<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
SCHEDULE 13E-4
Issuer Tender Offer Statement
(Pursuant to Section 13(e)(1) of the Securities Exchange Act of 1934)
Bradlees Stores, Inc.
(Name of Issuer)
Bradlees, Inc.
Bradlees Stores, Inc.
(Name of Person(s) Filing Statement)
9% Convertible Notes
(Title of Class of Securities)
N/A
-----------
(CUSIP Number of Class of Securities)
PETER THORNER
Chairman of the Board and Chief Executive Officer
&
DAVID L. SCHMITT
Senior Vice President, General Counsel
Secretary and Clerk
One Bradlees Circle
Braintree, Massachusetts 02184
(781) 380-3000
(Name, Address, including zip code, and telephone number, including area code,
of Person Authorized
to Receive Notices and Communication on Behalf of the Person(s) Filing
Statement)
(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
---------------
June 23, 1999
(Date Tender Offer First Published, Sent or Given to Security Holders)
---------------
CALCULATION OF FILING FEE
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TRANSACTION VALUATION*: AMOUNT OF FILING FEE:
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$13,993,956 $2,799
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</TABLE>
* Calculated solely for purposes of determining the filing fee, based upon
$13,993,956 aggregate principal amount of 9% Convertible Notes which may be
acquired pursuant to this offer.
[_] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
Amount Previously Paid: N/A Filing Party: N/A
Form or Registration No.: N/A Date Filed: N/A
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<PAGE>
ITEM 1. SECURITY AND ISSUER.
(a) The issuer of the securities to which this Schedule 13E-4 relates is
Bradlees Stores, Inc., a Massachusetts corporation, and the address of its
principal executive office is One Bradlees Circle, Braintree, Massachusetts
02184.
(b) This Schedule 13E-4 relates to the offer by Bradlees Stores, Inc. and
Bradlees, Inc. (together, the "Companies") to enter into an agreement with each
of the holders of up to $13,993,956 of aggregate principal amount (or such
lesser aggregate principal amount as are validly tendered and not withdrawn) of
the 9% Convertible Notes issued by Bradlees Stores, Inc. (the "Notes"), a
wholly-owned subsidiary of Bradlees, Inc., upon the terms and subject to the
conditions set forth in the Offer to Enter into Supplemental Agreement, dated
June 23, 1999 (the "Offer of Agreement"), and in the related Notice of
Acceptance (which together constitute the "Offer"), copies of which are attached
as Exhibits (a)(1) and (a)(2), respectively, and incorporated herein by
reference. As of June 23, 1999, $28,991,000 aggregate principal amount of Notes
were issued and outstanding. Bradlees Stores, Inc. expects to pay down
$17,137,500 of outstanding Notes prior to the closing of this Offer, leaving
$11,853,500 aggregate principal amount of Notes outstanding. In no case will
this Offer be made for more than $13,993,956 aggregate principal amount of
Notes. The information set forth in Section 9, "Interests of Directors and
Executive Officers; Transactions and Arrangements Concerning the Notes," of the
Offer of Agreement is incorporated herein by reference.
(c) The Notes are not listed on any exchange or with any market.
(d) Bradlees Stores, Inc. is a wholly-owned subsidiary of Bradlees, Inc.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in Section 10, "Source and Amount of Funds"
of the Offer of Agreement is incorporated herein by reference.
(b) The information set forth in "Terms of Outstanding Indebtedness--The
Credit Facility" is incorporated herein by reference to Post-Effective Amendment
No. 3 to the Registration Statement on Form S-1, filed by the Companies and New
Horizons of Yonkers, Inc. on June 11, 1999, as subsequently amended.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
(a)-(j) The information set forth in "Introduction," Section 8, "Background
and Purpose of the Offer; Certain Effects of the Offer," and Section 9,
"Interest of Directors and Executive Officers; Transactions and Arrangements
Concerning the Notes," of the Offer of Agreement is incorporated herein by
reference.
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
No transactions in the Notes or the Common Stock of Bradlees, Inc. into
which the Notes are convertible have been effected during the past forty
business days by Bradlees, Inc., or any of its subsidiaries, or any other party
required to report pursuant to this Item.
<PAGE>
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The information set forth in Section 9, "Interests of Directors and
Executive Officers; Transactions and Arrangements Concerning the Notes" of the
Offer of Agreement and the Letter of Intent between the manager of investment
partnerships holding in the aggregate approximately 71% of the Notes (the
"Majority Noteholders") and Bradlees Stores, Inc. dated May 19, 1999 are
incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED, OR TO BE COMPENSATED.
The information set forth in Section 16, "Fees and Expenses," of the Offer
of Agreement is incorporated herein by reference.
ITEM 7. FINANCIAL INFORMATION.
(a)-(b) The financial statements and related notes thereto contained in
Part II of the Bradlees, Inc. Annual Report on Form 10-K for the fiscal year
ended January 30, 1999 and Part I of the Bradlees, Inc. Quarterly Report on Form
10-Q for the quarterly period ended May 1, 1999 (copies of which are included as
Exhibits (g)(1) and (g)(2) to this Schedule 13E-4, respectively) are
incorporated herein by reference. As noted in the financial statements included
pursuant to this Item, the Companies had no earnings prior to extraordinary
items during the last two fiscal years. The Companies emerged from proceedings
under Chapter 11 of the United States Bankruptcy Code on February 2, 1999. In
connection with this emergence, the common stock of Bradlees, Inc. outstanding
prior to emergence was canceled. Therefore, book value per share at the end of
the most recent fiscal year is meaningless. Book value per share at the end of
the quarter ended May 1, 1999 was $3.09.
ITEM 8. ADDITIONAL INFORMATION.
(a)-(e) Not Applicable.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Form of Offer to Enter into Supplemental Agreement dated
June 23, 1999 (including Supplemental Agreement, with Annexes).
(2) Form of Notice of Acceptance (including Certification of Taxpayer
Identification Number on Substitute Form W-9 and Signature Page for
Supplemental Agreement and Collateral Agency Agreement).
(3) Form of Letter to Noteholders of the Companies, dated June 22, 1999
from Peter Thorner, Chief Executive Officer of the Companies.
(b) Not Applicable.
(c) Letter of Intent between the Majority Noteholders and Bradlees Stores,
Inc. dated May 19, 1999.
(d) Not Applicable.
(e) Not Applicable.
(f) Not Applicable.
(g) (1) Financial statements and notes contained in Part II of the
Bradlees, Inc. Annual Report on Form 10-K for the fiscal year ended
January 30, 1999.
(2) Financial statements and notes contained in Part I of the Bradlees,
Inc. Quarterly Report on Form 10-Q for the quarterly period ended
May 1, 1999.
(3) The information set forth in "Terms of Outstanding Indebtedness--
The Credit Facility" contained in Post-Effective Amendment No. 3 to
the Registration Statement on Form S-1, as subsequently amended,
filed by the Companies and New Horizons of Yonkers, Inc. on June
11, 1999.
- --------------
2
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SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
BRADLEES, INC.
By: /s/ Cornelius F. Moses, III
------------------------------
Name: Cornelius F. Moses, III
Title: Senior Vice President
and Chief Financial
Officer
BRADLEES STORES, INC.
By: /s/ Cornelius F. Moses, III
------------------------------
Name: Cornelius F. Moses, III
Title: Senior Vice President
and Chief Financial
Officer
Dated:
June 23, 1999
3
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
(a) (1) Form of Offer to Enter into Supplemental Agreement dated June 23,
1999 (including Supplemental Agreement, with Annexes).
(2) Form of Notice of Acceptance (including Certification of Taxpayer
Identification Number on Substitute Form W-9 and Signature Page for
Supplemental Agreement and Collateral Agency Agreement).
(3) Form of Letter to Noteholders of the Companies, dated June 22, 1999
from Peter Thorner, Chief Executive Officer of the Companies.
(b) Not Applicable.
(c) Letter of Intent between the Majority Noteholders and Bradlees Stores,
Inc. dated May 19, 1999.
(d) Not Applicable.
(e) Not Applicable.
(f) Not Applicable.
(g) (1) Financial statements and notes contained in Part II of the Bradlees,
Inc. Annual Report on Form 10-K for the fiscal year ended January 30,
1999.
(2) Financial statements and notes contained in Part I of the Bradlees,
Inc. Quarterly Report on Form 10-Q for the quarterly period ended
May 1, 1999.
(3) The information set forth in "Terms of Outstanding Indebtedness--The
Credit Facility" contained in Post-Effective Amendment No. 3 to the
Registration Statement on Form S-1, as subsequently amended, filed by
the Companies and New Horizons of Yonkers, Inc. on June 11, 1999.
4
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Offer to Enter into Supplemental Agreement
with Holders of
9% Convertible Notes of Bradlees Stores, Inc.
BRADLEES, INC. AND ITS WHOLLY-OWNED SUBSIDIARY, BRADLEES STORES, INC.
(TOGETHER, THE "COMPANIES") ARE OFFERING TO ENTER INTO A SUPPLEMENTAL AGREEMENT
WITH EACH OF THE HOLDERS OF 9% CONVERTIBLE NOTES OF BRADLEES STORES, INC. TO
ACCEPT THE OFFER TO ENTER INTO THE SUPPLEMENTAL AGREEMENT WITH THE COMPANIES,
YOU MUST COMPLETE THE ENCLOSED NOTICE OF ACCEPTANCE AND DELIVER IT, ALONG WITH
YOUR NOTES, TO GOODWIN, PROCTER & HOAR LLP, AT THE ADDRESS LISTED BELOW. THE
COMPANIES WILL ENTER INTO THE SUPPLEMENTAL AGREEMENT WITH EACH HOLDER WHO HAS
INDICATED ITS DESIRE TO ENTER INTO THE SUPPLEMENTAL AGREEMENT BY THE EXPIRATION
DATE OF THIS OFFER, SUBJECT TO THE TERMS AND CONDITIONS OF THIS OFFER. FOR MORE
INFORMATION ON HOW TO PROPERLY ENTER INTO THE SUPPLEMENTAL AGREEMENT, SEE
"PROCEDURE FOR ACCEPTING THE OFFER" BELOW.
THE OFFER TO ENTER INTO THE SUPPLEMENTAL AGREEMENT WILL EXPIRE AT 12:00
MIDNIGHT, BOSTON, MASSACHUSETTS TIME, ON WEDNESDAY, JULY 21, 1999, UNLESS THE
OFFER IS EXTENDED.
Questions and requests for assistance or for additional copies of this Offer
or other materials may be directed to the attention of Goodwin, Procter & Hoar
LLP at the address and telephone number set forth below:
Goodwin, Procter & Hoar LLP
Exchange Place
53 State Street
Boston, Massachusetts 02109
Attention: Stephen T. Adams, Esq.
Telephone: (617) 570-1121
Facsimile: (617) 523-1231
<PAGE>
To the holders of 9% Convertible
Notes of Bradlees Stores, Inc.:
Introduction
Bradlees, Inc. and Bradlees Stores, Inc. (the "Companies") invite holders of
outstanding 9% Convertible Notes of Bradlees Stores, Inc. (the "Notes") to enter
into a Supplemental Agreement with respect to the Notes (the "Offer").
Noteholders wishing to enter into the Supplemental Agreement must properly
complete, sign and deliver an executed Notice of Acceptance (the "Acceptance")
together with their Note or Notes to Goodwin, Procter & Hoar LLP, Attn: Stephen
T. Adams, Esq. (the "Agent") at the address set forth on the cover of this Offer
on or prior to 12:00 midnight, Boston, Massachusetts time, on Wednesday, July
21, 1999 (the "Expiration Date").
This Offer is for $13,993,956 aggregate principal amount of Notes.
Currently, there are $28,991,000 aggregate principal amount of Notes
outstanding. Bradlees Stores, Inc. expects to make a pre-payment of $17,137,500
on the Notes currently outstanding (the "Paydown"), leaving an aggregate
principal amount of $11,853,500 of Notes outstanding. This Paydown is expected
to occur immediately prior to the Closing of this Offer. If this Paydown occurs,
this offer will be for all Notes remaining outstanding after the Paydown. If
more than $13,993,956 aggregate principal amount of Notes are validly tendered,
the Companies will enter into the Supplemental Agreement with each Noteholder
who has validly tendered Notes, on a pro rata basis based upon the ratio of the
Notes validly tendered to the total amount of Notes outstanding (in effecting
such proration, the Companies will accept 48.27 percent of the Notes (rounded
down to the nearest $1,000) owned by each tendering Noteholder), so that the
aggregate amount of Notes subject to the Supplemental Agreement is not greater
than $13,993,956. In no event will this Offer be made for more than $13,993,956
aggregate principal amount of Notes.
The Companies have already agreed to enter into the Supplemental Agreement
with the manager of investment partnerships which hold approximately 71% of the
outstanding Notes (the "Majority Noteholders"). By this Offer, the Companies are
offering to enter into the Supplemental Agreement with each other Noteholder.
The Supplemental Agreement entered into by each Noteholder accepting this Offer
will have the same terms and conditions as the Supplemental Agreement being
entered into by the Majority Noteholders. Each Noteholder entering into the
Supplemental Agreement will grant the Companies an option to purchase all
outstanding Notes held by such person which are validly tendered and accepted
pursuant to the Offer at a discount prior to maturity. This discount option
granted to the Companies will be exercisable from December 1, 1999 to December
31, 1999 at a price equal to 86% of the outstanding principal amount. Each month
thereafter, the discount will decrease by 1% per month until it expires on
January 31, 2001. In consideration of receiving this option to purchase the
Notes at a discount prior to maturity, the Companies will pay an option premium
of 0.5% of the face value of each Note subject to the discount option on the
date of grant of the option, less the expenses of counsel to the Majority
Noteholders paid by the Companies. The Companies will also grant a second
priority leasehold mortgage on the collateral securing the Notes (subject to
substitution in certain circumstances) and will give each holder of a Note a put
option exercisable on or after February 3, 2003 to sell any Notes outstanding to
the Companies at a price equal to the then outstanding principal amount, if any,
plus accrued but unpaid interest. This is a summary of the terms of the
Supplemental Agreement. For more information see "Terms of the Supplemental
Agreement" and the Supplemental Agreement attached hereto as Annex A. See also
-------
the Form of Leasehold Mortgage, Security Agreement, Assignment of Leases, Rents
and Profits and Fixture Financing Statement attached hereto as Annex B and the
-------
Collateral Agency Agreement attached hereto as Annex C (together, the
-------
"Collateral Documents").
The Boards of Directors of Bradlees, Inc. and Bradlees Stores, Inc. have
approved the Companies' determinations to make this Offer and enter into the
Supplemental Agreement. Noteholders should make their own decisions whether to
enter into the Supplemental Agreement. Neither the Companies nor their Boards
of Directors makes any recommendation to any Noteholder as to whether or not to
enter into the Supplemental Agreement. Each Noteholder should consult with
their own legal and tax counsel prior to determining to accept this Offer to
enter into the Supplemental Agreement. See section 9 for information regarding
the interests of the Companies' directors and executive officers with respect to
the Supplemental Agreement.
2
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TABLE OF CONTENTS
<TABLE>
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SECTION PAGE
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INFORMATION INCORPORATED BY REFERENCE...................................... 4
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS............................ 4
SUMMARY.................................................................... 6
INTRODUCTION............................................................... 7
THE OFFER.................................................................. 7
1. Security and Issuer; Proration..................................... 7
2. Terms of the Supplemental Agreement................................ 8
3. Procedure for Accepting the Offer.................................. 9
4. Withdrawal Rights.................................................. 10
5. Payment of Option Premium and Closing.............................. 10
6. Certain Conditions of the Offer.................................... 10
7. Price Range of Shares; Dividends................................... 11
8. Background and Purpose of the Offer; Certain Effects of the Offer.. 11
9. Interests of Directors and Executive Officers; Transactions and
Arrangements Concerning the Shares................................. 12
10. Source and Amount of Funds......................................... 12
11. Effects of the Offer on the Market for Shares; Registration Under
the Exchange Act................................................... 12
12. Certain Legal Matters; Regulatory Approvals........................ 12
13. U.S. Federal Income Tax Consequences............................... 12
14. Extension of the Offer; Termination; Amendments.................... 12
15. Fees and Expenses.................................................. 13
16. Miscellaneous...................................................... 13
ANNEX A - Option Agreement
ANNEX B - Form of Leasehold Mortgage, Security Agreement, Assignment of
Leases, Rents and Profits and Fixture Financing Statement
ANNEX C - Collateral Agency Agreement
ANNEX D - Quarterly Report on Form 10-Q for the quarterly period ended
May 1, 1999
ANNEX E - Annual Report on Form 10-K for the fiscal year ended January 30, 1999.
ANNEX F - Post-Effective Amendment No. 3 to the Companies' Registration
Statement on Form S-1 filed on June 11, 1999
</TABLE>
3
<PAGE>
INFORMATION INCORPORATED BY REFERENCE
The following documents have been filed with the Securities and Exchange
Commission (the "Commission") and are incorporated by reference into this Offer:
1. The Companies' Annual Report on Form 10-K for the fiscal year ended
January 30, 1999.
2. The Companies' Quarterly Report on Form 10-Q for the quarterly period
ended May 1, 1999.
3. The description of the Common Stock of Bradlees, Inc. contained in its
registration statement on Form 8-A dated January 27, 1999, filed pursuant to
Section 12 of the Exchange Act, including any amendment or report filed for the
purpose of updating such description.
4. The description of the Notes contained in Post-Effective Amendment No. 3
to the Companies' Registration Statement on Form S-1 filed on June 11, 1999, as
subsequently amended (the "Registration Statement").
All documents filed by the Companies with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date hereof and prior to
the termination of the Offer shall be deemed to be incorporated by reference
herein and to be a part hereof from the date of filing of such documents. Any
statements contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes hereof to the extent that a
statement contained herein or in any other subsequently filed document which
also is incorporated by reference herein modifies or supersedes such statement.
Any statement so modified or superseded shall not be deemed to constitute a part
hereof except as so modified or superseded.
The Companies will provide without charge to each person to whom a copy of
this Offer is delivered, on written or oral request, copies of any or all
documents incorporated by reference herein (other than the exhibits thereto
unless such exhibits are incorporated specifically by reference therein).
Requests should be directed to Bradlees Stores, Inc., One Bradlees Circle,
Braintree, Massachusetts, 02185-9051; Attention: Investor Communications;
Telephone (781) 380-3000. In order to ensure timely delivery of the documents,
any such request should be made not later than five business days prior to the
Expiration Date.
Additional information. The Companies are subject to the informational
filing requirements of the Exchange Act and, in accordance therewith, are
obligated to file reports and other information with the Commission relating to
their business, financial condition and other matters. Information, as of
particular dates, concerning the Companies' directors and officers, their
remuneration, options granted to them, the principal holders of the Companies'
securities and any material interest of such persons in transactions with the
Companies is required to be disclosed and filed with the Commission. Such
reports and other information can be inspected and copied at the public
reference facilities maintained by the Commission at 450 Fifth Street, N.W.,
Room 2120, Washington, D.C. 20549; at its regional offices located at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661-2511; and 7 World Trade
Center, New York, New York 10048. Copies of such material may also be obtained
by mail, upon payment of the Commission's customary charges, from the Public
Reference Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington D.C. 20549. The Commission also maintains a Web site on the World
Wide Web at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission. Such reports, proxy statements and other information
concerning the Companies also can be inspected at the offices of the Nasdaq
Stock Market, Inc., 1735 K Street, N.W., Washington, D.C. 20006, on which the
Shares into which the Notes are convertible are listed.
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain statements incorporated by reference or made in this Offer 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. The words
"anticipate," "assume," "believe," "estimate," "expect," "intend," and other
similar expressions in this Offer are generally intended to identify forward-
looking statements. In connection with such forward-looking statements,
Noteholders should consider that such statements involve known and unknown
risks, uncertainties and other factors which are, in some cases, beyond the
Companies' control and which could materially affect the Companies' actual
results, performance or achievements. Factors that could cause the 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;
4
<PAGE>
. demographic changes;
. competition;
. unfavorable changes in interest rates;
. unfavorable weather conditions;
. loss of significant vendors;
. availability of adequate overseas transportation;
. liability and other claims asserted against the Companies;
. 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.
The Companies expressly 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. For a complete list of factors to consider when considering this
offer, see "Risk Factors" beginning on page 8 of the Registration Statement
attached hereto as Annex F, which factors are incorporated herein by reference.
-------
THE COMPANIES HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON
THEIR BEHALF AS TO WHETHER NOTEHOLDERS SHOULD ENTER INTO THE SUPPLEMENTAL
AGREEMENT PURSUANT TO THIS OFFER. THE COMPANIES HAVE NOT AUTHORIZED ANY PERSON
TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THE
OFFER ON THEIR BEHALF OTHER THAN THOSE CONTAINED IN THIS OFFER OR IN THE
SUPPLEMENTAL AGREEMENT. DO NOT RELY ON ANY SUCH RECOMMENDATION OR ANY SUCH
INFORMATION OR REPRESENTATIONS, IF GIVEN OR MADE, AS HAVING BEEN AUTHORIZED BY
THE COMPANIES.
5
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SUMMARY
This general summary is provided for the convenience of the Noteholders and
is qualified in its entirety by reference to the full text and more specific
details of this Offer, the Supplemental Agreement and the Collateral Documents.
Unless otherwise defined, capitalized terms used in this summary have the
respective meanings ascribed to them elsewhere in this Offer. Noteholders are
urged to read carefully this Offer, the documents incorporated by reference
herein, the Supplemental Agreement and the Collateral Documents.
The Offer
Notes Subject to the Offer................. $13,993,956 Aggregate Principal
Amount.
Terms of Supplemental Agreement............ Each Noteholder will grant the
Companies an option to purchase
any and all outstanding Notes
validly tendered and accepted
which are held by such Noteholder
at a purchase price equal to 86%
of the outstanding principal
amount, plus accrued interest,
exercisable for a one-month time
period from December 1, 1999
through December 31, 1999 (the
"Discount Option"). The Companies
can repurchase any Notes subject
to the Discount Option each month
thereafter, but the discount will
decrease by 1% per month such that
the discount will be fully
eliminated by January 31, 2001. In
consideration of the Discount
Option, the Companies will pay
each Noteholder entering into the
Supplemental Agreement (less
certain expenses) a premium on the
Closing Date (as defined below) of
the grant of the Discount Option
equal to 0.5% of the outstanding
principal amount of Notes held by
the holder entering into the
Supplemental Agreement, grant
second priority leasehold
mortgages in favor of the Discount
Noteholders on the collateral
(subject to substitution in
certain circumstances) already
securing the Notes, and provide a
put option exercisable on or after
February 3, 2003 to sell the Notes
to the Companies at a price equal
to the then outstanding principal
amount, if any, of the Notes, plus
accrued but unpaid interest.
Expiration Date............................ July 21, 1999, at 12:00 Midnight,
Boston, Massachusetts time, unless
extended by the Companies.
Closing Date............................... The date, after the Expiration
Date, when the Companies execute
the Supplemental Agreement.
Positions of the Companies and Directors... Neither the Companies nor their
Boards of Directors makes any
recommendation to any Noteholder
as to whether to accept or refrain
from accepting the Offer.
Withdrawal Rights.......................... Acceptances of this Offer to enter
into the Supplemental Agreement
which are tendered to the
Companies may be withdrawn at any
time until 12:00 Midnight, Boston,
Massachusetts time, on July 21,
1999, unless the Offer is extended
by the Companies. See Section 4.
Market Prices.............................. The Notes are not listed on any
securities exchange. The Common
Stock of Bradlees, Inc. is listed
on the Nasdaq National Market. The
Notes are convertible into common
stock of Bradlees, Inc. on and
after February 2, 2000. The common
stock issuable upon conversion of
the Notes will be listed on the
Nasdaq National Market upon
official notice of issuance. On
June 22, 1999 the last reported
sales price of the common stock
was $13.5625 per share.
6
<PAGE>
TO THE HOLDERS OF 9% CONVERTIBLE
NOTES OF BRADLEES STORES, INC.:
INTRODUCTION
Bradlees, Inc., a Massachusetts corporation and Bradlees Stores, Inc., a
Massachusetts corporation (together, the "Companies"), invite holders of 9%
Convertible Notes (the "Notes") of Bradlees Stores, Inc. to enter into a
supplemental agreement with the Companies (the "Supplemental Agreement"), upon
the terms and subject to the conditions set forth in this Offer (the "Offer").
The Notes which are the subject of this Offer were issued under an Indenture
dated as of February 2, 1999, between Bradlees Stores, Inc., as issuer, and IBJ
Whitehall Bank & Trust Company, as trustee.
Noteholders who tender a Notice of Acceptance and the Note or Notes held by
them will not be obligated to pay brokerage commissions or solicitation fees.
However, any tendering Noteholder or other payee who fails to complete, sign and
return to the Agent the Substitute Form W-9 that is included with the Notice of
Acceptance may be subject to required backup federal income tax withholding of
31% of the proceeds payable to such Noteholder or other payee upon closing of
the Supplemental Agreement pursuant to the Offer. See Section 5.
This Offer is for $13,993,956 aggregate principal amount of Notes.
Currently, there are $28,991,000 aggregate principal amount of Notes
outstanding. Bradlees Stores, Inc. expects to make a pre-payment of $17,137,500
on the Notes currently outstanding (the "Paydown"), leaving an aggregate
principal amount of $11,853,500 of Notes outstanding. This Paydown is expected
to occur immediately prior to the Closing of this Offer. If this Paydown occurs,
this offer will be for all Notes remaining outstanding after the Paydown. If
more than $13,993,956 aggregate principal amount of Notes are validly tendered,
the Companies will enter into the Supplemental Agreement with each Noteholder
who has validly tendered Notes, on a pro rata basis based upon the ratio of
Notes validly tendered to the total amount of Notes outstanding (in effecting
such proration, the Companies will accept 48.27 percent of the Notes (rounded
down to the nearest $1,000) owned by each tendering Noteholder), so that the
aggregate amount of Notes subject to the Supplemental Agreement is not greater
than $13,993,956. In no event will this Offer be made for more than $13,993,956
aggregate principal amount of Notes.
The Companies have signed an agreement with the Majority Noteholders, which
hold, as of the date of this Offer, $20.7 million, or approximately 71% of the
approximately $29.0 million of aggregate principal amount of outstanding Notes,
to enter into the Supplemental Agreement. The Companies will enter into the
Supplemental Agreement with the Majority Noteholders on the Closing Date
regardless of how many other Noteholders accept the Offer. The Companies are
undertaking this Offer to allow all other holders of outstanding Notes to
participate in the Supplemental Agreement on the same terms as the Majority
Noteholders.
The Companies expressly reserve the right to (i) extend, amend or modify the
terms of this Offer in any manner and (ii) withdraw or terminate this Offer at
any time for any reason. See "Extension of the Offer; Termination; Amendments."
THE BOARDS OF DIRECTORS OF THE COMPANIES HAVE APPROVED EACH COMPANIES'
DETERMINATION TO MAKE THIS OFFER AND ENTER INTO THE SUPPLEMENTAL AGREEMENT.
NOTEHOLDERS SHOULD MAKE THEIR OWN DECISIONS WHETHER TO ENTER INTO THE
SUPPLEMENTAL AGREEMENT. NEITHER THE COMPANIES NOR THEIR BOARDS OF DIRECTORS
MAKE ANY RECOMMENDATION TO ANY NOTEHOLDER AS TO WHETHER OR NOT TO ENTER INTO THE
SUPPLEMENTAL AGREEMENT. SEE SECTION 9 FOR INFORMATION REGARDING THE INTEREST OF
THE COMPANIES' DIRECTORS AND EXECUTIVE OFFICERS WITH RESPECT TO THE SUPPLEMENTAL
AGREEMENT.
There is no established trading market for the Notes. The Notes are
convertible on and after February 2, 2000 into shares of common stock of
Bradlees, Inc. (the "Shares"). The Shares are listed and traded on the Nasdaq
National Market ("Nasdaq") under the symbol "BRAD." On June 22, 1999, the last
full trading day by Nasdaq prior to the announcement by the Company of this
Offer, the closing sales price as reported by Nasdaq was $13.5625 per Share. THE
COMPANIES URGE NOTEHOLDERS TO OBTAIN CURRENT QUOTATIONS OF THE MARKET PRICE OF
THE SHARES UNDERLYING THE NOTES.
7
<PAGE>
THE OFFER
1. Security and Issuer; Proration
Bradlees, Inc. is a Massachusetts corporation which, through its wholly-
owned subsidiary, Bradlees Stores, Inc., operates discount department stores in
the Northeast. The Companies' principal executive offices are located at One
Bradlees Circle, Braintree Massachusetts 02185-9051. Their telephone number at
this location is (781) 380-3000.
This Offer is for $13,993,956 aggregate principal amount of Notes.
Currently, there are $28,991,000 aggregate principal amount of Notes
outstanding. After the expected Paydown, an aggregate principal amount of
$11,853,500 of Notes is expected to remain outstanding. This Paydown is expected
to occur immediately prior to the Closing of this Offer. If this Paydown occurs,
this offer will be for all Notes remaining outstanding after the Paydown. If
more than $13,993,956 aggregate principal amount of Notes are validly tendered,
the Companies will enter into the Supplemental Agreement with each Noteholder
who has validly tendered Notes, on a pro rata basis based upon the ratio of
Notes validly tendered to the total amount of Notes outstanding (in effecting
such proration, the Companies will accept 48.27 percent of the Notes (rounded
down to the nearest 41,000) owned by each tendering Noteholder), so that the
aggregate amount of Notes subject to the Supplemental Agreement is not greater
than $13,993,956. In no event will this Offer be made for more than $13,993,956
aggregate principal amount of Notes. Notes which are validly tendered but not
accepted due to proration will be returned to the Noteholder at the Companies'
expense.
THE OFFER IS NOT CONDITIONED ON ANY MINIMUM NUMBER OF NOTEHOLDERS AGREEING
TO ENTER INTO THE SUPPLEMENTAL AGREEMENT. THE OFFER IS, HOWEVER, SUBJECT TO
CERTAIN OTHER CONDITIONS. SEE SECTION 6. This Offer and the related Notice of
Acceptance will be mailed to record holders of Notes on or about June 23, 1999.
2. Terms of the Supplemental Agreement
Discount Options. The Supplemental Agreement provides that each Noteholder
(the "Discount Option Noteholder") will grant to the Companies an option (the
"Discount Option") to acquire Notes validly tendered and accepted which are held
by the Discount Option Noteholder (the "Discount Option Notes") at a discount
prior to maturity. The Discount Option shall apply to all of the outstanding
Discount Option Notes held by such Noteholder entering into the Supplemental
Agreement. The Companies will initially have the option to purchase the Discount
Option Notes at a price equal to 86% of the outstanding principal amount of the
Discount Option Notes, plus accrued interest, exercisable for a one month time
period from December 1, 1999 through December 31, 1999. Each month thereafter
the discount will decrease by 1% such that the discount will be fully eliminated
by January 31, 2001. The Discount Option may be exercised from time to time to
acquire all or part of the outstanding Discount Option Notes. (The Discount
Option may not be exercised in connection with mandatory redemptions of the
Notes pursuant to Section 3.1 of the Indenture or with proceeds of any Discount
Option Noteholder Collateral (as defined below)).
Option Premium. In consideration of the Discount Option, the Companies shall
pay each Discount Option Noteholder a premium on the Closing Date equal to 0.5%
of the outstanding principal amount of the Discount Option Notes owned by such
Discount Option Noteholder. The Option Premium payable to a Discount Option
Noteholder (other than the Majority Noteholders) will be reduced by a pro rata
portion (based on the ratio of Notes tendered by such Noteholder to the Notes
tendered by all Noteholder) of the amount of expenses of the Majority
Noteholders' counsel paid by the Companies. Such reduction may reduce a
Noteholders' Option Premium to zero. See "Fees and Expenses."
Discount Option Noteholder Collateral. As additional security for the
Discount Option Notes and the Companies' obligations under the Supplemental
Agreement, the Companies shall grant the Discount Option Noteholders second
priority leasehold mortgages (the "Discount Option Noteholder Collateral")on the
Additional Collateral (as defined in the Registration Statement) to secure the
full amount of principal plus accrued interest of the Discount Option Notes.
The lien of the Discount Option Noteholder Collateral will be subordinate to the
existing lien of leasehold mortgages on the Additional Collateral that secure
up to $6.5 million principal amount of Notes. This security interest shall be in
favor of a collateral agent for the benefit of the Discount Option Noteholders.
An affiliate of the Majority Noteholders that is controlled by the Majority
Noteholders will act as collateral agent under the Collateral Agency Agreement.
Put Option. The Companies shall grant the Discount Option Noteholders a put
option exercisable on or after February 3, 2003 to sell the Discount Option
Notes to the Companies at a price equal to the then outstanding principal amount
of the Discount Option Notes, plus accrued but unpaid interest.
Representations, Warranties and Covenants. The Companies and each
Noteholder entering into the Supplemental Agreement will be required to make
customary representations and warranties regarding organization, existence, good
standing, power, authority and breach and default of other agreements. Each
Noteholder will also be required to represent that such Noteholder has good and
valid title to the Notes, free and clear of all liens, pledges and encumbrances
of any kind whatsoever.
8
<PAGE>
Legal Opinion. To be validly tendered, each Notice of Acceptance must be
delivered with an unqualified legal opinion in the form set forth in the Notice
of Acceptance. Such opinion must be from counsel reasonably acceptable to the
Companies and must give an unqualified opinion regarding the Discount Option
Noteholders authorization, execution and delivery of the Supplemental Agreement.
Consents Required. The Companies must obtain the consent of the lenders
under the Revolving Credit and Guaranty Agreement with BankBoston, N.A. dated
February 2, 1999 (the "BankBoston Facility") prior to executing the
Supplemental Agreement. The Companies have received notice from BankBoston that
BankBoston has obtained such consents and intends to amend the terms of the
BankBoston Facility to permit the transactions contemplated by this Offer. No
assurance can be given, however, that the Companies and BankBoston will actually
enter into a definitive amendment permitting such transactions.
Agreement Binding on Transferees. The Companies will be permitted to assign
their rights and obligations under the Supplemental Agreement in the event of a
change of control or with the consent of all of the Noteholders. Discount
Option Noteholders will not be able to assign their rights and obligations under
the Supplemental Agreement separately from the Notes. All of the provisions of
the Supplemental Agreement will be binding on each accepting Noteholder and each
subsequent transferee of its Notes. A legend will be printed on the Notes of
all accepting Noteholders to indicate the binding effect of the Supplemental
Agreement.
Other Information. The Majority Noteholders, which own approximately 71% of
the aggregate principal amount of Notes outstanding, will enter into the
Supplemental Agreement on the Closing Date. Any other Noteholders who have
agreed to enter into the Supplemental Agreement as provided in this Offer will
also enter into the Supplemental Agreement on the Closing Date.
3. Procedure for Accepting the Offer
Valid Delivery of Acceptances. A Noteholder must forward a properly
completed, duly executed Notice of Acceptance, the Note or Notes held by them,
the legal opinion required by the Notice of Acceptance, the executed signature
pages to each of the Supplemental Agreement and the Collateral Agency Agreement
included with the Notice of Acceptance and any other required documents to the
Agent at the address of the Agent set forth on the cover of this Offer
(collectively, an "Acceptance"). To be validly delivered pursuant to the Offer,
the Acceptance must be received by the Agent prior to the Expiration Date.
The Notice of Acceptance must be endorsed and signed exactly as the name or
names of the registered holder or holders appear on such Notes, and instructions
for payment of the Option Premium and return of the Notes must be provided as
set forth in the Notice of Acceptance.
Determination of Validity. All questions as to the form of documents and
the validity, eligibility (including time of receipt) and acceptance will be
determined by the Companies, in their sole discretion, which determination shall
be final and binding on all parties. The Companies reserve the absolute right to
reject any and all Acceptances delivered to the Agent which they determine are
not in proper form or the acceptance of which may, in the opinion of the
Companies' counsel, be unlawful. The Companies also reserve the absolute right
to waive or amend any of the conditions of the Offer or any defect or
irregularity in the delivery of any Acceptance of any holder, whether or not
similar defects or irregularities are waived in the case of other holders of
Notes. No delivery of an Acceptance will be deemed to have been validly made
until all defects and irregularities have been cured or waived. Neither the
Companies, the Agent nor any other person will be under any duty to give
notification of any defects or irregularities in deliveries of Acceptances or
shall incur any liability for failure to give any such notification. The
Companies' interpretation of the terms and conditions of the Offer (including
the Notice of Acceptance) will be final and binding.
The tender of Acceptances pursuant to the procedures described above will
constitute the delivering Noteholder's acceptance of the terms and conditions of
the Offer, as well as the delivering Noteholder's representation and warranty
that such holder owns the Notes upon which an Acceptance has been tendered.
The receipt by the Companies of a properly tendered Acceptance pursuant to
the procedures described above will constitute a binding agreement between the
delivering holder and the Companies upon the terms and subject to the conditions
of this Offer.
4. Withdrawal Rights
Except as otherwise provided in this Section 4, Acceptances delivered
pursuant to this Offer are irrevocable. Acceptances tendered pursuant to the
Offer may be withdrawn at any time before the Expiration Date and, unless
accepted for payment by the Companies as provided in this Offer, may also be
withdrawn after 12:00 Midnight, Boston, Massachusetts time, on July 21, 1999.
9
<PAGE>
For a withdrawal to be effective, the Agent must receive (at its address set
forth on the front cover of this Offer) a notice of withdrawal in writing,
telegraphic or facsimile transmission form on a timely basis. Such withdrawal
must specify the name of the person who tendered the Acceptance to be withdrawn,
and the name of the registered holder, if different from that of the person who
tendered such Acceptance. All questions as to the form and validity, including
time of receipt, of notices of withdrawal will be determined by the Companies in
their sole discretion, which determination shall be final and binding on all
parties. None of the Companies, the Agent or any other person is or will be
obligated to give any notice of any defects or irregularities in any notice of
withdrawal, and none of them will incur any liability for failure to give any
such notice. Withdrawals may not be rescinded, and any Acceptance properly
withdrawn will thereafter be deemed not tendered for purposes of the Offer.
However, withdrawn Acceptances may be re-tendered before the Expiration Date by
again following the procedures described in Section 3.
5. Payment of Option Premium; Addition of Legend to Notes and Closing
Acceptances tendered to the Agent will be deemed to have been accepted by
the Companies if, as, and when the Companies execute the Supplemental Agreement
and pay the Option Premium in accordance with the Noteholder's payment
directions. The Companies will place a legend on each Note subject to the
Supplemental Agreement. This legend will notify future transferees of the
Note(s) that such Note is subject to the terms of the Supplemental Agreement.
The Companies will then return each Note to the tendering Noteholder.
ANY TENDERING NOTEHOLDER OR OTHER PAYEE WHO FAILS TO COMPLETE FULLY, SIGN
AND RETURN TO THE AGENT THE SUBSTITUTE FORM W-9 INCLUDED WITH THE NOTICE OF
ACCEPTANCE MAY BE SUBJECT TO REQUIRED BACKUP FEDERAL INCOME TAX WITHHOLDING OF
31% OF THE OPTION PREMIUM PAID PURSUANT TO THE OFFER.
6. Certain Conditions of the Offer
The Companies expressly reserve the right to (i) extend, amend or modify the
terms of this Offer in any manner and (ii) withdraw or terminate this Offer at
any time for any reason.
Notwithstanding any other provision of the Offer, the Companies shall not be
required to enter into the Supplemental Agreement, and may terminate or amend
the Offer or may postpone the closing of the Supplemental Agreement subject to
Rule 13e-4(f) promulgated under the Exchange Act, if at any time on or after
June 23, 1999, and prior to the Closing Date any of the following events shall
have occurred (or shall have been determined by the Companies to have occurred)
that, in the Companies' judgment in any such case and regardless of the
circumstances giving rise thereto (including any action or omission to act by
either of the Companies), makes it inadvisable to proceed with the Offer or with
the Supplemental Agreement:
(a) there shall have been threatened, instituted or pending before any
court, agency, authority or other tribunal any action, suit or proceeding by
any government or governmental, regulatory or administrative agency or
authority or by any other person, domestic or foreign, or any judgment,
order or injunction entered, enforced or deemed applicable by any such
court, authority, agency or tribunal, which (i) challenges or seeks to make
illegal, or to delay or otherwise directly or indirectly to restrain,
prohibit or otherwise affect the making of the Offer, the Supplemental
Agreement, the Collateral Documents or is otherwise related in any manner
to, or otherwise affects, the Offer; or (ii) could, in the sole judgment of
the Companies, materially affect the business, condition (financial or
otherwise), income operations or prospects of the Companies and their
subsidiaries taken as a whole, or otherwise materially impair in any way the
contemplated future conduct of the business of the Companies and their
subsidiaries taken as a whole; or
(b) there shall have been any action threatened or taken, or any
approval withheld, or any statute, rule or regulation invoked, proposed,
sought, promulgated, enacted, entered, amended, enforced or deemed to be
applicable to the Offer, the Supplemental Agreement, the Collateral
Documents or the Companies or any of their subsidiaries, by any government
or government regulatory or administrative authority or agency or tribunal,
domestic or foreign, which, in the sole judgment of the Companies, would or
might directly or indirectly result in any of the consequences referred to
in clause (i) or (ii) of paragraph (a) above; or
(c) there shall have occurred (i) the declaration of any banking
moratorium or any suspension of payments in respect of banks in the United
States (whether or not mandatory); (ii) any general suspension of trading
in, or limitation of prices for, securities on any United States national
securities exchange or in the over-the-counter market; (iii) the
commencement of a war, armed hostilities or any other national or
international crisis directly or indirectly involving the United States;
(iv) any limitation (whether or not mandatory) by any governmental,
regulatory or administrative agency or authority on,
10
<PAGE>
or any event which, in the sole judgment of the Companies, might materially
affect, the extension of credit by banks or other lending institutions in
the United States; (v) any significant decrease in the market price of the
Shares or in the market prices of equity securities generally in the United
States or any change in the general political, market, economic or financial
conditions or in the commercial paper markets in the United States or abroad
that could have in the sole judgment of the Companies a material adverse
effect on the business, condition (financial or otherwise), income,
operations or prospects or the Companies and their subsidiaries, taken as a
whole, or on the trading in the Notes; (vi) in the case of any of the
foregoing existing at the time of the announcement of the Offer, a material
acceleration or worsening thereof; or
(d) any change shall occur or be threatened in the condition (financial
or otherwise), business, operations, properties, assets, liabilities, income
or prospects of the Companies and their subsidiaries, taken as a whole,
which in the sole judgment of the Companies is or may be material and
adverse to the Companies and their subsidiaries taken as a whole (a
"Material Adverse Change"); or
(e) the failure of the Companies to obtain any consents required to be
obtained under the BankBoston Facility in order to ensure that the
transactions contemplated by the Supplemental Agreement do not cause or
result in an event of default under the BankBoston Facility.
The foregoing conditions are for the Companies' sole benefit and may be
asserted by the Companies regardless of the circumstances giving rise to any
such condition (including any action or inaction by the Companies) or may be
waived by the Companies in whole or in part. The Companies' failure at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right, and each such right shall be deemed an ongoing right that may be asserted
at any time and from time to time. Any determination by the Companies
regarding the inadvisability of proceeding with the Supplemental Agreement will
be final and binding on all parties.
7. Price Range of Shares; Dividends
The Companies emerged from bankruptcy on February 2, 1999. In connection
with this emergence, the old common stock of Bradlees, Inc. was canceled and new
common stock was issued. The new common stock is traded on the Nasdaq National
Market under the symbol "BRAD". As of June 3, 1999, there were approximately
1,548 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 May 1, 1999............ $ 10.00 $2.44
May 2, 1999 through June 22, 1999............... $13.5625 $7.94
</TABLE>
THE COMPANIES URGE NOTEHOLDERS TO OBTAIN CURRENT QUOTATIONS OF THE MARKET PRICE
OF THE SHARES.
There is no established trading market for the Notes, but the Notes are
convertible into shares of common stock of Bradlees, Inc. beginning on February
2, 2000.
8. Background and Purpose of the Offer; Certain Effects of the Offer
The principal purpose of the Offer is to improve the financial position of
the Companies by providing the Companies with additional financial flexibility.
