<PAGE>
As filed with the Securities and Exchange Commission on December 14, 1999
Registration Statement No. 333-66953
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
POST-EFFECTIVE
AMENDMENT NO. 5
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
---------------
BRADLEES, INC.
BRADLEES STORES, INC. and NEW HORIZONS OF YONKERS, INC.
(Exact name of Registrant as specified in its charter)
Bradlees, Inc.--Massachusetts 5311 Bradlees, Inc.--04-3156108
(Primary Standard
Industrial
Classification
Code Number)
Bradlees Stores, Inc.--Massachusetts Bradlees Stores, Inc.--04-3220855
New Horizons of Yonkers, New Horizons of Yonkers,
Inc.--Delaware Inc.--04-3172952
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
One Bradlees Circle
Braintree, Massachusetts 02184
(781) 380-3000
(Address, including zip code, and telephone number, including area code, of
Registrant's principal executive office)
PETER THORNER
Chairman of the Board and Chief Executive Officer
&
DAVID L. SCHMITT
Senior Vice President, General Counsel
Secretary and Clerk
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------
Copy to:
RAYMOND C. ZEMLIN, P.C.
Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
(617) 570-1000
---------------
Approximate date of commencement of proposed sale to the public: From time to
time after this Registration Statement becomes effective, which time is to be
determined by the Selling Securityholders. All of the Securities offered hereby
are offered for the account of the Selling Securityholders.
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act Registration Statement number of the earlier
effective Registration Statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this Prospectus is not complete and may be changed. The +
+Selling Securityholders may not sell these securities until the Registration +
+Statement filed with the Securities and Exchange Commission is effective. +
+This Prospectus is not an offer to sell these securities and it is not +
+soliciting an offer to buy these securities in any State where the offer or +
+sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
PROSPECTUS
BRADLEES, INC.
7,267,424 Shares of Common Stock
BRADLEES STORES, INC.
$36,000,000 of 9% Convertible Notes
Bradlees, Inc. and its subsidiary companies operate discount department
stores in the Northeast through Bradlees, Inc.'s subsidiary, Bradlees Stores,
Inc. The Securities being offered by this Prospectus were issued by us under
the terms of our bankruptcy reorganization.
This Prospectus relates to:
. 7,267,424 shares of Common Stock of Bradlees, Inc.;
. $36,000,000 of 9% Convertible Notes issued by Bradlees Stores, Inc. and
the Common Stock issuable upon conversion of the Convertible Notes; and
. The guarantee by Bradlees, Inc. and New Horizons of Yonkers, Inc. of the
9% Convertible Notes.
We are registering these securities on behalf of the Selling Securityholders.
The Selling Securityholders received these securities, directly or indirectly,
pursuant to our Plan of Reorganization in exchange for the cancellation of
various indebtedness owed by us to them. We are not selling any of these
securities and we will not receive any proceeds from the sale of these
securities. The Selling Securityholders may offer these securities through
public or private transactions, on the Nasdaq National Market, at prevailing
prices or at privately negotiated prices. The registration of these securities
does not necessarily mean that any Selling Securityholder will actually sell
such securities.
The Common Stock offered by this Prospectus is listed on the Nasdaq National
Market under the symbol "BRAD." On December 7, 1999, the last reported sale
price of our Common Stock was $9.375 per share.
Our principal executive offices are located at One Bradlees Circle,
Braintree, Massachusetts 02184. Our telephone number is (781) 380-3000.
-----------
Investing in these securities involves certain risks. See "Risk Factors"
beginning on page 8.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this Prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
-----------
The date of this Prospectus is , 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C>
PROSPECTUS SUMMARY........................................................ 2
The Company.............................................................. 2
The Offering............................................................. 3
Summary Financial Data................................................... 6
RISK FACTORS.............................................................. 8
Economic and Industry Risks.............................................. 8
Competition............................................................. 8
Concentration in the Northeast.......................................... 8
Merchandising Strategy Must Successfully Evolve......................... 8
Labor Negotiations...................................................... 9
Financial Risks.......................................................... 9
High Leverage........................................................... 9
History of Losses....................................................... 9
Restrictions Imposed by the Terms of the BankBoston Facility............ 10
Risk to Continuing Operations if Covenants Not Met...................... 10
Limitations on Future Growth............................................ 10
Liquidity............................................................... 11
Assets Pledged as Collateral under the BankBoston Facility.............. 11
Post-Bankruptcy Risks.................................................... 11
Recent Emergence from Chapter 11 Proceedings............................ 11
Fresh Start Reporting May Make Financial Statements Difficult to
Compare................................................................ 11
Determination of Equity Value........................................... 11
Tax Consequences of the Plan of Reorganization; Potential Loss of
Certain Tax Attributes................................................. 12
Risks Related to the Securities.......................................... 12
Limited Market for Common Stock and Notes............................... 12
Restrictions on Common Stock Dividends.................................. 13
Future Stock Issuances Can Dilute Current Owners........................ 13
The Guarantors Do not Have Significant Separate Assets.................. 13
Fraudulent Conveyance Matters........................................... 13
Miscellaneous Business Risks............................................. 13
Dependence on Key Personnel............................................. 13
Potential Year 2000 Liability........................................... 14
Board of Directors May Change........................................... 15
THE COMPANY............................................................... 16
General.................................................................. 16
Background to Our Bankruptcy Reorganization.............................. 16
The Plan of Reorganization............................................... 16
USE OF PROCEEDS........................................................... 21
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY.......................... 21
CAPITALIZATION............................................................ 22
SELECTED FINANCIAL DATA................................................... 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 28
Results of Operations.................................................... 28
Third Quarter 1999 Compared to Third Quarter 1998........................ 30
Year-to-Date 1999 Compared to Year-to-Date 1998.......................... 31
1998 Compared to 1997.................................................... 31
1997 Compared to 1996.................................................... 32
</TABLE>
(i)
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<TABLE>
<S> <C>
Liquidity and Capital Resources............................................ 33
Year 2000 Readiness Disclosure............................................. 34
Quantitative and Qualitative Disclosure About Market Risk.................. 35
BUSINESS.................................................................... 36
Company Overview........................................................... 36
Employees and Collective Bargaining Arrangements........................... 37
Competition................................................................ 37
Patents, Trademarks and Licenses........................................... 38
Seasonality................................................................ 38
Credit Facility............................................................ 38
Further Information........................................................ 39
Facilities................................................................. 39
Legal Proceedings.......................................................... 39
MANAGEMENT.................................................................. 40
Directors and Executive Officers........................................... 40
Board of Directors of Bradlees, Inc. and Its Committees.................... 42
Board of Directors of Bradlees Stores, Inc................................. 43
Board of Directors of New Horizons of Yonkers, Inc. ....................... 43
Summary Compensation Table................................................. 44
Corporate Bonus Plan....................................................... 45
Enterprise Appreciation Incentive Plan..................................... 45
Management Emergence Bonus Plan............................................ 45
Severance Program.......................................................... 46
Stock Option Plan for Key Employees........................................ 46
Retirement Plans........................................................... 47
Compensation of Directors.................................................. 48
Employment Agreement with Peter Thorner.................................... 48
Compensation Committee Interlocks and Insider Participation................ 48
PRINCIPAL STOCKHOLDERS...................................................... 49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 51
Other Transactions......................................................... 51
Company Policy............................................................. 51
SELLING SECURITY HOLDERS.................................................... 51
PLAN OF DISTRIBUTION ....................................................... 52
Type of Transactions....................................................... 52
Price of Transaction; Fees................................................. 52
SHARES ELIGIBLE FOR FUTURE SALE............................................. 53
TERMS OF OUTSTANDING INDEBTEDNESS........................................... 53
Credit Agreement........................................................... 53
CAP Notes.................................................................. 54
Cure Notes................................................................. 55
Tax Notes.................................................................. 55
Vendor Lien................................................................ 55
DESCRIPTION OF THE 9% CONVERTIBLE NOTES..................................... 55
General.................................................................... 55
Ranking.................................................................... 56
Redemption................................................................. 56
Limitations on Mergers and Consolidation................................... 57
Limitation on Indebtedness................................................. 57
Guarantees................................................................. 57
Events of Default, Notice and Waiver....................................... 58
Modification of the Indenture.............................................. 59
</TABLE>
(ii)
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<TABLE>
<S> <C>
Collateral................................................................. 60
Conversion................................................................. 60
Governing Law.............................................................. 60
The Trustee................................................................ 61
Authentication............................................................. 61
DESCRIPTION OF CAPITAL STOCK................................................ 62
General.................................................................... 62
Authorized and Outstanding Capital Stock................................... 62
Certain Provisions of the Articles and By-laws of Bradlees, Inc............ 63
Massachusetts Anti-takeover Laws........................................... 64
Stockholder Rights Plan.................................................... 65
Certain Provisions of the Articles and By-laws of Bradless Stores, Inc. ... 66
Transfer Agent and Registrar............................................... 66
Listing.................................................................... 66
LEGAL MATTERS............................................................... 67
EXPERTS..................................................................... 67
ADDITIONAL INFORMATION...................................................... 68
INDEX TO FINANCIAL STATEMENTS............................................... F-1
</TABLE>
(iii)
<PAGE>
FORWARD-LOOKING STATEMENTS
Certain statements incorporated by reference or made in this prospectus
under the captions "Prospectus Summary," "Risk Factors" and "The Company," and
elsewhere in this Prospectus are "forward-looking statements" within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Act of 1934. When we use the words "anticipate," "assume,"
"believe," "estimate," "expect," "intend," and other similar expressions in
this Prospectus, they are generally intended to identify forward-looking
statements. In connection with such forward-looking statements, you should
consider that they involve known and unknown risks, uncertainties and other
factors which are, in some cases, beyond our control and which could materially
affect our actual results, performance or achievements. Factors that could
cause our actual results, performance or achievements to differ materially from
those expressed or implied by such forward-looking statements include, but are
not limited to, the following:
. international, national, regional and local economic and political
conditions;
. demographic changes;
. changes in competition (including new competition in former Caldor
locations opened in Fall 1999 or expected to open in Spring 2000);
. unfavorable changes in interest rates;
. Year 2000 issues;
. unfavorable weather conditions;
. loss of significant vendors;
. availability of adequate overseas transportation;
. liability and other claims asserted against us;
. fluctuations in operating results;
. increased costs of key resources;
. continued acceptance of merchandising and marketing initiatives;
. changes in consumer spending and shopping habits;
. availability of new store sites;
. changes in import duties, tariffs and quotas;
. changes in business strategy;
. the ability to negotiate mutually acceptable collective bargaining
agreements; and
. the ability to attract and retain qualified personnel.
We disclaim any obligation to update any such factors or to publicly
announce the result of any revisions to any of these forward-looking statements
contained herein to reflect subsequent events or developments.
<PAGE>
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this Prospectus.
It is not complete and may not contain all of the information that you should
consider before investing in the Securities. You should read the entire
Prospectus carefully, including the "Risk Factors" section and the financial
statements and the notes to those statements.
The Company
Background
Bradlees, Inc. and its subsidiary companies operate discount department
stores in the Northeast through Bradlees, Inc.'s subsidiary, Bradlees Stores,
Inc. (collectively, the "Company"), primarily in the Boston to Philadelphia
corridor. We have been active in the discount department store business for
over 40 years.
On June 23, 1995, we filed a petition for relief under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11"). On February 2, 1999, we completed
our reorganization and emerged from bankruptcy. In connection with our
reorganization, we took significant steps to improve our operations, including:
. Recruiting an experienced management team;
. Reintroducing basic convenience and commodity products that our customers
expect us to carry;
. Revising our pricing policies to increase customer traffic;
. Revising our marketing strategy to reduce costly and inefficient advertising
and promotional events; and
. Reducing costs by improving operating efficiencies.
Business Strategy
We are focusing on three core product lines:
1. Moderately-priced basic and casual apparel;
2. Basic and fashion items for the home; and
3. Edited assortments of frequently purchased convenience and commodity
products.
We believe we can strategically leverage our traditional strengths in the
fashion and quality of our apparel and decorative home product offerings while
driving customer traffic with selected hardlines merchandise.
The Reorganization
We were compelled to seek the protection of the Bankruptcy Court on June 23,
1995. While in Chapter 11, we continued to manage our affairs as a debtor-in-
possession.
On October 5, 1998, the first Amended Disclosure Statement relating to our
plan of reorganization was approved by the Bankruptcy Court (the "Plan of
Reorganization"). The Plan of Reorganization, as subsequently modified, was
confirmed by the Bankruptcy Court on January 27, 1999 and became effective on
February 2, 1999 (the "Effective Date").
In connection with our reorganization in bankruptcy and our related
operational restructuring, all of the equity interests in Bradlees, Inc. that
existed immediately prior to the Effective Date were canceled. In addition, we
canceled certain indebtedness that existed prior to our entering bankruptcy.
Our Plan of Reorganization provided that certain holders of this canceled
indebtedness receive an equity interest in the reorganized company and/or 9%
Convertible Notes issued by Bradlees Stores, Inc. which pay interest at the
rate of 9% per annum and are convertible into our common stock after February
2, 2000. In connection with the issuance of these securities, we are
registering the resale of the securities received by certain of our creditors
under the Plan of Reorganization. This Prospectus is part of the Registration
Statement we agreed to file. See "The Company--The Plan of Reorganization."
2
<PAGE>
The Offering
The principal terms of the Common Stock and 9% Convertible Notes
(collectively, the "Securities") are summarized below. For a more complete
description, see "Description of Capital Stock" and "Description of the 9%
Convertible Notes." The Selling Securityholders will receive all of the
proceeds from the sale of the Securities offered hereby. We will not receive
any proceeds from this Offering.
Common Stock:
<TABLE>
<C> <S>
Issuer........................ Bradlees, Inc.
Securities Offered (1)........ 7,267,424 shares of Common Stock.
Common Stock outstanding (2).. 9,780,347 shares of Common Stock.
Voting Rights................. Each share of Common Stock has one vote.
Listing....................... We have listed the common stock offered by this
Prospectus on the Nasdaq National Market.
Trading Symbol................ BRAD
</TABLE>
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(1) Under the terms of the Plan of Reorganization, the number of shares issued
to the Selling Stockholders varies with the amount of general unsecured
claims allowed. The Securities Offered and Common Stock Outstanding assumes
that the amount of the general unsecured claims allowed are not less than
$225 million and the number of shares issued to the Selling Securityholders
is not more than 7,267,424. Excludes an indeterminate number of shares
issuable upon conversion of the 9% Convertible Notes. Since the number of
shares of Common Stock issuable upon conversion of the 9% Convertible Notes
varies as the market price of the Common Stock changes, it is impossible at
this time to determine how many shares may be issued upon conversion of the
9% Convertible Notes.
(2) There were 9,780,347 shares of common stock outstanding as of December 7,
1999. We expect to issue additional shares of common stock to creditors
under the Plan of Reorganization as their claims are resolved. We currently
expect that a total of approximately 11 million shares will be issued under
the Plan of Reorganization, including one million shares expected to be
issued upon the exercise of warrants with an exercise price of $7.00 per
share (the "Warrants"), of which 77,643 shares were issued through December
7, 1999 upon exercise of Warrants. This excludes outstanding options to
purchase 853,887 shares of Common Stock held by members of management. Also
excludes all shares of Common Stock issuable upon conversion of the 9%
Convertible Notes.
9% Convertible Notes:
Issuer...................... Bradlees Stores, Inc.
Securities Offered.......... We agreed to issue not more than $40,000,000
aggregate principal amount of 9% Convertible
Notes, of which $36,000,000 was originally
registered pursuant to the Registration Statement
of which this prospectus is a part. On the
Effective Date, we made a pre-payment of $11.0
million on the 9% Convertible Notes and issued
$28,995,000 of 9% Convertible Notes. In July
1999, we made a pre-payment of $17,015,000 from
proceeds of our Yonkers store lease financing.
Currently, $11,976,000 aggregate principal
remains outstanding. The Registration Statement
of which this prospectus forms a part relates to
$24,022,000 aggregate principal amount of the 9%
Convertible Notes issued on the Effective Date
after taking into account the first pre-payment
of $11 million.
Interest Rate............... The 9% Convertible Notes bear interest at a rate
of 9% per annum. Interest has been accruing from
the date we issued the Notes and is payable semi-
annually in arrears on each January 1 and July 1,
commencing July 1, 1999.
3
<PAGE>
Guarantors.................. The 9% Convertible Notes are guaranteed by
Bradlees, Inc., which owns all of the outstanding
capital stock of Bradlees Stores, Inc. and New
Horizons of Yonkers, Inc., a wholly-owned
subsidiary of Bradlees Stores, Inc. If Bradlees
Stores, Inc. cannot make payments on the 9%
Convertible Notes when they are due, Bradlees,
Inc. and New Horizons of Yonkers, Inc. must make
them instead. The guarantee by Bradlees, Inc. is
subordinated to the guarantee by Bradlees, Inc.
of our credit facility and the guarantee by New
Horizons of Yonkers, Inc. is subordinated to the
guarantee by New Horizons of Yonkers, Inc. of our
credit facility.
Liens....................... The 9% Convertible Notes are secured by, under
certain circumstances and subject to certain
limitations, first priority liens on our
leasehold interests in our Danbury, Connecticut,
Norwalk, Connecticut and Saddle Brook, New Jersey
stores, (as well as the net proceeds we receive
upon their disposition(s), none of which we are
currently seeking to sell). In July, 1999, New
Horizons of Yonkers, Inc. ("New Horizons"), a
subsidiary of Bradlees Stores, Inc., and 2500 CPA
Associates, LLC ("CPA") entered into an agreement
for the financing of New Horizons' leasehold
interest in the Yonkers, NY store (the "Lease
Financing Obligation"). Under this agreement, New
Horizons received $17.5 million in exchange for
the assignment of its leasehold interest to CPA
and annual incremental payments of $2.6 million
(including interest at an effective rate of
14.8%) under a sublease with CPA for a term of 35
years, including option periods. The Yonkers
store continues to operate as a Bradlees store
and the net proceeds of $17.2 million (after
certain fees) were used to pay down $17.0 million
of the Notes and $0.2 million of associated
accrued interest. The Lease Financing Obligation
is secured by (i) the leasehold interest in the
Yonkers store, (ii) first priority liens on
leasehold interests in three other named stores,
as well as any net proceeds received upon any
disposition(s) of such interests, and (iii) a
standby letter of credit of $1.1 million. In
addition, pursuant to the Plan of Reorganization,
we have modified the termination date and certain
other provisions of our lease for our Union
Square, New York store in exchange for a payment
upon the Effective Date of $11.0 million by the
landlord. This payment was applied as a pre-
payment to the 9% Convertible Notes.
Conversion.................. The 9% Convertible Notes are convertible any time
after the first anniversary of the Effective Date
into shares of our Common Stock. The conversion
price will initially be the average closing price
of our Common Stock during the twenty business
days preceding the first anniversary of the
Effective Date.
4
<PAGE>
Listing..................... We do not intend to apply for listing of the 9%
Convertible Notes on any securities exchange or
authorization for quotation on the NASDAQ system.
We do not expect that an active trading market
will develop for the 9% Convertible Notes.
Agreement with Respect to
certain of the Notes....... On August 12, 1999, we entered into a
supplemental agreement with the holders of
approximately $9.0 million, or approximately 75%,
of the outstanding Notes (see Note 4 to the
Condensed Consolidated Financial Statements) (the
"Discount Option Noteholders"). Under the
agreement, we can repurchase (and expect to do so
in December, 1999) the outstanding Notes held by
the Discount Option Noteholders (the "Discount
Option Notes") at a purchase price equal to 86%
of the outstanding principal amount (i.e. a 14%
discount), plus accrued interest, exercisable for
a one-month time period from December 1, 1999
through December 31, 1999 (the "Discount
Option"). Each month thereafter the discount will
decrease by 1% such that the discount will be
fully eliminated by January 31, 2001. In
consideration of the Discount Option, we agreed
to pay the Discount Option Noteholders a premium
on the closing date of the grant of the option
equal to 0.5% of the outstanding principal amount
of the Discount Option Notes, grant the Discount
Option Noteholders second priority leasehold
mortgages on the Collateral subject to
substitution in certain circumstances, and
provide a put option exercisable on or after
February 3, 2003 to sell the Discount Option
Notes to us at a price equal to the then
outstanding principal amount of the Discount
Option Notes, plus accrued interest. In
accordance with applicable SEC rules, we had
offered to enter into the supplemental agreement
with all Noteholders and closed the offer on
August 5, 1999.
5
<PAGE>
Summary Financial Data
(In thousands, except per share data)
The summary financial data set forth below presents historical and pro forma
financial information of the Company. The financial information for the 39
weeks ended October 30, 1999 and October 31, 1998 was derived from the
unaudited condensed consolidated financial statements of the Company which, in
the opinion of management, include all adjustments, consisting only of normal
adjustments necessary for a fair presentation of the results for the interim
periods. The results for the 39 weeks ended October 30, 1999 are not
necessarily indicative of results expected for the full year. Fiscal year 1998
refers to the 52 weeks ended January 30, 1999, fiscal year 1997 refers to the
52 weeks ended January 31, 1998 and fiscal year 1996 refers to the 52 weeks
ended February 1, 1997. The summary information should be read in conjunction
with the financial statements and related notes thereto appearing elsewhere in
this Prospectus, "Unaudited Pro Forma Condensed Consolidated Financial
Information" and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Since fresh-start reporting has been reflected in
the selected financial data as of October 30, 1999 and for the interim period
then ended and as of January 30, 1999, the selected financial data for those
periods are not comparable in certain material respects to the selected
financial data for the other periods presented. Accordingly, a black line has
been drawn between the reorganized Bradlees' (the "Registrant") selected
financial data and the pre-emergence Bradlees' ("the Predecessor") selected
financial data.
<TABLE>
<CAPTION>
Fiscal Year
----------------------------------------------
1998 39 Weeks Ended
---------------------- ---------------------------------
Pro
Historical Forma(a) 1997 1996 October 30, 1999 October 31, 1998
---------- ---------- ---------- ---------- ---------------- ----------------
(in thousands, except ratio and per share amounts)
Predecessor Registrant Predecessor
---------------------------------------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $1,337,197 $1,322,875 $1,344,444 $1,561,718 $1,029,699 $906,385
Gross margin............ 393,103 389,624 396,357 434,067 312,452 271,002
Operating expenses(b)... 397,297 387,854 407,003 532,496 318,595 295,939
Operating income
(loss)................. (4,194) 5,929 (10,646) (98,429) (6,143) (24,937)
Fresh-start revaluation
charge................. 108,428 -- -- -- -- --
Income (loss) before
income taxes and
extraordinary items.... (133,753) (22,094) (22,557) (218,759) (27,184) (34,583)
Income taxes............ -- -- -- -- -- --
Extraordinary gain on
debt discharge......... 419,703 -- -- -- -- --
Net income (loss)....... $ 285,950 $ (22,094) $ (22,557) $ (218,759) $ (27,184) $(34,583)
Loss per share:
Basic and diluted...... * $ (2.16) $ (1.98) $ (19.17) $ (2.73) $ (3.06)
Shares used for
computation:
Basic and diluted...... * 10,226 11,365 11,412 9,959 11,310
Ratio of earnings to
fixed charges(c)....... -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
January 30, October 30,
1999 1999
----------- -----------
Registrant
--------------------------
<S> <C> <C>
Balance Sheet Data:
Working capital................................... $ (7,818)(d) $(29,378)(d)
Total assets...................................... 463,751 553,737
Long-term debt, less current maturities........... 59,464 60,506
Total stockholders equity(e)...................... $ 55,000 $ 28,533
</TABLE>
- --------
* Earnings per share was not presented for 1998 because such presentation
would not be meaningful. The old stock was cancelled under the Plan of
Reorganization and the new stock was issued following consummation of the
Plan.
(a) Pro forma information gives effect to the consummation of the Plan of
Reorganization, including adjustments for fresh-start reporting. Pro forma
unaudited consolidated statement of operations data for fiscal year 1998 is
presented as if the Plan of Reorganization was consummated on January 31,
1998. See "Unaudited Pro Forma Consolidated Financial Information." These
amounts are presented for informational purposes only and do not purport to
represent what the Company's results of operations would have been if
consummation of the Plan of Reorganization had actually occurred on such
date. Pro forma earnings per share was computed based on an estimated
weighted average number of common shares outstanding during the applicable
period assuming that the Plan of Reorganization was effective on January
31, 1998.
6
<PAGE>
(b) Net of other operating income.
(c) For the periods presented above, earnings were insufficient to cover fixed
charges by the amount of the respective loss before income taxes and
extraordinary items. As used herein, "earnings" consists of income (loss)
before taxes plus fixed charges less capitalized interest. "Fixed charges"
consist of interest expense including amortization of debt issuance costs,
capitalized interest and a portion of rent expense which is deemed to be
representative of an interest factor.
(d) Included accrued bankruptcy expenses of $8.4 million at January 30, 1999
and a higher accounts payable level as a percentage of inventories at
October 30, 1999.
(e) See "Risk Factors--Post Bankruptcy Risks--Determination of Equity Value."
7
<PAGE>
RISK FACTORS
You should carefully consider the following factors and other information in
this Prospectus before deciding to invest in any of the Securities being
offered by the Selling Securityholders.
Economic and Industry Risks
Competition
The discount retail business is highly competitive, and many of our
competitors have greater resources than we do. We compete against national
companies, such as Wal-Mart Stores, Inc., Target Stores and Kmart Corp. and
regional companies such as Ames Department Stores. Caldor Corp., a major
competitor prior to April 1999 and in bankruptcy since 1995, closed all of its
stores and liquidated most of its assets. Kohl's, a department store chain,
Kmart, Wal-Mart and Ames have purchased approximately 25 of the former Caldor
store leases which compete within 5 miles of our stores. We are leasing 3 of
the former Caldor stores. See "Risk Factors--Limitations on Future Growth." It
is expected that Bradlees' business in competing locations will be at least
temporarily affected at the time former Caldor stores are reopened by
competitors. Most of the purchased Caldor leases are opening in the Spring of
2000. Consumers choose among these companies based upon a number of factors,
including price, location, product quality, merchandise selection, advertising
and service. Other factors in the competition for consumers are generally
beyond our control. These factors include:
. consumer preferences;
. changes in style; and
. population trends.
If we fail to compete successfully, customer traffic could be reduced, which
would negatively impact sales and profits. In addition, while we believe that
we are pursuing the proper merchandising and marketing strategies that will
allow us to compete effectively in our operating areas, we can not make
assurances that these strategies will further improve our performance, or that
such strategies will remain valid in the future.
Concentration in the Northeast
Our stores are located exclusively in the Northeast. This makes us more
susceptible to local and regional economic downturns than some of our
competitors who are nationally diversified. As with our competitors, we are
subject to a national economic downturn. Any economic downturn affecting us
might cause consumers to reduce their spending, impacting our sales. In
addition, our business is seasonal in nature, with a significant portion of our
sales occurring in the fourth quarter, which includes the pivotal holiday
selling season. If sales for the holiday selling season decline because of a
regional or national economic downturn, or for any other reason, our sales and
profits will be negatively impacted.
In addition, the Northeast is generally a more expensive area of the country
in which to own and operate stores. Since we are concentrated in the Northeast,
we face higher average costs of operating stores than our national competitors.
Merchandising Strategy Must Successfully Evolve
Our profitability is dependent upon the success of our merchandising
strategy which is to focus on three key merchandise categories: moderately-
priced basic and casual apparel; basic and fashion items for the home; and
frequently purchased convenience and commodity products. We believe we can
strategically leverage our traditional strengths in the fashion and quality of
our apparel and decorative home product offerings while driving customer
traffic with selected hardlines merchandise. There can be no assurance that
this strategy will be successful and, in the future, we must anticipate, gauge
and appropriately revise this strategy to meet changing consumer demands.
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Labor Negotiations
Unlike many of our competitors, the majority of our work force is unionized.
We cannot predict the effect, if any, that any future collective bargaining
agreements with these unions will have on our operations or financial
performance. Agreements affecting approximately 89% of the union labor force,
including the union representing our Braintree, MA distribution center, will
expire within one year and are expected to be renegotiated.
Financial Risks
High Leverage
After giving effect to the reduction in our outstanding debt pursuant to the
Plan of Reorganization, we have a reduced, but nevertheless substantial, amount
of debt. Our consolidated ratio of total debt to total capitalization as of
October 30, 1999 was approximately 0.89:1. See "Capitalization." We have a
$270 million financing facility with BankBoston, N.A. as Administrative Agent
and Issuing Bank (the "BankBoston Facility") under which we are allowed to
borrow for general corporate purposes, working capital and inventory purchases.
If we are unable to generate sufficient cash flow from operations in the
future, or if we fail to satisfy the financial covenants contained in the
BankBoston Facility, we could face default on the BankBoston Facility and other
financing agreements.
The leveraged nature of our capital structure will have several important
effects on our operations, including the following: (i) we continue to have
significant cash requirements for debt service; (ii) because our indebtedness
under the BankBoston Facility bears interest at a floating rate, to the extent
we have not hedged our interest rate exposure, we are sensitive to any increase
in prevailing interest rates; (iii) funds available for capital expenditures
will be limited; and (iv) our ability to meet our debt service obligations (and
to satisfy the financial covenants contained therein) may be impaired. Our
ability to meet such obligations in the future will be dependent upon our
future performance which, in turn, will be subject to general economic
conditions and to financial, business and other factors affecting our
operations, including factors beyond our control. See "Business-Credit
Facility."
Our ability to repay such indebtedness at maturity or otherwise may depend
upon our ability either to refinance or extend such indebtedness, to repay such
indebtedness with proceeds of other capital transactions, such as the issuance
of additional equity, or to sell assets. There can be no assurance that such
refinancing or extension will be available on reasonable terms or at all, that
additional equity will be issued, or that a sale of assets will occur. The
inability to repay such indebtedness could have a material adverse effect on
us.
History of Losses
We experienced significant losses from operations in fiscal years 1996 and
1995. In the long term, our ability to continue operations is dependent upon
our ability to achieve profitable results of operations and positive cash
flows. Although improvements in operating earnings have been made each year
since fiscal year 1996, we have continued to incur net losses ($27.2 million in
the first three quarters of fiscal year 1999 and $25.3 million in fiscal year
1998 prior to the fresh-start revaluation charge and the extraordinary gain on
debt discharge). For fiscal year 1997, we reported a net loss of $22.6 million,
for fiscal year 1996 we reported a net loss of $218.8 million and for fiscal
year 1995 we reported a net loss of $207.4 million. There can be no assurance
that we will achieve or maintain profitability in any future period. See
"Management Discussion and Analysis of Financial Condition and Results of
Operations."
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Restrictions Imposed by the Terms of the BankBoston Facility
The BankBoston Facility is a $270 million financing facility which includes
a $20 million junior secured "last in-last out" subfacility under which we are
allowed to borrow for general corporate purposes, working capital and inventory
purchases. The BankBoston Facility is a revolving credit facility which has
affirmative and negative covenants which substantially restrict many aspects of
our operations and finances.
The BankBoston Facility is a revolving credit facility that took effect upon
the Effective Date. This facility is for a term of up to three years and may
not exceed the maximum principal amount of $270 million. Under the terms of the
BankBoston Facility, we have agreed to certain financial covenants, including:
. maintaining a minimum level of earnings before interest, taxes,
depreciation and amortization;
. capping our capital expenditures at $25 million annually (as amended),
subject to certain exceptions; and
. agreeing not to let certain financial ratios which measure our debt
coverage and accounts payable to inventory ratios drop below specified
levels.
See also "Terms of Outstanding Indebtedness-Credit Agreement."
Risk to Continuing Operations if Covenants Not Met
The covenants under the BankBoston Facility will limit our operational and
financial flexibility and our ability to respond to changing retail conditions
and take advantage of attractive business opportunities. Should we be unable to
meet any of these covenants when required, it will be necessary to request
waivers and/or amendments of the facility from BankBoston. There can be no
assurance that the necessary waivers and/or amendments will be granted or that,
if granted, they will be on terms acceptable or favorable to us. Failure to
obtain such waivers and/or amendments could result in our obligations under the
BankBoston Facility being declared immediately due and payable, in which case
BankBoston could foreclose on the collateral securing the BankBoston Facility.
See "Terms of Outstanding Indebtedness-Credit Agreement."
Limitations on Future Growth
Our growth is subject to (i) our ability to maintain or further increase
revenues at existing stores, (ii) the availability of capital and additional
new store sites and (iii) the restrictions on capital expenditures set forth in
the BankBoston Facility, as amended, which prohibits annual capital
expenditures in excess of $25 million unless our earnings, as calculated before
interest, taxes, depreciation and amortization, are above $40 million annually
and we do not default under the BankBoston Facility. In addition, any capital
expenditures resulting from the utilization of the proceeds from any equity
offering are excludable from the annual limitation. There can be no assurance
that we will be able to maintain or further increase revenues at current stores
or that sufficient capital will be available to us or, if available, that it
will be available on terms that we consider reasonable. Our inability or
failure to maintain or further increase such revenues or obtain such sufficient
capital on favorable terms could have a material adverse effect on our
operations, business or financial condition.
Our current plans are expected to require annual capital expenditures of
approximately $25 million, which is in accordance with the amended cap
contained in the BankBoston Facility. We are continually evaluating store
locations and operations to determine whether to close or relocate stores that
do not meet our performance objectives. Additionally, we may expand, downsize,
or remodel existing stores.
We expect to pursue former Caldor locations where economically beneficial
and feasible. On May 26, 1999, the Bankruptcy Court in the Caldor Chapter 11
case approved our $1.25 million purchase of two former Caldor store leases, one
in the New Jersey market and one in the Philadelphia market. These two new
stores opened in October, 1999. An additional former Caldor location on Staten
Island, NY will be opened in April, 2000 under an operating lease.
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Further, numerous stores and our two distribution centers are in older
facilities. The foregoing limitations on capital expenditures could prevent us
from modernizing our distribution centers or remodeling our aging stores.
Liquidity
Although we have entered into the $270 million BankBoston Facility, we can
make no assurances that our cash and cash equivalents on hand and our cash
availability will be sufficient to meet our anticipated working capital needs
and capital expenditures in the future. To finance future expenditures, we may
need to issue additional securities and incur additional debt. We may not be
able to obtain additional required capital on satisfactory terms. The failure
to raise the funds necessary to finance future cash requirements could
materially and adversely affect our operating results in future periods. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Assets Pledged as Collateral under the BankBoston Facility and Vendor Lien
Agreement
Obligations under the BankBoston Facility are secured by liens on
substantially all of our non-real estate assets. If, after default, BankBoston
were to foreclose on the collateral securing the BankBoston Facility or if such
assets were liquidated, the proceeds of such assets would be applied to satisfy
our obligations under the BankBoston Facility. If this were to happen, it is
unlikely that the remaining unencumbered assets would be sufficient to allow
our equity holders to recover any significant amount. In addition, Bradlees
Stores, Inc. has entered into an agreement for the benefit of its trade vendors
which grants such trade vendors a subordinated security interest in Bradlees
Stores, Inc.'s inventory.
Post-Bankruptcy Risks
Recent Emergence from Chapter 11 Proceedings
We emerged from Chapter 11 proceedings on February 2, 1999. Although we have
been mostly successful in achieving favorable trade terms since our emergence
from Chapter 11, our experience in and recent emergence from Chapter 11 may
affect our ability to negotiate favorable trade terms with certain
manufacturers and other vendors. The failure to obtain such favorable terms
could have a material adverse effect on our operations, business or financial
condition.
Fresh Start Reporting May Make Financial Statements Difficult to Compare
For accounting purposes, we used the end of our fiscal year ended January
30, 1999 as our emergence date. In accordance with AICPA Statement of Position
90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy
Code" ("SOP 90-7"), we adopted "Fresh-Start Reporting" and the effects of such
adoption are reflected on our Consolidated Balance Sheet as of January 30,
1999. Accordingly, our Consolidated Balance Sheets after January 30, 1999 and
our Consolidated Statements of Operations for periods after January 30, 1999
will not be comparable in certain material respects to the Consolidated
Financial Statements for prior periods included elsewhere herein. For example,
the Consolidated Statement of Operations for fiscal year 1998 includes an
extraordinary gain relating to the debt discharged in the Chapter 11
proceedings. Since our financial statements will not be comparable to our
previous financial statements in certain material respects, or the financial
statements of our competitors who have not adopted fresh-start reporting, it
may be more difficult for third parties to accurately gauge our performance.
This might cause the price of our securities to fluctuate more than the prices
of the securities of our competitors.
Determination of Equity Value
The determination of equity value in the distributable value as of the
Effective Date was derived from an estimated enterprise value of the
reorganized Bradlees and reduced by estimated embedded debt levels. The
enterprise value was developed by an independent financial advisor for purposes
of the filing of our Disclosure
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Statement in the United States Bankruptcy Court for the Southern District of
New York in October 1998 (the "Disclosure Statement"). In developing the
determination of equity value, our financial advisor used various assumptions
and estimates, including projected embedded debt of approximately $90 million
which represented the ongoing revolver facility that was estimated to remain
after the seasonal paydown. As a result, the equity value was assumed to be in
the range of $75 to $90 million. For purposes of the Disclosure Statement, we
determined that an equity value of $85 million represented a reasonable
estimate of distributable equity value to the creditors.
Subsequent to the filing of the Disclosure Statement and the Effective Date,
a number of events occurred which impacted the determination of equity value
under fresh-start reporting, including but not limited to, the initial low
trading prices of the new stock, information regarding our fourth quarter
performance and final fiscal 1999 financial plan, a settlement with a landlord
regarding the disposition of the Union Square, NY leasehold interest and the
liquidation of Caldor, one of our major competitors. We employed a similar
valuation method under fresh-start reporting to determine our equity value to
that utilized by our independent financial advisor in the Disclosure Statement
and arrived at an estimated equity value of $55 million. The weighted average
price per share of the new stock from the Effective Date through April 28,
1999, prior to the filing of our Form 10-K, indicated an equity value of
approximately $51 million (based on 10,225,711 shares outstanding), although
there was limited trading of the new stock during portions of this period.
The calculated reorganization value was based upon a variety of estimates
and assumptions about circumstances and events that have not yet taken place.
Such estimates and assumptions are inherently subject to significant economic
and competitive uncertainties beyond our control, including but not limited to
those with respect to the future course of our business activity. Accordingly,
this equity value does not purport to be an estimate of current or future
trading prices of securities and actual market prices of such securities after
issuance will depend on various factors not possible to predict with certainty.
Tax Consequences of the Plan of Reorganization; Potential Loss of Certain Tax
Attributes
As a result of the implementation of the Plan of Reorganization, we (i)
underwent an "ownership change" (generally, a greater than 50 percentage point
change in ownership) for purposes of section 382 of the Internal Revenue Code
of 1986, as amended (the "Code"), and (ii) realized cancellation of
indebtedness income ("COI") from the cancellation of certain indebtedness in
exchange for Common Stock, 9% Convertible Notes and warrants to purchase shares
of Common Stock. Because such ownership change and cancellation of indebtedness
arose in a bankruptcy proceeding under Chapter 11, we avoided some of the
adverse Federal income tax consequences generally associated with such changes
(e.g. the COI realized is included in income). Nevertheless, we expect that our
ability to offset future taxable income with net operating loss carryforwards
("NOLs"), as well as certain built-in losses and tax credits, will be limited
and that certain of our tax attributes, including NOLs, were reduced (but not
eliminated). In addition, the sale of the Common Stock by the Selling
Securityholders under this Prospectus, as well as the exercise of the warrants,
may cause us to undergo another "ownership change" under Section 382 of the
Code and, accordingly, may further limit our NOLs and certain built-in losses
and tax credits to income.
Risks Related to the Securities
Limited Market for Common Stock and Notes
Prior to our emergence from bankruptcy, the stock of the predecessor company
("Old Bradlees") traded on the New York Stock Exchange. In October of 1997, the
New York Stock Exchange delisted the stock of Old Bradlees. The Common Stock
being offered hereby is listed on The Nasdaq National Market. The Notes being
offered hereby are not listed on any securities exchange. There can be no
assurance that a market will develop for the Notes, or that if a market does
develop, that the market will have sufficient liquidity so as not to impact the
price of the Notes. With respect to the Common Stock, although there has been
significant trading at times, there can be no assurance that the market will
continue to have sufficient liquidity so as not to impact the price of the
Common Stock.
