UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 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)
(781) 380-3000
(Registrant's telephone number, including area code)
None
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
Number of shares of the issuer's common stock outstanding as
of December 7, 1999: 9,780,347 shares.
Exhibit Index on Page 25
Page 1 of 34 (Including Exhibits)
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
October 30, 1999 and October 31, 1998, and the related condensed
consolidated statements of operations and cash flows, for the
thirteen and thirty-nine 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 and thirty-nine week
periods ended October 30, 1999 are not comparable to the
condensed consolidated financial statements as of and for the
thirteen and thirty-nine week periods ended October 31, 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
November 17, 1999
<TABLE>
BRADLEES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands except per share amount)
<CAPTION> 13 Weeks Ended
---------------
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
Registrant Predecessor
---------- -----------
<S> <C> <C>
Total sales $358,399 | $ 323,106
Leased department sales 11,672 | 10,973
-------- | -------
Net sales 346,727 | 312,133
Cost of goods sold 240,949 | 217,394
-------- | -------
Gross margin 105,778 | 94,739
Leased department and other |
operating income 3,451 | 3,185
-------- | --------
109,229 | 97,924
Selling, store oper., admin. |
and distribution expenses 101,734 | 95,706
Depreciation and amort. expense 6,604 | 7,803
Interest and debt expense 7,818 | 4,371
Reorganization items - | (2,749)
-------- | -------
Net loss $ (6,927) | $ (7,207)
======== | ========
|
Comprehensive loss $ (6,927) | $ (7,207)
======== | ========
Basic and diluted net loss per |
share $ (0.69) | $ (0.64)
======== | ========
|
Weighted average shares 9,986 | 11,310
======== ========
See accompanying notes to condensed consolidated financial
statements.
</TABLE>
<TABLE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Amounts in thousands except per share)
<CAPTION>
39 Weeks Ended
--------------
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
Registrant Predecessor
---------- -----------
<S> <C> <C>
Total sales $1,065,173 | $ 939,203
Leased department sales 35,474 | 32,818
--------- | --------
Net sales 1,029,699 | 906,385
Cost of goods sold 717,247 | 635,383
--------- | -------
Gross margin 312,452 | 271,002
Leased department and other |
operating income 10,095 | 9,286
-------- | --------
322,547 | 280,288
Selling, store oper., admin. |
and distribution expenses 307,558 | 280,854
Depreciation and amortization |
expenses 21,132 | 24,371
Loss on dispos. of properties - | 241
Interest and debt expense 21,819 | 11,960
Reorganization items (778) | (2,555)
-------- | --------
Net loss $(27,184) | $ (34,583)
======== | ========
|
Comprehensive loss $(27,184) | $ (34,583)
======== | ========
Basic and diluted net loss per |
share $ (2.73) | $ (3.06)
======== | ========
Weighted average shares 9,959 | 11,310
======== | ========
See accompanying notes to condensed consolidated financial
statements.
</TABLE>
<TABLE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<CAPTION>
Oct. 30, 1999 Jan. 30,1999 Oct. 31,1998
------------- ------------ ------------
Registrant Registrant Predecessor
---------- ---------- -----------
<S> <C> <C> <C>
ASSETS
Current assets: |
Unrestricted cash and cash |
equivalents $ 11,228 $ 9,485 | $10,959
Restricted cash and cash |
equivalents - - | 25,129
------- -------- | -------
Total cash and cash equiv. 11,228 9,485 | 36,088
------- -------- | -------
Accounts receivable 11,895 13,015 | 11,925
Inventories 323,495 232,343 | 318,883
Prepaid expenses 11,218 8,967 | 11,031
------- -------- | -------
Total current assets 357,836 263,810 | 377,927
------- -------- | -------
Prop., plant and equip.,net: |
Property excluding capital |
leases, net 93,475 93,039 | 123,892
Property under capital |
leases, net 22,786 10,347 | 17,732
------- -------- | -------
Total property, plant and |
equipment, net 116,261 103,386 | 141,624
------- -------- | -------
|
Other long-term assets: |
Lease interests, net 72,518 75,833 | 137,350
Assets held for sale - 14,000 | -
Other long-term assets,net 7,122 6,722 | 4,509
------- -------- | -------
Total other assets 79,640 96,555 | 141,859
------- -------- | -------
Total assets $ 553,737 $ 463,751 | $661,410
======= ======== | =======
</TABLE>
(Continued)
<TABLE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<CAPTION>
Oct. 30, 1999 Jan. 30, 1999 Oct. 31, 1998
------------- ------------- -------------
Registrant Registrant Predecessor
LIABILITIES AND ---------- ---------- -----------
STOCKHOLDERS' EQUITY
(DEFICIENCY)
<S> <C> <C> <C>
Current liabilities: |
Accounts payable $ 201,120 $ 119,302 | $ 179,413
Accrued expenses 19,597 29,326 | 23,221
Self-insurance reserves 5,798 6,462 | 6,027
Short-term debt 158,159 114,449 | 157,392
Current portion of capital |
lease oblig. and notes 2,540 2,089 | 1,038
------- ------- | -------
Total current liabilities 387,214 271,628 | 367,091
------- ------- | -------
Long-term liabilities: |
Obligations under capital |
leases 27,089 25,284 | 26,211
Lease financing obligation 17,496 - | -
Convertible notes payable 11,976 28,995 | -
Deferred income taxes - - | 8,581
Self-insurance reserves 11,773 13,120 | 12,237
Unfavorable lease liability 45,064 44,581 | -
Other long-term liabilities 24,592 25,143 | 19,034
------- ------- | -------
Total long-term |
liabilities 137,990 137,123 | 66,063
------- ------- | -------
|
Liab. subject to settlement |
under the reorg. case - - | 548,788
|
Stockholders' equity (def.): |
Common stock(new) 9,986,273 |
shs.(10,225,711 at 1/30/99) |
Par value 100 102 | -
Common stock(old) 11,310,384 |
shs. outstanding at 10/31/98 |
Par value - - | 115
Additional paid-in-capital 55,617 54,898 | 137,821
Accumulated deficit (27,184) - | (457,665)
Treasury stock, at cost - - | (803)
------- ------- | --------
Total stockholders' equity |
(deficiency) 28,533 55,000 | (320,532)
------- ------- | --------
Total liab. and stockholders' |
equity (deficiency) $ 553,737 $ 463,751 | $ 661,410
======= ======= | ========
</TABLE>
See accompanying notes to condensed consolidated financial
statements.
<TABLE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<CAPTION>
39 Weeks Ended
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
Registrant Predecessor
---------- -----------
<S> <C> <C>
Cash flows from oper. activities:
Net loss $ (27,184) | $ (34,583)
Adjustments to reconcile net loss |
to cash provided (used) by |
operating activities: |
Depreciation and amortization |
expense 21,132 | 24,371
Amortization of lease interests |
and unfavorable lease liability, |
net 3,798 | -
Amortization of deferred financing |
costs 1,088 | 1,215
Reorganization items (778) | (2,555)
Changes in working capital and |
other, net (10,749) | (37,232)
------- | -------
Net cash used by oper. activities |
before reorganization items (12,693) | (48,784) ------- | -------
------- | -------
Reorganization items: |
Interest income received - | 746
Chapter 11 prof. fees paid (8,130) | (7,786)
Other reorg. expenses paid, net (1,781) | (3,225)
------- | -------
Net cash used by reorg. items (9,911) | (10,265)
------- | -------
Net cash used by oper. activities (22,604) | (59,049)
Cash flows from investing activ.: |
Capital expenditures, net (17,055) | (10,379)
Lease acquisition costs (1,250) | -
Increase in restricted cash |
and cash equivalents - | (8,369)
------- | -------
Net cash used in invest. activ. (18,305) | (18,748)
------- | -------
Cash flows from financing activ.: |
Payments of convertible notes (17,019) | -
Pymts of liab. subject to settle. - | (6,551)
Net borrowings under the |
revolver/DIP facility 43,709 | 73,184
Proceeds from sales of properties - | 12,036
Proceeds from lease financing 17,500 | -
Deferred financing costs (181) | -
Proceeds rec. upon exer. of warrants 540 | -
Principal payments on notes and |
capital lease obligations (1,897) | (862)
------- | -------
Net cash provided by fin. activ. 42,652 | 77,807
------- | -------
Net increase in unrestricted cash |
and cash equivalents 1,743 | 10
Unrestricted cash and cash equiv.: |
Beginning of period 9,485 | 10,949
------- | -------
End of period $ 11,228 | $ 10,959
======= | =======
Supplemental disclosure of cash flow information:
Cash paid for interest and
certain debt fees $ 12,815 | $ 10,282
Cash paid for income taxes $ - | $ 279
Supplemental schedule of noncash |
(investing and financing) activ.: |
Capital lease oblig. incurred $ 2,883 | $ _
Reduction of liab. subj. to sett. |
due to trsf. of title to prop. $ - | $ 2,000
See accompanying notes to condensed consolidated
financial statements.