Other than pursuant to the Offer, the Companies have no present plan or
intention to make acquisitions of or offers for the Notes. However, the
Companies will continue to monitor the market for the Notes and reserve the
right, in their sole discretion, to acquire and to make offers for Notes
subsequent to the Expiration Date for cash or in exchange for other securities,
by optional redemption or otherwise. The terms of any such acquisitions or
offers may differ from the terms of the Offer. Such acquisitions or offers, if
any, may depend upon, among other things, the price and availability of the
Notes.
THE BOARDS OF DIRECTORS OF THE COMPANIES HAVE APPROVED THE OFFER.
NOTEHOLDERS SHOULD MAKE THEIR OWN DECISIONS WHETHER TO TENDER ACCEPTANCES.
NEITHER THE COMPANIES NOR THEIR BOARDS OF DIRECTORS MAKE ANY RECOMMENDATION TO
ANY NOTEHOLDER AS TO WHETHER TO TENDER OR REFRAIN
11
<PAGE>
FROM TENDERING ACCEPTANCES AND NEITHER THE COMPANIES NOR THEIR BOARDS OF
DIRECTORS HAVE AUTHORIZED ANY PERSON TO MAKE ANY SUCH RECOMMENDATION.
9. Interests of Directors and Executive Officers; Transactions and Arrangements
Concerning the Shares
Except as set forth below, neither the Companies nor, to their knowledge,
any of their subsidiaries, executive officers or directors or any associate of
any such executive officer or director has engaged in any transactions involving
the Notes or the Common Stock during the 40 business days preceding the date
hereof. Neither the Companies nor, to their knowledge, any of their executive
officers or directors is a party to any contract, arrangement, understanding or
relationship relating directly or indirectly to the Offer with any other person
with respect to the Notes or the Common Stock. Certain executives of the
Companies are entitled to participate in the Companies' Management Emergence
Bonus Plan. Unpaid bonuses under this plan are not payable until the date upon
which all Notes are fully paid or converted into equity. If all outstanding
Notes are tendered, these executives will have an interest in fully paying the
Notes.
10. Source and Amount of Funds
The Companies will pay the Option Premium and any other fees and expenses
incurred by them in connection with this Offer using their working capital and
borrowings under the BankBoston Facility.
11. Effects of the Offer on the Market for Shares; Registration Under the
Exchange Act
Other than as set forth in this Offer, the Supplemental Agreement will have
no effect on the Notes or the number of Shares into which the Notes are
convertible on or after February 2, 2000 that are outstanding.
12. Certain Legal Matters; Regulatory Approvals
The Companies are not aware of any license or regulatory permit that appears
to be material to their business that would be required or be adversely affected
by entering into the Supplemental Agreement as contemplated in the Offer.
Should any such approval or other action be required, the Companies currently
contemplate that they will seek such approval or other action. The Companies
cannot predict whether they may determine that they are required to delay the
Closing Date of the Supplemental Agreement pending the outcome of any such
matter. There can be no assurance that any such approval or other action, if
needed, would be obtained or would be obtained without substantial conditions or
that the failure to obtain any such approval or other action might not result in
adverse consequences to the business of the Companies. The Companies'
obligations under the Offer to enter into the Supplemental Agreement are subject
to certain conditions. See Section 6. The Companies must obtain the consent
of the lenders under the BankBoston Facility prior to executing the Supplemental
Agreement. The Companies have received notice from BankBoston that BankBoston
has obtained such consents and intends to amend the terms of the BankBoston
Facility to permit the transactions contemplated by this Offer. No assurance
can be given, however, that the Companies and BankBoston will actually enter
into a definitive amendment permitting such transactions.
13. U.S. Federal Income Tax Consequences
EACH NOTEHOLDER IS ENCOURAGED TO CONSULT SUCH NOTEHOLDER'S TAX ADVISOR AS TO
THE PARTICULAR CONSEQUENCES OF PARTICIPATION IN THE OFFER.
14. Extension of the Offer; Termination; Amendments
This Offer will expire on the Expiration Date. The Companies expressly
reserve the right, in their sole discretion, at any time and from time to time,
and regardless of whether or not any of the events set forth in Section 6 shall
have occurred or shall be deemed to have occurred, to extend the period of time
during which the Offer is open and thereby delay the Closing Date by giving oral
or written notice of such extension to the Agent and making a public
announcement thereof. Such public announcement shall be communicated, unless
otherwise required by applicable law or regulation, by making a release to
Business Wire. During any extension of this Offer, Acceptances previously
tendered pursuant to this Offer and not withdrawn will remain subject to the
Offer.
The Companies expressly reserve the right to (i) amend or modify the terms
of the Offer in any manner and (ii) withdraw or terminate the Offer, at any time
for any reason. If the Companies make a material change in the terms of the
Offer, the Companies will extend the Offer. The minimum period for which the
Offer will be extended following a material change will depend upon the facts
and circumstances, including the relative materiality of the change. With
respect to a change in the consideration offered to holders of Notes, the Offer
12
<PAGE>
will be extended for a minimum of ten business days following public
announcement of such change. Any withdrawal or termination of the Offer will be
followed as promptly as practicable by public announcement thereof. In the
event the Companies withdraw or terminates the Offer, they will give immediate
notice to the Agent, and all Acceptances theretofore tendered pursuant to the
Offer will be returned promptly to the tendering Noteholders thereof. See "--
Withdrawal of Tendered Acceptances."
15. Fees and Expenses
Except as set forth below, the Companies and each Noteholder will pay their
own expenses in connection with this Offer and the negotiation and documentation
of the Supplemental Agreement, the Collateral Documents and the transactions
contemplated thereby. The Companies have agreed to pay a portion of the
reasonable expenses of the counsel to the Majority Noteholders attributable to
Notes tendered by Noteholders other than the Majority Noteholders up to the
aggregate amount of the Option Premium which would otherwise have been payable
to Noteholders other than the Majority Noteholders but for such payment of
expenses by the Companies. The Companies will not pay the fees and expenses of
any legal, tax, accounting or other fees incurred by any Noteholder (other than
has set forth above for the Majority Noteholder) in such holders' review or
acceptance of the Offer, nor will the Companies pay fees or commissions to any
broker, dealer, commercial bank, trust company or other person for soliciting
any Acceptances pursuant to the Offer. The Companies will however, on request,
reimburse such persons for customary handling and mailing expenses incurred in
forwarding materials in respect of the Offer to the beneficial owners for which
they act as nominees. No such broker, dealer, commercial bank or trust company
has been authorized to act as the Companies' agent for purposes of the Offer.
The total cash expenditures (excluding the Option Premium) to be incurred by the
Companies in connection with the Offer, including printing, accounting and legal
fees are estimated to be approximately $150,000.
16. Miscellaneous
The Companies are not aware of any jurisdiction where the making of the
Offer is not in compliance with applicable law. If the Companies become aware
of any jurisdiction where the making of the Offer is not in compliance with any
valid applicable law, the Companies will make a good faith effort to comply with
such law. If after such good faith effort, the Companies cannot comply with such
law, the Offer will not be made to (nor will tenders be accepted from or on
behalf of) the holders of Notes residing in such jurisdiction.
Pursuant to Rule 13e-4 promulgated under the Exchange Act, the Companies
have filed with the Commission an Issuer Tender Offer Statement on Schedule 13E-
4 (the "Schedule 13E-4") which contains additional information with respect to
the Offer. The Schedule 13E-4, including the exhibits and any amendments
thereto, may be examined, and copies may be obtained, at the same places and in
the same manner as set forth under Additional Information with respect to
information concerning the Companies.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATION ON BEHALF OF THE COMPANIES IN CONNECTION WITH THE OFFER OTHER
THAN THOSE CONTAINED IN THIS OFFER OR IN THE RELATED LETTER OF TRANSMITTAL. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANIES.
Bradlees, Inc. and Bradlees Stores, Inc.
June 23, 1999
13
<PAGE>
ANNEX A
OPTION AGREEMENT
dated as of _______________, 1999
between
BRADLEES, INC.
BRADLEES STORES, INC.
and
CERTAIN HOLDERS OF 9% SECURED CONVERTIBLE
NOTES OF BRADLEES STORES, INC. DUE 2004
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<C> <S> <C>
1. Reference to Indenture; Definitions ........................ 2
2. Call Option ................................................ 2
2.1 Grant of Call Option ............................ 2
2.2 Option Premium .................................. 2
2.3 Call Option Exercise Price ...................... 3
2.4 Expiration of Call Option ....................... 4
2.5 Exercise of Call Option ......................... 4
2.6 Closing ......................................... 5
3. Put Option .................................................. 7
3.1 Grant of Put Option ............................. 7
3.2 Put Option Purchase Price ....................... 8
3.3 Exercise of Put Option .......................... 8
3.4 Closing ......................................... 8
4. Grant of Security; Substitution of Security ................. 10
5. Conditions to Effectiveness of Agreement .................... 11
6. Representations and Warranties of Noteholders ............... 13
7. Representations and Warranties of Bradlees and BSI .......... 15
8. Notices ..................................................... 16
9. Miscellaneous ............................................... 17
9.1 Assignment ..................................... 17
9.2 Further Assurances ............................. 18
9.3 Choice of Law .................................. 18
9.4 Survival ....................................... 18
9.5 Successors and Assigns ......................... 19
9.6 Counterpart Execution .......................... 19
9.7 Amendments; Waivers ............................ 19
9.8 Integration .................................... 20
9.9 Captions and Headings .......................... 20
9.10 Restrictive Legend ............................. 20
9.11 Expenses ....................................... 20
9.12 Reaffirmation of Indebtedness Under Notes ...... 21
</TABLE>
-i-
<PAGE>
Schedules
---------
Schedule A - Noteholders and Principal Amounts of Discount Option Notes
Schedule B - Wire Instructions
Exhibits
--------
Exhibit A - Call Option Exercise Notice
Exhibit B - Put Option Exercise Notice
Exhibit C - Mortgage
Exhibit D - Amendment No. 2 to Credit Agreement
Exhibit E - Collateral Agency Agreement
Exhibit F - Assignment Notice
-ii-
<PAGE>
OPTION AGREEMENT
----------------
THIS OPTION AGREEMENT (this "Agreement") made as of the ___ day of June,
1999 by and between certain holders of 9% Secured Convertible Notes Due 2004
(the "Notes") of Bradlees Stores, Inc. ("BSI") listed on Schedule A attached
----------
hereto and their successors and assigns (the "Noteholders"), BSI and Bradlees,
Inc. ("Bradlees").
W I T N E S S E T H:
--------------------
WHEREAS, BSI, as issuer, Bradlees, as guarantor, New Horizons of Yonkers,
Inc., as guarantor and IBJ Whitehall Bank & Trust Company, as trustee (the
"Trustee") have entered into an Indenture dated February 2, 1999 pursuant to
which BSI issued the Notes (the "Indenture");
WHEREAS, Bradlees and BSI have requested that the Noteholders grant
Bradlees a Call Option (as defined below) for Notes held by the Noteholders on
the terms set forth herein and have agreed (a) that BSI and Bradlees shall grant
the Noteholders a Put Option (as defined below) with respect to such Notes held
by the Noteholders on the terms set forth herein, and (b) that BSI shall grant
additional collateral to secure such Notes and the obligations of Bradlees and
BSI under the Call Option and the Put Option;
WHEREAS, the Noteholders have agreed to grant the Call Option in exchange
for (a) an option premium on the terms set forth herein, (b) the grant of the
Put Option, and (c) the grant of additional collateral to secure the Call
Option, the Put Option and the Discount Option Notes;
-1-
<PAGE>
NOW, THEREFORE, in consideration of the premises and of the mutual
agreement herein contained and other good and valuable consideration each to the
other in hand paid, the receipt and legal sufficiency whereof is hereby
acknowledged, the parties hereto covenant and agree as follows:
1. Reference to Indenture; Definitions. Terms used herein and not defined
-----------------------------------
herein are used as defined in the Indenture.
2. Call Option.
-----------
2.1 Grant of Call Option. In consideration of the Option Premium (as
--------------------
defined below), the grant of the Put Option, the grant of additional collateral
to secure the Call consideration of the Option, the Put Option and the Discount
Option Notes, and other good and valuable Option Premium (as consideration the
receipt and sufficiency of which is hereby acknowledged, each of the Noteholders
does hereby grant, bargain and sell to Bradlees an option (the "Call Option") to
purchase all of the Notes labeled with a restrictive legend as provided in
Section 9.10 hereof held by each of such Noteholders in a principal amount as
set forth on Schedule A attached hereto with respect to such Noteholder (the
"Discount Option Notes").
2.2 Option Premium. On the Effective Date (as defined below),
--------------
Bradlees shall pay to each Noteholder an option premium equal to one half of one
percent (.5%) of the Effective Date (as defined principal amount of the Discount
Option Notes as set forth with respect to such Noteholder on below), Bradlees
Schedule A attached hereto, less, in the case of each Noteholder other than a
Majority Noteholder (as defined below), an amount equal to the Majority
Noteholder Expenses (as defined below) paid by Bradlees or BSI to the Majority
Noteholders pursuant Section 9.11 hereof, multiplied by a fraction the numerator
of which is the principal amount of Discount Option Notes of such Noteholder as
set forth on Schedule A
----------
-2-
<PAGE>
attached hereto and the denominator of which is the principal amount of Discount
Option Notes of all Noteholders other than the Majority Noteholders as set forth
on Schedule A attached hereto (the "Option Premium").
2.3 Call Option Exercise Price. On the Call Option Closing Date (as
--------------------------
defined below) Bradlees shall pay to each Noteholder an amount equal to (a) the
principal amount of Discount Option Notes specified in a Call Option Exercise
Notice (as defined below) multiplied by a percentage (the "Discount Percentage")
as set forth below based upon the date on which the Call Option Closing Date
occurs, plus (b) unpaid interest accrued through the date preceding the Call
Option Closing Date on the principal amount specified in the Call Option
Exercise Notice (the "Call Option Purchase Price"):
<TABLE>
<CAPTION>
If the Call Option Closing Date
occurs during the following periods: Then the Discount Percentage shall be:
- ----------------------------------- -------------------------------------
<S> <C>
On or after December 1, 1999 but before
January 1, 2000 86%
On or after January 1, 2000 but before
February 1, 2000 87%
On or after February 1, 2000 but before
March 1, 2000 88%
On or after March 1, 2000 but before
April 1, 2000 89%
On or after April 1, 2000 but before
May 1, 2000 90%
On or after May 1, 2000 but before
June 1, 2000 91%
On or after June 1, but before
July 1, 2000 92%
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
On or after July 1, 2000, but before
August 1, 2000 93%
On or after August 1, 2000 but before
September 1, 2000 94%
On or after September 1, 2000 but before
October 1, 2000 95%
On or after October 1, 2000 but before
November 1, 2000 96%
On or after November 1, 2000 but before
December 1, 2000 97%
On or after December 1, 2000 but before
January 1, 2001 98%
On or after January 1, 2001 but before
February 1, 2001 99%
On or after February 1, 2001 100%
</TABLE>
2.4 Expiration of Call Option. The Call Option shall be exercisable in
-------------------------
whole, or from time to time in part as provided in Section 2.5 hereof,
commencing on or after December 1, 1999 and shall expire on the earliest to
occur of the following (the "Call Option Expiration Date"): (a) February 3,
2004, or (b) the date of any accelerated maturity of the Notes as provided in
Section 8.2 of the Indenture. Nothing herein is intended to limit or modify
BSI's right to redeem Notes pursuant to Section 3.2 of the Indenture.
2.5 Exercise of Call Option. The Call Option shall be a one-time
-----------------------
option that is exercisable only with respect to all outstanding Discount Option
Notes. From time to time after December 1, 1999 and until the Call Option
Expiration Date, Bradlees may exercise the Call Option by delivering a notice
(the "Call Option Exercise Notice") to each of the
-4-
<PAGE>
Noteholders at the addresses and in the manner provided in Section 8 hereof. The
Call Option Exercise Notice shall be substantially in the form of Exhibit A
---------
hereto and shall state: (i) that the Call Option is exercised in respect of all
outstanding Discount Option Notes, (ii) the principal amount of the Discount
Option Notes of such Noteholder for which the Call Option is being exercised,
(iii) the Scheduled Call Option Closing Date (as defined below) and (iv) the
Call Option Purchase Price payable to such Noteholder based on the Scheduled
Call Option Closing Date. The Call Option may not be exercised in connection
with any mandatory redemptions of the Notes pursuant to Section 3.1 of the
Indenture and no proceeds of collateral securing the Notes or the Discount
Option Notes may be applied to the payment of the Call Option Exercise Price.
2.6 Closing. (a) If Bradlees timely delivers the Call Option Exercise
-------
Notice in accordance with the terms hereof and the conditions to the
Noteholders' obligation to close hereunder are satisfied, then the Noteholders
shall be, and remain, obligated to transfer and assign to Bradlees all of such
Noteholders' right, title and interest in, to and under the Discount Option
Notes (the "Call Option Assignment") in accordance with the terms of this
Agreement. The closing of the Call Option Assignment (the "Call Option Closing")
shall take place on the Business Day specified in the Call Option Exercise
Notice, which shall be no earlier than the fifth Business Day after receipt of
the Call Option Exercise Notice by the Noteholders (the "Scheduled Call Option
Closing Date"), at the offices of Goodwin, Procter & Hoar LLP, Exchange Place,
Boston, MA 02109. At the Call Option Closing, each Noteholder shall sell,
transfer, assign, grant, set over and convey to Bradlees, and its successors and
assigns, without recourse, representation or warranty of any kind (except that
-5-
<PAGE>
such Noteholder shall represent that it is the only legal and beneficial owner
of, and has good title to the Discount Option Notes specified in the Put Option
Exercise Notice and that such Discount Option Notes have not been pledged,
encumbered, assigned, transferred, conveyed, disposed of or terminated, in whole
or in part), all of such Noteholder's right, title and interest in, to and under
the Discount Option Notes that are subject to the Call Option Exercise Notice in
accordance with the terms of this Agreement for and in consideration of the
Call Option Purchase Price.
(b) At the Call Option Closing, and as a condition to each Noteholder's
obligation to close:
(i) Bradlees shall deliver to such Noteholder an amount equal to the
Call Option Purchase Price payable to such Noteholder by wire transfer in
accordance with wire instructions set forth on Schedule B hereto or such other
----------
wire instructions specified in a notice by such Noteholder to Bradlees received
on or before the Scheduled Call Option Closing Date;
(ii) the Noteholders that are original signatories to this
Agreement shall have received and be entitled to retain the Option Premium, and
(iii) the Call Option Expiration Date shall not have occurred.
(c) At the Call Option Closing, and as a condition to Bradlees' obligation
to close with respect to each Discount Option Note, the Noteholder of such
Discount Option Note shall deliver to Bradlees (i) the original Discount Option
Note, or (ii) if the Noteholder represents that such note cannot be located
after diligent search, a lost note affidavit and indemnification in customary
form.
-6-
<PAGE>
(d) As used herein the term "Call Option Closing Date" shall refer to the
date not earlier than the Scheduled Call Option Closing Date on which all of
the Noteholders' conditions to close pursuant to Section 2.6(b) hereof have been
satisfied.
(e) In the event any Noteholder fails to deliver to Bradlees at the
Call Option Closing Date any original Discount Option Note or lost note
affidavit and indemnification as required by Section 2.6(c) (the "Undelivered
Notes"), then Bradlees shall deliver the Call Option Purchase Price payable to
such Noteholder with respect to such Undelivered Notes to a national bank
selected by Bradlees (the "Paying Agent"), to be held by the Paying Agent in an
interest bearing account for such Noteholder. Such Noteholder, and any successor
or assign of such Noteholder, shall thereupon cease to have any rights with
respect to the Undelivered Notes (including any rights to convert or otherwise
enforce the Undelivered Notes against Bradlees or BSI or to collect and receive
from BSI any principal, interest or other amount under the Undelivered Notes),
and the sole right of such Noteholder, and any successor or assign of such
Noteholder, with respect thereto shall be the right to receive from the Paying
Agent the Call Option Purchase Price, with any interest accrued thereon.
3. Put Option.
----------
3.1 Grant of Put Option. In consideration of the grant of the Call
-------------------
Option and other good and valuable consideration the receipt and sufficiency of
which is hereby acknowledged, BSI and Bradlees do hereby grant, bargain and sell
to each Noteholder an option (the "Put Option") to sell to BSI or Bradlees a
principal amount of the Discount Option Notes held by such Noteholder.
-7-
<PAGE>
3.2 Put Option Purchase Price. Upon exercise of the Put Option by a
-------------------------
Noteholder, BSI or Bradlees shall pay to such Noteholder an amount equal to (a)
the principal amount of the Discount Option Notes held by such Noteholder on the
Put Option Closing Date (as defined below), plus (b) unpaid interest on the
Discount Option Notes held by such Noteholder accrued through the date preceding
the Put Option Closing Date (the "Put Option Purchase Price").
3.3 Exercise of Put Option. The Put Option shall be deemed exercised
----------------------
on the earlier of (a) February 3, 2004, or (b) the date of any accelerated
maturity of the Notes as provided in Section 8.2 of the Indenture. In addition,
any Noteholder may exercise the Put Option by delivering notice of the exercise
of the Put Option to BSI and Bradlees on or after February 3, 2003 at the
address and in the manner provided in Section 8 hereof (the "Put Option Exercise
Notice"). The Put Option Exercise Notice shall be substantially in the form of
Exhibit B hereto and shall state: (i) that the Put Option has been exercised
- ---------
with respect to all Discount Option Notes held by such Noteholder, (ii) the
principal amount of all Discount Option Notes of such Noteholder, (iii) the
Scheduled Put Option Closing Date (as defined below), and (iv) the Put Option
Purchase Price payable based on the Scheduled Put Option Closing Date.
3.4 Closing. (a) If a Noteholder delivers the Put Option Exercise
-------
Notice in accordance with the terms hereof or if the Put Option is deemed
exercised pursuant to Section 3.3 hereof, BSI and Bradlees may by notice to such
Noteholder elect whether BSI or Bradlees shall receive an assignment of the
Discount Option Notes but shall each be, and remain, jointly and severally
obligated to pay to such Noteholder the Put Option Purchase Price. The closing
-8-
<PAGE>
of the Put Option (the "Put Option Closing") shall take place on (i) the day
that the Put Option is deemed exercised pursuant to the first sentence of this
Section 3.4 or (ii) the Business Day specified in the Put Option Exercise
Notice, which shall be no earlier than the fifth Business Day after receipt of
the Put Option Exercise Notice by BSI and Bradlees (the "Scheduled Put Option
Closing Date"), at the offices of Goodwin, Procter & Hoar LLP, Exchange Place,
Boston, MA 02109. At the Put Option Closing, each Noteholder shall sell,
transfer, assign, grant, set over and convey to BSI (or Bradlees if BSI and
Bradlees have by notice to the Noteholders elected Bradlees to receive an
assignment of the Discount Option Notes), and its successors and assigns,
without recourse, representation or warranty of any kind (except that such
Noteholder shall represent that it is the only legal and beneficial owner of,
and has good title to the Discount Option Notes, specified in the Put Option
Exercise Notice and that such Discount Option Notes have not been pledged,
encumbered, assigned, transferred, conveyed, disposed of or terminated, in whole
or in part), all of such Noteholders's right, title and interest in, to and
under the Discount Option Notes held by such Noteholder for and in consideration
of the Put Option Purchase Price.
(b) At the Put Option Closing, and as a condition to each Noteholder's
obligation to close, BSI or Bradlees shall deliver to such Noteholder an amount
equal to the Put Option Purchase Price by wire transfer in accordance with wire
instructions set forth on Schedule B hereto or such other wire instructions
----------
specified in a notice by such Noteholder to Bradlees received on or before the
Scheduled Put Option Closing Date;
(c) At the Put Option Closing, and as a condition to BSI's obligation to
close with respect to each Discount Option Note, the Noteholder of such Discount
Option Note shall
-9-
<PAGE>
deliver to BSI (i) the original Discount Option Note, or (ii) if the Noteholder
represents that such Discount Option Note cannot be located after diligent
search, a lost note affidavit and indemnification in customary form.
(d) As used herein, the term "Put Option Closing Date" shall refer to
the date not earlier than the Scheduled Put Option Closing Date on which all of
the conditions to close set forth in Sections 3.4(a), (b) and (c) hereof have
been satisfied.
4. Grant of Security; Substitution of Security. As security for the
-------------------------------------------
punctual payment and performance of the obligations of Bradlees and BSI under
the Discount Option Notes and this Agreement, including obligations in respect
of the Put Option and the Call Option, BSI will execute and deliver to
________________, as collateral agent for the benefit of the Noteholders (the
"Collateral Agent"): (s) a Leasehold Mortgage, Security Agreement, Assignment
of Leases, Rents and Profits and Fixture Financing Statement with respect to
BSI's leasehold interest in property located in Norwalk, Connecticut in the form
of Exhibit C hereto (the "Mortgage"). At BSI's request and at BSI's sole
---------
cost and expense, the Collateral Agent shall amend the Mortgage to release the
lien of the Mortgagee with respect to the BSI's leasehold interest in property
located in Danbury, Connecticut (the "Danbury Leasehold Interest") in connection
with the grant to the Collateral Agent of a first priority mortgage or other
security interest on property of a value equal to the greater
-10-
<PAGE>
of $3.7 million or the value of the Danbury Leasehold Interest provided that,
-------------
BSI shall have no right to substitute collateral in connection with a sale of
the Danbury Leasehold Interest. At the request of the Collateral Agent, BSI
shall provide current appraisals, from an appraisal firm reasonably acceptable
to the Collateral Agent, of the value of the Danbury Leasehold Interest and any
proposed substitute collateral.
5. Conditions to Effectiveness of Agreement. This Agreement shall be
----------------------------------------
effective on the date on which this Agreement has been executed and the
following conditions are satisfied (the "Effective Date"):
(a) Amendment to Credit Agreement. BSI and Bradlees shall have
-----------------------------
entered into an Amendment No. 2 to the Revolving Credit and Guaranty Agreement
among BSI, Bradlees and certain lenders party hereto dated February 2, 1999 in
the form of Exhibit F attached hereto ("Amendment No. 2 to Credit Agreement").
---------
(b) Collateral Agency Agreement. Each of the Noteholders and the
---------------------------
Collateral Agent shall have executed and delivered a Collateral Agency Agreement
in the form of Exhibit G attached hereto (the "Collateral Agency Agreement").
---------
(c) Security Documents. BSI shall have executed and delivered the
------------------
Mortgage and the Collateral Agent shall have recorded the Mortgage, UCC
financing statements and other documents sufficient to perfect a security
interest in the collateral described therein in favor of the Collateral Agent,
subject only to liens in favor of the Trustee.
-11-
<PAGE>
(d) Option Premium and Majority Noteholder Expenses. Each Noteholder
-----------------------------------------------
shall have received the Option Premium applicable to such Noteholder and
Bradlees and BSI shall have paid the Majority Noteholder Expenses to the
Majority Noteholders.
(e) Restrictive Legend. Pursuant to Section 2.4(a) of the Indenture,
------------------
with respect to Notes held in physical form by the Noteholders, each Noteholder
shall have delivered Notes to BSI in principal amount equal to or exceeding the
principal amount set forth with respect to such Noteholder on Schedule A
----------
attached hereto and BSI shall have delivered to such Noteholder (i) a Note in
such principal amount, having a legend as set forth in Section 9.10 hereof, and
(ii) if the principal amount of the Note delivered exceeds the principal amount
set forth with respect to such Noteholder on Schedule A attached hereto, a Note
----------
in a principal amount equal to such excess amount, which shall not bear any
legend. Pursuant to Section 2.4(b) of the Indenture, with respect to Notes of
any Noteholder represented by Global Notes, (i) BSI shall have executed and
delivered to the Trustee an Issuer Order for the exchange of such Global Note,
in whole or part, for a Physical Note payable to such Noteholder in the
principal amount set forth in respect of such Noteholder on Schedule A attached
----------
hereto and (ii) such Noteholder shall have delivered such Physical Note to BSI
and BSI shall have delivered such Note to such Noteholder, having a legend as
set forth in Section 9.10 hereof.
(f) Closing Certificates. Each of BSI and Bradlees shall have
--------------------
delivered to the Collateral Agent a customary closing certificate in form and
substance satisfactory to the Collateral Agent.
(g) Legal Opinions of Counsel to Bradlees and BSI. The Collateral
---------------------------------------------
Agent shall have received an opinion or opinions of counsel to Bradlees and BSI
in form and substance acceptable to the Collateral Agent concerning the
authorization, execution and delivery and
-12-
<PAGE>
enforceability of this Agreement and the Collateral Agency Agreement, the
authorization, execution, and delivery of the Mortgage and the existence of no
conflicts with respect to the Credit Agreement and the Indenture.
(h) Legal Opinions of Counsel to Noteholders. Bradlees and BSI shall
----------------------------------------
have received an opinion or opinions of counsel to each of the Noteholders in
form and substance acceptable to Bradlees and BSI concerning the authorization,
execution, delivery and enforceability of this Agreement and the Collateral
Agency Agreement and the existence of no conflicts with respect to the charter,
By-laws, partnership agreement, limited liability company agreement or other
organizational documents of the Noteholder.
(i) Title Insurance. The Collateral Agent shall have received mortgagee's
---------------
title insurance policies with respect to each of the leasehold interests subject
to the Mortgage and shall be satisfied with the condition of such title.
6. Representations and Warranties of Noteholders.
---------------------------------------------
Each Noteholder hereby represents and warrants to Bradlees and BSI that:
(a) Such Noteholder is a duly organized, validly existing and in good
standing in its respective jurisdiction of formation under the laws of such
jurisdiction and has the requisite power and authority to enter into, execute,
deliver and perform this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery or performance of this Agreement
will not result in any breach of any provision of, or constitute a default (or
an event which with notice or lapse of time or both would constitute a default)
under, any organizational documents or bylaws such Noteholder, or any material
agreement or instrument to which Noteholder is a party or by which it is bound,
or any statute, order, rule or regulation of any court or other governmental
authority applicable to it.
-13-
<PAGE>
(b) This Agreement has been duly and validly authorized, executed and
delivered by such Noteholder, and constitutes the legal, valid and binding
obligation of such Noteholder enforceable against such Noteholder in accordance
with its terms.
(c) Such Noteholder is the only legal and beneficial owner of, and has
good title to, the Discount Option Notes in a principal amount as set forth on
Schedule A attached hereto. Such Discount Option Notes have not been pledged,
- ----------
encumbered, assigned, transferred, conveyed, disposed of or terminated in whole
or in part. The principal amount of the Discount Option Notes of such
Noteholder set forth on Schedule A attached hereto is equal to (i) the principal
----------
amount of all Notes held by such Noteholder on the Effective Date (as defined
below), if a sale of the Yonkers Property for a price of $15 million or more has
occurred and such Noteholder has received its pro rata share of the Net Proceeds
--- ----
of such sale as a mandatory prepayment of the Notes pursuant to Section 3.1 of
the Indenture, or (ii) 48.27% of the principal amount of the Notes held by such
Noteholder on the Effective Date (rounded down to the nearest $1,000), if a sale
of the Yonkers Property for a price of $15 million or more has not occurred or
such Noteholder has not received its pro rata share of the Net Proceeds of such
--- ----
sale as a mandatory prepayment of the Notes pursuant to Section 3.1 of the
Indenture.
(d) No registration with, or consent or approval of, or any other action
by, any federal, state or governmental agency, authority, administrative
or regulatory body, arbitrator, court or other tribunal, foreign or domestic, is
required for the execution, delivery and performance of this Agreement by such
Noteholder or the sale by such Noteholder of the Discount Option Notes that has
not been obtained.
-14-
<PAGE>
(e) Such Noteholder is an "accredited investor" as defined in Rule 501
of the Securities Act of 1933, as amended. Such Noteholder has such knowledge
and experience in financial and business matters that it is capable of
evaluating the merits and risks of this Agreement. Such Noteholder is entering
into this Agreement for its own account, for investment only and not with a view
to, or any present intention of, effecting a distribution of the securities
subject to this Agreement.
7. Representations and Warranties of Bradlees and BSI.
--------------------------------------------------
Bradlees and BSI hereby represent and warrant to each Noteholder that:
(a) Each of Bradlees and BSI is a corporation duly organized, validly
existing and in good standing under the laws of the Commonwealth of
Massachusetts and each has the requisite corporate power and authority to enter
into, execute, deliver and perform this Agreement and to consummate the
transactions contemplated hereby. The execution, delivery or performance of
this Agreement will not result in any breach of any provision of, or constitute
a default (or an event which with notice or lapse of time or both would
constitute a default) under, any charter documents or bylaws of Bradlees or BSI,
or any material agreement or instrument to which Bradlees or BSI is a party or
by which it is bound, or any statute, order, rule or regulation of any court or
other governmental authority applicable to it.
(b) This Agreement has been duly and validly authorized, executed and
delivered by Bradlees and BSI and constitutes the legal, valid and binding
obligation of Bradlees and BSI, enforceable against Bradlees and BSI in
accordance with its terms.
(c) No registration with, or consent or approval of, or any other action
by, any federal, state or governmental agency, authority, administrative
or regulatory body,
-15-
<PAGE>
arbitrator, court or other tribunal, foreign or domestic, is required in
connection with the execution, delivery and performance of this Agreement by
Bradlees or BSI or the purchase by Bradlees or BSI of the Discount Option Notes,
that has not been obtained.
8. Notices. All waivers, elections, notices, demands and consents which
-------
either party may be required or may desire to give under this Option Agreement,
the Collateral Agency Agreement, the Mortgage or any mortgage or security
agreement entered into in connection herewith ("Notices") shall be in writing
and shall be deemed to have been duly given (i) on the third business day after
deposit in an official United States Postal Service office if mailed by
certified mail, return receipt requested, postage prepaid, or (ii) on the date
received, or refused, if delivered by prepaid overnight delivery service or by
telecopy if followed promptly by delivery by overnight delivery service, to the
party to whom the same is so given or made, at the address of such party as set
forth below as follows:
To the Noteholders: At the address set forth for each Noteholder on the
signature pages hereto.
To the Collateral Agent: c/o Morgens, Waterfall, Vintiadis &
Company, Inc.
10 E. 50th Street, 26th Floor
New York, NY 10022
Attn: Neil Augustine
Telecopy No.: (212) 838-5540
with a copy to the Collateral Agent's
attorneys: Ropes & Gray
One International Place
Boston, MA 02110
Attn: William F. McCarthy, Esq.
-16-
<PAGE>
Telecopy No.: (617) 951-7050
To Bradlees or BSI: One Bradlees Circle
P.O. Box 859051
Braintree, MA 02185-9051
Attn: David L. Schmitt, Esq.
Telecopy No.: (781) 380-8096
With a copy to Bradlees'
and BSI's attorneys: Goodwin, Procter & Hoar LLP
Exchange Place
Boston, MA 02109
Attn: Raymond C. Zemlin
Telecopy No.: (617) 570-1512
Either party may designate by Notice to the other a new address to which Notices
shall thereafter be mailed or delivered.
9. Miscellaneous.
-------------
9.1 Assignment. Bradlees and BSI shall not be entitled to assign
----------
their rights under this Agreement, without the prior written consent of all of
the Noteholders, which each Noteholder shall be entitled to grant or withhold in
its sole discretion, provided that, Bradlees or BSI shall be entitled to assign
-------- ----
their rights in connection with (a) any sale, transfer or other disposition of
all or substantially all of the assets of Bradlees or BSI, or (b) any
consolidation or merger of Bradlees or BSI with or into any other entity, if the
purchaser of such assets or such entity consolidated or merged with or into
Bradlees or BSI assumes in a writing delivered to the Noteholders the
obligations of Bradlees or BSI hereunder and under the Discount Option Notes.
Any Noteholder shall be entitled to assign its rights hereunder in connection
with any sale or assignment of the Discount Option Notes provided that any
successor or assign of a Noteholder shall deliver a Notice to Bradlees and BSI
of such succession, sale or assignment in
-17-
<PAGE>
the form of Exhibit H attached hereto (an "Assignment Notice"). Upon delivery of
---------
an Assignment Notice, any successor or assign of a Noteholder shall be
considered a Noteholder, shall have all rights and assume all obligations and
liabilities of the assigning Noteholder hereunder with respect to any assigned
Discount Option Notes and the assigning Noteholder shall have no further
obligations or liabilities under the Option Agreement with respect to such
assigned Discount Option Notes. Any assignment made in violation of the
provisions of this Section 9.1 shall be null, void and of no effect whatsoever.
9.2 Further Assurances. From and after the date hereof, each
------------------
Noteholder and Bradlees and BSI each covenant and agree to execute and deliver
all such documents and to take all such further actions as the other party
hereto may reasonably deem necessary, from time to time, to carry out the intent
and purposes of this Agreement and to consummate the transactions contemplated
hereby with each party's costs and expenses associated therewith, including
legal expenses, to be borne individually by each party, except as otherwise
provided in this Agreement. The provisions of this Section 9.2 shall survive the
expiration or termination of this Agreement.
9.3 Choice of Law. This Agreement shall be governed and construed in
-------------
accordance with the internal laws of the State of New York without giving effect
to the principles of conflicts of law.
9.4 Survival. All representations, warranties, and covenants made by
--------
the parties hereto in this Agreement and the documents delivered on the
Effective Date shall be considered to have been relied upon by the parties
hereto, shall be true when made and as of
-18-
<PAGE>
the Effective Date, and shall survive the execution, performance and delivery of
this Agreement and the Closing.
9.5 Successors and Assigns. Subject to the provisions of Section 9.1
----------------------
hereof, this Agreement, including, without limitation, the representations,
warranties and covenants contained herein, shall be binding upon and inure to
the benefit of and be enforceable by the parties hereto and their respective
successors and assigns.
9.6 Counterpart Execution. This Agreement may be executed in any
---------------------
number of counterparts, each of which, when so executed and delivered, shall be
an original, but all of which together shall constitute one agreement binding
both parties hereto.
9.7 Amendments; Waivers.
-------------------
(a) No amendment or waiver of any provision of this Agreement shall be
effective unless it is in writing and signed by each Noteholder and Bradlees and
BSI, provided that, Schedule A and Schedule B hereto shall be amended to reflect
-------- ---- ---------- ----------
changes of ownership of Discount Option Notes or wire transfer instructions of
Noteholders upon Notice to Bradlees and BSI by any Noteholder.
(b) No failure on the part of any party to exercise, and no delay in
exercising, any right hereunder or under any related document shall operate as a
waiver thereof by such party, nor shall any single or partial exercise of any
right hereunder or under any other related document preclude any other or
further exercise thereof or the exercise of any other right. The rights and
remedies of each party provided herein and in other related documents are
cumulative and are in addition to, and not exclusive or in lieu of, any rights
or remedies provided by law (except as otherwise expressly set forth herein) and
are not conditioned or
-19-
<PAGE>
contingent on any attempt by such party to exercise any of its rights under any
other related document against the other party or any other entity.
9.8 Integration. This Agreement, together with the exhibits hereto
-----------
and the documents delivered or executed in connection herewith, constitutes the
entire agreement and understanding between the parties hereto with respect to
the transactions contemplated herein and supersedes all prior agreements,
understandings or representations pertaining thereto, whether oral or written.
There are no warranties, representations or other agreements between the parties
in connection with the subject matter hereof except as specifically set forth or
incorporated herein.
9.9 Captions and Headings. The section captions and headings in this
---------------------
Agreement are for convenience only and are not intended to be full or accurate
descriptions of the contents thereof. The section captions shall not be deemed
to be part of this Agreement and in no way define, limit, extend or describe the
scope or intent of any provisions hereof.
9.10 Restrictive Legend. Each Discount Option Note shall bear a
------------------
legend in substantially the following form:
"THIS NOTE IS SUBJECT TO THE TERMS OF AN OPTION AGREEMENT BETWEEN
BRADLEES, INC., BRADLEES STORES, INC. AND CERTAIN HOLDERS OF 9%
SECURED CONVERTIBLE NOTES OF BRADLEES STORES, INC. DUE 2004. SUCH
OPTION AGREEMENT, AMONG OTHER THINGS, OBLIGATES THE HOLDER HEREOF TO
SELL THIS NOTE AT A DISCOUNT IN CERTAIN CIRCUMSTANCES AND SUBJECT TO
CERTAIN CONDITIONS."
9.11 Expenses. On the Effective Date, Bradlees or BSI shall pay to
--------
by MWV Separate Account Alpha, Morgens Waterfall Income
-20-
<PAGE>
Partners, Restart Partners, L.P., Restart Partners II, L.P., Restart Partners
III, L.P., Restart Partners IV, L.P., Restart Partners V, L.P. or MWV
International, Ltd. (the "Majority Noteholders") an amount equal to all
reasonable expenses incurred by the Majority Noteholders in connection with the
negotiation and documentation of this Agreement, the Collateral Agency
Agreement, the Mortgage, and the consummation of the transactions contemplated
hereby, including without limitation, reasonable attorneys' fees and costs
multiplied by a fraction the numerator of which is the aggregate principal
amount of all Discount Option Notes of Noteholders other than the Majority
Noteholders and the denominator of which is the aggregate principal amount of
all Discount Option Notes of all Noteholders (collectively, the "Majority
Noteholder Expenses"). Notwithstanding the foregoing, Bradlees and BSI shall not
be obligated to pay Majority Noteholder Expenses in excess of an amount equal to
the aggregate Option Premium that would otherwise have been payable to
Noteholders other than the Majority Noteholders but for the payment of such
Majority Noteholder Expenses by Bradlees and BSI. Bradlees and BSI shall pay
all filing fees, title insurance premiums, recording fees, documentary stamp
taxes or other fees and costs associated with any tender offer made in
connection with this Agreement and the recording of the Mortgage.
9.12 Reaffirmation of Indebtedness Under Notes. BSI and Bradlees
-----------------------------------------
hereby acknowledge and reaffirm the indebtedness evidenced by the Notes and the
Indenture, including the indebtedness evidenced by the Discount Option Notes.
Bradlees acknowledges and reaffirms its guaranty of indebtedness evidenced by
the Notes and the Indenture pursuant to Article 13 of the Indenture, including
its guaranty of the indebtedness evidenced by the Discount Option Notes.
-21-
<PAGE>
IN WITNESS WHEREOF, Bradlees, BSI and the Noteholders have executed this
Option Agreement as of the date and year first above written.
BRADLEES, INC.
By:_________________________
Name:
Title:
BRADLEES STORES, INC.
By:__________________________
Name:
Title:
NOTEHOLDERS: See Schedule A attached hereto.
----------
-22-
<PAGE>
Schedule A
----------
<TABLE>
<CAPTION>
Noteholders Principal Amount of
- ----------- -------------------
Discount Option Notes Option Premium/1/
---------------------- --------------
<S> <C> <C>
MWV SEPARATE ACCOUNT ALPHA $__________ $__________
By:_______________________________
Name:
Title:
MORGENS WATERFALL INCOME PARTNERS $__________ $__________
By: MW Capital L.L.C., its General Partner
By:_______________________________
Name:
Title:
RESTART PARTNERS, L.P. $__________ $__________
By: Prime Group, L.P., its General Partner
RESTART PARTNERS II, L.P. $__________ $__________
By: Prime Group II, L.P.
RESTART PARTNERS III, L.P. $__________ $__________
By: Prime Group III, L.P., its General Partner
RESTART PARTNERS IV, L.P. $__________ $__________
By: Prime Group IV, L.P., its General Partner
RESTART PARTNERS V, L.P. $__________ $__________
By: Prime Group V, L.P., its General Partner
By: Prime, Inc., their General Partner
By: _______________________________
Name:
Title:
MWV INTERNATIONAL, LTD. $__________ $__________
By: _______________________________
Name:
Title:
</TABLE>
/1/ Subject to adjustment as provided in Section 2.2 of the Option Agreement.
- ---
-23-
<PAGE>
Schedule B
----------
Noteholders Wire Instructions
- ----------- -----------------
MWV Separate Account Alpha CITIBANK, NY
Morgens Waterfall Income Partners NEW YORK, NY
Restart Partners, L.P. ABA #021000089
Restart Partners II, L.P. For the Account of: MORGAN STANLEY &
Restart Partners III, L.P. COMPANY
Restart Partners IV, L.P. Account #: 38890774
Restart Partners V, L.P. For Further Credit of: Ned Morgens
MWV International, Ltd. & Bruce Waterfall as Agents
Account #: 038-30008
-24-
<PAGE>
Exhibit A
---------
Call Option Exercise Notice
---------------------------
To: [Name of Noteholder]
[address of Noteholder]
Pursuant to Section 2.5 of the Option Agreement dated _____________, 1999
(the "Option Agreement") between Bradlees, Inc., Bradlees Stores, Inc.,and
certain holders of 9% Secured Convertible Notes of Bradlees Stores, Inc. Due
2004, Bradlees hereby exercises the Call Option to purchase the Discount Option
Notes on the terms set forth herein. Capitalized terms used but not defined
herein shall have meanings as defined in the Option Agreement.