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In addition, pursuant to our Plan of Reorganization, Shares of Common Stock
and Warrants to purchase Common Stock have been issued to certain of our
creditors. Some of these creditors may prefer to sell their Common Stock and/or
Warrants rather than to hold them on a long-term basis. The Shares, Notes and
Warrants issued in the reorganization to creditors other than the Selling
Securityholders are generally freely tradeable as a result of an exemption from
registration provided by the Bankruptcy Code. Accordingly, it is anticipated
that the market for our Common Stock will continue to be volatile and the
availability for unrestricted sale of such a large number of shares of Common
Stock may have the effect of depressing the market price of the Common Stock.
Restrictions on Common Stock Dividends
Old Bradlees did not declare or pay cash dividends on its common stock ("Old
Common Stock") or any other equity security while in Chapter 11, and we do not
anticipate paying cash dividends on the Common Stock offered hereby or any
other equity security in the foreseeable future. The BankBoston Facility
specifically prohibits the payment of any type of dividends on the Common
Stock. See "Terms of Outstanding Indebtedness-Credit Agreement."
Future Stock Issuances Can Dilute Current Owners
As part of the Plan of Reorganization, we have issued Warrants to purchase
1,000,000 shares of Common Stock at $7.00 per share, 77,643 of which have been
exercised. There are outstanding options to purchase 853,887 shares of our
Common Stock held by members of management. Further, we can also issue
additional securities (including 146,113 shares under our stock option plan) in
the future. When we sell a new security, the purchaser of that security is
entitled to a proportionate share of the aggregate rights of the holders of
that class of security. Thus, it is possible that the value we receive on the
sale of a new security will be less than the proportionate value attributable
to the existing holders of that security. Since all holders of the same
security share proportionately the rights of the security, the pre-existing
security holders will receive less value after the new security is issued than
if we had not issued the new security.
The Guarantors Do Not Have Significant Separate Assets
Bradlees, Inc., which owns all of the outstanding capital stock of Bradlees
Stores, Inc., will fully and unconditionally guarantee the 9% Convertible
Notes. Substantially all of the assets of the Companies, on a consolidated
basis, are held by Bradlees Stores, Inc. New Horizons of Yonkers, Inc. also
guarantees the 9% Convertible Notes. New Horizons of Yonkers, Inc. holds the
leasehold interest in our Yonkers, New York store. The guarantee by Bradlees,
Inc. is expressly subordinated to the guarantee by Bradlees, Inc. of the
BankBoston Facility, and the guarantee by New Horizons of Yonkers, Inc. is
expressly subordinated to the guarantee by New Horizons of Yonkers, Inc. of the
BankBoston Facility.
Fraudulent Conveyance Matters--Federal and state statutes allow courts, under
specific circumstances, to void guarantees and require note holders to return
payments received from guarantors.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a guarantee could be voided, or claims in respect of
a guarantee could be subordinated to all other debts of that guarantor under
certain circumstances. In addition, any payment by that guarantor pursuant to
its guarantee could be voided and required to be returned to the guarantor, or
to a fund for the benefit of the creditors of the guarantor.
Miscellaneous Business Risks
Dependence on Key Personnel
Our future success is largely dependent on the talents and efforts of Peter
Thorner, our Chief Executive Officer and Chairman of the Board, and other
members of senior management. We entered into an
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employment agreement with Mr. Thorner in 1995, but do not maintain a key person
life insurance policy on the life of Mr. Thorner. The loss of Mr. Thorner or
other members of our senior management could have a material adverse effect on
our operations, business and financial condition. See "Management--Employment
Agreement with Peter Thorner."
Potential Year 2000 Liability
The Year 2000 project is virtually complete and the cost of remediation
totaled approximately $4.1 million, including $1.7 million incurred in Year-to-
Date 1999 that was included in SG&A expenses. All software replacement or
remediation was virtually complete as of the end of Third Quarter 1999.
Successful tests have been performed of all major systems.
In 1998, to address compliance of our information technology systems, we
contracted with a major outside consulting firm to provide the resources
required to identify Year 2000 issues and remediate our systems as necessary.
In some cases, non-compliant software has been replaced through upgrades
provided by manufacturers of the respective software or by installation of
compliant replacement systems. We also addressed embedded systems and computer-
controlled devices in our stores, distribution centers and central office and
we are taking the necessary steps to ensure Year 2000 compliance. As of
October, 1999, the Year 2000 project was approximately 99% complete, excluding
the third-party compliance evaluation discussed below.
We believe that the critical systems we operate are now substantially Year
2000 compliant and that we are not likely to encounter significant internal
operational problems. However, there is no guarantee that a Year 2000 related
failure will not arise. This is due to the uncertainty surrounding potential
third-party related Year 2000 problems, as well as our potential failure to
discover all of our own susceptible internal systems. The risk to us resulting
from the failure of third-party or internal systems is similar to other
retailers and, for the most part, to other businesses. We took steps to
minimize this risk by surveying our suppliers and business partners to assess
their Year 2000 readiness, and their responses are being analyzed for any
necessary action.
A reasonable worst case scenario could involve the failure of our systems or
our supplier and business partner systems which would cause a material
disruption to our operations. For example, this could result in an interruption
of certain normal business activities and operations such as a temporary
inability to process sales transactions or transmit data either internally or
to suppliers and business partners. If the worst case scenario should occur for
any significant duration, it could have a material adverse impact on our
business, results of operations, liquidity and financial position. However, at
this time, we are unable to determine completely the financial consequences of
such potential Year 2000 failures.
While we expect our efforts will provide reasonable assurance that material
disruptions will not occur, the potential for disruptions cannot be fully
identified. We are therefore developing contingency plans that will provide for
alternative courses of action to mitigate material individual system or process
failures due to Year 2000 issues. These contingency plans are expected to be in
place by the end of the third quarter. At this time, we cannot estimate the
additional cost, if any, that might be incurred from the implementation of such
contingency plans.
The costs of the Year 2000 project and the dates on which we plan to
complete Year 2000 modifications are based on our 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.
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Board of Directors May Change
Our current Board of Directors consists of 3 representatives chosen by us
and 6 representatives chosen by creditors in our Chapter 11 proceeding. It is
likely that the composition of our Board will change in the future as current
members resign, decline to stand for re-election, or are not re-elected. This
turnover in our directors may be more likely than it is for other companies
because our creditor constituencies (which selected some of our directors) have
and may continue to dispose of their ownership interests. The changing
composition of our Board might result in changing corporate policies.
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THE COMPANY
General
Bradlees, Inc. ("Bradlees") and its subsidiary companies operate 104
discount department stores as of December, 1999, in seven states in the
Northeast, through Bradlees, Inc.'s subsidiary, Bradlees Stores, Inc.
(collectively, the "Company") primarily in the heavily populated corridor
running from the Boston to the Philadelphia metropolitan areas. The Company
expects to open an additional new store on Staten Island, NY in April 2000.
Headquartered in Braintree, Massachusetts, the Company and its predecessor have
been active in the discount department store business for over 40 years.
Background to Our Bankruptcy Reorganization
Events Leading to the Chapter 11 Filing. During the early 1990's, Old
Bradlees' business strategy relied heavily on opening new stores, remodeling
existing locations and competing on the basis of price. From 1992 to January,
1995, we 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. Old Bradlees' declining
operating performance, coupled with the aggressive expansion program, began to
erode our liquidity. Old Bradlees' liquidity further eroded in May and June,
1995 because of the unwillingness of factors and vendors to continue to extend
trade credit. Old Bradlees, unable to obtain sufficient financing to satisfy
factor and vendor concerns, was compelled to seek Bankruptcy Court protection
on June 23, 1995.
The Chapter 11 Filing. Old Bradlees, and each of its subsidiaries filed
petitions for relief under Chapter 11 of the United States Bankruptcy Code on
June 23, 1995. Once in bankruptcy, we filed an initial plan of reorganization
and related disclosure statement with the United States Bankruptcy Court for
the Southern District of New York (the "Bankruptcy Court") on April 13, 1998
and filed an Amended Plan of Reorganization and related disclosure statement
with the Bankruptcy Court on October 2, 1998. Our Plan of Reorganization was
originally confirmed by the Bankruptcy Court on November 18, 1998. The United
States District Court for the Southern District of New York reversed this
confirmation on December 23, 1998. We modified the Plan of Reorganization, and
the modified Plan of Reorganization was confirmed by the Bankruptcy Court on
January 27, 1999. The modified Plan of Reorganization became effective on
February 2, 1999 (the "Plan of Reorganization"). The Chapter 11 reorganization
process and our Plan of Reorganization are discussed below.
The Plan of Reorganization
The following chart shows the organization of Old Bradlees and the
organization of the Company following its reorganization.
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[CHART APPEARS HERE]
Corporate Structure Prior To The Reorganization
Bradlees, Inc.
Bradlees
Administrative
Co., Inc.
Bradlees Stores,
Inc.
Maximedia Dostra Realty New Horizons New Horizons New Horizons
Services Co., Inc. of Bruckner, of Westbury, of Yonkers
Inc. Inc. Inc. Inc.
Corporate Structure After The
Reorganization
Bradlees, Inc.
Bradlees Stores,
Inc.
New Horizons of
Yonkers, Inc.
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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. After we entered
Chapter 11, Section 362 of the Bankruptcy Code did not allow our creditors and
other parties in interest to take certain actions without Bankruptcy Court
approval. Among other things, they were not allowed to:
. Commence or continue a judicial, administrative or other proceeding
against us a) which was or could have been commenced prior to
commencement of the Chapter 11 proceeding, or b) to recover a claim
that arose prior to commencement of the case;
. Enforce any judgments against us that existed prior to our entry into
bankruptcy;
. Take any action to obtain possession of our property or to exercise
control over our property or our estates;
. Create, perfect or enforce any lien against our property;
. Collect, assess or recover claims against us that arose before the
commencement of the case; or
. Offset any debt owing to us that arose prior to the commencement of
the case against a claim of such creditor or party-in-interest against
us that arose before the commencement of the case.
Although we were authorized to operate our business as a debtor-in-
possession, we were not permitted to engage in transactions outside the
ordinary course of business without first complying with the notice and hearing
provisions of the Bankruptcy Code, and if necessary, obtaining Bankruptcy Court
approval. An official unsecured creditors' committee was formed by the United
States Trustee. This committee and various other parties in interest, including
creditors holding claims, such as the pre-petition bank group, had the right to
appear and be heard by the Bankruptcy Court on our applications relating to
certain business transactions. We were required to pay certain expenses of the
committee, including legal and accounting fees, to the extent allowed by the
Bankruptcy Court. In addition, upon the approval of the Bankruptcy Court, we
made monthly adequate protection payments of $300,000 to those creditors in the
pre-petition bank group, for an aggregate total payment of $13,300,000 as of
the Effective Date.
Plan of Reorganization--Procedures. A debtor-in-possession has the exclusive
right to propose and file with the Bankruptcy Court a plan of reorganization
for a period of time which can be extended by the Bankruptcy Court.
Given the seasonality and magnitude of our operations, our change in
business strategies, and the number of interested parties possessing claims
that had to be resolved in this Chapter 11 case, the plan formulation process
was complex. Accordingly, we obtained additional extensions of the exclusivity
period to August 3, 1998. The Bankruptcy Court approved the disclosure
statement on October 5, 1998 and confirmed the modified Plan of Reorganization
on January 27, 1999.
Our Plan of Reorganization contained distributable value (as of the
Effective Date) to creditors of approximately $162 million, which consisted of:
. Approximately $15 million of administrative claim payments;
. $14 million in cash to the bank group and the unsecured creditors;
. A $40 million note primarily payable to our pre-Chapter 11 bank group,
which was partially paid down through proceeds from the modification
of the lease terms of our Union Square, New York store and further
paid down through proceeds from the financing of our leasehold
interest in our Yonkers, New York store;
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. New Bradlees' Common Stock with an estimated value as of the Effective
Date of $85 million. The Old Bradlees Common Stock was canceled; and
. Certain notes totalling $6.2 million and other distributions totalling
$1.4 million.
The Plan of Reorganization became effective February 2, 1999 (the "Effective
Date"). Pursuant to the Plan of Reorganization, after giving effect to various
elections made by various creditors, the following occurred on the Effective
Date:
. Although creditors can dispute the disallowance of claims after the
Effective Date, the claims of unsecured creditors are currently
estimated to be allowed in the aggregate amount of approximately $250
million. The holders of all settled claims are expected to receive:
. $30.6 million in cash;
. 9% Convertible Notes in an original aggregate principal amount
equal to $40.0 million;
. approximately 10 million shares of our Common Stock;
. warrants to purchase 1,000,000 shares of our Common Stock at a
price of $7.00 per share (which warrants expire on February 2,
2004);
. 9% CAP Notes in an original aggregate principal amount of
$547,094;
. 9% Cure Notes in an original aggregate principal amount of $3.3
million; and
. 9% Tax Notes in an original aggregate principal amount of $2.4
million.
. The interests of all stockholders holding stock in Old Bradlees were
terminated, and the stock of Old Bradlees was canceled.
. All outstanding bonds, notes, indentures and like instruments were
canceled.
. Approximately $250 million in debtor-in-possession financing was paid
in full.
. We entered into the BankBoston Facility, which provides for a secured
revolving line of credit of $270 million with a maximum term of up to
3 years. See "Business -- Credit Facility."
. One of our subsidiaries, New Horizons of Yonkers, Inc., remained in
Chapter 11 to facilitate the planned disposition of its leasehold
interest. All of the operations of the Yonkers store remained with
Bradlees Stores, Inc.
. We merged Bradlees Administrative Co., Inc. into Bradlees, Inc. We
also merged all of the subsidiaries of Bradlees Stores, Inc., with the
exception of New Horizons of Yonkers, Inc., into Bradlees Stores, Inc.
. The tenure of the Board of Directors of Bradlees, Inc. terminated on
the Effective Date. The following became new members of the Board of
Bradlees, Inc. as of the Effective Date:
. We selected three members (Messrs. Thorner, Lynn, and Friedman);
. The Bank Group selected two members (Messrs. Altschuler and
Lieberman);
. The Unofficial Committee selected one member (Mr. MacDonald);
. The Creditors Committee selected one member (Mr. Clingman); and
. The Bank Group, the Unofficial Committee and the Creditors
Committee, acting together, selected two members (Messrs. Blauner
and Roth).
See "Management--Board of Directors of Bradlees, Inc. and Its
Committees."
19
<PAGE>
. We paid an aggregate emergence bonus of $1,000,000 and entered into an
agreement to pay additional bonuses of $2,000,000 if certain
conditions are met. We also paid deferred bonuses of $1,000,000
to certain executives. See "Executive Compensation--Management
Emergence Bonus Plan, Corporate Bonus Plan, and Enterprise
Appreciation Incentive Plan."
. We determined to grant options to purchase an aggregate of 750,000
shares of Common Stock to members of our senior management. These
options were granted on April 15, 1999. See "Management--Stock Option
Plan for Key Employees."
. We registered the resale of the Common Stock, the 9% Convertible
Notes, the Common Stock issuable upon the Conversion of the Notes and
the Common Stock issuable upon exercise of the Warrants, each as
received by certain parties, directly or indirectly as a result of
their ownership of participation interests in claims resulting in the
issuance of such securities with the Securities and Exchange
Commission under the Securities Act of 1933.
. The Plan of Reorganization also provided for many other matters,
including satisfaction of numerous other claims, satisfaction of
certain other claims in accordance with negotiated settlement
agreements and an agreement to keep in place certain retirement and
employment agreements.
The foregoing is a summary of the material terms of the Plan of
Reorganization. A complete copy of the Plan of Reorganization has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part.
20
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of Securities by the Selling
Stockholders.
MARKET PRICE OF COMMON STOCK AND DIVIDEND POLICY
As of the Effective Date (February 2, 1999) and pursuant to the Plan of
Reorganization, the Company's old common stock was canceled and new common
stock was issued following consummation of the Plan of Reorganization. The new
common stock is traded on the NASDAQ National Market under the symbol "BRAD".
As of December 7, 1999, there were approximately 1,367 holders of record of the
new common stock. The following table sets forth the high and low sales prices
for the new common stock for the periods indicated:
<TABLE>
<CAPTION>
High Low
------ -----
<S> <C> <C>
Fiscal year ended January 30, 1999--Not issued................. N/A N/A
February 3, 1999 through April 28, 1999........................ $10.00 $2.44
May 1, 1999 through June 4, 1999............................... $10.69 $7.94
June 7, 1999 through September 7, 1999......................... $22.50 $9.00
September 8, 1999 through December 7, 1999..................... $17.06 $7.25
</TABLE>
We do not anticipate paying cash dividends in the foreseeable future. We
expect that we will retain all available earnings generated by our operations
for the development and growth of our business. Any future determination as to
the payment of dividends will be made at the discretion of the Board of
Directors and will depend upon our operating results, financial condition,
capital requirements, general business conditions and such other factors as the
Board of Directors deems relevant. Certain financing agreements, including the
BankBoston Facility, restrict our ability to pay cash dividends on the Common
Stock and make certain other restricted payments (as defined therein).
Specifically, under the terms of the BankBoston Facility, we have agreed not to
pay dividends of any kind. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Liquidity and Capital
Resources."
21
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at October
30, 1999. The table should be read in conjunction with the Company's financial
statements and the related notes thereto and "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere
in this Prospectus.
<TABLE>
<CAPTION>
October 30, 1999
----------------
(in thousands)
<S> <C>
Long-term debt, including current maturities:
BankBoston Facility........................................... $158,159
Notes payable................................................. 17,229
Capital lease obligations..................................... 28,321
Lease financing obligation.................................... 17,496
--------
Total long-term debt, including current maturities........... 221,205
Stockholders' equity: (1)
Preferred stock .............................................. --
Common stock.................................................. 100
Additional paid in capital.................................... 55,617
Accumulated deficit........................................... (27,184)
--------
Total stockholders' equity..................................... 28,533 (2)
--------
Total capitalization........................................... $249,738
========
</TABLE>
- --------
(1) Excludes 922,357 shares of Common Stock reserved for issuance upon
exercise of the Warrants and 853,887 shares of Common Stock reserved for
issuance upon exercise of options granted in 1999. We can also issue an
additional 146,113 shares under our option plan.
(2) See "Risk Factors--Post Bankruptcy Risks--Determination of Equity Value."
22
<PAGE>
SELECTED FINANCIAL DATA
The selected data presented below under the captions "Statement of
Operations Data" and "Balance Sheet Data" for, and as of the end of, each of
the years in the five-year period ended January 30, 1999, are derived from the
consolidated financial statements of the Company, which consolidated financial
statements have been audited by Arthur Andersen LLP (fiscal years 1998 and
1997) or Deloitte & Touche LLP (pre-fiscal year 1997), independent certified
public accountants. The consolidated financial statements as of January 30,
1999 and January 31, 1998, and for each of the years in the three-year period
ended January 30, 1999, and the independent auditors' reports thereon, are
included elsewhere in this Prospectus. Fiscal year 1995 refers to the 53 weeks
ended February 3, 1996 and fiscal year 1994 refers to the 52 weeks ended
January 28, 1995. Certain reclassifications have been made to the operating
expenses and operating income of fiscal year 1994 to conform to the current
presentation. The selected financial data presented below for the 39-week
periods ended October 30, 1999 and October 31, 1998 and as of October 30, 1999
and October 31, 1998 are derived from the unaudited condensed consolidated
financial statements of the Company included elsewhere in this Prospectus.
The selected data should be read in conjunction with the consolidated
financial statements for the three-year period ended January 30, 1999, the
related notes and the independent auditors' reports, which contained
explanatory paragraphs for fiscal year 1996 related to the Company's filing for
reorganization under Chapter 11 which raised substantial doubt about its
ability to continue as a going concern, appearing elsewhere in this Prospectus.
As a result of the Company filing a voluntary petition to reorganize under
Chapter 11 on June 23, 1995 and operating as a debtor-in-possession thereafter
through fiscal year 1998, the selected financial data for periods prior to June
23, 1995 are not comparable in certain material respects to periods subsequent
to such date. In addition, under fresh-start reporting, the final consolidated
balance sheet as of January 30, 1999 became the opening consolidated balance
sheet of the reorganized Company. Since fresh-start reporting has been
reflected in the selected financial data as of October 30, 1999 and for the
interim periods then ended and as of January 30, 1999, the selected financial
data for those periods are not comparable in certain material respects to the
selected financial data for the other periods presented. Accordingly, a black
line has been drawn between the Registrant's selected financial data and the
Predecessor's selected financial data.
<TABLE>
<CAPTION>
39 Weeks Ended Fiscal Year
--------------------- ----------------------------------------------------------
October October
30, 1999 31, 1998 1998 1997 1996 1995 1994
---------- --------- ---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts and ratios)
Registrant Predecessor
---------- ---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $1,029,699 $ 906,385 $1,337,197 $1,344,444 $1,561,718 $1,780,768 $1,916,555
Gross margin............ 312,452 271,002 393,103 396,357 434,067 491,691 591,160
Operating expenses(a)... 318,595 295,939 397,297 407,003 532,496 612,102 549,154
Operating income
(loss)................. (6,143) (24,937) (4,194) (10,646) (98,429) (120,411) 42,006
Fresh-start revaluation
charge................. -- -- 108,428 -- -- -- --
Income (loss) before
income taxes and
extraordinary items.... (27,184) (34,583) (133,753) (22,557) (218,759) (311,946) 10,011
Income tax benefit
(expense).............. -- -- -- -- -- 104,533 (4,205)
Income (loss) before
extraordinary items and
cumulative effect of
accounting changes..... (27,184) (34,583) (133,753) (22,557) (218,759) (207,413) 5,806
Extraordinary items(b).. -- -- 419,703 -- -- -- --
Cumulative effect of ac-
counting changes(c).... -- -- -- -- -- -- (485)
Net income (loss)....... $ (27,184) $ (34,583) $ 285,950 $ (22,557) $ (218,759) $ (207,413) $ 5,321
Income (loss) per share:
Basic and diluted...... $ (2.73) $ (3.06) * $ (1.98) $ (19.17) $ (18.17) $ .47
Shares used for
computation............ 9,959 11,310 * 11,365 11,412 11,416 11,353
Ratio of earnings to
fixed charges(d)....... -- -- -- -- -- -- 1.31
Balance Sheet Data: Registrant
----------
Working capital(e)...... $ (29,378) $ 10,836 $ (7,818) $ 52,187 $ 68,649 $ 200,195 $ 32,874
Total assets............ 553,737 661,410 463,751 595,166 604,200 798,662 884,814
Long-term debt, less
current maturities(f).. 60,506 26,211 59,464 27,073 33,296 53,396 289,643
Total stockholders' eq-
uity (deficiency)...... $ 28,533 $(320,532) $ 55,000 $ (285,950) $ (263,293) $ (45,010) $ 163,432
</TABLE>
23
<PAGE>
- --------
* Earnings per share was not presented for the fiscal year ended January 30,
1999 because such presentation would not be meaningful. The old stock was
cancelled under the Plan of Reorganization and the new stock was issued
following consummation of the Plan of Reorganization.
(a) Net of other operating income.
(b) The extraordinary item in fiscal year 1998 resulted from the consummation
of the Plan of Reorganization and the associated discharge of all pre-
petition debt.
(c) The fiscal year 1994 charge for the cumulative effect of accounting changes
resulted from the adoption of Statement of Financial Accounting Standards
No. 112, "Employers' Accounting for Postemployment Benefits."
(d) For the periods presented since fiscal year 1994, earnings were
insufficient to cover fixed charges by the amounts of the respective loss
before income taxes and extraordinary items. For purposes of computing the
ratio of earnings to fixed charges, "earnings" consist of income (loss)
before taxes and extraordinary items plus fixed charges less capitalized
interest. "Fixed charges" consist of interest expense, including
amortization of debt issuance cost, capitalized interest and a portion of
rent expense which is deemed to be representative of an interest factor.
(e) Includes a higher accounts payable level as a percentage of inventories at
October 30, 1999, accrued bankruptcy expenses of $4.4 million at October
31, 1998 and $8.4 million for 1998 and excludes liabilities subject to
settlement under the reorganization case at October 31, 1998 and for 1995
through 1997.
(f) Excludes debt subject to settlement under the reorganization case at
October 31, 1998 and for 1995 through 1997.
24
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated statement of
operations is based on our consolidated statement of operations for fiscal 1998
included elsewhere in this Prospectus as adjusted to give effect to the
consummation of the Plan of Reorganization as if the Effective Date of the Plan
of Reorganization had occurred on January 31, 1998 (at the beginning of fiscal
1998).
The unaudited pro forma financial information and accompanying unaudited
notes should be read in conjunction with our consolidated financial statements
and the notes thereto appearing elsewhere in this Prospectus. The unaudited pro
forma consolidated financial information is presented for informational
purposes only and does not purport to represent what our results of operations
would actually have been if the Effective Date of the Plan of Reorganization
had occurred at the beginning of fiscal 1998, or to project our results of
operations for any future period.
25
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Adjustments Pro Forma
52 Weeks Ended --------------------------- 52 Weeks Ended
Jan. 30, 1999 Debits Credits Jan. 30, 1999
-------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Total sales............. $1,381,116 14,705 (1) -- $1,366,411
Leased department
sales.................. 43,919 383 (1) -- 43,536
---------- ----------
Net sales............... 1,337,197 1,322,875
Cost of goods sold...... 944,094 -- 10,357 (1) 933,251
486 (2)
---------- ----------
Gross margin............ 393,103 389,624
Leased department and
other operating
income................. 11,795 82 (1) -- 11,713
---------- ----------
404,898 401,337
Selling, store
operating,
administrative and
distribution expenses.. 376,856 4,059 (4) 4,553 (1) 373,059
4,400 (3)
1,705 (6) 8,634 (7)
8,026 (10)
Depreciation and
amortization expense... 32,236 -- 86 (1) 22,108
6,815 (4)
617 (6)
2,610 (9)
Loss on disposition of
properties............. 241 -- -- 241
---------- ----------
Income (loss) before
interest and
reorganization items... (4,435) 5,929
Interest and debt
expense................ 16,329 1,400 (5) 2,148 (5) 28,023
12,442 (8)
Reorganization items.... 4,561 -- 4,561 (3) --
---------- ----------
Loss before fresh-start
revaluation and
extraordinary item..... (25,325) -- -- (22,094)
Revaluation of assets
and liabilities
pursuant to adoption of
fresh-start reporting.. (108,428) -- 108,428 (3) --
---------- ----------
Loss before
extraordinary item..... (133,753) (22,094)
Extraordinary item--gain
on debt discharge...... 419,703 419,703 (3) -- --
---------- ----------
Net income (loss)....... $ 285,950 $ (22,094)
========== ==========
Weighted average shares
outstanding............ * 10,226
========== ==========
Net income (loss) per
share.................. $ * $ (2.16) (11)
========== ==========
</TABLE>
- --------
* Earnings per share was not presented for the fiscal year ended January 30,
1999 because such presentation would not be meaningful. The former stock was
canceled under the plan of reorganization and the new stock was issued
following consummation of the plan.
See accompanying notes to unaudited pro forma consolidated financial
statements.
26
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The following notes set forth the explanations and assumptions used and
adjustments made in preparing the unaudited pro forma consolidated statement of
operations for the 52 weeks ended January 30, 1999. The unaudited pro forma
consolidated statement of operations reflects the adjustments described below,
which are based on the assumptions and estimates described therein. There was
no tax impact from the pro forma adjustments.
Pro Forma Adjustments--Statement of Operations for the Fiscal Year Ended
January 30, 1999
1. To eliminate the sales and expense amounts associated with seven stores
closed since January 31, 1998 as part of the Company's reorganization.
2. To eliminate the provision for inventory impairment for the store closed
in March, 1999.
3. To eliminate an emergence-related bonus provision, reorganization items,
the fresh-start revaluation charge and the extraordinary gain on debt
discharge.
4. Adjustment in amortization of lease interests revalued under fresh-start
reporting (Note 2).
5. To record amortization of post-emergence deferred financing costs and
reverse the historical 1998 amortization of deferred financing costs.
6. To adjust lease rent expense and amortization expense for revised
straight-line rent calculations.
7. To adjust lease rent expense for amortization of the unfavorable lease
liability (Notes 2 and 9).
8. To adjust interest expense for amortization of the discount on the
unfavorable lease liability (Notes 2 and 9) and for increased interest expense
resulting from the 9% Convertible Notes and other issued notes (Note 7).
9. To record the effects resulting from the allocation of the estimated
excess of revalued assets over the reorganization value (negative goodwill) at
January 31, 1998.
10. To record additional SFAS No. 106 (Note 12) expense, lower the SERP
(Notes 2 and 12) expense and reduce the 1998 pension curtailment gain as a
result of the effect of fresh-start reporting and the associated earlier write-
off of unamortized prior service costs.
11. Pro forma earnings per share was computed based on an estimated weighted
average number of common shares outstanding during the applicable period
assuming that the Plan of Reorganization was effective on January 31, 1998.
Excludes any potential dilutive effect of stock options and warrants.
27
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Results of operations, summarized in millions of dollars (except per share
amounts) and expressed as a percentage of net sales, were as follows for the 13
weeks and 39 weeks ended October 30, 1999 ("Third Quarter 1999" and "Year-to-
Date 1999", respectively) and for the 13 weeks and 39 weeks ended October 31,
1998 (" Third Quarter 1998" and "Year-to-Date 1998", respectively):
<TABLE>
<CAPTION>
13 Weeks Ended 39 Weeks Ended
--------------------------- ---------------------------
Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998
Registrant Predecessor Registrant Predecessor
------------- ------------- ------------- -------------
(Dollars in millions except per share amounts)
<S> <C> <C> <C> <C>
Dollars in millions
(except per share
amounts)
Total sales............. $358.4 $323.1 $1,065.2 $939.2
Leased department
sales.................. 11.7 11.0 35.5 32.8
------ ------ -------- ------
Net sales............... 346.7 312.1 1,029.7 906.4
Cost of goods sold...... 240.9 217.4 717.2 635.4
------ ------ -------- ------
Gross margin............ 105.8 94.7 312.5 271.0
Leased department and
other operating
income................. 3.4 3.2 10.0 9.3
------ ------ -------- ------
109.2 97.9 322.5 280.3
Selling, store
operating,
administrative and
distribution expenses.. 101.7 95.7 307.6 280.9
Depreciation and
amortization expense... 6.6 7.8 21.1 24.4
Loss on disposition of
properties............. -- -- -- 0.2
Interest and debt
expense................ 7.8 4.4 21.8 12.0
Reorganization items.... 0.0 (2.8) (0.8) (2.6)
------ ------ -------- ------
Net loss................ $ (6.9) $ (7.2) $ (27.2) $(34.6)
====== ====== ======== ======
Basic and diluted net
loss per share......... $(0.69) $(0.64) $ (2.73) $(3.06)
====== ====== ======== ======
Total sales increase
(decrease)
All stores.............. 10.9% (5.6)% 13.4% 0.9%
Comparable stores....... 10.5% (2.0)% 14.2% 4.7%
Number of stores in
operation at end of
period................. 104 103 104 103
As a percentage of net
sales, results were as
follows:
Net sales............... 100.0% 100.0% 100.0% 100.0%
Cost of goods sold...... 69.5 69.6 69.7 70.1
------ ------ -------- ------
Gross margin............ 30.5 30.4 30.3 29.9
Leased department and
other operating
income................. 1.0 1.0 1.0 1.0
------ ------ -------- ------
31.5 31.4 31.3 30.9
Selling, store
operating,
administrative and
distribution expenses.. 29.3 30.7 29.9 31.0
Depreciation and
amortization expense... 1.9 2.5 2.0 2.7
Loss on disposition of
properties............. 0.0 0.0 0.0 0.0
Interest and debt
expense................ 2.3 1.4 2.1 1.3
Reorganization items.... 0.0 (0.9) (0.1) (0.3)
------ ------ -------- ------
Net loss................ (2.0)% (2.3)% (2.6)% (3.8)%
====== ====== ======== ======
</TABLE>
28
<PAGE>
Since fresh-start reporting has been reflected in the accompanying condensed
financial statements as of October 30, 1999 and for Third Quarter and Year-to-
Date 1999, those statements are not comparable in certain material respects to
the condensed consolidated financial statements as of October 31, 1998 and for
Third Quarter and Year-to-Date 1998. Accordingly, a black line has been drawn
between the Registrant's financial statements and the Predecessor's financial
statements. Management has attempted to indicate, where feasible, the major
effects on comparability from fresh-start reporting in the discussion and
analysis of financial condition and results of operations for Third Quarter and
Year-to-Date 1999.
The discussion and analysis for the annual periods is based on our results
of operations detailed below for the 52 weeks ended January 30, 1999 ("1998")
the 52 weeks ended January 31, 1998 ("1997"), and the 52 weeks ended February
1, 1997 ("1996"). The financial information discussed below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The following table sets forth
information concerning the number of our stores.
<TABLE>
<CAPTION>
Fiscal Year Ended
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Stores, beginning of
period.................... 109 110 134
New stores................. -- -- 3
Closed stores.............. (6)(a) (1) (27)
--- --- ---
Stores, end of period...... 103 109 110
=== === ===
</TABLE>
- --------
(a) Excludes one store closed in March, 1999.
The following table sets forth the amounts (in millions) and the percentages
of net sales for the items reflected in our Statements of Operations for the
periods indicated.
<TABLE>
<CAPTION>
1998 % of 1997 % of 1996 % of
1998 Net Sales 1997 Net Sales 1996 Net Sales
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $1,337.2 100.0 % $1,344.4 100.0 % $1,561.7 100.0 %
Cost of goods sold...... 944.1 70.6 % 948.0 70.5 % 1,127.6 72.2 %
-------- ----- -------- ----- -------- -----
Gross margin............ 393.1 29.4 % 396.4 29.5 % 434.1 27.8 %
Leased department and
other operating
income................. 11.8 0.9 % 12.1 0.9 % 13.7 0.9 %
-------- ----- -------- ----- -------- -----
404.9 30.3 % 408.5 30.4 % 447.8 28.7 %
Selling, store
operating,
administrative and
distribution expenses.. 376.9 28.2 % 382.9 28.5 % 504.0 32.3 %
Depreciation and
amortization expense... 32.2 2.4 % 36.2 2.7 % 42.2 2.7 %
-------- ----- -------- ----- -------- -----
Operating loss.......... (4.2) (0.3)% (10.6) (0.8)% (98.4) (6.3)%
Loss (gain) on
disposition of
properties............. 0.2 -- (5.4) (0.4)% (1.7) (0.1)%
Interest and debt
expense................ 16.3 1.2 % 16.6 1.2 % 11.5 0.7 %
Impairment of long-lived
assets................. -- -- -- -- 40.8 2.6 %
Reorganization items.... 4.6 0.4 % 0.8 0.1 % 69.8 4.5 %
-------- ----- -------- ----- -------- -----
Loss before fresh-start
revaluation, income
taxes and extraordinary
item................... (25.3) (1.9)% (22.6) (1.7)% (218.8) (14.0)%
Fresh-start revaluation
charge................. 108.4 8.1 % -- -- -- --
-------- ----- -------- ----- -------- -----
Loss before income taxes
and extraordinary...... (133.7) (10.0)% (22.6) (1.7)% (218.8) (14.0)%
Income taxes............ -- -- -- -- -- --
Extraordinary gain on
debt discharge......... (419.7) 31.4 % -- -- -- --
-------- ----- -------- ----- -------- -----
Net income (loss)....... $ 286.0 21.4 % $ (22.6) (1.7)% $ (218.8) (14.0)%
======== ===== ======== ===== ======== =====
</TABLE>
29
<PAGE>
Our business is seasonal in nature, with a significant portion of our 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.
Since fresh-start reporting has been reflected in the accompanying condensed
financial statements (Note 2) as of October 30, 1999 and for Third Quarter and
Year-to-Date 1999, those statements are not comparable in certain material
respects to the condensed consolidated financial statements as of October 31,
1998 and for Third Quarter and Year-to-Date 1998. Accordingly, a black line has
been drawn between the Registrant's financial statements and the Predecessor's
financial statements. We have attempted to indicate, where feasible, the major
effects on comparability from fresh-start reporting in the following discussion
and analysis of financial condition and results of operations for Third Quarter
and Year-to-Date 1999.
Third Quarter 1999 Compared to Third Quarter 1998
Total sales for Third Quarter 1999 increased $35.3 million or 10.9% from
Third Quarter 1998 due primarily to an increase of 10.5% in comparable store
sales (including leased shoe department sales). In addition, two new stores
were opened in October, 1999. We believe that the increase in comparable store
sales was due mostly to continued favorable customer response to our
merchandising and marketing initiatives and the first-quarter liquidation of
one of our major competitors (Caldor Corp.).
Over the last two years, we have lowered opening price points, developed more
item-intensive and price-point oriented circular ad offerings, introduced
certain convenience and commodity products, and implemented and expanded two
successful programs: "Certified Value" (highlights highly recognizable items at
competitive everyday prices) and "WOW" (integrates targeted and mostly
unadvertised opportunistic purchases). We had strong sales of both hardlines
and softlines merchandise in Third Quarter 1999, with hardlines merchandise
experiencing the larger increase. Comparable store sales increased 4.9% during
the fiscal month of November, 1999, which had unseasonably warm weather that
negatively impacted sales. The Company also discontinued one seasonal
promotional event in November, 1999 as compared to November, 1998.
Gross margin increased $11.1 million in Third Quarter 1999 compared to Third
Quarter 1998 due to the higher sales and a slightly higher gross margin rate
(30.5% vs. 30.4%). Leased department and other operating income increased $0.2
million but remained the same as a percentage of net sales in Third Quarter
1999 compared to Third Quarter 1998.
Selling, store operating, administrative and distribution ("SG&A") expenses
increased $6.0 million but dropped 1.4% as a percentage of net sales (due to
the improved sales performance) in Third Quarter 1999 from Third Quarter 1998.
The higher SG&A expenses were primarily due to store and distribution expenses
associated with staffing requirements to handle the higher sales volume and
satisfy customer demand and a $1.3 million credit in the Third Quarter 1998
benefits expense that resulted from a reduction in retiree medical benefits
(Note 8 to the Condensed Consolidated Financial Statements). In addition,
preopening expenses of $1.2 million were incurred in Third Quarter 1999 for the
two new stores.
Depreciation and amortization expense declined $1.2 million or 0.6% as a
percentage of net sales in Third Quarter 1999 from Third Quarter 1998 due
primarily to the impact of fresh-start reporting.
Interest and debt expense increased $3.4 million or 0.9% as a percentage of
net sales in Third Quarter 1999 from Third Quarter 1998. This increase was due
to $2.3 million of noncash interest expense resulting from the amortization of
the discount associated with the unfavorable lease liability recorded under
fresh-start reporting, interest of $0.6 million on the lease financing
obligation (Note 4 to the Condensed Consolidated Financial Statements) and
interest of $0.4 million on the new notes issued under the plan of
reorganization.
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The reorganization credit of $2.8 million in Third Quarter 1998 was directly
associated with the Chapter 11 proceedings and is discussed in Note 6 to the
Condensed Consolidated Financial Statements.
We did not record an income tax provision in Third Quarter 1999 due to the
current expectation of no income tax expense or benefit in 1999. There was also
no income tax expense or benefit recorded in Third Quarter 1998.
Year-to-Date 1999 Compared to Year-to-Date 1998
Year-to-Date 1999 total sales increased $126.0 million or 13.4% from Year-to-
Date 1998 due to this year's 14.2% increase in comparable store sales and the
two new stores opened in October, partially offset by the impact from the
closing of five stores in the first quarter of 1998 and one store in the first
quarter of 1999. We believe that the Year-to-Date 1999 increase in comparable
store sales was due primarily to the same factors discussed above for Third
Quarter 1999. We had strong increases in Year-to-Date 1999 sales of both
hardlines and softlines merchandise, with hardlines merchandise experiencing
the larger increase.
Gross margin increased $41.5 million in Year-to-Date 1999 compared to Year-
to-Date 1998 due primarily to the higher store sales and a higher gross margin
rate (30.3% vs. 29.9%). The improved year-to-date gross margin rate was
principally the result of a lower markdown rate which related, in part, to the
strong sales performance. Leased department and other operating income
increased $0.7 million due mostly to improved leased shoe department sales but
stayed the same as a percentage of net sales due to the strong overall sales
growth (which exceeded the leased department sales growth).
