UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 31, 1998
Commission file Number 1-11134
BRADLEES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3156108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Bradlees Circle
Braintree, MA 02184
(Address of principal executive offices)
(Zip Code)
(781) 380-3000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Number of shares of the issuer's common stock outstanding as
of December 1, 1998:
11,310,384 shares.
Exhibit Index on Page 32
Page 1 of 34(Including Exhibit)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Bradlees, Inc., Debtor-in-Possession:
We have reviewed the accompanying condensed consolidated balance
sheets of Bradlees, Inc. and subsidiaries, Debtor-in-Possession
(the "Company"), as of October 31, 1998 and November 1, 1997,
and the related condensed consolidated statements of operations,
for the thirteen week periods then ended and for the thirty-nine
week period ended October 31, 1998, and the related condensed
consolidated statement of cash flows for the thirty-nine week
period ended October 31, 1998. These financial statements are
the responsibility of the Company's management.
We conducted our review in accordance with standards
established by the American Institute of Certified Public
Accountants. A review of interim financial information consists
principally of applying analytical procedures to financial data
and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an
audit conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material
modifications that should be made to such condensed consolidated
financial statements for them to be in conformity with generally
accepted accounting principles.
The accompanying condensed consolidated financial statements
have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1 to the condensed
consolidated financial statements [and Notes 1 and 3 to the
annual financial statements for the year ended January 31, 1998
(not presented herein)], on June 23, 1995, the Company filed a
petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. In addition, the Company has experienced
operating losses in each of the three years ended January 31,
1998, and for the thirteen and thirty-nine week periods ended
October 31, 1998 and at October 31, 1998 had a substantial
stockholders' deficit. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent
upon, among other things, (i) consummation of the Plan of
Reorganization, (ii) compliance with all debt covenants under
the debtor-in-possession financing, (iii) the success of future
operations, including returning to profitability and maintaining
adequate post bankruptcy financing and liquidity, and (iv) the
resolution of the uncertainties of the reorganization case
discussed in Note 2. Management's plans in regard to these
matters are discussed in Notes 1 and 2 to the condensed
consolidated financial statements.
The eventual outcome of these matters discussed in the previous
paragraph is not presently determinable. The condensed
consolidated financial statements do not include any adjustments
relating to the resolution of these uncertainties or the
recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities and changes in
stockholders' equity that might be necessary should the Company
be unable to continue as a going concern.
The accompanying condensed consolidated statements of operations
and cash flows for the thirty-nine week period ended November 1,
1997, which include the thirteen week periods, ended May 3, 1997
and August 2, 1997 were reviewed by other accountants. Their
reports were dated May 21, 1997 and August 19, 1997,
respectively. These reports stated that the other accountants
were not aware of any material modifications that should be made
to those statements in order for them to be in conformity with
generally accepted accounting principles and included
explanatory paragraphs relating to (i) the Company's filing for
reorganization under Chapter 11 of the Federal Bankruptcy Code,
and (ii) substantial doubt about the Company's ability to
continue as a going concern.
/s/ARTHUR ANDERSEN LLP
New York, New York
November 17, 1998
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
Part 1 - Financial Information
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
13 Weeks Ended
--------------
Oct. 31, 1998 Nov. 1, 1997
-------------- -------------
Total sales $323,106 $342,337
Leased department sales 10,973 11,904
-------- --------
Net sales 312,133 330,433
Cost of goods sold 217,394 233,329
-------- --------
Gross margin 94,739 97,104
Leased department and other
operating income 3,028 3,282
-------- --------
97,767 100,386
Selling, store operating,
administrative and
distribution expenses 95,549 93,796
Depreciation and amortization exp. 7,803 9,004
Interest and debt expense 4,371 4,187
Reorganization items (2,749) (6,978)
-------- -------
Net income (loss) ($7,207) $ 377
========= =======
Comprehensive income (loss) ($7,207) $ 377
========= =======
Net income (loss) per share ($0.64) $0.03
========= =========
Weighted average shares outstanding
(in thousands)-basic and diluted 11,310 11,366
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
39 Weeks Ended
--------------
Oct. 31, 1998 Nov. 1, 1997
------------- ------------
Total sales $939,203 $930,683
Leased department sales 32,818 35,463
-------- --------
Net sales 906,385 895,220
Cost of goods sold 635,383 625,521
-------- --------
Gross margin 271,002 269,699
Leased department and other
operating income 8,757 8,722
-------- --------
279,759 278,421
Selling, store operating,
administrative and
distribution expenses 280,326 289,844
Depreciation and amortization exp. 24,370 27,544
Loss on disposition of properties 241 -
Interest and debt expense 11,960 11,673
Reorganization items (2,555) (2,160)
-------- --------
Net loss ($34,583) ($48,480)
========= =========
Comprehensive loss ($34,583) ($48,480)
========= =========
Net loss per share ($3.06) ($4.26)
========= =========
Weighted average shares outstanding
(in thousands) - basic and diluted 11,311 11,382
======== ========
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997
------------- ------------- ------------
ASSETS
Current assets:
Unrestricted cash
and cash equivalent $10,959 $10,949 $11,291
Restricted cash and
cash equivalents 25,129 16,760 9,436
------ ------ -------
Total cash and
cash equivalents 36,088 27,709 20,727
------ ------ -------
Accounts receivable 11,925 10,013 14,183
Inventories 318,883 238,629 335,359
Prepaid expenses 11,031 8,733 11,087
Assets held for sale - 7,754 7,754
------ ------ -------
Total current assets 377,927 292,838 389,110
------- ------- -------
Property, plant and
equipment, net:
Property excluding
capital leases, net 123,892 131,525 135,430
Property under capital
leases, net 17,732 18,959 21,126
------ ------ -------
Total property, plant
and equipment, net 141,624 150,484 156,556
------- ------- -------
Other assets:
Lease interests
at fair value, net 137,350 142,454 144,705
Assets held for sale - 4,000 5,250
Other, net 4,509 5,390 4,386
------- ------- -------
Total other assets 141,859 151,844 154,341
------- ------- -------
Total assets $661,410 $595,166 $700,007
======== ======== ========
(Continued)
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997
------------- ------------- ------------
LIABILITIES AND
STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accounts payable $179,413 $124,361 $196,279
Accrued expenses 23,221 30,516 34,619
Self-insurance reserves 6,027 6,564 6,144
Short-term debt 157,392 84,208 131,500
Current portion of
capital lease obligations 1,038 1,038 1,038
------- ------- ------
Total current liabilities 367,091 246,687 369,580
Long-term liabilities:
Obligations under
capital leases 26,211 27,073 32,738
Deferred income taxes 8,581 8,581 8,581
Self-insurance reserves 12,237 13,328 12,473
Other long-term liabilities 19,034 23,342 28,186
------ ------ ------
Total long-term
liabilities 66,063 72,324 81,978
Liabilities subject to
settlement under the
reorganization case 548,788 562,105 560,154
Stockholders' deficiency:
Common stock - 11,310,384
outstanding (11,312,154
at 1/31/98, 11,387,154
at 11/1/97)
Par value 115 115 115
Additional paid-in-capital 137,821 137,821 137,951
Accumulated deficit (457,665) (423,082) (449,007)
Treasury stock, at cost (803) (804) (764)
-------- -------- -------
Total stockholders'
deficiency (320,532) (285,950) (311,705)
-------- -------- -------
Total liabilities and
stockholders'deficiency $661,410 $595,166 $700,007
======== ======== ========
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
39 Weeks Ended
--------------
Oct. 31, 1998 Nov. 1, 1997
------------- ------------
Cash flows from operating
activities:
Net loss ($34,583) ($48,480)
Adjustments to reconcile net
loss to cash used by operating
activities:
Depreciation and amortization expense 24,370 27,544
Amortization of deferred financing
costs 1,215 2,098
Reorganization items (2,555) (2,160)
Changes in working capital
and other, net (37,231) (29,832)
--------- --------
Net cash used by operating activities
before reorganization items (48,784) (50,830)
--------- --------
Reorganization items:
Interest income received 746 330
Chapter 11 professional fees paid (7,786) (7,877)
Other reorganization expenses
paid, net (3,225) (5,611)
-------- --------
Net cash used by reorganization items (10,265) (13,158)
--------- --------
Net cash used by operating activities (59,049) (63,988)
Cash flows from investing activities:
Capital expenditures, net (10,379) (14,721)
Increase in restricted cash
and cash equivalents (8,369) (310)
--------- -------
Net cash used in
investing activities (18,748) (15,031)
--------- --------
Cash flows from financing activities:
Payments of liabilities
subject to settlement (6,551) (5,447)
Deferred financing costs - (2,026)
Net borrowings under the
DIP facilities 73,184 89,000
Proceeds from sales of properties 12,036 -
Principal payments on capital
lease obligations (862) (1,242)
--------- --------
Net cash provided by
financing activities 77,807 80,285
--------- --------
Net increase in unrestricted cash
and cash equivalents 10 1,266
Unrestricted cash and cash equivalents:
Beginning of period 10,949 10,025
--------- --------
End of period $10,959 $11,291
========= =========
Supplemental disclosure of cash
flow information:
Cash paid for interest and
certain debt fees $10,282 $9,264
Cash received (paid) for income taxes ($279) $109
Supplemental schedule of noncash
(investing and financing) activities:
Reduction of liabilities subject to
settlement due to transfer of
title to property $2,000 -
See accompanying notes to condensed consolidated financial
statements.