</TABLE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Bradlees, Inc. and subsidiaries (collectively
"Bradlees" or the "Company") operate in the discount department
store retail segment in the Northeast United States. The
Company emerged from Chapter 11 of the United States Bankruptcy
Code ("Chapter 11") on February 2, 1999 (the "Effective Date").
The Company had filed petitions for relief under Chapter 11 on
June 23, 1995 (the "Filing"). While in Chapter 11, the Company
(the "Predecessor") operated its business as a
debtor-in-possession subject to the jurisdiction of the United
States Bankruptcy Court for the Southern District of New York
(the "Bankruptcy Court"). The reorganized Company (the
"Registrant") adopted fresh-start reporting and gave effect to
its emergence as of its fiscal 1998 year-end (January 30, 1999).
Under fresh-start
reporting, the final consolidated balance sheet as of January
30, 1999 became the opening consolidated balance sheet of the
reorganized Company. Since fresh-start reporting has been
reflected in the accompanying condensed financial statements as
of October 30, 1999 and for the interim periods then ended,
those statements are not comparable in certain material respects
to the condensed consolidated financial statements as of October
31, 1998 and for the interim periods then ended. Accordingly, a
black line has been drawn between the Registrant's financial
statements and the Predecessor's financial statements.
With respect to the
unaudited condensed consolidated financial statements for the 13
weeks (third quarter) and 39 weeks (year-to-date) ended October
30, 1999 and October 31, 1998, it is the Company's opinion that
all necessary adjustments (consisting of normal and recurring
adjustments) have been included to present a fair statement of
results for the interim periods. Certain prior-year amounts
have been reclassified to conform to this year's presentation.
Basic and diluted shares
outstanding and the basic and diluted loss per share were the
same for both the 13 weeks and 39 weeks ended October 30, 1999
because the inclusion of common stock equivalents (which
included warrants and stock options in the second quarter)
would have reduced the reported loss per share. The Registrant's
shares presented in its financial statements presume full
issuance of new Bradlees Common Stock, including the latest
estimate of shares to be issued for claims not yet fully
resolved, in accordance with the Company's plan of
reorganization (the "Plan") confirmed by the Bankruptcy Court on
January 27, 1999 plus shares issued upon exercise of warrants
through October 30, 1999.
These statements should be read in conjunction
with the Company's financial statements (Form 10-K) for the
fiscal year ended January 30, 1999 ("1998"). Due to the
seasonal nature of the Company's business, operating results for
this year's interim periods presented are not necessarily
indicative of results that may be expected for the fiscal year
ending January 29, 2000 ("1999"). Certain information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted, pursuant to the
general rules and regulations promulgated by the Securities and
Exchange Commission (the "SEC").
2. REORGANIZATION CASE AND FRESH-START
REPORTING
The Plan contained distributable
value to creditors of approximately $162 million (as of the
Effective Date) which consisted of approximately $15 million of
administrative claim payments (including $4.5 million of
professional fees accrued at January 30, 1999 and paid
subsequent to the Effective Date); $14 million of cash
distributions to the pre-Chapter 11 bank group and the unsecured
creditors; a $40 million note primarily payable to the
pre-Chapter 11 bank group, which was immediately paid down on
the Effective Date by approximately $11 million from the
proceeds of the modification of the lease terms of the Union
Square, NY store; certain notes totaling $6.2 million; other
distributions totaling $1.4 million; approximately 10 million
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 1 million shares of Common Stock, exercisable
at $7.00 per share and expiring February 2, 2004.
The Plan was consummated on February 2, 1999 and Bradlees
emerged from Chapter 11. Pursuant to the guidance provided by
the American Institute of Certified Public Accountants in
Statement of Position ("SOP") 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code", the
Company adopted fresh-start reporting and reflected the
consummation distributions in the consolidated balance sheet as
of January 30, 1999 to give effect to the reorganization as of
year-end. Under fresh-start reporting, the reorganization value
of the Company was allocated to the emerging Company's net
assets on the basis of the purchase method of accounting.
Subsequent to the filing of the Company's Disclosure
Statement and occurrence of the Effective Date, a number of
events occurred which impacted the determination of equity value
under fresh-start reporting, including but not limited to, the
initial low trading prices of the new stock, information
regarding the Company's fourth quarter 1998 performance and
final 1999 financial plan, a settlement with a landlord
regarding the disposition of the Union Square, NY leasehold
interest and the liquidation of Caldor Corp., a major competitor
of the Company. The Company employed a similar valuation method
under fresh-start reporting to determine its equity value to
that utilized by its independent financial advisor in the
Disclosure Statement and arrived at an estimated equity value of
$55 million.
During the Chapter 11 case, the
Company received Bankruptcy Court approval to make certain
adequate protection payments to the pre-petition bank group.
Contractual interest expense not recorded on certain
pre-petition debt totaled approximately $7.7 and $23.1 million
for the third quarter and first three quarters of 1998,
respectively.
3. RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents at October 31, 1998
represented certain funds received by the Company during the
Chapter 11 case that were required to be restricted. These
funds were utilized on the Effective Date for the consummation
payments.
4. DEBT
FINANCING FACILITY Prior to the Effective Date, the Company
had a $250 million financing facility (the "Financing Facility")
(of which $125 million was available for issuance of letters of
credit) with BankBoston Retail Finance, Inc. ("BBNA") as agent,
under which the Company was allowed to borrow for general
corporate purposes, working capital and inventory purchases.
The Financing Facility consisted of (a) an up to eighteen-month
debtor-in-possession revolving credit facility in the maximum
principal amount of $250 million (the "DIP Facility") and,
subject to meeting certain conditions, (b) an up to three-year
post-emergence credit facility in the maximum principal amount
of $250 million (as modified, the "Revolver" - see below). The
outstanding amount under the DIP Facility was repaid on the
Effective Date with proceeds from the Revolver. The Revolver is
scheduled to expire on December 23, 2001.
Trade and standby letters of credit outstanding under the
Revolver were $7.1 and $21.5 million, respectively, as of
October 30, 1999. Trade and standby letters of credit
outstanding under the DIP Facility were $8.5 and $19.3 million,
respectively, as of October 31, 1998.
REVOLVER The Revolver consists of a $250
million senior secured revolving line of credit (of which $125
million is available for issuance of letters of credit) and a
$20 million junior secured "last in-last out" facility. The
Company expects to use the Revolver primarily for working
capital and general business needs.
The senior secured tranche has an advance
rate equal to 80% of the Loan Value of Eligible Receivables (as
defined), plus generally 72% of the Loan Value of Eligible
Inventory (as defined), subject to certain adjustments. Between
March 1 and December 15, the inventory advance rate will be
increased to 77% of the Loan Value of Eligible Inventory
provided that the total amount of all senior secured advances
does not exceed 85% of the Loan to Value Ratio (as defined).
