<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
-------------------------------
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-1394
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Edison Brothers Stores, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 43-0254900
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
501 N. Broadway, St. Louis, Missouri 63102
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 314-331-6000
------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the period covered by this report:
Common Stock, $.01 par value - 9,855,495
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<PAGE> 2
EDISON BROTHERS STORES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
Part I. Financial Information
Condensed Consolidated Balance Sheets as of
October 31, 1998 and January 31, 1998 1
Condensed Consolidated Statements of Operations for the 13 weeks ended
October 31, 1998, the 4 weeks ended
November 1, 1997 and the 9 weeks ended October 4, 1997 2
Condensed Consolidated Statements of Operations for the 39 weeks ended
October 31, 1998, the 4 weeks ended
November 1, 1997 and the 35 weeks ended October 4, 1997 3
Condensed Consolidated Statements of Cash Flows for the 39 weeks ended
October 31, 1998, the 4 weeks ended
November 1, 1997 and the 35 weeks ended October 4, 1997 4
Notes to Condensed Consolidated Financial Statements 5
Management's Discussion and Analysis of Operating Results
and Financial Condition 10
Part II. Other Information 15
Signatures 17
</TABLE>
<PAGE> 3
PART I FINANCIAL INFORMATION
EDISON BROTHERS STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
ASSETS
October 31, 1998 January 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 11.9 $ 58.2
Merchandise inventories 216.8 167.9
Other current assets 23.0 28.1
- ---------------------------------------------------------------------------------------------------------------------
Total Current Assets 251.7 254.2
Property and equipment, net of accumulated depreciation and
amortization of $31.0 and $9.4. 115.8 121.1
Reorganization value in excess of identifiable assets, net of
accumulated amortization of $3.2 and $1.0. 26.2 28.4
Other assets 35.3 39.3
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 429.0 $ 443.0
- ---------------------------------------------------------------------------------------------------------------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Short-term borrowings $ 81.6 $ ----
Merchandise accounts payable 37.1 43.2
Expense accounts payable 21.0 29.3
Other current liabilities 47.1 72.8
- ---------------------------------------------------------------------------------------------------------------------
Total Current Liabilities 186.8 145.3
Long-term debt 127.1 127.7
Post-retirement and other employee benefits 45.8 46.7
Other liabilities 2.8 1.6
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 362.5 321.3
- ---------------------------------------------------------------------------------------------------------------------
Common stockholders' equity:
Common stock 0.1 0.1
Capital in excess of par value 130.5 130.5
Common stock warrants 7.0 7.0
Accumulated deficit (70.6) (15.4)
Foreign currency translation adjustment (0.5) (0.5)
- ---------------------------------------------------------------------------------------------------------------------
Total Common Stockholders' Equity 66.5 121.7
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND COMMON STOCKHOLDERS' EQUITY $ 429.0 $ 443.0
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
1
<PAGE> 4
EDISON BROTHERS STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
As Reorganized Pre-Confirmation
--------------------------------------------------------------------
13 Weeks Ended 4 Weeks Ended 9 Weeks Ended
October 31, 1998 November 1, 1997 October 4, 1997
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET RETAIL SALES $ 212.3 $ 62.7 $ 153.2
- ----------------------------------------------------------------------------------------------------------------------
Cost of goods sold, occupancy, and
buying expenses 158.1 48.7 111.7
Store operating and administrative expenses 58.2 17.3 45.7
Depreciation and amortization 8.5 2.7 5.2
Interest expense, net 5.3 1.0 2.8
Restructuring and reorganization expenses ---- ---- 26.5
Impairment of long-lived assets ---- ---- 2.5
Other operating expenses ---- (0.3) (0.1)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 230.1 69.4 194.3
- ----------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM
AND THE EFFECTS OF FRESH START ADJUSTMENTS (17.8) (6.7) (41.1)
Income tax provision (benefit) 0.0 0.1 0.1
- ----------------------------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM AND THE
EFFECTS OF FRESH START ADJUSTMENTS (17.8) (6.8) (41.2)
- ----------------------------------------------------------------------------------------------------------------------
Extraordinary item: Gain on debt discharge ---- ---- 8.3
- ----------------------------------------------------------------------------------------------------------------------