BRADLEES INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The condensed consolidated financial statements of Bradlees,
Inc. and subsidiaries, including Bradlees Stores, Inc.
(collectively "Bradlees" or the "Company") have been prepared in
accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7: "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP
90-7") and generally accepted accounting principles applicable
to a going concern, which principles, except as otherwise
disclosed, assume that assets will be realized and liabilities
will be discharged in the normal course of business. The
Company filed petitions for relief under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") on June 23, 1995
(the "Filing"). The Company is presently operating its business
as a debtor-in-possession subject to the jurisdiction of the
United States Bankruptcy Court for the Southern District of New
York (the "Bankruptcy Court").
With respect to the unaudited
condensed consolidated financial statements for the 13 weeks
(third quarter) and 39 weeks (year-to-date) ended October 31,
1998 and November 1, 1997, it is the Company's opinion that all
necessary adjustments (consisting of normal and recurring
adjustments) have been included to present a fair statement of
results for the interim periods. Certain prior-year amounts
have been reclassified to conform to this year's presentation.
These statements should be read
in conjunction with the Company's financial statements (Form
10-K) for the fiscal year ended January 31, 1998 ("1997"). Due
to the seasonal nature of the Company's business, operating
results for the interim periods are not necessarily indicative
of results that may be expected for the fiscal year ending
January 30, 1999 ("1998"). Certain information and footnote
disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have
been condensed or omitted, pursuant to the general rules and
regulations promulgated by the Securities and Exchange
Commission (the "SEC").
The Company's ability to
continue as a going concern is dependent upon consummation of
the Company's amended plan of reorganization by the Bankruptcy
Court (Note 2), the ability to maintain compliance with debt
covenants under the DIP Facility (Note 4), achievement of
profitable operations, maintenance of adequate financing, and
the resolution of the uncertainties of the reorganization case
discussed in Note 2. The Company experienced significant
operating losses in 1996 and 1995.
In an effort
to return the Company to profitability and accomplish its
long-term goals, the Company is focusing on three core product
lines: moderately-priced basic and casual apparel, basic and
fashion items for the home, and edited assortments of frequently
purchased commodity and convenience products. Bradlees is
committed to quality and fashion, especially in apparel and home
furnishings, and to improved customer service. The Company
believes that it can strategically leverage its strength in the
fashion and quality content of its apparel and decorative home
product offerings while driving traffic with selected hardlines
merchandise.
2. Reorganization
Case
In the Chapter 11
case, substantially all liabilities as of the date of the Filing
are subject to settlement under the amended plan of
reorganization (the "Plan") that was confirmed by the Bankruptcy
Court on November 18, 1998. The Plan provides for approximately
$165 million in distributions to creditors, inclusive of $16
million of administrative claim payments, $7 million in tax and
cure notes, $14 million in cash, $40 million in convertible
notes primarily payable to the Company's pre-Chapter 11 bank
group, new common stock with an estimated value of $85 million
and $3 million in other distributions. As previously reported,
all existing stock will be canceled upon the Company's emergence
from bankruptcy with no issuance of new stock to current
shareholders.
A Form 8-K
has been filed with the SEC that describes, among other things,
the classification and treatment of pre-petition claims under
the Plan and conditions to the occurrence of the Plan's
effective date. The Company expects to emerge from Chapter 11
at, or prior to, the end of fiscal year 1998. Pro forma
financial information has been presented in the Company's Form
S-1 Registration Statement ("Form S-1") filed with the SEC in
November, 1998 and is updated in Note 11. A lessor of one of
the Company's stores has filed an appeal from the Confirmation
Order (the "Appeal") and an application in the United States
District Court for the Southern District of New York seeking a
stay of the Confirmation Order pending the outcome of the Appeal
(the "Stay Application"). The Appeal and Stay Application have
not yet been decided. A hearing on the Stay Application is
scheduled for December 15, 1998.
Schedules were filed by the Company with the Bankruptcy Court
setting forth the assets and liabilities of the Company as of
the date of the Filing as shown by the Company's accounting
records. Differences between amounts shown by the Company and
claims filed by creditors are continuing to be investigated and
resolved. Although the ultimate amount and settlement terms for
all pre-petition liabilities have not yet been finalized, the
Company believes that the total of unsecured claims will not
exceed $300 million, a condition precedent to the effectiveness
of the Plan. Payments of approximately $2.1 million were made
in 1997 to settle certain reclamation claims and two properties
that were financed prior to the Filing and held for sale at the
beginning of 1998 were either sold or transferred during the
second quarter and the associated pre-petition financing
obligation was reduced accordingly (Note 7).
Under the Bankruptcy Code, the Company may
elect to assume or reject real estate leases, employment
contracts, personal property leases, service contracts and other
executory pre-petition leases and contracts, subject to
Bankruptcy Court approval. A liability of approximately $45.7
million was recorded through October 31, 1998, for rejected
leases and contracts. This liability may be subject to future
adjustments based on claims filed and Bankruptcy Court actions.
The Company believes that it has recorded its best estimate of
the liability for rejected leases and contracts based on
information currently available.
The principal categories of claims
classified as "Liabilities Subject to Settlement Under the
Reorganization Case" are identified below. Deferred financing
costs as of the Filing of $3.4 million, $2.0 million and $2.7
million, respectively, for the pre-petition revolving loan
facility (the "Revolver") and subordinated debt (the "2002 and
2003 Notes") have been netted against the related outstanding
debt amounts. In addition, a $9.0 million cash settlement and
approximately $12.7 million of adequate protection payments
since the Filing have been applied to reduce the Revolver debt
amount. The cash settlement relates to a portion of the
Company's cash balance as of the date of the Filing ($9.3
million) which was claimed as collateral by the pre-petition
bank group. The claim was settled in full for $9.0 million and
approved by the Bankruptcy Court in 1995. All amounts presented
below may be subject to future adjustments depending on
Bankruptcy Court actions, further developments with respect to
disputed claims, determination as to the security of certain
claims, the value of any collateral securing such claims, or
other events.
