SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended January 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 No.)
One Bradlees Circle, Braintree, MA 02184
- ---------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number,
including area code: (781) 380-3000
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE
PER SHARE (Delisted in October, 1997)
Securities registered pursuant to Section 12(g) of Act: None
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 and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---- ---- ----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 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 No Not applicable X
---- ---- ----
Aggregate market value of the voting stock held by non-affiliates of the
registrant at April 1, 1998: $7,713,682
Number of shares of the registrant's common stock outstanding as of
April 1, 1998: 11,310,384
DOCUMENTS INCORPORATED BY REFERENCE: None
BBRADLEES, INC.
AND SUBSIDIARIES
PART I
------
ITEM 1. BUSINESS
Bradlees, Inc. and its subsidiaries, including Bradlees Stores, Inc.
collectively "Bradlees" or the "Company") operate 103 discount department
stores as of April, 1998, in seven states in the Northeast, primarily in the
heavily populated corridor running from the Boston to the Philadelphia
metropolitan areas. Headquartered in Braintree, Massachusetts, Bradlees and
its predecessor have been active in the discount department store business for
over 30 years. 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"). The Company filed a
plan of reorganization and related disclosure statement with the Bankruptcy
Court on April 13, 1998 and expects to emerge from Chapter 11 in August, 1998.
Events leading to the Filing and the Chapter 11 reorganization process are
discussed below.
Events Leading to the Filing. During the early 1990's, Bradlees' business
strategy relied heavily on opening new stores, remodeling existing locations
and competing on the basis of price. From 1992 to January, 1995, Bradlees
opened 15 new stores (10 in 1994) and remodeled 41 stores at a total capital
cost of $182 million. The new stores were generally larger stores with rents
that substantially exceeded the chain average rent per square foot. Some of
the new stores were also multilevel facilities which further increased their
operating costs when compared with other prototypical Bradlees stores.
The store expansion and remodeling program marginally increased sales while
gross margins declined and operating expenses increased. Bradlees' declining
operating performance, coupled with the aggressive expansion program, began to
erode the Company's liquidity. The Company's liquidity further eroded in May
and June, 1995, because of the unwillingness of factors and vendors to
continue to extend trade credit. Bradlees, unable to obtain sufficient
financing to satisfy factor and vendor concerns, was compelled to seek
Bankruptcy Court protection on June 23, 1995.
Business Strategy. In 1995, the Company began to implement a strategy
to position the Company between traditional discount stores and department
stores. Some of the initiatives associated with this strategy, especially the
relatively rapid introduction of higher-price points, an aggressive clearance
markdown policy, costly promotions of the Bradlees' credit card and associated
elimination of layaway, elimination of certain basic convenience and commodity
items that are generally sold in discount stores, along with costly changes in
the Company's advertising strategy, resulted in significant sales and margin
declines and operating losses. In late December, 1996, the Company's Board of
Directors appointed Peter Thorner as Chairman, CEO and President, replacing
the former Chairman and CEO, Mark Cohen. Prior to joining Bradlees, Mr.
Thorner led the successful turnaround of Ames Department Stores, Inc. In
April, 1997, Mr. Thorner hired Robert Lynn as President and Chief Merchandising
Officer.
The Company made the following key modifications to its business strategy
during 1997 to enhance profitability and improve customer service:
(a) reintroduced lower opening price points in a comprehensive variety of
merchandise categories to enhance value and increase customer traffic;
(b) reduced costly promotional events and thereby eliminated or reduced
the likelihood of substandard profit margins; (c) reintroduced certain basic
convenience and commodity products that are typical of assortments carried by
discount retailers; (d) reinstituted a layaway program while controlling
promotions of the Bradlees' credit card, and installed new in-store directional
and departmental signage; (e) revised the Company's markdown policy based on
product rate of sale; (f) modified weekly ad circulars to achieve more
item-intensive and price-point oriented ad offerings; (g) introduced both a
"Certified Value" program that highlights certain key recognizable items at
competitive everyday prices and a "Wow!" program which integrates targeted and
unadvertised opportunistic purchases; and (h) significantly reduced overhead
while improving operating efficiencies.
The Company is focusing on three key merchandise categories:
moderately-priced family apparel, home furnishings and conventional
consumable hardlines products. Bradlees is committed to quality and fashion,
especially in apparel and home furnishings, and to improving customer service,
to differentiate itself from its competition. The Company believes 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. Management has continued
its efforts to improve sales and profitability in 1998, including the expansion
of both the "Wow!" and "Certified Value" programs that have been particularly
successful to-date.
Merchandise Mix. Bradlees' stores provide a broad spectrum of basic and
fashion apparel (including private-label brands), basic and fashion home
furnishings, convenience hard goods and extensive seasonal offerings.
Bradlees' average merchandise mix in 1997 was comprised of approximately 53%
softlines and soft home furnishings and 47% hardlines, versus an estimated
industry average of 42% softlines and soft home furnishings and 58% hardlines.
The Company's softlines focus should enable it to achieve a higher overall
gross margin rate than the industry average.
Advertising and Promotional Programs. Bradlees' marketing strategy is
designed to appeal to its value-oriented customers. Sales are driven from
competitive pricing and promotions, primarily in weekly circulars, that
feature a large number of special values for the customer throughout the
store. Approximately 45% of Bradlees' sales were derived from its weekly
circulars in 1997. Approximately 5.6 million circulars are distributed
each week. Although circulars are the major promotional vehicle, the
Company also uses newspaper advertising, periodic television broadcasts,
Bradlees credit-card statement inserts and in-store promotions.
Point-of-purchase advertising, layaway, employee discounts, and senior citizen
discounts are also used as marketing vehicles.
Operations. Several programs have been or are being implemented to improve
the store organization, thereby focusing the organization more intently on
customer service while at the same time reducing expenses. The number
of store regions was reduced from two to one and the number of store districts
from nine to eight. In addition, store managers will be using automated staff
scheduling programs in 1998 to improve operating efficiency and provide better
service to the customer. Finally, the Company recently hired a Senior Vice
President, Stores, who is reporting to the Company's President and Chief
Operating Officer for improved coordination of merchandising and store
activities.
Management has improved productivity and controls and reduced expenses in
other areas of the Company. For example, a new merchandising management system
was implemented in 1997 that facilitates, among other things, tracking
merchandise more accurately and efficiently from vendors and through
distribution centers to stores. The new merchandising management system is
being further enhanced in 1998. In addition, the Company expects to begin
developing a warehouse management system in 1998. The Company also installed a
new mainframe computer and point-of-sale controllers in 1997 and is modifying
its point-of-sale equipment and software to allow for additional promotional
capabilities, enhance controls and improve customer service.
Store Profitability. The Company closed six stores in February, 1998. No
additional stores are currently planned for closing, although certain leasehold
interests may need to be sold in order to fund the payment of the $40 million
note payable under the Company's plan of reorganization (see "Reorganization
Case" below). The Company continues to closely monitor the profitability of
each store and will close, sell or relocate those stores whose performance is
inadequate and not responsive to remedial actions.
EMPLOYEES AND COLLECTIVE BARGAINING ARRANGEMENTS
Bradlees employs approximately 10,000 people of which approximately 73%
are covered by collective bargaining arrangements, including arrangements
affecting approximately 54% of the labor force that will expire within one year
and are expected to be renegotiated.
COMPETITION
Bradlees competes in most of its markets with a variety of national,
regional and local discount and other department and specialty stores, which
vary by market. Some of these competitors have substantially greater resources
than the Company. Bradlees competes on the basis of product quality and value,
merchandise selection, advertising and price. In addition, store location,
appearance and customer service are important competitive factors. Bradlees'
principal discount department store competitors are Caldor, Kmart and Wal-Mart,
and in certain locations, Target and Ames. Bradlees' principal department
store competitors are Sears and J.C. Penney. Target and Kohl's, a department
store chain, are opening stores in some areas in which Bradlees operates.
Management believes that it is pursuing the proper merchandising and marketing
strategies and operating focus that should allow it to compete effectively in
its operating areas. However, no assurances can be given that these strategies
will further improve performance or that Bradlees' business and financial
performance will not be adversely affected by future competitive pressures.
PATENTS, TRADEMARKS AND LICENSES
The trademark "Bradlees" is registered with the United States Patent and
Trademark Office. The Company has a significant number of other trademarks,
trade names, and service marks. None of these other trademarks are currently
considered individually to have a material impact on the Company's business.
SEASONALITY
The Company's business is seasonal in nature,with a significant portion
of its net sales ocurring in the fourth quarter, which includes the holiday
selling season (See "Management's Discussion and Analysis of Financial
Condition and Results of Operations").
REORGANIZATION CASE
The following discussion provides general background information regarding
the Chapter 11 process, but is not intended to be an exhaustive summary.
Chapter 11 Reorganization under the Bankruptcy Code. Pursuant to Section
362 of the Bankruptcy Code, during a Chapter 11 case, creditors and other
parties in interest may not, without Bankruptcy Court approval, among other
things; (i) commence or continue a judicial, administrative or other proceeding
against Bradlees a) which was or could have been commenced prior to
commencement of the Chapter 11 case, or b) to recover a claim that arose prior
to commencement of the case; (ii) enforce any pre-petition judgments against
Bradlees; (iii) take any action to obtain possession of property of Bradlees
or to exercise control over property of Bradlees or its estates; (iv) create,
perfect or enforce any lien against the property of Bradlees; (v) collect,
assess or recover claims against Bradlees that arose before the commencement
of the case; or (vi) offset any debt owing to Bradlees that arose prior to the
commencement of the case against a claim of such creditor or party-in-interest
against Bradlees that arose before the commencement of the case.
Although Bradlees is authorized to operate its business as a
debtor-in-possession, it may not engage in transactions outside the ordinary
course of business without first complying with the notice and hearing
provisions of the Bankruptcy Code and obtaining Bankruptcy Court approval when
necessary. An official unsecured creditors' committee has been formed by the
United States Trustee and is acting in the Chapter 11 case of Bradlees. This
committee and various other parties in interest, including creditors holding
claims, such as the pre-petition bank group, have the right to appear and
be heard on applications of the debtors relating to certain business
transactions. The Company is required to pay certain expenses of the
committee, including legal and accounting fees, to the extent allowed by the
Bankruptcy Court. In addition, the Company has an agreement, approved by the
Bankruptcy Court, with the pre-petition bank group to make monthly adequate
protection payments of $300,000.
Plan of Reorganization - Procedures. For 120 days after the date of the
filing of a voluntary Chapter 11 petition, a debtor-in-possession has the
exclusive right to propose and file with the Bankruptcy Court a plan of
reorganization. If a debtor-in-possession files a plan of reorganization
during the initial 120-day exclusivity period, no other party may file a plan
of reorganization until 180 days after the date of filing of the Chapter 11
petition, during which period the debtor-in-possession has the exclusive right
to solicit acceptances of the plan. If a Chapter 11 debtor fails to file its
plan during the initial 120 day exclusivity period, or such additional
exclusivity period ordered by the Bankruptcy Court, or after such plan has been
filed fails to obtain acceptance of such plan from impaired classes of
creditors and equity security holders during the exclusive solicitation period,
any party in interest, including a creditor, an equity security holder, a
committee of creditors or equity security holders, or an indenture trustee may
file a plan of reorganization in the Chapter 11 cases.
Given the seasonality and magnitude of the Company's operations, the
change in business strategies, and the number of interested parties possessing
claims that have to be resolved in this Chapter 11 case, the plan formulation
process is complex. Accordingly, the Company obtained additional extensions
of the exclusivity period to August 3, 1998 and the period to solicit
acceptance of a plan of reorganization and related disclosure statement to
October 5, 1998. On April 13, 1998, the Company filed its plan of
reorganization and related disclosure statement with the Bankruptcy Court and,
subject to confirmation of the plan, expects to emerge from Chapter 11 in
August, 1998. A hearing to approve the disclosure statement has been scheduled
for May 27, 1998 with the Bankruptcy Court. Although the Company does not
currently intend to seek an additional extension, or extensions of exclusivity,
it is possible that an additional extension or extensions would be requested
by the Company. Extensions of exclusivity are common in large Bankruptcy cases
but there can be no assurance that an additional extension or extensions would
be granted by the Bankruptcy Court.
The Company's plan of reorganization contains distributable value to
creditors of approximately $145 million including: approximately $20 million
of administrative claim payments; a $40 million note primarily payable to the
Company's pre-Chapter 11 bank group, which is anticipated to be funded through
proceeds of sales of certain leasehold interests; and new Bradlees' Common
Stock with an estimated value of $70 million. As previously reported in the
Form 10-K for the fiscal year ended February 1, 1997 and in certain press
releases, the existing Bradlees' Common Stock will be canceled.
Once a plan of reorganization is filed and a disclosure statement is
approved by the Bankruptcy Court at a hearing, the disclosure statement will
be sent with the plan of reorganization to members of those classes of claims
that are impaired and equity security holders for acceptance or rejection.
The Bankruptcy Code defines acceptance of a plan by a class of impaired claims
as acceptance by holders of at least two-thirds in dollar amount and more than
one-half in number of claims in that class, but for that purpose counts only
those who actually vote to accept or reject the plan. Thus, a class will have
voted to accept the plan only if two-thirds in amount and a majority in number
actually voting cast their ballots in favor of acceptance. Holders of claims
who fail to vote are not counted as either accepting or rejecting a plan.
Following acceptance or rejection of the plan by impaired classes of creditors
and equity security holders, the Bankruptcy Court, after notice and a hearing,
would consider whether to confirm the plan.
Among other things, to confirm a plan, the Bankruptcy Court is required
to find that (i) each impaired class of (creditors') claims and, if applicable,
equity security holders will, pursuant to the plan, receive at least as much
as the class would have received in a liquidation, (ii) each impaired class of
(creditors') claims and, if applicable, equity security holders has accepted
the plan by the requisite vote and (iii) confirmation of the plan is not likely
to be followed by the liquidation or need for further financial reorganization
unless the plan proposes such liquidation or reorganization. Under the
Bankruptcy Code, the classes of claims or interests not receiving a
distribution under the plan of reorganization are deemed not to have accepted
the plan, and therefore would not be entitled to vote to accept or reject the
plan.
If any impaired class of creditors' claims or equity security holders does
not accept the plan and assuming that all of the other requirements of the
Bankruptcy Code are met, the proponent of the plan may invoke the so-called
"cramdown" provisions of the Bankruptcy Code. Under these provisions, the
Bankruptcy Court may confirm a plan notwithstanding the non-acceptance of the
plan by an impaired class of creditors' claims or equity security holders if
certain requirements of the Bankruptcy Code are met, including that (i) at
least one impaired class of claims has accepted the plan, (ii) the plan "does
not discriminate unfairly" and (iii) the plan "is fair and equitable, with
respect to each class of claims or interests that is impaired under, and has
not accepted, the plan." As used in the Bankruptcy Code, phrases "discriminate
unfairly" and "fair and equitable" have narrow and specific meanings unique
to bankruptcy law.
Schedules have been filed by the Company with the Bankruptcy Court
setting forth the assets and liabilities of Bradlees as of the Filing as
shown by the Company's books and records. As part of the Chapter 11
reorganization process, the Company has notified all known or potential
claiments for the purpose of identifing all pre-petition claims against
Bradlees. Pursuant to an order of the Bankruptcy Court, all proofs of
claim were required to be filed by April 1, 1996. Differences between
amounts shown by Bradlees and claims filed by creditors are being
investigated and resolved. The ultimate amount of and settlement terms
for such liabilities are subject to an approved plan of reorganization
and, accordingly, are not presently determinable.
Under the Bankruptcy Code, the Company may elect to assume or reject
real estate leases, employment contracts, personal property leases, service
contracts and other unexpired executory pre-petition leases and contracts,
subject to Bankruptcy Court approval. Bradlees established and recorded
an estimated liability of approximately $48.1 million as of January 1, 1998,
for rejected leases. This liability may be
subject to future adjustments based on claims filed by the lessors and
Bankruptcy Court actions. Although the Company does not anticipate the
rejection of additional leases, the Company cannot presently determime or
reasonably estimate the ultimate liability which may result from the filing
of claims for any rejected contracts or from any additional leases which may
be rejected in the future.
Bradlees, Inc. was organized as a Massachusetts corporation in 1992.
Its headquarters is located at One Bradlees Circle, Braintree, Massachusetts
02184 and its telephone number is (781) 380-3000.
ITEM 2. PROPERTIES
STORE LOCATION AND SIZE
Bradlees' stores are located principally in shopping centers that are in
high traffic areas. The stores appeal to consumers seeking a wide range of
value-priced merchandise and shopping convenience.
The following chart shows the geographic distribution of the Company's
stores
as of April, 1998:
Maine 1
New Hampshire 8
Massachusetts 36
Connecticut 17
New York 6
New Jersey 29
Pennsylvania 6
---
Total 103
===
The Company operates stores in a variety of size ranges, with the current
average equal to 75,924 total square feet.
DISTRIBUTION FACILITIES
Bradlees' distribution facilities are located in Edison, New Jersey and
Braintree, Massachusetts. The 584,000 square foot Edison facility generally
serves as the soft goods processing center for nearly all apparel and
softlines merchandise and as the hardlines merchandise distribution facility
for the New York, New Jersey and Pennsylvania stores. The 470,000 square
foot Braintree facility generally services all stores with basic merchandise
items and distributes hardlines merchandise to the New England states.
PROPERTIES
As of January 31, 1998, the Company's stores, including the six stores
closed in February, 1998, occupied a total of approximately 8,285,917 square
feet of selling area. Bradlees leases all of its stores, two distribution
centers and central office under long-term leases.
ITEM 3. LEGAL PROCEEDINGS
The Company is presently operating its business as a debtor-in-possession
subject to the jurisdiction of the Bankruptcy Court. There were no material
legal proceedings pending against the Company prior to the Chapter 11 filing.
The Company currently retains the exclusive right to file a plan of
reorganization until August 3, 1998 and to solicit acceptance of a plan of
reorganization until October 5, 1998. The company filed a plan of
reorganization and related disclosure statement on April 13, 1998. Certain
claims have been brought against the Company which are incident to, and will
be resolved in, the Chapter 11 proceeding.
There are no other material legal proceedings pending or, to the knowledge
of management, threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the 13
weeks ended January 31, 1998.
PART II
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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Market Price Range Dividends (a)
Year Ended Year Ended
Jan. 31, 1998 Feb. 1, 1997 Jan. 31, 1998 Feb. 1, 1997
------------- ------------ ------------- ------------
High Low High Low
---- --- ---- ---
First 13 weeks $1.00 - .50 $2.50 - 1.50 None
Second 13 weeks .55 - .03 2.00 - 1.00
Third 13 weeks .39 - .20 1.37 - .62
Fourth 13 weeks .27 - .13 1.12 - .74
Stock Exchange Listing NASDAQ DOMESTIC PINK SHEETS
Ticker Symbol BRLYQ
Approximate number of holders of record at April 1, 1998 669
(a) Dividends cannot be declared on the Company's common stock under the
terms of the Company's DIP facility.
On May 1, 1997, The New York Stock Exchange (NYSE) announced that trading
in the Company's current Common Stock was suspended effective on that date and
that the NYSE would apply for delisting of the Company's current Common Stock.
This was based on the Company's announcement on May 1, 1997, that new Common
Stock is likely to be issued and the current Common Stock canceled under any
future plan of reorganization (see "Reorganization Case" under Part I,
Item 1-Business, of this Form 10-K) and the fact that the Company fell below
the NYSE's continued listing criteria. The Company's current Common Stock
was officially delisted by the NYSE in October, 1997, but has been trading on
the NASDAQ Pink Sheets. All shares of the Company's current Common Stock would
be canceled under the Company's plan of reorganization filed on April 13, 1998.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of Bradlees should be read in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this Form 10-K.
(in millions, except for per share data)
---------------------------------------
52 weeks 52 weeks 53 weeks 52 weeks 52 weeks
ended ended ended ended ended
1/31/98 2/1/97 2/3/96 1/28/95 1/29/94
------- ------ ------ ------- -------
Net Sales $1,344.4 $1,561.7 $1,780.8 $1,916.6 $1,880.5
Net income (loss)(1) (22.6) (218.8) (207.4) 5.3 6.8
Net income (loss)
per common share (1.98) (19.17) (18.17) .47 .60
Working capital (2) 46.2 68.6 185.3 32.9 88.6
Total assets 595.2 604.2 798.7 884.8 785.8
Long-term debt and
redeemable preferred
stock 27.1 33.3 53.4 289.6 269.8
Liabilities subject
to settlement 562.1 571.0 539.8 - -
(1) Includes a pre-tax reorganization charge of $.8 million and a gain on
disposition of properties of $5.4 million for the 52 weeks ended
January 31, 1998 ("1997"). Includes pre-tax charges of $40.8 and $99.4
million relating to the impairment of long-lived assets and pre-tax
reorganization items of $69.8 and $65.0 million for the 52 and 53 weeks ended
February 1, 1997 ("1996") and February 3, 1996 ("1995"), respectively. Also,
includes a gain on disposition of properties of $1.7 million for 1996 and the
cumulative effect of an accounting change (net of taxes) of $.5 million for
the year ended January 28, 1995.
(2) Working capital for 1995 through 1997 excludes liabilities subject to
settlement under the reorganization case.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(a) RESULTS OF OPERATIONS
Fiscal Year Ended
----------------------------------------------------
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
Stores, beginning of period 110 134 136
New stores - 3 -
Closed stores (1)(a) (27) (2)
--- --- ---
Stores, end of period 109 110 134
=== === ===
(a) Excludes six stores closed in February, 1998.
