<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 28, 2000
Commission file number 1-11134
BRADLEES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3156108
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification number)
One Bradlees Circle
Braintree, MA 02184
(Address of principal executive offices)
(Zip code)
(781) 380-3000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days.
Yes /X/ No / /
Number of shares of the issuer's common stock outstanding as of December 1,
2000: 9,859,298 shares.
Exhibit Index on Page 19
Page 1 of 20 (Excluding exhibits)
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Bradlees, Inc.:
We have reviewed the accompanying condensed consolidated balance sheets of
Bradlees, Inc. and subsidiaries (the "Company") as of October 28, 2000 and
October 30, 1999, and the related condensed consolidated statements of
operations for the thirteen and thirty-nine week periods ended October 28, 2000
and October 30, 1999, and the condensed consolidated statements of cash flows
for the thirty-nine week periods ended October 28, 2000 and October 30, 1999.
These financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the condensed consolidated financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3, the Company's
Revolver, which is scheduled to expire on December 23, 2001, contains certain
financial covenants, which if not achieved, would permit the lenders to
accelerate the repayment of the outstanding principal. Management's current
projections indicate that there may not be sufficient cash flow from operations
to comply with the terms of these covenants prior to the expiration of the
Revolver which raises substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 3. The financial statements do not include any adjustments relating to the
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the company be unable to
continue as a going concern.
We have previously audited, in accordance with generally accepted auditing
standards, the balance sheet of Bradlees, Inc. and subsidiaries as of January
29, 2000 (not presented herein), and, in our report dated March 14, 2000, we
expressed an unqualified opinion on that statement. In our opinion, the
information set forth in the accompanying condensed balance sheet as of January
29, 2000 is fairly stated, in all material respects, in relation to the balance
sheet from which it has been derived.
New York, New York
November 14, 2000
2
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
13 WEEKS ENDED
------------------------------------------
OCTOBER 28, 2000 OCTOBER 30, 1999
---------------- ----------------
<S> <C> <C>
Net sales $ 334,438 $ 344,347
Leased department and other operating income 3,308 3,451
------------- -------------
Total revenue 337,746 347,798
Cost of goods sold 239,062 239,246
Selling, store operating, administrative and distribution
expenses 101,123 101,734
Depreciation and amortization expense 6,523 6,604
------------- -------------
Income from operations (8,962) 214
Interest and debt expense 9,295 7,818
------------- -------------
Net loss (18,257) (7,604)
============= =============
Comprehensive loss (18,257) (7,604)
============= =============
Net loss per share - basic and diluted (1.83) (0.76)
============= =============
Weighted average shares outstanding - basic and diluted $ 9,955 $ 9,986
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
PART 1 - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
39 WEEKS ENDED
------------------------------------
OCTOBER 28, 2000 OCTOBER 30, 1999
---------------- ----------------
<S> <C> <C>
Net Sales $ 1,009,722 $ 1,025,831
Leased department and other operating income 10,080 10,095
---------------- ----------------
Total revenue 1,019,802 1,035,926
Cost of goods sold 715,718 713,985
Selling, store operating, administrative and distribution expenses 304,431 307,558
Depreciation and amortization expense 18,835 21,132
Gain on disposition of property (2,733) -
Non-recurring benefit - contingency resolution (4,262) -
---------------- ----------------
Loss from operations (12,187) (6,749)
Interest and debt expense 25,074 21,819
Reorganization items - (778)
---------------- ----------------
Loss before cumulative effect of accounting change (37,261) (27,790)
Cumulative effect of accounting change - 558
---------------- ----------------
Net loss $ (37,261) $ (28,348)
================ ================
Comprehensive loss $ (37,261) $ (28,348)
================ ================
Net loss per share - basic and diluted:
Loss before cumulative effect of accounting change $ (3.74) $ (2.79)
Cumulative effect of accounting change - (0.06)
---------------- ----------------
Net loss per share - basic and diluted $ (3.74) $ (2.85)
================ ================
Weighted average shares outstanding - basic and diluted 9,955 9,959
================ ================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 28, 2000 JAN. 29, 2000 OCTOBER 30, 1999