1. The Call Option has been exercised with respect to all outstanding
Discount Option Notes.
2. Discount Option Notes of [Name of Noteholder] in principal amount of
$________ are subject to the Call Option.
3. The Scheduled Call Option Closing Date is __________.
4. If the closing occurs on the Scheduled Call Option Closing Date, the
Call Option Purchase Price payable to [Name of Noteholder], is
$_________.
Dated: ___________________
BRADLEES, INC.
By: _____________________
Name:
Title:
<PAGE>
Exhibit B
---------
Put Option Exercise Notice
--------------------------
To: Bradlees Stores, Inc.
One Bradlees Circle
P.O. Box 859051
Braintree, MA 02185-9051
Pursuant to Section 3.3 of the Option Agreement dated _____________, 1999
(the "Option Agreement") between Bradlees, Inc., Bradlees Stores, Inc. and
certain holders of 9% Secured Convertible Notes of Bradlees Stores, Inc. Due
2004, the undersigned hereby exercises the Put Option. Capitalized terms used
but not defined herein shall have meanings as defined in the Option Agreement.
1. The Put Option has been exercised with respect to $___________ principal
amount of Discount Option Notes held by [Name of Noteholder], which
constitute all Discount Option Notes held by such Noteholder.
2. The Scheduled Put Option Closing Date is ___________.
3. If the closing occurs on the Scheduled Put Option Closing Date, the Put
Option Purchase Price payable to [Name of Noteholder] is $__________.
Dated: __________________
[Name of Noteholder]
[address of Noteholder]
By: _____________________
Name:
Title:
<PAGE>
Exhibit F
---------
[Bradlees Logo Appears Here]
Paul R. McKelvey
Vice President - Treasurer
(781) 380-8234
(781) 380-8224 FAX
May 18, 1999
Mr. Francis D. O'Connor
Vice President
BankBoston Retail Finance, Inc.
40 Broad Street, 10th Floor
Boston, MA 02109
Dear Frank:
Bradlees is currently negotiating a sale-leaseback transaction on our Yonkers
property. It is our intent to retain and operate the store as it is a profitable
location generating approximately $3.2 million (projected 1999) of four-wall
cashflow. Assuming the receipt of at least $15.0 million from the aforementioned
sale-leaseback which will be used to repay our 9% Notes on a pro rata basis, the
balance remaining on such Notes will be approximately $14.0 million.
Bradlees is offering to repurchase the remaining $14.0 million of Notes
beginning December 1, 1999 at a 14% discount. Such discount option falls away at
a rate of 1% per month after December 31, 1999. The Note repurchase in December,
1999 would produce a $2.0 million gain. Bradlees is also offering the
Noteholders a put option exercisable on or after February 3, 2003 to sell the
Notes to the Company at par (i.e. one year early).
The current Notes are secured by a first priority lien on our leasehold interest
in our Yonkers store as well as up to $6.5 million of first priority liens on
our leasehold interests in our Danbury, Connecticut, Norwalk, Connecticut, and
Saddlebrook, New Jersey stores. These latter leaseholds have an estimated fair
market value of $13.3 million. As part of the Note repurchase offer, Bradlees is
offering to remove the $6.5 million cap.
Because such leaseholds are already pledged as collateral for the Notes, we are
requesting that BankBoston and the Bank Group support both the lifting of the
$6.5 million cap and the granting of the put option.
Very truly yours,
/s/ Paul R. McKelvey
Paul R. McKelvey
PRM/arf
Bradlees, Inc., One Bradlees Circle (P.O. Box 859051), Braintree, MA 02185-9051
<PAGE>
[BankBoston Logo Appears Here]
BankBoston, N.A.
BankBoston Retail Finance
40 Broad Street
Boston, Massachusetts 02109
Tel: 617-434-4004
Mr. Paul McKelvey, Treasurer
Bradlees, Inc.
One Bradlees Circle
Braintree, MA 02184-9051 June 17, 1999
Fax: (781) 380-8224
Dear Paul:
I am writing to inform you that I have received the approval of the requisite
Bradlees' bank group lenders to amend the credit facility in accordance with the
requests outlined in your letter dated May 18, 1999 (attached) which includes
the sale leaseback transaction. I shall request our attorney, Chris Plout of
Latham & Watkins, to prepare an amendment agreement for execution immediately.
If you have any questions with regard to this matter, please feel free to
contact me at (617) 434-4193.
Sincerely,
/s/ Frank O'Connor
Frank O'Connor
Director
cc: C. Plout - Latham & Watkins
<PAGE>
Exhibit H
---------
Assignment Notice
-----------------
To: Bradlees, Inc.
Bradlees Stores, Inc.
One Bradlees Circle
P.O. Box 859051
Braintree, MA 02185-9051
Pursuant to Section 9.1 of the Option Agreement dated _______________, 1999
(the "Option Agreement") between Bradlees, Inc., Bradlees Stores, Inc. and
certain holders of 9% Secured Convertible Notes of Bradlees Stores, Inc. due
2004, notice is hereby given that the undersigned is the successor or assign of
[Name of Assigning Noteholder] (the "Assignor") and is the beneficial owner of
Discount Option Notes (as such term is defined in the Option Agreement) in the
principal amount of $____________. The undersigned acknowledges that such
Discount Option Notes are subject to the terms of the Option Agreement and
agrees to assume all obligations and liabilities of the Assignor under the
Option Agreement with respect to such Discount Option Notes.
The undersigned further represents that it is an "accredited investor" as
defined in Rule 501 of the Securities Act of 1933, as amended. The undersigned
has such knowledge and experience in financial and business matters that it is
capable of evaluating the merits and risks of the Option Agreement. The
undersigned is entering into the Option Agreement for its own account, for
investment only and not with a view to, or any present intention of, effecting a
distribution of the securities subject to the Option Agreement.
Notices delivered to the undersigned as a Noteholder pursuant to Section 8
of the Option Agreement shall be mailed or delivered to the address set forth
below.
Dated: ____________________
[Name of Assignee]
By:__________________________________
Name:
Title:
[Address of Assignee]
<PAGE>
ANNEX B
================================================================================
LEASEHOLD MORTGAGE, SECURITY AGREEMENT,
ASSIGNMENT OF LEASES RENTS AND PROFITS AND
FIXTURE FINANCING STATEMENT
from
BRADLEES STORES, INC.
to
[_____________________]
as Collateral Agent
Dated as of [__________, ___,] 1999
================================================================================
WHEN RECORDED, RETURN TO:
[__________________]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
ARTICLE I PAYMENT OF TAXES, INSURANCE, ETC............................ 4
1.1. Payment of Taxes and Claims................................. 4
1.2. Compliance with Insurance Requirements Instruments.......... 4
1.3. Compliance with Laws........................................ 4
1.4. Government Approvals........................................ 4
1.5. Liens....................................................... 4
1.6. The Lease................................................... 4
1.7. Utility Services............................................ 5
1.8. Maintenance and Repair, etc................................. 5
1.9. Alterations, Changes, etc................................... 5
1.10. Acquired Property Subject to Lien........................... 6
ARTICLE II COVENANTS OF THE MORTGAGOR.................................. 6
2.1. Compliance with Indenture................................... 6
2.2. Obligations Secured by Mortgage............................. 6
2.3. Prohibitions on Sale Transfer etc........................... 7
2.4. Recordation................................................. 7
2.5. No Waste.................................................... 7
2.6. Inspection, etc............................................. 7
2.7. Notice of Event of Default, Default or Claimed Default...... 7
2.8. No Credit for Payment of Taxes.............................. 8
2.9. Use of Mortgagee's Name..................................... 8
2.10. The Lease................................................... 8
2.11. The Easements............................................... 12
ARTICLE III EMINENT DOMAIN, INSURANCE PROCEEDS, ETC. ................... 13
3.1. Damage, Destruction or Taking; the Mortgagor to Give
Notice; Assignment of Awards............................... 13
3.2. Application of Insurance Proceeds........................... 13
3.3. Application of Awards, etc.................................. 13
ARTICLE IV EVENTS OF DEFAULT........................................... 14
4.1. Events of Default; Indebtedness Due......................... 14
4.2. Enforcement; Foreclosure.................................... 15
4.3. Power of Sale............................................... 15
4.4. The Mortgagee Authorized to Execute Deeds, etc. ............ 16
4.5. Purchase of Mortgaged Property by the Mortgagee............. 16
4.6. Receipt a Sufficient Discharge to Purchaser................. 16
4.7. Waiver of Appraisement, Valuation, etc. .................... 16
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
4.8. Sale a Bar Against the Mortgagor............................ 16
4.9. Application of Proceeds of Sale and Other Monies............ 16
4.10. Appointment of Receiver..................................... 17
4.11. Possession, Management and Income........................... 17
4.12. Right to Perform the Mortgagor's Covenants.................. 18
4.13. Cumulative Remedies......................................... 18
4.14. Provisions Subject to Applicable Law........................ 19
4.15. No Waiver................................................... 19
4.16. Compromise of Actions....................................... 20
4.17. Expenses Incurred in Protecting or Enforcing Rights......... 20
4.18. Power of Attorney........................................... 20
ARTICLE V FINANCING STATEMENT AND MISCELLANEOUS PROVISIONS............ 21
5.1. Further Assurances.......................................... 21
5.2. Fixtures; Financing Statement............................... 21
5.3. Assignment of Leases, Rents and Profits..................... 21
5.4. Partial Release............................................. 22
5.5. Release and Discharge of Mortgage........................... 23
5.6. Mortgagor, Mortgagee, Person(s)............................. 24
5.7. Cessation of Mortgagor's Interest........................... 24
5.8. Notices..................................................... 24
5.9. No Merger of Fee and Leasehold Estates...................... 24
5.10. No Claims Against the Mortgagee, etc. ...................... 24
5.11. Waiver of Right to Bring Counterclaim in Foreclosure
Action..................................................... 25
5.12. Usury Laws.................................................. 25
5.13. FIRPTA...................................................... 26
5.14. Trust Funds................................................. 26
5.15. Miscellaneous............................................... 26
5.16. Effectiveness of Mortgage................................... 26
5.17. Mortgagee Waiver and Consent Agreement...................... 26
5.18. WAIVER OF JURY TRIAL........................................ 26
5.19. New Jersey Particular Provisions............................ 26
5.20. Subordination............................................... 27
SCHEDULE A - Property Descriptions and Leases
SCHEDULE B - Superior Mortgages
</TABLE>
<PAGE>
LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT
OF LEASES, RENTS AND PROFITS AND FIXTURE FINANCING STATEMENT
------------------------------------------------------------------
THIS LEASEHOLD MORTGAGE, SECURITY AGREEMENT, ASSIGNMENT OF LEASES,
RENTS AND PROFITS AND FIXTURE FINANCING STATEMENT, made as of [_________ ___],
1999, by, BRADLEES STORES, INC., a Massachusetts corporation, having an address
at One Bradlees Circle, P.O. Box 9051, Braintree, Massachusetts 02184-9051
(together with its permitted successors and assigns, the "Mortgagor"), in favor
---------
[______________], having an address at [_______________], as Collateral Agent
for the benefit of the Noteholders (as such terms are defined in the Collateral
Agency Agreement, hereinafter defined, together with its successors in interest,
the "Mortgagee"). Reference is hereby made to a Collateral Agency Agreement
---------
(the "Collateral Agency Agreement") of even date herewith among Mortgagor,
Bradlees and the Noteholders. Capitalized terms used herein without definition
shall have the meanings give to them in the Collateral Agency Agreement.
Reference is also made to an Indenture (as it may be amended from time to time,
the "Indenture") dated as of February 2, 1999 among Mortgagor, Bradlees, Inc.
and IBJ Whitehall Bank & Trust Company, under which Mortgagor issued promissory
notes (the "Notes") in the aggregate principal amount of $29,000,000.
WITNESSETH:
----------
WHEREAS, Mortgagor, Bradlees and the Noteholders have entered into the
Option Agreement, pursuant to which the Noteholders have agreed to grant
Bradlees a call option for the Discount Option Notes held by the Noteholders on
the terms and subject to the conditions set forth therein;
WHEREAS, the Discount Option Notes evidence the principal sum of
[$ ] (the "Mortgage Amount") plus interest thereon (collectively,
such notes, the "Notes");
WHEREAS, in consideration of the Secured Obligations, Mortgagor has
agreed to grant this Mortgage to secure the Secured Obligations in the Mortgage
Amount, as evidenced by the Discount Option Notes;
NOW, THEREFORE, to secure (i) payment of the indebtedness evidenced by
the Discount Option Notes, together with all interest accrued thereon as
provided for in the Discount Option Notes, and (ii) payment of all other amounts
due under the Discount Option Documents (copies of which are attached hereto as
Exhibits - ) and (iii) the performance of the covenants and agreements
contained herein and in the Discount Option Documents; and also in consideration
of the sum of Ten Dollars in hand paid, the receipt and sufficiency of which are
hereby acknowledged:
<PAGE>
GRANTING CLAUSE
The Mortgagor, intending to be legally bound, hereby mortgages, gives,
grants, assigns, transfers, pledges, grants a security interest and sets over to
the Mortgagee, to secure (i) payment of the indebtedness evidenced by the
Discount Option Notes, in the aggregate principal amount equal to the Mortgage
Amount, together with all interest accrued thereon as provided for in the
Discount Option Notes, and (ii) payment of all other amounts due under the
Discount Option Documents, and (iii) the performance of the covenants and
agreements contained herein and in the Discount Option Documents, any and all of
the Mortgagor's right, title and interest in and to the following property
(collectively as set forth in this Granting Clause the "Mortgaged Property"):
------------------
(a) the leasehold estate of the Mortgagor created pursuant to the leases
(collectively, the "Lease") described in Schedule A hereto covering the
-----
property described in Schedule A hereto and any additions thereto covered
by the Lease (collectively the "Premises");
--------
(b) all buildings, plants, structures and other improvements now or hereafter
constructed or located on the Premises, or within the Easement Areas (as
hereinafter defined) to the extent constructed and/or owned by the
Mortgagor, and all right, title and interest of the Mortgagor, if any, in
and to all fixtures, now or hereafter located on the Premises, within the
Easement Areas or in any such improvements (such of the Mortgaged Property
as is referred to in this paragraph (b) being hereinafter collectively
called the "Improvements"), including, without limitation, all heating,
------------
lighting, pipes, pipelines, pumps, conduits, plumbing, lifting, cleaning,
fire prevention, fire extinguishing, refrigerating, ventilating,
communications, air cooling and air conditioning apparatus, elevators,
escalators, shades, awnings, screens, storm doors and windows, permanently
attached cabinets, partitions, ducts and compressors, and all of the right,
title and interest of the Mortgagor in and to any Improvements which may be
subject to any title retention or security agreement superior in lien to
the lien of this Mortgage; it being understood and agreed that all
Improvements are part and parcel of the Premises and appropriated to the
use of the Premises and, whether affixed or annexed or not, shall for the
purpose of this Mortgage be deemed conclusively to be real estate and
conveyed hereby;
(c) any insurance proceeds, and the right to receive the same, and any and all
awards or payments, including interest thereon, and the right to receive
the same, which may be made with respect to the Mortgaged Property as a
result of (i) the exercise of the right of eminent domain, (ii) the
alteration of the grade of any street, or (iii) any other injury to or
decrease in the value of the Mortgaged Property;
(d) to the extent permitted by law, all franchises, permits, licenses and
contract rights regarding the use, occupancy or operation of the Mortgaged
Property, including, without limitation, all warranties, all rights with
respect to contracts for utilities, maintenance, service or repair of the
Mortgaged Property and all development and water rights, if any;
2
<PAGE>
(e) all and singular the easements, rights-of-way or use, licenses, privileges,
servitudes, tenements, hereditaments and appurtenances now or hereafter
belonging to or in anywise appertaining to any of the foregoing, including,
without limitation, all easements, interests and rights created and granted
pursuant to the terms of the Lease(all of the foregoing hereinafter
collectively being referred to the "Easements" and the areas subject to the
---------
Easements being referred to as the "Easement Areas"); all rents, income,
--------------
issues, profits and proceeds thereof; and all the estate, right, title,
interest, property, claim and demand whatsoever, in law as well as in
equity, which the Mortgagor now has or may hereafter acquire, in and to any
of the foregoing;
(f) all other title, estates, interests or rights of the Mortgagor in the
Premises, the Improvements and the Easement Areas, whether now existing or
hereafter acquired; and
(g) any proceeds, and the right to receive the same, arising from or relating
to any conversion (voluntary or involuntary) of the Mortgaged Property,
including, without limitation, proceeds of any sale, assignment, sublease
or transfer of the Lease, Premises or Improvements.
AND without limiting any of the other provisions of this Mortgage, the
Mortgagor expressly grants to the Mortgagee, as secured party, a security
interest in all of those portions of the Mortgaged Property (for the avoidance
of doubt, expressly excluding any and all "inventory", "equipment" and other
personal property (other than, with respect to such personal property, as
expressly set forth in paragraphs (a) through (g) above) as such terms are
defined or used in the Uniform Commercial Code of the state in which the
Mortgaged Property is located (the "State UCC")) which are or may be subject to
---------
the State UCC provisions applicable to secured transactions (including, without
limitation, Article 9 thereof). The Mortgagor agrees to execute and deliver,
from time to time such further instruments (including, without limitation,
further security agreements, as defined in the applicable provisions of Article
9 of the State UCC) as may be reasonably requested by the Mortgagee to confirm
the security interest and lien of this Mortgage on the Mortgagor's interest in
such portions of the Mortgaged Property.
SUBJECT, HOWEVER, to the encumbrances, if any, listed in the title
insurance policies issued to and approved by the Mortgagee in connection
herewith (which encumbrances are hereinafter collectively referred to as the
"Permitted Encumbrances").
- -----------------------
TO HAVE AND TO HOLD the Mortgaged Property with all privileges and
appurtenances hereby granted, pledged, transferred, conveyed, mortgaged and
assigned, or agreed or intended so to be, unto the Mortgagee and its successor
and assigns, forever.
3
<PAGE>
The Mortgagor covenants that (i) it is lawfully seized and possessed of
good and marketable title to the Premises, the Easement Areas and the
Improvements; (ii) the Mortgaged Property is subject only to the Permitted
Encumbrances; (iii) it has a good right and full power and authority to make
this Mortgage; and (iv) the Mortgagor at its expense will warrant and defend to
the Mortgagee such title to the Mortgaged Property and the lien and interest of
the Mortgagee thereon and therein against all claims and demands and will
maintain and preserve such lien and will keep this Mortgage a first lien upon
the Mortgaged Property subject only to Permitted Encumbrances.
The Mortgagor further represents, warrants, covenants and agrees as
follows:
ARTICLE I
Payment of Taxes, Insurance, etc.
---------------------------------
1.1. Payment of Taxes and Claims. The Mortgagor shall pay, or cause to be
---- ---------------------------
paid when due, all taxes assessments or similar charges, payments in lieu of
taxes, assessments, or similar charges and all charges, betterments, or other
assessments relating to or imposed upon the Mortgaged Property and all other
lawful claims required to be paid by the Mortgagor (including, without
limitation, claims for labor, services, materials and supplies) pursuant to the
terms and provisions of the Lease.
1.2. Compliance with Insurance Requirements Instruments. The Mortgagor
---- --------------------------------------------------
shall at all times (a) obtain and maintain, or cause to be obtained and
maintained, the types and amounts of insurance required by the Lease, and (b)
comply or cause compliance with any instruments of record at the time in force
affecting the Mortgaged Property or any part thereof.
1.3. Compliance with Laws. The Mortgagor shall comply with all Laws, and
---- --------------------
shall not do or permit any act or thing to be done which is contrary to any Law
in respect of the ownership and use of the Mortgaged Property, provided,
however, that the Mortgagor shall have the right to contest same in good faith.
1.4. Government Approvals. The Mortgagor shall maintain all Government
---- --------------------
Approvals as required by Law relating to the Premises.
1.5. Liens. The Mortgagor shall not create, incur, assume or suffer to
---- -----
exist, directly or indirectly, any Lien on or with respect to the Mortgaged
Property or any portion thereof, or the Mortgagor's or the Mortgagee's interest
therein, or any income or profits arising therefrom, except for the Permitted
Encumbrances.
1.6. The Lease.
---- ---------
1.6.1. Modifications. The Mortgagor shall neither cancel, terminate
------ -------------
or surrender the Lease, nor amend or modify the Lease in any material respect,
4
<PAGE>
nor request or grant any consent or waiver thereunder which would have a
material adverse effect upon the interest of the Mortgagee hereunder.
1.6.2. Performance. The Mortgagor shall faithfully keep and perform
------ -----------
all of its obligations as lessee under the Lease. The Mortgagor, on behalf of
the Mortgagee, shall send written notice (by certified mail, return receipt
requested) to the Landlord, with a copy to the Mortgagee, setting forth (i) the
terms of this Section 1.7, (ii) the name and address of the Mortgagee, and
(iii) the recording date and other recording information for this Mortgage,
together with a true copy of this Mortgage, within sixty (60) days after the
execution of this Mortgage. Mortgagor shall provide copies to Mortgagee of all
material notices and communications to or from the Landlord.
1.7. Utility Services. The Mortgagor shall (i) pay or cause to be paid all
---- ----------------
charges for all public and private utility services, all public or private rail
and highway services and all other public or private transportation services, if
any, all public or private communications services, and all sprinkler systems
and protective services at any time rendered to or in connection with the
Premises to the extent required by the Lease, (ii) comply or cause compliance
with all contracts relating to any such services, and (iii) do all other things
required for the maintenance and continuance of all such services.
1.8. Maintenance and Repair, etc. The Mortgagor shall maintain and operate
---- ----------------------------
(or cause to be maintained and operated) the Premises and the Easement Areas in
accordance with good business practices consistent with those used by prudent
operators of similar facilities. The Mortgagor shall keep, or cause to be kept,
in good working order and condition, ordinary wear and tear excepted, the
Improvements necessary or useful in the proper conduct of its business on the
Premises. The Mortgagor shall not permit the Improvements or any portion thereof
to be removed, demolished or materially altered, except where such events
involve less than $250,000 per event or $1,000,000 in the aggregate in any
fiscal year. To the extent required by Law, the Lease or the Easements, the
Mortgagor shall keep or cause to be kept the adjoining sidewalks, curbs, vaults
and vault space, if any, and streets and ways located on or adjacent to the
same, and all means of access to the Premises, in good and clean order and
condition and in such a fashion that the value and utility of the Premises will
not be diminished, subject only to ordinary wear and tear. The Mortgagor
promptly, at its own expense, shall make or cause to be made all necessary or
appropriate repairs, replacements and renewals of the Improvements, whether
interior or exterior, structural or nonstructural, ordinary or extraordinary,
foreseen or unforeseen to the extent required pursuant to the Lease. All
repairs, replacements and renewals shall be equal or superior in quality,
utility and class to the original work. The Mortgagor, at its expense, shall do
or cause others to do every act necessary or appropriate for the preservation
and safety of the Premises by reason of or in connection with any excavation or
other building operation upon the Premises and upon any adjoining property,
whether or not the Mortgagor or any other Person shall be required to take such
action or be liable for failure to do so.
1.9. Alterations, Changes, etc. So long as no Event of Default shall have
---- --------------------------
occurred and be continuing, the Mortgagor shall have the right to make or cause
to be made reasonable replacements in the ordinary course of business for,
alterations of and
5
<PAGE>
additions to the Premises or any part thereof, provided that any replacement,
alteration or addition (a) shall not change the general character or affect
adversely the structural integrity of the Premises, or reduce the fair market
value thereof below its value immediately before such replacement, alteration or
addition or impair the usefulness of the Premises, (b) is effected with due
diligence, in a good and workmanlike manner and in compliance with all Laws and
insurance requirements, as set forth in the Indenture, (c) is promptly and fully
paid for, or caused to be paid for, by the Mortgagor, (d) is made, if the
estimated cost of such replacement, alteration or addition exceeds $2,000,000,
(i) under the supervision of an engineer or architect and in accordance with the
plans, specifications and cost estimates reasonably satisfactory to the
Mortgagee, and (ii) only after the Mortgagor shall have furnished or caused to
be furnished to the Mortgagee a contractor's payment and performance bond. In
any event in which the Mortgagor shall furnish the Mortgagee with plans and
specifications for any such replacement, alteration or addition, the Mortgagee
may engage, at the Mortgagor's reasonable expense, an architect or engineer to
review such plans and specifications on the Mortgagee's behalf. All
replacements for, alterations of and additions to the Premises shall immediately
constitute a part of the Mortgaged Property subject to this Mortgage.
1.10. Acquired Property Subject to Lien. All property at any time acquired
----- ---------------------------------
by the Mortgagor which is located at the Premises and required by this Mortgage
to become subject to the lien hereof, including any property acquired as
provided in Section 1.11, whether such property is acquired by exchange,
purchase, construction or otherwise, shall forthwith become subject to the lien
of this Mortgage without further action on the part of the Mortgagor or the
Mortgagee. The Mortgagor, at its expense, will execute and deliver to the
Mortgagee, upon request (and will record and file as provided in the Granting
Clause), an instrument supplemental to this Mortgage, satisfactory in substance
and form to the Mortgagee, whenever such an instrument is, in the opinion of the
Mortgagee, necessary or desirable under applicable law to subject to the lien of
this Mortgage all right, title and interest of the Mortgagor in and to all
property required by this Mortgage to be subjected to the lien hereof and
acquired by the Mortgagor since the date of this Mortgage or the date of the
most recent supplemental instrument so subjecting property to the lien hereof,
whichever is later.
ARTICLE II
Covenants of the Mortgagor
2.1. Compliance with Indenture. The Mortgagor shall comply or cause
---- -------------------------
compliance with all of the covenants and agreements contained in the Indenture
applicable to the Mortgagor, all of which covenants, conditions and agreements
are hereby incorporated herein by reference as though set forth herein in their
entirety.
2.2. Obligations Secured by Mortgage. This Mortgage shall secure the
---- -------------------------------
payment of the principal sum of, interest on, additional interest as provided in
and any prepayment premiums due under, the Discount Option Notes and shall
further secure all advances for the payment of taxes, assessments, insurance
premiums and all other costs
6
<PAGE>
incurred for the protection of the Mortgaged Property, together with interest
thereon from the date of such advances at the highest rate then borne by any of
the Discount Option Notes or at the highest rate permitted by law, whichever is
less.
2.3. Prohibitions on Sale Transfer etc. Except as provided herein, the
---- ----------------------------------
Mortgagor shall not, directly or indirectly, voluntarily sell, lease, assign,
transfer or convey, or permit the sale, lease, assignment, transfer or
conveyance of the Premises or Improvements or any additions, alterations or
changes to existing improvements on, the Mortgaged Property or any part thereof
or interest therein. If the Mortgaged Property is sold, transferred, assigned or
conveyed by operation of law without compliance with the terms hereof, the
Mortgagee may, at its option, declare the entire indebtedness secured hereby to
be immediately due and payable. Subject to the terms of the Lease and except for
the assignment effected hereby, and the liens created by the Permitted
Encumbrances, the Mortgagor will not assign the whole or any part of the rents,
income or profits arising from the Mortgaged Property, and all other assignments
thereof shall be null and void.
2.4. Recordation. The Mortgagor agrees that, at its expense, it will cause
---- -----------
this Mortgage, UCC-1 Financing Statements and each supplement or extension
hereto or thereto to be recorded, registered and filed, as applicable, and shall
cause the recording, registering and filing, of the same to be kept current in
the same manner and in such places, and will pay or cause to be paid all
applicable recording, registration or filing fees.
2.5. No Waste. The Mortgagor shall not commit or permit to be committed any
---- --------
physical waste upon the Mortgaged Property, or do any act that would materially
impair or depreciate the value of the Mortgaged Property.
2.6. Inspection, etc. The Mortgagor shall permit the Mortgagee and any
---- ----------------
representatives designated by the Mortgagee to visit and inspect the Mortgaged
Property or any part thereof, to inspect all property, books of record and
account and other records of the Mortgagor relating to the Mortgaged Property
and to make copies thereof and extracts therefrom, and to discuss its affairs,
finances and accounts with, and to be advised as to the same by, any officer and
any employee or independent accountant or the Mortgagor, all at such reasonable
times and intervals as from time to time may be requested upon two (2) days'
prior notice. The Mortgagee shall not have any duty to make any such inspection
and shall not incur any liability or obligation for not making the same
carefully or properly, or for not completing the same; nor shall the fact that
such inspection may not have been made by the Mortgagee relieve the Mortgagor of
any obligations that it may otherwise have under this Mortgage.
2.7. Notice of Event of Default, Default or Claimed Default. The Mortgagor
---- ------------------------------------------------------
shall deliver, without request or demand, a notice to the Mortgagee within four
(4) business days of becoming aware of the existence of any condition or event
which constitutes an Event of Default or which, after notice or lapse of time or
both, would constitute an Event of Default, which notice shall specify (i) the
nature and period of existence thereof, and (ii) what action the Mortgagor is
taking, or causing to be taken, or intends to take, or to cause to be taken,
with respect thereto.
7
<PAGE>
2.8. No Credit for Payment of Taxes. The Mortgagor shall not be entitled to
---- ------------------------------
any credit against the principal or premium, if any, or interest or additional
interest on the Discount Option Notes or any other sum which may become payable
under the terms hereof or any Discount Option Document by reason of the payment
of any tax on the Mortgaged Property or any part thereof or by reason of the
payment of any other taxes, assessments or similar charges, and shall not apply
for or claim any deduction from the taxable value of the Mortgaged Property or
any part thereof by reason of this Mortgage.
2.9. Use of Mortgagee's Name. The Mortgagor shall not use the Mortgagee's
---- -----------------------
name or the name of any Person controlling, controlled by or under common
control with the Mortgagee in connection with the Mortgaged Property, or any
part thereof, or any of the Mortgagor's activities, except as such use may be
required by applicable requirements of law.
2.10. The Lease.
----- ---------
(a) The Mortgagor shall:
(i) pay all rents, additional rents and other sums required to be
paid by the Mortgagor under and pursuant to the provisions of the Lease;
(ii) diligently perform and observe before the expiration of
applicable cure periods all of the terms, covenants and conditions of the
Lease on the part of the Mortgagor, as tenant thereunder, to be performed
and observed, unless such performance or observance shall be waived or
not required by the Landlord;
(iii) promptly advise the Mortgagee of any default under the Lease on
the part of the Landlord or any successor landlord; and
(iv) upon written request of Mortgagee, use reasonable efforts to
obtain a certificate of estoppel of the Landlord or any successor
landlord at such intervals as the same may be obtained under the Lease.
(b) The Mortgagor shall not surrender the leasehold estate created by the
Lease or terminate or cancel the Lease or modify, change, supplement, alter or
amend the Lease, in any respect, either orally or in writing, and the Mortgagor
hereby assigns to the Mortgagee, as further security for the payment and
performance of the obligations and indebtedness secured hereby and for the
performance and observance of the terms, covenants and conditions of this
Mortgage, all of the rights, privileges and prerogatives of the Mortgagor, as
tenant under the Lease, to surrender the leasehold estate created by the Lease
or to terminate, cancel, modify, change, supplement, alter or amend the Lease,
and any such surrender of the leasehold estate created by the Lease or
termination, cancellation, modification, change, supplement, alteration or
amendment of the Lease shall be void and of no force and effect. Simultaneously
with the execution of this Mortgage, the Mortgagor has delivered to the
Mortgagee a true copy of an executed
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<PAGE>
counterpart of the Lease, together with a true copy of an executed
counterpart of any and all assignments thereof and amendments thereto and
an executed counterpart of any memorandum of lease recorded in connection
therewith, all of which shall be retained by the Mortgagee until the entire
indebtedness secured hereby has been paid in full.
(c) If the Mortgagor shall default in the performance or observance of
any term, covenant or condition of the Lease on the part of the Mortgagor, as
tenant thereunder, to be performed or observed, then, without limiting the
generality of the other provisions of this Mortgage, and without waiving or
releasing the Mortgagor from any of its obligations hereunder, the Mortgagee
shall have the right, but shall be under no obligation, to pay any sums and to
perform any act or take any action as may be appropriate to cause all of the
terms, covenants and conditions of the Lease on the part of the Mortgagor, as
tenant thereunder, to be promptly performed or observed on behalf of the
Mortgagor, to the end that the rights of the Mortgagor in, to and under the
Lease shall be kept unimpaired and free from default. If the Mortgagee shall
make any payment or perform any act or take action in accordance with the
preceding sentence, the Mortgagee will use its diligent efforts to notify the
Mortgagor of the making of any such payment, the performance of any such act, or
taking of any such action. All sums so paid and expended by the Mortgagee and
the interest thereon shall be secured by the lien of this Mortgage. In any such
event, the Mortgagee and any person designated by the Mortgagee shall have, and
are hereby granted, the right to enter upon the Mortgaged Property at any time
and from time to time for the purpose of taking any such action.
(d) If the Landlord shall deliver to the Mortgagee a copy of any notice
of default sent by the Landlord to the Mortgagor, as tenant under the Lease,
such notice shall constitute full protection to the Mortgagee for any action
taken or omitted to be taken by the Mortgagee, in good faith, in reliance
thereon.
(e) The Mortgagor shall, from time to time, use reasonable efforts to
obtain from the Landlord such certificates of estoppel with respect to
compliance by the Mortgagor with the terms of the Lease as may be requested by
the Mortgagee.
(f) If the Lease is for any reason whatsoever terminated prior to the
natural expiration of its term, and if, pursuant to any provision of the Lease
or otherwise, the Mortgagee or its designee shall acquire from the Landlord a
new lease of the Premises, the Mortgagor shall have no right, title or interest
in or to such new lease or the leasehold estate created thereby.
(g) No release or forbearance of any of the "Tenant" obligations under
the Lease, pursuant to the Lease or otherwise, shall release the Mortgagor from
any of its obligations under this Mortgage.
(h) In the event of any arbitration or court proceedings pursuant to the
Lease, the Mortgagor hereby authorizes the Mortgagee to participate in such
arbitration or court proceedings in order to protect the Mortgagee's interests
hereunder and provided same shall not be exercised prior to an Event of Default
hereby irrevocably appoints the Mortgagee its agent and attorney-in-fact (which
appointment shall be deemed to be an
9
<PAGE>
agency coupled with an interest) to exercise all of its rights in connection
with such arbitration or court proceedings, including the right to appoint
arbitrators and to conduct arbitration proceedings on its behalf, after the
occurrence of any event of default, but nothing contained herein shall obligate
the Mortgagee to participate in any such arbitration or court proceedings.
(i) The Mortgagor shall not, without the Mortgagee's prior written
consent, elect to treat the Lease or the leasehold estate created thereby as
terminated under Subsection 365(h)(1) of the Bankruptcy Code, after rejection or
disaffirmance of the Lease by the Landlord thereunder or by any trustee of such
party, and any such election made without such consent shall be void and
ineffective.
(ii) The Mortgagor hereby unconditionally assigns, transfers and sets
over to the Mortgagee all of the Mortgagor's claims and rights to the payment of
damages that may hereafter arise as a result of any rejection or disaffirmance
of the Lease by the Landlord thereunder or by any trustee of such party,
pursuant to the Bankruptcy Code. The Mortgagee shall have and is hereby granted
the right to proceed, in its own name or in the name of the Mortgagor, in
respect of any claim, suit, action or proceeding relating to the rejection or
disaffirmance of the Lease (including, without limitation, the right to file and
prosecute, to the exclusion of the Mortgagor, any proofs of claim, complaint,
motions, applications, notices and other documents) in any case in respect of
the Landlord under the Bankruptcy Code. This assignment constitutes a present,
irrevocable and unconditional assignment of the foregoing claims, rights and
remedies, and shall continue in effect until all of the indebtedness and
obligations secured by this Mortgage shall have been satisfied and discharged in
full. Any amounts received by the Mortgagee as damages arising out of any such
rejection of the Lease shall be applied first to all reasonable costs and
expenses of the Mortgagee (including, without limitation, reasonable legal fees)
in connection with the exercise of its rights under this paragraph and then, in
such manner as the Mortgagee shall determine, to the reduction and payment of
the indebtedness secured by this Mortgage, and thereafter any balance shall be
remitted to the Mortgagor.
(iii) The Mortgagee shall not, pursuant to Subsection 365(h)(2) of
the Bankruptcy Code, offset against the rent payable under the Lease the amount
of any damages caused by the nonperformance by the Landlord of such party's
obligations under the Lease after rejection or disaffirmance thereof under the
Bankruptcy Code, without the prior written consent of the Mortgagee if such
offset would result in a forfeiture of the Lease. The Mortgagee shall have the
right to object to all or any part of such offset, and, in the event of such
objection, the Mortgagor shall not effect any offset of the amounts so objected
to by the Mortgagee. The Mortgagor shall indemnify and hold the Mortgagee
harmless from and against any and all claims, demands, actions, suits,
proceedings, damages, losses, costs and expenses of every nature whatsoever
(including, without limitation, reasonable legal fees) arising from or relating
to any such offset by the Mortgagor.
(iv) The Mortgagor shall, promptly after obtaining knowledge thereof,
give written notice to the Mortgagee of any actual filing by or against the
10
<PAGE>
Landlord of a petition under the Bankruptcy Code. The aforesaid written notice
shall set forth any information possessed by the Mortgagor concerning the date
of such filing and the court in which such petition was filed.
(v) In the event that any action, proceeding, motion or notice shall
be commenced or filed in respect of the Landlord under the Lease or the
Mortgaged Property or any part thereof, in connection with any case under the
Bankruptcy Code, following an Event of Default hereunder the Mortgagee shall
have, and is hereby granted, the option, to the exclusion of the Mortgagor,
exercisable upon notice from the Mortgagee to the Mortgagor, to conduct and
control any such litigation with counsel of the Mortgagee's choice. The
Mortgagee may proceed, in its own name or in the name of the Mortgagor, in
connection with any such litigation, and the Mortgagor agrees to execute any and
all powers, authorizations, consents and other documents required by the
Mortgagee in connection therewith. The Mortgagor shall, upon demand, pay to the
Mortgagee all reasonable costs and expenses (including, without limitation,
reasonable legal fees) paid or incurred by the Mortgagee in connection with the
prosecution or conduct of any such proceedings, and, to the extent permitted by
law, such costs and expenses shall be added to the indebtedness secured by this
Mortgage. The Mortgagor shall not, without the prior written consent of the
Mortgagee, commence any action, suit, proceeding or case, or file any
application or make any motion, in respect of the Lease in any such case under
the Bankruptcy Code.
(vi) In the event that a petition under the Bankruptcy Code shall be
filed by or against the Mortgagor, and the Mortgagor or any trustee of the
Mortgagor shall decide to reject the Lease pursuant to Section 365(a) of the
Bankruptcy Code or the Lease shall be subject to rejection pursuant to Section
365(d)(4) of the Bankruptcy Code, the Mortgagor shall give the Mortgagee at
least ten (10) days' prior written notice of the date on which application shall
be made to the court for authority to reject the Lease. The Mortgagee shall have
the right, but not the obligation, to serve upon the Mortgagor or such trustee
within such ten (10) day period a notice stating that (A) the Mortgagee demands
that the Mortgagor or such trustee assume and assign the Lease to the Mortgagee
pursuant to Section 365 of the Bankruptcy Code, and (B) the Mortgagee covenants
to cure, or provide adequate assurance of prompt cure of, all defaults and
provide adequate assurance of future performance under the Lease. In the event
that the Mortgagee serves such notice upon the Mortgagor or such trustee,
neither the Mortgagor nor such trustee shall seek to reject the Lease, and the
Mortgagor and such trustee shall comply with such demand within thirty (30) days
after such notice shall have been given, subject to the Mortgagee's performance
of such covenant.
(vii) In the event that a petition under the Bankruptcy Code shall be
filed by or against the Mortgagor, neither the Mortgagor nor any trustee of
the Mortgagor shall seek to extend any of the deadlines set forth in
Section 365 of the Bankruptcy Code without the written consent of the
Mortgagee.
(viii) The Mortgagor hereby assigns, transfers and sets over to the
Mortgagee a nonexclusive right to apply to the Bankruptcy Court under Subsection
365(d)(4) of the Bankruptcy Code for an order extending the period during which
the
11
<PAGE>
Lease may be rejected or assumed after the entry of any order for relief in
respect to the Mortgagor under Chapter 7 or Chapter 11 of the Bankruptcy Code.
2.11. The Easements.
----- -------------
(a) The Mortgagor shall:
(i) pay or cause to be paid all sums required to be paid by the
Mortgagor under and pursuant to the provisions of the Easements;
(ii) diligently perform and observe before the expiration of
applicable cure periods all of its obligations under the Easements; and
(iii) promptly notify the Mortgagee of the giving of any notice to
the Mortgagor of any default by the Mortgagor in the performance or
observance of any of its obligations under the Easements and promptly
deliver to the Mortgagee a true copy of each such notice.
(b) The Mortgagor shall not terminate or cancel any Easement or modify,
change, supplement, alter or amend any Easement, in any respect either orally or
in writing, and the Mortgagor hereby assigns to the Mortgagee, as further
payment and performance of the obligations and indebtedness secured hereby and
for the performance and observance of the terms, covenants and conditions of
this Mortgage, all of the rights, privileges and prerogatives of the Mortgagor
to terminate, cancel, modify, change, supplement, alter or amend any Easement
and any termination, cancellation, modification, change, supplement, alteration
or amendment of any Easement shall be void and of no force and effect.
Simultaneously with the execution of this Mortgage, the Mortgagor has delivered
to the Mortgagee true and complete certified copies of the Easements, together
with certified copies of any and all assignments thereof and amendments thereto.
(c) If the Mortgagor shall default in the performance or observance of
its obligations under the Easements, then without limiting the generality of the
other provisions of this Mortgage, and without waiving or releasing the
Mortgagor from any of its obligations hereunder, the Mortgagee shall have the
right, but shall be under no obligation, to pay any sums and to perform any act
or take any action as may be appropriate to cause all of the terms, covenants
and conditions of the Easements on the part of the Mortgagor to be promptly
performed or observed on behalf of the Mortgagor, to the end that the rights of
the Mortgagor in, to and under the Easements shall be kept unimpaired and free
from default. All sums so paid and expended by the Mortgagee and the interest
thereon shall be secured by the lien of this Mortgage. In any such event, the
Mortgagee and any Person designated by the Mortgagee shall have, and are hereby
granted, the right to enter upon the Mortgaged Property at any time and from
time to time for the purpose of taking any such action.
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ARTICLE III
Eminent Domain, Insurance Proceeds, Etc.
----------------------------------------
3.1. Damage, Destruction or Taking; the Mortgagor to Give Notice;
---- ------------------------------------------------------------
Assignment of Awards. In case of (a) any damage to or destruction of
---------------------
the Premises or any part thereof, or (b) any condemnation proceedings or
exercise of any right of eminent domain (hereinafter a "Taking") of all or any
part of the Premises, or to the commencement of any proceedings or negotiations
which might result in any such Taking, the Mortgagor will promptly give or cause
to be given written notice thereof to the Mortgagee, generally describing the
nature and extent of such damage or destruction or of such Taking or the nature
of such proceedings or negotiations and the nature and extent of the Taking
which might result therefrom, as the case may be. Subject to the terms and
provisions of the Lease, the Mortgagee shall be entitled to all insurance
proceeds payable on account of such damage or destruction and to all awards or
payments allocable to the Mortgaged Property on account of such Taking and the
Mortgagor hereby irrevocably assigns, transfers and sets over to the Mortgagee
all rights of the Mortgagor to any such proceeds, award or payment and
irrevocably authorizes and empowers the Mortgagee, at its option, in the name of
the Mortgagor or otherwise, to file and prosecute what would otherwise be the
Mortgagor's claim for any such proceeds, award or payment and to collect,
receipt for and retain the same for disposition in accordance with Section 3.2,
in the case of proceeds received in connection with damage or destruction to the
Premises, and Section 3.3, in the case of proceeds received in connection with a
Taking. The Mortgagor will pay or cause to be paid all reasonable costs and
expenses incurred by the Mortgagee in connection with any such damage,
destruction or Taking and seeking and obtaining any insurance proceeds, award or
payment in respect thereof. Notwithstanding the foregoing, provided no Event of
Default exists, the Mortgagor shall be entitled to file and prosecute all claims
and to apply any proceeds or awards to restoration.