The Company may also borrow up to an additional $20 million
under the junior secured facility provided that the total
borrowings (senior secured and junior secured) do not exceed 93%
of the Loan to Value Ratio.
The Revolver permits
the Company to borrow funds under the senior secured tranche at
an interest rate per annum equal to (a) the higher of (i) the
annual rate of interest as announced by BankBoston as its "Base
Rate" and (ii) the weighted average of the rates on overnight
federal funds plus 0.50% per annum; or (b) 2.25% per annum plus
the quotient of (i) the LIBOR Rate in effect divided by (ii) a
percentage equal to 100% minus the percentage established by the
Federal Reserve as the maximum rate for all reserves applicable
to any member bank of the Federal Reserve system in respect of
eurocurrency liabilities. Each of these rates is subject to a
0.50% increase in the event of overadvances. The junior secured
facility permits the Company to borrow funds at the "Base Rate"
plus 7.00% per annum.
The Revolver is secured by
substantially all of the non-real estate assets of the Company.
The Revolver contains financial covenants including (i) minimum
rolling twelve-month EBITDA at the end of each quarter, (ii)
minimum monthly accounts payable to inventory ratios; (iii)
maximum annual capital expenditures; and (iv) minimum operating
cash flow to interest expense ratios (for the fiscal quarters
ending on or about January 31, 2001, and thereafter). The
Company is in compliance with the Revolver covenants.
LEASE FINANCING
OBLIGATION In July, 1999, New Horizons of Yonkers, Inc. ("New
Horizons"), a subsidiary of Bradlees Stores, Inc. (Note 9), and
2500 CPA Associates, LLC ("CPA") entered into an agreement for
the financing of New Horizon's leasehold interest in the
Yonkers, NY store (the "Lease Financing Obligation"). Under
this agreement, New Horizons received $17.5 million in exchange
for the assignment of its leasehold interest to CPA and annual
incremental payments of $2.6 million (including interest at an
effective rate of 14.8%) under a sublease with CPA for a term of
35 years, including option periods. The Yonkers store continues
to operate as a Bradlees store and the net proceeds (after
certain fees) of $17.2 million were used to pay down $17.0
million of the Notes (see below) and $0.2 million of associated
accrued interest.
The Lease Financing Obligation is secured by (i) the leasehold
interest in the Yonkers store, (ii) first priority liens on
leasehold interests in three other named stores, as well as any
net proceeds received upon any disposition(s) of such interests,
and (iii) a standby letter of credit of $1.1 million.
In addition, as a result of the lease financing transaction,
the underlying Yonkers operating lease was converted to a
capital lease with a $2.9 million obligation and associated
capital lease asset. Also, the prior assets held for sale of
$14 million for Yonkers (Note 7) were reclassified, with $3.4
million (representing the net book value of the store equipment
and leasehold improvements) added to property excluding capital
leases, net and $10.6 million (representing the remaining
incremental lease value previously determined under fresh-start
reporting) added to property under capital leases, net.
9% CONVERTIBLE NOTES The 9% Convertible Notes (the "Notes")
were issued by Bradlees Stores, Inc. Each Note will mature on
February 3, 2004 and bears interest at the rate of 9% per annum
from the date of issuance, payable semi-annually in arrears on
January 1 and July 1 of each year, commencing July 1, 1999. The
aggregate principal amount of the Notes outstanding as of
October 30, 1999 was $12 million (which reflects the $17 million
aggregate principal paydown in July discussed above and the $11
million aggregate principal amount that was pre-paid on the
Effective Date).
The Company has the right to redeem the Notes at any time, in
whole or in part, subject to certain availability levels under
the Revolver, by paying the holder the unpaid principal plus
accrued and unpaid interest. The Company obtained an option to
repurchase $9 million of the Notes at a discount (see below).
The remaining outstanding Notes are secured by first priority
liens on leasehold interests in three named stores (the
"Collateral"), as well as any net proceeds received upon any
disposition(s) of such interests.
During the third quarter, the Company entered into a
supplemental agreement with the holders of approximately $9.0
million, or approximately 75%, of the $12.0 million of the
outstanding Notes (the "Discount Option Noteholders"). Under
the agreement, the Company can repurchase (and currently expects
to do so in December, 1999) the outstanding Notes held by the
Discount Option Noteholders (the "Discount Option Notes") at a
purchase price equal to 86% of the outstanding principal amount
(i.e. a 14% discount, plus accrued interest, exercisable for a
one-month period from December 1, 1999 through December 31, 1999
(the "Discount Option"). Each month thereafter the discount
will decrease by 1% such that the discount will be fully
eliminated by January 31, 2001. In consideration of the
Discount Option, the Company agreed to pay the Discount Option
Noteholders a premium on the closing date of the grant of the
option equal to 0.5% of the outstanding principal amount of the
Discount Option Notes, grant the Discount Option Noteholders
second priority leasehold mortgages on the Collateral subject to
substitution in certain circumstances, and provide a put option
exercisable on or after February 3, 2003 to sell the Discount
Option Notes to the Company at a price equal to the then
outstanding principal amount of the Discount Option Notes, plus
accrued interest. In accordance with applicable SEC rules, the
Company had offered to enter into the supplemental agreement
with all Noteholders and closed the offer on August 5, 1999.
The first priority
liens on the Collateral 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 unweighted average
closing price of the Common Stock during the twenty business
days preceding the first anniversary of the Effective Date.
5. INCOME TAXES
The Company provides for income taxes under the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes". On an interim basis, the
Company provides for income taxes using the estimated annual
effective rate method. The Company did not recognize a
quarterly or annual income tax expense or benefit in 1998 and
also does not expect to recognize a quarterly or annual income
tax expense or benefit in 1999.
6. REORGANIZATION ITEMS
The Company provided for or incurred
the following expense and income items during the third quarter
and year-to-date periods of 1999 and 1998, directly associated
with the Chapter 11 reorganization proceedings and the resulting
restructuring of its operations:
<TABLE>
(000's)
-----------------------------------------
13 Weeks Ended 39 Weeks Ended
10/30/99 10/31/98 10/30/99 10/31/98
<CAPTION> -------- -------- -------- --------
<C> <C> <C> <C>
Professional fees $ - $2,250 $ - $6,750
Interest income - (274) - (746)
Provision for occupancy
and other store closing
costs - - (778) -
Net asset write-off - - - 470
Gain on disposition of
properties - - - (1,873)
Provision for rejected
leases - (4,725) - (7,156)
------ ----- ----- ------
$ - $(2,749) $(778) $(2,555)
====== ====== ===== ======
</TABLE>
PROFESSIONAL FEES AND
INTEREST INCOME: Professional fees represented estimates of
expenses incurred, primarily for legal, consulting and
accounting services provided to the Company and the creditors
committee (which were required to be paid by the Company while
in Chapter 11). Interest income represented interest earned on
cash invested during the Chapter 11 proceeding.
PROVISION FOR OCCUPANCY AND
OTHER STORE CLOSING COSTS AND NET ASSET WRITE-OFF: The
Company entered into a lease financing transaction (Note 4)
which allowed its Yonkers, NY store to continue in operation,
resulting in the reversal of reserves totaling $0.8 million in
July, 1999 that had been established for the expected store
closing costs. The Company incurred a $0.5 million net asset
write-off in the second quarter of 1998 relating to the disposal
of greeting card fixtures that were replaced as a consequence of
the Company's rejection of its greeting card supply contract.