---------------- ------------- ----------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash $ 9,055 $ 9,786 $ 11,228
Accounts receivable 10,162 11,524 8,658
Inventories 349,336 248,151 326,200
Prepaid expenses 11,924 9,843 11,218
------------- ---------- -----------
Total current assets 380,477 279,304 357,304
------------- ---------- -----------
Property, plant and equipment, net:
Property excluding capital leases, net 96,128 92,541 93,475
Property under capital leases, net 21,109 22,358 22,786
------------- ---------- -----------
Total property, plant and equipment, net 117,237 114,899 116,261
------------- ---------- -----------
Other assets:
Lease interests, net 68,212 71,478 72,518
Other, net 8,889 7,606 7,122
------------- ---------- -----------
Total other assets 77,101 79,084 79,640
------------- ---------- -----------
Total assets $ 574,815 $ 473,287 $ 553,205
============= ========== ===========
LIABILITIES AND STOCKHOLDERS'
EQUITY
Current liabilities:
Accounts payable $ 203,002 $ 143,111 $ 201,120
Accrued expenses 13,720 24,841 20,229
Self-insurance reserves 5,967 6,553 5,798
Revolver borrowings 227,375 129,857 158,159
Current portion of capital lease
obligations and notes 2,972 2,959 2,540
------------- ---------- -----------
Total current liabilities 453,036 307,321 387,846
------------- ---------- -----------
Long-term liabilities:
Obligations under capital leases 21,537 26,096 27,089
Lease financing obligation 17,478 17,492 17,496
Convertible notes payable -- -- 11,976
Self-insurance reserves 11,933 13,304 11,773
Unfavorable lease liability 45,447 45,226 45,064
Other long-term liabilities 16,099 17,361 24,592
------------- ---------- -----------
Total long-term liabilities 112,494 119,479 137,990
------------- ---------- -----------
Stockholders' equity:
Common stock 9,954,599 shares outstanding
(9,966,720 shares at 01/29/00;
9,986,273 shares at 10/30/99)
Par value 100 100 100
Additional paid-in-capital 55,814 55,755 55,617
Accumulated deficit (46,629) (9,368) (28,348)
------------- ---------- -----------
Total stockholders' equity 9,285 46,487 27,369
------------- ---------- -----------
Total liabilities and stockholders' equity $ 574,815 $ 473,287 $ 553,205
============= ========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
OCTOBER 28, 2000 OCTOBER 30, 1999
---------------- ----------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (37,261) $ (28,348)
Adjustments to reconcile net loss
to net cash provided (used) by operating activities:
Depreciation and amortization expense 18,835 21,132
Amortization of deferred financing costs 1,395 1,088
Gain on disposition of property (2,733) --
Non-recurring benefit - contingency resolution (4,262) --
Amortization of lease interests and unfavorable
lease liability, net 3,486 3,798
Cumulative effect of accounting change -- 558
Reorganization items -- (778)
Changes in working capital and other, net (49,333) (10,143)
------------- -------------
Net cash provided (used) by operating
activities before reorganization items (69,873) (12,693)
Reorganization items:
Chapter 11 professional fees paid (743) (8,130)
Other reorganization expenses paid, net (1,596) (1,781)
------------- -------------
Net cash used by reorganization items (2,339) (9,911)
------------- -------------
Net cash used by operating activities (72,212) (22,604)
Cash flows from investing activities:
Capital expenditures, net (21,174) (17,055)
Lease acquisition costs -- (1,250)
------------- -------------
Net cash used in investing activities (21,174) (18,305)
Cash flows from financing activities:
Deferred financing costs (2,276) (181)
Payments of convertible notes -- (17,019)
Net borrowings under revolver 97,518 43,709
Proceeds from lease financing -- 17,500
Proceeds received upon exercise of warrants -- 540
Principal payments on notes and capital lease
obligations (2,587) (1,897)
------------- -------------
Net cash provided by financing activities 92,655 42,652
Net increase (decrease) in cash (731) 1,743
Cash - Beginning of year 9,786 9,485
------------- -------------
Cash - End of period $ 9,055 $ 11,228
============= =============
Supplemental disclosure of cash flow information:
Cash paid for interest and certain debt fees $ 16,047 $ 12,815
Cash paid for income taxes -- --
Supplemental schedule of noncash (investing and
financing) activities:
Capital lease obligations incurred $ -- $ 2,883
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Bradlees, Inc. and subsidiaries (collectively "Bradlees" or the
"Company") operate in the discount department store retail segment in the
Northeast United States. The Company emerged from Chapter 11 of the United
States Bankruptcy Code ("Chapter 11") on February 2, 1999. The reorganized
Company adopted fresh-start reporting and gave effect to its emergence as of its
fiscal 1998 year-end (January 30, 1999). Under fresh-start reporting, the final
consolidated balance sheet as of January 30, 1999 became the opening
consolidated balance sheet of the reorganized Company.
