10-Q 1 q1200210q.txt AMES DEPARTMENT STORES, INC 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 May 4, 2002 ----------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------------------------------ -------------------------------------------- Commission File Number 1-05380 AMES DEPARTMENT STORES, INC. ---------------------------------- (Exact name of registrant as specified in its charter) Delaware 04-2269444 -------------------------------- ---------------------------------------- State or other jurisdiction of (I.R.S. Employer Identification Number) incorporation or organization) 2418 Main Street, Rocky Hill, Connecticut 06067 ----------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code: (860) 257-2000 ----------------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- 29,408,057 shares of Common Stock were outstanding on June 1, 2002. Exhibit Index on page 19 Page 1 of 22

AMES DEPARTMENT STORES, INC. AND SUBSIDIARIES FORM 10-Q FOR THE QUARTER ENDED May 4, 2002 I N D E X Page Part I: FINANCIAL INFORMATION Item 1. Consolidated Condensed Statements of Operations 3 for the Thirteen Weeks ended May 4, 2002 and May 5, 2001 Consolidated Condensed Balance Sheets as of 4 May 4, 2002, February 2, 2002, and May 5, 2001 Consolidated Condensed Statements of Cash Flows 5 for the Thirteen Weeks ended May 4, 2002 and May 5, 2001 Notes to Consolidated Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial 11 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 Weeks Ended ---------------------------------- May 4, May 5, 2002 2001 ---------------- -------------- Total net sales $567,882 $793,687 Leased department and other income 6,718 9,149 ---------------- -------------- TOTAL REVENUE 574,600 802,836 COSTS AND EXPENSES Cost of merchandise sold 412,095 565,956 Selling, general and administrative expenses 182,069 238,715 Depreciation and amortization expense, net 14,661 19,636 Interest and debt expense, net 11,906 23,258 Reorganization expenses 3,000 - ---------------- -------------- LOSS BEFORE INCOME TAXES (49,131) (44,729) Income tax benefit - 16,997 ---------------- -------------- NET LOSS BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE ($49,131) ($27,732) ---------------- -------------- Cumulative effect of accounting change, net of tax of $0 5,562 - ---------------- -------------- NET LOSS ($43,569) $(27,732) ================ ============== Basic net loss per common share: Before cumulative effect of accounting change ($1.67) ($.94) Cumulative effect of accounting change, net of tax of $0 0.19 - ---------------- -------------- Basic net loss per share ($1.48) ($.94) ================ ============== Weighted average number of common shares outstanding 29,408 29,397 ================ ============== Diluted net loss per common share: Before cumulative effect of accounting change ($1.67) ($.94) Cumulative effect of accounting change, net of tax of $0 0.19 - ---------------- -------------- Diluted net loss per share ($1.48) ($.94) ================ ============== Weighted average number of equivalent shares 29,408 29,397 ================ ============== (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) ---------------- ----------------- ----------------- May 4, February 2, May 5, 2002 2002 2001 ---------------- ----------------- ----------------- ASSETS Current Assets: Cash and cash equivalents $22,039 $29,105 $44,440 Receivables 20,032 12,631 34,877 Merchandise inventories 594,901 532,407 837,476 Deferred taxes, net - - 34,768 Prepaid expenses and other current assets 22,854 26,511 31,053 ---------------- --------------- ------------- Total current assets 659,826 600,654 982,614 ---------------- --------------- ------------- Fixed Assets 494,588 591,623 715,386 Less - Accumulated depreciation and amortization (231,981) (248,076) (221,366) ---------------- --------------- ------------- Net fixed assets 262,607 343,547 494,020 ---------------- --------------- ------------- Other assets and deferred charges 50,954 52,283 70,685 Deferred taxes, net - - 411,891 Beneficial lease rights, net 13,900 31,324 40,469 Goodwill, net 55,923 55,923 57,837 ---------------- --------------- ------------- $1,043,210 $1,083,731 $2,057,516 ================ =============== ============= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable: Trade $73,520 $67,458 $321,931 Other 45,574 51,982 70,934 -------------- --------------- ------------- Total accounts payable 119,094 119,440 392,865 -------------- --------------- ------------- Current portion of long term debt 442,372 342,128 - Current portion of capital lease and financing obligations 7,782 7,962 19,018 Self-insurance reserves 28,140 29,205 29,225 Accrued expenses and other current liabilities 67,767 70,172 112,046 Store closing reserves 1,061 62,928 142,797 -------------- --------------- ------------- Total current liabilities 666,216 631,835 695,951 -------------- --------------- ------------- Long-term debt - - 804,552 Capital lease and financing obligations 56,706 80,816 133,963 Other long-term liabilities 31,592 32,543 43,284 Excess of revalued net assets over equity under fresh-start reporting - 5,562 10,176 Liabilities subject to compromise 748,021 748,731 - Commitments and contingencies Stockholders' (Deficit) Equity: Preferred stock - - - Common stock 295 295 295 Additional paid-in-capital 533,394 533,394 533,394 Accumulated deficit (992,092) (948,523) (163,177) Treasury stock (922) (922) (922) -------------- --------------- ------------- Total stockholders' equity / (deficit) (459,325) (415,756) 369,590 -------------- --------------- ------------- $1,043,210 $1,083,731 $2,057,516 ============== =============== ============= (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 Thirteen Weeks Ended ---------------------------------------- May 4, May 5, 2002 2001 ------------------ -------------------- Cash flows from operating activities: Net loss ($43,569) ($27,732) Cumulative effect of Accounting change (5,562) - ------------------ -------------------- Net loss before cumulative effect adjustment (49,131) (27,732) Expenses (income) not requiring the outlay of cash: Income tax benefit - (16,997) Depreciation and amortization of fixed and other assets 16,140 21,524 Inventory impairment utilization (10,107) - Amortization of debt discounts and deferred financing costs 2,258 1,437 ------------------ -------------------- Cash used by operations before changes in working capital and store closing activities (40,840) (21,768) Changes in working capital: Increase in receivables (7,401) (17,838) Increase in merchandise inventories (50,951) (93,344) Decrease in accounts payable (346) (31,421) Decrease in accrued expenses and other liabilities (2,948) (7,721) Decrease in other working capital and other, net 7,230 10,417 Changes due to store closing activities: Payments of store closing costs (7,437) (7,101) ------------------ -------------------- Net cash used for operating activities (102,693) (168,776) ------------------ -------------------- Cash flows from investing activities: Purchases of fixed assets (842) (14,651) ------------------ -------------------- Net cash used for investing activities (842) (14,651) ------------------ -------------------- Cash flows from financing activities: Borrowings under the revolving credit facilities, net 100,244 198,495 Payments on debt and capital lease obligations (1,065) (4,076) Change in liabilities subject to compromise (710) - Payments of deferred financing costs (2,000) (16,313) ------------------ -------------------- Net cash provided by financing activities 96,469 178,106 ------------------ -------------------- Decrease in cash and cash equivalents (7,066) (5,321) Cash and cash equivalents, beginning of period 29,105 49,761 ------------------ -------------------- Cash and cash equivalents, end of period $22,039 $44,440 ================== ==================== Supplemental disclosure of cash flow information: Cash paid during the period for: Interest and debt fees not capitalized $10,052 $28,490 Income taxes - 60 (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 : The accompanying 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 (the "Chapter 11 cases"), 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, we may sell or otherwise dispose of assets, and liquidate or settle liabilities for amounts other than those reflected in the consolidated financial statements. Further, a plan or plans of reorganization could materially change the amounts reported in the accompanying consolidated 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 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. 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 began operating 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 the ultimate liability that may result from the filing of claims for all contracts that may be rejected. Estimates have been made, however, for certain contracts to be rejected and are included in the liabilities subject to compromise. 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, 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 and on December 18, 2001, the court granted an extension of the exclusivity period to May 31, 2002. On May 23, 2002, the Court granted a further extension of the exclusivity period until February 28, 2003. If the Debtors fail to file a plan of reorganization during the period of exclusivity or if such a 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. As part of its restructuring, the Company also anticipates that all existing equity will be cancelled. 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 have been 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. The Bankruptcy Court established a March 25, 2002 bar date for claims in the Company's Chapter 11 Cases. 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. .. 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 quarters ended May 4, 2002 and May 5, 2001, no options 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. The Company records reserves for inventory shrinkage and markdowns on a regular basis, such reserves are reflected as a reduction in inventory value in the Consolidated Balance Sheet. 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 or until a reorganization plan defining the repayment terms has been approved by the Bankruptcy Court. 