3.2. Application of Insurance Proceeds. All insurance proceeds received by
---- ---------------------------------
or payable to the Mortgagee on account of any damage to or destruction of the
Premises or any part thereof (less the actual costs, fees and expenses incurred
by the Mortgagee, including, without limitation, attorneys' fees and expenses,
in connection therewith, for which the Person incurring the same shall be
reimbursed from such proceeds) shall be paid to the Mortgagee and applied in
accordance with Section 8.4 of the Indenture.
3.3. Application of Awards, etc. All awards and payments received by or
---- ---------------------------
payable to the Mortgagor and the Mortgagee or either of them on account of a
Taking (less the actual costs, fees and expenses incurred by the Mortgagee,
including, without limitation, attorneys' fees and expenses, in connection
therewith, for which the Person incurring the same shall be reimbursed from such
award or payment), together with any interest or other income earned on such
awards from the investment thereof and any other interest paid on any such
awards prior to disbursement hereunder shall be paid to the Mortgagee and
applied in accordance with Section 8.4 of the Indenture, provided,
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<PAGE>
however, that if the terms of the Indenture are inconsistent or conflict with
the terms and provisions of the Lease, the terms and conditions of the Lease
shall control.
ARTICLE IV
Events of Default
-----------------
4.1. Events of Default; Indebtedness Due. If any one or more of the
---- -----------------------------------
following events (herein sometimes called "Events of Default") shall occur:
-----------------
(a) if there shall occur any "Event of Default" as defined in the
Indenture or in any other Security Documents; or if the Mortgagor
defaults in the observance or performance of any covenant or agreement on
its part to be performed contained in this Mortgage beyond applicable
cure or grace periods; or
(b) if subsequent to the date of this Mortgage the law of the state in
which the Mortgaged Property is located shall be changed by statutory
enactment judicial decision, regulation or otherwise, so as (i) to tax
the holder of any lien or charge upon real property (for state, county,
municipal or other purpose) based on the value of the real property
subject to such lien or charge, or (ii) to change the taxation (other
than income taxes imposed on the income of the holder thereof) of deeds
of trust, mortgages or debts secured by land or property or the manner of
collecting any such taxation, in either such case in a manner such as to
affect adversely this Mortgage or the indebtedness secured hereby or the
holder of this Mortgage, unless, within thirty (30) days following
receipt of a written request from the Mortgagee, the Mortgagor shall have
entered into a lawful and binding agreement satisfactory in substance and
form to the Mortgagee, obligating the Mortgagor to pay or reimburse the
Mortgagee for any tax (other than income taxes imposed on the income of
the holder thereof) imposed on the Mortgagee by reason of any of the
foregoing; then (1) if such event is an Event of Default specified in the
Indenture in Section 8.1(d), (c) or (f) with respect to the Mortgagor,
the outstanding principal of the Discount Option Notes (with accrued
interest thereon) and all other amounts owing under the Discount Option
Documents shall automatically become immediately due and payable at par
together with interest accrued thereon without presentment, demand,
protest or notice of any kind all of which are hereby waived by the
Mortgagor, and (2) in the case of any other Event of Default, the
Mortgagee may, in addition to any right, power or remedy permitted by law
or equity, by Acceleration Notice and in accordance with Section 8.2 of
the Indenture, declare the outstanding principal of the Discount Option
Notes (with accrued interest thereon) and all other amounts owing under
the Discount Option Documents to be, and the outstanding principal of the
Discount Option Notes and such amounts shall thereupon be and become,
immediately due and payable, without presentment, demand, protest or
other notice of any kind, all of which are hereby waived by the
Mortgagor. The Mortgagor shall pay on demand all reasonable costs and
expenses (including, without limitation, attorneys' fees) incurred by or
on behalf of the Mortgagee in
14
<PAGE>
enforcing the payment of such Discount Option Notes or other obligations,
or occasioned by any default or Event of Default under this Mortgage; or
(c) a default under any of the Discount Option Documents beyond
applicable cure or grace periods.
The Mortgagor hereby waives any notice of default except as specifically
required hereby.
Notwithstanding the foregoing, if the Event of Default occurs solely as a
result of a notice of default by Landlord to the Mortgagor, the Mortgagor shall
have the right to cure the default so noticed within applicable grace periods
under the Lease or, if such default shall not be reasonably susceptible to cure,
within thirty (30) days of receipt of such notice, provide the Mortgagee with a
replacement mortgage in the amount hereof encumbering other collateral mutually
acceptable to the Mortgagor and the Mortgagee and the payment by the Mortgagor
of all fees and expenses incurred in connection with the granting of such
replacement mortgage including, but not limited to, opinions, title insurance
and all recording costs. In the event the Mortgagor and the Mortgagee are unable
to mutually agree upon and record a replacement mortgage within said thirty (30)
day period, it shall be an Event of Default. The foregoing is not intended to
limit the rights of the Mortgagee pursuant to Section 4.12 hereof and in the
event the Mortgagee exercises such rights, the Mortgagor shall have ten (10)
days within which to reimburse the Mortgagee for all costs and expenses incurred
by the Mortgagee in the exercise thereof.
4.2. Enforcement; Foreclosure. If an Event of Default shall have occurred
---- ------------------------
and be continuing beyond any applicable grace or cure period provided for herein
or in the Indenture, the Mortgagee, at any time, at its election may, subject to
Section 12.1(b) and Sections 8.3, 8.5, and 8.8 of the Indenture, proceed at law
or in equity or otherwise to enforce the payment of any outstanding Discount
Option Notes in accordance with the terms hereof and thereof, obtain specific
performance of any agreement contained herein, obtain an injunction against the
violation of any of the terms hereof, or in the aid of the exercise of any power
granted hereby, or by law, in accordance with the terms hereof or institute
foreclosure or other proceedings according to law. All procedural errors in said
proceedings, together with any stay of or exemption from execution, or extension
of time of payment, which may be given by any statute now in force or enacted
hereafter, are hereby forever irrevocably waived and released.
4.3. Power of Sale. If the unpaid principal amount of and the premium, if
---- -------------
any, and interest on the Discount Option Notes at the time outstanding shall
have become due and payable and shall not have been paid, the Mortgagee may,
subject to Section 12.1(b) and Sections 8.3, 8.5 and 8.8 of the Indenture, sell,
assign, transfer and deliver the whole or, from time to time, any part of the
Mortgaged Property, or any interest in any part thereof, at any private sale or
at public auction, with or without demand, advertisement or notice, for cash, on
credit or for other property, for immediate or future delivery, and for such
price or prices and on such terms as the Mortgagee in its uncontrolled
discretion may determine, or as may be required by law.
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4.4. The Mortgagee Authorized to Execute Deeds, etc. The Mortgagor
---- -----------------------------------------------
irrevocably appoints the Mortgagee the true and lawful attorney of the
Mortgagor, coupled with an interest, in its name and stead and on its behalf,
for the purpose of effectuating any sale, assignment, transfer or delivery for
the enforcement hereof, whether pursuant to power of sale, foreclosure or
otherwise, upon the occurrence and during the continuance of an Event of Default
to execute and deliver all such deeds, bills of sale, assignments and other
instruments as the Mortgagee may consider necessary or appropriate, with full
power of substitution, the Mortgagor hereby ratifying and confirming all that
its said attorney or any substitute shall lawfully do by virtue hereof.
Nevertheless, if so requested by the Mortgagee or any purchaser, the Mortgagor
will ratify and confirm any such sale, assignment, transfer or delivery by
executing and delivering to the Mortgagee or such purchaser all such proper
deeds, bills of sale, assignments, releases and other instruments as may be
designated in any such request.
4.5. Purchase of Mortgaged Property by the Mortgagee. Any Holder may be a
---- -----------------------------------------------
purchaser of the Mortgaged Property or of any part thereof or of any interest
therein at any sale thereof, whether pursuant to power of sale, foreclosure or
otherwise, and may apply upon the purchase price thereof the indebtedness
secured hereby owing to such Holder, to the extent of such Holder's distributive
share of the purchase price. Any such Holder shall, upon any such purchase,
acquire good title to the properties so purchased, free of the lien of this
Mortgage and free of all rights of redemption in the Mortgagor.
4.6. Receipt a Sufficient Discharge to Purchaser. Upon any sale of the
---- -------------------------------------------
Mortgaged Property or any part thereof or any interest therein, whether pursuant
to power of sale, foreclosure or otherwise, the receipt of the Mortgagee or the
officer making the sale under judicial proceedings shall be a sufficient
discharge to the purchaser for the purchase money, and such purchaser shall not
be obliged to see to the application thereof.
4.7. Waiver of Appraisement, Valuation, etc. The Mortgagor hereby waives,
---- ---------------------------------------
to the fullest extent it may lawfully do so, the benefit of all appraisement,
valuation, stay, extension and redemption laws now or hereafter in force and all
rights of marshalling in the event of any sale of the Mortgaged Property or any
part thereof or any interest therein.
4.8. Sale a Bar Against the Mortgagor. Any sale of the Mortgaged Property
---- --------------------------------
or any part thereof or any interest therein under or by virtue of this Mortgage,
whether pursuant to foreclosure or power of sale or otherwise, shall forever be
a perpetual bar against the Mortgagor.
4.9. Application of Proceeds of Sale and Other Monies. The proceeds of any
---- ------------------------------------------------
sale of the Mortgaged Property or any part thereof or any interest therein upon
foreclosure of this Mortgage or otherwise and all other sums at any time
received or held by the Mortgagee hereunder, shall (except as otherwise provided
herein or by law) be applied as follows:
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First: to the payment of all court costs, all reasonable expenses
-----
of sale, all reasonable costs and expenses of any receiver and any taxes,
assessments or charges, which are prior to the lien of this Mortgage;
Second: to the payment of any indebtedness secured by this Mortgage
------
other than indebtedness evidenced by the Discount Option Notes; and
Third: in accordance with Section 2.2 of the Collateral Agency
-----
Agreement.
4.10. Appointment of Receiver. If an Event of Default shall have occurred
----- -----------------------
and be continuing, the Mortgagee shall, as a matter of right, be entitled to the
appointment of a receiver for all or any part of the Mortgaged Property, whether
such receivership be incidental to an action of foreclosure or otherwise, and
the Mortgagor hereby consents to the appointment of such a receiver and will not
oppose any such appointment. Such appointment may be made either before or after
sale, without notice, without regard to the solvency of the Mortgagor at the
time of application for such receiver and without regard to the then value of
the Mortgaged Property or whether the same shall be then occupied as a homestead
or not, and the Mortgagee or any other person may be appointed as such receiver.
Such receiver shall have the power to collect the rents, issues and profits of
the Mortgaged Property during the pendency of such foreclosure suit and, in case
of a sale and a deficiency, during the full statutory period of redemption, if
any, whether there be redemption or not, as well as during any further times
when the Mortgagor, except for the intervention of such receiver, would be
entitled to collect such rents, issues and profits, and all other powers which
may be necessary or are usual in such cases for the protection, possession,
control, management and operation of the Mortgaged Property during the whole of
said period. All sums paid by such receiver and all costs and expenses
(including, without limitation, reasonable attorneys' fees) incurred by such
receiver in exercising such powers, together with interest thereon at the
highest rate then borne by any of the Discount Option Notes from the date of
payment or incurring, shall constitute additional indebtedness secured by this
Mortgage.
4.11. Possession, Management and Income. At any time after the occurrence of an
- ----- ---------------------------------
Event of Default, the Mortgagee, upon notice to the Mortgagor and without the
appointment of a receiver or an application therefor, may enter upon and take
possession of the Mortgaged Property or any part thereof by force, summary
proceedings, ejectment or otherwise and may remove the Mortgagor and all other
Persons and any and all property therefrom and may hold, operate, maintain,
repair, preserve, lease either in its name or in the name of the Mortgagor) and
manage the same and receive all earnings, income, rents, issues, proceeds and
profits accruing with respect thereto or any part thereof. The Mortgagee shall
be under no liability (other than liability for its own gross negligence or
willful misconduct) for or by reason of any such taking of possession, entry,
removal, holding, operation or management, except that any amounts so received
by the Mortgagee shall be applied to pay all reasonable costs and expenses of so
entering upon, taking possession of, holding, operating, maintaining, repairing,
preserving, leasing and managing the Mortgaged Property or any part thereof, and
any taxes, assessments or other charges prior to the lien of this Mortgage which
the Mortgagee may consider it necessary or desirable to pay, and any balance of
such amounts shall be applied as provided in Section 4.9 hereof.
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4.12. Right to Perform the Mortgagor's Covenants. If the Mortgagor shall
----- ------------------------------------------
fail to make any payment or perform any term, covenant or condition required to
be performed hereunder or under the Discount Option Notes or the Discount Option
Documents, and such failure either constitutes an Event of Default hereunder or
thereunder, the Mortgagee, without waiving or releasing any obligation or
default, may (but shall be under no obligation to) at any time thereafter upon
five days' prior written notice to the Mortgagor (which notice shall not be
deemed to be required in the event that the Mortgagee reasonably believes that
any delay will impair the value of the Mortgaged Property or its rights
hereunder) make such payment or perform such act for the account and at the
expense of the Mortgagor, and may enter upon the Mortgaged Property for such
purpose and take all such action thereon as may be necessary or appropriate
therefor. No such entry and no such action shall be deemed an eviction of any
lessee of the Mortgaged Property or any part thereof. All sums so paid by the
Mortgagee and all costs and expenses (including, without limitation, reasonable
attorneys' fees) so incurred, together with interest thereon at the highest rate
per annum applicable to the Discount Option Notes, from the date of payment or
incurring, shall constitute additional indebtedness secured by this Mortgage,
and the Mortgagor agrees to pay such sums to the person incurring the same on
demand.
4.13. Cumulative Remedies. Each right, power and remedy of the Mortgagee
----- -------------------
provided for in this Mortgage, or in the Discount Option Documents, or now or
hereafter existing at law or in equity or by statute or otherwise shall be
separate, distinct, cumulative and concurrent and shall be in addition to every
other right, power or remedy provided for in this Mortgage, or in the Discount
Option Documents, now or hereafter existing at law or in equity or by statute or
otherwise, and the exercise or beginning of the exercise by the Mortgagee of any
one or more of the rights, powers or remedies provided for in this Mortgage or
in the Discount Option Documents or now or hereafter existing at law or in
equity or by statute or otherwise shall not preclude the simultaneous or later
exercise by the Mortgagee of any or all such other rights, powers or remedies,
and no act of the Mortgagee shall be construed as an election to exercise any
one such right, power or remedy to the exclusion of any other such right, power
or remedy, anything herein or otherwise to the contrary notwithstanding. The
Mortgagor expressly waives (i) all demands, presentments, notices of protest and
of dishonor and notices of every kind or nature (other than notices expressly
provided for in the Discount Option Notes or Discount Option Documents),
including without limitation those of any action or non-action on the part of
the Mortgagee or any guarantor, or any other person whomsoever, (ii) the right
to require the Mortgagee to proceed against any guarantor or any other party,
(ii) the right to require the Mortgagee to proceed against or apply any other
security it may hold, and (iv) the right to require the Mortgagee to pursue any
other remedy for the benefit of the Mortgagor. Furthermore, the Mortgagor agrees
that the Mortgagee may in its sole discretion without prejudice to or in any way
limiting or lessening its rights hereunder, and without affecting or impairing
in any way the liability of the Mortgagor hereunder or under any obligation
secured hereby (A) exercise its rights under this Mortgage without taking any
action against any guarantor or any other party,
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and without proceeding against or applying any other security it may hold,
(B) at its election, exercise any right or remedy it may have against any
security held by the Mortgagee, including without limitation the right to
foreclose upon any such security by judicial or non-judicial sale, and the
Mortgagor hereby irrevocably and unconditionally waives, releases and forever
agrees not to assert any defense arising out of the absence, impairment or loss
of any right of reimbursement or subrogation or any other right or remedy of the
Mortgagor against any such security, whether resulting from such election by the
Mortgagee or otherwise, and (C) take or give up, or modify, vary, exchange,
renew or abstain from perfecting or taking advantage of, any security for any
such obligation secured hereby.
4.14. Provisions Subject to Applicable Law. All rights, powers and remedies
----- ------------------------------------
provided in this Mortgage may be exercised only to the extent that the exercise
thereof does not violate any provisions of applicable law and are intended to be
limited to the extent necessary so that they will not render this Mortgage
invalid, unenforceable or not entitled to be recorded, registered or filed under
the provisions of any applicable law. If any term of this Mortgage or any
application thereof shall be invalid or unenforceable, the remainder of this
Mortgage and any other application of such term shall not be affected thereby.
4.15. No Waiver. Any failure by the Mortgagee to insist upon the strict
----- ---------
performance by the Mortgagor of any of the terms and provisions hereof shall not
constitute a waiver of any such term or provision or of any Event of Default.
The Mortgagee, notwithstanding any such failure, shall have the right thereafter
to insist upon the strict performance by the Mortgagor of any and all of the
terms and provisions of this Mortgage to be performed by the Mortgagor and no
waiver of any Event of Default shall affect or alter this Mortgage, which shall
continue in full force and effect with respect to any other then existing or
subsequent Event of Default. By accepting payment of any amount secured hereby
after its due date, the Mortgagee shall not be deemed to waive its right either
to require prompt payment when due of all other amounts payable hereunder or
otherwise secured hereby or to declare a default for failure to effect such
prompt payment. Regardless of consideration and without the necessity for any
notice to or consent by the holder of any subordinate lien on the Mortgaged
Property, the obligation of anyone at any time liable for any of the
indebtedness secured by this Mortgage or any part of the security held for the
indebtedness may be released and the time of payment may be extended and the
terms of any of the Discount Option Notes and/or this Mortgage may otherwise be
modified without, as to the security for the remainder thereof, in anywise
impairing or affecting the lien of this Mortgage or the priority of such lien,
as security for the payment of the indebtedness as it may be so extended or
modified, over any subordinate lien. The Mortgagee may resort for the payment of
the indebtedness secured hereby to any other security therefor, in such order
and manner as the Mortgagee may elect. By exercising or failing to exercise any
right, power or remedy under this Mortgage or the Discount Option Documents, no
such person or persons shall be deemed to have waived, released or in any way
limited its or their right to exercise any right, power or remedy under any
other of such instruments. In no event shall the indebtedness secured by this
Mortgage be deemed to be discharged, released or reduced by the exercise of any
right, power or remedy hereunder, except to the extent of the actual net
19
<PAGE>
proceeds received by the Mortgagee from such enforcement of any said right,
power or remedy (including without limitation judicial or non-judicial sale or
deed in lieu of foreclosure), after deducting all legally permitted costs of
such sale or other disposition.
4.16. Compromise of Actions. Following an Event of Default any action, suit
----- ---------------------
or proceeding brought by the Mortgagee pursuant to any of the terms of this
Mortgage or otherwise, and any claim made by the Mortgagee hereunder (other than
against Mortgagor) may be compromised, withdrawn or otherwise dealt with without
any notice to or approval of the Mortgagor.
4.17. Expenses Incurred in Protecting or Enforcing Rights. If the Mortgagee
----- ---------------------------------------------------
shall incur or expend any sums, including reasonable attorneys' fees, to the
extent permitted by law, whether in connection with any action or proceeding or
not, to sustain the lien of this Mortgage or its priority, or to protect or
enforce any of its rights hereunder, or to recover any indebtedness hereby
secured, or for any title examination or title insurance policy relating to the
title to the Mortgaged Property if obtained for any of the purposes herein above
in this paragraph set forth, all such sums, to the extent permitted by law,
shall on notice and demand be paid by the Mortgagor, together with interest
thereon at the rate per annum applicable to the Discount Option Notes, and shall
be a lien on the Mortgaged Property, if and to the extent permitted by
applicable law, prior to any right of title to, interest in, or claim upon, the
Mortgaged Property subordinate to the lien of this Mortgage, and shall be deemed
to be part of the indebtedness secured hereby.
4.18. Power of Attorney. The Mortgagor hereby irrevocably and
----- -----------------
unconditionally appoints the Mortgagee as the Mortgagor's true and lawful
attorney-in-fact, to act for the Mortgagor in the Mortgagor's name, place and
stead, and for the Mortgagor's use and benefit, to execute, deliver and file all
applications and any and all other necessary documents or things, to effect a
transfer, reinstatement, renewal and/or extension of any and all licenses,
permits, certifications, consents and approvals from all applicable governmental
agencies or authorities("Governmental Authorizations") issued to the Mortgagor
-----------------------------
in connection with the Mortgagor's use or occupancy of the Mortgaged Property or
operation of the Premises, to permit any transferee of the Premises to operate
under the authority of the Governmental Authorizations issued to the Mortgagor,
and to do any and all other acts incidental to any of the foregoing. The
Mortgagor irrevocably and unconditionally grants to the Mortgagee, as its
attorney-in-fact, full power and authority to do and perform every act necessary
and proper to be done in the exercise of any of the foregoing powers as fully as
the Mortgagor might or could do if personally present or acting, with full power
of substitution, hereby ratifying and confirming all that said attorney shall
lawfully do or cause to be done by virtue hereof. This power of attorney is
coupled with an interest and is irrevocable prior to payment in full of the
obligations secured hereby.
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ARTICLE V
Financing Statement and Miscellaneous Provisions
------------------------------------------------
5.1. Further Assurances. The Mortgagor, at its expense shall execute,
---- ------------------
acknowledge and deliver all such instruments and take all such action as the
Mortgagee may from time to time reasonably request for assuring to the Mortgagee
the properties and rights now or hereafter subjected to the lien hereof or
assigned hereunder or intended so to be, including without limitation, the
execution of a supplemental mortgage or mortgages relating to any land or other
interest in real estate acquired after the date hereof and referred to in clause
(ii) of paragraph (a) of the granting clause hereof.
5.2. Fixtures; Financing Statement. This Mortgage constitutes a security
agreement under the Uniform Commercial Code as enacted by the state in which the
Mortgaged Property is located. The Mortgagor covenants and agrees that, upon the
request of the Mortgagee or upon the subsequent acquisition of any proceeds,
fixtures and other real property, the Mortgagor will provide to the Mortgagee
such further assurances and take such further actions as may be required by the
Mortgagee to establish the Mortgagee's first and prior security interest in any
such proceeds, fixtures and other real property, including, without limitation,
execution and filing or recording in all necessary public offices, at the
Mortgagor's sole cost and expense, any UCC financing statements in form
acceptable to the Mortgagee. Upon request, the Mortgagor shall execute, deliver
and cause to be recorded and filed from time to time with all necessary public
offices, at the Mortgagor's sole cost and expense, continuances and such other
instruments as will maintain the Mortgagee's priority of security in all such
proceeds, fixtures and other property. IT IS INTENDED BY THE MORTGAGOR AND THE
MORTGAGEE THAT THIS MORTGAGE BE EFFECTIVE AS A FINANCING STATEMENT FILED WITH
THE REAL ESTATE RECORDS AS A FIXTURE FILING. FOR THIS PURPOSE, THE FOLLOWING
INFORMATION IS SET FORTH:
(a) Debtor shall mean the Mortgagor, and the address of Debtor shall be its
address set forth on the cover hereof.
(b) Secured Party shall mean the Mortgagee, and the address of Secured
Party shall be its address set forth on the cover hereof.
(c) This document covers goods which are or are to become fixtures related
to the real estate.
(d) The record owners of the real estate are set forth in Schedule A.
5.3. Assignment of Leases, Rents and Profits. To further secure the
---- ---------------------------------------
Obligations, the Mortgagor hereby sells, assigns and transfers unto the
Mortgagee all the rents, issues and profits of the Mortgaged Property
(collectively, "Rents") now due and which may hereafter become due under or by
-----
virtue of any lease, whether written or verbal, or any letting of, or of any
agreement for the use or occupancy of the Mortgaged Property or any part
thereof, which may have been heretofore or may be hereafter made
21
<PAGE>
or agreed to or which may be made or agreed to by the Mortgagee under the powers
herein granted, it being the intention hereby to establish an absolute transfer
and assignment of all such and agreements, and all the avails thereunder, to the
Mortgagee and not merely the passing of a security interest. The Mortgagor, to
the extent permitted by applicable law, hereby irrevocably appoints the
Mortgagee its true and lawful attorney (coupled with an interest) in its name,
place and stead (with or without taking possession of the Premises) to rent,
lease or let all or any portion of the Mortgaged Property to any party or
parties at such rental and upon such terms as the Mortgagee shall, in its
reasonable discretion, determine, and to collect all of said Rents arising from
or accruing at any time hereafter, and all now due or that may hereafter become
due under each and every one of the leases and agreements, written or verbal, or
other tenancy existing, or which may hereafter exist on the Mortgaged Property,
with the same rights and powers and subject to the same immunities, exoneration
of liability and rights of recourse and indemnity as the Mortgagee would have
upon taking possession pursuant to the provisions of Article 4 hereof. The
Mortgagor represents and agrees that no Rent has been or will be paid by any
person or entity in possession of any portion of the Mortgaged Property for more
than one installment in advance and that the payment of none of the Rents to
accrue for any portion of the Mortgaged Property will be waived, released,
reduced, discounted or otherwise discharged or compromised by the Mortgagor. As
between the Mortgagor and the Mortgagee, the Mortgagor waives any rights to set-
off disputed amounts due from any person or entity in possession of any portion
of the Mortgaged Property against sums due to the Mortgagee (but the Mortgagor
shall not be deemed hereunder to have waived any rights or remedies against such
person or entity). The Mortgagor agrees that it will not assign any of the Rents
of the Mortgaged Property. Nothing herein contained shall be construed as
constituting the Mortgagee a mortgagee in possession in the absence of the
taking of actual possession of the Mortgaged Property by the Mortgagee pursuant
to Article 4 hereof. In the exercise of the powers herein granted the Mortgagee,
no liability shall be asserted or enforced against the Mortgagee, all such
liability being expressly waived and released by the Mortgagor, except liability
arising out of the gross negligence or willful misconduct of the Mortgagee. The
Mortgagor further agrees to assign and transfer to the Mortgagee all future
leases upon all or any part of the Mortgaged Property and to execute and
deliver, at the request of the Mortgagee, all such further assurances and
assignments in the Mortgaged Property as the Mortgagee shall from time to time
reasonably require. Although it is the intention of the parties that the
assignment contained in this section shall be a present absolute assignment, it
is expressly understood and agreed, anything herein contained to the contrary
notwithstanding, that the Mortgagee shall not exercise any of the rights or
powers conferred upon it by this section except after the occurrence and during
the continuance of an Event of Default and until such time the Mortgagor may
continue to collect and use the rents and operate and manage the Mortgaged
Property.
5.4. Partial Release. (a) The Mortgagee, at any time and from time to time,
---- ---------------
without liability therefor, without prior notice to the Mortgagor and without
affecting the lien of this Mortgage on any Mortgaged Property or the liability
of the Mortgagor except as expressly provided by such release, easement or
other agreement, may release any part of the Mortgaged Property, consent to the
making of any map or plat of all or any part of
22
<PAGE>
the Mortgaged Property, join in granting any easement thereon or join in any
extension agreement or agreement subordinating the lien of this Mortgage or
enter into any other agreement in connection with the Mortgaged Property.
(b) Mortgagee covenants and agrees that at the request of Mortgagor, and at
the cost and expense of Mortgagor, Mortgagee shall, pursuant to a partial
release of mortgage (the "Partial Release"), release the lien of this Mortgage
on the real property described in Schedule A as the "Danbury Property". The
execution of the Partial Release shall not in any way affect the lien of this
Mortgage on any other Mortgaged Property or the liability of the Mortgagor,
except as expressly provided in the Partial Release. Mortgagees obligation to
execute the Partial Release, as set forth in this paragraph, is conditioned upon
Mortgagor's grant to Mortgagee of a first priority mortgage or other security
interest on property of a value equal to the greater of $3,700,000 or the value
of the Danbury Property. At the request of Mortgagee, and prior to Mortgagee's
execution of the Partial Release, Mortgagor shall provide current appraisals
from an appraisal firm reasonably acceptable to Mortgagee, of the value of the
Danbury Property and any proposed substitute collateral.
5.5. Release and Discharge of Mortgage. If (i) all of the outstanding
---- ---------------------------------
principal of and interest on all of the Discount Option Notes shall be paid in
accordance with the terms thereof and of the Discount Option Documents, and any
and all sums payable by the Mortgagor under the Discount Option Documents shall
be paid or (ii) if all of the interests of the Mortgagor in the Mortgaged
Property under the Mortgage shall be Disposed of and if the Mortgagor shall be
in compliance with all the terms, covenants and conditions applicable to it to
be complied with under the Discount Option Notes and of the Discount Option
Documents, then in either such case, this Mortgage shall be null and void and of
no further force and effect and the Mortgaged Property hereunder shall thereupon
be, and shall be deemed to have been, reconveyed, released and discharged from
the lien of this Mortgage without further notice on the part of the Mortgagor or
Mortgagee hereunder, and the Mortgagee, at the Mortgagor's expense, will execute
and deliver such reasonable or necessary instruments, if any, as the Mortgagor
may request evidencing or confirming the reconveyance, release and discharge of
the Mortgaged Property from the lien of this Mortgage, and any such instrument,
when duly executed by the Mortgagee and duly recorded in the place where this
Mortgage is recorded, shall conclusively evidence such reconveyance, release and
discharge. Notwithstanding the foregoing, if (i) or (ii) above shall occur, then
the Mortgagor shall have the option to request an assignment of this Mortgage
without recourse, representation or warranty, in lieu of the termination of this
Mortgage as described above, and, at the Mortgagor's written request, this
Mortgage shall remain in full force and effect and the Mortgagee shall assign
this Mortgage, and the Mortgagee, at the Mortgagor's expense, will execute and
deliver such reasonable or necessary instruments, if any, as the Mortgagor may
request evidencing or confirming the assignment of this Mortgage, and any such
instrument, when duly executed by the Mortgagee and duly recorded in the place
where this Mortgage is recorded, shall conclusively evidence the assignment of
this Mortgage, and the release and discharge of the Mortgagor from its
obligations hereunder. Notwithstanding the foregoing, any release of this
Mortgage in connection with a sale of
23
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the Mortgaged Property shall not include a release of the security interests of
the Mortgagee in the proceeds of such sale and shall expressly reserve the
Mortgagee's security interests in such proceeds unless and until such proceeds
are actually received by the Mortgagee.
5.6. Mortgagor, Mortgagee, Person(s). Wherever used in this Mortgage,
---- -------------------------------
unless the context clearly indicates a contrary intent or unless otherwise
specifically provided herein, the word "the Mortgagor" shall mean "the Mortgagor
or any subsequent owner or owners of the Mortgaged Property, or both", and the
word "the Mortgagee" shall mean "the Mortgagee or any holder or holders from
time to time of the Discount Option Notes. "
5.7. Cessation of Mortgagor's Interest. No cessation of the Mortgagor's
---- ---------------------------------
interest in the Mortgaged Property shall affect this Mortgage or any of the
Discount Option Notes.
5.8. Notices. All notices, demands, requests, consents, approvals and other
---- -------
instruments under this Mortgage or any of the Discount Option Notes shall be in
writing and shall be sent by first class mail, registered mail or overnight
courier and, if to the Mortgagee, addressed to the Mortgagee at the address set
forth for communications in the Option Agreement, and, if to the Mortgagor,
addressed to it at the address set forth for communications in the Option
Agreement, or to such other address with respect to any party as such party
shall notify the other in writing; provided any such communication to the
--------
Mortgagor may also, at the option of the Mortgagee, be hand delivered to the
Mortgagor at its address set forth above.
5.9. No Merger of Fee and Leasehold Estates. So long as any portion of the
---- --------------------------------------
obligations and indebtedness secured hereby remains unpaid or has not been
performed, unless the Mortgagee shall otherwise consent, the fee title to the
Premises and the leasehold estate therein created pursuant to the provisions of
the Lease shall not merge but shall always be kept separate and distinct,
notwithstanding the union of such estates in the Mortgagor, or in any other
person by purchase, operation of law or otherwise. If the Mortgagee shall
acquire the fee title to the Premises and the leasehold estate therein created
pursuant to the provisions of the Lease, by foreclosure of this Mortgage or
otherwise, such estates shall not merge as a result of such acquisition and
shall remain separate and distinct for all purposes after such acquisition
unless and until the Mortgagee shall elect to merge such estates.
5.10. No Claims Against the Mortgagee, etc. Nothing contained in this
----- -------------------------------------
Mortgage shall constitute any consent or request by the Mortgagee, express or
implied, for the performance of any labor or services or the furnishing of any
materials or other property in respect of the Mortgaged Property or any part
thereof, or shall be construed to permit the making of any claim against the
Mortgagee in respect of labor or services or the furnishing of any materials or
other property or any claim that any lien based on the performance of such labor
or services or the furnishing of any such materials or other property is prior
to the lien of this Mortgage.
24
<PAGE>
5.11. Waiver of Right to Bring Counterclaim in Foreclosure Action. In any
----- -----------------------------------------------------------
action to foreclose the lien or liens of this Mortgage, including a partial
foreclosure, no defense, counterclaim, or setoff shall be available to the
Mortgagor other than a compulsory counterclaim or one which denies the existence
or sufficiency of the facts upon which the action is grounded. If any defense,
counterclaim or setoff, other than one permitted by the preceding sentence, is
timely raised in such foreclosure action, such defense, counterclaim, or setoff
shall be dismissed; provided, however, that if such defense, counterclaim, or
-------- -------
setoff is based on a claim which could be tried in an action for money damages,
such claim may be brought in a separate action which shall not thereafter be
consolidated with such foreclosure action. The bringing of such separate action
for money damages shall not be deemed to afford any grounds for staying the
foreclosure action. Any assignee of this Mortgage and the Discount Option Notes
shall take the same free and clear of all offsets, counterclaims, or defenses of
any nature whatsoever which the Mortgagor may have against any assignor of this
Mortgage and the Discount Option Notes and no such offset, counterclaim, or
defense shall be interposed or asserted by the Mortgagor in any action or
proceeding brought by any such assignee upon this Mortgage or the Discount
Option Notes and any such right to interpose or assert any such offset,
counterclaim, or defense in any such action or proceeding is hereby expressly
waived by the Mortgagor. In addition, the Mortgagor shall not make, nor be
entitled to make, any claim for money damages against the Mortgagee based upon
any claim or assertion that the Mortgagee has unreasonably withheld or delayed
the Mortgagee's consent and/or approval with respect to any provision contained
in the Discount Option Notes, or this Mortgage or the Discount Option Documents,
which provides, in effect, that the Mortgagee's consent and/or approval is
required and shall not be unreasonably withheld or delayed. The Mortgagor's sole
remedy in such event shall be limited to an action or proceeding to enforce any
such provision pursuant to specific performance, injunction, or declaratory
judgment.
5.12. Usury Laws. It is the intent of the Mortgagor and the Mortgagee to
----- ----------
comply at all times with applicable usury laws. If at any time such laws would
render usurious any amounts called for under the Discount Option Notes, then it
is the Mortgagor's and the Mortgagee's express intention that such excess amount
be immediately credited on the principal balance of the Discount Option Notes
(or, if the Discount Option Notes have been fully paid, refunded by the
Mortgagee to the Mortgagor and the Mortgagor shall accept such refund), and the
provisions hereof and thereof be immediately deemed to be reformed to comply
with the then applicable laws, without the necessity of the execution of any
further documents, but so as to permit the recovery of the fullest amount
otherwise called for hereunder and thereunder. Any such crediting or refund
shall not cure or waive any default by the Mortgagor under the Discount Option
Notes or the Discount Option Documents. If, at any time following any such
reduction in the interest rate payable by the Mortgagor, there remains unpaid
any principal amounts under the Discount Option Notes and the maximum interest
rate permitted by applicable law is increased or eliminated, then the interest
rate payable hereunder shall be readjusted, to the extent permitted by
applicable law, so that the total dollar amount of interest payable hereunder
shall be equal to the dollar amount of interest which would have been paid by
the Mortgagor without giving effect to the applicable usury laws theretofore in
effect. The Mortgagor agrees, however, that in determining whether or not
25
<PAGE>
any interest payable under the Discount Option Notes exceeds the highest rate
permitted by law, any non-principal payment (except payments specifically stated
in the Discount Option Notes or in any Security Document to be "interest"),
including, without limitation, prepayment fees and late charges, shall be
deemed, to the extent permitted by law, to be an expense, fee, premium, or
penalty rather than interest.
5.13. FIRPTA. If the Mortgagee purchases the Mortgaged Property pursuant to
----- ------
a foreclosure under this Mortgage, or accepts an assignment of the Mortgaged
Property in lieu of the foreclosure, the Mortgagor hereby authorizes the
Mortgagee to withhold the amount of tax, if any, required to be withheld under
Section 1445 of the Internal Revenue Code of 1986, as amended (or any successor
provision thereto), out of any sums payable to the Mortgagor from such
foreclosure sale or assignment in lieu thereof, as the case may be, after
payment of all parties other than the Mortgagor who are entitled to be paid out
of any foreclosure or assignment proceeds, as if the Mortgagor were a foreign
person, unless the Mortgagor certifies its nonforeign status at the time of such
foreclosure sale or assignment, as the case may be, by executing and delivering
to the Mortgagee a certificate satisfactory to the Mortgagee.
5.14. Trust Funds. Intentionally deleted.
----- -----------
5.15. Miscellaneous. All the terms of this Mortgage shall apply to and be
----- -------------
binding upon and inure to the benefit of the successors and assigns of the
Mortgagor and all persons claiming under or through the Mortgagor or any such
successor or assign and the Mortgagee and its successors in interest. The
headings in this Mortgage are for convenient reference only and shall not limit
or otherwise affect any of the terms hereof. This Mortgage may be executed in
several counterparts, each of which shall be an original, but all of which shall
constitute one and the same instrument. This Mortgage is to be construed
according to the laws of the state in which the Mortgaged Property is located.
5.16. Effectiveness of Mortgage. This Mortgage is given on the express
----- -------------------------
condition that if all the covenants, stipulations and agreements of the
Mortgagor herein contained shall be fully and faithfully performed, and the
portion of the Discount Option Notes secured hereby shall be well and truly paid
according to its terms, then this Mortgage shall be void; otherwise this
Mortgage shall remain in full force and effect.
5.17. Mortgagee Waiver and Consent Agreement. A Mortgagee Waiver and
----- --------------------------------------
Consent Agreement, among the Mortgagee, the Mortgagor and BankBoston Retail
Finance, Inc. exists with respect to the Mortgaged Property.
5.18. WAIVER OF JURY TRIAL. BOTH THE MORTGAGOR AND THE MORTGAGEE HEREBY
----- --------------------
IRREVOCABLY WAIVE ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR
COUNTERCLAIM ARISING OUT OF OR RELATING TO THIS MORTGAGE.
5.19. New Jersey Particular Provisions. (a) The Mortgagor shall not claim
----- --------------------------------
or demand or be entitled to receive any credit or credits on the principal
26
<PAGE>
indebtedness to be secured by this Mortgage, or on the interest payable thereon,
for any part of the taxes assessed against the Premises and no deduction shall
be made or claimed from the taxable value of the Premises by reason of this
Mortgage.
(b) THE MORTGAGOR CERTIFIES AND ACKNOWLEDGES THAT IT HAS RECEIVED A TRUE
AND CORRECT COPY OF THIS MORTGAGE WITHOUT CHARGE.
5.20. Subordination. This Mortgage and the rights of Mortgagee hereunder
----- -------------
shall be expressly subject, subordinate and inferior in order of priority to the
lien of that certain Leasehold Mortgage, Security Agreement, Assignment of
Leases and Rents and Profits and Fixture Financing Statement dated February 2,
1999 from Bradlees Stores, Inc. to IBS Whitehall Bank & Trust Company, as
Trustee and to all amendments, extensions, modifications, renewals,
consolidations and supplements.
27
<PAGE>
IN WITNESS WHEREOF, this Mortgage has been duly executed by the
Mortgagor on the day and year first above written.
WITNESS: BRADLEES STORES, INC.
By: By:
----------------------------- ------------------------------
Title: Cornelius F. Moses, III
Senior Vice President and
Chief Financial Officer
By: By:
----------------------------- ------------------------------
Title: David L. Schmidt
Senior Vice President and
General Counsel
[Corporate Seal]
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this ___ day of __________, 1999, before me, the undersigned
officer, personally appeared Cornelius F. Moses, III, having an address c/o
Bradlees Stores, Inc., One Bradlees Circle, P.O. Box 9051, Braintree,
Massachusetts 02184, personally known and acknowledged himself to me to be the
Senior Vice President and Chief Financial Officer of Bradlees Stores, Inc., and
that as such officer, being duly authorized to do so pursuant to its bylaws or a
resolution of its board of directors, executed, subscribed and acknowledged the
foregoing instrument for the purposes therein contained, by signing the name of
the corporation by himself in his authorized capacity as such officer as his
free and voluntary act and deed and the free and voluntary act and deed of said
corporation.
IN WITNESS WHEREOF, hereunto set my hand and official seal.
----------------------------------------------
Notary Public
NOTARIAL SEAL
My Commission Expires:
- ---------------------------
<PAGE>
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this ___ day of __________, 1999, before me, the undersigned
officer, personally appeared David L. Schmitt, having an address c/o Bradlees
Stores, Inc., One Bradlees Circle, P.O. Box 9051, Braintree, Massachusetts
02184, personally known and acknowledged himself to me to be the Senior Vice
President and General Counsel of Bradlees Stores, Inc., and that as such
officer, being duly authorized to do so pursuant to its bylaws or a resolution
of its board of directors, executed, subscribed and acknowledged the foregoing
instrument for the purposes therein contained, by signing the name of the
corporation by himself in his authorized capacity as such officer as his free
and voluntary act and deed and the free and voluntary act and deed of said
corporation.
IN WITNESS WHEREOF, hereunto set my hand and official seal.
----------------------------------------------
Notary Public
NOTARIAL SEAL
My Commission Expires:
- ---------------------------
<PAGE>
Schedule A
----------
<PAGE>
ANNEX C
__________________________________________________
__________________________________________________
COLLATERAL AGENCY AGREEMENT
Dated as of ________________, 1999
among
BRADLEES, INC.
BRADLEES STORES, INC.
CERTAIN HOLDERS OF 9% SECURED CONVERTIBLE NOTES DUE 2004
OF BRADLEES STORES, INC.
and
___________________
as Collateral Agent
__________________________________________________
__________________________________________________
<PAGE>
TABLE OF CONTENTS
<TABLE>
<S> <C>
1. DEFINITIONS, ETC. .................................................. -1-
2. SECURITY. .......................................................... -2-
2.1. Credit Security ............................................ -2-
2.2. Application of Proceeds .................................... -2-
3. ACTIONS BY COLLATERAL AGENT; NOTEHOLDERS' DIRECTION ................ -2-
3.1. Appointment of Collateral Agent ............................ -2-
3.2. Actions by the Collateral Agent ............................ -3-
3.3. Information Regarding Obligors, etc. ....................... -3-
4. COLLATERAL AGENT ................................................... -3-
4.1. Concerning the Agent ....................................... -3-
4.1.1. Action in Good Faith, etc. ......................... -3-
4.1.2. No Implied Duties, etc. ............................ -4-
4.1.3. Validity, etc. ..................................... -4-
4.1.4. Compliance ......................................... -4-
4.1.5. Employment of Agents and Counsel ................... -4-
4.1.6. Reliance on Documents and Counsel .................. -4-
4.1.7. Collateral Agent's Reimbursement ................... -5-
4.2. Indemnity .................................................. -5-
4.3. Collateral Agent's Resignation or Removal .................. -5-
5. REPRESENTATIONS AND WARRANTIES ..................................... -6-
5.1. Authority .................................................. -6-
5.2. Authorization and Enforceability ........................... -6-
5.3. No Legal Obstacle to Agreement ............................. -6-
6. SUCCESSORS AND ASSIGNS; FUTURE NOTEHOLDERS ......................... -6-
6.1. Successors and Assigns ..................................... -6-
6.2. Joinder of Future Noteholders .............................. -6-
7. EXPENSES; INDEMNITY ................................................ -7-
7.1. Expenses ................................................... -7-
7.2. General Indemnity .......................................... -7-
7.3. Indemnity with Respect to Discount Option Security ......... -7-
8. CONTINUING AGREEMENT, DEFEASANCE, ETC. ............................. -8-
8.1. Continuing Agreement ....................................... -8-
8.2. Defeasance ................................................. -8-
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
9. NOTICES ............................................................ -8-
10. VENUE; SERVICE OF PROCESS .......................................... -8-
11. WAIVER OF JURY TRIAL ............................................... -9-
12. GENERAL ............................................................ -9-
</TABLE>
ii
<PAGE>
COLLATERAL AGENCY AGREEMENT
This Collateral Agency Agreement, dated as of ___________, 1999, is among
Bradlees, Inc., Bradlees Stores, Inc.("BSI"), the Noteholders listed on Schedule
--------
A hereto and their successors and assigns and __________, as collateral agent
- -
(the "Collateral Agent") for itself and the Noteholders. The parties agree as
----------------
follows:
1. DEFINITIONS, ETC.
Capitalized terms used but not defined herein shall have meanings as
defined in the Option Agreement. The following terms shall have meanings as
defined below:
"Collateral Agent" means __________, in its capacity as Collateral Agent
----------------
under this Agreement.