With respect to the unaudited condensed consolidated financial
statements for the 13 weeks (third quarter) and 39 weeks (year-to-date) ended
October 28, 2000 and October 30, 1999, 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. Diluted
net income per share for the second quarters of both years reflect the impact of
common stock equivalents (stock options and warrants). Shares outstanding and
loss per share were the same for both the basic and diluted calculations for the
year-to-date periods because the inclusion of common stock equivalents would
have reduced the reported loss per share. The presented shares outstanding
include shares of Bradlees Common Stock issued or presumed issued in accordance
with the Company's plan of reorganization. This includes certain shares expected
to be issued as final unresolved pre-petition claims are settled.
The Company's Revolver (Note 3), which is scheduled to expire on
December 23, 2001, contains certain financial covenants, which, if not achieved,
would permit the lenders to accelerate the repayment of the outstanding
principal. Management's current projections indicate that there may not be
sufficient cash flow from operations to comply with the terms of those covenants
prior to the expiration of the Revolver. The Company has been advised by its
independent public accountants that if it does not resolve these matters prior
to the completion of the audit of its financial statements for the year ended
February 3, 2001, their auditor's report will be modified to reflect the
uncertainty related to these matters. Management's plan in regard to these
matters are discussed in Note 3.
These statements should be read in conjunction with the Company's
financial statements (Form 10-K) for the fiscal year (52 weeks) ended January
29, 2000 ("1999"). Due to the seasonal nature of the Company's business,
operating results for the third quarter and year-to-date period are not
necessarily indicative of results that may be expected for the fiscal year (53
weeks) ending February 3, 2001 ("2000"). 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").
7
<PAGE>
2. CUMULATIVE EFFECT OF ACCOUNTING CHANGE
In December, 1999, the SEC issued Staff Accounting Bulletin (SAB) No.
101, "Revenue Recognition in Financial Statements", which provides guidance on,
among other things, recognition of layaway sales and reporting of leased
department sales. SAB No. 101 requires that layaway sales and the associated
gross margin not be recognized until the customers pick up the merchandise and
that the fee income rather than the sales from leased departments be included in
the presentation of total revenue in SEC filings. The Company elected the early
adoption of the provisions of SAB No. 101 in the fourth quarter of 1999
effective as of the beginning of 1999 and, accordingly, recorded a charge of
$0.6 million in the first quarter of 1999 for the cumulative effect of a change
in accounting method for layaway sales and has excluded leased department sales
from the presentation of total revenue in the accompanying consolidated
statements of operations.
3. DEBT
REVOLVER The $290 million Revolver consists of a $250 million senior
secured revolving line of credit (of which $90 million is available for issuance
of letters of credit) ("Tranche A"), a $20 million junior secured "last in-last
out" facility ("Tranche B") and a $20 million secured and fully-funded facility
("Tranche C") that was entered into on June 29, 2000. The Company expects to
continue to use the Revolver primarily for working capital and general business
needs. The Revolver is scheduled to expire on December 23, 2001. Trade and
standby letters of credit outstanding under the Revolver were $6.7 and $23.8
million, respectively, at October 28, 2000 and $7.1 and $21.5 million,
respectively, at October 30, 1999.
Tranche A has an advance rate equal to 80% of the Loan Value of
Eligible Receivables (as defined), plus generally 72% of the Loan Value of
Eligible Inventory (as defined), subject to certain adjustments. Between March 1
and December 15, the inventory advance rate will be increased to 77% of the Loan
Value of Eligible Inventory provided that the total amount of all Tranche A
advances does not exceed 85% of the Loan to Value Ratio (as defined). The
Company may also borrow up to an additional $20 million under Tranche B provided
that the total borrowings (Tranches A and B) do not exceed 93% of the Loan to
Value Ratio. The total Revolver borrowings (Tranches A, B and C) are not to
exceed (a) the lesser of (i) (x) from January 1 through April 30, 90% of the
Loan Value of Eligible Inventory, (y) from May 1 through September 30, 91.5% of
the Loan Value of Eligible Inventory or (z) from October 1 through December 31,
93% of the Loan Value of Eligible Inventory and (ii) 100% of the current
Appraised Value of Eligible Inventory (as defined), plus (b) 80% of Eligible
Receivables, minus (c) the then amount of all Borrowing Base Reserves (as
defined). Any Tranche C borrowings cannot be repaid prior to the complete
repayment of any borrowings under Tranches A and B.
