<PAGE>
Filed pursuant to Rule 424(b)(1)
Registration No. 333-66953
PROSPECTUS
BRADLEES, INC.
7,267,424 Shares of Common Stock
BRADLEES STORES, INC.
$36,000,000 of 9% Convertible Notes
Bradlees, Inc. and its subsidiary companies operate discount department
stores in the Northeast through Bradlees, Inc.'s subsidiary, Bradlees Stores,
Inc. The Securities being offered by this Prospectus were issued by us under
the terms of our bankruptcy reorganization.
This Prospectus relates to:
. 7,267,424 shares of Common Stock of Bradlees, Inc.;
. $36,000,000 of 9% Convertible Notes issued by Bradlees Stores, Inc. and
the Common Stock issuable upon conversion of the Convertible Notes; and
. The guarantee by Bradlees, Inc. and New Horizons of Yonkers, Inc. of the
9% Convertible Notes.
We are registering these securities on behalf of the Selling Securityholders.
The Selling Securityholders received these securities, directly or indirectly,
pursuant to our Plan of Reorganization in exchange for the cancellation of
various indebtedness owed by us to them. We are not selling any of these
securities and we will not receive any proceeds from the sale of these
securities. The Selling Securityholders may offer these securities through
public or private transactions, on the Nasdaq National Market, at prevailing
prices or at privately negotiated prices. The registration of these securities
does not necessarily mean that any Selling Securityholder will actually sell
such securities.
The Common Stock offered by this Prospectus is listed on the Nasdaq National
Market on a "when issued" basis under the symbol "BRADV." On February 12, 1999,
the last reported sale price of our Common Stock was $5.50 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 6.
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.
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The date of this Prospectus is February 24, 1999
<PAGE>
TABLE OF CONTENTS
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Page
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PROSPECTUS SUMMARY........................................................ 2
The Company.............................................................. 2
The Offering............................................................. 3
Summary Financial Data................................................... 5
RISK FACTORS.............................................................. 6
Economic and Industry Risks.............................................. 6
Competition............................................................. 6
Concentration in the Northeast.......................................... 6
Merchandising Strategy Must Successfully Evolve......................... 6
Labor Negotiations...................................................... 7
Financial Risks.......................................................... 7
High Leverage........................................................... 7
History of Losses....................................................... 7
Restrictions Imposed by the Terms of the BankBoston Facility............ 7
Risk to Continuing Operations if Covenants Not Met...................... 8
Limitations on Future Growth............................................ 8
Liquidity............................................................... 8
Assets Pledged as Collateral under the BankBoston Facility.............. 9
Post-Bankruptcy Risks.................................................... 9
Recent Emergence from Chapter 11 Proceedings............................ 9
Fresh Start Reporting May Make Future Financial Statements Difficult to
Compare................................................................ 9
Determination of Equity Value........................................... 9
Tax Consequences of the Plan of Reorganization; Potential Loss of
Certain Tax Attributes................................................. 10
Risks Related to the Securities.......................................... 10
Limited Market for Common Stock and Notes............................... 10
Restrictions on Common Stock Dividends.................................. 10
Future Stock Issuances Can Dilute Current Owners........................ 11
Guarantor Does not Have Significant Separate Assets..................... 11
Fraudulent Conveyance Matters........................................... 11
Miscellaneous Business Risks............................................. 11
Dependence on key personnel............................................. 11
Potential Year 2000 Liability........................................... 11
Change of Control not Restricted........................................ 12
Board of Directors May Change........................................... 12
THE COMPANY............................................................... 13
General.................................................................. 13
Background to Our Bankruptcy Reorganization.............................. 13
The Plan of Reorganization............................................... 13
USE OF PROCEEDS........................................................... 18
DIVIDEND POLICY........................................................... 18
CAPITALIZATION............................................................ 19
SELECTED FINANCIAL DATA................................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................................................... 30
Results of Operations.................................................... 30
1997 Compared to 1996.................................................... 30
1996 Compared to 1995.................................................... 32
Year-to-Date 1998 Compared to Year-to-Date 1997.......................... 33
Liquidity and Capital Resources.......................................... 34
Year 2000 Readiness Disclosure........................................... 35
</TABLE>
(i)
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<TABLE>
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BUSINESS.................................................................... 37
Company Overview........................................................... 37
Employees and Collective Bargaining Arrangements........................... 38
Competition................................................................ 38
Patents, Trademarks and Licenses........................................... 39
Seasonality................................................................ 39
Credit Facility............................................................ 39
Further Information........................................................ 39
Facilities................................................................. 40
Legal Proceedings.......................................................... 40
MANAGEMENT.................................................................. 41
Directors and Executive Officers........................................... 41
Board of Directors of Bradlees, Inc. and Its Committees.................... 43
Board of Directors of Bradlees Stores, Inc................................. 44
Board of Directors of New Horizons of Yonkers, Inc. ....................... 44
Summary Compensation Table................................................. 45
Corporate Bonus Plan....................................................... 46
Enterprise Appreciation Incentive Plan..................................... 46
Management Emergence Bonus Plan............................................ 46
Severance Program.......................................................... 47
Stock Option Plan for Key Employees........................................ 47
Retirement Plans........................................................... 47
Compensation of Directors.................................................. 48
Employment Agreement with Peter Thorner.................................... 48
Compensation Committee Interlocks and Insider Participation................ 49
PRINCIPAL STOCKHOLDERS...................................................... 50
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................................... 56
Limitation on Indebtedness................................................. 57
Guarantee.................................................................. 57
Events of Default, Notice and Waiver....................................... 57
Modification of the Indenture.............................................. 59
Collateral................................................................. 59
Conversion................................................................. 60
Governing Law.............................................................. 61
</TABLE>
(ii)
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<TABLE>
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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;
. 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; 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 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 key merchandise categories:
1. Moderately-priced basic and casual apparel;
2. Basic and fashion items for the home; and
3. 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 one year.
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
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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).. 10,225,711 shares of Common Stock.
Voting Rights................. Each share of Common Stock has one vote.
Listing....................... We have listed the common stock offered by this
Prospectus on the Nasdaq National Market.
Trading Symbol................ BRAD
</TABLE>
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(1) Under the terms of the Plan of Reorganization, the number of shares issued
to the Selling Stockholders varies with the amount of general unsecured
claims allowed. The Securities Offered and Common Stock Outstanding assumes
that the amount of the general unsecured claims allowed are not less than
$225 million and the number of shares issued to the Selling Securityholders
is not more than 7,267,424. Excludes an indeterminate number of shares
issuable upon conversion of the 9% Convertible Notes. Since the number of
shares of Common Stock issuable upon conversion of the 9% Convertible Notes
varies as the market price of the Common Stock changes, it is impossible at
this time to determine how many shares may be issued upon conversion of the
9% Convertible Notes.
(2) Excluding 1,000,000 shares of Common Stock reserved for issuance upon
exercise of outstanding warrants as of February 2, 1999 (the "Warrants")
and 750,000 shares of Common Stock issuable upon exercise of employee
options which we have agreed to issue under the Plan of Reorganization.
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 will be 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,
3
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Bradlees, Inc. and New Horizons of Yonkers, Inc.
must make them instead. The guarantee by
Bradlees, Inc. is subordinated to the guarantee
by Bradlees, Inc. of our credit facility and the
guarantee by New Horizons of Yonkers, Inc. is
subordinated to the guarantee by New Horizons of
Yonkers, Inc. of our credit facility.
Liens....................... The 9% Convertible Notes will be 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, 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. 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 will be 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.
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.
4
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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 thirty-
nine weeks ended October 31, 1998 and November 1, 1997 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 periods.
The results for the thirty-nine weeks ended October 31, 1998 are not
necessarily indicative of the results to be expected for the full year. Fiscal
year 1997 refers to the 52 weeks ended January 31, 1998, fiscal year 1996
refers to the 52 weeks ended February 1, 1997 and fiscal year 1995 refers to
the 53 weeks ended February 3, 1996. 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."
<TABLE>
<CAPTION>
Fiscal Year 39 Weeks Ended
---------------------------------------------- --------------------------------
1997 October 31, 1998
---------------------- -------------------
Pro Pro November 1,
Historical Forma(a) 1996 1995 Historical Forma(a) 1997
---------- ---------- ---------- ---------- ---------- -------- -----------
(in thousands, except ratio and per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net Sales............... $1,344,444 $1,294,748 $1,561,718 $1,780,768 $906,385 $903,074 $895,220
Gross margin............ 396,357 384,457 434,067 491,691 271,002 270,163 269,699
Operating expenses(b)... 401,578 373,281 530,757 612,102 296,180 282,768 308,666
Operating income
(loss)................. (5,221) 11,176 (96,690) (120,411) (25,178) (12,605) (38,967)
Loss before income
taxes.................. (22,557) (18,525) (218,759) (311,946) (34,583) (33,794) (48,480)
Income tax benefit...... - - - 104,533 - - -
Net loss................ $ (22,557) $ (18,525) $ (218,759) $ (207,413) $(34,583) $(33,794) $(48,480)
Loss per share:
Basic and diluted...... $ (1.98) $ (1.81) $ (19.17) $ (18.17) $ (3.06) $ (3.30) $ (4.26)
Shares used for
computation:
Basic and diluted...... 11,365 10,226 11,412 11,416 11,311 10,226 11,382
Ratio of earnings to
fixed charges(c)....... - - - - - - -
</TABLE>
<TABLE>
<CAPTION>
October 31, 1998
--------------------
January 31, Pro
1998 Historical Forma(a)
----------- ---------- --------
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Balance Sheet Data:
Working capital(d)........................ $ 46,151 $ 10,836 $(17,509)
Total assets.............................. 595,166 661,410 596,002
Long-term debt, less current
maturities(d)............................ 27,073 26,211 60,562
Total stockholders equity (deficiency).... $(285,950) $(320,532) $ 85,000(e)
</TABLE>
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(a) Pro forma information gives effect to the consummation of the Plan,
including adjustments for fresh-start reporting. Pro forma condensed
consolidated statement of operations data for fiscal year 1997 and the
thirty-nine week period ended October 31, 1998 is presented as if the Plan
was consummated on February 1, 1997, and the balance sheet data at October
31, 1998 is presented as if the Plan was consummated on such date. See
"Unaudited Pro Forma Condensed Consolidated Financial Information." These
amounts are presented for informational purposes only and do not purport to
represent what the Company's financial position or results of operations
would have been if consummation of the Plan had actually occurred on such
dates.
(b) Net of other income.
(c) For the periods presented above, earnings were insufficient to cover fixed
charges by the amount of the respective loss before income taxes. 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) Excluding liabilities subject to settlement under the reorganization case.
(e) See "Risk Factors--Post Bankruptcy Risks--Determination of Equity Value."
5
<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 K-Mart Corp. and
regional companies, such as Caldor Corp. and Ames Department Stores. Caldor
Corp., which has been in bankruptcy since 1995, announced on January 22, 1999
that it intends to close all of its stores and liquidate its assets. Caldor
Corp. is currently conducting going-out-of-business sales in certain markets in
which we operate stores. In the near term it is likely that these sales will
create pressure on the sales of Bradlees' stores in these markets. In addition,
as Caldor Corp. liquidates its assets, new competitors may purchase the Caldor
stores. It is uncertain at this time what competitive impact may result from
Caldor's liquidation of assets. 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 other competitors, we
are also 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.
6
<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 pro forma consolidated ratio of total debt to total capitalization
as of October 31, 1998 was approximately 0.72:1. 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 have been made each year since fiscal year 1996,
we have continued to incur net losses. For the 39 weeks ended October 31, 1998,
we reported a net loss of $34.5 million as compared to a net loss of $48.5
million for the 39 weeks ended November 1, 1997. Additionally, our November,
1998 and December, 1998 sales performance was below plan. 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.
7
<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 stores that do not meet our
performance objectives. Additionally, we may expand, downsize, relocate, or
remodel existing stores.
Further, numerous stores and our two distribution centers are in older
facilities. The foregoing limitations on capital expenditures could prevent us
from modernizing our distribution centers or remodeling our aging stores.
Liquidity
Although we have entered into the $270 million BankBoston Facility, we can
make no assurances that our cash and cash equivalents on hand and our cash
availability will be sufficient to meet our anticipated working capital needs
and capital expenditures in the future. To finance future expenditures, we may
need to issue additional securities and incur additional debt. We may not be
able to obtain additional required capital on satisfactory terms, if at all.
The failure to raise the funds necessary to finance future cash requirements
could materially and adversely affect our operating results in future periods.
We plan to sell our leasehold interest in our Yonkers, New York store. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
8
<PAGE>
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. 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 Future Financial Statements Difficult to Compare
For accounting purposes, we plan to use 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 will adopt "Fresh-Start Reporting" and will
reflect the effects of such adoption 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 1998 will
include a 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 included in the unaudited pro forma
condensed consolidated financial statements and elsewhere in this Prospectus
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 represents the ongoing revolver facility that
is estimated to remain after the seasonal cleanup of the facility. As a result,
the equity value was assumed to be in the range of $75 to $90 million. For
purposes of the Disclosure Statement and this Prospectus, we have determined
that an equity value of $85 million represents a reasonable estimate of
distributable equity value to the creditors. Subsequent to the filing of the
Disclosure Statement, a number of events have occurred which will impact the
determination of equity value, including but not limited to, the initial
trading prices of our stock (on a "when issued" basis), information regarding
our fourth quarter performance, a settlement with a landlord regarding the
disposition of a leasehold interest and the current liquidation of Caldor, a
major competitor. The weighted average price per share of our "when issued"
shares from the Effective Date through February 12, 1999 indicates an equity
value of approximately $52 million (based on 10,225,711 shares outstanding),
although there has been only limited trading during this period.
9
<PAGE>
In finalizing our fresh start reporting requirements, we are required to
perform a final appraisal of the book value of our equity which will take into
account the above matters and other pertinent events, and will result in a
change to the determination of equity value reflected in the unaudited pro
forma financial information. 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 will (i)
undergo 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) realize 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 will not be 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, will be
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 pre-reorganization
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 Securities, or that if a
market does develop, that the market will have sufficient liquidity so as not
to impact the price of the Securities.
In addition, pursuant to our Plan of Reorganization, Shares of Common Stock
and Warrants to purchase Common Stock will be 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 will generally be 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, to the extent one exists,
will be volatile and the availability for unrestricted sale of such a large
number of shares of Common Stock may have the effect of depressing the market
price of the Common Stock.
Restrictions on Common Stock Dividends
Old Bradlees did not declare or pay cash dividends on its common stock ("Old
Common Stock") or any other equity security while in Chapter 11, and we do not
anticipate paying cash dividends on the Common Stock offered hereby or any
other equity security in the foreseeable future. The BankBoston Facility
specifically prohibits the payment of any type of dividends on the Common
Stock. See "Terms of Outstanding Indebtedness-Credit Agreement."
10
<PAGE>
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. Pursuant to the Plan of
Reorganization, we have also agreed to issue options to purchase 750,000 shares
of our Common Stock at an exercise price per share which is the lowest 10-day
rolling average of the closing prices of our Common Stock within the period
between 60 and 90 days after the Effective Date (April 3, 1999 to May 3, 1999).
These options will be issued when their exercise price is determined. Further,
we can also issue additional securities (including 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. 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."
Potential Year 2000 Liability
We have determined that we must modify portions of our software so that our
computer systems will properly recognize and use dates beyond December 31,
1999. We believe we can mitigate the impact of the Year 2000 disruption by
upgrading or modifying existing software and, in certain instances, converting
to new software. However, if the Year 2000 upgrades, modifications and
conversions are not made, or are not made in a timely manner, the Year 2000
issue could have a material impact on our operations.
We are using both internal and external resources to remediate, replace and
test software for Year 2000 compliance. We have entered into a contract with a
major outside consulting firm to provide the majority of the
11
<PAGE>
resources necessary to identify, and then replace or remediate, our affected
systems. We intend to complete our Year 2000 project no later than the
beginning of the fourth quarter of fiscal 1999, but currently expect to
substantially complete the conversion by the second quarter of fiscal 1999. At
this time, we expect the cost of the Year 2000 project to be approximately $3
to $4 million, the majority of which is being incurred in 1998 and included in
SG&A expenses. Through October 31, 1998, we have incurred $1.9 million for such
expense.
The remaining major systems to be remediated or replaced are the Company's
merchandise planning system (approximately 50% remediated) and store host
systems (approximately 30% remediated) expected to be completed by the end of
the first quarter of 1999, and the warehouse management system that is
scheduled to be replaced by the end of the second quarter of 1999. A test of
all systems, including store support and facility systems, for proper Year 2000
compliance is planned for the end of the second quarter of 1999.
We are in the process of developing contingency plans in the event that such
replacement or remediation is not fully completed in a timely manner. We have
calculated the costs of the Year 2000 project and predicted the dates on which
we plan to complete the Year 2000 modifications using our best estimates, which
required using a number of assumptions of future events including the continued
availability of certain resources, third party modification plans and other
factors. However, we can not guarantee that we will achieve the predicted
estimates and our actual results could differ materially from those plans.
We are also attempting to obtain representations and assurances from our
third party providers of services and goods, including vendors of software
products, that their software is or will be Year 2000 compliant on a timely
basis. However, because certain of our processes may be interrelated with, or
dependent upon, systems outside our control, we can give no assurances that the
implementation of our Year 2000 project will be successful.
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.
12
<PAGE>
THE COMPANY
General
Bradlees, Inc. ("Bradlees") and its subsidiary companies operate 103
discount department stores as of February 1, 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. One store is
planned to be closed in March, 1999 and two other stores are expected to begin
closing in fiscal 1999. Headquartered in Braintree, Massachusetts, the Company
and its predecessor have been active in the discount department store business
for 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.
13
<PAGE>
CORPORATE STRUCTURE PRIOR TO THE REORGANIZATION CHART APPEARS HERE
CORPORATE STRUCTURE AFTER THE REORGANIZATION CHART APPEARS HERE
14
<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 $163 million, which consists of:
. Approximately $16 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 is anticipated to be primarily paid down through proceeds of
sale of our leasehold interest in our Yonkers, New York store and the
modification of the lease terms of our Union Square, New York store;
15
<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 $265 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."
. 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."
16
<PAGE>
. We determined to grant, on or about May 3, 1999, options to purchase
an aggregate of 750,000 shares of Common Stock to certain members of
our management. 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.
17
<PAGE>
USE OF PROCEEDS
We will not receive any proceeds from the sale of Securities by the Selling
Stockholders.
DIVIDEND POLICY
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."
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<PAGE>
CAPITALIZATION
The following table sets forth the unaudited capitalization of the Company
at October 31, 1998, and as adjusted to give pro forma effect to the
consummation of the Plan of Reorganization at that date. The presentation does
not purport to represent what the Company's actual capitalization would have
been had such transactions in fact been consummated on such date. The table
should be read in conjunction with the Company's financial statements and the
related notes thereto, "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and "Unaudited Pro Forma Condensed
Consolidated Financial Information" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
October 31, 1998
--------------------
Pro
Historical Forma
---------- --------
(in thousands)
<S> <C> <C>
Long-term debt, including current maturities:
Liabilities subject to settlement under the
reorganization case................................... $ 548,788 $ - (1)
DIP facility/BankBoston Facility....................... 157,392 161,511
Notes payable.......................................... - 35,239 (2)
Capital lease obligations.............................. 27,249 26,928
--------- --------
Total long-term debt, including current maturities.... 733,429 223,678
Stockholders' equity (deficiency)(3):
Common stock........................................... 115 102 (2)
Additional paid in capital............................. 137,821 84,898 (2)
Accumulated deficit.................................... (457,665) -
Treasury stock, at cost................................ (803) -
--------- --------
Total stockholders' equity (deficiency)................. (320,532) 85,000 (4)
--------- --------
Total capitalization.................................... $ 412,897 $308,678
========= ========
</TABLE>
- --------
(1) Reflects cancellation of liabilities at the Effective Date.
(2) Reflects issuance of $40 million of 9% Convertible Notes less $11 million
repayment from the Union Square proceeds, and certain other long-term debt
and estimated equity value of the new Common Stock and Warrants issued in
connection with settlement of claims.
(3) Excludes 1,000,000 shares of Common Stock reserved for issuance upon
exercise of the Warrants and 750,000 shares of Common Stock reserved for
issuance upon exercise of options we have agreed to grant. The Warrants
will be valued along with the Common Stock after the Effective Date and
the total equity value may be modified as a result.
(4) See "Risk Factors--Post Bankruptcy Risks--Determination of Equity Value."
19
<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 31, 1998, are derived from the
consolidated financial statements of the Company, which consolidated financial
statements have been audited by Arthur Andersen LLP (fiscal year 1997) or
Deloitte & Touche LLP (pre-fiscal year 1997), independent certified public
accountants. The consolidated financial statements as of January 31, 1998 and
February 1, 1997, and for each of the years in the three-year period ended
January 31, 1998, and the independent auditors' reports thereon, are included
elsewhere in this Prospectus. Fiscal year 1994 refers to the 52 weeks ended
January 28, 1995 and fiscal year 1993 refers to the 52 weeks ended January 29,
1994. Certain reclassifications have been made to the operating expenses and
operating income of fiscal years 1994 and 1993 to conform to the current
presentation.
The selected data should be read in conjunction with the consolidated
financial statements for the three-year period ended January 31, 1998, the
related notes and the independent auditors' reports, which contain explanatory
paragraphs for fiscal years 1995-1997 relating to the Company's filing for
reorganization under Chapter 11 and raise substantial doubt about its ability
to continue as a going concern, appearing elsewhere in this Prospectus. The
consolidated financial statements and the selected data do not include any
adjustments that might result from the outcome of these uncertainties. 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, the
selected financial data for periods prior to June 23, 1995 are not comparable
in certain material respects to periods subsequent to such date. The selected
data presented below for the thirty-nine week periods ended October 31, 1998
and November 1, 1997 and as of October 31, 1998 and November 1, 1997 are
derived from the unaudited condensed consolidated financial statements of the
Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
Unaudited
39 Weeks Ended Fiscal Year
----------------------- ----------------------------------------------------------
October 31, November 1,
1998 1997 1997 1996 1995 1994 1993
----------- ----------- ---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts and ratios)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Net sales............... $ 906,385 $ 895,220 $1,344,444 $1,561,718 $1,780,768 $1,916,555 $1,880,511
Gross margin........... 271,002 269,699 396,357 434,067 491,691 591,160 603,504
Operating expenses(a)... 296,180 308,666 401,578 530,757 612,102 549,154 544,386
Operating income
(loss)................. (25,178) (38,967) (5,221) (96,690) (120,411) 42,006 59,118
Income (loss) before
income taxes and
extraordinary items.... (34,583) (48,480) (22,557) (218,759) (311,946) 10,011 26,069
Income tax benefit
(expense).............. - - - - 104,533 (4,205) (12,619)
Income (loss) before
extraordinary items and
cumulative effect of
accounting changes..... (34,583) (48,480) (22,557) (218,759) (207,413) 5,806 13,450
Extraordinary items(b).. - - - - - - (5,200)
Cumulative effect of ac-
counting changes(c).... - - - - - (485) (1,475)
Net income (loss)....... $ (34,583) $ (48,480) $ (22,557) $ (218,759) $ (207,413) $ 5,321 $ 6,775
Income (loss) per share:
Basic and diluted...... $ (3.06) $ (4.26) $ (1.98) $ (19.17) $ (18.17) $ .47 $ .60
Shares used for
computation............ 11,311 11,382 11,365 11,412 11,416 11,353 11,273
Ratio of earnings to
fixed charges(d)....... - - - - - 1.31 1.81
Balance Sheet Data:
Working capital(e)...... $ 10,836 $ 19,530 $ 46,151 $ 68,649 $ 200,195 $ 32,874 $ 88,623
Total assets............ 661,410 700,007 595,166 604,200 798,662 884,814 785,845
Long-term debt, less
current maturities(e).. 26,211 32,738 27,073 33,296 53,396 289,643 269,798
Total stockholders' eq-
uity (deficiency)...... $(320,532) $(311,705) $ (285,950) $ (263,293) $ (45,010) $ 163,432 $ 163,680
</TABLE>
- --------
(a) Net of other income.
(b) The extraordinary item in fiscal year 1993 resulted from the refinancing of
a credit agreement and the associated write-off of unamortized deferred
financing costs.
20
<PAGE>
(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," and the
fiscal year 1993 charge resulted from a change in the method of discounting
accrued workers' compensation and general liability claims.
(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. 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) Excludes liabilities subject to settlement under the reorganization case
after the Chapter 11 filing.
