1,682,919 1,923,567 (12.5)% Selling, general and administrative expense 704,051 757,437 (7.1)% Depreciation and amortization expense, net 64,665 54,189 19.3% Interest and debt expense, net 63,046 64,843 (2.8)% Closed stores income (24,098) - Reorganization expenses 25,674 - -------------- -------------- Loss before income taxes (210,673) (142,633) Income tax (provision) benefit (429,662) 54,201 -------------- -------------- Net loss ($640,335) ($88,432) ============== ==============

The decrease in net sales is primarily attributable to a comparable store sales decrease of 28.9% for the quarter and 13.8% for the first three quarters of Fiscal 2001 compared to the same periods in Fiscal 2000. Gross margin as a percentage of sales decreased to 20.9% from 25.1% during the third quarter of fiscal 2001 compared to the same period in Fiscal 2000. During the thirty nine weeks ended November 3, 2001, gross margin rates decreased from 26.7% to 26.1% compared to the same period in Fiscal 2000. For the quarter, the gross margin rate was negatively impacted by the liquidation sales in the 47 closing stores as well as a lower amount of vendor funds. For the year, the gross margin was negatively impacted by the 47 store closing as well as a higher rate of inventory shrinkage, partially offset by an improved promotional markdown rate. Additionally, a charge of $17.8 million was recorded to margin in the third quarter of 2001 to reserve for anticipated additional inventory markdowns. The decrease in selling, general and administrative expenses primarily resulted from cost reduction programs and the closing of the thirty-two stores. Selling, general and administrative expenses as a percentage of sales increased from 28.5% to 33.8% for the quarter and from 28.9% to 30.9% for the first thirty nine weeks as compared to last year; the increase was primarily a result of lower than expected sales. The increase in depreciation and amortization expense is primarily a result of additional depreciation associated with the new store and remodeling expenditures incurred during Fiscal 2000. The decrease in interest expense is mainly attributable to a lower level of borrowings under our credit facility. Our estimated annual effective income tax rate for fiscal 2000 was applied to the loss before income taxes for each period to compute a non-cash income tax benefit. The income tax benefits are included in current assets in the consolidated condensed balance sheets as of October 28, 2000. In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some or all of the deferred taxes will be realized. Based on a number of factors, including the Company's filing for Chapter 11 bankruptcy protection on August 20, 2001, as previously discussed, and management's current financial forecasts, the Company recorded an increase to the valuation allowance of $212.9 million and $429.7 million during the thirteen and thirty-nine weeks ended November 3, 2001. Liquidity and Capital Resources Current Year The Company's liquidity position deteriorated in the second and third quarters primarily due to a continuation of declining sales that resulted in a significant deficiency in cash necessary for operating activities. As described above under "Chapter 11 Filing," on August 20, 2001, the Company filed a voluntary petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. The following table reflects certain balance sheet account balances as of the end of the current fiscal quarter compared to the same account balances as of the beginning of the current fiscal year. November 3, February 3, Percentage 2001 2001 Change Change ---------------- ---------------- ------------ ------------- (In thousands) ---------------------------------------------------- Cash and cash equivalents $34,628 $49,761 ($15,133) (30.4)% Merchandise inventories 749,452 744,132 5,320 0.7% Net fixed assets 388,626 547,999 (159,373) (29.1)% Trade accounts payable 131,678 345,915 (214,237) (61.9)% Store closing reserves 12,846 179,365 (166,519) (92.8)% Accrued expenses 86,230 114,205 (27,975) (24.5)% Capital lease and financing obligations 64,575 165,365 (100,790) (61.0)%

The decrease in our cash position was primarily due to merchandise inventory purchases, reduction of accounts payable, and payments of deferred financing costs and capital expenditures. These cash reductions were partially offset by additional credit agreement borrowings of $79.7 million. The decrease in net fixed assets was due to net fixed asset retirements (including capital lease retirements) totaling $116.4 million, associated with the 81 stores that have closed since the beginning of the year, and $62.8 million in depreciation expense partially offset by $22.9 million in capital expenditures and $4.5 million in capital lease additions. The decrease in trade accounts payable was principally the result of a decrease in purchases resulting from the closing of 32 stores in March of 2001 and 47 stores in October of 2001 as well as from reduced