The following discussion and analysis is based on the results of
operations of the Company detailed below for the 52 weeks ended January 31,
1998 ("1997"), the 52 weeks ended February 1, 1997 ("1996") and the 53 weeks
ended February 3, 1996 ("1995"). The financial information discussed below
should be read in conjunction with the Consolidated Financial Statements and
Notes included elsewhere in this Form 10-K.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(Dollars in millions)
1997 1996 1995
1997 % of Net Sales 1996 % of Net Sales 1995 % of Net Sales
---- -------------- ---- -------------- ---- --------------
Net sales $1,344.4 100.0% $1,561.7 100.0% $1,780.8 100.0%
Cost of
goods sold 948.0 70.5% 1,127.6 72.2% 1,289.1 72.4%
----- ------ ------- ------ ------- ------
Gross
margin 396.4 29.5% 434.1 27.8% 491.7 27.6%
Leased
department
and other
operating
income 12.1 0.9% 13.7 0.9% 15.1 0.8%
----- ------ ------- ------ ------- ------
408.5 30.4% 447.8 28.7% 506.8 28.5%
Selling, store
operating,
administ.
and distrib.
expenses 382.9 28.5% 504.0 32.3% 572.8 32.2%
Depreciation
and
amortization
expense 36.2 2.7% 42.2 2.7% 54.4 3.1%
----- ------ ------ ------ ----- ------
Operating
loss (10.6) (0.8%) (98.4) (6.3%) (120.4) (6.8%)
Gain on
disposition
of
properties (5.4) (0.4%) (1.7) (0.1%) - -
Interest and
debt expense 16.6 1.2% 11.5 0.7% 27.2 1.5%
Impairment of
long-lived
assets - - 40.8 2.6% 99.4 5.6%
Reorganization
items 0.8 0.1% 69.8 4.5% 65.0 3.6%
Income tax
benefit - - - - (104.6) (5.9%)
----- ------ ------ ------ ------ ------
Net loss ($22.6) (1.7%) ($218.8) (14.0%) ($207.4) (11.6%)
======= ====== ======== ======= ======== =======
The Company's business is seasonal in nature, with a significant portion
of its net sales occurring in the fourth quarter, which includes the holiday
selling season. Comparable store sales, which include leased shoe department
sales, for each year are discussed below and represent percentage
increases/decreases over the prior year for stores that were open and operated
by Bradlees for at least the prior full fiscal year. The rate of inflation did
not have a significant effect on sales during these years.
RESULTS OF OPERATIONS FOR 1997 COMPARED TO 1996
The following discussion, as well as other portions of this document,
includes certain statements which are or may be construed as forward looking
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 levels of 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 and economic
conditions, availability and cost of sufficient labor, and changes in import
duties, tariffs and quotas.
Net sales for 1997 declined $217.3 million or 13.9% from 1996 due
primarily to the closing of 27 stores during 1996 and a 5.0% decrease in
comparable store sales. The major cause for the decline in comparable store
sales was the Company's significant reduction in the number of promotional
activities in 1997 that had historically poor profit productivity.
The Company is focusing on three key merchandise categories: moderately
priced family apparel, home furnishings and conventional consumable hardlines
products. Bradlees is committed to quality and fashion, especially in apparel
and home furnishings, and to improving customer service, in order to
differentiate itself from its competition. The Company believes that it can
strategically leverage its strength in the quality and fashion content of its
product offerings while driving traffic with selected hardlines merchandise.
Management is continuing efforts to improve sales, including the expansion of
both the "Wow!" (opportunistic and unadvertised purchases) and "Certified
Value" (everyday low prices on selected highly recognizable products) programs
that have been particularly successful to-date. Comparable store sales
stabilized during the fourth quarter of 1997 (unchanged from 1996) and have
been strong through April, 1998.
Gross margin declined $37.7 million but increased 1.7% as a percentage of
net sales in 1997 compared to 1996. The decline in gross margin dollars was
due to the store closings and lower comparable store sales, partially offset
by the increase in the gross margin rate. The increase in the rate was
primarily due to a lower markdown rate resulting from fewer promotions,
improved inventory control and a decrease of $3.7 million in 1997 compared to
1996 in going-out-of-business markdown provisions for closed stores included in
cost of goods sold (Note 7 to the Consolidated Financial Statements), partially
offset by a slightly lower overall initial markup.
Leased department income and other operating income declined $1.6 million
but was unchanged as a percentage of net sales in 1997 compared to 1996. The
decline was primarily due to lower leased shoe department sales partially
offset by the benefit of layaway income (classified as other operating income)
from the layaway program that was reimplemented in the second half of 1997.
Selling, store operating, administrative and distribution ("SG&A")
expenses declined $121.1 million and 3.8% as a percentage of net sales in
1997 compared to 1996. The decline in SG&A expenses was due to the closed stores
and numerous expense reduction initiatives, including substantial reductions in
overhead and advertising costs, designed to begin bringing the Company's SG&A
rate to a more competitive level. Included in the 1997 SG&A expense reductions
were a $4.5 million expense credit resulting from the elimination of automatic
beginning of year vacation vesting for certain pay groups (Note 14) and a $3.9
million curtailment gain associated with a reduction in retiree medical
benefits (Note 11).
Depreciation and amortization expense declined $6.0 million in 1997
compared to 1996, primarily as a result of the closed stores and the 1996
year-end write-downs of certain long-lived assets in accordance with of
SFAS No. 121 (Note 4). However as a percentage of net sales, depreciation and
amortization remained unchanged.
The Company sold an owned store in January, 1998 for approximately $8.0
million and recognized a gain of $5.4 million. This store was closed as a
result of the sale of the property and the sale was not directly associated
with the Chapter 11 proceedings; therefore, the gain was not classified as a
reorganization item. The net proceeds from this sale were placed into
restricted funds.
Interest and debt expense increased $5.1 million or .5% as a percentage
of net sales in 1997 compared to 1996 due primarily to higher average
borrowings under the DIP facilities (Note 6) in 1997 and a $1.1 million write-
off in 1997 of deferred financing costs associated with the replacement of the
prior DIP facility. Interest expense in 1996 includes a credit of $.8 million
resulting from a change in the interest rate used to discount self-insurance
reserves.
Reorganization items resulted in net charges of $.8 and $69.8 million,
or .1% and 4.5% of net sales, in 1997 and 1996, respectively. These net
charges relate directly to the Chapter 11 proceedings and associated
restructuring of the Company's operations and are discussed in Note 7 to the
Consolidated Financial Statements.
The Company did not incur any income tax expense or benefit in 1997 and
1996 (Note 12).
RESULTS OF OPERATIONS FOR 1996 COMPARED TO 1995
Net sales for 1996 declined $219.1 million or 12.3% from 1995 due
primarily to the closing of 27 stores in 1996 and a 5.4% decrease in comparable
store sales. The major causes for the decline in comparable store sales were
the Company's relatively rapid introduction of higher-priced merchandise at
the expense of many lower opening price-point merchandise categories,
elimination of layaway, significant reduction in the number of basic
convenience and commodity items that are generally sold in discount stores, and
changes in the Company's advertising strategy that included a reduction in the
number of merchandise offerings in the Company's weekly circular. Although the
Company improved the quality and fashion of its merchandise, the changes that
were implemented assumed rapid customer acceptance of the new merchandise mix
and significant sales from increased promotional activities.
Gross margin declined $57.6 million but increased .2% as a percentage of
net sales in 1996 compared to 1995. The decline in gross margin dollars was
due to the lower sales, partially offset by the slight increase in the gross
margin rate. The increase in the rate was due to a higher overall initial
markup and lower inventory shrink, partially offset by a higher markdown rate
associated primarily with increased promotional activities and the negative
impact of a $6.7 million going-out-of-business markdown provision included in
cost of goods sold in 1996.
Leased department income and other operating income declined $1.4 million
but increased .1% as a percentage of net sales in 1996 compared to 1995. The
decline was due to lower leased shoe department sales and the absence of any
layaway income since the discontinuance of the layaway program in August, 1995.
SG&A expenses declined $68.8 million but increased .1% as a percentage of
net sales in 1996 compared to 1995. The decline in SG&A expenses was due to
the closed stores and reductions in logistics and certain home office expenses,
partially offset by an increase in advertising expenses. The increase in SG&A
expenses as a percentage of net sales was due to the sales decline in 1996.
Depreciation and amortization expense declined $12.2 million or .4% as a
percentage of net sales in 1996 compared to 1995, primarily as a result of the
closed stores and the 1995 year-end write-down of certain long-lived assets in
accordance with the adoption of SFAS No. 121 (Note 4).
The Company recognized a gain of $1.7 million in 1996 for forfeited
deposits received on the unconsummated sale of an owned undeveloped property
(included in current assets held for sale).
Interest and debt expense declined $15.7 million or .8% as a percentage
of net sales in 1996 compared to 1995 due primarily to the discontinuance of
accruing interest on substantially all pre-petition debt subsequent to the
Filing on June 23, 1995. Interest expense includes a credit of $.8 million in
1996 and a $2.9 million charge in 1995 resulting from changes in the interest
rate used to discount self-insurance reserves.
The Company incurred charges of $40.8 and $99.4 million, or 2.6% and 5.6%
of net sales, in 1996 and 1995, respectively, due to the impairment of certain
long-lived assets in accordance with SFAS No. 121 (Note 4).
Reorganization items resulted in net charges of $69.8 and $65.0 million,
or 4.5% and 3.6% of net sales in 1996 and 1995, respectively. These net
charges related directly to the Chapter 11 proceedings and associated
restructuring of the Company's operations and are discussed in Note 7 to the
Consolidated Financial Statements.
The Company did not incur any income tax expense or benefit in 1996
compared to an income tax benefit of $104.5 million in 1995 (Note 12). A
portion of the Company's 1995 loss before income taxes was utilized in April,
1996, to recover $24.5 million of income taxes previously paid, of which $6.0
million of these funds was restricted in April, 1996, pending further order of
the Bankruptcy Court.
(b) LIQUIDITY AND CAPITAL RESOURCES
The Company obtained a new $250 million financing facility (of which $125
million is available for issuance of letters of credit) in December, 1997 with
BankBoston Retail Finance, Inc. ("BBNA") as agent (the "New Facility"), under
which the Company is allowed to borrow for general corporate purposes, working
capital and inventory purchases (Note 6). The New Facility consists of (a) an
up to eighteen month debtor-in-possession revolving credit facility in the
maximum principal amount of $250 million (the "New DIP") and, subject to
meeting certain conditions, (b) an up to three year post-confirmation revolving
credit facility in the maximum principal amount of $250 million (the "Exit
Facility"). The commitment period for the combined facility cannot exceed four
years. The Company received a modification dated April 7, 1998 to the
commitment from BBNA, as agent, that modified this commitment so that the plan
of reorganization filed by the Company on April 13, 1998 satisfies the
conditions for the Exit Facility. The Exit Facility will be secured by all of
the assets of the Company, except in intersts in real property. The new DIP
replaced a $200 million Debtor-in-Possession Revolving Credit and Guaranty
Agreement with The Chase Manhattan Bank, as agent (the "Prior DIP Facility").
Borrowings, exclusive of the issuance of letters of credit, under the DIP
facilities during 1997 peaked at $147 million and averaged $87.2 million
compared to a peak of $42.5 million and an average of $5.9 million in 1996.
The increase in borrowings was primarily due to the operating loss incurred in
1996. The Company's unrestricted cash and cash equivalents balance peaked at
$21.9 million and averaged approximately $13.0 million during 1997, compared
to a peak of $67.5 million and an average of $20.7 million during 1996. As of
January 31, 1998, the Company had $84.2 million of borrowings outstanding under
the New DIP and $10.9 million of unrestricted cash and cash equivalents. As of
February 1, 1997, the Company had borrowings outstanding under the Prior DIP
Facility of $42.5 million and $10.0 million of unrestricted cash and cash
equivalents.
The Company currently expects its borrowings, exclusive of the issuance of
letters of credit, in 1998 to peak at approximately $170 million in October or
November, 1998 and average approximately $115 million. The New DIP 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 over advance amount on the Loan
Value of Eligible Inventory of 5% (the "Overadvance Amount"), subject to a $20
million limitation. The Exit Facility has an advance rate equal to 60% 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 Company can borrow an
overadvance amount on the Loan Value of Eligible Inventory of 5%, provided the
Loan to Value Ratio does not exceed 85%. The amount available to borrow in
1998, after deducting expected letters of credit outstanding, is currently
expected to peak at approximately $220 million in October or November, 1998 and
average approximately $175 million.
Other than payments made to certain pre-petition creditors approved by the
Bankruptcy Court (Note 3), 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 a reorganization plan defining the repayment terms has been confirmed by
the Bankruptcy Court. Virtually all pre-petition indebtedness of Bradlees is
subject to settlement under the reorganization case.
In 1997, net cash provided by operating activities before reorganization
items was $7.2 million compared to net cash used by operating activities before
reorganization items of $26.3 million in 1996. This improvement was primarily
due to the significant reduction in the operating loss in 1997. The net cash
used by operating activities of $26.3 million before reorganization items in
1996 was due primarily to the operating loss incurred, partially offset by the
income tax refund and the net cash benefit from the closing of the 27 stores.
In 1995, cash flow from operations before reorganization items was $31.5
million, including the significant benefit resulting from nonpayment of most
of the liabilities incurred prior to the Filing.
Inventories increased $1.7 million in 1997. Inventories declined $45.3
million during 1996 due primarily to the closing of the 27 stores.
Inventories declined $16.8 million during 1995, exclusive of the inventory
impairment discussed in Note 7, primarily as a result of a more aggressive
clearance policy. Accounts payable increased $9.0 million in 1997 due
primarily to better payment terms at the end of 1997 compared to the end of
1996. Accounts payable declined $32.3 million in 1996 due primarily to the
impact of the closed stores. Accounts payable, exclusive of amounts subject
to settlement, declined $70.8 million in 1995, primarily as a result of
improved liquidity after the Filing that led to more timely payments.
Cash flows from reorganization items and the increase in restricted cash
and cash equivalents (included in investing activities) are discussed in Notes
7 and 2, respectively. Proceeds from sales of assets (included in financing
activities) in 1997 and 1996 are discussed in Note 2.
Capital expenditures of $19.6 million in 1997 represented primarily
management information systems (including a new mainframe computer, new store
point-of-sale controllers and a new merchandising management system), store
fixtures (including new chain-wide in-store directional and departmental
signage) and store improvements. The decrease in capital expenditures
from the $27.5 million spent in 1996 was due primarily to amounts spent on
store merchandise fixtures in 1996 and the fewer stores operating in 1997.
Capital expenditures of $37.0 million in 1995 included $12.8 million of
additions financed through a special purpose entity (Note 8) and represented
primarily costs associated with the new stores opened in March, 1996 and other
real estate development.
In 1998, the Company expects total capital expenditures to be
approximately $20 million (some of which may be subject to Bankruptcy Court
approval) based upon its current plan, 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
ten stores, and other store improvements. The Company currently expects to
finance these expenditures through internally-generated funds.
The Company believes its ability to meet its financial obligations and
make planned capital expenditures will depend on the Company's future operating
performance, which will be subject to financial, economic and other factors
affecting the industry and operations of the Company, including factors beyond
its control.
Bradlees currently anticipates the following investment and financing
activities for 1998:
(a) capital expenditures of approximately $20 million as discussed above, (b)
payments of certain capital lease obligations (Note 8), (c) adequate protection
payments (Note 3) until emergence from Chapter 11, (d) average borrowings of
approximately $115 million and (e) the possible sale of certain properties and
lease interests. These anticipated activities exclude the impact of
consumation of the Company's filed plan of reorganization, which calls for
approximately $145 million of distributable value, including: approximately
$20 million of administrative claim payments that are anticipated to be paid
from restricted funds; a $40 million note primarily payable to the Company's
pre-Chapter 11 bank group, which is anticipated to be settled through proceeds
of sales of certain leasehold interests; and new Bradlees stock with an
estimated value of $70 million. As previously reported, the existing Bradlees
stock will be canceled.
The Company believes the actions set forth above and the availability of
its New Facility, 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 is dependent
upon the Company's attainment of sales, gross profit, and expense levels that
are reasonably consistent with its financial plan.
YEAR 2000 PROJECT
The Company has determined that it will be necessary to modify portions of
its software so that its computer systems will properly utilize dates beyond
December 31, 1999 ("Year 2000"). The Company believes that with upgrades or
modifications to existing software and certain conversions to new software, the
impact of the Year 2000 issue can be mitigated. However, if such 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 Company will utilize both internal and external resources to
reprogram, replace, and test software for Year 2000 compliance. The Company
has contracted with a major outside consulting firm to provide the majority of
the resources required to identify, and then replace or remediates the
Company's systems as necessary. The Company plans to complete the Year 2000
project no later than by the beginning of the fourth quarter of 1999 but
currently expects that the Year 2000 project will be substantially complete
by the second quarter of 1999. The Year 2000 project cost is estimated to be
approximately $3 to $4 million, primarily incurred in 1998. The costs are
expected to be expensed as incurred, unless new software is purchased which
will be capitalized. The Company has not incurred significant costs prior to
January 31, 1998 other than internal costs (which have not been capitalized)
to evaluate the extent of Year 2000 compliance and to develop a remediation
plan.
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.
The Company is also attempting to obtain representations and assurances
from third party providers of services and goods, including vendors of
software products, that their software is or will be Year 2000 compliant on a
timely basis. However, because certain processes of the Company may be
interrelated with, or dependent upon, systems outside the control of the
Company, there can be no assurance that all such implementations will be
successful.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See index to the Financial Statements - Item 14(a).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE.
To the best of their knowledge, management is not aware of any current
disagreements with its accountants, Arthur Andersen LLP ("AA"). On September
24, 1997, the Audit Committee of the Board of Directors of Bradlees, Inc.
recommended the appointment of AA as certifying accountants for the Company
replacing Deloitte & Touche LLP ("D&T"), who was dismissed, effective on
September 24, 1997 and the appointment along with the dismissal was approved
by the board of Directors and the Bankruptcy Court. There were no
disagreements between D&T and the Company's management at the decision-making
level during the two most recent fiscal years and the subsequent interim
periods (the "Reporting Period"), which disagreements, if not resolved to the
satisfaction of D&T, would have caused D&T to make reference to the subject
matter of the disagreements in connection with its reports. In addition, there
were no reportable events, as defined in Item 304(a)(i)(v) of Regulation S-K,
during the Reporting Period. A Form 8-K dated September 24,1997 was filed to
report the change in accountants.
D&T's report on the consolideated financial statements for the year
ended February 1, 1997 expressed an unqualified opinion and included
explanatory paragraphs relating to the following:
a) The Company's filing for reorganization protection under Chapter 11
of the Federal Bankruptcy Code.
b) The Company's 1996 and 1995 losses from operations and stockholders'
deficiency which raise substantial doubt about the Company's ability
to continue as a going concern.
During the Reporting Period, neither the Company nor anyone on its
behalf has consulted AA regarding the application of accounting principles
to a specified transaction or the type of audit opinion that might be rendered
on the Company's financial statements, and AA has not provided a written
or oral report or advice that Bradlees' management concluded was an important
factor considered by the registrant in reaching a decision on the issue.
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and current positions of all executive officers and
directors of the Company as of April 29, 1998 are listed below along with their
business experience during the past five years.
Name Age Position
Robert W. Benenati 49 Senior Vice President, Logistics
Jack E. Bush 63 Director
Bruce Conforto 45 Senior Vice President, Chief Information Officer
John A. Curry 63 Director
Gregory K. Dieffenbach 48 Senior Vice President, Human Resources
Judith Dunning 47 Senior Vice President, Planning and Allocation
John M. Friedman, Jr. 53 Director
Mark E. James 48 Senior Vice President, Marketing
Robert G. Lynn 48 Director, President/Chief Operating Officer
Cornelius F. Moses, III 39 Senior Vice President, Chief Financial Officer
Patricia M. Pomerleau 49 Director
Ronald T. Raymond 54 Senior Vice President, Asset Protection
Sheldon Rutstein 63 Director
Willis G. Ryckman 53 Director
David L. Schmitt 47 Senior Vice President, General Counsel,
Secretary and Clerk
Sandra L. Smith 41 Senior Vice President, General Merchandise
Manager, Hardlines
Thomas N. Smith 41 Senior Vice President, Stores
James C. Sparks 51 Senior Vice President, General Merchandise
Manager, Softlines
Peter Thorner 54 Chairman and Chief Executive Officer
Mr. Benenati became Senior Vice President, Logistics of the Company in
October 1997. He was Senior Vice President, Operations, from February 1997
to October 1997. He was Senior Vice President, Distribution of the Company from
June 1995 to February 1997. Prior to joining the Company, he was Senior Vice
President, Distribution of QVC, Inc. from 1994 to June 1995. He was Vice
President, Operations and Administration for Simon and Schuster Publishing Co.
from prior to 1993 to 1994.
Mr. Bush became a Director of the Company in July 1997. He has served as
President of Raintree Partners, Inc., a management consulting firm, since 1995
and Chairman and Chief Executive Officer of Jumbo Sports, Inc., a sporting
goods retailer, since December 1997. He served as President and Director of
Michaels Stores, Inc. from prior to 1993 to 1995. He also serves as a Director
of Stage Stores, Inc. and Carolina Art and Frame Co.