Fresh start adjustments ---- ---- 2.9
- ----------------------------------------------------------------------------------------------------------------------
NET LOSS $ (17.8) $ (6.8) $ (30.0)
- ----------------------------------------------------------------------------------------------------------------------
NET LOSS PER BASIC AND DILUTED SHARE $ (1.73) $ (0.67)
- ----------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED AVERAGE SHARES OUTSTANDING
(IN THOUSANDS) 10,296 10,225
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 5
EDISON BROTHERS STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
As Reorganized Pre-Confirmation
--------------------------------------------------------------------
39 Weeks Ended 4 Weeks Ended 35 Weeks Ended
October 31, 1998 November 1, 1997 October 4, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------
NET RETAIL SALES $ 623.4 $ 62.7 $ 613.8
- ----------------------------------------------------------------------------------------------------------------------
Cost of goods sold, occupancy, and
buying expenses 464.0 48.7 435.2
Store operating and administrative expenses 174.2 17.3 174.5
Depreciation and amortization 26.2 2.7 20.5
Interest expense, net 13.1 1.0 4.3
Restructuring and reorganization expenses ---- ---- 44.7
Pension settlement gain ---- ---- (15.8)
Impairment of long-lived assets ---- ---- 2.5
Other operating expenses 0.7 (0.3) 5.7
- ---------------------------------------------------------------------------------------------------------------------
TOTAL EXPENSES 678.2 69.4 671.6
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE INCOME TAXES, EXTRAORDINARY ITEM
AND THE EFFECTS OF FRESH START ADJUSTMENTS (54.8) (6.7) (57.8)
Income tax provision (benefit) 0.2 0.1 0.3
- ---------------------------------------------------------------------------------------------------------------------
LOSS BEFORE EXTRAORDINARY ITEM AND THE
EFFECTS OF FRESH START ADJUSTMENTS (55.0) (6.8) (58.1)
- ---------------------------------------------------------------------------------------------------------------------
Extraordinary item: Gain on debt discharge ---- ---- 8.3
- ---------------------------------------------------------------------------------------------------------------------
Fresh start adjustments ---- ---- 2.9
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS $ (55.0) $ (6.8) $ (46.9)
- ---------------------------------------------------------------------------------------------------------------------
NET LOSS PER BASIC AND DILUTED SHARE $ (5.36) $ (0.67)
- ----------------------------------------------------------------------------------------------------------------------
BASIC AND DILUTED AVERAGE SHARES OUTSTANDING
(IN THOUSANDS) 10,254 10,225
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 6
EDISON BROTHERS STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
<TABLE>
<CAPTION>
As Reorganized Pre-Confirmation
--------------------------------------------------------------------
39 Weeks Ended 4 Weeks Ended 35 Weeks Ended
October 31, 1998 November 1, 1997 October 4, 1997
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (55.0) $ (6.8) $ (46.9)
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
Depreciation and amortization 26.2 2.7 20.5
Pension settlement gain ---- ---- (15.8)
Extraordinary gain on debt discharge ---- ---- (8.3)
Fresh start accounting adjustment ---- ---- (2.9)
Working capital changes (85.9) (12.5) 9.3
Other 3.5 0.4 6.4
- ----------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING ACTIVITIES (111.2) (16.2) (37.7)
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19.0) (5.2) (27.2)
Decrease in investments ---- ---- 78.5
Other 0.4 0.2 2.6
- ----------------------------------------------------------------------------------------------------------------------
TOTAL INVESTING ACTIVITIES (18.6) (5.0) 53.9
- ----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase in short-term borrowings 81.6 11.6 ----
Payments on liabilities subject to compromise ---- (2.0) (96.9)
Decrease (increase) in senior-note interest escrow 5.3 ---- (17.6)
Other (3.4) (0.1) (2.3)
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FINANCING ACTIVITIES 83.5 9.5 (116.8)
- ----------------------------------------------------------------------------------------------------------------------
Effect of exchange rates on cash ---- ---- ----
CASH USED (46.3) (11.7) (100.6)
Beginning Cash and Cash Equivalents 58.2 25.0 125.6
- ----------------------------------------------------------------------------------------------------------------------
ENDING CASH AND CASH EQUIVALENTS $ 11.9 $ 13.3 $ 25.0
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 7
EDISON BROTHERS STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in Millions)
NOTE 1: GENERAL
The financial statements as of October 31, 1998 and November 1, 1997, of Edison
Brothers Stores, Inc. (the "Company") are unaudited, and are presented pursuant
to the rules and regulations of the Securities and Exchange Commission.