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", "DIP Facility" or "DIP"), with General Electric Capital Corporation ("GE Capital" or "GECC"). 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, as amended, 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 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. On September 25, 2001, the Bankruptcy Court issued a final order authorizing 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 which has been reduced by payments to $54.4 million as of May 4, 2002. 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). On April 4, 2002, the Company and its GECC DIP Facility lenders agreed to certain modifications of the covenants required by the terms of the GECC DIP Facility. The Company was in compliance with all financial covenants of the DIP Facilities as of May 4, 2002. As of May 4, 2002, borrowings of $388.0 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 May 4, 2002. In addition, $33.0 and $11.3 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 GECC DIP Facility for the 13 weeks ended May 4, 2002 was 7.53%. The peak borrowing level under the GECC DIP Facility through May 4, 2002 was $388.0 million and occurred in the fiscal month of April, 2002. Senior Notes due 2003 The 12.5% Senior Notes due 2003 (the "Hills Senior Notes") were, at the time of the acquisition of Hills, an unsecured obligation of Hills Stores Company ("Hills"). The Company had Hills Senior Notes with a recorded value of $44.1 million outstanding as of August 20, 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 or until a reorganization plan defining the repayment terms has been approved by the Bankruptcy Court. 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 20, 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 or until a reorganization plan defining the repayment terms has been approved by the Bankruptcy Court.. 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. 7. Income Taxes: The Company's estimated annual effective income tax rate was applied to the loss before income taxes for the thirteen weeks ended May 5, 2001, 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 May 5, 2001. 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 not be realized. In Fiscal 2001, the Company increased its valuation allowance on its deferred tax assets by $591 million. The Company has recorded a full valuation allowance on net deferred tax assets as realization of such assets in future years is uncertain. 8. Commitments and Contingencies: Reference can be made to the 2001 Form 10-K (Item 3 - Legal) for various litigation involving the Company, for which there were no material changes since the filing date of the 2001 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 judgments against the Company, however, ultimately may be paid only pursuant to a confirmed plan of reorganization. 9. Closed Store Reserves and Inventory Charges: 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 during the quarter ended May 4, 2002. (in thousands) ----------------- Balance at 2/2/02 $62,928 Fixed asset write-downs (66,622) Beneficial lease write off (15,976) Capital lease obligation write off 23,234 Occupancy costs (3,062) Severance (4,181) Transferred from liabilities subject to compromise 4,740 ----------------- Balance at 5/4/02 $1,061 ================= 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 May 4, 2002 liabilities subject to compromise was comprised of : (in thousands) Balance at May 4, 2002 ----------------- Accounts payable trade $259,570 Accounts payable other 78,327 Lease rejection and other store closing costs 103,329 Equipment lease obligations 21,870 Senior notes 244,147 Accrued taxes, general liability and other prepetition obligations 40,778 ----------------- Total $748,021 ================= 11. Recently Issued Accounting Pronouncements: During June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("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 No. 141 requires intangible assets that meet certain criteria to be recognized as assets apart from goodwill. SFAS No 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 Company adopted SFAS No. 142 at the start of fiscal year 2002. As a result of this standard, the Company recorded a cumulative effect adjustment, during the quarter ended May 4, 2002, of $5.6 million reflecting the elimination of "excess of revalued net assets over equity under fresh-start reporting," also referred to as Negative Goodwill. In addition, the Company estimates that $2.6 million of goodwill amortization will be eliminated during this Fiscal year as a result of the adoption of this standard. Further determination as to any potential impairment of goodwill and other intangible assets as calculated under the provisions of these new standards has not yet been determined by the Company. In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. Management does not expect the impact of SFAS No. 143 to be material to the Company's consolidated financial statements. During August 2001 the Financial Accounting Standard 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. 