GAIN ON DISPOSITION OF
PROPERTIES AND PROVISION FOR REJECTED LEASES: The Company
sold a previously closed store in the second quarter of 1998 and
recognized a gain of $1.9 million. During the third quarter of
1998, the Company obtained confirmation that the lessor of a
previously rejected lease had re-let the premises and,
accordingly, the Company reduced its liability for rejected
leases by $4.7 million and recognized a reorganization credit
for that amount. During the second quarter of 1998, the Company
was notified by two of its former landlords at closed locations
that the properties had been re-let and therefore their claims
for rejected lease damages were reduced by $2.4 million.
RESTRUCTURING
RESERVES: As of October 30, 1999, the Company had remaining
reserves totaling approximately $3.2 million for costs
associated with the prior closing and planned closing of stores
and other restructuring activities. Approximately $1.8 million
of restructuring costs were paid in the first three quarters of
1999. The majority of the remaining reserved costs are expected
to be paid within a year.
7. ASSETS HELD
FOR SALE
Assets held for sale at January 30, 1999 represented the estimated
net realizable value (assigned under fresh-start reporting) of the
Company's Yonkers, NY store lease. As described in Note 4 under
"Lease Financing Obligation" and in Note 6, the Company entered
into a lease financing agreement which allowed its Yonkers store
to continue in operation and recorded certain reclassifications
of the $14 million previously in assets held for sale.
8. POST-RETIREMENT AND STOCK OPTION
PLANS
The Company provides certain
health care and life insurance benefits for certain retired
non-union employees meeting age and service requirements. The
Company accounts for the post-retirement plan in accordance with
SFAS No. 106, "Employers' Accounting for Post-Retirement
Benefits Other Than Pensions," which requires the Company to
accrue the estimated cost of retiree benefit payments during the
years the employee provides services. The Company's
post-retirement benefits are funded on a current basis.
Effective January 1,
1998, changes were made to the post-retirement plan that
included the elimination of future benefits for active employees
who do not become eligible by January 1, 2000, and a phase-out
of the Company contributions over two years (at 50% per year
beginning January 1, 1999) towards the cost of providing medical
benefits to eligible retirees. Under SFAS No. 106,
non-recurring amortization credits of $1.3 and $4.0 million were
recorded in the third quarter and first three quarters of 1998,
respectively, to reflect these changes to the post-retirement
plan. As a consequence of the adoption of fresh-start reporting
at January 30, 1999 (Note 2), no amortization credit has been
recorded in 1999.
Pursuant to the 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, of which 24,363 shares were
forfeited through October, 1999, 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). Through October, 1999, additional options were granted
to other members of management to purchase 137,050 shares, of
which 8,800 shares were forfeited, of new Bradlees Common Stock
at prices equal to the market prices of the Common Stock on the
dates of the grants.
9. SUMMARIZED FINANCIAL INFORMATION FOR
BRADLEES STORES, INC. AND NEW HORIZONS OF YONKERS, INC.
Under the Plan, Bradlees, Inc. issued
the new Bradlees Common Stock (Note 2) and Bradlees Stores, Inc.
issued the Notes (Note 4). Bradlees, Inc. operates its stores
through Bradlees Stores, Inc., a direct wholly-owned subsidiary.
Bradlees, Inc. is guaranteeing the Notes issued by Bradlees
Stores, Inc. Substantially all of the assets of the Company, on
a consolidated basis, are held by Bradlees Stores, Inc. The
following summarized financial information of Bradlees Stores,
Inc. is presented in accordance with SEC Staff Accounting
Bulletin 53 and Regulation S-X Rule 1-02 (bb):
<TABLE>
<CAPTION>
(000's)
----------------------------------
Oct. 30, 1999 Oct. 31, 1998
------------- ------------
<S> <C> <C>
Current Assets $357,836 | $371,208
Noncurrent Assets 182,531 | 283,441
Current Liabilities 387,214 | 367,091
Payable to Bradlees, Inc. 55,288 | 189,734
Due to New Horizons of Yonkers, Inc. 7,008 | 1
Noncurrent Liabilities 117,613 | 66,063
Liabilities Subject to |
Settlement Under the |
Reorganization Case - | 328,557
Stockholders' Deficit $(26,756) | $(296,797)
</TABLE>
<TABLE>
<CAPTION>
(000's)
-------------------------------------------------------
13 Wks ended 13 Wks ended 39 Wks ended 39 Wks ended
Oct.30, 1999 Oct.31, 1998 Oct.30, 1999 Oct.31,1998
------------ ------------ ------------ -----------
<S> <C> <C> <C> <C>
Net Sales $346,727 | $312,133 $1,029,699 | $906,385
Gross Margin 105,778 | 94,739 312,452 | 271,002
Loss from Continuing | |
Operations (6,896)| (7,313) (26,756)| (34,689)
Net Loss $(6,896)| $(7,313) $(26,756)| $(34,689)
</TABLE>
New Horizons (Note 4) is the lessee of Bradlees'
Yonkers, New York store lease, which it subleases to Bradlees
Stores, Inc. New Horizons, which remained in Chapter 11 to
facilitate the planned disposition of its leasehold interest, is
also fully and unconditionally guaranteeing the Notes issued by
Bradlees Stores, Inc. and its plan of reorganization became
effective at the time of the disposition. The following
summarized financial information of New Horizons is presented in
accordance with SEC Staff Accounting Bulletin 53 and Regulation
S-X Rule 1-02 (bb):
<TABLE>
<CAPTION>
(000's)
-------------------------------
Oct. 30, 1999 Oct. 31, 1998
------------- -------------
<S> <C> <C>
Property Under Capital Lease, net $13,370 | $ -
Due from Bradlees Stores, Inc. 7,008 | 1
Obligation Under Capital Lease 2,881 | -
Lease Financing Obligation 17,496 | -
Stockholders' Equity $ 1 | $ 1
</TABLE>
<TABLE>
<CAPTION>
(000's)
--------------------------------------------------------
13 Wks ended 13 Wks ended 39 Wks ended 39 Wks ended
Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Rental Income $975 | $147 $1269 | $441
Rent Expense 59 | 147 353 | 441
Amortization Expense 112 | - 112 | -
Interest Expense 725 | - 804 | -
Income from Continuing | |
Operations 79 | - - | -
Net Income $ 79 | $ - $ - | $ -
</TABLE>
10. SUBSEQUENT EVENTS
On November 23, 1999, the Company's Board of Directors adopted
a Shareholder Rights Plan and declared a dividend of one
preferred stock purchase right for each outstanding share of
common stock, par value $.01 per share. The dividend was
payable on November 26, 1999 to the stockholders of record on
November 26, 1999.
The Board adopted the rights plan to protect
stockholders from coercive or otherwise unfair takeover tactics.
In general terms, it works by imposing a significant penalty
upon any person or group which acquires 15% or more of Bradlees'
outstanding common stock without the approval of the Board. The
rights plan should not interfere with any merger or other
business combination approved by the Board.
The Company also has elected to be
governed by Section 50A of Chapter 156B of the General Laws of
the Commonwealth of Massachusetts, which, among other things,
requires that the Company have a classified Board of Directors.
For those interested in the specific terms of
the rights plan as made between the Company and BankBoston,
N.A., as the Rights Agent, and the Company's election to be
governed by Section 50A, reference can be made to the Company's
Form 8-K or Form 8-A filed with the SEC on November 30, 1999.
On December 3, 1999, the SEC
released Staff Accounting Bulletin (SAB) No. 101, which provides
guidance on the recognition, presentation, and disclosure of
revenue, including layaway sales and the presentation of leased
sales, in financial statements filed
with the SEC. SAB No. 101 must be applied no later than the
first quarter of the fiscal year beginning January 30, 2000.
The Company is currently evaluating the impact of SAB No.101 on
its financial statements.