Year-to-Date 1999 SG&A expenses increased $26.7 million but dropped 1.1% as a
percentage of net sales (due to the improved sales performance) from Year-to-
Date 1998. The higher SG&A expenses were primarily due to the incremental
expenses incurred to handle the higher sales volume as discussed above for
Third Quarter 1999, and a $4.0 million credit in the Year-to-Date 1998 benefits
expense that resulted from a reduction in retiree medical benefits (Note 8 to
the Condensed Consolidated Financial Statements).
Depreciation and amortization expense declined $3.3 million or 0.7% as a
percentage of net sales in Year-to-Date 1999 from Year-to-Date 1998 due
primarily to the impact of fresh-start reporting.
Interest and debt expense increased $9.8 million or 0.8% as a percentage of
net sales in Year-to-Date 1999 from Year-to-Date 1998. This increase was due
primarily to $7.0 million of noncash interest expense resulting from the
amortization of the discount associated with the unfavorable lease liability
recorded under fresh-start reporting and interest of $1.9 million on the new
notes issued under the plan of reorganization.
Reorganization credits of $0.8 and $2.6 million in Year-to-Date 1999 and
1998, respectively, were directly associated with the Chapter 11 proceedings
and are discussed in Note 6 to the Condensed Consolidated Financial Statements.
We did not record an income tax provision in Year-to-Date 1999 due to the
current expectation of no income tax expense or benefit in 1999. There was also
no income tax expense or benefit recorded in Year-to-Date 1998.
1998 Compared to 1997
Net sales for 1998 declined $7.2 million as a result of the impact of
operating six fewer stores, mostly offset by a comparable store sales increase
of 3.5%. The increase in comparable store sales was due to the merchandising
and marketing initiatives begun in 1997. (See "Business--Strategy.")
Gross margin decreased $3.3 million, primarily as a result of the six closed
stores, and 0.1% as a percentage of net sales in 1998 compared to 1997.
Continued lower markdown and inventory shrink rates in
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<PAGE>
1998, along with improved allowances and a lower going-out-of-business markdown
provision ($0.5 million vs. $2.9 million), mostly offset the impact on the
gross margin rate from a lower cumulative initial markup in 1998.
Leased department and other operating income declined $0.3 million but
remained the same as a percentage of net sales. A decrease in leased department
sales in 1998 was mostly offset by the impact of a full year of layaway fees
(classified as other operating income). Bradlees' layaway program was
reinstated in the second half of 1997.
SG&A expenses declined $6.0 million and 0.3% as a percentage of net sales in
1998 compared to 1997. The decline in SG&A expenses was due to the closed
stores and certain expense reduction initiatives, including the curtailment of
retiree medical benefits, a freeze of non-union pension benefits and improved
monitoring of vendor activities, partially offset by increased logistics
expenses resulting from the handling and shipping of a higher number of cartons
in 1998 and an emergence-related bonus provision of $4.4 million.
Depreciation and amortization expense declined $4.0 million and 0.3% as a
percentage of net sales in 1998 compared to 1997 due primarily to the closed
stores and certain fixed assets becoming fully-depreciated in 1998.
We sold a property held for sale in 1998 for $7.6 million of net proceeds
and recognized a loss of $0.2 million compared to a $5.4 million gain on sale
of a property in 1997. These sales were not directly associated with the
Chapter 11 proceedings, therefore the 1998 loss and the 1997 gain were not
included in reorganization items with the other property dispositions during
those years. The net proceeds from the 1998 sale were placed into restricted
funds.
Interest and debt expense declined $0.3 million but stayed the same as a
percentage of net sales. We had increased interest expense from a higher
average borrowing level under the DIP Facility and a slightly higher average
interest rate in 1998 that was offset by lower amortization of deferred
financing costs (which in 1997 included a $1.1 million write-off of deferred
financing costs associated with the prior DIP facility) and lower capital lease
interest (due to certain closed stores).
Reorganization items resulted in net charges of $4.6 and $0.8 million, or
0.4% and 0.1% as a percentage of net sales, in 1998 and 1997, respectively.
These net charges related directly to the Chapter 11 proceedings and associated
restructuring of our operations and are discussed in Note 8 to the Consolidated
Financial Statements.
In 1998, we incurred a charge of $108.4 million associated with the
revaluation of assets and liabilities pursuant to the adoption of fresh-start
reporting and recognized an extraordinary gain on debt discharge of $419.7
million related to the Plan consummation and settlement of the pre-petition
liabilities.
We did not incur any income tax expense or benefit in 1998 and 1997.
1997 Compared to 1996
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 our
significant reduction in the number of promotional activities in 1997, which
had historically poor profit productivity.
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, partially offset by a slightly lower overall initial markup.
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<PAGE>
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 in the second half of 1997.
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 our
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 and a $3.9
million curtailment gain associated with a reduction in retiree medical
benefits.
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 SFAS No. 121.
However as a percentage of net sales, depreciation and amortization remained
unchanged.
We 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 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
related directly to the Chapter 11 proceedings and associated restructuring of
our operations.
We did not incur any income tax expense or benefit in 1997 and 1996.
Liquidity and Capital Resources
We had outstanding borrowings of $158.2 million at October 30, 1999,
exclusive of the issuance of letters of credit, under our $270 million
BankBoston Facility (Note 4 to the Condensed Consolidated Financial Statements)
compared to outstanding borrowings of $157.4 million at October 31, 1998,
exclusive of the issuance of letters of credit, under the DIP Facility (Note 4
to the Condensed Consolidated Financial Statements). Peak and average revolver
borrowings were $165 and $132 million, respectively, in Year-to-Date 1999
compared to $162 and $116 million under the DIP Facility, respectively, in
Year-to-Date 1998. The associated weighted average interest rate in Year-to-
Date 1999 (7.44%) declined from the same prior-year period (7.93%). The
increase in average borrowings since the end of Third Quarter 1998 related
primarily to reorganization expenses paid since that period.
The amount available to borrow in the fourth quarter of 1999 is currently
expected to peak at approximately $270 million in November, 1999 and average
approximately $235 million. We currently expect borrowings under the BankBoston
Facility in the fourth quarter to peak at approximately $172 million in
November, 1999 and average approximately $140 million. Total outstanding
letters of credit under the BankBoston Facility are expected to peak at
approximately $32 million in January, 2000 and average approximately $30
million.
Other than payments made to certain pre-petition creditors approved by the
Bankruptcy Court, payments on indebtedness, exclusive of certain capital lease
obligations, incurred prior to the Filing were not made until after
consummation of our plan of reorganization. Virtually all of our pre-petition
indebtedness was subject to settlement under the reorganization case.
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<PAGE>
In Year-to-Date 1999, cash provided by operations before reorganization
items was $12.7 million, compared to $48.8 million of cash used by operations
before reorganization items in Year- to-Date 1998. This improvement in Year-to-
Date cash from operating activities was due primarily to the improvement in
operating results and improved vendor payment terms. Net cash used by
reorganization items in Year-to-Date 1999 of $9.9 million was comprised of
Chapter 11-related professional fee payments of $8.1 million and store closing
and severance costs of $1.8 million.
Inventories at October 30, 1999 increased $4.6 million from October 31,
1998, due primarily to the two new stores and increased $91.2 million from
January 30, 1999 due primarily to a normal seasonal build-up.
Accounts payable at October 30, 1999, increased $21.7 million from October
31, 1998 due to improved vendor payment terms and a higher level of merchandise
purchases and increased $81.8 million from January 30, 1999 due to the
associated normal seasonal build-up of inventories, a higher level of
merchandise purchases and improved vendor payment terms.
Accrued expenses were $3.6 million lower than at October 31, 1998 due
primarily to this year's discontinuance of accruals for Chapter 11 professional
fees. Accrued expenses at October 30, 1999 were $9.7 million lower than at
January 30, 1999 due to payments made against reserves established prior to
1999 for Chapter 11 professional fees, employee severance and termination
benefits and store closing costs.
We incurred capital expenditures, excluding lease acquisition costs of $1.3
million for two former Caldor stores opened in October, 1999, of $17.1 million
in Year-to-Date 1999 (compared to $10.4 million in Year-to-Date 1998),
primarily for a warehouse management system (which was implemented in August,
1999 in our Edison, NJ distribution center), remodeling of the two new stores
and various other store and distribution center improvements. For all of 1999,
we expect total capital expenditures (including the lease acquisition costs) to
be approximately $25 million, which is an allowed amount under an amendment to
the BankBoston Facility obtained in September. These 1999 capital expenditures
are primarily for the warehouse management system and other management
information systems, remodeling of three new stores (including an additional
former Caldor store on Staten Island, NY to be opened in April, 2000 under an
operating lease) and various other store and distribution center improvements.
We currently expect to finance these expenditures through internally-generated
funds.
We believe that the availability under our BankBoston Facility, together
with our available cash and expected cash flows from 1999 operations and
beyond, will enable us to fund our expected needs for working capital, capital
expenditures and debt service requirements. We expect to utilize internally
generated funds and/or funds available under the BankBoston Facility in
December, subject to minimum availability requirements, to prepay certain of
the Notes currently remaining outstanding (Note 4 to the Condensed Consolidated
Financial Statements). An extraordinary gain of approximately $1 million is
expected to be recorded at the time of the prepayment. Our ability to meet our
financial obligations, make planned capital expenditures and implement our
strategic initiatives will depend on our future operating performance, which
will be subject to financial, competitive, economic and other factors affecting
the industry and our operations, including factors beyond our control. Further
improvements in operating profitability and achievement of expected cash flows
from operations are necessary to provide adequate liquidity and are dependent
upon our attainment of comparable store sales increases, along with gross
margin and expense levels that are reasonably consistent with our financial
plans.
Year 2000 Readiness Disclosure
The Year 2000 project is virtually complete and the cost of remediation
totaled approximately $4.1 million, including $1.7 million incurred in Year-to-
Date 1999 that was included in SG&A expenses. All software replacement or
remediation was virtually complete as of the end of Third Quarter 1999.
Successful tests have been performed of all major systems.
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<PAGE>
In 1998, to address compliance of our information technology systems, we
contracted with a major outside consulting firm to provide the resources
required to identify Year 2000 issues and remediate our systems as necessary.
In some cases, non-compliant software has been replaced through upgrades
provided by manufacturers of the respective software or by installation of
compliant replacement systems. We also addressed embedded systems and computer-
controlled devices in our stores, distribution centers and central office and
we are taking the necessary steps to ensure Year 2000 compliance. As of
October, 1999, the Year 2000 project was approximately 99% complete, excluding
the third-party compliance evaluation discussed below.
We believe the that critical systems we operate are now substantially Year
2000 compliant and that we are not likely to encounter significant internal
operational problems. However, there is no guarantee that a Year 2000 related
failure will not arise. This is due to the uncertainty surrounding potential
third-party related Year 2000 problems, as well as our potential failure to
discover all of our own susceptible internal systems. The risk to us resulting
from the failure of third-party or internal systems is similar to other
retailers and, for the most part, to other businesses. We took steps to
minimize this risk by surveying our suppliers and business partners to assess
their Year 2000 readiness, and their responses are being analyzed for any
necessary action.
A reasonable worst case scenario could involve the failure of our systems or
our supplier and business partner systems which would cause a material
disruption to our operations. For example, this could result in an interruption
of certain normal business activities and operations such as a temporary
inability to process sales transactions or transmit data either internally or
to suppliers and business partners. If the worst case scenario should occur for
any significant duration, it could have a material adverse impact on our
business, results of operations, liquidity and financial position. However, at
this time, we are unable to determine completely the financial consequences of
such potential Year 2000 failures.
While we expect our efforts will provide reasonable assurance that material
disruptions will not occur, the potential for disruptions cannot be fully
identified. We are therefore developing contingency plans that will provide for
alternative courses of action to mitigate material individual system or process
failures due to Year 2000 issues. At this time, we cannot estimate the
additional cost, if any, that might be incurred from the implementation of such
contingency plans.
The costs of the Year 2000 project and the dates on which we plan to
complete Year 2000 modifications are based on our 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.
Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk associated with our
financial instruments. We are exposed to such market risk from changes in
interest rates which may adversely affect our financial position, results of
operations and cash flows. In seeking to minimize the risks from interest rate
fluctuations, we manage exposures through our regular operating and financing
activities. We do not use financial instruments for trading or other
speculative purposes and are not party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings under
our $270 million post-emergence financing facility. Under the BankBoston
Facility, we may borrow funds under the $250 million senior secured tranche at
variable interest rates based on (a) the higher of (i) the annual rate of
interest as announced by BankBoston as its "Base Rate" and (ii) the weighted
average of the rates on overnight federal funds plus 0.50% per annum; or (b)
2.25% per annum plus the quotient of (i) the LIBOR Rate in effect divided by
(ii) a percentage equal to 100% minus the percentage established by the Federal
Reserve as the maximum rate for all reserves applicable to any member bank of
the Federal Reserve system in respect of eurocurrency liabilities. Each of
these rates is subject to a 0.50% increase in the event of overadvances. The
$20 million junior secured facility permits us to borrow funds at the "Base
Rate" plus 7.00% per annum.
35
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BUSINESS
Company Overview
We operate 104 discount department stores as of December, 1999, in seven
states in the Northeast, primarily in the heavily populated corridor running
from the Boston to the Philadelphia metropolitan areas. We opened two new
stores in October, 1999 and will open an additional new store in April, 2000.
We began operations in 1958 and were organized as a Massachusetts corporation
in 1992 and are headquartered in Braintree, Massachusetts. We have been active
in the discount department store business for over 40 years. Our web site is
www.bradlees.com.
Business Strategy. In 1995, we began to implement a strategy to position
ourselves 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 our advertising
strategy, resulted in significant sales and margin declines and operating
losses. In late December, 1996, our 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 1997, Mr. Thorner hired Robert Lynn as
President and Chief Merchandising Officer. Mr. Lynn was appointed President and
Chief Operating Officer in 1998.
We made the following key modifications to our business strategy during 1997
and 1998 to enhance profitability and improve customer service:
. Reintroduced lower opening price points in a comprehensive variety of
merchandise categories to enhance value and increase customer traffic;
. Reduced costly promotional events and thereby eliminated or reduced
the likelihood of substandard profit margins;
. Reintroduced certain basic convenience and commodity products that are
typical of assortments carried by discount retailers;
. Reinstituted a layaway program while controlling promotions of the
Bradlees credit card;
. Installed new in-store directional and departmental signage;
. Revised our markdown policy based on product rate of sale;
. Modified weekly ad circulars to achieve more item-intensive and price-
point oriented ad offerings;
. Introduced and expanded both a "Certified Value" program that
highlights certain key recognizable items at competitive everyday
prices and a "WOW!" program which integrates targeted and mostly
unadvertised opportunistic purchases; and
. Significantly reduced overhead while improving operating efficiencies.
We are 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 convenience and commodity products. We are committed to
quality and fashion, especially in apparel and home furnishings, and to
superior customer service, to further improve sales and operating profitability
and to differentiate ourselves from our competition. We believe we can
strategically leverage our strength in the fashion and quality content of our
apparel and decorative home product offerings while driving traffic with
selected hardlines merchandise.
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Merchandise Mix. We 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. Our average
merchandise mix in 1998 was comprised of approximately 51% softlines and soft
home furnishings and 49% hardlines, versus an estimated industry average of 42%
softlines and soft home furnishings and 58% hardlines. Softline products
generally have higher gross margins than hardline products.
Advertising and Promotional Programs. Our marketing strategy is designed to
appeal to our 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. A major portion
of our sales were derived from our weekly circulars in 1998. Approximately 6.1
million circulars are currently distributed each week. Although circulars are
our major promotional vehicle, we also use newspaper advertising, direct
mailings, 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
store organization, thereby focusing our organization more intently on customer
service while at the same time controlling expenses. For example, store
managers began using automated staff scheduling programs in 1998 to improve
operating efficiency and provide better service to our customers. We also hired
a Senior Vice President, Stores, in 1998 who is reporting to the President and
Chief Operating Officer for improved coordination of merchandising and store
activities. In addition, a new program was recently implemented in the stores
to ensure timely merchandise replenishments and an enhanced in-stock position.
Management has improved productivity and controls and reduced expenses in
other areas. For example, a new merchandising management system was implemented
during 1997 that facilitates, among other things, tracking merchandise more
accurately and efficiently from vendors through distribution centers and to
stores. The merchandising management system was enhanced in 1998. We also
installed a new mainframe computer and point-of-sale controllers in 1997 and
modified our point-of-sale equipment and software in 1998 to allow for improved
detection of bad checks and additional promotional capabilities. In addition,
we implemented a new warehouse management system in August 1999 in our Edison,
NJ distribution center and installed chain-wide debit/ATM card readers in
October, 1999.
Store Profitability. We closed six stores in February, 1998 and one store in
March, 1999. Although we have emerged from Chapter 11, we continue to monitor
the profitability of each store and if economically beneficial, we will close,
sell or relocate those stores whose performance is inadequate and not
responsive to remedial actions. One store is currently anticipated to be closed
in early 2000 in connection with the Plan.
Employees and Collective Bargaining Arrangements
We employ approximately 12,000 people, of which approximately 70% are
covered by collective bargaining agreements. Agreements affecting approximately
89% of the union labor force, including the union representing our Braintree,
MA distribution center, will expire within one year and are expected to be
renegotiated. We believe our relations with our employees are good.
Competition
We compete in most of our 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 we do. We
compete 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. Our principal discount department
store competitors are Kmart and Wal-Mart, and in certain locations, Target and
Ames. Our 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 we operate.
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Caldor Corp., one of our major competitors prior to April, 1999, recently
liquidated its entire business under Chapter 11 and has sold some of its store
leases to Kohl's, Wal-Mart, Kmart and Ames. At the time of the reopenings of
the purchased stores, our business in 25 competing locations is expected to be
at least temporarily affected by the new competition. Most of these purchased
locations are not opening until Spring of 2000. We expect to pursue Caldor
locations where economically beneficial and feasible. The two new stores opened
in October, 1999 and the new store scheduled to open in April, 2000 are former
Caldor stores.
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 our 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. We have a significant number of other trademarks, trade
names, and service marks. Other than the "Certified Value" and "WOW! How Do We
Do It?" service marks, none of the other trademarks, tradenames or services
marks are currently considered to individually have a material impact on our
business.
Seasonality
Our business is seasonal in nature, with a significant portion of net sales
occurring in the fourth quarter, which includes the holiday selling season.
Credit Facility
The BankBoston Facility provides us with a $250 million senior secured
revolving credit facility (of which $125 million is available for issuance of
letters of credit) and a $20 million junior secured "last in-last out"
subfacility that are scheduled to expire on December 23, 2001. We can use the
BankBoston Facility for working capital and general business needs.
The senior secured tranche has an advance rate equal to 80% of the Loan
Value of Eligible Receivables, plus generally 72% of the Loan Value of Eligible
Inventory, subject to certain adjustments. The Company may also borrow up to an
additional $20 million under the junior secured facility provided that the
total inventory borrowings do not exceed 93% of the Loan to Value Ratio.
The BankBoston Facility permits us to borrow funds under the senior secured
tranche at an interest rate per annum equal to (a) the higher of (i) the annual
rate of interest as announced by BankBoston as its "Base Rate" and (ii) the
weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System plus 1/2 of 1% per annum; or (b) 2.25%
per annum plus the quotient of (i) the LIBOR Rate in effect divided by (ii) a
percentage equal to 100% minus the percentage established by the Board of
Governors of the Federal Reserve System as the maximum rate for all reserves
applicable to any member bank of the Federal Reserve System in respect of
Eurocurrency Liabilities. Each of these rates is subject to a 0.50% increase in
the event of overadvances. The junior secured subfacility permits us to borrow
funds at the "Base Rate" plus 7.00% per annum.
In connection with the BankBoston Facility, we have entered into a Security
Agreement and a Pledge Agreement with BankBoston. The Security Agreement and
the Pledge Agreement cover substantially all of our non-real estate assets.
Under the terms of the BankBoston Facility, we have agreed to certain financial
covenants including:
. maintaining a minimum level of earnings before interest, taxes,
depreciation and amortization;
. capping our capital expenditures at $25 million annually (as amended),
subject to certain exceptions;
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. agreeing not to let certain financial ratios which measure our debt
coverage and accounts payable to inventory ratios drop below specified
goals.
See "Terms of Outstanding Indebtedness--Credit Agreement."
Further Information
Bradlees, Inc. files annual, quarterly and special reports, proxy statements
and other information with the SEC. We have requested an exemption from these
filing requirements for Bradlees Stores, Inc. and New Horizons of Yonkers, Inc.
since information concerning these entities is included in the filings made by
Bradlees, Inc. You may read and copy any document we file at the SEC's public
reference rooms in Washington, D.C., New York, New York and Chicago, Illinois.
Please call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our SEC filings are also available to the public from the
SEC's Website at "http://www.sec.gov."
Facilities
Our stores are located principally in shopping centers that are in high
traffic areas. Our stores appeal to consumers seeking a wide range of value-
priced merchandise and shopping convenience.
The following chart shows the geographic distribution of our stores as of
December, 1999:
<TABLE>
<S> <C>
Maine................................................................. 1
New Hampshire......................................................... 8
Massachusetts......................................................... 35
Connecticut........................................................... 17
New York.............................................................. 6
New Jersey............................................................ 30
Pennsylvania.......................................................... 7
---
Total................................................................. 104
===
</TABLE>
We operate stores in a variety of sizes, with the current average store
being 75,728 selling square feet.
Our 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 stores.
As of December, 1999, our stores occupied a total of approximately 7,900,426
square feet of selling area. We lease all of our stores, two distribution
centers and central office under long-term leases.
Legal Proceedings
On June 23, 1995, we filed a voluntary petition in the United States
Bankruptcy Court for the Southern District of New York to reorganize under
Chapter 11 of the United States Bankruptcy Code. Our modified plan of
reorganization was confirmed on January 27, 1999, and became effective on the
Effective Date. After the Effective Date, the Bankruptcy Court retained
jurisdiction over us for limited purposes. New Horizons of Yonkers, Inc.
remained in Chapter 11 after the Effective Date to facilitate the expected
disposition of its leasehold interest. Thus, it will continue to be subject to
the jurisdiction of the Bankruptcy Court.
From time to time, we are party to litigation arising in the ordinary course
of business. We believe that no pending legal proceeding will have a material
adverse effect on our business, financial condition or results of operations.
39
<PAGE>
MANAGEMENT
Directors and Executive Officers
The names, ages, and current positions of all of the executive officers and
directors of Bradlees, Inc. as of December 7, 1999 are listed below along with
their business experience during the past five years. The Directors of Bradlees
Stores, Inc. and New Horizons of Yonkers, Inc. are Messrs. Thorner, Moses and
Schmitt. The executive officers of Bradlees Stores, Inc. and New Horizons of
Yonkers, Inc. are the same as those of Bradlees, Inc.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Robert A. Altschuler(3)........ 43 Director
Stephen J. Blauner(2).......... 46 Director
W. Edward Clingman, Jr.(3)(4).. 46 Director
Bruce Conforto................. 47 Senior Vice President, Chief Information Officer
Gregory K. Dieffenbach......... 49 Senior Vice President, Human Resources
Judith D. Dunning.............. 49 Senior Vice President, Planning and Allocation
John M. Friedman, Jr.(2)....... 55 Director
Mark E. James.................. 50 Senior Vice President, Marketing
Lawrence Lieberman(3).......... 51 Director
Robert G. Lynn................. 49 Director, President and Chief Operating Officer
Charles K. MacDonald(2)........ 40 Director
Cornelius F. Moses III(1)...... 41 Senior Vice President, Chief Financial Officer
Ronald T. Raymond.............. 56 Senior Vice President, Asset Protection
William H. Roth(4)............. 47 Director
David L. Schmitt(1)............ 49 Senior Vice President, General Counsel, Secretary and Clerk
Sandra L. Smith................ 42 Senior Vice President, General Merchandise Manager,
Hardlines
Thomas N. Smith................ 43 Senior Vice President, Stores
James C. Sparks................ 53 Senior Vice President, General Merchandise Manager,
Softlines
Peter Thorner(1)(4)............ 56 Chairman and Chief Executive Officer
</TABLE>
- --------
(1) Director of Bradlees Stores, Inc. and New Horizons of Yonkers, Inc.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee
(4) Member of the Nominating Committee
Mr. Altschuler became a Director of the Company in February 1999. He has
served as Vice President and Director of Leasing for Marx Realty & Improvement
Co., Inc. since prior to 1994.
Mr. Blauner became a Director of the Company in February 1999. He has served
as a consultant on bankruptcy and distressed investing for a small group of
clients since January 1998. In addition, since 1998 Mr. Blauner has served in
an Of Counsel position to the law firm of Milbank, Tweed, Hadley & McCloy LLP
for the purposes of representing the Loan Syndications and Trading Association,
Inc. as its outside general counsel. From prior to 1994 to December 1997, he
served as a partner and from 1996, as co-head of the national bankruptcy
department at Milbank, Tweed, Hadley & McCloy LLP.
Mr. Clingman became a Director of the Company in February 1999. As a founder
and principal of Clingman and Hanger Management Associates, L.L.C., a
management consulting firm, Mr. Clingman became President, Chief Executive
Officer and Director of Venture Stores, Inc. ("Venture") in July 1999 with
responsibility for completing its liquidation and related wind-down. Venture
filed for bankruptcy protection under Chapter 11 of the United States
Bankruptcy Code in January 1998. Mr. Clingman has continued to serve as
President and Chief Executive Officer of Best Products Co., Inc. ("Best
Products") from January 1997 to
40
<PAGE>
the present (during Best Products' liquidation and related wind-down). Prior to
serving as President and Chief Executive Officer, Mr. Clingman served as Senior
Vice President, General Counsel and Secretary of Best Products from May 1996 to
December 1996. He served as Vice President, General Counsel and Secretary of
Best Products from prior to 1994 to May 1996. Mr. Clingman serves as a director
of Best Products.
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 1994 to August 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 1994 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 1994 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 1994 to when he retired in 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 from prior to 1994 to December 1996.
Mr. Lieberman became a Director of the Company in February 1999. He has
served as a partner and Chief Operating Officer of Sami and Samy, Inc., an
import company, since March 1999. He served as Vice President, Merchandising
for ABC Home Furnishings Inc. from prior to 1994 to February 1999.
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. MacDonald became a Director of the Company in February 1999. He has
served as President of Morgandane Management Corp., an investment advisory
firm, from 1997 to the present. From prior to 1994 to 1995, he was a portfolio
manager for Stonington Management Corp. ("Stonington"). Morgandane
Management Corp. provides investment advisory services to Stonington.
Stonington is under common managment with Elliott Associates, L.P. and Westgate
International, L.P. Mr. MacDonald also serves as a director of Atlantic Gulf
Communities Corp.
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 1994 to April 1995.
41
<PAGE>
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 1994 to July 1995.
Mr. Roth became a Director of the Company in February 1999. He has served as
a partner at the law firm of Kelly & Roth since prior to 1994.
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 1994 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.
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 prior to 1994 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 1994 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 1994 to 1994.
On September 24, 1996, while Mr. James was Senior Vice President, Marketing
and Advertising of Best Products, and Mr. Clingman was Senior Vice President,
General Counsel and Secretary of Best Products, Best Products filed for
bankruptcy protection under Chapter 11 of the United States Bankruptcy Code.
Best Products was subsequently liquidated.
Mr. Conforto was Vice President of Information Services for Rickel Home
Centers, Inc. when they filed for bankruptcy protection under Chapter 11 of the
United States Bankruptcy Code. Rickel Home Centers, Inc. was subsequently
liquidated.
Board of Directors of Bradlees, Inc. and Its Committees
The business of Bradlees, Inc. is managed under the direction of the Board
of Directors. There are nine members of the Board of Directors of Bradlees,
Inc. These directors were selected pursuant to the Plan and assumed their
positions as of the Effective Date. The Board of Directors of Bradlees, Inc. is
divided into three classes, with one class to be elected at each year's annual
meeting of stockholders commencing as of the 2000 annual meeting.
42
<PAGE>
At each annual meeting of stockholders, the successors of the directors will be
elected by a plurality of the votes cast at such meeting. Bradlees, Inc.
intends to hold its first annual meeting after the Effective Date in the Spring
of 2000. The directors serving in each class are as follows:
<TABLE>
<S> <C>
Class I (term expires in 2000)....................... Stephen J. Blauner
Lawrence Lieberman
Charles K. MacDonald
Class II (term expires in 2001)...................... Robert A. Altschuler
Robert G. Lynn
William H. Roth
Class III (term expires in 2002)..................... W. Edward Clingman, Jr.
John M. Friedman, Jr.
Peter Thorner
</TABLE>
The Board of Bradlees, Inc. has established an audit committee (the "Audit
Committee"), a compensation committee (the "Compensation Committee") and a
nominating committee (the "Nominating Committee"). The Audit Committee, which
consists solely of outside directors, recommends to the Board of Directors the
firm to be appointed as independent accountants to audit financial statements
and to perform services related to the audit. The Audit Committee also reviews
the scope and results of the audit with the independent accountants, reviews
with management and the independent accountants the Company's year-end
operating results, considers the adequacy of the internal accounting procedures
and confirms and assures the independence of both the internal auditor and the
independent accountants. The Audit Committee is evaluating the recent
recommendations of the Blue Ribbon Panel (a panel comprised of various
constituencies of the financial community that was formed to make
recommendations to strengthen the role of audit committees in the financial
reporting process). The members of the Audit Committee are W. Edward
Clingman, Jr., Robert A. Altschuler and Lawrence Lieberman.
The Compensation Committee, which consists solely of outside directors,
reviews and recommends to the Board of Directors the compensation arrangements
for all directors and officers, approves such arrangements for other senior
level employees and administers and takes such other action as may be required
in connection with certain compensation and incentive plans of the Company. The
Compensation Committee also determines the number of options to be granted or
shares of Common Stock to be issued to eligible persons under our Bradlees,
Inc. 1999 Stock Option Plan (the "Stock Plan"). In addition, the Compensation
Committee establishes, amends and revokes rules and regulations for
administration of the Stock Plan. The members of the Compensation Committee are
John M. Friedman, Jr., Stephen J. Blauner and Charles K. MacDonald.
The Nominating Committee consists of the Chairman of the Board and two other
non-employee directors nominated by the Chairman of the Board and approved by a
majority of the Board. The purpose of the Nominating Committee is to facilitate
the nomination of directors to fill vacancies on the Board. The members of the
Nominating Committee are Peter Thorner, William H. Roth and W. Edward Clingman,
Jr.
Board of Directors of Bradlees Stores, Inc.
The business of Bradlees Stores, Inc. is managed by its Board of Directors.
As of the Effective Date, there were three members of its Board of Directors.
The Amended and Restated Articles of Organization of Bradlees Stores, Inc.
provide that the members of the Board of Directors shall serve initial terms
which will expire upon the election and qualification of directors at each
annual meeting of stockholders.
Board of Directors of New Horizons of Yonkers, Inc.
The business of New Horizons of Yonkers, Inc. is managed by its Board of
Directors. As of the Effective Date, there were three members of its Board of
Directors. The By-laws of New Horizons of Yonkers, Inc. provide for the
creation of committees to exercise the powers of the Board. No such committees
currently exist.
43
<PAGE>
SUMMARY COMPENSATION TABLE
The following table sets forth the earned compensation for the Chief
Executive Officer of the Company and our four highest-paid executive officers
in 1998 other than the Chief Executive Officer (the "Named Officers") for 1998,
1997 and 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------
Awards
----------------------
Payouts
--------
Annual Compensation
------------------------------------
Restricted Securities
Name and Other Annual Stock Underlying LTIP All Other
Principal Position Year Salary Bonus Compensation Awards Option/SARs Payouts Compensation
- ------------------ ---- -------- -------- ------------ ---------- ----------- -------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter Thorner........... 1998 $847,596 $467,500(l) $55,836(2) -- -- $550,000(3) $ 601,169(4)
Chairman and Chief 1997 $741,827 $299,063(5) (6) -- -- $150,000(3) $ 9,318
Executive Officer l996 $589,166 -- $12,961 -- -- $150,000(3) $ 9,293
Robert G. Lynn.......... 1998 $586,442 $300,000(1) (6) -- -- -- $ 189,020(4)
Director, President, 1997 $401,827(7) $196,875(5) $29,109 -- -- -- $ 840
and
Chief Operating Officer
Thomas N. Smith......... 1998 $295,000 $103,250(l) (6) -- -- -- $ 76,004(8)
Senior Vice President, 1997 $ 45,385(7) -- -- -- -- -- $ 127,768
Stores
Cornelius F. l998 $282,343 $105,000(l) (6) -- -- -- $ 128,636(4)
Moses, III..............
Senior Vice President l997 $279,175 $ 84,012(5) (6) -- -- -- $ 1,054
and Chief Financial 1996 $228,682 -- (6) -- -- -- $ 944
Officer
David L. Schmitt ....... 1998 $246,154 $ 89,250(l) (6) -- -- -- $ 103,980(4)
Senior Vice President, 1997 $243,751 $ 73,500(5) (6) -- -- -- $ 912
General Counsel, 1996 $180,024 -- (6) -- -- -- $ 748
Secretary and Clerk
</TABLE>
- --------
(1) Includes an earned bonus paid in April 1999 pursuant to the Company's
Corporate Bonus Plan (see below).
(2) Includes $26,400 for an automobile allowance and $29,436 for reimbursement
of certain legal and annual financial counseling expenses and the tax
liabilities related to such expenses.
(3) See Enterprise Appreciation Incentive Plan (see below).
(4) Includes premiums paid by the Company with respect to term life insurance
for the calendar year ended December 31, 1998 and the following earned
bonuses paid following the Effective Date pursuant to the Management
Emergence Bonus Plan (see below): Mr. Thorner--$400,000; Mr. Lynn--
$116,667; Mr. Moses--$75,000; and Mr. Schmitt--$58,333. Also includes the
following deferred payments, with interest, paid following the Effective
Date with respect to the bonuses earned pursuant to the Corporate Bonus
Plan (see below) in fiscal 1997 and/or its predecessor, the Retention Bonus
Plan in fiscal 1995: Mr. Thorner--$190,228; Mr. Lynn--$69,873; Mr. Moses--
$52,017; and Mr. Schmitt--$44,251. Also includes the following matching
contributions made by the Company pursuant to the Bradlees 401(k) Savings
Plan (the "401(k) Plan"); Mr. Thorner--$1,798; Mr. Lynn--$1,385;
Mr. Moses--$692; and Mr. Schmitt--$588.
(5) Includes an earned bonus paid in April 1998 pursuant to the Corporate Bonus
Plan (see below), but excludes the following deferred payments which were
paid, with interest, following the Effective Date: Mr. Thorner--$99,688;
Mr. Lynn--$65,625; Mr. Moses--$28,004; and Mr. Schmitt--$24,500.
(6) Perquisites and other personal benefits for the indicated periods did not
exceed the lesser of $50,000 or 10% of reported salary and bonus.
(7) Represents a partial year beginning when Mr. Lynn joined the Company in
April 1997 and Mr. Smith joined the Company in December 1997.
(8) Includes premiums paid by the Company with respect to term life insurance
for the calendar year ended December 31, 1998. Also includes $58,351 for
relocation expenses related to Mr. Smith's employment as Senior Vice
President, Stores of the Company and reimbursement for tax liabilities
related to such relocation expenses. Also includes an earned bonus of
$16,667 paid following the Effective Date pursuant to the Management
Emergence Bonus Plan (see below).
44
<PAGE>
Corporate Bonus Plan
In February 1997 we adopted, and in April 1997 the Bankruptcy Court
approved, the Corporate Bonus Plan (the "Corporate 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 our annual business plan. The amount of the award
increases if our 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 we achieve our target performance level and (b) bonus eligible
employees based on performance if we do not achieve our target performance
level.
Under the Corporate Bonus Plan, we had to obtain a minimum EBITDA (as
defined) of $32 million for fiscal 1998, 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). For each $5 million
of EBITDA improvement (net of the provision for the additional earned bonus)
over the amount projected, the award increases by 25% of the base award up to a
maximum increase of 100% of the award. We achieved an EBITDA of $32.4 million
(net of the provision for the bonuses) for fiscal 1998 and paid total bonuses
of $4.8 million to 377 employees under the Corporate Bonus Plan in April 1999.
With respect to the Named Officers and certain other members of our senior
management, one-quarter of the amount of any bonus payable before such time as
we consummated our Chapter 11 plan of reorganization was paid, with interest,
on the Effective Date. The remaining three-quarters of the bonuses were
previously paid. See "Summary Compensation Table."
For fiscal 1999, our Board of Directors adopted threshold performance
measurements tied directly to our 1999 business plan. We must obtain a minimum
EBITDA of $40 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 we
achieve certain levels of EBITDA below $40 million. For each $5 million of
EBITDA improvement (net of the provision for the additional earned bonus) over
$40 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.
Mr. Lynn is eligible for a special annual incentive award of up to $500,000
for fiscal 1999 at Mr. Thorner's discretion. This bonus eligibility is for the
same reasons discussed for Mr. Thorner's special annual incentive and is
payable on the same terms (see "Employment Agreement with Peter Thorner").
Enterprise Appreciation Incentive Plan
In August 1995 we adopted, and in November 1995 the Bankruptcy Court
approved, the Enterprise Appreciation Incentive Plan (the "Incentive Plan").
The Incentive Plan was terminated on the Effective Date. The Incentive Plan was
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. A payment of $400,000 was paid to Mr. Thorner following
the Effective Date with respect to amounts due him for the remaining term of
the Incentive Plan (see "Summary Compensation Table" and "Employment Agreement
with Peter Thorner"). No further payments will be made under the Incentive Plan
since it has been terminated.
Management Emergence Bonus Plan
On the Effective Date, certain executives were selected to participate in
our Management Emergence Bonus Plan (the "Emergence Bonus Plan"). The aggregate
amount payable to these employees under the Emergence Bonus Plan is $3 million.
One million dollars of this was paid following the Effective Date. The
remaining $2 million will be paid on the later of (a) the one-year anniversary
of the Effective Date and (b) the date upon which the 9% Convertible Notes are
fully paid or converted into equity. No payments will be made under the
Emergence Bonus Plan if there exists any continuing default under the
BankBoston Facility or its successor. If an employee leaves us for any reason,
other than an involuntary termination without Cause or a
45
<PAGE>
voluntary termination for Good Reason, (as such terms are defined under the
Emergence Bonus Plan) within one year of receiving a payment under the
Emergence Bonus Plan, the payment shall be subject to partial or total
recoupment. If an employee is involuntarily terminated without Cause,
voluntarily leaves for Good Reason, or leaves due to death or disability, then
the employee does not have to return any payments under the Emergence Bonus
Plan and is entitled to receive any portion of the payments to be made under
the Emergence Bonus Plan within 30 days after the date of termination of
employment.
Severance Program
In August 1995 we 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, death,
disability or by the employee, then salary is guaranteed, subject to mitigation
by other employment, for up to eighteen months for the President and Senior
Vice Presidents and twelve months for Vice Presidents, and six months for
certain other employees 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 our Plan of Reorganization
did not constitute a change of control under the Severance Program.
Stock Option Plan for Key Employees
There were no options for Old Bradlees' common stock granted or exercised by
Named Officers in fiscal 1998. Pursuant to the Plan of Reorganization, all
options outstanding immediately prior to the Effective Date were canceled as of
the Effective Date. On the Effective Date, the Bradlees, Inc. 1999 Stock Option
Plan (the "Stock Plan") became effective. There are outstanding options to
purchase 853,887 shares of our Common Stock held by our management. In
addition, the Compensation Committee has the right to grant options with
respect to 146,113 additional shares at such price and on such terms as the
Compensation Committee shall determine.
46
<PAGE>
Retirement Plans
We maintain a qualified retirement plan (the "Retirement Plan") for our
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. Effective December 31, 1998, the Retirement Plan for
our non-union employees was frozen for credited service and salary adjustments
and we reinstated matching contributions to our 401(k) Plan. 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. We also maintain a
non-qualified Supplemental Executive Retirement Plan (the "Supplemental Plan").
Under the Supplemental Plan, as amended in the third quarter of 1999, an
eligible employee, upon normal retirement at age 65, may receive supplemental
retirement benefits equal to his Final Average Compensation, minus the sum of
50% of his Social Security benefits and the annual benefit payable from the
Retirement Plan multiplied by a percentage factor which ranges from 10% to
385%, depending on the employee's years of service. The benefits from the
Supplemental Plan are payable in the form of a single lump sum amount. The
following table shows the estimated lump sum retirement benefits which will be
payable to participating employees from the Retirement Plan and the
Supplemental Plan after selected periods of service. These benefits presented
below do not reflect the Social Security offset described above.