Accordingly, Notes to the Consolidated Financial Statements which are contained
in the Company's 1997 Annual Report should be read in conjunction with these
Financial Statements. In the opinion of management, the accompanying unaudited
condensed consolidated financial statements reflect all adjustments (which are
of a normal recurring nature) necessary to present fairly the financial
position, results of operations and cash flows for the interim periods
presented, but are not necessarily indicative of the results of operations for a
full fiscal year.
On November 3, 1995, the Company and 65 of its subsidiaries filed petitions for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. An Amended Joint
Plan of Reorganization (the "Plan") was confirmed by the Bankruptcy Court on
September 9, 1997. The Company emerged from Chapter 11 on September 26, 1997.
During the period from November 3, 1995 through September 26, 1997, the Company
conducted business as debtor-in-possession.
Due to the Restructuring and implementation of Fresh Start Accounting, the
condensed consolidated financial statements for the new Reorganized Company
(period starting October 5, 1997) are not comparable to those of the Predecessor
Company (periods prior to October 5, 1997). For financial reporting purposes,
the effective date of the Company's emergence from bankruptcy is considered to
be the close of business on October 4, 1997.
A black line has been drawn on the accompanying condensed consolidated financial
statements to distinguish between the Reorganized Company and the Predecessor
Company.
Certain reclassifications, not affecting net income, have been made to the 1997
financial statements to conform to current year presentation.
NOTE 2: OTHER CURRENT ASSETS
Components of other current assets include:
<TABLE>
<CAPTION>
As Reorganized
--------------------------------------------
October 31, 1998 January 31, 1998
---------------- ----------------
<S> <C> <C>
Prepaid expenses $ 14.2 $ 13.7
Senior note interest escrow 5.9 11.2
Other 2.9 3.2
- ------------------------------------------------------------------------------------------------------------
TOTAL $ 23.0 $ 28.1
- ------------------------------------------------------------------------------------------------------------
</TABLE>
5
<PAGE> 8
NOTE 3: OTHER ASSETS
Components of other assets include:
<TABLE>
<CAPTION>
As Reorganized
--------------------------------------------
October 31, 1998 January 31, 1998
---------------- ----------------
<S> <C> <C>
Assets held for senior note interest escrow $ 9.4 $ 10.3
Intangible assets, net of accumulated
amortization of $2.6 and $1.0 2.4 4.3
Prepaid pension expense 18.1 19.3
Other 5.4 5.4
- ------------------------------------------------------------------------------------------------------------
TOTAL $ 35.3 $ 39.3
- ------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 4: OTHER CURRENT LIABILITIES
Components of other current liabilities include:
<TABLE>
<CAPTION>
As Reorganized
---------------------------------------------
October 31, 1998 January 31, 1998
---------------- ----------------
<S> <C> <C>
Assumed prepetition reclamation $ 1.2 $ 3.0
Accrued payroll and vacations 9.0 10.2
Other taxes 14.2 28.2
Other 22.7 31.4
- ------------------------------------------------------------------------------------------------------------
TOTAL $ 47.1 $ 72.8
- ------------------------------------------------------------------------------------------------------------
</TABLE>
NOTE 5: FINANCING ARRANGEMENTS
SENIOR NOTES
Pursuant to the Plan, the Company issued senior notes in the aggregate principal
amount of $120 due on September 26, 2007 ("Senior Notes"). The Senior Notes bear
interest at a fixed rate of 11% per annum, payable semi-annually on January 31
and July 31 of each year. To secure the payment of approximately the first two
and one-half years of interest on the Senior Notes, the Company entered into a
Funding Escrow Agreement and transferred cash and assets held for sale into the
escrow account established pursuant to the Funding Escrow Agreement.
The Senior Notes may be redeemed, at the option of the Company, in increments of
not less than $5 at the following Redemption Prices (expressed as percentages of
the principal amount):
July 1, 1998 through June 30, 1999 104% of par
July 1, 1999 through June 30, 2000 103% of par
July 1, 2000 through June 30, 2001 102% of par
July 1, 2001 through June 30, 2002 101% of par
July 1, 2002 through September 26, 2007 100% of par
6
<PAGE> 9
In the event there occurs a change in control, as defined in the Trust Indenture
and First Supplemental Trust Indenture (together, the "Indenture") pursuant to
which the Senior Notes were issued, each holder of Senior Notes may, at the
option of the holder, require the Company to repurchase all or any of such
holder's Senior Notes at a price equal to 101% of par plus accrued interest. In
the event the Company makes extraordinary asset sales (as defined in the
Indenture) and if the net proceeds thereof not otherwise required to be paid to
other lenders exceeds $5, 50% of such net sale proceeds must be used to pay
principal under the Senior Notes.
