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FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
For the fiscal year ended January 29, 2000 Commission File Number 1-11134
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BRADLEES, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
MASSACHUSETTS 04-3156108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
ONE BRADLEES CIRCLE, BRAINTREE, MA 02184
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (781) 380-3000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of Act:
Common Stock, $.01 Par Value Per Share
Preferred Stock Purchase Rights
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No _
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the Registrant has filed all documents and
reports required to be filed by Section 12, 13, or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes X No _ Not applicable _
Aggregate market value of the voting stock held by non-affiliates of the
Registrant at April 10, 2000: $52,204,569
Number of shares of the Registrant's common stock outstanding as of April 10,
2000: 9,820,785 shares.
DOCUMENTS INCORPORATED BY REFERENCE: Portions of Registrant's 1999 definitive
proxy statement to be filed pursuant to Regulation 14A within 120 days after the
end of the Registrant's fiscal year are incorporated by reference in Part III.
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Page 1 of 55 (excluding Exhibits)
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BRADLEES, INC. AND SUBSIDIARIES
Certain statements incorporated by reference or made in this report are
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. When we use
the words "anticipate," "assume," "believe," "estimate," "expect," "intend" and
other similar expressions in this report, they are generally intended to
identify forward-looking statements. In connection with such forward-looking
statements, you should consider that they involve known and unknown risks,
uncertainties and other factors which are, in some cases, beyond our control and
which could materially affect our actual results, performance or achievements.
Factors that could cause our actual results, performance or achievements to
differ materially from those expressed or implied by such forward-looking
statements include, but are not limited to: international, national, regional
and local economic and political conditions; demographic changes; changes in
competition (including new competition in former Caldor locations opened in Fall
1999 or expected to open in 2000); unfavorable changes in interest rates;
unfavorable weather conditions; loss of significant vendors; availability of
adequate overseas transportation; liability and other claims asserted against
us; fluctuations in operating results; increased costs of key resources;
continued customer 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; the ability to distribute
and ship merchandise to our stores in a timely and efficient manner; changes in
business strategy; the ability to negotiate mutually acceptable collective
bargaining agreements; and the ability to attract and retain qualified
personnel.
Since fresh-start reporting was reflected in the Consolidated Financial
Statements (included elsewhere in this Form 10-K) as of January 30, 1999 and for
the fiscal year ended January 29, 2000 ("1999"), the statements as of and for
those periods, respectively, are not comparable in certain material respects to
prior periods presented. Accordingly, a black line has been drawn between the
Registrant's financial information and the Predecessor's financial information.
We have attempted to indicate, where feasible, the major effects on
comparability from fresh-start reporting.
PART I
ITEM 1. BUSINESS
Bradlees, Inc. and subsidiaries (collectively "Bradlees" or the "Company")
operate 104 discount department stores as of April, 2000 (excluding our new
Staten Island store that will have its grand opening in early May, 2000) in
seven states in the Northeast, primarily in the heavily populated corridor
running from the Boston to the Philadelphia metropolitan areas. Headquartered in
Braintree, Massachusetts, we have been active in the discount department store
business for over 40 years. We filed petitions for relief under Chapter 11 of
the United States Bankruptcy Code ("Chapter 11") on June 23, 1995 (the
"Filing"). Prior to emerging from Chapter 11 on February 2, 1999 (the "Effective
Date"), we operated our business as a debtor-in-possession subject to the
jurisdiction of the United States Bankruptcy Court for the Southern District of
New York (the "Bankruptcy Court"). Events leading to the Filing and subsequent
management change are discussed below.
EVENTS LEADING TO THE FILING. During the early 1990's, our 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 our other prototypical stores. The store expansion and
remodeling program marginally increased sales while gross margins declined and
operating expenses increased. Our declining operating performance, coupled with
the aggressive expansion program, began to erode our liquidity. Our liquidity
further eroded in May and June, 1995 because of
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the unwillingness of factors and vendors to continue to extend trade credit.
Unable to obtain sufficient financing to satisfy factor and vendor concerns, we
were compelled to seek Bankruptcy Court protection on June 23, 1995.
MANAGEMENT CHANGE. In 1995, we began to implement a strategy to position
the Company between traditional discount department stores and department
stores. Some of the initiatives associated with this strategy resulted in
significant sales and margin declines and large operating losses, 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 our layaway program, elimination of certain basic convenience and
commodity items that are generally sold in discount department stores, and
costly changes in the Company's advertising strategy. In late December, 1996,
our former Board of Directors appointed Peter Thorner as Chairman, CEO and
President, replacing the former Chairman and CEO, Mark Cohen. Prior to joining
Bradlees, Mr. Thorner led the successful turnaround of Ames Department
Stores, Inc. In 1997, Mr. Thorner hired Robert Lynn as President and Chief
Merchandising Officer and Mr. Lynn was appointed President and Chief Operating
Officer in 1998. Mr. Lynn previously served as President and Chief Executive
Officer of the United States division of F. W. Woolworth.
BUSINESS STRATEGY. We made the following key modifications to our business
strategy during 1997 and 1998 to enhance profitability, improve customer service
and complete our reorganization: (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 department stores; (d) reinstituted a layaway program while
better controlling promotions of the Bradlees credit card, and installed new
in-store directional and departmental signage; (e) revised the Company's
markdown policy to be based on product rate of sale; (f) modified weekly ad
circulars to achieve more item-intensive and price-point oriented ad offerings;
(g) introduced both a "Certified Value" program that highlights certain key
recognizable items at competitive everyday prices and a "WOW!" program which
integrates targeted and mostly unadvertised opportunistic purchases; (h) closed
unprofitable stores; and (i) significantly reduced overhead while improving
operating efficiencies.
We continued our efforts to improve our sales and profitability in 1999,
including the expansion of both the "Certified Value" and "WOW!" programs that
have been particularly successful. In April, 2000, we are implementing a "Silver
Circle" program that highlights various senior citizen (62 years or older)
offerings, including a 10% discount on all purchases each Tuesday and Wednesday.
