UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 1, 1998
Commission file Number 1-11134
BRADLEES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3156108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Bradlees Circle
Braintree, MA 02184
(Address of principal executive offices)
(Zip Code)
(781) 380-3000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
Number of shares of the issuer's common stock outstanding as of
September 1, 1998: 11,310,384 shares.
Exhibit Index on Page 23
Page 1 of 25
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Bradlees, Inc., Debtor-in-Possession:
We have reviewed the accompanying condensed consolidated balance
sheet of Bradlees, Inc. and subsidiaries, Debtor-in-Possession
(the "Company"), as of August 1, 1998, and the related condensed
consolidated statements of operations and cash flows for the
twenty-six week period ended August 1, 1998 and the condensed
consolidated statements of operations for the thirteen-week
period ended August 1, 1998. These financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above to be in conformity with
generally accepted accounting principles.
The accompanying condensed consolidated financial statements
have been prepared assuming that the Company will continue as a
going concern. As discussed in Note 1 to the condensed
consolidated financial statements [and Notes 1 and 3 to the
annual financial statements for the year ended January 31, 1998
(not presented herein)], on June 23, 1995, the Company filed a
petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. In addition, the Company has experienced
operating losses in each of the three years ended January 31,
1998, and for the twenty-six week period ended August 1, 1998
and at August 1, 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 2. Management's plans in regard to these
matters are discussed in Notes 1 and 2 to the condensed
consolidated financial statements.
The eventual outcome of these matters discussed in the previous
paragraph is not presently determinable. The condensed
consolidated financial statements do not include any adjustments
relating to the resolution of these uncertainties or the
recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities and changes in
stockholders' equity that might be necessary should the Company
be unable to continue as a going concern.
The accompanying condensed consolidated balance sheet of the
Company as of August 2, 1997, the condensed consolidated
statements of operations for the thirteen week period ended
August 2, 1997, and the related condensed consolidated
statements of operations and cash flows for the twenty-six week
period ended August 2, 1997 were reviewed by other accountants
whose report was dated August 19, 1997. This report stated that
the other accountants were not aware of any material
modifications that should be made to those statements in order
for them to be in conformity with generally accepted accounting
principles and included explanatory paragraphs relating to (i)
the Company's filing for reorganization under Chapter 11 of the
Federal Bankruptcy Code, and (ii) substantial doubt about the
Company's ability to continue as a going concern.
/s/ARTHUR ANDERSEN LLP
----------------------
New York, New York
August 18, 1998
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
PART I FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
13 Weeks Ended
Aug. 1, 1998 Aug. 2, 1997
------------ ------------
Total sales $ 322,791 $ 311,507
Leased department sales 12,410 14,091
-------- -------
Net sales 310,381 297,416
Cost of goods sold 213,788 204,480
-------- -------
Gross margin 96,593 92,936
Leased department and other
operating income 2,957 3,145
-------- -------
99,550 96,081
Selling, store operating,
administrative and distribution
expenses 92,250 97,726
Depreciation and amortization exp. 7,993 9,197
Interest and debt expense 3,964 3,951
Reorganization items (1,935) 2,071
-------- -------
Net loss $ (2,722) $ (16,864)
======== ========
Comprehensive loss $ (2,722) $ (16,864)
======== ========
Net loss per share -
basic and diluted $ (0.24) $ (1.48)
======== ========
Weighted average shares
outstanding (in thousands) -
basic and diluted 11,309 11,387
======== ========
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
26 Weeks Ended
Aug. 1, 1998 Aug. 2, 1997
------------ ------------
Total sales $ 616,097 $ 588,346
Leased department sales 21,845 23,559
-------- -------
Net sales 594,252 564,787
Cost of goods sold 417,989 392,192
-------- -------
Gross margin 176,263 172,595
Leased department and other
operating income 5,730 5,440
-------- -------
181,993 178,035
Selling, store operating,
administrative and distribution
expenses 184,777 196,048
Depreciation and amortization exp. 16,567 18,540
Loss on disposition of property 241 -
Interest and debt expense 7,590 7,486
Reorganization items 194 4,818
-------- --------
Net loss $ (27,376) $ (48,857)
======== ========
Commprehensive loss $ (27,376) $ (48,857)
======== ========
Net loss per share
basic and diluted $ (2.42) $ (4.29)
======== ========
Weighted average shares
outstanding (in thousands)
basic and diluted 11,309 11,387
======== ========
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