Pension Plan Table
Estimated Lump Sum Retirement Benefits
<TABLE>
<CAPTION>
Final Average 10 Years 15 or More
Compensation* of Service Years of Service
- ------------- ---------- ----------------
<S> <C> <C>
$ 200,000 $ 380,000 $ 770,000
$ 250,000 $ 475,000 $ 962,500
$ 300,000 $ 570,000 $1,155,000
$ 400,000 $ 760,000 $1,540,000
$ 500,000 $ 950,000 $1,925,000
$ 600,000 $1,140,000 $2,310,000
$ 700,000 $1,330,000 $2,695,000
$ 800,000 $1,520,000 $3,080,000
$ 900,000 $1,710,000 $3,465,000
$1,000,000 $1,900,000 $3,850,000
$1,100,000 $2,090,000 $4,235,000
$1,200,000 $2,280,000 $4,620,000
$1,300,000 $2,470,000 $5,005,000
$1,400,000 $2,660,000 $5,390,000
$1,500,000 $2,850,000 $5,775,000
$1,600,000 $3,040,000 $6,160,000
</TABLE>
- --------
* Federal law limits the amount of compensation that may be taken into account
in calendar year 1998 in calculating benefits under the Retirement Plan to
$160,000 and limits the annual benefits that may be payable in calendar year
1998 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, bonus and severance lump sum. The
calculation of retirement benefits under both plans is generally based upon the
participant's highest annual compensation averaged over 36 months. As of
December 31, 1998, the years of credited service for the Retirement Plan for
Messrs. Thorner, Lynn, Smith, Moses, and Schmitt were 4, 2, 0, 4, and 4,
respectively. As of December 31, 1998, the years of credited service for the
Supplemental Plan for Messrs. Thorner, Lynn, Smith, Moses, and Schmitt were 9,
2, 1, 4 and 4, respectively.
47
<PAGE>
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
We have entered into a three-year employment agreement with Mr. Thorner,
commencing as of October 26, 1995 and amended as of November 7, 1997 and as of
May 3, 1999. This employment agreement is automatically extended for one
additional day each day unless either party gives the other party two years
written notice of its election not to extend the contract. 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, our Board of Directors approved an increase in Mr. Thorner's annual base
salary to $850,000 effective February 1, 1998. In April 1999, the Board of
Directors approved an increase in Mr. Thorner's annual base salary to $925,000
effective January 31, 1999. While in Chapter 11, the annual incentive award was
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 the Plan of Reorganization was deferred, and paid
with interest on the Effective Date.
In addition, the employment agreement provides for the payment by us 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 by us. The employment agreement also provides that
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 were paid under the Incentive
Plan to Mr. Thorner, other than the annual nonrefundable advances and a payment
of $400,000 with respect to amounts due Mr. Thorner for the remaining term of
the Incentive Plan, which was paid following the Effective Date, thereby
completing our obligation to Mr. Thorner with respect to the $1,000,000 due to
Mr. Thorner. The agreement also provides for certain retirement benefits, for
reimbursement of certain legal, annual financial counseling and relocation
expenses and participation in our employee benefit plans. The employment
agreement also provides that in the event of Mr. Thorner's termination of
employment by us (including following a change in control of the Company)
without Cause or Good Reason (as defined in the Employment Agreement), Mr.
Thorner would generally be entitled to all payments and benefits called for
under the agreement for the remainder of its term. Consummation of the Plan of
Reorganization did not constitute a change of control under the agreement.
On September 8, 1999, the Compensation Committee awarded Mr. Thorner a
special annual incentive award of $1,000,000 both as a retention incentive and
in recognition of, among other things, the Company's strong operating
performance since emerging from bankruptcy. Subject to meeting certain
conditions, one-half of this bonus is payable on January 15, 2000 and the
second-half is payable on April 15, 2001.
Compensation Committee Interlocks and Insider Participation
All executive officer compensation decisions are made by the Compensation
Committee. The Compensation Committee reviews and makes recommendations
regarding the compensation for our management and key employees, including
salaries and bonuses.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our Common Stock as of December 7, 1999, by (i) each
person known by us to beneficially own five percent or more of the outstanding
shares of the Common Stock, (ii) each director and certain executive officers,
and (iii) all directors, nominees for director and executive officers as a
group. Except as otherwise indicated, we believe that the beneficial owners of
the Common Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject to
community property laws where applicable. All of the Common Stock of Bradlees
Stores, Inc. is owned by Bradlees, Inc.
<TABLE>
<CAPTION>
Directors, Executives
Officers,
and 5% Beneficial Shares Beneficially Owned
Owners(1)(2) Prior to the Offering(2) Percentage(3)
--------------------- ------------------------- -------------
<S> <C> <C>
Awad Asset Management, Inc............. 1,152,915 11.5%
Gemina Partners, L.P.(4)............... 650,000 6.5%
Robert A. Altschuler................... 0 *
Stephen J. Blauner..................... 2,000 *
W. Edward Clingman, Jr................. 0 *
John M. Friedman, Jr. ................. 0 *
Lawrence Lieberman..................... 0 *
Robert Lynn............................ 33,336(5) *
Charles K. MacDonald................... 0 *
Cornelius F. Moses, III................ 12,121(6) *
William H. Roth........................ 1,500 *
David L. Schmitt....................... 12,121(7) *
Thomas N. Smith........................ 12,121(8) *
Peter Thorner.......................... 83,333(9) *
All directors and executive officers
as a group (consisting of 19 people).. 229,137 2.3%
</TABLE>
- --------
* Represents less than 1.0% of the issued and outstanding shares of Common
Stock.
(1) Unless otherwise indicated, the mailing address for each stockholder and
director is c/o the Company, One Bradlees Circle, Braintree, Massachusetts
02184. The mailing address for Awad Asset Management, Inc. is 250 Park
Avenue, 2nd Floor, New York, New York 10177. The mailing address for Gemina
Partners, L.P. is 900 Third Avenue, New York, New York 10022.
(2) As used in this table, "beneficial ownership" means the sole or shared
power to vote or direct the voting of a security, or the sole or shared
investment power with respect to a security (i.e., the power to dispose, or
direct the disposition of, a security). In computing the number of shares
of Common Stock beneficially owned by a person, shares of Common Stock
subject to options held by that person that are currently exercisable or
exercisable within 60 days of December 7, 1999 are deemed outstanding, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. The beneficial ownership amounts
above exclude an indeterminate number of shares issuable upon conversion of
the 9% Convertible Notes. Since the number of shares of Common Stock
issuable upon conversion of the 9% Convertible Notes varies as the market
price of the Common Stock changes, it is impossible at this time to
determine how many shares may be issued upon conversion of the 9%
Convertible Notes. We have agreed to issue warrants to purchase 927,167
shares of our Common Stock to certain creditors after the surrender of
their pre-petition notes, but until such surrender is complete, all of the
recipients of such warrants are not determinable.
(3) Percentage ownership is based upon 9,986,273 shares of Common Stock
presumed issued and outstanding as of December 7, 1999.
(4) Gemina Capital Management, L.L.C., as the general partner of Gemina
Partners, L.P., and Leonard Schuster and Steven Schuster, as the managing
members of Gemina Capital Management, L.L.C., each may be deemed to be the
indirect beneficial owners of the 650,000 shares of the Company's Common
49
<PAGE>
Stock directly held by Gemina Partners, L.P. In addition, Leonard Schuster
and Steven Schuster may be deemed to be the indirect beneficial owners of
203,500 shares of the Company's Common Stock directly held by Stelvio
Limited, a Jersey Channel Islands company that they jointly control.
(5) Includes options to purchase 33,336 shares of Common Stock which are
exercisable within 60 days of December 7, 1999 but excludes options to
purchase 66,671 shares of Common Stock which are not currently
exercisable.
(6) Includes options to purchase 12,121 shares of Common Stock which are
exercisable within 60 days of December 7, 1999 but excludes options to
purchase 24,242 shares of Common Stock which are not currently
exercisable.
(7) Includes options to purchase 12,121 shares of Common Stock which are
exercisable within 60 days of December 7, 1999 but excludes options to
purchase 24,242 shares of Common Stock which are not currently
exercisable.
(8) Includes options to purchase 12,121 shares of Common Stock which are
exercisable within 60 days of December 7, 1999 but excludes options to
purchase 24,242 shares of Common Stock which are not currently
exercisable.
(9) Includes options to purchase 83,333 shares of Common Stock which are
exercisable within 60 days of December 7, 1999 but excludes options to
purchase 166,667 shares of Common Stock which are not currently
exercisable.
50
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Other Transactions
In February 1998, we made a loan in the amount of $100,000 to Thomas N.
Smith, Senior Vice President, Stores, in connection with his relocation. This
loan was interest-free and payable on January 30, 1999. The due date was
extended until April 15, 1999, with interest at 10% per annum during the
extension period. The loan was repaid in full. In September 1998, we made a
loan in the amount of $100,000 to Bruce Conforto, Senior Vice President and
Chief Information Officer, in connection with his relocation. This loan was
interest-free and payable on or prior to March 31, 1999. The loan was repaid in
full.
Company Policy
We have a policy that any transactions with directors, officers, employees
or affiliates be approved in advance by a unanimous vote of our Board of
Directors with any affected director abstaining from such vote, and be on terms
no less favorable to us than we could obtain from non-affiliated parties.
SELLING SECURITYHOLDERS
The following table sets forth the name of each Selling Securityholder, and
the amount of the Securities owned by each such Selling Securityholder as of
December 7, 1999, except as otherwise noted, which have been or will be offered
hereby. This Prospectus relates to the offers and sales of the Securities by
the Selling Securityholders, including the shares of Common Stock issuable upon
conversion of the 9% Convertible Notes. The Securities subject to offering and
sale by the Selling Securityholders pursuant hereto constitute all of the
holdings of such securities by such Selling Securityholders. The following
table includes any Common Stock issuable upon exercise of outstanding Warrants.
Each Selling Stockholder may offer and sell all of the Securities registered
hereby. If such Selling Stockholder sells all of the Securities registered
hereby, such Selling Stockholder will not beneficially own any of our
securities. Inclusion on this list does not imply that any person or entity
will actually offer or sell any of the shares registered on its behalf.
<TABLE>
<CAPTION>
Shares of Principal Amount
Common Stock(1) of Notes(2)
--------------- ----------------
<S> <C> <C>
Gabriel Capital, L.P.(3)...................... 289,105 $ 302,000
Elliott Associates, L.P.(4)................... 6,780 $ 647,000(6)
Westgate International, L.P.(4)............... 39,463 $ 1,357,000
MWV Separate Account Alpha(5)................. 0 $ 487,694
Morgens Waterfall Income Partners(5).......... 0 $ 431,664
Restart Partners, L.P.(5)..................... 0 $ 1,277,115
Restart Partners II, L.P.(5).................. 0 $ 1,917,889
Restart Partners III, L.P.(5)................. 0 $ 1,315,001
Restart Partners IV, L.P. (5)................. 0 $ 1,466,390
Restart Partners V, L.P.(5)................... 0 $ 531,966
MWV International, Ltd.(5).................... 0 $ 1,129,281
------- -----------
TOTAL....................................... 335,348(7) $10,863,000(7)
</TABLE>
- --------
(1) Excludes an indeterminate number of shares issuable upon conversion of the
9% Convertible Notes. Since the number of shares of Common Stock issuable
upon conversion of the 9% Convertible Notes varies as the market price of
the Common Stock changes, it is impossible at this time to determine how
many shares may be issued upon conversion of the 9% Convertible Notes.
(2) The principal amount of Notes shown is, except as otherwise noted, based on
information provided by the Trustee for the Notes.
(3) Information regarding the number of shares of common stock is based on
information provided by Gabriel Capital, L.P. on Schedule 13D filed with
the Securities and Exchange Commission on May 3, 1999. J. Ezra Merkin
("Merkin") is the sole general partner of Gabriel Capital, L.P.
(4) Information regarding the number of of shares of Common Stock is based on
information provided by Elliott Associates, L.P. and Westgate
International, L.P. on Schedule 13D filed with the Securities and Exchange
Commission on May 7, 1999. Elliott Associates, L.P. and Westgate
International, L.P. are investment partnerships under common management. In
addition, Westgate International, L.P. and Martley International, Inc.
together beneficially own 39,463 shares of Common Stock.
(5) Each of these entities is an investment partnership under common management
by Morgens, Waterfall, Vintiadis & Company, Inc. ("MWV"). The amounts shown
are based on information provided by MWV.
(6) The amount owned by Elliott includes $1,176,000 in principal amount of
Notes purchased since February 2, 1999.
(7) Additional securities have been registered hereby on behalf of parties
which may receive such securities in connection with the Companies'
emergence from Chapter 11 and which parties have not yet been identified.
Once identified, such parties will be listed above pursuant to a post-
effective amendment of the Registration Statement of which this Prospectus
forms a part.
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<PAGE>
PLAN OF DISTRIBUTION
Type of Transactions.
The Selling Securityholders (and donees, pledgees, transferees or other
successors in interest receiving Securities from a Selling Securityholder after
the date of this Prospectus) may offer and sell all or a portion of their
Securities at various times in one or more of the following types of
transactions:
. In the over-the-counter market;
. In private transactions and in transactions other than the over-the-
counter market;
. In connection with short sales of the Securities;
. By pledge to secure debts or other obligations;
. In connection with the writing of non-traded and exchange traded call
options, swaps or derivatives (exchange-listed or otherwise) and in
settlement of other transactions in standardized or over-the-counter
options;
. cross or block trades;
. "at the market" to or through market makers, into an existing market;
. direct sales to purchasers, sales effected through agents;
. hedging transactions with broker-dealers (who may short the Common
Stock); or
. In a combination of any of the above transactions.
Price of Transaction; Fees.
These transactions may be at market price, at prices related to the market
price, at negotiated prices or at fixed prices that may be changed. If the
Selling Securityholders use the services of an underwriter, broker, dealer or
agent to assist with the sale of Securities, the party providing services may
be paid for their efforts. The compensation can be paid by either the buyer or
the seller of the Securities and can be in the form of a discount, commission
or concession. The buyer and the seller will determine how much compensation
will be paid and the form in which it will be paid. It is possible that the
agent providing these services, or the Selling Securityholders, might be
considered to be underwriters under the Securities Act, and any profits
received or compensation paid could be considered an underwriting discount or
commission under the Securities Act.
At the time a particular offer of Securities is made, a prospectus
supplement, to the extent required, will be distributed which will set forth
the aggregate amount and type of Securities being offered, the names of the
Selling Securityholders, the purchase price, the amount of expenses of the
offering and the terms of the offering, including the name or names of any
underwriters, brokers, dealers or agents, any discounts, commissions and other
items constituting compensation from the Selling Securityholders and any
discounts, commissions or concessions allowed or reallowed or paid to dealers.
Under the Exchange Act and applicable rules and regulations promulgated
thereunder, any person engaged in a distribution of any of the Securities may
not simultaneously engage in market making activities with respect to the
Securities for a period of 5 days prior to the commencement of the
distribution, subject to certain exemptions. In addition and without limiting
the foregoing, the Selling Securityholders will be subject to applicable
provisions of the Exchange Act and the rules and regulations promulgated
thereunder, including without limitation Regulation M, which provisions may
limit the timing of purchases and sales of any of the Securities by the Selling
Securityholders.
Under the securities laws of certain states, the Securities may be sold in
such states only through registered or licensed brokers or dealers. In
addition, in certain states the Securities may not be sold unless the
Securities have been registered or qualify for sale in such state or an
exemption from registration or qualification is available and is complied with.
52
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of December 7, 1999, we have 9,780,347 shares of Common Stock
outstanding. We expect to issue additional shares of Common Stock to creditors
under the Plan of Reorganization as their claims are resolved. We currently
expect a total of approximately 11 million shares will be issued under the Plan
of Reorganization, including one million shares expected to be issued upon the
exercise of warrants, of which 77,643 shares were issued upon exercise of
warrants through December 7, 1999. Under the terms of our Plan of
Reorganization, the number of shares we issue to our former creditors varies
with the amount of general unsecured claims allowed. The number of shares
outstanding is based upon an assumption that the amount of general unsecured
claims allowed are not less than $225 million and the number of shares issued
to the Selling Securityholder's not more than 7,267,424. The number of shares
outstanding does not include an indeterminate number of shares of Common Stock
which may be issued upon conversion of the 9% Convertible Notes. The offer and
sale of 7,267,424 of such shares of Common Stock, plus an indeterminate number
of shares issuable upon conversion of the 9% Convertible Notes, are registered
under the Securities Act pursuant to the Registration Statement of which this
Prospectus is a part.
All of the outstanding shares of Common Stock, all of the shares of Common
Stock issuable upon exercise of the warrants and options, and all of the shares
of Common Stock issuable upon conversion of the 9% Convertible Notes, are
freely tradeable without restriction or further registration under the
Securities Act, either because such shares were issued or are issuable pursuant
to the exemption provided by Section 1145 of the Bankruptcy Code and such
shares are not "restricted securities" as defined in Rule 144 under the
Securities Act or because the offer and resale of such shares is registered
pursuant to the Registration Statement of which this Prospectus forms a part or
pursuant to a registration statement on Form S-8 as described below.
A total of 1,000,000 shares of Common Stock were reserved for issuance under
the Stock Plan, of which 853,887 shares are the subject of options granted to
management as of December 7, 1999. In addition, 1,000,000 shares of Common
Stock were reserved for issuance under Warrants outstanding, 77,643 of which
have been issued as of December 7, 1999. The Warrants will expire on February
2, 2004. We have filed a registration statement on Form S-8 under the
Securities Act to register all shares of Common Stock currently issuable
pursuant to the Stock Plan. To the extent shares of Common Stock are owned or
purchased by our "affiliates" as such term is defined in Rule 144 and are not
registered pursuant to this Registration Statement of which this Prospectus
forms a part, such restricted shares may generally be sold in compliance with
Rule 144.
In general under Rule 144 as currently in effect, a person (or persons whose
shares are aggregated), including persons deemed to be affiliates, whose
restricted securities have been fully paid for and held for at least one year
from the later of the date of acquisition from us or any of our affiliates, may
sell such securities in brokers' transactions or directly to market makers,
provided the number of shares sold in any three-month period does not exceed
the greater of 1% of the then outstanding shares of the Common Stock or the
average weekly trading volume in the public market during the four calendar
weeks immediately preceding the filing of the seller's Form 144. Sales under
Rule 144 are also subject to certain notice requirements and availability of
current public information concerning us. Pursuant to Rule 144(k), after two
years have elapsed from the later of the acquisition of the restricted
securities from us or any of our affiliates, such shares may be sold without
limitation by persons who have not been our affiliates for at least three
months.
TERMS OF OUTSTANDING INDEBTEDNESS
Credit Agreement
As of the Effective Date, we entered into a $270 million financing facility
with BankBoston, N.A. as Administrative Agent and Issuing Bank. The facility is
composed of a $250 million senior secured revolving credit facility and a $20
million "last-in last-out" secured subfacility. This facility is for a period
expiring on December 23, 2001 and may not exceed a maximum principal amount of
$270 million. The initial advances
53
<PAGE>
under this BankBoston Facility were used to pay in full all of our obligations
under the DIP Facility and the remainder can be used for general corporate
purposes, working capital and inventory purchases. No more than $125 million of
the advances under the BankBoston Facility are permitted to be in the form of
letters of credit.
Borrowings under the BankBoston Facility are secured by a first-priority
security interest in all of our assets, properties and rights, except for our
interest in any owned or leased real property. The security interest of the
junior secured facility, though a first-priority interest, ranks behind the
security for the senior secured facility.
The BankBoston Facility permits us to borrow funds under the senior secured
facility at an interest rate per annum equal to (a) the higher of (i) the
annual rate of interest as announced by BankBoston as its "Base Rate" and (ii)
the weighted average of the rates on overnight federal funds transactions with
members of the Federal Reserve System plus 1/2 of 1% per annum; or (b) 2.25%
per annum plus the quotient of (i) the LIBOR Rate in effect divided by (ii) a
percentage equal to 100% minus the percentage established by the Board of
Governors of the Federal Reserve System as the maximum rate for all reserves
applicable to any member bank of the Federal Reserve System in respect of
Eurocurrency Liabilities. Each of these rates is subject to a 0.50% increase in
the event of overadvances. The junior secured subfacility permits us to borrow
funds at the "Base Rate" plus 7.00% per annum. We are also required to pay a
fee of 1.50% per annum of the average daily balance of the maximum amount that
is available at any time for drawing or payment under any outstanding letters
of credit.
The BankBoston Facility contains a number of significant covenants
preventing us from taking certain actions including:
. Undergoing a merger or entering into a stock or asset acquisition
(subject to certain exceptions);
. Making capital expenditures in any fiscal year in excess of $25 million,
which limit is subject to increase after twelve months provided we meet
certain earnings goals. In addition, any capital expenditures resulting
from the utilization of the proceeds from any equity offering are
excludable from the annual limitation;
. Permitting our earnings before interest, taxes, depreciation and
amortization ("EBITDA") from dropping below specified levels;
. Permitting the ratio of (a) our amount of accounts payable to (b) the
value of our inventory to be less than specified percentages (which
percentages change on a monthly basis, but are between 37.0% and 42.5%);
. Allowing the ratio of (a) our EBITDA less certain capital expenditures
to (b) our cash interest expense plus principal payments to be less than
1.00:1; and
. Purchasing or guaranteeing any other party's indebtedness, paying
dividends, entering into certain transactions with our affiliates and
making any investments other than those permitted.
If we fail to meet these and other obligations under the BankBoston
Facility, the lenders under the BankBoston Facility would have recourse to a
number of remedies, including an acceleration of amounts owed and foreclosure
on the collateral securing the borrowings.
CAP Notes
Pursuant to the Plan of Reorganization, Bradlees Stores, Inc. has issued CAP
Notes in the aggregate principal amount of $547,094. The CAP Notes bear
interest at a rate equal to nine percent (9%) per annum. Principal and accrued
interest are payable in twelve equal quarterly installments, commencing three
months after the Effective Date. Bradlees Stores, Inc. can prepay these notes,
in whole or in part, at any time or from time to time, without premium or
penalty. The CAP Notes are secured by a first lien on the property on which the
CAP Note holder holds a valid first priority security interest.
54
<PAGE>
Cure Notes
Pursuant to the Plan of Reorganization, Bradlees Stores, Inc. has issued
Cure Notes in the aggregate principal amount of $3.3 million. The Cure Notes
are not secured and bear interest at a rate equal to nine percent (9%) per
annum. For most of the Cure Notes, principal and accrued interest are not
payable until three years after the Effective Date. Bradlees Stores, Inc. can
prepay these notes, in whole or in part, at any time or from time to time,
without premium or penalty.
Tax Notes
Pursuant to the Plan of Reorganization and Section 1129(a)(9)(C) of the
Bankruptcy Code, Bradlees Stores, Inc. has agreed to make deferred cash
payments in the aggregate principal amount of $2.4 million on account of
allowed tax claims. Payments will be made in equal annual installments of
principal, plus simple interest accruing from the Effective Date at a rate
equal to nine percent (9%) per annum on the unpaid portion of such claims. The
first payment is due on the latest of: (i) 90 days after the Effective Date,
(ii) 90 days after the date on which an order allowing any such claim becomes a
final order, and (iii) such other date as is agreed to by Bradlees Stores, Inc.
and by the holder of such claim. Bradlees Stores, Inc. has the right to pay any
such claim, or the remaining balance of any such claim, in full, at any time,
on or after the Effective Date, without premium or penalty.
Vendor Lien
Bradlees Stores, Inc. has entered into an agreement for the benefit of its
trade vendors which grants such trade vendors a subordinated security interest
in Bradlees Stores, Inc.'s inventory.
DESCRIPTION OF THE 9% CONVERTIBLE NOTES
The 9% Convertible Notes (as used in this section, the "Notes") were issued
under an Indenture dated February 2, 1999 (the "Indenture") among Bradlees,
Inc., Bradlees Stores, Inc., New Horizons of Yonkers, Inc. and IBJ Whitehall
Bank & Trust Company, as trustee (the "Trustee"). The material provisions of
the Notes and the Indenture are summarized below. The statements under this
caption relating to the Notes and the Indenture are summaries only, however,
and do not purport to be complete. Such summaries make use of terms defined in
the Indenture and are qualified in their entirety by express reference to the
Indenture, which has been filed as an exhibit to the Registration Statement of
which this Prospectus is a part. The Notes will be issued by Bradlees Stores,
Inc. The Indenture will be subject to and governed by the Trust Indenture Act
of 1939, as amended (the "TIA").
General
Each Note will mature on February 3, 2004, and bears interest at the rate of
9% per annum, payable semi-annually in arrears on January 1 and July 1 of each
year, commencing July 1, 1999, to the person in whose name the Note is
registered at the close of business on the record date next preceding such
interest payment date. Bradlees Stores, Inc. will pay interest on overdue
principal and will pay interest on overdue interest. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months. Bradlees
Stores, Inc. will pay the principal on the Notes only to each Holder who
presents and surrenders such Notes to a Paying Agent on or after February 3,
2004. Bradlees Stores, Inc. will pay principal and interest in U.S. legal
tender by Federal funds bank wire transfer or by check to the persons who are
registered Holders at the close of business on the Record Date next preceding
the applicable interest payment date. The aggregate principal amount of the
Notes that may be issued under the Indenture will be limited to $28,995,000
(which excludes the $11.0 million aggregate principal amount that was pre-paid
on the Effective Date).
55
<PAGE>
The Notes are transferable and exchangeable at the office of the Security
Registrar and were issued in fully registered form, without coupons, in
denominations of $1,000 and any whole multiple thereof. Bradlees Stores, Inc.
may require payment of a sum sufficient to cover any transfer tax or other
similar governmental charge payable in connection with certain transfers and
exchanges and any other expenses connected therewith.
Ranking
The indebtedness represented by the Notes ranks equally with other non-
subordinated indebtedness of Bradlees Stores, Inc. Each Note will rank on
parity with each other Note.
Except as described under "Merger, Consolidation or Sale of Assets," or
"Limitations on Indebtedness" the Notes do not contain any provisions that
would limit the ability of Bradlees Stores, Inc. to incur indebtedness or that
would afford holders of Notes protection in the event of (i) a highly leveraged
or similar transaction involving Bradlees Stores, Inc., the management of
Bradlees Stores, Inc., or any affiliate of any such party, (ii) a change of
control, or (iii) a reorganization, restructuring, merger or similar
transaction involving Bradlees Stores, Inc. that may adversely affect the
holders of the Notes. In addition, subject to the limitations set forth under
"Merger, Consolidation or Sale of Assets," Bradlees Stores, Inc. may, in the
future, enter into certain transactions, such as the sale of all or
substantially all of its assets or the merger or consolidation of the Bradlees
Stores, Inc., that would increase the amount of Bradlees Stores, Inc.'s
indebtedness or substantially reduce or eliminate Bradlees Stores, Inc.'s
assets, which may have an adverse effect on Bradlees Stores, Inc.'s ability to
service its indebtedness, including the Notes.
Redemption
Any Notes outstanding shall be redeemed, along with any accrued and unpaid
interest on such Notes, with the net proceeds received upon the disposition of
our leasehold interest in our Yonkers, New York store (see below) or the net
proceeds (up to a maximum amount of $6.5 million plus accrued and unpaid
interest and expenses) received upon the disposition of the Additional
Collateral (as defined below). Additionally, the net proceeds of any offering
of common stock by Bradlees, Inc., except offerings to employees pursuant to
the Plan of Reorganization or pursuant to any benefit plan, shall be used to
repay, pro rata, any outstanding Notes plus accrued and unpaid interest. We
also have the right to redeem the Notes at any time, in whole or in part, by
paying the holder the unpaid principal plus accrued and unpaid interest. In
addition, pursuant to the Plan of Reorganization, we have modified the
termination date and certain other provisions of our lease for our Union
Square, New York store in exchange for a payment upon the Effective Date of
$11.0 million by the landlord. This payment was applied as a pre-payment to the
Notes, leaving $28,995,000 aggregate principal amount of Notes outstanding. In
July 1999 we applied proceeds, less fees and expenses, that we received from
the financing of our Yonkers, New York store as a pre-payment on the Notes.
This pre-payment was $17,019,000, leaving $11,976,000 aggregate principal
amount of Notes outstanding. Notice of any redemption shall be given to the
holder of the Notes to be redeemed not less than 10 days prior to the scheduled
redemption date.
On August 12, 1999, we entered into a supplemental agreement with the
holders of $9.0 million, or approximately 75%, of the $12.0 million of the
outstanding Notes (the "Discount Option Noteholders"). Under the agreement, we
can repurchase the outstanding Notes held by the Discount Option Noteholders
(the "Discount Option Notes") at a purchase price equal to 86% of the
outstanding principal amount (i.e. a 14% discount), plus accrued interest,
exercisable for a one-month time period from December 1, 1999 through December
31, 1999 (the "Discount Option"). Each month thereafter the discount will
decrease by 1% such that the discount will be fully eliminated by January 31,
2001. In consideration of the Discount Option, we agreed to pay the Discount
Option Noteholders a premium on the closing date of the grant of the option
equal to 0.5% of the outstanding principal amount of the Discount Option Notes,
grant the Discount Option Noteholders second priority leasehold mortgages on
the Collateral subject to substitution in certain circumstances, and provide a
put option exercisable on or after February 3, 2003 to sell the Discount Option
Notes to us at a price equal to the then outstanding principal amount of the
Discount Option Notes, plus
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accrued interest. In accordance with applicable SEC rules, we had offered to
enter into the supplemental agreement with all Noteholders and closed the offer
on August 5, 1999.
Limitations on Mergers and Consolidation
The Indenture provides that neither Bradlees, Inc. nor Bradlees Stores, Inc.
may consolidate or merge with, or sell, assign, transfer, lease or convey all
or substantially all of its assets to, any other entity unless (i) either
Bradlees, Inc. or Bradlees Stores, Inc., as the case may be, shall be the
continuing entity, or the successor entity formed by or resulting from any such
consolidation or merger or which shall have received the transfer of such
assets, shall be a person organized and existing under the laws of any
jurisdiction of the United States, and shall expressly assume by supplemental
indenture (A) in the case of a transaction involving Bradlees Stores, Inc.,
Bradlees Stores, Inc.'s obligations to pay principal of and interest on all of
the Notes, as well as every covenant and obligation of Bradlees Stores, Inc.
under the Indenture and the Security Documents or (B) in the case of a
transaction involving Bradlees, Inc., the guarantee obligations and other
obligations of Bradlees, Inc. under the Indenture (ii) before and immediately
after giving effect to such transaction, no event of default under the
Indenture, and no event which, after notice or the lapse of time, or both,
would become such an event of default, shall have occurred or be continuing and
(iii) Bradlees, Inc., Bradlees Stores, Inc. or the successor entity, shall
deliver to the Trustee a certificate and an opinion of counsel that such
actions comply with the applicable provisions of the Indenture.
Limitations on Indebtedness
The Indenture provides that neither Bradlees Stores, Inc. nor any of its
subsidiaries will incur any Indebtedness (which as defined in the Indenture
includes obligations for borrowed money, the defined purchase price of certain
assets and guarantees of the foregoing) other than (i) Indebtedness incurred
under or permitted by the BankBoston Facility (or any amendment, restatement,
modification, renewal, refunding, replacement or refinancing thereof in whole
or in part from time to time provided that the Indebtedness does not exceed
$270 million plus any guarantees thereof); (ii) Indebtedness represented by the
Notes, the guarantee of the Notes described below and other Indebtedness
incurred pursuant to the Plan of Reorganization (or any amendment, restatement,
modification, renewal, refunding, replacement or refinancing thereof in whole
or in part from time to time); (iii) Indebtedness, which may be in addition to
Indebtedness incurred pursuant to clause (i), incurred in connection with the
acquisition (by purchase, lease or otherwise) of additional store sites or to
finance the fixtures, equipment, inventory and other costs and expenses
associated with such store sites; (iv) Indebtedness incurred to finance or
refinance capital expenditures; and (v) Indebtedness incurred in the ordinary
course of our business as of February 2, 1999 in accordance with past
practices. The Indenture further provides that Bradlees, Inc. will not incur
Indebtedness other than as described in clauses (i) through (iii) above;
provided that any indebtedness incurred by Bradlees, Inc. pursuant to clause
(iii) above shall rank pari passu with Bradlees, Inc.'s guarantee of the Notes.
Guarantees
Bradlees, Inc. and New Horizons of Yonkers, Inc. have severally, fully and
unconditionally guaranteed the payment obligations of Bradlees Stores, Inc.
under the 9% Notes, the Indenture and the Security Documents. The obligations
of Bradlees, Inc. under its guarantee are unsecured obligations of Bradlees,
Inc. and New Horizons of Yonkers, Inc. and are limited as necessary to prevent
the guarantee from constituting a fraudulent conveyance under applicable law.
See "Risk Factors--Fraudulent Conveyance Matters." The guarantee by each
guarantor ranks equally with all other non-subordinated indebtedness of such
guarantor except the guarantee by Bradlees, Inc. is expressly subordinated to
the guarantee by Bradlees, Inc. of the BankBoston Facility and the guarantee by
New Horizons of Yonkers, Inc. is expressly subordinated to the guarantee by New
Horizons of Yonkers, Inc. of the BankBoston Facility. A guarantor may not make
payments on the Notes if such guarantor's guarantee of the BankBoston Facility
is not paid when due or discharged in full, unless the representative under the
BankBoston Facility consents. Upon any distribution to creditors following a
liquidation, dissolution, bankruptcy, reorganization or similar proceeding
relating to a guarantor, holders of such guarantor's guarantee of the
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BankBoston Facility are entitled to payment in full (including interest after
commencement of any such proceedings) before holders of Notes may be paid under
the guarantee.
Prior to making any distributions pursuant to these guarantees, the Trustee
or paying agent must inquire of the representative of the BankBoston Facility
as to whether such distribution is permitted under the subordination provisions
of the Indenture. If no response is received within 24 hours of such inquiry,
distributions may be made.
Events of Default, Notice and Waiver
The following events are "Events of Default" with respect to the Notes: (i)
default for 15 days in the payment of any installment of interest on any Note
when it becomes due and payable; (ii) default in the payment of principal of
any Note when it becomes due and payable, at maturity, acceleration, redemption
or otherwise; (iii) default in the performance or breach of any other
obligation of Bradlees Stores, Inc., Bradlees, Inc. or New Horizons of Yonkers,
Inc. contained in the Indenture or related security agreement that continues
for 30 days after written notice from holders of at least 25% of the aggregate
principal amount of outstanding Notes thereof given to Bradlees, Inc., Bradlees
Stores, Inc. or New Horizons of Yonkers, Inc. as provided in the Indenture;
(iv) certain events of bankruptcy, insolvency or reorganization, or court
appointment of a receiver, liquidator or trustee of Bradlees, Inc., Bradlees
Stores, Inc. or New Horizons of Yonkers, Inc.; (v) any one or more judgments or
orders as to liability or debt for payment in excess of five million dollars in
the aggregate shall be rendered against us and either (a) enforcement
proceedings shall have been commenced and shall be continuing by any creditor
upon such judgment or order or (b) there shall be any period of 30 consecutive
days during which a stay of enforcement of such judgment or order, by reason of
a pending appeal, payment or otherwise, shall not be in effect; (vi) Bradlees,
Inc. fails to deliver Common Stock within three trading days upon conversion of
the Notes; (vii) the guarantee of Bradlees, Inc. ceases to be in effect for a
period of ten days after notice is provided; (viii) any liens created by the
security agreement shall cease to be enforceable and Bradlees Stores, Inc. does
not cure the cessation within 30 days; and (ix) the collateral agent under the
BankBoston Facility has commenced the exercise of its remedies with respect to
amounts outstanding thereunder or the related collateral.
If an Event of Default under the Indenture occurs and is continuing and has
not been waived, then in every such case the holders of at least 25% in
principal amount of outstanding Notes have the right to declare the principal
amount of all the Notes to be due and payable immediately by written notice
thereof to Bradlees Stores, Inc. and the Trustee. However, at any time after
such a declaration of acceleration with respect to the Notes has been made, the
holders of a majority in principal amount of outstanding Notes may, on behalf
of the holders of all of the Notes, rescind and cancel such declaration and its
consequences if (i) the recission would not conflict with any judgement or
decree; (ii) all existing events of default, with respect to the Notes have
been cured or waived, except nonpayment of principal or interest that has
become due solely because of acceleration; (iii) to the extent payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid; and (iv) Bradlees Stores, Inc. has paid the
Trustee its reasonable compensation and reimbursed the Trustee for its
expenses, disbursements and advancements. The Indenture also provides that the
holders of not less than a majority in principal amount of the outstanding
Notes may waive any past default and its consequences, except a default (i) in
the payment of the principal of (or premium, if any) or interest on any Note;
or (ii) with respect to an obligation contained in the Indenture that cannot be
modified or amended without the consent of the holder of each outstanding Note
affected thereby.
The TIA requires the Trustee to give notice to the holders of the Notes
within 90 days of the occurrence of an Event of Default of which it is aware
under the Indenture unless such default shall have been cured or waived;
provided, however, that such Trustee may withhold notice to the holders of
Notes if specified responsible officers, as set forth in the TIA, of such
Trustee consider such withholding to be in the interest of such holders.
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The Indenture provides that no holders of Notes may institute any
proceedings, judicial or otherwise, upon or with respect to the Indenture or
for any remedy thereunder, except in the case of failure of the Trustee to act
within 10 days after it has received satisfactory indemnity and a written
request to institute proceedings relating to an Event of Default from the
holders of not less than 25% aggregate principal amount of the outstanding
Notes. This provision will not prevent, however, any holder of Notes from
instituting suit for the enforcement of payment of the principal and interest
on such Notes at the respective due dates thereof.
The holders of a majority in principal amount of the outstanding Notes shall
have the right to direct the time, method and place of conducting any
proceeding for any remedy available to the Trustee, or of exercising any trust
or power conferred upon such Trustee. The Trustee may refuse to follow any
direction which is in conflict with any law or the Indenture, which may involve
the Trustee in personal liability or which may be unduly prejudicial to the
holders of Notes not joining therein, it being understood that the Trustee
shall have no duty to ascertain the potential prejudice of any actions.
Within 120 days after the close of each fiscal year, Bradlees Stores, Inc.
is required to deliver to the Trustee a certificate, signed by one of several
specified officers of Bradlees Stores, Inc., stating whether or not such
officer has knowledge of any failure by Bradlees Stores, Inc. to comply with
any of its obligations under the Indenture.
Modification of the Indenture
Modifications and amendments of the Indenture, any security documents or the
Notes are permitted to be made only with the consent of the holders of a
majority in principal amount of all outstanding Notes issued under the
Indenture affected by such modification or amendment; provided, however, that
no such modification or amendment may, without the consent of the holder of
each such Note affected thereby, (i) reduce the principal or change or have the
effect of changing the stated maturity of any Notes, or change the date on
which any Notes may be subject to redemption, or reduce the redemption price;
(ii) reduce the rate of interest, or change or have the effect of changing the
stated maturity for payment of interest on the Notes, (iii) change the place of
payment or currency for payment of principal or interest on any such Notes;
(iv) impair the right to institute suit for the enforcement of any payment on
or with respect to any such Notes or permitting the holders of a majority in
principal amount of Notes to waive events of default; (v) reduce the above-
stated percentage of any outstanding Notes necessary to modify or amend the
Indenture with respect to such Notes or to waive compliance with certain
provisions thereof or certain Events of Default and consequences thereunder;
(vi) change any material provision of any security document; (vii) adversely
affect the right of holders of the Notes to convert them into common stock;
(viii) waive a default in payment of principal or interest; (ix) release
Bradlees, Inc. from its guarantee obligations or release collateral other than
as permitted by the Indenture; or (x) modify any of the foregoing provisions.
In addition, if any Indebtedness is outstanding under the BankBoston Facility,
provisions of the Indenture relating to the BankBoston Facility guarantees and
the subordination of the guarantees of the Notes shall not be amended without
the consent of the agent of the BankBoston Facility. Any amendment to release
the collateral securing the Notes must be unanimously approved by all holders
of Notes.