<TABLE>
BRADLEES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Results of Operations
---------------------
Results of operations, summarized in
millions of dollars (except per share amounts) and expressed as
a percentage of net sales (on next page), were as follows for the
13 weeks and 39 weeks ended Octobe 1999 ("Third Quarter 1999"
and "Year-to-Date 1999", respectively) and for the 13 weeks and
39 week ended October 31, 1998 ("Third Quarter 1998" and
"Year-to-Date 1998", respectively):
<CAPTION>
13 Weeks Ended 39 Weeks Ended
-------------- --------------
Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998
------------- ------------- ------------- -------------
Registrant Predecessor Registrant Predecessor
---------- ----------- ---------- -----------
(Dollars in millions except per share amounts)
<S> <C> <C> <C> <C>
Total sales $ 358.4 | $ 323.1 $ 1,065.2 | $ 939.2
Leased dept. | |
sales 11.7 | 11.0 35.5 | 32.8
------- | ------- ------- | ------
Net sales 346.7 | 312.1 1,029.7 | 906.4
Cost of goods | |
sold 240.9 | 217.4 717.2 | 635.4
------- | ------- ------- | ------
Gross margin 105.8 | 94.7 312.5 | 271.0
Leased dept. | |
and other oper. | |
income 3.4 | 3.2 10.0 | 9.3
------- | ------- ------- | ------
109.2 | 97.9 322.5 | 280.3
Selling, store | |
operating, | |
administrative & | |
distribution | |
expenses 101.7 | 95.7 307.6 | 280.9
Depreciation and | |
amortization | |
expense 6.6 | 7.8 21.1 | 24.4
Loss on dispos. | |
of properties - | - - | 0.2
Interest and debt | |
expense 7.8 | 4.4 21.8 | 12.0
Reorg. items - | (2.8) (0.8) | (2.6)
------| ------- ------- | -------
Net loss $ (6.9)| $ (7.2) $(27.2) | $(34.6)
=======| ======= ======= | =======
Basic & diluted | |
net loss per | |
share $ (0.69)| $ (0.64) $(2.73) | $(3.06)
========| ======== ======= | =======
Total sales | |
increase (decrease) | |
All stores 10.9%| -5.6% 13.4% | 0.9%
Comparable | |
stores 10.5%| -2.0% 14.2% | 4.7%
| |
Number of stores in | |
operation at end of | |
period 104 | 103 104 | 103
</TABLE>
<TABLE>
BRADLEES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations (Continued)
- ---------------------------------
<CAPTION>
13 Weeks Ended 39 Weeks Ended
Oct. 30, 1999 Oct. 31, 1998 Oct. 30, 1999 Oct. 31, 1998
------------- ------------- ------------- -------------
Registrant Predecessor Registrant Predecessor
------------- ------------- ------------- -------------
As a percentage of net sales,
results were as follows:
<S> <C> <C> <C> <C>
Net sales 100.0%| 100.0% 100.0% | 100.0%
Cost of goods | |
sold 69.5 | 69.6 69.7 | 70.1
------ | ------ ------ | -----
Gross margin 30.5 | 30.4 30.3 | 29.9
Leased depart. | |
and other | |
oper. income 1.0 | 1.0 1.0 | 1.0
------ | ------ ------ | -----
31.5 | 31.4 31.3 | 30.9
Selling, store | |
operating, | |
admin. and | |
distribution | |
expenses 29.3 | 30.7 29.9 | 31.0
Depreciation & | |
amortization | |
expense 1.9 | 2.5 2.0 | 2.7
Loss on dispos. | |
of properties - | - - | 0.2
Interest & debt | |
expense 2.3 | 1.4 2.1 | 1.3
Reorganization | |
items - | (0.9) (0.1) | (0.3)
------- | ------- ------- | --------
Net loss (2.0)%| (2.3)% (2.6)%| (3.8)%
========| ======== ========| ========
</TABLE>
Certain statements incorporated by reference or made in this
report are "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. When we use the words
"anticipate," "assume," "believe," "estimate," "expect,"
"intend" and other similar expressions in this report, 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:
international, national, regional and local economic and
political conditions; demographic changes; changes in
competition (including new competition in former Caldor
locations opened in Fall 1999 or expected to open in Spring
2000); unfavorable changes in interest rates; Year 2000 issues;
unfavorable weather conditions; loss of significant vendors;
availability of adequate overseas transportation; liability and
other claims asserted against us; fluctuations in operating
results; increased costs of key resources; continued acceptance
of merchandising and marketing initiatives; changes in consumer
spending and shopping habits; availability of new store sites;
changes in import duties, tariffs and quotas; changes in
business strategy; the ability to negotiate mutually acceptable
collective bargaining agreements; the ability to attract and
retain qualified personnel; and those risks and uncertainties
contained under the heading "Risk Factors" beginning on page 8
of the Company's Registration Statement on Form S-1, as amended
from time to time, as filed with the SEC.
Since fresh-start reporting has been reflected in the
accompanying condensed financial statements (Note 2) as of
October 30, 1999 and for Third Quarter and Year-to-Date 1999,
those statements are not comparable in certain material respects
to the condensed consolidated financial statements as of October
31, 1998 and for Third Quarter and Year-to-Date 1998.
Accordingly, a black line has been drawn between the
Registrant's financial statements and the Predecessor's
financial statements. We have attempted to indicate, where
feasible, the major effects on comparability from fresh-start
reporting in the following discussion and analysis of financial
condition and results of operations for Third Quarter and
Year-to-Date 1999.
THIRD QUARTER 1999 COMPARED TO
THIRD QUARTER 1998
Total sales for Third
Quarter 1999 increased $35.3 million or 10.9% from Third Quarter
1998 due primarily to an increase of 10.5% in comparable store
sales (including leased shoe department sales). In addition,
two new stores were opened in October, 1999. We believe that
the increase in comparable store sales was due mostly to
continued favorable customer response to our merchandising and
marketing initiatives and the first-quarter liquidation of one
of our major competitors (Caldor Corp.).
Over the last two years, we have lowered opening price points,
developed more item-intensive and price-point oriented circular ad
offerings, introduced certain convenience and commodity products, and
implemented and expanded two successful programs: "Certified
Value" (highlights highly recognizable items at competitive
everyday prices) and "WOW" (integrates targeted and mostly
unadvertised opportunistic purchases). We had strong sales of
both hardlines and softlines merchandise in Third Quarter 1999,
with hardlines merchandise experiencing the larger increase.
Comparable store sales increased 4.9% during the fiscal month of
November, 1999, which had unseasonably warm weather that
negatively impacted sales. The Company also discontinued one
seasonal promotional event in November, 1999 as compared to
November, 1998.
Gross margin increased $11.1 million in Third Quarter 1999 compared to
Third Quarter 1998 due to the higher sales and a slightly higher
gross margin rate (30.5% vs. 30.4%). Leased department and
other operating income increased $0.2 million but remained the
same as a percentage of net sales in Third Quarter 1999 compared
to Third Quarter 1998.
Selling, store operating, administrative and distribution ("SG&A")
expenses increased $6.0 million but dropped 1.4% as a percentage
of net sales (due to the improved sales performance) in Third
Quarter 1999 from Third Quarter 1998. The higher SG&A expenses
were primarily due to store and distribution expenses associated
with staffing requirements to handle the higher sales volume and
satisfy customer demand and a $1.3 million credit in the Third
Quarter 1998 benefits expense that resulted from a reduction in
retiree medical benefits (Note 8). In addition, preopening
expenses of $1.2 million were incurred in Third Quarter 1999 for
the two new stores.
Depreciation and amortization expense declined $1.2 million or 0.6%
as a percentage of net sales in Third Quarter 1999 from Third Quarter
1998 due primarily to the impact of fresh-start reporting.
Interest and debt expense increased $3.4 million or 0.9% as a percentage
of net sales in Third Quarter 1999 from Third Quarter 1998. This
increase was due to $2.3 million of noncash interest expense
resulting from the amortization of the discount associated with
the unfavorable lease liability recorded under fresh-start
reporting, interest of $0.6 million on the Lease Financing
Obligation (Note 4) and interest of $0.4 million on the new
notes issued under the plan of reorganization.