Aug. 1, 1998 Jan. 31, 1998 Aug. 2, 1997
------------ ------------- ------------
ASSETS
Current assets:
Unrestricted cash and
cash equivalents $8,148 $10,949 $10,858
Restricted cash
and cash equivalents 24,862 16,760 9,334
------ ------ ------
Total cash and
cash equivalents 33,010 27,709 20,192
------ ------- -------
Accounts receivable 7,373 10,013 10,453
Inventories 239,478 238,629 253,993
Prepaid expenses 8,733 8,733 8,887
Assets held for sale - 7,754 7,754
------ ------- -------
Total current assets 288,594 292,838 301,279
------- ------- -------
Property, plant and
equipment, net:
Property excl. capital
leases, net 124,768 131,525 136,975
Property under capital
leases, net 17,978 18,959 22,681
------- ------- -------
Total property, plant
and equipment, net 142,746 150,484 159,656
------- ------- -------
Other assets:
Lease interests at fair
value, net 139,063 142,454 146,570
Assets held for sale - 4,000 5,250
Other, net 4,850 5,390 4,432
------- ------- -------
Total other assets 143,913 151,844 156,252
------- ------- -------
Total assets $575,253 $595,166 $617,187
======== ======== ========
(Continued)
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
Aug. 1, 1998 Jan. 31, 1998 Aug. 2, 1997
------------ ------------- ------------
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $121,153 $124,361 $139,410
Accrued expenses 24,324 30,516 41,389
Self-insurance reserves 6,474 6,564 7,378
Short-term debt 111,592 84,208 89,000
Current portion of capital
lease obligations 1,038 1,038 1,966
-------- ------- -------
Total current liabilities 264,581 246,687 279,143
-------- ------- -------
Long-term liabilities:
Obligations under
capital leases 26,499 27,073 32,224
Deferred income taxes 8,581 8,581 8,581
Self-insurance reserves 13,145 13,328 14,979
Other long-term liabilities 21,333 23,342 26,976
------- ------- -------
Total long-term liabilities 69,558 72,324 82,760
------- ------- -------
Liabilities subject to
settlement under the
reorganization case 554,439 562,105 567,365
Stockholders' equity
(deficiency):
Common stock - 11,310,384
outstanding (11,312,154
at 1/31/98, 11,387,154
at 8/2/97)
Par value 115 115 115
Additional paid-in-capital 137,821 137,821 137,951
Accumulated deficit (450,458) (423,082) (449,382)
Treasury stock, at cost (803) (804) (765)
--------- --------- ---------
Total stockholders'
equity (deficiency) (313,325) (285,950) (312,081)
--------- --------- ---------
Total liabilities and
stockholders equity
(deficiency) $575,253 $595,166 $617,187
======== ======== ========
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
Aug. 1, 1998 Aug. 2, 1997
------------ ------------
Cash flows from operating
activities:
Net loss $(27,376) $(48,857)
Adjustments to reconcile
net loss to cash used by
operating activities:
Depreciation and amortization exp. 16,567 18,540
Amortization of deferred
financing costs 763 1,577
Reorganization items 194 4,818
Changes in working capital
and other, net (5,698) 3,597
------- ------
Net cash used by operating
activities before
reorganization items (15,550) (20,325)
------- -------
Reorganization items:
Interest income received 472 229
Chapter 11 professional fees paid (5,008) (5,068)
Other reorganization expenses
paid, net (2,688) (3,295)
------- ------
Net cash used by reorganization
items (7,224) (8,134)
------- ------
Net cash used by operating
activities (22,774) (28,459)
Cash flows from investing activities:
Capital expenditures, net (5,540) (10,890)
Increase in restricted cash and
cash equivalents (8,102) (208)
------- -------
Net cash used in investing
activities (13,642) (11,098)
------- -------
Cash flows from financing activities:
Payments of liabilities subject
to settlement (5,231) (3,506)
Deferred financing costs - (1,776)
Borrowings under the DIP facility 27,384 46,500
Proceeds from sales of properties 12,036 -
Principal payments on capital
lease obligations (574) (828)
------- ------
Net cash provided by
financing activities 33,615 40,390
------- ------
Net increase (decrease) in
unrestricted cash and cash
equivalents (2,801) 833
Unrestricted cash and cash equivalents:
Beginning of period 10,949 10,025
------- ------
End of period $8,148 $10,858
======= =======
Supplemental disclosure of cash
flow information:
Cash paid for interest and certain
debt fees $6,501 $5,221
Cash paid for income taxes $ 153 $ 109
Supplemental schedule of noncash
(investing and financing) activities:
Reduction of liabilities subject to
settlement due to transfer of title
to property $2,000 $ -
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The condensed consolidated financial statements of Bradlees,
Inc. and subsidiaries, including Bradlees Stores, Inc.
(collectively "Bradlees" or the "Company"), have been prepared
in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7: "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP
90-7") and generally accepted accounting principles applicable
to a going concern, which principles, except as otherwise
disclosed, assume that assets will be realized and liabilities
will be discharged in the normal course of business. The Company
filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11") on June 23, 1995 (the "Filing").