The Indenture limits, without prior consent, the incurrence of new indebtedness
and liens, disposition of assets and the payment of dividends. As of October 31,
1998, the Company was in compliance with these covenants.
CREDIT FACILITY
At the Emergence Date, the Company entered into a loan agreement with Congress
Financial Corporation, as agent (the "Agent"), and the CIT Group/Business
Credit, Inc., as co-agent, for a $200 revolving credit facility secured by
inventory and other related assets, to fund ongoing working capital needs and to
provide letter of credit financing (the "Credit Facility"). The Credit Facility
has a sublimit of $150 for the issuance of letters of credit. The Credit
Facility is intended to provide the Company with cash and liquidity to conduct
its operations and expires on September 26, 2002.
At the Company's option, the Company may borrow under the Credit Facility at the
Prime Rate (as defined in the Credit Facility) plus .25%, or at the Eurodollar
Rate (as defined in the Credit Facility) plus 2.5%. The borrowing rate as of
October 31, 1998 was 8.0%.
The maximum borrowing, up to $200, is limited to 60% of the value of eligible
inventory (as defined in the Credit Facility) or 85% of the Net Recovery Cost
Percentage of the inventory (as defined in the Credit Facility) multiplied by
the cost of eligible inventory, plus 95% of the aggregate amount of cash held by
the Agent as collateral, less any availability reserves established by the
Agent. During the period commencing August 1 through and including December 15
of each year, the borrowing limit calculation uses 70% of eligible inventory and
100% of the Net Recovery Cost Percentage.
The Company is required to pay an unused line fee of .375% per annum.
The Credit Facility contains various covenants including a limitation on store
closings, limitations on the incurrence of additional liens and indebtedness,
limitations on sales of assets, required minimum adjusted net worth, as defined,
and a prohibition on paying dividends.
The Credit Facility was amended on April 13, 1998. This amendment principally
provided for a reduced minimum adjusted net worth covenant. The Credit Facility
was subsequently amended on August 12, 1998. This amendment principally provided
for a reduced minimum adjusted net worth covenant and increased letter of credit
and borrowing fees.
As of October 31, 1998, $81.6 was outstanding under the Credit Facility.
Outstanding letters of credit were $56.7 and available borrowings, before
availability reserves established by the Agent, if any, under the Credit
Facility, were $21.9.
7
<PAGE> 10
NOTE 6: RESTRUCTURING AND REORGANIZATION EXPENSES
In accordance with SOP 90-7, expenses resulting from the Chapter 11
reorganization are reported separately as restructuring and reorganization
expenses in the condensed consolidated statements of operations. These amounts
are summarized below.
<TABLE>
<CAPTION>
9 Weeks Ended 35 Weeks Ended
October 4, 1997 October 4, 1997
--------------- ---------------
<S> <C> <C>
Legal and consulting fees $ 6.1 $ 19.2
Estimated costs of store closings 2.3 5.6
Payroll and related expenses 11.2 15.8
Interest income (1.4) (5.9)
Relocation and other facility related
expenses 3.6 4.2
Other 4.7 5.8
--------------------------------------------------------------------------------------------------
TOTAL $ 26.5 $ 44.7
--------------------------------------------------------------------------------------------------
</TABLE>
NOTE 7: INCOME TAXES
The effective tax rates of 0.0% and 0.4% of the pre-tax losses for the 13 weeks
and 39 weeks ended October 31, 1998, respectively, differ from the Company's
customary relationship between the income tax benefit and pre-tax accounting
loss. No tax benefit relative to current operating results has been recorded,
since the Company has concluded that it likely will not be able to realize its
deferred tax assets. The provision for the 39 weeks ended October 31, 1998 of
$0.2 in the 1998 condensed consolidated statements of operations relates to
state taxes and taxes on foreign operations of the Company.
The Company is currently undergoing an examination by the Internal Revenue
Service ("IRS") of its income tax returns for 1992 through 1996. Also, the IRS
has asserted deficiencies against the income tax returns of the Company for the
tax years 1986 through 1991, which the Company is contesting. The Company has
reached tentative agreement with the IRS on all of the issues involved in these
examinations and believes that the ultimate resolution of these matters will not
have a material adverse impact on its financial condition.