Modifications and amendments of the Indenture, any security documents or the
Notes will be permitted to be made by Bradlees, Inc, Bradlees Stores, Inc. and
the Trustee thereunder without the consent of any holder of the Notes for any
of the following purposes: (i) to evidence the succession of another person to
Bradlees Stores, Inc. as obligor under the Indenture to the extent permitted
under the Indenture; (ii) to provide for the acceptance of appointment by a
successor Trustee or facilitate the administration of the trust under the
Indenture by more than one Trustee; (iii) to cure any ambiguity, defect or
inconsistency in such documents, provided that in the opinion of the Trustee,
such action shall not adversely affect the interests of holders of Notes issued
under the Indenture; (iv) to provide for uncertificated Notes; (v) to maintain
compliance with the requirements of the SEC or to remain qualified under the
TIA; (vi) to give effect to the release of any collateral or any lien in
accordance with the terms of any security document; (vii) to make any change
that does not adversely affect the rights of any Note holders or (viii) to make
any change that provides an additional benefit to the holders of the Notes.
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Collateral
The Notes are secured by, under certain circumstances and subject to certain
limitations described below, first priority liens on our leasehold interests in
our Danbury, Connecticut, Norwalk, Connecticut and Saddle Brook, New Jersey
stores (the "Collateral"), as well as the net proceeds we receive upon their
disposition(s) (none of which we are currently seeking to sell). Pursuant to
the Plan of Reorganization, we have modified the termination date and certain
other provisions of our lease for our Union Square, New York store in exchange
for a payment upon the Effective Date of $11.0 million by the landlord. This
payment was applied as a pre-payment to the Notes. In July 1999 we applied the
proceeds, less fees and expenses, that we received from the sale/leaseback of
our Yonkers, New York store as a pre-payment on the Notes. This pre-payment was
$17,019,000, leaving $11,976,000 aggregate principal amount of Notes
outstanding.
The lien on the Collateral only secures indebtedness under the Notes equal
to the sum of $6.5 million plus an amount from time to time equal to the amount
of interest (plus interest on interest) that would accrue on $6.5 million of
principal amount of outstanding Notes from February 2, 1999 to the date of
calculation of the extent of such lien on the Collateral (but excluding any
period for which interest has in fact been paid under the Notes) and all costs
and expenses payable by us under the mortgages encumbering the Collateral. We
have obtained title insurance covering the leasehold mortgages described above.
In addition, pursuant to the supplemental agreement we granted to the
Discount Option Noteholders, subject to substitution in certain circumstances,
second priority leasehold mortgages on the Collateral in favor of the Discount
Option Noteholders. See "Description of 9% Convertible Notes--Redemption."
Prior to any foreclosure of the leasehold mortgages by the Trustee, the
Trustee has agreed to generally allow the Company 120 days to conduct going-
out-of-business sales at those stores or to remove the inventory located at
those stores.
Conversion
The Notes are convertible any time after the first anniversary (February 2,
2000) of the Effective Date into shares of our Common Stock. The conversion
price will initially be the arithmetic unweighted average closing price of the
Common Stock of Bradlees, Inc. during the twenty business days preceding the
first anniversary of the Effective Date. The conversion price may change if (i)
we make any distributions in shares of our Common Stock to our stockholders;
(ii) we issue options, warrants or rights to our stockholders that dilute
current owners of Bradlees, Inc. Common Stock; (iii) we take any action to
increase or decrease the number of shares outstanding which would effectively
dilute the value of the convertible feature of the Note; (iv) we distribute any
assets (other than cash dividends not exceeding certain levels), evidences of
indebtedness or shares of stock; or (v) certain extraordinary distributions of
cash are made to holders of our Common Stock (directly or by means of a tender
or exchange offer) where the amount distributed (plus other amounts distributed
to holders of our Common Stock in the previous 12 months) exceeds 15% of the
market capitalization (determined pursuant to the Indenture) of Bradlees, Inc.
In the case of a reclassification, change, merger, consolidation or sale of
substantially all assets, Bradlees, Inc. shall, as a condition precedent to
such event, enter into a supplemental indenture providing that the
consideration to be received by the Note holders upon conversion after such
event shall be the same as such holder would have received in connection with
such extraordinary event had they held the number of shares of our Common Stock
which would have been issued had such Notes been converted immediately prior to
such event. The Notes will not be convertible after the close of business on
January 30, 2004, or after the close of business on the second day prior to the
date on which the specified Note was to be redeemed.
Governing Law
The Indenture and each Note are governed by, and construed in accordance
with, the laws of the State of New York without giving effect to the principles
thereof relating to conflicts of law except Sections 5-1401 and 5-1402 of the
New York General Obligations Law.
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The Trustee
IBJ Whitehall Bank & Trust Company is the Trustee under the Indenture. Their
address is One State Street, New York, New York 10004.
The TIA contains certain limitations on the right of the Trustee, should it
become a creditor of the Company, to obtain payment of claims in certain cases,
or to realize on certain property received in respect of any such claim as
security or otherwise.
The Indenture provides that in case an Event of Default shall occur and be
continuing, the Trustee will be required to use the degree of care and skill of
a prudent person in the conduct of his or her own affairs.
Authentication
One officer of Bradlees Stores, Inc. has signed each Note on behalf of
Bradlees Stores, Inc., in each case by manual or facsimile signature. A Note
will not be valid until the Trustee or an Authenticating Agent manually signs
the certificate of authentication on the Note. Each Note will be dated as of
the date of its authentication.
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DESCRIPTION OF CAPITAL STOCK
General
The following summary description of the capital stock of Bradlees is
qualified in its entirety by reference to the Bradlees Amended and Restated
Articles of Organization (the "Articles") and the Bradlees Amended and Restated
By-laws (the "By-laws"), copies of which are filed as exhibits to the
Registration Statement of which this Prospectus is a part. All of the stock of
Bradlees Stores, Inc. is owned by Bradlees. The terms of the common stock of
Bradlees Stores, Inc. are contained in the Amended and Restated Articles of
Organization and the Amended and Restated By-laws of Bradlees Stores, Inc.,
copies of which have been filed as exhibits to the Registration Statement of
which this Prospectus is a part.
Authorized and Outstanding Capital Stock
Bradlees has authorized capital stock consisting of 41,000,000 shares, par
value $.01 per share, consisting of 40,000,000 shares of Common Stock and
1,000,000 shares of preferred stock. As of December 7, 1999, 9,780,347 shares
of Common Stock, held by approximately 1,367 stockholders, were issued and
outstanding. As of December 7, 1999, no preferred stock was issued or
outstanding. We expect to issue additional shares of Common Stock to creditors
under the Plan of Reorganization as their claims are resolved. We currently
expect that a total of 9,909,091 shares will be issued under the Plan of
Reorganization excluding the impact from the exercise of warrants.
Common Stock. In addition to the 9,909,091 shares expected to be issued
under the Plan of Reorganization, the following shares of Common Stock were
reserved for issuance:
. 1,000,000 shares issuable upon exercise of outstanding warrants (of
which 77,182 have been issued upon exercise of warrants through
December 7, 1999); and
. 1,000,000 shares for issuance under the Stock Plan (options to
purchase 853,887 of these shares are outstanding as of December 7,
1999).
In addition, we have agreed to issue an indeterminate number of shares upon
the conversion of the 9% Convertible Notes.
The holders of Common Stock are entitled to one vote per share on all
matters to be voted on by stockholders. Therefore, the holders of a majority of
the shares voted in the election of directors can elect all of the directors
then standing for election, subject to the rights of the holders of preferred
stock, if and when issued. As of December 7, 1999, no preferred stock was
issued or outstanding. The holders of Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by our Board of
Directors from funds legally available therefor. See "Dividend Policy." The
possible issuance of preferred stock with a preference over Common Stock as to
dividends could impact that dividend rights of holders of Common Stock. The
holders of Common Stock have no preemptive or other subscription rights, and
there are no conversion rights or redemption or sinking fund provisions with
respect to the Common Stock. All outstanding shares of Common Stock, including
the shares offered hereby, are fully paid and non-assessable.
Undesignated Preferred Stock. Pursuant to Bradlees' Articles, the Board of
Directors is authorized, without further action of the stockholders, to issue
up to 1,000,000 shares of preferred stock in one or more series and to fix the
designations, powers, preferences and the relative, participating, optional or
other special rights of the shares of each series and any qualifications,
limitations and restrictions thereon as set forth in our Articles of
Organization. Any such preferred stock issued by us may rank prior to the
Common Stock as to dividend rights, liquidation preference or both, may have
full or limited voting rights and may be convertible into shares of Common
Stock. In connection with the adoption of a shareholder rights plan as
described below, the Board of Directors authorized and designated 150,000
shares of preferred stock as Series A Junior Participating Cumulative Preferred
Stock. This series of preferred stock could become issuable to stockholders
upon the exercise of rights in accordance with the terms of the shareholder
rights plan.
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Certain Provisions of the Articles and By-laws of Bradlees, Inc.
General. Bradlees' Articles and By-laws contain rules of corporate
governance and stockholder rights. The Articles and By-laws allow the Board of
Directors to issue shares of preferred stock and to set the voting rights and
preferences of that stock.
Section 50A of Chapter 156B of the Massachusetts General Laws. The Company
is subject to the provisions of Section 50A of Chapter 156B of the
Massachusetts General Laws ("Section 50A"). Under Section 50A, the Board of
Directors has been divided into three classes with one class to be elected at
each year's annual meeting of stockholders commencing as of the 2000 annual
meeting. In addition to requiring a staggered Board, Section 50A provides,
among other things, that (i) all vacancies in the Board shall be filled only by
the Board, (ii) directors elected by the Board to fill vacancies shall hold
office for the remainder of the term of the class of directors in which the
vacancy occurred, (iii) no decrease in the number of directors constituting the
Board may shorten the term of any incumbent director, (iv) the number of
directors may be fixed only by the Board, and (v) directors may be removed by
stockholders only for "cause" and by the affirmative vote of a majority of the
shares outstanding and entitled to vote thereon Section 50A defines "cause" as
only (i) conviction of a felony, (ii) declaration of unsound mind by order of
court, (iii) gross dereliction of duty, (iv) commission of an action involving
moral turpitude or (v) commission of an action which constitutes intentional
misconduct or a knowing violation of law if such action in either event results
both in an improper substantial personal benefit and a material injury to the
company.
Nomination of Directors. Any holder of record of shares of capital stock or
the Nominating Committee established by the board of directors may nominate
directors. Shareholders who seek to nominate directors are subject to advance
notice and disclosure requirements as well as time limits (see below).
Meetings of Stockholders. The board of directors may call a special meeting
of stockholders. The clerk or in certain circumstances any other officer must
call a special meeting of the stockholders upon written application of one or
more stockholders who hold at least (1) a majority in interest in interest of
the capital stock entitled to vote at such meeting or (2) such lesser
percentage as shall be determined to be the maximum percentage which we are
permitted by applicable law to establish for the call of such a meeting. At a
special meeting, the shareholders may only act upon those matters set forth in
the notice of the special meeting. The By-laws set forth advance notice and
disclosure requirements and time limitations on any new business which a
stockholder wishes to propose for consideration at an annual meeting of
stockholders (see below).
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. Our amended and restated bylaws provide that stockholders seeking
to bring business before an annual meeting of stockholders, or to nominate
candidates for election as directors at an annual meeting of stockholders, must
provide timely notice in writing. For the first annual meeting following the
Effective Date, a stockholder's notice shall be timely if delivered to, or
mailed to and received by us at our principal executive offices not later than
the close of business on the later of (A) the 75th day prior to the scheduled
date of such annual meeting or (B) the 15th day following the day on which
public announcement of the date of such annual meeting is first made by us. For
all subsequent annual meetings, a stockholder's notice shall be timely if
delivered to, or mailed to and received at our principal executive offices not
less than 75 days nor more than 120 days prior to the anniversary date of the
immediately preceding annual meeting; provided, however, that in the event the
annual meeting is scheduled to be held on a date more than 30 days before the
anniversary date of the prior year's annual meeting or more than 60 days after
the anniversary date of the prior year's annual meeting, a stockholder's notice
shall be timely if delivered to, or mailed to and received by us at our
principal executive offices not later than the close of business on the later
of (A) the 75th day prior to the scheduled date of such annual meeting or (B)
the 15th day following the day on which we first make a public announcement of
the date of such annual meeting.
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Indemnification and Limitation of Liability. The By-laws provide that we
shall indemnify our directors and officers to the fullest extent authorized by
Massachusetts law against all expense and liabilities reasonably incurred in
connection with service for or on behalf of us, unless that director or officer
is adjudicated in that proceeding to have breached his or her duty of loyalty
to us. We may, in the discretion of the Board of Directors, indemnify our
employees and agents as if they were directors or officers, to the fullest
extent authorized by Massachusetts law.
Pursuant to Massachusetts law and the Articles, a director does not have any
liability for monetary damages for breach of fiduciary duty except for:
. any breach of the director's duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. an unauthorized distribution or loan to an officer or director in
violation of the Massachusetts General Laws; or
. any transaction from which the director obtained an improper
personal benefit.
In addition, Massachusetts law states that a corporation may not indemnify a
director, officer or employee who has not acted in good faith in the reasonable
belief that his or her action was in the best interest of the corporation.
Sale, Lease or Exchange of Assets; Merger. Massachusetts law provides that,
unless the articles of organization provide otherwise, two-thirds ( 2/3) of the
outstanding shares are required to approve a sale, lease or exchange of all or
substantially all of our assets or a merger or consolidation. The Articles do
not contain a provision changing this requirement.
Amendment of the By-laws. The board of directors or the shareholders may
amend or repeal the Articles or By-laws, subject to the following:
. The board of directors can amend or repeal the By-laws with a
majority vote of the directors in office. Following an amendment,
the board of directors must give notice to all shareholders entitled
to vote on amendments by the time the board gives notice of the next
annual meeting.
. The shareholders can amend or repeal the By-laws with a vote of at
least two-thirds ( 2/3) of all shareholders eligible to vote. All
shares of voting stock vote together as a single class.
. If the board of directors recommends an amendment or repeal of the
By-laws, the shareholders can amend or repeal with a majority vote
of all shareholders eligible to vote. All shares of voting stock
vote together as a single class.
Amendment of the Articles. The shareholders can amend the Articles at any
annual meeting or at a special meeting called to amend the Articles. The
shareholders may vote to amend the Articles alone or with the board of
directors. The board of directors may not amend the Articles without
shareholder approval.
. The shareholders can amend the Articles with a vote of at least two-
thirds of all shareholders eligible to vote. All shares of voting
stock vote together as a single class.
. If the board of directors recommends an amendment, the shareholders
can amend the Articles with a majority vote of all shareholders
eligible to vote. All shares of voting stock vote together as a
single class.
Massachusetts Anti-takeover Laws
Chapter 110F
Chapter 110F of the Massachusetts General Laws prohibits corporations from
engaging in certain
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business combinations which include mergers and consolidations and certain
stock or assets sales with an interested stockholder. This prohibition extends
for three years following the date the stockholder becomes an interested
stockholder. An interested stockholder is a holder of five percent (5%) or more
of the outstanding stock of the corporation. The statute allows corporations to
elect not to be governed by Chapter 110F if a majority of shares entitled to
vote approves such election. In its Articles, Bradlees has elected not to be
governed by Chapter 110F. The Articles were approved by the Bankruptcy Court in
connection with the Plan of Reorganization. This election took effect at the
Effective Date.
Chapter 110D
Chapter 110D of the Massachusetts General Laws governs any person (the
"acquiror") who makes a bona fide offer to acquire, or acquires, shares of
stock of a Massachusetts corporation that when combined with shares already
owned, would increase the acquiror's ownership to at least 20% of the voting
stock of such company. To vote his or her shares, an acquiror must obtain the
approval of a majority of shares held by all stockholders not including shares
of the acquiror, officers or inside directors of the corporation. A
Massachusetts corporation may elect not to be governed by Chapter 110D by
including a provision to that effect in its articles of organization or by-
laws. In its Articles, Bradlees has opted not to be governed by the provisions
of Chapter 110D.
Stockholder Rights Plan
On November 23, 1999, the Company adopted a shareholder rights plan. The
purpose of the rights plan is to protect stockholders from coercive or
otherwise unfair takeover tactics. The rights plan may delay, deter or prevent
a change of control of Bradlees and, therefore, could adversely affect
stockholders' ability to realize a premium over the then-prevailing market
price for our Common Stock in connection with such a transaction.
In connection with the adoption of the rights plan, our board of directors
declared a dividend distribution of one preferred stock purchase right for each
outstanding share of Common Stock. The rights dividend was paid to stockholders
of record as of November 26, 1999 (the "record date"). Each right entitles its
registered holder to purchase from us a unit consisting of one one-thousandth
of a share of our Series A Junior Participating Cumulative Preferred Stock, par
value $0.01 per share, at a cash exercise price per unit of $45.00, subject to
adjustment, once the rights become exercisable. This portion of a share of
preferred stock will give the stockholder approximately the same dividend,
voting and liquidation rights as would one share of Common Stock. Prior to
exercise, the right does not give its holder any dividend, voting or
liquidation rights.
The rights initially are not exercisable and are attached to and trade with
all shares of Common Stock outstanding as of, and issued subsequent to, the
record date. The rights will separate from the Common Stock and will become
exercisable upon the earlier of the following (a "distribution event"):
. the close of business on the tenth calendar day following the pubic
announcement that a person or group of affiliated or associated
persons, (referred to as an "acquiring person") has acquired
beneficial ownership of 15% or more of the outstanding shares of
Common Stock; or
. the close of business on the tenth business day (or such later date
as determined by the Board before any person or group becomes an
acquiring person) following the commencement of a tender offer or
exchange offer that could result upon its completion in a person or
group becoming the beneficial owner of 15% or more of the
outstanding shares of Common Stock.
If a person or group becomes an acquiring person, the shareholder rights
plan provides that as of the close of business ten calendar days after the
public announcement of that event, each holder of a right (other than such
person or group) will be entitled to receive, upon payment of the $45.00
exercise price, shares of Common Stock of our company having a market value of
$90.00, based on the market price of the Common Stock prior to such
acquisition. If we are acquired in a merger or similar transaction, the
shareholder rights plan provides that each holder of a right (other than such
person or group) will be entitled to receive, upon payment
65
<PAGE>
of the $45.00 exercise price, shares of common stock of the acquiring company
having a market value of $90.00, based on the market price of the acquiring
company's common stock prior to such merger or similar
transaction.
In the event that our board of directors approves a transaction that it has
determined is in the best interests of our stockholders but that otherwise
would cause a distribution event under the rights plan, the board may, in
connection with such approval, redeem the rights for a nominal price. Once the
rights are redeemed, the transaction can proceed without causing a distribution
event. The rights plan could make it more difficult for a third party to
acquire, and could discourage a third party from acquiring or seeking to
acquire, Bradlees or a large block of our Common Stock.
Certain Provisions of the Articles and By-laws of Bradlees Stores, Inc.
The Articles and By-laws of Bradlees Stores, Inc. are substantially the same
as the Articles and By-laws of Bradlees, Inc. discussed above, with the
following major exceptions
. Bradlees Stores, Inc. has only three directors;
. Bradlees Stores, Inc. has authorized capital stock consisting of
150,000 shares of common stock and 50,000 shares of preferred stock.
All of the issued and outstanding shares of common stock of Bradlees Stores,
Inc. is held by Bradlees, Inc. There is no preferred stock of Bradlees Stores,
Inc. currently outstanding.
Transfer Agent and Registrar
Boston EquiServe serves as the transfer agent and registrar for the Common
Stock.
Listing
The Common Stock is listed on the Nasdaq National Market under the symbol
"BRAD."
We do not intend to apply for listing of the Notes on any securities
exchange or authorization for quotation on the Nasdaq Stock Market.
66
<PAGE>
LEGAL MATTERS
Goodwin, Procter & Hoar llp, Boston, Massachusetts has passed upon the
validity of the shares of the Common Stock and the Notes offered by this
Prospectus.
EXPERTS
Our consolidated balance sheet, statements of operations, stockholder's
equity (deficiency), and cash flows as of January 30, 1999 and January 31, 1998
and for the fiscal years then ended included in this prospectus and elsewhere
in the registration statement have been audited by Arthur Andersen LLP,
independent public accountants, as indicated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in giving said reports. Arthur Andersen LLP's report for the fiscal
year ended January 30, 1999 contained an explanatory paragraph relating to our
emergence from bankruptcy which indicated that effective January 30, 1999, we
accounted for the reorganization and adopted "fresh-start reporting." As a
result of the reorganization and adoption of fresh-start reporting, the January
30, 1999 consolidated balance sheet was not comparable to our January 31, 1998
consolidated balance sheet since it presented the consolidated financial
position of the reorganized entity.
The consolidated statement of operations, statement of stockholders' equity
(deficiency) and cash flows of Bradlees, Inc. for the year ended February 1,
1997 included in this prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein (which report
expresses an unqualified opinion and includes explanatory paragraphs referring
to (a) our filing for reorganization under Chapter 11 of the Federal Bankruptcy
Code, and (b) our 1996 loss from operations and stockholders' deficiency, which
raised substantial doubt about our ability to continue as a going concern), and
have been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
67
<PAGE>
ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission (the "Commission")
a Registration Statement on Form S-1 (including any and all amendments thereto,
the "Registration Statement") under the Securities Act and the rules and
regulations promulgated thereunder, with respect to the Securities offered
hereby. This Prospectus omits certain information contained in the Registration
Statement, and reference is made to the Registration Statement and the exhibits
and schedules thereto for further information with respect to the Company and
the Securities offered hereby. Statements contained in this Prospectus
concerning the provisions or contents of any contract, agreement or any other
document referred to herein are not necessarily complete with respect to each
such contract, agreement or document filed as an exhibit to the Registration
Statement, and reference is made to such exhibit for a more complete
description of the matters involved, and each such statement shall be deemed
qualified by such reference. We are subject to the information requirements of
the Exchange Act, and in accordance therewith will file reports, proxy
statements and other information with the Commission. We have requested an
exemption from the filing requirements for Bradlees Stores, Inc. and New
Horizons of Yonkers, Inc. since information concerning these entities is
included in filings made by Bradlees, Inc. Such reports, proxy statements and
other information, as well as the Registration Statement, including the
exhibits and schedules thereto, may be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional
offices of the Commission located at 7 World Trade Center, 13th Floor, New
York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such materials may be obtained from such offices,
upon payment of the fees prescribed by the Securities and Exchange Commission.
The Commission maintains a Web site (http://www.sec.gov) that contains reports,
proxy and information statements and other information regarding registrants
that submit electronic filings to the Commission.
On September 24, 1997, the Audit Committee of our Board of Directors
recommended the appointment of Arthur Andersen LLP as our certifying
accountants replacing Deloitte & Touche LLP, who was dismissed, effective
September 24, 1997 and the appointment along with the dismissal was approved by
the Board of Directors and the United States Bankruptcy Court for the Southern
District of New York.
There were no disagreements between Deloitte & Touche LLP and our 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 Deloitte & Touche LLP, would have caused
Deloitte & Touche LLP 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.
Deloitte & Touche LLP's report on the consolidated financial statements for
the year ended February 1, 1997 expressed an unqualified opinion and included
explanatory paragraphs relating to the following:
February 1, 1997 report:
a.Our filing for reorganization protection under Chapter 11 of the
Federal Bankruptcy Code.
b. Our 1996 loss from operations and stockholders' deficiency which
raises substantial doubt about the Company's ability to continue as a
going concern.
During the Reporting Period, neither we nor anyone on our behalf consulted
Arthur Andersen LLP regarding the application of accounting principles to a
specified transaction or the type of audit opinion that might be rendered on
our financial statements, and Arthur Andersen LLP did not provide 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.
68
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Bradlees, Inc. and Subsidiaries
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Financial Statements as of October 30, 1999
(Unaudited)
Condensed Consolidated Statements of Operations for the 13 weeks ended Oc-
tober 30, 1999 and
October 31, 1998......................................................... F-2
Condensed Consolidated Statements of Operations for the 39 weeks ended Oc-
tober 30, 1999 and
October 31, 1998......................................................... F-3
Condensed Consolidated Balance Sheets as of October 30, 1999, January 30,
1999 and October 31, 1998................................................ F-4
Condensed Consolidated Statements of Cash Flows for the 39 weeks ended Oc-
tober 30, 1999 and
October 31, 1998......................................................... F-6
Notes to Condensed Consolidated Financial Statements...................... F-7
Consolidated Financial Statements as of January 30, 1999
Report of Independent Public Accountants--Arthur Andersen LLP............. F-14
Independent Auditors' Report--Deloitte & Touche LLP....................... F-15
Consolidated Statements of Operations for the 52 weeks ended January 30,
1999, January 31, 1998 and February 1, 1997 ............................. F-16
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998... F-17
Consolidated Statements of Cash Flows for the 52 weeks ended January 30,
1999, January 31, 1998 and February 1, 1997 ............................. F-18
Consolidated Statements of Stockholders' Equity (Deficiency) for the 52
weeks ended January 30, 1999, January 31, 1998 and February 1, 1997...... F-19
Notes to Consolidated Financial Statements................................ F-20
</TABLE>
F-1
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
PART I--FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
---------------------------
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
Registrant Predecessor
------------- -------------
<S> <C> <C>
Total sales........................................................................................ $358,399 $323,106
Leased department sales............................................................................ 11,672 10,973
-------- --------
Net sales.......................................................................................... 346,727 312,133
Cost of goods sold................................................................................. 240,949 217,394
-------- --------
Gross margin....................................................................................... 105,778 94,739
Leased department and other operating income....................................................... 3,451 3,185
-------- --------
.................................................................................................. 109,229 97,924
Selling, store operating, administrative and distribution expenses................................. 101,734 95,706
Depreciation and amortization expense.............................................................. 6,604 7,803
Interest and debt expense.......................................................................... 7,818 4,371
Reorganization items............................................................................... 0 (2,749)
-------- --------
Net loss........................................................................................... $ (6,927) $ (7,207)
======== ========
Comprehensive loss................................................................................. $ (6,927) $ (7,207)
======== ========
Basic and diluted net loss per share............................................................... $ (0.69) $ (0.64)
======== ========
Weighted average shares............................................................................ 9,986 11,310
- --------------------------------------------------
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
39 Weeks Ended
---------------------------
Oct. 30, 1999 Oct. 31, 1998
Registrant Predecessor
------------- -------------
<S> <C> <C>
Total sales........................................................................................ $1,065,173 $939,203
Leased department sales............................................................................ 35,474 32,818
---------- --------
Net sales.......................................................................................... 1,029,699 906,385
Cost of goods sold................................................................................. 717,247 635,383
---------- --------
Gross margin....................................................................................... 312,452 271,002
Leased department and other operating income....................................................... 10,095 9,286
---------- --------
322,547 280,288
Selling, store operating, administrative and distribution expenses................................. 307,558 280,854
Depreciation and amortization expense.............................................................. 21,132 24,371
Loss on disposition of properties.................................................................. 0 241
Interest and debt expense.......................................................................... 21,819 11,960
Reorganization items............................................................................... (778) (2,555)
---------- --------
Net loss........................................................................................... $ (27,184) $(34,583)
========== ========
Comprehensive loss................................................................................. $ (27,184) $(34,583)
========== ========
Basic and diluted net loss per share............................................................... $ (2.73) $ (3.06)
========== ========
Weighted average shares............................................................................ 9,959 11,310
========== ========
- --------------------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-3
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
October 30, 1999 Jan. 30, 1999 October 31, 1998
Registrant Registrant Predecessor
---------------- ------------- ----------------
<S> <C> <C> <C>
Assets
Current assets:
Unrestricted cash and cash equivalents...................................... $ 11,228 $ 9,485 $ 10,959
Restricted cash and cash equivalents........................................ -- -- 25,129
-------- -------- --------
Total cash and cash equivalents........................................... 11,228 9,485 36,088
-------- -------- --------
Accounts receivable......................................................... 11,895 13,015 11,925
Inventories................................................................. 323,495 232,343 318,883
Prepaid expenses............................................................ 11,218 8,967 11,031
-------- -------- --------
Total current assets...................................................... 357,836 263,810 377,927
-------- -------- --------
Property, plant and equipment, net:
Property excluding capital leases, net...................................... 93,475 93,039 123,892
Property under capital leases, net.......................................... 22,786 10,347 17,732
-------- -------- --------
Total property, plant and equipment, net.................................. 116,261 103,386 141,624
-------- -------- --------
Other long-term assets:
Lease interests, net........................................................ 72,518 75,833 137,350
Assets held for sale........................................................ -- 14,000 --
Other long-term assets, net................................................. 7,122 6,722 4,509
-------- -------- --------
Total other assets........................................................ 79,640 96,555 141,859
-------- -------- --------
Total assets.............................................................. $553,737 $463,751 $661,410
======== ======== ========
- ----------------------
</TABLE>
F-4
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
October 30, Jan. 30, October 31,
1999 1999 1998
Registrant Registrant Predecessor
----------- ---------- -----------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable......................................................................... $201,120 $119,302 $ 179,413
Accrued expenses......................................................................... 19,597 29,326 23,221
Self-insurance reserves.................................................................. 5,798 6,462 6,027
Short-term debt.......................................................................... 158,159 114,449 157,392
Current portion of capital lease obligations and notes................................... 2,540 2,089 1,038
-------- -------- ---------
Total current liabilities.............................................................. 387,214 271,628 367,091
-------- -------- ---------
Long-term liabilities:
Obligations under capital leases......................................................... 27,089 25,284 26,211
Lease financing obligation............................................................... 17,496 -- --
Convertible notes payable................................................................ 11,976 28,995 --
Deferred income taxes.................................................................... -- -- 8,581
Self-insurance reserves.................................................................. 11,773 13,120 12,237
Unfavorable lease liability.............................................................. 45,064 44,581 --
Other long-term liabilities.............................................................. 24,592 25,143 19,034
-------- -------- ---------
Total long-term liabilities............................................................ 137,990 137,123 66,063
-------- -------- ---------
Liabilities subject to settlement under the reorganization case............................ -- -- 548,788
Stockholders' equity (deficiency):
Common stock (new) 9,986,273 shares outstanding (10,225,711 at 1/30/99) Par value........ 100 102 --
Common stock (old)--11,310,384 shares outstanding at 10/31/98 Par value ................. -- -- 115
Additional paid-in-capital............................................................... 55,617 54,898 137,821
Accumulated deficit...................................................................... (27,184) -- (457,665)
Treasury stock, at cost.................................................................. -- -- (803)
-------- -------- ---------
Total stockholders' equity (deficiency)................................................ 28,533 55,000 (320,532)
-------- -------- ---------
Total liabilities and stockholders' equity (deficiency)................................ $553,737 $463,751 $ 661,410
======== ======== =========
- ----------------------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-5
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
---------------------------------
October 30, 1999 October 31, 1998
Registrant Predecessor
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss................................... $(27,184) $(34,583)
Adjustments to reconcile net loss to cash
provided (used) by operating activities:
Depreciation and amortization expense.... 21,132 24,371
Amortization of lease interests and
unfavorable lease liability, net........ 3,798 --
Amortization of deferred financing
costs................................... 1,088 1,215
Reorganization items..................... (778) (2,555)
Changes in working capital and other,
net..................................... (10,749) (37,232)
-------- --------
Net cash used by operating activities
before reorganization items............... (12,693) (48,784)
-------- --------
Reorganization items:
Interest income received................. -- 746
Chapter 11 professional fees paid........ (8,130) (7,786)
Other reorganization expenses paid, net.. (1,781) (3,225)
-------- --------
Net cash used by reorganization items ..... (9,911) (10,265)
-------- --------
Net cash used by operating activities...... (22,604) (59,049)
Cash flows from investing activities:
Capital expenditures, net.................. (17,055) (10,379)
Lease acquisition costs.................... (1,250) 0
Increase in restricted cash and cash
equivalents .............................. -- (8,369)
-------- --------
Net cash used in investing activities...... (18,305) (18,748)
-------- --------
Cash flows from financing activities:
Payment of convertible notes............... (17,019) --
Payments of liabilities subject to
settlement................................ -- (6,551)
Net borrowings under the revolver/DIP
facility.................................. 43,709 73,184
Proceeds from sales of properties.......... 0 12,036
Proceeds from lease financing.............. 17,500 --
Deferred financing costs................... (181) --
Proceeds received upon exercise of
warrants.................................. 540 --
Principal payments on notes and capital
lease obligations ........................ (1,897) (862)
-------- --------
Net cash provided by financing activities.. 42,652 77,807
-------- --------
Net increase in unrestricted cash and cash
equivalents................................. 1,743 10
Unrestricted cash and cash equivalents:
Beginning of period ....................... 9,485 10,949
-------- --------
End of period.............................. $ 11,228 $ 10,959
======== ========
Supplemental disclosure of cash flow
information:
Cash paid for interest and certain debt
fees...................................... $ 12,815 $ 10,282
Cash paid for income taxes................. $ -- $ 279
Supplemental schedule of noncash (investing
and financing) activities:
Capital lease obligations incurred......... $ 2,883 $ --
Reduction of liabilities subject to
settlement due to transfer of title to
property.................................. $ -- $ 2,000
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-6
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
Bradlees, Inc. and subsidiaries (collectively "Bradlees" or the "Company")
operate in the discount department store retail segment in the Northeast United
States. The Company emerged from Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") on February 2, 1999 (the "Effective Date"). The Company had
filed petitions for relief under Chapter 11 on June 23, 1995 (the "Filing").
While in Chapter 11, the Company (the "Predecessor") operated 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 reorganized Company (the "Registrant") adopted fresh-start
reporting and gave effect to its emergence as of its fiscal 1998 year-end
(January 30, 1999).
Under fresh-start reporting, the final consolidated balance sheet as of
January 30, 1999 became the opening consolidated balance sheet of the
reorganized Company. Since fresh-start reporting has been reflected in the
accompanying condensed financial statements as of October 30, 1999 and for the
interim periods then ended, those statements are not comparable in certain
material respects to the condensed consolidated financial statements as of
October 31, 1998 and for the interim periods then ended. Accordingly, a black
line has been drawn between the Registrant's financial statements and the
Predecessor's financial statements.
With respect to the unaudited condensed consolidated financial statements for
the 13 weeks (third quarter) and 39 weeks (year-to-date) ended October 30, 1999
and October 31, 1998, 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.
Basic and diluted shares outstanding and the basic and diluted loss per share
were the same for both the 13 weeks and 39 weeks ended October 30, 1999 because
the inclusion of common stock equivalents (which included warrants and stock
options in the second quarter) would have reduced the reported loss per share.
The Registrant's shares presented in its financial statements presume full
issuance of new Bradlees Common Stock, including the latest estimate of shares
to be issued for claims not yet fully resolved, in accordance with the
Company's plan of reorganization (the "Plan") confirmed by the Bankruptcy Court
on January 27, 1999 plus shares issued upon exercise of warrants through
October 30, 1999.
These statements should be read in conjunction with the Company's financial
statements (Form 10-K) for the fiscal year ended January 30, 1999 ("1998"). Due
to the seasonal nature of the Company's business, operating results for this
year's interim periods presented are not necessarily indicative of results that
may be expected for the fiscal year ending January 29, 2000 ("1999"). 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").
2. Reorganization Case and Fresh-Start Reporting
The Plan contained distributable value to creditors of approximately $162
million (as of the Effective Date) which consisted of approximately $15 million
of administrative claim payments (including $4.5 million of professional fees
accrued at January 30, 1999 and paid subsequent to the Effective Date); $14
million of cash distributions to the pre-Chapter 11 bank group and the
unsecured creditors; a $40 million note primarily payable to the pre-Chapter 11
bank group, which was immediately paid down on the Effective Date by
approximately $11 million from the proceeds of the modification of the lease
terms of the Union Square, NY store; certain notes totaling $6.2 million; other
distributions totaling $1.4 million; approximately 10 million
F-7
<PAGE>
shares of new Bradlees Common Stock with an estimated value as of the Effective
Date of $85 million; and warrants allowing for the purchase of one million
shares of Common Stock, exercisable at $7.00 per share and expiring February 2,
2004.
The Plan was consummated on February 2, 1999 and Bradlees emerged from
Chapter 11. Pursuant to the guidance provided by the American Institute of
Certified Public Accountants in Statement of Position ("SOP") 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code", the Company
adopted fresh-start reporting and reflected the consummation distributions in
the consolidated balance sheet as of January 30, 1999 to give effect to the
reorganization as of year-end. Under fresh-start reporting, the reorganization
value of the Company was allocated to the emerging Company's net assets on the
basis of the purchase method of accounting.
Subsequent to the filing of the Company's Disclosure Statement and occurrence
of the Effective Date, a number of events occurred which impacted the
determination of equity value under fresh-start reporting, including but not
limited to, the initial low trading prices of the new stock, information
regarding the Company's fourth quarter 1998 performance and final fiscal 1999
financial plan, a settlement with a landlord regarding the disposition of the
Union Square, NY leasehold interest and the liquidation of Caldor Corp., a
major competitor of the Company. The Company employed a similar valuation
method under fresh-start reporting to determine its equity value to that
utilized by its independent financial advisor in the Disclosure Statement and
arrived at an estimated equity value of $55 million.
During the Chapter 11 case, the Company received Bankruptcy Court approval to
make certain adequate protection payments to the pre-petition bank group.
Contractual interest expense not recorded on certain pre-petition debt totaled
approximately $7.7 and $23.1 million for the third quarter and first three
quarters of 1998, respectively.
3. Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at October 31, 1998 represented certain
funds received by the Company during the Chapter 11 case that were required to
be restricted. These funds were utilized on the Effective Date for the
consummation payments.
4. Debt
Financing Facility Prior to the Effective Date, the Company had a $250
million financing facility (the "Financing Facility") (of which $125 million
was available for issuance of letters of credit) with BankBoston Retail
Finance, Inc. ("BBNA") as agent, under which the Company was allowed to borrow
for general corporate purposes, working capital and inventory purchases. The
Financing Facility consisted of (a) an up to eighteen-month debtor-in-
possession revolving credit facility in the maximum principal amount of $250
million (the "DIP Facility") and, subject to meeting certain conditions, (b) an
up to three-year post-emergence credit facility in the maximum principal amount
of $250 million (as modified, the "Revolver"--see below). The outstanding
amount under the DIP Facility was repaid on the Effective Date with proceeds
from the Revolver. The Revolver is scheduled to expire on December 23, 2001.
Trade and standby letters of credit outstanding under the Revolver were $7.1
and $21.5 million, respectively, as of October 30, 1999. Trade and standby
letters of credit outstanding under the DIP Facility were $8.5 and $19.3
million, respectively, as of October 31, 1998.
Revolver The Revolver consists of a $250 million senior secured revolving
line of credit (of which $125 million is available for issuance of letters of
credit) and a $20 million junior secured "last in-last out" facility. The
Company expects to use the Revolver primarily for working capital and general
business needs.
The senior secured tranche has an advance rate equal to 80% of the Loan Value
of Eligible Receivables (as defined), plus generally 72% of the Loan Value of
Eligible Inventory (as defined), subject to certain adjustments. Between March
1 and December 15, the inventory advance rate will be increased to 77% of the
F-8
<PAGE>
Loan Value of Eligible Inventory provided that the total amount of all senior
secured advances does not exceed 85% of the Loan to Value Ratio (as defined).
The Company may also borrow up to an additional $20 million under the junior
secured facility provided that the total borrowings (senior secured and junior
secured) do not exceed 93% of the Loan to Value Ratio.
The Revolver permits the Company to borrow funds under the senior secured
tranche at an interest rate per annum equal to (a) the higher of (i) the annual
rate of interest as announced by BankBoston as its "Base Rate" and (ii) the
weighted average of the rates on overnight federal funds plus 0.50% per annum;
or (b) 2.25% per annum plus the quotient of (i) the LIBOR Rate in effect
divided by (ii) a percentage equal to 100% minus the percentage established by
the Federal Reserve as the maximum rate for all reserves applicable to any
member bank of the Federal Reserve system in respect of eurocurrency
liabilities. Each of these rates is subject to a 0.50% increase in the event of
overadvances. The junior secured facility permits the Company to borrow funds
at the "Base Rate" plus 7.00% per annum.
The Revolver is secured by substantially all of the non-real estate assets of
the Company. The Revolver contains financial covenants including (i) minimum
rolling twelve-month EBITDA at the end of each quarter, (ii) minimum monthly
accounts payable to inventory ratios; (iii) maximum annual capital
expenditures; and (iv) minimum operating cash flow to interest expense ratios
(for the fiscal quarters ending on or about January 31, 2001, and thereafter).