12. Subsequent Events: On June 6, 2002, the Company announced the closing of six stores. The liquidation of the inventories in the six stores immediately began on June 7, 2002. The Company will record a charge in the second quarter of Fiscal 2002 for employee severance, the write-off of fixed assets and the estimated cost of the leases to be rejected in the Chapter 11 proceedings related to these closing stores. On June 17, 2002, the Company announced that it had entered into agreements with the current lenders to its DIP Facility led by GE Capital as agent, to amend its current DIP Facility agreement and with KRC Acquisition Corporation, an affiliate of Kimco Realty Corporation for the sale and leaseback of certain of its properties. Both of these agreements are subject to Bankrupty Court approval. The Company expects that the new agreements will result in approximately $25 million in additional availability for the Company. 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 began operating 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 the ultimate liability that may result from the filing of claims for all contracts that may be rejected. Estimates have been made however, for certain contracts to be rejected and are included in the liabilities subject to compromise category. 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, 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 and on December 18, 2001, the court granted an extension of the exclusivity period to May 31, 2002. On May 23, 2002, the Court granted a further extension of the exclusivity period until February 28, 2003. If the Debtors fail to file a plan of reorganization during the period of exclusivity or if such a 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. As part of its restructuring, the Company also anticipates that all existing equity will be cancelled. 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 have been 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. The Bankruptcy Court established a March 25, 2002, bar date for claims in the Company's Chapter 11 Cases. 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 our ability to continue as a going concern. In addition, we are subject to risks associated with (i) our ability to operate pursuant to the terms of the Debtor-In-Possession credit facilities ("DIP Facilities" or "DIP"), (ii) our ability to operate successfully under the Chapter 11 proceedings, (iii) the approval of plans and activities by the Bankruptcy Court and (iv) our ability 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 one of the largest regional discount retailers, 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 the terms of the DIP Facilities. At May 4, 2002, the amount of our General Electric Capital Corporation Debtor-In-Possession ("GECC DIP") revolving credit agreement debt outstanding was $388.0 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 GECC DIP 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 GECC DIP 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 net pre-tax loss of $49.1 million in our fiscal quarter ended May 4, 2002. There can be no assurance that losses will not continue in the future. If losses do continue to occur, we would 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 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 financial statements. Further, a plan or plans of reorganization could materially change the amounts reported in the accompanying consolidated 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 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. The Company has previously indicated its belief that all existing equity will be cancelled as part of the reorganization. The Company believes the DIP Facilities , 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 under "Forward-looking Statements." Results of Operations The following tables illustrate the consolidated results of operations for the thirteen weeks ended May 4, 2002 compared to the consolidated results of operation for the thirteen weeks ended May 5, 2001. For the thirteen weeks ended May 4, May 5, Percentage 2002 2001 Change ---------------- -------------- ---------------- (In thousands) Net sales $567,882 $793,687 (28.5)% Leased department and other income 6,718 9,149 (26.6)% -------------- -------------- Total revenue 574,600 802,836 (28.4)% Costs and expenses: Cost of merchandise sold 412,095 565,956 (27.2)% Selling, general, and administrative expense 182,069 238,715 (23.7)% Depreciation and amortization expense, net 14,661 19,636 (25.3)% Interest and debt expense, net 11,906 23,258 (48.8)% Reorganization expenses 3,000 - -------------- -------------- Loss before income taxes (49,131) (44,729) Income tax benefit - 16,997 -------------- -------------- Net Loss before cumulative effect of accounting change (49,131) (27,732) Cumulative effect of accounting changes, net of tax of $0 5,562 - -------------- -------------- Net loss ($43,569) ($27,732) ============== ==============