We will continue to show our entire weekly ad circular and certain other sale
offerings on our web site, www.bradlees.com, however there are no near-term
plans to sell more than a limited number of items directly from the web site.
We are focusing on three core product lines: moderately-priced basic and
casual apparel, basic and fashion items for the home, and edited assortments of
frequently purchased commodity and convenience products. We are committed to
quality and fashion, especially in apparel and home furnishings, and to superior
customer service, to further improve sales and operating profitability and to
differentiate us from our discount department store competition. We believe we
can strategically leverage our traditional strengths in the fashion and quality
content of our apparel and decorative home product offerings while driving
customer traffic with selected hardlines merchandise.
MERCHANDISE MIX. Our stores provide a broad spectrum of basic and fashion
apparel (including private-label brands), basic and fashion home furnishings,
convenience hard goods and extensive seasonal offerings. Our average merchandise
mix in 1999 was comprised of approximately 51% softlines, shoes and soft home
furnishings and 49% hardlines, versus an estimated industry average of
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42% softlines, shoes and soft home furnishings and 58% hardlines. Softline
products generally have higher gross margins than hardline products.
ADVERTISING AND PROMOTIONAL PROGRAMS. Our marketing strategy is designed to
appeal to our value-oriented customers. Sales are driven from competitive
pricing and promotions, primarily in weekly circulars that feature a large
number of special values for the customer throughout the store. A major portion
of our sales are derived from our weekly circulars. Approximately 6.2 million
circulars are currently distributed each week. Although circulars are our major
promotional vehicle, we also use our web site, newspaper advertising, direct
mailings, periodic television broadcasts, Bradlees credit card statement inserts
and in-store promotions. Point-of-purchase advertising, layaway, employee
discounts, and senior citizen discounts are also used as marketing vehicles.
OPERATIONS. In 2000, we are implementing, among other things, a new system
to better plan and forecast merchandise replenishments, new distribution yard
management and transportation systems, a new fleet of larger trailers, and new
conveying and sortation equipment in our Edison, NJ distribution center that
will allow for more accurate and efficient handling of merchandise from in-bound
to out-bound trailers. Also, certain programs have been or are being implemented
to improve the store organization, thereby focusing the organization more
intently on customer service while at the same time controlling expenses. For
example, a program was recently implemented in the stores to ensure timely
merchandise replenishment and an enhanced in-stock position.
Management has improved productivity and controls and reduced expenses in
other areas. For example, we implemented a new warehouse management system in
August, 1999 in our Edison, NJ distribution center and installed chain-wide
debit/ATM card readers in October, 1999. We modified our point-of-sale equipment
and software in 1998 to allow for improved detection of bad checks and for
additional promotional capabilities. In addition, a new merchandising management
system was implemented in 1997 and enhanced in 1998. We also installed a new
mainframe computer and point-of-sale controllers in 1997.
STORE PROFITABILITY. We are pursuing new store openings for 2000 and 2001
where feasible and economically beneficial and we expect to resume our store
remodeling program. We opened two former Caldor stores in October 1999 and will
open another one by early May, 2000 on Staten Island, NY. We closed one store in
March, 1999 and six stores in February, 1998. We will continue to monitor the
profitability of each store and we will close, sell or relocate those stores
whose performance is inadequate and not responsive to remedial actions. There
are no current plans to close any stores.
EMPLOYEES AND COLLECTIVE BARGAINING ARRANGEMENTS
We employ approximately 10,000 people, of which approximately 71% are
covered by collective bargaining arrangements, including arrangements affecting
approximately 75% of the union labor force that will expire within one year and
are expected to be renegotiated. The number of people employed increases during
the holiday selling season.
COMPETITION
We compete in most of our markets with a variety of national, regional and
local discount and other department and specialty stores, which vary by market.
Some of these competitors have substantially greater resources than we do. We
compete on the basis of product quality and value, merchandise selection,
advertising and price. In addition, store location, appearance and customer
service are important competitive factors. Our principal discount department
store competitors are Kmart and Wal-Mart, and in certain locations, Target and
Ames. Our principal department store competitors are Sears and J.C. Penney.
Target and Kohl's, a department store chain, are currently opening stores in
some areas in which we operate.
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Caldor Corp., one of our major discount department store competitors prior
to April, 1999, liquidated under Chapter 11 and sold some of its store locations
to Kohl's, Wal-Mart, Kmart and Ames. At the time of the reopening of the
purchased stores, our business in competing locations was or is expected to be
at least temporarily affected by the new competition. Most of these purchased
locations will have reopened by April, 2000. We expect to pursue certain
remaining Caldor locations (beyond the three stores already acquired) if
economically beneficial and feasible.
We believe that we are pursuing the proper merchandising and marketing
strategies and operating focus that should allow us to compete effectively in
our operating areas. However, no assurances can be given that these strategies
will further improve performance or that Bradlees' business and financial
performance will not be adversely affected by future competitive pressures.
PATENTS, TRADEMARKS AND LICENSES
The trademark "Bradlees" is registered with the United States Patent and
Trademark Office. We have a significant number of other trademarks, trade names,
and service marks. Other than the "Certified Value" and "WOW! How Do We Do It?"
service marks, none of the other trademarks, trade names, and service marks are
currently considered individually to have a material impact on our business.
SEASONALITY
Our business is seasonal in nature, with a significant portion of our sales
occurring in the fourth quarter, which includes the holiday selling season.
REORGANIZATION CASE AND OTHER INFORMATION
Our emergence from Chapter 11 followed confirmation of our plan of
reorganization, as modified (the "Plan"), by the Bankruptcy Court on
January 27, 1999. Note 2 to our Consolidated Financial Statements included
elsewhere in this Form 10-K provides certain information regarding the Chapter
11 process and adoption of fresh-start reporting as of the end of 1998 to give
effect to our emergence at that time.
We began operations in 1958 and were organized as a Massachusetts
corporation in 1992. Our headquarters is located at One Bradlees Circle,
Braintree, Massachusetts 02184 and our telephone number is (781) 380-3000. Our
web site is www.bradlees.com.