Liabilities Subject to Settlement (000's)
- --------------------------------- --------------
Under the Reorganization Case
- -----------------------------
Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997
------------- ------------ ---------
Accounts payable $166,567 $165,324 $165,016
Accrued expenses 26,000 27,996 27,694
Revolver 68,405 71,105 72,005
2002 Notes 122,274 122,274 122,274
2003 Notes 97,957 97,957 97,957
Financing obligation 12,460 17,951 17,951
Obligations under capital
leases 9,440 11,407 11,527
Provision for rejected
leases 45,685 48,091 45,730
------- ------- -------
$548,788 $562,105 $560,154
======== ======== ========
3. Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at October 31, 1998 were
comprised of the following, along with earned interest of $1.2
million: (a) $6.0 million of the $24.5 million federal income
tax refund received in April, 1996; (b) $1.1 million of
forfeited deposits, net of property carrying costs, received in
1996 on a planned sale of an owned undeveloped property that was
not consummated and $7.6 million of net proceeds received when
this property was sold in March, 1998; (c) $8.0 million from the
sale of a closed store in January, 1998; and (d) other funds
($1.2 million) restricted for security deposits for utility
expenses incurred after the Filing.
4. Debt
As a result of the Filing, substantially all debt
(exclusive of the DIP Facility) outstanding at October 31, 1998,
was classified as liabilities subject to settlement (Note 2).
No principal or interest payments are made on any pre-petition
debt (excluding certain capital leases) without Bankruptcy Court
approval or until the Plan has been consummated. During 1995,
the Company received Bankruptcy Court approval to make certain
adequate protection payments to the pre-petition bank group.
The adequate protection payments, a cash settlement, and
deferred financing costs have been netted against the related
outstanding debt amounts (Note 2).
Generally, interest on pre-petition debt ceases accruing
upon the filing of a petition under the Bankruptcy Code.
Contractual interest expense not recorded on certain
pre-petition debt (the Revolver, 2002 Notes and 2003 Notes)
totaled approximately $7.7 and $23.1 million for the third
quarter and year-to-date periods of 1998, respectively, and $7.8
and $23.3 million for the third quarter and year-to-date periods
of 1997, respectively.
FINANCING FACILITY The Company has
a $250 million financing facility (the "Financing Facility") (of
which $125 million is available for issuance of letters of
credit) with BankBoston Retail Finance, Inc. ("BBNA") as agent,
under which the Company is allowed to borrow for general
corporate purposes, working capital and inventory purchases.
The Financing Facility consists of (a) an up to eighteen-month
debtor-in-possession revolving credit facility in the maximum
principal amount of $250 million (the "DIP Facility"-see below)
and, subject to meeting certain conditions, (b) an up to
three-year post-emergence credit facility in the maximum
principal amount of $270 million (the "Exit Facility"-see
below). The commitment period for the combined facility cannot
exceed four years.
The DIP Facility replaced
a $200 million Debtor-in Possession Revolving Credit and
Guaranty Agreement (the "Prior DIP Facility") with Chase
Manhattan Bank, as agent. There were outstanding direct
borrowings of $157.4 million under the DIP Facility as of
October 31, 1998. Trade and standby letters of credit
outstanding under the DIP Facility were $8.5 and $19.3 million,
respectively, at October 31, 1998, and $16.1 and $19.7 million,
respectively, at November 1, 1997 under the Prior DIP Facility.
The DIP
Facility has an advance rate of 60% of the Loan Value of
Eligible Receivables (as defined), plus 72% of the Loan Value of
Eligible Inventory (as defined). Between March 1 and December
15, the Company can borrow an overadvance amount on the Loan
Value of Eligible Inventory of 5% (the "Overadvance Amount"),
subject to a $20 million limitation. At the Company's option,
the Company may borrow under the DIP Facility at the Alternate
Base Rate (as defined) in effect from time to time (the "Base
Rate Applicable Margin") or the adjusted Eurodollar rate plus
2.25% (the "Eurodollar Applicable Margin") for interest periods
of one, two or three months. The Base Rate Applicable Margin
and Eurodollar Applicable Margin would be increased 0.5% during
any fiscal month that the Company has Overadvance Amounts. The
weighted average interest rate under the DIP Facility was 7.92%
in the third quarter and 7.93% in the year-to-date period of
1998.
There are no compensating balance requirements under the DIP
Facility but the Company is required to pay an annual commitment
fee of 0.3% of the unused portion. The DIP Facility contains
restrictive covenants including, among other things, limitations
on the incurrence of additional liens and indebtedness,
limitations on capital expenditures and the sale of assets, the
maintenance of minimum operating earnings ("EBITDA") and minimum
accounts payable to inventory ratios. The lenders under the DIP
Facility have a "super-priority claim" against the estate of the
Company. As of October 31, 1998, the Company is in compliance
with the DIP Facility covenants. The DIP Facility expires on
the earlier of June 30, 1999 or the effective date of the Plan.
The Company has received a commitment for the Exit Facility,
which consists of a $250 million senior secured revolving line
of credit (of which $125 million is available for issuance of
letters of credit) and a $20 million junior secured "last
in-last out" facility. The Exit Facility is for a term of up to
three years. The Company will use the Exit Facility to repay
its existing DIP Facility and for working capital and general
business needs.
The senior secured tranche has an advance rate equal to 80% of
the Loan Value of Eligible Receivables, plus the lower of (i)
72% of the Loan Value of Eligible Inventory or (ii) 80% of the
ratio of the annual appraised liquidation value to the Loan
Value (as defined) of the inventory (the "Loan to Value Ratio").
Between March 1 and December 15, the inventory advance rate will
be increased to 77% of the Loan Value of Eligible Inventory.
The Company may also borrow up to an additional $20 million
under the junior secured facility provided that the total
inventory borrowings do not exceed 93% of the Loan to Value
Ratio.
The Exit Facility permits the Company to borrow
funds under the senior secured tranche at an interest rate per
annum equal to (a) the higher of (i) the annual rate of interest
as announced by BankBoston as its "Base Rate" and (ii) the
weighted average of the rates on overnight federal funds plus
0.50% per annum; or (b) 2.25% per annum plus the quotient of (i)
the LIBOR Rate in effect divided by (ii) a percentage equal to
100% minus the percentage established by the Federal Reserve as
the maximum rate for all reserves applicable to any member bank
of the Federal Reserve system in respect of eurocurrency
liabilities. Each of these rates is subject to a 0.50% increase
in the event of overadvances. The junior secured facility
permits the Company to borrow funds at the "Base Rate" plus
7.00% per annum.
The Exit Facility is subject to
certain conditions being satisfied, including minimum EBITDA
performance and minimum borrowing availability on the effective
date of the Plan (Note 2). The Exit Facility will be secured by
substantially all of the non-real estate assets of the Company.
The Exit Facility contains financial covenants including (i)
minimum EBITDA, (ii) minimum accounts payable to inventory;
(iii) maximum capital expenditures; and (iv) minimum operating
cash flow to interest expense (for the fiscal quarters ending on
or about January 31, 2001, and thereafter).
5. Income Taxes
The Company provides for income taxes under
the provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". On an interim
basis, the Company provides for income taxes using the estimated
annual effective rate method. The Company did not recognize a
quarterly or annual income tax expense or benefit in 1997 and
also does not expect to recognize a quarterly or annual income
tax expense or benefit in 1998.
As a result of the implementation of
the Plan, the Company will (i) undergo an "ownership change"
(generally, a greater than 50 percentage point change in
ownership) for purposes of Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"), and (ii) realize
cancellation of indebtedness income ("COI") from the
cancellation of certain indebtedness in exchange for common
stock, 9% convertible notes and warrants to purchase shares of
common stock. Because such ownership change and cancellation of
indebtedness arise in a bankruptcy proceeding under Chapter 11,
the Company will avoid some of the adverse Federal income tax
consequences generally associated with such changes (e.g. the
COI realized will not be includible in income). Nevertheless,
the Company expects that its' ability to offset future taxable
income with net operating loss carryforwards ("NOLs"), as well
as certain built-in losses and tax credits, will be limited and
that certain tax attributes, including NOLs, will be reduced
(but not eliminated). In addition, if the Company experiences
another "ownership change" under Section 382 of the Code
subsequent to emergence, there may be further limits on the
Company's NOLs and certain built-in losses and tax credits to
income.