NOTE 8: EARNINGS (LOSS) PER SHARE
Net income (loss) per basic and diluted share is based on the weighted average
common shares outstanding during each period. The Company reported a loss for
the 13 weeks and 39 weeks ended October 31, 1998, and the 4 weeks ended November
1, 1997 and, therefore, shares issuable under stock option plans are
antidilutive for those periods. Share and per share data are not presented for
the period prior to October 4, 1997, the effective date of the Company's plan of
reorganization, due to the general lack of comparability as a result of the
revised capital structure of the Company.
8
<PAGE> 11
NOTE 9: COMPREHENSIVE INCOME
In June 1997, the Financial Accounting Standards Board (FASB) adopted Statement
of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and disclosure of
comprehensive income and its components. Effective February 1, 1998, the Company
adopted SFAS No. 130. For the 13 weeks and 39 weeks ended October 31, 1998,
total comprehensive loss was $17.9 and $55.0, respectively. For the 4 weeks
ended November 1, 1997, total comprehensive loss was $6.9. Total comprehensive
loss for the 9 weeks and 35 weeks ended October 4, 1997 was $30.0 and $47.3,
respectively.
NOTE 10: NEW ACCOUNTING PRONOUNCEMENTS
In February 1998, the FASB adopted SFAS No. 132, "Employer's Disclosures about
Pensions and Other Postretirement Benefits," which establishes reporting
requirements related to a business' pensions and other postretirement benefits.
SFAS No. 132 is effective for fiscal years beginning after December 15, 1997,
and does not apply to interim financial statements in the year of adoption. The
Company will adopt SFAS No. 132 for the fiscal year ending January 30, 1999.
In June 1997, the FASB adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," which establishes reporting requirements
related to a business' operating segments, products and services, geographic
areas of operations and major customers. SFAS No. 131 is effective for fiscal
years beginning after December 15, 1997, and does not apply to interim financial
statements in the year of adoption. The Company will adopt SFAS No. 131 for the
fiscal year ending January 30, 1999. The Company does not expect SFAS No. 131 to
have a significant impact on its Consolidated Financial Statements and the
related disclosures.
9
<PAGE> 12
EDISON BROTHERS STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
On November 3, 1995, Edison Brothers Stores, Inc. (the Company) and 65 of its
subsidiaries filed petitions for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. An Amended Joint Plan of Reorganization (the Plan) was
confirmed by the Bankruptcy Court on September 9, 1997. The Company emerged from
Chapter 11 on September 26, 1997. During the period from November 3, 1995
through September 26, 1997, the Company conducted business as
debtor-in-possession. For financial reporting purposes, the effective date of
the Company's emergence from bankruptcy is considered to be the close of
business on October 4, 1997.
The following discussion compares the 13 week period ended October 31, 1998 to
the 13 week period ended November 1, 1997. It does not distinguish between the 4
week period ended November 1, 1997 and the 9 week period ended October 4, 1997,
as separate discussions of these periods are not meaningful in terms of their
operating results or comparisons to the current year.
OPERATING RESULTS
Net sales for the 13 weeks and 39 weeks ended October 31, 1998 were $212.3 and
$623.4 million, respectively, a decrease of 1.7% and 7.8% from the comparable
periods of 1997. The decrease reflected a 6.2% decrease in the average number of
stores in operation between the first 39 weeks of 1997 and first 39 weeks of
1998. Same-store sales increased 2.2% for the 13 week period and declined 2.7%
for the 39 week period.
Cost of goods sold, including occupancy and buying expenses, was 74.5% and 74.4%
of sales for the 13 and 39 weeks ended October 31, 1998, respectively, compared
to 74.3% and 71.5% for the comparable periods in 1997. The increase in cost of
goods sold, including occupancy and buying expenses, as a percentage of sales
was primarily due to increased markdowns as a percentage of sales. The Company
initiated an aggressive markdown program to clear older merchandise at the end
of the first quarter of 1998.
Store operating and administrative expenses were 27.4% and 27.9% of sales for
the 13 and 39 weeks ended October 31, 1998, compared to 29.2% and 28.4% for the
comparable periods in 1997. These expenses decreased $4.8 million and $20.7
million for the 13 and 39 weeks ended October 31, 1998, respectively, compared
to 1997. The Company has realized savings from the reorganization of field
management as well as the centralization of the planning and allocation,
merchandising support and marketing functions.
Depreciation and amortization expense increased $0.6 and $3.0 million between
1998 and 1997, for the 13 and 39 week periods, respectively. The increase
resulted primarily from amortization of the reorganization value in excess of
identifiable assets and favorable lease rights recorded upon the Company's
adoption of Fresh Start Accounting and depreciation on the $41 million in
capital expenditures incurred in 1997.