Mr. Conforto became Senior Vice President, Chief Information Officer of
the Company in April 1998. Prior to joining the Company, he was Vice
President, Corporate Information Technology of HFS Incorporated from August
1996 to April 1997. He was Vice President of Information Services for Rickel
Home Centers, Inc. from prior to 1993 to August 1996.
Mr. Curry became a Director of the Company in January 1994. He has served
as President Emeritus of Northeastern University since September 1996. He
served as President of Northeastern University from prior to 1993 to September
1996.
Mr. Dieffenbach became Senior Vice President, Human Resources of the
Company in July 1997. Prior to joining the Company, he was Vice President,
Human Resources for Uptons Department Stores, Inc. from prior to 1993 to May
1997.
Ms. Dunning became Senior Vice President, Planning and Allocation of the
Company in February 1997. Ms. Dunning served as Vice President, Strategic
Planning of the Company from January 1996 to February 1997. Prior to joining
the Company, she was Vice President, Merchandise Planning of
Rich's/Lazarus/Goldsmith's, a division of Federated Department Stores, Inc.,
from February 1995 to January 1996 and Vice President, Merchandise Planning of
Lazarus Department Stores, Inc., a division of Federated Department Stores,
Inc., from prior to 1993 to February 1995.
Mr. Friedman became a Director of the Company in May 1996. Mr. Friedman
was a partner at Dewey Ballantine from prior to 1993 to April 1996.
Mr. James became Senior Vice President, Marketing of the Company in May
1997. Prior to joining the Company, he was Senior Vice President, Marketing
and Advertising for Best Products Co., Inc. ("Best Products") from prior to
1993 to December 1996.
Mr. Lynn became President and Chief Operating Officer of the Company in
April 1998. He served as President and Chief Merchandising Officer of
the Company from April 1997 to April 1998. Mr. Lynn was elected a Director of
the Company in April 1997. Prior to joining the Company, he was a consultant
to various retail and manufacturing clients from January 1996 to April 1997.
He was Vice Chairman and Chief Operating Officer of American Eagle Outfitters,
Inc. from January 1995 to December 1995 and a Director from April 1994 to
December 1995. Mr. Lynn was a retail consultant to the creditors' committee
in the McCrory bankruptcy from December 1993 to January 1995. Mr. Lynn served
as President and Chief Executive Officer of the United States division of
F.W. Woolworth from January 1989 to September 1993.
Mr. Moses became Senior Vice President, Chief Financial Officer of the
Company in July 1996. Mr. Moses served as Senior Vice President, Finance of
the Company from July 1995 to July 1996. Mr. Moses was Vice President, Finance
of the Company from April 1995 to July 1995. Prior to joining the Company, Mr.
Moses was Senior Vice President, Finance of Ames Department Stores, Inc.
("Ames") from prior to 1993 to April 1995.
Ms. Pomerleau became a Director of the Company in March 1993. She has
served as President and Chief Executive Officer of AlphaSight Online
Strategists since April 1996. She was Managing Partner of Pomerleau Associates
from October 1995 to March 1996. Prior to founding Pomerleau Associates, she
was Managing Partner of ADS Consulting from November 1994 to October 1995. Ms.
Pomerleau was Executive Vice President, Chief Operating Officer of South Shore
Hospital, Inc. and South Shore Health and Educational Corporation and a member
of the Board of Directors of each from prior to 1993 to October 1994.
Mr. Raymond became Senior Vice President, Asset Protection of the Company
in July 1995. Prior to joining the Company, he was Senior Vice President,
Asset Protection for Ames from prior to 1993 to July 1995.
Mr. Rutstein became a Director of the Company in April 1995. He has
served as a Consultant for Raytheon Co. since December 1994. He was Senior
Vice President and Chief Financial Officer for Raytheon Co. from prior to 1993
to December 1994.
Mr. Ryckman became a Director of the Company in May 1997. He has served
as Founder and President of WGR, Inc. since prior to 1993 and of WGR Golf L.P.
since 1994. He has served as Chief Operating Officer and Managing Director of
Associate Capital L.P., a New York-based hedge fund, since 1995. He has served
as Chairman of the Board of Tri Tech Labs, Inc. and Irma Shorell, Inc. since
prior to 1993. He also serves as a Director of Omni Capital Corporation,
Banyon Hotel Management Corporation, Krasdale Foods, Inc., National Propane
Corp., Provision, Inc. and Panavision, Inc.
Mr. Schmitt has served as Senior Vice President, General Counsel,
Secretary and Clerk of the Company since November 1995. He was Vice President,
General Counsel, Secretary and Clerk of the Company from July 1995 to November
1995. Prior to joining the Company he was Vice President, Business Development
for Wheelabrator Clean Water Systems, Inc. from 1994 to June 1995. He was
President of CP Consulting from prior to 1993 to June 1994.
Ms. Smith became Senior Vice President, General Merchandise Manager,
Hardlines of the Company in July 1995. Ms. Smith served as Vice President,
General Merchandise Manager, Hardlines of the Company from February 1994 to
July 1995 and Divisional Merchandise Manager, Home Fashions of the Company from
prior to 1993 to February 1994.
Mr. Smith became Senior Vice President, Stores of the Company in December
1997. Prior to joining the Company, he was Director of Operations and
Merchandising for Fry's Electronics from April 1995 to December 1997. He was
Division Director for The Home Depot/Crossroads from June 1993 to April 1995.
He was Regional Vice President for Wal-Mart from prior to 1993 to April 1993.
Mr. Sparks became Senior Vice President, General Merchandise Manager,
Softlines of the Company in July 1995. He was Vice President, General
Merchandise Manager, Softlines of the Company from October 1994 to July 1995.
Prior to joining the Company, Mr. Sparks was Vice President, General
Merchandise Manager of Belk Lindsey from prior to 1993 to October 1994.
Mr. Thorner has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since April 1997. He served as Chairman of
the Board of Directors, President and Chief Executive Officer of the Company
from December 1996 to April 1997. He served as President and Chief Operating
Officer of the Company from June 1995 to December 1996 and he was elected a
Director of the Company in July 1995. He was Vice Chairman of the Company from
March 1995 to June 1995. Prior to joining the Company, he was President, Chief
Operating Officer and Acting Chief Executive Officer and a member of the Board
of Directors of Ames from prior to 1993 to 1994.
Mr. Mark Cohen resigned as a member of the Board of Directors of the
Company in June 1997.
On September 24, 1996, while Mr. James was Senior Vice President,
Marketing and Advertising of Best Products, Best Products filed for bankruptcy
protection under Chapter 11 of the United States Bankruptcy Code. Best
Products was subsequently liquidated.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership (Forms 3, 4
and 5) with the Securities and Exchange Commission.
Based solely on the Company's review of the copies of Forms 3 and 4 and
amendments thereto received by it during 1997, Forms 5 and amendments thereto
received by it with respect to fiscal 1997, or written representations from
certain reporting persons that no Forms 5 were required to be filed by those
persons, the Company believes that during 1997, except as described below,
officers, directors and greater-than-ten-percent beneficial owners complied
with all filing requirements under Section 16(a) of the Exchange Act applicable
to them.
The Form 3 for each of Mr. Jack E. Bush, Director, Mr. Gregory K.
Dieffenbach, Senior Vice President, Human Resources, Ms. Judith Dunning, Senior
Vice President, Planning and Allocation, Mr. Robert G. Lynn, Director,
President and Chief Operating Officer, Mr. Willis G. Ryckman, Director, Mr.
Mark E. James, Senior Vice President, Marketing and Mr. Thomas N. Smith, Senior
Vice President, Stores, was filed late.
ITEM 11. EXECUTIVE COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth the earned compensation for the Chief
Executive Officer of the Company and the four highest-paid executive officers
of the Company in 1997 other than the Chief Executive Officer (the "Named
Officers") for 1997, 1996 and 1995.
Summary Compensation Table
Long Term Compensation
--------------------------
Awards
------------------
Payouts
-------
------Annual Compensation---- Securities
Other Rest. Underlying
Name and Annual Stock Options LTIP All Other
Princ. Year Salary Bonus Comp. Awards /SARs Payouts Comp.
Position $ $ $ $ $ $
- -------- --- ------- -------- ------ -------- -------- -------- -------
Peter
Thorner 1997 741,827 299,063(1) (2) - - 150,000(3) 9,318(4)
Chairman1996 589,166 - 12,961 - - 150,000 9,293
& CEO 1995 440,391 406,252(5) 97,257 231,250(6) 100,000 150,000 4,490
Robert
G. Lynn 1997 401,827(7)196,875(1)29,109(8) - - - 840(4)
Dir.,Pres.
and COO
Robert W.
Benenati 1997 292,729 90,011(1) (2) - - - 1,113(4)
Senior VP1996 205,036 - 62,762 - - - 850
Logistics1995 141,948 190,075(5)18,793 - - - 596
Cornelius1997 279,175 84,012(1) (2) - - - 1,054(4)
F. Moses,1996 228,682 - (2) - - - 944
III, SVP 1995 162,322 79,453(5)162,087 - - - 216
& CFO
David L. 1997 243,751 73,500(1) (2) - - - 912(4)
SVP, 1996 180,024 - (2) - - - 748
General 1995 103,860 69,556(5) (2) - - - 312
Counsel,
Secretary and Clerk
(1) Includes an earned bonus paid in April, 1998 pursuant to the Company's
Corporate Bonus Plan (see below), but excludes the following deferred payments
which will be payable, with interest, at the substantial consummation of a
Chapter 11 plan or plans of reorganization of the Company: Mr. Thorner -
$99,688; Mr. Lynn - $65,625; Mr. Benenati - $30,004; Mr. Moses - $28,004; and
Mr. Schmitt - $24,500.
(2) Perquisites and other personal benefits for the indicated periods did
not exceed the lesser of $50,000 or 10% of reported salary and bonus.
(3) See Enterprise Appreciation Incentive Plan below.
(4) Premiums paid by the Company with respect to term life insurance for
the calendar year ended December 31, 1997.
(5) Includes an earned bonus paid in April, 1996 pursuant to the Company's
Retention Bonus Plan, but excludes the following deferred payments which will
be payable, with interest, at the substantial consummation of a Chapter 11 plan
or plans of reorganization of the Company: Mr. Thorner - $68,751; Mr. Benenati
- - $16,915; Mr. Moses - $18,151; and Mr. Schmitt - $14,852.
(6) Based on a fair market value of $9.250, the closing price of the
Company's Common Stock on May 11, 1995, the date of grant. These shares vest
at the rate of 20% a year, on or after the third business day following the
announcement of annual earnings for the year 1995 through 1999. The remaining
number of restricted shares and the aggregate value of such shares on January
30, 1998, the last trading day of fiscal 1997, was 15,000 shares valued at
$1,875. The aggregate market value is based on a fair market value of $.125,
the closing price of the Company's Common Stock on January 30, 1998. The
Common Stock will be canceled under the Company's filed plan of
reorganization.
(7) Represents a partial year beginning when Mr. Lynn joined the Company in
April, 1997.
(8) Includes $27,216 for relocation expenses related to Mr. Lynn's
employment as President and Chief Merchandising Officer of the Company and
reimbursement for tax liabilities related to such relocation expenses.
CORPORATE BONUS PLAN
In February 1997 the Company adopted, and in April 1997 the Bankruptcy
Court approved, the Corporate Bonus Plan (the "Corporate Bonus Plan"), which
replaced the Retention Bonus Plan. The Corporate Bonus Plan provides
incentives and rewards for (i) performance of key employees that meets or
exceeds expectations and (ii) attainment of threshold performance measurements
tied directly to the Company's annual business plan. The amount of the award
would increase as the Company's performance exceeds the business plan. In
addition, a discretionary fund in the amount of $500,000 has been established
to provide bonuses to (a) non-bonus eligible employees based upon performance
regardless of whether the Company achieves its target performance level and
(b) bonus eligible employees based on performance if the Company does not
achieve its target performance level.
Under the Corporate Bonus Plan, the Company had to obtain a minimum EBITDA
(as defined) of $28.1 million for fiscal 1997, net of the anticipated costs of
the Corporate Bonus Plan, in order for any employee to be eligible for an award
(except for the discretionary fund mentioned above). For each $5 million of
EBITDA improvement over the amount projected, the award increases by 25% of the
base award up to a maximum increase of 100% of the award. The Company achieved
an EBITDA of $28.5 million (net of the provision for the bonuses and excluding
gains on disposition of properties) for fiscal 1997 and paid total bonuses of
$3.9 million to approximately 286 employees under the Corporate Bonus Plan in
April 1998.
With respect to the Named Officers and certain other members of senior
management of the Company, one-quarter of the amount of any bonus payable
before such time as the Company has consummated a Chapter 11 plan of
reorganization is contingently payable, with interest, at the earlier of
the date of consummation of such plan, or the date of termination of
employment by the Company without cause, by the officer for good reason,
or on account of death or disability.
For fiscal 1998, the Board of Directors of the Company adopted threshold
performance measurements tied directly to the Company's 1998 business plan.
The Company must obtain a minimum EBITDA of $32 million, net of the anticipated
costs of the Corporate Bonus Plan, in order for any employee to be eligible for
100% of an award (except for the discretionary fund mentioned above). Partial
awards will be made if the Company achieves certain levels of EBITDA below $32
million. For each $5 million of EBITDA improvement over $32 million, the award
increases by 25% of the base award up to a maximum increase of 100% of the
award. In addition, any award may be increased or decreased by 25% based upon
an employee's performance.
ENTERPRISE APPRECIATION INCENTIVE PLAN
In August 1995 the Company adopted, and in November 1995 the Bankruptcy
Court approved, the Enterprise Appreciation Incentive Plan (the "Incentive
Plan"). The Incentive Plan is intended to provide an incentive to those key
executives whose management and individual performance will have a direct
impact on increasing the long-term value of the Company. The Incentive Plan is
also designed to encourage those executives to remain with the Company during
the Chapter 11 reorganization and to provide competitive long-term compensation
in the absence of a traditional equity-based plan. All members of the
Company's senior management are eligible to be selected by the Board of
Directors to participate in the Incentive Plan. No payments are expected to be
paid under the Incentive Plan, other than Mr. Thorner's annual nonrefundable
advances (see Employment Agreement with Peter Thorner below) because the
Company anticipates that the Incentive Plan will be canceled and replaced by
a different incentive plan under the presently proposed terms of the Company's
filed plan of reorganization.
Under the Incentive Plan, each participant has been granted an equity
incentive award payable on June 23, 2000 (the fifth anniversary of the Chapter
11 filing date) equal to the increase in the value of the Company (as
determined by appraisal) over the five years ending on June 23, 2000. Each
participant's interest in the Incentive Plan vests in equal installments over
the five-year period, subject to acceleration in certain situations. In the
event a participant terminates his or her employment without good reason or is
terminated with cause prior to June 23, 2000, then the participant forfeits his
or her rights under the Incentive Plan.
Awards under the Incentive Plan would be paid promptly following June 23,
2000 in the form of 60% cash and the balance in cash, notes and stock as
described thereunder. In no event will the total of all benefits payable under
the Incentive Plan exceed the lesser of $20,000,000 or 13% (6% was for the
Company's prior CEO, M. Cohen, and is not reallocable) of the total
appreciation in the value of the Company during the five-year period. The
extent of the participation by Mr. Thorner in the Incentive Plan is specified
in his employment agreement (see Employment Agreement with Peter Thorner
below). The maximum benefit of the other participants (exclusive of Mr.
Thorner) in the Incentive Plan will not exceed the lesser of $6,153,846 or 4%
of the total appreciation in the value of the Company during the five-year
period. The interest of other members of senior management who are
participating in the Incentive Plan will be designated by the Company's Chief
Executive Officer, subject to approval by the Board of Directors, on the date
of substantial consummation of the Company's plan of reorganization.
SEVERANCE PROGRAM
In August 1995 the Company adopted, and in November 1995 the Bankruptcy
Court approved, a severance program (the "Severance Program") that covers all
officers, Vice President and above, and certain other employees of the Company,
but not including Mr. Thorner who has a separate employment agreement (see
Employment Agreement with Peter Thorner below). If the employment of any
participant in the Severance Program is terminated other than for Cause (as
defined), death, disability or by the employee, then salary is guaranteed,
subject to mitigation by other employment, for up to eighteen months for the
President, Executive Vice Presidents and Senior Vice Presidents and twelve
months for Vice Presidents, and a lump-sum payment equal to six months of
salary is paid to certain other employees. Certain participants would also
receive a lump-sum payment equal to the amount of any incentive payment for the
fiscal year in which the termination occurred (the "Severance Lump Sum").
If the employment of any participant is terminated other than for Cause,
death, disability or retirement, or is terminated under certain other
circumstances, within one year following a change of control of the Company,
the employee will receive a lump-sum payment. The payment is the Severance
Lump Sum amount plus one and one-half times the annual salary in effect
immediately prior to the change of control (the "Annual Salary") for the
President and Senior Vice Presidents, one times the Annual Salary for Vice
Presidents and one-half times the Annual Salary for certain other employees.
For purposes of the Severance Program, a change of control includes but is not
limited to the acquisition by any person of beneficial ownership of 50% or more
of the Company's outstanding voting securities, or the failure of the
individuals who constituted the Board of Directors in August 1995 to continue
to constitute a majority of the Board unless the election of the new directors
has been approved by the incumbent directors. Consummation of the Company's
plan of reorganization will not constitute a change of control under the
Severance Program.
STOCK OPTION PLAN FOR KEY EMPLOYEES
There were no options granted to employees and no options were exercised
by any of the Named Officers during 1997. The following table sets forth
information regarding the fiscal year-end number and value of unexercised stock
options held by the Named Officers.
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year End Option Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-The Money
Options at Options at
Fiscal Year End Fiscal Year End(1)
Shares Acquired ----------------- ------------------
Name on Exercise Value Realized Exercisable Unex. Exercisable Unex.
- ----- --------------- -------------- --------- ------ ----------- -----
P. Thorner 0 $0 40,000 60,000 $0 $0
R.G. Lynn 0 $0 - - - -
R.W. Benenati 0 $0 - - - -
C.F. Moses, III 0 $0 - - - -
D.L. Schmitt 0 $0 - - - -
___________________
(1) Based on a fair market value of $.125, the closing price of the
Company's Common Stock on January 30, 1998, the last trading day of 1997.
RETIREMENT PLANS
The Company maintains a qualified retirement plan (the "Retirement Plan")
for its eligible employees. The retirement benefits under the Retirement Plan
are determined pursuant to a benefit formula that takes into account the
employee's Final Average Compensation (as defined in the Retirement Plan),
and/or years of service, up to 30 years. All benefits under the Retirement
Plan, except the minimum benefits, are subject to an integration offset based
upon the employee's Covered Compensation (as defined in the Retirement Plan) or
Final Average Compensation, if less. The Company also maintains a non-
qualified Supplemental Executive Retirement Plan (the "Supplemental Plan")
which, as of December 1, 1995, replaced the Excess Pension Plan which was
terminated. Under the Supplemental Plan an eligible employee, upon normal
retirement at age 65, may receive supplemental retirement benefits equal to 50%
of his Final Average Compensation, minus the sum of his Social Security
benefits and the annual benefit payable from the Retirement Plan. The benefits
from the Supplemental Plan are payable in the form of a single lump sum amount.
The following table shows the estimated annual retirement benefits which will
be payable to participating employees from the Retirement Plan and the
Supplemental Plan in the form of a straight life annuity upon normal retirement
at age 65 after selected periods of service. These benefits presented below do
not reflect the Social Security offset described above and do not take into
account any reduction for joint and survivor payments.
PENSION PLAN TABLE
Estimated Annual Retirement Benefits
Final Average 10 Years 15 or More
Compensation* of Service Years of Service
------------- ---------- ----------------
$200,000 $66,666 $100,000
$250,000 $83,333 $125,000
$300,000 $100,000 $150,000
$400,000 $133,333 $200,000
$500,000 $166,666 $250,000
$600,000 $200,000 $300,000
$700,000 $233,333 $350,000
$800,000 $266,666 $400,000
$900,000 $300,000 $450,000
$1,000,000 $333,333 $500,000
$1,100,000 $366,666 $550,000
$1,200,000 $400,000 $600,000
$1,300,000 $433,333 $650,000
*Federal law limits the amount of compensation that may be taken into account
in calendar year 1997 in calculating benefits under the Retirement Plan to
$160,000 and limits the annual benefits that may be payable in calendar year
1997 to $125,000. These tax limits do not apply to benefits payable from the
Supplemental Plan.
Compensation recognized under the Retirement Plan is the participant's
annualized rate of base salary. Compensation under the Supplemental Retirement
Plan is the participant's base salary and bonus. The calculation of retirement
benefits under both plans is generally based upon the participant's highest
annual compensation averaged over three years. As of December 31, 1997, the
years of credited service for the Retirement Plan for Messrs. Thorner, Lynn,
Benenati, Moses, and Schmitt were 3, 1, 3, 3, and 3, respectively. As of
December 31, 1997, the years of credited service for the Supplemental Plan for
Messrs. Thorner, Lynn, Benenati, Moses, and Schmitt were 8, 1, 3, 3 and 3,
respectively.
COMPENSATION OF DIRECTORS
Each director who is not an employee of the Company receives an annual
retainer of $30,000. Directors who are also employees of the Company do not
receive any remuneration for serving as directors.
EMPLOYMENT AGREEMENT WITH PETER THORNER
The Company has entered into a three-year employment agreement with Mr.