The Revolver permits the Company to borrow funds under Tranche A at an
interest rate per annum equal to (a) the higher of (i) the annual rate of
interest as announced by Fleet National Bank 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
8
<PAGE>
Reserve system in respect of eurocurrency liabilities. Each of these rates is
subject to a 0.50% increase in the event of overadvances. Tranche B permits the
Company to borrow funds at the "Base Rate" plus 7.00% per annum. Tranche C
carries an annual interest rate of 16.50%. The weighted average interest rate
under the Revolver for the first nine months of 2000 was 9.08% compared to 7.44%
for the first nine months of 1999. In addition, $1.2 million of deferred
financing costs were paid in the second quarter of 2000 in connection with the
Tranche C financing and related Revolver amendment.
Tranche A and Tranche B are secured by substantially all of the
non-real estate assets of the Company. Tranche C is secured by a second lien on
substantially all of the non-real estate assets of the Company and a first lien
on selected leasehold interests. The Revolver contains financial covenants
including (i) minimum rolling twelve-month EBITDA at the end of each quarter,
(ii) minimum monthly accounts payable to inventory ratio; (iii) maximum annual
capital expenditures; (iv) minimum net availability of $50 million from December
15 to January 15 as amended November 2, 2000 and certain other levels
thereafter; and (v) minimum operating cash flow to interest expense (effective
beginning with the fiscal quarter ending February 3, 2001 but waived for that
quarter pursuant to the fourth amendment and waiver dated June 29, 2000).
Effective May 19, 2000, the Company's capital expenditure covenant was amended
to increase the annual limit to $30 million from $25 million. The Company is in
compliance with the Revolver covenants as of October 28, 2000.
Current projections indicate there may not be sufficient cash flow from
operations to comply with the financial covenant contained in the Company's
Revolver, which requires the Company to maintain $50 million of availability
from December 15, 2000 to January 15, 2001. In that regard, we have entered into
discussions with our lenders to modify or waive the covenant to avoid a default
under the loan agreement and to allow for the continuation of operations. The
Company is considering various alternatives in dealing with its ongoing cash
requirements including strategic combinations and partial or complete
liquidation.
9% CONVERTIBLE NOTES The 9% Convertible Notes (the "Notes") previously
outstanding were scheduled to mature on February 3, 2004, bore interest at 9%
per annum and were convertible any time after February 2, 2000 into shares of
the Company's Common Stock. The Company had the right to redeem the Notes at any
time, in whole or in part, subject to certain availability levels under the
Revolver, by paying the holder the unpaid principal plus accrued and unpaid
interest. The Company redeemed $17.0 million of the Notes with the proceeds from
its Lease Financing Obligation (see below) in July, 1999 and exercised an option
to repurchase $9 million of the Notes at a discount in December, 1999. The
remaining $3 million of outstanding Notes were redeemed along with associated
accrued and unpaid interest in January, 2000.
LEASE FINANCING OBLIGATION In July, 1999, the Company and 2500 CPA
Associates, LLC ("CPA") entered into an agreement for the financing of the
Company's leasehold interest in the Yonkers, NY store (the "Lease Financing
Obligation"). Under this agreement, the Company received $17.5 million in
exchange for the assignment of its leasehold interest to CPA and annual
incremental payments of $2.6 million (including interest at an effective rate of
14.8%) under a sublease with CPA for a term of 35 years, including option
periods. The Yonkers store
9
<PAGE>
continues to operate as a Bradlees store and the net proceeds (after certain
fees) of $17.2 million were used to pay down $17.0 million of the Notes (see
above) and $0.2 million of associated accrued interest.
The Lease Financing Obligation is secured by (i) the leasehold interest
in the Yonkers store, (ii) first priority liens on leasehold interests in three
other named stores, as well as any net proceeds received upon any disposition(s)
of such interests, and (iii) a standby letter of credit of $1.1 million.
4. 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 1999 and did not recognize
a quarterly or year-to-date income tax expense or benefit through the third
quarter of 2000 due to the uncertainty of any net annual income tax expense for
financial reporting for 2000.
5. REORGANIZATION ITEMS
There were no reorganization items recorded through the third quarter
of 2000. In the second quarter of 1999, the Company entered into a lease
financing transaction (Note 3) which allowed its Yonkers, NY store to continue
in operation, resulting in the reversal of reserves totaling $0.8 million that
had been established for the expected store closing costs. Approximately $1.6
million of restructuring costs previously provided for were paid in the first
three quarters of 2000, which included $1.4 million of the $2.0 million payment
associated with the termination of the lease for the Company's previously closed
Peabody, MA store (Note 7). There are no material remaining restructuring costs
expected to be paid.