6.Reorganization Items
The Company provided for or incurred the
following expense and income items during the third quarter and
year-to-date periods of 1998 and 1997, directly associated with
the Chapter 11 reorganization proceedings and the resulting
restructuring of its operations:
(000's)
----------
13 Weeks Ended 39 Weeks Ended
10/31/98 11/1/97 10/31/98 11/1/97
------- -------- ------- --------
Professional fees $2,250 $2,250 $6,750 $7,500
Interest income (274) (101) (746) (330)
Net asset write-off - - 470 -
Gain on disposition of
properties - (800) (1,873) (1,003)
Provision for rejected
leases (4,725) (5,207) (7,156) (5,207)
Employee severance and
termination benefits - (3,400) - (3,400)
Provision for MIS retention
bonuses - 280 - 280
------ ------- ------- -------
$(2,749) $(6,978) $(2,555) $(2160)
====== ======= ======= =======
PROFESSIONAL FEES AND INTEREST INCOME: Professional fees
represent estimates of expenses incurred, primarily for legal,
consulting and accounting services provided to the Company and
the creditors committee (which are required to be paid by the
Company while in Chapter 11). Interest income represents
interest earned on cash invested during the Chapter 11
proceeding.
NET ASSET WRITE-OFF: The Company incurred a $0.5 million net
asset write-off in the second quarter of 1998 relating to the
disposal of greeting card fixtures that were replaced as a
consequence of the Company's rejection of its greeting card
supply contract.
GAIN ON DISPOSITION OF PROPERTIES: The Company sold a previously
closed store in the second quarter of 1998 (see Note 7) and
recognized a gain of $1.9 million that was classified as a
reorganization item since the associated asset write-offs were
previously included in reorganization items. In 1997, the
Company sold three closed store leases and certain equipment and
recorded the related gains of $1.0 million, including $0.8
million in the third quarter, as reorganization items.
PROVISION FOR REJECTED LEASES: During the third quarter of 1998,
the Company obtained confirmation that the lessor of a
previously rejected lease had re-let the premises and,
accordingly, the Company reduced its liability for rejected
leases by $4.7 million and recognized a reorganization credit
for that amount. During the second quarter of 1998, the Company
was notified by two of its former landlords at closed locations
that the properties had been re-let and therefore their claims
for rejected lease damages were reduced by $2.4 million. The
Company reduced its rejected lease liability accordingly and
recognized a reorganization credit for that amount in the second
quarter. During the third quarter of 1997, the Company sold a
closed store lease and reversed the associated $5.2 million
rejected lease liability that had been previously recorded at
the time of the store-closing announcement when it was expected
that the lease would be rejected.
EMPLOYEE SEVERANCE AND TERMINATION BENEFITS: The credit
of $3.4 million in the third quarter and year-to-date period of
1997 resulted from the reversal of certain executive severance
reserves, including a significant portion of the severance
reserve that had been established for the Company's former CEO
Mark Cohen, whose employment terminated in December, 1996, and
remaining reserves for certain former executives who found
employment. During the third quarter of 1997, a mediated
settlement was reached with Mr. Cohen that was subsequently
approved by the Bankruptcy Court.
MIS RETENTION BONUSES: The Company had a retention bonus program
for certain Management Information System (MIS) employees that
provided for bonuses during the Chapter 11 proceedings for
continued employment through April, 1998. In April, 1998 these
bonuses were paid and this program was then discontinued.
RESTRUCTURING RESERVES: The Company closed 6 stores in February,
1998. As of October 31, 1998, the Company had remaining
reserves (included in accrued expenses) totaling approximately
$1.0 million (exclusive of provisions for rejected leases
discussed in Note 2) for costs associated with the closing of
the 6 stores and other restructuring activities. Approximately
$3.2 million of restructuring costs were paid in the
year-to-date period of 1998. The majority of the remaining
reserved costs are expected to be paid within a year. In
connection with the terms of the Plan, the Company expects to
incur charges of approximately $4.2 million prior to emergence
for an estimated going-out-of-business inventory impairment of
$2 million (to be recorded as cost of goods sold) and other
store closing costs of $2.2 million for two store closings
anticipated to occur by the end of fiscal year 1999.
7. Assets Held for Sale
The Company had assets held for sale
at the beginning of 1998 that consisted of two properties, one
of which was sold in the second quarter for approximately $4.3
million. A net gain of approximately $1.9 million was recorded
in the second quarter for the sale of that property (Note 6) and
the net proceeds from the sale of the property of $3.5 million
were utilized to pay down the related pre-petition financing
obligation. Title to the other property that had been held for
sale was transferred to the related financing group at the end
of the second quarter and the pre-petition financing obligation
was reduced by the amount of the carrying value of the property
($2 million) pending a final agreement on the economic value of
the property (which is currently anticipated to be at or above
$2 million).
8.Retirement Plans
The Company has a qualified, noncontributory
defined benefit pension plan for non-union employees. Plan
benefits are based on the participant's compensation and years
of service. As of December 31, 1998, the Company will freeze
credited service and salary levels in this plan. This change
impacts all management and non-union hourly associates. All
affected associates were notified of the freeze in November.
Vesting service will continue for non-vested associates but no
future credited service will be provided. The Company expects
to record a gain (not yet determined) in the fourth quarter as a
result of the freeze.
The Company has a 401(k) plan for all
active employees in eligible job categories. Employees may
contribute a portion of their salary to the plan. As of January
1, 1999, the Company will contribute an amount equal to 50% of
up to 6% of each participant's salary contributed to the plan.
This change impacts all management and non-union hourly
associates. Currently eligible participants will become fully
vested in the Company contribution as required by law, while new
hires on or after January 1, 1999, will have a 20% per year
vesting schedule with full vesting after 5 years.
The Company provides certain health care and life
insurance benefits for certain retired non-union employees
meeting age and service requirements. The Company accounts for
the post retirement plan in accordance with SFAS No. 106,
"Employers' Accounting for Post-Retirement Benefits Other Than
Pensions," which requires the Company to accrue the estimated
cost of retiree benefit payments during the years the employee
provides services. The Company's post- retirement benefits are
funded on a current basis.
The SFAS No. 106 valuation at January 31, 1998, along
with amortization credits of $1.3 and $4.0 million in the third
quarter and year-to-date periods of 1998, respectively,
reflected changes that were effective January 1, 1998. The
changes represent the elimination of future benefits for active
employees who do not become eligible by January 1, 2000, and a
phase-out of the Company contributions over the next two years
(at 50% per year beginning January 1, 1999) towards the cost of
providing medical benefits to eligible retirees.
9.Change in Accounting Estimate
The Company is primarily self-insured for workers'
compensation and general liability costs. Actuarial studies of
the self-insurance reserves were completed in the third quarters
of 1998 and 1997 using a discount rate of 6.0% (the same rate
used at January 31, 1998 and February 1, 1997). As a result of
the 1997 study, the self-insurance reserves were reduced by $3.6
million in the third quarter of 1997 with a corresponding
reduction in SG&A expenses (selling, store operating,
administrative and distribution expenses).
10.Summarized Financial Information for Bradlees Stores, Inc.
Under the Plan (Note 2), Bradlees, Inc. is issuing securities
and Bradlees Stores, Inc. is issuing certain debt. Bradlees,
Inc. operates its stores through Bradlees Stores, Inc., an
indirect wholly-owned subsidiary. Bradlees, Inc. is
guaranteeing the debt issued by Bradlees Stores, Inc.