Thorner, commencing as of October 26, 1995 and amended as of November 7, 1997.
Effective December 24, 1996,
concurrent with his then appointment as Chairman, President and Chief
Executive Officer, Mr. Thorner received a minimum annual base salary of
$725,000 and an annual incentive award of 55% of his base salary. In
March 1998, the Board of Directors of the Company approved an increase in
Mr. Thorner's annual base salary to $850,000 effective February 1, 1998.
While in Chapter 11, the annual incentive award is payable pursuant to
the Corporate Bonus Plan. The annual incentive award could be increased to
110% of Mr. Thorner's base salary if certain maximum performance goals are met
under the Corporate Bonus Plan. Under the employment agreement, one-quarter of
the amount of any annual incentive bonus payable before the consummation of a
Chapter 11 plan of reorganization would be deferred, with interest, until the
earliest of the date of consummation of the plan or the date of termination of
employment by the Company without Cause (as defined), by the officer for Good
Reason (as defined) or on account of death or disability.
In addition, the employment agreement provides for the payment by the
Company of an equity incentive bonus (payable in cash, debt and equity
securities) pursuant to the Incentive Plan determined by reference to the
increase in value of the Company from the date of the bankruptcy filing to the
fifth anniversary of the employment agreement, subject generally to vesting
over five years. Under the employment agreement, Mr. Thorner is entitled to
receive an annual nonrefundable advance of $150,000 towards his benefits under
the Incentive Plan while he remains employed with the Company. Mr. Thorner's
equity incentive bonus under the Incentive Plan would be at least $1,000,000
but would not exceed the lesser of $4,615,385 or 3% of the appreciation in
value of the Company. No payments, other than the annual nonrefundable
advances, are expected to be paid under the Incentive Plan because the Company
anticipates that the Incentive Plan will be canceled and replaced by a
different incentive plan under the presently proposed terms of the Company's
filed plan of reorganization. The agreement also provides for certain
retirement benefits, for reimbursement of certain legal, annual financial
counseling and relocation expenses and participation in the Company's employee
benefit plans. The employment agreement also provides that in the event of Mr.
Thorner's termination of employment by the Company (including following a
change in control of the Company) without Cause or Good Reason, Mr. Thorner
would generally be entitled to all payments and benefits called for under the
agreement for the remainder of its term.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Based on Schedule 13Ds and 13Gs filed with the Securities and Exchange
Commission, the Company believes that no person owns beneficially more than 5%
of the Company's outstanding Common Stock as of April 3, 1998.
The following table sets forth certain information regarding the
beneficial ownership of the Company's Common Stock as of April 27, 1998 by (i)
each of the Company's directors, (ii) the Named Officers and (iii) all
directors and executive officers as a group.
Name of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Shares Outstanding
- ----------------- -------------------- ------------------
Robert W. Benenati - -
Jack E. Bush - -
John A. Curry (1) 15,000 *
John M. Friedman, Jr. (1) 10,000 *
Robert G. Lynn - -
Cornelius F. Moses, III - -
Patricia M. Pomerleau (1) 15,000 *
Sheldon Rutstein (1) 15,000 *
Willis G. Ryckman (1) 5,000 *
David L. Schmitt - -
Peter Thorner (2) 79,689 *
All directors and executive
officers as a group
(nineteen people) (3) 158,536 1.4%
____________________
* Less than 1% of the outstanding shares of Common Stock.
(1) The entire amount of the Company's Common Stock set forth are shares of
Common Stock subject to options that are exercisable within 60 days of
April 27, 1998.
(2) Includes 60,000 shares of Common Stock subject to options held by Mr.
Thorner that are exercisable within 60 days of April 27, 1998.
(3) Includes a total of 138,140 shares of Common Stock subject to options
held by the directors and executive officers that are exercisable within
60 days of April 27, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In February 1998, the Company made a loan in the amount of $100,000 to
Thomas N. Smith, Senior Vice President, Stores in connection with his
relocation. This loan is interest-free and payable on or prior to January 30,
1999. Any bonus payments payable to Mr. Smith prior to January 30, 1999 shall
be used to repay the loan in part.
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Reports of Independent Auditors.
Consolidated statements of operations for the years ended January 31,
1998, February 1, 1997 and February 3, 1996.
Consolidated balance sheets as of January 31, 1998 and February 1,
1997.
Consolidated statements of cash flows for the years ended January 31,
1998, February 1, 1997 and February 3, 1996.
Consolidated statements of stockholders' equity (deficiency) for the
years ended January 31, 1998, February 1, 1997 and February 3, 1996.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All financial statement schedules are omitted, as the required
information is not applicable or is included in the consolidated
financial statements or related notes.
3. Exhibits
The exhibits required to be filed by item 601 of Regulation S-K are
listed in the accompanying Exhibit Index.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the 13 weeks
ended January 31, 1998:
Date of Report Date of Filing Item Number Description
-------------- -------------- ----------- -----------
November 24, 1997 November 26, 1997 5 Disclosure of
new financing
facility
January 9, 1998 January 12, 1998 5 Reporting of
third quarter
results
compared to
plan
BRADLEES, INC.
AND SUBSIDIARIES
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 in the City of
Braintree, Commonwealth of Massachusetts on April 29, 1998.
BRADLEES, INC.
By: /s/ PETER THORNER By: /s/ CORNELIUS F. MOSES, III
----------------------------- ------------------------------
Peter Thorner Cornelius F. Moses, III
Chairmen and Chief Senior Vice President,
Executive Officer Chief Financial Officer
(Principal Executive Officer) (Principal Financial and
Accounting Officer)
By: /s/ ROBERT G. LYNN By: /s/ RICK C. WELKER
----------------------------- -----------------------------
Robert G. Lynn Rick C. Welker
President and Director Vice President and Controller
(Chief Operating Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants in the capacities and on the date indicated.
Signature Title Date
- ---------------------- ---------------- --------------
/s/ JACK E. BUSH Director April 29, 1998
- ------------------
Jack E. Bush
/s/ JOHN A. CURRY Director April 29, 1998
- ------------------
John A. Curry
/s/ JOHN FRIEDMAN, JR. Director April 29, 1998
- ----------------------
John Friedman, Jr.
/s/ PATRICIA M. POMERLEAU Director April 29, 1998
- -------------------------
Patricia M. Pomerleau
/s/ SHELDON RUTSTEIN Director April 29, 1998
- --------------------
Sheldon Rutstein
/s/ WILLIS G. RYCKMAN Director April 29, 1998
- ---------------------
Willis G. Ryckman
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------- ----------- -------------
3.1* Restated Articles of Organization of Bradlees,
Inc., are incorporated by reference from Amendment
No. 4 to the Company's Form S-1 Registration No.
33-47720, Part II, Item 16, Exhibit 3.1, as filed
with the Securities and Exchange Commission on
June 16, 1992.
3.2* By-Laws of Bradlees, Inc., are incorporated by
reference from the Company's Form S-4 Registration
No. 33-60068, Part II, Item 21, Exhibit 3.2, as
filed with the Securities and Exchange Commission
on March 26, 1993.
4.1* Indenture between Bradlees, Inc. and Fleet Bank of
Massachusetts, N.A., as Trustee, relating to the
2003 Notes (including form of 2003 Note) is
incorporated by reference from the Company's Form
S-4 Registration No. 33-60068, Part II, Item 21,
Exhibit 4.1, as filed with the Securities and Exchange
Commission on March 26, 1993.
4.2* Form of Indenture between Bradlees, Inc. and Fleet
Bank of Massachusetts, N.A., as Trustee, relating
to the Exchange Notes (including form of Exchange
Note) is incorporated by reference from the Company's
Form S-4 Registration No. 33-60068, Part II, Item 21,
Exhibit 4.2, as filed with the Securities and Exchange
Commission on March 26, 1993.
4.3* Indenture, dated as of August 1, 1992, between
Bradlees, Inc. and State Street Bank and Trust
Company, as Trustee, relating to the 2002 Notes is
incorporated by reference from Amendment No. 1 to the
Company's Form S-1, Registration No. 33-49436, Part II,
Item 16, Exhibit 4.1, as filed with the Securities
and Exchange Commission on July 29, 1992.
10.1* Credit Agreement, dated as of March 3, 1993,
among Bradlees, Inc., various lending institutions
and Bankers Trust Company as Agent, is incorporated by
reference from the Company's Form S-4, Registration
No. 33-60068, Part II, Item 21, Exhibit 10.2, as
filed with the Securities and Exchange Commission on
March 26, 1993.
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------- ----------- -------------
10.2* First Amendment to Credit Agreement, dated as of
April 26, 1993, among Bradlees, Inc., various
lending institutions and Bankers Trust Company as
Agent, is incorporated by reference from Amendment
No. 2 to the Company's Form S-4, Registration No.
3-60068, Part II, Item 21, Exhibit 10.14, as filed
with the Securities and Exchange Commission on May
21, 1993.
10.3* Second Amendment to Credit Agreement, dated as of
June 24, 1993, among Bradlees, Inc., various lending
institutions and Bankers Trust Company as Agent, is
incorporated by reference from the Company's Form
10-Q for the quarterly period ended May 22, 1993,
Part II, Item 6, Exhibit 10, as filed with the
Securities and Exchange Commission on July 2, 1993.
10.4* Third Amendment to Credit Agreement, dated as of
September 20, 1993, among Bradlees, Inc., various
lending institutions and Bankers Trust Company as
Agent, is incorporated by reference from the
Company's Form 10-Q for the quarterly period ended
November 6, 1993, Part II, Item 6, Exhibit 10,
as filed with the Securities and Exchange Commission
on December 20, 1993.
10.5* Fourth Amendment to Credit Agreement, dated as
of September 15, 1994, among Bradlees, Inc., various
lending institutions and Bankers Trust Company as
Agent, is incorporated by reference from the
Company's Form 10-Q for the quarterly period ended
August 13, 1994, Part II, Item 6, Exhibit 10, as
filed with the Securities and Exchange Commission on
September 27, 1994.
10.6* Fifth Amendment to Credit Agreement, dated as of
April 17, 1995, among Bradlees, Inc., various
lending institutions and Bankers Trust Company as
Agent, is incorporated by reference from the Company's
Form 10-K for the fiscal year ended January 28, 1995,
Part IV, Item 14(a)(3), Exhibit 10.6, as filed with the
Securities and Exchange Commission on April 28, 1995.
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------- ----------- -------------
10.7* Stock Purchase Agreement among the Company, Bradlees
Administrative Co., Inc., Stop & Shop and the
Bradlees Holding Companies is incorporated by
reference from Amendment No. 7 to the Company's
Form S-1, Registration No. 33-47720, Part II,
Item 16, Exhibit 10.2, as filed with the Securities
and Exchange Commission on July 1, 1992.
10.8* Restricted Stock Plan is incorporated by reference
from Amendment No. 6 to the Company's Form S-1,
Registration No. 33-47720, Part II, Item 16,
Exhibit 10.3, as filed with the Securities and
Exchange Commission on June 29, 1992.
10.9* Amendment No. 1 to Restricted Stock Plan is
incorporated by reference from the Company's
Form 10-Q for the quarterly period ended
November 5, 1994, Part II, Item 6, Exhibit 10.7,
as filed with the Securities and Exchange Commission
on December 20, 1994.
10.10* Key Employee Stock Option Plan is incorporated
by reference from Amendment No. 6 to the Company's
Form S-1, Registration No. 33-47720, Part II,
Item 16, Exhibit 10.7, as filed with the Securities
and Exchange Commission on June 29, 1992.
10.11* Amendment No. 1 to Key Employee Stock Option Plan is
incorporated by reference from the Company's Form
10-Q for the quarterly period ended November 5, 1994,
Part II, Item 6, Exhibit 10.8, as filed with the
Securities and Exchange Commission on December 20, 1994.
10.12* Form of Restricted Stock Agreement is incorporated
by reference from Amendment No. 6 to the Company's
Form S-1, Registration No. 33-47720, Part II, Item 16,
Exhibit 10.8, as filed with the Securities and Exchange
Commission on June 29, 1992.
10.13* 1993 Non-Employee Directors' Stock Option Plan is
incorporated by reference from the Company's Form 10-Q
for the quarterly period ended August 14, 1993,
Part II, Item 6, Exhibit 10, as filed with the
Securities and Exchange Commission on September 27, 1993.
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------- ----------- -------------
10.14* Transitional Reimbursement Agreement is incorporated
by reference from Amendment No. 3 to the Company's
Form S-1, Registration No. 33-47720, Part II,
Item 16, Exhibit 10.10, as filed with the Securities
and Exchange Commission on June 16, 1992.
10.15* Management Information Reimbursement Agreement is
incorporated by reference from Amendment No. 3 to
the Company's Form S-1, Registration No. 33-47720,
Part II, Item 16, Exhibit 10.11, as filed with the
Securities and Exchange Commission on June 16, 1992.
10.16* Product Supply Agreement is incorporated by reference
from Amendment No. 3 to the Company's Form S-1,
Registration No. 33-47720, Part II, Item 16,
Exhibit 10.12 as filed with the Securities
and Exchange Commission on June 16, 1992.
10.17* Trailer Option Agreement is incorporated by
reference from Amendment No. 3 to the Company's
Form S-1, Registration No. 33-47720, Part II, Item 16,
Exhibit 10.13, as filed with the Securities and
Exchange Commission on June 16, 1992.
10.18* Letter Agreement, dated March 28, 1995, amending
the Product Supply Agreement, Transitional
Reimbursement Agreement and Management Information
Reimbursement Agreement is incorporated by reference
from the Company's Form 10-K for the fiscal year
ended February 1, 1997, Part IV, Item 14(a)(3),
Exhibit 10.18, as filed with the Securities and
Exchange Commission on May 2, 1997.
10.19* Amendment No. 1, dated as of October 31, 1994,
to Management Information Reimbursement Agreement
is incorporated by reference from the Company's
Form 10-K for the fiscal year ended February 1, 1997,
Part IV, Item 14(a)(3), Exhibit 10.19, as filed with
the Securities and Exchange Commission on May 2, 1997.
10.20* Amendment No. 2, dated as of August 11, 1996, to
Management Information Reimbursement Agreement is
incorporated by reference from the Company's Form 10-K
for the fiscal year ended February 1, 1997, Part IV,
Item 14(a)(3), Exhibit 10.20, as filed with the
Securities and Exchange Commission on May 2, 1997.
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------- ----------- -------------
10.21* Employment Agreement dated as of October 18, 1994
Among Bradlees Stores, Inc., Bradlees, Inc. and
Barry A. Berman is incorporated by reference from
the Company's Form 10-Q for the quarterly period
ended November 5, 1994, Part II, Item 6, Exhibit 10.1,
as filed with the Securities and Exchange Commission
on December 20, 1994.
10.22* Amended and Restated Employment Agreement dated as
of October 26, 1995 between and among Bradlees, Inc.,
Bradlees Stores, Inc. and Peter Thorner is incorporated
by reference from the Company's Form 10-Q for the
quarterly period ended October 28, 1995, Part II,
Item 6, Exhibit 10.2, as filed with the Securities
and Exchange Commission on December 12, 1995.
10.23 Amendment to Amended and Restated Employment Agreement,
dated as of November 7, 1997, between and among
Bradlees, Inc., Bradlees Stores, Inc. and Peter Thorner.
10.25* Bradlees, Inc. and Bradlees Stores, Inc. Enterprise
Appreciation Incentive Plan Effective June 23, 1995 is
incorporated by reference from the Company's Form 10-Q
for the quarterly period ended October 28, 1995, Part II,
Item 6, Exhibit 10.5, as filed with the Securities and
Exchange Commission on December 12, 1995.
10.26* Debtor-in-Possession Revolving Credit and Guaranty
Agreement, dated as of June 23, 1995, between Chemical
Bank, as Agent, and Bradlees Stores, Inc., a
Debtor-in-Possession, with Bradlees Administrative
Co., Inc. and the Subsidiaries of the Borrower as
Guarantors, is incorporated by reference from the
Company's Form 8-K dated July 26, 1995, Item 7,
Exhibit 10.1, as filed with the Securities and
Exchange Commission on July 27, 1995.
10.27* First Amendment, dated as of June 30, 1995, to
Debtor-in-Possession Revolving Credit and Guaranty
Agreement, is incorporated by reference from the
Company's Form 8-K dated July 26, 1995, Item 7,
Exhibit 10.2, as filed with the Securities and
Exchange Commission on July 27, 1995.
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------- ----------- -------------
10.28* Second Amendment, dated as of August 9, 1995, to
Debtor-in-Possession Revolving Credit and Guaranty
Agreement, is incorporated by reference from the
Company's Form 10-Q for the quarterly period ended
August 12, 1995, Part II, Item 6, Exhibit 10.3, as
filed with the Securities and Exchange Commission
on September 26, 1995.
10.29* Third Amendment, dated as of March 15, 1996, to
Debtor-in-Possession Revolving Credit and Guaranty
Agreement, dated as of June 23, 1995, between
Chemical Bank, as Agent and Societe Generale, as
Co-Agent, and Bradlees Stores, Inc., a Debtor-in-
Possession, with Bradlees Administrative Co., Inc.
and the Subsidiaries of the Borrower as Guarantors,
is incorporated by reference from the Company's
Form 8-K dated March 29, 1996, Item 7, Exhibit 10.4,
as filed with the Securities and Exchange Commission
on April 1, 1996.
10.30* Fourth Amendment, dated as of September 13, 1996, to
Debtor-in-Possession Revolving Credit and Guaranty
Agreement, dated as of June 23, 1995, between
The Chase Manhattan Bank, as Agent and Societe Generale,
as Co-Agent, and Bradlees Stores, Inc., a Debtor-in-
Possession, with Bradlees Administrative Co., Inc. and
the Subsidiaries of the Borrower as Guarantors, is
incorporated by reference from the Company's Form 10-Q
for the quarterly period ended August 3, 1996, Part II,
Item 6, Exhibit 10.5, as filed with the Securities and
Exchange Commission on September 17, 1996.
10.31* Fifth Amendment, dated as of January 13, 1997, to
Debtor-in-Possession Revolving Credit and Guaranty
Agreement, is incorporated by reference from the
Company's Form 8-K dated January 28, 1997, Item 7,
Exhibit 10.6, as filed with the Securities and Exchange
Commission on January 29, 1997.
10.32* Sixth Amendment, dated as of March 20, 1997, to Debtor-in-
Possession Revolving Credit and Guaranty Agreement is
incorporated by reference from the Company's Form 10-K,
for the fiscal year ended February 1, 1997, Part IV,
Item 14(a)(3), Exhibit 10.37, as filed with the Securities
and Exchange Commission on May 2, 1997.
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------- ----------- -------------
10.33* First Amendment, dated as of October 16, 1997,
to Amended and Restated Revolving Credit and
Guaranty Agreement, dated as of June 23, 1995 and
Amended and Restated as of April 10, 1997, between
The Chase Manhattan Bank, as Agent, and Bradlees
Stores, Inc., as Debtor-in-Possession and the
Subsidiaries of the Borrower as Guarantors, is
incorporated by reference from the Company's Form
8-K dated November 24, 1997, Item 7, Exhibit 10, as
filed with the Securities and Exchange Commission on
November 26, 1997.
10.34* Bradlees, Inc. and Bradlees Stores, Inc. Supplemental
Executive Retirement Plan Effective December 1, 1995
is incorporated by reference from the Company's
Form 10-K for the year ended February 3, 1996,
Part IV, Item 14(a)(3), Exhibit 10.32, as filed with
the Securities and Exchange Commission on May 3, 1996.
10.35* Form of Senior Vice President Severance Agreement is
incorporated by reference from the Company's Form 10-K
for the year ended February 3, 1996, Part IV,
Item 14(a)(3), Exhibit 10.33, as filed with the
Securities and Exchange Commission on May 3, 1996.
10.36* Form of Revised Senior Vice President Severance Agreement
is incorporated by reference from the Company's Form 10-K
for the fiscal year ended February 1, 1997, Part IV,
Item 14(a)(3), Exhibit 10.40, as filed with the
Securities and Exchange Commission on May 2, 1997.
10.37* Form of Revised Senior Vice President Severance Agreement
is incorporated by reference from the Company's Form 10-Q
for the quarterly period ended May 3, 1997, Part II,
Item 6, Exhibit 10, as filed with the Securities and
Exchange Commission on June 6, 1997.
10.38* Form of President Severance Agreement is incorporated by
reference from the Company's Form 10-K for the fiscal year
ended February 1, 1997, Part IV, Item 14(a)(3),
Exhibit 10.41, as filed with the Securities and Exchange
Commission on May 2, 1997.
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------ ----------- -------------
10.39* Corporate Bonus Plan for Fiscal Year Ended January 31,
1998 and Subsequent Fiscal Years is incorporated by
reference from the Company's Form 10-Q for the
quarterly period ended August 2, 1997, Part II,
Item 6, Exhibit 10, as filed with the Securities and
Exchange Commission on September 16, 1997.
10.40* Stipulation and Order, dated October 6, 1997, Among
Bradlees Stores, Inc., Bradlees, Inc. and Their
Affiliates and Mark A. Cohen Settling Claims Arising
Under Employment Contract with Mark A. Cohen and Bar
Order, are incorporated by reference from the Company's
Form 10-Q for the quarterly period ended November 1, 1997,
Part II, Item 6, Exhibit 10, as filed with the Securities
and Exchange Commission on December 16, 1997.