6. STOCK OPTIONS
A total of 1,000,000 shares of Common Stock were reserved for issuance
under the Bradlees Inc. 1999 Stock Option Plan (the "1999 Option Plan"). Through
the third quarter of 2000, the Company has authorized grants of options to
purchase 892,950 shares of Common Stock to senior management and other members
of management, of which options to purchase 787,028 shares were outstanding at
October 28, 2000.
In May, 2000, the Company's shareholders approved the 2000 Stock Option
and Incentive Plan (the "2000 Stock Plan") which authorizes the Company to issue
up to 1,250,000 shares of Common Stock pursuant to various stock incentive
awards. During the second quarter of 2000, the Company granted options to
purchase 848,870 shares to senior management at $4.00 per share and 17,500
shares to non-employee directors at $4.31 per share, of which options to
purchase 789,096 shares were outstanding at October 28, 2000.
10
<PAGE>
All of the above options vest in annual one-third increments except for
the non-employee director options which vest after the first year. All vested
options shall be exercisable for a period of 5 years from the date of the grant.
7. OTHER ITEMS
The Company recognized a $4.3 million non-recurring benefit in the
second quarter of 2000 resulting from the resolution of the Company's
pre-petition unclaimed property reserves that had been included in accounts
payable. These reserves were eliminated based on an analysis performed by
outside consultants and management after the Company's emergence from Chapter 11
and associated communications that occurred in the second quarter of 2000 after
the filing of the Company's unclaimed property return for the period ended June
30, 1996.
The Company adjusted its medical insurance reserves by $1.2 million in
the second quarter of 2000 in accordance with revised estimates provided by its
insurance advisors and claims experience and recognized a credit for such amount
in selling, store operating, administrative and distribution ("SG&A") expenses.
The Company also recorded a $1.9 million credit (included in SG&A expenses) in
the first quarter of 2000 resulting from a change in accounting estimate
associated with the reduction in a severance-related liability. The previous
charge for this severance item was not classified as a reorganization item.
In February, 2000, the Company terminated its lease commitment for its
closed store in Peabody, MA with a lump-sum payment of $2.0 million. The Company
recorded a gain of $2.7 million in the first quarter of 2000 associated with the
early termination of the related capital lease obligation.
11
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The financial information discussed herein should be read in conjunction with
the Condensed Consolidated Financial Statements and Notes included elsewhere
in this Form 10-Q. Also, the following discussions include certain statements
which are or may be construed as "forward-looking statements" (see definition
on page 2 of our Form 10-K for the fiscal year ended January 29, 2000) about
our business, sales and expenses, and operating and capital requirements. Any
such statements are subject to the risk factors disclosed in our Form 10-K
that could cause the actual results or requirements to vary materially. For
example, our statements regarding expected fiscal year 2000 levels of
borrowings, letters of credit, amounts available to borrow and capital
expenditures are dependent on our future operating performance and ability to
meet our financial obligations, which are further dependent upon, among other
things, the risk factors disclosed in our Form 10-K.
RESULTS OF OPERATIONS
Results of operations, expressed in millions of dollars (except per share
amounts) and as a percentage of net sales (on next page), were as follows for
the 13 weeks and 39 weeks ended October 28, 2000 ("Third Quarter 2000" and
"Year-to-Date 2000", respectively) and for the 13 weeks and 39 weeks ended
October 30, 1999 ("Third Quarter 1999" and Year-to-Date 1999", respectively):
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
OCT. 28, 2000 OCT. 30, 1999 OCT. 28, 2000 OCT. 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
(Dollars in millions except per share amounts)
Net sales $334.4 $344.3 $1,009.7 $1,025.8
Cost of goods sold 239.1 239.2 715.7 714.0
-------- --------- ---------- -----------
Gross margin 95.3 105.1 294.0 311.8
Leased department and other operating
income 3.3 3.4 10.1 10.1
-------- --------- ---------- -----------
98.6 108.5 304.1 321.9
Selling, store operating, administrative
and distribution expenses 101.1 101.7 304.5 307.5
Depreciation and amortization expense 6.5 6.6 18.8 21.1
Gain on disposition of property -- -- 2.7 --
Non-recurring benefit - contingency
resolution -- -- 4.3 --
--------- --------- ---------- ------------
Income (loss) from operations (9.0) 0.2 (12.2) (6.7)
Interest and debt expense 9.3 7.8 25.1 21.8
Reorganization items -- -- -- (0.8)