The Company is presently operating its business as a
debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court").
With respect to the unaudited condensed consolidated
financial statements for the 13 weeks (second quarter) and 26
weeks (year-to-date) ended August 1, 1998 and August 2, 1997, it
is the Company's opinion that all necessary adjustments
(consisting of normal and recurring adjustments) have been
included to present a fair statement of results for the interim
periods. Certain prior-year amounts have been reclassified to
conform to this year's presentation.
These statements should be read in conjunction with the
Company's financial statements (Form 10-K) for the fiscal year
ended January 31, 1998 ("1997"). Due to the seasonal nature of
the Company's business, operating results for the interim
periods are not necessarily indicative of results that may be
expected for the fiscal year ending January 30, 1999 ("1998").
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted,
pursuant to the general rules and regulations promulgated by the
Securities and Exchange Commission (the "SEC").
The Company's ability to continue as a going concern is
dependent upon the confirmation of a plan of reorganization by
the Bankruptcy Court, the ability to maintain compliance with
debt covenants under the DIP Facility (Note 4), achievement of
profitable operations, maintenance of adequate financing, and
the resolution of the uncertainties of the reorganization case
discussed in Note 2. The Company experienced significant
operating losses in 1996 and 1995.
In an effort to return the Company to profitability and
accomplish its long-term goals, the Company is focusing on three
core product lines: moderately-priced basic and casual apparel,
basic and fashion items for the home, and edited assortments of
frequently purchased commodity and convenience products.
Bradlees is committed to quality and fashion, especially in
apparel and home furnishings, and to improved customer service.
The Company believes that it can strategically leverage its
strength in the fashion and quality content of its apparel and
decorative home product offerings while driving traffic with
selected hardlines merchandise.
2. Reorganization Case
In the Chapter 11 case, substantially all liabilities as of
the date of the Filing are subject to settlement under 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 approximately $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
plan of reorganization, and accordingly, are not presently
determinable. Two properties that were financed prior to the
Filing and held for sale at the beginning of 1998 were either
sold or transferred during the second quarter and the associated
pre-petition financing obligation was reduced accordingly (see
Note 7).
The Company currently retains the exclusive
right to solicit acceptance of a plan of reorganization until
October 5, 1998, 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 expects to file an
amended plan of reorganization and related disclosure statement
with the Bankruptcy Court on or about September 17, 1998, and, subject
to confirmation of the amended plan of reorganization, currently
anticipates emergence from Chapter 11 at the end of fiscal 1998.
A hearing to approve the amended disclosure statement has been
scheduled with the Bankruptcy Court for September 17, 1998.
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 $50.4 million was recorded through August 1,
1998, for rejected leases and contracts. This liability may be
subject to future adjustments based on claims filed 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
has recorded its best estimate of the liability for rejected
leases and contracts 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 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 $11.5 million of
adequate protection payments since the Filing have been applied
to reduce the Revolver debt amount. The cash settlement relates
to a portion of the Company's cash balance as of the date of the
Filing ($9.3 million) which was claimed as collateral by the
pre-petition bank group. The claim was settled in full for $9.0
million and approved by the Bankruptcy Court in 1995. All
amounts presented below may be subject to future adjustments
depending on Bankruptcy Court actions, further developments with
respect to disputed claims, determination as to the security of
certain claims, the value of any collateral securing such
claims, or other events.
Liabilities Subject to Settlement (000's)
Under the Reorganization Case Aug.1,1998 Jan.31,1998 Aug.2,1997
- ----------------------------- ---------- ----------- ----------
Accounts payable $165,720 $165,324 $165,762
Accrued expenses 25,646 27,996 27,932
Revolver 69,605 71,105 72,905
2002 Notes 122,274 122,274 122,274
2003 Notes 97,957 97,957 97,957
Financing obligation 12,460 17,951 17,951
Obligations under capital
leases 10,367 11,407 11,647
Provision for rejected leases 50,410 48,091 50,937
-------- -------- --------
$554,439 $562,105 $567,365
======== ======== ========
3. Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at August 1, 1998 were
comprised of the following, along with earned interest of $1.0
million: (a) $6.0 million of the $24.5 million federal income
tax refund received in April, 1996; (b) $1.1 million of
forfeited deposits, net of property carrying costs, received in
1996 on a planned sale of an owned undeveloped property that was
not consummated and $7.6 million of net proceeds received when
this property was sold in March, 1998; (c) $8.0 million from the
sale of a closed store in January, 1998; and (d) other funds
($1.2 million) restricted for security deposits for utility
expenses incurred after the Filing.
4. Debt
As a result of the Filing, substantially all debt
(exclusive of the DIP Facility) outstanding at August 1, 1998,
was classified as liabilities subject to settlement (Note 2).