Restructuring and reorganization expenses of $44.7 million were incurred in the
39 week period of 1997 for early lease termination costs, write-offs of fixtures
and equipment and discontinued operations, legal and consulting fees, severance
payroll and related fringe benefits, and other bankruptcy related expenses,
10
<PAGE> 13
offset by interest income earned while the Company was in Chapter 11.
FINANCIAL CONDITION
Liquidity and Capital Resources
The Company's principal short-term cash needs are for inventory expenditures and
the funding of operating losses prior to and after the Christmas selling season.
The Company experiences a significant increase in sales during the Christmas
selling season (Thanksgiving through Christmas). This selling season generally
accounts for approximately 14% of annual sales. The Company funds short-term
cash needs through a combination of cash flows provided by operations, normal
trade credit arrangements and the Credit Facility. For the first nine months of
1998, cash used from operating activities was $111.2 million, primarily due to
the net loss of $55.0 million and changes in working capital of $85.9 million,
offset by depreciation and amortization of $26.2 million. The working capital
changes were primarily the result of increased inventory levels for the
Christmas selling season and the payment of taxes attributable to the
termination of the pension plan in accordance with the Plan.
The Company has a credit facility totaling $200 million subject to certain
limitations on the value of inventory (as defined in the Credit Facility) with a
sublimit of $150 million for the issuance of letters of credit. See Note 5 of
the Notes to Condensed Consolidated Financial Statements. At October 31, 1998,
the Company had outstanding borrowings of $81.6 million under the Credit
Facility and outstanding letters of credit of $56.7 million. As of October 31,
1998, the Company had $21.9 million available for additional borrowings under
the Credit Facility.
As a result of higher than expected operating losses, the Company had to amend
the minimum net worth covenant under the Credit Facility in April 1998 and again
in August 1998. As of October 31, 1998, the Company's net worth, as defined, was
$11.7 million in excess of the minimum requirement.
As a result of 1998 operating losses and a diminishing amount of availability
under the Credit Facility, the Company has experienced shortened trade credit
terms with certain vendors and has had to issue domestic letters of credit to
procure certain merchandise ($9.4 million outstanding domestic letters of credit
as of October 31,1998). The Company's continuation as a going concern will
depend on, to varying degrees, the following factors:
1. Significant improvement in the profitability of operations.
2. No significant further shortening or restriction of trade credit.
3. Securing additional sources of liquidity or financing, such as an increase
in the advance rate under the Credit Facility.
The Company is currently in the process of implementing significant expense
reduction programs and has hired an advisor to help it to procure additional
external financing. There can be no assurance that these efforts will be
successful.
Capital Expenditures
Capital expenditures totaled $19.0 million for the first 39 weeks of 1998
compared to $32.4 million in the first 39 weeks of 1997. These expenditures
primarily related to the remodeling of certain stores and
11
<PAGE> 14
costs incurred in connection with implementing new information systems.
For 1998, the Company expects capital expenditures to total approximately $24
million depending primarily on the number of stores opened or remodeled. The
Company expects that capital expenditures will be funded principally by net cash
provided by operating activities and borrowings under the Credit Facility.
Other Investing Activities
Cash flows from other investing activities increased $78.5 million in 1997 when
the Company moved excess funds out of investments and into cash equivalent
securities. The Company made cash payments pursuant to the Plan subsequent to
moving funds out of investments.
Financing Activities
Cash flows from financing activities in the first 39 weeks of 1998 consisted
primarily of borrowings under the Credit Facility less an interest payment on
the Senior Notes. In 1997, the Company used cash to fund financing needs,
primarily for the $96.9 paid to creditors pursuant to the Plan and the $17.6
deposited in the senior note interest escrow.
YEAR 2000
The efficient operation of the Company's business is dependent in part on its
computer software programs and operating systems (collectively, "Programs and
Systems"). These Programs and Systems are used in several key areas of the
Company's business, including merchandise purchasing, inventory management,
pricing, sales, shipping and financial reporting, as well as in various
administrative functions. The Company has been evaluating its Programs and
Systems to identify potential "Year 2000" compliance problems. These actions are
necessary to ensure that the Programs and Systems will recognize and process the
Year 2000 and beyond.