Substantially all of the assets of the Company, on a
consolidated basis, are held by Bradlees Stores, Inc. The
following summarized financial information of Bradlees Stores,
Inc. is presented in accordance with SEC Staff Accounting
Bulletin 53 and Regulation S-X Rule 1-02 (bb):
(000's)
---------
Oct.31, 1998 Jan. 31, 1998 Nov. 1, 1997
------------ ------------- ------------
Current Assets $ 371,208 $ 286,332 $ 382,649
Noncurrent Assets 283,441 302,286 310,855
Current Liabs. 367,091 246,687 369,580
Payable to Bradlees, Inc. 189,735 189,881 189,139
Noncurrent Liabilities 66,063 72,324 81,978
Subject to Settlement Under
the Reorganization
Case $ 328,557 $ 341,874 $ 339,923
Thirty-Nine Weeks Ended
-----------------------
October 31,1998 November 1,1997
--------------- ---------------
Net Sales $ 906,385 $ 895,220
Gross Margin 271,002 269,699
Loss from Cont. Oper. (34,689) (48,628)
Net Loss $ (34,689) $ (48,628)
Upon consummation of the
Plan, Bradlees, Inc. will contribute a portion of its
intercompany receivable to the capital of Bradlees Stores, Inc.
so that $96 million will be allowed as the final intercompany
claim.
11.Pro Forma
Financial Information (Unaudited)
The following
unaudited pro forma summary information, pro forma condensed
consolidated balance sheet and unaudited pro forma condensed
consolidated statement of operations are based on the statements
of Bradlees as adjusted to give effect to the consummation of
the Plan (Note 2). The unaudited pro forma summary information,
and pro forma condensed consolidated statement of operations
have been prepared as if the effective date of the Plan had
occurred on February 1, 1997. The unaudited pro forma condensed
consolidated balance sheet has been prepared assuming the
effective date of the Plan had occurred on October 31, 1998.
The unaudited
pro forma condensed consolidated financial information and
accompanying notes should be read in conjunction with the
Company's financial statements and the notes thereto appearing
in the Company's Form 10-K for 1997, Form S-1 and elsewhere in
this Form 10-Q. The unaudited pro forma condensed consolidated
financial information is presented for informational purposes
only and does not purport to represent what the Company's
financial position or results of operations would actually have
been if the consummation of the Plan had occurred on such date
or at the beginning of the period indicated, or to project the
Company's financial position or results of operations at any
future date or for any future period.
The following unaudited pro forma summary information for 1997 was
derived from the unaudited pro forma condensed consolidated
statement of operations for 1997 presented, along with the notes
thereto, in the Form S-1 filed in November, 1998:
Pro Forma Summary Information
(Unaudited)
(000's Omitted)
Fiscal Year Ended
January 31,1998
---------------
Total Sales $1,340,983
Net Loss (18,590)
Loss Per Common Share (1.88)
Pro Forma Number of Stores 103
The pro forma net loss amount above excludes the gain on debt
discharge and fresh-start reporting credit expected to be
recorded on the effective date.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
Pro Forma Adjustments Pro Forma
October 31, 1998 Debit Credit Oct. 31, 1998
---------------- ----- ------ -------------
ASSETS
Current assets:
Unrestricted cash &
cash equivalents $10,959 $ - $ - $10,959
Restricted cash &
cash equivalents 25,129 - 23,929(2) 1,200
------ ----- ------- ------
Total cash &
cash equivalents 36,088 - 23,929 12,159
------ ----- ------- ------
Accts receivable 11,925 11,925
Inventories 318,883 1,000(3h) 317,883
Prepaid expenses 11,031 - - 11,031
------ ----- ------- ------
Total current
assets 377,927 - 24,929 352,998
------ ----- ------- ------
Property, plant &
equipment, net:
Property excluding
capital leases,net 123,892 - 11,000(2) 110,692
2,200(3j)
Property under
capital leases,net 17,732 9,196(3b) 5,406(3j) 21,522
------ ----- ------- ------
Total property,
plant& equipment,net 141,624 9,196 18,606 132,214
------ ----- ------- ------
Other assets:
Lease interests at
fair value, net 137,350 - 59,530(3j) 77,820
Assets held for sale - 11,000(2) - 30,000
19,000(3d)
Other, net 4,509 1,275(2) 1,222(3g) 3,298
1,264(3i)
Reorganization value
in excess of revalued
assets - 9,985(3k) - 9,985
------ ----- ------- ------
Total other assets 141,859 41,260 62,016 121,103
------ ----- ------- ------
Total assets $661,410 $50,456 $105,551 $606,315
------ ----- ------- ------
See accompanying notes to unaudited pro forma condensed
consolidated financial statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
Pro Forma Adjustments Pro Forma
October 31,1998 Debit Credit Oct. 31,1998
LIABILITIES AND
STOCKHOLDERS'
DEFICIENCY
Current liabilities:
Accounts payable $179,413 $ - $ - $179,413
Accrued expenses 23,221 7,000(2) 2,000(1) 15,746
2,475(3c)
Self-insurance
reserves 6,027 - - 6,027
Short-term debt 157,392 - 7,371(2) 164,763
Current portion of
notes & cap. lease 1,038 - 750(2) 1,788
------ ----- ------- ------
Total current
liabilities 367,091 9,475 10,121 367,737
------ ----- ------- ------
Long-term
liabilities:
Obligations under
capital leases 26,211 321(3b) - 25,890
Convertible notes
payable - - 40,000(2) 40,000
Deferred income taxes 8,581 8,581(3h) - -
Self-insurance
reserves 12,237 - - 12,237
Unfavorable lease
liability - - 45,573(3j) 45,573
Other long-term
liabilities 19,034 - 2,000(1) 29,878
6,550(2)
2,294(3f)
------ ----- ------- ------
Total long-term
liabilities 66,063 8,902 96,417 153,578
------ ----- ------- ------
Liabilities subject to
settlement under
the reorg. case 548,788 548,788(2) - -
Stockholders' deficiency:
Common stock
Par value 115 115(3a) 99(2) 99
Additional
paid-in-capital 137,821 137,821(3a) 84,901(2) 84,901
Accumulated deficit (457,665) 4,000(1) 393,463(2) -
68,202(3)
Treasury stock,
at cost (803) 803(3a) -
------ ----- ------- ------
Total stockholders'
equity (deficiency) (320,532) 141,936 547,468 85,000
------ ----- ------- ------
Total liabilities
and stockholders' equity
(deficiency) $661,410 $709,101 $654,006 $606,315
------ ----- ------- ------
See accompanying notes to unaudited pro forma condensed
consolidated financial statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF
OPERATIONS
(Dollars in thousands except per share amounts)
Pro Forma
39 Weeks Ended Pro Forma Adjustments 39 Weeks Ended
Oct. 31, 1998 Debits Credits Oct. 31, 1998
------------- ------ ------- -------------
Total sales $ 939,203 3,381(1) - $ 935,822
Leased
department sales 32,818 70(1) - 32,748
------ ------
Net sales 906,385 903,074
Cost of goods
sold 635,383 - 2,472(1) 632,911
------- ------
Gross margin 271,002 270,163
Leased department
and other operating
income 8,757 25(1) - 8,732
------ ------
279,759 278,895
Selling, store
operating,
administrative
and distribution
expenses 280,326 2,967(3) 631(1) 278,498
1,021(6) 5,773(7)
724(10) 136(11)
Depreciation and
amortization
expense 24,370 - 3(1) 12,761
5,103(3)
2,253(5)
469(6)
3,781(9)
Loss on
disposition of
properties 241 241
Interest and
debt expense 11,960 319(4) 1,215(4) 21,382
10,318(8)
Reorganization
items ------ ------
(2,555) 2,555(2) - -
Net loss $ (34,583) $ (33,987)
========== ===========
Comprehensive
loss $ (34,583) $ (33,987)
========== ===========
Net loss per
share - basic
and diluted $ (3.06) (12) $ (3.32)
========== ==========
Weighted average
shares outstanding
(in thousands) -
basic and diluted 11,311 10,226
======= ========
See accompanying notes to unaudited pro forma condensed
consolidated financial statements.