vendor payment terms experienced as a result of our Chapter 11 bankruptcy filing. Store closing reserves decreased primarily as a result of costs related to the store closings, including $61.8 million in fixed asset write-downs, $2.0 million in severance costs and $14.1 million in occupancy costs. An additional $64.4 million was transferred to the Liabilities Subject to Compromise account for lease rejection costs. We reduced the reserve for stores closed prior to August 20, 2001 by $100 million and recorded a $75.9 million charge related to the closing of the 47 stores. The decrease in capital lease and financing obligations was due to $58.7 million in write-offs associated with the closing of the 32 stores and 47 stores as previously referenced, $13.1 million in payments on capital lease obligations partially offset by $4.5 million in capital lease additions and $42.4 million which was transferred to Liabilities Subject to Compromise. Liabilities Subject to Compromise consists of obligations of the Company as of the August 20, 2001 Chapter 11 filing date (see note 10 to the consolidated financial statements for further details). Our principal sources of liquidity are our Debtor in Possession credit agreements, cash from operations, and cash on hand. On August 20, 2001, the Company entered into a $700 million Debtor-In-Possession Credit Agreement, dated as of August 20, 2001 ( the "GECC DIP Facility"), with General Electric Capital Corporation ("GE Capital"). The Company also entered into a $55 million Credit Agreement, dated as of August 20, 2001 (the "Kimco DIP Facility" and, together with the GECC DIP Facility, the "DIP Facilities"), with Kimco Funding, LLC ("Kimco"). The GECC DIP Facility consists of a $575 million Tranche A Revolver (including a Swing Line Commitment of $30 million as a subfacility thereof), a $50 million fully drawn Tranche B Revolver and a $75 million Term Loan. The GECC DIP Facility has a sublimit of $75 million for the issuance of letters of credit. Amounts borrowed under the Tranche A and Tranche B Revolvers bear interest at the Index Rate plus 1.50% per annum or, at the election of the Company, the applicable LIBOR Rate plus 2.75% per annum. Amounts borrowed under the Term Loan bear interest at the Index Rate plus 5.25% per annum. The Company must also pay an unused commitment fee equal to 0.35% per annum multiplied by the average unused daily balance of the Revolving Loan and the Swing Line Loan. The GECC DIP Facility terminates on the earliest of, among other dates, August 20, 2003 and the effective date of a plan of reorganization in the Chapter 11 Cases. Proceeds from the GECC DIP Facility were used to repay in full the Prior Credit Facility (as defined below), and will be used to pay such transaction costs and expenses related to the Chapter 11 cases, to provide working capital and for other general corporate purposes. The GECC DIP Facility replaced the Company's former credit facility under the Credit Agreement, dated as of March 2, 2001 (the "Prior Credit Facility"), with GE Capital, as agent, and a syndicate of other banks and financial institutions. The Prior Credit Facility provided for a secured revolving credit facility of up to $750 million, with a sub-limit of $50 million for letters of credit, and a secured term facility for $50 million. On September 25, 2001, the Bankruptcy Court issued a final order authorizing the Company to use the GECC DIP Facility. The lenders under the GECC DIP Facility have a super-priority claim against the estates of the Debtors (except with respect to the Company's right, title and interest in all real property leases in which the lenders under the Kimco DIP Facility have a first priority lien). The Kimco DIP Facility consists of a $55 million term loan. Amounts borrowed under the Kimco DIP Facility bear interest at the Index Rate plus 6.00% per annum. The Company must also pay an additional fee on or prior to July 31, 2002 and each anniversary date thereof occurring on or prior to the maturity date equal to 0.33% multiplied by the aggregate principal amount of loans outstanding on such date. The Kimco DIP Facility terminates on the earliest of, among other dates, August 20, 2003 and the effective date of a plan of reorganization in the Chapter 11 Cases. Proceeds from the Kimco DIP Facility will be used for the financing of (i) capital expenditures relating to the Company's real property assets, (ii) its operating expenses and (iii) intercompany loans to Ames Merchandising Corporation. The lenders under the Kimco DIP Facility have a priority claim against the estates of the Debtors, which ranks junior to the super-priority claims of the lenders under the GECC DIP Facility (except with respect to the Company's right, title and interest in all real property leases in which the lenders under the Kimco DIP Facility have a first priority lien). As of November 3, 2001, borrowings of $441.5 million were outstanding under the GECC DIP Credit Facility. These