No principal or interest payments are made on any pre-petition
debt (excluding certain capital leases) without Bankruptcy Court
approval or until 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 2).
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 certain adequate protection
payments approved by the Bankruptcy Court, 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 $7.7
and $15.4 million for the second quarter and year-to-date
periods of 1998, respectively, and $7.8 and $15.6 million for
the second quarter and year-to-date periods of 1997,
respectively.
Financing Facility: The Company has a $250 million financing
facility (the "Financing Facility") (of which $125 million is
available for issuance of letters of credit) with BankBoston
Retail Finance, Inc. ("BBNA") as agent, under which the Company
is allowed to borrow for general corporate purposes, working
capital and inventory purchases. The Financing Facility
consists of (a) an up to eighteen month debtor-in-possession
revolving credit facility in the maximum principal amount of
$250 million (the "DIP Facility"-see below) and, subject to
meeting certain conditions, (b) an up to three year
post-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 DIP Facility
replaced a $200 million Debtor-in Possession Revolving Credit
and Guaranty Agreement (the "Prior DIP Facility") with Chase
Manhattan Bank, as agent. There were outstanding direct
borrowings of $111.6 million under the DIP Facility as of August
1, 1998. Trade and standby letters of credit outstanding under
the DIP Facility were $24.8 and $19.7 million, respectively, at
August 1, 1998, and $29.9 and $19.7 million, respectively, at
August 2, 1997 under the Prior DIP Facility.
The DIP Facility has an
advance rate of 60% of the Loan Value of Eligible Receivables
(as defined), plus 72% of the Loan Value of Eligible Inventory
(as defined). Between March 1 and December 15, the Company can
borrow an overadvance amount on the Loan Value of Eligible
Inventory of 5% (the "Overadvance Amount"), subject to a $20
million limitation. At the Company's option, the Company may
borrow under the DIP Facility at the Alternate Base Rate (as
defined) in effect from time to time (the "Base Rate Applicable
Margin") or the adjusted Eurodollar rate plus 2.25% (the
"Eurodollar Applicable Margin") for interest periods of one, two
or three months. The Base Rate Applicable Margin and Eurodollar
Applicable Margin would be increased 0.5% during any fiscal
month that the Company has Overadvance Amounts. The weighted
average interest rate under the DIP Facility was 7.95% in the
second quarter and 7.97% in the year-to-date period of 1998.
There are no compensating balance requirements under the DIP Facility
but the Company is required to pay an annual commitment fee of
0.3% of the unused portion. The DIP Facility contains
restrictive covenants including, among other things, limitations
on the incurrence of additional liens and indebtedness,
limitations on capital expenditures and the sale of assets, the
maintenance of minimum operating earnings ("EBITDA") and minimum
accounts payable to inventory ratios. The lenders under the DIP
Facility have a "super-priority claim" against the estate of the
Company. As of August 1, 1998, the Company is in compliance
with the DIP Facility covenants. The DIP Facility expires on
the earlier of June 30, 1999, or the effective date of any plan
of reorganization that is confirmed by the Bankruptcy
Court.
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 that the overadvance does not cause the Loan Value of
Eligible Inventory to exceed 75% and 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 would be increased 0.5% 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
modified their commitment so that the plan of reorganization
filed by the Company on April 13, 1998, although not an
all-equity plan, satisfied the conditions for the Exit Facility
and the Company expects to obtain a similar modification for the
amended plan of reorganization (Note 2). The Exit Facility will
be secured by all of the assets of the Company, except interest
in real property (although this may be somewhat modified for the
amended plan of reorganization).
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).
5. Income Taxes
The Company provides for income taxes under the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". On an interim
basis, the Company provides for income taxes using the estimated
annual effective rate method. The Company did not recognize a
quarterly or annual income tax expense or benefit in 1997 and
also does not expect to recognize a quarterly or annual income
tax expense or benefit in 1998.
6. Reorganization Items
The Company provided for or
incurred the following expense and income items during the
second quarter and year-to-date periods of 1998 and 1997,
directly associated with the Chapter 11 reorganization
proceedings and the resulting restructuring of its operations:
(000's)
13 Weeks Ended 26 Weeks Ended
8/1/98 8/2/97 8/1/98 8/2/97
------ ------ ------ ------
Professional fees $2,250 $2,250 $4,500 $5,250
Interest income (351) (111) (472) (229)
Asset write-off 470 - 470 -
Gain on disposition of
properties (1,873) (68) (1,873) (203)
Provision for rejected
leases (2,431) - (2,431) -
------- ------ ------ ------
$(1,935) $2,071 $ 194 $4,818
======= ====== ====== ======
Professional
fees and interest income: Professional fees represent estimates
of expenses incurred, primarily for legal, consulting and
accounting services provided to the Company and the creditors
committee (which are required to be paid by the Company while in
Chapter 11). Interest income represents interest earned on cash
invested during the Chapter 11 proceeding.