21
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma condensed consolidated balance sheet and
unaudited pro forma condensed consolidated statements of operations are based
on the statements of Bradlees included elsewhere in this Prospectus as adjusted
to give effect to the consummation of the Plan of Reorganization. The unaudited
pro forma condensed consolidated statements of operations have been prepared as
if the Effective Date of the Plan of Reorganization had occurred on February 1,
1997. The unaudited pro forma condensed consolidated balance sheet has been
prepared assuming the Effective Date of the Plan of Reorganization had occurred
on October 31, 1998.
The unaudited pro forma condensed consolidated financial information and
accompanying notes should be read in conjunction with the Company's financial
statements and the notes thereto appearing elsewhere in this Prospectus. The
Unaudited Pro Forma Condensed Consolidated Financial Information is presented
for informational purposes only and does not purport to represent what the
Company's financial position or results of operations would actually have been
if the Effective Date of the Plan of Reorganization had occurred on such date
or at the beginning of the period indicated, or to project the Company's
financial position or results of operations at any future date or for any
future period.
22
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments Pro Forma
Oct. 31, 1998 Debits Credits Oct. 31, 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Unrestricted cash and
cash equivalents...... $ 10,959 $ 11,000(2) $ 11,005(2) $ 10,954
Restricted cash and
cash equivalents...... 25,129 - 25,129(2) -
-------- ---------- ----------- --------
Total cash and cash
equivalents.......... 36,088 11,000 36,134 10,954
-------- ---------- ----------- --------
Accounts receivable.... 11,925 - - 11,925
Inventories............ 318,883 - 1,000(3h) 317,883
Prepaid expenses....... 11,031 - - 11,031
-------- ---------- ----------- --------
Total current assets.. 377,927 11,000 37,134 351,793
-------- ---------- ----------- --------
Property, plant and
equipment, net:
Property excluding
capital leases, net... 123,892 - 9,900(2) 111,792
2,200(3j)
Property under capital
leases, net........... 17,732 9,196(3b) 5,406(3j) 21,522
-------- ---------- ----------- --------
Total property, plant
and equipment, net... 141,624 9,196 17,506 133,314
-------- ---------- ----------- --------
Other assets:
Lease interests at fair
value, net............ 137,350 - 59,530(3j) 77,820
Assets held for sale... - 3,400(2) - 14,000
10,600(3d)
Other, net............. 4,509 2,575(2) 1,222(3g) 4,598
1,264(3i)
Reorganization value in
excess of revalued
assets................ - 14,477(3k) - 14,477
-------- ---------- ----------- --------
Total other assets.... 141,859 31,052 62,016 110,895
-------- ---------- ----------- --------
Total assets.......... $661,410 $ 51,248 $ 116,656 $596,002
======== ========== =========== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
23
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments Pro Forma
Oct. 31, 1998 Debits Credits Oct. 31, 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable....... $ 179,413 $ - $ - $179,413
Accrued expenses....... 23,221 2,000(2) 2,000(1) 20,746
2,475(3c)
Self-insurance
reserves.............. 6,027 - - 6,027
Short-term debt........ 157,392 - 4,119(2) 161,511
Current portion of
notes and capital
lease obligations..... 1,038 - 567(2) 1,605
--------- ---------- ---------- --------
Total current
liabilities.......... 367,091 4,475 6,686 369,302
--------- ---------- ---------- --------
Long-term liabilities:
Obligations under
capital leases........ 26,211 321(3b) - 25,890
Convertible notes
payable............... - 11,005(2) 40,000(2) 28,995
Deferred income taxes.. 8,581 8,581(3h) - -
Self-insurance
reserves.............. 12,237 - - 12,237
Unfavorable lease
liability............. - - 45,573(3j) 45,573
Other long-term
liabilities........... 19,034 - 2,000(1) 29,005
5,677(2)
2,294(3f)
--------- ---------- ---------- --------
Total long-term
liabilities.......... 66,063 19,907 95,544 141,700
--------- ---------- ---------- --------
Liabilities subject to
settlement under the
reorganization case.... 548,788 548,788(2) - -
Stockholders' equity
(deficiency):
Common stock
Par value............. 115 115(3a) 102(2) 102
Additional paid-in-
capital.............. 137,821 137,821(3a) 84,898(2) 84,898
Accumulated deficit.... (457,665) 4,000(1) 393,463(2) -
68,202(3)
Treasury stock, at
cost.................. (803) - 803(3a) -
--------- ---------- ---------- --------
Total stockholders'
equity (deficiency).. (320,532) 141,936 547,468 85,000
--------- ---------- ---------- --------
Total liabilities and
stockholders' equity
(deficiency)......... $ 661,410 $ 715,106 $ 649,698 $596,002
========= ========== ========== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
24
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
39 Weeks 39 Weeks
Ended Pro Forma Adjustments Ended
Oct. 31, 1998 Debits Credits Oct. 31, 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Total sales............. $939,203 3,381(1) - $935,822
Leased department
sales.................. 32,818 70(1) - 32,748
-------- --------
Net sales............... 906,385 903,074
Cost of goods sold...... 635,383 - 2,472(1) 632,911
-------- --------
Gross margin............ 271,002 270,163
Leased department and
other operating in-
come................... 8,757 25(1) - 8,732
-------- --------
279,759 278,895
Selling, store
operating,
administrative and
distribution expenses.. 280,326 2,967(3) 631(1) 278,498
1,021(6) 5,773(7)
724(10) 136(11)
Depreciation and amorti-
zation expense......... 24,370 - 3(1) 12,761
5,103(3)
2,253(5)
469(6)
3,781(9)
Loss on disposition of
properties............. 241 241
Interest and debt ex-
pense.................. 11,960 869(4) 1,215(4) 21,189
9,575(8)
Reorganization items.... (2,555) 2,555(2) - -
-------- --------
Net loss................ $(34,583) $(33,794)
======== ========
Comprehensive loss...... $(34,583) $(33,794)
======== ========
Net loss per share - ba-
sic and diluted........ $ (3.06) $ (3.30)(12)
======== ========
Weighted average shares
outstanding (in
thousands) - basis and
diluted................ 11,311 10,226
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
25
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
52 Weeks 52 Weeks
Ended Pro Forma Adjustments Ended
Jan. 31, 1998 Debits Credits Jan. 31, 1998
------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
Total sales............. $1,392,250 $ 51,267(1) - $1,340,983
Leased sales............ 47,806 1,571(1) - 46,235
---------- ----------
Net sales............... 1,344,444 1,294,748
Cost of goods sold...... 948,087 - 35,343(1) 910,291
2,453(2)
---------- ----------
Gross margin............ 396,357 384,457
Leased department and
other operating
income................. 12,151 389(1) - 11,762
---------- ----------
408,508 396,219
Selling, store
operating,
administrative and
distribution expenses.. 382,910 3,957(4) 14,617(1) 370,556
1,361(7) 7,697(8)
4,879(11) 237(12)
Depreciation and
amortization expense... 36,244 187(1) 19,912
7,464(4)
3,004(6)
636(7)
5,041(10)
Gain on disposition of
properties............. (5,425) (5,425)
Interest and debt
expense................ 16,584 15,510(9) 3,751(5) 29,701
1,358(5)
Reorganization items.... 752 - 752(3) -
---------- ----------
Loss before income
taxes.................. (22,557) (18,525)
Income taxes............ - -
---------- ----------
Net loss................ $ (22,557) $ (18,525)
========== ==========
Net loss per share -
basic and diluted..... $ (1.98) $ (1.81)(13)
========== ==========
Weighted average shares
outstanding (in
thousands) - basic and
diluted................ 11,365 10,226
========== ==========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
26
<PAGE>
BRADLEES, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The following notes set forth the explanations and assumptions used and
adjustments made in preparing the unaudited pro forma condensed consolidated
balance sheet as of October 31, 1998, and the unaudited pro forma condensed
consolidated statements of operations for the 52 weeks ended January 31, 1998
and for the 39 weeks ended October 31, 1998.
The unaudited pro forma condensed consolidated financial statements reflect
the adjustments described under "Pro Forma Adjustments" below, which are based
on the assumptions and preliminary estimates described therein, which are
subject to change. These statements do not purport to be indicative of the
financial position and results of operations of Bradlees as of such dates or
for such periods, nor are they indicative of future results. Furthermore, these
unaudited pro forma condensed consolidated financial statements do not reflect
anticipated changes which may occur as the result of activities before and
after the Effective Date of the Plan of Reorganization and other matters. (For
the purposes of the unaudited pro forma condensed consolidated financial
statements, the "Effective Date" is assumed to be October 31, 1998 for the
unaudited pro forma condensed consolidated balance sheet, and February 1, 1997
for the unaudited pro forma condensed consolidated statements of operations.)
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the financial statements and the notes thereto
included elsewhere in this Prospectus.
Pro Forma Adjustments
The unaudited pro forma condensed consolidated balance sheet and unaudited
pro forma condensed consolidated statements of operations reflect the following
pro forma adjustments based on the assumptions described below:
October 31, 1998 Balance Sheet Pro Forma Adjustments
1. Reserves established prior to emergence for emergence-related and
performance bonuses payable on the Effective Date or subsequent to
the Effective Date.
2. Plan consummation distributions that include, among other things, an
estimated equity value of $85.0 million, $14.0 million in cash
distributions, and 9% Convertible Notes totaling $40.0 million. In
connection with the consummation of the Plan, we will receive $11
million in cash for the modification to the Union Square lease and
immediately pay down the 9% Convertible Notes. The reduction of $9.9
million in property, plant and equipment, net, includes a write-off
of $6.5 million for the Union Square store and a reclassification of
$3.4 million to assets held for sale for one store lease that is
expected to be sold to help fund the further paydown of the 9%
Convertible Notes.
The payment of $25.1 million out of restricted funds and $4.1
million out of revolver borrowings is for certain settlements due
under the POR and for financing costs of $2.6 million associated
with the post-emergence revolver. The total payment, including
approximately $4.5 million to be paid for professional fees
subsequent to emergence, is expected to be $33.7 million in order to
fund all administrative and convenience claims, including the
bonuses due at consummation and the exit financing costs.
3. Fresh-start accounting adjustments that reflect the estimated
adjustments necessary to adopt fresh-start reporting in accordance
with Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". Fresh-start reporting
requires that the reorganization value of Bradlees be allocated to
Bradlees' assets in conformity with APB Opinion 16, "Business
Combinations", for transactions reported on the basis of the
purchase method. Any portion of the assigned reorganization value
exceeding the revalued net assets is recorded as a long-term asset,
while any portion of the assigned reorganization value that falls
below the revalued net assets, which may occur when fresh-start
reporting is adopted as of
27
<PAGE>
January 30, 1999, will be assigned to reduce long-term assets on a pro
rata basis. The calculation of the preliminary and estimated new
equity value is discussed in detail in Section Three (Subsection XIII)
of the Disclosure Statement filed as an exhibit to this Registration
Statement. See also "Risk Factors--Post Bankruptcy Risks--
Determination of Equity Value."
The fresh-start accounting adjustments are summarized as follows:
a. Cancellation of the old common stock pursuant to the Plan and
close-out to retained earnings.
b. A revaluation of all capital lease obligations and related
capital lease assets using our estimated October 31, 1998
borrowing rate (12%) for similar financings.
c. Revaluation of the straight-line rent reserve ($2.5 million).
Straight-line rent is recalculated on a going-forward basis by
the reorganized Bradlees.
d. Revaluation of the store lease held for sale to an estimated
total net realizable value of $14 million.
e. Restatement of LIFO merchandise inventories to estimated fair
value approximates FIFO cost. Inventories valued at FIFO cost
then become the base year layer for LIFO inventories in the
post-consummation financial reporting period. No LIFO adjustment
is expected.
f. Recording of additional pension plan liability (primarily from
the reduction of the discount rate) of $4.3 million (excluding
the impact from the fourth quarter non-union pension freeze--
Note 8 to the October 31, 1998 Form 10-Q) and additional
Supplemental Executive Retirement Plan (the "SERP") liability of
$1.4 million, reduced by the write-off of the unrecognized FAS
No. 106 prior service costs of $3.4 million.
g. Revaluation of the intangible SERP asset ($1.2 million) to its
estimated net realizable value.
h. Write-off ($8.6 million) of deferred income taxes (due to a
change in the status of timing differences) and a $1.0 million
reduction to reflect inventory at its estimated net realizable
value.
i. Write-off of the unamortized deferred financing charges ($1.3
million) associated with the terminated Debtor-in-Possession
(DIP) bank facility which will be amortized prior to emergence.
j. Revaluation of fixed assets and leasehold interests based upon
the estimated fair market value of properties and leases while
considering the current markets in which Bradlees has locations.
This revaluation resulted in, among other things, the recording
of a write-down of $59.5 million in favorable lease interests
and an unfavorable lease liability of $45.6 million for certain
locations. The remaining favorable lease interests and the
unfavorable lease liability will both be amortized to rent
expense.
k. Recording of the reorganization value in excess of the revalued
assets at October 31, 1998.
The Company expects to incur charges of approximately $5.7 million as of
January 30, 1999 for an estimated going-out-of-business inventory impairment
of $0.5 million for one store in the process of closing and other store
closing costs of $5.2 million, including two other store closings anticipated
to begin by the end of fiscal year 1999. At the same time, the Company expects
to recognize a gain of approximately $4.5 million from the modification of the
Union Square lease terms.
Pro Forma Adjustments - Statement of Operations for the Thirty-nine Weeks
Ended October 31, 1998
1. To eliminate the sales and expense amounts associated with five stores
closed in February, 1998.
2. To eliminate reorganization items.
3. Adjustment in amortization of lease interests revalued under fresh-
start reporting.
28
<PAGE>
4. To record amortization of post-emergence deferred financing costs
and reverse the historical year to date amortization of deferred
financing costs.
5. Reduction in depreciation expense due to certain reclassifications
to assets held for sale and fixed asset write-offs resulting from
fresh-start reporting.
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.
8. To adjust interest expense for amortization of the discount on the
unfavorable lease liability and for increased interest expense
resulting from a slightly higher average revolver borrowing level,
the 9% Convertible Notes and other issued notes.
9. To record reduction in depreciation and amortization expense
resulting from the allocation of the estimated excess of revalued
assets over the reorganization value at February 1, 1997.
10. To record additional FAS No. 106 expense as a result of fresh-start
reporting.
11. To reduce pension expense as a result of fresh-start reporting.
12. Pro forma earnings per share were computed based on the estimated
weighted average number of common shares outstanding during the
applicable period assuming that the Plan was effective on February
1, 1997.
Pro Forma Adjustments - Statement of Operations for the Fiscal Year Ended
January 31, 1998
1. To eliminate the sales and expense amounts associated with six
stores closed since February 1, 1997, excluding one store that was
assumed to be closed and sold in the ordinary course of business in
January, 1998.
2. To eliminate the provision for inventory impairment for the stores
closed in 1998.
3. To eliminate reorganization items, which include charges associated
with closing the six stores.
4. Adjustment in amortization of lease interests revalued under fresh-
start reporting.
5. To record amortization of post-emergence deferred financing costs
and reverse the historical fiscal year 1997 amortization of deferred
financing costs.
6. Reduction in depreciation expense due to certain reclassifications
to assets held for sale and fixed asset write-offs resulting from
fresh-start reporting.
7. To adjust lease rent expense and amortization expense for revised
straight-line rent calculations.
8. To adjust lease rent expense for amortization of the unfavorable
lease liability.
9. To adjust interest expense for amortization of the discount on the
unfavorable lease liability and for increased interest expense
resulting from a higher average revolver borrowing level and the 9%
Convertible Notes and other issued notes.
10. To record reduction in depreciation and amortization expense
resulting from the allocation of the estimated excess of revalued
assets over the reorganization value at February 1, 1997.
11. To record additional FAS No. 106 expense and eliminate the fiscal
year 1997 curtailment gain as a result of the effect of fresh-start
reporting and the associated write-off of unamortized prior service
costs.
12. To reduce pension and SERP expense as a result of the effect of
fresh-start reporting.
13. Pro forma earnings per share were computed based on the estimated
weighted average number of common shares outstanding during the
applicable period assuming that the Plan was effective on February
1, 1997.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
The following discussion and analysis is based on our results of operations
detailed below for the 52 weeks ended January 31, 1998 ("1997"), the 52 weeks
ended February 1, 1997 ("1996") and the 53 weeks ended February 3, 1996
("1995"). The financial information discussed below should be read in
conjunction with the Consolidated Financial Statements and Notes thereto
included elsewhere in this Prospectus. The following table sets forth
information concerning the number of our stores.
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Stores, beginning of
period.................... 110 134 136
New stores................. - 3 -
Closed stores.............. (1)(a) (27) (2)
--- --- ---
Stores, end of period...... 109 110 134
=== === ===
</TABLE>
- --------
(a) Excludes six stores closed in February, 1998.
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>
1997 1996 1995
---------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Net sales............... $ 1,344.4 100.0 % $ 1,561.7 100.0 % $1,780.8 100.0 %
Cost of goods sold...... 948.0 70.5 % 1,127.6 72.2 % 1,289.1 72.4 %
--------- ----- --------- ----- -------- -----
Gross margin............ 396.4 29.5 % 434.1 27.8 % 491.7 27.6 %
Leased department and
other operating
income................. 12.1 0.9 % 13.7 0.9 % 15.1 0.8 %
--------- ----- --------- ----- -------- -----
408.5 30.4 447.8 28.7 % 506.8 28.5 %
Selling, store
operating,
administrative and
distribution expenses.. 382.9 28.5 % 504.0 32.3 % 572.8 32.2 %
Depreciation and
amortization expense... 36.2 2.7 % 42.2 2.7 % 54.4 3.1 %
--------- ----- --------- ----- -------- -----
Operating loss.......... (10.6) (0.8)% (98.4) (6.3)% (120.4) (6.8)%
Gain on disposition of
properties............. (5.4) (0.4)% (1.7) (0.1)% - -
Interest and debt
expense................ 16.6 1.2 % 11.5 0.7 % 27.2 1.5 %
Impairment of long-lived
assets................. - - 40.8 2.6 % 99.4 5.6 %
Reorganization items.... 0.8 0.1 % 69.8 4.5 % 65.0 3.6 %
Income tax benefit...... - - - - (104.6) (5.9)%
--------- ----- --------- ----- -------- -----
Net loss................ $ (22.6) (1.7)% $ (218.8) (14.0)% $ (207.4) (11.6)%
========= ===== ========= ===== ======== =====
</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.
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
30
<PAGE>
store sales was our significant reduction in the number of promotional
activities in 1997, which had historically poor profit productivity.
We are focusing 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 that we can
strategically leverage our strength in the quality and fashion content of our
product offerings while driving traffic with selected hardlines merchandise.
Management is continuing efforts to improve sales, including the expansion of
both the "Wow!" (opportunistic and unadvertised purchases) and "Certified
Value" (everyday low prices on selected highly recognizable products) programs
that have been particularly successful to-date. Comparable store sales
stabilized during the fourth quarter of 1997 (unchanged from 1996).
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 (classified as other operating income)
from the layaway program that was reimplemented in the second half of 1997.
Selling, store operating, administrative and distribution ("SG&A") expenses
declined $121.1 million and 3.8% as a percentage of net sales in 1997 compared
to 1996. The decline in SG&A expenses was due to the closed stores and numerous
expense reduction initiatives, including substantial reductions in overhead and
advertising costs, designed to begin bringing 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 debtor-in-possession credit 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.
31
<PAGE>
1996 Compared to 1995
Net sales for 1996 declined $219.1 million or 12.3% from 1995 due primarily
to the closing of 27 stores in 1996 and a 5.4% decrease in comparable store
sales. The major causes for the decline in comparable store sales were our
relatively rapid introduction of higher-priced merchandise at the expense of
many lower opening price-point merchandise categories, elimination of layaway,
significant reduction in the number of basic convenience and commodity items
that are generally sold in discount stores, and changes in our advertising
strategy that included a reduction in the number of merchandise offerings in
our weekly circular. Although we improved the quality and fashion of our
merchandise in 1996, the changes that were implemented assumed rapid customer
acceptance of the new merchandise mix and significant sales from increased
promotional activities.
Gross margin declined $57.6 million but increased .2% as a percentage of net
sales in 1996 compared to 1995. The decline in gross margin dollars was due to
the lower sales, partially offset by the slight increase in the gross margin
rate. The increase in the rate was due to a higher overall initial markup and
lower inventory shrink, partially offset by a higher markdown rate associated
primarily with increased promotional activities and the negative impact of a
$6.7 million going-out-of-business markdown provision included in cost of goods
sold in 1996.
Leased department income and other operating income declined $1.4 million
but increased .1% as a percentage of net sales in 1996 compared to 1995. The
decline was due to lower leased shoe department sales and the absence of any
layaway income since the discontinuance of the layaway program in August, 1995.
SG&A expenses declined $68.8 million but increased .1% as a percentage of
net sales in 1996 compared to 1995. The decline in SG&A expenses was due to the
closed stores and reductions in logistics and certain home office expenses,
partially offset by an increase in advertising expenses. The increase in SG&A
expenses as a percentage of net sales was due to the sales decline in 1996.
Depreciation and amortization expense declined $12.2 million or .4% as a
percentage of net sales in 1996 compared to 1995, primarily as a result of the
closed stores and the 1995 year-end write-down of certain long-lived assets in
accordance with the adoption of SFAS No. 121.
We recognized a gain of $1.7 million in 1996 for forfeited deposits received
on the unconsummated sale of an owned undeveloped property.
Interest and debt expense declined $15.7 million or .8% as a percentage of
net sales in 1996 compared to 1995 due primarily to the discontinuance of
accruing interest on substantially all pre-petition debt subsequent to our
filing for bankruptcy on June 23, 1995. Interest expense includes a credit of
$.8 million in 1996 and a $2.9 million charge in 1995 resulting from changes in
the interest rate used to discount self-insurance reserves.
We incurred charges of $40.8 and $99.4 million, or 2.6% and 5.6% of net
sales, in 1996 and 1995, respectively, due to the impairment of certain long-
lived assets in accordance with SFAS No. 121.
Reorganization items resulted in net charges of $69.8 and $65.0 million, or
4.5% and 3.6% of net sales, in 1996 and 1995, respectively. These net charges
related directly to the Chapter 11 proceedings and associated restructuring of
our operations.
We did not incur any income tax expense or benefit in 1996 compared to an
income tax benefit of $104.5 million in 1995. A portion of our 1995 loss before
income taxes was utilized in April, 1996 to recover $24.5 million of income
taxes previously paid, of which $6.0 million was restricted in April, 1996
pending further order of the Bankruptcy Court.
32
<PAGE>
Year-to-Date 1998 Compared to Year-to-Date 1997
<TABLE>
<CAPTION>
39 weeks ended
October 31, 1998 November 1, 1997
---------------- ----------------
<S> <C> <C>
Stores, beginning of period................. 109 110
New stores.................................. - -
Closed stores............................... (6) (1)
------ ------
Stores, end of period....................... 103 109
====== ======
Results of operations, summarized in millions of dollars and expressed as a
percentage of net sales were as follows for the 39 weeks ended October 31, 1998
("Year-to-Date 1998") and for the 39 weeks ended November 1, 1997 ("Year-to-
Date 1997"):
<CAPTION>
Year to Date Year to Date
1998 1997
---------------- ----------------
(Dollars in millions except
per share amounts)
<S> <C> <C>
Total sales................................. $939.2 $930.7
Leased dept. sales.......................... 32.8 35.5
------ ------
Net sales................................... 906.4 895.2
Cost of goods sold.......................... 635.4 625.5
------ ------
Gross margin................................ 271.0 269.7
Leased dept. and other operating income..... 8.7 8.7
------ ------
279.7 278.4
Selling, store operating, administrative and
distribution expenses...................... 280.3 289.8
Depreciation and amortization expense....... 24.4 27.5
Loss on disposition of properties........... 0.2 -
Interest and debt expense................... 12.0 11.7
Reorganization items........................ (2.6) (2.1)
------ ------
Net loss.................................. $(34.6) $(48.5)
====== ======
Net loss per share........................ $(3.06) $(4.26)
====== ======
Total sales increase (decrease):
All stores................................ 0.9% (19.5)%
Comparable stores......................... 4.7% (7.6)%
</TABLE>
<TABLE>
<CAPTION>
39 Weeks Ended
October 31, 1998 November 1, 1997
---------------- ----------------
<S> <C> <C>
As a percentage of net sales, results were
as follows:
Net sales................................... 100.0 % 100.0 %
Cost of goods sold.......................... 70.1 69.9
----- -----
Gross margin................................ 29.9 30.1
Leased dept. and other operating income..... 0.9 1.0
----- -----
30.8 31.1
Selling, store operating, administrative and
distribution expenses...................... 30.9 32.3
Depreciation and amortization expense....... 2.7 3.1
Loss on disposition of properties........... - -
Interest and debt expense................... 1.3 1.3
Reorganization items........................ (0.3) (0.2)
----- -----
Net loss.................................... (3.8)% (5.4)%
===== =====
</TABLE>
33
<PAGE>
Year-to-Date 1998 total sales increased $8.5 million or 0.9% from Year-to-
Date 1997 due to an increase of 4.7% in comparable store sales, partially
offset by the impact from closing six stores in February, 1998. The increase in
Year-to-Date 1998 comparable store sales was due primarily to various
merchandising and marketing initiatives started in 1997, including the
reintroduction of layaway, lower opening price points in certain departments,
more item-intensive and price-point oriented circular ad offerings, the
addition of certain convenience and commodity products to drive traffic, and
the implementation of two key programs: "Certified Value" (highlights certain
key recognizable items at competitive everyday prices) and "WOW!" (integrates
targeted and unadvertised opportunistic purchases).