The Company is in compliance with the Revolver covenants.
Lease Financing Obligation In July, 1999, New Horizons of Yonkers, Inc. ("New
Horizons"), a subsidiary of Bradlees Stores, Inc. (Note 9), and 2500 CPA
Associates, LLC ("CPA") entered into an agreement for the financing of New
Horizon's leasehold interest in the Yonkers, NY store (the "Lease Financing
Obligation"). Under this agreement, New Horizons received $17.5 million in
exchange for the assignment of its leasehold interest to CPA and annual
incremental payments of $2.6 million (including interest at an effective rate
of 14.8%) under a sublease with CPA for a term of 35 years, including option
periods. The Yonkers store continues to operate as a Bradlees store and the net
proceeds (after certain fees) of $17.2 million were used to pay down $17.0
million of the Notes (see below) and $0.2 million of associated accrued
interest.
The Lease Financing Obligation is secured by (i) the leasehold interest in
the Yonkers store, (ii) first priority liens on leasehold interests in three
other named stores, as well as any net proceeds received upon any
disposition(s) of such interests, and (iii) a standby letter of credit of $1.1
million.
In addition, as a result of the lease financing transaction, the underlying
Yonkers operating lease was converted to a capital lease with a $2.9 million
obligation and associated capital lease asset. Also, the prior assets held for
sale of $14 million for Yonkers (Note 7) were reclassified, with $3.4 million
(representing the net book value of the store equipment and leasehold
improvements) added to property excluding capital leases, net and $10.6 million
(representing the remaining incremental lease value previously determined under
fresh-start reporting) added to property under capital leases, net.
9% Convertible Notes The 9% Convertible Notes (the "Notes") were issued by
Bradlees Stores, Inc. (Note 9). Each Note will mature on February 3, 2004 and
bears interest at the rate of 9% per annum from the date of issuance, payable
semi-annually in arrears on January 1 and July 1 of each year, commencing July
1, 1999. The aggregate principal amount of the Notes outstanding as of October
30, 1999 was $12 million (which reflects the $17 million aggregate principal
paydown in July as discussed above and the $11 million aggregate principal
amount that was pre-paid on the Effective Date).
The Company has the right to redeem the Notes at any time, in whole or in
part, subject to certain availability levels under the Revolver, by paying the
holder the unpaid principal plus accrued and unpaid interest. The Company
obtained an option to repurchase $9 million of the Notes at a discount (see
below). The remaining outstanding Notes are secured by first priority liens on
leasehold interests in three named stores (the "Collateral"), as well as any
net proceeds received upon any disposition(s) of such interests.
F-9
<PAGE>
During the third quarter, the Company entered into a supplemental agreement
with the holders of approximately $9.0 million, or approximately 75%, of the
$12.0 million of the outstanding Notes (the "Discount Option Noteholders").
Under the agreement, the Company can repurchase, (and currently expects to do
so in December, 1999), the outstanding Notes held by the Discount Option
Noteholders (the "Discount Option Notes") at a purchase price equal to 86% of
the outstanding principal amount (i.e. a 14% discount, plus accrued interest,
exercisable for a one-month period from December 1, 1999 through December 31,
1999 (the "Discount Option")). Each month thereafter the discount will decrease
by 1% such that the discount will be fully eliminated by January 31, 2001. In
consideration of the Discount Option, the Company agreed to pay the Discount
Option Noteholders a premium on the closing date of the grant of the option
equal to 0.5% of the outstanding principal amount of the Discount Option Notes,
grant the Discount Option Noteholders second priority leasehold mortgages on
the Collateral subject to substitution in certain circumstances, and provide a
put option exercisable on or after February 3, 2003 to sell the Discount Option
Notes to the Company at a price equal to the then outstanding principal amount
of the Discount Option Notes, plus accrued interest. In accordance with
applicable SEC rules, the Company had offered to enter into the supplemental
agreement with all Noteholders and closed the offer on August 5, 1999.
The first priority liens on the Collateral secures indebtedness under the
Notes equal to the sum of $6.5 million plus an amount from time to time equal
to the amount of interest that would accrue on $6.5 million of principal amount
of outstanding Notes from February 2, 1999 to the date of calculation of the
extent of such lien (see also Note 10).
The Notes are convertible any time after the first anniversary of the
Effective Date into shares of the Company's Common Stock. The conversion price
will initially be the unweighted average closing price of the Common Stock
during the twenty business days preceding the first anniversary of the
Effective Date.
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 1998 and also does not expect to
recognize a quarterly or annual income tax expense or benefit in 1999.
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 1999 and 1998, directly
associated with the Chapter 11 reorganization proceedings and the resulting
restructuring of its operations:
<TABLE>
<CAPTION>
(000's)
------------------------------------
13 Weeks Ended 39 Weeks Ended
----------------- -----------------
10/30/99 10/31/98 10/30/99 10/31/98
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Professional fees..................... -- $ 2,250 -- $ 6,750
Interest income....................... -- (274) -- (746)
Provision for occupancy and other
store closing costs.................. -- -- (778) --
Net asset write-off................... -- -- -- 470
Gain on disposition of properties..... -- -- -- (1,873)
Provision for rejected leases......... -- (4,725) -- (7,156)
----- ------- ----- -------
$ -- $(2,749) $(778) $(2,555)
===== ======= ===== =======
</TABLE>
Professional fees and interest income: Professional fees represented
estimates of expenses incurred, primarily for legal, consulting and accounting
services provided to the Company and the creditors committee
F-10
<PAGE>
(which were required to be paid by the Company while in Chapter 11). Interest
income represented interest earned on cash invested during the Chapter 11
proceeding.
Provision for occupancy and other store closing costs and net asset write-
off: The Company entered into a lease financing transaction (Note 4) which
allowed its Yonkers, NY store to continue in operation, resulting in the
reversal of reserves totaling $0.8 million in July, 1999 that had been
established for the expected store closing costs. The Company incurred a $0.5
million net asset write-off in the second quarter of 1998 relating to the
disposal of greeting card fixtures that were replaced as a consequence of the
Company's rejection of its greeting card supply contract.
Gain on disposition of properties and provision for rejected leases: The
Company sold a previously closed store in the second quarter of 1998 and
recognized a gain of $1.9 million. During the third quarter of 1998, the
Company obtained confirmation that the lessor of a previously rejected lease
had re-let the premises and, accordingly, the Company reduced its liability for
rejected leases by $4.7 million and recognized a reorganization credit for that
amount. During the second quarter of 1998, the Company was notified by two of
its former landlords at closed locations that the properties had been re-let
and therefore their claims for rejected lease damages were reduced by $2.4
million.
Restructuring Reserves: As of October 30, 1999, the Company had remaining
reserves totaling approximately $3.2 million for costs associated with the
prior closing and planned closing of stores and other restructuring activities.
Approximately $1.8 million of restructuring costs were paid in the first three
quarters of of 1999. The majority of the remaining reserved costs are expected
to be paid within a year.
7. Assets Held for Sale
Assets held for sale at January 30, 1999 represented the estimated net
realizable value (assigned under fresh-start reporting) of the Company's
Yonkers, NY store lease. As described in Note 4 under "Lease Financing
Obligation" and in Note 6, the Company entered into a lease financing agreement
which alowed its Yonkers store to continue in operation and recorded certain
reclassifications of the $14 milion previously in assets held for sale.
8. Post-Retirement and Stock Option Plans
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.
Effective January 1, 1998, changes were made to the post-retirement plan that
included 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 two years (at 50% per year beginning January 1, 1999)
towards the cost of providing medical benefits to eligible retirees. Under SFAS
No. 106, non-recurring amortization credits of $1.3 and $4.0 million were
recorded in the third quarter and first three quarters of 1998, respectively,
to reflect these changes to the post-retirement plan. As a consequence of the
adoption of fresh-start reporting at January 30, 1999 (Note 2), no amortization
credit has been recorded in 1999.
Pursuant to the Company's plan of reorganization, the Company agreed to grant
options to purchase 750,000 shares of new Bradlees' Common Stock to the
Company's senior management. Those options were granted under the Bradlees,
Inc. 1999 Stock Option Plan (the "Stock Plan"), which allows for the granting
of a million options, when their exercise price was determined in April, 1999
and will vest in one-third increments beginning on the date of grant and each
of the two anniversaries following the date of grant. These options, of which
24,363 shares were forfeited through October, 1999, are exercisable for a
period of five years from the
F-11
<PAGE>
date of grant. Compensation expense related to these options began to be
recorded over the vesting period in accordance with Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock issued to Employees" (intrinsic
value method). Through October, 1999, additional options were granted to other
members of management to purchase 137,050 shares, of which 8,800 shares were
forfeited, of new Bradlees Common Stock at a price equal to the market prices
of the Common Stock on the dates of the grants.
9. Summarized Financial Information for Bradlees Stores, Inc. and New Horizons
of Yonkers, Inc.
Under the Plan, Bradlees, Inc. issued the new Bradlees Common Stock (Note 2)
and Bradlees Stores, Inc. issued the Notes (Note 4). Bradlees, Inc. operates
its stores through Bradlees Stores, Inc., a direct wholly-owned subsidiary.
Bradlees, Inc. is guaranteeing the Notes issued by Bradlees Stores, Inc.
Substantially all of the assets of the Company, on a consolidated basis, are
held by Bradlees Stores, Inc. The following summarized financial information of
Bradlees Stores, Inc. is presented in accordance with SEC Staff Accounting
Bulletin 53 and Regulation S-X Rule 1-02 (bb):
<TABLE>
<CAPTION>
(000's)
---------------------------
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
<S> <C> <C>
Current Assets................................. $357,836 $ 371,208
Noncurrent Assets.............................. 182,531 283,441
Current Liabilities............................ 387,214 367,091
Payable to Bradlees, Inc. ..................... 55,288 189,735
Due to New Horizons of Yonkers, Inc. .......... 7,008 1
Noncurrent Liabilities......................... 117,613 66,063
Liabilities Subject to Settlement Under the
Reorganization Case........................... -- 328,557
Stockholders' Deficit.......................... $(26,756) $(296,798)
</TABLE>
<TABLE>
<CAPTION>
(000's)
-----------------------------------------------------------
13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended
Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net Sales............... $346,727 $312,133 $1,029,699 $906,385
Gross Margin............ 105,778 94,739 312,452 271,002
Income (Loss) from Con-
tinuing Operations..... (6,896) (7,313) (26,756) (34,689)
Net Income (Loss)....... $ (6,896) $ (7,313) $ (26,756) $(34,689)
</TABLE>
New Horizons (Note 4) is the lessee of Bradlees' Yonkers, New York store
lease, which it subleases to Bradlees Stores, Inc. New Horizons, which remained
in Chapter 11 to facilitate the planned disposition of its leasehold interest,
is also fully and unconditionally guaranteeing the Notes issued by Bradlees
Stores, Inc. and its plan of reorganization became effective at the time of the
disposition. The following summarized financial information of New Horizons is
presented in accordance with SEC Staff Accounting Bulletin 53 and Regulation S-
X Rule 1-02 (bb):
<TABLE>
<CAPTION>
(000's)
---------------------------
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
<S> <C> <C>
Property Under Capital Lease, net................ $13,370 $ --
Due from Bradlees Stores, Inc. .................. 7,008 1
Obligation Under Capital Lease................... 2,881 --
Lease Financing Obligation....................... 17,496 --
Stockholders' Equity (Deficit)................... $ 1 $ 1
</TABLE>
F-12
<PAGE>
<TABLE>
<CAPTION>
(000's)
-----------------------------------------------------------
13 Weeks ended 13 Weeks ended 39 Weeks ended 39 Weeks ended
Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Rental Income........... $975 $147 $1,269 $294
Rent Expense............ 59 147 353 294
Amortization Expense.... 112 -- 112 --
Interest Expense........ 725 -- 804 --
Loss from Continuing
Operations............. 79 -- -- --
Net Income.............. $ 79 $-- $ -- $--
</TABLE>
10. Subsequent Events
On November 23, 1999, the Company's Board of Directors adopted a Shareholder
Rights Plan and declared a dividend of one preferred stock purchase right for
each outstanding share of common stock, par value $.01 per share. The dividend
was payable on November 26, 1999 to the stockholders of record on November 26,
1999.
The Board adopted the rights plan to protect stockholders from coercive or
otherwise unfair takeover tactics. In general terms, it works by imposing a
significant penalty upon any person or group which acquires 15% or more of
Bradlees' outstanding common stock without the approval of the Board. The
rights plan should not interfere with any merger or other business combination
approved by the Board.
The Company also has elected to be governed by Section 50A of Chapter 156B of
the General Laws of the Commonwealth of Massachusetts, which, among other
things, requires that the Company have a classified Board of Directors.
For those interested in the specific terms of the rights plan as made between
the Company and BankBoston, N.A., as the Rights Agent, and the Company's
election to be governed by Section 50A, reference can be made to the Company's
Form 8-K or Form 8-A filed with the SEC on November 30, 1999.
On December 3, 1999, the SEC released Staff Accounting Bulletin (SAB) No.
101, which provides guidance on the recognition, presentation and disclosure of
revenue, including layaway sales and the presentation of leased sales, in
financial statements filed with the SEC. SAB No. 101 must be applied no later
than the first quarter of the fiscal year beginning January 30, 2000. The
Company is currently evaluating the impact of SAB No. 101 on its financial
statements.
F-13
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Bradlees, Inc.:
We have audited the accompanying consolidated balance sheet of Bradlees,
Inc. and subsidiaries, (the "Company"), as of January 30, 1999 and 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 referred to below 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.
On February 2, 1999, the Company emerged from bankruptcy. As discussed in
Notes 1 and 2 to the consolidated financial statements, effective January 30,
1999, the Company accounted for the reorganization and adopted "fresh-start
reporting." As a result of the reorganization and adoption of fresh-start
reporting, the January 30, 1999 consolidated balance sheet is not comparable to
the Company's January 31, 1998 consolidated balance sheet since it presents the
consolidated financial position of the reorganized entity.
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 30, 1999, and January 31, 1998, and the results of
its operations and its cash flows for the fiscal years then ended in conformity
with generally accepted accounting principles.
/s/ Arthur Andersen LLP
New York, New York
March 26, 1999
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Bradlees, Inc.,
We have audited the accompanying consolidated statements of operations,
stockholders' equity (deficiency) and cash flows of Bradlees, Inc. and
subsidiaries for the year ended February 1, 1997. 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, such consolidated financial statements present fairly, in all
material respects, the results of operations of Bradlees, Inc. and subsidiaries
and their cash flows for the year ended February 1, 1997 in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 2, the Company had filed for reorganization under
Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated
financial statements for the year ended February 1, 1997 do not purport to
reflect or provide for the consequences of the bankruptcy proceedings. In
particular, such consolidated financial statements for the year ended February
1, 1997 do not purport to show the effects of any adjustments (a) as to assets,
to reflect their realizable value on a liquidation basis or their availability
to satisfy liabilities; (b) as to prepetition liabilities, to reflect the
amounts that may be allowed for claims or contingencies, or the status and
priority thereof; (c) as to stockholder accounts, to reflect the effect of any
changes that may be made in the capitalization of the Company; or (d) as to
operations, to reflect the effect of any changes that may be made in its
business.
The accompanying consolidated financial statements for the year ended
February 1, 1997 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 2 to the consolidated financial
statements, the Company's 1996 loss 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 2. The consolidated financial statements for the year ended February 1,
1997 do not include adjustments that might result from the outcome of this
uncertainty.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 20, 1997 (February 16, 1999 with respect to Note 17)
F-15
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total sales................ $1,381,116 $1,392,250 $1,619,444
Leased sales............... 43,919 47,806 57,726
---------- ---------- ----------
Net sales.................. 1,337,197 1,344,444 1,561,718
Cost of goods sold......... 944,094 948,087 1,127,651
---------- ---------- ----------
Gross margin............... 393,103 396,357 434,067
Leased department and other
operating income.......... 11,795 12,151 13,734
---------- ---------- ----------
404,898 408,508 447,801
Selling, store operating,
administrative and
distribution expenses..... 376,856 382,910 504,030
Depreciation and amortiza-
tion expense.............. 32,236 36,244 42,200
Loss (gain) on disposition
of properties............. 241 (5,425) (1,739)
Interest and debt expense.. 16,329 16,584 11,495
Impairment of long-lived
assets.................... -- -- 40,782
Reorganization items....... 4,561 752 69,792
---------- ---------- ----------
Loss before fresh-start
revaluation, income taxes
and extraordinary item.... (25,325) (22,557) (218,759)
Revaluation of assets and
liabilities pursuant to
adoption of fresh-start
reporting................. (108,428) -- --
---------- ---------- ----------
Loss before income taxes
and extraordinary item.... (133,753) (22,557) (218,759)
Income taxes............... -- -- --
---------- ---------- ----------
Loss before extraordinary
item...................... (133,753) (22,557) (218,759)
Extraordinary item--gain on
debt discharge............ 419,703 -- --
---------- ---------- ----------
Net income (loss).......... $ 285,950 $ (22,557) $ (218,759)
========== ========== ==========
Comprehensive income
(loss).................... $ 285,950 $ (22,557) $ (218,759)
========== ========== ==========
Net income (loss) per
share--basic and diluted.. * $ (1.98) $ (19.17)
========== ========== ==========
Weighted average shares
outstanding (in
thousands)--basic and
diluted................... * 11,365 11,412
========== ========== ==========
</TABLE>
- --------
* Earnings per share is not presented for the fiscal year ended January 30,
1999 because such presentation would not be meaningful. The old stock was
cancelled under the plan of reorganization and the new stock was issued
following consummation of the plan.
See accompanying Notes to Consolidated Financial Statements.
F-16
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
The purchase method of accounting was used to record the fair value of assets
and assumed liabilities of the reorganized company at January 30, 1999.
Accordingly, the accompanying balance sheet as of January 30, 1999 is not
comparable in certain material respects to such balance sheet as of any prior
period since the balance sheet as of January 30, 1999 is that of a reorganized
entity.
<TABLE>
<CAPTION>
January 30, 1999 January 31, 1998
Registrant Predecessor
---------------- ----------------
<S> <C> <C>
Assets
Current assets:
Unrestricted cash and cash equivalents...................................................... $ 9,485 $ 10,949
Restricted cash and cash equivalents........................................................ -- 16,760
-------- --------
Total cash and cash equivalents............................................................. 9,485 27,709
-------- --------
Accounts receivable......................................................................... 13,015 10,013
Inventories................................................................................. 232,343 238,629
Prepaid expenses............................................................................ 8,967 8,733
Assets held for sale........................................................................ -- 7,754
-------- --------
Total current assets........................................................................ 263,810 292,838
-------- --------
Property, plant and equipment, net........................................................... 103,386 150,484
-------- --------
Other assets:
Lease interests, net........................................................................ 75,833 142,454
Assets held for sale........................................................................ 14,000 4,000
Other, net.................................................................................. 6,722 5,390
-------- --------
Total other assets.......................................................................... 96,555 151,844
-------- --------
Total assets................................................................................ $463,751 $595,166
======== ========
Liabilities and Stockholders' Equity (Deficiency):
Current liabilities:
Accounts payable............................................................................ $119,302 $124,361
Accrued employee compensation and benefits.................................................. 10,007 9,302
Self-insurance reserves..................................................................... 6,462 6,564
Other accrued expenses...................................................................... 19,319 15,178
Short-term debt............................................................................. 114,449 84,208
Current portion of notes and capital lease obligations...................................... 2,089 1,038
-------- --------
Total current liabilities................................................................... 271,628 240,651
-------- --------
Obligations under capital leases............................................................. 25,284 27,073
Convertible notes payable.................................................................... 28,995 --
Deferred income taxes........................................................................ -- 8,581
Self-insurance reserves...................................................................... 13,120 13,328
Unfavorable lease liability.................................................................. 44,581 --
Other long-term liabilities.................................................................. 25,143 29,378
Liabilities subject to settlement under the reorganization case.............................. -- 562,105
Commitments and contingencies (Note 14)
Stockholders' equity (deficiency):
Preferred stock (new)--1,000,000 authorized, none issued; par value $0.01................... -- --
Common stock (new)--40,000,000 authorized, 10,225,711 shares issued; par value $0.01........ 102 --
Common stock (old)--40,000,000 authorized, 11,310,384 shares issued; par value $0.01........ -- 115
Additional paid-in-capital.................................................................. 54,898 137,821
Accumulated deficit......................................................................... -- (423,082)
Treasury stock (old), at cost--155,575 shares............................................... -- (804)
-------- --------
Total stockholders' equity (deficiency)..................................................... 55,000 (285,950)
-------- --------
Total liabilities and stockholders' equity (deficiency)..................................... $463,751 $595,166
- --------------------------------------------------
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-17
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net income (loss).......... $ 285,950 $(22,557) $(218,759)
Adjustments to reconcile
net income (loss) to cash
provided (used) by
operating activities:
Depreciation and
amortization.............. 32,236 36,244 42,200
Impairment of long-lived
assets.................... -- -- 40,782
Amortization of deferred
financing costs........... 2,148 3,750 2,154
Reorganization items....... 4,561 752 69,792
Loss (gain) on disposition
of properties............. 241 (5,425) (1,739)
Fresh-start revaluation
charge.................... 108,428 -- --
Extraordinary gain on debt
discharge................. (419,703) -- --
Increase (decrease) in cash
resulting from changes in:
Accounts receivable........ (805) (1,773) 2,296
Inventories................ 6,029 (1,709) 44,293
Prepaid expenses........... (249) (357) 1,542
Refundable income taxes.... -- -- 24,576
Accounts payable........... (5,510) 9,046 (32,319)
Accrued expenses........... (7,139) (6,185) 580
Other, net................. 312 (4,547) (1,664)
--------- -------- ---------
Net cash provided (used) by
operating activities
before reorganization
items..................... 6,499 7,239 (26,266)
--------- -------- ---------
Operating cash flows from
reorganization items:
Interest income received... 1,038 420 1,445
Bankruptcy-related
professional fees paid.... (10,275) (9,626) (10,756)
Other reorganization
expenses paid, net........ (3,796) (7,157) (17,572)
--------- -------- ---------
Net cash used by
reorganization items...... (13,033) (16,363) (26,883)
--------- -------- ---------
Net cash used by operating
activities................ (6,534) (9,124) (53,149)
--------- -------- ---------
Cash Flows From Investing
Activities:
Capital expenditures, net.. (17,054) (19,568) (27,527)
Decrease (increase) in
restricted cash and cash
equivalents............... 16,760 (7,634) (7,932)
--------- -------- ---------
Net cash used in investing
activities................ (294) (27,202) (35,459)
--------- -------- ---------
Cash Flows From Financing
Activities:
Principal payments on long-
term debt................. (1,149) (1,657) (2,707)
Principal payments on
convertible notes
payable................... (11,005) -- --
Payments of liabilities
subject to settlement..... (7,231) (6,467) (5,327)
Proceeds from sales of
assets.................... 23,041 7,967 1,739
Borrowings (payments) under
DIP facilities............ (84,208) 41,708 42,500
Borrowings under post-
emergence revolver........ 114,449 -- --
Deferred financing costs... (2,621) (4,301) (584)
Consummation cash
distributions............. (25,912) -- --
--------- -------- ---------
Net cash provided by
financing activities...... 5,364 37,250 35,621
--------- -------- ---------
Net increase (decrease) in
restricted cash and cash
equivalents............... (1,464) 924 (52,987)
Unrestricted cash and cash
equivalents:
Beginning of period ....... 10,949 10,025 63,012
--------- -------- ---------
End of period.............. $ 9,485 $ 10,949 $ 10,025
========= ======== =========
Supplemental disclosure of
cash flow information:
Cash paid for interest..... $ 13,781 $ 12,807 $ 9,991
Cash received (paid) for
income taxes.............. $ (322) $ 109 $ 25,046
Supplemental schedule of
noncash (investing and
financing) activities:
Reduction of liabilities
subject to settlement due
to transfer of title to
property.................. $ 2,000 $ -- $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-18
<PAGE>
BRADLEES STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Retained
Common Stock Additional Earnings Stockholders'
------------------- Paid-in- Unearned (Accumulated Treasury Equity
Shares Amount Capital Compensation Deficit ) Stock (Deficiency)
----------- ------ ---------- ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at February 3,
1996................... 11,416,656 $115 $137,951 $(793) $(181,766) $(517) $ (45,010)
Restricted stock--
forfeitures............ (22,223) -- -- 150 -- (150) --
Restricted stock--
amortization........... -- -- -- 476 -- -- 476
Net loss................ -- -- -- -- (218,759) -- (218,759)
----------- ---- -------- ----- --------- ----- ---------
Balance at February 1,
1997................... 11,394,433 115 137,951 (167) (400,525) (667) (263,293)
Restricted stock--
forfeitures............ (82,279) -- (130) 137 -- (137) (130)
Restricted stock--
amortization........... -- -- -- 30 -- -- 30
Net loss................ -- -- -- -- (22,557) -- (22,557)
----------- ---- -------- ----- --------- ----- ---------
Balance at January 31,
1998................... 11,312,154 115 137,821 -- (423,082) (804) (285,950)
Restricted stock--
forfeitures............ (1,770) -- -- -- -- -- --
Cancellation of the
former equity interests
under plan of
reorganization......... (11,310,384) (115) (137,821) -- 137,132 804 --
Net income.............. -- -- -- -- 285,950 -- 285,950
Issuance of new equity
interests in
connection with
emergence from
Chapter 11............. 10,225,711 102 54,898 -- -- -- 55,000
----------- ---- -------- ----- --------- ----- ---------
Balance at January 30,
1999................... 10,225,711 $102 $ 54,898 -- -- -- $ 55,000
=========== ==== ======== ===== ========= ===== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-19
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Bradlees, Inc. and subsidiaries (collectively "Bradlees" or the "Company")
operate in the discount department store retail segment in the Northeast United
States. Accordingly, there are no specific operating or geographic statement
disclosures pursuant to SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," other than the consolidated financial
position and results of operations. The Company filed petitions for relief
under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") on June
23, 1995 (the "Filing"). Prior to emerging from Chapter 11 on February 2, 1999
(the "Effective Date"), the Company (the "Predecessor") operated 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 reorganized Company (the "Registrant") adopted fresh-start
reporting (Note 2) and gave effect to its emergence as of its fiscal 1998 year-
end (January 30, 1999).
Under fresh-start reporting, the final consolidated balance sheet as of
January 30, 1999 becomes the opening consolidated balance sheet of the
reorganized Company. Since fresh-start reporting has been reflected in the
accompanying consolidated balance sheet as of January 30, 1999, the
consolidated balance sheet as of that date is not comparable in certain
material respects to any such balance sheet as of any prior date or for any
prior period since the balance sheet as of January 30, 1999 is that of a
reorganized entity. Accordingly, a black line has been drawn between the
Registrant's balance sheet and the Predecessor's balance sheet.
Bradlees had 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"). 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.
Upon emergence from Chapter 11, Bradlees, Inc. has two subsidiaries, Bradlees
Stores Inc., through which the stores are operated, and New Horizons of
Yonkers, Inc. (Note 17), which is the lessee of the Yonkers, NY store. New
Horizons of Yonkers, Inc. remained in Chapter 11 to facilitate the expected
disposition of the leasehold interest.
Management believes the Company's 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 business and operations of the Company, including factors
beyond its control. Further improvements in operating profitability and
achievement of expected cash flows from operations is critical to providing
adequate liquidity and is dependent upon the Company's attainment of comparable
store sales increases, along with gross margin and expense levels that are
reasonably consistent with its financial plans.
2. Reorganization Case and Fresh-Start Reporting
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,
F-20
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
During the Chapter 11 case, the Company's ability to continue as a going
concern was dependent upon the confirmation of a plan of reorganization by the
Bankruptcy Court, the ability to maintain compliance with debt covenants under
the DIP facilities (Note 7), achievement of profitable operations, and the
resolution of the uncertainties of the reorganization case discussed herein.
The 1997 and 1996 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 a significant operating loss in 1996. Substantially all liabilities as
of the date of the Filing were subject to settlement under the plan of
reorganization, as modified (the "Plan"), confirmed by the Bankruptcy Court on
January 27, 1999. Under the Bankruptcy Code, the Company could elect to assume
or reject real estate leases, employment contracts, personal property leases,
service contracts and other executory pre-petition leases and contracts,
subject to Bankruptcy Court approval. A liability of approximately $45.7
million was recorded for rejected leases and contracts prior to the Effective
Date.
As mentioned above, the Company's Plan was confirmed on January 27, 1999. The
Company made the following key modifications to its business strategy during
fiscal 1998 and 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
mostly unadvertised opportunistic purchases; and (h) significantly reduced
overhead while improving operating efficiencies.
The Company had assets held for sale at the beginning of 1998 that consisted
of two properties that were financed under the pre-petition SPE financing
obligation (Note 9), one of which was sold in 1998 for approximately $4.3
million. The net proceeds from the sale of the property of $3.5 million were
utilized to partially pay down the related pre-petition SPE financing
obligation. Title to the other property that had been held for sale was
transferred to the related financing group in 1998 and the pre-petition SPE
financing obligation was further 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 was made part of the Plan).
The principal categories of claims classified as "Liabilities subject to
settlement under the reorganization case" prior to the Effective Date 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 "Pre-Petition Revolver") and subordinated debt
(the "2002 and 2003 Notes") were netted against the related outstanding debt
amounts. In addition, a $9.0 million cash settlement and approximately $13.3
million of adequate protection payments reduced the Pre-Petition 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).
F-21
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
(000's)
----------------------------------
Liabilities Subject to Settlement
Under the Reorganization Case January 30, 1999* January 31, 1998
--------------------------------- ----------------- ----------------
<S> <C> <C>
Accounts payable........................ $167,322 $165,324
Accrued expenses........................ 24,010 27,996
Pre-petition revolver................... 67,805 71,105
2002 Notes.............................. 122,274 122,274
2003 Notes.............................. 97,957 97,957
SPE financing obligation (Note 9)....... 12,460 17,951
Obligations under capital leases........ 9,360 11,407
Liability for rejected leases and
contracts.............................. 45,685 48,091
-------- --------
$546,873 $562,105
======== ========
</TABLE>
- --------
*Prior to the Effective Date.
A debtor-in-possession has the exclusive right to propose and file with the
Bankruptcy Court a plan of reorganization for a period of time which can be
extended by the Bankruptcy Court. Given the seasonality and magnitude of the
Company's operations, change in business strategies, and number of interested
parties possessing claims that had to be resolved in the Chapter 11 case, the
Plan formulation process was complex. Accordingly, the Company obtained
extensions of its exclusivity period to December 1, 1998. The Bankruptcy Court
approved the Company's disclosure statement on October 5, 1998 and, as
mentioned above, confirmed the Plan on January 27, 1999. There were no material
unresolved contingencies.
The Plan contained distributable value to creditors of approximately $162
million (as of the Effective Date) which consisted of approximately $15 million
of administrative claim payments (including $4.5 million of professional fees
paid subsequent to the Effective Date and accrued at January 30, 1999); $14
million of cash distributions to the pre-Chapter 11 bank group and the
unsecured creditors; a $40 million note primarily payable to the pre-Chapter 11
bank group, which was paid down on the Effective Date by approximately $11
million from the proceeds of the modification of the lease terms of the Union
Square, NY store; new Bradlees' Common Stock (the former Bradlees' common stock
was canceled) with an estimated value as of the Effective Date of $85 million
(see discussion below) and Warrants; and certain notes totaling $6.2 million
(Note 7) and other distributions totaling $1.4 million. The Warrants allow for
the purchase of one million shares of Common Stock and are exercisable at $7.00
per share.
The Plan also provided for many other matters, including satisfaction of
numerous other claims, satisfaction of certain claims in accordance with
negotiated settlement agreements and an agreement to keep in place certain
retirement and employment agreements. Creditors can dispute the disallowance of
certain claims after the Effective Date and the Company has maintained an
adequate reserve in the event such disputes result in the allowance of
administrative claims not included in the consummation cash distributions. The
Consolidated Financial Statements presume full issuance of the common stock and
notes in accordance with the Plan.
The determination of equity value included in the distributable value as of
the Effective Date was derived from an estimated enterprise value of the
reorganized Bradlees and reduced by estimated embedded debt levels. The
enterprise value was developed by an independent financial advisor for purposes
of the filing of the Company's Disclosure Statement in the Bankruptcy Court in
October 1998. In developing the determination of the initial equity value, the
financial advisor used various assumptions and estimates, including projected
embedded debt which represented that portion of the ongoing revolver facility
that is estimated to remain after the seasonal clean-up of the facility. As a
result, the initial equity value was assumed to be in the range of $75 to $90
million. For purposes of the Disclosure Statement, the Company determined that
an equity value of $85 million represented a reasonable estimate of
distributable equity value to the creditors.
F-22
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Fresh-Start Reporting
As discussed above, the Company's Plan was consummated on February 2, 1999
and Bradlees emerged from Chapter 11. Pursuant to the guidance provided by the
American Institute of Certified Public Accountants in Statement of Position
("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", the Company adopted fresh-start reporting and reflected the
consummation distributions in the accompanying consolidated balance sheet as of
January 30, 1999 to give effect to the reorganization as of year-end. Under
fresh-start reporting, the reorganization value of the Company was allocated to
the emerging Company's net assets on the basis of the purchase method of
accounting.
The significant consummation and fresh-start reporting adjustments (shown in
the statement presented at the end of this Note) are summarized as follows:
a. Payment of $11.9 million of administrative and other claims, $14
million of cash distributions and $2.4 million of financing costs
associated with the post-emergence revolver, with required borrowings of
$2.9 million, along with new notes (Note 7) and estimated new stock value
(see accompanying explanation below) issued to creditors on the Effective
Date. The associated write-off of the liabilities subject to settlement
under the reorganization case resulted in the recording of an extraordinary
non-taxable gain on debt discharge of $419.7 million.
b. Proceeds received on the Effective Date from the modification of the
lease terms of the Union Square, NY store that were immediately utilized to
partially pay down the new $40 million note.
c. Payment of emergence-related bonuses, partially offset by a reserve
established for disputed claims.
d. Cancellation of the former common stock pursuant to the Plan and
close-out to the accumulated deficit.
e. A revaluation of capital lease obligations and related capital lease
assets.
f. Revaluation of the straight-line rent reserve. Straight-line rent is
recalculated on a going-forward basis by the reorganized Bradlees.
g. Revaluation of the Yonkers, NY store lease held for sale to its
estimated net realizable value.
h. Fresh-start reductions in the pension plan liability (Note 12),
resulting in a net prepaid pension asset of $4.2 million, and in the SFAS
No. 106 (Note 12) liability, partially offset by additional Supplemental
Executive Retirement Plan ("SERP") liability (Note 12). A reclassification
was then recorded to transfer the net prepaid pension asset from other
long-term liabilities to other assets, net.
i. Revaluation of the intangible SERP asset to its estimated net
realizable value.
j. Revaluation of deferred income taxes (due to a change in the status of
timing differences).
k. Revaluation of fixed assets and leasehold interests based upon
estimated fair market values, considering the current markets in which
Bradlees has locations. This revaluation resulted in, among other things,
the recording of a write-down of $54.3 million in favorable lease interests
and an unfavorable lease liability of $44.6 million (present value) for
certain locations. The revaluation of lease interests was based, in part,
on an appraisal of certain leases by a valuation advisory service.
l. Allocation of the $13 million excess of the revalued net assets over
the reorganization value (negative goodwill) to reduce long-term assets on
a pro-rata basis, which resulted in a total fresh-start adjustment to the
accumulated deficit of $28.7 million.
The resulting charge of $108.4 million from all fresh-start adjustments,
excluding the write-off of the old stock, is presented as "Revaluation of
assets and liabilities pursuant to adoption of fresh-start reporting" in the
F-23
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
consolidated statement of operations for 1998. An unaudited pro forma statement
of operations assuming the Company had emerged from Chapter 11 at the beginning
of 1998 is presented in Note 4.
The fresh-start reporting reorganization value was primarily based on the
Company's projected earnings before interest, taxes and depreciation and
amortization ("EBITDA") for fiscal 1999 adjusted to exclude the projected
EBITDA of two stores expected to close at the end of fiscal 1999 and certain
non-cash credits and discounted to present value using the Company's weighted
average cost of capital rate of 14%. Only projected fiscal 1999 EBITDA was
utilized to calculate the value due to the uncertainties facing the Company,
such as changing competitive conditions, that made future projections less
meaningful. A multiple of 5.0 was applied to the adjusted fiscal 1999 EBITDA to
assist in calculating the reorganization value. The multiple was determined
after analyzing the multiples of several publicly-held companies operating in a
comparable business. The discount rate and multiple utilized by the Company
reflected a relatively "high risk investment". The use of a short projection
period placed a greater emphasis on the accuracy of the multiple.
The Company's reorganization value represented the value of the
"reconstituted entity". This value was viewed as the fair value of the Company
before considering liabilities and approximated the amount a willing buyer
would have paid for the assets of the Company immediately after the
reorganization was completed. The Company's "enterprise value", as defined in
the Plan and later re-estimated by management (see below), represented the
reorganization value calculated above plus expected cash from asset
dispositions and cash in excess of normal operating requirements of the
reorganized Company immediately before the distributions called for by the
Plan.
Subsequent to the filing of the Disclosure Statement and the Effective Date,
a number of events occurred which impacted the determination of equity value
under fresh-start reporting, including but not limited to, the initial trading
prices of the new stock, information regarding the Company's fourth quarter
performance and final fiscal 1999 financial plan, a settlement with a landlord
regarding the disposition of the Union Square, New York leasehold interest and
the liquidation of Caldor, a major competitor of the Company. The Company
employed a similar valuation method under fresh-start reporting to determine
its equity value to that utilized by its independent financial advisor in the
Disclosure Statement and arrived at the estimated equity value of $55 million.
The weighted average price per share of the new stock from the Effective Date
through April 28, 1999 indicated an equity value of approximately $51 million
(based on 10,225,711 shares outstanding), although there was limited trading of
the new stock during portions of this period.
The Company's reorganization value of $464 million was less than the
appraised value of its assets at January 30, 1999, which was approximately $477
million. Management believes that the creditors accepted the Plan and the
corresponding reorganization value, despite the inherent future business risks,
primarily because the Company had made significant progress in improving its
operating performance in 1997 and 1998, the Company's reorganization value
exceeded its liquidation value, there was a waiver of all preferences, and
certain creditors believed that it was in the Company's best interest to emerge
from bankruptcy at that time. In accordance with the purchase method of
accounting, the excess of the revalued net assets over reorganization value
(negative goodwill) was allocated to reduce proportionately the values assigned
to non-current assets in determining their appraised values.
The calculated reorganization value was based upon a variety of estimates and
assumptions about circumstances and events that have not yet taken place. Such
estimates and assumptions are inherently subject to significant economic and
competitive uncertainties beyond the control of the Company, including but not
limited to those with respect to the future course of the Company's business
activity.