Net asset write-off: The
Company incurred a $0.5 million net asset write-off in the
second quarter of 1998 relating to the disposal of greeting card
fixtures that are being replaced as a consequence of the
Company's rejection of its greeting card supply contract.
Gain on disposition
of properties: The Company sold a previously closed store in the
second quarter of 1998 (see Note 7) and recognized a gain of
$1.9 million that was classified as a reorganization item since
the associated asset write-offs were previously included in
reorganization items.
Provision for
rejected leases: During the second quarter of 1998, the Company
was notified by two of its former landlords at closed locations
that the properties had been re-let and therefore their claims
for rejected lease damages were reduced by $2.4 million. The
Company reduced its rejected lease liability accordingly and
recognized a reorganization credit for that amount in the second
quarter. In regards to the rejection of the Company's greeting
card supply contract mentioned above, the Company recorded
certain reclassifications to and within liabilities subject to
settlement under the reorganization case for this contract
rejection.
Restructuring
reserves: The Company closed 6 stores in February, 1998. As of
August 1, 1998, the Company had remaining reserves (included in
accrued expenses) totaling approximately $1.1 million (exclusive
of provisions for rejected leases discussed in Note 2) for costs
associated with the closing of the 6 stores and prior store
closings and restructuring. Approximately $2.7 million of
restructuring costs were paid in the year-to-date period of
1998. The majority of the remaining reserved costs are expected
to be paid within a year.
7. Assets Held for Sale
The Company had assets
held for sale at the beginning of 1998 that consisted of two
properties, one of which was sold in the second quarter for
approximately $4.3 million. A net gain of approximately $1.9
million was recorded in the second quarter for the sale of that
property (Note 6) and the net proceeds from the sale of the
property of $3.5 million were utilized to pay down the related
pre-petition financing obligation. Title to the other property
that had been held for sale was transferred to the related
financing group at the end of the second quarter and the
pre-petition financing obligation was reduced by the amount of
the carrying value of the property ($2 million) pending a final
agreement on the economic value of the property (which is
currently anticipated to be at or above $2 million).
8. 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 Post-Retirement Benefits Other Than Pensions,"
which requires the Company to accrue the estimated cost of
retiree benefit payments during the years the employee provides
services. The Company's post-retirement benefits are funded on
a current basis.
The SFAS No. 106 valuation at January 31, 1998, along with
amortization credits of $1.4 and $2.8 million in the second
quarter and year-to-date periods of 1998, respectively,
reflected changes that were effective January 1, 1998. The
changes represent the elimination of future benefits for active
employees who do not become eligible by January 1, 2000, and a
phase-out of the Company contributions over the next two years
(at 50% per year beginning January 1, 1999) towards the cost of
providing medical benefits to eligible retirees.
9. Statement of Financial Accounting Standards No. 133
In June 1998, the Financial Accounting
Standards Board issued Statement of Financial Accounting
Standards (SFAS) No. 133, "Accounting for Derivative Instruments
and Hedging Activities". SFAS No. 133 establishes accounting
and reporting standards requiring that every derivative
instrument (including certain derivative instruments embedded in
other contracts) be recorded in the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133
requires that changes in the derivative's fair value be
recognized currently in earnings unless specific hedge
accounting criteria are met. SFAS No. 133 is effective for
fiscal years beginning after June 15, 1999. The Company
currently believes that there will be no impact from SFAS No.