The Company's State of Readiness
In 1997 we established a comprehensive plan of action designed to achieve Year
2000 compliance. The project includes (1) information technology ("IT") and (2)
non-IT or embedded technology systems. The project is divided into five phases:
awareness, assessment, remediation, testing and implementation. We have
essentially completed the awareness and assessment phases for both elements, and
are currently at different points in the remediation, testing and implementation
phases for each of the elements. We are using both internal and external
resources to implement our plan.
For our information systems, we have assessed both existing and newly
implemented hardware and applications (software and operating systems), and have
substantially finalized plans to address all assessed risks. Approximately 80
percent of our hardware is Year 2000 compliant, and the remainder is currently
in the remediation phase. Approximately 60 percent of our applications are
compliant, with 40 percent in the testing phase. We anticipate completion of the
testing phase for our software by early 1999 and we intend to extensively test
our key operating systems through simulation of the year 2000.
We began addressing non-IT systems, or embedded technology/infrastructure, risks
at our stores, distribution centers and headquarters facilities during 1998.
Approximately 20 percent of our non-IT
12
<PAGE> 15
systems are Year 2000 compliant and the remainder are currently in the
remediation phase. Testing and implementation are approximately 10 percent
complete and we anticipate substantial completion by early 1999.
In addition, we have identified our key business partners, including merchandise
suppliers, and will continue to assess their readiness throughout 1999 and
mitigate the risk to us if they are not prepared for the year 2000.
Costs
The Company estimates that expenses associated with achieving Year 2000
compliance will be $7.0 million in 1998 and $2.0 million in 1999. Additionally,
an undetermined amount of the Company's IT payroll costs are being spent on the
testing and remediation phases of the project. The Company is also replacing the
three Warehouse Management Systems it uses in each of its distribution centers
with one new system. The cost of this replacement, which includes certain new
material handling equipment, will amount to approximately $10 million.
Risks
Like most large companies, the Company is dependent upon its own internal
computer systems and upon timely performance by its business partners. A
large-scale Year 2000 failure could, among other things, impair the Company's
ability to timely receive and deliver merchandise to stores, resulting in lost
sales opportunities and additional expenses. Such failure could materially and
adversely affect the Company's results of operations, liquidity and financial
condition. The Company's Year 2000 program seeks to identify and minimize these
risks and includes testing of its systems and purchased hardware and software,
to ensure, to the extent feasible, that all such systems will function before
and after the Year 2000. The Company will continually refine its understanding
of the risks the Year 2000 poses to its significant business partners based upon
information obtained through surveys and interviews. That refinement will
continue throughout 1998 and 1999.
Contingency Plans
To date, the Company has not established a contingency plan for possible Year
2000 issues. The level of planning required will be a function of the risks
ascertained through all of the earlier Year 2000 efforts. The Company
anticipates starting this contingency planning, if needed, in Spring 1999 and
continuing such planning during the remainder of fiscal 1999.
OTHER MATTERS
The Company has identified 62 stores which will close during the fourth quarter
of 1998. These stores are primarily either unprofitable or Oaktree stores (a
format the Company is phasing out) which cannot be converted to other Edison
formats. The Company expects to record a fourth quarter charge of approximately
$1.2 million for the associated severance costs, fixed asset write-offs and
other closing costs.
The Company has decided to offer for sale its Repp by Mail mens catalog
operation. Sales for the catalog were $14.7 million in 1997 and $14.8 million in
the first 39 weeks of 1998.
13
<PAGE> 16
This Report contains "forward-looking statements" within the meaning of Section
21E of the Securities Exchange Act of 1934, as amended. The words "anticipate,"
"believe," "expect," "will," "could" and similar expressions are intended to
identify certain forward-looking statements. Such statements reflect the
Company's current views with respect to future events and financial performance
and involve risks and uncertainties, including, without limitation, the risks
described above and such other risks as are described in the Company's other
filings with the Securities and Exchange Commission. Should one or more of these
risks or uncertainties occur, or should underlying assumptions prove incorrect,
actual results may vary materially and adversely from those anticipated,
believed or otherwise indicated. Consequently, all of the forward-looking
statements made in this Report are qualified by these cautionary statements.
14
<PAGE> 17
EDISON BROTHERS STORES, INC. AND SUBSIDIARIES
PART II OTHER INFORMATION
Items 1 through 5 of Part II are not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No.
2 Debtors' Amended Joint Plan of Reorganization under
Chapter 11 of the Bankruptcy Code, dated June 30, 1997, as
modified, was filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended
November 1, 1997 and is incorporated herein by reference.