Gross margin for Year-to-Date 1998 increased $1.3 million, primarily as a
result of the strong comparable store sales and decreased 0.2% as a percentage
of net sales due primarily to a lower initial markup. Leased department and
other operating income was unchanged in Year-to-Date 1998 compared to Year-to-
Date 1997, as layaway fee income more than offset the impact from the store
closings and unfavorable leased shoe department sales.
Year-to-Date 1998 SG&A expenses declined $9.5 million or 1.4% as a
percentage of net sales compared to Year-to-Date 1997. The improved SG&A
expense performance was due primarily to advertising, home office and benefits
expense reductions, partially offset by last year's third quarter reduction of
$3.6 million in self-insurance reserves.
Depreciation and amortization expense declined $3.1 million or 0.4% as a
percentage of net sales in Year-to-Date 1998 compared to Year-to-Date 1997. The
decline was primarily due to the closing of six stores in February 1998.
Interest and debt expense increased $0.3 million and remained the same as a
percentage of net sales in Year-to-Date 1998 from Year-to-Date 1997. Peak and
average revolver borrowings were $162 and $116 million, respectively, in Year-
to-Date 1998 compared to $144 and $85 million, respectively, in Year-to-Date
1997, and the weighted average revolver interest rate was 7.93% during Year-to-
Date 1998 compared to 7.51% in the prior-year period. The unfavorable impact on
Year-to-Date 1998 interest expense from these factors was mostly offset by
lower bank fees, lower capital lease interest expense and lower amortization of
deferred financing costs.
Reorganization credits of $2.6 and $2.1 million for Year-to-Date 1998 and
Year-to-Date 1997, respectively, were associated with the Chapter 11
proceedings and related restructuring and are discussed in Note 6.
We did not record an income tax provision in Year-to-Date 1998 due to the
current expectation of no income tax expense or benefit in 1998. There was no
income tax expense or benefit recorded in Year-to-Date 1997.
Liquidity and Capital Resources
We had outstanding borrowings of $157.4 million at October 31, 1998,
exclusive of the issuance of letters of credit, under our $250 million DIP
Facility (Note 4). As of November 1, 1997, we had outstanding borrowings of
$131.5 million, exclusive of the issuance of letters of credit, under the prior
DIP facility (Note 4). The increase in borrowings since the end of the third
quarter of 1997 relates primarily to the net loss incurred in Year-to-Date
1998, along with payments for Chapter 11 professional fees and other
reorganization expenses.
We currently expect our borrowings, exclusive of the issuance of letters of
credit, for the fourth quarter of 1998 to peak at approximately $167 million in
November, 1998 and average approximately $120 million. The revolver amount
available to borrow in the fourth quarter of 1998, after deducting expected
letters of credit outstanding, is currently expected to peak at approximately
$225 million in November, 1998 and average approximately $185 million.
34
<PAGE>
Other than payments made to certain pre-petition creditors approved by the
Bankruptcy Court (Notes 2 and 4), principal and interest payments on
indebtedness, exclusive of certain capital lease obligations, incurred prior to
Chapter 11 have not been made and will not be made without Bankruptcy Court
approval or until the Plan of Reorganization has been consummated. Virtually
all pre-petition indebtedness of Bradlees is subject to settlement under the
reorganization case.
In Year-to-Date 1998, cash used by operations before reorganization items
was $48.8 million, compared to $50.8 million of cash used by operations before
reorganization items in Year-to-Date 1997. Net cash used by reorganization
items in Year-to-Date 1998 of $10.3 million was comprised of professional fee
payments of $7.8 million and store closing and severance costs of $3.2 million,
partially offset by interest income on restricted funds of $0.7 million.
Inventories at October 31, 1998 decreased $16.5 million from November 1,
1997, due primarily to the closing of six stores in February 1998 (inventories
decreased approximately $1.1 million, excluding the impact of the closed
stores). Accounts payable at October 31, 1998 decreased $16.9 million from
November 1, 1997, mostly due to the decrease in inventories. The increases in
inventories and accounts payable from January 31, 1998 were primarily the
result of normal seasonal build-ups.
Accrued expenses at October 31, 1998 were $7.3 million lower than at January
31, 1998, due primarily to payments made against certain reserves established
in or prior to 1997 for performance bonuses, employee severance and termination
benefits and store closing costs. Accrued expenses were $11.4 million lower
than at November 1, 1997, due primarily to reductions in severance reserves,
vacation pay liabilities and store closing costs.
We incurred capital expenditures of $10.4 million in Year-to-Date 1998
(compared to $14.7 million in Year-to-Date 1997), primarily for management
information systems, store remodels and store maintenance projects. The larger
Year-to-Date 1997 total was principally a result of the 1997 expenditures
associated with a new merchandise management system. For all of 1998, we expect
total capital expenditures to total approximately $18 to $20 million, primarily
for management information systems (including the initial expenditures for a
warehouse management system expected to be completed in 1999 and enhancements
to the new merchandise management system), the remodeling of nine stores, and
other store improvements and maintenance. We currently expect to finance these
expenditures through internally-generated funds.
We believe our business strategies and the availability of our DIP Facility
and BankBoston Facility, together with our available cash and expected cash
flows from 1998 operations and beyond, will enable us to fund our expected
needs for working capital, capital expenditures and debt service requirements.
Achievement of expected cash flows from operations will be dependent upon our
attainment of sales, gross profit, expense and trade support levels that are
reasonably consistent with our financial plans. Such operating performance will
be subject to financial, economic and other factors affecting the industry and
our operations, including factors beyond our control.
Year 2000 Readiness Disclosure
We have determined that we must modify portions of our software so that our
computer systems will properly recognize and use dates beyond December 31,
1999. We believe we can mitigate the impact of the Year 2000 disruption by
upgrading or modifying existing software and, in certain instances, converting
to new software. However, if the Year 2000 upgrades, modifications and
conversions are not made, or are not made in a timely manner, the Year 2000
issue could have a material impact on our operations.
We intend to use both internal and external resources to remediate, replace
and test software for Year 2000 compliance. We have entered into a contract
with a major outside consulting firm to provide the majority of the resources
necessary to identify, and then replace or remediate, our affected systems. We
intend to complete our Year 2000 project no later than the beginning of the
fourth quarter of fiscal 1999, but currently
35
<PAGE>
expect to substantially complete the conversion by the second quarter of fiscal
1999. At this time, we expect the cost of the Year 2000 project to be
approximately $3 to $4 million, the majority of which is being incurred in 1998
and included in SG&A expenses. Through October 31, 1998, we have incurred $1.9
million for such expense.
The remaining major systems to be remediated or replaced are the Company's
merchandise planning system (approximately 50% remediated) and store host
systems (approximately 30% remediated) expected to be completed by the end of
the first quarter of 1999, and the warehouse management system that is
scheduled to be replaced by the end of the second quarter of 1999. A test of
all systems, including store support and facility systems, for proper Year 2000
compliance is planned for the end of the second quarter of 1999.
We are in the process of developing contingency plans in the event that such
replacement or remediation is not fully completed in a timely manner. We have
calculated the costs of the Year 2000 project and predicted the dates on which
we plan to complete the Year 2000 modifications using our best estimates, which
required using a number of assumptions of future events, including the
continued availability of certain resources, third party modification plans and
other factors. However, we can not guarantee that we will achieve the predicted
estimates and our actual results could differ materially from those plans.
We are also attempting to obtain representations and assurances from our
third party providers of services and goods, including vendors of software
products, that their software is or will be Year 2000 compliant on a timely
basis. However, because certain of our processes may be interrelated with, or
dependent upon, systems outside our control, we can give no assurances that the
implementation of our Year 2000 project will be successful.
36
<PAGE>
BUSINESS
Company Overview
We operate 103 discount department stores as of February 1, 1999, in seven
states in the Northeast, primarily in the heavily populated corridor running
from the Boston to the Philadelphia metropolitan areas. One store is planned to
be closed in March, 1999 and two others are expected to begin closing in fiscal
1999. Headquartered in Braintree, Massachusetts, the Company and its
predecessor have been active in the discount department store business for 40
years.
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, significant reduction in the number of 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. Prior to joining Bradlees, Mr.
Thorner led the successful turnaround of Ames Department Stores, Inc. In April,
1997, Mr. Thorner hired Robert Lynn as President and Chief Merchandising
Officer.
We made the following key modifications to our business strategy during 1997
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 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 both a "Certified Value" program that highlights certain
key recognizable items at competitive everyday prices and a "Wow!"
program which integrates targeted and unadvertised opportunistic
purchases; and
. Significantly reduced overhead while improving operating efficiencies.
We are focusing 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 strength in the fashion and quality content of our apparel and
decorative home product offerings while driving traffic with selected hardlines
merchandise. Management has continued its efforts to improve sales and
profitability in 1998, including the expansion of both the "Wow!" and
"Certified Value" programs that have been particularly successful to-date.
Merchandise Mix. 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
37
<PAGE>
average merchandise mix in fiscal year 1997 was comprised of approximately 53%
softlines and soft home furnishings and 47% hardlines, versus an estimated
industry average of 42% softlines and soft home furnishings and 58% hardlines.
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. Approximately
45% of our sales were derived from our weekly circulars in 1997. Approximately
5.6 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 us more intently on customer service while
at the same time reducing expenses. These improvements included reducing the
number of store regions from two to one and the number of store districts from
nine to eight. In addition, store managers are using automated staff scheduling
programs in 1998 to improve operating efficiency and provide better service to
the customer.
Management has improved productivity and controls and reduced expenses in
other areas. For example, a new merchandising management system was implemented
during 1997 and 1998 that facilitates, among other things, tracking merchandise
more accurately and efficiently from vendors through distribution centers and
to stores. In addition, we have begun developing a warehouse management system
that is planned to be completed in 1999. We also installed a new mainframe
computer and point-of-sale controllers and modified our point-of-sale equipment
and software to allow for additional promotional capabilities, enhanced
controls and improved customer service.
Store Profitability. We closed six stores in February, 1998. We currently
plan to sell our leasehold interest in our Yonkers, New York store. We are also
in the process of closing our Danvers, Massachusetts store. We continue to
closely monitor the profitability of each store and will close, sell or
relocate those stores whose performance is inadequate and not responsive to
remedial actions.
Employees and Collective Bargaining Arrangements
As of December 1, 1998, we employed approximately 10,000 people, of which
approximately 66% are covered by collective bargaining agreements. Agreements
affecting approximately 14% 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 Caldor, Kmart and Wal-Mart, and in certain locations,
Target and Ames. Caldor Corp., which has been in bankruptcy since 1995,
announced on January 22, 1999 that it intends to close all of its stores and
liquidate its assets. Caldor Corp. is currently conducting going-out-of-
business sales in certain markets in which we operate stores. 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 Bradlees
operates. Management believes that it is pursuing the proper merchandising and
marketing strategies and operating focus that should allow it to compete
effectively in its operating areas. However, no assurances can be given that
these strategies will further improve performance or that our business and
financial performance will not be adversely affected by future competitive
pressures.
38
<PAGE>
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. We do not consider any of these other trademarks,
tradenames or services marks 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 pivotal 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 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."
39
<PAGE>
Facilities
The following chart shows the geographic distribution of our stores as of
February 1, 1999:
<TABLE>
<S> <C>
Maine................................................................. 1
New Hampshire......................................................... 8
Massachusetts......................................................... 36
Connecticut........................................................... 17
New York.............................................................. 6
New Jersey............................................................ 29
Pennsylvania.......................................................... 6
---
Total................................................................. 103
===
</TABLE>
We operate stores in a variety of sizes, with the current average store
being 75,924 total 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 February 1, 1999, our stores, including the one store which is in the
process of closing and two stores which are expected to begin closing by the
end of fiscal year 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.
Pursuant to the Plan of Reorganization, in exchange for a payment of $11.0
million by the landlord, we have revised certain terms of the lease for our
Union Square, New York store, including amending the expiration date of such
lease to be March 15, 2000 and eliminating lease terms which allowed for
extensions of the lease. In addition, we have agreed to a $1.1 million annual
payment over the remaining term of the lease.
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 will retain
jurisdiction over us for limited purposes. New Horizons of Yonkers, Inc. will
remain in Chapter 11 after the Effective Date until it sells the leasehold
interest it holds. 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.
40
<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 February 2, 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. Alt-
schuler....... 42 Director
Robert W.
Benenati...... 50 Senior Vice President, Logistics
Stephen J.
Blauner....... 45 Director
W. Edward
Clingman,
Jr. .......... 45 Director
Bruce
Conforto..... 46 Senior Vice President, Chief Information Officer
Gregory K.
Dieffenbach.. 49 Senior Vice President, Human Resources
Judith D. Dun-
ning......... 48 Senior Vice President, Planning and Allocation
John M. Fried-
man, Jr. .... 54 Director
Mark E.
James........ 49 Senior Vice President, Marketing
Lawrence Lie-
berman....... 50 Director
Robert G.
Lynn......... 48 Director, President and Chief Operating Officer
Charles K.
MacDonald.... 40 Director
Cornelius F.
Moses
III(1)....... 40 Senior Vice President, Chief Financial Officer
Ronald T. Ray-
mond......... 55 Senior Vice President, Asset Protection
William H.
Roth......... 46 Director
David L.
Schmitt(1)... 48 Senior Vice President, General Counsel, Secretary and Clerk
Sandra L.
Smith........ 41 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 Thorn-
er(1)........ 55 Chairman and Chief Executive Officer
</TABLE>
- --------
(1) Director of Bradlees Stores, Inc. and New Horizons of Yonkers, Inc.
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 1987.
Mr. Benenati became Senior Vice President, Logistics of the Company in
October 1997. He was Senior Vice President, Operations, from February 1997 to
October 1997. He was Senior Vice President, Distribution of the Company from
June 1995 to February 1997. Prior to joining the Company, he was Senior Vice
President, Distribution of QVC, Inc. from August 1994 to June 1995. He was Vice
President, Operations and Administration for Simon and Schuster Publishing Co.
from prior to 1993 to August 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 for
the purposes of representing the Loan Syndications and Trading Association,
Inc. as its outside general counsel. From prior to 1993 to December 1997, he
served as a partner and head of the bankruptcy department at Milbank, Tweed,
Hadley & McCloy.
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 March 1993 to May 1996. Mr.
Clingman serves as a director of Best Products.
41
<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 1993 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 1993 to May 1997.
Ms. Dunning became Senior Vice President, Planning and Allocation of the
Company in February 1997. Ms. Dunning served as Vice President, Strategic
Planning of the Company from January 1996 to February 1997. Prior to joining
the Company, she was Vice President, Merchandise Planning of
Rich's/Lazarus/Goldsmith's, a division of Federated Department Stores, Inc.,
from February 1995 to January 1996 and Vice President, Merchandise Planning of
Lazarus Department Stores, Inc., a division of Federated Department Stores,
Inc., from prior to 1993 to February 1995.
Mr. Friedman became a Director of the Company in May 1996. Mr. Friedman was
a partner at Dewey Ballantine from prior to 1993 to 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 1993 to December 1996.
Mr. Lieberman became a Director of the Company in February 1999. He has
served as Vice President, Merchandising for ABC Home Furnishings Inc. since
December 1990.
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 1993 to 1995, he was a portfolio
manager for Stonington Management Corp. 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 1993 to April 1995.
Mr. Raymond became Senior Vice President, Asset Protection of the Company in
July 1995. Prior to joining the Company, he was Senior Vice President, Asset
Protection for Ames from prior to 1993 to July 1995.
Mr. Roth became a Director of the Company in February 1999. He has served as
a partner at the law firm of Kelly & Roth since 1987.
42
<PAGE>
Mr. Schmitt has served as Senior Vice President, General Counsel, Secretary
and Clerk of the Company since November 1995. He was Vice President, General
Counsel, Secretary and Clerk of the Company from July 1995 to November 1995.
Prior to joining the Company he was Vice President, Business Development for
Wheelabrator Clean Water Systems, Inc. from 1994 to June 1995. He was President
of CP Consulting from prior to 1993 to June 1994.
Ms. Smith became Senior Vice President, General Merchandise Manager,
Hardlines of the Company in July 1995. Ms. Smith served as Vice President,
General Merchandise Manager, Hardlines of the Company from February 1994 to
July 1995 and Divisional Merchandise Manager, Home Fashions of the Company from
prior to 1993 to February 1994.
Mr. Smith became Senior Vice President, Stores of the Company in December
1997. Prior to joining the Company, he was Director of Operations and
Merchandising for Fry's Electronics from April 1995 to December 1997. He was
Division Director for The Home Depot/Crossroads from June 1993 to April 1995.
He was Regional Vice President for Wal-Mart from prior to 1993 to April 1993.
Mr. Sparks became Senior Vice President, General Merchandise Manager,
Softlines of the Company in July 1995. He was Vice President, General
Merchandise Manager, Softlines of the Company from October 1994 to July 1995.
Prior to joining the Company, Mr. Sparks was Vice President, General
Merchandise Manager of Belk Lindsey from prior to 1993 to October 1994.
Mr. Thorner has served as Chairman of the Board of Directors and Chief
Executive Officer of the Company since April 1997. He served as Chairman of the
Board of Directors, President and Chief Executive Officer of the Company from
December 1996 to April 1997. He served as President and Chief Operating Officer
of the Company from June 1995 to December 1996 and he was elected a Director of
the Company in July 1995. He was Vice Chairman of the Company from March 1995
to June 1995. Prior to joining the Company, he was President, Chief Operating
Officer and Acting Chief Executive Officer and a member of the Board of
Directors of Ames from prior to 1993 to 1994.
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. As of the Effective Date, there are nine members of the Board of
Directors of Bradlees, Inc. These directors were selected pursuant to the Plan
and assumed their positions immediately prior to 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 Directors the
firm to be appointed as independent accountants to audit financial statements
and to perform
43
<PAGE>
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 considers the
effect of such procedures on the accountants' independence.
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 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.
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.
44
<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 1997 other than the Chief Executive Officer (the "Named Officers") for
fiscal years 1997, 1996 and 1995.
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........... 1997 $741,827 $299,063(l) (2) - - $150,000(3) $9,318(4)
Chairman and Chief l996 $589,166 - $ 12,961 - - $150,000(3) $9,293
Executive Officer 1995 $440,391 $406,252(5) $ 97,257 $231,250(6) 100,000 $150,000(3) $4,490
Robert G. Lynn.......... 1997 $401,827(7) $196,875(1) $ 29,109(8) - - - $ 840(4)
Director, President, and
Chief Operating Officer
Robert W. Benenati...... 1997 $292,729 $ 90,011(l) (2) - - - $1,113(4)
Senior Vice 1996 $205,036 - $ 62,762 - - - $ 850
President, Logistics l995 $141,948 $190,075(5) $ 18,793 - - - $ 596
Cornelius F. l997 $279,175 $ 84,012(l) (2) - - - $1,054(4)
Moses, III..............
Senior Vice President 1996 $228,682 - (2) - - - $ 944
and Chief Financial 1995 $162,322 $ 79,453(5) $162,087 - - - $ 216
Officer
David L. Schmitt ....... 1997 $243,751 $ 73,500(l) (2) - - - $ 912(4)
Senior Vice 1996 $180,024 - (2) - - - $ 748
President, General 1995 $103,860 $ 69,556(5) (2) - - - $ 312
Counsel, Secretary and
Clerk
</TABLE>
- --------
(1) Includes an earned bonus paid in April, 1998 pursuant to our Corporate
Bonus Plan (see below), but excludes the following deferred payments
which were paid, with interest, at the Effective Date: Mr. Thorner -
$99,688; Mr. Lynn - $65,625; Mr. Benenati - $30,004; Mr. Moses -
$28,004; and Mr. Schmitt - $24,500.
(2) Perquisites and other personal benefits for the indicated periods did
not exceed the lesser of $50,000 or 10% of reported salary and bonus.
(3) See Enterprise Appreciation Incentive Plan below.
(4) Premiums paid with respect to term life insurance for the calendar year
ended December 31, 1997.
(5) Includes an earned bonus paid in April, 1996 pursuant to our Retention
Bonus Plan, but excludes the following deferred payments which were
paid, with interest, at the Effective Date: Mr. Thorner - $68,751; Mr.
Benenati - $16,915; Mr. Moses - $18,151; and Mr. Schmitt - $14,852.
(6) Based on a fair market value of $9.250, the closing price of the
Company's Common Stock on May 11, 1995, the date of grant. The
restrictions on these shares lapse at the rate of 20% a year, on or
after the third business day following the announcement of annual
earnings for the years 1995 through 1999. On January 30, 1998, the last
trading day of fiscal 1997, 15,000 shares with a value of $1,875 were
still subject to restrictions. The aggregate market value is based on a
fair market value of $.125, the closing price of the Company's Common
Stock on January 30, 1998. The Common Stock was canceled at the
Effective Date.
(7) Represents a partial year beginning when Mr. Lynn joined the Company in
April, 1997.
(8) Includes $27,216 for relocation expenses related to Mr. Lynn's
employment as President and Chief Merchandising Officer of the Company
and reimbursement for tax liabilities related to such relocation
expenses.
45
<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 $28.1 million for fiscal 1997, net of the anticipated costs of the
Corporate Bonus Plan, in order for any employee to be eligible for 100% of an
award (except for the discretionary fund mentioned above). For each $5 million
of EBITDA improvement over the amount projected, the award increases by 25% of
the base award up to a maximum increase of 100% of the award. We achieved an
EBITDA of $28.5 million (net of the provision for the bonuses and excluding
gains on disposition of properties) for fiscal 1997 and paid total bonuses of
$3.9 million to approximately 286 employees under the Corporate Bonus Plan in
April 1998.
With respect to the Named Officers and certain other members of 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 1998, our Board of Directors adopted threshold performance
measurements tied directly to our 1998 business plan. We must obtain a minimum
EBITDA of $32 million, net of the anticipated costs of the Corporate Bonus
Plan, in order for any employee to be eligible for 100% of an award (except for
the discretionary fund mentioned above). Partial awards will be made if we
achieve certain levels of EBITDA below $32 million. For each $5 million of
EBITDA improvement over $32 million, the award increases by 25% of the base
award up to a maximum increase of 100% of the award. In addition, any award may
be increased or decreased by 25% based upon an employee's performance.
Enterprise Appreciation Incentive Plan
In August 1995 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. No further payments are expected to be paid under the
Incentive Plan, other than the payment of $400,000 with respect to amounts due
Mr. Thorner for the remaining term of the Incentive Plan (see Employment
Agreement with Peter Thorner below) because the Incentive Plan was canceled.
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 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 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 (as such terms are defined under the Emergence Bonus Plan). If
an employee leaves us for any reason, other than an involuntary termination
without Cause or a voluntary termination for Good Reason, within one year of
receiving a payment under the Emergence Bonus Plan, the payment shall be
subject to partial or total
46
<PAGE>
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, Executive
Vice Presidents and Senior Vice Presidents and twelve months for Vice
Presidents, and a lump-sum payment equal to six months of salary is paid to
certain other employees. Certain participants would also receive a lump-sum
payment equal to the amount of any incentive payment for the fiscal year in
which the termination occurred (the "Severance Lump Sum").