"Discount Option Documents" shall mean the Discount Option Notes, the
-------------------------
Option Agreement and the Security Documents.
"Discount Option Notes" shall mean the 9% Secured Convertible Notes due
---------------------
2004 of BSI that are held by the Noteholders and that are subject to the Option
Agreement.
"Noteholders" shall mean the holders of 9% Secured Convertible Notes due
-----------
2004 of BSI that are parties to the Option Agreement and their successors and
assigns
"Obligors" shall mean BSI and Bradlees, Inc.
--------
"Option Agreement" shall mean the Option Agreement dated as of the date
----------------
hereof among Bradlees, Inc., BSI and certain holders of 9% Secured Convertible
Notes Due 2004 of BSI.
"Person" shall mean an individual, partnership, corporation, limited
------
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, government entity or other cognizable person or
entity.
"Required Noteholders" means, with respect to any consent or other action
--------------------
to be taken by the Noteholders under this Agreement or with respect to
collateral securing the Discount Option Notes, such Noteholders as own not less
then a majority in principal amount of the Discount Option Notes.
"Secured Obligations" shall mean all obligations of Bradlees, Inc. or BSI
-------------------
to the Noteholders under the Discount Option Documents.
-1-
<PAGE>
"Security Documents" shall mean each of this Agreement, the Norwalk
------------------
Mortgage, the Saddlebrook Mortgage, the Danbury Mortgage and any other security
agreement or mortgage now or hereafter entered into in connection with the
Option Agreement or the Discount Option Notes.
2. SECURITY.
2.1 Credit Security. As security for the payment and performance of the
---------------
Secured Obligations, BSI has mortgaged, pledged and collaterally granted and
assigned to the Collateral Agent for the benefit of the Noteholders and the
holders from time to time of any Secured Obligation, and created a security
interest in favor of the Collateral Agent for the benefit of the Noteholders and
such holders in, all of BSI's right, title and interest in and to (but none of
its obligations or liabilities with respect to) the items and types of present
and future property described in the Mortgage and any other Security Document
(the "Discount Option Security").
2.2. Application of Proceeds. The proceeds of all sales and collections
-----------------------
in respect of any Discount Option Security or other assets of any Obligor, all
funds collected by the Collateral Agent from the Obligors in respect of the
Discount Option Security and any portion of the Discount Option Security
consisting of cash, the application of which is not otherwise specifically
provided for herein, shall be applied as follows:
First, to the payment of the costs and expenses of such sales and
collections, the reasonable expenses of the Collateral Agent and the
reasonable fees and expenses of its special counsel;
Second, any surplus then remaining to the payment of the Secured
Obligations pro rata in accordance with the relative amounts due to the
Noteholders with respect to the Discount Option Notes, including without
limitation, principal and accrued interest in respect of the Discount
Option Notes, provided that, the Collateral Agent may withhold any
-------- ----
distribution of such surplus to a holder of Discount Option Notes that has
not executed and delivered to the Collateral Agent a copy of this Agreement
or an agreement in the form of Exhibit A hereto until the Collateral Agent
---------
has received such delivery;
Third, any surplus then remaining shall be paid to BSI, subject,
however, to the rights of the holder of any then existing lien of which the
Collateral Agent has actual notice.
3. ACTIONS BY COLLATERAL AGENT; NOTEHOLDERS' DIRECTION.
3.1. Appointment of Collateral Agent. Each of the Noteholders hereby
-------------------------------
appoints and authorizes the Collateral Agent to act for them as their collateral
agent in connection with the
-2-
<PAGE>
transactions contemplated by this Agreement on the terms set forth herein, and
hereby agrees that all actions in connection with Discount Option Security and
the enforcement or exercise of any remedies in respect of the Secured
Obligations shall be taken solely by the Collateral Agent pursuant to this
Agreement.
3.2. Actions by the Collateral Agent. The Collateral Agent shall not
-------------------------------
take any action under this Agreement, including in connection with Discount
Option Security and the enforcement or exercise of any remedies in respect of
the Secured Obligations, and shall not be obligated to take any such action,
except to the extent expressly specified in a written notice received by the
Collateral Agent signed by the Required Noteholders. All actions taken by the
Collateral Agent in accordance with this Section 3.2, including taking any
action (i) waiving in writing compliance with any covenant in this Agreement or
any other Security Document, (ii) releasing the Danbury Mortgage and accepting
substitute collateral therefor, or (iii) taking any other action, shall be
binding upon all Noteholders; provided, however, that the foregoing shall not be
-------- -------
deemed a waiver of any Noteholder's rights against any other party hereto with
respect to the taking of such action.
3.3. Information Regarding Obligors, etc. Each of the Noteholders
-----------------------------------
acknowledges and agrees that it has made such investigation as it deems
desirable of the risks undertaken by it in entering into this Agreement and is
fully satisfied that it understands all such risks. Each of the Noteholders
waives any obligation which may now or hereafter exist on the part of the
Noteholders or the Collateral Agent to inform it of the risks being undertaken
by entering into this Agreement or of any changes in such risks and, from and
after the date hereof, each of the Noteholders undertakes to keep itself
informed of such risks and any changes therein. Each of the Noteholders
expressly waives any duty which may now or hereafter exist on the part of the
Noteholders or the Collateral Agent to disclose to the Noteholders any matter
related to the business, operations, character, collateral, credit, condition
(financial or otherwise), income or prospects of the Obligors or their
properties or management, whether now or hereafter known by the Obligors. or the
Collateral Agent other than matters related to the disposition of the Discount
Option Security. Each of the Noteholders represents, warrants and agrees that
it assumes sole responsibility for obtaining from the Obligors all information
concerning this Agreement and all other Security Documents and all other
information as to the Obligors or their properties or management as such
Noteholder deems necessary or desirable.
4. COLLATERAL AGENT.
4.1. Concerning the Agent.
--------------------
4.1.1. Action in Good Faith, etc. In the exercise of its rights,
-------------------------
powers and duties hereunder, the Collateral Agent shall act in a commercially
reasonable manner. The Collateral Agent and its officers, directors, employees
and agents shall be under no duty to act except as expressly set forth in
Section 3.2 and shall have no liability to the Noteholders for any action or
failure to act taken or suffered without willful misconduct
-3-
<PAGE>
or gross negligence. The Collateral Agent shall in all cases be entitled to
rely, and shall not be liable to the Noteholders for any action taken in
reliance, on instructions given to the Collateral Agent in accordance with
Section 3.2.
4.1.2. No Implied Duties, etc. The Collateral Agent shall have and
----------------------
may exercise such powers as are specifically delegated to the Collateral Agent
under this Agreement together with all other powers as may be incidental
thereto. The Collateral Agent shall have no implied duties to any Person or any
obligation to take any action under this Agreement or any other Security
Document except for any action specifically provided for in this Agreement or
any other Security Document to be taken by the Collateral Agent.
4.1.3. Validity, etc. The Collateral Agent shall not be responsible
-------------
to any Noteholder (a) for the legality, validity, enforceability or
effectiveness of this Agreement, (b) for any recitals, reports, representations,
warranties or statements contained in or made in connection with this Agreement,
(c) for the existence or value of any assets included in the Discount Option
Security, (d) for the effectiveness of any lien purported to be included in the
Discount Option Security, (e) for the specification or failure to specify any
particular assets to be included in the Discount Option Security or (f) for any
decision to release the Danbury Mortgage or to accept substitute collateral
therefor.
4.1.4. Compliance. The Collateral Agent shall not be obligated to
----------
ascertain or inquire as to the performance or observance of any of the terms of
this Agreement or any Security Document, including the occurrence of any default
under the Option Agreement or the Discount Option Notes.
4.1.5. Employment of Agents and Counsel. The Collateral Agent may
--------------------------------
execute any of its duties as Collateral Agent under this Agreement by or through
employees, agents and attorneys-in-fact and shall not be responsible to any
Noteholder or any Obligor (except as to money or securities received by the
Collateral Agent or the Collateral Agent's authorized agents) for the default or
misconduct of any such agents or attorneys-in-fact selected by the Collateral
Agent with reasonable care. The Collateral Agent shall be entitled to advice of
counsel concerning all matters pertaining to the agency hereby created and its
duties hereunder and shall be reimbursed by the Obligors for all reasonable
attorneys' fees and costs incurred in connection with its responsibilities
hereunder.
4.1.6. Reliance on Documents and Counsel. The Collateral Agent
---------------------------------
shall be entitled to rely, and shall be fully protected in relying, upon any
affidavit, certificate, cablegram, consent, instrument, letter, notice, order,
document, statement, telecopy, telegram, telex or teletype message or writing
believed in good faith by the Collateral Agent to be genuine and correct and to
have been signed, sent or made by the Person in
-4-
<PAGE>
question, including without limitation any telephonic or oral statement made by
such Person and, with respect to legal matters, upon the opinion of counsel
selected by the Collateral Agent.
4.1.7. Collateral Agent's Reimbursement. Each of the Noteholders
--------------------------------
jointly and severally agrees to reimburse the Collateral Agent for any expenses
not reimbursed by the Obligors within 30 days (without limiting their
obligations to make such reimbursement): (a) for which the Collateral Agent is
entitled to reimbursement by the Obligors under this Agreement, and (b) after
the exercise of the Put Option or the occurrence of an Event of Default under
the Discount Option Notes, for any other expenses incurred by the Collateral
Agent on their behalf in connection with the enforcement of their rights under
this Agreement or any other Security Document.
4.2. Indemnity. The Noteholders hereby, jointly and severally,
---------
indemnify and hold harmless the Collateral Agent and its directors, officers,
employees, agents, professional advisers and representatives (to the extent that
the Collateral Agent is not indemnified by the Obligors, and without in any way
limiting the Obligations of the Obligors so to indemnify the Collateral Agent
pursuant to Sections 7.2 and 7.3) from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, costs,
expenses or disbursements of any kind whatsoever which may at any time be
imposed on, incurred by or asserted against the Collateral Agent and its
directors, officers, employees, agents, professional advisers and
representatives relating to or arising out of this Agreement, the Discount
Option Security, any other Security Document, the transactions contemplated
hereby or thereby, or any action taken or omitted by the Collateral Agent in
connection with any of the foregoing, provided, however, that the foregoing
-------- -------
shall not extend to actions or omissions which are taken by the Collateral Agent
with gross negligence or willful misconduct. The foregoing indemnity shall
survive the expiration of this Agreement or any of the agreements evidencing the
Secured Obligations. All amounts due under this Section 4.2 shall be
immediately payable on written demand therefor.
4.3. Collateral Agent's Resignation or Removal. The Collateral Agent
-----------------------------------------
may resign at any time by giving at least 30 days' prior written notice of its
intention to do so to each of the Noteholders and to BSI and upon the
appointment by the Required Noteholders of a successor Collateral Agent. If no
successor Collateral Agent shall have been so appointed and shall have accepted
such appointment within 30 days after the retiring Collateral Agent's giving of
such notice of resignation, then the retiring Collateral Agent may appoint a
successor Collateral Agent; Any Collateral Agent may be removed upon the written
request of the Required Noteholders, which request shall also appoint a
successor Collateral Agent. Upon the appointment of a new Collateral Agent
hereunder, the term "Collateral Agent" shall for all purposes of this Agreement
and any other Security Document thereafter mean such successor. After any
retiring Collateral Agent's resignation hereunder as Collateral Agent, or the
removal hereunder of any Collateral Agent, the provisions of this Agreement or
any other Security Document shall continue to inure to the benefit of such
Collateral Agent as to any actions taken
-5-
<PAGE>
or omitted to be taken by it while it was Collateral Agent under this Agreement
or any other Security Document.
5. REPRESENTATIONS AND WARRANTIES.
Each of the parties to this Agreement represents and warrants that:
5.1. Authority. Such Person has all necessary power and has taken all
---------
necessary action to enter into and perform this Agreement and to make this
Agreement the legal, valid, binding and enforceable obligation it purports to
be.
5.2. Authorization and Enforceability. Each Person has taken all
--------------------------------
partnership or corporate action required to execute, deliver and perform this
Agreement and each other Discount Option Document to which it is party. Each of
this Agreement and each other Discount Option Document constitutes the legal,
valid and binding obligation of such Person and is enforceable against such
Person in accordance with its terms.
5.3. No Legal Obstacle to Agreement. Neither the execution and delivery
------------------------------
of this Agreement nor the consummation of any transaction contemplated hereby
nor the fulfillment of the terms hereof or of any other agreement or instrument
referred to herein has constituted or resulted in, or will constitute or result
in, a breach of the provisions of any agreement, instrument, deed or lease to
which such Person is a party or by which such Person is bound or of the charter
or by-laws of such Person, or the violation of any law, judgment, decree or
governmental or administrative order, rule or regulation applicable to it, or
has resulted in or will result in the creation under any agreement, instrument,
deed or lease of any lien upon any of the assets of such Person (other than the
lien created by this Agreement in the Discount Option Security). No approval,
authorization or other action by, or declaration to or filing with, any
governmental or administrative authority or any other Person is required to be
obtained or made by any such Person in connection with the execution, delivery
and performance of this Agreement.
6. SUCCESSORS AND ASSIGNS; FUTURE NOTEHOLDERS.
6.1. Successors and Assigns. The provisions of this Agreement shall
----------------------
inure to the benefit of the holders of Secured Obligations and their successors
and assigns and shall be binding upon each of the parties hereto and their
respective successors and assigns.
6.2. Joinder of Future Noteholders. Any assignee of a holder of Discount
-----------------------------
Option Notes, by accepting Discount Option Notes, agrees to become party to this
Agreement. Such assignee shall memorialize such agreement by duly authorizing,
executing and delivering to the Collateral Agent a fully executed agreement in
the form of Exhibit A to this Agreement agreeing to be bound by the terms and
---------
conditions hereof.
-6-
<PAGE>
7. EXPENSES; INDEMNITY.
7.1. Expenses. The Obligors will pay all expenses incurred by the
--------
Collateral Agent or any Noteholder in connection with the enforcement of any
rights hereunder or under any other Discount Option Documents, including without
limitation costs of collection and reasonable attorneys' fees and out-of-pocket
expenses.
7.2. General Indemnity. The Obligors hereby, jointly and severally,
-----------------
indemnify and hold harmless the Collateral Agent and its directors, officers,
employees, agents, professional advisers and representatives (the Collateral
Agent and each of such directors, officers, employees, agents, professional
advisers and representatives is referred to as an "Indemnitee"), against and
from, any and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind whatsoever which
may at any time be imposed on, incurred by or asserted against any such
Indemnitee relating to or arising out of this Agreement, the Discount Option
Security any other Security Document, the transactions contemplated hereby or
thereby, or any action taken or omitted by any such Indemnitee Agent in
connection with any of the foregoing; provided, however, that the foregoing
-------- -------
shall not extend to actions or omissions which are taken by an Indemnitee with
gross negligence or willful misconduct. The foregoing indemnity shall survive
the expiration of this Agreement or any of the agreements evidencing the Secured
Obligations. All amounts due under this Section 7.2 shall be payable on written
demand therefor.
7.3. Indemnity with Respect to Discount Option Security. The Obligors
--------------------------------------------------
hereby, jointly and severally, indemnify and hold harmless each Indemnitee and
each Noteholder and its partners, directors, officers, employees, agents,
professional advisers and representatives (each Noteholder and each of such
partners, directors, officers, employees, agents, professional advisers and
representatives is referred to as a "Noteholder Indemnitee") from and against
any and all claims, damages, losses, liabilities, judgments or reasonable
expenses (including all reasonable fees and disbursements of counsel with whom
any of them may consult in connection therewith and all reasonable expenses of
litigation or preparation therefor) which may be incurred or sustained by or
asserted against any of them, directly or indirectly, in connection with the
existence or exercise of any rights with respect to the Discount Option Security
in accordance with the Security Documents; provided, however, that the foregoing
-------- -------
shall not extend to actions or omissions which are taken by an Indemnitee or a
Noteholder Indemnitee with gross negligence or willful misconduct. The
foregoing indemnity shall survive the expiration of this Agreement or any of the
agreements evidencing the Secured Obligations. All amounts due under this
Section 7.3 shall be payable on written demand therefor.
-7-
<PAGE>
8. CONTINUING AGREEMENT, DEFEASANCE, ETC.
8.1. Continuing Agreement. This Agreement shall be a continuing
--------------------
agreement, shall be irrevocable and shall remain in full force and effect until
the payment in full of the Secured Obligations then outstanding in accordance
with the terms thereof. No action which the holders of the Secured Obligations
or the Obligors may take or refrain from taking with respect to the Secured
Obligations, including any amendments thereto, shall affect the provisions of
this Agreement or the obligations of the Obligors or any Noteholder hereunder.
No right of the Noteholders shall at any time be prejudiced or impaired by any
act or failure to act on the part of any Obligor or by any act or failure to
act, in good faith, by the Noteholders or the Collateral Agent, or by any
noncompliance by any Obligor with the terms of this Agreement, regardless of any
knowledge thereof which the Noteholders may have or otherwise be charged with.
8.2. Defeasance. When all Secured Obligations have been performed, paid
----------
and reasonably determined by the Noteholders to have been indefeasibly
discharged in full, at the Obligors' written request, accompanied by such
certificates and proofs as the Collateral Agent shall reasonably deem necessary,
the Discount Option Security shall revert to the Obligors and the rights, title
and interest of the Collateral Agent therein shall terminate. Thereupon, on the
Obligors' demand and at their cost and expense, the Collateral Agent shall
execute proper instruments, acknowledging satisfaction of and discharging this
Agreement, and shall redeliver to the Obligors the Discount Option Security then
in its possession; provided, however, that Section 7 shall survive the
-------- -------
termination of this Agreement.
9. NOTICES.
Any notice or other communication in connection with this Agreement shall
be deemed to be delivered if in writing and delivered in the manner provided in
Section 9 of the Option Agreement.
10. VENUE; SERVICE OF PROCESS.
(a) Each of the Obligors and each of the Noteholders irrevocably
submits to the nonexclusive jurisdiction of the state courts of The State
of New York and to the nonexclusive jurisdiction of the United States
District Court for the Southern District of New York for the purpose of any
suit, action or other proceeding arising out of or based upon this
Agreement or the subject matter hereof brought by the Collateral Agent, any
Noteholder or their successors or assigns, and
(b) Each of the Obligors and each of the Noteholders waives to the
extent not prohibited by applicable law that cannot be waived, and agrees
not to assert, by way of motion, as a defense or otherwise, in any such
proceeding, any claim that it is not subject personally to the jurisdiction
of the above-named courts, that its property is
-8-
<PAGE>
exempt or immune from attachment or execution, that any such proceeding
brought in one of the above-named courts is brought in an inconvenient
forum, that the venue of any such proceeding brought in one of the above-
named courts is improper, or that this Agreement or any other Security
Document, or the subject matter hereof or thereof, may not be enforced in
or by such court.
Each of the Obligors and each of the Noteholders hereby consents to service of
process in any such proceeding by registered or certified mail, return receipt
requested, at its address specified in or pursuant to Section 10 is reasonably
calculated to give actual notice.
11. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW
WHICH CANNOT BE WAIVED, EACH OF THE PARTIES HERETO HEREBY WAIVES AND COVENANTS
THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE) ANY RIGHT
TO TRIAL BY JURY IN ANY FORUM IN RESPECT TO ANY ISSUE, CLAIM, DEMAND, ACTION,
CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR THE SUBJECT
MATTER HEREOF OR ANY SECURED OBLIGATIONS OR IN ANY WAY CONNECTED WITH THE
DEALINGS OF THE PARTIES HERETO IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR
OTHERWISE. Each of the parties hereto may file an original counterpart or a
copy of this Section with any court as written evidence of consent by the
parties hereto to the waiver of the right to trial by jury.
12. GENERAL.
All covenants, agreements, representations and warranties made herein shall
be deemed to have been material and relied on by the Noteholders,
notwithstanding any investigation made by the Noteholders or on their behalf,
and shall survive the execution and delivery to the Noteholders hereof and
thereof. The headings in this Agreement are for convenience of reference only
and shall not limit, alter or otherwise affect the meaning hereof. No change,
amendment, modification or supplementation of this Agreement shall be binding on
any party unless it is in writing and signed by the parties hereto. The
invalidity or unenforceability of any term or provision hereof shall not affect
the validity or enforceability of any other term or provision hereof. This
Agreement and the other agreements referred to herein constitute the entire
understanding of the parties with respect to the subject matter hereof and
thereof and supersede all prior and current understandings and agreements,
whether written or oral. This Agreement is a Security Document. This Agreement
may be executed in any number of counterparts, which together shall constitute
one instrument. This Agreement shall be governed by and construed in accordance
with the laws of The State of New York (other than the conflict of law rules).
-9-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
under seal as of the date first above written.
COLLATERAL AGENT: [Name of Collateral Agent]
By:
-----------------------------
Name:
Title:
OBLIGORS: BRADLEES, INC.
By:
-----------------------------
Name:
Title:
BRADLEES STORES, INC.
By:
-----------------------------
Name:
Title:
NOTEHOLDERS: See Schedule A attached hereto.
----------
-10-
<PAGE>
Exhibit A
---------
To: [Name of Collateral Agent]
c/o Morgens, Waterfall, Vintiadis
& Company, Inc.
10 E. 50th Street, 26th Floor
New York, NY 10022
Attn: Neil Augustine
Pursuant to Section 6.2 of the Collateral Agency Agreement dated
_____________, 1999 (the "Collateral Agency Agreement") between Bradlees, Inc.,
Bradlees Stores, Inc., certain holders of 9% Secured Convertible Notes of
Bradlees Stores, Inc. Due 2004 and _______________, as collateral agent (the
"Collateral Agent"), the undersigned hereby notifies the Collateral Agent that
the undersigned is an assignee of Discount Option Notes in principal amount of
$________________. The undersigned has received and has had an opportunity to
review the Collateral Agency Agreement. The undersigned hereby agrees that, by
accepting an assignment of the Discount Option Notes, the undersigned has become
a party to the Collateral Agency Agreement and acknowledges and agrees to be
bound by the terms and conditions thereof.
Dated:
--------------------
[NAME OF NOTEHOLDER]
By:
---------------------
Name:
Title:
-11-
<PAGE>
Exhibit A(2)
NOTICE OF ACCEPTANCE
To Accompany 9% Convertible Notes of Bradlees Stores, Inc.
To: Goodwin, Proctor & Hoar LLP
Exchange Place
53 State Street
Boston, MA 02109
Attn: Stephen T. Adams
DO NOT SEND THIS NOTICE OF ACCEPTANCE OR YOUR 9% CONVERTIBLE NOTES TO
BRADLEES, INC.
For information call: (617) 570-1121
Delivery of this Notice of Acceptance to an address other than as set forth
above does not constitute a valid delivery.
In order to accept the Offer to enter into Supplemental Agreement, you must
complete and sign pages 2, 3 and 4 of this Notice of Acceptance, and have your
attorney complete an opinion in the form set forth on page 5 of this Notice of
Acceptance and deliver pages 2, 3 and 4, along with an opinion of counsel, to
the address set forth above so that it is received not later than 12:00 midnight
on July 21, 1999. Failure to provide any of the required information may cause
this Notice of Acceptance not to be a valid delivery.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby delivers this Notice of Acceptance and the 9%
Convertible Notes of Bradlees Stores, Inc. (the "Note(s)") delivered herewith
pursuant to and subject to the terms of the Offer to Enter into Supplemental
Agreement dated June 23, 1999 (the "Offer") for the purpose of entering into the
Supplemental Agreement as set forth in the Offer.
In connection with the undersigned entering into the Supplemental
Agreement, the undersigned represents that he or it is an "accredited investor"
as defined in Rule 501 of the Securities Act of 1933, as amended (the
"Securities Act").
The undersigned has such knowledge and experience in financial and business
matters that he or it is capable of evaluating the merits and risks of entering
into the Supplemental Agreement. The undersigned is entering into the
Supplemental Agreement for its own account, for investment only and not with a
view to, or any present intention of, effecting a distribution of the securities
represented by the Supplemental Agreement or any part thereof.
The undersigned is the only legal and beneficial owner of and has good
title to the Notes delivered herewith. Such Notes are free and clear of all
liens, pledges or encumbrances of any kind whatsoever.
Noteholder
--------------------------------------
Name:
Title:
Address:
------------------------------
------------------------------
------------------------------
2
<PAGE>
<TABLE>
<CAPTION>
TAXPAYER IDENTIFICATION NUMBER
Substitute Form W-9
(To be completed by all holders)
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C>
Name:
(If joint names, list both and circle the name of the person or entity whose number
you enter in Part 1 below)
Address:
-----------------------------------------
-----------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Part 1 -- Please provide your Taxpayer Identification Part 2 (To be filled in only if Part 1 is left blank)
Number ("TIN") in the space provided below and certify by
signing below.
[_]-- Awaiting TIN
--------------------------------------------------
(Social Security or Employer Identification Number) [_]-- Exempt from backup withholding
- ---------------------------------------------------------------------------------------------------------------------------
Part 3 -- Certification -- Under penalties of perjury, I certify that:
1. The information provided above on this Substitute Form W-9 is true, complete and correct, and
2. I am not subject to backup withholding because: (a) I am exempt from backup withholding, or (b) I have not been notified by the
Internal Revenue Service (the "IRS") that I am subject to backup withholding as a result of a failure to report all interest or
dividends, or (c) the IRS has notified me that I am no longer subject to backup withholding.
Certification Instructions -- You must cross out item 2 above if you have been notified by the IRS that you are currently
subject to backup withholding because of under reporting interest or dividends on your tax return.
Signature: Date:
---------------------------------------------- ------------------------------------------
NOTE: Failure to complete and return this Substitute Form W-9 may result in backup withholding of any payments made to
you. Please review Substitute Form W-9 (Instruction 2) for additional details.
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUBSTITUTE FORM W-9
Under Federal income tax law, each holder must provide the Agent with his, her
or its correct taxpayer identification number ("TIN") and certify that the TIN
is correct under penalties of perjury. Failure to furnish the correct TIN may
subject the security holder to a penalty imposed by the Internal Revenue
Service, and any option fee payable to the Noteholder may be subject to backup
withholding.
The TIN that must be provided on the Substitute Form W-9 is that of the
registered holder of the Note(s). The TIN for an individual is his or her
social security number. Sole proprietors may enter either their social security
number or their employer identification number. For other entities the TIN is
your employer identification number.
The applicable Box in Part 2 of the Substitute Form W-9 may be checked if the
person surrendering the Note(s) has not been issued a TIN and has applied for a
TIN or intends to apply for a TIN in the near future. Exempt persons
(including, among others, all corporations) are not subject to backup
withholding for certain payments, such as interest and dividends, and should
indicate their exempt status in Part 2 of the Substitute Form W-9.
3
<PAGE>
Signature Page to Supplemental Agreement
Noteholder Principal Amount of Notes Tendered*
- ---------- ----------------------------------
$
By:
------------------------
Name:
Title:
Address:
Telephone:
Facsimile:
* The amount of Notes actually subject to the Supplemental Agreement may be
reduced as provided in the Offer to Enter into Supplemental Agreement dated June
23, 1999.
********************************************************************************
Signature Page to Collateral Agency Agreement
Noteholder Principal Amount of Notes Tendered*
- ---------- ----------------------------------
$
By:
-------------------------
Name:
Title:
Address:
Telephone:
Facsimile:
* The amount of notes actually subject to the Collateral Agency Agreement may be
reduced as provided in the Offer to Enter into Supplemental Agreement dated June
23, 1999.
4
<PAGE>
Form of Legal Opinion
Each tendering Noteholder must return an opinion of counsel with this Notice
of Acceptance. The opinion of counsel must be from counsel reasonably
acceptable to the Companies, and give such counsel's unqualified opinion
concerning the following:
a. The Noteholder is a [insert nature of entity] duly organized and
validly existing under the laws of the State of [insert jurisdiction of
organization].
b. The Noteholder has the power, corporate or otherwise, to enter into
and perform the Supplemental Agreement, the Collateral Agency Agreement and the
transactions contemplated thereby.
c. The Supplemental Agreement and the Collateral Agency Agreement have
been duly authorized, executed and delivered by the Noteholder, have been
adopted by all necessary action, corporate or otherwise, of the Noteholder, and
are legal, valid and binding obligations of the Noteholder, enforceable against
the Noteholder in accordance with their terms.
d. The execution, delivery and performance of the Supplemental Agreement
and the Collateral Agency Agreement by the Noteholder will not violate, breach
or conflict with any laws, rules or regulations applicable to the Noteholder or
the organizational documents of the Noteholder.
5
<PAGE>
Exhibit A(3)
[Leterhead of Bradlees, Inc.]
June 22, 1999
Noteholders of Bradlees Stores, Inc.
Re: Issuer Tender Offer
-------------------
Gentlemen:
Enclosed please find materials concerning an offer to enter into a
supplemental agreement relating to your 9% Convertible Notes of Bradlees Stores,
Inc. Please review these materials carefully.
Very truly yours,
/s/ Peter Thorner
Peter Thorner
Chairman and CEO
Enclosure
<PAGE>
Exhibit C
Bradlees Inc.
Bradlees Stores, Inc.
One Bradlees Circle
P.O. Box 859051
Braintree, MA 02185-9051
Morgens, Waterfall, Vintiadis & Co., Inc.
10 E. 50th Street
New York, New York 10022
Attn: Neil Augustine
Re: 9% Secured Convertible Notes Due 2004 (the "Convertible Notes")
---------------------------------------------------------------
Dear Mr. Augustine:
This letter will confirm the agreement of Bradlees Stores, Inc. (the
"Company") to purchase an option to acquire Convertible Notes held by advisory
affiliates of Morgens, Waterfall, Vintiadis & Company, Inc. ("MWV") and to grant
MWV a put option in respect of the Convertible Notes that it holds on the terms
attached hereto as Annex A (the "Transaction"). The Company and Bradlees Inc.
-------
have obtained consent in the Transaction from their Boards of Directors.
If MWV is in agreement with the foregoing, please so indicate by signing
below and returning a copy of this letter to me.
Very truly yours,
BRADLEES INC.
BRADLEES STORES, INC.
By: /s/ David L. Schmidt
---------------------------------
Name: David L. Schmidt
Title: Sr. VP and General Counsel
Agreed:
MORGENS, WATERFALL, VINTIADIS & CO., INC.,
on behalf of its advisory affiliates that are
holders of Convertible Notes
By: /s/ Neil A. Augustine
Neil A. Augustine
Duly Authorized
Portfolio Group Manager
<PAGE>
Annex A
-------
BRADLEES STORES, INC.
MORGENS, WATERFALL, VINTIADIS & CO., INC.
9% Secured Convertible Notes due '04 (the "Notes") Restructuring
May 19, 1999
Discount Options: Certain affiliates of Morgens, Waterfall, Vintiadis &
Company, Inc. ("MWV") and other participating
Noteholders (collectively with MWV, the "Discount Option
Noteholders") will grant to Bradlees Stores, Inc. (the
"Company") an option (the "Discount Option") to acquire
Notes held by the Discount Option Noteholders (the
"Discount Option Notes") at a discount prior to
maturity. The Discount Option shall apply (i) to all of
the outstanding Discount Option Notes, if at the time of
exercise of the Option the existing Yonkers leasehold
has been sold for a price of $15 million or more and the
Discount Option Noteholders have received their pro rata
--- ----
share of proceeds of such sale, or (ii) to 48.27% of the
outstanding Discount Option Notes, if at the time of
exercise of the Discount Option the existing Yonkers
leasehold has not been sold for a price of $15 million
or more or the Discount Option Noteholders have not
received their pro rata share of proceeds of such sale.
--- ----
The Company will initially have the option to purchase
the Discount Option Notes at a price equal to 86% of the
outstanding principal amount of the Discount Option
Notes, plus accrued interest, exercisable for a one
month time period from December 1, 1999 through
December 31, 1999. Each month thereafter the discount
will decrease by 1% such that the discount will be fully
eliminated by January 31, 2001. The Discount Option may
be exercised from time to time to acquire all or part of
the outstanding Discount Options Notes. The Discount
Option may not be exercised in connection with mandatory
redemptions of the Notes pursuant to Section 3.1 of the
Note Indenture (i.e. proceeds of the sale of the Yonkers
leasehold or other Additional Collateral required to be
used to redeem the Notes may not be applied to the
strike price of the Discount Option) or with proceeds of
any Discount Option Noteholder Collateral (as defined
below).
Option Premium: In consideration of the Discount Option, the Company
shall pay the Discount Option Noteholders a premium on
the closing date of the grant of the Option equal to
0.5% of (i) the outstanding principal amount of the
Discount Option Notes (after application of repayments
pursuant to Section 3.1 of the Note Indenture received
through the date of closing), if at the time of such
closing the existing Yonkers leasehold has been sold for
a price of $15 million or more and the Discount Option
Noteholders have received their pro rata share of
--- ----
proceeds of such sale,
<PAGE>
or (ii) 48.27% of the outstanding Discount Option Notes,
if at the time of exercise of such closing the existing
Yonkers leasehold has not been sold for a price of
$15 million or more or the Discount Option Noteholders
have not received their pro rata share of proceeds of
--- ----
such sale.
Discount Option
Noteholder Collateral: As additional security for the Discount Option Notes and
the Company's obligations under the put option referred
to below, the Company shall grant the Discount Option
Noteholders second priority leasehold mortgages on the
Additional Collateral which secure the full amount of
principal plus accrued interest of the Discount Option
Notes and which are subordinate only to the existing
leasehold mortgages on the Additional Collateral that
secure the 9% Secured Convertible Notes. With respect to
the Danbury, CT lease, the Company will use reasonable
efforts to obtain any requisite landlord consents to the
new leasehold mortgage with respect to such property
and, if such consents cannot be obtained, will cooperate
with MWV to seek to amend the indenture to eliminate any
dollar limitation on the amount secured by the existing
Danbury, CT leasehold mortgage and to ensure to the
extent permissible under the indenture that the Discount
Option Noteholders receive the benefit of such increased
collateral value. MWV shall have the right to terminate
this proposal and to withdraw from participation in the
transaction at any time prior to closing if MWV is not
satisfied, in its sole discretion, with title and other
due diligence matters related to the Additional
Collateral.
Put Option: The Company shall grant the Discount Option Noteholders
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.
Representations,
Warranties and
Covenants: Documentation shall contain usual and customary
representations, warranties and covenants by the Company
and the Discount Option Noteholders.
Consents Required: Board of Directors and verbal commitment of BankBoston
to support transaction (both to be obtained on or before
May 19, 1999), consent of the lenders under the
Revolving Credit and Guaranty Agreement dated
February 2, 1999 (to be obtained prior to closing and no
later than May 28, 1999) and, to the extent required,
the 9% Secured Convertible
-2-
<PAGE>
Noteholders and parties to any lease, mortgage or other
contract constituting or relating to Additional
Collateral. If amendment of the redemption provisions of
the indenture for the 9% Secured Convertible Notes is
required to permit the exercise of the Discount Option
and the consent of all holders of the 9% Secured
Convertible Noteholders is required for such amendment,
Bradlees Inc. shall enter into the Discount Option in
place of the Company.
Closing: The Company shall enter into a binding commitment on or
prior to May 19, 1999 at 5:00 p.m., with closing to
occur by the earlier of (i) the date of closing of any
sale of the existing Yonkers leasehold, or (ii) June 18,
1999.
-3-
<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended January 30, 1999 Commission File Number 1-11134
BRADLEES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3156108
- ------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Bradlees Circle, Braintree, MA 02184
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 380-3000
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of Act:
COMMON STOCK, $.01 PAR VALUE PER SHARE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [_]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes [X] No [_] Not applicable [_]
Aggregate market value of the voting stock held by non-affiliates of the
registrant at April 28, 1999: $56,456,006
Number of shares of the registrant's common stock outstanding as of April 28,
1999: 9,148,664 shares.
DOCUMENTS INCORPORATED BY REFERENCE: None
Page 1 of 75 (Excluding Exhibits)
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
Statements made or incorporated into this Form 10-K include a number of
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-
looking statements include, without limitation, statements containing the words
"anticipates", "believes", "expects", "intends", "future", and words of similar
import which express management's beliefs, expectations or intentions regarding
the Company's future performance. The Company's actual results could differ
materially from those set forth in the forward-looking statements. Certain
factors that might cause such a difference are discussed in the section entitled
"Risk Factors" beginning on page six of the second post-effective amendment to
the Company's Registration Statement on Form S-1 filed with the Securities and
Exchange Commission on April 30, 1999.
PART I
-----
ITEM 1. BUSINESS
Bradlees, Inc. and subsidiaries (collectively "Bradlees" or the "Company")
operate 102 discount department stores as of April, 1999, in seven states in the
Northeast, primarily in the heavily populated corridor running from the Boston
to the Philadelphia metropolitan areas. Headquartered in Braintree,
Massachusetts, Bradlees and its predecessor have been active in the discount
department store business for over 40 years. 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 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"). Events leading to
the Filing and the Chapter 11 reorganization process are discussed below.
Events Leading to the Filing. During the early 1990's, Bradlees' business
strategy relied heavily on opening new stores, remodeling existing locations and
competing on the basis of price. From 1992 to January, 1995, Bradlees opened 15
new stores (10 in 1994) and remodeled 41 stores at a total capital cost of $182
million. The new stores were generally larger stores with rents that
substantially exceeded the chain average rent per square foot. Some of the new
stores were also multilevel facilities which further increased their operating
costs when compared with other prototypical Bradlees stores. The store expansion
and remodeling program marginally increased sales while gross margins declined
and operating expenses increased. Bradlees' declining operating performance,
coupled with the aggressive expansion program, began to erode the Company's
liquidity. The Company's liquidity further eroded in May and June, 1995 because
of the unwillingness of factors and vendors to continue to extend trade credit.
Bradlees, unable to obtain sufficient financing to satisfy factor and vendor
concerns, was compelled to seek Bankruptcy Court protection on June 23, 1995.
Business Strategy. In 1995, the Company began to implement a strategy to
position the Company between traditional discount stores and department stores.
Some of the initiatives associated with this strategy, especially the relatively
rapid introduction of higher-price points, an aggressive clearance markdown
policy, costly promotions of the Bradlees credit card and associated elimination
of layaway, elimination of certain basic convenience and commodity items that
are generally sold in discount stores, along with costly changes in the
Company's advertising strategy, resulted in significant sales and margin
declines and operating losses. In late December, 1996, the Company's Board of
Directors
2
<PAGE>
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 and Mr. Lynn was
appointed President and Chief Operating Officer in 1998.
The Company made the following key modifications to its business strategy
during 1997 and 1998 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 is focusing on three core product lines: moderately-priced
basic and casual apparel, basic and fashion items for the home, and edited
assortments of frequently purchased commodity and convenience products. Bradlees
is committed to quality and fashion, especially in apparel and home furnishings,
and to superior customer service, to further improve sales and operating
profitability and to differentiate itself from its competition. The Company
believes it can strategically leverage its strength in the fashion and quality
content of its apparel and decorative home product offerings while driving
traffic with selected hardlines merchandise. Management continued its efforts to
improve sales and profitability in 1998 (the fiscal year ended January 30,
1999), including the expansion of both the "Certified Value" and "WOW!" programs
that have been particularly successful.
Merchandise Mix. Bradlees stores provide a broad spectrum of basic and
fashion apparel (including private-label brands), basic and fashion home
furnishings, convenience hard goods and extensive seasonal offerings. Bradlees'
average merchandise mix in 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. The Company's
softlines focus should enable it to achieve a higher overall gross margin rate
than the industry average.
Advertising and Promotional Programs. Bradlees' marketing strategy is
designed to appeal to its value-oriented customers. Sales are driven from
competitive pricing and promotions, primarily in weekly circulars that feature a
large number of special values for the customer throughout the store. A major
portion of Bradlees' sales are derived from its weekly circulars. Approximately
5.7 million circulars are distributed each week. Although circulars are the
major promotional vehicle, the Company also uses newspaper advertising, periodic
television broadcasts, Bradlees credit card statement inserts and in-store
promotions. Point-of-purchase advertising, layaway, employee discounts, and
senior citizen discounts are also used as marketing vehicles.
Operations. Several programs have been or are being implemented to improve
the store organization, thereby focusing the organization more intently on
customer service while at the same time controlling expenses. For example, store
managers began using automated staff scheduling programs in 1998 to improve
operating efficiency and provide better service to the customer. The Company
also hired a Senior Vice President, Stores, in fiscal 1998 who is reporting to
the Company's
3
<PAGE>
President and Chief Operating Officer for improved coordination of merchandising
and store activities. In addition, programs are currently being 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 of the Company. For example, a new merchandising management system
was implemented in 1997 that facilitates, among other things, tracking
merchandise more accurately and efficiently from vendors and through
distribution centers to stores. The merchandising management system was enhanced
in 1998. In addition, the Company began developing a warehouse management system
in 1998 that will begin to be implemented in 1999. The Company also installed a
new mainframe computer and point-of-sale controllers in 1997 and modified its
point-of-sale equipment and software to allow for improved detection of bad
checks and additional promotional capabilities.
Store Profitability. The Company closed six stores in February, 1998 and
one store in March, 1999. Two additional stores are currently planned to begin
closing by the end of fiscal 1999, although the Company is currently evaluating
the merits of various lease disposition transactions for one of those stores,
including a possible sale/leaseback transaction that would allow for the store
to remain open. Although the Company has emerged from Chapter 11, the Company
will continue to monitor the profitability of each store and, if economically
beneficial, will close, sell or relocate those stores whose performance is
inadequate and not responsive to remedial actions. The Company is pursuing a few
new store openings in fiscal 1999 (see "Competition" below).
EMPLOYEES AND COLLECTIVE BARGAINING ARRANGEMENTS
Bradlees employs approximately 10,000 people of which approximately 74% are
covered by collective bargaining arrangements, including arrangements affecting
approximately 25% of the labor force that will expire within one year and are
expected to be renegotiated.
COMPETITION
Bradlees competes in most of its markets with a variety of national,
regional and local discount and other department and specialty stores, which
vary by market. Some of these competitors have substantially greater resources
than the Company. Bradlees competes on the basis of product quality and value,
merchandise selection, advertising and price. In addition, store location,
appearance and customer service are important competitive factors. Bradlees'
principal discount department store competitors are Kmart and Wal-Mart, and in
certain locations, Target and Ames. Bradlees' principal department store
competitors are Sears and J.C. Penney. Target and Kohl's, a department store
chain, are opening stores in some areas in which Bradlees operates.
Caldor Corp., a major competitor of the Company prior to April, 1999,
recently liquidated under Chapter 11 and has sold some of its store locations to
Kohl's, Wal-Mart, Kmart and Ames. At the time of the reopenings of the purchased
stores, Bradlees' business in competing locations is expected to be at least
temporarily affected by the new competition. Certain of these purchased
locations are not expected to open until early 2000.
Bradlees expects to pursue Caldor locations where economically beneficial
and feasible. On April 19, 1999, the Bankruptcy Court in the Caldor Chapter 11
case approved Caldor's acceptance of Bradlees' $1.25 million bid for two Caldor
store leases, one in the New Jersey market and one in the Philadelphia market,
that is subject to landlord review and final Bankruptcy Court approval. These
two new stores are expected to open in the beginning of October, 1999.
Management believes that it is
4
<PAGE>
pursuing the proper merchandising and marketing strategies and operating focus
that should allow it to compete effectively in its operating areas. However, no
assurances can be given that these strategies will further improve performance
or that Bradlees' business and financial performance will not be adversely
affected by future competitive pressures.