Notes to Unaudited Pro Forma Condensed Consolidated Financial
Statements
The following notes set forth the explanations and assumptions
used and adjustments made in preparing the unaudited pro forma
condensed consolidated balance sheet as of October 31, 1998, and
the unaudited pro forma condensed consolidated statement of
operations for the thirty-nine weeks then ended
The unaudited pro forma condensed consolidated financial
statements reflect the adjustments described under "Pro Forma
Adjustments" below, which are based on the assumptions and
preliminary estimates described therein, which are subject to
change. These statements do not purport to be indicative of the
financial position and results of operations of Bradlees as of
such dates or for such periods, nor are they indicative of
future results. Furthermore, these unaudited pro forma
condensed consolidated financial statements do not reflect the
anticipated gain on debt discharge or fresh-start reporting
credit which are expected to be incurred as of the effective
date of the Plan. (For the purposes of the pro forma financial
statements, the "Effective Date" is assumed to be October 31,
1998 for the pro forma balance sheet, and February 1, 1997 for
the pro forma statement of operations.)
The unaudited pro forma condensed consolidated
financial statements should be read in conjunction with the
financial statements and the notes thereto included elsewhere in
this Form 10-Q.
Pro Forma Adjustments
The unaudited pro forma condensed consolidated balance
sheet and unaudited pro forma condensed consolidated statement
of operations reflect the following pro forma adjustments based
on the assumptions described below:
October 31, 1998 Balance Sheet Pro Forma Adjustments
1. Reserves established prior to emergence for emergence-related
and performance bonuses payable on the Effective Date or
subsequent to the Effective Date.
2. Plan consummation distributions that include, among other
things, an estimated equity value of $85.0 million, $14.0
million in cash distributions, and 9% convertible notes totaling
$40.0 million (expected to be paid in fiscal year 1999). The
reclassification of $12 million from property, plant and
equipment, net, to assets held for sale reflects two store
leases that are expected to be sold to help fund the payoff of
the 9% convertible notes.
The payment of $23.7 million out of restricted funds and
$7.6 million out of borrowings is for certain settlements due
under the Plan and for financing costs of $1.3 million
associated with the post-emergence revolver. The total payment
of $31.3 million is expected to fund all administrative and
convenience claims and the exit financing costs, with the
remaining restricted cash held for security deposits for
post-emergence payments.
3. Fresh-start accounting
adjustments that reflect the estimated adjustments necessary to
adopt fresh-start reporting in accordance with Statement of
Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". Fresh-start
reporting requires that the reorganization value of Bradlees be
allocated to Bradlees' assets in conformity with APB Opinion 16,
"Business Combinations", for transactions reported on the basis
of the purchase method. The portion of the assigned
reorganization value exceeding the revalued net assets is
recorded as a long-term asset. The calculation of the
preliminary and estimated new equity value is discussed in
detail in Section three (Subsection XIII) of the Disclosure
Statement filed as an exhibit to the Form S-1.
The fresh-start accounting adjustments are summarized as
follows:
a. Cancellation of the old common stock pursuant to the
Plan and close-out to retained earnings.
b. A revaluation of all capital lease obligations and
related capital lease assets using the Company's estimated
October 31, 1998 borrowing rate (12%) for similar financings.
c. Revaluation of the straight-line rent reserve
($2.5 million). Straight-line rent is recalculated on a
going-forward basis by the reorganized Bradlees.
d. Revaluation of the two store leases
held for sale to an estimated total net realizable value of $30
million.
e. Restatement of LIFO merchandise
inventories to estimated fair value approximates FIFO cost.
Inventories valued at FIFO cost then become the base year layer
for LIFO inventories in the post-consummation financial
reporting period. No LIFO adjustment is expected.
f. Recording of additional
pension plan liability of $4.3 million and additional
Supplemental Employee Retirement Plan ("SERP") liability of $1.4
million, reduced by the write-off of the unrecognized FAS No.
106 prior service costs of $3.4 million.
g. Revaluation ($1.2
million) of the intangible SERP asset to its estimated net
realizable value.
h. Write-off
($8.6 million) of deferred income taxes (due to a change in the
status of timing differences) and a $1.0 million reduction to
reflect inventory at its estimated net realizable value.
i. Write-off of
the unamortized deferred financing charges ($1.3 million)
associated with the terminated DIP Facility which will be
amortized prior to emergence.
j.
Revaluation of fixed assets and leasehold interests based upon
the estimated fair market value of properties and leases while
considering the current markets in which Bradlees has locations.
This revaluation resulted in the recording of a write-down of
$59.5 million in favorable lease interests and an unfavorable
lease liability of $45.6 million for certain locations. The
remaining favorable lease interests and the unfavorable lease
liability will both be amortized to rent expense.
k. Recording of the reorganization value in excess of the
revalued assets at October 31,1998.
Pro Forma Adjustments Statement of Operations for the
Thirty-nine Weeks Ended October 31, 1998
1. To eliminate the sales and expense amounts
associated with five stores closed in February, 1998.
2. To eliminate reorganization items.
3. Adjustment in amortization of lease interests
revalued under fresh-start reporting.
4. To record amortization of post-emergence
deferred financing costs and reverse the historical fiscal year
1997 amortization of deferred financing costs.
5. Reduction in depreciation expense due to
certain reclassifications to assets held for sale and fixed
asset write-offs resulting from fresh-start reporting.
6. To adjust lease rent expense and amortization expense
for revised straight-line rent calculations.
7. To adjust lease rent expense for amortization of the
unfavorable lease liability.
8. To adjust interest expense for amortization of the discount
on the unfavorable lease liability and for increased interest
expense resulting from a slightly higher average revolver
borrowing level, the 9% convertible notes and other issued
notes. 9. To record reduction in depreciation and amortization
expense resulting from the allocation of the estimated excess of
revalued assets over the reorganization value at February 1,
1997. 10.To record additional SFAS No. 106 expense as a
result of fresh-start reporting.
11.To reduce pension expense as a result of fresh-start
reporting.
12.Pro forma earnings per share was computed based on the
estimated weighted average number of common shares outstanding
during the applicable period assuming that the Plan was
effective on February 1, 1997.