The decrease in net sales of 28.5% is primarily attributable to the closing of 119 stores and a 8.7% decrease in comparable store sales. Gross margin as a percentage of sales decreased to 27.4% from 28.7% during the first quarter of fiscal 2002 compared to the same period in Fiscal 2001. For the quarter, the gross margin rate was negatively impacted by a reduction in vendor funds received, partially offset by a lower markdown rate from last year. The decrease in selling, general and administrative expenses primarily resulted from cost reduction programs and the closure of 119 stores. Selling, general and administrative expenses as a percentage of sales increased from 30.1% to 32.1% for the quarter; the increase was primarily a result of lower than expected sales. The decrease in depreciation and amortization expense is primarily a result of a lower fixed asset base as a result of write-offs of the assets in the closed stores. The decrease in interest expense is mainly attributable to a lower level of borrowings under our credit facilities and the reclassification of the Ames Senior Notes and the Hills Senior Notes to liabilities subject to compromise. The Company adopted Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" at the start of Fiscal 2002. Adoption of SFAS No. 142 resulted in a cumulative effect of accounting change item in the Company's statement of operations. The Company recorded a $5.6 million gain from the write-off of "excess of revalued net assets over equity under fresh-start reporting" also referred to as negative goodwill. Liquidity and Capital Resources Current Year The following table reflects certain balance sheet account balances as of the end of the current year fiscal quarter compared to the same account balances as of the beginning of the current fiscal quarter. May 4, February 2, Percentage 2002 2002 Change Change ---------------- ---------------- ------------ ------------- (In thousands) --------------------------------------------------------------------- Cash and cash equivalents $22,039 $29,105 ($7,066) (24.3)% Merchandise inventories 594,901 532,407 62,494 11.7% Net fixed assets 262,607 343,547 (80,940) (23.6)% Trade accounts payable 73,520 67,458 6,062 9.0% Store closing reserves 1,061 62,928 (61,867) (98.3)% Accrued expenses 67,767 70,172 (2,405) (3.4)% Capital lease and financing obligations 56,706 80,816 (24,110) (29.8)%

The decrease in our cash position was primarily caused by the closing of 54 stores. The increase in inventory was due to seasonable buildup partially offset by the liquidation of inventory in the 54 closing stores. The decrease in net fixed assets was due to net fixed asset retirements (including capital lease asset retirements) totaling $66.6 million, associated with the 54 stores that have closed since the beginning of the year, and $15.1 million in depreciation expense partially offset by $.8 million in capital expenditures. The increase in trade accounts payable was principally the result of increased inventory purchases. Store closing reserves decreased primarily as a result of costs related to the store closings, including $66.6 million in fixed asset write-downs partially offset by $23.2 million in capital lease obligation write offs, $16.0 million in beneficial lease write offs, $4.2 million in severance costs and $3.1 million in occupancy costs. An additional $4.7 million was transferred from the liabilities subject to compromise account for lease rejection costs. The decrease in capital lease and financing obligations was primarily due to $23.2 million in write-offs associated with the closing of the 54 stores. 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 2001 first quarter. May 4, May 5, Percentage 2002 2001 Change Change ---------------- ---------------- ------------ ------------- (In thousands) -------------------------------------------------------------------- Cash and cash equivalents $22,039 $44,440 ($22,401) (50.4)% Merchandise inventories 594,901 837,476 (242,575) (29.0)% Net fixed assets 262,607 494,020 (231,413) (46.8)% Trade accounts payable 73,520 321,931 (248,411) (77.2)% Store closing reserves 1,061 142,797 (141,736) (99.3)% Accrued expenses 67,767 112,046 (44,279) (39.5)% Capital lease and financing obligations 56,706 133,963 (77,257) (57.7)%

The decrease in merchandise inventories was due to a smaller store base as a result of the closing of 119 stores since the end of last year quarter ended May 5, 2001. The reduction in net fixed assets resulted from write-offs of $169.6 million primarily associated with the 119 stores, as referenced above, and $74.1 million in depreciation expense offset by $11.4 million in capital expenditures and $0.6 million in capital lease additions incurred during the twelve months ended May 4, 2002. The decrease in trade accounts payable from May 5, 2001 resulted primarily from the transfer of vendor payables as of Auguest 19, 2002 to liabilities subject to compromise. Store closing reserves decreased as a result $166.9 million in fixed asset write-offs, $103.7 million of transfers to liabilities subject to compromise in recognition of potential lease rejection costs, $23.4 million of beneficial lease write-offs, $11.2 million of occupancy costs and $7.8 million of severance costs offset by $114.7 million in store closing charges and $57.1 million of capital lease obligation write-offs. The decrease in capital lease and financing obligations was due to $57.1 million in write-offs associated with the closing stores as previously referenced, $7.8 million in payments on capital lease obligations and $2.0 million of principal payments on financing obligations partially offset by $0.6 million in capital lease additions. Liquidity Sources Our principal sources of liquidity are our Debtor in Possession credit agreements (see below), 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 May 4, 2002, borrowings of $388.0 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 May 4. 