ITEM 2. PROPERTIES
STORE LOCATION AND SIZE
Our stores are located principally in shopping centers that are in high
traffic areas. The stores appeal to consumers seeking a wide range of
value-priced merchandise and shopping convenience.
The following chart shows the geographic distribution of our stores as of
April, 2000:
<TABLE>
<S> <C>
Maine....................................................... 1
New Hampshire............................................... 8
Massachusetts............................................... 35
Connecticut................................................. 17
New York.................................................... 6
New Jersey.................................................. 30
Pennsylvania................................................ 7
---
Total....................................................... 104
===
</TABLE>
5
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We operate these stores in a variety of size ranges, with the current
average equal to 76,552 selling square feet (including our new Staten Island
store opening in May).
DISTRIBUTION FACILITIES
Our distribution facilities are located in Edison, New Jersey and Braintree,
Massachusetts. Our 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. Our 470,000 square-foot Braintree facility
generally services all stores with basic merchandise items and distributes
hardlines merchandise to the New England states. We are in the process of
arranging for some additional warehouse space for certain merchandise items.
PROPERTIES
As of January 29, 2000, our stores, including the Staten Island store
opening in May, occupied a total of approximately 8,037,920 square feet of
selling area. We lease all of our stores, two distribution centers and central
office under long-term leases.
ITEM 3. LEGAL PROCEEDINGS
After the Effective Date, the Bankruptcy Court retained jurisdiction over us
for limited purposes. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the 13 weeks
ended January 29, 2000.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of the Effective Date (February 2, 1999) and pursuant to the plan of
reorganization, the Company's old common stock was canceled and new common stock
was issued following consummation of the plan of reorganization. The new common
stock is traded on the NASDAQ National Market under the symbol "BRAD". As of
April 10, 2000, there were approximately 1,367 holders of record of our common
stock. The following table sets forth the high and low sales prices for our
common stock for the four quarters of the fiscal year ended January 29, 2000:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter (from February 3, 1999)....................... $10.00 $2.44
Second Quarter.............................................. 22.50 7.94
Third Quarter............................................... 21.25 7.25
Fourth Quarter.............................................. 12.50 7.50
</TABLE>
We adopted a shareholder rights plan in November, 1999 (see Note 9 to the
Consolidated Financial Statements). 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
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requirements, general business conditions and such other factors as the Board of
Directors deems relevant. Under the terms of the current Revolver, we are
precluded from paying dividends of any kind.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of Bradlees should be read in
conjunction with the Consolidated Financial Statements and related Notes
appearing elsewhere in this Form 10-K.
<TABLE>
<CAPTION>
(IN MILLIONS, EXCEPT FOR PER SHARE DATA)
----------------------------------------------------------------------
52 WEEKS 52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS
ENDED ENDED ENDED ENDED ENDED
1/29/00 1/30/99 1/31/98 2/1/97 2/3/96
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales..................................... $1,493.2 : $1,337.2 $1,344.4 $1,561.7 $1,780.8
Net income (loss) (1)......................... (9.4) : 285.9 (22.6) (218.8) (207.4)
Net income (loss) per common share............ (.95) : * (1.98) (19.17) (18.17)
Working capital (2)........................... (28.0) (7.8) : 52.2 68.6 200.2
Total assets.................................. 473.3 463.8 : 595.2 604.2 798.7
Long-term debt................................ 47.2 59.5 : 27.1 33.3 53.4
Liabilities subject to settlement............. -- -- : 562.1 571.0 539.8
</TABLE>
In connection with our emergence from Chapter 11, we adopted fresh-start
reporting (Note 2 to the Consolidated Financial Statements) at the end of the
fiscal year ended January 30, 1999 ("1998"), therefore the balance sheet amounts
as of that date and the amounts from our statement of operations for 1999 are
not comparable in certain material respects to the prior years' amounts.
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* Earnings per share was not presented for 1998 because such presentation
would not be meaningful. The former stock was canceled under the Plan and
the new stock was issued following consummation of the Plan.
(1) Included in 1999 was a reorganization credit of $0.8 million, an
extraordinary gain on debt discharge of $1.2 million, and a charge of
$0.6 million for the cumulative effect of an accounting change. Included in
1998 was a reorganization charge of $4.6 million, a fresh-start revaluation
charge of $108.4 million, and an extraordinary gain on debt discharge of
$419.7 million. Included in the 52 weeks ended January 31, 1998 ("1997") was
a reorganization charge of $0.8 million and a gain on disposition of
properties of $5.4 million. Included in the 52 and 53 weeks ended
February 1, 1997 ("1996") and February 3, 1996 ("1995"), respectively, were
charges of $40.8 and $99.4 million related to the impairment of long-lived
assets and reorganization items of $69.8 and $65.0 million. Also, included
in 1996 was a gain on disposition of properties of $1.7 million.
(2) Working capital includes the entire outstanding balance of our revolving
financing facility as a current liability and in 1999 and 1998 included $1.0
and $8.4 million of accrued bankruptcy expenses, respectively, and for 1995
through 1997 excluded liabilities subject to settlement under the
reorganization case.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The financial information discussed herein should be read in conjunction
with the Consolidated Financial Statements and Notes included elsewhere in this
Form 10-K. Also, the following discussions include certain statements which are
or may be construed as "forward-looking statements" (see page 2 of this
Form 10-K) about our business, sales and expenses, and operating and capital
requirements. Any such statements are subject to the risk factors discussed on
page 2 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
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dependent on the Company's future operating performance and ability to meet its
financial obligations, which are further dependent upon, among other things, the
risk factors disclosed on page 2.
(a) RESULTS OF OPERATIONS
The following table sets forth information concerning the number of our
stores.
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------------------
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
<S> <C> <C> <C>
Stores, beginning of period..... 103 109 110
Stores opened................... 2(a) -- --
Stores closed................... (1) (6) (1)
--- --- ---
Stores, end of period........... 104 103 109
=== === ===
</TABLE>
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(a) Excludes an additional new store acquired in 1999 and to be opened in May,
2000.