The reorganization credit of $2.8 million in Third Quarter 1998
was directly associated with the Chapter 11 proceedings and is
discussed in Note 6.
We did not record an income tax provision in Third Quarter 1999
due to the current expectation of no income tax expense or
benefit in 1999. There was also no income tax expense or
benefit recorded in Third Quarter 1998.
YEAR-TO-DATE 1999 COMPARED TO YEAR-TO-DATE 1998
Year-to-Date 1999 total sales increased $126.0 million or
13.4% from Year-to-Date 1998 due to this year's 14.2% increase
in comparable store sales and the two new stores opened in
October, partially offset by the impact from the closing of five
stores in the first quarter of 1998 and one store in the first
quarter of 1999. We believe that the Year-to-Date 1999 increase
in comparable store sales was due primarily to the same factors
discussed above for Third Quarter 1999. We had strong increases
in Year-to-Date 1999 sales of both hardlines and softlines
merchandise, with hardlines merchandise experiencing the larger
increase.
Gross margin increased $41.5 million in Year-to-Date 1999
compared to Year-to-Date 1998 due primarily to the higher sales
and a higher gross margin rate (30.3% vs. 29.9%). The improved
year-to-date gross margin rate was principally the result of a
lower markdown rate which related, in part, to the strong sales
performance. Leased department and other operating income
increased $0.7 million due mostly to improved leased shoe
department sales but stayed the same as a percentage of net
sales due to the strong overall sales growth (which exceeded the
leased department sales growth).
Year-to-Date 1999 SG&A expenses increased $26.7 million
but dropped 1.1% as a percentage of net sales (due to the
improved sales performance) from Year-to-Date 1998. The higher
SG&A expenses were primarily due to the incremental expenses
incurred to handle the higher sales volume as discussed above
for Third Quarter 1999 and a $4.0 million credit in the
Year-to-Date 1998 benefits expense that resulted from a
reduction in retiree medical benefits (Note 8).
Depreciation and amortization expense
declined $3.3 million or 0.7% as a percentage of net sales in
Year-to-Date 1999 from Year-to-Date 1998 due primarily to the
impact of fresh-start reporting.
Interest and debt expense increased $9.8
million or 0.8% as a percentage of net sales in Year-to-Date
1999 from Year-to-Date 1998. This increase was due primarily to
$7.0 million of noncash interest expense resulting from the
amortization of the discount associated with the unfavorable
lease liability recorded under fresh-start reporting and
interest of $1.9 million on the new notes issued under the plan
of reorganization.
Reorganization credits of
$0.8 and $2.6 million in Year-to-Date 1999 and 1998,
respectively, were directly associated with the Chapter 11
proceedings and are discussed in Note 6.
We did not record an income
tax provision in Year-to-Date 1999 due to the current
expectation of no income tax expense or benefit in 1999. There
was also no income tax expense or benefit recorded in
Year-to-Date 1998.
LIQUIDITY AND CAPITAL RESOURCES
We had outstanding borrowings of $158.2 million at October 30, 1999,
exclusive of the issuance of letters of credit, under our $270
million Revolver (Note 4) compared to outstanding borrowings of
$157.4 million at October 31, 1998, exclusive of the issuance of
letters of credit, under the DIP Facility (Note 4). Peak and
average Revolver borrowings were $165 and $132 million,
respectively, in Year-to-Date 1999 compared to $162 and $116
million under the DIP Facility, respectively, in Year-to-Date
1998. The associated weighted average interest rate in
Year-to-Date 1999 (7.44%) declined from the same prior-year
period (7.93%). The increase in average borrowings since the
end of Third Quarter 1998 related primarily to reorganization
expenses paid since that period.
The amount available to borrow in the fourth quarter of 1999 is
currently expected to peak at approximately $270 million in
November, 1999 and average approximately $235 million. We
currently expect borrowings under the Revolver in the fourth
quarter to peak at $172 million in November, 1999 and average
approximately $140 million, while total outstanding letters of
credit under the Revolver are expected to peak at approximately
$32 million in January, 2000 and average approximately $30
million.
Other than payments made to certain pre-petition creditors
approved by the Bankruptcy Court (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 of
our pre-petition indebtedness was subject to settlement under
the reorganization case.
In Year-to-Date 1999, cash used by operations before
reorganization items was $12.7 million, compared to $48.8
million of cash used by operations before reorganization items
in Year-to-Date 1998. This improvement in year-to-date cash
from operating activities was due primarily to the improvement
in operating results and improved vendor payment terms. Net
cash used by reorganization items in Year-to-Date 1999 of $9.9
million was comprised of Chapter 11-related professional fee
payments of $8.1 million and store closing and severance costs
of $1.8 million.
Inventories at October 30, 1999 increased $4.6 million
from October 31, 1998, due primarily to the two new stores and
increased $91.2 million from January 30, 1999 due primarily to a
normal seasonal build-up.
Accounts payable at October 30, 1999, increased $21.7 million
from October 31, 1998 due to improved vendor payment terms and a
higher level of merchandise purchases and increased $81.8
million from January 30, 1999 due to the associated normal
seasonal build-up of inventories, a higher level of merchandise
purchases and improved vendor payment terms.
Accrued expenses were $3.6 million lower than at
October 31, 1998 due primarily to this year's discontinuance of
accruals for Chapter 11 professional fees. Accrued expenses at
October 30, 1999 were $9.7 million lower than at January 30,
1999 due principally to payments made against reserves
established prior to 1999 for Chapter 11 professional fees and
employee severance and termination benefits and store closing
costs.
We incurred capital expenditures,
excluding lease acquisition costs of $1.3 million for two former
Caldor stores opened in October, 1999, of $17.1 million in
Year-to-Date 1999 (compared to $10.4 million in Year-to-Date
1998), primarily for a warehouse management system (which was
implemented in August, 1999 in our Edison, NJ distribution
center), remodeling of the two new stores and various other
store and distribution center improvements. For all of 1999, we
expect total capital expenditures (including the lease
acquisition costs) to be approximately $25 million, which is an
allowed amount under an amendment to our Revolver obtained in
September. These 1999 capital expenditures are primarily for
the warehouse management system and other management information
systems, remodeling of three new stores (including an additional
former Caldor store on Staten Island, NY to be opened in April,
2000 under an operating lease) and various other store and
distribution center improvements. We currently expect to
finance these expenditures through internally-generated funds.
We believe that the availability under our Revolver, together with
our available cash and expected cash flows from 1999 operations
and beyond, will enable us to fund our expected needs for
working capital, capital expenditures and debt service
requirements. We expect to utilize internally generated funds
and/or funds available under the Revolver in December, subject
to minimum availability requirements, to prepay certain of the
Notes (Note 4) currently remaining outstanding. An
extraordinary gain of approximately $1 million is expected to be
recorded at the time of the prepayment. Our ability to meet our
financial obligations, make planned capital expenditures and
implement our strategic initiatives will depend on our future
operating performance, which will be subject to financial,
competitive, economic and other factors affecting the industry
and our operations, including factors beyond our control.
Further improvements in operating profitability and achievement
of expected cash flows from operations are necessary to provide
adequate liquidity and are dependent upon our attainment of
comparable store sales increases, along with gross margin and
expense levels that are reasonably consistent with our financial
plans.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 project is virtually complete and the cost of
remediation totaled approximately $4.1 million, including $1.7
million incurred in Year-to-Date 1999 that was included in SG&A
expenses. All software replacement or remediation was virtually
complete as of the end of Third Quarter 1999. Successful tests
have been performed of all major systems.