PATENTS, TRADEMARKS AND LICENSES
The trademark "Bradlees" is registered with the United States Patent and
Trademark Office. The Company has a significant number of other trademarks,
trade names, and service marks. Other than the "Certified Value" and "WOW! How
Do We Do It?" service marks, none of the other trademarks, trade names, and
service marks are currently considered individually to have a material impact on
the Company's business.
SEASONALITY
The Company's business is seasonal in nature, with a significant portion of
its sales occurring in the fourth quarter, which includes the holiday selling
season (see "Management's Discussion and Analysis of Financial Condition and
Results of Operations").
REORGANIZATION CASE AND FRESH-START REPORTING
As mentioned on page two, Bradlees has emerged from Chapter 11. The
emergence followed confirmation of the Company's plan of reorganization, as
modified (the "Plan"), by the Bankruptcy Court on January 27, 1999. Note 2 to
the Company's Consolidated Financial Statements included elsewhere in this Form
10-K provides information regarding the Company's Chapter 11 process and
adoption of fresh-start reporting as of the end of fiscal 1998 to give effect to
its emergence at that time.
Bradlees, Inc., which began operations in 1958, was organized as a
Massachusetts corporation in 1992. Its headquarters is located at One Bradlees
Circle, Braintree, Massachusetts 02184 and its telephone number is (781) 380-
3000. Bradlees web site is www.bradlees.com.
ITEM 2. PROPERTIES
STORE LOCATION AND SIZE
Bradlees stores are located principally in shopping centers that are in
high traffic areas. The stores appeal to consumers seeking a wide range of
value-priced merchandise and shopping convenience.
The following chart shows the geographic distribution of the Company's
stores as of April, 1999:
Maine 1
New Hampshire 8
Massachusetts 35
Connecticut 17
New York 6
New Jersey 29
Pennsylvania 6
---
Total 102
===
5
<PAGE>
The Company operates these stores in a variety of size ranges, with the
current average equal to 75,728 selling square feet.
DISTRIBUTION FACILITIES
Bradlees' distribution facilities are located in Edison, New Jersey and
Braintree, Massachusetts. The 584,000 square-foot Edison facility generally
serves as the soft goods processing center for nearly all apparel and softlines
merchandise and as the hardlines merchandise distribution facility for the New
York, New Jersey and Pennsylvania stores. The 470,000 square-foot Braintree
facility generally services all stores with basic merchandise items and
distributes hardlines merchandise to the New England states.
PROPERTIES
As of January 30, 1999, the Company's stores, including the one store
closed in March, 1999, occupied a total of approximately 7,820,151 square feet
of selling area. Bradlees leases all of its stores, two distribution centers and
central office under long-term leases.
ITEM 3. LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the knowledge of
management, threatened against the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the 13 weeks
ended January 30, 1999.
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of the Effective Date (February 2, 1999) and pursuant to the Plan, the
Company's old common stock was canceled and new common stock was issued
following consummation of the Plan. The new common stock is traded on the NASDAQ
National Market under the symbol "BRAD". As of April 19, 1999, there were
approximately 1,470 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
</TABLE>
Dividends cannot be declared on the Company's common stock under the
terms of the Company's post-emergence financing facility.
6
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of Bradlees should be read in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
(in millions, except for per share data)
------------------------------------------------
52 weeks 52 weeks 52 weeks 53 weeks 52 weeks
ended ended ended ended ended
1/30/99 1/31/98 2/1/97 2/3/96 1/28/95
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
Net sales $1,337 $1,344 $1,562 $1,781 $1,917
Net income (loss)(1) 285.9 (22.6) (218.8) (207.4) 5.3
Net income (loss)
per common share * (2.0) (19.2) (18.2) 0.47
Working Capital(2) (7.8) | 52.2 68.6 200.2 32.9
Total assets 463.8 | 595.2 604.2 798.7 884.8
Long-term debt 59.5 | 27.1 33.3 53.4 289.6
Liabilities subject |
to settlement - | 562.1 571 539.8 -
</TABLE>
In connection with its emergence from Chapter 11, the Company adopted
fresh-start reporting (Note 2 to the Consolidated Financial Statements) at the
end of the fiscal year ended January 30, 1999 ("1998"), therefore the balance
sheet amounts as of that date are not comparable in certain material respects to
the prior balance sheet amounts.
* Earnings per share was not presented for 1998 because such presentation would
not be meaningful. The former stock was canceled under the Plan and the new
stock was issued following consummation of the Plan.
(1) Included a pre-tax reorganization charge of $4.6 million, a pre-tax fresh-
start revaluation charge of $108.4 million, and a pre-tax extraordinary gain on
debt discharge of $419.7 million in 1998. Included a pre-tax reorganization
charge of $.8 million and a gain on disposition of properties of $5.4 million
for the 52 weeks ended January 31, 1998 ("1997"). Included pre-tax charges of
$40.8 and $99.4 million relating to the impairment of long-lived assets and pre-
tax reorganization items of $69.8 and $65.0 million for the 52 and 53 weeks
ended February 1, 1997 ("1996") and February 3, 1996 ("1995"), respectively.
Also, includes a gain on disposition of properties of $1.7 million for 1996 and
the cumulative effect of an accounting change (net of taxes) of $.5 million for
the year ended January 28, 1995 ("1994").
(2) Working capital includes $8.4 million of accrued bankruptcy expenses for
1998 and excludes liabilities subject to settlement under the reorganization
case for 1995 through 1997.
7
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(a) Results of Operations
<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 discussion and analysis is based on the results of operations
of the Company detailed below for the 52 weeks ended January 30, 1999 ("1998"),
January 31, 1998 ("1997") and February 1, 1997 ("1996"). The financial
information discussed below should be read in conjunction with the Consolidated
Financial Statements and Notes included elsewhere in this Form 10-K.
Management's Financial Discussion and Analysis of
Condition and Results of Operations
(Dollars in millions)
<TABLE>
<CAPTION>
1998 1997 1996
% of % of % of
Net Net Net
1998 Sales 1997 Sales 1996 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 dept.and other op.inc. 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, st.op., adm. and dist.exp. 376.9 28.2% 382.9 28.5% 504.0 32.3%
Depr. and amort. 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 disp.of prop. 0.2 - (5.4) (0.4%) (1.7) (0.1%)
Int.and debt expense 16.3 1.2% 16.6 1.2% 11.5 0.7%
Impairment of long-lived assets - - - - 40.8 2.6%
Reorg. items 4.6 0.4% 0.8 0.1% 69.8 4.5%
-------- ----- ----- ----- -------- -----
Loss before fresh-start reval.,
inc. taxes and extraordinary item (25.3) (1.9%) (22.6) (1.7%) (218.8) (14.0%)
Fresh-start reval. charge 108.4 8.1% - - - -
-------- ----- ----- ----- -------- -----
Loss before inc. taxes and
extraordinary item (133.8) (10.0%) (22.6) (1.7%) (218.8) (14.0%)
-------- ----- ----- ----- -------- -----
Income taxes - - - - - -
Extraordinary gain on debt disch. (419.7) 31.4% - - - -
-------- ----- ----- ----- -------- -----
Net income(loss) $285.9 21.4% ($22.6) (1.7%) ($218.8) (14.0%)
======== ===== ====== ===== ======= =====
</TABLE>
The Company's business is seasonal in nature, with a significant portion of
its net sales occurring in the fourth quarter, which includes the holiday
selling season. Comparable store sales, which include
8
<PAGE>
leased shoe department sales, for each year are discussed below and represent
percentage increases/decreases over the prior year for stores that were open and
operated by Bradlees for at least the prior full fiscal year. The rate of
inflation did not have a significant effect on sales during these years.
RESULTS OF OPERATIONS FOR 1998 COMPARED TO 1997
The following discussion, as well as other portions of this document,
includes certain statements which are or may be construed as forward looking
about the Company's business, sales and expenses, and operating and capital
requirements. Any such statements are subject to risks that could cause the
actual results or requirements to vary materially. For example, the Company's
statements regarding expected 1999 levels of borrowings, amounts available to
borrow and capital expenditures are dependent on the Company's future operating
performance and ability to meet its financial obligations, which is further
dependent upon, among other things, continued acceptance of the Company's
merchandising and marketing initiatives started in 1997, competitive conditions,
changes in consumer spending and consumer spending habits, weather and economic
conditions, availability and cost of sufficient labor, and changes in import
duties, tariffs and quotas.
Net sales for 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 Item 1 - 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 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.
Selling, store operating, administrative and distribution ("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 (Note 12), a freeze of non-union pension benefits (Note 12) 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.
The Company 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
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<PAGE>
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. The Company had increased interest expense from a
higher average borrowing level under the DIP Facility (Note 7) 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 the Company's operations and are discussed in Note 8 to the
Consolidated Financial Statements.
In 1998, the Company incurred a charge of $108.4 million associated with
the revaluation of assets and liabilities pursuant to the adoption of fresh-
start reporting (Note 2) and recognized an extraordinary gain on debt discharge
of $419.7 million related to the Plan consummation and settlement of the pre-
petition liabilities (Note 2).
The Company did not incur any income tax expense or benefit in 1998 and
1997 (Note 13).
RESULTS OF OPERATIONS FOR 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 the
Company's significant reduction in the number of promotional activities in 1997
that had historically poor profit productivity. Comparable store sales
stabilized during the fourth quarter of 1997 (unchanged from 1996).
Gross margin declined $37.7 million but increased 1.7% as a percentage of
net sales in 1997 compared to 1996. The decline in gross margin dollars was due
to the store closings and lower comparable store sales, partially offset by the
increase in the gross margin rate. The increase in the rate was primarily due to
a lower markdown rate resulting from fewer promotions, improved inventory
control and a decrease of $3.7 million in 1997 compared to 1996 in going-out-of-
business markdown provisions for closed stores included in cost of goods sold
(Note 8 to the Consolidated Financial Statements), partially offset by a
slightly lower overall initial markup.
Leased department 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 the
Company's SG&A rate to a more competitive level. Included in the 1997 SG&A
expense reductions were a $4.5 million expense credit resulting from the
elimination of automatic beginning of year vacation vesting for certain pay
groups (Note 15) and a $3.9 million curtailment gain associated with a reduction
in retiree medical benefits (Note 12).
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<PAGE>
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
(Note 5). However as a percentage of net sales, depreciation and amortization
remained unchanged.
The Company sold an owned store in January, 1998 for approximately
$8.0 million and recognized a gain of $5.4 million. This store was closed as a
result of the sale of the property and the sale was not directly associated with
the Chapter 11 proceedings; therefore, the gain was not classified as a
reorganization item. The net proceeds from this sale were placed into restricted
funds.
Interest and debt expense increased $5.1 million or .5% as a percentage of
net sales in 1997 compared to 1996 due primarily to higher average borrowings
under the DIP facilities 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 included 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
the Company's operations and are discussed in Note 8 to the Consolidated
Financial Statements.
The Company did not incur any income tax expense or benefit in 1997 and
1996 (Note 13).
(b) LIQUIDITY AND CAPITAL RESOURCES
Borrowings under the DIP Facility (Note 7) during 1998, exclusive of the
issuance of letters of credit, peaked at $166.6 million, dropped to $57.6
million after the holiday season and averaged $116.4 million compared to a peak
of $147.0 million and an average of $87.2 million in 1997 under the DIP
facilities. The increase in borrowings was primarily due to payments for
liabilities subject to settlement and reorganization expenses in 1998 not
covered by cash flow from operations. The DIP Facility was terminated and repaid
on the Effective Date with funds from the Revolver (see below).
In connection with the emergence from Chapter 11, a $270 million post-
emergence financing facility (the "Revolver") became effective, of which $125
million is available for issuance of letters of credit (Note 7). The Company is
allowed to borrow under the Revolver primarily for working capital and general
business needs. The Company currently expects its borrowings under the Revolver
in 1999 to peak at approximately $185 million in October or November, 1999 and
average approximately $140 million. The amount available to borrow in 1999 under
the Revolver, including for letters of credit, is currently expected to peak at
approximately $270 million in October or November, 1999 and average
approximately $225 million.
Other than payments made to certain pre-petition creditors approved by the
Bankruptcy Court (Note 2), principal and interest payments on indebtedness,
exclusive of certain capital lease obligations, incurred prior to the Filing
were not made without Bankruptcy Court approval or until consummation of the
Plan. Virtually all pre-petition indebtedness of Bradlees was subject to
settlement under the reorganization case. The consummation cash distributions of
$25.9 million were made on the Effective Date and funded primarily out of
restricted cash and cash equivalents (Note 2).
11
<PAGE>
In 1998, net cash provided by operating activities before reorganization
items was $6.5 million compared to $7.2 million in 1997. The benefits in 1998
from decreased inventories and a lower operating loss were offset by a decrease
in accounts payable compared to an increase in accounts payable in 1997.
Portions of the net cash benefit from the closing of the six stores in early
1998 were included in both 1998 and 1997. The significant improvement in net
cash provided by operating activities before reorganization items in 1997 was
primarily due to the significant reduction in the operating loss in 1997. The
net cash used by operating activities of $26.3 million before reorganization
items in 1996 was due primarily to the operating loss incurred, partially offset
by the income tax refund and the net cash benefit from the closing of the 27
stores.
Inventories declined $6.3 million in 1998 due primarily to the six closed
stores and increased $1.7 million in 1997. Inventories declined $45.3 million
during 1996 due primarily to the closing of the 27 stores. Accounts payable
declined $5.1 million in 1998 and increased $9.0 million in 1997 due primarily
to better payment terms at the end of 1997 compared to the end of 1996. Accounts
payable declined $32.3 million in 1996 due primarily to the impact of the closed
stores.
Cash flows from reorganization items (included in operating activities) and
the changes in restricted cash and cash equivalents (included in investing
activities) are discussed in Notes 8 and 3, respectively. Proceeds from sales of
assets (included in financing activities) relate primarily to the sale or
modification of store leases and are discussed in Notes 2, 3 and 8. The Company
utilized the $11.0 million of proceeds from the modification of the Union
Square, NY lease to partially pay down the 9% Convertible Notes (Note 7) issued
on the Effective Date.
Capital expenditures of $17.1 million in 1998 primarily represented
management information systems (including the start of a new warehouse
management system and enhancements to the merchandising management system
installed in 1997), the remodeling of nine stores and other store improvements
and fixtures. Capital expenditures of $19.6 million in 1997 primarily
represented management information systems (including a new mainframe computer,
new store point-of-sale controllers and a new merchandising management system),
store fixtures (including new chain-wide in-store directional and departmental
signage) and store improvements. The decrease in capital expenditures from the
$27.5 million spent in 1996 was due primarily to amounts spent on store
merchandise fixtures in 1996 and the fewer stores operating after 1996.
In 1999, the Company expects total capital expenditures to be approximately
$20 million based upon its current plan, primarily for management information
systems (including expenditures for the warehouse management system to be
implemented beginning in 1999), a few new stores and various store improvements.
The Company currently expects to finance these expenditures through internally-
generated funds and the Revolver if necessary.
Bradlees currently anticipates the following investment and financing
activities for 1999: (a) capital expenditures of approximately $20 million as
discussed above, (b) payments of certain capital lease obligations (Note 9), (c)
principal payments on the new notes (Note 7), (d) average borrowings under the
Revolver of approximately $140 million and (e) the possible sale or
sale/leaseback of a lease (the proceeds of which would be utilized to pay down a
major portion of the outstanding 9% Convertible Notes) for a store currently
expected to begin closing by the end of 1999.
The Company believes that the availability under its Revolver, together
with its available cash and expected cash flows from 1999 operations and beyond,
will enable it to fund its expected needs for working capital, capital
expenditures and debt service requirements. The Company's ability to meet its
12
<PAGE>
financial obligations, make planned capital expenditures and implement its
strategic initiatives will depend on the Company's future operating performance,
which will be subject to financial, competitive, economic and other factors
affecting the industry 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.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 project is proceeding as planned and the cost of remediation
is still estimated to be approximately $3 to $4 million, the majority of which
($2.4 million) was incurred in 1998 and included in SG&A expenses. The Company
expects that the Year 2000 project will be substantially complete by the end of
the second quarter of 1999.
In 1998, to address compliance of its information technology systems, the
Company contracted with a major outside consulting firm to provide the resources
required to remediate the Company's 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.
The Company has also addressed embedded systems and computer-controlled devices
in its stores, distribution centers and central office and is taking the
necessary steps to ensure Year 2000 compliance. As of April, 1999, the Year 2000
project is approximately 90% complete.
The Company believes the critical systems it operates will be Year 2000
compliant by the end of the second quarter of 1999, and believes it is not
likely to encounter significant 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 the potential failure to discover all of its own susceptible internal
systems. The risk to the Company resulting from the failure of third-party or
internal systems is similar to other retailers and, for the most part, to other
businesses. The Company is taking steps to minimize this risk by surveying its
suppliers and business partners to determine their Year 2000 readiness, which
will be assessed by the end of June 1999.
A reasonable worst case scenario could involve the failure of the Company's
systems or its supplier and business partner systems which would cause a
material disruption to the Company's 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 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 the
Company's business, results of operations, liquidity and financial position.
However, at this time the Company is unable to determine completely the
financial consequences of such potential Year 2000 failures.
While the Company expects its efforts will provide reasonable assurance
that material disruptions will not occur, the potential for disruptions cannot
be fully identified. The Company is therefore developing contingency plans based
on the successful completion of the Year 2000 project, results of testing of
internal systems, embedded systems and other computer-controlled devices, and
assessment of third-party compliance. The contingency plans will provide for
alternative courses of action to mitigate material individual system or process
failures due to Year 2000 issues, and are expected to be in place by the end of
August 1999. At this time, the Company cannot estimate the additional cost, if
any, that might develop from the implementation of such contingency plans.
13
<PAGE>
The costs of the Year 2000 project and the dates on which the Company plans
to complete Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest rates which
may adversely affect its financial position, results of operations and cash
flows. In seeking to minimize the risks from interest rate fluctuations, the
Company manages exposures through its regular operating and financing
activities. The Company does not use financial instruments for trading or other
speculative purposes and is not party to any leveraged financial instruments.
The Company is exposed to interest rate risk primarily through its
borrowings under its $270 million post-emergence financing facility (Note 7).
Under the facility, the Company 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 the Company to
borrow funds at the "Base Rate" plus 7.00% per annum.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to the Financial Statements - Item 14(a).
ITEM 9. CHANGES IN AND/OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
To the best of their knowledge, management is not aware of any current
disagreements with its accountants, Arthur Andersen LLP ("AA"). On September 24,
1997, the Company's Audit Committee of the Board of Directors recommended the
appointment of AA as certifying accountants for the Company replacing Deloitte &
Touche LLP ("D&T"), who was dismissed, effective September 24, 1997 and the
appointment along with the dismissal was approved by the Board of Directors and
the Bankruptcy Court. There were no disagreements between D&T and the Company's
management at the decision-making level during the two most recent fiscal years
and the subsequent interim periods (the "Reporting Period"), which
disagreements, if not resolved to the satisfaction of D&T, would have caused D&T
to make reference to the subject matter of the disagreements in connection with
its reports. In addition, there were no reportable events, as defined in Item
304(a)(i)(v) of Regulation S-K, during the Reporting Period. A Form 8-K dated
September 24, 1997 was filed to report the change in accountants.
14
<PAGE>
D&T'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:
a) The Company's filing for reorganization protection under Chapter 11 of
the Federal Bankruptcy Code.
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.
During the Reporting Period, neither the Company nor anyone on its behalf
consulted AA regarding the application of accounting principles to a specified
transaction or the type of audit opinion that might be rendered on the Company's
financial statements, and AA 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.
15
<PAGE>
PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and current positions of all executive officers and
directors of the Company as of April 19, 1999 are listed below along with their
business experience during the past five years.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Robert A. Altschuler(2) 42 Director
Stephen J. Blauner(1) 46 Director
W. Edward Clingman, Jr.(2)(3) 46 Director
Bruce Conforto 46 Senior Vice President,
Chief Information Officer
Gregory K. Dieffenbach 49 Senior Vice President,
Human Resources
Judith D. Dunning 48 Senior Vice President,
Planning and Allocation
John M. Friedman, Jr.(1) 54 Director
Mark E. James 49 Senior VicePresident, Marketing
Lawrence Lieberman(2) 50 Director
Robert G. Lynn 49 Director, President and Chief
Operating Officer
Charles K. MacDonald(1) 40 Director
Cornelius F. Moses, III 40 Senior Vice President,
Chief Financial Officer
David Phillion 44 Senior Vice President, Logistics
Ronald T. Raymond 55 Senior Vice President, Asset
Protection
William H. Roth(3) 47 Director
David L. Schmitt 48 Senior Vice President, General
Counsel, Secretary and Clerk
Sandra L. Smith 42 Senior Vice President, General
Merchandise Manager, Hardlines
Thomas N. Smith 42 Senior Vice President, Stores
James C. Sparks 52 Senior Vice President, General
Merchandise Manager, Softlines
Peter Thorner(3) 55 Chairman and Chief Executive
Officer
</TABLE>
_______________________
(1) Member of the Compensation Committee of the Board of Directors of the
Company.
(2) Member of the Audit Committee of the Board of Directors of the Company.
(3) Member of the Nominating Committee of the Board of Directors of the Company.
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
practice at Milbank, Tweed, Hadley & McCloy LLP.
Mr. Clingman became a Director of the Company in February 1999. He has
served as President and Chief Executive Officer of Best Products Co., Inc.
("Best Products") from January 1997 to 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
16
<PAGE>
Secretary from May 1996 to December 1996. He served as Vice President, General
Counsel and Secretary 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 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
management 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
17
<PAGE>
Company, Mr. Moses was Senior Vice President, Finance of Ames Department Stores,
Inc. ("Ames") from prior to 1994 to April 1995.
Mr. Phillion became Senior Vice President, Logistics of the
Company in March 1999. Mr. Phillion served as Vice President,
Merchandise and Promotional Planning of the Company from
February 1997 to March 1999. He was Director of Merchandise
Support of the Company from prior to 1994 to February 1997.
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.
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.
18
<PAGE>
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.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership (Forms 3, 4
and 5) with the Securities and Exchange Commission.
Based solely on the Company's review of the copies of Forms 3 and 4 and
amendments thereto received by it during 1998, Forms 5 and amendments thereto
received by it with respect to fiscal 1998, or written representations from
certain reporting persons that no Forms 5 were required to be filed by those
persons, the Company believes that during 1998 officers, directors and greater-
than-ten-percent beneficial owners complied with all filing requirements under
Section 16(a) of the Exchange Act applicable to them.
BOARD OF DIRECTORS OF THE COMPANY AND ITS COMMITTEES
The business of the Company is managed under the direction of its Board of
Directors. There are nine members of the Board of Directors. These directors
were selected pursuant to the Plan and assumed their positions as of the
Effective Date. The Amended and Restated Articles of Organization of the Company
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. At each annual meeting of stockholders, the
successors of the directors will be elected by a plurality of the votes cast at
such meeting. The Company intends to hold its first annual meeting after the
Effective Date in the Spring of 2000.
The Board of the Company 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 the 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 annual 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 the Bradlees, Inc.
1999 Stock Option Plan (the "Stock Plan"). In addition, the Compensation
Committee establishes, amends and revokes
19
<PAGE>
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.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
- --------------------------
The following table sets forth the earned compensation for the Chief
Executive Officer of the Company and the four highest paid executive officers of
the Company in 1998 other than the Chief Executive Officer (the "Named
Officers") for 1998, 1997 and 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
Long Term Compensation
-----------------------------------
Awards
-------------
Annual Compensation Payouts
------------------------------- Securities -------
Name and Other Restricted Underlying All
Principal Annual Stock Options/ LTIP Other
Position Year Salary Bonus Compensation Awards SARs Payouts Compensation
- -------- ---- ----- ----- ------------ ------ ---- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Peter Thorner 1998 $847,596 $467,500(1) $55,836(2) - - $550,000(3) $601,169(4)
Chairman and 1997 $741,827 $299,063(5) (6) - - $150,000(3) $ 9,318
Chief Executive 1996 $589,166 - $12,961 - - $150,000(3) $ 9,293
Officer
Robert G. Lynn 1998 $586,442 $300,000(1) (6) - - - $189,020(4)
Director, 1997 $401,827(7) $196,875(5) $29,109 - - - 840
President and
Chief Operating
Officer
Thomas N. Smith 1998 $295,000 $103,250(1) (6) - - - $ 76,004(8)
Senior Vice 1997 $ 45,385(7) - - - - - $127,768
President, Stores
Cornelius F. Moses, III 1998 $282,343 $105,000(1) (6) - - - $128,636(4)
Senior Vice President 1997 $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(1) (6) - - - $103,980(4)
Senior Vice 1997 $243,751 $ 73,500(5) (6) - - - $ 912
President, 1996 $180,024 - (6) - - - $ 748
General Counsel,
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).
20
<PAGE>
(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).
CORPORATE BONUS PLAN
In February 1997 the Company adopted, and in April 1997 the Bankruptcy
Court approved, the Corporate Bonus Plan (the "Corporate Bonus Plan"). The
Corporate Bonus Plan provides incentives and rewards for (i) performance of key
employees that meets or exceeds expectations and (ii) attainment of threshold
performance measurements tied directly to the Company's annual business plan.
The amount of the award increases if the Company's performance exceeds the
business plan. 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 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). The Company 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 the
Company's senior management, one-quarter of the amount of any bonus payable
before the Company consummated its Plan was paid, with interest, following the
Effective Date. The remaining three-quarters of the bonuses was previously paid.
See "Summary Compensation Table."
For fiscal 1999, the Company's Board of Directors adopted threshold
performance measurements tied directly to the Company's 1999 business plan.
The Company must obtain a minimum EBITDA of
21
<PAGE>
$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 the Company
achieves certain levels of EBITDA below $40 million. For each $5 million of
EBITDA improvement (net of the provision for the additional earned bonuses) 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.
ENTERPRISE APPRECIATION INCENTIVE PLAN
In August 1995 the Company adopted, and in November 1995 the Bankruptcy
Court approved, the Enterprise Appreciation Incentive Plan (the "Incentive
Plan"). The Incentive Plan was terminated on the Effective Date. The Incentive
Plan was intended to provide an incentive to those key executives whose
management and individual performance would 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 below). No further payments will be made
under the Incentive Plan since it has been terminated.
MANAGEMENT EMERGENCE BONUS PLAN
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.
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 the Company for any reason, other than
an involuntary termination without Cause or a voluntary termination for Good
Reason (as such terms are defined in 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 the Company adopted, and in November 1995 the Bankruptcy
Court approved, a severance program (the "Severance Program") that covers all
officers, Vice President and above, and certain other employees of the Company,
but not including Mr. Thorner who has a separate employment agreement (see
Employment Agreement with Peter Thorner below). If the employment of any
participant in the Severance Program is terminated other than for cause, 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").
22
<PAGE>
If the employment of any participant is terminated other than for Cause,
death, disability or retirement, or is terminated under certain other
circumstances, within one year following a change of control of the Company, the
employee will receive a lump-sum payment. The payment is the Severance Lump Sum
amount plus one and one-half times the annual salary in effect immediately prior
to the change of control (the "Annual Salary") for the President and Senior
Vice Presidents, one times the Annual Salary for Vice Presidents and one-half
times the Annual Salary for certain other employees. For purposes of the
Severance Program, a change of control includes but is not limited to the
acquisition by any person of beneficial ownership of 50% or more of the
Company's outstanding voting securities, or the failure of the individuals who
constituted the Board of Directors in August 1995 to continue to constitute a
majority of the Board unless the election of the new directors has been approved
by the incumbent directors. Consummation of the Plan 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. Pursuant to the Plan, the Company has
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 Effective Date and at the end of each of the two years following the
Effective Date. All vested options shall be exercisable for a period of five
years from the Effective Date. 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, 1999 and May 3, 1999 (the period between sixty and ninety
days after the Effective Date). At the time of the 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 to
options with respect to 250,000 additional shares at such price and on such
terms as the Compensation Committee shall determine.
RETIREMENT PLANS
The Company maintains a qualified retirement plan (the "Retirement Plan")
for its eligible employees. The retirement benefits under the Retirement Plan
are determined pursuant to a benefit formula that takes into account the
employee's Final Average Compensation (as defined in the Retirement Plan),
and/or years of service, up to 30 years. Effective December 31, 1998, the
Retirement Plan for the Company's non-union employees was frozen for credited
service and salary adjustments and the Company reinstated matching contributions
to its 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. The Company also maintains a non-qualified Supplemental Executive
Retirement Plan (the "Supplemental Plan") which, as of December 1, 1995,
replaced the Excess Pension Plan which was terminated. Under the Supplemental
Plan an eligible employee, upon normal retirement at age 65, may receive
supplemental retirement benefits equal to 50% of his or her Final Average
Compensation, minus the sum of his or her Social Security benefits and the
annual benefit payable from the Retirement Plan. The benefits from the
Supplemental Plan are payable in the form of a single lump sum amount. The
following table shows the estimated annual retirement benefits which will be
payable to participating employees from the Retirement Plan and the Supplemental
Plan in the form of a straight life annuity upon normal retirement at age 65
after selected periods of service. These
23
<PAGE>
benefits presented below do not reflect the Social Security offset described
above and do not take into account any reduction for joint and survivor
payments.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
Estimated Annual Retirement Benefits
------------------------------------
Final Average 10 Years 15 or More
Compensation* of Service Years of Service
------------ ---------- ----------------
<S> <C> <C>
$ 200,000 $ 66,666 $100,000
$ 250,000 $ 83,333 $125,000
$ 300,000 $100,000 $150,000
$ 400,000 $133,333 $200,000
$ 500,000 $166,666 $250,000
$ 600,000 $200,000 $300,000
$ 700,000 $233,333 $350,000
$ 800,000 $266,666 $400,000
$ 900,000 $300,000 $450,000
$1,000,000 $333,333 $500,000
$1,100,000 $366,666 $550,000
$1,200,000 $400,000 $600,000
$1,300,000 $433,333 $650,000
$1,400,000 $466,666 $700,000
$1,500,000 $500,000 $750,000
$1,600,000 $533,333 $800,000
</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 and bonus. The calculation of retirement
benefits under both plans is generally based upon the participant's highest
annual compensation averaged over three years. As of December 31, 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.
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.
24
<PAGE>
EMPLOYMENT AGREEMENT WITH PETER THORNER
The Company has entered into a three-year employment agreement with Mr.
Thorner, commencing as of October 26, 1995 and amended as of November 7, 1997.
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. Effective December 24, 1996, concurrent with his
then appointment as Chairman, President and Chief Executive Officer, Mr. Thorner
received a minimum annual base salary of $725,000 and an annual incentive award
of 55% of his base salary. In March 1998, The Company's 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 following the Effective
Date.
In addition, the employment agreement provided for the payment by the
Company of an equity incentive bonus (payable in cash, debt and equity
securities) pursuant to the Incentive Plan determined by reference to the
increase in value of the Company from the date of the bankruptcy filing to the
fifth anniversary of the employment agreement, subject generally to vesting over
five years. Under the employment agreement, Mr. Thorner was entitled to receive
an annual nonrefundable advance of $150,000 towards his benefits under the
Incentive Plan while he remained employed by the Company. The employment
agreement also provided 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. 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 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 did not constitute a change of control under the
agreement.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
All executive officer compensation decisions will be made by the
Compensation Committee. The Compensation Committee will review and make
recommendations regarding the compensation for management and key employees,
including salaries and bonuses.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of April 19, 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 the Named
Officers, and (iii) all directors and executive officers as a group. Except as
otherwise indicated, we
25
<PAGE>
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.
<TABLE>
<CAPTION>
Directors, Named Officers,
and 5% Beneficial Owners(1)(2) Shares Beneficially Owned(2) Percentage(3)
- ------------------------------ --------------------------- -------------
<S> <C> <C>
Ariel Fund Limited 1,369,944 13.4%
Gabriel Capital, L.P. 928,617 9.1%
Robert A. Altschuler 0 *
Stephen J. Blauner 2,000 *
W. Edward Clingman, Jr. 0 *
John M. Friedman, Jr. 0 *
Lawrence Lieberman 0 *
Robert G. Lynn 0 *
Charles K. MacDonald 0 *
Cornelius F. Moses, III 0 *
William H. Roth 1,500 *
David L. Schmitt 0 *
Thomas N. Smith 0 *
Peter Thorner 0 *
All directors and executive
officers as a group
(consisting of 20 people). 3,500 *
</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. For Ariel Fund Limited, the mailing address is c/o Maples & Calder, P.O.
Box 309, Grand Cayman, Cayman Islands, BWI. For Gabriel Capital, L.P., the
mailing address is 450 Park Avenue, New York, New York 10627.
(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
April 19, 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. The number of shares beneficially owned does not include any warrants
that may be owned by such person. The Company has agreed to issue warrants to
purchase 1,000,000 shares of the Company's 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 10,225,711 shares of Common Stock issued
and outstanding as of April 19, 1999.
26
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
OTHER TRANSACTIONS
In February 1998, the Company made a loan in the amount of $100,000 to
Thomas N. Smith, Senior Vice President, Stores, in connection with his
relocation. This loan 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 has been repaid in full. In September 1998, the
Company 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 has
been repaid in full.
COMPANY POLICY
The Company has a policy that any transactions with directors, officers,
employees or affiliates be approved in advance by a unanimous vote of the
Company's Board of Directors, with any affected director abstaining from such
vote, and be on terms no less favorable to the Company than the Company could
obtain from non-affiliated parties.
27
<PAGE>
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Public Accountants--Arthur Andersen LLP
Independent Auditors' Report- Deloitte & Touche LLP.
Consolidated statements of operations for the 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 years ended January 30,
1999, January 31, 1998 and February 1, 1997.
Consolidated statements of stockholders' equity (deficiency) for the
years ended January 30, 1999, January 31, 1998 and February 1, 1997.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All financial statement schedules are omitted, as the required
information is not applicable or is included in the consolidated
financial statements or related notes.
3. Exhibits
The exhibits required to be filed by item 601 of Regulation S-K are
listed in the accompanying Exhibit Index.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the 13 weeks ended
January 30, 1999:
<TABLE>
<CAPTION>
Date of Report Date of Filing Item Number Description
-------------- -------------- ----------- -----------
<S> <C> <C> <C>
December 2, 1998 December 3, 1998 3 & 5 Reporting of confirmation
of plan of reorganization
and third-quarter results
compared to forecast and
plan
</TABLE>
28
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Braintree, Commonwealth of Massachusetts on April 28, 1999.
BRADLEES, INC.
By: /s/ CORNELIUS F. MOSES, III
------------------------------------------
Cornelius F. Moses, III
Senior Vice President, Chief Financial Officer
(Principal Financial and Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/PETER THORNER Chairman and Chief April 28, 1999
Peter Thorner Executive Officer
(Principal Executive Officer)
/s/ROBERT G. LYNN President and Director April 28, 1999
- ------------------------- (Chief Operating Officer)
Robert G. Lynn
/s/CORNELIUS F.MOSES, III Senior Vice President, April 28, 1999
- ------------------------- Chief Financial Officer
Cornelius F. Moses, III (Principal Financial and
Accounting Officer)
/s/ROBERT A. ALTSCHULER Director April 28, 1999
- -------------------------
Robert A. Altschuler
/s/ STEPHEN J. BLAUNER Director April 28, 1999
- -------------------------
Stephen J. Blauner
/s/ W. EDWARD CLINGMAN, JR. Director April 28, 1999
- ---------------------------
W. Edward Clingman, Jr.
/s/ JOHN M. FRIEDMAN, JR. Director April 28, 1999
- -------------------------
John M. Friedman, Jr.
/s/ LAWRENCE LIEBERMAN Director April 28, 1999
- -------------------------
Lawrence Lieberman
/s/ CHARLES K. MACDONALD Director April 28, 1999
- -------------------------
Charles K. MacDonald
/s/ WILLIAM H. ROTH Director April 28, 1999
- -------------------------
William H. Roth
</TABLE>
29
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
--- ----------- -------------
<C> <S> <C>
2.1* Modified Plan of Reorganization and Plan Disclosure
Statement is incorporated by reference from Pre-
Effective Amendment No. 2 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-66953), Part II,
Item 16, Exhibit 2.1, as filed with the Securities and
Exchange Commission on January 28, 1999.
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, is incorporated by reference from Post-
Effective Amendment No. 1 to the Company's Registration
Statement on Form S-1 (SEC File No.333-66953), Part II,
Item 16 Exhibit 2.2 as filed with the Securities and
Exchange Commission on February 16, 1999.
2.3* Form of 9% Convertible Note is incorporated by reference
from Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-
66953), Part II, Item 16, Exhibit 2.3, as filed with the
Securities and Exchange Commission on January 28, 1999.
2.4* Form of New Warrant is incorporated by reference from
Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No.333-
66953), Part II, Item 16, Exhibit 2.9, as filed with the
Securities and Exchange Commission on January 28,1999.
3.1* Amended and Restated Articles of Organization of
Bradlees,Inc. is incorporated by reference from Post-
Effective Amendment No. 1 to the Company's Registration
Statement on Form S-1 (SEC File No.333-66953), Part II,
Item 16, Exhibit 3.1, as filed with the Securities and
Exchange Commission on February 16, 1999.
3.2* Amended and Restated By-laws of Bradlees, Inc. is
incorporated by reference from Post-Effective Amendment
No. 1 to the Company's Registration Statement on
Form S-1(SEC File No. 333-66953), Part II, Item 16,
Exhibit 3.3, as filed with the Securities and Exchange
Commission on February 16, 1999.
</TABLE>
30
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
--- ----------- -------------
<C> <S> <C>
4.1* Specimen Certificate for shares of Common Stock, $.01
par value, of Bradlees, Inc. is incorporated by
reference from Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File
No.333-66953), Part II, Item 16, Exhibit 4.1, as filed
with the Securities and Exchange Commission on
January 28, 1999.
10.1* Registration Rights Agreement is incorporated by
reference from Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (SEC File
No. 333-66953), Part II, Item 16, Exhibit 10.1, as filed
with the Securities and Exchange Commission on
February 16, 1999.
10.2* 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.
10.3* 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.
10.4* 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.
10.5 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.
</TABLE>
31
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
--- ----------- -------------
<C> <S> <C>
10.6* Form of Senior Vice President Severance Agreement is
incorporated by reference from the Company's Form 10-K
for the year ended February 3, 1996, Part IV, Item
14(a)(3), Exhibit 10.33 as filed with the Securities and
Exchange Commission on May 3, 1996.
10.7* 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.
10.8* 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.
10.9 Form of Revised Senior Vice President Severance
Agreement.
10.10* 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.
10.11* 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.
10.12* 10.12* 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.
</TABLE>
32
<PAGE>
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
Exhibit Sequentially
No. Description Numbered Page
--- ----------- -------------
<C> <S> <C>
10.13* 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 is incorporated by reference
from Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-
66953), Part II, Item 16, Exhibit 10.41, as filed with
the Securities and Exchange Commission on February 16,
1999.
10.14* Bradlees, Inc. 1999 Stock Option Plan is incorporated by
reference from Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File
No. 333-66953), Part II, Item 16, Exhibit 10.42, as
filed with the Securities and Exchange Commission
January 28, 1999.
10.15* Bradlees, Inc. and Bradlees Stores, Inc. Management
Emergence Bonus Plan is incorporated by reference from
Pre-Effective Amendment No. 2 to the Company's
Registration Statement on Form S-1 (SEC File No. 333-
66953), Part II, Item 16, Exhibit 10.43, as filed with
the Securities and Exchange Commission on January 28,
1999.
21* Subsidiaries of the Registrant is incorporated by
reference from Post-Effective Amendment No. 1 to the
Company's Registration Statement on Form S-1 (SEC File
No. 333-66953), Part II, Item 16,Exhibit 21, as filed
with the Securities and Exchange Commission on
February 16, 1999.
27 Financial Data Schedule (a)
</TABLE>
*Previously filed.
(a) Filed on the SEC's EDGAR system.
33
<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 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.
New York, New York /s/ ARTHUR ANDERSEN LLP
March 26, 1999 -----------------------
34
<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 its operations and its cash flows of Bradlees,
Inc. and subsidiaries for the year ended February 1, 1997 in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 2, the Company 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 plan concerning these matters are also described in Note 2. The
consolidated financial statements 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)
35
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
52 Weeks 52 Weeks 52 Weeks
ended ended ended
Jan. 30, 1999 Jan. 31, 1998 Feb. 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 & other
operating inc. 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
Depr.& amort. expense 32,236 36,244 42,200
Loss (gain) on disposition of
properties 241 (5,425) (1,739)
Interest & debt exp. 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, inc. taxes &
extraordinary item (25,325) (22,557) (218,759)
Revaluation of assets & liab.
pursuant to adoption of
fresh-start reporting (108,428) - -
---------- ---------- -----------
Loss before inc. taxes &
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
& diluted * ($1.98) ($19.17)
========== =========== ===========
Weighted average shares
outstanding (000) - 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.
36
<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
---------- -----------
Assets
- ------
<S> <C> <C>
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.
37
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
52 Wks ended 52 Wks ended 52 Wks ended
Jan. 30,1999 Jan. 31,1998 Feb. 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 inc.(dec.) 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.
38
<PAGE>
BRADLEES STORES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Retained
Earnings Stockholders'
Common Stock Additional Unearned (Accumulated Treasury Equity
Shares Amount Paid-in-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-amortizations - - - 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 the
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.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bradlees, Inc. and Subsidiaries
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 segment
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 became 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
40
<PAGE>
average rent per square foot. Some of the new stores were also multilevel
facilities which further increased their operating costs when compared with
other prototypical Bradlees stores. The store expansion and remodeling program
marginally increased sales while gross margins declined and operating expenses
increased. Bradlees' declining operating performance, coupled with the
aggressive expansion program, began to erode the Company's liquidity. The
Company's liquidity further eroded in May and June, 1995 because of the
unwillingness of factors and vendors to continue to extend trade credit.
Bradlees, unable to obtain sufficient financing to satisfy factor and vendor
concerns, was compelled to seek Bankruptcy Court protection on June 23, 1995.
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 a 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
41
<PAGE>
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).
<TABLE>
<CAPTION>
(000's)
--------------------------------
Liabilities Subject to Settlement
Under the Reorganization Case Jan. 30, 1999* Jan. 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.
42
<PAGE>
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.
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.
43
<PAGE>
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
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, 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
44
<PAGE>
disposition of the Union Square, NY 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.
45
<PAGE>
The effect of the Plan on the Company's consolidated balance sheet as of
January 30, 1999 was as follows (in thousands):
<TABLE>
<CAPTION>
Historical Adjustments to 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
& cash equivalents $ 9,485 $ - $ - $ 9,485
Restricted cash and
cash equivalents 25,412 (25,412)(a) - -
-------- -------- -------- --------
Total cash &
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
======== ======== ======== ========
</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.
46
<PAGE>
<TABLE>
<CAPTION>
Historical Adjustments to Record Plan Reorganized
as of -------------------------- as of
January 30, Debt Fresh January 30,
1999 Discharge Start 1999
------ --------- ----- ------
<S> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payment $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 capital
lease obligations 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
liabilities - - 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.
47
<PAGE>
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 was 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 owned undeveloped property that was not consummated and $7.6
million of net proceeds received when this property was sold in March, 1998;
48
<PAGE>
(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.
Buildings 30 years
Fixtures, machinery and equipment 3 to 10 years
Leasehold improvements 10 to 20 years
or the term of the
lease, if shorter
Lease interests Lease interests 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 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).
49
<PAGE>
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 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.
50
<PAGE>
4. PRO FORMA FINANCIAL INFORMATION (UNUADITED)
The following unaudited pro forma consolidated statement of operations is
based on the Company's consolidated statement of operations for fiscal 1998
included in this Form 10-K 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 appearing in
this Form 10-K. 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.