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The following discussion and analysis is based on the results of operations
of the Company detailed below for the 52 weeks ended January 29, 2000 ("1999"),
January 30, 1999 ("1998") and January 31, 1998 ("1997").
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1999 1998 1997
1999 % OF NET SALES 1998 % OF NET SALES 1997 % OF NET SALES
-------- -------------- -------- -------------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net sales........................ $1,493.2 100.0% $1,337.2 100.0% $1,344.4 100.0%
Cost of goods sold............... 1,044.4 69.9% 944.1 70.6% 948.0 70.5%
-------- ------ -------- ------ -------- ------
Gross margin..................... 448.7 30.1% 393.1 29.4% 396.4 29.5%
Leased department and other
operating income............... 13.7 0.9% 12.5 0.9% 12.9 0.9%
-------- ------ -------- ------ -------- ------
462.4 31.0% 405.6 30.3% 409.3 30.4%
Selling, store operating,
administrative and distribution
expenses....................... 416.4 27.9% 377.6 28.2% 383.7 28.5%
Depreciation and amortization
expense........................ 27.7 1.9% 32.2 2.4% 36.2 2.7%
Reorganization items............. (0.8) (0.1%) 4.6 0.4% 0.8 --
-------- ------ -------- ------ -------- ------
Operating income (loss).......... 19.1 1.3% (8.8) (0.7%) (11.4) (0.8%)
Loss (gain) on disposition of
properties..................... -- -- 0.2 -- (5.4) (0.4%)
Interest and debt expense........ 29.1 2.0% 16.3 1.2% 16.6 1.3%
-------- ------ -------- ------ -------- ------
Loss before fresh-start
revaluation, income taxes,
extraordinary item and
cumulative effect of accounting
change......................... (10.0) (0.7%) (25.3) (1.9%) (22.6) (1.7%)
Fresh-start revaluation charge... -- -- 108.4 8.1% -- --
-------- ------ -------- ------ -------- ------
Loss before income taxes,
extraordinary item and
cumulative effect of accounting
change......................... (10.0) (0.7%) (133.8) (10.0%) (22.6) (1.7%)
Income taxes..................... -- -- -- -- -- --
-------- ------ -------- ------ -------- ------
Loss before extraordinary item
and cumulative effect of
accounting change.............. (10.0) (0.7%) (133.8) (10.0%) (22.6) (1.7%)
Extraordinary item............... 1.2 0.1% 419.7 31.4% -- --
Cumulative effect of accounting
change......................... (0.6) -- -- -- -- --
-------- ------ -------- ------ -------- ------
Net income (loss)................ $ (9.4) (0.6%) $ 285.9 21.4% $ (22.6) (1.7%)
======== ====== ======== ====== ======== ======
</TABLE>
The Company's business is seasonal in nature, with a significant portion of
its net sales occurring in the fourth quarter, which includes the holiday
selling season. Comparable store sales, which include leased department sales,
are discussed below for 1999 and 1998 and represent percentage increases/
decreases over the prior year for stores that were open and operated by Bradlees
for at least the prior
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full fiscal year. The rate of inflation did not have a significant effect on
sales during the years discussed below.
RESULTS OF OPERATIONS FOR 1999 COMPARED TO 1998
Net sales for 1999 increased $156.0 million or 11.7% over 1998 due to a
comparable store sales increase of 11.8%. We believe that the increase in
comparable store sales in 1999 was mostly due to continued favorable customer
response to our merchandising and marketing initiatives (see Item 1--Business
Strategy) and the first-quarter liquidation of one of our major discount
department store competitors (Caldor Corp.). In 1999, we had strong increases in
sales of both hardlines and softlines, with hardlines experiencing the larger
increase.
Gross margin increased $55.6 million due to the higher sales volume and a
0.7% increase in the gross margin rate in 1999 compared to 1998 (30.1% vs.
29.4%). Continued lower markdown rates in 1999, along with improved allowances,
more than offset the impact on the gross margin rate from a lower cumulative
initial markup in 1999. Leased department and other operating income increased
$1.2 million, due primarily to the effect from higher leased department sales,
but remained the same as a percentage of net sales.
Selling, store operating, administrative and distribution ("SG&A") expenses
increased $38.8 million but declined 0.3% as a percentage of net sales, due to
the improved sales performance, in 1999 compared to 1998. The increase in SG&A
expenses was primarily due to store and distribution expenses incurred to handle
the higher sales volume and satisfy customer demand and certain one-time gains
of approximately $12 million included in SG&A expenses in 1998 associated with
the curtailment of retiree medical benefits and freeze of non-union pension
benefits (see Note 11 to the Consolidated Financial Statements). In addition,
preopening expenses of $1.5 million were incurred in 1999 for new stores.
Depreciation and amortization expense declined $4.5 million and 0.5% as a
percentage of net sales in 1999 compared to 1998 due primarily to the writedown
of noncurrent assets that was recorded under fresh-start reporting and certain
fixed assets becoming fully-depreciated in 1999.
Reorganization items resulted in a net credit of $0.8 million in 1999 and a
net charge of $4.6 million in 1998, or 0.1% and 0.4% as a percentage of net
sales, respectively. These amounts related directly to the Chapter 11
proceedings and associated restructuring of our operations and are discussed in
Note 7 to the Consolidated Financial Statements.
Interest and debt expense increased $12.8 million or 0.8% as a percentage of
net sales. This increase was due primarily to $9.4 million of noncash interest
expense resulting from the amortization of the discount associated with the
unfavorable lease liability recorded under fresh-start reporting (Note 3). We
also incurred interest expense of approximately $3.4 million on the new debt
issued under the Plan and on our lease financing obligation.
An extraordinary gain of $1.2 million was recognized in the fourth quarter
of 1999 for the early extinguishment of the 9% Convertible Notes (Note 6). Also
in 1999, we elected early adoption of SAB No. 101 related to the accounting for
layaway sales (Note 3) and recognized a charge of $0.6 million for the effect of
the accounting change. Neither of these items had an associated tax effect
because no income tax expense or benefit was recorded in 1999. In 1998, a charge
of $108.4 million and an extraordinary gain of $419.7 million were recognized in
the fourth quarter, with no income tax effect, for the fresh-start revaluation
of assets and liabilities and the discharge of pre-petition debt (Note 2),
respectively.