In 1998, to address compliance of our information technology
systems, we contracted with a major outside consulting firm to
provide the resources required to identify Year 2000 issues and
remediate our systems as necessary. In some cases,
non-compliant software has been replaced through upgrades
provided by manufacturers of the respective software or by
installation of compliant replacement systems. We also
addressed embedded systems and computer-controlled devices in
our stores, distribution centers and central office and we are
taking the necessary steps to ensure Year 2000 compliance. As
of October, 1999, the Year 2000 project was approximately 99%
complete, excluding the third-party compliance evaluation
discussed below.
We believe that the critical systems we
operate are now substantially Year 2000 compliant and that we
are not likely to encounter significant internal operational
problems. However, there is no guarantee that a Year 2000
related failure will not arise. This is due to the uncertainty
surrounding potential third-party related Year 2000 problems, as
well as our potential failure to discover all of our own
susceptible internal systems. The risk to us resulting from the
failure of third-party or internal systems is similar to other
retailers and, for the most part, to other businesses. We took
steps to minimize this risk by surveying our suppliers and
business partners to assess their Year 2000 readiness, and their
responses are being analyzed for any necessary action.
A reasonable worst case
scenario could involve the failure of our systems or our
supplier and business partner systems which would cause a
material disruption to our operations. For example, this could
result in an interruption of certain normal business activities
and operations such as a temporary inability to process sales
transactions or transmit data either internally or to suppliers
and business partners. If the worst case scenario should occur
for any significant duration, it could have a material adverse
impact on our business, results of operations, liquidity and
financial position. However, at this time, we are unable to
determine completely the financial consequences of such
potential Year 2000 failures.
While we expect our efforts will provide reasonable assurance
that material disruptions will not occur, the potential for
disruptions cannot be fully identified. We therefore have
developed contingency plans that will provide for alternative
courses of action to mitigate material individual system or
process failures due to Year 2000 issues. At this time, we
cannot estimate the additional cost, if any, that might be
incurred from the implementation of such contingency plans.
The costs of the Year 2000 project and the dates on which we
plan to complete Year 2000 modifications are based on our best
estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources, third-party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
plans.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk
associated with our financial instruments. We are exposed to
such market risk from changes in interest rates which may
adversely affect our financial position, results of operations
and cash flows. In seeking to minimize the risks from interest
rate fluctuations, we manage exposures through our regular
operating and financing activities. We do not use financial
instruments for trading or other speculative purposes and are
not party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our
borrowings under our $270 million post-emergence financing
facility (Note 4). 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.
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 Second Amendment to Credit Agreement 27
dated as of September 22, 1999, among
reorganized Bradlees Stores, Inc.,
reorganized Bradlees, Inc. and
BankBoston, N.A., as Agent.
15 Letter re: unaudited interim 36
financial information.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the
quarterly period ended October 30, 1999:
Date of Report Date of Filing Item Number Description
-------------- -------------- ----------- -----------
August 20, 1999 August 20, 1999 5 Disclosure of
second quarter
1999 results
compared to
plan.
BRADLEES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities
Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly
authorized.
BRADLEES, INC.
Date: December 13, 1999 By /s/ PETER THORNER
Peter Thorner
Chairman and
Chief Executive Officer
Date: December 13, 1999 By /s/ CORNELIUS F. MOSES III
Cornelius F. Moses III
Senior Vice President, Chief
Financial Officer
EXHIBIT 10
SECOND AMENDMENT TO
CREDIT AGREEMENT
SECOND AMENDMENT (this
"Amendment"), dated as of September 22, 1999, among reorganized
BRADLEES STORES, INC., a Massachusetts corporation (the
"Borrower"), reorganized BRADLEES, INC., a Massachusetts
corporation ("BI"), and each of the other guarantors listed in
Schedule 3.04 to the Credit Agreement (as defined below)
(together with BI, each a "Guarantor" and collectively, the
"Guarantors"), and the Lenders party to the Credit Agreement
referred to below. Capitalized terms not otherwise defined
herein shall have the meanings ascribed to them in the Credit
Agreement.
W I T N E S S E T H
WHEREAS, the
Borrower, BI, the Guarantors, the financial institutions party
to the Credit Agreement as lenders (the "Lenders"), BankBoston,
N.A., as issuer of Letters of Credit, as administrative agent
(the "Administrative Agent"), and as agent for the Tranche B
Lenders, BankBoston Retail Finance, Inc., as collateral agent
(the "Collateral Agent"), and the CIT Group/Business Credit,
Inc. and Congress Financial Corporation (New England), each as
co-agents, are parties to that certain Revolving Credit and
Guaranty Agreement, dated as of February 2, 1999, as amended by
that certain First Amendment to Credit Agreement, dated as of
March 24, 1999 (as amended, restated, supplemented or otherwise
modified from time to time, the "Credit Agreement");
WHEREAS, the Borrower
has requested that the Lenders agree to certain amendments to
the Credit Agreement as more fully set forth below; and
WHEREAS, subject to the
terms and conditions set forth below, the Lenders are willing to
agree to such amendments.
NOW, THEREFORE, in
consideration of the premises and for other good and valuable
consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties hereto do hereby agree as follows:
1. Amendments.
----------
(a) Section
5.17 of the Credit Agreement is amended by deleting "$6,000" in
the sixth line thereof and replacing it with "$9,000".
(b) Section
6.04 of the Credit Agreement is amended by (i) deleting
"$20,000,000" wherever it appears therein and replacing it with
"$25,000,000" and (ii) inserting the following text at the end
of such Section:
"Notwithstanding the foregoing, to the extent BI receives
any cash proceeds (the "Equity Proceeds") from the issuance
(the "Equity Issuance") by BI of any of its equity
securities in a transaction not otherwise prohibited under
this Credit Agreement, the Equity Proceeds may be used by
the Credit Parties for Capital Expenditures without
counting such Capital Expenditures against the dollar
limits set forth in the immediately preceding sentence;
provided that, (i) the Administrative Agent shall have
received fully executed copies of all instruments,
agreements and other documents which relate to such Equity
Issuance (excluding copies of the certificates representing
the securities so issued, other than a specimen thereof),
(ii) as required by the Loan Documents, pending any
expenditure of such Equity Proceeds permitted under this
Credit Agreement, all Equity Proceeds are held by the
Collateral Agent as Collateral for the Obligations pursuant
to documentation reasonably satisfactory to the Collateral
Agent, (iii) at the end of each month in which any Capital
Expenditures are made from such Equity Proceeds, the
Administrative Agent receives from the Borrower a written
statement of the amount of such Capital Expenditures made
during such month and a certification from an officer of
the Borrower that such expenditures were for Capital
Expenditures, and (iv) during the period that any Equity
Proceeds are being held by the Collateral Agent as provided
above, to the extent that the Borrower or any other Credit
Party makes any expenditure that, historically, is outside
of the Borrower's or such Credit Party's ordinary course of
business (as reasonably determined by the Administrative
Agent) that is not a Capital Expenditure, the full amount
of such expenditure shall be deducted from the amount of
such Equity Proceeds that may be utilized for Capital
Expenditures in excess of the amounts set forth in the
immediately preceding sentence."
(c) The definition of "Change of Control" set forth in
Section 1.01 of the Credit Agreement is hereby amended as
follows:
(i) The parenthetical phrases "(other than Gabriel and
Elliott and their respective Affiliates)" and "(or, in the
case only of direct purchasers from Gabriel or Elliott of
shares of voting securities of BI owned by Gabriel or
Elliott on the Plan Effective Date, 50%)" are hereby
deleted; and
(ii) Effective after the election of members of the
Board of Directors of BI at BI's regular shareholders
meeting in calendar year 2000, the term "Plan Effective
Date" in clause (b) thereof shall be replaced with the term
"2000 Meeting Date".