51
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
(Amounts in thousands except per share amounts)
<TABLE>
<CAPTION>
52 Pro Forma
Weeks Ended Pro Forma Adjustments 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 dept. 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 dept.& other
operating income 11,795 82(1) - 11,713
-------- --------
404,898 401,337
Selling, store operating,
admininitrative and
distribution expenses 376,856(4) 4,059(1) 4,553 373,059
(6) 1,705(3) 4,400
(10) 8,026(7) 8,634
Depreciation and
amortization expenses 32,236 -(1) 86 22,108
(4) 6,815
(6) 617
(9) 2,610
Loss on disposition
of properties 241 - - 241
-------- --------
Income (loss) before
interest and
reorganization items (4,435) 5,929
Interest and debt
expense 16,329(5) 1,400(5) 2,148 28,023
(8) 12,442
Reorganization items 4,561 -(3) 4,561 -
-------- --------
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) - (3) 108,428 -
-------- --------
Loss before extraordinary
item (133,753) (22,094)
Extraordinary item -
gain on debt discharge 419,703(3) 419,703 - -
-------- --------
Net income (loss) $285,950 $(22,094)
======== ========
Weighted average shares
outstanding * 10,226
======== ========
Net income (loss)
per share * (11) $( 2.16)
======== ========
</TABLE>
See accompanying notes to this pro forma statement.
* Earnings per share was not presented for the fiscal year ended January 30,
1999 because such presentatiion would not be meaningful. The former stock was
canceled under the plan of reorganization and the new stock issued following
consummation of the plan.
52
<PAGE>
Notes to Unaudited Pro Forma Consolidated Statement 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 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.
53
<PAGE>
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):
1996
----
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
=======
6. PROPERTY, PLANT AND EQUIPMENT, NET
----------------------------------
<TABLE>
<CAPTION>
(000's)
-------------------------------
Jan. 30, 1999 Jan. 31, 1998
------------- -------------
<S> <C> <C>
Property excluding capital leases:
Buildings and improvements $40,198 | $ 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 $103,386 | $150,484
equipment,net ======== | ========
</TABLE>
Property, plant and equipment were revalued at January 30, 1999
under fresh-start reporting (Note 2).
54
<PAGE>
7. DEBT
----
<TABLE>
<CAPTION>
(000's)
-----------------------------
Jan. 30, 1999 Jan. 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
55
<PAGE>
regarding the value of the 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 million 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.
56
<PAGE>
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 31, 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, 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.
57
<PAGE>
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.
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.
58
<PAGE>
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 are receiving Warrants (Note 10) upon surrender of such notes following
the Effective Date and the 2002 Notes and 2003 Notes were deemed canceled.
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.
59
<PAGE>
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 (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, NY 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.
60
<PAGE>
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 (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):
1998 1997 1996
---- ---- ----
Net sales $14,322 $69,423 $221,738
Operating loss (592) (1,158) (29,827)
61
<PAGE>
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>
(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>
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
62
<PAGE>
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.
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.
63
<PAGE>
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 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 each of the two anniversaries following the date of grant. All
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 the 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.
64
<PAGE>
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.
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.
65
<PAGE>
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>
The funded status (after fresh-start reporting in 1998) was as follows:
<TABLE>
<CAPTION>
(000's)
-------------------------------------------------------------
January 30, 1999 January 31, 1998
----------------------------------- -------------------------
Qualified Plan Non-Qualified Plans Qual. Plan Non-qual.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>
66
<PAGE>
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)
-------------------------------------------------------------
1999 1998
----------------------------------- -------------------------
Qualified Plan Non-Qualified Plans Qual. Plan Non-qual 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>
67
<PAGE>
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)
-------------------
1/30/99 1/31/98
------- -------
<S> <C> <C>
Accumulated post-retirement benefit |
obligation for: |
Retirees $ 915 | $ 733
Fully eligible 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>
68
<PAGE>
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:
<TABLE>
<CAPTION>
(000's)
----------------
1998 1997
---- ----
<S> <C> <C>
Change in Accumulated Post-Retirement |
Benefit Obligation (APBO) |
APBO at beginning 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)
------ | -------
$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 insurance) 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>
69
<PAGE>
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 30, 1999. The realization of the deferred tax assets is
dependent upon future taxable income during the Federal and State carryforward
periods.
70
<PAGE>
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 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 (as defined) 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
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
71
<PAGE>
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 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.
72
<PAGE>
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.
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
73
<PAGE>
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>
<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)
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>
74
<PAGE>
Exhibit G(2)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 1, 1999
Commission file Number 1-11134
BRADLEES, INC.
(Exact name of registrant as specified in its charter)
04-3156108 MASSACHUSETTS
(I.R.S. Employer (State or other jurisdiction
Identification Number) of incorporation or organization)
One Bradlees Circle
Braintree, MA 02184
(Address of principal executive offices) (Zip Code)
(781) 380-3000
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes [X] No [ ]
Number of shares of the issuer's common stock outstanding as of June 4, 1999:
9,694,224 shares.
Exhibit Index on Page 21
Page 1 of 22 (Excluding Exhibits)
<PAGE>
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Board of
Directors and Stockholders of Bradlees, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of
Bradlees, Inc. and subsidiaries (the "Company") as of May 1, 1999 and May 2,
1998, and the related condensed consolidated statements of operations and cash
flows for the thirteen-week periods then ended. These financial statements are
the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
On February 2, 1999, the Company emerged from bankruptcy. As discussed in Notes
1 and 2 to the condensed 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 condensed consolidated financial statements as of and for the
thirteen-week period ended May 1, 1999 are not comparable to the condensed
consolidated financial statements as of and for the thirteen-week period ended
May 2, 1998.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
New York, New York
May 20, 1999
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------
May 1, 1999 May 2, 1998
----------- -----------
Registrant Predecessor
----------- -----------
<S> <C> <C>
Total sales $ 324,842 : $ 293,306
Leased department sales 9,567 : 9,435
--------- : -------
Net sales 315,275 : 283,871
Cost of goods sold 227,113 : 204,201
--------- : ---------
Gross margin 88,162 : 79,670
Leased department and other :
operating income 2,731 : 2,947
--------- : --------
90,893 : 82,617
Selling, store operating, :
administrative and :
distribution expenses 100,204 : 92,701
Depreciation and amortization exp. 7,288 : 8,574
Loss on disposition of properties - : 241
Interest and debt expense 6,882 : 3,625
Reorganization items - : 2,129
--------- : --------
Net loss $ (23,481) : $ (24,653)
========== : =========
Comprehensive loss $ (23,481) : $ (24,653)
========== : =========
Net loss per share $ (2.30) : $ (2.18)
========== : =========
Weighted average shs. outstanding :
(in thousands)-basic and diluted 10,226 : 11,311
========== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
May 1, 1999 Jan. 30, 1999 May 2, 1998
ASSETS ----------- ------------- -----------
Registrant Registrant Predecessor
----------- ------------- -----------
<S> <C> <C> <C>
Current assets: :
Unrestricted cash :
and cash equivalents $10,315 $9,485 : $10,281
Restricted cash and :
cash equivalents - - : 24,550
--------- --------- : --------
Total cash and :
cash equivalents 10,315 9,485 : 34,831
--------- --------- : --------
Accounts receivable 11,002 13,015 : 9,494
Inventories 261,528 232,343 : 260,960
Prepaid expenses 10,435 8,967 : 8,868
Assets held for sale - - : 4,000
--------- --------- : --------
Total current assets 293,280 263,810 : 318,153
--------- --------- : --------
Property, plant :
and equipment, net: :
Property excluding :
capital leases, net 89,053 93,039 : 127,245
Property under capital :
leases, net 10,037 10,347 : 18,428
--------- --------- : --------
Total property, plant :
and equipment, net 99,090 103,386 : 145,673
--------- --------- : --------
Other assets: :
Lease interests at :
fair value, net 74,728 75,833 : 140,550
Assets held for sale 14,000 14,000 : -
Other, net 6,354 6,722 : 5,114
--------- --------- : --------
Total other assets 95,082 96,555 : 145,664
--------- --------- : --------
Total assets $ 487,452 $ 463,751 : $ 609,490
========= ========= : =========
</TABLE>
(Continued)
2
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
May 1, 1999 Jan. 30, 1999 May 2, 1998
----------- ------------- -----------
LIABILITIES AND
STOCKHOLDERS' Registrant Registrant Predecessor
EQUITY (DEFICIENCY) ----------- ------------- -----------
<S> <C> <C> <C>
:
Current liabilities: :
Accounts payable $ 156,680 $ 119,302 : $ 141,055
Accrued expenses 21,304 29,326 : 17,854
Self-insurance reserves 6,358 6,462 : 6,515
Short-term debt 132,427 114,449 : 116,125
Current portion of :
capital lease obligations :
and notes 2,532 2,089 : 1,038
--------- --------- : --------
Total current liabilities 319,301 271,628 : 282,587
--------- --------- : --------
Long-term liabilities: :
Obligations under :
capital leases 24,824 25,284 : 26,786
Convertible notes payable 28,995 28,995 : -
Deferred income taxes - - : 8,581
Self-insurance reserves 12,908 13,120 : 13,228
Unfavorable lease liab. 44,742 44,581 : -
Other long-term liabs. 25,045 25,143 : 27,980
--------- --------- : --------
Total long-term liabs. 136,514 137,123 : 76,575
--------- --------- : --------
Liabilities subject to :
settlement under :
the reorganization case - - : 560,931
:
Stockholders' equity
deficiency): :
Common stock (new)
10,225,711 shares :
outstanding (10,225,711
at 1/30/99) :
Par value 102 102 : -
Common stock (old) -
11,310,384 :
shares outstanding at
5/2/98 :
Par value - : 115
Additional paid-in-capital 55,016 54,898 : 137,821
Accumulated deficit (23,481) - : (447,735)
Treasury stock, at cost - - : (804)
---------- -------- : --------
Total stockholders' :
equity (deficiency) 31,637 55,000 : (310,603)
---------- -------- : --------
Total liabilities :
and stockholders' :
equity (deficiency) $ 487,452 $ 463,751 : $ 609,490
========== ========== : =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
13 Weeks Ended
---------------
May 1, 1999 May 2, 1998
----------- -----------
Cash flows from operating
activities: Registrant Predecessor
----------- -----------
<S> <C> <C>
Net loss $ (23,481) : $ (24,653)
Adjustments to reconcile net :
loss to cash :
used by operating activities: :
Depreciation and amortization exp. 7,288 : 8,574
Amortization of lease interests :
and unfavorable lease liability, net 1,266 : -
Amortization of deferred :
financing costs 377 : 384
Reorganization items - : 2,129
Changes in working capital :
and other, net 4,634 : (11,185)
--------- : --------
Net cash used by :
operating activities before :
reorganization items (9,916) : (24,751)
Reorganization items: --------- : --------
Interest income received - : 121
Chapter 11 professional fees paid (2,858) : (2,906)
Other reorganization exp. paid, net (830) : (2,062)
--------- : --------
Net cash used by :
reorganization items (3,688) : (4,847)
--------- : --------
Net cash used by :
operating activities (13,604) : (29,598)
Cash flows from investing :
activities: :
Capital expenditures, net (2,920) : (1,644)
--------- : ---------
Inc. in restricted cash and :
cash equivalents - : (7,790)
Net cash used in investing :
activities (2,920) : (9,434)
--------- : ---------
Cash flows from financing :
activities: :
Payments of liabilities subject :
to settlement - : (1,020)
Net borrowings under the :
revolver/DIP facility 17,977 : 31,917
Proceeds from sales of properties - : 7,754
Principal payments on notes and :
capital lease obligations (623) : (287)
--------- : ---------
Net cash provided by financing :
activities 17,354 : 38,364
--------- : ---------
Net inc.(dec.) in unrestricted cash :
and cash equivalents 830 : (668)
Unrestricted cash and :
cash equivalents: :
Beginning of period 9,485 : 10,949
---------- : ---------
End of period $ 10,315 : $ 10,281
========== : ==========
Supplemental disclosure of :
cash flow information: :
Cash paid for interest and :
certain debt fees $ 2,618 : $ 3,403
Cash paid for income taxes $ 435 : $ -
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<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 May 1, 1999 and for the
interim period then ended, those statements are not comparable in certain
material respects to the condensed consolidated financial statements as of
May 2, 1998 and for the interim period 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 (first quarter) ended May 1, 1999 and May 2, 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
loss per share were the same for the first quarter ended May 1, 1999, because
the inclusion of common stock equivalents (warrants and stock options) would
have reduced the reported loss per share. The presented shares outstanding
presume full issuance of new Bradlees Common Stock in accordance with the
Company's plan of reorganization (the "Plan") confirmed by the Bankruptcy Court
on January 27, 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 the
first quarter 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
5
<PAGE>
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
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; certain notes totaling $6.2 million; other distributions totaling $1.4
million; 10.2 million 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 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, NY
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 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 million for the first quarter of 1998.
3. RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents at May 2, 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.
6
<PAGE>
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 expires on December 23, 2001.
Trade and standby letters of credit outstanding under the Revolver were $9.5
and $20.0 million, respectively, as of May 1, 1999. The DIP Facility had
replaced a $200 million Debtor-in-Possession Revolving Credit and Guaranty
Agreement with The Chase Manhattan Bank, as agent. Trade and standby letters of
credit outstanding under the DIP facilities were $9.8 and $19.8 million,
respectively, as of May 2, 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 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
7
<PAGE>
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; (iii) maximum annual capital expenditures; and
(iv) minimum operating cash flow to interest expense (for the fiscal quarters
ending on or about January 31, 2001, and thereafter). The Company is in
compliance with the Revolver covenants.
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 May 1, 1999 was $28,995,000
(which reflects 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.
The outstanding Notes are expected to be paid down, along with any accrued
and unpaid interest on the prepaid Notes, with the estimated net proceeds of
$17.2 million to be received upon the planned sale and leaseback of the
leasehold interest in the Company's Yonkers, NY store (Note 10). The Company 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 (see also Note 10).
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 lease
disposition, (ii) 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. (Note 9).
The lien on the Additional 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.
8
<PAGE>
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 incurred $2.1 million of expenses, primarily for professional
fees, during the first quarter of 1998, directly associated with the Chapter 11
reorganization proceedings.
As of May 1, 1999, the Company had remaining reserves totaling approximately
$5.8 million for costs associated with the prior closing and planned closing of
stores and other restructuring activities. A portion of these reserves ($1.1
million) was established at the end of 1998 for the planned closing of the
Yonkers, NY store which is now expected to remain in operation (Note 10). As a
result, that portion of the reserves is expected to reduce the carrying value of
the property prior to the calculation of any deferred gain resulting from the
sale/leaseback. Approximately $0.8 million of restructuring costs were paid in
the first quarter 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 May 1, 1999 represented the estimated net realizable
value (assigned under fresh-start reporting) of the Company's Yonkers, NY store
lease. As discussed in Note 10, the Company received Bankruptcy Court approval
to enter into a sale/leaseback agreement for the Yonkers store lease subsequent
to the end of the first quarter. Assets held for sale as of May 2, 1998,
consisted of two properties, one of which was sold in the second quarter of 1998
for approximately $4.5 million and the net proceeds of the sale were utilized to
pay down the related pre-petition borrowings. The other property held for sale
was later transferred to the pre-petition financing group.
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.
9
<PAGE>
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, a $1.4
million amortization credit was recorded in the first quarter of 1998 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 was
recorded in the first quarter of 1999.
Pursuant to the Plan, 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 one 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 are exercisable for a period of five years from the
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). On April 28, 1999, additional options were granted to other
members of management to purchase 127,500 shares of new Bradlees Common Stock at
a price equal to the market price of the Common Stock on that date.
9. SUMMARIZED FINANCIAL INFORMATION FOR
BRADLEES STORES, INC. AND NEW HORIZONS OF YONKERS, INC.
Under the Plan, Bradlees, Inc. issued the securities 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)
May 1, 1999 May 2, 1998
----------- -----------
<S> <C> <C>
Current Assets $293,280 | $311,588
Due from New Horizons of Yonkers, Inc. 14,000 | -
Noncurrent Assets 194,172 | 291,295
Current Liabilities 319,301 | 282,587
Payable to Bradlees, Inc. 54,930 | 189,943
Noncurrent Liabilities 136,514 | 76,575
Liabilities Subject to Settlement Under |
the Reorganization Case $ - | $340,400
<CAPTION>
(000's)
-------------------------------
13 Weeks ended 13 Weeks ended
May 1, 1999 May 2, 1998
--------------- --------------
<S> <C> <C>
Net Sales $315,275 | $283,871
Gross Margin 88,162 | 79,670
Loss from Continuing Operations (23,293) | (24,603)
Net Loss $(23,293) | $(24,603)
</TABLE>
10
<PAGE>
New Horizons of Yonkers, Inc. ("New Horizons"), 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' financial activity was limited
to rent expense under the lease and rental income from the sublease during the
periods presented. 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. 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)
---------------------------
May 1, 1999 May 2, 1998
------------- ------------
<S> <C> <C>
Asset Held for Sale $14,000 | $ -
Due to Bradlees Stores, Inc. 13,999 | 1
Stockholders' Equity $ 1 | $ 1
<CAPTION>
(000's)
---------------------------------
13 Weeks ended 13 Weeks ended
May 1, 1999 May 2, 1998
-------------- --------------
<S> <C>
Rental Income $147 | $147
Rent Expense $147 | $147
</TABLE>
10. SUBSEQUENT EVENTS
On May 20, 1999, the Bankruptcy Court approved a binding letter of intent
between New Horizons and AFC Realty Capital, Inc. ("AFC") for a sale and
leaseback of the Yonkers, NY store lease. Under this agreement, expected to be
consummated by the end of July, 1999 following completion of AFC's financing
arrangements, New Horizons will sell its lease interest in that store for $17.5
million and lease back the store in exchange for annual incremental payments of
$2.6 million over the remainder of the lease term, including option periods,
which totals 35 years. The store will continue in business as a Bradlees store
and the expected net proceeds of $17.2 million after certain estimated fees and
expenses will be used to pay down the Notes (Note 4).
Also on May 20, 1999, the Company entered into an agreement with the holders
of $20.7 million, or approximately 71%, of the $29.0 million of outstanding
Notes (the "Discount Option Noteholders"). Under the agreement, which is subject
to definitive documentation, the Company can repurchase the outstanding Notes
expected to be held by the Discount Option Noteholders after the paydown from
the
11
<PAGE>
Yonkers sale/leaseback proceeds (the "Discount Option Notes"). The purchase
price is equal to 86% of the outstanding principal amount, plus accrued
interest, exercisable for a one-month time period from December 1, 1999 through
December 31, 1999 (the "Discount Option"). The Company can repurchase the
Discount Option Notes each month thereafter, but the discount will decrease by
1% per month such that the discount will be fully eliminated by January 31,
2001. In consideration of the Discount Option, the Company has 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 Additional Collateral (Note 4),and 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, if any, of the Discount Option Notes, plus accrued
interest. In accordance with applicable SEC rules, the Company intends to offer
to enter into similar agreements with all of the other Noteholders and complete
the offer by the end of July, 1999.
Both the sale/leaseback transaction and the transaction with the Discount
Option Noteholders described above require the consent of the lenders under the
Revolver (Note 4). Based on discussions to date with such lenders, the Company
believes it will receive such consent.
On May 26, 1999, after appropriate landlord review and approval, the
Bankruptcy Court in Caldor Corporation's Chapter 11 case approved the Company's
purchase of two former Caldor store leases, one in Philadelphia, PA and one in
Hamilton, NJ, for a total cost of $1.25 million. The Company expects to open the
two stores in early October.
12
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
Results of Operations
- -----------------------
Results of operations expressed in millions and as a percentage of net sales
were as follows for the 13 weeks ended May 1, 1999 ("First Quarter 1999") and
May 2, 1998 ("First Quarter 1998"):
<TABLE>
<CAPTION>
13 Weeks Ended
---------------------------------
May 1, 1999 May 2, 1998
-------------- ---------------
Registrant Predecessor
-------------- ---------------
<S> <C> <C>
(Dollars in millions except
per share amounts)
Total sales $ 324.8 : $ 293.3
Leased department sales 9.5 : 9.4
------ : ------
Net sales 315.3 100.0%: 283.9 100.0 %
Cost of goods sold 227.1 72.0 : 204.2 71.9
------ ----- : ------ ------
Gross margin 88.2 28.0 : 79.7 28.1
Leased department and other :
operating income 2.7 0.9 : 2.9 1.0
----- ----- : ------ ------
90.9 28.9 : 82.6 29.1
Selling, store operating, :
administrative and :
distribution expenses 100.2 31.8 : 92.7 32.7
Depreciation and :
amortization expense 7.3 2.3 : 8.6 3.0
Loss on disposition of property - - : 0.3 0.1
Interest and debt expense 6.9 2.2 : 3.6 1.3
Reorganization items - - : 2.1 0.7
----- -----: ----- -----
Net loss ($23.5) (7.4): ($24.7) (8.7)%
====== ======: ======= =====
:
Net loss per share $ (2.30) : $ (2.18)
======= : =======
Total sales increase
(decrease):
All stores 10.7 % 6.0 %
Comparable stores 12.6 10.0 %
Number of stores in operation
at end of period 102 103
</TABLE>
The following discussions, as well as other portions of this document,
include certain statements which are or may be construed as forward looking
about the Company's business, sales and expenses, and operating and capital
requirements. Any such statements are subject to risks that could cause the
actual results or requirements to vary materially. For example, the Company's
statements regarding expected 1999 levels of borrowings, amounts available to
borrow and capital expenditures are dependent on the Company's future operating
performance and ability to meet its financial obligations, which is further
dependent upon, among other things, continued acceptance of the Company's
merchandising and marketing initiatives, competitive conditions, changes in
consumer spending and consumer spending habits, continued vendor support,
weather and economic conditions, availability and cost of sufficient labor, and
changes in import duties, tariffs and quotas.
Since fresh-start reporting (Note 2) has been reflected in the accompanying
condensed financial statements as of May 1, 1999 and for First Quarter 1999,
those statements are not comparable in certain material respects to the
condensed consolidated financial statements as of May 2, 1998 and for First
Quarter 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 following discussion and analysis of financial
condition and results of operations for First Quarter 1999.
13
<PAGE>
FIRST QUARTER 1999 COMPARED
TO FIRST QUARTER 1998
Total sales for First Quarter 1999 increased $31.5 million or 10.7% from
First Quarter 1998 due to an increase of 12.6% in comparable store sales
(including leased shoe department sales), partially offset by the impact from
closing six stores in February, 1998 and one store in March, 1999. Management
believes that the increase in comparable store sales was due primarily to
continued favorable customer response to the Company's merchandising and
marketing initiatives and the first-quarter liquidation of one of the Company's
major competitors (Caldor Corp.). Over the last two years, the Company has
lowered opening price points, developed more item-intensive and price-point
oriented circular ad offerings, reintroduced 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).
There were strong sales of both hardlines and softlines in First Quarter 1999,
with hardlines experiencing the larger increase. Comparable store sales also
increased 12.6% during the fiscal month of May, 1999.
Gross margin increased $8.5 million due to the higher comparable store sales,
partially offset by the impact from the closing of the seven stores since the
beginning of 1998. The gross margin rate of 28.0% remained virtually the same as
in the prior year period (28.1%). Leased department and other operating income
had a slight decrease of $0.2 million or 0.1% as a percentage of net sales in
First Quarter 1999 compared to First Quarter 1998.
Selling, store operating, administrative and distribution ("SG&A")
expenses increased $7.5 million but dropped 0.9% as a percentage of net sales
(due to the improved sales performance) in First Quarter 1999 from First Quarter
1998. The higher SG&A expenses were primarily due to certain incremental
expenses, such as store payroll and other store expenses, logistics expenses and
advertising costs, incurred to handle the higher sales volume and attract former
Caldor customers and a $1.4 million decrease in benefits expense in First
Quarter 1998 that resulted from a reduction in retiree medical benefits (Note
8). These factors were partially offset by the beneficial impact on SG&A
expenses from the store closings.
Depreciation and amortization expense declined $1.3 million or 0.7% as a
percentage of net sales in First Quarter 1999 from First Quarter 1998 due
primarily to the impact of fresh-start reporting.
The Company recognized a $0.3 million loss in First Quarter 1998 associated
with the sale of undeveloped property in Westbury, NY that had been held for
sale. The net proceeds from this sale of $7.6 million were placed into
restricted cash and cash equivalents at that time.
14
<PAGE>
Interest and debt expense increased $3.3 million or 0.9% as a percentage of
net sales in First Quarter 1999 from First Quarter 1998. This increase was due
primarily 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 and accrued interest of $0.8 million on the
new notes issued under the plan of reorganization. Interest costs in First
Quarter 1999 were slightly impacted by higher seasonal borrowings compared to
the prior-year period (see Liquidity and Capital Resources).
The charges in reorganization items of $2.1 million in First Quarter 1998
were directly associated with the Chapter 11 proceedings and are discussed in
Note 6.
The Company did not record an income tax provision in First 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 First Quarter 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had outstanding borrowings of $132.4 million at May 1, 1999,
exclusive of the issuance of letters of credit, under the Company's $270 million
Revolver (Note 4) compared to outstanding borrowings of $116.1 million at May 2,
1998, exclusive of the issuance of letters of credit, under the DIP Facility
(Note 4). The increase in borrowings since the end of First Quarter 1998 related
primarily to reorganization expenses paid since that period. Peak and average
revolver borrowings were $136.1 and $121.8 million, respectively, in First
Quarter 1999 compared to $122.5 and $99.5 million, respectively, in First
Quarter 1998, however the associated weighted average interest rate in First
Quarter 1999 (7.31%) was down from the prior-year period (7.99%).
The Company currently expects its borrowings, exclusive of the issuance of
letters of credit, for the full year of 1999 to peak at approximately $180
million in October and/or November, 1999 and average approximately $140 million.
The amount available to borrow in 1999 is currently expected to peak at
approximately $270 million in October and/or November, 1999 and average
approximately $230 million.
Other than payments made to certain pre-petition creditors approved by the
Bankruptcy Court (Note 2), payments on indebtedness, exclusive of certain
capital lease obligations, incurred prior to the Filing were not made until
after consummation of the Company's plan of reorganization. Virtually all pre-
petition indebtedness of Bradlees was subject to settlement under the
reorganization case.
In First Quarter 1999, cash used by operations before reorganization items
was $9.9 million, compared to $24.8 million of cash used by operations before
reorganization items in First Quarter 1998. This improvement in first-quarter
cash usage was due primarily to the improvement in operating results and
improved vendor terms.
15
<PAGE>
Net cash used by reorganization items in First Quarter 1999 of $3.7 million
was comprised of professional fee payments of $2.9 million and store closing and
severance costs of $0.8 million.
Inventories at May 1, 1999 increased only $0.6 million from May 2, 1998,
despite the higher sales volume, and increased $29.2 million from January 30,
1999 due primarily to a normal seasonal build-up.
Accounts payable at May 1, 1999, increased $15.6 million from May 2, 1998 due
to improved vendor terms and increased $37.4 million from January 30, 1999 due
to the associated normal seasonal build-up of inventories and improved vendor
terms.
Accrued expenses at May 1, 1999 were $8.0 million lower than at January 30,
1999 due to payments made against reserves established prior to 1999 for the
1998 performance bonuses, Chapter 11 professional fees, and employee severance
and termination benefits and store closing costs. Accrued expenses were $3.4
million higher than at May 2, 1998 due primarily to the reserves established at
the end of 1998 for anticipated store closing costs.
The Company incurred capital expenditures of $2.9 million in First Quarter
1999 (compared to $1.6 million in First Quarter 1998), primarily for a warehouse
management system that will begin being implemented in 1999 and various store
improvements. For all of 1999, the Company expects total capital expenditures to
be approximately $20 million, primarily for the warehouse management system and
other management information systems, two new stores (Note 10) and various store
improvements. The Company currently expects to finance these expenditures
through internally-generated funds.
The Company believes that the availability under its Revolver, together with
its available cash and expected cash flows from 1999 operations and beyond, will
enable it to fund its expected needs for working capital, capital expenditures
and debt service requirements. The Company expects to utilize internally
generated funds or funds available under its Revolver if it decides to exercise
the option to prepay the Notes (Note 10). The Company's ability to meet its
financial obligations, make planned capital expenditures and implement its
strategic initiatives will depend on the Company's future operating performance,
which will be subject to financial, competitive, economic and other factors
affecting the industry 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.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 project is proceeding as planned and the cost of remediation is
currently estimated to total
16
<PAGE>
approximately $4 million, $3.3 million of which has been incurred to-date
including $0.9 million in the first quarter of 1999 that was included in
SG&A expenses. The Company expects that the Year 2000 project will be
substantially completed by the end of the second quarter of 1999.
In 1998, to address compliance of its information technology systems, the
Company contracted with a major outside consulting firm to provide the resources
required to identify Year 2000 issues and remediate the Company's 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. The Company has also addressed embedded
systems and computer-controlled devices in its stores, distribution centers and
central office and is taking the necessary steps to ensure Year 2000 compliance.
As of April, 1999, the Year 2000 project was approximately 90% complete,
excluding the third-party compliance evaluation and contingency plans discussed
below.
The Company believes the critical systems it operates will be Year 2000
compliant by the end of the second quarter of 1999, and believes it is not
likely to encounter significant 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 the potential failure of the Company to discover all of its own
susceptible internal systems. The risk to the Company resulting from the failure
of third-party or internal systems is similar to other retailers and, for the
most part, to other businesses. The Company is taking steps to minimize this
risk by surveying its suppliers and business partners to assess their Year 2000
readiness, which will be determined by the end of June 1999.
A reasonable worst case scenario could involve the failure of the Company's
systems or its supplier and business partner systems which would cause a
material disruption to the Company's 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 the Company's business, results of operations, liquidity and financial
position. However, at this time the Company is unable to determine completely
the financial consequences of such potential Year 2000 failures.
While the Company expects its efforts will provide reasonable assurance that
material disruptions will not occur, the potential for disruptions cannot be
fully identified. The Company is therefore developing contingency plans based on
the successful completion of the Year 2000 project, results of testing of
internal systems, embedded systems and other computer-controlled devices, and
assessment of third-party compliance. The contingency plans will provide for
alternative courses of action to mitigate material individual system or process
failures due to Year 2000 issues, and are expected to be in place by the end of
August 1999. At this time, the Company cannot estimate the additional cost, if
any, that might be incurred from the implementation of such contingency plans.
17
<PAGE>
The costs of the Year 2000 project and the dates on which the Company plans
to complete Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events including the
continued availability of certain resources, third-party modification plans and
other factors. However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those plans.
18
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
PART II OTHER INFORMATION
Item 6. - Exhibits
and Reports on Form 8-K
(a) Index to Exhibits
Exhibit No. Exhibit Page No.
- ----------- ------- --------
10 Amendment to Amended and Restated 23
Employment Agreement dated as of
May 3, 1999, between Bradlees, Inc.,
Bradlees Stores, Inc. and Peter Thorner.
15 Letter re: unaudited interim financial 26
information.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the quarterly period ended May
1, 1999:
Date of Report Date of Filing Item Number Description
- -------------- -------------- ----------- -----------
April 1, 1999 April 1, 1999 5 Disclosure of
fourth quarter 1998
results compared to
plan and 1999
summary financial
plan.
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRADLEES, INC.
Date: June 10, 1999 By /s/ PETER THORNER
----------------------------------
Peter Thorner
Chairman and Chief Executive
Officer
Date: June 10, 1999 By /s/ CORNELIUS F. MOSES III
----------------------------------
Cornelius F. Moses III
Senior Vice President, Chief
Financial Officer
<PAGE>
As filed with the Securities and Exchange Commission on June 11, 1999
Registration Statement No. 333-66953
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
POST-EFFECTIVE
AMENDMENT NO. 3
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.-- Bradlees Stores, Inc.--
Massachusetts 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.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
PROSPECTUS
Subject to Completion
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 June 4, 1999, the last reported sale price
of our Common Stock was $10.17 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 June 11, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<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............ 9
Risk to Continuing Operations if Covenants Not Met...................... 10
Limitations on Future Growth............................................ 10
Liquidity............................................................... 10
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
Change of Control not Restricted........................................ 15
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
1998 Compared to 1997.................................................... 30
1997 Compared to 1996.................................................... 31
Liquidity and Capital Resources.......................................... 32
Year 2000 Readiness Disclosure........................................... 33
Quantitative and Qualitative Disclosure About Market Risk................ 34
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
BUSINESS.................................................................... 35
Company Overview........................................................... 35
Employees and Collective Bargaining Arrangements........................... 36
Competition................................................................ 36
Patents, Trademarks and Licenses........................................... 37
Seasonality................................................................ 37
Credit Facility............................................................ 37
Further Information........................................................ 38
Facilities................................................................. 38
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
Collateral................................................................. 60
Conversion................................................................. 61
Governing Law.............................................................. 61
</TABLE>
(ii)
<PAGE>
<TABLE>
<S> <C>
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............ 62
Massachusetts Anti-takeover Laws........................................... 64
Certain Provisions of the Articles and By-laws of Bradless Stores, Inc. ... 64
Transfer Agent and Registrar............................................... 65
Listing.................................................................... 65
LEGAL MATTERS............................................................... 65
EXPERTS..................................................................... 65
ADDITIONAL INFORMATION...................................................... 65
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;
. competition;
. unfavorable changes in interest rates;
. 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).. 9,694,224 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>
- --------
(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 9,694,224 shares of common stock outstanding as of June 4, 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 10,225,711 shares will be issued under the Plan of
Reorganization. The 10,225,711 shares exclude 1,000,000 shares of Common
Stock reserved for issuance upon exercise of outstanding warrants as of
February 2, 1999 (the "Warrants") with an exercise price of $7.00 per share
and 877,500 shares of Common Stock issuable upon exercise of employee
options which have been granted. 750,000 options were granted to senior
management on April 15, 1999 at an exercise price of $4.22 per share and an
additional 127,500 options were granted to other members of management on
April 28, 1999 at an exercise price of $7.13 per share. 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. 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 pre-payment.
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.
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
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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 (i) a
first priority lien on our leasehold interest in
our Yonkers, New York store, which we are seeking
to sell and leaseback (and the net proceeds we
receive upon its disposition), (ii) 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), and (iii) a first priority
pledge of all of the outstanding capital stock of
New Horizons of Yonkers, Inc. We have agreed with
the holders of the 9% Convertible Notes that if
we have not disposed of our leasehold interest in
our Yonkers, New York store by July 31, 1999, the
Trustee may market and sell such leasehold
interest and the Trustee may take title to all of
the outstanding capital stock of New Horizons of
Yonkers, Inc. In either such event, it is
expected that the Trustee or its representative
will continue to actively seek to sell such
leasehold interest. The net proceeds realized
upon a sale (by us, the Trustee or its
representative) of the Yonkers, New York
leasehold interest will be paid to the holders of
the 9% Convertible Notes as a prepayment. The
disposition of our leasehold interest in the
Yonkers, New York store is subject to Bankruptcy
Court approval. On May 20, 1999, the Bankruptcy
Court approved a binding letter of intent between
New Horizons and AFC Realty Capital, Inc. ("AFC")
for a sale and leaseback of the Yonkers, New York
store lease. Under this agreement, expected to be
consummated by the end of July, 1999 following
completion of AFC's financing arrangements,
New Horizons will sell its lease interest in that
store for $17.5 million and leaseback the store
in exchange for annual incremental payments of
$2.6 million over the remainder of the lease
term, including option periods, which totals 35
years. The store will continue in business as a
Bradlees store and the expected net proceeds of
$17.2 million after certain estimated fees and
expenses will be used to pay down the Notes. 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.
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<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 May 20, 1999, we entered into an agreement
with the holders of $20.7 million, or
approximately 71%, of the $29.0 million
outstanding Notes (the "Discount Option
Noteholders") . Under the agreement, which is
subject to definitive documentation, we can
repurchase the outstanding Notes expected to be
held by the Discount Option Noteholders after the
paydown from the Yonkers sale/leaseback proceeds
(the "Discount Option Notes"). The purchase price
is equal to 86% of the outstanding principal
amount, plus accrued interest, exercisable for a
one-month time period from December 1, 1999
through December 31, 1999 (the "Discount
Option"). We can repurchase the Discount Option
Notes each month thereafter, but the discount
will decrease by 1% per month such that the
discount will be fully eliminated by January 31,
2001. In consideration of the Discount Option, we
have agreed to pay the Discount Option
Noteholders a premium on the closing date of the
grant of the Discount 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 Additional Collateral (as defined below,
and 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 intend
to offer to enter into similar agreements with
all of the other Noteholders and complete the
offer by the end of July, 1999. Both the
sale/leaseback transaction and this transaction
with the Discount Option Noteholders require the
consent of the lenders under the BankBoston
Facility. Based on discussions to date with such
lenders, we believe we will receive such consent.
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<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
thirteen weeks ended May 1, 1999 and May 2, 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 thirteen weeks ended May 1, 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 May 1, 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 13 Weeks Ended
---------------------- -----------------------
Pro
Historical Forma(a) 1997 1996 May 1, 1999 May 2, 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 $315,275 $283,871
Gross margin............ 393,103 389,624 396,357 434,067 88,162 79,670
Operating expenses(b)... 397,297 387,854 407,003 532,496 104,761 98,328
Operating income
(loss)................. (4,194) 5,929 (10,646) (98,429) (16,599) (18,658)
Fresh-start revaluation
charge................. 108,428 - - - - -
Income (loss) before
income taxes and
extraordinary items.... (133,753) (26,494) (22,557) (218,759) (23,481) (24,653)
Income taxes............ - - - - - -
Extraordinary gain on
debt discharge......... 419,703 - - - - -
Net income (loss)....... $ 285,950 $ (22,094) $ (22,557) $ (218,759) $(23,481) $(24,653)
Loss per share:
Basic and diluted...... * $ (2.16) $ (1.98) $ (19.17) $ (2.30) $ (2.18)
Shares used for
computation:
Basic and diluted...... * 10,226 11,365 11,412 10,226 11,311
Ratio of earnings to
fixed charges(c)....... - - - - - -
</TABLE>
<TABLE>
<CAPTION>
January 30, May 1,
1999 1999
----------- --------
Registrant
-----------------------
<S> <C> <C>
Balance Sheet Data:
Working capital.................................... $ (7,818)(d) $(26,021)(d)
Total assets....................................... 463,751 487,452
Long-term debt, less current maturities............ 59,464 58,415
Total stockholders equity(e)....................... $ 55,000 $ 31,637
</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.
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<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) Includes accrued bankruptcy expenses of $8.4 million at January 30, 1999
and $5.5 million at May 1, 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, has closed all of
its stores and has begun to liquidate its assets. Kohl's, a department store
chain, Kmart, Wal-Mart and Ames have purchased some of the Caldor stores. We
have also purchased two of the 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 those purchased stores are
reopened. Certain of the purchased Caldor stores are not expected to open until
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.
8
<PAGE>
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.
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 May
1, 1999 was approximately 0.86:1. 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 ($23.5 million in
the first quarter 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."
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.
9
<PAGE>
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 $20 million annually, 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 new store
sites and (iii) the restrictions on capital expenditures set forth in the
BankBoston Facility, which prohibits annual capital expenditures in excess of
$20 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. 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 $20 million, which are within the restrictions 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 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 Caldor store leases, one in the New
Jersey market and one in the Philadelphia market. These two new stores are
expected to open in the beginning of October, 1999.
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
10
<PAGE>
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 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.
11
<PAGE>
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 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
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, 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
recent significant trading, 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.
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.
12
<PAGE>
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. We issued to senior
management options to purchase 750,000 shares of our Common Stock on April 15,
1999 at an exercise price of $4.22 per share. An additional 127,500 options
were granted to other members of management on April 28, 1999 at an exercise
price of $7.13. Further, we can also issue additional securities (including
122,500 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. will
also guarantee the 9% Convertible Notes. New Horizons of Yonkers, Inc. holds
the leasehold interest in our Yonkers, New York store. New Horizons of Yonkers,
Inc. is still in Chapter 11, however, it is expected to emerge from bankruptcy
upon consummation of the sale/leaseback transaction. 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 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."
13
<PAGE>
Potential Year 2000 Liability
The Year 2000 project is proceeding as planned and the cost of remediation
is currently estimated to total approximately $4 million, $3.3 million of which
has been incurred to-date including $0.9 million in the first quarter of 1999
that was included in SG&A expenses. We expect that our Year 2000 project will
be substantially completed by the end of the second quarter of 1999.
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 have also addressed embedded systems and
computer-controlled devices in our stores, distribution centers and central
office and are taking the necessary steps to ensure Year 2000 compliance. As of
April, 1999, our Year 2000 project was approximately 90% complete, excluding
third-party compliance evaluation and contingency plans discussed below.
We believe the critical systems we operate will be Year 2000 compliant by
the end of the second quarter of 1999, and we believe we are not likely to
encounter significant 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. Our
risk resulting from the failure of third-party or internal systems is similar
to other retailers and, for the most part, to other businesses. We are taking
steps to minimize this risk by surveying our suppliers and business partners to
assess their Year 2000 readiness, which will be determined by the end of June
1999.
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 based on the
successful completion of the Year 2000 project, results of testing of internal
systems, embedded systems and other computer-controlled devices, and assessment
of third-party compliance. The contingency plans will provide for alternative
courses of action to mitigate material individual system or process failures
due to Year 2000 issues, and are expected to be in place by the end of August
1999. 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 management's best estimates,
which were derived utilizing numerous assumptions of future events including
the continued availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
14
<PAGE>
Change of Control not Restricted
Our Plan of Reorganization prohibits us from having anti-takeover measures
in our Articles of Organization and By-Laws. Numerous studies have shown that
the presence of such anti-takeover provisions in a corporation's organizational
documents has the result of increasing shareholder value in any attempted take-
over. If we do not subsequently amend these documents to include such
provisions, it is possible that our Board of Directors will be limited in its
ability to respond to any potential takeover, thus reducing the ability of the
Board to obtain maximum value for shareholders in a takeover.
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 it is likely that one or more of our creditor constituencies (which
some of our directors represent) will dispose of their ownership interests. The
changing composition of our Board might result in changing corporate policies.
15
<PAGE>
THE COMPANY
General
Bradlees, Inc. ("Bradlees") and its subsidiary companies operate 102
discount department stores as of April, 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. 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.
16
<PAGE>
[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.
17
<PAGE>
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 is
anticipated to be further paid down through proceeds from the
sale/leaseback of our leasehold interest in our Yonkers, New York
store.
18
<PAGE>
. 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 creditors are estimated to be allowed in
the aggregate amount of approximately $240 million. The holders of
these claims are expected to receive:
. $30.6 million in cash;
. 9% Convertible Notes in an original aggregate principal amount
equal to $40.0 million;
. 10,225,711 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. 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 certain members of our 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 June 4, 1999, there were approximately 1,548 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
</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 May 1,
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>
May 1, 1999
-------------
(in thousands)
<S> <C>
Long-term debt, including
current maturities:
BankBoston Facility..... $132,427
Notes payable........... 34,891
Capital lease
obligations............ 26,056
--------
Total long-term debt,
including current
maturities............ 193,374
Stockholders' equity(1):
Preferred stock ........ --
Common stock............ 102
Additional paid in
capital................ 55,016
Accumulated deficit..... (23,481)
--------
Total stockholders'
equity.................. 31,637(2)
--------
Total capitalization..... $225,011
========
</TABLE>
- --------
(1) Excludes 1,000,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants and 877,500 shares of Common Stock reserved for
issuance upon exercise of options granted on April 15, 1999, and April 28,
1999. We can also issue an additional 122,500 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 thirteen week
periods ended May 1, 1999 and May 1, 1998 and as of May 1, 1999 and May 2, 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 May 1, 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 Registrant's selected financial data and the
Predecessor's selected financial data.
<TABLE>
<CAPTION>
13 Weeks Ended Fiscal Year
-------------------- ----------------------------------------------------------
May 1, May 2,
1999 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............... $315,275 $ 283,871 $1,337,197 $1,344,444 $1,561,718 $1,780,768 $1,916,555
Gross margin............ 88,162 79,670 393,103 396,357 434,067 491,691 591,160
Operating expenses(a)... 104,761 98,328 397,297 407,003 532,496 612,102 549,154
Operating income
(loss)................. (16,599) (18,658) (4,194) (10,646) (98,429) (120,411) 42,006
Fresh-start revaluation
charge................. - - 108,428 - - - -
Income (loss) before
income taxes and
extraordinary items.... (23,481) (24,653) (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..... (23,481) (24,653) (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)....... $(23,481) $ (24,653) $ 285,950 $ (22,557) $ (218,759) $ (207,413) $ 5,321
Income (loss) per share:
Basic and diluted...... $ (2.30) $ (2.18) * $ (1.98) $ (19.17) $ (18.17) $ .47
Shares used for
computation............ 10,226 11,311 * 11,365 11,412 11,416 11,353
Ratio of earnings to
fixed charges(d)....... - - - - - - 1.31
Balance Sheet Data: Registrant
----------
Working capital(e)...... $(26,021) $ 35,566 $ (7,818) $ 52,187 $ 68,649 $ 200,195 $ 32,874
Total assets............ 487,452 609,490 463,751 595,166 604,200 798,662 884,814
Long-term debt, less
current maturities(f).. 58,415 26,786 59,464 27,073 33,296 53,396 289,643
Total stockholders' eq-
uity (deficiency)...... $ 31,637 $(310,603) $ 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 accrued bankruptcy expenses of $5.5 million at May 1, 1999 and
$8.4 million for 1998 and excludes liabilities subject to settlement under
the reorganization case at May 2, 1998 and for 1995 through 1997.