We did not incur any income tax expense or benefit in 1999 and 1998
(Note 12).
10
<PAGE>
RESULTS OF OPERATIONS FOR 1998 COMPARED TO 1997
Net sales for 1998 declined $7.2 million as a result of the impact of
operating six fewer stores, mostly offset by a comparable store sales increase
of 3.5%. We believe that the increase in comparable store sales in 1998 was
primarily due to the merchandising and marketing initiatives begun in 1997 (see
Item 1--Business Strategy).
Gross margin decreased $3.3 million, primarily as a result of the six closed
stores, and 0.1% as a percentage of net sales in 1998 compared to 1997.
Continued lower markdown and inventory shrink rates in 1998, along with improved
allowances and a lower going-out-of-business markdown provision ($0.5 million
vs. $2.9 million), mostly offset the impact on the gross margin rate from a
lower cumulative initial markup in 1998.
Leased department and other operating income declined $0.4 million but
remained the same as a percentage of net sales. A decrease in leased department
sales in 1998 was mostly offset by the impact of a full year of layaway fees
which are classified as other operating income. Our layaway program was
reinstated in the second half of 1997.
SG&A expenses declined $6.1 million and 0.3% as a percentage of net sales in
1998 compared to 1997. The decline in SG&A expenses was due to the closed stores
and certain expense reduction initiatives in 1998, including the curtailment of
retiree medical benefits (Note 11), a freeze of non-union pension benefits
(Note 11) and improved monitoring of vendor activities. This decline in SG&A
expenses was partially offset by the 1997 credits to SG&A expenses for changes
in accounting estimates for self-insurance and vacation pay expenses (Note 14),
increased logistics expenses in 1998 resulting from the handling and shipping of
a higher number of cartons and an emergence-related bonus provision of
$4.4 million.
Depreciation and amortization expense declined $4.0 million and 0.3% as a
percentage of net sales in 1998 compared to 1997 due primarily to the closed
stores and certain fixed assets becoming fully-depreciated in 1998.
Reorganization items resulted in net charges of $4.6 and $0.8 million, or
0.4% and 0.1% as a percentage of net sales, in 1998 and 1997, respectively.
These net charges related directly to the Chapter 11 proceedings and associated
restructuring of our operations and are discussed in Note 7 to the Consolidated
Financial Statements.
We sold a property held for sale in 1998 for $7.6 million of net proceeds
and recognized a loss of $0.2 million compared to a $5.4 million gain on sale of
a property in 1997. These sales were not directly associated with the Chapter 11
proceedings, therefore the 1998 loss and the 1997 gain were not included in
reorganization items with the other property dispositions during those years.
The net proceeds from the 1998 sale were placed into restricted funds that were
paid to creditors upon consummation of the Plan.
Interest and debt expense declined $0.3 million but stayed the same as a
percentage of net sales. The Company had increased interest expense from a
higher average borrowing level under the DIP Facility (Note 6) and a slightly
higher average interest rate in 1998 that was offset by lower amortization of
deferred financing costs (which in 1997 included a $1.1 million write-off of
deferred financing costs associated with the prior DIP facility) and lower
capital lease interest (due to certain closed stores).
In 1998, the Company incurred a charge of $108.4 million associated with the
revaluation of assets and liabilities pursuant to the adoption of fresh-start
reporting and recognized an extraordinary gain on debt discharge of
$419.7 million related to the Plan consummation and settlement of the
pre-petition liabilities.
The Company did not incur any income tax expense or benefit in 1998 and
1997.
11
<PAGE>
(b) LIQUIDITY AND CAPITAL RESOURCES
Borrowings under our Revolver (see below) increased $15.4 million during
1999 and, exclusive of the issuance of letters of credit, peaked at
$172 million, dropped to $74 million after the holiday season and averaged
$132 million, compared to a peak of $167 million, a low of $58 million and an
average of $116 million in 1998 under our DIP Facility. The increase in
borrowings can be primarily attributable to higher average inventory levels and
to the funds utilized for the early extinguishment of the 9% Convertible Notes
not covered by the proceeds from the financing of our Yonkers' store lease (see
below). The DIP Facility was terminated and repaid on the Effective Date with
funds from our Revolver.
In connection with our emergence from Chapter 11, a $270 million
post-emergence financing facility (the "Revolver") became effective, of which
$125 million is available for issuance of letters of credit (Note 6). We are
allowed to borrow under the Revolver primarily for working capital and general
business needs. The amount available to borrow in fiscal year 2000 ("2000")
under the Revolver is currently expected to peak at approximately $270 million
in October and November, 2000 and average approximately $240 million. We
currently expect our borrowings in 2000 to peak at approximately $190 million in
October or November, 2000 and average approximately $155 million, while total
outstanding letters of credit issued under the Revolver are expected to peak at
approximately $50 million in August, 2000 and average approximately
$36 million.
As presented in our consolidated statements of cash flows included elsewhere
in this Form 10-K, net cash provided by operating activities before
reorganization items in 1999 was $32.7 million compared to $6.5 million in 1998
and $7.2 million in 1997. This improvement was primarily the result of the
significant increase in our income from operations in 1999. The benefits in 1998
from decreased inventories and a lower operating loss were offset by a decrease
in accounts payable compared to an increase in accounts payable in 1997.
Portions of the net cash benefit from the closing of the six stores in early
1998 were included in both 1998 and 1997.
Inventories increased $15.8 million in 1999 primarily to satisfy customer
demand and for the new stores. Inventories declined $6.0 million in 1998 due
primarily to the six closed stores and increased $1.7 million in 1997. Accounts
payable increased $23.8 million in 1999 due primarily to the higher year-end
inventory level and improved vendor payment terms. Accounts payable declined
$5.5 million in 1998 and increased $9.0 million in 1997 due primarily to better
payment terms at the end of 1997 compared to the end of 1996. The payments of
bankruptcy-related professional fees were the main reason for accrued expenses
declining to $10.1 million in 1999 from $18.0 million in 1998 (see consolidated
balance sheets).