If the employment of any participant is terminated other than for Cause,
death, disability or retirement, or is terminated under certain other
circumstances, within one year following a change of control of the Company,
the employee will receive a lump-sum payment. The payment is the Severance Lump
Sum amount plus one and one-half times the annual salary in effect immediately
prior to the change of control (the "Annual Salary") for the President and
Senior Vice Presidents, one times the Annual Salary for Vice Presidents and
one-half times the Annual Salary for certain other employees. For purposes of
the Severance Program, a change of control includes but is not limited to the
acquisition by any person of beneficial ownership of 50% or more of the
Company's outstanding voting securities, or the failure of the individuals who
constituted the Board of Directors in August 1995 to continue to constitute a
majority of the Board unless the election of the new directors has been
approved by the incumbent directors. Consummation of 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. Pursuant to the Plan of
Reorganization, we have agreed to grant options to purchase 750,000 shares of
our Common Stock to our management. The options will be granted when their
exercise price is determined. The exercise price of these options will be the
lowest ten-day rolling average of the closing price of our Common Stock within
the period between sixty and ninety days after the Effective Date.
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.
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
47
<PAGE>
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
</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,
Benenati, Moses, and Schmitt were 4, 2, 4, 4, and 4, respectively. As of
December 31, 1998, the years of credited service for the Supplemental Plan for
Messrs. Thorner, Lynn, Benenati, Moses, and Schmitt were 9, 2, 4, 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. 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, our Board of
Directors approved an increase in Mr. Thorner's
48
<PAGE>
annual base salary to $850,000 effective February 1, 1998. 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 on 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 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.
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 our management and key
employees, including salaries and bonuses.
49
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of our Common Stock as of February 2, 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>
Ariel Fund Limited..................... 2,853,981 27.9%
Gabriel Capital, L.P................... 1,934,578 18.9%
Elliott Associates, L.P.(4)............ 461,120 4.6%
Westgate International, L.P.(4)........ 977,619 9.6%
Robert A. Altschuler................... 0 *
Robert W. Benenati..................... 0 *
Stephen J. Blauner..................... 0 *
W. Edward Clingman, Jr................. 0 *
Bruce Conforto......................... 0 *
Gregory Dieffenbach.................... 0 *
Judith Dunning......................... 0 *
John M. Friedman, Jr. ................. 0 *
Mark James............................. 0 *
Lawrence Lieberman..................... 0 *
Robert Lynn............................ 0 *
Charles K. MacDonald................... 0 *
Cornelius F. Moses, III................ 0 *
Ronald T. Raymond...................... 0 *
William H. Roth........................ 0 *
David L. Schmitt....................... 0 *
Sandra Smith........................... 0 *
Thomas N. Smith........................ 0 *
James C. Sparks........................ 0 *
Peter Thorner.......................... 0 *
All directors and executive officers
as a group (consisting of 20 people).. 0 *
</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. For
Elliott Associates, L.P. the mailing address is 712 Fifth Avenue, 36th
Floor, New York, New York 10019. For Westgate International, L.P. the
mailing address is c/o Midland Bank Trust Corporation (Cayman) Limited,
P.O. Box 1109, Mary Street, Grand Cayman, Cayman Islands, BWI.
(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 this Prospectus are deemed outstanding, but
are not deemed to be outstanding for the purpose of computing the
percentage ownership of any other person. 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, but until resolution of all outstanding claims, the recipients of
such warrants are not determinable.
(3) Percentage ownership prior to this Offering is based upon 10,225,711 shares
of Common Stock issued and outstanding as of February 2, 1999.
(4) Elliott Associates, L.P. and Westgate International, L.P. are investment
partnerships under common management.
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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 has been
extended until April 15, 1999, with interest at 10% per annum during the
extension period. Any bonus payments payable to Mr. Smith prior to April 15,
1999 shall be used to repay any outstanding balance of the loan. As of February
16, 1999, the amount remaining outstanding under this loan was $75,267. 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 is interest-free and payable on or prior to March 31,
1999. Any bonus payments payable to Mr. Conforto prior to March 31, 1999 shall
be used to repay any outstanding balance of this loan. As of February 16, 1999,
the amount remaining outstanding under this loan was $88,750.
Company Policy
We have a policy that any transactions with directors, officers, employees
or affiliates be approved in advance by a majority of our Board of Directors,
including a majority of the disinterested members of the Board, and be on terms
no less favorable to us than we could obtain from non-affiliated parties.
SELLING SECURITYHOLDERS
The Selling Securityholders are Ariel Fund Limited, Gabriel Capital, L.P.,
Elliott Associates, L.P. and Westgate International, L.P.
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
February 2, 1999 which are subject to being 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. For the respective percentages of
the Company's securities beneficially owned by each Selling Securityholder
(including such ownership as may be attributed to such securityholders) prior
to the offering. See "Principal Stockholders." The following table does not
include any Common Stock issuable upon exercise of outstanding options or
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 his, her or its
behalf.
<TABLE>
<CAPTION>
Shares of Principal Amount
Common Stock(1) of Notes(2)
--------------- ----------------
<S> <C> <C>
Ariel Fund Limited(3)......................... 2,853,981 $17,421,221
Gabriel Capital, L.P.(3)...................... 1,934,578 $11,809,016
Elliott Associates, L.P.(4)................... 461,120 $ 540,000
Westgate International, L.P.(4)............... 977,619 $ 4,532,875
--------- -----------
TOTAL....................................... 6,227,298(5) $34,303,112(5)
</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 includes such holders' pro rata portion
of the $11.0 million pre-payment of the Notes made on the Effective Date.
The aggregate principal amount outstanding after accounting for the pre-
payment and the issuance of Notes in $1,000 denominations is: $12,201,000
for Ariel; $8,271,000 for Gabriel; $3,172,000 for Westgate; and $378,000
for Elliott.
(3) J. Ezra Merkin ("Merkin") is the sole general partner of Gabriel Capital,
L.P. Gabriel Capital Corp. is the investment advisor for Ariel, and Merkin
is the sole shareholder, sole director and president of Gabriel Capital
Corp.
(4) Elliott Associates, L.P. and Westgate International L.P. are investment
partnerships under common management.
(5) 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.
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<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
At the Effective Date, we have 10,225,711 shares of Common Stock
outstanding. 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 750,000 shares of Common Stock reserved
for issuance upon exercise of Options which we agreed to grant pursuant to the
Plan of Reorganization. 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 750,000 shares will be the
subject of options we agreed to grant pursuant to the Plan of Reorganization.
These options will be granted in May, 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 currently
intend 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. 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
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<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.
54
<PAGE>
Cure Notes
Pursuant to the Plan of Reorganization, Bradlees Stores, Inc. has issued
Cure Notes in the aggregate principal amount of $3.4 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 $3.4 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 eight percent (8%) per annum on the unpaid portion of such claims. The
first payment is due on the latest of: (i) 30 days after the Effective Date,
(ii) 30 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 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, 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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<PAGE>
The Notes will be transferable and exchangeable at the office of the
Security Registrar and will be 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 will rank 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.
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
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<PAGE>
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. will severally, fully and
unconditionally guarantee 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 will be unsecured obligations of
Bradlees, Inc. and New Horizons of Yonkers, Inc. and will be 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.
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
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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 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
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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.
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
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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 are currently seeking to sell our leasehold interest in our Yonkers, New
York store. We have 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. No assurances can
be given that we will receive any bids at or in excess of $15 million and we
reserve the right to accept bids of less than $15 million.
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 are in the process of obtaining title insurance covering the leasehold
mortgages described above. In the event we are unable to obtain title insurance
satisfactory to the holders of the Notes, we have agreed to substitute an
insurable replacement mortgage or mortgages encumbering other leasehold
interests held by us, which leasehold interests are mutually acceptable to both
us and the Trustee as directed by the holders of a majority of principal amount
of outstanding Notes.
We have agreed to obtain this title insurance (including title insurance on
the replacement properties, if any) within 45 days following the Effective
Date. If we do not obtain this insurance for any reason whatsoever (including,
without limitation, our inability to agree on replacement collateral) within
this time period, we have agreed to pay the Trustee liquidated damages for the
benefit of the Note holders of $5,000 per day until our obligations are
satisfied.
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 will be 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
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<PAGE>
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 will be the Trustee under the Indenture.
Its 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. will sign 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 February 2, 1999, 10,225,711 shares
of Common Stock, held by approximately 2,200 stockholders, are issued and
outstanding. As of February 2, 1999, no preferred stock was issued or
outstanding.
Common Stock. In addition to the 10,225,711 shares we have issued, 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.
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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.
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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;
. 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.
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Transfer Agent and Registrar
Boston EquiServe serves as the transfer agent and registrar for the Common
Stock.
Listing
The Common Stock is currently listed on the Nasdaq National Market on a
"when issued" basis under the symbol "BRADV."
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 31, 1998 and
for the fiscal year 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 31, 1998 contained an explanatory paragraph that raised substantial
doubt about the Company's ability to continue as a going concern. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
The consolidated financial statements of Bradlees, Inc. as of February 1,
1997 and for the years ended February 1, 1997 and February 3, 1996 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 and 1995 losses from operations and
stockholders' deficiency, which raise 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 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. 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
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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.
We intend to furnish our stockholders with annual reports containing audited
consolidated financial statements and an opinion thereon expressed by an
independent public accounting firm, and with quarterly reports for the first
three quarters of each fiscal year containing unaudited interim consolidated
financial information.
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 and 1995 losses 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.
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INDEX TO FINANCIAL STATEMENTS
Bradlees, Inc. and Subsidiaries
(Operating as Debtor-in-Possession)
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Financial Statements as of October 31, 1998
(unaudited)
Condensed Consolidated Statements of Operations for the thirteen weeks
ended October 31, 1998
(unaudited) and November 1, 1997 (unaudited)............................ F-2
Condensed Consolidated Statements of Operations for the thirty-nine weeks
ended October 31, 1998 (unaudited) and November 1, 1997 (unaudited)..... F-3
Condensed Consolidated Balance Sheets as of October 31, 1998 (unaudited)
and November 1, 1997 (unaudited)........................................ F-4
Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks
ended October 31, 1998 (unaudited) and November 1, 1997 (unaudited)..... F-6
Notes to Condensed Consolidated Financial Statements (unaudited)......... F-7
Consolidated Financial Statements as of January 31, 1998
Report of Independent Public Accountants-Arthur Andersen LLP............. F-21
Independent Auditors' Report-Deloitte & Touche LLP....................... F-22
Consolidated Statements of Operations for the fiscal years ended January
31, 1998, February 1, 1997 and February 3, 1996......................... F-23
Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997.. F-24
Consolidated Statements of Cash Flows for the fiscal years ended January
31, 1998, February 1, 1997 and February 1, 1996......................... F-25
Consolidated Statements of Stockholders' Equity (Deficiency) for the fis-
cal years ended January 31, 1998, February 1, 1997 and February 3,
1996.................................................................... F-26
Notes to Consolidated Financial Statements............................... F-27
</TABLE>
F-1
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
13 Weeks Ended
--------------------------
Oct. 31, 1998 Nov. 1, 1997
------------- ------------
<S> <C> <C>
Total sales........................................ $323,106 $342,337
Leased department sales............................ 10,973 11,904
-------- --------
Net sales.......................................... 312,133 330,433
Cost of goods sold................................. 217,394 233,329
-------- --------
Gross margin....................................... 94,739 97,104
Leased department and other operating income....... 3,028 3,282
-------- --------
97,767 100,386
-------- --------
Selling, store operating, administrative and
distribution expenses............................. 95,549 93,796
Depreciation and amortization expense.............. 7,803 9,004
Interest and debt expense.......................... 4,371 4,187
Reorganization items............................... (2,749) (6,978)
-------- --------
Net income (loss).................................. $ (7,207) $ 377
======== ========
Comprehensive income (loss)........................ $ (7,207) $ 377
======== ========
Net loss per share - basic and diluted............. $ (0.64) $ 0.03
======== ========
Weighted average shares outstanding (in
thousands) - basic and diluted.................... 11,310 11,366
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-2
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
39 Weeks Ended
--------------------------
Oct. 31, 1998 Nov. 1, 1997
------------- ------------
<S> <C> <C>
Total sales........................................ $939,203 $930,683
Leased department sales............................ 32,818 35,463
-------- --------
Net sales.......................................... 906,385 895,220
Cost of goods sold................................. 635,383 625,521
-------- --------
Gross margin....................................... 271,002 269,699
Leased department and other
operating income................................... 8,757 8,722
-------- --------
279,759 278,421
Selling, store operating, administrative and
distribution expenses............................. 280,326 289,844
Depreciation and amortization expense.............. 24,370 27,544
Loss on disposition of properties.................. 241 --
Interest and debt expense.......................... 11,960 11,673
Reorganization items............................... (2,555) (2,160)
-------- --------
Net loss........................................... $(34,583) $(48,480)
======== ========
Comprehensive loss................................. $(34,583) $(48,480)
======== ========
Net loss per share - basic and diluted............. $ (3.06) $ (4.26)
======== ========
Weighted average shares outstanding (in
thousands) - basic and diluted.................... 11,311 11,382
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-3
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997
------------- ------------- ------------
<S> <C> <C> <C>
ASSETS
Current assets:
Unrestricted cash and cash
equivalents........................ $ 10,959 $ 10,949 $ 11,291
Restricted cash and cash
equivalents........................ 25,129 16,760 9,436
-------- -------- --------
Total cash and cash equivalents... 36,088 27,709 20,727
-------- -------- --------
Accounts receivable................. 11,925 10,013 14,183
Inventories......................... 318,883 238,629 335,359
Prepaid expenses.................... 11,031 8,733 11,087
Assets held for sale................ - 7,754 7,754
-------- -------- --------
Total current assets.............. 377,927 292,838 389,110
Property, plant and equipment, net:
Property excluding capital leases,
net................................ 123,892 131,525 135,430
Property under capital leases, net.. 17,732 18,959 21,126
-------- -------- --------
Total property, plant and
equipment, net................... 141,624 150,484 156,556
-------- -------- --------
Other assets:
Lease interests at fair value, net.. 137,350 142,454 144,705
Assets held for sale................ - 4,000 5,250
Other, net.......................... 4,509 5,390 4,386
-------- -------- --------
Total other assets................ 141,859 151,844 154,341
-------- -------- --------
Total assets........................ $661,410 $595,166 $700,007
======== ======== ========
</TABLE>
(Continued)
See accompanying notes to condensed consolidated financial statements.
F-4
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997
------------- ------------- ------------
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS'
DEFICIENCY
Current liabilities:
Accounts payable.................... $179,413 $124,361 $196,279
Accrued expenses.................... 23,221 30,516 34,619
Self-insurance reserves............. 6,027 6,564 6,144
Short-term debt..................... 157,392 84,208 131,500
Current portion of capital lease
obligations........................ 1,038 1,038 1,038
-------- -------- --------
Total current liabilities......... 367,091 246,687 369,580
-------- -------- --------
Long-term liabilities
Obligations under capital leases.... 26,211 27,073 32,738
Deferred income taxes............... 8,581 8,581 8,581
Self-insurance reserves............. 12,237 13,328 12,473
Other long-term liabilities......... 19,034 23,342 28,186
-------- -------- --------
Total long-term liabilities....... 66,063 72,324 81,978
-------- -------- --------
Liabilities subject to settlement
under the reorganization case........ 548,788 562,105 560,154
Stockholders' deficiency:
Common stock - 11,310,384
outstanding (11,312,154 at 1/31/98,
11,387,154 at 11/1/97)
Par value.......................... 115 115 115
Additional paid-in-capital......... 137,821 137,821 137,951
Accumulated deficit................. (457,665) (423,082) (449,007)
Treasury stock, at cost............. (803) (804) (764)
-------- -------- --------
Total stockholders' deficiency.... (320,532) (285,950) (311,705)
-------- -------- --------
Total liabilities and stockholders'
deficiency......................... $661,410 $595,166 $700,007
======== ======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-5
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
<TABLE>
<CAPTION>
39 Weeks Ended
--------------------------
Oct. 31, 1998 Nov. 1, 1997
------------- ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss.......................................... $(34,583) $(48,480)
Adjustments to reconcile net loss to cash used by
operating activities:
Depreciation and amortization expense........... 24,370 27,544
Amortization of deferred financing costs........ 1,215 2,098
Reorganization items............................ (2,555) (2,160)
Changes in working capital and other, net....... (37,231) (29,832)
-------- --------
Net cash used by operating activities before
reorganization items............................. (48,784) (50,830)
-------- --------
Reorganization items:
Interest income received........................ 746 330
Chapter 11 professional fees paid............... (7,786) (7,877)
Other reorganization expenses paid, net......... (3,225) (5,611)
-------- --------
Net cash used by reorganization items............. (10,265) (13,158)
-------- --------
Net cash used by operating activities............. (59,049) (63,988)
Cash flows from investing activities:
Capital expenditures, net......................... (10,379) (14,721)
Increase in restricted cash and cash equivalents.. (8,369) (310)
-------- --------
Net cash used in investing activities............. (18,748) (15,031)
-------- --------
Cash flows from financing activities:
Payments of liabilities subject to settlement..... (6,551) (5,447)
Deferred financing costs.......................... - (2,026)
Net borrowings under the DIP facilities........... 73,184 89,000
Proceeds from sales of properties................. 12,036 -
Principal payments on capital lease obligations... (862) (1,242)
-------- --------
Net cash provided by financing activities......... 77,807 80,285
-------- --------
Net increase (decrease) in unrestricted cash and
cash equivalents................................... 10 1,266
Unrestricted cash and cash equivalents:
Beginning of period............................... 10,949 10,025
-------- --------
End of period..................................... $ 10,959 $ 11,291
======== ========
Supplemental disclosure of cash flow information:
Cash paid for interest and certain debt fees...... $ 10,282 $ 9,264
Cash received (paid) for income taxes............. $ (279) $ 109
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 condensed consolidated financial statements.
F-6
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The condensed consolidated financial statements of Bradlees, Inc. and
subsidiaries, including Bradlees Stores, Inc. (collectively "Bradlees" or the
"Company"), have been prepared in accordance with the American Institute of
Certified Public Accountants Statement of Position 90-7: "Financial Reporting
by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") and
generally accepted accounting principles applicable to a going concern, which
principles, except as otherwise disclosed, assume that assets will be realized
and liabilities will be discharged in the normal course of business. The
Company filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11") on June 23, 1995 (the "Filing"). The Company is
presently operating its business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Court").
With respect to the unaudited condensed consolidated financial statements
for the 13 weeks (third quarter) and 39 weeks (year-to-date) ended October 31,
1998 and November 1, 1997, it is the Company's opinion that all necessary
adjustments (consisting of normal and recurring adjustments) have been included
to present a fair statement of results for the interim periods. Certain prior-
year amounts have been reclassified to conform to this year's presentation.
These statements should be read in conjunction with the Company's financial
statements (Form 10-K) for the fiscal year ended January 31, 1998 ("1997"). Due
to the seasonal nature of the Company's business, operating results for the
interim periods are not necessarily indicative of results that may be expected
for the fiscal year ending January 30, 1999 ("1998"). Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted, pursuant to the general rules and regulations promulgated by the
Securities and Exchange Commission (the "SEC").
The Company's ability to continue as a going concern is dependent upon the
consummation of the Company's amended plan of reorganization (Note 2), the
ability to maintain compliance with debt covenants under the DIP Facility (Note
4), achievement of profitable operations, maintenance of adequate financing,
and the resolution of the uncertainties of the reorganization case discussed in
Note 2. The Company experienced significant operating losses in 1996 and 1995.
In an effort to return the Company to profitability and accomplish its long-
term goals, the Company is focusing on three core product lines: moderately-
priced basic and casual apparel, basic and fashion items for the home, and
edited assortments of frequently purchased commodity and convenience products.
Bradlees is committed to quality and fashion, especially in apparel and home
furnishings, and to improved customer service. The Company believes that it can
strategically leverage its strength in the fashion and quality content of its
apparel and decorative home product offerings while driving traffic with
selected hardlines merchandise.
2. Reorganization Case
In the Chapter 11 case, substantially all liabilities as of the date of the
Filing are subject to settlement under the amended and modified plan of
reorganization (the "Plan") that was confirmed by the Bankruptcy Court on
January 27, 1999. As of the Effective Date, the Plan provided for approximately
$163 million in distributions to creditors, inclusive of $16 million of
administrative claim payments, $6 million in tax and cure notes, $14 million in
cash, $40 million in convertible notes primarily payable to the Company's pre-
Chapter 11 bank group, new common stock with an estimated value of $85 million,
and $2 million in other distributions. As previously reported, all existing
stock will be canceled upon the Company's emergence from bankruptcy with no
issuance of new stock to current shareholders.
A Form 8-K has been filed with the SEC that describes, among other things,
the classification and treatment of pre-petition claims under the Plan and
conditions to the occurrence of the Plan's effective date.
F-7
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
The Company emerged from Chapter 11 on February 2, 1999. Pro forma financial
information has been presented in the Company's Form S-1 Registration Statement
("Form S-1") filed with the SEC in November, 1998 and is updated in Note 11.
The Plan 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 and the modified
Plan was confirmed by the Bankruptcy Court on January 27, 1999 and became
effective on February 2, 1999.
Schedules were filed by the Company with the Bankruptcy Court setting forth
the assets and liabilities of the Company as of the date of the Filing as shown
by the Company's accounting records. Differences between amounts shown by the
Company and claims filed by creditors are continuing to be investigated and
resolved. Although the ultimate amount and settlement terms for all pre-
petition liabilities have not yet been finalized, the Company believes that the
total of unsecured claims will not exceed $300 million, a condition precedent
to the effectiveness of the Plan. Payments of approximately $2.1 million were
made in 1997 to settle certain reclamation claims and two properties that were
financed prior to the Filing and held for sale at the beginning of 1998 were
either sold or transferred during the second quarter and the associated pre-
petition financing obligation was reduced accordingly (Note 7).
Under the Bankruptcy Code, the Company may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts and other executory pre-petition leases and contracts, subject to
Bankruptcy Court approval. A liability of approximately $45.7 million was
recorded through October 31, 1998, for rejected leases and contracts. This
liability may be subject to future adjustments based on claims filed and
Bankruptcy Court actions. The Company believes that it has recorded its best
estimate of the liability for rejected leases and contracts based on
information currently available.
The principal categories of claims classified as "Liabilities Subject to
Settlement Under the Reorganization Case" are identified below. Deferred
financing costs as of the Filing of $3.4 million, $2.0 million and $2.7
million, respectively, for the pre-petition revolving loan facility (the
"Revolver") and subordinated debt (the "2002 and 2003 Notes") have been netted
against the related outstanding debt amounts. In addition, a $9.0 million cash
settlement and approximately $12.7 million of adequate protection payments
since the Filing have been applied to reduce the Revolver debt amount. The cash
settlement relates to a portion of the Company's cash balance as of the date of
the Filing ($9.3 million) which was claimed as collateral by the pre-petition
bank group. The claim was settled in full for $9.0 million and approved by the
Bankruptcy Court in 1995. All amounts presented below may be subject to future
adjustments depending on Bankruptcy Court actions, further developments with
respect to disputed claims, determination as to the security of certain claims,
the value of any collateral securing such claims, or other events.
<TABLE>
<CAPTION>
(000's)
Liabilities Subject to Settlement ----------------------------------------
Under the Reorganization Case Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997
--------------------------------- ------------- ------------- ------------
<S> <C> <C> <C>
Accounts payable................... $166,567 $165,324 $165,016
Accrued expenses................... 26,000 27,996 27,694
Revolver........................... 68,405 71,105 72,005
2002 Notes......................... 122,274 122,274 122,274
2003 Notes......................... 97,957 97,957 97,957
Financing obligation............... 12,460 17,951 17,951
Obligations under capital leases... 9,440 11,407 11,527
Provision for rejected leases...... 45,685 48,091 45,730
-------- -------- --------
$548,788 $562,105 $560,154
======== ======== ========
</TABLE>
F-8
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
3. Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at October 31, 1998 were comprised of
the following, along with earned interest of $1.2 million: (a) $6.0 million of
the $24.5 million federal income tax refund received in April, 1996; (b) $1.1
million of forfeited deposits, net of property carrying costs, received in 1996
on a planned sale of an owned undeveloped property that was not consummated and
$7.6 million of net proceeds received when this property was sold in March,
1998; (c) $8.0 million from the sale of a closed store in January, 1998; and
(d) other funds ($1.2 million) restricted for security deposits for utility
expenses incurred after the Filing.