10.41* Revolving Credit and Guaranty Agreement, dated as of
December 23, 1997, between BankBoston, N.A. as
Administrative Agent and as Issuing Bank, and the
borrower, Bradlees Stores, Inc., a Debtor-in-Possession,
with Bradlees, Inc., Bradlees Administrative Co., Inc.
and the Subsidiaries of the Borrower as Guarantors, is
incorporated by reference from the Company's Form 8-K
dated January 9, 1998, Item 7, Exhibit 10.1, as filed
with the Securities and Exchange Commission on
January 12, 1998.
10.42* Form of Revolving Credit and Guaranty Agreement between
BankBoston, N.A., as Administrative Agent and as
Issuing Bank, and the reorganized Bradlees Stores, Inc.
as contemplated in a plan of reorganization, is
incorporated by reference from the Company's Form 8-K
dated January 9, 1998, Item 7, Exhibit 10.1, as filed
with the Securities and Exchange Commission on
January 12, 1998.
10.43 Consent to Modification of Commitment Letter, dated
April 7, 1998, regarding Form of Revolving Credit and
Guaranty Agreement between BankBoston, N.A., as
Administrative Agent and as Issuing Bank, and the
reorganized Bradlees Stores, Inc. as contemplated in
a plan of reorganization.
21* Subsidiaries of the Registrant is incorporated by
reference from the Company's Form 10-K for the fiscal
year ended January 28, 1995, Part IV, Item 14 (a)(3),
Exhibit 21, as filed with the Securities and Exchange
Commission on April 28, 1995.
INDEX TO EXHIBITS
-----------------
Exhibit Sequentially
No. Description Numbered Page
------- ----------- -------------
23.1 Consent of Arthur Andersen LLP, Independent Auditors.
23.2 Consent of Deloitte & Touche LLP, Independent Auditors.
*Previously filed.
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Bradlees, Inc. Debtor-in-Possession:
We have audited the accompanying consolidated balance sheet of Bradlees,
Inc. and subsidiaries, Debtor-in-Possession (the "Company"), as of
January 31, 1998, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for the fiscal year then
ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Bradlees, Inc.
and subsidiaries as of January 31, 1998, and the results of its
operations and its cash flows for the fiscal year then ended in
conformity with generally accepted accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Notes 1 and 3 to the consolidated financial statements 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
at January 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) acceptance
of a Plan of Reorganization by the Company's creditors with confirmation
by the Bankruptcy Court, (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 3.
Management's plans in regard to these matters are also discussed in Note 1
to the financial statements.
The eventual outcome of these matters discussed in the previous paragraph
is not presently determinable. The 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 that
might be necessary should the Company be unable to continue as a going
concern.
New York, New York /s/ ARTHUR ANDERSEN LLP
March 17, 1998 -----------------------
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Bradlees, Inc., Debtor-in-Possession:
We have audited the accompanying consolidated balance sheets of Bradlees,
Inc. and subsidiaries, Debtor-in-Possession (the "Company"), as of
February 1, 1997, and the related consolidated statements of operations,
stockholders' equity (deficiency), and cash flows for the years ended
February 1, 1997 and February 3, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Bradlees, Inc. and
subsidiaries at February 1, 1997 and the results of its operations and
its cash flows for the years ended February 1, 1997 and February 3, 1996
in conformity with generally accepted accounting principles.
As discussed in Notes 1 and 3, the Company has filed for reorganization
under Chapter 11 of the Federal Bankruptcy Code. The accompanying
consolidated financial statements do not purport to reflect or provide for
the consequences of the bankruptcy proceedings. In particular, such
consolidated financial statements do not purport to show (a) as to assets,
their realizable value on a liquidation basis or their availability to
satisfy liabilities; (b) as to prepetition liabilities, the amounts that
may be allowed for claims or contingencies, or the status and priority
thereof; (c) as to stockholder accounts, the effect of any changes that
may be made in the capitalization of the Company; or (d) as to operations,
the effect of any changes that may be made in its business.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed
in Note 1 to the consolidated financial statements, the Company's 1996
and 1995 losses from operations and stockholders' deficiency raise
substantial doubt about the Company's ability to continue as a going
concern. Management's plans concerning these matters are also described
in Note 1. The consolidated financial statements do not include
adjustments that might result from the outcome of this uncertainty.
Boston, Massachusetts /s/ DELOITTE & TOUCHE LLP
March 20, 1997 -------------------------
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
52 Weeks ended 52 Weeks ended 53 Weeks ended
1/31/98 2/1/97 2/3/96
---------- ---------- ----------
Total sales $1,392,250 $1,619,444 $1,840,926
Leased sales 47,806 57,726 60,158
Net sales 1,344,444 1,561,718 1,780,768
Cost of goods sold 948,087 1,127,651 1,289,077
---------- ---------- ----------
Gross margin 396,357 434,067 491,691
Leased department and
other operating income 12,151 13,734 15,130
---------- ---------- ----------
408,508 447,801 506,821
Selling, store operating,
administrative and
distribution expenses 382,910 504,030 572,843
Depreciation and
amortization expense 36,244 42,200 54,387
Gain on disposition of
properties (5,425) (1,739) -
Interest and debt expense 16,584 11,495 27,176
Impairment of long-lived
assets - 40,782 99,358
Reorganization items 752 69,792 65,003
---------- ---------- ----------
Loss before income taxes (22,557) (218,759) (311,946)
Income tax benefit - - (104,533)
---------- ---------- ----------
Net loss ($22,557) ($218,759) ($207,413)
========= =========== ==========
Net loss per share
- - basic and diluted ($1.98) ($19.17) ($18.17)
========= =========== ==========
Weighted average shares
outstanding (in thousands)-
basic and diluted 11,365 11,412 11,416
========= =========== ==========
See accompanying Notes to Consolidated Financial Statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
January 31,1998 February 1,1997
Assets --------------- ---------------
Current assets:
Unrestricted cash and cash equivalents $10,949 $10,025
Restricted cash and cash equivalents 16,760 9,126
------ -------
Total cash and cash equivalents 27,709 19,151
Accounts receivable 10,013 8,240
Inventories 238,629 236,920
Prepaid expenses 8,733 8,466
Assets held for sale 7,754 8,419
-------- -------
Total current assets 292,838 281,196
-------- --------
Property, plant and equipment, net 150,484 163,641
-------- --------
Other assets:
Lease interests, net 142,454 150,229
Assets held for sale 4,000 5,250
Other, net 5,390 3,884
-------- --------
Total other assets 151,844 159,363
-------- --------
Total assets $595,166 $604,200
======== ========
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable $124,361 $115,315
Accrued employee comp. & benefits 17,401 13,317
Self-insurance reserves 6,564 7,086
Other accrued expenses 13,115 32,607
Short-term debt 84,208 42,500
Current portion of capital
lease obligations 1,038 1,722
-------- --------
Total current liabilities 246,687 212,547
-------- --------
Obligations under capital leases 27,073 33,296
Deferred income taxes 8,581 8,581
Self-insurance reserves 13,328 14,386
Other long-term liabilities 23,342 27,642
Liabilities subject to settlement under
the reorganization case 562,105 571,041
Commitments and contingencies (Note 13)
Stockholders' equity (deficiency):
Common stock - 11,312,154 shares outstanding
(11,394,433 at 2/1/97)
Par value 115 115
Additional paid-in-capital 137,821 137,951
Unearned compensation - (167)
Accumulated deficit (423,082) (400,525)
Treasury stock, at cost-155,575 shares
(73,296 at 2/1/97) (804) (667)
-------- --------
Total stockholders' deficiency (285,950) (263,293)
-------- --------
Total liabilities and
stockholders' deficiency $595,166 $604,200
======== ========
See accompanying Notes to Consolidated Financial Statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
52 Weeks ended 52 Weeks ended 53 Weeks ended
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
Cash Flows From
Operating Act.:
Net loss $(22,557) $(218,759) $(207,413)
Adjustments to
reconcile net loss
to cash provided (used)
by operating activities:
Depr. and amortization 36,244 42,200 54,387
Impairment of
long-lived assets - 40,782 99,358
Amortization of
deferred financing costs 3,750 2,154 1,475
Stock compensation - - 701
Deferred income taxes - - (79,957)
Reorganization items 752 69,792 65,003
Gain on disp. of properties (5,425) (1,739) -
Increase (decrease) in cash
resulting from changes in:
Accounts receivable (1,773) 2,296 6,819
Inventories (1,709) 44,293 16,848
Prepaid expenses (357) 1,542 372
Refundable income taxes - 24,576 (24,576)
Accounts payable 9,046 (32,319) 96,431
Accrued expenses (6,185) 580 3,401
Other, net (4,547) (1,664) (1,359)
------- ------- -------
Net cash provided (used)
by operating activities
before reorg. items 7,239 (26,266) 31,490
------- ------- -------
Operating cash flows from
reorganization items:
Interest income received 420 1,445 2,965
Bankruptcy-related
professional fees paid (9,626) (10,756) (2,250)
Other reorg. expenses
paid, net (7,157) (17,572) (3,084)
------- ------- -------
Net cash used by
reorganization items (16,363) (26,883) (2,369)
------- ------- -------
Net cash (used) provided
by operating activities (9,124) (53,149) 29,121
------- ------- -------
Cash Flows from
Investing Activities:
Capital expend., net (19,568) (27,527) (37,029)
Increase in restricted
cash and cash equivalents (7,634) (7,932) (1,194)
------- ------- -------
Net cash used in
investing activities (27,202) (35,459) (38,223)
------- ------- -------
Cash Flows From
Financing Activities:
Principal payments
on long-term debt (1,657) (2,707) (5,794)
Payments of liabilities
subject to settlement (6,467) (5,327) (11,764)
Proceeds from
sales of assets 7,967 1,739 -
Borrowings under
pre-petition revolving
loan facility - - 72,500
Borrowings under
financing obligation - - 12,801
Borrowings under
DIP facilities 41,708 42,500 -
Deferred financing costs (4,301) (584) (4,047)
Other common stock
activity, net _ - (18)
Dividends paid _ _ 1,712
------ ------ ------
Net cash provided
by financing activities 37,250 35,621 601,966
------ ------ -------
Net incr.(decr.) in
unrestricted cash and
cash equivalents 924 (52,987) 52,864
Unrestricted cash
and cash equivalents:
Beginning of period 10,025 63,012 10,148
------- ------ ------
End of period $10,949 $10,025 $63,012
======= ======= =======
Supplemental disclosure
of cash flow information:
Cash paid for interest $12,807 $9,991 $16,382
Cash received for
income taxes $109 $25,046 $2,869
Supplemental schedule of
noncash (investing and
financial) activities:
Capital lease
obligations incurred $ - $ - $8,398
See accompanying Notes to Consolidated Financial Statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-In-Possession)
(Dollars in thousands except per share amounts)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Retained
Earnings Stockhold.
Com Stock Add'l Unearned (Accum Treasury Equity
Shares Amt Pd-in-Cap. Comp Deficit) Stk (Defic.)
--------- --- ---------- -------- -------- -------- ---------
Balance at
1/28/95 11,385,254 $113 $138,077 $(1,697) $27,359 $(420) $163,432
Restricted
st.- grant 25,000 1 232 (232) - - 1
Restricted
st.-reval. - - (628) 628 - - -
Restricted
st.-forfeit.(13,139) - - 79 - (79) -
Restricted
st.-amort. - - - 429 - - 429
Def. salary
option grant 27,000 1 270 - - - 271
Other treas.
st. act.,net (7,459) - - - - (18) (18)
Net loss - - - - (207,413) - (207,413)
Dividends
($0.15/share) - - - - (1,712) - (1,712)
-----------------------------------------------------------------
Balance at
2/3/96 11,416,656 115 137,951 (793) (181,766) (517) (45,010)
Restricted
st.-forfeit.(22,223) - - 150 - (150) -
Restricted
st.-amort. - - - 476 - - 476
Net loss - - - - (218,759) - (218,759)
--------------------------------------------------------------------
Balance at
2/1/97 11,394,433 115 137,951 (167) (400,525) (667) (263,293)
Restricted
st.-forfeit.(82,279) - (130) 137 - (137) (130)
Restricted
st.-amort. - - - 30 - - 30
Net loss - - - - (22,557) - (22,557)
--------------------------------------------------------------------
Balance at
1/31/98 11,312,154 $115 $137,821 - $(423,082) $(804)$(285,950)
====================================================================
See accompanying Notes to Consolidated Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bradlees, Inc. and Subsidiaries
(Operating as Debtor-In-Possession)
1. BASIS OF PRESENTATION
---------------------
Bradlees, Inc. and its subsidiaries, including Bradlees Stores, Inc.
(collectively "Bradlees" or the "Company") is a discount department store
retailer operating in the Northeast United States. The Company's
consolidated financial statements 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").
Bradlees acquired the Bradlees Business from The Stop & Shop Companies,
Inc. ("Stop & Shop") with the proceeds from a July 10, 1992 initial public
offering of 11,018,625 shares of its common stock ("the Acquisition").
The Bradlees Business was comprised of Bradlees New England Holdings, Inc.,
Bradlees New York Holdings, Inc. and Stop & Shop Holdings, Inc. ("Holdings")
and Holdings' wholly-owned subsidiary, Bradlees New Jersey, Inc. and each of
their subsidiaries. Certain real estate subsidiaries of the Bradlees Business
were retained by Stop & Shop and the properties owned by these subsidiaries
were leased to Bradlees. The Acquisition was accounted for using the purchase
method of accounting.
The Company's ability to continue as a going concern is dependent upon
the confirmation of a plan of reorganization by the Bankruptcy Court, the
ability to maintain compliance with debt covenants under the New Financing
Facility (Note 6), achievement of profitable operations, and the resolution
of the uncertainties of the reorganization case discussed in Note 3.
A confirmed plan of reorganization could materially change the amounts
reported in the accompanying consolidated financial statements. The
accompanying consolidated financial statements do not include any adjustments
relating to the recoverability of the value of recorded asset amounts or the
amounts and classification of liabilities that might be necessary as a
consequence of a confirmed plan of reorganization. The Company incurred
significant operating losses in 1996 and 1995.
The Company made the following key modifications to its business
strategy during fiscal 1997 to enhance profitability and improve customer
service: (a) reintroduced lower opening price points in a comprehensive
variety of merchandise categories to enhance value and increase customer
traffic; (b) reduced costly promotional events and thereby eliminated or
reduced the likelihood of substandard profit margins; (c) reintroduced
certain basic convenience and commodity products that are typical of
assortments carried by discount retailers; (d) reinstituted a layaway
program, while controlling promotions of the Bradlees' credit card, and
installed new in-store directional and departmental signage; (e) revised
the Company's markdown policy based on product rate of sale; (f) modified
weekly ad circulars to achieve more item-intensive and price-point oriented
ad offerings; (g) introduced both a "Certified Value" program that highlights
certain key recognizable items at competitive everyday prices and a "Wow!"
program which integrates targeted and unadvertised opportunistic purchases;
and (h) significantly reduced overhead while improving operating efficiencies.
The Company continues to focus on three key merchandise categories:
moderately priced family apparel, home furnishings and conventional consumable
hardlines products. Bradlees is committed to quality and fashion, especially
in apparel and home furnishings, and to improving customer service, to
differentiate itself from its competition. The Company believes that it
can strategically leverage its strength in the quality and fashion content
of its apparel and decorative home product offerings while driving traffic
with selected hardlines merchandise.
The Company closed one store in April, 1997 and, in December, 1997,
announced the planned closing of six additional underperforming stores by
February, 1998, including one owned store that was being closed as a result
of the sale of the property in January, 1998 (for which a gain of $5.4 million
was recorded). The Company closed 27 stores in 1996.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
Principles of consolidation
---------------------------
The consolidated financial statements include the accounts of all
subsidiaries and the accounts of the special purpose entity ("SPE") with
which the Company had a financing arrangement for new store sites (Note 8).
All intercompany transactions have been eliminated in consolidation.
The Company's fiscal year ends on the Saturday nearest to January 31. The
term "1997" refers to the 52 weeks ended January 31, 1998; "1996" refers to
the 52 weeks ended February 1, 1997; and "1995" refers to the 53 weeks ended
February 3, 1996.
Fair Value of Financial Instruments
-----------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 107,
Disclosures About Fair Value of Financial Instruments" requires disclosures
of estimated fair values of financial instruments both reflected and not
reflected in the accompanying financial statements. The estimated fair
values of the Company's cash and cash equivalents, accounts receivable,
borrowings under the DIP facilities and accounts payable (post-petition)
approximate the carrying amounts at January 31, 1998 and February 1, 1997
due to their short maturities or variable-rate nature of the borrowings.
The fair value of the Company's liabilities subject to settlement are not
presently determinable as a result of the Chapter 11 proceedings. The fair
values of the 2002 Notes and 2003 Notes (Note 6) were not obtainable at
January 31, 1998 and February 1, 1997. Face values of the 2002 Notes and
2003 Notes were $125,000 and $100,000, respectively, at January 31, 1998
and February 1, 1997.
Geographical concentration
--------------------------
As of January 31, 1998, the Company operated 109 discount department
stores in seven states in the Northeast, primarily in the heavily populated
corridor running from Boston to Philadelphia. A significant change in
economic or competitive conditions within this area could have a material
impact on the Company's operations. The Company closed six additional stores
in February, 1998.
Use of estimates
-----------------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
The primary estimates underlying the Company's financial statements include
the value of assets held for sale, the estimated useful lives of fixed assets
and lease interests, the estimates used in SFAS No. 121 calculations (Note 4),
accruals for self-insured workers compensation and general liability (Note 14),
vacation pay reserves (Note 14), provisions for rejected leases and
restructuring costs associated with closing stores (Note 7), and the
classification of liabilities subject to settlement (Note 3).
Collective bargaining arrangements
----------------------------------
Approximately 73% of the Company's labor force is covered by collective
bargaining agreements, of which collective bargaining agreements affecting
approximately 54% of the labor force will expire within one year and are
expected to be renegotiated.
Cash and cash equivalents
-------------------------
Highly liquid investments with original maturities of 3 months or less
when purchased are classified as cash and cash equivalents. Restricted cash
and cash equivalents at January 31, 1998 were comprised of the following,
along with earned interest of $.5 million: (a) $6.0 million of the $24.5
million federal income tax refund received in April, 1996, held in escrow
pending further order of the Bankruptcy Court; (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 (pursuant to the
Bankruptcy Court order permitting the sale of the property, all proceeds
associated with the sale of the property must be maintained in a segregated
escrow account pending further order of the Bankruptcy Court);
(c) $8.0 million from the sale of a closed store in 1997; and (d) other funds
($1.2 million) restricted for security deposits for utility expenses incurred
after the Filing.
Inventories
-----------
Substantially all inventories are valued at the lower of cost
(which includes certain warehousing costs) or market, using the last-in,
first-out ("LIFO") retail method. No LIFO charge has been recorded by the
Company as there has been no excess of current cost over LIFO cost since
the Acquisition.
Assets held for sale
--------------------
Assets held for sale are stated at the lower of net book
value or estimated net realizable value and have been classified as
current or noncurrent based upon the anticipated time to sell the asset.
Property, plant and equipment
-----------------------------
Maintenance, repairs and minor renewals are charged to operations
as incurred. Major renewals and betterments which substantially extend the
useful life of the property are capitalized. The costs of assets sold or
retired and the related amounts of accumulated depreciation are eliminated
from the accounts in the year of disposal, with the resulting gain or
loss included in earnings. Depreciation and amortization are recorded based
upon the estimated useful lives under the straight-line method. Leasehold
improvements and assets recorded under capital leases are amortized over the
lives of the respective leases (including extensions) or the lives of the
improvements, whichever is shorter.
Buildings 30 years
Fixtures, machinery and equipment 3 to 10 years
Leasehold improvements 10 to 20 years
or the term of the lease, if shorter
Lease interests
---------------
Lease interests represent the lease rights acquired at the
Acquisition (Note 1) and are amortized on the straight-line method over the
remaining lives of the leases (including option periods) or 40 years, if
shorter. Accumulated amortization was $34.8 million at January 31, 1998 and
$27.7 million at February 1, 1997. During 1996, accumulated amortization of
$3.3 million was eliminated in accordance with SFAS No. 121 (Note 4).
Lease interests acquired at the Acquisition represented the value
attributed to real estate leased by the Company at July 10, 1992. The lease
interests were determined by calculating the present value of the excess of
market rent for each lease over the actual rent payable (including percentage
rent) over the remaining lease term, including all renewal option periods,
discounted at 10%, and then adjusted in accordance with the purchase method of
accounting. The recoverability of the remaining carrying value of lease
interests is dependent upon the Company's ability to generate sufficient future
cash flows from operations at each leased site, or in the case of a sale or
disposition of a lease or leases, the continuation of similar favorable market
rents. Accordingly, recoverability of this asset could be significantly
affected by future economic, market and competitive factors and is subject
to the inherent uncertainty associated with estimates.
Self-insurance reserves
-----------------------
The Company is primarily self-insured for workers'compensation and
general liability costs. The self-insurance reserves are actuarially determined
using discount rates of 6.00% at January 31, 1998 and February 1, 1997.
Self-insurance reserves have been classified as current and noncurrent
in accordance with the estimated timing of the projected payments.
Deferred financing costs
------------------------
Deferred financing costs (related to the DIP facilities) are amortized
over the lives of the related financings. Accumulated amortization was
$.1 million at January 31, 1998 and $2.9 million at February 1,
1997. The Company wrote off $1.1 million of unamortized deferred financing
costs in 1997 relating to the prior DIP Facility (Note 6) that was replaced in
December, 1997. Net deferred financing costs as of the filing date of $3.4
million, $2.0 million, and $2.7 million for the pre-petition revolver, 2002
Notes and 2003 Notes, respectively, were netted against the related outstanding
debt subject to settlement
during 1995 (Note 3).