During 1999, we entered into a lease financing agreement for our Yonkers, NY
store lease and utilized the net proceeds of approximately $17 million to pay
off a portion of our 9% Convertible Notes (the "Notes"). In addition, we
exercised an option to repurchase $9 million of the Notes in December, 1999 and
redeemed the remaining outstanding Notes in late January, 2000. Cash flows used
for reorganization items (included in operating activities) are discussed in
Note 7. Proceeds from sales of assets (included in financing activities) in 1998
and 1997 related primarily to the sale or modification of store leases. We
utilized $11.0 million of proceeds from the modification of the Union Square, NY
lease at the end of 1998 to partially pay down the Notes at that time.
Other than payments made to certain pre-petition creditors approved by the
Bankruptcy Court, principal and interest payments on indebtedness, exclusive of
certain capital lease obligations, incurred prior to the Filing were not made
without Bankruptcy Court approval or until consummation of the Plan. Virtually
all pre-petition indebtedness of Bradlees was subject to settlement under the
reorganization case. The consummation cash distributions of $25.9 million were
made on the Effective Date and funded primarily out of restricted cash and cash
equivalents.
12
<PAGE>
We incurred capital expenditures of $22.2 million in 1999, excluding lease
acquisition costs of $1.3 million for two former Caldor stores opened in
October, 1999, primarily for a warehouse management system implemented in our
Edison, NJ distribution center, remodeling of three acquired stores (including
an additional former Caldor store on Staten Island, NY to be opened by the
beginning of May, 2000) and various other store and distribution center
improvements, including the costs for the remodeling of our Norwalk, CT store
which was in process at year-end. Capital expenditures of $17.1 million in 1998
primarily represented management information systems (including enhancements to
the merchandising management system installed in 1997), the remodeling of nine
stores and other store improvements and fixtures. Capital expenditures of
$19.6 million in 1997 primarily represented management information systems
(including a new mainframe computer, new store point-of-sale controllers and a
new merchandising management system), store fixtures (including new chain-wide
in-store directional and departmental signage) and various store improvements.
In 2000, we expect total capital expenditures to be approximately
$28 million based upon our current plan, primarily for a few new stores and
remodels, management information systems (including expenditures for new
distribution yard management and transportation systems and a new merchandise
replenishment system), and various store and distribution center improvements.
We currently expect to finance these expenditures through internally-generated
funds. We are also implementing new conveying and sortation equipment in our
Edison distribution center in 2000 that we currently anticipate will either be
included in the total capital expenditures above or an addition to that total if
separate financing can be arranged.
We currently anticipate the following investment and financing activities in
2000: (a) capital expenditures of approximately $28 million and the possible
financing of certain capital expenditures discussed above, (b) average
borrowings under the Revolver of approximately $155 million, (c) and certain
payments of long-term debt (Note 6).
We believe that the availability under our Revolver, together with our
available cash and expected cash flows from 2000 operations and beyond, will
enable us to fund our expected needs for working capital, capital expenditures
and debt service requirements. The Revolver expires in December, 2001 and will
need to be repaid or extended at that time. Our ability to meet our financial
obligations, make planned capital expenditures and implement our strategic
initiatives will depend on our future operating performance, which will be
subject to financial, competitive, economic and other factors affecting the
industry and operations of the Company, including factors beyond our control.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 project was completed on time in 1999 and we have not
experienced any significant Year 2000 issue since the date change on January 1,
2000. The cost of remediation totaled approximately $4.1 million, including
$1.7 million incurred in 1999 that was included in SG&A expenses. All software
replacement or remediation was completed by the end of 1999.
We believe the critical systems we operate are Year 2000 compliant and that
we are not likely to encounter significant internal operational problems.
However, there is no guarantee that a Year 2000 related failure will not arise.
This is due to the uncertainty surrounding potential third-party related Year
2000 problems, as well as our potential failure to discover all of our own
susceptible internal systems. The risk to us resulting from the failure of
third-party or internal systems is similar to other retailers and, for the most
part, to other businesses. We took steps to minimize this risk by surveying our
suppliers and business partners to assess their Year 2000 readiness, and their
responses were analyzed for any necessary action.
We intend to continue to monitor our compliance, as well as the compliance
of others whose operations are material to our business. While we expect our
efforts will continue to provide reasonable assurance that material disruptions
will not occur, the potential for disruptions cannot be fully
13
<PAGE>
identified. We therefore have developed contingency plans that will provide for
alternative courses of action to mitigate material individual system or process
failures due to Year 2000 issues. At this time, we cannot estimate the
additional cost, if any, that might be incurred from the implementation of such
contingency plans.
ACCOUNTING POLICY MATTERS
In December, 1999 the Securities and Exchange Commission (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 leased department sales not be
included in the presentation of total revenue in SEC filings.
We 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 for the cumulative effect of a change in accounting
method for layaway sales and excluded leased department sales from the
presentation of total revenue in our Consolidated Statements of Operations.
Customer deposits for layaway purchases not yet picked up are included in "Other
accrued expenses".
In 1998, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 133, "Accounting for Derivatives and Hedging Activities," which establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
In 1999, the FASB approved SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities--Deferral of the Effective Date of FASB Statement
No. 133," which amends SFAS No. 133 to be effective for all fiscal years
beginning after June 15, 2000. We are currently analyzing the impact, if any,
from SFAS No. 137 on our financial position and results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our market risk associated with our
financial instruments. We are exposed to market risk from changes in interest
rates which may adversely affect our financial position, results of operations
and cash flows. In seeking to minimize the risks from interest rate
fluctuations, we manage exposures through our regular operating and financing
activities. We do not use financial instruments for trading or other speculative
purposes and are not party to any leveraged financial instruments.