4. Debt
As a result of the Filing, substantially all debt (exclusive of the DIP
Facility) outstanding at October 31, 1998, was classified as liabilities
subject to settlement (Note 2). No principal or interest payments are made on
any pre-petition debt (excluding certain capital leases) without Bankruptcy
Court approval or until a reorganization plan defining the repayment terms has
been approved. During 1995, the Company received Bankruptcy Court approval to
make certain adequate protection payments to the pre-petition bank group. The
adequate protection payments, a cash settlement, and deferred financing costs
have been netted against the related outstanding debt amounts (Note 2).
Generally, interest on pre-petition debt ceases accruing upon the filing of
a petition under the Bankruptcy Code. Contractual interest expense not recorded
on certain pre-petition debt (the Revolver, 2002 Notes and 2003 Notes) totaled
approximately $7.7 and $23.1 million for the third quarter and year-to-date
periods of 1998, respectively, and $7.8 and $23.3 million for the third quarter
and year-to-date periods of 1997, respectively.
Financing Facility. The Company has a $250 million financing facility (the
"Financing Facility") (of which $125 million is available for issuance of
letters of credit) with BankBoston Retail Finance, Inc. ("BBNA") as agent,
under which the Company is allowed to borrow for general corporate purposes,
working capital and inventory purchases. The Financing Facility consists of (a)
an up to eighteen month debtor-in-possession revolving credit facility in the
maximum principal amount of $250 million (the "DIP Facility" - see below) and,
subject to meeting certain conditions, (b) an up to three year post-
confirmation revolving credit facility in the maximum principal amount of $250
million (the "Exit Facility" - see below). The commitment period for the
combined facility cannot exceed four years.
The DIP Facility replaced a $200 million Debtor-in Possession Revolving
Credit and Guaranty Agreement (the "Prior DIP Facility") with Chase Manhattan
Bank, as agent. There were outstanding direct borrowings of $157.4 million
under the DIP Facility as of October 31, 1998. Trade and standby letters of
credit outstanding under the DIP Facility were $8.5 and $19.3 million,
respectively, at October 31, 1998, and $16.1 and $19.7 million, respectively,
at November 1, 1997 under the Prior DIP Facility.
The DIP Facility has an advance rate of 60% of the Loan Value of Eligible
Receivables (as defined), plus 72% of the Loan Value of Eligible Inventory (as
defined). Between March 1 and December 15, the Company can borrow an
overadvance amount on the Loan Value of Eligible Inventory of 5% (the
"Overadvance Amount"), subject to a $20 million limitation. At the Company's
option, the Company may borrow under the DIP Facility at the Alternate Base
Rate (as defined) in effect from time to time (the "Base Rate Applicable
Margin") or the adjusted Eurodollar rate plus 2.25% (the "Eurodollar Applicable
Margin") for interest periods of one, two or three months. The Base Rate
Applicable Margin and Eurodollar Applicable Margin would be increased 0.5%
during any fiscal month that the Company has Overadvance Amounts. The weighted
average interest rate under the DIP Facility was 7.92% in the third quarter and
7.93% in the year-to- date period of 1998.
F-9
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
There are no compensating balance requirements under the DIP Facility but
the Company is required to pay an annual commitment fee of 0.3% of the unused
portion. The DIP Facility contains restrictive covenants including, among other
things, limitations on the incurrence of additional liens and indebtedness,
limitations on capital expenditures and the sale of assets, the maintenance of
minimum operating earnings ("EBITDA") and minimum accounts payable to inventory
ratios. The lenders under the DIP Facility have a "super-priority claim"
against the estate of the Company. As of October 31, 1998, the Company is in
compliance with the DIP Facility covenants. The DIP Facility expires on the
earlier of June 30, 1999, or the effective date of the Plan.
The Company has received a commitment for the Exit Facility, which 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 Exit Facility is for a term of
up to three years. The Company will use the Exit Facility to repay its existing
DIP Facility and for working capital and general business needs.
The senior secured tranche has an advance rate equal to 80% of the Loan
Value of Eligible Receivables, plus the lower of (i) 72% of the Loan Value of
Eligible Inventory or (ii) 80% of the ratio of the annual appraised liquidation
value to the Loan Value (as defined) of the inventory (the "Loan to Value
Ratio"). Between March 1 and December 15, the inventory advance rate will be
increased to 77% of the Loan Value of Eligible Inventory. 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 Exit Facility 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 Exit Facility is subject to certain conditions being satisfied,
including minimum EBITDA performance and minimum borrowing availability on the
effective date of the Plan. The Exit Facility will be secured by substantially
all of the non-real estate assets of the Company. The Exit Facility contains
financial covenants including (i) minimum EBITDA, (ii) minimum accounts payable
to inventory; (iii) maximum capital expenditures; and (iv) minimum operating
cash flow to interest expense (for the fiscal quarters ending on or about
January 31, 2001, and thereafter).
5. Income Taxes
The Company provides for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes".
On an interim basis, the Company provides for income taxes using the estimated
annual effective rate method. The Company did not recognize a quarterly or
annual income tax expense or benefit in 1997 and also does not expect to
recognize a quarterly or annual income tax expense or benefit in 1998.
As a result of the implementation of the Plan, the Company will (i) undergo
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) realize 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 arise in a
bankruptcy proceeding under Chapter 11, the Company will avoid some of the
adverse
F-10
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Federal income tax consequences generally associated with such changes (e.g.
the COI realized will not be includible in income). Nevertheless, the Company
expects that its 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 tax attributes, including NOLs, will
be reduced (but not eliminated). In addition, if the Company experiences
another "ownership change" under Section 382 of the Code subsequent to
emergence, there may be further limits on the Company's NOLs and certain built-
in losses and tax credits to income.
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 1998 and 1997, directly
associated with the Chapter 11 reorganization proceedings and the resulting
restructuring of its operations:
<TABLE>
<CAPTION>
(000's)
------------------------------------
13 Weeks Ended 39 Weeks Ended
----------------- -----------------
10/31/98 11/1/97 10/31/98 11/1/97
-------- ------- -------- -------
<S> <C> <C> <C> <C>
Professional fees.................... $ 2,250 $ 2,250 $ 6,750 $ 7,500
Interest income...................... (274) (101) (746) (330)
Net asset write-off.................. - - 470 -
Gain on disposition of properties.... - (800) (1,873) (1,003)
Provision for rejected leases........ (4,725) (5,207) (7,156) (5,207)
Employee severance and termination
benefits............................ - (3,400) - (3,400)
Provision for MIS retention bonuses.. - 280 - 280
------- ------- ------- -------
$(2,749) $(6,978) $(2,555) $(2,160)
======= ======= ======= =======
</TABLE>
Professional fees and interest income: Professional fees represent estimates
of expenses incurred, primarily for legal, consulting and accounting services
provided to the Company and the creditors committee (which are required to be
paid by the Company while in Chapter 11). Interest income represents interest
earned on cash invested during the Chapter 11 proceeding.
Net asset write-off: The Company incurred a $0.5 million net asset write-off
in the second quarter of 1998 relating to the disposal of greeting card
fixtures that are being replaced as a consequence of the Company's rejection of
its greeting card supply contract.
Gain on disposition of properties: The Company sold a previously closed
store in the second quarter of 1998 (see Note 7) and recognized a gain of $1.9
million that was classified as a reorganization item since the associated asset
write-offs were previously included in reorganization items. In 1997, the
Company sold three closed stores leases and certain equipment and recorded
related gains of $1.0 million, including $0.8 million in the third quarter, as
reorganization items.
Provision for rejected leases: 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.
The Company reduced its rejected lease liability accordingly and recognized a
reorganization credit for that amount in the second quarter. During the third
quarter of 1997, the Company sold a closed store lease and reversed the
associated $5.2 million rejected lease liability that had previously been
recorded at the time of the store-closing announcement when it was expected
that the lease would be rejected.
F-11
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
Employee severance and termination benefits: The credit of $3.4 million in
the third quarter and year-to-date period of 1997 resulted from the reversal of
certain executive severance reserves, including a significant portion of the
severance reserve that had been established for the Company's former CEO Mark
Cohen, whose employment terminated in December 1996, and remaining reserves for
certain former executives who found employment. During the third quarter of
1997, a mediated settlement was reached with Mr. Cohen that was subsequently
approved by the Bankruptcy Court.
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 proceedings for continued employment through April 1998. In
April, 1998 these bonuses were paid and this program was then discontinued.
Restructuring reserves: The Company closed 6 stores in February, 1998. As of
October 31, 1998, the Company had remaining reserves (included in accrued
expenses) totaling approximately $1.0 million (exclusive of provisions for
rejected leases discussed in Note 2) for costs associated with the closing of
the 6 stores and other restructuring activities. Approximately $3.2 million of
restructuring costs were paid in the year-to-date period of 1998. The majority
of the remaining reserved costs are expected to be paid within a year.
The Company expects to incur charges of approximately $5.7 million as of
January 30, 1999 for an estimated going-out-of-business inventory impairment of
$0.5 million (to be recorded as cost of goods sold) for one store in the
process of closing and other store closing costs of $5.2 million, including two
other store closings anticipated to begin by the end of fiscal year 1999. At
the same time, the Company expects to recognize a gain of approximately $4.5
million from the modification of the Union Square lease terms.
7. Assets Held for Sale
The Company had assets held for sale at the beginning of 1998 that consisted
of two properties, one of which was sold in the second quarter for
approximately $4.3 million. A net gain of approximately $1.9 million was
recorded in the second quarter for the sale of that property (Note 6) and the
net proceeds from the sale of the property of $3.5 million were utilized to pay
down the related pre-petition financing obligation. Title to the other property
that had been held for sale was transferred to the related financing group at
the end of the second quarter and the pre-petition financing obligation was
reduced by the amount of the carrying value of the property ($2 million)
pending a final agreement on the economic value of the property (which is
currently anticipated to be at or above $2 million).
8. Retirement Plans
The Company has a qualified, noncontributory defined benefit pension plan
for non-union employees. Plan benefits are based on the participant's
compensation and years of service. As of December 31, 1998, the Company will
freeze credited service and salary levels in this plan. This change impacts all
management and non-union hourly associates. All affected associates were
notified of the freeze in November. Vesting service will continue for non-
vested associates but no future credited service will be provided. The Company
recorded a gain of $6.2 million in the fourth quarter as a result of the
freeze, net of the effect of using a lower discount rate in the valuation of
the pension liability.
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. As
of January 1, 1999, the Company will contribute an amount equal to 50% of up to
6% of each participant's salary contributed to the plan. This change impacts
all management and non-union hourly associates. Currently eligible participants
will become fully vested in the Company contribution as required by law, while
new hires on or after January 1, 1999 will have a 20% per year vesting schedule
with full vesting after 5 years.
F-12
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
The Company provides certain health care and life insurance benefits for
certain retired non-union employees meeting age and service requirements. The
Company accounts for the post retirement plan in accordance with SFAS No. 106,
"Employers' Accounting for Post-Retirement Benefits Other Than Pensions," which
requires the Company to accrue the estimated cost of retiree benefit payments
during the years the employee provides services. The Company's post-retirement
benefits are funded on a current basis.
The SFAS No. 106 valuation at January 31, 1998, along with amortization
credits of $1.3 and $4.0 million in the third quarter and year-to-date periods
of 1998, respectively, reflected changes that were effective January 1, 1998.
The changes represent the elimination of future benefits for active employees
who do not become eligible by January 1, 2000, and a phase-out of the Company
contributions over the next two years (at 50% per year beginning January 1,
1999) towards the cost of providing medical benefits to eligible retirees.
9. Changes in Accounting Estimates
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 quarters of 1998 and 1997 using a discount rate of 6.0%
(the same rate used at January 31, 1998 and February 1, 1997). As a result of
the 1997 study, 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).
10. Summarized Financial Information for Bradlees Stores, Inc. and New Horizons
of Yonkers, Inc.
Under the Plan (Note 2), Bradlees, Inc. is issuing common stock and Bradlees
Stores, Inc. is issuing certain debt. Bradlees, Inc. operates its stores
through Bradlees Stores, Inc., an indirect wholly-owned subsidiary.
Bradlees, Inc. is fully and unconditionally 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)
----------------------------
Oct. 31, Jan. 31, Nov. 1,
1998 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Current Assets................................... $371,208 $286,332 $382,649
Noncurrent Assets................................ 283,441 302,286 310,855
Current Liabilities.............................. 367,091 246,687 369,580
Payable to Bradlees, Inc......................... 189,735 189,881 189,139
Noncurrent Liabilities........................... 66,063 72,324 81,978
Liabilities Subject to Settlement Under the
Reorganization Case............................. $328,557 $341,874 $339,923
<CAPTION>
Thirty-Nine Weeks
Ended
------------------
Oct. 31, Nov. 1,
1998 1997
-------- --------
<S> <C> <C> <C>
Net Sales........................................ $906,385 $895,220
Gross Margin..................................... 271,002 269,699
Loss from Continuing Operations.................. (34,689) (48,628)
Net Loss......................................... $(34,689) $(48,628)
</TABLE>
Upon confirmation of the Plan, Bradlees, Inc. will contribute a portion of
its intercompany receivable to the capital of Bradlees Stores, Inc. so that $96
million will be allowed as the final intercompany claim.
F-13
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued)
New Horizons of Yonkers, Inc., a subsidiary of Bradlees Stores, Inc. is the
lessee of the Yonkers, New York Bradlees' store lease (with no net book value),
which it subleases to Bradlees Stores, Inc. New Horizons of Yonkers, Inc.'s
financial activity was limited to rent expense under the lease and rental
income from the sublease during the above periods. New Horizons of Yonkers,
Inc. 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)
-----------------------------------
October 31, January 31, November 1,
1998 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
Due from Bradlees Stores, Inc. ...... $ 1 $ 1 $ 1
Stockholders' Equity................. $ 1 $ 1 $ 1
<CAPTION>
Thirty-Nine Weeks Ended
-----------------------
October 31, November 1,
1998 1997
----------- -----------
<S> <C> <C> <C>
Rental Income........................ $441 $441
Rent Expense......................... $441 $441
</TABLE>
11. Pro Forma Financial Information (Unaudited)
The following unaudited pro forma summary information, pro forma condensed
consolidated balance sheet and unaudited pro forma condensed consolidated
statement of operations are based on the statements of Bradlees as adjusted to
give effect to the consummation of the Plan (Note 2). The unaudited pro forma
summary information, and pro forma condensed consolidated statement of
operations have been prepared as if the effective date of the Plan had occurred
on February 1, 1997. The unaudited pro forma condensed consolidated balance
sheet has been prepared assuming the effective date of the Plan had occurred on
October 31, 1998.
The unaudited pro forma condensed consolidated financial information and
accompanying notes should be read in conjunction with the Company's financial
statements and the notes thereto appearing in the Company's Form 10-K for 1997,
Form S-1 and elsewhere in these financial statements. The unaudited pro forma
condensed consolidated financial information is presented for informational
purposes only and does not purport to represent what the Company's financial
position or results of operations would actually have been if the consummation
of the Plan had occurred on such date or at the beginning of the period
indicated, or to project the Company's financial position or results of
operations at any future date or for any future period.
The following unaudited pro forma summary information for 1997 was derived
from the unaudited pro forma condensed consolidated statement of operations for
1997 presented, along with the notes thereto, in the Form S-1:
Pro Forma Summary Information
(Unaudited)
(000's Omitted)
<TABLE>
<CAPTION>
Fiscal Year Ended
January 31, 1998
-----------------
<S> <C>
Total Sales................................................ $1,340,983
Net Loss................................................... (18,525)
Loss Per Common Share...................................... (1.81)
Pro Forma Number of Stores................................. 103
</TABLE>
The pro forma net loss amount above excludes the gain on debt discharge and
fresh-start reporting credit expected to be recorded on the effective date.
F-14
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments Pro Forma
Oct. 31, 1998 Debits Credits Oct. 31, 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Unrestricted cash and
cash equivalents...... $ 10,959 $ 11,000(2) $ 11,005(2) $ 10,954
Restricted cash and
cash equivalents...... 25,129 - 25,129(2) -
-------- ---------- ----------- --------
Total cash and cash
equivalents.......... 36,088 11,000 36,134 10,954
-------- ---------- ----------- --------
Accounts receivable.... 11,925 11,925
Inventories............ 318,883 1,000(3h) 317,883
Prepaid expenses....... 11,031 - - 11,031
-------- ---------- ----------- --------
Total current assets.. 377,927 11,000 37,129 351,793
-------- ---------- ----------- --------
Property, plant and
equipment, net:
Property excluding
capital leases, net... 123,892 - 9,900(2) 111,792
2,200(3j)
Property under capital
leases, net........... 17,732 9,196(3b) 5,406(3j) 21,522
-------- ---------- ----------- --------
Total property, plant
and equipment, net... 141,624 9,196 17,506 133,314
-------- ---------- ----------- --------
Other assets:
Lease interests at fair
value, net............ 137,350 - 59,530(3j) 77,820
Assets held for sale... - 3,400(2) - 14,000
10,600(3d)
Other, net............. 4,509 2,575(2) 1,222(3g) 4,598
1,264(3i)
Reorganization value in
excess of revalued
assets................ - 14,477(3k) - 14,477
-------- ---------- ----------- --------
Total other assets.... 141,859 31,052 62,016 110,895
-------- ---------- ----------- --------
Total assets.......... $661,410 $ 51,248 $ 116,656 $596,002
======== ========== =========== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-15
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
Pro Forma Adjustments Pro Forma
Oct. 31, 1998 Debits Credits Oct. 31, 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable....... $ 179,413 $ - $ - $179,413
Accrued expenses....... 23,221 2,000(2) 2,000(1) 20,746
2,475(3c)
Self-insurance
reserves.............. 6,027 - - 6,027
Short-term debt........ 157,392 - 4,119(2) 161,511
Current portion of
capital lease
obligations........... 1,038 - 567(2) 1,605
--------- ---------- ---------- --------
Total current
liabilities.......... 367,091 4,475 6,686 369,302
--------- ---------- ---------- --------
Long-term liabilities:
Obligations under
capital leases........ 26,211 321(3b) - 25,890
Convertible notes
payable............... - 11,005(2) 40,000(2) 28,995
Deferred income taxes.. 8,581 8,581(3h) - -
Self-insurance
reserves.............. 12,237 - - 12,237
Unfavorable lease
liability............. - - 45,573(3j) 45,573
Other long-term
liabilities........... 19,034 - 2,000(1) 29,005
5,677(2)
2,294(3f)
--------- ---------- ---------- --------
Total long-term
liabilities.......... 66,063 19,907 95,544 141,700
--------- ---------- ---------- --------
Liabilities subject to
settlement under the
reorganization case.... 548,788 548,788(2) - -
Stockholders' equity
(deficiency):
Common stock
Par value............. 115 115(3a) 102(2) 102
Additional paid-in-
capital.............. 137,821 137,821(3a) 84,898(2) 84,898
Accumulated deficit.... (457,665) 4,000(1) 393,463(2) -
68,202(3)
Treasury stock, at
cost.................. (803) - 803(3a) -
--------- ---------- ---------- --------
Total stockholders'
equity (deficiency).. (320,532) 141,936 547,468 85,000
--------- ---------- ---------- --------
Total liabilities and
stockholders' equity
(deficiency)......... $ 661,410 $ 715,106 $ 649,698 $596,002
========= ========== ========== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-16
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
Pro Forma
39 Weeks 39 Weeks
Ended Pro Forma Adjustments Ended
Oct. 31, 1998 Debits Credits Oct. 31, 1998
------------- ---------- ----------- -------------
<S> <C> <C> <C> <C>
Total sales............. $939,203 3,381(1) - $935,822
Leased department
sales.................. 32,818 70(1) - 32,748
-------- --------
Net sales............... 906,385 903,074
Cost of goods sold...... 635,383 - 2,472(1) 632,911
-------- --------
Gross margin............ 271,002 270,163
Leased department and
other operating in-
come................... 8,757 25(1) - 8,732
-------- --------
279,759 278,895
Selling, store
operating,
administrative and
distribution expenses.. 280,326 2,967(3) 631(1) 278,498
1,021(6) 5,773(7)
724(10) 136(11)
Depreciation and amorti-
zation expense......... 24,370 - 3(1) 12,761
5,103(3)
2,253(5)
469(6)
3,781(9)
Loss on disposition of
properties............. 241 241
Interest and debt ex-
pense.................. 11,960 869(4) 1,215(4) 21,189
9,575(8)
Reorganization items.... (2,555) 2,555(2) - -
-------- --------
Net loss................ $(34,583) $(33,794)
======== ========
Comprehensive loss...... $(34,583) $(33,794)
======== ========
Net loss per share - ba-
sic and diluted........ $ (3.06) $ (3.30)(12)
======== ========
Weighted average shares
outstanding (in
thousands) - basis and
diluted................ 11,311 10,226
======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed consolidated financial
statements.
F-17
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
The following notes set forth the explanations and assumptions used and
adjustments made in preparing the unaudited pro forma condensed consolidated
balance sheet as of October 31, 1998, and the unaudited pro forma condensed
consolidated statement of operations for the thirty-nine weeks then ended.
The unaudited pro forma condensed consolidated financial statements reflect
the adjustments described under "Pro Forma Adjustments" below, which are based
on the assumptions and preliminary estimates described therein, which are
subject to change. These statements do not purport to be indicative of the
financial position and results of operations of Bradlees as of such dates or
for such periods, nor are they indicative of future results. Furthermore, these
unaudited pro forma condensed consolidated financial statements do not reflect
the anticipated gain on debt discharge or fresh-start reporting credit which
are expected to be incurred as of the effective date of the Plan. (For the
purposes of the pro forma financial statements, the "Effective Date" is assumed
to be October 31, 1998 for the pro forma balance sheet, and February 1, 1997
for the pro forma statement of operations.)
The unaudited pro forma condensed consolidated financial statements should
be read in conjunction with the financial statements and the notes thereto
included in these financial statements.
The unaudited pro forma condensed consolidated balance sheet and unaudited
pro forma condensed consolidated statements of operations reflect the following
pro forma adjustments based on the assumptions described below:
October 31, 1998 Balance Sheet Pro Forma Adjustments
1. Reserves established prior to emergence for emergence-related and
performance bonuses payable on the Effective Date or subsequent to
the Effective Date.
2. Plan consummation distributions that include, among other things, an
estimated equity value of $85.0 million, $14.0 million in cash
distributions, and 9% Convertible Notes totaling $40.0 million. In
connection with the consummation of the Plan, we will receive $11.0
million in cash for the modification of the Union Square lease and
immediately pay down the 9% Convertible Notes. The reduction of $9.9
million in property, plant and equipment, net, includes a write-off
of $6.5 million for the Union Square store and a reclassification of
$3.4 million to assets held for sale for one store lease that is
expected to be sold to help fund the further paydown of the 9%
Convertible Notes.
The payment of $25.1 million out of restricted funds and $4.1
million out of revolver borrowings is for certain settlements due
under the POR and for financing costs of $2.6 million associated
with the post-emergence revolver. The total payment, including
approximately $4.5 million to be paid for professional fees
subsequent to emergence, is expected to be $33.7 million in order to
fund all administrative and convenience claims, including the
bonuses due at consummation and the exit financing costs.
3. Fresh-start accounting adjustments that reflect the estimated
adjustments necessary to adopt fresh-start reporting in accordance
with Statement of Position 90-7, "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code". Fresh-start reporting
requires that the reorganization value of Bradlees be allocated to
Bradlees' assets in conformity with APB Opinion 16, "Business
Combinations", for transactions reported on the basis of the
purchase method. Any portion of the assigned reorganization value
exceeding the revalued net assets is recorded as a long-term asset,
while any portion of the assigned reorganization value that falls
below the revalued net assets, which may occur when fresh-start
reporting is adopted as of January 30, 1999, will be assigned to
reduce long-term assets on a pro rata basis. The calculation of the
preliminary and estimated new equity value is discussed in detail in
Section Three (Subsection XIII) of the Disclosure Statement filed as
an exhibit to this Registration Statement. See also "Risk Factors--
Post Bankruptcy Risks--Determination of Equity Value."
F-18
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The fresh-start accounting adjustments are summarized as follows:
a. Cancellation of the old common stock pursuant to the Plan and
close-out to retained earnings.
b. A revaluation of all capital lease obligations and related
capital lease assets using our estimated October 31, 1998
borrowing rate (12%) for similar financings.
c. Revaluation of the straight-line rent reserve ($2.5 million).