Store opening and closing costs
-------------------------------
Pre-opening costs are expensed prior to or when a store opens or, in the
case of a remodel, reopens. Store closing costs are provided for when the
decision is made to close such stores.
Stock compensation
------------------
The Company accounts for stock-based employee compensation costs using
the intrinsic value method.
Income taxes
------------
The Company provides for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Deferred income taxes, net of valuation
allowances, are provided to recognize the effect of temporary differences
between financial reporting and income tax reporting of assets and liabilities.
Net loss per share
------------------
Net loss per share is computed using the weighted average
number of common shares outstanding, plus the common stock equivalents related
to stock options if not anti-dilutive, in accordance with the provisions of
the SFAS No.128 "Earnings Per Share", which was adopted in 1997. The weighted
average number of shares (in thousands) used in the calculation for both basic
and diluted net loss per share in 1997, 1996 and 1995 was 11,365, 11,412 and
11,416 shares respectively. Diluted earnings per share equals basic earning
per share as the dilutive calculations would have an antidilutive impact as
a result of the net loss incurred in each of the years.
Reclassifications
-----------------
Certain reclassifications have been made to the 1996 and 1995 financial
statements to conform with the 1997 presentation.
New accounting pronouncements
-----------------------------
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income", which is effective for the Company beginning with the fiscal
year ending January 30, 1999 ("1998"). SFAS No. 130 will require that total
comprehensive income (the change in equity from transactions and other events
except those resulting from investment by owners) be reported in the
financial statements. The Company does not expect SFAS No. 130 to have
any material impact on the Company's financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information", which is effective
beginning with 1998. SFAS No. 131 will require that segment financial
information be publicly reported on the basis that is used internally for
evaluating segment performance. The Company does not expect SFAS No. 131
to have a material effect on its financial statement disclosures.
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-Retirement Benefits", which is effective
beginning with 1998 and which will affect the Company's pension and
post-retirement plan disclosures in 1998. SFAS No. 132 requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures. The Company is still reviewing the effect that SFAS No.132 will
have on its 1998 disclosures.
3. REORGANIZATION CASE
-------------------
During the early 1990's, Bradlees' business strategy relied heavily
on opening new stores, remodeling existing locations and competing on the
basis of price. From 1992 to January, 1995, Bradlees opened 15 new stores
(10 in 1994) and remodeled 41 stores at a total capital cost of $182 million.
The new stores were generally larger stores with rents that substantially
exceeded the chain average rent per square foot. Some of the new stores
were also multilevel facilities which further increased their operating costs
when compared with other prototypical Bradlees stores. The store expansion
and remodeling program marginally increased sales while gross margins declined
and operating expenses increased. Bradlees' declining operating performance,
coupled with the agressive expansion program, began to erode the Company's
liquidity. The Company's liquidity further eroded in May and June, 1995,
because or the unwillingness of factors and vendors to continue to extend
trade credit. Bradlees, unable to obtain sufficient financing to satisfy
factor and vendor concerns, was compelled to seek Bankruptcy Court protecton
on June 23, 1995.
In the Chapter 11 case, substantially all liabilities as of the date
of the Filing are subject to settlement under a plan of reorganization to be
voted upon by the Company's creditors and stockholders and confirmed by the
Bankruptcy Court. Schedules have been 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 being
investigated and resolved. Except for payments of $2.1 million made in 1997 to
settle certain reclamation claims, the ultimate amount and settlement terms for
pre-petition liabilities are subject to a confirmed plan of reorganization, and
accordingly, are not presently determinable. The Company currently retains the
exclusive right to file a plan of reorganization until August 3, 1998 and to
solicit acceptance of a plan of reorganization until October 5, 1998, each
subject to possible extension as approved by the Bankruptcy Court. The Company
filed its plan of reorganization and related disclosure statement with the
Bankruptcy Court on April 13, 1998 and, subject to confirmation of the plan of
reorganization, currently anticipates emergence from Chapter 11 in August, 1998.
A hearing to approve the disclosure statement has been scheduled for May 27,
1998 with the Bankruptcy Court.
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 $48.1 million has been recorded as
of January 31, 1998 for rejected leases. This liability may be subject to
future adjustments based on claims filed by the lessors and Bankruptcy Court
actions. Although the Company does not currently anticipate the rejection
of additional leases, the Company cannot presently determine or reasonably
estimate the ultimate liability which may result from the filing of claims for
any rejected contracts or from any additional leases which may be rejected at
a future date. The Company believes that it recorded its best estimate of the
liability for rejected leases based on information 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 date 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 $10 million of adequate protection payments reduced
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. Also,
payments of approximately $1.1 and $.8 million were made to IBM Credit
Corporation ("IBM") and Comdisco, Inc. ("Comdisco"), respectively, in 1996 for
settlement of certain equipment capital lease obligations (Note 6). 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.
(000's)
Liabilities Subject to Settlement ------------------------------
Under the Reorganization Case Jan. 31, 1998 Feb. 1, 1997
- --------------------------------- ------------- ------------
Accounts payable $165,324 $167,098
Accrued expenses 27,996 27,932
Revolver 71,105 75,005
2002 Notes 122,274 122,274
2003 Notes 97,957 97,957
SPE financing obligation (Note 8) 17,951 17,951
Obligations under capital leases 11,407 11,887
Liability for rejected leases 48,091 50,937
-------- -------
$562,105 $571,041
======== ========
4. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 121
---------------------------------------------------
In the fourth quarter of 1995, the Company adopted SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of " and recorded a charge of approximately $99.4 million to reflect
the impairment of certain long-lived assets. In the fourth quarter of 1996,
the Company recorded an additional charge of approximately $40.8 million in
accordance with SFAS No. 121 based on revisions to cash flow assumptions and as
a result of the significant operating loss incurred in 1996. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company reviewed its long-lived assets for recoverability in
both years primarily as a result of the significant operating losses incurred.
Because of these prior-year charges and the closings of unprofitable stores, and
because the Company met its operating earnings plan in 1997, there was no such
SFAS No. 121 charge in 1997.
In applying SFAS No. 121 in 1996 and 1995, the Company compared anticipated
cash flows over the remaining lease term, including anticipated renewal periods,
from each store (excluding closing stores) with the corresponding carrying
amount of identified long-lived assets and recorded a reduction in carrying
value where such cash flows were not sufficient to recover the related assets
over the term of the lease.
The fair value of these impaired long-lived assets was determined primarily
using the Company's current estimate of the associated future cash flows over
the base lease term, including anticipated renewal periods and consideration of
the fair market value of the assets at the end of the lease term. The stream of
future cash flows by store were discounted at a 20% rate, which the Company
believed to be commensurate with the risks involved. There were significant
assumptions, primarily future cash flows, inherent in the SFAS No. 121
calculations, particularly given the Company's prior-year operating losses and
evolving merchandising strategy.
The assumptions utilized in 1996 and 1995 were subject to significant
business, economic and competitive uncertainties. The charges in 1996 and 1995
were comprised of the following long-lived asset impairments (in 000's):
1996 1995
---- ----
Property excluding capital leases, net $10,548 $43,632
Property under capital leases, net 3,363 21,688
Lease interest and lease
acquisition costs, net 26,871 34,038
------ ------
Total long-lived asset impairments $40,782 $99,358
======= =======
5. PROPERTY, PLANT, AND EQUIPMENT, NET
----------------------------------
(000's)
------------------------------
Jan. 1, 1998 Feb. 1, 1997
------------ ------------
Property excluding capital leases:
Buildings and improvements $96,678 $96,978
Equipment and fixtures 123,603 109,486
Land - 3,731
------- -------
Subtotal 220,281 210,195
Accumulated depreciation (88,756) (70,949)
-------- --------
Property excluding capital leases, net 131,525 139,246
------- -------
Property under capital leases:
Buildings and improvements 22,682 28,218
Equipment and fixtures 8,395 8,395
------ ------
Subtotal 31,077 36,613
Accumulated amortization (12,118) (12,218)
-------- --------
Property under capital leases, net 18,959 24,395
-------- --------
Total property, plant and equipment, net $150,484 $163,641
========= ========
6. DEBT
----
(000's)
-------------------------------
Jan. 31, 1998 Feb. 1, 1998
------------- ------------
DIP facilities (8.5%-1997, 8.5%-1996) $84,208 $42,500
Prepetition Revolver (10.25%-1997, 10.0%-1996) 71,105 75,005
Prepetition 2002 Notes (11%) 122,274 122,274
Prepetition 2003 Notes (9.25%) 97,957 97,957
SPE financing obligation (7.75%) (Note 8) 17,951 17,951
Obligations under capital leases (Note 8) 39,518 46,905
------ ------
Total debt 433,013 402,592
Less: Short-term debt (DIP facilities) 84,208 42,500
Current portion-capital leases 1,038 1,722
Less: Debt subject to settlement (Note 3):
Prepetition Revolver 71,105 75,005
Prepetition 2002 Notes 122,274 122,274
Prepetition 2003 Notes 97,957 97,957
SPE financing obligation 17,951 17,951
Obligations under capital leases 11,407 11,887
------ ------
Long-term debt obligations under capital leases $27,073 $33,296
======= =======
As a result of the Filing, substantially all debt (exclusive of the DIP
facilities) outstanding at January 31, 1998 and February 1, 1997 was classified
as liabilities subject to settlement (Note 3). No principal or interest
payments are made on any pre-petition debt (excluding certain capital leases)
without Bankruptcy Court approval or until a reorganization plan defining the
repayment terms has been approved. 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 3).
On June 25, 1996, the Bankruptcy Court approved an agreement between the
Company and BTM Capital Corporation ("BTM") that fixed the secured claim of BTM
in the amount of $2.25 million, subject to reduction for adequate protection
payments also approved by the Bankruptcy Court. On December 17, 1996, the
Bankruptcy Court approved agreements between the Company and IBM and between
the Company and Comdisco which settled all litigation between the parties
regarding the characterization of certain equipment lease agreements. Under
these agreements, the Company agreed to pay all amounts due to IBM
($1.1 million in December, 1996) and Comdisco ($.8 million in January, 1997),
purchase all the equipment under the IBM equipment lease agreement
($1.4 million in December, 1996) and reject the Comdisco lease effective
February 28, 1997.
Generally, interest on pre-petition debt ceases accruing upon the filing
of a petition under the Bankruptcy Code; if, however, the debt is
collateralized by an interest in property whose value (minus the cost of
preserving such property) exceeds the amount of the debt, post-petition
interest may be payable. Other than those noted above, no other
determinations have yet been made regarding the value of the property
interests which collateralize various debts. Although interest may be
paid pursuant to an order of the Bankruptcy Court, it is uncertain whether any
post-petition interest will be payable or paid. The Company believes at this
time that it is unlikely that such interest will be paid. Contractual
interest expense not recorded on certain pre-petition debt (the Revolver,
2002 Notes and 2003 Notes) totaled approximately $31.1 and $31.3 million
for 1997 and 1996, respectively.
New Financing Facility
----------------------
The Company obtained a new $250 million financing facility (of which
$125 million is available for issuance of letters of credit) in December, 1997
with BankBoston Retail Finance, Inc. ("BBNA") as agent (the "New Facility"),
under which the Company is allowed to borrow for general corporate purposes,
working capital and inventory purchases. The New Facility consists of
(a) an up to eighteen month debtor-in-possession revolving credit facility
in the maximum principal amount of $250 million (the "New DIP"-see below)
and, subject to meeting certain conditions, (b) an up to three year
post-confirmation revolving credit facility in the maximum principal amount
of $250 million (the "Exit Facility"-see below). The commitment period for
the combined facility cannot exceed four years.
The New DIP replaced a $200 million Debtor-in-Possession Revolving
Credit and Guaranty Agreement with Thr Chase Manhattan Bank, as agent
(the "Prior DIP Facility"). There were outstanding direct borrowings of
$84.2 million under the New DIP as of January 31, 1998. Trade and stand
by letters of credit outstanding under the DIP facilities were $7.1 and
$26.8 million, respectively, at January 31, 1998 and $9.2 million and
$26.9, respectively, as of February 1, 1997. The weighted average borrowings
under the DIP facilities in 1997 were $87.2 million. The weighted average
interest rate under the DIP facilities in 1997 was 7.54%.
The New DIP 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 New DIP 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 will be subject to an additional 0.50% during any fiscal month that
the Company has Overadvance Amounts.
There are no compensating balance requirements under the New DIP but the
Company is required to pay an annual commitment fee of 0.30% of the unused
portion of the New DIP. The New DIP contains restrictive covenants including,
among other things, limitations of 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 New DIP have a
"super-priority claim" against the estate of the Company. As of
January 31, 1998, the Company was in compliance with the New DIP covenants.
The New DIP expires on the earlier of June 30, 1999 or the effective date
of any plan of reorganization that is confirmed by the Bankruptcy Court.
In the fourth quarter of 1997, the Company incurred a charge of
approximately $1.1 million for the write-off of the Prior DIP Facility's
unamortized deferred financing costs and paid approximately $2.3 million
for financing fees associated with the New DIP.
The Exit Facility has an advance rate equal to 60% 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 Company can borrow an overadvance amount
on the Loan Value of Eligible Inventory of 5%, provided the Loan to Value
Ratio does not exceed 85%. At the Company's option, the Company may borrow
under the Exit Facility at the Base Rate Applicable Margin or the Eurodollar
Applicable Margin for interest periods of one, two, or three months. The
Base Rate Applicable Margin and Eurodollar Applicable Margin will be subject
to an additional 0.50% during any fiscal month that the Company has
Overadvance Amounts.
The Exit Facility is subject to certain conditions being satisfied,
including (i) an all equity plan of reorganization; (ii) minimum EBITDA
performance; and (iii) minimum borrowing availability on the effective date
of the plan of reorganization. The Company obtained a modification to the
commitment letter dated April 7, 1998, from BBNA, as agent, that modifies
their commitment so that the plan of reorganization filed by the Company
on April 13, 1998, although not an all equity plan, satisfies the conditions
for the Exit Facility. The Exit Facility will be secured by all of the
assets of the Company, except interests in real property.
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, 2000, and thereafter).
Prepetition Revolver Prior to the Filing, the Company had a $150 million
--------------------
revolving loan facility ("Revolver"), including outstanding commercial and
standby letters of credit. The Revolver had a maturity date of July 31, 1997,
and had a variable interest rate based on, among others factors, the
Company's elected borrowing period and amount. The weighted average interest
rate approximated 10.0% in 1997 and 1996 and 8.1% in 1995. No interest has
been paid or accrued on the Revolver since the Filing.
Prepetition 2002 Notes and 2003 Notes
-------------------------------------
The 2002 Notes and 2003 Notes are pari passu to each other and
subordinated to the Company's senior indebtedness. Beginning on
August 1, 1997, the 2002 Notes were to be redeemable, in whole or in part,
at the Company's option, at 104%, decreasing annually to par on
August 1, 2000. Beginning on March 1, 2000, the 2003 Notes were to be
redeemable, in whole or in part, at the Company's option, at par plus
accrued interest. Interest on the 2002 Notes and 2003 Notes, due
semiannually, has not been paid or accrued since the Filing.
7. REORGANIZATION ITEMS
--------------------
The Company provided for or incurred the following expense and income
items in 1997, 1996 and 1995 directly associated with the Chapter 11
reorganization proceedings and the resulting restructuring of its operations
(in 000's):
1997 1996 1995
---- ---- ----
Professional fees $10,000 $10,000 $9,200
Interest income (420) (1,445) (3,078)
Provision for rejected leases (2,846) 32,756 18,971
Net asset/liability write-offs (3,408) 4,034 21,548
Gain on disposition of properties (1,153) (1,697) -
Provision for inventory impairment - (1,000) 7,100
Provision for occupancy and other
store closing costs 1,112 4,102 3.059
Employee severance and termination
benefits (2,813) 23,042 -
Provision for MIS retention bonuses 280 - -
Chapter 11 customer discounts - - 2,960
Provision for retention bonuses - - 5,243
------ ------- -------
Total reorganization items $752 $69,792 $65,003
====== ======= =======
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.
Provision for rejected leases and net asset/liabilitywrite-offs:
----------------------------------------------------------------
Under the Bankruptcy Code, the Company may elect to reject real estate
leases, subject to Bankruptcy Court approval. The Company recorded provisions
of approximately $32.8 and $19.0 million in 1996 and 1995, respectively,
for rejected leases and anticipated claims for certain closed and closing
store leases that were expected to be rejected. In 1997, the Company reversed
a rejected lease provision of $5.2 million that had been recorded in 1996
for a store that was subsequently sold in 1997 with no rejection liability.
In addition, the Company recorded a provision of approximately $2.4
million in 1997 for four of the six stores closed in February, 1998 whose
leases were rejected by the Company.
In connection with the store closings and lease rejections, the Company
wrote off certain net assets (net liability in 1997), primarily for leasehold
improvements, net capital leases and lease interests. The credit of $3.4
million in 1997 resulted from the write-off of closed stores' capital lease
obligations that exceeded the carrying value of the closed stores' assets.
Net asset write-offs also include adjustments to lower the carrying values
of certain properties held for sale to their current net realizable values.
The rejected lease liability may be subject to future adjustments based on
claims filed by the lessors and Bankruptcy Court actions. The Company cannot
presently determine or reasonably estimate the ultimate liability which may
result from such claims and actions or from additional leases which may be
rejected at a future date.
Gain on disposition of properties:
----------------------------------
The Company sold certain closed store leases in 1997 and 1996 and the
related gains were classified as reorganization items since the sales were
directly related to the Chapter 11 proceedings and the associated net asset
write-offs were previously included in reorganization items.
Inventory impairment and store closing costs:
---------------------------------------------
In December, 1997, the Company approved a restructuring plan to close
6 stores by February, 1998. One of the 6 stores was owned and closed as
a result of the sale of the property in January, 1998. In connection with
the plan to close the 6 stores, the Company rejected certain leases and wrote
off net assets (See "Provision for rejected leases and net asset/liability
write-offs"). In addition, the Company established provisions in 1997 for
the associated closing costs and for an inventory impairment for the 6 stores
of $2.9 million that was charged to cost of sales. The provision for
inventory impairment represented the incremental markdowns required
to liquidate the inventory at the closed stores. Such costs are recorded
in accordance with the retail inventory method.
In January, 1996, the Company approved a restructuring plan to close 13
stores in the first half of 1996. In connection with this plan, the Company
also rejected certain leases and wrote off net assets. In addition, the
Company established provisions in 1995 for inventory impairment and other
closing costs associated with closing the 13 stores. The provision for
inventory impairment was reduced by $1 million at the conclusion of the
going-out-of-business sales in 1996 when actual results became available.
The $1 million reduction was recorded as a credit to reorganization items
since the original provision was recorded as a reorganization item in 1995
prior to a Securities and Exchange Commission staff announcement in which
the stated that inventory markdowns attributable to a restructuring or
exit plan should be classified in the income statement as a component of
cost of sales.
In July, 1996, the Company approved a restructuring plan to close 14
additional stores in October, 1996. In connection with this plan, the Company
also rejected certain leases and wrote off net assets. In addition, the
Company established provisions for inventory impairment and other closing
costs associated with closing the 14 stores. An inventory impairment charge
of $6.7 million for 15 stores (including the one store to be closed in April,
1997) was charged to cost of sales in 1996.
Other store closing costs represent incremental asset protection,
occupancy and various closing costs associated with the decision to close the
stores. Other store closing costs paid in 1997 totaled approximately
$3.5 million.
Employee severance and termination benefits:
--------------------------------------------
The credit to employee severance and termination benefits of $2.8 million
in 1997 resulted from the reversal of certain severance reserves totaling
$3.4 million, including a significant portion of the severance reserve that
had been established in 1996 for Mark Cohen, the Company's former CEO,
partially offset by a $0.6 million charge for severance and termination
benefits for 382 store associates at the 6 stores closed in February, 1998.
A settlement agreement was reached with Mr. Cohen in 1997.
Employee severance and termination benefits of $23.0 million in 1996
included the following: (a) $13.5 million for the January 1997 management
reorganization and regional and district consolidation; (b) $1.2 million
resulting from the 14 stores closed in October, 1996; (c) $4.2 million for
central office positions eliminated in September, 1996; (d) $1.1 million
resulting from the 13 stores closed in the first half of 1996; and
(e) $3.0 million paid to store, district and regional associate positions
eliminated as a result of the February, 1996 store management reorganization.
Severance and termination benefits paid in 1997 and 1996 totaled approximately
$4.5 and $16.6 million, respectively.
Chapter 11 customer discounts:
------------------------------
The "Chapter 11 customer discounts" reflected a special 5% discount that
was provided to customers during a two-week period following the Filing
to retain customer loyalty and to compensate customers for the inconvenience
of unavailable merchandise.
Retention bonuses:
-----------------
During 1995, the Bankruptcy Court approved certain assumed and amended
executive contracts and the Company's Retention Bonus Plan (the "Retention
Plan") that provided for management bonuses for continued employment
during the first fiscal year of Chapter 11 reorganization and through the
date of payment. Thereafter, the Retention Plan and executive contracts
provided incentives and rewards for perfomance that met or exceeded
established levels, as well as for continued employment. The 1995 provision
included the Chapter 11-related bonuses, along with certain executive
guaranteed awards related to the Filing.