We are exposed to interest rate risk primarily through our borrowings under
our $270 million post-emergence financing facility (see Note 6 to our
Consolidated Financial Statements). Under the facility, we may borrow funds
under the $250 million senior secured tranche at variable interest rates based
on (a) the higher of (i) the annual rate of interest as announced by BankBoston
as its "Base Rate" and (ii) the weighted average of the rates on overnight
federal funds plus 0.50% per annum; or (b) 2.25% per annum plus the quotient of
(i) the LIBOR Rate in effect divided by (ii) a percentage equal to 100% minus
the percentage established by the Federal Reserve as the maximum rate for all
reserves applicable to any member bank of the Federal Reserve system in respect
of eurocurrency liabilities. Each of these rates is subject to a 0.50% increase
in the event of overadvances. The $20 million junior secured facility permits us
to borrow funds at the "Base Rate" plus 7.00% per annum.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to the Financial Statements--Item 14 (a).
ITEM 9. CHANGES IN AND/OR DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
14
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information which responds to this item relating to all directors is set
forth under the heading "Election of a Class of Directors" contained in the
Company's 1999 definitive proxy statement which will be filed with the
Securities and Exchange Commission within 120 days of the Company's fiscal
year-end and is incorporated herein by reference.
The names, ages, and current positions of all executive officers of the
Company as of April 10, 2000 are listed below, followed by a description of
their business experience during the past five years.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- -------- -----------------------------------------------------
<S> <C> <C>
Bruce Conforto......................... 47 Senior Vice President, Chief Information Officer
Gregory K. Dieffenbach................. 50 Senior Vice President, Human Resources
Judith D. Dunning...................... 49 Senior Vice President, Planning and Allocation
Mark E. James.......................... 50 Senior Vice President, Marketing
Robert G. Lynn......................... 50 Director, President and Chief Operating Officer
Cornelius F. Moses, III................ 41 Senior Vice President, Chief Financial Officer
Ronald T. Raymond...................... 56 Senior Vice President, Asset Protection
David L. Schmitt....................... 49 Senior Vice President, General Counsel, Secretary and
Clerk
Sandra L. Smith........................ 43 Senior Vice President, General Merchandise Manager,
Hardlines
Thomas N. Smith........................ 43 Senior Vice President, Stores
Alfred Snyder.......................... 52 Senior Vice President, Logistics
James C. Sparks........................ 53 Senior Vice President, General Merchandise Manager,
Softlines
Peter Thorner.......................... 56 Chairman and Chief Executive Officer
</TABLE>
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. ("Rickel") from prior to 1995 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 1995 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.
15
<PAGE>
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 Co., Inc. ("Best Products") from prior to 1995
to December 1996.
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 prior to 1995 to
December 1995. Mr. Lynn was a retail consultant to the creditors' committee in
the McCrory bankruptcy from prior to 1995 to January 1995.
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.
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 1995 to July 1995.
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 prior to 1995 to June 1995.
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 prior to 1995 to
July 1995.
Mr. Smith became Senior Vice President, Stores of the Company in
December 1997. Prior to joining the Company, he was Director of Operations and
Merchandising for Fry's Electronics from April 1995 to December 1997.
Mr. Snyder became Senior Vice President, Logistics of the Company in
January 2000. Prior to joining the Company, he was Senior Vice President and
General Manager, Logistics of the Discovery Channel from 1995 to January 2000.
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 prior to 1995 to July 1995.
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.
On September 24, 1996, while Mr. James was Senior Vice President, Marketing
and Advertising 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 when it
filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy
Code. Rickel was subsequently liquidated.
16
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
Information relating to executive compensation is set forth under the
heading "Executive Compensation" contained in the Company's proxy statement
which will be filed with the Securities and Exchange Commission within 120 days
of the Company's fiscal year-end and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information which responds to this item with respect to each director is
set forth under the heading "Security Ownership of Management and Principal
Stockholders" contained in the Company's proxy statement which will be filed
with the Securities and Exchange Commission within 120 days of the Company's
fiscal year-end and is incorporated herein by reference.
The information which responds to this item with respect to beneficial
owners of 5% or more of the Company's common stock and beneficial ownership of
the Company's common stock by all directors and officers of the Company as a
group is set forth under the heading "Security Ownership of Management and
Principal Stockholders" contained in the Company's proxy statement which will be
filed with the Securities and Exchange Commission within 120 days of the
Company's fiscal year-end and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information which responds to this item is set forth under the heading
"Certain Relationships" contained in the Company's proxy statement which will be
filed with the Securities and Exchange Commission within 120 days of the
Company's fiscal year-end and is incorporated herein by reference.
17
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
Report of Independent Public Accountants--Arthur Andersen LLP
Consolidated statements of operations for the years ended January 29, 2000,
January 30, 1999, and January 31, 1998.
Consolidated balance sheets as of January 29, 2000 and January 30, 1999.
Consolidated statements of cash flows for the years ended January 29, 2000,
January 30, 1999 and January 31, 1998.
Consolidated statements of stockholders' equity (deficiency) for the years
ended January 29, 2000, January 30, 1999 and January 31, 1998.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules
All financial statement schedules are omitted, as the required information
is not applicable or is included in the consolidated financial statements
or related notes.
3. Exhibits
The exhibits required to be filed by item 601 of Regulation S-K are listed
in the accompanying Exhibit Index.
(b) Reports on Form 8-K
The following report on Form 8-K was filed during the 13 weeks ended
January 29, 2000:
<TABLE>
<CAPTION>
DATE OF REPORT DATE OF FILING ITEM NUMBER DESCRIPTION
-------------- ----------------- ----------- ----------------------------------
<S> <C> <C> <C>
November 23, 1999 November 23, 1999 5 Reporting of third quarter 1999
results compared to plan.
November 23, 1999 November 30, 1999 5 Reporting of adoption of
Shareholder Rights Plan.
</TABLE>
18
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of
Braintree, Commonwealth of Massachusetts on April 26, 2000.
<TABLE>
<S> <C> <C>
BRADLEES, INC.