F-24
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The effect of the Plan on the Company's consolidated balance sheet as of
January 30, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Adjustments to
Historical Record Plan Reorganized
as of ------------------------- as of
January 30, Debt Fresh January 30,
1999 Discharge Start 1999
----------- --------- --------- -----------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Unrestricted cash and
cash equivalents...... $ 9,485 $ -- $ -- $ 9,485
Restricted cash and
cash equivalents...... 25,412 (25,412)(a) -- --
--------- --------- --------- --------
Total cash and cash
equivalents........... 34,897 (25,412) -- 9,485
--------- --------- --------- --------
Accounts receivable.... 24,017 (11,002)(b) 13,015
Inventories............ 232,343 -- -- 232,343
Prepaid expenses....... 8,967 -- -- 8,967
--------- --------- --------- --------
Total current assets... 300,224 (36,414) -- 263,810
--------- --------- --------- --------
Property, plant and
equipment, net:
Property excluding
capital leases, net... 115,253 -- (22,214)(k,l) 93,039
Property under capital
leases, net........... 17,386 -- (7,039)(e,k,l) 10,347
--------- --------- --------- --------
Total property, plant
and equipment, net.... 132,639 -- (29,253) 103,386
--------- --------- --------- --------
Other assets:
Lease interests at fair
value, net............ 135,638 -- (59,805)(k,l) 75,833
Assets held for sale... 3,400 -- 10,600 (g) 14,000
Other, net............. 1,499 2,387 (a) 2,836 (h,i) 6,722
--------- --------- --------- --------
Total other assets..... 140,537 2,387 (46,369) 96,555
--------- --------- --------- --------
Total assets........... $ 573,400 $ (34,027) $ (75,622) $463,751
========= ========= ========= ========
LIABILITIES AND
STOCKHOLDER'S EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable....... $ 119,302 $ -- $ -- $119,302
Accrued expenses....... 29,293 33 (c) -- 29,326
Self-insurance
reserves.............. 6,462 -- -- 6,462
Short-term debt........ 111,562 2,887 (a) -- 114,449
Current portion of
notes and cap. lease
oblig................. 1,038 1,051 (a) -- 2,089
--------- --------- --------- --------
Total current
liabilities........... 267,657 3,971 -- 271,628
--------- --------- --------- --------
Long-term liabilities
Obligations under
capital leases........ 25,924 -- (640)(e) 25,284
Convertible notes
payable............... -- 28,995 (a,b) -- 28,995
Deferred income taxes.. 8,581 -- (8,581)(j) --
Self-insurance
reserves.............. 13,120 -- -- 13,120
Unfavorable lease
liability............. -- -- 44,581 (k) 44,581
Other long-term
liabilities........... 22,519 5,177 (a) (2,553)(f,h) 25,143
--------- --------- --------- --------
Total long-term
liabilities........... 70,144 34,172 32,807 137,123
--------- --------- --------- --------
Liabilities subject to
settlement under the
reorganization case.... 546,873 (546,873) (a) -- --
Stockholders' equity
(deficiency):
Common stock
Par value.............. 115 102 (a) (115)(d) 102
Additional paid-in-
capital............... 137,821 54,898 (a) (137,821)(d) 54,898
Accumulated deficit.... (448,407) 419,703 (a) 28,704 (l) --
Treasury stock, at
cost.................. (803) -- 803 (d) --
--------- --------- --------- --------
Total stockholders'
equity (deficiency)... (311,274) 474,703 (108,429) 55,000
--------- --------- --------- --------
Total liabilities and
stockholders' equity
(deficiency).......... $ 573,400 $ (34,027) $ (75,622) $463,751
========= ========= ========= ========
</TABLE>
See explanations of the adjustments to record the effect of the Plan
previously listed at the beginning of the accompanying "Fresh-Start Reporting"
section.
F-25
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Summary of Significant Accounting Policies
Principles of consolidation: The consolidated financial statements include
the accounts of all subsidiaries and, prior to the adoption of fresh-start
reporting (Note 2), the accounts of the special purpose entity ("SPE") with
which the Company had a financing arrangement for new store sites (Note 9). All
intercompany transactions have been eliminated in consolidation.
The Company's fiscal year ends on the Saturday nearest to January 31. The
term "1998" refers to the 52 weeks ended January 30, 1999; "1997" refers to the
52 weeks ended January 31, 1998; and "1996" refers to the 52 weeks ended
February 1, 1997.
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 post-emergence revolver
and DIP facilities, and accounts payable (post-petition) approximated the
carrying amounts at January 30, 1999 and January 31, 1998 due to their short
maturities or variable-rate nature of the borrowings. The fair value of the new
convertible notes (issued following Plan consummation) were assumed equal to
face value at January 30, 1999. The fair value of the Company's liabilities
subject to settlement were not determinable at January 31, 1998 as a result of
the Chapter 11 proceedings. The fair values of the 2002 Notes and 2003 Notes
(Note 7) were not obtainable at January 31, 1998. Face values of the 2002 Notes
and 2003 Notes were $125,000 and $100,000, respectively, at January 31, 1998.
Geographical concentration: As of January 30, 1999, the Company operated 103
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 one store in
March, 1999 which was announced in December, 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 valuation
of assets and liabilities and the calculation of reorganization value under
fresh-start reporting (Note 2), the estimated useful lives of fixed assets and
lease interests, the estimates used in the SFAS No. 121 calculation (Note 5),
accruals for a self-insured medical program (beginning in 1998) and for self-
insured workers' compensation and general liability (Note 15), vacation pay
reserves (Note 15), provisions for rejected leases and restructuring costs
associated with closing stores (Note 8), and the classification of liabilities
subject to settlement (Note 2).
Collective bargaining arrangements: Approximately 74% of the Company's labor
force is covered by collective bargaining agreements, of which collective
bargaining agreements affecting approximately 25% 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 30, 1999 prior to the
consummation cash distributions (Note 2) were comprised of the following, along
with earned interest of $1.5 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
F-26
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 charges were recorded by the Company as
there was no excess of current cost over LIFO cost since the Acquisition (Note
1).
Assets held for sale: Assets held for sale are stated at the lower of net
book value or estimated net realizable value and 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.
<TABLE>
<S> <C>
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
</TABLE>
Lease interests: Lease interests at January 30, 1999 represented the value
assigned to the Company's lease rights under fresh-start reporting (Note 2).
This asset will be amortized as a charge to rent expense over the remaining
lease terms. Lease interests at January 30, 1998 represented the lease rights
acquired at the Acquisition (Note 1) and were amortized on the straight-line
method over the remaining lives of the leases (including option periods) or 40
years, if shorter. Accumulated amortization was $41.6 million at January 30,
1999 prior to fresh-start reporting and $34.8 million at January 31, 1998.
The recoverability of the 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 further
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 medical
(beginning in 1998), workers' compensation and general liability costs. The
medical self-insurance reserve was determined with the assistance of the
Company's insurance advisor. The workers' compensation and general liability
self-insurance reserves were actuarially determined using a discount rate of
6.00% at January 30, 1999 and January 31, 1998. 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 are amortized over the
lives of the related financings. Deferred financing costs at January 30, 1999
were associated with the Revolver (Notes 2 and 7). Deferred financing costs
associated with the DIP Facility were fully amortized prior to the Effective
Date (Note 7). Accumulated amortization was $.1 million at January 31, 1998.
The Company wrote off $1.1 million of unamortized deferred financing costs in
1997 relating to the Prior DIP Facility (Note 7) 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
F-27
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 2).
Store opening and closing costs: Pre-opening costs were expensed prior to or
when a store opened or, in the case of a remodel, reopened. 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 (Note 11).
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.
Earnings per share: Net earnings per share was not presented for 1998 because
the old stock was canceled under the Plan and the new stock was not issued
until after consummation of the Plan. Net loss per share for 1997 and 1996 was
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 and
1996 was 11,365 and 11,412 shares, respectively. Diluted earnings per share
equaled basic earning per share as the dilutive calculations would have an
anti-dilutive impact as a result of the net loss incurred in each of those
years.
Reclassifications: Certain reclassifications have been made to the 1997 and
1996 financial statements to conform with the 1998 presentation.
Recent accounting pronouncements: In June, 1998 the Financial Accounting
Standards Board (FASB) issued 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 does not utilize any derivative or hedging instruments and
therefore believes that there will be no impact from SFAS No. 133 on the
Company's earnings.
SOP 98-1, "Accounting for the Costs for Computer Software Developed or
Obtained for Internal Use", is effective for fiscal years beginning after
December 15, 1998. SOP 98-1 states, among other things, that computer software
incurred in the preliminary project state, training costs and data conversion
costs should be expensed as incurred, while costs incurred in the application
development stage should be capitalized. The Company will adopt the provisions
of SOP 98-1 in 1999 and believes that its current method of capitalizing
software costs is in conformity with the statement.
SOP 98-5, "Reporting on the Costs of Start-Up Activities", is effective for
fiscal years beginning after December 15, 1998. SOP 98-5 provides guidance on
the financial reporting of start-up costs and organization costs and requires
costs of start-up activities and organization costs to be expensed as incurred.
The Company will adopt the provisions of SOP 98-5 in 1999 and believes that it
will have an insignificant impact on its financial statements.
F-28
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. Pro Forma Financial Information (Unaudited)
The following unaudited pro forma consolidated statement of operations is
based on the Company's consolidated statement of operations for fiscal 1998 as
adjusted to give effect to the consummation of the Plan (Note 2) as if the
Effective Date had occurred on January 31, 1998 (at the beginning of fiscal
1998). This unaudited pro forma financial information and the accompanying
unaudited notes should be read in conjunction with the Company's consolidated
financial statements and the notes thereto. The unaudited pro forma
consolidated information is presented for informational purposes only and does
not purport to represent what the Company's results of operations would
actually have been if the Effective Date of the Plan had occurred at the
beginning of 1998, or to project the Company's results of operations for any
future period.
F-29
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
Pro Forma Adjustments Pro Forma
52 Weeks Ended --------------------------- 52 Weeks Ended
Jan. 30, 1999 Debits Credits Jan. 30, 1999
-------------- ---------- ----------- --------------
<S> <C> <C> <C> <C>
Total sales............. $1,381,116 14,705 (1) -- $1,366,411
Leased department
sales.................. 43,919 383 (1) -- 43,536
---------- ----------
Net sales............... 1,337,197 1,322,875
Cost of goods sold...... 944,094 -- 10,357 (1) 933,251
486 (2)
---------- ---------- ---------- ----------
Gross margins........... 393,103 389,624
Leased department and
other operating
income................. 11,795 82 (1) -- 11,713
---------- ----------
404,898 401,337
Selling, store
operating,
administrative and
distribution expenses.. 376,856 4,059 (4) 4,553 (1) 373,059
4,400 (3)
1,705 (6) 8,634 (7)
8,026 (10)
Depreciation and
amortization expense... 32,236 -- 86 (1) 22,108
6,815 (4)
617 (6)
2,610 (9)
Loss on disposition of
properties............. 241 -- -- 241
---------- ----------
Income (loss) before
interest and
reorganization items... (4,435) 5,929
Interest and debt
expense................ 16,329 1,400 (5) 2,148 (5) 28,023
12,442 (8)
Reorganization items.... 4,561 -- 4,561 (3) --
---------- ----------
Loss before fresh-start
revaluation and
extraordinary item..... (25,325) (22,094)
Revaluation of assets
and liabilities
pursuant to adoption of
fresh-start reporting.. (108,428) -- 108,428 (3) --
---------- ----------
Loss before
extraordinary item..... (133,753) (22,094)
Extraordinary item--gain
on debt discharge...... 419,703 419,703 (3) -- --
---------- ----------
Net income (loss)....... $ 285,950 $ (22,094)
========== ==========
Weighted average shares
outstanding............ * 10,226
========== ==========
Net income (loss) per
share.................. $ * $ (2.16) (11)
========== ==========
</TABLE>
- --------
* Earnings per share was not presented for the fiscal year ended January 30,
1999 because such presentation would not be meaningful. The former stock was
canceled under the plan of reorganization and the new stock was issued
following consummation of the plan.
F-30
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(continued)
The following notes set forth the explanations and assumptions used and
adjustments made in preparing the unaudited pro forma consolidated statement of
operations for the 52 weeks ended January 30, 1999. The unaudited pro forma
consolidated statement of operations reflects the adjustments described below,
which are based on the assumptions and estimates described therein. There was
no tax impact from the pro forma adjustments.
Pro Forma Adjustments--Statement of Operations for the Fiscal Year Ended
January 30, 1999
1. To eliminate the sales and expense amounts associated with seven stores
closed since January 31, 1998 as part of the Company's reorganization.
2. To eliminate the provision for inventory impairment for the store closed
in March, 1999.
3. To eliminate an emergence-related bonus provision, reorganization items,
the fresh-start revaluation charge and the extraordinary gain on debt
discharge.
4. Adjustment in amortization of lease interests revalued under fresh-start
reporting (Note 2).
5. To record amortization of post-emergence deferred financing costs and
reverse the historical 1998 amortization of deferred financing costs.
6. To adjust lease rent expense and amortization expense for revised
straight-line rent calculations.
7. To adjust lease rent expense for amortization of the unfavorable lease
liability (Notes 2 and 9).
8. To adjust interest expense for amortization of the discount on the
unfavorable lease liability (Notes 2 and 9) and for increased interest expense
resulting from the 9% Convertible Notes and other issued notes (Note 7).
9. To record the effects resulting from the allocation of the estimated
excess of revalued assets over the reorganization value (negative goodwill) at
January 31, 1998.
10. To record additional SFAS No. 106 (Note 12) expense, lower the SERP
(Notes 2 and 12) expense and reduce the 1998 pension curtailment gain as a
result of the effect of fresh-start reporting and the associated earlier write-
off of unamortized prior service costs.
11. Pro forma earnings per share was computed based on an estimated weighted
average number of common shares outstanding during the applicable period
assuming that the Plan of Reorganization was effective on January 31, 1998.
Excludes any potential dilutive effect of stock options and warrants.
5. Statement of Financial Accounting Standards No. 121
In the fourth quarter of 1996, the Company recorded a charge of approximately
$40.8 million in accordance with SFAS No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", based on
future 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 1996 primarily as a result of the
significant operating loss incurred in that year. Because of prior-year charges
and the closings of unprofitable stores, and because the Company met its
operating earnings plans in 1998 and 1997, there were no SFAS No. 121 charges
in those years.
F-31
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
In applying SFAS No. 121 in 1996, 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 were subject to significant business,
economic and competitive uncertainties. The charge in 1996 was comprised of the
following long-lived asset impairments (in 000's):
<TABLE>
<CAPTION>
1996
-------
<S> <C>
Property excluding capital leases, net............................ $10,548
Property under capital leases, net................................ 3,363
Lease interest and lease acquisition costs, net................... 26,871
-------
Total long-lived asset impairment................................. $40,782
=======
</TABLE>
6. Property, Plant and Equipment, Net
<TABLE>
<CAPTION>
(000's)
---------------------------------
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Property excluding capital leases:
Buildings and improvements................... $ 40,197 $ 96,678
Equipment and fixtures....................... 52,842 123,603
Land......................................... -- --
-------- --------
Subtotal.................................... 93,039 220,281
Accumulated depreciation..................... -- (88,756)
-------- --------
Property excluding capital leases, net...... 93,039 131,525
======== ========
Property under capital leases:
Buildings and improvements................... 8,493 22,682
Equipment and fixtures....................... 1,854 8,395
-------- --------
Subtotal.................................... 10,347 31,077
Accumulated amortization..................... -- (12,118)
-------- --------
Property under capital leases, net.......... 10,347 18,959
-------- --------
Total property, plant and equipment, net..... $103,386 $150,484
======== ========
</TABLE>
Property, plant and equipment, net, were revalued at January 30, 1999 under
fresh-start reporting (Note 2).
F-32
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Debt
<TABLE>
<CAPTION>
(000's)
---------------------------------
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Revolver (7.75%-1998).................... $114,449 $ --
DIP Facility (8.5%-1997)................. -- 84,208
Prepetition Revolver (10.25%-1997)....... -- 71,105
Convertible Notes (9.0%)................. 28,995 --
CAP, Cure & Tax Notes (9.0%)............. 6,236 --
Prepetition 2002 Notes (11%)............. -- 122,274
Prepetition 2003 Notes (9.25%)........... -- 97,957
SPE financing obligation (7.75%) (Note
9)...................................... -- 17,951
Obligations under capital leases (Note
9)...................................... 26,322 39,518
-------- --------
Total debt............................... 176,002 433,013
Less:
Short-term debt (Revolver/DIP Facility).. 114,449 84,208
Current portion-capital leases........... 1,038 1,038
Current portion-CAP, Cure & Tax Notes.... 1,051 --
Less: Debt subject to settlement (Note
2):
Prepetition Revolver..................... -- 71,105
Prepetition 2002 Notes................... -- 122,274
Prepetition 2003 Notes................... -- 97,957
SPE financing obligation................. -- 17,951
Obligations under capital leases......... -- 11,407
-------- --------
Long-term debt........................... $ 59,464 $ 27,073
======== ========
</TABLE>
The Company believes that the new and reinstated debt obligations carry face
interest rates that are similar to market rates (for financings of a similar
nature) and therefore such obligations did not require a discounting to present
value on the Effective Date (Note 1). As a result of the Filing, substantially
all debt outstanding (exclusive of the DIP facilities) prior to the Effective
Date was classified as liabilities subject to settlement (Note 2). No principal
or interest payments were made on any pre-petition debt (excluding certain
capital leases) without Bankruptcy Court approval. 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 were netted against the related
outstanding debt amounts (Note 2).
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 were made prior
to the Effective Date regarding the value of the
F-33
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
property interests which collateralized various pre-petition debts. Contractual
interest expense not recorded on certain pre-petition debt (the Revolver, 2002
Notes and 2003 Notes) totaled approximately $30.6, $31.1 and $31.3 million for
1998, 1997 and 1996, respectively.
Financing Facility: Prior to the Effective Date, the Company had a $250
million financing facility (the "Financing Facility") (of which $125 million
was available for issuance of letters of credit) with BankBoston Retail
Finance, Inc. ("BBNA") as agent, under which the Company was allowed to borrow
for general corporate purposes, working capital and inventory purchases. The
Financing Facility consisted of (a) an up to eighteen-month debtor-in-
possession revolving credit facility in the maximum principal amount of $250
million (the "DIP Facility"- see below) and, subject to meeting certain
conditions, (b) an up to three-year post-emergence credit facility in the
maximum principal amount of $250 million (as modified, the "Revolver"--see
below). The Company satisfied the required conditions in order for the Revolver
to become effective, including minimum operating earnings ("EBITDA") and
minimum borrowing availability on the Effective Date. The outstanding amount
under the DIP Facility was repaid on the Effective Date with proceeds from the
Revolver. The Revolver expires on December 23, 2001.
The DIP Facility had replaced a $200 million Debtor-in-Possession Revolving
Credit and Guaranty Agreement with The Chase Manhattan Bank, as agent (the
"Prior DIP Facility"). Trade and standby letters of credit outstanding under
the DIP facilities were $10.8 and $17.3 million, respectively, at January 30,
1999 and $7.1 million and $26.8, respectively, as of January 31, 1998. The
weighted average borrowings under the DIP Facility in 1998 were $116.4 million.
The weighted average interest rate under the DIP Facility in 1998 was 7.81%.
Revolver: The Revolver consists of a $250 million senior secured revolving
line of credit (of which $125 million is available for issuance of letters of
credit) and a $20 million junior secured "last in-last out" facility. The
Company expects to use the Revolver primarily for working capital and general
business needs.
The senior secured tranche has an advance rate equal to 80% of the Loan Value
of Eligible Receivables (as defined), plus generally 72% of the Loan Value of
Eligible Inventory (as defined), subject to certain adjustments. Between March
1 and December 15, the inventory advance rate will be increased to 77% of the
Loan Value of Eligible Inventory provided that the total amount of all senior
secured advances does not exceed 85% of the Loan to Value Ratio (as defined).
The Company may also borrow up to an additional $20 million under the junior
secured facility provided that the total borrowings (senior secured and junior
secured) do not exceed 93% of the Loan to Value Ratio.
The Revolver permits the Company to borrow funds under the senior secured
tranche at an interest rate per annum equal to (a) the higher of (i) the annual
rate of interest as announced by BankBoston as its "Base Rate" and (ii) the
weighted average of the rates on overnight federal funds plus 0.50% per annum;
or (b) 2.25% per annum plus the quotient of (i) the LIBOR Rate in effect
divided by (ii) a percentage equal to 100% minus the percentage established by
the Federal Reserve as the maximum rate for all reserves applicable to any
member bank of the Federal Reserve system in respect of eurocurrency
liabilities. Each of these rates is subject to a 0.50% increase in the event of
overadvances. The junior secured facility permits the Company to borrow funds
at the "Base Rate" plus 7.00% per annum.
The Revolver is secured by substantially all of the non-real estate assets of
the Company. The Revolver contains financial covenants including (i) minimum
quarterly EBITDA, (ii) minimum monthly accounts payable to inventory; (iii)
maximum annual capital expenditures; and (iv) minimum operating cash flow to
interest expense (for the fiscal quarters ending on or about January 2001 and
thereafter). The Company is in compliance with the Revolver covenants.
DIP Facility: The DIP Facility had 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,
F-34
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Company could 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 could 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 had Overadvance
Amounts.
There were no compensating balance requirements under the DIP Facility but
the Company was required to pay an annual commitment fee of 0.3% of the unused
portion. The DIP Facility contained 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 EBITDA and minimum accounts payable to inventory ratios.
The lenders under the DIP Facility had a "super-priority claim" against the
estate of the Company. The Company was in compliance with the DIP Facility
covenants. The DIP Facility expired on the Effective Date.
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 DIP Facility. The Company accelerated the amortization of
those fees during the fourth quarter of 1998 to complete such amortization
prior to the Effective Date, at which time it paid $2.4 million (Note 2) for
financing fees associated with the Revolver.
Pre-petition Revolver: Prior to the Filing, the Company had a $150 million
revolving loan facility ("Pre-petition Revolver"), including outstanding
commercial and standby letters of credit. The Pre-petition Revolver had a
maturity date of July 31, 1997 and 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 1998, 1997 and 1996. No interest
was paid or accrued on the Pre-petition Revolver during the Chapter 11 case.
9% Convertible Notes: The 9% Convertible Notes (the "Notes") were issued by
Bradlees Stores, Inc. (Note 17) under an Indenture dated February 2, 1999 (the
"Indenture"). Certain provisions of the Notes and the Indenture are summarized
below. The statements under this caption relating to the Notes and the
Indenture are summaries only, however, and do not purport to be complete. Such
summaries make use of terms defined in the Indenture and are qualified in their
entirety by reference to the Indenture, which was filed as an exhibit to the
Company's Form S-1 Registration Statement.
Each Note will mature on February 3, 2004, and will bear interest at the rate
of 9% per annum from the date of issuance, payable semi-annually in arrears on
January 1 and July 1 of each year, commencing July 1, 1999. The aggregate
principal amount of the Notes that may be issued under the Indenture is limited
to $28,995,000 (which excludes the $11.0 million aggregate principal amount
that was pre-paid on the Effective Date). The indebtedness represented by the
Notes ranks equally with the Company's other non-subordinated indebtedness.
Any Notes outstanding shall be redeemed, along with any accrued and unpaid
interest on such Notes, with the net proceeds received upon the planned sale of
the leasehold interest in the Yonkers, New York store or the net proceeds (up
to a maximum amount of $6.5 million plus accrued and unpaid interest and
expenses) received upon any disposition of the Additional Collateral (as
defined below). Additionally, the net proceeds of any offering of common stock
by Bradlees, Inc., except offerings to employees pursuant to the Plan or
pursuant to any benefit plan, shall be used to repay, pro rata, any outstanding
Notes plus accrued and unpaid interest. The Company also has the right to
redeem the Notes at any time, in whole or in part, by paying the holder the
unpaid principal plus accrued and unpaid interest.
F-35
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Notes are secured by (i) a first priority lien on the leasehold interest
in the Yonkers, New York store and the net proceeds received upon its
disposition (which will be subject to Bankruptcy Court approval), (ii) under
certain circumstances and subject to certain limitations described below, first
priority liens on leasehold interests in three other named stores (the
"Additional Collateral"), as well as any net proceeds received upon any
dispositions(s), and (iii) a first priority pledge of all of the outstanding
capital stock of New Horizons of Yonkers, Inc. The net proceeds realized upon
the sale of the Yonkers, New York leasehold interest will be paid to the
holders of the Notes as a pre-payment.
The lien on the Additional Collateral shall only secure indebtedness under
the Notes equal to the sum of $6.5 million plus an amount from time to time
equal to the amount of interest that would accrue on $6.5 million of principal
amount of outstanding Notes from February 2, 1999 to the date of calculation of
the extent of such lien.
The Notes are convertible any time after the first anniversary of the
Effective Date into shares of the Company's Common Stock. The conversion price
will initially be the arithmetic unweighted average closing price of the Common
Stock during the twenty business days preceding the first anniversary of the
Effective Date.
CAP Notes: Pursuant to the Plan, the Company issued Capital Lease ("CAP")
Notes in the aggregate principal amount of $547,094. The CAP Notes bear
interest at a rate equal to nine percent (9%) per annum. Principal and accrued
interest are payable in twelve equal quarterly installments, commencing three
months after the Effective Date. The Company can prepay these notes, in whole
or in part, without premium or penalty. The CAP Notes are secured by a first
lien on the property on which the CAP Note holder holds a valid first priority
security interest.
Cure Notes: Pursuant to the Plan, the Company issued Cure Notes in the
aggregate principal amount of $3.3 million. The Cure Notes are not secured and
bear interest at a rate equal to nine percent (9%) per annum. Interest is
payable annually. The Company can prepay these notes, in whole or in part,
without premium or penalty.
Tax Notes: Pursuant to the Plan and the Bankruptcy Code, the Company agreed
to make deferred cash payments in the aggregate principal amount of $2.4
million on account of allowed tax claims. Payments will be made in equal
quarterly installments of principal, plus simple interest accruing from the
Effective Date at a rate equal to nine percent (9%) per annum on the unpaid
portion of such claims. The first payment is due on the latest of: (i) 90 days
after the Effective Date, (ii) 90 days after the date on which an order
allowing any such claim becomes a final order, and (iii) such other date as is
agreed to by the Company and by the holder of such claim. The Company can
prepay these notes, in whole or in part, without premium or penalty.
Pre-petition 2002 Notes and 2003 Notes: The 2002 Notes and 2003 Notes were
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. No
interest on the 2002 Notes and 2003 Notes, due semiannually, was paid or
accrued during the Chapter 11 case. Holders of the 2002 Notes and 2003 Notes
will receive Warrants (Note 10) upon surrender of such notes following the
Effective Date and the 2002 Notes and 2003 Notes were deemed canceled.
F-36
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
8. Reorganization Items
The Company provided for or incurred the following expense and income items
in 1998, 1997 and 1996 directly associated with the Chapter 11 reorganization
proceedings and the resulting restructuring of its operations (in 000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Professional fees............................... $12,000 $10,000 $10,000
Interest income................................. (1,038) (420) (1,445)
Provision for rejected leases................... (7,156) (2,846) 32,756
Net asset/liability write-offs.................. 620 (3,408) 4,034
Gain on disposition of properties............... (6,153) (1,153) (1,697)
Provision for inventory impairment.............. -- -- (1,000)
Provision for occupancy and other store closing
costs.......................................... 4,868 1,112 4,102
Employee severance and termination benefits..... 1,420 (2,813) 23,042
Provision for MIS retention bonuses............. -- 280 --
------- ------- -------
Total reorganization items.................... $ 4,561 $ 752 $69,792
======= ======= =======
</TABLE>
Professional fees and interest income: Professional fees represented
estimates of expenses incurred, primarily for legal, consulting and accounting
services provided to the Company and the creditors committee (which were
required to be paid by the Company while in Chapter 11). Interest income
represented interest earned on cash invested during the Chapter 11 proceeding.
Provision for rejected leases and net asset/liability write-offs: Under the
Bankruptcy Code, the Company could elect to reject real estate leases, subject
to Bankruptcy Court approval. The Company recorded a provision of approximately
$32.8 in 1996 for rejected leases and anticipated claims for certain closed and
closing store leases that were expected to be rejected. The liability
established for all rejected leases during the Chapter 11 case was subject to
future adjustments, including adjustments based on claims filed by the lessors
and Bankruptcy Court actions. 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.
During 1998, the Company obtained confirmation that the lessor of a previously
rejected lease had re-let the premises and, accordingly, the Company reduced
its liability for rejected leases by $4.7 million. Also during 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.
The Company incurred a net asset write-off in 1998 relating to the disposal
of greeting card fixtures that were replaced as a consequence of the Company's
rejection of its greeting card supply contract. In connection with store
closings and lease rejections, the Company wrote off certain net assets in 1996
(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. The net asset write-offs in 1997
and 1996 also included adjustments to lower the carrying values of certain
properties held for sale to their most current net realizable values.
Gain on disposition of properties: The Company sold a previously closed store
in 1998 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. The Company also recognized a gain, net of
the associated net asset write-off, of $4.3 million in January, 1999 related to
the modification of the Union Square lease terms
F-37
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Note 2). The Company sold certain closed store leases in 1997 and 1996 and the
related gains were classified as reorganization items since the associated net
asset write-offs were also previously included in reorganization items.
Inventory impairment and store closing costs: In January, 1999, the Company
recorded a provision of approximately $4.9 million for the estimated closing
costs associated with one store that closed in March, 1999 and the Union Square
and Yonkers, New York stores that are anticipated to begin closing by the end
of fiscal year 1999 in connection with the Company's Plan (Note 2). A provision
of $0.5 million for an inventory impairment at the store closed in March, 1999
was charged to cost of sales in January, 1999.
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 of $2.9 million for
the 6 stores that was charged to cost of sales. This provision for inventory
impairment, along with the January, 1999 provision above, 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 it 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 1998 totaled approximately $2.0 million.
Employee severance and termination benefits: The Company recorded a provision
of approximately $1.4 million in January, 1999 for severance and termination
benefits for approximately 563 associates at the three closing stores and for
certain central office positions eliminated. 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
F-38
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(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 1998, 1997 and 1996 totaled
approximately $1.8, $4.5 and $16.6 million, respectively.
MIS retention bonuses: The Company had a retention bonus program for certain
Management Information System (MIS) employees that provided for bonuses during
the Chapter 11 proceeding for continued employment through April, 1998. In
April, 1998 these bonuses were paid and this program was discontinued.
Restructuring reserves: As of January 30, 1999, the Company had remaining
reserves (included in accrued expenses and in other long-term liabilities)
totaling approximately $6.6 million (exclusive of provisions for rejected
leases discussed in Note 2) for costs associated with the closing of stores and
other restructuring activities. Approximately one-half of the remaining
reserved costs are expected to be paid within a year, with the other costs,
including certain closed store occupancy costs, payable thereafter.
Approximately $3.8 million of restructuring costs, including the severance and
termination benefit payments discussed above, were paid in 1998.
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 March, 1999, the one
store closed in April, 1997, the 6 stores closed in February, 1998 and the 27
stores closed during 1996 were (in 000's):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- --------
<S> <C> <C> <C>
Net sales........................................ $14,322 $69,423 $221,738
Operating loss................................... (592) (1,158) (29,827)
</TABLE>
9. Lease Commitments and Unfavorable Lease Liability
At January 30, 1999, the Company had various noncancelable leases in effect
for its stores, distribution centers, and central office building, as well as
for certain equipment. Capital lease obligations were revalued under fresh-
start reporting (Note 2). Minimum payments due under leases are as follows:
<TABLE>
<CAPTION>
(000's)
-------------------------------
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1999....................................... $ 4,326 $ 48,237
2000....................................... 4,364 44,488
2001....................................... 4,149 42,419
2002....................................... 4,110 40,659
2003....................................... 4,110 34,558
Thereafter................................. 32,147 241,593
-------- --------
Total minimum payments..................... 53,206 $451,954
======== ========
Estimated executory costs.................. (2,610)
--------
Net minimum lease payments................. 50,596
Imputed interest........................... (24,274)
--------
Present value of net minimum lease
payments.................................. 26,322
Less current portion....................... (1,038)
--------
Obligations under capital leases, net of
current portion........................... $ 25,284
========
</TABLE>
F-39
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Minimum payments for capital and operating leases have not been reduced by
minimum sublease rentals of $11.0 and $7.2 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:
<TABLE>
<CAPTION>
( 000's)
-------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Operating leases:
Minimum rent.................................... $48,565 $48,749 $57,352
Contingent rent................................. 209 425 1,024
Sublease income................................. (7,622) (7,899) (9,248)
------- ------- -------
41,152 41,275 49,128
------- ------- -------
Capital leases:
Sublease income................................. (815) (1,297) (1,726)
------- ------- -------
Total............................................. $40,337 $39,978 $47,402
======= ======= =======
</TABLE>
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.
The unfavorable lease liability was recorded as part of fresh-start reporting
(Note 2) and represents the estimated present value liability related to lease
commitments that exceed market rents for similar locations. This liability will
be amortized as a reduction of rent expense over the remaining lease terms
while the associated present value discount will be amortized to interest and
debt expense based on the effective interest method.
The Company entered into a financing facility in 1994 with a special purpose
entity ("SPE") 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
included the accounts of the SPE in its consolidated financial statements.
Borrowings of approximately $12.5 and $18.0 million at January 30, 1999 (prior
to the Effective Date) and January 31, 1998 were included in liabilities
subject to settlement (Note 2).
10. Capital Stock and Additional Paid-In Capital
Pursuant to the Plan, reorganized Bradlees has authorized capital stock
consisting of 41,000,000 shares, par value $.01 per share, consisting of
40,000,000 shares of Common Stock and 1,000,000 shares of Preferred Stock. As
of January 30, 1999, 10,225,711 shares of Common Stock were presumed issued
under fresh-start reporting and in accordance with the Plan. The shares are
being issued following consummation of the Plan. No Preferred Stock was issued.
F-40
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Common Stock: In addition to the above shares being issued under the Plan,
the following shares of Common Stock are reserved for issuance: 1,000,000
shares issuable upon exercise of outstanding warrants (see below); and
1,000,000 shares are reserved for issuance under the Stock Plan (see below and
Note 11). In addition, an indeterminate number of shares can be issued upon
conversion of any of the 9% Convertible Notes (Note 7).
The holders of Common Stock are entitled to one vote per share on all matters
to be voted on by stockholders. Therefore, the holders of a majority of the
shares voted in the election of directors can elect all of the directors then
standing for election, subject to the rights of the holders of Preferred Stock,
if and when issued. The holders of Common Stock are entitled to receive such
dividends, if any, as may be declared from time to time by the Company's Board
of Directors. Dividends cannot be paid under the Revolver. The possible
issuance of Preferred Stock with a preference over common Stock as to any
future dividends could impact the dividend rights of holders of Common Stock.
The holders of Common Stock have no preemptive or other subscription rights,
and there are no conversion rights or redemption or sinking fund provisions
with respect to the Common Stock.
All of the outstanding shares of Common Stock, all of the shares of Common
Stock issuable upon exercise of the warrants and options, and all of the shares
of Common Stock issuable upon conversion of the 9% Convertible Notes, are
freely tradeable without restriction or further registration under the
Securities act, either because such shares were issued or are issuable pursuant
to the exemption provided by Section 1145 of the Bankruptcy Code and such
shares are not "restricted securities" as defined in Rule 144 under the
Securities Act or because the offer and resale of such shares was registered
pursuant to the Company's Form S-1 Registration Statement or pursuant to a
registration statement on Form S-8 as described below.
Undesignated Preferred Stock: The Board of Directors is authorized, without
further action of the stockholders, to issue up to 1,000,000 shares of
Preferred Stock. Any Preferred Stock issued may rank prior to the Common Stock
as to dividend rights, liquidation preference or both, may have full or limited
voting rights and may be convertible into shares of Common Stock.
Warrants and Options: On the Effective Date, a total of 1,000,000 shares of
Common Stock were reserved for issuance under the Stock Plan, of which 750,000
shares will be the subject of options pursuant to the Plan. These options will
be granted in May, 1999. In addition, 1,000,000 shares of Common Stock were
reserved for issuance under Warrants at an exercise price of $7.00 per share.
The Warrants are being issued following consummation of the Plan and will
expire on February 2, 2004. The Company currently intends to file a
registration statement on Form S-8 under the Securities Act to register all
shares of Common Stock currently issuable pursuant to the Stock Plan.
Prior Common Stock: The authorized capital stock of the Company prior to the
Effective Date consisted of 40 million shares of common stock, par value of
$0.01 per share, of which 11,310,384 shares were outstanding at January 30,
1999, prior to being canceled under the Plan, and one million shares of
preferred stock, also canceled under the Plan, par value of $0.01 per share,
none of which were outstanding at January 30, 1999.
Prior to the Effective Date, the Company had a Restricted Stock Plan that
provided for the award of 277,008 shares of common stock ("Restricted Stock")
to certain officers and employees. At January 30, 1999, prior to the Effective
Date, 13,447 shares were outstanding under the Restricted Stock Plan. The
Restricted Stock Plan was terminated on the Effective Date. There were no
awards of Restricted Stock since the Filing. No cash payments were required
from Restricted Stock recipients and all issued shares accrued dividends, if
any. In general, the shares became unrestricted under a five-year vesting
schedule. All shares of Restricted Stock could vest earlier in certain
circumstances (death, disability, retirement or a change of control). Shares of
F-41
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Restricted Stock which had not vested were not freely transferable and reverted
to the Company upon the employee's termination.
11. Stock Options
On the Effective Date, the Bradlees, Inc. 1999 Stock Option Plan (the "Stock
Plan") became effective. Pursuant to the Plan, the Company agreed to grant
options to purchase 750,000 shares of the Company's Common Stock to the
Company's senior management. The options will be granted when their exercise
price is determined and will vest in one-third increments beginning on the date
of grant and on each of the two anniversaries of the date of grant following
the date of grant. All such vested options shall be exercisable for a period of
five years from the date of grant. The exercise price of these options will be
the lowest ten-day rolling average of the closing price of the Company's Common
Stock between April 3 and May 3, 1999 (the period between sixty and ninety days
after the Effective Date). At the time of grant, any compensation expense
related to these options will begin to be recorded over the vesting period. In
addition, the Compensation Committee has the right to grant options with
respect to 250,000 additional shares at such price and on such terms as the
Compensation Committee shall determine.
Prior to the Effective Date, the Company had a 1992 Stock Option Plan for Key
Employees (the "Key Employee Plan") that provided for the grant of options for
up to 1,272,283 shares of Common Stock to certain employees. The Key Employee
Plan was terminated on the Effective Date. No options were granted under the
Key Employee Plan since the Filing. The options were intended to qualify as
incentive stock options or non-qualified stock options and generally had a
three- to five-year vesting schedule. Activity in the Key Employee Plan was as
follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
-------- ----------------
<S> <C> <C>
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
Granted........................................... -- --
Canceled/Expired.................................. (27,680) $12.99
Exercised......................................... -- --
Terminated........................................ (253,345) $11.92
-------- ------
Outstanding at January 30, 1999................... -- --
======== ======
</TABLE>
Prior to the Effective Date, the Company also had a 1993 Non-Employee
Directors' Stock Option Plan (the "Directors' Plan") that provided for the
grant of non-qualified options for up to 100,000 shares of Common Stock to non-
employee directors. In general, the options had a three-year vesting schedule.
No options were issued, canceled, exercised or expired under the Directors'
Plan in 1998. The Directors' Plan was terminated on the Effective Date. During
1997 and 1996, 30,000 and 15,000 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 was $7.02). At January 31, 1998, 45,000 of the options were exercisable
at a weighted average price of $12.26 and had a weighted average remaining
contractual life of 5.26 years.
F-42
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 (APB)
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 1998, 1997 and 1996, and
accordingly the pro forma disclosures have been omitted.
12. Employee Benefit Plans
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits", which revised disclosures about
pension and other post-retirement benefit plans. The following information is
provided in accordance with the requirements of SFAS No. 132.
Pension plans: Certain union employees are covered by multi-employer defined
benefit plans. Expenses for these plans were $.8 million in 1998, $.9 million
for 1997 and $1.1 million for 1996.
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. Effective December 31, 1998, benefit accruals for specified
employees were frozen and the Company instituted an employer matching
contribution at that time under its 401(k) plan (see below). The freeze
triggered a curtailment gain of $6.2 million in November, 1998 and the plan
liabilities and assets were remeasured with the associated net impact included
in the curtailment gain. In addition, purchase accounting was applied at
January 30, 1999 (Note 2), resulting in immediate recognition of all previously
unrecognized liabilities and a charge of $5.7 million that was included in the
fresh-start revaluation charge.
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. Effective December 31, 1998, benefit accruals for specified
employees were frozen under the Company's qualified pension plan (see above).
The Supplemental Executive Retirement Plan ("SERP") benefits were adjusted
accordingly to reflect the change in future qualified pension benefits. In
addition, purchase accounting was applied at January 30, 1999 to immediately
write-off the intangible SERP asset and the associated additional liability and
to recognize all previously unrecognized liabilities, resulting in a charge of
$1.1 million that was included in the fresh-start revaluation charge.