MIS retention bonuses:
----------------------
The Company has a retention bonus program for certain Management
Information System (MIS) employees that provides 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.
Closed store results:
---------------------
Net sales and operating losses (exclusive of any central office expense
allocation and prior to interest expense, income taxes and reorganization
items) from the one store closed in April, 1997, the six stores closed in
February, 1998 and the 27 stores closed during 1996 were (in 000's):
1997 1996 1995
---- ---- ----
Net sales $61,039 $213,363 $367,693
Operating loss (251) (28,012) (36,040)
8. LEASES
------
At January 31, 1998, the Company had various noncancelable leases in
effect for substantially all of its stores, distribution centers, and its
office building, as well as certain equipment. In connection with the
Filing, all lease contracts whether assumed or rejected are subject to
Bankruptcy Court approval. Therefore, the commitments shown below may not
reflect actual cash outlays in the future. Payments under certain capital
leases which the Company currently believes represent undersecured financings
are classified as liabilities subject to settlement and are not presented
herein. Minimum payments due under remaining leases, excluding leases
which are included in the provision for rejected leases (Note 3 and 7), are
as follows:
(000's)
-----------------------------------
Capital Leases Operating Leases
-------------- ----------------
1998 $4,645 $41,853
1999 4,646 40,844
2000 4,111 39,357
2001 4,132 37,933
2002 4,132 36,041
Thereafter 40,416 220,198
------ -------
Total minimum payments 62,082 $416,226
Estimated executory costs (2,857) ========
-------
Net minimum lease payments 59,225
Imputed interest (31,114)
--------
Present value of net minimum
lease payments 28,111
Less current portion (1,038)
-------
Obligations under capital leases,
net of current portion $27,073
=======
Minimum payments for capital and operating leases have not been reduced
by minimum sublease rentals of $11.7 and $10.0 million, respectively, due
in the future under noncancelable leases. The minimum payments do not include
the contingent rentals that may be payable under certain leases.
Total rent expense is as follows:
(000's)
-------------------------------
1997 1996 1995
---- ---- ----
Operating leases:
Minimum rent $48,749 $57,352 $60,890
Contingent rent 425 1,024 972
Sublease income (7,899) (9,248) (9,585)
-------- -------- --------
41,275 49,128 52,277
Capital leases:
Sublease income (1,297) (1,726) (1,829)
-------- -------- --------
Total $39,978 $47,402 $50,448
======== ======== ========
Contingent rentals are determined on the basis of a percentage of sales
in excess of stipulated minimums for certain stores. Sublease income includes
leased department income which is included in leased department and other
operating income. Most of the leases require that the Company pay taxes,
maintenance, insurance and certain operating expenses. Management expects
that, in the normal course of business, expiring leases will be renewed or
replaced by other leases.
During 1994, the Company entered into a financing facility with a special
purpose entity ("SPE") (Note 2) and a group of banks, with Bankers Trust as
Agent, that provided a $75 million financing facility for new store sites,
which was to expire in 1998. On April 17, 1995, the amount under the
financing facility was reduced to $45 million, of which only $30 million
could be utilized in 1995. In June, 1995, the amount was further reduced
to $24 million, the amount required for the two sites then under development.
Under the terms of the financing facility with the SPE, the Company entered
into leases with terms of up to six years. Upon expiration of the leases,
the Company could purchase the properties, allow the SPE to sell the sites to
an unrelated third party (subject to the residual guarantee which, in effect,
guarantees 100% of the outstanding borrowings) or extend the lease term.
As a result of the guarantee and the Filing, the Company has included the
accounts of the SPE in its consolidated financial statements. Borrowings of
approximately $18 million at January 31, 1998 and February 1, 1997 are
included in liabilities subject to settlement and are collateralized by land
and buildings (with a carrying value of $4.0 million) that are classified as
long-term assets held for sale. Any proceeds from the sale of these
properties will be restricted to pay down the related borrowings.
9. COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
-------------------------------------------
The authorized capital stock of the Company consists of 40 million
shares of common stock, par value of $0.01 per share ("Common Stock"), of
which 11,312,154 shares were outstanding at January 31, 1998, and one million
shares of preferred stock, par value of $0.01 per share, none of which were
outstanding at January 31, 1998. The Common Stock will be canceled under the
Company's filed plan of reorganization.
The Company has a Restricted Stock Plan that provides for the award of
277,008 shares of Common Stock ("Restricted Stock") to certain officers and
employees. At January 31, 1998, 15,217 shares were outstanding under the
Restricted Stock Plan. There have been no awards of Restricted Stock since
the Filing. No cash payments are required from Restricted Stock recipients
and all issued shares accrue dividends, if any. In general, the shares become
unrestricted under a five-year vesting schedule. All shares of Restricted
Stock may vest earlier in certain circumstances (death, disability, retirement
or a change of control). Shares of Restricted Stock which have not vested
are not freely transferable and revert to the Company upon the employee's
termination.
10. STOCK OPTIONS
-------------
The Company has a 1992 Stock Option Plan for Key Employees ("Key Employee
Plan") that provides for the grant of options for up to 1,272,283 shares of
Common Stock to certain employees. No options have been granted under the Key
Employee Plan since the Filing. The options are intended to qualify as
incentive stock options or non qualified stock options and generally have a
three to five-year vesting schedule. Activity in the Key Employee Plan is
as follows:
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
Outstanding at January 28, 1995 1,052,362 $13.65
Granted 153,000 9.78
Canceled (261,794) 13.83
Exercised - -
----------
Outstanding at February 3, 1996 943,568 $12.97
Granted -
Canceled (265,790) $13.46
Exercised - -
----------
Outstanding at February 1, 1997 677,778 $12.78
Granted - -
Canceled (396,753) $13.32
Exercised - -
---------- ------
Outstanding at January 31, 1998 281,025 $12.30
========== ======
Exercisable at January 31, 1998 171,997 $12.65
========== ======
Options outstanding at January 31, 1998, range in exercise price from
$6.50 to $18.38 and have a remaining weighted average contractual life of 5.56
years.
The Company has a 1993 Non-Employee Directors' Stock Option Plan
("Directors' Plan") that provides for the grant of non qualified options for
up to 100,000 shares of Common Stock to non-employee directors. In general,
the options have a three-year vesting schedule. During 1997, 1996 and 1995,
30,000, 15,000 and 30,000 options, respectively, were granted under the
Directors' Plan. During both 1997 and 1996, 15,000 options were canceled.
At January 31, 1998, 90,000 options under the Directors' Plan were outstanding
with exercise prices ranging from $0.06 to $15.75 (weighted average exercise
price is $7.02). At January 31, 1998, 45,000 of the options were exercisable
at a weighted average price of $12.26 and have a weighted average remaining
contractual life of 5.26 years.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-
Based Compensation," effective for the Company's fiscal year beginning
February 4, 1996. SFAS No. 123 encourages but does not require the
recognition of compensation expense for the fair value of stock option and
other equity instruments issued to employees. If the fair-value provisions
of SFAS No. 123 are not adopted, certain pro forma amounts of net earnings
and earnings per share that would have been reported had these provisions
been adopted are required to be disclosed, if material. The Company continues
to account for stock-based compensation in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
using the intrinsic value method. The difference between accounting for
stock-based compensation under APB No. 25 and SFAS No. 123 was not material
for 1997, 1996 and 1995, and accordingly the pro forma disclosures have
been omitted.
11. EMPLOYEE BENEFIT PLANS
----------------------
Pension plans
-------------
Certain union employees are covered by multi-employer defined benefit
plans. Expenses for these plans were $.9 million for 1997, $1.1 million for
1996 and $1.3 million for 1995.
The Company has a qualified, noncontributory defined benefit pension plan
for employees not participating in multi-employer plans. Plan benefits are
based on the participant's compensation and/or years of service. The Company
funds the net pension costs each year. The plan assets are held in a master
trust fund, which invests primarily in equity, fixed income securities and
cash and cash equivalents.
The Company has several nonqualified, noncontributory defined benefit
plans for the benefit of certain highly compensated employees. The plans
are unfunded and benefits paid under the plans are based on years of service
and employees' compensation.
The components of net pension costs for the plans are as follows:
(000's)
--------------------------------
1997 1996 1995
---- ---- ----
Service costs $3,272 $3,897 $3,061
Interest costs 5,054 4,909 4,369
Return on plan assets (9,566) (7,617) (9,165)
Net amortization and deferral 4,177 2,993 5,497
Curtailment loss 126 554 -
Special termination benefits (359) 782 -
------- ------- -------
Net pension costs $2,704 $5,518 $3,762
======= ====== ======
The funded status is as follows:
(000's)
------------------------------------------------------------------------
January 31, 1998 February 1, 1997
-------------------------------------- ----------------------------
Qualified Plan Non qualified Plans Qual. Plan Non qual. Plans
-------------- ------------------- ---------- ---------------
Actuarial present value of:
Vested benefit obligation
$61,504 $3,046 $55,352 $4,444
Accumulated benefit obligation
$62,656 $3,490 $56,183 $4,583
Projected benefit obligation
$72,233 $4,236 $66,978 $5,126
Plan assets at fair value
68,611 - 62,325 -
------ ----- ------ -----
Projected
benefit obligation greater
than plan assets
(3,622) (4,236) (4,653) (5,126)
Unrecognized prior service cost
518 1,434 576 107
Unrecognized transition obligation
- 102 - 1,609
Unrecognized net (gain)
(2,740) 435 313 49
Additional minimum liability (recorded
as other assets)
- (1,225) - (1,222)
----- ----- ---- -----
Accrued pension liability
$(5,844) $(3,490) $(3,764) $(4,583)
====== ====== ====== =====
The curtailment losses and special termination benefits in 1997 and 1996
result from the employment terminations of several executives and the closing
of stores. These costs in 1996 were primarily included in termination benefits
as part of reorganization items (Note 7). Certain portions ($1.2 million) of
nonqualified plans' accrued pension liability at January 31, 1998 relate
to pre-petition employment contracts and are included in liabilities subject
to settlement under the reorganization case.
The rate of increase in future compensation levels used in determining
the actuarial present value of the projected benefit obligation for the
qualified plan was 4.09% for 1997 and 1996; the discount rate was 7.0% for
1997 and 7.25% for 1996; and the expected rate of return on the plan assets
was 9.25% for 1997 and 9.0% for 1996. The rate of increase in future
compensation levels and discount rate used in determining the actuarial
present value of the projected benefit obligation for the non qualified plans
was 4.25% for 1997 and 1996 and 7.0% for 1997 and 7.25% for 1996,
respectively.
Defined Contribution Plan
-------------------------
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.
The Company's contributions to the plan, which were suspended in 1996, were
in the form of cash or common stock of the Company and were based on a
percentage of employee contributions. There was no plan expense in 1997 and
1996, as compared to $1.0 million for 1995.
Post retirement Plan
--------------------
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 Postretirement 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 the $3.9
million curtailment gain and a $.4 million amortization credit, reflects
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.
The status of the plan is as follows:
(000's)
--------------------
1/31/98 2/1/97
------- ------
Accumulated post retirement benefit obligation for:
Retirees $733 $1,886
Fully eligible actives 536 1,998
Other actives 439 3,983
------- -------
1,708 7,867
Plan assets at fair value - -
-------- -------
Funded status (1,708) (7,867)
Unrecognized prior service cost (5,189) (5,313)
Unrecognized net (gain) loss (2,513) (1,203)
-------- -------
Accrued post retirement benefit cost $(9,410) $(14,383)
======== ========
Net post retirement (benefit) cost is as follows:
1997 1996 1995
---- ---- ----
Service cost $172 $241 $338
Interest cost 429 540 774
Amortization, net (1,359) (877) (808)
Curtailment gain (3,939) - -
------- ----- -----
Net (benefit) cost $(4,697) $(96) $304
The assumed health care cost trend rate used in measuring the accumulated
post retirement benefit obligation was 8.70% for 1997 (6.25% for post-65
coverage) grading down to 4.25% over 10 years and 8.70% for 1996 (6.75% for
post-65 coverage) grading down to 4.25% over 10 years. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated post-retirement benefit obligation by .56% and the service and
interest cost by 3.31%. The assumed discount rate used in determining the
accumulated post-retirement benefit obligation was 7.25% for 1997 and 1996.
12. INCOME TAXES
------------
There was no income tax expense or benefit in 1997 and 1996. The income
tax benefit in 1995 was comprised of the following components:
(000's)
-------
1995
----
Current:
Federal $(24,476)
State (100)
---------
(24,576)
=========
Deferred:
Federal (74,765)
State (5,192)
---------
(79,957)
---------
$(104,533)
==========
The income tax expense (benefit) differs from the amount computed by
applying the statutory Federal income tax rates to the earnings (loss) before
income taxes as follows:
1997 1996 1995
---- ---- ----
Statutory rate (35.0%) (35.0%) (35.0%)
State income taxes, net of Federal income tax benefit (4.0%) (6.4%) (4.8%)
Non-deductible professional fees 14.5% 1.5% 1.2%
Non-deductible compensation - 1.5% -
Valuation allowance 24.5% 38.4% 5.1%
------- ------- -------
0% 0% (33.5%)
======= ======= =======
Deferred taxes represent the differences between financial statement
amounts and the tax bases of assets and liabilities. Deferred tax liabilities
(assets) are as follows:
(000's)
-----------------
1997 1996
---- ----
Lease interests $51,399 $50,435
Inventories 11,854 12,916
Other 3,295 793
------- -------
Total liabilities 66,548 64,144
------- -------
Net operating loss carryforwards (105,917) (100,393)
Self insurance accruals (8,602) (9,018)
Rejected lease claims (20,350) (21,725)
Post-retirement benefits (3,704) (5,829)
Closing costs (2,902) (3,278)
Property, plant and equipment, net (3,233) (4,294)
Capital leases (10,708) (2,890)
Vacation (2,636) (3,769)
Alternative minimum tax credit carryforwards (2,144) (2,144)
Other (3,182) (2,110)
--------- ---------
(163,378) (155,449)
Valuation allowance 105,411 99,886
--------- --------
Total assets (57,967) (55,563)
--------- --------
Net deferred tax liability $8,581 $8,581
========= ========
At January 31, 1998, the Company had net operating loss carryforwards of
approximately $260.8 million for Federal income tax purposes which will expire
beginning in fiscal year 2011 and alternative minimum tax credit carryforwards
of $2.1 million which are available to reduce future Federal regular income
taxes over an indefinite period. As part of the Company's filed plan of
reorganization, it is anticipated that a major portion of the net operating
loss carryforward will be reduced by the cancellation of indebtedness and that
the change in ownership resulting from the issuance of new stock will result
in a limitation on the remaining amount of net operating loss and tax credit
carryovers that can be utilized each year.
The Company had a valuation allowance of $99.9 million against deferred
tax assets in 1996. During 1997, the valuation allowance was increased by
$5.5 million. The realization of the deferred tax assets is dependent upon
future taxable income during the Federal and State carryforward periods.
13. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company, exclusive of matters relating to the Filing (Note 3), is
party to various legal actions and administrative proceedings and subject to
various claims arising in the ordinary course of business. The Company
believes that the disposition of these matters will not have a material
adverse effect on its financial position, results of operations or liquidity.
All civil litigation commenced against the Company prior to the Filing has been
stayed by operation of law. There were no material legal proceedings pending
against the Company prior to the Filing.
In February, 1997 the Company adopted the Corporate Bonus Plan (the
"Corporate Bonus Plan") that was approved by the Bankruptcy Court. The
Corporate Bonus Plan provides incentives and rewards for (i) performance of
key employees that meets or exceeds expectations and (ii) attainment of
threshold performance measurements tied directly to the Company's 1997 business
plan. The amount of the award would increase as the Company's performance
exceeds the business plan. In addition, a discretionary fund in the amount
of $500,000 has been established to provide bonuses to (a) non-bonus eligible
employees based upon performance regardless of whether the Company achieves
its target performance level and (b) bonus eligible employees based on
performance if the Company does not achieve its target performance level.
Under the Corporate Bonus Plan, the Company had to obtain a minimum
EBITDA (as defined) of $28.1 million in 1997, net of the anticipated costs of
the Corporate Bonus Plan, in order for any employee to be eligible for an
award (except for the discretionary fund mentioned above). For each $5 million
of EBITDA improvement over the amount projected, the award increases by 25%
of the base award up to a maximum increase of 100% of the award. The Company
achieved the minimum EBITDA in 1997 and, accordingly, recorded a provision of
approximately $4 million for such bonuses in 1997 that was included in selling,
store operating, administrative and distribution expenses. These bonuses
were paid in April, 1998.
With respect to the five highest-paid officers of the Company and certain
other members of senior management of the Company, one-quarter of the
amount of any bonus payable before such time as the Company has
consummated a Chapter 11 plan of reorganization is contingently
payable, with interest, at the earlier of the date of consummation of
such plan, or the date of termination of employment by the Company without
cause, by the officer for good reason, or on account of death or
disability. Approximately $.4 million was subject to this deferral under
the Corporate Bonus Plan in 1997. This is in addition to approximately
$.2 million of bonuses earned under the Retention Plan (Note 7) in 1995
that remains subject to the same deferral.
In August, 1995, the Company adopted, and in November, 1995, the
Bankruptcy Court approved, the Enterprise Appreciation Incentive Plan
(the "Incentive Plan"). All members of the Company's senior management
are eligible to be selected by the Board of Directors to participate in
the Incentive Plan. Under the Incentive Plan, each participant receives
an equity incentive award payable on June 23, 2000 (the fifth anniversary
of the Chapter 11 filing date) equal to the increase in the value of the
Company (as determined by appraisal) over the five years ending on June
23, 2000. Each participant's interest in the Incentive Plan vests in equal
installments over the five-year period, subject to acceleration in certain
situations. In the event a participant terminates his or her employment
without good reason or is terminated with cause prior to June 23, 2000,
then the participant forfeits his or her rights under the Incentive Plan.
Awards under the Incentive Plan will be paid promptly following June 23,
2000 in the form of 60% cash and the balance in cash, notes and stock as
described thereunder. In no event will the total of all benefits payable
under the Incentive Plan exceed the lesser of $20,000,000 or 13% (6% was for
the Company's former CEO, Mark Cohen, and is not reallocable) of the total
appreciation in the value of the Company during the five year period.
No payments are expected to be paid under the Incentive Plan because the
Company anticipates that the Incentive Plan will be canceled and replaced
by a different incentive plan under the presently proposed terms of the
Company's filed plan of reorganization.
The Company has entered into a three-year employment agreement with its
current CEO, Peter Thorner, commencing as of October 26, 1995 and amended as
of November 7, 1997. Mr. Thorner's employment agreement provides for the
payment by the Company of an equity incentive bonus (payable in cash, debt
and equity securities) pursuant to the Incentive Plan determined by reference
to the increase in value of the Company from the date of the bankruptcy
filing to the fifth anniversary of the employment agreement, subject
generally to vesting over five years. Mr. Thorner's equity incentive bonus
under the Incentive Plan would be at least $1,000,000 but would not exceed
the lesser of $4,615,385 or 3% of the appreciation in value of the Company.
As stated above, no payments, other than annual nonrefundable advances of
$150,000 to Mr. Thorner, are expected to be paid under the Incentive Plan
because the Company anticipates that the Incentive Plan will be canceled and
replaced by a different incentive plan under the presently proposed terms
of the Company's filed plan of reorganization. The employment agreement also
provides that in the event of Mr. Thorner's termination of employment by the
Company (including following a change in control of the Company) without
Cause or Good Reason (as defined), Mr. Thorner would generally be entitled
to all payments and benefits called for under the agreement for the
remainder of its term.
In August, 1995, the Company adopted and the Bankruptcy Court approved a
severance program (the "Severance Program") that covers certain members of
management. If the employment of any participant in the Severance Program is
terminated other than for cause, death, disability or by the employee, or in
connection with a change in control (as defined), then salary and certain
incentive payments are guaranteed for periods ranging up to eighteen months,
subject to mitigation by other employment. Amounts payable at January 31, 1998
under the Severance Program for management terminations were included in the
reserve for termination benefits (Note 7).
14. CHANGES IN ACOUNTING ESTIMATES
------------------------------
As discussed in Note 2, 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 quarter of 1997, using a
discount rate of 6.0% (the same rate used at February 1, 1997), and in the
third quarter of 1996, using a discount rate of 6.0% (compared to 5.3% at
February 3, 1996). As a result of the studies, 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) and by $5.0 million in the third quarter of 1996 with
corresponding reductions of $4.2 and $.8 million in SG&A expenses and interest
expense, respectively. The reductions in the self-insurance reserves were
primarily the result of aggressive claims management and safety initiatives.
The Company changed its vacation pay vesting policy for certain pay
groups in December, 1997, whereby the employees in those pay groups earn
their vacation pay entitlements over the course of each calendar year worked
(similar to industry practice) rather than being fully vested on the first
day of each calendar year. As a result of this change, $4.5 million of the
Company's vacation pay reserves as of January 1, 1998 was eliminated with a
corresponding credit in SG&A expenses.