(f) Excludes debt subject to settlement under the reorganization case at May 2,
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 expressed in millions and as percentage of net sales
were as follows for the 13 weeks ended May 1, 1999 ("First Quarter 1999") and
May 2, 1998 ("First Quarter 1998"):
<TABLE>
<CAPTION>
13 Weeks Ended
May 1, 1999 May 2, 1998
------------- -------------
Registrant Predecessor
------------- -------------
(Dollars in millions
except per share amounts)
<S> <C> <C> | <C> <C>
Total sales...................................$324.8 | $293.3
Leased department sales....................... 9.5 | 9.4
------ | ------
Net sales..................................... 315.3 100.0 % | 283.9 100.0 %
Cost of goods sold............................ 227.1 72.0 | 204.2 71.9
------ ----- | ------ -----
Gross margin.................................. 88.2 28.0 | 79.7 28.1
Leased department and other operating income.. 2.7 0.9 | 2.9 1.0
------ ----- | ------ -----
90.9 28.9 | 82.6 29.1
Selling, store operating, administrative and |
distribution expenses........................ 100.2 31.8 | 92.7 32.7
Depreciation and amortization expense......... 7.3 2.3 | 8.6 3.0
Loss on disposition of property............... - - | 0.3 0.1
Interest and debt expense..................... 6.9 2.2 | 3.6 1.3
Reorganization items.......................... - - | 2.1 0.7
------ ----- | ------ -----
Net loss......................................$(23.5) (7.4)% | $(24.7) (8.7)%
====== ===== | ====== =====
Net loss per share............................$(2.30) | $(2.18)
====== | ======
Total sales increase (decrease): |
All stores................................... 10.7% | 6.0%
Comparable stores............................ 12.6% | 10.0%
Number of stores in operation at end of |
period....................................... 102 | 103
</TABLE>
Since fresh-start reporting has been reflected in the accompanying condensed
financial statements as of May 1, 1999 and for First Quarter 1999, those
statements are not comparable in certain material respects to the condensed
consolidated financial statements as of May 2, 1998 and for First Quarter 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 First Quarter 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.
28
<PAGE>
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>
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.
First Quarter 1999 Compared to First Quarter 1998
Total sales for First Quarter 1999 increased $31.5 million or 10.7% from
First Quarter 1998 due to an increase of 12.6% in comparable store sales
(including leased shoe department sales), partially offset by the impact from
closing six stores in February, 1998 and one store in March, 1999. The increase
in comparable store sales was due primarily 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, reintroduced 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). There were strong sales of both hardlines and softlines in First
Quarter 1999, with hardlines experiencing the larger increase. Comparable store
sales also increased 12.6% during the fiscal month of May, 1999.
29
<PAGE>
Gross margin increased $8.5 million due to the higher comparable store
sales, partially offset by the impact from the closing of the seven stores
since the beginning of 1998. The gross margin rate of 28.0% remained virtually
the same as in the prior year period (28.1%). Leased department and other
operating income had a slight decrease of $0.2 million or 0.1% as a percentage
of net sales in First Quarter 1999 compared to First Quarter 1998.
Selling, store operating, administrative and distribution ("SG&A") expenses
increased $7.5 million but dropped 0.9% as a percentage of net sales (due to
the improved sales performance) in First Quarter 1999 from First Quarter 1998.
The higher SG&A expenses were primarily due to certain incremental expenses,
such as store payroll and other store expenses, logistics expenses and
advertising costs, incurred to handle the higher sales volume and attract
former Caldor customers and a $1.4 million decrease in benefits expense in
First Quarter 1998 that resulted from a reduction in retiree medical benefits
(Note 8 of the Condensed Consolidated Financial Statements). These factors were
partially offset by the beneficial impact on SG&A expenses from the store
closings.
Depreciation and amortization expense declined $1.3 million or 0.7% as a
percentage of net sales in First Quarter 1999 from First Quarter 1998 due
primarily to the impact of fresh-start reporting.
We recognized a $0.3 million loss in First Quarter 1998 associated with the
sale of undeveloped property in Westbury, NY that had been held for sale. The
net proceeds from this sale of $7.6 million were placed into restricted cash
and cash equivalents at that time.
Interest and debt expense increased $3.3 million or 0.9% as a percentage of
net sales in First Quarter 1999 from First Quarter 1998. This increase was due
primarily 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 and accrued interest of $0.8 million on
the new notes issued under the plan of reorganization. Interest costs in First
Quarter 1999 were slightly impacted by higher seasonal borrowings compared to
the prior-year period (See "Management's Discussion and Analysis--Liquidity and
Capital Resources").
The charges in reorganization items of $2.1 million in First Quarter 1998
were directly associated with the Chapter 11 proceedings and are discussed in
Note 6 of the Condensed Consolidated Financial Statements.
We did not record an income tax provision in First 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 First Quarter 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 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.
30
<PAGE>
Selling, store operating, administrative and distribution ("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.
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,
31
<PAGE>
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 $132.4 million at May 1, 1999, exclusive of
the issuance of letters of credit, under the BankBoston Facility (Note 4 of the
Condensed Consolidated Financial Statements) compared to outstanding borrowings
of $116.1 million at May 2, 1998, exclusive of the issuance of letters of
credit, under the DIP Facility (Note 4 of the Condensed Consolidated Financial
Statements). The increase in borrowings since the end of First Quarter 1998
related primarily to reorganization expenses paid since that period. Peak and
average revolver borrowings were $136.1 and $121.8 million, respectively, in
First Quarter 1999 compared to $122.5 and $99.5 million, respectively, in First
Quarter 1998, however the associated weighted average interest rate in First
Quarter 1999 (7.31%) was down from the prior-year period (7.99%).
We currently expect our borrowings, exclusive of the issuance of letters of
credit, for the full year of 1999 to peak at approximately $180 million in
October and/or November, 1999 and average approximately $140 million. The
amount available to borrow in 1999 is currently expected to peak at
approximately $270 million in October and/or November, 1999 and average
approximately $230 million.
Other than payments made to certain pre-petition creditors approved by the
Bankruptcy Court (Note 2), 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 pre-petition
indebtedness of Bradlees was subject to settlement under the reorganization
case.
In First Quarter 1999, cash used by operations before reorganization items
was $9.9 million, compared to $24.8 million of cash used by operations before
reorganization items in First Quarter 1998. This improvement in first-quarter
cash usage was due primarily to the improvement in operating results and
improved vendor terms.
Net cash used by reorganization items in First Quarter 1999 of $3.7 million
was comprised of professional fee payments of $2.9 million and store closing
and severance costs of $0.8 million.
32
<PAGE>
Inventories at May 1, 1999 increased only $0.6 million from May 2, 1998,
despite the higher sales volume, and increased $29.2 million from January 30,
1999 due primarily to a normal seasonal build-up.
Accounts payable at May 1, 1999, increased $15.6 million from May 2, 1998
due to improved vendor terms and increased $37.4 million from January 30, 1999
due to the associated normal seasonal build-up of inventories and improved
vendor terms.
Accrued expenses at May 1, 1999 were $8.0 million lower than at January 30,
1999 due to payments made against reserves established prior to 1999 for the
1998 performance bonuses, Chapter 11 professional fees, and employee severance
and termination benefits and store closing costs. Accrued expenses were $3.4
million higher than at May 2, 1998 due primarily to the reserves established at
the end of 1998 for anticipated store closing costs.
We incurred capital expenditures of $2.9 million in First Quarter 1999
(compared to $1.6 million in First Quarter 1998), primarily for a warehouse
management system that will begin being implemented in 1999 and various store
improvements. For all of 1999, we expect total capital expenditures to be
approximately $20 million, primarily for the warehouse management system and
other management information systems, two new stores (Note 10 of the Condensed
Consolidated Financial Statements) and various store improvements. We currently
expect to finance these expenditures through internally-generated funds.
We believe that the availability under the 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 or funds available under the BankBoston Facility if we decide
to exercise the option to prepay the Notes (Note 10 of the Condensed
Consolidated Financial Statements). 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 our
industry and operations, including factors beyond our control. Further
improvements in operating profitability and achievement of expected cash flows
from operations is critical to providing adequate liquidity and is 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 proceeding as planned and the cost of remediation
is currently estimated to total approximately $4 million, $3.3 million of which
has been incurred to-date including $0.9 million in the first quarter of 1999
that was included in SG&A expenses. We expect that the Year 2000 project will
be substantially completed by the end of the second quarter of 1999.
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 have also addressed embedded systems and
computer-controlled devices in our stores, distribution centers and central
office and are taking the necessary steps to ensure Year 2000 compliance. As of
April, 1999, the Year 2000 project was approximately 90% complete, excluding
third-party compliance evaluation and contingency plans discussed below.
We believe the critical systems we operate will be Year 2000 compliant by
the end of the second quarter of 1999, and we believe we are not likely to
encounter significant 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. Our
risk resulting from the failure of third-party or internal systems is similar
to other retailers and, for the most part, to other businesses. We are taking
steps to minimize this risk by surveying our suppliers and business partners to
assess their Year 2000 readiness, which will be determined by the end of June
1999.
33
<PAGE>
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 based on the
successful completion of the Year 2000 project, results of testing of internal
systems, embedded systems and other computer-controlled devices, and assessment
of third-party compliance. The contingency plans will provide for alternative
courses of action to mitigate material individual system or process failures
due to Year 2000 issues, and are expected to be in place by the end of August
1999. 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 management's best estimates,
which were derived utilizing numerous assumptions of future events including
the continued availability of certain resources, third-party modification plans
and other factors. However, there can be no guarantee that these estimates will
be achieved and actual results could differ materially from those plans.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to 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 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.
34
<PAGE>
BUSINESS
Company Overview
We operate 102 discount department stores as of June, 1999, in seven states
in the Northeast, primarily in the heavily populated corridor running from the
Boston to the Philadelphia metropolitan areas. 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.
35
<PAGE>
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 distributed each week. Although circulars are our major
promotional vehicle, we also use newspaper advertising, periodic television
broadcasts, Bradlees credit-card statement inserts and in-store promotions.
Point-of-purchase advertising, layaway, employee discounts and senior citizen
discounts are also used as marketing vehicles.
Operations. Several programs have been or are being implemented to improve
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, programs are currently being 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. In addition,
we began developing a warehouse management system in 1998 that will begin to be
implemented in 1999. We also installed a new mainframe computer and point-of-
sale controllers in 1997 and modified our point-of-sale equipment and software
to allow for improved detection of bad checks and additional promotional
capabilities.
Store Profitability. We closed six stores in February, 1998 and one store in
March, 1999. One additional store is currently anticipated to begin closing by
the end of fiscal 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. We are pursuing a few new store openings in
1999. See "Competition."
Employees and Collective Bargaining Arrangements
We employ approximately 12,000 people, of which approximately 70% are
covered by collective bargaining agreements. Agreements affecting approximately
25% of the labor force 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.
36
<PAGE>
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
locations to Kohl's, Wal-Mart, Kmart and Ames. At the time of the reopenings of
the purchased stores, our business in competing locations is expected to be at
least temporarily affected by the new competition. Certain of these purchased
locations are not expected to open until Spring of 2000.
We expect to pursue 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 Caldor store leases, one in the New
Jersey market and one in the Philadelphia market. These two new stores are
expected to open in the beginning of October, 1999.
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 for a period until December 23, 2001. We can use the BankBoston
Facility for working capital, general business needs and to pay off our DIP
Facility.
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
37
<PAGE>
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 $20 million annually, subject to
certain exceptions;
. 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
June, 1999:
<TABLE>
<S> <C>
Maine................................................................. 1
New Hampshire......................................................... 8
Massachusetts......................................................... 35
Connecticut........................................................... 17
New York.............................................................. 6
New Jersey............................................................ 29
Pennsylvania.......................................................... 6
---
Total................................................................. 102
===
</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 January 30, 1999, our stores, including the one store closed in March,
1999, occupied a total of approximately 7,820,151 square feet of selling area.
We lease all of our stores, two distribution centers and central office under
long-term leases.
38
<PAGE>
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 June 4, 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)........ 42 Director
Stephen J. Blauner(2).......... 46 Director
W. Edward Clingman, Jr.(3)(4).. 46 Director
Bruce Conforto................. 46 Senior Vice President, Chief Information Officer
Gregory K. Dieffenbach......... 49 Senior Vice President, Human Resources
Judith D. Dunning.............. 48 Senior Vice President, Planning and Allocation
John M. Friedman, Jr.(2)....... 54 Director
Mark E. James.................. 49 Senior Vice President, Marketing
Lawrence Lieberman(3).......... 50 Director
Robert G. Lynn................. 49 Director, President and Chief Operating Officer
Charles K. MacDonald(2)........ 40 Director
Cornelius F. Moses III(1)...... 40 Senior Vice President, Chief Financial Officer
David Phillion................. 44 Senior Vice President, Logistics
Ronald T. Raymond.............. 55 Senior Vice President, Asset Protection
William H. Roth(4)............. 47 Director
David L. Schmitt(1)............ 48 Senior Vice President, General Counsel, Secretary and Clerk
Sandra L. Smith................ 42 Senior Vice President, General Merchandise Manager,
Hardlines
Thomas N. Smith................ 42 Senior Vice President, Stores
James C. Sparks................ 52 Senior Vice President, General Merchandise Manager,
Softlines
Peter Thorner(1)(4)............ 55 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. He has
served as President and Chief Executive Officer of Best Products Co., Inc.
("Best Products") from January 1997 to 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 from May 1996 to December 1996. He served as Vice
President, General Counsel and Secretary from prior to 1994 to May 1996. Mr.
Clingman serves as a director of Best Products.
40
<PAGE>
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 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.
Mr. Phillion became Senior Vice President, Logistics of the Company in March
1999. Mr. Phillion served as Vice President, Merchandise and Promotional
Planning of the Company from February 1997 to March 1999. He was Director of
Merchandise Support of the Company from prior to 1994 to February 1997.
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.
41
<PAGE>
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 Amended and Restated Articles of
Organization of Bradlees, 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. 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 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
42
<PAGE>
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.
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. On April 15, 1999 we granted options
to purchase 750,000 shares of our Common Stock to our senior management. The
options were granted at an exercise price of $4.22 per share and will vest in
equal one-third increments beginning on the date of grant and each of the two
anniversaries following the date of grant. These options shall be exercisable
for a period of five years from the date of grant. At the time of grant, any
compensation expense related to options will to be recorded over the vesting
period. On April 28, 1999, the Compensation Committee granted 127,500
additional options to other members of management at an exercise price of $7.13
per share and will vest in equal one-third increments beginning on the first
anniversary of the date of grant. In addition, the Compensation Committee has
the right to grant options with respect to 122,500 additional shares at such
price and on such terms as the Compensation Committee shall determine.
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<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")
which, as of December 1, 1995, replaced the Excess Pension Plan which was
terminated. Under the Supplemental Plan an eligible employee, upon normal
retirement at age 65, may receive supplemental retirement benefits equal to 50%
of his Final Average Compensation, minus the sum of his Social Security
benefits and the annual benefit payable from the Retirement Plan. The benefits
from the Supplemental Plan are payable in the form of a single lump sum amount.
The following table shows the estimated annual retirement benefits which will
be payable to participating employees from the Retirement Plan and the
Supplemental Plan in the form of a straight life annuity upon normal retirement
at age 65 after selected periods of service. These benefits presented below do
not reflect the Social Security offset described above and do not take into
account any reduction for joint and survivor payments.
Pension Plan Table
Estimated Annual Retirement Benefits
<TABLE>
<CAPTION>
10 Years
Final Average of 15 or More
Compensation* Service Years of Service
- ------------- -------- ----------------
<S> <C> <C>
$ 200,000 $ 66,666 $100,000
$ 250,000 $ 83,333 $125,000
$ 300,000 $100,000 $150,000
$ 400,000 $133,333 $200,000
$ 500,000 $166,666 $250,000
$ 600,000 $200,000 $300,000
$ 700,000 $233,333 $350,000
$ 800,000 $266,666 $400,000
$ 900,000 $300,000 $450,000
$1,000,000 $333,333 $500,000
$1,100,000 $366,666 $550,000
$1,200,000 $400,000 $600,000
$1,300,000 $433,333 $650,000
$1,400,000 $466,666 $700,000
$1,500,000 $500,000 $750,000
$1,600,000 $533,333 $800,000
</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 and bonus. The calculation of retirement
benefits under both plans is generally based upon the participant's highest
annual compensation averaged over three years. As of December 31, 1998, the
years of credited service for the
47
<PAGE>
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.
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.
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 June 4, 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>
Gemina Partners, L.P.(4)............... 650,000 6.4%
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 20 people).. 253,500 2.5%
</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 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 June 4, 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. The
number of shares beneficially owned does not include any warrants that may
be owned by such person. We have agreed to issue warrants to purchase
1,000,000 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 10,225,711 shares of Common Stock
presumed issued and outstanding as of June 4, 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
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.
49
<PAGE>
(5) Includes options to purchase 33,336 shares of Common Stock which are
exercisable within 60 days of June 4, 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 June 4, 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 June 4, 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 June 4, 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 June 4, 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
June 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 $ 731,000
Elliott Associates, L.P.(4).................. 6,780 $ 1,567,000(6)
Westgate International, L.P.(4).............. 39,463 $ 3,285,000
MWV Separate Account Alpha(5)................ 0 $ (1,180,622)
Morgens Waterfall Income Partners(5)......... 0 $ 3,091,673
Restart Partners II, L.P.(5)................. 0 $ 4,642,873
Restart Partners III, L.P.(5)................ 0 $ 3,183,387
Restart Partners IV, L.P. (5)................ 0 $ 3,549,873
Restart Partners V, L.P.(5).................. 0 $ 1,287,796
MWV International, Ltd.(5)................... 0 $ 2,733,792
------- ------------
TOTAL...................................... 335,348(7) $26,298,000(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 June 4, 1999, we have 9,694,224 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
10,225,711 shares will be issued under the Plan of Reorganization. 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. In addition, we have an aggregate of 1,000,000 shares of Common Stock
reserved for issuance upon the exercise of outstanding Warrants and 1,000,000
shares of Common Stock reserved for issuance upon exercise of Options. 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.
As of February 2, 1999, a total of 1,000,000 shares of Common Stock were
reserved for issuance under the Stock Plan, of which 877,500 shares are the
subject of options granted in April, 1999 (750,000 granted to senior management
on April 15, 1999 and an additional 127,500 granted to other members of
management on April 28, 1999). In addition, 1,000,000 shares of Common Stock
were reserved for issuance under Warrants outstanding as of February 2, 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 $20 million,
which limit is subject to increase after twelve months provided we meet
certain earnings goals;
. 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.
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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. 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.
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).
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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 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. 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 May 20, 1999, we entered into an agreement with the holders of $20.7
million, or approximately 71%, of the $29.0 million outstanding Notes (the
"Discount Option Noteholders"). Under the agreement, which is subject to
definitive documentation, we can repurchase the outstanding Notes expected to
be held by the Discount Option Noteholders after the paydown from the Yonkers
sale/leaseback proceeds (the "Discount Option Notes"). The purchase price is
equal to 86% of the outstanding principal amount, plus accrued interest,
exercisable for a one-month time period from December 1, 1999 through December
31, 1999 (the "Discount Option"). We can repurchase the Discount Option Notes
each month thereafter, but the discount will decrease by 1% per month such that
the discount will be fully eliminated by January 31, 2001. In consideration of
the Discount Option, we have agreed to pay the Discount Option Noteholders a
premium on the closing date of the grant of the Discount 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
Additional Collateral (as defined below, and subject to substiution 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, if any, of the Discount Option Notes, plus
accrued interest. In accordance with applicable SEC rules, we intend to offer
to enter into similar agreements with all of the other Noteholders and complete
the offer by the end of July, 1999.
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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
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.
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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.
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
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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 (i) a first priority lien on our leasehold interest
in our Yonkers, New York store which we are seeking to sell (and the net
proceeds we receive upon its disposition), (ii) 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 "Additional Collateral"), as well as the
net proceeds we receive upon their disposition(s) (none of which we are
currently seeking to sell), and (iii) a first priority pledge of all of the
outstanding capital stock of New Horizons of Yonkers, Inc. We have agreed with
the holders of the Notes that if we have not disposed of our leasehold interest
in our Yonkers, New York store by July 31, 1999, the Trustee may market and
sell such leasehold interest and the Trustee may take title to all of the
outstanding capital stock of New Horizons of Yonkers, Inc. In either such
event, it is expected that the Trustee or its representative will continue to
actively seek to sell such leasehold interest. The net proceeds realized upon a
sale (by us, the Trustee or its representative) of the Yonkers, New York
leasehold interest will be paid to the holders of the Notes as a pre-payment.
The disposition of our leasehold interest in the Yonkers, New York store is
subject to Bankruptcy Court approval. 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 outstanding
principal amount of Notes.
We have been seeking to sell our leasehold interest in our Yonkers, New York
store. We had filed motions with the Bankruptcy Court seeking authorization to
auction such interest. Those motions require a minimum bid of $15 million. In
addition, we have agreed with the holders of the Notes that if we receive a
bona fide cash offer of $15 million or higher (excluding customary prorations
and transaction costs), we will accept such bid.
On May 20, 1999, the Bankruptcy Court approved a binding letter of intent
between New Horizons and AFC Realty Capital, Inc. ("AFC") for a sale and
leaseback of the Yonkers, New York store lease. Under this agreement, expected
to be consummated by the end of July, 1999 following completion of AFC's
financing arrangements, New Horizons will sell its lease interest in that store
for $17.5 million and leaseback the store in exchange for annual incremental
payments of $2.6 million over the remainder of the lease term, including option
periods, which totals 35 years. The store will continue in business as a
Bradlees store and the expected net proceeds of $17.2 million after certain
estimated fees and expenses will be used to pay down the Notes.
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 (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 Additional
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 Additional Collateral. We have obtained title insurance
covering the leasehold mortgages described above.
In addition, we have entered into an agreement with the Discount Option
Noteholders pursuant to which we have agreed to provide, subject to
substitution in certain circumstances, second priority leasehold mortgages on
the Additional Collateral in favor of the Discount Option Noteholders. See
"Description of 9% Convertible Notes--Redemption.".
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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 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.
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 June 4, 1999, 9,694,224 shares of
Common Stock, held by approximately 1,548 stockholders, were issued and
outstanding. As of June 4, 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 10,225,711 shares will be issued under the Plan of Reorganization.
Common Stock. In addition to the 10,225,711 shares expected to be issued
under the Plan of Reorganization, the following shares of Common Stock are
reserved for issuance:
. 1,000,000 shares issuable upon exercise of outstanding warrants; and
. 1,000,000 shares are reserved for issuance under the Stock Plan.
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 February 2, 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. 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.
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.
62
<PAGE>
Board of Directors. The Articles and By-laws provide that the initial number
of directors shall be 9. The board of directors may increase, but not decrease,
the number of directors. The first annual meeting of stockholders will be held
in 2000. The initial directors shall serve terms expiring at this annual
meeting. Successors will hold office until the next annual meeting of the
stockholders in 2001. The initial directors shall hold office until their
successors are elected and qualified or until their resignation or removal.
Any holder of record of shares of capital stock or the Nominating Committee
established by the board of directors may nominate directors. Shareholders who
nominate directors are subject to advance notice and disclosure requirements as
well as time limits. Shareholders shall elect directors by the affirmative vote
of a plurality of the votes cast at the meeting.
Removal of Directors. The board of directors may only remove any director by
the vote of a majority of directors then in office if the director to be
removed is (i) subject to any regulatory or judicial order or decree barring or
suspending such individual from any activity related to the purchase, sale or
trading of securities or commodities; or (ii) such person has been indicted on
charges relating to the purchase, sale or trading of securities or commodities.
The shareholders may remove any director with the vote of two-thirds ( 2/3) of
the shareholders eligible to elect Directors.
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.
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 Law; 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.
63
<PAGE>
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 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.
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;
64
<PAGE>
. 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.
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
The consolidated balance sheet, statements of operations, stockholder's
equity (deficiency), and cash flows of the Company 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 the Company's emergence from bankruptcy which indicated
that 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 was not comparable to the Company's 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) the Company's filing for reorganization under Chapter 11 of the Federal
Bankruptcy Code, and (b) the Company's 1996 loss from operations and
stockholders' deficiency, which raised substantial doubt about the Company's
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.
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
65
<PAGE>
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 the Board of Directors of the
Company recommended the appointment of Arthur Andersen LLP as certifying
accountants for the Company 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 the Company's
management at the decision-making level during the two most recent fiscal years
and the subsequent interim periods (the "Reporting Period"), which
disagreements, if not resolved to the satisfaction of 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. The Company's filing for reorganization protection under Chapter 11
of the Federal Bankruptcy Code.
b. The Company's 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 the Company nor anyone on its 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 the Company's 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.
66
<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 May 1, 1999 (Unaudited)
Condensed Consolidated Statements of Operations for the 13 weeks ended
May 1, 1999 and
May 2, 1998............................................................. F-2
Condensed Consolidated Balance Sheets as of May 1, 1999, January 30, 1999
and May 2, 1998......................................................... F-3
Condensed Consolidated Statements of Cash Flows for the 13 weeks ended
May 1, 1999 and
May 2, 1998............................................................. F-5
Notes to Condensed Consolidated Financial Statements..................... F-6
Consolidated Financial Statements as of January 30, 1999
Report of Independent Public Accountants--Arthur Andersen LLP............ F-12
Independent Auditors' Report--Deloitte & Touche LLP...................... F-13
Consolidated Statements of Operations for the 52 weeks ended January 30,
1999, January 31, 1998 and February 1, 1997 ............................ F-14
Consolidated Balance Sheets as of January 30, 1999 and January 31, 1998.. F-15
Consolidated Statements of Cash Flows for the 52 weeks ended January 30,
1999, January 31, 1998 and February 1, 1997 ............................ F-16
Consolidated Statements of Stockholders' Equity (Deficiency) for the 52
weeks ended January 31, 1998 and February 1, 1997....................... F-17
Notes to Consolidated Financial Statements............................... F-18
</TABLE>
F-1
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
PART I--FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
Registrant Predecessor
----------- -----------
<S> <C> <C>
Total sales............................................................................................ $324,842 $293,306
Leased department sales................................................................................ 9,567 9,435
-------- --------
Net sales.............................................................................................. 315,275 283,871
Cost of goods sold..................................................................................... 227,113 204,201
-------- --------
Gross margin........................................................................................... 88,162 79,670
Leased department and other operating income........................................................... 2,731 2,947
-------- --------
90,893 82,617
Selling, store operating, administrative and distribution expenses..................................... 100,204 92,701
Depreciation and amortization expense.................................................................. 7,288 8,574
Loss on disposition of properties...................................................................... -- 241
Interest and debt expense.............................................................................. 6,882 3,625
Reorganization items................................................................................... -- 2,129
-------- --------
Net loss............................................................................................... $(23,481) $(24,653)
======== ========
Comprehensive loss..................................................................................... $(23,481) $(24,653)
======== ========
Net loss per share..................................................................................... $==(2.30) $==(2.18)
======== ========
Weighted average shares outstanding (in thousands)--basic and diluted.................................. 10,226 11,311
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-2
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
May 1, 1999 Jan. 30, 1999 May 2, 1998
Registrant Registrant Predecessor
----------- ------------- -----------
<S> <C> <C> <C>
Assets
Current assets:
Unrestricted cash and cash
equivalents........................... $ 10,315 $ 9,485 $ 10,281
Restricted cash and cash equivalents... -- -- 24,550
-------- -------- --------
Total cash and cash equivalents...... 10,315 9,485 34,831
-------- -------- --------
Accounts receivable.................... 11,002 13,015 9,494
Inventories............................ 261,528 232,343 260,960
Prepaid expenses....................... 10,435 8,967 8,868
Assets held for sale................... -- -- 4,000
-------- -------- --------
Total current assets................. 293,280 263,810 318,153
-------- -------- --------
Property, plant and equipment, net:
Property excluding capital leases,
net................................... 89,053 93,039 127,245
Property under capital leases, net..... 10,037 10,347 18,428
-------- -------- --------
Total property, plant and equipment,
net................................. 99,090 103,386 145,673
-------- -------- --------
Other assets:
Lease interests at fair value, net..... 74,728 75,833 140,550
Assets held for sale................... 14,000 14,000 --
Other, net............................. 6,354 6,722 5,114
-------- -------- --------
Total other assets................... 95,082 96,555 145,664
-------- -------- --------
Total assets......................... $487,452 $463,751 $609,490
======== ======== ========
</TABLE>
(Continued)
F-3
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
May 1, 1999 Jan. 30, 1999 May 2, 1998
Registrant Registrant Predecessor
----------- ------------- -----------
<S> <C> <C> <C>
Liabilities and Stockholders' Equity (Deficiency)
Current liabilities:
Accounts payable...................................................................... $156,680 $119,302 $141,055
Accrued expenses...................................................................... 21,304 29,326 17,854
Self-insurance reserves............................................................... 6,358 6,462 6,515
Short-term debt....................................................................... 132,427 114,449 116,125
Current portion of capital lease obligations and notes................................ 2,532 2,089 1,038
-------- -------- --------
Total current liabilities........................................................... 319,301 271,628 282,587
-------- -------- --------
Long-term liabilities:
Obligations under capital leases...................................................... 24,824 25,284 26,786
Convertible notes payable............................................................. 28,995 28,995 --
Deferred income taxes................................................................. -- -- 8,581
Self-insurance reserves............................................................... 12,908 13,120 13,228
Unfavorable lease liability........................................................... 44,742 44,581 --
Other long-term liabilities........................................................... 25,045 25,143 27,980
-------- -------- --------
Total long-term liabilities......................................................... 136,514 137,123 76,575
-------- -------- --------
Liabilities subject to settlement under the reorganization case......................... -- -- 560,931
Stockholders' equity (deficiency):
Common stock (new) 10,225,711 shares outstanding (10,225,711 at 1/30/99) Par value.... 102 102 --
Common stock (old)--11,310,384 shares outstanding at 5/2/98 Par value ................ -- -- 115
Additional paid-in-capital............................................................ 55,016 54,898 137,821
Accumulated deficit................................................................... (23,481) -- (447,735)
Treasury stock, at cost............................................................... -- -- (804)
-------- -------- --------
Total stockholders' equity (deficiency)............................................. 31,637 55,000 (310,603)
- --------------------------------------------------
-------- -------- --------
Total liabilities and stockholders' equity (deficiency)............................. $487,452 $463,751 $609,490
</TABLE>
See accompanying Notes to Condensed Consolidated FInancial Statements.
F-4
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
13 Weeks Ended
-----------------------
May 1, 1999 May 2, 1998
Registrant Predecessor
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss............................................. $(23,481) $(24,653)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization expense.............. 7,288 8,574
Amortization of lease interests and unfavorable
lease liability, net.............................. 1,266 --
Amortization of deferred financing costs........... 377 384
Reorganization items............................... -- 2,129
Changes in working capital and other, net.......... 4,634 (11,185)
-------- --------
Net cash used by operating activities before
reorganization items ............................... (9,916) (24,751)
-------- --------
Reorganization items:
Interest income received........................... -- 121
Chapter 11 professional fees paid.................. (2,858) (2,906)
Other reorganization expenses paid, net............ (830) (2,062)
-------- --------
Net cash used by reorganization items ............... (3,688) (4,847)
-------- --------
Net cash used by operating activities................ (13,604) (29,598)
Cash flows from investing activities:
Capital expenditures, net............................ (2,920) (1,644)
-------- --------
Increase in restricted cash and cash equivalents .... -- (7,790)
-------- --------
Net cash used in investing activities................ (2,920) (9,434)
-------- --------
Cash flows from financing activities:
Payments of liabilities subject to settlement........ -- (1,020)
Net borrowings under the revolver/DIP facility....... 17,977 31,917
Proceeds from sales of properties.................... -- 7,754
Principal payments on notes and capital lease
obligations ........................................ (623) (287)
-------- --------
Net cash provided by financing activities............ 17,354 38,364
-------- --------
Net increase(decrease) in unrestricted cash and cash
equivalents........................................... 830 (668)
Unrestricted cash and cash equivalents:
Beginning of period ................................. 9,485 10,949
-------- --------
End of period........................................ $ 10,315 $ 10,281
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest and certain debt fees......... $ 2,618 $ 3,403
Cash paid for income taxes........................... $ 435 $ --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
F-5
<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 May 1, 1999 and for the
interim period then ended, those statements are not comparable in certain
material respects to the condensed consolidated financial statements as of May
2, 1998 and for the interim period 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 (first quarter) ended May 1, 1999 and May 2, 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 loss per share were the same for the first quarter ended May 1,
1999, because the inclusion of common stock equivalents (warrants and stock
options) would have reduced the reported loss per share. The presented shares
outstanding presume full issuance of new Bradlees Common Stock in accordance
with the Company's plan of reorganization (the "Plan") confirmed by the
Bankruptcy Court on January 27, 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 the
first quarter 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
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; certain notes totaling $6.2 million; other
distributions totaling $1.4 million; 10.2 million 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.
F-6
<PAGE>
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 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, NY
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 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 million for the first quarter of 1998.
3. Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at May 2, 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 expires on December 23, 2001.
Trade and standby letters of credit outstanding under the Revolver were $9.5
and $20.0 million, respectively, as of May 1, 1999. The DIP Facility had
replaced a $200 million Debtor-in-Possession Revolving Credit and Guaranty
Agreement with The Chase Manhattan Bank, as agent. Trade and standby letters of
credit outstanding under the DIP facilities were $9.8 and $19.8 million,
respectively, as of May 2, 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
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
F-7
<PAGE>
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; (iii) maximum annual capital expenditures; and
(iv) minimum operating cash flow to interest expense (for the fiscal quarters
ending on or about January 31, 2001, and thereafter). The Company is in
compliance with the Revolver covenants.
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 May 1,
1999 was $28,995,000 (which reflects 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.
The outstanding Notes are expected to be paid down, along with any accrued
and unpaid interest on the prepaid Notes, with the estimated net proceeds of
$17.2 million to be received upon the planned sale and leaseback of the
leasehold interest in the Company's Yonkers, NY store (Note 10). The Company
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 (see also Note
10).
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 lease
disposition, (ii) 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. (Note 9).
The lien on the Additional 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.
F-8
<PAGE>
6. Reorganization Items
The Company incurred $2.1 million of expenses, primarily for professional
fees, during the first quarter of 1998, directly associated with the Chapter 11
reorganization proceedings.
As of May 1, 1999, the Company had remaining reserves totaling approximately
$5.8 million for costs associated with the prior closing and planned closing of
stores and other restructuring activities. A portion of these reserves ($1.1
million) was established at the end of 1998 for the planned closing of the
Yonkers, NY store which is now expected to remain in operation (Note 10). As a
result, that portion of the reserves is expected to reduce the carrying value
of the property prior to the calculation of any deferred gain resulting from
the sale/leaseback. Approximately $0.8 million of restructuring costs were paid
in the first quarter 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 May 1, 1999 represented the estimated net realizable
value (assigned under fresh-start reporting) of the Company's Yonkers, NY store
lease. As discussed in Note 10, the Company received Bankruptcy Court approval
to enter into a sale/leaseback agreement for the Yonkers store lease subsequent
to the end of the first quarter. Assets held for sale as of May 2, 1998,
consisted of two properties, one of which was sold in the second quarter of
1998 for approximately $4.5 million and the net proceeds of the sale were
utilized to pay down the related pre-petition borrowings. The other property
held for sale was later transferred to the pre-petition financing group.
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, a $1.4 million amortization credit was recorded in the first quarter
of 1998 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 was recorded in the first quarter of 1999.
Pursuant to the Company's plan of reorganization, the Company agreed to grant
options to purchase 750,000 shares of the Company's 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 vest in one-third increments beginning on the date of grant and each of the
two anniversaries following the date of grant. These options are exercisable
for a period of five years from the 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). On April 28, 1999, additional
options were granted to other members of management to purchase 127,500 shares
of the Company's Common Stock at a price equal to the market price of the
Common Stock on that date.
F-9
<PAGE>
9. Summarized Financial Information for Bradlees Stores, Inc. and New Horizons
of Yonkers, Inc.
Under the Plan, Bradlees, Inc. issued the securities 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)
-----------------------------
May 1, 1999 May 2, 1998
-------------- --------------
<S> <C> <C>
Current Assets............................ $293,280 $ 311,588
Due from New Horizons of Yonkers, Inc..... 14,000 --
Noncurrent Assets......................... 194,172 291,295
Current Liabilities....................... 319,301 282,587
Payable to Bradlees, Inc.................. 54,930 189,943
Noncurrent Liabilities.................... 136,514 76,575
Liabilities Subject to Settlement Under
the Reorganization Case.................. $ -- $ 340,400
<CAPTION>
(000's)
-----------------------------
13 Weeks ended 13 Weeks ended
May 1, 1999 May 2, 1998
-------------- --------------
<S> <C> <C>
Net Sales................................. $315,275 $ 283,871
Gross Margin.............................. 88,162 79,670
Loss from Continuing Operations........... (23,293) (24,603)
Net Loss.................................. $(23,293) $ (24,603)
</TABLE>
New Horizons of Yonkers, Inc. ("New Horizons"), 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' financial activity was
limited to rent expense under the lease and rental income from the sublease
during the periods presented. 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. 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)
-----------------------------
May 1, 1999 May 2, 1998
-------------- --------------
<S> <C> <C>
Asset Held for Sale..... $14,000 $--
Due to Bradlees Stores,
Inc.................... 13,999 1
Stockholders' Equity.... $ 1 $ 1
<CAPTION>
(000's)
-----------------------------
13 Weeks ended 13 Weeks ended
May 1, 1999 May 2, 1998
-------------- --------------
<S> <C> <C>
Rental Income........... $ 147 $147
Rent Expense............ $ 147 $147
</TABLE>
10. Subsequent Events
On May 20, 1999, the Bankruptcy Court approved a binding letter of intent
between New Horizons and AFC Realty Capital, Inc. ("AFC") for a sale and
leaseback of the Yonkers, NY store lease. Under this agreement, expected to be
consummated by the end of July, 1999 following completion of AFC's financing
arrangements, New Horizons will sell its lease interest in that store for $17.5
million and lease back the store in
F-10
<PAGE>
exchange for annual incremental payments of $2.6 million over the remainder of
the lease term, including option periods, which totals 35 years. The store will
continue in business as a Bradlees store and the expected net proceeds of $17.2
million after certain estimated fees and expenses will be used to pay down the
Notes (Note 4).
Also on May 20, 1999, the Company entered into an agreement with the holders
of $20.7 million, or approximately 71%, of the $29.0 million of outstanding
Notes (the "Discount Option Noteholders"). Under the agreement, which is
subject to definitive documentation, the Company can repurchase the outstanding
Notes expected to be held by the Discount Option Noteholders after the paydown
from the Yonkers sale/leaseback proceeds (the "Discount Option Notes"). The
purchase price is equal to 86% of the outstanding principal amount, plus
accrued interest, exercisable for a one-month time period from December 1, 1999
through December 31, 1999 (the "Discount Option"). The Company can repurchase
the Discount Option Notes each month thereafter, but the discount will decrease
by 1% per month such that the discount will be fully eliminated by January 31,
2001. In consideration of the Discount Option, the Company has 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 Additional Collateral (Note 4, and 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
intends to offer to enter into similar agreements with all of the other
Noteholders and complete the offer by the end of July, 1999.
Both the sale/leaseback transaction and the transaction with the Discount
Option Noteholders described above require the consent of the lenders under the
Revolver (Note 4). Based on discussions to date with such lenders, the Company
believes it will receive such consent.
On May 26, 1999, after appropriate landlord review and approval, the
Bankruptcy Court in Caldor Corporation's Chapter 11 case approved the Company's
purchase of two former Caldor store leases, one in Philadelphia, PA and one in
Hamilton, NJ, for a total cost of $1.25 million. The Company expects to open
the two stores in early October.
F-11
<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-12
<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-13
<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-14
<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-15
<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-16
<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-17
<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-18
<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-19
<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-20
<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-21
<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-22
<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-23
<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 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.
F-24
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 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).
F-25
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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-26
<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-27
<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-28
<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-29
<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-30
<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 property interests which
collateralized various pre-petition debts. Contractual interest expense not
recorded on
F-31
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 trance 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, the Company could
borrow an overadvance amount on the Loan Value of Eligible Inventory of 5% (the
F-32
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
"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-33
<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-34
<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-35
<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-36
<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> <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-37
<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-38
<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-39
<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-40
<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-41
<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-42
<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-43
<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-44
<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-45
<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-46
<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-47
<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-48
<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-49
<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................................................................. 35
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............................................................ 65
Experts.................................................................. 65
Additional Information................................................... 65
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
---------------
June 11, 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 the Effective Date, we issued the following securities in connection with
the Effectiveness of our Plan of Reorganization:
1. We issued 10,225,711 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.
+4.1 --Specimen Certificate for shares of Common Stock, $.01 par value,
of Bradlees, Inc.
##5.1 --Opinion of Goodwin, Procter & Hoar LLP with respect to the
legality of the securities being offered.
++10.9 --Form of Revised Senior Vice President Severance Agreement.
+10.1 --Registration Rights 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.
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.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<C> <S>
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.
+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.
(b) Financial Statement Schedule filed as part of this Registration
Statement is as follows:
Condensed Consolidated Financial Statements as of May 1, 1999 (Unaudited)
Condensed Consolidated Statements of Operations for the 13 weeks ended May 1,
1999 and
May 2, 1998
Condensed Consolidated Balance Sheets as of May 1, 1999, January 30, 1999 and
May 2, 1998
Condensed Consolidated Statements of Cash Flows for the 13 weeks ended May 1,
1999 and
May 2, 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
II-4
<PAGE>
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) 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-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrants have duly caused this Post-Effective Amendment No. 3 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 June 11, 1999.
BRADLEES, INC.
/s/ Peter Thorner
By: _________________________________
Name: Peter Thorner
Office Title: Chairman of the
Board andChief
Executive Officer
BRADLEES STORES, INC.
/s/ Peter Thorner
By: _________________________________
Name: Peter Thorner
Office Title: Chairman of the
Board andChief
Executive Officer
NEW HORIZONS OF YONKERS, INC.
/s/ Peter Thorner
By: _________________________________
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. 3 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. 3 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-6
<PAGE>
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ Peter Thorner Chief Executive June 11, 1999
- ------------------------------------- Officer (Principal
Peter Thorner Executive Officer)
and Chairman of the
Board
/s/ Cornelius F. Moses, III Senior Vice June 11, 1999
- ------------------------------------- President and Chief
Cornelius F. Moses, III Financial Officer
(Principal
Financial Officer
and Principal
Accounting Officer)
/s/ Robert Lynn Director, President June 11, 1999
- ------------------------------------- and Chief Operating
Robert Lynn Officer
Director
- -------------------------------------
Robert A. Altschuler
/s/ Stephen J. Blauner Director June 11, 1999
- -------------------------------------
Stephen J. Blauner
/s/ W. Edward Clingman, Jr. Director June 11, 1999
- -------------------------------------
W. Edward Clingman, Jr.
/s/ John M. Friedman, Jr. Director June 11, 1999
- -------------------------------------
John M. Friedman, Jr.
/s/ Lawrence Lieberman Director June 11, 1999
- -------------------------------------
Lawrence Lieberman
Director
- -------------------------------------
Charles K. MacDonald
/s/ William H. Roth Director June 11, 1999
- -------------------------------------
William H. Roth
/s/ David L. Schmitt Director of Bradlees June 11, 1999
- ------------------------------------- Stores, Inc. and
David L. Schmitt New Horizons of
Yonkers, Inc.
</TABLE>
II-7
<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.
+4.1 --Specimen Certificate for shares of Common Stock, $.01 par value, of Bradlees, Inc.
##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.
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.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Exhibit No. Title
----------- -----
<C> <S>
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.
+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.