-------- --------- ---------- -----------
Income (loss) before cumulative
effect of accounting change (18.3) (7.6) (37.3) (27.7)
Cumulative effect of accounting change -- -- -- (0.6)
-------- --------- ---------- ------------
Net income (loss) ($18.3) ($7.6) ($37.3) ($28.3)
======== ========= ========== ===========
Basic net income (loss) per share ($1.83) ($0.76) ($3.74) ($2.85)
======== ========= ========== ===========
Diluted net income (loss) per share ($1.83) ($0.76) ($3.74) ($2.85)
======== ========= ========== ===========
Total revenue increase (decrease) -2.8% 10.9% -1.5% 13.4%
Comparable store sales increase (decrease) -5.2% 10.5% -4.4% 14.2%
Number of stores in operation at end of
period 105 104 105 104
</TABLE>
12
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS (CONTINUED)
<TABLE>
13 WEEKS ENDED 39 WEEKS ENDED
OCT. 28, 2000 OCT. 30, 1999 OCT. 28, 2000 OCT. 30, 1999
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
As a percentage of net sales,
results were as follows:
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of goods sold 71.5 69.5 70.9 69.6
------------ ------------ ------------ ------------
Gross margin 28.5 30.5 29.1 30.4
Leased department and other operating income 1.0 1.0 1.0 1.0
------------ ------------ ------------ ------------
29.5 31.5 30.1 31.4
Selling, store operating, administrative
and distribution expenses 30.2 29.5 30.2 30.0
Depreciation and amortization expense 1.9 1.9 1.9 2.1
Gain on disposition of property - - 0.3 -
Non-recurring benefit - contingency resolution - - 0.4 -
------------ ------------ ------------ ------------
Income (loss) from operations (2.6) 0.1 (1.2) (0.7)
Interest and debt expense 2.9 2.3 2.5 2.1
Reorganization items - - - (0.1)
------------ ------------ ------------ ------------
Income (loss) before cumulative effect of
accounting change (5.5) (2.2) (3.7) (2.7)
Cumulative effect of accounting change - - - (0.1)
------------ ------------ ------------ ------------
Net income (loss) (5.5)% (2.2)% (3.7)% (2.8)%
============ ============ ============ ============
</TABLE>
13
<PAGE>
THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999
Net sales for Third Quarter 2000 declined $9.9 million or 2.9% from
Third Quarter 1999 due to a decrease of 5.2% in comparable store sales (which
include leased shoe department sales), mostly offset by the beneficial impact
from the opening of three new stores since Second Quarter 1999. We believe that
the decrease in comparable store sales was due primarily to an unseasonably mild
early fall in the Northeast that adversely impacted sales of apparel and other
seasonal merchandise, slower consumer spending due to higher gasoline and
heating oil prices, an uncertain economic environment, and the impact from
fiscal year 2000 competitive store openings in the vicinity of a significant
number of our stores. Because we are more softlines-oriented than other discount
department store chains, our business was particularly affected by the
unseasonable weather conditions. Third Quarter 1999 comparable store sales had
increased 10.5%.
Gross margin decreased $9.9 million in Third Quarter 2000 compared to
Third Quarter 1999 due to the lower sales and a lower gross margin rate (28.5%
vs. 30.5%). The lower gross margin rate was primarily attributable to a lower
mix of softlines and seasonal sales due to the reasons discussed above and an
associated higher level of markdowns to control inventory levels. Leased
department and other operating income had a slight decrease of $0.1 million in
Third Quarter 2000 compared to Third Quarter 1999. Leased department sales were
$11.6 million in Third Quarter 2000 compared to $11.7 million in Third Quarter
1999.
Selling, store operating, administrative and distribution ("SG&A")
expenses decreased $0.6 million but increased by 0.6% as a percentage of net
sales in Third Quarter 2000 from Third Quarter 1999. The lower SG&A expenses
were primarily due to decreases in home office and benefits expenses, including
a net reduction in provision for annual performance incentives compared to last
year, partially offset by an increase in payroll and occupancy expense for two
new stores opened during Third Quarter 1999 and one new store opened subsequent
to Third Quarter 1999.
Depreciation and amortization expense declined $0.1 million from Third
Quarter 1999 due primarily new asset additions offset by certain older assets
becoming fully depreciated since Third Quarter 1999.
Interest and debt expense increased $1.5 million or 0.6% as a
percentage of net sales in Third Quarter 2000 from Third Quarter 1999. This
increase was due primarily to higher seasonal borrowings (see "Liquidity and
Capital Resources") at a higher average interest rate (9.8% vs. 7.7%) and the
interest under the Lease Financing Obligation (Note 3), partially offset by the
interest savings from the early retirement of the 9% Convertible Notes (Note 3)
and lower amortization of the discount associated with the unfavorable lease
liability.