15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
----------------------------------------
($ in thousands except per share data)
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
Year Ended January 31, 1998:
Net sales $267,371 $297,416 $330,433 $449,224 $1,344,444
Gross margin 79,658 92,936 97,104 126,658 396,357
Net income (loss) (31,993) (16,864) 376 25,925 (22,557)
Net inc.(loss)per share $(2.81) $(1.48) $0.03 $2.29 $(1.98)
Weeks in period 13 13 13 13 52
Year Ended February 1, 1997 :
Net sales $337,703 $369,578 $404,456 $449,981 $1,561,718
Gross margin 102,514 101,396 113,061 117,096 434,067
Net loss (53,746) (82,785) (23,073) (59,155) (218,759)
Net loss per share $(4.71) $(7.25) $(2.02) $(5.19) $(19.17)
Weeks in period 13 13 13 13 52
Exhibit 10.23
AMENDMENT TO AMENDED
AND RESTATED EMPLOYMENT AGREEMENT
THIS AMENDMENT TO AMENDED AND RESTATED AGREEMENT, dated as of this 7th
day of November, 1997, is made by, between and among Bradlees, Inc., a
Massachusetts corporation, Bradlees Stores, Inc., a Massachusetts Corporation
(either of which are herein called the "Company" and both of which are called
the "Companies"), and Peter Thorner (the "Executive").
WHEREAS, the Companies have entered into an employment agreement with the
Executive dated October 26, 1995 (the "Amended and Restated Employment
Agreement"), and
WHEREAS, certain conditions of the Executive's employment with the
Companies pursuant to the Amended and Restated Employment Agreement have
changed; and
WHEREAS, all of the Executive and the Companies are desirous of entering
into an amendment to the Amended and Restated Employment Agreement to reflect
such changed conditions of the Executive's employment.
NOW THEREFORE, the Companies and the Executive agree as follows:
1. Article II, Section 2.27(b) shall be deleted in its entirety and
replaced with the following:
"(b) failure of the Executive to be appointed and to continue to be
appointed to the position of Chief Executive Officer and Chairman of the
Board of Directors of such of the Companies or any present or future
affiliate of the Companies that is (1) a public holding company for
(A) either of the Companies or (B) the principal operating company affiliated
with the Companies; and (2) any other company or companies presently or in
the future affiliated with the Companies (by direct or indirect ownership by
the Companies or a parent company of either Company of 100% of the voting
power of equity securities) to which individually or in the aggregate 20%
or more of the tangible assets (at net book value) have directly or indirectly
been transferred from the principal operating company (currently, Bradlees
Stores, Inc.) (excluding in any case any liquidating entity);"
2. Article II, Section 2.27(d) shall be deleted in its entirety and
replaced with the following:
"(d) any change in the Executive's reporting responsibility being
solely to the Boards of Directors of the Companies;"
3. Article II, Section 2.29 shall be deleted in its entirety and
replaced with the following:
"2.29 "Highest Average Annual Compensation" means the average of the
Executive's highest consecutive three years of salary and bonus;
provided, however, that in no event will Executive's Highest Average
Annual Compensation be less than $1,123,750 ($725,000 salary and bonus
at target); and provided, further, that if the Executive is terminated
Without Cause or the Executive terminates his employment for Good Reason
and the Executive receives Severance Payments, Executive will be treated
as earning salary and bonus in the amount used to calculate the Severance
Payments for each respective year for which the Severance Payments are
calculated".
4. Article III, Section 3.1 shall be deleted in its entirety and
replaced with the following:
"3.1 Duties. The Executive shall be a member of the Board of Directors,
the Chairman of the Board of Directors and Chief Executive Officer of both of
the Companies, and shall assume the duties and responsibilities as specified
in the Companies' By-Laws, if applicable, and/or as assigned as of the date
hereof by the Boards of Directors of the Companies, it being contemplated
that the shareholders and Directors of the Companies will elect and re-elect
the Executive to those offices throughout the Contract Term. The Executive
will report solely to the Boards. During the Contract Term, and excluding any
periods of vacation, sick leave or Disability to which the Executive is
entitled, the Executive agrees to devote the Executive's full attention and
time to the business and affairs of the Companies and to use the Executive's
best efforts to perform faithfully and efficiently the duties and
responsibilities of the Executive's positions as described herein."
5. Article V, Section 5.1 is hereby amended effective as of December
24, 1996, by the deletion of the dollar value "$550,000" in line 3, and the
insertion of the dollar value "$725,000" in lieu thereof.
6. Article V, Section 5.2 is hereby amended effective as of December
24, 1996, by the deletion of the percentage "50%" in line seven, the deletion
of the percentage "100%" in line 10, the deletion of the percentage "50%" in
line 12, and the deletion of the percentage "50%" in line 17, and the insertion
of the percentages "55%", "110%", "55%" and "55%" in lieu thereof respectively.
7. Article VI, Section 6.8 is hereby amended to read "6.8(a)", and new
Section 6.8(b) shall be added as follows:
"6.8(b) Automobile Payment. In the alternative to Section 6.8(a) above,
at the option of the Executive, the Companies may provide the Executive on a
monthly basis with the cash equivalent of the costs to the Companies of
providing the automobile described in paragraph 6.8(a); provided, however,
the Executive shall pay for all expenses associated with the use and enjoyment
of the automobile."
8. Article VII, Section 7.1 shall be deleted in its entirety and
replaced with the following:
"7.1 Reimbursement. The Executive is currently residing in temporary
housing in the Boston Area at his own expense. Should the Executive
choose to relocate his permanent residence to the Boston area during the
term of this Agreement, the Companies shall reimburse the Executive for living
expenses and other relocation expenses in accordance with the Employer's
standard Relocation (the "Policy"), and for such costs as he may incur in
connection with the purchase of a new home in the Boston area to the extent
provided by such Policy. In addition, the Employer shall reimburse the
Executive for such other reasonable and customary living expenses and such
other reasonable and customary relocation expenses not otherwise covered by
the Policy. All amounts accruing to the benefit of the Executive under this
Section 7.1 shall be referred to herein collectively as the "Relocation
Payments".
9. Article X, Section 10.7 is hereby amended by the deletion of the
words "President or Chief Operating Officer" in lines 6 and 7, and the
insertion of the words "Chairman of the Board and Chief Executive Officer" in
lieu thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
Attest: Bradlees Stores, Inc.
David L. Schmitt Cornelius F. Moses, III
______________________________ By:___________________________
Its: _SVP & CFO ______________
Attest: Bradlees, Inc.
David L. Schmitt Cornelius F. Moses, III
______________________________ By:___________________________
Its:__SVP &CFO________________
Attest: Executive
David L. Schmitt Peter Thorner
______________________________ ____________________________
Peter Thorner
EXHIBIT 10.43
April 7, 1998
Bradlees Stores, Inc.
One Bradlees Circle
P.O. Box 859051
Braintree, MA 02185-9051
Attention: Cornelius F. Moses, III
Senior Vice President and
Chief Financial Officer
Re: Consent to Modification of Commitment Letter
Gentlemen:
Reference is made to that certain commitment letter (including the Term
Sheet attached thereto, the "Commitment Letter") dated December 23, 1997, among
Bradlees Stores, Inc., as debtor and debtor-in-possession (the "Debtor") in a
case (the "Case") filed under Chapter 11 of the United States Bankruptcy Code
(the "Code") in the United States Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Court"), and the lenders party thereto (the "Lenders")
regarding post-confirmation financing in connection with a plan of
reorganization to be filed by the Debtor with the Bankruptcy Court. Capitalized
terms used herein without definition shall have the meanings given to such terms
in the Commitment Letter.
You have advised the Lenders that the Debtor currently anticipates
seeking confirmation of a plan of reorganization (the "Plan") that will not
satisfy all of the conditions to the Lenders' commitment under the Commitment
Letter (the "Commitment") and, thus, would render the Commitment and the
Commitment Letter null and void and of no further force or effect. Therefore,
the Debtor has requested that the Lenders consent to a modification of the
Commitment Letter to provide for (i) the issuance of certain specified secured
indebtedness to certain pre-petition creditors of the Debtor and (ii) the
granting to certain of the Debtor's pre-petition trade creditors of a
second-priority lien on the Debtor's Inventory, in each case in connection with
the Plan and as more specifically set forth below.
Bradlees Stores, Inc.
April 7, 1998
Page 2
Subject to the approval by the Bankruptcy Court of all aspects of this
letter agreement (this "Consent"), the Commitment Letter as modified by this
Consent (the "Modified Commitment Letter"), and the transactions contemplated
by the Modified Commitment Letter (such approval of the Bankruptcy Court being
evidenced by the entry of one or more orders satisfactory in form and substance
to the Lenders), and subject to the payment of the Consent Fee set forth below,
the Lenders' commitment to provide the Facility as set forth in the Commitment
Letter is modified as follows:
1. The Plan may provide for the issuance of notes by the Debtor in an
aggregate principal amount not to exceed $40,000,000 bearing interest at a rate
not to exceed 9% per annum (the "Notes") in favor of (to the extent provided in
the Plan) (i) the banks and other financial institutions (the "Pre-Petition
Revolver Bank Group") holding pre-petition claims under that certain Credit
Agreement among Bradlees, Inc., the Pre-Petition Revolver Bank Group and Bankers
Trust Company, as Agent, dated as of March 3, 1993, (ii) the banks and other
financial institutions (the "SPE Group") holding pre-petition claims under the
SPE Documents (as defined in the Plan)1 and (iii) to the extent allowed by order
of the Bankruptcy Court, holders of pre-petition, general unsecured claims
against certain of the Debtor's subsidiaries, in partial satisfaction of such
claims.
a. The Notes shall have a term of not less than five (5) years from
date of issuance, may require equal semi-annual payments of accrued interest
(but not principal), and shall be subject to prepayment without penalty from
the proceeds of the sale of the Permissible Collateral (as defined below) and
the net proceeds of any equity offering by the Debtor on or after the Plan
Effective Date.
b. The Notes may be secured by the Debtors's or the Guarantors'
interest in the real property and improvements located at the site of the
Debtor's locations in Yonkers, New York (the "Yonkers Store") and Union Square,
New York, New York (the "Union Square Store") (and the proceeds of any
disposition of any of the foregoing) (collectively, the "Permissible
Collateral").
_____________________
1 When this Consent refers to definitions contained in "the Plan", such
definitions are those contained in the draft Plan, dated March 27, 1998,
provided to the Administrative Agent on March 30, 1998.
Bradlees Stores, Inc.
April 7, 1998
Page 3
c. All other terms and provisions of the Notes, as well as all
documentation relating to the Permissible Collateral, shall be reasonably
satisfactory to the Administrative Agent and, in any event, shall not contain
any cross-default or cross-acceleration rights to the Facility.
2. The Plan may also provide for the issuance by the Debtor of unsecured
notes in an aggregate principal amount not to exceed $3.5 million bearing
interest at a rate not to exceed 8% per annum (the "Cure Notes") in favor of
non-debtor parties to executory contracts that are to be assumed pursuant to the
Plan for the purpose of paying "cure amounts" as required by section 365 of the
Bankruptcy Code.
a. The Cure Notes shall have a term of not less than three years
and may be subject to equal periodic payments of principal and accrued interest
over such three-year period. In addition, the Cure Notes may be prepaid by the
Debtor, without premium or penalty, with the prior written consent of the
Administrative Agent, such consent not to be unreasonably withheld.
b. All other terms and provisions of the Cure Notes shall be
reasonably satisfactory to the Administrative Agent and, in any event, shall
not contain any cross-default or cross-acceleration rights to the Facility.
3. The Plan may also provide for the issuance of notes by the
Debtor in an aggregate principal amount not to exceed $840,000 bearing interest
at a rate not to exceed 8% per annum (the "CAP Notes") in favor of the holders
of Capital Lease Claims (as defined in the Plan).
a. The CAP Notes shall have a term of not less than six years
and may require equal semi-annual payments of accrued interest (but not
principal). In addition, the CAP Notes may be prepaid by the Debtor, without
premium or penalty, with the prior written consent of the Administrative
Agent, such consent not to be unreasonably withheld.
b. The CAP Notes may be secured by a first lien on the property
on which the holder of a Capital Lease Claim is determined by the Bankruptcy
Court to have held a valid first priority security interest as of the Petition
Date (the "CAP Collateral").
c. All other terms and provisions of the CAP Notes, as well as
all documentation related to the CAP Collateral, shall be reasonably
satisfactory to the Administrative Bradlees Stores, Inc.
April 7, 1998
Page 4
Agent and, in any event, shall not contain any cross-default
or cross-acceleration rights to the Facility.
4. The Plan may also provide that certain trade creditors of the
Debtor be granted a second-priority Lien on the Debtor's Inventory to secure
the extension of trade credit by such trade creditors subsequent to
confirmation of the Plan (the "Trade Lien"). All terms and conditions of the
Trade Lien (including all documentation relating thereto) shall be reasonably
satisfactory to the Administrative Agent and, in any event, shall include the
following:
a. The Trade Lien shall be junior and subordinate to the Lien
of the Lenders securing the Obligations and shall provide that the holders of
the Trade Lien shall have no right to exercise or enforce any rights with
respect to the Trade Lien or the Inventory (or to consent to or approve any
such exercise or enforcement by the Administrative Agent), or to receive any
payment from the proceeds of the Inventory, unless and until the Obligations
are finally and indefeasibly paid in full.
b. The documentation evidencing the Trade Lien shall not
contain any cross-default or cross-acceleration rights to the Facility. In
addition, the holders of the Trade Lien shall have no right to consent to or
approve any amendments, modifications, refinancings or other changes to the
Facility, including, without limitation, increases in advance rates, interest
rates and principal amount and the creation or elimination of any reserves or
categories of ineligible Inventory.
c. The Trade Lien shall be available to vendors who provide
retail merchandise to the reorganized Debtor after the Plan Effective Date or
to vendors who have provided retail merchandise to the Debtor before the Plan
Effective Date which is not paid for as of the Plan Effective Date, in each
case subject to the release provisions set forth in paragraph d. below.
d. The Trade Lien shall be automatically released upon the
earliest to occur of (i) two (2) years after the Plan Effective Date,
(ii) the date on which the ratio of the amount of accounts payable of the
Debtor to the amount of Inventory of the Debtor, computed on a cost basis, for
any rolling three-month period is more than five percentage points less than
such ratio on a comparable store basis for the same period in the prior year,
(iii) the consummation of a transaction pursuant to which the reorganized
Debtor or the reorganized Bradlees, Inc. merges or otherwise combines with
another company or companies, (iv) as to any individual trade vendor that has
provided retail merchandise during the pendency of the Case, at such time as
such
Bradlees Stores, Inc.
April 7, 1998
Page 5
vendor fails to provide retail merchandise to the Debtor on
terms which are at least as favorable to the Debtor as the credit terms under
which such vendor provided retail merchandise to the Debtor in the year prior
to the Plan Effective Date and (v) as to any individual trade vendor that
initially provides retail merchandise to the Debtor after the Plan Effective
Date, at such time as such vendor fails to provide retail merchandise to the
Debtor on terms which are as least as favorable to the Debtor as the initial
credit terms under which such vendor first provided retail merchandise to the
Debtor. The Administrative Agent shall have access to all information
necessary to determine if the vendors are providing sufficient credit support,
as determined by the formulas set forth in subparagraphs (ii) and (iv) above,
and shall have the authority to execute and file all documents necessary to
effectuate any such release.
5. In connection with the above-described modifications to the
Commitment Letter, the Debtor and the Lenders agree that the EBITDA
condition precedent to lending set forth in Sections 4.01(t) of the
Term Sheet shall be calculated without giving effect to any revenues
attributable to the operations of the Yonkers Store and the Union
Square Store for the entire periods for which such condition precedent
is measured.
In consideration for the Lenders' agreement to modify the Commitment
Letter as set forth above, the Debtor shall pay to the Administrative Agent,
for the pro rata benefit of the Lenders, a consent fee equal to $500,000
(the "Consent Fee"), payable in immediately available funds on the Plan
Effective Date.
Except as specifically provided herein, this Consent does not in any
way affect or impair the terms, conditions and other provisions of the
Commitment Letter, and all terms, conditions (including all conditions
precedent, except as provided in paragraph 3 above) and other provisions of
the Commitment Letter shall remain in full force and effect. Any modifications
or amendments herein are limited to the specific provisions described and shall
not be deemed to (i) be amendments of any other term or condition of the
Commitment Letter or (ii) prejudice any rights not specifically addressed
herein which the Administrative Agent or any Lender may now have or may have
in the future under the Commitment Letter. Furthermore, nothing herein shall
be deemed to be a waiver of the rights of the Lenders (as Lenders under the
DIP Facility) to object to any Plan as creditors under such facility.
For the avoidance of doubt, the terms and conditions of the Lenders'
commitment under the Modified Commitment Letter with respect to the Facility
are not limited to the terms and conditions set forth in the Modified
Commitment Letter or this Consent. Those matters that are not covered by
or made clear under the provisions of the Modified Commitment Letter or this
Consent are subject to the approval and agreement of the Lenders and the
Debtor.
Bradlees Stores, Inc.
April 7, 1998
Page 6
The expense reimbursement, indemnity and confidentiality provisions of
the Commitment Letter shall apply with equal force to this Consent.
This Consent shall be governed by, and construed in accordance with,
the laws of the State of New York.
If the foregoing correctly sets forth our agreement, please indicate
your acceptance of the terms hereof by signing and returning to the
Administrative Agent by telecopy not later than 5:00 p.m., Boston time,
on April 7, 1998 (with an original to follow by overnight mail), the enclosed
duplicate original of this Consent. The modifications to the Commitment Letter
contained herein shall terminate if (a) you shall have failed to accept this
Consent in the time and manner set forth in the previous sentence or
(b) the Lenders shall not have received payment of the Consent Fee no later
than the Plan Effective Date.
This Consent may be executed in any number of counterparts, each
of which shall be an original and all of which, when taken together, shall
constitute one agreement.
Very truly yours,
BANKBOSTON, N.A.
By: /s/ ELIZABETH A. RATTO
Name: Elizabeth A. Ratto
Title: Vice President
CIT GROUP/BUSINESS CREDIT, INC.,
as Co-Agent and as a Lender
By: /s/ JAMES CONHEENEY
Name: James Conheeney
Title: Vice President
Address: 1211 Avenue of the Americas
New York, NY 10036
CONGRESS FINANCIAL CORPORATION (NEW ENGLAND),
as Co-Agent and as a Lender
By: /s/ KATHLEEN J. MERRITT
Name: Kathleen J. Merritt
Title: Vice President
Address: One Post Office Square, Suite 3600
Boston, MA 02109
LASALLE NATIONAL BANK,
as a Lender
By: /s/ BEN SCHREINER
Name: Ben Schreiner
Title: Loan Officer
Address: 135 S. LaSalle St.
Chicago, IL 60603
FIRSTRUST BANK,
as a Lender
By: /s/ KENT D. NELSON
Name: Kent D. Nelson
Title: Vice President
Address: 1931 Cottman Ave.
Philadelphia, PA 19111
AT&T COMMERCIAL FINANCE CORPORATION,
as a Lender
By: /s/ PAUL SEIDENWAR
Name: Paul Seidenwar_
Title: Assistant Vice President
Address: 2 Gate Hall Dr.
Parsippany, NJ 07054
GREEN TREE FINANCIAL SERVICING CORPORATION,
as a Lender
By: /s/ CHRISTOPHER A. GOUSKAS
Name: Christopher A. Gouskas
Title: Senior Vice President
Address: 100 North Point Center East, Suite 200
Alpharetta, GA 30022
HELLER FINANCIAL, INC.,
as a Lender
By: /s/ STEPHEN M. METIVIER
Name: Stephen M. Metivier
Title: Assistant Vice President
Address: 150 East 42nd Street
New York, NY 10017
FREMONT FINANCIAL CORPORATION,
as a Lender
By: /s/ CHERI RITTMAN
Name: Cheri Rittman
Title: Vice President
Address: 2020 Santa Monica Blvd., Suite 600
Santa Monica, CA 90404
FLEET NATIONAL BANK,
as a Lender
By: /s/ THOMAS E. HJERPE
Name: Thomas E. Hjerpe
Title: Vice President
Address: One Federal St.
Boston, MA 02110
NATIONAL CITY COMMERCIAL FINANCE, INC.,
as a Lender
By: /s/ CHRISTINA M. LUCAS
Name: Christina M. Lucas
Title: Vice President
Address: 1965 East Sixth St., Suite 400
Cleveland, Ohio 44114-2214
Agreed to and accepted as of the date first above written:
BRADLEES STORES, INC.,
as Debtor and Debtor-in-Possession
By: /s/ CORNELIUS F. MOSES, III
Name: Cornelius F. Moses, III
Title: Senior Vice President
and Chief Financial Officer
EXHIBIT 23.1
ARTHUR ANDERSON LLP
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporaton
of our report dated March 17, 1998 included in this Form 10-K, into the
Company's previously filed Registration Statement Nos. 33-64850, 33-64858,
33-80896, 33-86954, 33-86956 and 33-92178.
New York, New York /s/ ARTHUR ANDERSON LLP
April 29, 1998
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Nos. 33-64850,
33-64858, 33-80896, 33-86954, 33-86956 and 33-92178 of Bradlees, Inc. and
subsidiaries (operating as Debtor-in-Possession) on Forms S-8 of our report
dated March 20, 1997 (which expresses an unqualified opinion and includes
expanatory paragraphs relating to (a) the Company's filing for reoganization
under Chapter 11 of the Federal Bankruptcy Code, and (b) the Company's 1996
and 1995 losses from operations and stockholders' deficiency which raise
substantial doubt about the Company's ability to continue as a going concern)
appearing in this Annual Report on Form 10-K of Bradlees, Inc. and subsidiaries
for the year ended January 31, 1998.
Boston, Massachusets /s/ DELOITTE & TOUCHE
April 29, 1998
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