133 on the Company's earnings.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Results of operations, summarized in millions of dollars and
expressed as a percentage of net sales (on the next page), were
as follows for the 13 weeks and 26 weeks ended August 1, 1998
("Second Quarter 1998" and "Year-to-Date 1998",respectively) and
for the 13 weeks and 26 weeks ended August 2, 1997 ("Second
Quarter 1997" and "Year-to-Date 1997", respectively):
13 Weeks Ended 26 Weeks Ended
Aug. 1, 1998 Aug. 2, 1997 Aug. 1, 1998 Aug. 2, 1997
------------ ------------ ------------ ------------
(Dollars in millions
except per share
amounts)
Total sales $322.8 $311.5 $616.1 $588.3
Leased dept. sales 12.4 14.1 21.8 23.5
------ ------ ----- -----
Net sales 310.4 297.4 594.3 564.8
Cost of goods sold 213.8 204.5 418.0 392.2
------ ------ ----- -----
Gross margin 96.6 92.9 176.3 172.6
Leased dept. and
other operating income 3.0 3.2 5.7 5.4
------ ------ ----- -----
99.6 96.1 182.0 178.0
Selling,store operating,
administrative and
distribution expenses 92.3 97.7 184.8 196.1
Depreciation and
amortization expense 8.0 9.2 16.6 18.5
Loss on disposition
of properties - - 0.2 -
Interest and debt exp. 3.9 4.0 7.6 7.5
Reorganization items (1.9) 2.1 0.2 4.8
------ ------ ----- ------
Net loss $(2.7) $(16.9) $(27.4) $(48.9)
====== ====== ====== ======
Net loss
per share $(0.24) $(1.48) $(2.42) $(4.29)
====== ====== ====== ======
Total sales incr.(decr.):
All stores 3.6 % (19.3)% 4.7 % (20.1)%
Comparable stores 7.4 % (7.3)% 8.6 % (6.9)%
Number of stores in
operation at end of
period 103 109 103 109
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Con't)
13 Weeks Ended 26 Weeks Ended
Aug. 1, 1998 Aug. 2, 1997 Aug. 1, 1998 Aug. 2, 1997
------------ ------------ ------------ ------------
As a percentage of
net sales, results
were as follows:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 68.9 68.8 70.3 69.4
------ ------ ------ ------
Gross margin 31.1 31.2 29.7 30.6
Leased depart.
other oper. income 1.0 1.1 0.9 0.9
------ ------ ----- -----
32.1 32.3 30.6 31.5
Selling, store oper.,
administrative and
distribution exp. 29.7 32.9 31.1 34.7
Depreciation and
amortization expense 2.6 3.1 2.8 3.3
Loss on disposition
of properties - - - -
Int. and debt exp. 1.3 1.3 1.3 1.3
Reorganization items (0.6) 0.7 - 0.9
------ ------ ----- -----
Net loss (0.9)% (5.7)% (4.6)% (8.7)%
====== ======= ======= =======
The following discussions, as well as other portions of this
document, include 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 second-half
borrowings, amounts available to borrow and capital expenditures
are dependent on the Company's future operating performance and
ability to meet its financial obligations, which is further
dependent upon, among other things, continued acceptance of the
Company's new merchandising and marketing initiatives,
competitive conditions, changes in consumer spending and
consumer spending habits, weather, economic and political
conditions, availability and cost of sufficient labor, the Asian economic
conditions, and changes in import duties, tariffs and quotas.
Second Quarter 1998 Compared to Second Quarter 1997
- ---------------------------------------------------
Total sales for Second Quarter 1998
increased $11.3 million or 3.6% from Second Quarter 1997 due to
an increase of 7.4% in comparable store sales (including leased
shoe department sales), partially offset by the impact from
closing six stores in February, 1998. The increase in
comparable store sales was due primarily to the various
merchandising and marketing initiatives started in 1997,
including the reintroduction of lower opening price points in
certain departments and layaway, more item-intensive and
price-point oriented circular ad offerings, the addition of
certain convenience and commodity products to drive traffic, and
the implementation of two key programs: "Certified Value"
(highlights highly recognizable items at competitive everyday
prices) and "WOW" (integrates targeted and unadvertised
opportunistic purchases). There were strong sales of both
hardlines and softlines in Second Quarter 1998.
Gross margin increased $3.7 million in Second Quarter 1998
compared to Second Quarter 1997 due principally to the strong
comparable store sales. Gross margin as a percentage of net
sales remained virtually unchanged (31.1% vs. 31.2%) from the
Second Quarter of 1997. Leased department and other operating
income decreased $0.2 million or 0.1% as a percentage of net
sales in Second Quarter 1998 compared to Second Quarter 1997.
Selling, store operating, administrative and distribution
("SG&A") expenses declined $5.4 million or 3.2% as a percentage
of net sales in Second Quarter 1998 from Second Quarter 1997.
The improved SG&A expense performance was due primarily to the
store closings, reductions in store operating and advertising
expenses, and reductions in overhead costs, including a $1.4
million decrease in benefits expense in Second Quarter 1998
resulting from a reduction in retiree medical benefits and
improved monitoring of vendor account activities.
Depreciation and amortization expense declined $1.2 million
or 0.5% as a percentage of net sales in Second Quarter 1998 from
Second Quarter 1997 due primarily to the impact of the closed
stores.
Interest and debt expense was virtually unchanged and
remained the same as a percentage
of net sales in Second Quarter 1998 from Second Quarter 1997.
Peak and average revolver borrowings were $127 and $116 million,
respectively, in Second Quarter 1998 compared to $89 and $79
million, respectively, in Second Quarter 1997, (see Liquidity
and Capital Resources), and the weighted average revolver
interest rate in Second Quarter 1998 (7.95%) was up from the
prior-year period (7.63%). The unfavorable impact on interest
expense from these factors was offset by lower capital lease
interest expense and lower amortization of deferred financing
costs in Second Quarter 1998.