Straight-line rent is recalculated on a going-forward basis by
the reorganized Bradlees.
d. Revaluation of the one store lease held for sale to an
estimated total net realizable value of $14 million.
e. Restatement of LIFO merchandise inventories to estimated fair
value approximates FIFO cost. Inventories valued at FIFO cost
then become the base year layer for LIFO inventories in the
post-consummation financial reporting period. No LIFO
adjustment is expected.
f. Recording of additional pension plan liability (primarily from
the reduction of the discount rate) of $4.3 million (excluding
the impact from the fourth quarter non-union pension freeze--
Note 8 to the October 31, 1998 Form 10-Q.) and additional
Supplemental Executive Retirement Plan (the "SERP") liability
of $1.4 million, reduced by the write-off of the unrecognized
FAS No. 106 prior service costs of $3.4 million.
g. Revaluation of the intangible SERP asset ($1.2 million) to its
estimated net realizable value.
h. Write-off ($8.6 million) of deferred income taxes (due to a
change in the status of timing differences) and a $1.0 million
reduction to reflect inventory at its estimated net realizable
value.
i. Write-off of the unamortized deferred financing charges ($1.3
million) associated with the terminated Debtor-in-Possession
(DIP) bank facility which will be amortized prior to
emergence.
j. Revaluation of fixed assets and leasehold interests based upon
the estimated fair market value of properties and leases while
considering the current markets in which Bradlees has
locations. This revaluation resulted in, among other things,
the recording of a write-down of $59.5 million in favorable
lease interests and an unfavorable lease liability of $45.6
million for certain locations. The remaining favorable lease
interests and the unfavorable lease liability will both be
amortized to rent expense.
k. Recording of the reorganization value in excess of the
revalued assets at October 31, 1998.
F-19
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro Forma Adjustments - Statement of Operations for the Thirty-nine Weeks
Ended October 31, 1998
1. To eliminate the sales and expense amounts associated with five
stores closed in February, 1998.
2. To eliminate reorganization items.
3. Adjustment in amortization of lease interests revalued under fresh-
start reporting.
4. To record amortization of post-emergence deferred financing costs
and reverse the historical year to date amortization of deferred
financing costs.
5. Reduction in depreciation expense due to certain reclassifications
to assets held for sale and fixed asset write-offs resulting from
fresh-start reporting.
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.
8. To adjust interest expense for amortization of the discount on the
unfavorable lease liability and for increased interest expense
resulting from a slightly higher average revolver borrowing level,
the 9% Convertible Notes and other issued notes.
9. To record reduction in depreciation and amortization expense
resulting from the allocation of the estimated excess of revalued
assets over the reorganization value at February 1, 1997.
10. To record additional FAS No. 106 expense as a result of fresh-start
reporting.
11. To reduce pension expense as a result of fresh-start reporting.
12. Pro forma earnings per share were computed based on the estimated
weighted average number of common shares outstanding during the
applicable period assuming that the Plan was effective on February
1, 1997.
F-20
<PAGE>
ARTHUR ANDERSEN LLP
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Bradlees, Inc., Debtor-in-Possession:
We have audited the accompanying consolidated balance sheet of Bradlees,
Inc. and subsidiaries, Debtor-in-Possession (the "Company"), as of January 31,
1998, and the related consolidated statements of operations, stockholders'
equity (deficiency) and cash flows for the fiscal year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bradlees, Inc. and
subsidiaries as of January 31, 1998, and the results of its operations and its
cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Notes 1 and 3 to the consolidated financial statements on June 23, 1995, the
Company filed a petition for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. In addition, the Company has experienced operating losses in
each of the three years ended January 31, 1998 and at January 31, 1998 had a
substantial stockholders' deficit. These matters raise substantial doubt about
the Company's ability to continue as a going concern. The Company's ability to
continue as a going concern is dependent upon, among other things, (i)
acceptance of a Plan of reorganization by the Company's creditors with
confirmation by the Bankruptcy Court, (ii) compliance with all debt covenants
under the debtor-in-possession financing, (iii) the success of future
operations, including returning to profitability and maintaining adequate post
bankruptcy financing and liquidity and (iv) the resolution of the uncertainties
of the reorganization case discussed in Note 3. Management's plans in regard to
these matters are also discussed in Note 1 to the financial statements.
The eventual outcome of these matters discussed in the previous paragraph is
not presently determinable. The consolidated financial statements do not
include any adjustments relating to the resolution of these uncertainties or
the recoverability and classification of recorded asset amounts or the amounts
and classification of liabilities that might be necessary should the Company be
unable to continue as a going concern.
/s/ Arthur Andersen LLP
New York, New York
March 17, 1998 (except with respect to the matter discussed in Note 16, as to
which the date is February 16, 1999)
F-21
<PAGE>
Deloitte & Touche LLP
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and
Stockholders of Bradlees, Inc., Debtor-in-Possession:
We have audited the accompanying consolidated balance sheet of Bradlees,
Inc. and subsidiaries, Debtor-in-Possession (the "Company"), as of February 1,
1997, and the related consolidated statements of operations, stockholders'
equity (deficiency) and cash flows for the years ended February 1, 1997 and
February 3, 1996. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Bradlees, Inc. and
subsidiaries at February 1, 1997 and the results of its operations and its cash
flows for the years ended February 1, 1997 and February 3, 1996 in conformity
with generally accepted accounting principles.
As discussed in Notes 1 and 3, the Company has filed for reorganization
under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated
financial statements do not purport to reflect or provide for the consequences
of the bankruptcy proceedings. In particular, such consolidated financial
statements do not purport to show (a) as to assets, their realizable value on a
liquidation basis or their availability to satisfy liabilities; (b) as to
prepetition liabilities, the amounts that may be allowed for claims or
contingencies, or the status and priority thereof; (c) as to stockholder
accounts, the effect of any changes that may be made in the capitalization of
the Company; or (d) as to operations, the effect of any changes that may be
made in its business.
The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As discussed in
Note 1 to the consolidated financial statements, the Company's 1996 and 1995
losses from operations and stockholders' deficiency raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
concerning these matters are also described in Note 1. The consolidated
financial statements do not include adjustments that might result from the
outcome of this uncertainty.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
March 20, 1997 (February 16, 1999 with respect to Note 16)
F-22
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands except per share amounts)
<TABLE>
<CAPTION>
52 Weeks ended 52 Weeks ended 53 Weeks ended
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Total sales................ $ 1,392,250 $1,619,444 $1,840,926
Leased sales............... 47,806 57,726 60,158
----------- ---------- ----------
Net sales.................. 1,344,444 1,561,718 1,780,768
Cost of goods sold......... 948,087 1,127,651 1,289,077
----------- ---------- ----------
Gross margin............... 396,357 434,067 491,691
Leased department and other
operating income.......... 12,151 13,734 15,130
----------- ---------- ----------
408,508 447,801 506,821
Selling, store operating,
administrative
and distribution
expenses.................. 382,910 504,030 572,843
Depreciation and
amortization expense...... 36,244 42,200 54,387
Gain on disposition of
properties................ (5,425) (1,739) -
Interest and debt expense.. 16,584 11,495 27,176
Impairment of long-lived
assets.................... - 40,782 99,358
Reorganization items....... 752 69,792 65,003
----------- ---------- ----------
Loss before income taxes... (22,557) (218,759) (311,946)
Income tax benefit......... - - (104,533)
----------- ---------- ----------
Net loss................... $ (22,557) $ (218,759) $ (207,413)
=========== ========== ==========
Net loss per share - basic
and diluted............... $ (1.98) $ (19.17) $ (18.17)
=========== ========== ==========
Weighted average shares
outstanding
(in thousands) - basic and
diluted................... 11,365 11,412 11,416
=========== ========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-23
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
January 31, 1998 February 1, 1997
---------------- ----------------
<S> <C> <C>
Assets
Current assets:
Unrestricted cash and cash equivalents..... $ 10,949 $ 10,025
Restricted cash and cash equivalents....... 16,760 9,126
--------- ---------
Total cash and cash equivalents.......... 27,709 19,151
--------- ---------
Accounts receivable.......................... 10,013 8,240
Inventories.................................. 238,629 236,920
Prepaid expenses............................. 8,733 8,466
Assets held for sale......................... 7,754 8,419
--------- ---------
Total current assets..................... 292,838 281,196
--------- ---------
Property, plant and equipment, net........... 150,484 163,641
--------- ---------
Other assets:
Lease interests, net....................... 142,454 150,229
Assets held for sale....................... 4,000 5,250
Other, net................................. 5,390 3,884
--------- ---------
Total other assets....................... 151,844 159,363
--------- ---------
Total assets............................. $ 595,166 $ 604,200
========= =========
Liabilities and Stockholders' Deficiency
Current liabilities:
Accounts payable........................... $ 124,361 $ 115,315
Accrued employee compensation and
benefits.................................. 17,401 13,317
Self-insurance reserves.................... 6,564 7,086
Other accrued expenses..................... 13,115 32,607
Short-term debt............................ 84,208 42,500
Current portion of capital lease
obligations............................... 1,038 1,722
--------- ---------
Total current liabilities................ 246,687 212,547
--------- ---------
Obligations under capital leases............. 27,073 33,296
Deferred income taxes........................ 8,581 8,581
Self-insurance reserves...................... 13,328 14,386
Other long-term liabilities.................. 23,342 27,642
Liabilities subject to settlement under the
reorganization case......................... 562,105 571,041
Commitments and contingencies (Note 13)
Stockholders' equity (deficiency):
Common stock - 11,312,154 shares
outstanding (11,394,433 at 2/1/97) Par
value...................................... 115 115
Additional paid-in-capital................. 137,821 137,951
Unearned compensation...................... - (167)
Accumulated deficit........................ (423,082) (400,525)
Treasury stock, at cost - 155,575 shares
(73,296 at 2/1/97)........................ (804) (667)
--------- ---------
Total stockholders' deficiency........... (285,950) (263,293)
========= =========
Total liabilities and stockholders'
deficiency.............................. $ 595,166 $ 604,200
========= =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-24
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
52 Weeks ended 52 Weeks ended 53 Weeks ended
January 31, 1998 February 1, 1997 February 3, 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Cash Flows From Operating
Activities:
Net loss................... $(22,557) $(218,759) $(207,413)
Adjustments to reconcile
net loss to cash provided
(used) by operating
activities:
Depreciation and
amortization.............. 36,244 42,200 54,387
Impairment of long-lived
assets.................... - 40,782 99,358
Amortization of deferred
financing costs........... 3,750 2,154 1,475
Stock compensation......... - - 701
Deferred income taxes...... - - (79,957)
Reorganization items....... 752 69,792 65,003
Gain on disposition of
properties................ (5,425) (1,739) -
Increase (decrease) in cash
resulting from changes in:
Accounts receivable........ (1,773) 2,296 6,819
Inventories................ (1,709) 44,293 16,848
Prepaid expenses........... (357) 1,542 372
Refundable income taxes.... - 24,576 (24,576)
Accounts payable........... 9,046 (32,319) 96,431
Accrued expenses........... (6,185) 580 3,401
Other, net................. (4,547) (1,664) (1,359)
-------- --------- ---------
Net cash provided (used)
by operating activities
before reorganization
items.................... 7,239 (26,266) 31,490
-------- --------- ---------
Operating cash flows from
reorganization items:
Interest income received... 420 1,445 2,965
Bankruptcy-related
professional fees paid.... (9,626) (10,756) (2,250)
Other reorganization
expenses paid, net........ (7,157) (17,572) (3,084)
-------- --------- ---------
Net cash used by
reorganization items..... (16,363) (26,883) (2,369)
-------- --------- ---------
Net cash (used) provided
by operating activities.. (9,124) (53,149) 29,121
-------- --------- ---------
Cash Flows from Investing
Activities:
Capital expenditures, net.. (19,568) (27,527) (37,029)
Increase in restricted cash
and cash equivalents...... (7,634) (7,932) (1,194)
-------- --------- ---------
Net cash used in investing
activities............... (27,202) (35,459) (38,223)
-------- --------- ---------
Cash Flows From Financing
Activities:
Principal payments on long-
term debt................. (1,657) (2,707) (5,794)
Payments of liabilities
subject to settlement..... (6,467) (5,327) (11,764)
Proceeds from sales of
assets.................... 7,967 1,739 -
Borrowings under pre-
petition revolving loan
facility.................. - - 72,500
Borrowings under financing
obligation................ - - 12,801
Borrowings under DIP
facilities................ 41,708 42,500 -
Deferred financing costs... (4,301) (584) (4,047)
Other common stock
activity, net............. - - (18)
Dividends paid............. - - (1,712)
-------- --------- ---------
Net cash provided by
financing activities..... 37,250 35,621 61,966
-------- --------- ---------
Net increase (decrease) in
unrestricted cash and
cash equivalents......... 924 (52,987) 52,864
Unrestricted cash and cash
equivalents:
Beginning of period........ 10,025 63,012 10,148
-------- --------- ---------
End of period.............. $ 10,949 $ 10,025 $ 63,012
======== ========= =========
Supplemental disclosure of
cash flow information:
Cash paid for interest..... $ 12,807 $ 9,991 $ 16,382
Cash received for income
taxes..................... $ 109 $ 25,046 $ 2,869
Supplemental schedule of
noncash (investing and
financial) activities:
Capital lease obligations
incurred.................. $ - $ - $ 8,398
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-25
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
(Dollars in thousands except per share amounts)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
<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 January 28,
1995................... 11,385,254 $113 $138,077 $(1,697) $ 27,359 $(420) $ 163,432
Restricted stock -
grant................. 25,000 1 232 (232) - - 1
Restricted stock -
revaluation........... - (628) 628 - - -
Restricted stock -
forfeitures........... (13,139) - - 79 - (79) -
Restricted stock -
amortization.......... - - - 429 - - 429
Deferred salary option
plan grant............. 27,000 1 270 - - - 271
Other treasury stock
activity, net.......... (7,459) - - - - (18) (18)
Net loss................ - - - - (207,413) - (207,413)
Dividends ($0.15 per
share)................. - - - - (1,712) - (1,712)
---------- ---- -------- ------- --------- ----- ---------
Balance at February 3,
1996................... 1,416,656 115 137,951 (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)
========== ==== ======== ======= ========= ===== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements
F-26
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
(Operating as Debtor-In-Possession)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
Bradlees, Inc. and its subsidiaries, including Bradlees Stores, Inc.
(collectively "Bradlees" or the "Company") is a discount department store
retailer operating in the Northeast United States. The Company's consolidated
financial statements have been prepared in accordance with the American
Institute of Certified Public Accountants Statement of Position 90-7,
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code"
("SOP 90-7") and generally accepted accounting principles applicable to a going
concern, which principles, except as otherwise disclosed, assume that assets
will be realized and liabilities will be discharged in the normal course of
business. The Company filed petitions for relief under Chapter 11 of the United
States Bankruptcy Code ("Chapter 11") on June 23, 1995 (the "Filing"). The
Company is presently operating its business as a debtor-in-possession subject
to the jurisdiction of the United States Bankruptcy Court for the Southern
District of New York (the "Bankruptcy Court").
Bradlees acquired the Bradlees Business from The Stop & Shop Companies, Inc.
("Stop & Shop") with the proceeds from a July 10, 1992 initial public offering
of 11,018,625 shares of its common stock ("the Acquisition"). The Bradlees
Business was comprised of Bradlees New England Holdings, Inc., Bradlees New
York Holdings, Inc. and Stop & Shop Holdings, Inc. ("Holdings") and Holdings'
wholly-owned subsidiary, Bradlees New Jersey, Inc. and each of their
subsidiaries. Certain real estate subsidiaries of the Bradlees Business were
retained by Stop & Shop and the properties owned by these subsidiaries were
leased to Bradlees. The Acquisition was accounted for using the purchase method
of accounting.
The Company's ability to continue as a going concern is dependent upon the
confirmation of a plan of reorganization by the Bankruptcy Court, the ability
to maintain compliance with debt covenants under the New Financing Facility
(Note 6), achievement of profitable operations, and the resolution of the
uncertainties of the reorganization case discussed in Note 3. A confirmed plan
of reorganization could materially change the amounts reported in the
accompanying consolidated financial statements. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability of the value of recorded asset amounts or the amounts and
classification of liabilities that might be necessary as a consequence of a
confirmed plan of reorganization. The Company incurred significant operating
losses in 1996 and 1995.
The Company made the following key modifications to its business strategy
during fiscal 1997 to enhance profitability and improve customer service: (a)
reintroduced lower opening price points in a comprehensive variety of
merchandise categories to enhance value and increase customer traffic; (b)
reduced costly promotional events and thereby eliminated or reduced the
likelihood of substandard profit margins; (c) reintroduced certain basic
convenience and commodity products that are typical of assortments carried by
discount retailers; (d) reinstituted a layaway program, while controlling
promotions of the Bradlees' credit card, and installed new in-store directional
and departmental signage; (e) revised the Company's markdown policy based on
product rate of sale; (f) modified weekly ad circulars to achieve more item-
intensive and price-point oriented ad offerings; (g) introduced both a
"Certified Value" program that highlights certain key recognizable items at
competitive everyday prices and a "Wow!" program which integrates targeted and
unadvertised opportunistic purchases; and (h) significantly reduced overhead
while improving operating efficiencies.
The Company continues to focus on three key merchandise categories:
moderately priced family apparel, home furnishings and conventional consumable
hardlines products. Bradlees is committed to quality and fashion, especially in
apparel and home furnishings, and to improving customer service, to
differentiate itself from its competition. The Company believes that it can
strategically leverage its strength in the quality and fashion content of its
apparel and decorative home product offerings while driving traffic with
selected hardlines merchandise.
F-27
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Company closed one store in April, 1997 and, in December, 1997,
announced the planned closing of six additional underperforming stores by
February, 1998, including one owned store that was being closed as a result of
the sale of the property in January, 1998 (for which a gain of $5.4 million was
recorded). The Company closed 27 stores in 1996.
2. Summary of Significant Accounting Policies
Principles of consolidation The consolidated financial statements include
the accounts of all subsidiaries and the accounts of the special purpose entity
("SPE") with which the Company had a financing arrangement for new store sites
(Note 8). All intercompany transactions have been eliminated in consolidation.
The Company's fiscal year ends on the Saturday nearest to January 31. The
term "1997" refers to the 52 weeks ended January 31, 1998; "1996" refers to the
52 weeks ended February 1, 1997; and "1995" refers to the 53 weeks ended
February 3, 1996.
Fair Value of Financial Instruments Statement of Financial Accounting
Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial
Instruments" requires disclosures of estimated fair values of financial
instruments both reflected and not reflected in the accompanying financial
statements. The estimated fair values of the Company's cash and cash
equivalents, accounts receivable, borrowings under the DIP facilities and
accounts payable (post-petition) approximate the carrying amounts at January
31, 1998 and February 1, 1997 due to their short maturities or variable-rate
nature of the borrowings. The fair value of the Company's liabilities subject
to settlement are not presently determinable as a result of the Chapter 11
proceedings. The fair values of the 2002 Notes and 2003 Notes (Note 6) were not
obtainable at January 31, 1998 and February 1, 1997. Face values of the 2002
Notes and 2003 Notes were $125,000 and $100,000, respectively, at January 31,
1998 and February 1, 1997.
Geographical concentration As of January 31, 1998, the Company operated 109
discount department stores in seven states in the Northeast, primarily in the
heavily populated corridor running from Boston to Philadelphia. A significant
change in economic or competitive conditions within this area could have a
material impact on the Company's operations. The Company closed six additional
stores in February, 1998.
Use of estimates The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The primary
estimates underlying the Company's financial statements include the value of
assets held for sale, the estimated useful lives of fixed assets and lease
interests, the estimates used in SFAS No. 121 calculations (Note 4), accruals
for self-insured workers compensation and general liability (Note 14), vacation
pay reserves (Note 14), provisions for rejected leases and restructuring costs
associated with closing stores (Note 7), and the classification of liabilities
subject to settlement (Note 3).
Collective bargaining arrangements Approximately 73% of the Company's labor
force is covered by collective bargaining agreements, of which collective
bargaining agreements affecting approximately 54% of the labor force will
expire within one year and are expected to be renegotiated.
Cash and cash equivalents Highly liquid investments with original maturities
of 3 months or less when purchased are classified as cash and cash equivalents.
Restricted cash and cash equivalents at January 31, 1998 were comprised of the
following, along with earned interest of $.5 million: (a) $6.0 million of the
$24.5 million federal income tax refund received in April, 1996 held, in escrow
pending further order of the Bankruptcy Court; (b) $1.1 million of forfeited
deposits, net of property carrying costs, received in 1996 on a
F-28
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
planned sale of an owned undeveloped property that was not consummated
(pursuant to the Bankruptcy Court order permitting the sale of the property,
all proceeds associated with the sale of the property must be maintained in a
segregated escrow account pending further order of the Bankruptcy Court); (c)
$8.0 million from the sale of a closed store in 1997; and (d) other funds ($1.2
million) restricted for security deposits for utility expenses incurred after
the Filing.
Inventories Substantially all inventories are valued at the lower of cost
(which includes certain warehousing costs) or market, using the last-in, first-
out ("LIFO") retail method. No LIFO charge has been recorded by the Company as
there has been no excess of current cost over LIFO cost since the Acquisition.
Assets held for sale Assets held for sale are stated at the lower of net
book value or estimated net realizable value and have been classified as
current or noncurrent based upon the anticipated time to sell the asset.
Property, plant and equipment Maintenance, repairs and minor renewals are
charged to operations as incurred. Major renewals and betterments which
substantially extend the useful life of the property are capitalized. The costs
of assets sold or retired and the related amounts of accumulated depreciation
are eliminated from the accounts in the year of disposal, with the resulting
gain or loss included in earnings. Depreciation and amortization are recorded
based upon the estimated useful lives under the straight-line method. Leasehold
improvements and assets recorded under capital leases are amortized over the
lives of the respective leases (including extensions) or the lives of the
improvements, whichever is shorter.
<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 represent the lease rights acquired at the
Acquisition (Note 1) and are amortized on the straight-line method over the
remaining lives of the leases (including option periods) or 40 years, if
shorter. Accumulated amortization was $34.8 million at January 31, 1998 and
$27.7 million at February 1, 1997. During 1996, accumulated amortization of
$3.3 million was eliminated in accordance with SFAS No. 121 (Note 4).
Lease interests acquired at the Acquisition represented the value attributed
to real estate leased by the Company at July 10, 1992. The lease interests were
determined by calculating the present value of the excess of market rent for
each lease over the actual rent payable (including percentage rent) over the
remaining lease term, including all renewal option periods, discounted at 10%,
and then adjusted in accordance with the purchase method of accounting. The
recoverability of the remaining carrying value of lease interests is dependent
upon the Company's ability to generate sufficient future cash flows from
operations at each leased site, or in the case of a sale or disposition of a
lease or leases, the continuation of similar favorable market rents.
Accordingly, recoverability of this asset could be significantly affected by
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 workers'
compensation and general liability costs. The self-insurance reserves are
actuarially determined using discount rates of 6.00% at January 31, 1998 and
February 1, 1997. Self-insurance reserves have been classified as current and
noncurrent in accordance with the estimated timing of the projected payments.
Deferred financing costs Deferred financing costs (related to the DIP
facilities) are amortized over the lives of the related financings. Accumulated
amortization was $.1 million at January 31, 1998 and $2.9 million
F-29
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
at February 1, 1997. The Company wrote off $1.1 million of unamortized deferred
financing costs in 1997 relating to the prior DIP Facility (Note 6) that was
replaced in December, 1997. Net deferred financing costs as of the filing date
of $3.4 million, $2.0 million, and $2.7 million for the pre-petition revolver,
2002 Notes and 2003 Notes, respectively, were netted against the related
outstanding debt subject to settlement during 1995 (Note 3).
Store opening and closing costs Pre-opening costs are expensed prior to or
when a store opens or, in the case of a remodel, reopens. Store closing costs
are provided for when the decision is made to close such stores.
Stock compensation The Company accounts for stock-based employee
compensation costs using the intrinsic value method.
Income taxes The Company provides for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Deferred income taxes, net of valuation
allowances, are provided to recognize the effect of temporary differences
between financial reporting and income tax reporting of assets and liabilities.
Net loss per share Net loss per share is computed using the weighted average
number of common shares outstanding, plus the common stock equivalents related
to stock options if not anti-dilutive, in accordance with the provisions of the
SFAS No. 128 "Earnings Per Share", which was adopted in 1997. The weighted
average number of shares (in thousands) used in the calculation for both basic
and diluted net loss per share in 1997, 1996 and 1995 was 11,365, 11,412 and
11,416 shares respectively. Diluted earnings per share equals basic earning per
share as the dilutive calculations would have an antidilutive impact as a
result of the net loss incurred in each of the years.