The Company expects to incur a charge of approximately
$4.2 million prior to emergence for an estimated
going-out-of-business inventory impairment of $2 million and
other store closing costs of $2.2 million for two store closings
anticipated to occur by the end of fiscal year 1999.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as
Debtor-in-Possession)
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
Results of operations,
summarized in millions of dollars and expressed as a percentage
of net sales (on the next page), were as follows for the 13
weeks and 39 weeks ended October 31, 1998 ("Third Quarter 1998"
and "Year-to-Date 1998", respectively) and for the 13 weeks and
39 weeks ended November 1, 1997 ("Third Quarter 1997" and
"Year-to-Date 1997", respectively) :
13 Weeks Ended 39 Weeks Ended
-------------- --------------
Oct.31,1998 Nov.1,1997 Oct.31,1998 Nov.1,1997
----------- ---------- ----------- ---------
Dollars in millions except per share
amounts)
Total sales $323.1 $342.3 $939.2 $930.7
Leased department sales 11.0 11.9 32.8 35.5
------- ------ ------ -----
Net sales 312.1 330.4 906.4 895.2
Cost of goods sold 217.4 233.3 635.4 625.5
------- ------ ------ -----
Gross margin 94.7 97.1 271.0 269.7
Leased
department and other
operating income 3.1 3.3 8.7 8.7
------- ------ ------ ------
97.8 100.4 279.7 278.4
Selling, store operating,
administrative and
distribution expenses 95.5 93.8 280.3 289.8
Depreciation and
amortization expense 7.8 9.0 24.4 27.5
Loss on disposition
of properties - - 0.2 -
Interest and debt exp. 4.4 4.2 12.0 11.7
Reorganization items (2.7) (7.0) (2.6) (2.1)
------- ------ ------ -----
Net income (loss) ($7.2) $0.4 ($34.6) ($48.5)
======== ====== ====== ======
Net income (loss)
per share ($0.64) $0.03 ($3.06) ($4.26)
======== ====== ====== ======
Total sales inc.(dec.):
All stores (5.6)% (18.6)% 0.9 % (19.5)%
Comparable stores (2.0)% (8.7)% 4.7 % (7.6)%
Number of stores in
operation at end of
period 103 109 103 109
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Con't)
13 Weeks Ended 39 Weeks Ended
-------------- --------------
Oct.31,1998 Nov.1,1997 Oct.31,1998 Nov.1,1997
----------- ---------- ----------- ----------
As a percentage
of net sales,
results were
as follows:
Net sales 100.0 % 100.0% 100.0% 100.0 %
Cost of goods sold 69.6 70.6 70.1 69.9
-------- ------- ------ ------
Gross margin 30.4 29.4 29.9 30.1
Leased department and
other oper. income 1.0 1.0 0.9 1.0
-------- ------- ------ -------
31.4 30.4 30.8 31.1
Selling,store operating,
administrative and
distribution exp. 30.6 28.4 30.9 32.3
Depreciation and
amortization expense 2.5 2.7 2.7 3.1
Loss on disposition
of properties - - - -
Inter. and debt exp. 1.5 1.3 1.3 1.3
Reorganization items (0.9) (2.1) (0.3) (0.2)
-------- ------- ------ -------
Net income (loss) (2.3)% 0.1 % (3.8)% (5.4)%
======== ======= ======= ========
The following discussions, as well as other portions of this
document, include certain statements which are or may be
construed as forward looking statements (within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934) about the Company's business,
sales and expenses, and operating and capital requirements. Any
such statements are subject to risks that could cause the actual
results or requirements to vary materially. For example, the
Company's statements regarding expected 1998 fourth-quarter
borrowings, amounts available to borrow and capital expenditures
are dependent on the Company's future operating performance and
ability to meet its financial obligations, which is further
dependent upon, among other things, continued acceptance of the
Company's new merchandising and marketing initiatives,
competitive conditions, changes in consumer spending and
consumer spending habits, weather, economic and political
conditions, availability and cost of sufficient labor, and
changes in import duties, tariffs and quotas.
Third Quarter 1998 Compared to Third Quarter 1997
Total sales for Third Quarter 1998 declined $19.2
million or 5.6% from Third Quarter 1997 due to the impact from
closing six stores in February, 1998 and a decrease of 2.0% in
comparable store sales (including leased shoe department sales).
The decline in comparable store sales was due primarily to
unseasonably warm weather that hurt Fall apparel and shoe sales
and weak sales of toys. Prior to Third Quarter 1998, comparable
softlines' sales had increased 6.0%.
Gross margin decreased $2.4 million in Third
Quarter 1998 compared to Third Quarter 1997 due principally to
the decline in sales, partially offset by an increase of 1.0% in
the gross margin rate (30.4% vs. 29.4%). The increase in the
rate was due primarily to an increase in allowances. Leased
department and other operating income decreased $0.2 million but
remained the same as a percentage of net sales in Third Quarter
1998 compared to Third Quarter 1997.
Selling, store operating, administrative and
distribution ("SG&A") expenses increased $1.7 million or 2.2% as
a percentage of net sales in Third Quarter 1998 from Third
Quarter 1997. Excluding last year's $3.6 million adjustment to
the Company's self-insurance reserves (Note 9), SG&A expenses
continued to decline in the Third Quarter 1998, primarily as a
result of advertising and benefits expense reductions and store
closings. The increase as a percentage of net sales was also
affected by the lower sales. The 1997 reduction in the
self-insurance reserves was primarily the result of aggressive
claims management and safety initiatives that continued into
1998 to keep the required self-insurance reserves below
prior-year levels.
Depreciation and amortization expense
declined $1.2 million or 0.2% as a percentage of net sales in
Third Quarter 1998 from Third Quarter 1997 due primarily to the
impact of store closings.
Interest and debt expense increased $0.2
million or 0.2% as a percentage of net sales in Third Quarter
1998 from Third Quarter 1997. Peak and average revolver
borrowings were $162 and $131 million, respectively, in Third
Quarter 1998 compared to $144 and $110 million, respectively, in
Third Quarter 1997 (see Liquidity and Capital Resources). The
weighted average revolver interest rate in Third Quarter 1998
(7.92%) was up from the prior-year period (7.59%). The
unfavorable impact on interest expense from these factors was
partially offset by lower bank fees, capital lease interest
expense and amortization of deferred financing costs in Third
Quarter 1998. As a result of the confirmation of the Company's
amended plan of reorganization (the "Plan") and expected
consummation by fiscal year-end, the remaining deferred
financing costs of $1.3 million at October 31, 1998 will be
amortized over the course of the fourth quarter.
The credits in reorganization items of $2.7 million in Third
Quarter 1998 and $7.0 million in Third Quarter 1997 were
directly associated with the Chapter 11 proceedings and related
restructuring and are discussed in Note 6.
The Company did not record an income tax provision in Third
Quarter 1998 due to the current expectation of no income tax
expense or benefit in 1998. There was also no income tax
expense or benefit recorded in Third Quarter 1997.
Year-to-Date 1998 Compared to Year-to-Date 1997
Year-to-Date 1998 total sales increased $8.5 million or 0.9%
from Year-to-Date 1997 due to an increase of 4.7% in comparable
store sales, partially offset by the impact from closing six
stores in February, 1998. The increase in Year-to-Date 1998
comparable store sales was due primarily to various
merchandising and marketing initiatives started in 1997,
including the reintroduction of layaway, lower opening price
points in certain departments, more item-intensive and
price-point oriented circular ad offerings, the addition of
certain convenience and commodity products to drive traffic, and
the implementation of two key programs: "Certified Value"
(highlights highly recognizable items at competitive everyday
prices) and "WOW" (integrates targeted and unadvertised
opportunistic purchases).
Gross margin for Year-to-Date 1998
increased $1.3 million, primarily as a result of the increase in
comparable store sales and decreased 0.2% as a percentage of net
sales due primarily to a lower initial markup. Leased
department and other operating income was unchanged in
Year-to-Date 1998 compared to Year-to-Date 1997, as layaway fee
income more than offset the impact from the store closings and
unfavorable leased shoe department sales.
Year-to-Date 1998 SG&A expenses declined $9.5
million or 1.4% as a percentage of net sales compared to
Year-to-Date 1997. The improved SG&A expense performance was
due primarily to advertising, home office and benefits expense
reductions, partially offset by last year's third quarter
reduction of $3.6 million in self-insurance reserves.
Depreciation and amortization expense declined $3.1
million or 0.4% as a percentage of net sales in Year-to-Date
1998 compared to Year-to-Date 1997. The decline was primarily
due to the closing of the six stores in February 1998.
Interest and debt expense increased $0.3 million and
remained the same as a percentage of net sales in Year-to-Date
1998 from Year-to-Date 1997. Peak and average revolver
borrowings were $162 and $116 million, respectively, in
Year-to-Date 1998 compared to $144 and $85 million,
respectively, in Year-to-Date 1997. The weighted average
revolver interest rate was 7.93% during Year-to-Date 1998
compared to 7.51% in the prior-year period. The unfavorable
impact on Year-to-Date 1998 interest expense from these factors
was mostly offset by the same factors discussed above for Third
Quarter 1998.