The credit in reorganization items of $1.9
million in Second Quarter 1998 and the charge of $2.1 million in
Second Quarter 1997 were directly associated with the Chapter 11
proceedings and related restructuring and are discussed in Note
6.
The Company did not record an income tax
provision in Second Quarter 1998 due to the current expectation
of no income tax expense or benefit in 1998. There was also no
income tax expense or benefit recorded in Second Quarter 1997.
Year-to-Date 1998 Compared to Year-to-Date 1997
- -----------------------------------------------
Year-to-Date 1998 total sales increased
$27.8 million or 4.7% from Year-to-Date 1997 due to an increase
of 8.6% in comparable store sales, partially offset by the
impact from closing six stores in February, 1998. The increase
in Year-to-Date comparable store sales was due primarily to the
factors discussed above for Second Quarter 1998.
Gross margin for Year-to-Date 1998
increased $3.7 million, primarily as a result of the strong
comparable store sales but decreased 0.9% as a percentage of net
sales due primarily to a 1.7% decline in the gross margin rate
in the first quarter of 1998. The decrease in the gross margin
rate in the first quarter was due primarily to a lower initial
markup, partially offset by fewer clearance markdowns.
Leased department and other
operating income increased $0.3 million in Year-to-Date 1998
compared to Year-to-Date 1997. Layaway fee income more than
offset the impact from the store closings and unfavorable leased
shoe department sales.
Year-to-Date 1998 SG&A
expenses declined $11.3 million or 3.6% as a percentage of net
sales compared to Year-to-Date 1997. The improved SG&A expense
performance was due primarily to the same factors discussed
above for Second Quarter 1998.
Depreciation and amortization expense declined $1.9 million or 0.5%
as a percentage of net sales in Year-to-Date 1998 compared to
Year-to-Date 1997. The decline was primarily due to the closing
of six stores in February 1998.
Interest and debt expense increased $0.1 million and remained
the same as a percentage of net sales in Year-to-Date 1998 from
Year-to-Date 1997. Peak and average revolver borrowings were
$127 and $108 million, respectively, in Year-to-Date 1998
compared to $94 and $73 million, respectively, in Year-to-Date
1997, and the weighted average revolver interest rate was 7.97%
during Year-to-Date 1998 compared to 7.45% in the prior-year
period. The unfavorable impact on Year-to-Date 1998 interest
expense from these factors was offset by the same factors
discussed above for Second Quarter 1998.
Reorganization items of $0.2 and $4.8 million for
Year-to-Date 1998 and Year-to-Date 1997, respectively, were
associated with the Chapter 11 proceedings and related
restructuring and are discussed in Note 6.
The Company did not record an income
tax provision in Year-to-Date 1998 due to the current
expectation of no income tax expense or benefit in 1998. There
was no income tax expense or benefit recorded in Year-to-Date
1997.
Liquidity and Capital Resources
- -------------------------------
The Company had outstanding
borrowings of $111.6 million at August 1, 1998, exclusive of the
issuance of letters of credit, under the Company's $250 million
DIP Facility (Note 4). As of August 2, 1997, the Company had
outstanding borrowings of $89.0 million, exclusive of the
issuance of letters of credit, under the Prior DIP Facility
(Note 4). The increase in borrowings since the end of Second
Quarter 1997 relates primarily to the net loss incurred in
Year-to-Date 1998, including Chapter 11 professional fees and
other reorganization expenses.
The Company currently expects its borrowings, exclusive of the
issuance of letters of credit, for the second half of 1998 to peak at
approximately $180 million in October or November, 1998 and
average approximately $130 million. The amount available to
borrow in the second half of 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 $180 million.
Other than payments made to certain pre-petition creditors
approved by the Bankruptcy Court (Notes 2 and 4), principal and
interest payments on indebtedness, exclusive of certain capital
lease obligations, incurred prior to the Filing have not been
made and will not be made without Bankruptcy Court approval or
until 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 Year-to-Date 1998, cash used by operations
before reorganization items was $15.6 million, compared to $20.3
million of cash used by operations before reorganization items
in Year-to-Date 1997. This decrease in cash usage was due
principally to the improvement in operating results,partially
offset by a reduction in accrued expenses (see discussion
below).
Net cash used by reorganization items in
Year-to-Date 1998 of $7.2 million was comprised of professional
fee payments of $5.0 million and store closing and severance
costs of $2.7 million, partially offset by interest income of
$0.5 million.
Inventories at August 1, 1998,
decreased $14.5 million from August 2, 1997, due primarily to
the closing of six stores in February 1998 (inventories
increased approximately $1.6 million, excluding the impact of
the closed stores). Accounts payable at August 1, 1998,
decreased $18.3 million from August 2, 1997, due, in part, to
the decrease in inventories.