Reclassifications Certain reclassifications have been made to the 1996 and
1995 financial statements to conform with the 1997 presentation.
New accounting pronouncements In June 1997, the FASB issued SFAS No. 130,
"Reporting Comprehensive Income", which is effective for the Company beginning
with the fiscal year ending January 30, 1999 ("1998"). SFAS No. 130 will
require that total comprehensive income (the change in equity from transactions
and other events except those resulting from investment by owners) be reported
in the financial statements. The Company does not expect SFAS No. 130 to have
any material impact on the Company's financial statements.
In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information", which is effective beginning with
1998. SFAS No. 131 will require that segment financial information be publicly
reported on the basis that is used internally for evaluating segment
performance. The Company does not expect SFAS No. 131 to have a material effect
on its financial statement disclosures.
In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Post-Retirement Benefits", which is effective
beginning with 1998 and which will affect the Company's pension and post-
retirement plan disclosures in 1998. SFAS No. 132 requires additional
information on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis, and eliminates certain
disclosures. The Company is still reviewing the effect that SFAS No. 132 will
have on its 1998 disclosures.
F-30
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
3. Reorganization Case
During the early 1990's, Bradlees' business strategy relied heavily on
opening new stores, remodeling existing locations and competing on the basis of
price. From 1992 to January, 1995, Bradlees opened 15 new stores (10 in 1994)
and remodeled 41 stores at a total capital cost of $182 million. The new stores
were generally larger stores with rents that substantially exceeded the chain
average rent per square foot. Some of the new stores were also multilevel
facilities which further increased their operating costs when compared with
other prototypical Bradlees stores. The store expansion and remodeling program
marginally increased sales while gross margins declined and operating expenses
increased. Bradlees' declining operating performance, coupled with the
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.
In the Chapter 11 case, substantially all liabilities as of the date of the
Filing are subject to settlement under a plan of reorganization to be voted
upon by the Company's creditors and stockholders and confirmed by the
Bankruptcy Court. Schedules have been filed by the Company with the Bankruptcy
Court setting forth the assets and liabilities of the Company as of the date of
the Filing as shown by the Company's accounting records. Differences between
amounts shown by the Company and claims filed by creditors are being
investigated and resolved. Except for payments of $2.1 million made in 1997 to
settle certain reclamation claims, the ultimate amount and settlement terms for
pre-petition liabilities are subject to a confirmed plan of reorganization, and
accordingly, are not presently determinable. The Company currently retains the
exclusive right to file a plan of reorganization until August 3, 1998 and to
solicit acceptance of a plan of reorganization until October 5, 1998, each
subject to possible extension as approved by the Bankruptcy Court. The Company
filed its plan of reorganization and related disclosure statement with the
Bankruptcy Court on April 13, 1998 and, subject to confirmation of the plan of
reorganization, currently anticipates emergence from Chapter 11 in August,
1998. A hearing to approve the disclosure statement has been scheduled for May
27, 1998 with the Bankruptcy Court.
Under the Bankruptcy Code, the Company may elect to assume or reject real
estate leases, employment contracts, personal property leases, service
contracts and other executory pre-petition leases and contracts, subject to
Bankruptcy Court approval. A liability of approximately $48.1 million has been
recorded as of January 31, 1998 for rejected leases. This liability may be
subject to future adjustments based on claims filed by the lessors and
Bankruptcy Court actions. Although the Company does not currently anticipate
the rejection of additional leases, the Company cannot presently determine or
reasonably estimate the ultimate liability which may result from the filing of
claims for any rejected contracts or from any additional leases which may be
rejected at a future date. The Company believes that it recorded its best
estimate of the liability for rejected leases based on information available.
The principal categories of claims classified as "Liabilities subject to
settlement under the reorganization case" are identified below. Deferred
financing costs as of the Filing date of $3.4 million, $2.0 million and $2.7
million, respectively, for the pre-petition revolving loan facility (the
"Revolver") and subordinated debt (the "2002 and 2003 Notes") have been netted
against the related outstanding debt amounts. In addition, a $9.0 million cash
settlement and approximately $10 million of adequate protection payments
reduced the Revolver debt amount. The cash settlement relates to a portion of
the Company's cash balance as of the date of the Filing ($9.3 million) which
was claimed as collateral by the pre-petition bank group. The claim was settled
in full for $9.0 million and approved by the Bankruptcy Court in 1995. Also,
payments of approximately $1.1 and $.8 million were made to IBM Credit
Corporation ("IBM") and Comdisco, Inc. ("Comdisco"), respectively, in 1996 for
settlement of certain equipment capital lease obligations (Note 6). All amounts
presented below may be subject to future adjustments depending on Bankruptcy
Court actions, further
F-31
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
developments with respect to disputed claims, determination as to the security
of certain claims, the value of any collateral securing such claims, or other
events.
<TABLE>
<CAPTION>
(000's)
---------------------------------
Liabilities Subject to Settlement Under the
Reorganization Case January 31, 1998 February 1, 1997
- ------------------------------------------- ---------------- ----------------
<S> <C> <C>
Accounts payable............................ $165,324 $167,098
Accrued expenses............................ 27,996 27,932
Revolver.................................... 71,105 75,005
2002 Notes.................................. 122,274 122,274
2003 Notes.................................. 97,957 97,957
SPE financing obligation (Note 8)........... 17,951 17,951
Obligations under capital leases............ 11,407 11,887
Liability for rejected leases............... 48,091 50,937
-------- --------
$562,105 $571,041
======== ========
</TABLE>
4. Statement of Financial Accounting Standards No. 121
In the fourth quarter of 1995, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of" and recorded a charge of approximately $99.4 million to reflect
the impairment of certain long-lived assets. In the fourth quarter of 1996, the
Company recorded an additional charge of approximately $40.8 million in
accordance with SFAS No. 121 based on revisions to cash flow assumptions and as
a result of the significant operating loss incurred in 1996. SFAS No. 121
requires that long-lived assets and certain identifiable intangibles to be held
and used by an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company reviewed its long-lived assets for recoverability in
both years primarily as a result of the significant operating losses incurred.
Because of these prior-year charges and the closings of unprofitable stores,
and because the Company met its operating earnings plan in 1997, there was no
such SFAS No. 121 charge in 1997.
In applying SFAS No. 121 in 1996 and 1995, the Company compared anticipated
cash flows over the remaining lease term, including anticipated renewal
periods, from each store (excluding closing stores) with the corresponding
carrying amount of identified long-lived assets and recorded a reduction in
carrying value where such cash flows were not sufficient to recover the related
assets over the term of the lease.
The fair value of these impaired long-lived assets was determined primarily
using the Company's current estimate of the associated future cash flows over
the base lease term, including anticipated renewal periods and consideration of
the fair market value of the assets at the end of the lease term. The stream of
future cash flows by store were discounted at a 20% rate, which the Company
believed to be commensurate with the risks involved. There were significant
assumptions, primarily future cash flows, inherent in the SFAS No. 121
calculations, particularly given the Company's prior-year operating losses and
evolving merchandising strategy.
The assumptions utilized in 1996 and 1995 were subject to significant
business, economic and competitive uncertainties. The charges in 1996 and 1995
were comprised of the following long-lived asset impairments (in 000's):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Property excluding capital leases, net...................... $10,548 $43,632
Property under capital leases, net.......................... 3,363 21,688
Lease interest and lease acquisition costs, net............. 26,871 34,038
------- -------
Total long-lived asset impairment........................... $40,782 $99,358
======= =======
</TABLE>
F-32
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
5. Property, Plant and Equipment, Net
<TABLE>
<CAPTION>
(000's)
---------------------------------
January 31, 1998 February 1, 1997
---------------- ----------------
<S> <C> <C>
Property excluding capital leases:
Buildings and improvements.................. $ 96,678 $ 96,978
Equipment and fixtures...................... 123,603 109,486
Land........................................ - 3,731
-------- --------
Subtotal.................................. 220,281 210,195
Accumulated depreciation.................... (88,756) (70,949)
-------- --------
Property excluding capital leases, net.... 131,525 139,246
-------- --------
Property under capital leases:
Buildings and improvements.................. 22,682 28,218
Equipment and fixtures...................... 8,395 8,395
-------- --------
Subtotal.................................. 31,077 36,613
Accumulated amortization.................... (12,118) (12,218)
-------- --------
Property under capital leases, net........ 18,959 24,395
-------- --------
Total property, plant and equipment, net...... $150,484 $163,641
======== ========
</TABLE>
6. Debt
<TABLE>
<CAPTION>
(000's)
---------------------------------
January 31, 1998 February 1, 1997
---------------- ----------------
<S> <C> <C>
DIP facilities (8.5% - 1997, 8.5% - 1996)... $ 84,208 $ 42,500
Pre-petition Revolver (10.25% - 1997,
10.0% - 1996).............................. 71,105 75,005
Pre-petition 2002 Notes (11%)............... 122,274 122,274
Pre-petition 2003 Notes (9.25%)............. 97,957 97,957
SPE financing obligation (7.75%) (Note 8)... 17,951 17,951
Obligations under capital leases (Note 8)... 39,518 46,905
-------- --------
Total debt.................................. 433,013 402,592
Less: Short-term debt (DIP facilities).. 84,208 42,500
Current portion - capital leases........ 1,038 1,722
Less: Debt subject to settlement (Note
3):
Prepetition Revolver.................... 71,105 75,005
Prepetition 2002 Notes.................. 122,274 122,274
Prepetition 2003 Notes.................. 97,957 97,957
SPE financing obligation................ 17,951 17,951
Obligations under capital leases........ 11,407 11,887
-------- --------
Long-term debt obligations under capital
leases..................................... $ 27,073 $ 33,296
======== ========
</TABLE>
As a result of the Filing, substantially all debt (exclusive of the DIP
facilities) outstanding at January 31, 1998 and February 1, 1997 was classified
as liabilities subject to settlement (Note 3). No principal or interest
payments are made on any pre-petition debt (excluding certain capital leases)
without Bankruptcy Court approval or until a reorganization plan defining the
repayment terms has been approved. During 1995, the Company received Bankruptcy
Court approval to make certain adequate protection payments to the pre-petition
bank group. The adequate protection payments, a cash settlement, and deferred
financing costs have been netted against the related outstanding debt amounts
(Note 3).
F-33
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
On June 25, 1996, the Bankruptcy Court approved an agreement between the
Company and BTM Capital Corporation ("BTM") that fixed the secured claim of BTM
in the amount of $2.25 million, subject to reduction for adequate protection
payments also approved by the Bankruptcy Court. On December 17, 1996, the
Bankruptcy Court approved agreements between the Company and IBM and between
the Company and Comdisco which settled all litigation between the parties
regarding the characterization of certain equipment lease agreements. Under
these agreements, the Company agreed to pay all amounts due to IBM ($1.1
million in December, 1996) and Comdisco ($.8 million in January, 1997),
purchase all the equipment under the IBM equipment lease agreement ($1.4
million in December, 1996) and reject the Comdisco lease effective February 28,
1997.
Generally, interest on pre-petition debt ceases accruing upon the filing of
a petition under the Bankruptcy Code; if, however, the debt is collateralized
by an interest in property whose value (minus the cost of preserving such
property) exceeds the amount of the debt, post-petition interest may be
payable. Other than those noted above, no other determinations have yet been
made regarding the value of the property interests which collateralize various
debts. Although interest may be paid pursuant to an order of the Bankruptcy
Court, it is uncertain whether any post-petition interest will be payable or
paid. The Company believes at this time that it is unlikely that such interest
will be paid. Contractual interest expense not recorded on certain pre-petition
debt (the Revolver, 2002 Notes and 2003 Notes) totaled approximately $31.1 and
$31.3 million for 1997 and 1996, respectively.
New Financing Facility The Company obtained a new $250 million financing
facility (of which $125 million is available for issuance of letters of credit)
in December, 1997 with BankBoston Retail Finance, Inc. ("BBNA") as agent (the
"New Facility"), under which the Company is allowed to borrow for general
corporate purposes, working capital and inventory purchases. The New Facility
consists of (a) an up to eighteen month debtor-in-possession revolving credit
facility in the maximum principal amount of $250 million (the "New DIP" - see
below) and, subject to meeting certain conditions, (b) an up to three year
post-confirmation revolving credit facility in the maximum principal amount of
$250 million (the "Exit Facility" - see below). The commitment period for the
combined facility cannot exceed four years.
The New DIP replaced a $200 million Debtor-in-Possession Revolving Credit
and Guaranty Agreement with The Chase Manhattan Bank, as agent (the "Prior DIP
Facility"). There were outstanding direct borrowings of $84.2 million under the
New DIP as of January 31, 1998. Trade and standby letters of credit outstanding
under the DIP facilities were $7.1 and $26.8 million, respectively, at January
31, 1998 and $9.2 and $26.9 million, respectively, as of February 1, 1997. The
weighted average borrowings under the DIP facilities in 1997 were $87.2
million. The weighted average interest rate under the DIP facilities in 1997
was 7.54%.
The New DIP has an advance rate of 60% of the Loan Value of Eligible
Receivables (as defined), plus 72% of the Loan Value of Eligible Inventory (as
defined). Between March 1 and December 15, the Company can borrow an
overadvance amount on the Loan Value of Eligible Inventory of 5% (the
"Overadvance Amount"), subject to a $20 million limitation. At the Company's
option, the Company may borrow under the New DIP at the Alternate Base Rate (as
defined) in effect from time to time (the "Base Rate Applicable Margin") or the
adjusted Eurodollar rate plus 2.25% (the "Eurodollar Applicable Margin") for
interest periods of one, two, or three months. The Base Rate Applicable Margin
and Eurodollar Applicable Margin will be subject to an additional 0.50% during
any fiscal month that the Company has Overadvance Amounts.
There are no compensating balance requirements under the New DIP but the
Company is required to pay an annual commitment fee of 0.30% of the unused
portion of the New DIP. The New DIP contains restrictive covenants including,
among other things, limitations of the incurrence of additional liens and
indebtedness, limitations on capital expenditures and the sale of assets, the
maintenance of minimum operating earnings ("EBITDA"), and minimum accounts
payable to inventory ratios. The lenders under the New DIP
F-34
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
have a "super-priority claim" against the estate of the Company. As of January
31, 1998, the Company was in compliance with the New DIP covenants. The New DIP
expires on the earlier of June 30, 1999 or the effective date of any plan of
reorganization that is confirmed by the Bankruptcy Court.
In the fourth quarter of 1997, the Company incurred a charge of
approximately $1.1 million for the write-off of the Prior DIP Facility's
unamortized deferred financing costs and paid approximately $2.3 million for
financing fees associated with the New DIP.
The Exit Facility has an advance rate equal to 60% of the Loan Value of
Eligible Receivables, plus the lower of (i) 72% of the Loan Value of Eligible
Inventory or (ii) 80% of the ratio of the annual appraised liquidation value to
the Loan Value (as defined) of the inventory (the "Loan to Value Ratio").
Between March 1 and December 15, the Company can borrow an overadvance amount
on the Loan Value of Eligible Inventory of 5%, provided the Loan to Value Ratio
does not exceed 85%. At the Company's option, the Company may borrow under the
Exit Facility at the Base Rate Applicable Margin or the Eurodollar Applicable
Margin for interest periods of one, two, or three months. The Base Rate
Applicable Margin and Eurodollar Applicable Margin will be subject to an
additional 0.50% during any fiscal month that the Company has Overadvance
Amounts.
The Exit Facility is subject to certain conditions being satisfied,
including (i) an all equity plan of reorganization; (ii) minimum EBITDA
performance; and (iii) minimum borrowing availability on the effective date of
the plan of reorganization. The Company obtained a modification to the
commitment letter dated April 7, 1998, from BBNA, as agent, that modifies their
commitment so that the plan of reorganization filed by the Company on April 13,
1998, although not an all equity plan, satisfies the conditions for the Exit
Facility. The Exit Facility will be secured by all of the assets of the
Company, except interests in real property.
The Exit Facility contains financial covenants including (i) minimum EBITDA,
(ii) minimum accounts payable to inventory, (iii) maximum capital expenditures
and (iv) minimum operating cash flow to interest expense (for the fiscal
quarters ending on or about January 31, 2000, and thereafter).
Prepetition Revolver Prior to the Filing, the Company had a $150 million
revolving loan facility ("Revolver"), including outstanding commercial and
standby letters of credit. The Revolver had a maturity date of July 31, 1997,
and had a variable interest rate based on, among other factors, the Company's
elected borrowing period and amount. The weighted average interest rate
approximated 10.0% in 1997 and 1996 and 8.1% in 1995. No interest has been paid
or accrued on the Revolver since the Filing.
Prepetition 2002 Notes and 2003 Notes The 2002 Notes and 2003 Notes are pari
passu to each other and subordinated to the Company's senior indebtedness.
Beginning on August 1, 1997, the 2002 Notes were to be redeemable, in whole or
in part, at the Company's option, at 104%, decreasing annually to par on August
1, 2000. Beginning on March 1, 2000, the 2003 Notes were to be redeemable, in
whole or in part, at the Company's option, at par plus accrued interest.
Interest on the 2002 Notes and 2003 Notes, due semiannually, has not been paid
or accrued since the Filing.
F-35
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
7. Reorganization Items
The Company provided for or incurred the following expense and income items
in 1997, 1996 and 1995 directly associated with the Chapter 11 reorganization
proceedings and the resulting restructuring of its operations (in 000's):
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Professional fees.................................. $10,000 $10,000 $ 9,200
Interest income.................................... (420) (1,445) (3,078)
Provision for rejected leases...................... (2,846) 32,756 18,971
Net asset/liability write-offs..................... (3,408) 4,034 21,548
Gain on disposition of properties.................. (1,153) (1,697) -
Provision for inventory impairment................. - (1,000) 7,100
Provision for occupancy and other store closing
costs............................................. 1,112 4,102 3,059
Employee severance and termination benefits........ (2,813) 23,042 -
Provision for MIS retention bonuses................ 280 - -
Chapter 11 customer discounts...................... - - 2,960
Provision for retention bonuses.................... - - 5,243
------- ------- -------
Total reorganization items........................ $ 752 $69,792 $65,003
======= ======= =======
</TABLE>
Professional fees and interest income: Professional fees represent estimates
of expenses incurred, primarily for legal, consulting and accounting services
provided to the Company and the creditors committee (which are required to be
paid by the Company while in Chapter 11). Interest income represents interest
earned on cash invested during the Chapter 11 proceeding.
Provision for rejected leases and net asset/liability write-offs: Under the
Bankruptcy Code, the Company may elect to reject real estate leases, subject to
Bankruptcy Court approval. The Company recorded provisions of approximately
$32.8 and $19.0 million in 1996 and 1995, respectively, for rejected leases and
anticipated claims for certain closed and closing store leases that were
expected to be rejected. In 1997, the Company reversed a rejected lease
provision of $5.2 million that had been recorded in 1996 for a store that was
subsequently sold in 1997 with no rejection liability. In addition, the Company
recorded a provision of approximately $2.4 million in 1997 for four of the six
stores closed in February, 1998 whose leases were rejected by the Company.
In connection with the store closings and lease rejections, the Company
wrote off certain net assets (net liability in 1997), primarily for leasehold
improvements, net capital leases and lease interests. The credit of $3.4
million in 1997 resulted from the write-off of closed stores' capital lease
obligations that exceeded the carrying value of the closed stores' assets. Net
asset write-offs also include adjustments to lower the carrying values of
certain properties held for sale to their current net realizable values. The
rejected lease liability may be subject to future adjustments based on claims
filed by the lessors and Bankruptcy Court actions. The Company cannot presently
determine or reasonably estimate the ultimate liability which may result from
such claims and actions or from additional leases which may be rejected at a
future date.
Gain on disposition of properties: The Company sold certain closed store
leases in 1997 and 1996 and the related gains were classified as reorganization
items since the sales were directly related to the Chapter 11 proceedings and
the associated net asset write-offs were previously included in reorganization
items.
Inventory impairment and store closing costs: In December, 1997, the Company
approved a restructuring plan to close 6 stores by February, 1998. One of the 6
stores was owned and closed as a result of the sale of the property in January,
1998. In connection with the plan to close the 6 stores, the Company
F-36
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rejected certain leases and wrote off net assets (see "Provision for rejected
leases and net asset/liability write-offs"). In addition, the Company
established provisions in 1997 for the associated closing costs and for an
inventory impairment for the 6 stores of $2.9 million that was charged to cost
of sales. The provision for inventory impairment represented the incremental
markdowns required to liquidate the inventory at the closed stores. Such costs
are recorded in accordance with the retail inventory method.
In January, 1996, the Company approved a restructuring plan to close 13
stores in the first half of 1996. In connection with this plan, the Company
also rejected certain leases and wrote off net assets. In addition, the Company
established provisions in 1995 for inventory impairment and other closing costs
associated with closing the 13 stores. The provision for inventory impairment
was reduced by $1 million at the conclusion of the going-out-of-business sales
in 1996 when actual results became available. The $1 million reduction was
recorded as a credit to reorganization items since the original provision was
recorded as a reorganization item in 1995 prior to a Securities and Exchange
Commission staff announcement in which 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 1997 totaled approximately $3.5 million.
Employee severance and termination benefits: The credit to employee
severance and termination benefits of $2.8 million in 1997 resulted from the
reversal of certain severance reserves totaling $3.4 million, including a
significant portion of the severance reserve that had been established in 1996
for Mark Cohen, the Company's former CEO, partially offset by a $0.6 million
charge for severance and termination benefits for 382 store associates at the 6
stores closed in February, 1998. A settlement agreement was reached with Mr.
Cohen in 1997.
Employee severance and termination benefits of $23.0 million in 1996
included the following: (a) $13.5 million for the January 1997 management
reorganization and regional and district consolidation; (b) $1.2 million
resulting from the 14 stores closed in October, 1996; (c) $4.2 million for
central office positions eliminated in September, 1996; (d) $1.1 million
resulting from the 13 stores closed in the first half of 1996; and (e) $3.0
million paid to store, district and regional associate positions eliminated as
a result of the February, 1996 store management reorganization. Severance and
termination benefits paid in 1997 and 1996 totaled approximately $4.5 and $16.6
million, respectively.
Chapter 11 customer discounts: The "Chapter 11 customer discounts" reflected
a special 5% discount that was provided to customers during a two-week period
following the Filing to retain customer loyalty and to compensate customers for
the inconvenience of unavailable merchandise.
Retention bonuses: During 1995, the Bankruptcy Court approved certain
assumed and amended executive contracts and the Company's Retention Bonus Plan
(the "Retention Plan") that provided for management bonuses for continued
employment during the first fiscal year of Chapter 11 reorganization and
through the date of payment. Thereafter, the Retention Plan and executive
contracts provided incentives and
F-37
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
rewards for performance that met or exceeded established levels, as well as for
continued employment. The 1995 provision included the Chapter 11-related
bonuses, along with certain executive guaranteed awards related to the Filing.
MIS retention bonuses: The Company has a retention bonus program for certain
Management Information System (MIS) employees that provides for bonuses during
the Chapter 11 proceedings for continued employment through April, 1998. In
April, 1998 these bonuses were paid and this program was then discontinued.
Closed store results: Net sales and operating losses (exclusive of any
central office expense allocation and prior to interest expense, income taxes
and reorganization items) from the one store closed in April, 1997, the six
stores closed in February, 1998 and the 27 stores closed during 1996 were (in
000's):
<TABLE>
<CAPTION>
1997 1996 1995
------- -------- --------
<S> <C> <C> <C>
Net sales....................................... $61,039 $213,363 $367,693
Operating loss.................................. (251) (28,012) (36,040)
</TABLE>
8. Leases
At January 31, 1998, the Company had various noncancelable leases in effect
for substantially all of its stores, distribution centers, and its office
building, as well as certain equipment. In connection with the Filing, all
lease contracts whether assumed or rejected are subject to Bankruptcy Court
approval. Therefore, the commitments shown below may not reflect actual cash
outlays in the future. Payments under certain capital leases which the Company
currently believes represent undersecured financings are classified as
liabilities subject to settlement and are not presented herein. Minimum
payments due under remaining leases, excluding leases which are included in the
provision for rejected leases (Notes 3 and 7), are as follows:
<TABLE>
<CAPTION>
(000's)
-------------------------------
Capital Leases Operating Leases
-------------- ----------------
<S> <C> <C>
1998.......................................... $ 4,645 $ 41,853
1999.......................................... 4,646 40,844
2000.......................................... 4,111 39,357
2001.......................................... 4,132 37,933
2002.......................................... 4,132 36,041
Thereafter.................................... 40,416 220,198
-------- --------
Total minimum payments........................ 62,082 $416,226
========
Estimated executory costs..................... (2,857)
--------
Net minimum lease payments.................... 59,225
Imputed interest.............................. (31,114)
--------
Present value of net minimum lease payments... 28,111
Less current portion.......................... (1,038)
--------
Obligations under capital leases, net of
current portion.............................. $ 27,073
========
</TABLE>
Minimum payments for capital and operating leases have not been reduced by
minimum sublease rentals of $11.7 and $10.0 million, respectively, due in the
future under noncancelable leases. The minimum payments do not include the
contingent rentals that may be payable under certain leases.