Reorganization credits of
$2.6 and $2.1 million for Year-to-Date 1998 and Year-to-Date
1997, respectively, were associated with the Chapter 11
proceedings and related restructuring and are discussed in Note
6.
The Company did
not record an income tax provision in Year-to-Date 1998 due to
the current expectation of no income tax expense or benefit in
1998. There was also no income tax expense or benefit recorded
in Year-to-Date 1997.
Liquidity and Capital
Resources
The Company had
outstanding borrowings of $157.4 million at October 31, 1998,
exclusive of the issuance of letters of credit, under the
Company's $250 million DIP Facility (Note 4). As of November
1, 1997, the Company had outstanding borrowings of $131.5
million, exclusive of the issuance of letters of credit, under
the Prior DIP Facility (Note 4). The increase in borrowings
since the end of Third Quarter 1997 relates primarily to the net
loss incurred in Year-to-Date 1998, along with payments for
Chapter 11 professional fees and other reorganization expenses.
The Company currently
expects its borrowings, exclusive of the issuance of letters of
credit, for the fourth quarter of 1998 to peak at approximately
$167 million in November and average approximately $120 million.
The revolver amount available to borrow in the fourth quarter of
1998, after deducting expected letters of credit outstanding, is
currently expected to peak at approximately $225 million in
November and average approximately $185 million.
Other than payments made to
certain pre-petition creditors approved by the Bankruptcy Court
(Notes 2 and 4), principal and interest payments on
indebtedness, exclusive of certain capital lease obligations,
incurred prior to the Filing have not been made and will not be
made without Bankruptcy Court approval or until the Plan has
been consummated. Virtually all pre-petition indebtedness of
Bradlees is subject to settlement under the reorganization case.
In Year-to-Date
1998, cash used by operations before reorganization items was
$48.8 million, compared to $50.8 million of cash used by
operations before reorganization items in Year-to-Date 1997.
Net cash used by reorganization items in Year-to-Date 1998 of
$10.3 million was comprised of professional fee payments of $7.8
million and store closing and severance costs of $3.2 million,
partially offset by interest income on restricted funds of $0.7
million.
Inventories at October 31,
1998, decreased $16.5 million from November 1, 1997, due
primarily to the closing of the six stores in February 1998
(inventories decreased approximately $1.1 million, excluding the
impact of the closed stores). Accounts payable at October 31,
1998, decreased $16.9 million from November 1, 1997, mostly due
to the decrease in inventories. The increases in inventories
and accounts payable from January 31, 1998, were primarily the
result of normal seasonal build-ups.
Accrued expenses at October
31, 1998, were $7.3 million lower than at January 31, 1998, due
primarily to payments made against certain reserves established
in or prior to 1997 for performance bonuses, employee severance
and termination benefits and store closing costs. Accrued
expenses were $11.4 million lower than at November 1, 1997, due
primarily to reductions in severance reserves, vacation pay
liabilities and store closing costs.
The Company incurred
capital expenditures of $10.4 million in Year-to-Date 1998
(compared to $14.7 million in Year-to-Date 1997), primarily for
management information systems, store remodels and store
maintenance projects. The larger Year-to-Date 1997 total was
principally a result of the 1997 expenditures associated with a
new merchandise management system. For all of 1998, the Company
expects capital expenditures to total approximately $18 million
to $20 million, primarily for management information systems
(including the initial expenditures for a warehouse management
system and enhancements to the new merchandise management
system), the remodeling of nine stores, and other store
improvements and maintenance. The Company currently expects to
finance these expenditures through internally-generated funds.
The Company believes its
business strategies and the availability of its DIP Facility and
Exit Facility (Note 4), together with the Company's available
cash and expected cash flows from 1998 operations and beyond,
will enable Bradlees to fund its expected needs for working
capital, capital expenditures and debt service requirements.
Achievement of expected cash flows from operations will be
dependent upon the Company's attainment of sales, gross profit,
expense and trade support levels that are reasonably consistent
with its financial plans. Such operating performance will be
subject to financial, economic and other factors affecting the
industry and operations of the Company, including factors beyond
its control.
Year 2000
Readiness Disclosure
There have
been no significant changes to the Company's Year 2000 project
as reported in its Form 10-K for the fiscal year ended January
31, 1998. The Year 2000 project is proceeding as planned and
the total cost is estimated to be approximately $3 to $4
million, the majority of which is being incurred in 1998 and
included in SG&A expenses. The Company incurred and expensed
approximately $1.9 million of such costs in Year-to-Date 1998.
The Company expects that the Year 2000 project will be
substantially complete by the second quarter of 1999.
The remaining major systems to be remediated or replaced are the
Company's merchandise planning system (approximately 50%
remediated) and store host systems (approximately 30%
remediated) expected to be completed by the end of the first
quarter of 1999, and the warehouse management system that is
scheduled to be replaced by the end of the second quarter of
1999. A major test of all systems, including store support and
facility systems, for proper Year 2000 compliance is planned for
the end of the second quarter of 1999.
The Company contracted with a major outside
consulting firm to provide the majority of the resources
required to identify, and then replace or remediate, the
Company's systems as necessary. The Company is also developing
contingency plans in the event that such replacement or
remediation is not fully completed in a timely manner. If the
Year 2000 upgrades, modifications and conversions are not made,
or are not made in a timely manner, the Year 2000 issue could
have a material impact on the Company's operations.
The costs of the Year
2000 project and the dates on which the Company plans to
complete Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
plans.
BRADLEES, INC.
AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 6. Exhibits and
Reports on Form 8-K (a)Index to Exhibits
Exhibit No. Exhibit Page No.
15 Letter re:
unaudited interim financial
information. 34
(b)
Reports on Form 8-K
The
following reports on Form 8-K were filed during the
quarterly period ended October 31, 1998:
Date of Report Date of Filing Item Number Description
- -------------- -------------- ----------- ------------
September 1, 1998 September 1, 1998 5 Disclosure of
second quarter
1998 results
compared to plan.
September 22, 1998 September 23, 1998 5 Disclosure of
second-half
1998 forecast.
BRADLEES, INC.
AND SUBSIDIARIES
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.
BRADLEES, INC.
Date: December 14, 1998 By /s/ PETER THORNER
------------------
Peter Thorner
Chairman and Chief Executive
Officer
Date: December 14, 1998 By /s/ CORNELIUS F. MOSES III
--------------------------
Cornelius F. Moses III
Senior Vice President, Chief
Financial Officer
Exhibit 15
November 17, 1998
Bradlees, Inc.
One Bradlees Circle
Braintree, Massachusetts 02184
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of
the unaudited interim financial information of Bradlees, Inc.,
and subsidiaries, Debtor-in-Possession, for the 13-week period
ended October 31, 1998 as indicated in our report dated November
17, 1998 which included a going concern paragraph relating to
(i) the Company's filing for reorganization under Chapter 11 of
the U.S. Bankruptcy Code, (ii) certain matters which raise
substantial doubt about the Company's ability to continue as a
going concern. Because we did not perform an audit, we
expressed no opinion on that information.
We are aware that out report referred to
above, which is included in your Quarterly Report on Form 10-Q
for the quarter ended October 31, 1998, is incorporated by
reference in Registration Statement Nos. 33-64850, 33-64858,
33-80896, 33-86954, 33-86956 and 33-92178.
We also are aware that the
aforementioned report, pursuant to Rule 436 (c) under the
Securities Act of 1933, is not considered a part of the
Registration Statement prepared or certified by an accountant or
a report prepared or certified by an accountant within the
meaning of Sections 7 and 11 of that Act.
/s/ARTHUR ANDERSEN LLP
--------------------------
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