Accrued expenses at August 1, 1998, were $6.2 million lower than
at January 31, 1998, due primarily to payments made against certain
reserves established in or prior to 1997 for performance
bonuses, employee severance and termination benefits and store
closing costs. Accrued expenses were $17.0 million lower than
at August 2, 1997, due primarily to reductions in severance
reserves, vacation pay liabilities and store closing costs.
The Company incurred capital expenditures of $5.5 million in
Year-to-Date 1998 (compared to $10.9 million in Year-to-Date
1997), primarily for management information systems, store
remodels and store maintenance projects. The larger
Year-to-Date 1997 total was principally a result of the 1997
expenditures associated with a new merchandise management
system. For all of 1998, the Company expects total capital
expenditures to be approximately $20 million, primarily for
management information systems (including the initial
expenditures for a warehouse management system and enhancements
to the new merchandise management system), the remodeling of
nine stores, and other store improvements and maintenance. The
Company currently expects to finance these expenditures through
internally-generated funds.
The Company believes its business strategies and the
availability of its DIP Facility and Exit Facility (Note 4),
together with the Company's available cash and expected cash
flows from 1998 operations and beyond, will enable Bradlees to
fund its expected needs for working capital, capital
expenditures and debt service requirements. Achievement of
expected cash flows from operations will be dependent upon the
Company's attainment of sales, gross profit, expense and trade
support levels that are reasonably consistent with its financial
plans. Such operating performance will be subject to financial,
economic and other factors affecting the industry and operations
of the Company, including factors beyond its control.
Year 2000 Project
- -----------------
There have been no significant changes to the
Company's Year 2000 project as reported in its Form 10-K for the
fiscal year ended January 31, 1998. The Year 2000 project is
proceeding as planned and its cost is estimated to be
approximately $3 to $4 million, the majority of which is
expected to be incurred in 1998. The Company incurred
approximately $1.2 million in costs in Year-to-Date 1998. The
Company expects that the Year 2000 project will be substantially
complete by the second quarter of 1999.
The Company contracted with
a major outside consulting firm to provide the majority of the
resources required to identify, and then replace or remediate,
the Company's systems as necessary. The company also intends to
develop contingency plans during the second-half of 1998 in the
event that such replacement or remediation is not fully
completed in a timely manner. If the Year 2000 upgrades,
modifications and conversions are not made, or are not made in a
timely manner, the Year 2000 issue could have a material impact
on the Company's operations.
The costs of the Year
2000 project and the dates on which the Company plans to
complete Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
plans.
BRADLEES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. - Exhibits and Reports on Form 8-K
(a) Index to Exhibits
Exhibit No. Exhibit Page No.
- ----------- ------------------------------- -------
15 Letter re: unaudited interim financial 25
information.
(b) Reports on Form 8-K
The following reports on Form 8-K were filed during the
quarterly period ended August 1, 1998:
Date of Report Date of Filing Item Number Description
- -------------- -------------- ----------- ------------------
June 4, 1998 June 5, 1998 5 Disclosure of first
quarter 1998 results
compared to plan.
BRADLEES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
BRADLEES, INC.
Date: September 14, 1998 By /s/ PETER THORNER
-----------------
Peter Thorner
Chairman and Chief
Executive Officer
Date: September 14, 1998 By /s/ CORNELIUS F. MOSES III
--------------------------
Cornelius F. Moses III
Senior Vice President,
Chief Financial Officer
Exhibit 15
August 18, 1998
Bradlees, Inc.
One Bradlees Circle
Braintree, Massachusetts 02184
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of
the unaudited interim financial information of Bradlees, Inc.,
and subsidiaries, Debtor-in-Possession, for the 13-week period
ended August 1, 1998 as indicated in our report dated August 18,
1998 which included a going concern paragraph relating to (i)
the Company's filing for reorganization under Chapter 11 of the
U.S. Bankruptcy Code, (ii) certain matters which raise
substantial doubt about the Company's ability to continue as a
going concern. Because we did not perform an audit, we
expressed no opinion on that information.
We are aware that out report referred to above, which is
included in your Quarterly Report on Form 10-Q for the quarter
ended August 1, 1998, is incorporated by reference in
Registration Statement Nos. 33-64850, 33-64858, 33-80896,
33-86954, 33-86956 and 33-92178.
We also are aware that the aforementioned report, pursuant to
Rule 436 (c) under the Securities Act of 1933, is not considered
a part of the Registration Statement prepared or certified by an
accountant or a report prepared or certified by an accountant
within the meaning of Sections 7 and 11 of that Act.
/s/ARTHUR ANDERSEN LLP
----------------------
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