(d) The following definition shall be added to the
Credit Agreement in proper alphabetical sequence:
""2000 Meeting Date" shall mean the date of BI's
- --------------------
regular shareholders meeting in calendar year 2000."
2. Conditions Precedent. The amendments contained in Sections
--------------------
1 and 2 above are subject to, and contingent upon, the
prior satisfaction of each of the following conditions:
(a) the Administrative Agent shall have received duly
executed counterparts hereof signed by the Credit Parties
and the Required Lenders;
(b) all representations and warranties of the Credit
Parties contained herein shall be true and correct in all
material respects as of the date of this Amendment; and
(c) in consideration for the amendments contained in
Sections 1(a) and 1(b) above, the Borrower shall have paid
to the Administrative Agent in immediately available
funds, for the ratable benefit of the Lenders executing
this Amendment, a nonrefundable amendment fee of $135,000.
3.Representations and Warranties. The Credit Parties hereby
--------------------------------
represent and warrant to the Lenders as follows:
(a) As of the date hereof, the representations and
warranties contained in the Credit Agreement and the other
Loan Documents are true and correct in all material
respects after giving effect to this Amendment as though
made on and as of such date, except to the extent that
such representations and warranties expressly relate
solely to an earlier date (in which case such
representations and warranties shall have been true and
correct on and as of such earlier date);
(b) after giving effect to this Amendment, no event has
occurred and is continuing which constitutes an Event of
Default or an Event of Super-Default;
(c) each of the Credit Parties has the corporate power
and authority to execute, deliver and perform the terms
and provisions of this Amendment and the transactions
contemplated hereby, and has taken or caused to be taken
all necessary actions to authorize the execution, delivery
and performance of this Amendment and the performance of
the transactions contemplated hereby;
(d) except for those that have been obtained, no
consent of any other Person and no action of or filing
with any Governmental Authority is required to authorize,
or is otherwise required in connection with, the
execution, delivery and performance of this Amendment and
the performance of the transactions contemplated hereby;
(e) this Amendment has been duly executed and delivered
on behalf of each of the Credit Parties and constitutes
the legal, valid and binding obligation of each Credit
Party, enforceable in accordance with its terms; and
(f) the execution, delivery and performance of this
Amendment will not violate any law, statute or regulation,
or any order or decree of any Governmental Authority, or
conflict with, or result in the breach of, or constitute a
default under, any material contract by which any Credit
Party is bound or the articles of incorporation or bylaws
of any Credit Party.
4. Effect of Amendment. Except as specifically provided
herein, this Amendment does not in any way affect or impair the
terms, conditions and other provisions of the Credit Agreement
or the other Loan Documents, and all such terms, conditions and
other provisions of such documents shall remain in full force
and effect. The amendments contained herein are limited to the
specific provisions and circumstances described and shall not be
deemed to (i) be a waiver or amendment of any other term or
condition of the Credit Agreement or any other Loan Document or
(ii) prejudice any rights not specifically addressed herein
which the Administrative Agent, the Collateral Agent or any
Lender may now have or may have in the future under the Credit
Agreement or any other Loan Document.
5. Counterparts. This Amendment may be executed in
any number of counterparts, each of which shall be deemed an
original, and all of which taken together shall be deemed to
constitute one and the same instrument. Delivery of an executed
signature page of this Amendment by facsimile transmission shall
be effective as delivery of a manually executed counterpart
hereof.
6. Severability. Any provision of this
Amendment that is prohibited or unenforceable in any
jurisdiction for any reason shall, as to such jurisdiction, be
ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions
hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such
provision in any other jurisdiction. If this Amendment is
deemed invalid or unenforceable with respect to any Credit Party
which is a party hereto, this Amendment shall remain valid and
enforceable with respect to all other Credit Parties party
hereto.
7. Governing Law. THIS AMENDMENT SHALL BE CONSTRUED IN ACCORDANCE
WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK WITHOUT
GIVING EFFECT TO THE CHOICE OF LAW PRINCIPLES THEREOF.
8. Headings. Section headings are included herein for convenience
of reference only and shall not constitute a part of this
Amendment for any other purpose.
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be duly executed as of the day and the year first
above written.
BRADLEES STORES, INC.,
as Borrower
By: /s/PAUL R. MCKELVEY
Name: Paul R. McKelvey
Title: Vice President - Treasurer
GUARANTORS:
BRADLEES, INC.,
as a Guarantor
By: /s/PAUL R. MCKELVEY
Name: Paul R. McKelvey
Title: Vice President - Treasurer
NEW HORIZONS OF YONKERS, INC.,
as a Guarantor
By: /s/PAUL R. MCKELVEY
Name: Paul R. McKelvey
Title: Vice President - Treasurer
LENDERS:
BANKBOSTON, N.A.,
as a Lender
By: /s/FRANCIS O'CONNOR
Name: Francis O'Connor
Title: Vice President
Address:100 Federal Street, 9th Floor
Boston, MA 02110
BANKBOSTON, N.A.,
as a Lender
By: /s/ROBERT DEANGELIS
Name: Robert DeAngelis
Title: Senior Vice President
FINOVA CAPITAL CORPORATION
as a Lender
By: /s/JASON S. ITO
Name: Jason S. Ito
Title:Authorized Signer
FIRSTRUST BANK
as a Lender
By: /s/BRYAN T. DENNEY
Name: Bryan T. Denney
Title: Vice President
FOOTHILL CAPITAL CORPORATION
as a Lender
By: /s/TODD R. NAKAMOTO
Name: Todd R. Nakamoto
Title: Vice President
FREMONT FINANCIAL CORPORATION
as a Lender
By: /s/RUTH YANG
Name: Ruth Yang
Title: Authorized Signer
GENERAL ELECTRIC CAPITAL
CORPORATION
as a Lender
By: /s/CHARLES D. CHIODO
Name: Charles D. Chiodo
Title: Authorized Signature
LASALLE BUSINESS CREDIT, INC.,
as a Lender
By: /s/WILLIAM A. STAPEL
Name: William A. Stapel
Title: F. V. P.
NATIONAL CITY COMMERCIAL
FINANCE, INC.,
as a Lender
By: /s/PAUL H. WEYBRECHT
Name: Paul H. Weybrecht
Title: Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.,
as a Lender
By: /s/JAMES CONHEENEY
Name: James Conheeney
Title: Vice President
JACKSON NATIONAL LIFE INSURANCE
COMPANY
as a Lender
By: /s/MICHAEL J. WILLIAMS
Name: Michael J. Williams
Title: Vice President
RECEIPT ACKNOWLEDGED:
BANKBOSTON, N.A.,
as Administrative Agent, as Tranche B. Agent,
and as Issuing Bank
By: /s/ROBERT DEANGELIS
Name: Robert DeAngelis
Title: Senior Vice President
BANKBOSTON RETAIL FINANCE, INC.,
By: /s/ROBERT DEANGELIS
Name: Robert De Angelis
Title: Senior Vice President
Exhibit 15
December 13, 1999
Bradlees, Inc.
One Bradlees Circle
Braintree, Massachusetts 02184
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of
the unaudited interim financial information of Bradlees, Inc.,
and subsidiaries for the 13-week and 39-week periods ended
October 30, 1999 and October 31, 1998 as indicated in our report
dated November 17, 1999, which included an explanatory paragraph
relating to the Company's emergence from bankruptcy on February
2, 1999, and adoption of "fresh-start reporting." Because we
did not perform an audit, we expressed no opinion on that
information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the quarter
ended October 30, 1999, is incorporated by reference in
Registration Statement No. 333-77555.
We also are aware that the aforementioned report,
pursuant to Rule 436 (c) under the Securities Act of 1933, is
not considered a part of the Registration Statement prepared or
certified by an accountant or a report prepared or certified by
an accountant within the meaning of Sections 7 and 11 of that
Act.
/s/ARTHUR
ANDERSEN LLP
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