F-38
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Total rent expense is as follows:
<TABLE>
<CAPTION>
(000's)
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Operating leases:
Minimum rent....................................... $48,749 $57,352 $60,890
Contingent rent.................................... 425 1,024 972
Sublease income.................................... (7,899) (9,248) (9,585)
------- ------- -------
41,275 49,128 52,277
------- ------- -------
Capital leases:
Sublease income.................................... (1,297) (1,726) (1,829)
------- ------- -------
Total................................................ $39,978 $47,402 $50,448
======= ======= =======
</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.
During 1994, the Company entered into a financing facility with a special
purpose entity ("SPE") (Note 2) and a group of banks, with Bankers Trust as
Agent, that provided a $75 million financing facility for new store sites,
which was to expire in 1998. On April 17, 1995, the amount under the financing
facility was reduced to $45 million, of which only $30 million could be
utilized in 1995. In June, 1995, the amount was further reduced to $24 million,
the amount required for the two sites then under development. Under the terms
of the financing facility with the SPE, the Company entered into leases with
terms of up to six years. Upon expiration of the leases, the Company could
purchase the properties, allow the SPE to sell the sites to an unrelated third
party (subject to the residual guarantee which, in effect, guarantees 100% of
the outstanding borrowings) or extend the lease term. As a result of the
guarantee and the Filing, the Company has included the accounts of the SPE in
its consolidated financial statements. Borrowings of approximately $18 million
at January 31, 1998 and February 1, 1997 are included in liabilities subject to
settlement and are collateralized by land and buildings (with a carrying value
of $4.0 million) that are classified as long-term assets held for sale. Any
proceeds from the sale of these properties will be restricted to pay down the
related borrowings.
9. Common Stock and Additional Paid-In Capital
The authorized capital stock of the Company consists of 40 million shares of
common stock, par value of $0.01 per share ("Common Stock"), of which
11,312,154 shares were outstanding at January 31, 1998, and one million shares
of preferred stock, par value of $0.01 per share, none of which were
outstanding at January 31, 1998. The Common Stock will be canceled under the
Company's filed plan of reorganization.
The Company has a Restricted Stock Plan that provides for the award of
277,008 shares of Common Stock ("Restricted Stock") to certain officers and
employees. At January 31, 1998, 15,217 shares were outstanding under the
Restricted Stock Plan. There have been no awards of Restricted Stock since the
Filing. No cash payments are required from Restricted Stock recipients and all
issued shares accrue dividends, if any. In general, the shares become
unrestricted under a five-year vesting schedule. All shares of Restricted Stock
may vest earlier in certain circumstances (death, disability, retirement or a
change of control). Shares of Restricted Stock which have not vested are not
freely transferable and revert to the Company upon the employee's termination.
F-39
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
10. Stock Options
The Company has a 1992 Stock Option Plan for Key Employees ("Key Employee
Plan") that provides for the grant of options for up to 1,272,283 shares of
Common Stock to certain employees. No options have been granted under the Key
Employee Plan since the Filing. The options are intended to qualify as
incentive stock options or non qualified stock options and generally have a
three to five-year vesting schedule. Activity in the Key Employee Plan is as
follows:
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Outstanding at January 28, 1995..................... 1,052,362 $13.65
Granted............................................. 153,000 9.78
Canceled............................................ (261,794) 13.83
Exercised........................................... - -
---------
Outstanding at February 3, 1996..................... 943,568 $12.97
Granted............................................. -
Canceled............................................ (265,790) $13.46
Exercised........................................... - -
---------
Outstanding at February 1, 1997..................... 677,778 $12.78
Granted............................................. - -
Canceled............................................ (396,753) $13.32
Exercised........................................... - -
--------- ------
Outstanding at January 31, 1998..................... 281,025 $12.30
========= ======
Exercisable at January 31, 1998..................... 171,997 $12.65
========= ======
</TABLE>
Options outstanding at January 31, 1998, range in exercise price from $6.50
to $18.38 and have a remaining weighted average contractual life of 5.56 years.
The Company has a 1993 Non-Employee Directors' Stock Option Plan
("Directors' Plan") that provides for the grant of non qualified options for up
to 100,000 shares of Common Stock to non-employee directors. In general, the
options have a three-year vesting schedule. During 1997, 1996 and 1995, 30,000,
15,000 and 30,000 options, respectively, were granted under the Directors'
Plan. During both 1997 and 1996, 15,000 options were canceled. At January 31,
1998, 90,000 options under the Directors' Plan were outstanding with exercise
prices ranging from $0.06 to $15.75 (weighted average exercise price is $7.02).
At January 31, 1998, 45,000 of the options were exercisable at a weighted
average price of $12.26 and have a weighted average remaining contractual life
of 5.26 years.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," effective for the Company's fiscal year beginning February 4,
1996. SFAS No. 123 encourages but does not require the recognition of
compensation expense for the fair value of stock option and other equity
instruments issued to employees. If the fair-value provisions of SFAS No. 123
are not adopted, certain pro forma amounts of net earnings and earnings per
share that would have been reported had these provisions been adopted are
required to be disclosed, if material. The Company continues to account for
stock-based compensation in accordance with Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value
method. The difference between accounting for stock-based compensation under
APB No. 25 and SFAS No. 123 was not material for 1997, 1996 and 1995, and
accordingly the pro forma disclosures have been omitted.
F-40
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
11. Employee Benefit Plans
Pension plan. Certain union employees are covered by multi-employer defined
benefit plans. Expenses for these plans were $.9 million for 1997, $1.1 million
for 1996 and $1.3 million for 1995.
The Company has a qualified, noncontributory defined benefit pension plan
for employees not participating in multi-employer plans. Plan benefits are
based on the participant's compensation and/or years of service. The Company
funds the net pension costs each year. The plan assets are held in a master
trust fund, which invests primarily in equity, fixed income securities and cash
and cash equivalents.
The Company has several nonqualified, noncontributory defined benefit plans
for the benefit of certain highly compensated employees. The plans are unfunded
and benefits paid under the plans are based on years of service and employees'
compensation.
The components of net pension costs for the plans are as follows:
<TABLE>
<CAPTION>
000's
-------------------------
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Service costs........................................ $ 3,272 $ 3,897 $ 3,061
Interest costs....................................... 5,054 4,909 4,369
Return on plan assets................................ (9,566) (7,617) (9,165)
Net amortization and deferral........................ 4,177 2,993 5,497
Curtailment loss..................................... 126 554 -
Special termination benefits......................... (359) 782 -
------- ------- -------
Net pension costs.................................... $ 2,704 $ 5,518 $ 3,762
======= ======= =======
</TABLE>
The funded status is as follows:
<TABLE>
<CAPTION>
(000's)
---------------------------------------------
January 31, 1998 February 1, 1997
---------------------- ----------------------
Qualified Nonqualified Qualified Nonqualified
Plan Plans Plan Plans
--------- ------------ --------- ------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation..... $61,504 $ 3,046 $55,352 $ 4,444
======= ======= ======= =======
Accumulated benefit obligation.. $62,656 $ 3,490 $56,183 $ 4,583
======= ======= ======= =======
Projected benefit obligation.... $72,233 $ 4,236 $66,978 $ 5,126
Plan assets at fair value....... 68,611 - 62,325 -
------- ------- ------- -------
Projected benefit obligation
greater
than plan assets............... (3,622) (4,236) (4,653) (5,126)
Unrecognized prior service
cost........................... 518 1,434 576 107
Unrecognized transition
obligation..................... - 102 - 1,609
Unrecognized net (gain) loss.... (2,740) 435 313 49
Additional minimum liability
(recorded
as other assets)............... - (1,225) - (1,222)
------- ------- ------- -------
Accrued pension liability....... $(5,844) $(3,490) $(3,764) $(4,583)
======= ======= ======= =======
</TABLE>
The curtailment losses and special termination benefits in 1997 and 1996
result from the employment terminations of several executives and the closing
of stores. These costs in 1996 were primarily included in
F-41
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
termination benefits as part of reorganization items (Note 7). Certain portions
($1.2 million) of the nonqualified plans' accrued pension liability at January
31, 1998 relate to pre-petition employment contracts and are included in
liabilities subject to settlement under the reorganization case.
The rate of increase in future compensation levels used in determining the
actuarial present value of the projected benefit obligation for the qualified
plan was 4.09% for 1997 and 1996; the discount rate was 7.0% for 1997 and 7.25%
for 1996; and the expected rate of return on the plan assets was 9.25% for 1997
and 9.0% for 1996. The rate of increase in future compensation levels and
discount rate used in determining the actuarial present value of the projected
benefit obligation for the non qualified plans was 4.25% for 1997 and 1996 and
7.0% for 1997 and 7.25% for 1996, respectively.
Defined Contribution Plan The Company has a 401(k) plan for all active
employees in eligible job categories. Employees may contribute a portion of
their salary to the plan. The Company's contributions to the plan, which were
suspended in 1996, were in the form of cash or common stock of the Company and
were based on a percentage of employee contributions. There was no plan expense
in 1997 and 1996, as compared to $1.0 million for 1995.
Postretirement Plan The Company provides certain health care and life
insurance benefits for certain retired non-union employees meeting age and
service requirements. The Company accounts for the post- retirement plan in
accordance with SFAS No. 106, "Employers' Accounting for Postretirement
Benefits Other Than Pensions," which requires the Company to accrue the
estimated cost of retiree benefit payments during the years the employee
provides services. The Company's postretirement benefits are funded on a
current basis.
The SFAS No. 106 valuation at January 31, 1998, along with the $3.9 million
curtailment gain and a $.4 million amortization credit, reflects changes that
were effective January 1, 1998. The changes represent the elimination of future
benefits for active employees who do not become eligible by January 1, 2000,
and a phase-out of the Company contributions over the next two years (at 50%
per year beginning January 1, 1999) towards the cost of providing medical
benefits to eligible retirees.
The status of the plan is as follows:
<TABLE>
<CAPTION>
(000's)
---------------------------------
January 31, 1998 February 1, 1997
---------------- ----------------
<S> <C> <C>
Accumulated postretirement benefit
obligation for:
Retirees.................................. $ 733 $ 1,886
Fully eligible actives.................... 536 1,998
Other actives............................. 439 3,983
------- --------
1,708 7,867
Plan assets at fair value................... - -
------- --------
Funded status............................... (1,708) (7,867)
Unrecognized prior service cost............. (5,189) (5,313)
Unrecognized net (gain)..................... (2,513) (1,203)
------- --------
Accrued postretirement benefit cost......... $(9,410) $(14,383)
======= ========
</TABLE>
F-42
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Net postretirement (benefit) cost is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ----- -----
<S> <C> <C> <C>
Service cost.......................................... $ 172 $ 241 $ 338
Interest cost......................................... 429 540 774
Amortization, net..................................... (1,359) (877) (808)
Curtailment gain...................................... (3,939) - -
------- ----- -----
Net (benefit) cost.................................... $(4,697) $ (96) $ 304
======= ===== =====
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation was 8.70% for 1997 (6.25% for post-65
coverage) grading down to 4.25% over 10 years and 8.70% for 1996 (6.75% for
post-65 coverage) grading down to 4.25% over 10 years. A one percentage point
increase in the assumed health care cost trend rate would increase the
accumulated postretirement benefit obligation by .56% and the service and
interest cost by 3.31%. The assumed discount rate used in determining the
accumulated postretirement benefit obligation was 7.25% for 1997 and 1996.
12. Income Taxes
There was no income tax expense or benefit in 1997 and 1996. The income tax
benefit in 1995 was comprised of the following components:
<TABLE>
<CAPTION>
(000's)
---------
1995
---------
<S> <C>
Current:
Federal......................................................... $ (24,476)
State........................................................... (100)
---------
(24,576)
---------
Deferred:
Federal......................................................... (74,765)
State........................................................... (5,192)
---------
(79,957)
---------
$(104,533)
=========
</TABLE>
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>
1997 1996 1995
----- ----- -----
<S> <C> <C> <C>
Statutory rate..................................... (35.0%) (35.0%) (35.0%)
State income taxes, net of Federal income tax
benefit........................................... (4.0%) (6.4%) (4.8%)
Non-deductible professional fees................... 14.5% 1.5% 1.2%
Non-deductible compensation........................ - 1.5% -
Valuation allowance................................ 24.5% 38.4% 5.1%
----- ----- -----
0% 0% (33.5%)
===== ===== =====
</TABLE>
F-43
<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)
--------------------
1997 1996
--------- ---------
<S> <C> <C>
Lease interests........................................ $ 51,399 $ 50,435
Inventories............................................ 11,854 12,916
Other.................................................. 3,295 793
--------- ---------
Total liabilities...................................... 66,548 64,144
--------- ---------
Net operating loss carryforwards....................... (105,917) (100,392)
Self insurance accruals................................ (8,602) (9,018)
Rejected lease claims.................................. (20,350) (21,725)
Postretirement benefits................................ (3,704) (5,829)
Closing costs.......................................... (2,902) (3,278)
Property, plant and equipment, net..................... (3,233) (4,294)
Capital leases......................................... (10,708) (2,890)
Vacation............................................... (2,636) (3,769)
Alternative minimum tax credit carryforwards........... (2,144) (2,144)
Other.................................................. (3,182) (2,110)
--------- ---------
(163,378) (155,449)
Valuation allowance.................................... 105,411 99,886
--------- ---------
Total assets........................................... (57,967) (55,563)
--------- ---------
Net deferred tax liability............................. $ 8,581 $ 8,581
========= =========
</TABLE>
At January 31, 1998, the Company had net operating loss carryforwards of
approximately $260.8 million for Federal income tax purposes which will expire
beginning in fiscal year 2011 and alternative minimum tax credit carryforwards
of $2.1 million which are available to reduce future Federal regular income
taxes over an indefinite period. As part of the Company's filed plan of
reorganization, it is anticipated that a major portion of the net operating
loss carryforward will be reduced by the cancellation of indebtedness and that
the change in ownership resulting from the issuance of new stock will result in
a limitation on the remaining amount of net operating loss and tax credit
carryovers that can be utilized each year.
The Company had a valuation allowance of $99.9 million against deferred tax
assets in 1996. During 1997, the valuation allowance was increased by $5.5
million. The realization of the deferred tax assets is dependent upon future
taxable income during the Federal and State carryforward periods.
13. Commitments and Contingencies
The Company, exclusive of matters relating to the Filing (Note 3), is party
to various legal actions and administrative proceedings and subject to various
claims arising in the ordinary course of business. The Company believes that
the disposition of these matters will not have a material adverse effect on its
financial position, results of operations or liquidity. All civil litigation
commenced against the Company prior to the Filing has been stayed by operation
of law. There were no material legal proceedings pending against the Company
prior to the Filing.
In February, 1997 the Company adopted the Corporate Bonus Plan (the
"Corporate Bonus Plan") that was approved by the Bankruptcy Court. The
Corporate Bonus Plan provides incentives and rewards for (i)
F-44
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
performance of key employees that meets or exceeds expectations and (ii)
attainment of threshold performance measurements tied directly to the Company's
1997 business plan. The amount of the award would increase as the Company's
performance exceeds the business plan. In addition, a discretionary fund in the
amount of $500,000 has been established to provide bonuses to (a) non-bonus
eligible employees based upon performance regardless of whether the Company
achieves its target performance level and (b) bonus eligible employees based on
performance if the Company does not achieve its target performance level.
Under the Corporate Bonus Plan, the Company had to obtain a minimum EBITDA
(as defined) of $28.1 million in 1997, net of the anticipated costs of the
Corporate Bonus Plan, in order for any employee to be eligible for an award
(except for the discretionary fund mentioned above). For each $5 million of
EBITDA improvement over the amount projected, the award increases by 25% of the
base award up to a maximum increase of 100% of the award. The Company achieved
the minimum EBITDA in 1997 and, accordingly, recorded a provision of
approximately $4 million for such bonuses in 1997 that was included in selling,
store operating, administrative and distribution expenses. These bonuses were
paid in April, 1998.
With respect to the five-highest paid officers of the Company and certain
other members of senior management of the Company, one-quarter of the amount of
any bonus payable before such time as the Company has consummated a Chapter 11
plan of reorganization is contingently payable, with interest, at the earlier
of the date of consummation of such plan, or the date of termination of
employment by the Company without cause, by the officer for good reason, or on
account of death or disability. Approximately $.4 million was subject to this
deferral under the Corporate Bonus Plan in 1997. This is in addition to
approximately $.2 million of bonuses earned under the Retention Plan (Note 7)
in 1995 that remains subject to the same deferral.
In August, 1995, the Company adopted, and in November, 1995, the Bankruptcy
Court approved, the Enterprise Appreciation Incentive Plan (the "Incentive
Plan"). All members of the Company's senior management are eligible to be
selected by the Board of Directors to participate in the Incentive Plan. Under
the Incentive Plan, each participant receives an equity incentive award payable
on June 23, 2000 (the fifth anniversary of the Chapter 11 filing date) equal to
the increase in the value of the Company (as determined by appraisal) over the
five years ending on June 23, 2000. Each participant's interest in the
Incentive Plan vests in equal installments over the five-year period, subject
to acceleration in certain situations. In the event a participant terminates
his or her employment without good reason or is terminated with cause prior to
June 23, 2000, then the participant forfeits his or her rights under the
Incentive Plan.
Awards under the Incentive Plan will be paid promptly following June 23,
2000 in the form of 60% cash and the balance in cash, notes and stock as
described thereunder. In no event will the total of all benefits payable under
the Incentive Plan exceed the lesser of $20,000,000 or 13% (6% was for the
Company's former CEO, Mark Cohen, and is not reallocable) of the total
appreciation in the value of the Company during the five year period. No
payments are expected to be paid under the Incentive Plan because the Company
anticipates that the Incentive Plan will be canceled and replaced by a
different incentive plan under the presently proposed terms of the Company's
filed plan of reorganization.
The Company has entered into a three-year employment agreement with its
current CEO, Peter Thorner, commencing as of October 26, 1995 and amended as of
November 7, 1997. Mr. Thorner's employment agreement provides for the payment
by the Company of an equity incentive bonus (payable in cash, debt and equity
securities) pursuant to the Incentive Plan determined by reference to the
increase in value of the Company from the date of the bankruptcy filing to the
fifth anniversary of the employment agreement, subject generally to vesting
over five years. Mr. Thorner's equity incentive bonus under the Incentive Plan
would be at least $1,000,000 but would not exceed the lesser of $4,615,385 or
3% of the appreciation in value of the Company. As stated above, no payments,
other than annual nonrefundable advances of $150,000 to Mr.
F-45
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Thorner, are expected to be paid under the Incentive Plan because the Company
anticipates that the Incentive Plan will be canceled and replaced by a
different incentive plan under the presently proposed terms of the Company's
filed plan of reorganization. The employment agreement also provides that in
the event of Mr. Thorner's termination of employment by the Company (including
following a change in control of the Company) without Cause or Good Reason (as
defined), Mr. Thorner would generally be entitled to all payments and benefits
called for under the agreement for the remainder of its term.
In August, 1995, the Company adopted and the Bankruptcy Court approved a
severance program (the "Severance Program") that covers certain members of
management. If the employment of any participant in the Severance Program is
terminated other than for cause, death, disability or by the employee, or in
connection with a change in control (as defined), then salary and certain
incentive payments are guaranteed for periods ranging up to eighteen months,
subject to mitigation by other employment. Amounts payable at January 31, 1998
under the Severance Program for management terminations were included in the
reserve for termination benefits (Note 7).
14. Changes in Accounting Estimates
As discussed in Note 2, the Company is primarily self-insured for workers'
compensation and general liability costs. Actuarial studies of the self-
insurance reserves were completed in the third quarter of 1997, using a
discount rate of 6.0% (the same rate used at February 1, 1997), and in the
third quarter of 1996, using a discount rate of 6.0% (compared to 5.3% at
February 3, 1996). As a result of the studies, the self-insurance reserves were
reduced by $3.6 million in the third quarter of 1997 with a corresponding
reduction in SG&A expenses (selling, store operating, administrative and
distribution expenses) and by $5.0 million in the third quarter of 1996 with
corresponding reductions of $4.2 and $.8 million in SG&A expenses and interest
expense, respectively. The reductions in the self-insurance reserves were
primarily the result of aggressive claims management and safety initiatives.
The Company changed its vacation pay vesting policy for certain pay groups
in December, 1997, whereby the employees in those pay groups earn their
vacation pay entitlements the course of each calendar year worked (similar to
industry practice) rather than being fully vested on the first day of each
calendar year. As a result of this change, $4.5 million of the Company's
vacation pay reserves as of January 1, 1998 was eliminated with a corresponding
credit in SG&A expenses.
15. Summary of Quarterly Results (Unaudited)
<TABLE>
<CAPTION>
($ in thousands except per share data)
--------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter Total
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended January 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
Year Ended February 1,
1997:
Net sales................. $337,703 $369,578 $404,456 $449,981 $1,561,718
Gross margin.............. 102,514 101,396 113,061 117,096 434,067
Net loss.................. (53,746) (82,785) (23,073) (59,155) (218,759)
Net loss per share........ $ (4.71) $ (7.25) $ (2.02) $ (5.19) $ (19.17)
Weeks in period........... 13 13 13 13 52
</TABLE>
F-46
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
16. Summarized Financial Information for Bradlees Stores, Inc. and New Horizons
of Yonkers, Inc.
On January 27, 1999, the Company's amended and modified plan of
reorganization (the "Plan") was confirmed by the Bankruptcy Court. Under the
Plan, Bradlees, Inc. is issuing common stock and Bradlees Stores, Inc. is
issuing 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 31, February 1,
1998 1997
-------------- --------------
<S> <C> <C> <C>
Current Assets................... $ 286,332 $ 274,980
Noncurrent Assets................ 302,286 322,962
Current Liabilities.............. 246,687 212,547
Payable to Bradlees, Inc......... 189,881 190,038
Noncurrent Liabilities........... 72,324 83,905
Liabilities Subject to Settlement
Under the Reorganization Case... $ 341,874 $ 350,810
<CAPTION>
(000's)
--------------------------------------------
52 Weeks ended 52 Weeks ended 53 Weeks ended
January 31, February 1, February 3,
1998 1997 1996
-------------- -------------- --------------
<S> <C> <C> <C>
Net Sales........................ $1,344,444 $1,561,718 $1,780,768
Gross Margin..................... 396,357 434,067 491,691
Loss from Continuing Operations.. (22,620) (218,726) (206,870)
Net Loss......................... $ (22,620) $ (218,726) $ (206,870)
</TABLE>
Upon confirmation of the Plan, Bradlees, Inc. will contribute a portion of
its intercompany receivable to the capital of Bradlees Stores, Inc. so that $96
million will be allowed as the final intercompany claim.
New Horizons of Yonkers, Inc., a subsidiary of Bradlees Stores, Inc., is the
lessee of the Yonkers, New York Bradlees' store lease (with no net book value),
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 above periods. New Horizons of
Yonkers, Inc. 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 31, February 1,
1998 1997
-------------- --------------
<S> <C> <C> <C>
Due from Bradlees Stores, Inc.... $ 1 $ 1
Stockholders' Equity............. $ 1 $ 1
<CAPTION>
(000's)
--------------------------------------------
52 Weeks ended 52 Weeks ended 53 Weeks ended
January 31, February 1, February 3,
1998 1997 1996
-------------- -------------- --------------
<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-47
<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............................................................. 6
The Company.............................................................. 13
Use of Proceeds.......................................................... 18
Dividend Policy.......................................................... 18
Capitalization........................................................... 19
Selected Financial Data.................................................. 20
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 30
Business................................................................. 37
Management............................................................... 41
Principal Stockholders................................................... 50
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.
7,267,424 Shares of Common Stock
$36,000,000 9% Convertible Notes
----------------
PROSPECTUS
----------------
February 24, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