The $0.8 million credit in reorganization items recognized in Second
Quarter 1999 is discussed in Note 5.
We did not record an income tax expense or benefit in Third Quarter
2000 or Third Quarter 1999 (Note 4).
14
<PAGE>
YEAR-TO-DATE 2000 COMPARED TO YEAR-TO-DATE 1999
Year-to-Date 2000 net sales declined $16.1 million or 1.5% from
Year-to-Date 1999 due to this year's 4.4% decrease in comparable store sales,
mostly offset by the impact from the opening of two stores during Third Quarter
1999 and one new store since Third Quarter 1999. We believe that the
Year-to-Date 2000 decrease in comparable store sales was due primarily to the
same factors discussed above for Third Quarter 2000. We had strong double-digit
increases in Year-to-Date 1999 sales of both hardlines and softlines
merchandise, with an overall comparable store sales increase of 14.2% during
that period.
Gross margin decreased $17.8 million in Year-to-Date 2000 compared to
Year-to-Date 1999 due primarily to a lower gross margin rate (29.1% vs. 30.4%).
The lower year-to-date gross margin rate was principally the result of the same
factors discussed above for Third Quarter 2000. Leased department and other
operating income was essentially the same as last year in dollars and percent to
sales.
Year-to-Date 2000 SG&A expenses decreased $3.0 million but increased
0.2% as a percentage of net sales from Year-to-Date 1999. The lower SG&A
expenses were primarily due to the same factors as discussed above for Third
Quarter 2000, along with higher logistics and advertising expenses incurred in
the first half of 2000 and a $1.9 million credit to SG&A expenses in the first
quarter for a change in an accounting estimate (Note 7).
Depreciation and amortization expense declined $2.3 million or 0.2% as
a percentage of net sales in Year-to-Date 2000 from Year-to-Date 1999 due
primarily to certain fixed assets becoming fully-depreciated since Third Quarter
1999.
We recorded a gain of $2.7 million in the First Quarter of 2000
associated with the early termination of a capital lease obligation (Note 7).
We recorded a benefit of $4.3 million in Second Quarter 2000 for the
resolution of our pre-petition unclaimed property reserves (Note 7).
Interest and debt expense increased $3.3 million or 0.4% as a
percentage of net sales in Year-to-Date 2000 from Year-to-Date 1999. This
increase was due primarily to the same factors as discussed above for Third
Quarter 2000.
Last year's reorganization credit and cumulative effect of accounting
change are discussed in Notes 5 and 2 respectively.
We did not record an income tax provision in Year-to-Date 2000 due to
the current expectation of no income tax expense or benefit in 2000. There was
also no income tax expense or benefit recorded in Year-to-Date 1999.
15
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
We had outstanding borrowings of $227.4 million at October 28, 2000,
exclusive of the issuance of letters of credit, under our $290 million Revolver
(Note 3) compared to $158.2 million at October 30, 1999. Peak and average
Revolver borrowings were approximately $227 and $182 million, respectively, in
Year-to-Date 2000 compared to $163 and $132 million, respectively, in
Year-to-Date 1999. The increase in borrowings from Year-to-Date 1999 was
primarily due to the Year-to-Date 2000 net loss, an increase in inventories and
other working capital changes (discussed below), and cash used by reorganization
items.
Our borrowings under the Revolver, exclusive of the issuance of letters
of credit, for the full year of 2000 peaked at approximately $240 million in
November, 2000 and averaged approximately $180 million. The amount available to
borrow under the Revolver in 2000 is currently expected to peak at approximately
$290 million in November, 2000 and average approximately $245 million, while
total outstanding letters of credit under the Revolver peaked at approximately
$40 million in August, 2000 and average approximately $30 million.
In Year-to-Date 2000, cash used by operations before reorganization
items was $69.9 million compared to $12.7 million in Year-to-Date 1999. This
increase in cash usage was primarily due to changes in working capital and an
increase in the cash loss from operations (after consideration of the non-cash
gain on disposition of property and the non-recurring benefit in Year-to-Date
2000).
Inventories at October 28, 2000 increased $23.1 million from October
30, 1999 due to one new store opening subsequent to Third Quarter 1999, opening
of an additional warehouse and earlier receipts of seasonal merchandise compared
to Third Quarter 1999. Inventories increased $101.2 million from January 29,
2000 due primarily to a normal seasonal build-up. We have adjusted our
merchandise purchases since April, 2000 in response to the lower sales volume.