The components of net pension costs (prior to fresh-start reporting) for the
qualified and non-qualified plans were as follows:
<TABLE>
<CAPTION>
(000's)
--------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Service costs.................................... $ 3,599 $ 3,272 $ 3,897
Interest costs................................... 5,503 5,054 4,909
Return on plan assets............................ (12,691) (9,566) (7,617)
Net amortization and deferral.................... 6,762 4,177 2,993
Curtailment (gain) loss.......................... (6,207) 126 554
Special termination benefits..................... -- (359) 782
-------- ------- -------
Net pension (benefit) cost....................... $ (3,034) $ 2,704 $ 5,518
======== ======= =======
</TABLE>
F-43
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The funded status (after fresh-start reporting in 1998) was as follows:
<TABLE>
<CAPTION>
(000's)
-------------------------------------------------------------
January 30, 1999 January 31, 1998
------------------------------ ------------------------------
Non- Non-
Qualified Plan Qualified Plans Qualified Plan Qualified Plans
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Actuarial present value
of:
Vested benefit
obligation............ $71,974 $ 2,697 $61,504 $ 3,046
======= ======= ======= =======
Accumulated benefit
obligation............. $73,328 $ 3,077 $62,656 $ 3,490
======= ======= ======= =======
Projected benefit
obligation............. 73,429 4,458 72,233 4,236
Plan assets at fair
value.................. 77,597 -- 68,611 --
------- ------- ------- -------
Projected benefit
obligation less than
(greater than) plan
assets................ 4,168 (4,458) (3,622) (4,236)
Unrecognized prior
service cost........... -- -- 518 1,434
Unrecognized transition
obligation............. -- -- -- 102
Unrecognized net (gain)
loss................... -- -- (2,740) 435
Additional minimum
liability (recorded as
other assets).......... -- -- -- (1,225)
------- ------- ------- -------
Prepaid pension cost
(accrued pension
liability)............. $ 4,168 ($4,458) ($5,844) ($3,490)
======= ======= ======= =======
</TABLE>
The curtailment losses and special termination benefits in 1997 and 1996
resulted 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 8). Certain portions ($1.2 million) of
the nonqualified plans' accrued pension liability at January 31, 1998 related
to pre-petition employment contracts and were included in liabilities subject
to settlement under the reorganization case. These amounts totaled $1.7 million
at January 30, 1999 prior to the Effective Date and are presented as a 1998
non-qualified plan curtailment amount below since these amounts are being
settled under the Plan (Note 2) and were included in the extraordinary gain on
debt discharge.
Summarized information about the changes in the plans' benefit obligations
and assets (including the effect of fresh-start reporting in 1998) and about
the assumptions used in determining the plans' information is as follows:
<TABLE>
<CAPTION>
(000's)
-------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Non- Non-
Qualified Plan Qualified Plans Qualified Plan Qualified Plans
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
Change in benefit
obligation:
Benefit obligation at
beginning of year..... $72,233 $ 4,236 $66,978 $ 5,126
Service cost........... 2,952 648 2,813 460
Interest cost.......... 5,123 380 4,836 218
Amendments............. 11 351 -- --
Actuarial loss (gain)
and assumption
changes............... 6,522 546 886 512
Expenses paid.......... (556) -- (634) --
Benefits paid.......... (3,149) (12) (2,646) (1,721)
Curtailment............ (9,707) (1,691) -- --
Special termination
benefits.............. -- -- -- (359)
------- ------- ------- -------
Benefit obligation at
end of year........... $73,429 $ 4,458 $72,233 $ 4,236
======= ======= ======= =======
Change in plan assets:
Fair value at beginning
of year............... 68,611 -- 62,325 --
Actual return on plan
assets................ 12,691 -- 9,566 --
Expenses paid.......... (556) -- (634) --
Benefits paid.......... (3,149) -- (2,646) --
------- ------- ------- -------
Fair value of plan
assets at end of
year.................. $77,597 $ -- $68,611 $ --
======= ======= ======= =======
Weighted average
assumptions at the end
of the year:
Discount rate.......... 6.50% 6.50% 7.00% 7.00%
Expected return on plan
assets................ 9.25% N/A 9.25% N/A
Rate of compensation
increase.............. 3.50% 4.00% 4.09% 4.25%
</TABLE>
F-44
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 and reinstated in January, 1999, are in the form of cash and
based on a percentage of employee contributions. There was no plan expense in
1997 and 1996, as compared to $0.1 million for the one month of 1998.
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 valuations at January 30, 1999 and January 31, 1998 reflect
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 two years
(at 50% per year beginning January 1, 1999) towards the cost of providing
medical benefits to eligible retirees. In addition, purchase accounting was
applied at January 30, 1999 to immediately recognize all previously
unrecognized liabilities, resulting in a credit of approximately $2 million
that was included in the fresh-start revaluation charge.
The status of the plan (after fresh-start reporting in 1998) was as follows:
<TABLE>
<CAPTION>
(000's)
---------------------------------
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Accumulated post-retirement benefit
obligation for:
Retirees............................... $ 915 $ 733
Fully elibible actives................. 430 536
Other actives.......................... 153 439
------- -------
1,498 1,708
Plan assets at fair value............... -- --
------- -------
Funded status........................... (1,498) (1,708)
Unrecognized prior service.............. -- (5,189)
Unrecognized net gain................... -- (2,513)
------- -------
Accrued post-retirement benefit cost.... $(1,498) $(9,410)
======= =======
</TABLE>
Net post-retirement benefit (prior to fresh-start reporting) was as follows:
<TABLE>
<CAPTION>
(000's)
-----------------------
1998 1997 1996
------- ------- -----
<S> <C> <C> <C>
Service cost........................................ $ 8 $ 172 $ 241
Interest cost....................................... 102 429 540
Amortization, net................................... (5,681) (1,359) (877)
Curtailment gain.................................... -- (3,939) --
------- ------- -----
Net benefit......................................... $(5,571) $(4,697) $ (96)
======= ======= =====
</TABLE>
Summarized information (including the effect of fresh-start reporting) about
the changes in the plan benefit obligation (there are no plan assets) is as
follows:
F-45
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
(000's)
---------------
1998 1997
------ -------
<S> <C> <C>
Change in Accumulated Post-Retirement Benefit Obligation
(APBO):
APBO at beginning of year............................... $1,708 $ 7,867
Service cost............................................ 8 173
Interest cost........................................... 102 428
Amendments.............................................. (304) (4,925)
Actuarial loss (gain) and assumption changes............ 345 (1,560)
Benefits paid........................................... (361) (275)
------ -------
APBO at end of year..................................... $1,498 $ 1,708
====== =======
</TABLE>
Assumptions used in determining the plan information were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Discount rate.................................................... 6.50% 7.00%
Expected return on plan assets................................... N/A N/A
Rate of compensation increase (life ins.)........................ 4.00% 4.25%
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation was 7.50% for 1998 (5.50% for post-65
coverage) grading down to 4.00% over 10 years and 8.70% for 1997 (6.25% for
post-65 coverage) grading down to 4.25% over 10 years. A one percentage point
change in the health care cost trend rate would have had the following effects:
<TABLE>
<CAPTION>
(000's)
---------------------
One Percentage Point
---------------------
Increase Decrease
---------- ----------
<S> <C> <C>
Effect on total service and interest cost
components.......................................... $ 2 $ 2
Effect on accumulated benefit obligation............. $29 $20
</TABLE>
13. Income Taxes
There was no income tax expense or benefit in 1998, 1997 or 1996.
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:
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Statutory rate..................................... 35.0% (35.0)% (35.0)%
State income taxes, net of Federal income tax
benefit........................................... 0.0% (4.0)% (6.4)%
Non-includible fresh-start accounting gain......... (36.4)% -- --
Non-deductible professional fees................... 1.0% 14.5% 1.5%
Non-deductible compensation........................ 0.4% -- 1.5%
Valuation allowance................................ -- 24.5% 38.4%
----- ----- -----
0% 0% 0%
===== ===== =====
</TABLE>
F-46
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Deferred taxes represent the differences between financial statement amounts
and the tax bases of assets and liabilities. Deferred tax liabilities (assets)
are as follows:
<TABLE>
<CAPTION>
(000's)
-------------------
1998 1997
-------- ---------
<S> <C> <C>
Lease interests......................................... $ 6,639 $ 51,399
Inventories............................................. 4,221 11,854
Other................................................... -- 3,295
-------- ---------
Total liabilities....................................... 10,860 66,548
-------- ---------
Net operating loss carryforwards........................ (29,065) (105,917)
Self-insurance accruals................................. (8,029) (8,602)
Rejected lease claims................................... -- (20,350)
Post-retirement benefits................................ (3,231) (3,704)
Closing costs........................................... (2,072) (2,902)
Property, plant and equipment, net...................... (24,216) (3,233)
Capital leases.......................................... (6,358) (10,708)
Vacation pay............................................ (1,814) (2,636)
Alternative minimum tax credit carryforwards............ (3,316) (2,144)
Other................................................... (3,900) (3,182)
-------- ---------
(82,001) (163,378)
Valuation allowance..................................... 71,141 105,411
-------- ---------
Total assets............................................ (10,860) (57,967)
-------- ---------
Net deferred tax liability.............................. $ -- $ 8,581
======== =========
</TABLE>
At January 30, 1999, the Company had net operating loss carryforwards of
approximately $75.2 million for Federal income tax purposes which will expire
beginning in fiscal year 2010 and alternative minimum tax credit carryforwards
of $3.3 million which are available to reduce future Federal regular income
taxes over an indefinite period. As a result of the Company's emergence from
Chapter 11, a portion of the net operating loss carryforwards were reduced by
the cancellation of indebtedness income recognized. Also, a change in ownership
occurred on the Effective Date (due to the issuance of new stock) which will
result in a limitation on the remaining amounts of net operating loss and tax
credit carryforwards that can be utilized each year. This annual limitation
will be based primarily on the equity value of reorganized Bradlees under
Section 382 of the Internal Revenue Code of 1986. Any tax benefits realized for
book purposes after the Effective Date resulting only from pre-emergence net
operating loss and tax credit carryforwards will have to be reported as an
addition to paid-in capital.
The Company had a valuation allowance of $71.1 million against deferred tax
assets at January 31, 1999. The realization of the deferred tax assets is
dependent upon future taxable income during the Federal and State carryforward
periods.
14. Commitments and Contingencies
General: The Company 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.
Trade Vendors'Lien: On the Effective Date, the Company entered into an
agreement for the benefit of its trade vendors which grants such trade vendors
a subordinated security interest in the Company's inventory (the "Trade
Vendors' Lien"). The Trade Vendors' Lien, which is subordinated to the lien
securing the Revolver (Note 7), attaches to the Company's inventory (but not
any other assets). The Trade Vendors' Lien shall
F-47
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
terminate on the earliest to occur of (i) two years after the Effective Date,
(ii) at the sole option of the Company, the date on which the ratio of the
amount of accounts payable to the amount of inventory 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 Company
merges or otherwise combines with another company or companies, (iv) at the
sole option of the Company, as to any individual trade vendor, at such time as
such vendor fails to provide merchandise to the Company on terms which are at
least as favorable as the credit terms under which such vendor provided
merchandise in the year prior to the Effective Date and (v) at the sole option
of the Company, as to any individual trade vendor that initially provides
retail merchandise after the Effective Date, at such time as such vendor fails
to provide retail merchandise on terms which are as favorable as the initial
credit terms which such vendor provided retail merchandise to the reorganized
Bradlees; provided, however, that any termination by the Company of the Trade
Vendors' Lien will not be effective until the thirtieth (30th) day after the
Company gives (a) actual notice to the Trade Vendors' Collateral Agent (as
defined) and (b) (x) in the case of trade vendors generally, notice by
publication in The New York Times (national edition), of its intent to
terminate the Trade Vendors' Lien and actual notice to trade vendors to whom
amounts are then due and owing, or (y) in the case of an individual trade
vendor, actual notice of such termination to the trade vendor whose Trade
Vendors' Lien the Company proposes to terminate.
Corporate Bonus Plan: 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
annual business plan. For each $5 million of EBITDA improvement, net of the
provision for the additional earned bonuses, over the amount projected, the
award increases by 25% of the base award up to a maximum increase of 100% of
the award. In addition, a discretionary fund in the amount of $500,000 is
available 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 $32.0 million in 1998 and $28.1 million in 1997, 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). The Company achieved the minimum EBITDA in 1998 and in 1997 and,
accordingly, recorded provisions of approximately $4.8 and $4.0 million for
such bonuses in 1998 and 1997, respectively, that were included in selling,
store operating, administrative and distribution expenses. The 1998 and 1997
bonuses were paid in April, 1999 and April, 1998, respectively.
Management Emergence Bonus Plan: On the Effective Date, certain executives
were selected to participate in the Company's Management Emergence Bonus Plan
(the "Emergence Bonus Plan"). The aggregate amount payable to these employees
under the Emergence Bonus Plan is $3 million and a provision for such was
accrued in January, 1999. One million dollars of this was paid on the Effective
Date. The remaining $2 million will be paid on the later of (a) the one-year
anniversary of the Effective Date and (b) the date upon which the 9%
Convertible Notes (Note 7) are fully paid or converted to equity. No payments
will be made under the Emergence Bonus Plan if there exists any continuing
default under the Revolver or its successor. If an employee leaves the Company
for any reason, other than an involuntary termination without Cause (as
defined) or a voluntary termination for Good Reason (as defined), within one
year of receiving a payment under the Emergence Bonus Plan, the payment shall
be subject to partial or total recoupment. If an employee is involuntarily
terminated without Cause, voluntarily leaves for Good Reason, or leaves due to
death or disability, then the employee does not have to return any payments
under the Emergence Bonus Plan and is
F-48
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
entitled to receive any portion of the payments to be made under the Emergence
Bonus Plan within 30 days after the date of termination of employment.
CEO Contract: The Company entered into a three-year employment agreement with
its current CEO, Mr. Thorner, commencing as of October 26, 1995 and amended as
of November 7, 1997. This employment agreement is automatically extended for
one additional year each year unless either party gives the other party written
notice of its election not to extend the contract. Under the agreement, Mr.
Thorner is entitled to an annual incentive award of 55% of his base salary
pursuant to the Corporate Bonus Plan (see above). 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. 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 (as defined), Mr. Thorner would generally be entitled to all payments
and benefits called for under the agreement for the remainder of its term.
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 above). If the employment of any participant in the Severance
Program is terminated other than for cause, 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, twelve months for Vice Presidents, and six months for
certain other employees, 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 (as
defined), 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 Plan did not
constitute a change of control under the Severance Program.
15. Changes in Accounting Estimates
As discussed in Note 3, 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 1998 and 1997, using
a discount rate of 6.0% (the same rate used at January 31, 1998 and February 1,
1997), and also 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.
F-49
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company changed its vacation pay vesting policy for certain pay groups in
December, 1997, whereby the employees in those pay groups now 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, $4.5 million of the Company's
vacation pay reserves as of January 1, 1998 was eliminated with a corresponding
credit in SG&A expenses.
16. Summary of Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
($ in thousands except per share data)
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended January 30,
1999:
Net sales.................. $283,871 $310,381 $312,133 $430,812 $1,337,197
Gross margin............... 79,670 96,593 94,739 122,101 393,103
Net income (loss).......... (24,653) (2,722) (7,207) 320,532 285,950
Net income (loss) per
share..................... $ (2.18) $ (0.24) $ (0.64) * *
Weeks in period............ 13 13 13 13 52
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 income (loss) per
share..................... $ (2.81) $ (1.48) $ 0.03 $ 2.29 $ (1.98)
Weeks in period............ 13 13 13 13 52
</TABLE>
* Earnings per share is not presented for the quarter and fiscal year ended
January 30, 1999 because such presentation would not be meaningful. The
former stock was canceled under the Plan and the new stock was not issued
until after consummation.
17. Summarized Financial Information for Bradlees Stores, Inc. and New Horizons
of Yonkers, Inc.
Under the Plan, Bradlees, Inc. issued securities and Bradlees Stores, Inc.
issued certain debt. Bradlees, Inc. operates its stores through Bradlees
Stores, Inc., an indirect wholly-owned subsidiary. Bradlees, Inc. is
guaranteeing the debt issued by Bradlees Stores, Inc. Substantially all of the
assets of the Company, on a consolidated basis, are held by Bradlees Stores,
Inc. The following summarized financial information of Bradlees Stores, Inc. is
presented in accordance with SEC Staff Accounting Bulletin 53 and Regulation S-
X Rule 1-02 (bb):
<TABLE>
<CAPTION>
(000's)
---------------------------------
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Current Assets........................... $263,810 $286,332
Due from New Horizons of Yonkers, Inc.... 14,000 --
Noncurrent Assets........................ 199,941 302,286
Current Liabilities...................... 271,628 246,687
Payable to Bradlees, Inc................. 55,000 189,881
Noncurrent Liabilities................... 137,123 72,324
Liabilities Subject to Settlement Under
the Reorganization Case................. $ -- $341,874
</TABLE>
F-50
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
<TABLE>
<CAPTION>
(000's)
--------------------------------------------------
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Net Sales............... $1,337,197 $1,344,444 $1,561,718
Gross Margin............ 393,103 396,357 434,067
Earnings (Loss) from
Continuing Operations.. 65,552 (22,620) (218,726)
Net Earnings (Loss)..... $ 65,552 $ (22,620) $ (218,726)
</TABLE>
Upon confirmation of the Plan, Bradlees, Inc. contributed a portion of its
intercompany receivable to the capital of Bradlees Stores, Inc. so that $96
million was allowed as the final intercompany claim. A major portion ($220.2
million) of the extraordinary gain on debt discharge presented in the Company's
consolidated statement of operations for 1998 was allocated to Bradlees, Inc.
as a result of the settlement of the 2002 and 2003 Notes (Note 7).
New Horizons of Yonkers, Inc., a subsidiary of Bradlees Stores, Inc., is the
lessee of Bradlees' Yonkers, New York store lease, which it subleases to
Bradlees Stores, Inc. New Horizons of Yonkers, Inc.'s financial activity was
primarily limited to rent expense under the lease and rental income from the
sublease during the periods presented. New Horizons of Yonkers, Inc., which
remained in Chapter 11 to facilitate the planned disposition of its leasehold
interest, is also fully and unconditionally guaranteeing the debt issued by
Bradlees Stores, Inc. The following summarized financial information of new
Horizons of Yonkers, Inc. is presented in accordance with SEC Staff Accounting
bulletin 53 and Regulation S-X Rule 1-02 (bb):
<TABLE>
<CAPTION>
(000's)
---------------------------------
January 30, 1999 January 31, 1998
---------------- ----------------
<S> <C> <C>
Asset Held for Sale........................ $14,000 $--
Due to Bradlees Stores, Inc................ 13,999 1
Stockholders' Equity....................... $ 1 $ 1
</TABLE>
<TABLE>
<CAPTION>
(000's)
--------------------------------------------------
52 Weeks Ended 52 Weeks Ended 52 Weeks Ended
January 30, 1999 January 31, 1998 February 1, 1997
---------------- ---------------- ----------------
<S> <C> <C> <C>
Rental Income........... $588 $588 $ 588
Rent Expense............ 588 588 588
Impairment of Long-Lived
Assets (Lease
Acquisition Costs)..... $-- $-- $15,793
</TABLE>
F-51
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Prospective investors may rely only on the information contained in this
Prospectus. Neither Bradlees, Inc. nor Bradlees Stores, Inc. has authorized
anyone to provide prospective investors with information different from that
contained in this Prospectus. This Prospectus is not an offer to sell nor is
it seeking an offer to buy these securities in any jurisdiction where the
offer or sale is not permitted. The information contained in this Prospectus
is correct only as of the date of this Prospectus, regardless of the time of
the delivery of this Prospectus or any sale of these securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the Securities or possession or distribution of
this Prospectus in any such jurisdiction. Persons who come into possession of
this Prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this Offering
and the distribution of this Prospectus applicable in that jurisdiction.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 8
The Company.............................................................. 16
Use of Proceeds.......................................................... 21
Market Price of Common Stock and Dividend Policy......................... 21
Capitalization........................................................... 22
Selected Financial Data.................................................. 23
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 28
Business................................................................. 36
Management............................................................... 40
Principal Stockholders................................................... 49
Certain Relationships and Related Transactions........................... 51
Selling Securityholders.................................................. 51
Plan of Distribution..................................................... 52
Shares Eligible for Future Sale.......................................... 53
Terms of Outstanding Indebtedness........................................ 53
Description of the 9% Convertible Notes.................................. 55
Description of Capital Stock............................................. 62
Legal Matters............................................................ 67
Experts.................................................................. 67
Additional Information................................................... 68
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
BRADLEES, INC.
BRADLEES STORES, INC.
and New Horizons of Yonkers, Inc.
7,267,424 Shares of Common Stock
$36,000,000 9% Convertible Notes
---------------
PROSPECTUS
---------------
1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The following table sets forth the estimated expenses of this Offering:
<TABLE>
<CAPTION>
Nature of Expense Amount(1)
----------------- ---------
<S> <C>
SEC Registration Fee............................................... $ 27,343
--------
Nasdaq Listing Fee................................................. 77,875
--------
Accounting Fees and Expenses....................................... 185,000
--------
Legal Fees and Expenses............................................ 250,000
--------
Printing Expenses.................................................. 50,000
--------
Trustee's Fees and Expenses........................................ 25,000
--------
Transfer Agent's Fee............................................... 25,000
--------
Miscellaneous...................................................... 9,782
--------
TOTAL............................................................ $650,000
========
</TABLE>
- --------
(1) The amounts set forth above, except for the SEC fee, are in each case
estimated.
Item 14. Indemnification of Directors and Officers
The Company's Amended and Restated Articles of Organization provide that a
Director shall not have personal liability to the Company or its stockholders
for monetary damages arising out of the Director's breach of fiduciary duty as
a Director of the Company to the maximum extent permitted by Massachusetts law.
Section 13(b)(1 1/2) of Chapter 156B of the Massachusetts Business Corporation
Law provides that the articles of organization of a corporation may state a
provision eliminating or limiting the personal liability of a Director to a
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, provided, however, that such provision shall not eliminate
or limit the liability of a Director (i) for any breach of the Director's duty
of loyalty to the corporation or its stockholders, (ii) for acts or omissions
not in good faith or which involve intentional misconduct or knowing violation
of law, (iii) under Section 61 or 62 of the Massachusetts Business Corporation
Law dealing with liability for unauthorized distributions and loans to
insiders, respectively, or (iv) for any transaction from which the Director
derived an improper personal benefit.
The Company's Amended and Restated By-Laws further provide that the Company
shall, to the fullest extent authorized by Chapter 156B of the Massachusetts
General Laws, indemnify each person who is, or was or has agreed to become, a
Director or officer of the Company or who is or was a Director or employee of
the Company and is serving, or shall have served, at the request of the
Company, as Director or officer of another organization or in any capacity with
respect to any employee benefit plan of the Company, against all liabilities
and expenses (including reasonable attorneys' fees), judgments and fines
incurred by him or on his behalf in connection with, or arising out of, the
defense or disposition of any action, suit or other proceeding, whether civil
or criminal, or any appeal therefrom in which they may be involved by reason of
being or having been such a Director or officer or as a result of service with
respect to any such employee benefit plan. Section 67 of Chapter 156B of the
Massachusetts General Laws authorizes a corporation to indemnify its directors,
officers, employees and other agents unless such person shall have been
adjudicated in any proceeding not to have acted in good faith in the reasonable
belief that such action was in the best interests of the corporation or, to the
extent such matter is related to service with respect to an employee benefit
plan, in the best interests of the participants or beneficiaries of such
employee benefit plan.
II-1
<PAGE>
The effect of these provisions would be to permit indemnification by the
Company for, among other liabilities, liabilities arising out of the Securities
Act of 1933, as amended (the "Securities Act").
Section 67 of the Massachusetts Business Corporation Law also affords a
Massachusetts corporation the power to obtain insurance on behalf of its
directors and officers against liabilities incurred by them in those
capacities. We have procured a directors' and officers' liability and company
reimbursement liability insurance policy that (i) insures directors and
officers of the Company against losses (above a deductible amount) arising from
certain claims made against them by reason of certain acts done or attempted by
such directors or officers and (ii) insures the Company against losses (above a
deductible amount) arising from any such claims, but only if the Company is
required or permitted to indemnify such directors or officers for such losses
under statutory or common law or under provisions of the Company's Amended and
Restated Articles of Organization or Amended and Restated By-Laws.
The By-laws of New Horizons of Yonkers, Inc. provide that such corporation
shall indemnify its officers and directors to the extent permitted by the
General Corporation Law of Delaware.
Item 15. Recent Sales of Unregistered Securities
On or subsequent to the Effective Date, we issued the following securities
in connection with the Effectiveness of our Plan of Reorganization:
1. We issued approximately 10 million shares of our Common Stock to holders
of approximately $361 million of allowed prepetition claims against us in
satisfaction of such claims in reliance upon the exemption from registration
set forth in Section 1145 of the Bankruptcy Code.
2. We issued $40.0 million aggregate principal amount of 9% Convertible
Notes to holders of approximately $108 million of allowed prepetition claims
against us in satisfaction of such claims in reliance upon the exemption from
registration set forth in Section 1145 of the Bankruptcy Code.
3. We issued warrants to purchase 1,000,000 shares of our common stock to
holders of approximately $265 million of allowed prepetition claims against us
in satisfaction of such claims in reliance upon the exemption from registration
set forth in Section 1145 of the Bankruptcy Code.
4. We issued $3.3 million worth of Cure Notes to holders of approximately
$3.3 million of allowed prepetition claims against us in satisfaction of such
claims in reliance upon the exemption from registration set forth in Section
1145 of the Bankruptcy Code.
5. We issued $547,094 worth of Cap Notes to holders of approximately
$547,094 of allowed prepetition claims against us in satisfaction of such
claims in reliance upon the exemption from registration set forth in Section
1145 of the Bankruptcy Code.
6. We issued $2.4 million worth of Tax Notes to holders of approximately
$2.4 million of allowed prepetition claims against us in satisfaction of such
claims in reliance upon the exemption from registration set forth in Section
1145 of the Bankruptcy Code.
Item 16. Exhibits and Financial Schedules
(a) Exhibits.
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<C> <S>
##2.1 --Modified Plan of Reorganization and Plan Disclosure Statement.
+2.2 --Indenture dated February 2, 1999 between Bradlees Stores, Inc., Bradlees, Inc., New Horizons of
Yonkers, Inc. and IBJ Whitehall Bank & Trust Company, with Form of Note.
##2.3 --Form of 9% Convertible Note.
+2.4 --Form of Leasehold Mortgage.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<C> <S>
##2.5 --Form of CAP Notes.
##2.6 --Form of Cure Note.
##2.7 --Form of Tax Note for other priority tax claims.
##2.8 --Form of Tax Note for Federal priority tax claims.
##2.9 --Form of New Warrant.
+2.10 --Stock Pledge Agreement.
+3.1 --Amended and Restated Articles of Organization of Bradlees, Inc.
+3.2 --Amended and Restated Articles of Organization of Bradlees
Stores, Inc.
+3.3 --Amended and Restated By-laws of Bradlees, Inc.
+3.4 --Amended and Restated By-laws of Bradlees Stores, Inc.
+3.5 --Certificate of Incorporation of New Horizons of Yonkers, Inc.
+3.6 --By-laws of New Horizons of Yonkers, Inc.
3.7 --Certificate of Vote of Directors Establishing a Series of a
Class of Stock of Bradlees, Inc. classifying and designating the
Series A Junior Participating Cumulative Preferred Stock
(incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form 8-A, filed with the Securities and
Exchange Commission on November 30, 1999).
3.8 --Amendment No. 1 to Amended and Restated By-laws of Bradlees,
Inc. (incorporated by reference to Exhibit 3.2 of the Company's
Registration Statement on Form 8-A, filed with the Securities and
Exchange Commission on November 30, 1999).
+4.1 --Specimen Certificate for shares of Common Stock, $.01 par value,
of Bradlees, Inc.
4.2 --Shareholder Rights Agreement, dated as of November 23, 1999
between Bradlees, Inc. and BankBoston, N.A., as Rights Agent
(incorporated by reference to the Company's Registration
Statement on Form 8-A, filed with the Securities and Exchange
Commission on November 30, 1999).
##5.1 --Opinion of Goodwin, Procter & Hoar LLP with respect to the
legality of the securities being offered.
+10.1 --Registration Rights Agreement.
++10.9 --Form of Revised Senior Vice President Severance Agreement.
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 is incorporated by reference from
the Company's Form 10-K for the year ended January 31, 1998, Part
IV, Item 14(a)(3), Exhibit 10.23, as filed with the Securities
and Exchange Commission on May 1, 1998.
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.
10.34 --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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<C> <S>
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.
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, 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 between BankBoston, N.A.
as Administrative Agent and as Issuing Bank, and the Borrower,
Bradlees Stores, Inc., with Bradlees, Inc. as Guarantor.
##10.42 --Bradlees, Inc. 1999 Stock Option Plan.
##10.43 --Bradlees, Inc. and Bradlees Stores, Inc. Management Emergence
Bonus Plan.
+10.44 --Vendor Lien Agreement
10.45 --Amendment to Amended and Restated Employment Agreement, dated as
of May 3, 1999, 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 May 1,
1999, Part II, Item 6, Exhibit 10, as filed with the Securities
and Exchange Commission on June 11, 1999.
10.46 --Second Amendment to Credit Agreement dated as of September 22,
1999, among reorganized Bradlees Stores, Inc., reorganized
Bradlees, Inc. and BankBoston, N.A., as Agent, is incorporated by
reference from the Company's Form 10-Q for the quarterly period
ended October 30, 1999, Part II, Item 6, Exhibit 10, as filed
with the Securities and Exchange Commission on December 14, 1999.
15.1 --Letter re: unaudited interim financial information is
incorporated by reference from the Company's Form 10-Q for the
quarterly period ended October 30, 1999, Part II, Item 6, Exhibit
15, as filed with the Securities and Exchange Commission on
December 14, 1999.
+21 --Subsidiaries of the Registrant.
##23.1 --Consent of Counsel (included in Exhibit 5.1 hereto).
*23.2 --Consent of Arthur Andersen LLP.
*23.3 --Consent of Deloitte & Touche LLP.
+24.1 --Power of Attorney.
##25.1 --Statement of Eligibility on Form T-1.
</TABLE>
- --------
# Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (SEC File No. 333-66953) filed with the Securities and Exchange
Commission on November 6, 1998.
## Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-66953) filed
with the Securities and Exchange Commission on January 28, 1999.
+ Previously filed as an exhibit to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-66953) filed
with the Securities and Exchange Commission on February 16, 1999.
++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 30, 1999, as filed with the Securities and
Exchange Commission on April 30, 1999.
* Filed herewith.
II-4
<PAGE>
(b) Financial Statement Schedule filed as part of this Registration
Statement is as follows:
Condensed Consolidated Financial Statements as of October 30, 1999 (Unaudited)
Condensed Consolidated Statements of Operations for the 13 weeks ended
October 30, 1999 and October 31, 1998
Condensed Consolidated Statements of Operations for the 39 weeks ended
October 30, 1999 and October 31, 1998
Condensed Consolidated Balance Sheets as of October 30, 1999, January 30, 1999
and October 31, 1998
Condensed Consolidated Statements of Cash Flows for the 39 weeks ended
October 30, 1999 and October 31, 1998
Notes to Condensed Consolidated Financial Statements
Consolidated Financial Statements as of January 30, 1999
Report of Independent Public Accountants-Arthur Andersen LLP
Independent Auditors' Report-Deloitte & Touche LLP
Consolidated Statements of Operations for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998
Consolidated Statements of Cash Flows for the fiscal years ended January 30,
1999, January 31, 1998 and February 1, 1997
Consolidated Statements of Stockholders' Equity (Deficiency) for the fiscal
years ended January 30, 1999, January 31, 1998 and February 1, 1997
Notes to Consolidated Financial Statements
Item 17. Undertakings
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrants
have been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
The undersigned registrants hereby undertake:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as
part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of this Registration Statement as of the time it
was declared effective.
(2) For the purpose of determining any liability under the Securities Act
of 1933, each post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To file during any period in which offers or sales are being made, a
post-effective amendment to this registration statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
II-5
<PAGE>
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most
recent post-effective amendment thereof) which individually or
in the aggregate, represent a fundamental change in the
information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if,
in the aggregate, the changes in volume and price represent no
more than 20 percent change in the maximum aggregate offering
price set forth in "Calculation of Registration Fee" table in
the effective registration statement; and
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(4) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrants have duly caused this Post-Effective Amendment No. 5 to the
Registration Statement to be signed on their behalf by the undersigned,
thereunto duly authorized, in the City of Braintree, The Commonwealth of
Massachusetts on December 14, 1999.
BRADLEES, INC.
By: /s/ Peter Thorner
---------------------------------
Name:Peter Thorner
Office Title: Chairman of the
Board andChief
Executive Officer
BRADLEES STORES, INC.
By: /s/ Peter Thorner
---------------------------------
Name:Peter Thorner
Office Title: Chairman of the
Board andChief
Executive Officer
NEW HORIZONS OF YONKERS, INC.
By: /s/ Peter Thorner
---------------------------------
Name:Peter Thorner
Office Title: Chairman of the
Board andChief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Post-Effective Amendment No. 5 to the Registration Statement has been signed
below by the following persons in the capacities and on the date indicated.
Each person listed below has signed this Post-Effective Amendment No. 5 to the
Registration Statement in their capacity as an officer or director of Bradlees,
Inc. Messrs. Thorner and Moses are also signing this Registration Statement as
officers and directors of Bradlees Stores, Inc. and New Horizons of Yonkers,
Inc. Mr. Lynn is also signing this Registration Statement as an officer of
Bradlees Stores, Inc. and New Horizons of Yonkers, Inc. Mr. Schmitt, in his
individual capacity, is signing this Registration Statement solely as a
director of Bradlees Stores, Inc. and New Horizons of Yonkers, Inc.
II-7
<PAGE>
<TABLE>
<S> <C>
Signature Title
Date
/s/ Peter Thorner Chief Executive December 14,
- ------------------------------------- Officer (Principal 1999
Peter Thorner Executive Officer)
and Chairman of the
Board
* Senior Vice December 14,
- ------------------------------------- President and Chief 1999
Cornelius F. Moses, III Financial Officer
(Principal
Financial Officer
and Principal
Accounting Officer)
* Director, President December 14,
- ------------------------------------- and Chief Operating 1999
Robert Lynn Officer
Director
- -------------------------------------
Robert A. Altschuler
* Director December 14,
- ------------------------------------- 1999
Stephen J. Blauner
* Director December 14,
- ------------------------------------- 1999
W. Edward Clingman, Jr.
* Director December 14,
- ------------------------------------- 1999
John M. Friedman, Jr.
* Director December 14,
- ------------------------------------- 1999
Lawrence Lieberman
Director
- -------------------------------------
Charles K. MacDonald
* Director December 14,
- ------------------------------------- 1999
William H. Roth
/s/ David L. Schmitt Director of Bradlees December 14,
- ------------------------------------- Stores, Inc. and 1999
David L. Schmitt New Horizons of
Yonkers, Inc.
*By: /s/ David L. Schmitt
--------------------------------
Attorney-in-Fact
</TABLE>
II-8
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<C> <S>
##2.1 --Modified Plan of Reorganization and Plan Disclosure Statement.
+2.2 --Indenture dated February 2, 1999 between Bradlees Stores, Inc., Bradlees, Inc., New Horizons of
Yonkers, Inc. and IBJ Whitehall Bank & Trust Company.
##2.3 --Form of 9% Convertible Note.
+2.4 --Form of Leasehold Mortgage.
##2.5 --Form of CAP Note.
##2.6 --Form of Cure Note.
##2.7 --Form of Tax Note for priority tax claims.
##2.8 --Form of Tax Notes for Federal priority tax claims.
##2.9 --Form of New Warrant.
+2.10 --Stock Pledge Agreement.
+3.1 --Amended and Restated Articles of Organization of Bradlees, Inc.
+3.2 --Amended and Restated Articles of Organization of Bradlees Stores, Inc.
+3.3 --Amended and Restated By-laws of Bradlees, Inc.
+3.4 --Amended and Restated By-laws of Bradlees Stores, Inc.
+3.5 --Certificate of Incorporation of New Horizons of Yonkers, Inc.
+3.6 --By-laws of New Horizons of Yonkers, Inc.
3.7 --Certificate of Vote of Directors Establishing a Series of a Class of Stock of Bradlees, Inc.
classifying and designating the Series A Junior Participating Cumulative Preferred Stock
(incorporated by reference to Exhibit 3.1 of the Company's Registration Statement on Form 8-A,
filed with the Securities and Exchange Commission on November 30, 1999).
3.8 --Amendment No. 1 to Amended and Restated By-laws of Bradlees, Inc. (incorporated by reference to
Exhibit 3.2 of the Company's Registration Statement on Form 8-A, filed with the Securities and
Exchange Commission on November 30, 1999).
+4.1 --Specimen Certificate for shares of Common Stock, $.01 par value, of Bradlees, Inc.
4.2 --Shareholder Rights Agreement, dated as of November 23, 1999 between Bradlees, Inc. and BankBoston,
N.A., as Rights Agent (incorporated by reference to the Company's Registration Statement on Form 8-
A, filed with the Securities and Exchange Commission on November 30, 1999).
##5.1 --Opinion of Goodwin, Procter & Hoar LLP with respect to the legality of the securities being
offered.
+10.1 --Registration Rights Agreement.
++10.9 --Form of Revised Senior Vice President Severance Agreement.
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 is incorporated by reference from the
Company's Form 10-K for the year ended January 31, 1998, Part IV, Item 14(a)(3), Exhibit 10.23, as
filed with the Securities and Exchange Commission on May 1, 1998.
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.
10.34 --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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<C> <S>
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.
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 between BankBoston, N.A. as Administrative Agent and as
Issuing Bank, and the Borrower, Bradlees Stores, Inc., with Bradlees, Inc. as Guarantor.
##10.42 --Bradlees, Inc., 1999 Stock Option Plan.
##10.43 --Bradlees, Inc. and Bradlees Stores, Inc. Management Emergence Bonus Plan.
+10.44 --Vendor Lien Agreement.
10.45 --Amendment to Amended and Restated Employment Agreement, dated as of May 3, 1999, 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 May 1, 1999, Part II, Item 6, Exhibit 10, as
filed with the Securities and Exchange Commission on June 11, 1999.
10.46 --Second Amendment to Credit Agreement dated as of September 22, 1999, among reorganized Bradlees
Stores, Inc., reorganized Bradlees, Inc. and BankBoston, N.A., as Agent, is incorporated by
reference from the Company's Form 10-Q for the quarterly period ended October 30, 1999, Part II,
Item 6, Exhibit 10, as filed with the Securities and Exchange Commission on December 14, 1999.
15.1 --Letter re: unaudited interim financial information is incorporated by reference from the Company's
Form 10-Q for the quarterly period ended October 30, 1999, Part II, Item 6, Exhibit 15, as filed
with the Securities and Exchange Commission on December 14, 1999.
+21 --Subsidiaries of the Registrant.
##23.1 --Consent of Counsel (included in Exhibit 5.1 hereto).
*23.2 --Consent of Arthur Andersen LLP.
*23.3 --Consent of Deloitte & Touche LLP.
+24.1 --Power of Attorney.
##25.1 --Statement of Eligibility on Form T-1.
</TABLE>
- --------
# Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (SEC File No. 333-66953) filed with the Securities and Exchange
Commission on November 6, 1998.
## Previously filed as an exhibit to Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-66953) filed
with the Securities and Exchange Commission on January 28, 1999.
+ Previously filed as an exhibit to Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (SEC File No. 333-66953) filed
with the Securities and Exchange Commission on February 16, 1999.
++ Previously filed as an exhibit to the Company's Annual Report on Form 10-K
for the fiscal year ended January 30, 1999, as filed with the Securities and
Exchange Commission on April 30, 1999.
* Filed herewith.
<PAGE>
Exhibit 23.2
[AA Letterhead]
Consent of Independent Public Accountants
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made part of this
Post-Effective Amendment No. 5 to Registration Statement No. 333-66953.
/s/ Arthur Andersen LLP
New York, New York
December 13, 1999
<PAGE>
Exhibit 23.3
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 5 to Registration
Statement No. 333-66953 of Bradlees, Inc., Bradlees Stores, Inc., and New
Horizons of Yonkers, Inc. of our report dated March 20, 1997 (February 16, 1999
with respect to Note 17) on Bradlees, Inc.'s consolidated statements of
operations, stockholders' equity (deficiency), and cash flows (which expresses
an unqualified opinion and includes explanatory paragraphs relating to (a) the
Company filing for reorganization under Chapter 11 of the Federal Bankruptcy
Code and (b) the Company's 1996 loss from operations and stockholders'
deficiency, which raise substantial doubt about the Company's ability to
continue as a going concern) appearing in the prospectus, which is part of this
Registration Statement.
We also consent to the reference to us under the headings "Selected Financial
Data" and "Experts" in such prospectus.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
December 13, 1999