2002. In addition, $33.0 and $11.3 million of standby and trade letters of credit, respectively, were outstanding under the GECC DIP Facility. The weighted average interest rate on the borrowings for the thirteen weeks ended May 4, 2002 was 7.53%. The peak borrowing level under the GECC DIP Facility through May 4, 2002 was $388.0 million and occurred in the fiscal month of April, 2002. 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 Closed Store Reserves 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 during the quarter ended May 4, 2002. (in thousands) ---------------- Balance at 2/2/02 $62,928 Fixed asset write-downs (66,622) Beneficial lease write off (15,976) Capital lease obligation write off 23,234 Occupancy costs (3,062) Severance (4,181) Transferred from liabilities subject to compromise 4,740 ---------------- Balance at 5/4/02 $1,061 ================ On June 6, 2002, the Company announced the closing of six stores. Liquidation of the inventories of the six stores began on June 7, 2002. The Company will record a charge in the second quarter of Fiscal 2002 for employee severance, the write-off of fixed assets and the estimated cost of the leases to be rejected in the Chapter 11 proceedings related to these closing stores. 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 May 4, 2002, approximately $442.4 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 None

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: June 17, 2002 /s/ JOSEPH R. ETTORE ---------------------------------------------------- Joseph R. Ettore, Chairman, Chief Executive Officer, and Director Dated: June 17, 2002 /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 Weeks Ended ------------------------------------ May 4, May 5, 2002 2001 ---------------- --------------- Net loss before cumulative effect of accounting change ($49,131) ($27,732) Cumulative effect of accounting change 5,562 - ---------------- --------------- Basic and diluted net loss...................... (43,569) (27,732) ================ =============== For Basic Earnings Per Share: Weighted average number of common shares outstanding during the period (b)............................. 29,408 29,397 Basic earnings per share: Basic income per share before cumulative effect of accounting change ($1.67) ($.94) Cumulative effect adjustment, net of tax of $0 0.19 - ---------------- --------------- Basic net loss per Share.................................... ($1.48) ($.94) ================ =============== For Diluted Earnings Per Share: Weighted average number of common shares outstanding during the period (b)...................................... 29,408 29,397 Add common stock equivalent shares represented by: Options under the 2000 Store Manager Stock Option Plan - 95 ---------------- --------------- Weighted average number of common and common Equivalent shares..................................... 29,408 29,397 ================ =============== Diluted earnings per share: Diluted income per share before cumulative effect of accounting change ($1.67) ($.94) Cumulative effect adjustment, net of tax of $0 0.19 - ---------------- --------------- Diluted net loss per share (a)............................. ($1.48) ($.94) ================ =============== (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) Thirteen Weeks Ended Fiscal Year Ended ------------ ------------------------------------------------------------------------------ May 4, February 2, February 3, January 29, January 29, January 31, 2002 2002 2001 2000 1999 1998 ------------ -------------- ------------ ------------ ------------ ------------ Income (loss) before income taxes. Extraordinary item and cumulative effect adjustment (49,131) (383,154) (288,377) (31,355) 52,605 53,633 Add: Interest expense 11,906 76,151 87,961 60,843 15,253 11,600 Interest component of rental expense 5,908 26,068 28,876 29,253 21,121 18,409 ------------ -------------- ------------ ------------ ------------ ------------ Earnings available for fixed charges (31,317) (280,935) (171,540) 58,741 88,979 83,642 Fixed Charges: Interest expense 11,906 76,151 87,961 60,843 15,253 11,600 Interest component of rental expense 5,908 26,068 28,876 29,253 21,121 18,409 ------------ -------------- ------------ ------------ ------------ ------------ Total fixed charges 17,814 102,219 116,837 90,096 36,374 30,009 Ratio of earnings to fixed charges (1.8)x (2.7)x (1.5)x .7x 2.4x 2.8x 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 fiscal year quarter ended May 4, 2002, the amount of additional earnings that would have been required to cover fixed charges for this period was $49.1 million.

AMES DEPARTMENT STORES INC 10-Q