Accounts payable at October 28, 2000 increased $1.9 million from
October 30, 1999 and $59.9 million from January 29, 2000 due to the increased
inventory level related to the additional store and other factors described
above, offset by the Second Quarter 2000 write-off of certain unclaimed property
reserves totaling $4.3 million previously included in accounts payable (Note 7)
and a reduction in medical insurance reserves ($1.2 million of which was
previously included in accounts payable).
Accrued expenses at October 28, 2000 were $6.5 million lower than at
October 30, 1999 due primarily to a lower provision for annual performance
bonuses in Year-to-Date 2000 and continued payments made against reserves
established at the end of 1998 for reorganization items. Accrued expenses at
October 28, 2000 were $11.1 million lower than at January 29, 2000 due primarily
to payments made against reserves established prior to 2000 for emergence
bonuses and the 1999 performance bonuses, along with payments made against the
reserves for reorganization items.
16
<PAGE>
Other long-term liabilities decreased $8.5 million from October 30,
1999 due primarily to decreases in certain employee benefit liabilities since
Third Quarter 1999, adjustments to restructuring reserves in 1999, paydowns of
long-term notes, the first-quarter 2000 change in accounting estimate described
in Note 7, and a reclassification of a reserve for emergence bonuses to
short-term liabilities at the end of 1999. These factors were partially offset
by an increase in our straight-line rent liability. Other long-term liabilities
decreased $1.3 million from January 29, 2000 due primarily to the first quarter
change in accounting estimate (Note 7).
We incurred capital expenditures of $21.2 million in Year-to-Date 2000
(compared to $17.1 million in Year-to-Date 1999), primarily for new conveying
and sortation equipment in our Edison distribution center, certain management
information systems and one new store (Staten Island, NY). For all of 2000, we
currently expect total capital expenditures to be approximately $23.4 million
(compared to $22 million for all of 1999), primarily for the new conveying and
sortation equipment, and a new store (Staten Island), management information
systems (including expenditures for new distribution yard management and
transportation systems and a new merchandise replenishment system) and various
store and other distribution center improvements. We currently expect to finance
these expenditures through internally-generated funds or through funds available
under the Revolver.
Current projections indicate there may not be sufficient cash flow from
operations to comply with the financial covenant contained in the Company's
Revolver, which requires the Company to maintain $50 million of availability
from December 15, 2000 to January 15, 2001. In that regard, we have entered into
discussions with our lenders to modify or waive the covenant to avoid a default
under the loan agreement and to allow for the continuation of operations. The
Company is considering various alternatives in dealing with its ongoing cash
requirements including strategic combinations and partial or complete
liquidation.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk associated with
our financial instruments other than as stated above. We are exposed to market
risk from changes in interest rates which may adversely affect our financial
position, results of operations and cash flows. In seeking to minimize the risks
from interest rate fluctuations, we manage exposures through our regular
operating and financing activities. We do not use financial instruments for
trading or other speculative purposes and are not party to any leveraged
financial instruments.
We are exposed to interest rate risk primarily through our borrowings
under our $290 million Revolver (see Note 3 to our Condensed Consolidated
Financial Statements). Under the Revolver, we may borrow funds under Tranche A
at an interest rate per annum equal to (a) the higher of (i) the annual rate of
interest as announced by Fleet National Bank 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.
Tranche B permits the Company to borrow funds at the "Base Rate" plus 7.00% per
annum. Tranche C carries an annual interest rate of 16.50%.
17
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Index to Exhibits
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
---------- -------
<S> <C>
10 Amendment to Amended and Restated Employment Agreement, dated
as of September 29, 2000, between and among Bradlees, Inc., Bradlees Stores,
Inc. and Peter Thorner.
10.1 Fifth Amendment and Waiver to Credit Agreement dated as of November 2,
2000, among Bradlees Stores, Inc., Bradlees, Inc. and Fleet National Bank
and Back Bay Capital Funding, LLC (Tranche C), as Agents.
11 Computation of earnings per share
15 Letter re: unaudited interim financial information.
27 Financial data schedule (filed on EDGAR)
(b) Reports on Form 8-K
</TABLE>
There were no reports on Form 8-K filed during the quarterly period ended
October 28, 2000.
18
<PAGE>
BRADLEES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BRADLEES, INC.
Date: December 12, 2000 By /s/ Peter Thorner
-------------------------------------
Peter Thorner
Chairman and Chief Executive Officer
Date: December 12, 2000 By /s/ J. Gregory Ambro
----------------------------------
J. Gregory Ambro
Senior Vice President, Chief Financial
Officer
19