3.1 Amended and Restated Certificate of Incorporation of the
Company was filed as an Exhibit to the Company's Quarterly
Report on Form 10-Q for the quarter ended November 1, 1997
and is incorporated herein by reference.
3.2 Amended and Restated Bylaws of the Company were filed as
an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 1, 1997 and are
incorporated herein by reference.
4.1 Loan and Security Agreement, dated as of September 26,
1997, by and among the Company, Edison Brothers Apparel
Stores, Inc. and Edison Puerto Rico Stores, Inc., as
Borrowers, the Guarantors named therein, the financial
institutions named therein as Lenders, Congress Financial
Corporation, as Agent, and The CITGroup/Business Credit,
Inc., as Co-Agent, was filed as an Exhibit to the
Company's Quarterly Report on Form 10-Q for the quarter
ended November 1, 1997 and is incorporated herein by
reference.
4.2 Amendment No. 1 to Loan and Security Agreement, dated as
of April 13, 1998, by and among the Company, Edison
Brothers Apparel Stores, Inc. and Edison Puerto Rico
Stores, Inc., as Borrowers, the Guarantors named therein,
the financial institutions named therein as Lenders,
Congress Financial Corporation, as Agent, and The
CITGroup/Business Credit, Inc., as Co-Agent, was filed as
an Exhibit to the Company's Annual Report on Form 10-K for
the year ended January 31, 1998 and is incorporated herein
by reference.
4.3 Amendment No. 2 to Loan and Security Agreement, dated as
of August 12, 1998, by and among the Company, Edison
Brothers Apparel Stores, Inc. and Edison Puerto Rico
Stores, Inc., as
15
<PAGE> 18
Borrowers, the Guarantors named therein,
the financial institutions named therein as Lenders,
Congress Financial Corporation, as Agent, and The
CITGroup/Business Credit, Inc., as Co-Agent, was filed as
an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended August 1, 1998 and is incorporated
herein by reference.
4.4 Indenture, dated as of September 26, 1997, between the
Company and The Bank of New York, as Trustee, was filed as
an Exhibit to the Company's Quarterly Report on Form 10-Q
for the quarter ended November 1, 1997 and is incorporated
herein by reference.
4.5 First Supplemental Trust Indenture, dated as of September
26, 1997, between the Company and The Bank of New York, as
Trustee, was filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended
November 1, 1997 and is incorporated herein by reference.
4.6 Funding Escrow Agreement, dated as of September 26, 1997,
among the Company, Edison Brothers Apparel Stores, Inc.
and Mercantile Trust Company, N. A., as Escrow Agent, was
filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 1, 1997 and is
incorporated herein by reference.
4.7 Registration Rights Agreement, dated as of September 26,
1997, between the Company and Swiss Bank Corporation was
filed as an Exhibit to the Company's Quarterly Report on
Form 10-Q for the quarter ended November 1, 1997 and is
incorporated herein by reference.
4.8 Warrant Agreement, dated as of September 26, 1997, between
the Company and ChaseMellon Shareholder Services, L.L.C.,
as Warrant Agent, was filed as an Exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended
November 1, 1997 and is incorporated herein by reference.
27 Financial Data Schedule
(b) There were no reports filed on Form 8-K during the 13
weeks ended October 31, 1998.
16
<PAGE> 19
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
EDISON BROTHERS STORES, INC.
DATE: December 10, 1998
/s/ John F. Burtelow
----------------------------------------------
By John F. Burtelow
Executive Vice President, Chief Administrative
Officer and Chief Financial Officer
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED BALANCE SHEET AS OF OCTOBER 31, 1998, AND THE CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS OF THE COMPANY FOR THE 39 WEEKS ENDED
OCTOBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
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<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> OCT-31-1998
<CASH> 11,900
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 216,800
<CURRENT-ASSETS> 251,700
<PP&E> 146,800
<DEPRECIATION> 31,000
<TOTAL-ASSETS> 429,000
<CURRENT-LIABILITIES> 186,800
<BONDS> 127,100
0
0
<COMMON> 102
<OTHER-SE> 66,400
<TOTAL-LIABILITY-AND-EQUITY> 429,000
<SALES> 623,400
<TOTAL-REVENUES> 623,400
<CGS> 467,100
<TOTAL-COSTS> 197,300
<OTHER-EXPENSES> 700
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<INTEREST-EXPENSE> 13,100
<INCOME-PRETAX> (54,800)
<INCOME-TAX> 200
<INCOME-CONTINUING> (55,000)
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