borrowings are included in the current portion of long-term debt in the accompanying consolidated condensed balance sheet as of November 3, 2001. In addition, $28.9 and $9.4 million of standby and trade letters of credit, respectively, were outstanding under the Credit Facility. The weighted average interest rate on the borrowings for the thirteen weeks ended November 3, 2001 was 8.52%. The peak borrowing level through November 3, 2001 was $573.4 million and occurred in the fiscal month of May, 2001. Achievement of expected cash flows from operations and compliance with our credit agreement covenants (see Note 5 to the consolidated financial statements) are dependent upon the attainment of sales, gross profit, expense levels, vendor relations, and flow of merchandise that are consistent with our financial projections. Comparable Quarters The following table reflects certain balance sheet account balances as of the end of the current fiscal quarter compared to the same account balances at the end of the Fiscal 2000 third quarter. November 3, October 28, Percentage 2001 2000 Change Change ---------------- ---------------- ------------ ------------- (In thousands) ---------------------------------------------------- Cash and cash equivalents $34,628 $41,876 $(7,248) (17.3)% Merchandise inventories 749,452 1,045,847 (296,395) (28.3)% Net fixed assets 388,626 551,535 (162,909) (29.5)% Trade accounts payable 131,678 420,730 (289,052) (68.7)% Other accounts payable 46,464 84,881 (38,417) (45.3)% Store closing reserves 12,846 51,242 (38,396) (74.9)% Accrued expenses 86,230 135,474 (49,244) (36.3)% Capital lease and financing obligations 64,575 166,095 (101,520) (61.1)%

The decrease in merchandise inventories from October 28, 2000 was due to the closing of 32 stores in March of 2001 and 47 stores in October of 2001 as well as reduced purchases of inventory as a result of the difficult retail environment. The reduction in net fixed assets resulted from write-offs primarily associated with the closing of 32 stores and 47 stores, as referenced above, and $85.2 million in depreciation expense offset by $31.7 million in capital expenditures and $9.0 million in capital lease additions incurred during the twelve months ended November 3, 2001. The decrease in trade accounts payable from October 28, 2000 resulted primarily from reduced purchases of merchandise related to the closed stores, and reduced vendor payment terms experienced as a result of our Chapter 11 filing. The decrease in other accounts payable results from our expense control programs and a reduction in selling general and administrative expenses related to the closing stores. Store closing reserves decreased as a result of the $129.8 million charge taken in the fourth quarter of Fiscal 2000 offset by $78.0 million in the current year usage previously discussed and $1.7 million in usage during the fourth quarter of fiscal 2000. The reserve increased by $75.9 million related to the 47 store closing offset by a $100.0 million reduction in the reserve related to stores closed prior to August 20, 2001. An additional $64.4 million was transferred to Liabilities Subject to Compromise in recognition of potential lease rejection costs. The decrease in capital lease and financing obligations was due to $58.7 million in write-offs associated with the closing stores as previously referenced, $21.4 million in payments on capital lease obligations partially offset by $9.0 million in capital lease additions and $42.4 million transferred to Liabilities Subject to Compromise. Item 3. Quantitative and Qualitative Disclosures About Market Risk We have exposure to interest rate volatility primarily relating to interest rate changes applicable to revolving loans under our credit facilities. These loans bear interest at rates which vary with changes in (i) the London Interbank Offered Rate (LIBOR) or (ii) the Index Rate (as defined in our credit agreement). We do not speculate on the future direction of interest rates. As of November 3, 2001, approximately $496.5 million of our debt bore interest at variable rates. We believe that the effect, if any, of possible near term changes in interest rates on our consolidated financial position, results of operations or cash flows would not be significant. PART II OTHER INFORMATION Item 1. Legal Proceedings. Reference can be made to Item 3 - Legal Proceedings included in the Company's most recent Form 10-K for various litigation involving the Company, for which there were no material changes since the filing date of the Form 10-K, except as set forth in Part I, Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations. On August 20, 2001, the Debtors filed their voluntary petitions for reorganization under Chapter 11 of the Bankruptcy Code with the United States Bankruptcy Court for the Southern District of New York, Case Nos. 01-42217 through 01-42221 (REG). All civil litigation commenced against the Debtors prior to that date has been stayed by operation of law. Item 4. Submission of Matters to a Vote of Security Holders. None Item 6. Exhibits and Reports on Form 8-K. (a) Index to Exhibits Exhibit No. Exhibit 11 Schedule of computation of basic and diluted net income (loss)per share 12 Ratio of Earnings to Fixed Charges (b) Reports on Form 8-K On August 24, 2001, the Company filed a report on form 8K regarding the filing of voluntary petitions by the Company and its subsidiaries under Chapter 11 of the U.S. Bankruptcy Code. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. AMES DEPARTMENT STORES, INC. (Registrant) Dated: December 17, 2001 /s/ Joseph R. Ettore ---------------------------------------------------- Joseph R. Ettore, Chairman, Chief Executive Officer, and Director Dated: December 17, 2001 /s/ Rolando de Aguiar ---------------------------------------------------- Rolando de Aguiar, Senior Executive Vice President, Chief Financial and Administrative Officer

Exhibit 11 AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES SCHEDULE OF COMPUTATION OF BASIC AND DILUTED EARNINGS PER SHARE (In Thousands, Except Per Share Amounts) For the Thirteen For the Thirty-Nine Weeks Ended Weeks Ended ------------------------------ ---------------------------- November 3, October 28, November 3, October, 28 2001 2000 2001 2000 -------------- -------------- ---------------- --------------- Net loss................. (336,176) ($37,236) ($640,335) ($88,432) ============== ============== ================ ================ For Basic Earnings Per Share: Weighted average number of common shares outstanding During the period (b)............................... 29,408 29,407 29,405 29,378 ================ ============== ================ ================ Basic net loss per share.......... ($11.43) ($1.27) ($21.78) ($3.01) ================ ============== ================ =============== For Diluted Earnings Per Share: Weighted average number of common shares outstanding during the period (b)........................... 29,408 29,407 29,405 29,378 Add common stock equivalent shares represented by: Series B Warrants.................. - - - 4 Options under the 1994 Management Stock Option Plan and 1998 Stock Incentive Plan......... - 36 143 202 Options under the 1994 Non-Employee Director Stock Option Plan.................. - 21 - 40 Options under 2000 Store Manager Stock Option Plan - - 33 22 ---------------- -------------- ---------------- -------------- Weighted average number of common and common Equivalent shares................................... 29,408 29,407 29,405 29,378 ================ ================ ================ ============= Diluted net loss per share (a)........... ($11.43) ($1.27) ($21.78) ($3.01) ================ ============== ================ ============= (a) Common stock equivalents have not been included, because the effect would be anti-dilutive. (b) The weighted average number of common shares outstanding is net of treasury stock.

Exhibit 12 AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES RATIO OF EARNINGS TO FIXED CHARGES (In Thousands, Except Ratio Data) Thirty-Nine Weeks Ended Fiscal Year Ended ------------- ------------------------------------------------------------------------- November 3, February 3, January 29, January 30, January 31, January 25, 2001 2001 2000 1999 1998 1997 ------------- ------------ ------------ ------------- ------------ ------------ Income (loss) before income taxes, extraordinary item and cumulative effect adjustment (210,673) (288,377) (31,355) 52,605 53,633 26,804 Add: Interest expense 63,046 87,961 60,843 15,253 11,600 19,043 Interest component of rental expense 28,046 28,876 29,253 21,121 18,409 16,541 ------------- ------------ ------------ ------------- ------------ ------------ Earnings available for fixed charges (119,581) (171,540) 58,741 88,979 83,642 62,388 Fixed Charges: Interest expense 63,046 87,961 60,843 15,253 11,600 19,043 Interest component of rental expense 28,046 28,876 29,253 21,121 18,409 16,541 ------------- ------------ ------------ ------------- ------------ ------------ Total fixed charges 91,092 116,837 90,096 36,374 30,009 35,584 Ratio of earnings to fixed charges (1.3)x (1.5)x 0.7x 2.4x 2.8x 1.8x For the purpose of calculating the ratio of earnings to fixed charges, earnings consist of income before income taxes, extraordinary item and cumulative effect adjustment plus fixed charges (net of capitalized interest). Fixed charges consist of interest expense on all indebtedness and capitalized interest, amortized premiums, discounts and capitalized expenses related to indebtedness, and one-third of rent expense on operating leases representing that portion of rent expense deemed by us to be attributable to interest. For the thirty-nine weeks ended November 3, 2001 and the fiscal year ended February 3, 2001, the amount of additional earnings that would have been required to cover fixed charges for these periods was $210.7 million and $288.4 million, respectively.

AMES DEPARTMENT STORES INC 10-Q