By: /s/ CORNELIUS F. MOSES, III
-----------------------------------------
Cornelius F. Moses, III
SENIOR VICE PRESIDENT, CHIEF FINANCIAL
OFFICER
(PRINCIPAL FINANCIAL AND ACCOUNTING
OFFICER)
</TABLE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrants in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ PETER THORNER Chairman and Chief Executive April 26, 2000
------------------------------------------- Officer (Principal Executive
Peter Thorner Officer)
/s/ ROBERT G. LYNN President and Director April 26, 2000
------------------------------------------- (Chief Operating Officer)
Robert G. Lynn
Senior Vice President, Chief April 26, 2000
/s/ CORNELIUS F. MOSES, III Financial Officer (Principal
------------------------------------------- Financial and Accounting
Cornelius F. Moses, III Officer)
/s/ ROBERT A. ALTSCHULER Director April 26, 2000
-------------------------------------------
Robert A. Altschuler
/s/ STEPHEN J. BLAUNER Director April 26, 2000
-------------------------------------------
Stephen J. Blauner
/s/ W. EDWARD CLINGMAN, JR. Director April 26, 2000
-------------------------------------------
W. Edward Clingman, Jr.
/s/ JOHN M. FRIEDMAN, JR. Director April 26, 2000
-------------------------------------------
John M. Friedman, Jr.
/s/ LAWRENCE LIEBERMAN Director April 26, 2000
-------------------------------------------
Lawrence Lieberman
Director April 26, 2000
-------------------------------------------
Charles K. MacDonald
/s/ WILLIAM H. ROTH Director April 26, 2000
-------------------------------------------
William H. Roth
</TABLE>
19
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- -------------- ------------------------------------------------------------ -------------
<S> <C> <C>
2.1* Modified Plan of Reorganization and Plan Disclosure
Statement is incorporated by reference from Pre-Effective
Amendment No. 2 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-66953), Part II, Item 16,
Exhibit 2.1, as filed with the Securities and Exchange
Commission on January 28, 1999.
2.2* Form of New Warrant is incorporated by reference from
Pre-Effective Amendment No. 2 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-66953), Part II,
Item 16, Exhibit 2.9, as filed with the Securities and
Exchange Commission on January 28, 1999.
3.1* Amended and Restated Articles of Organization of
Bradlees, Inc. is incorporated by reference from
Post-Effective Amendment No. 1 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-66953), Part II,
Item 16, Exhibit 3.1, as filed with the Securities and
Exchange Commission on February 16, 1999.
3.2* Amended and Restated By-laws of Bradlees, Inc. is
incorporated by reference from Post-Effective Amendment
No. 1 to the Company's Registration Statement on Form S-1
(SEC File No. 333-66953), Part II, Item 16, Exhibit 3.3, as
filed with the Securities and Exchange Commission on
February 16, 1999.
3.3* Certificate of Vote of Directors Establishing a Series of a
Class of Stock of Bradlees, Inc. classifying and designating
the Series A Junior Participating Cumulative Preferred Stock
is incorporated by reference to Exhibit 3.1 of the Company's
Registration Statement on Form 8-A, filed with the
Securities and Exchange Commission on November 30, 1999.
3.4* Amendment No. 1 to Amended and Restated By-laws of
Bradlees, Inc. is incorporated by reference to Exhibit 3.2
of the Company's Registration Statement on Form 8-A, filed
with the Securities and Exchange Commission on November 30,
1999.
4.1* Specimen Certificate for shares of Common Stock, $.01 par
value, of Bradlees, Inc. is incorporated by reference from
Pre-Effective Amendment No. 2 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-66953), Part II,
Item 16, Exhibit 4.1, as filed with the Securities and
Exchange Commission on January 28, 1999.
4.2* Shareholder Rights Agreement, dated as of November 23, 1999
between Bradlees, Inc. and BankBoston, N.A., as Rights Agent
is incorporated by reference to the Company's Registration
Statement on Form 8-A, Exhibit 4.1, filed with the
Securities and Exchange Commission on November 30, 1999.
10.1* Registration Rights Agreement is incorporated by reference
from Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1
(SEC File No. 333-66953), Part II, Item 16, Exhibit 10.1, as
filed with the Securities and Exchange Commission on
February 16, 1999.
</TABLE>
20
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- -------------- ------------------------------------------------------------ -------------
<S> <C> <C>
10.2* Amended and Restated Employment Agreement dated as of
October 26, 1995 between and among Bradlees, Inc., Bradlees
Stores, Inc. and Peter Thorner is incorporated by reference
from the Company's Form 10-Q for the quarterly period ended
October 28, 1995, Part II, Item 6, Exhibit 10.2, as filed
with the Securities and Exchange Commission on December 12,
1995.
10.3* Amendment to Amended and Restated Employment Agreement,
dated as of November 7, 1997, between and among
Bradlees, Inc., Bradlees Stores, Inc. and Peter Thorner is
incorporated by reference from the Company's Form 10-K for
the year ended January 31, 1998, Part IV, Item 14(a)(3),
Exhibit 10.23, as filed with the Securities and Exchange
Commission on May 1, 1998.
10.4* Supplement to Amended and Restated Employment Agreement,
dated as of April 15, 1998, between and among
Bradlees, Inc., Bradlees Stores, Inc. and Peter Thorner is
incorporated by reference from the Company's Form 10-Q for
the quarterly period ended May 2, 1998, Part II, Item 6,
Exhibit 10, as filed with the Securities and Exchange
Commission on June 5, 1998.
10.5* Amendment to Amended and Restated Employment Agreement,
dated as of May 3, 1999, between and among Bradlees, Inc.,
Bradlees Stores, Inc. and Peter Thorner is incorporated by
reference from the Company's Form 10-Q for the quarterly
period ended May 1, 1999, Part II, Item 6, Exhibit 10, as
filed with the Securities and Exchange Commission on
June 11, 1999.
10.6* Bradlees, Inc. and Bradlees Stores, Inc. Enterprise
Appreciation Incentive Plan Effective June 23, 1995 is
incorporated by reference from the Company's Form 10-Q for
the quarterly period ended October 28, 1995, Part II, Item
6, Exhibit 10.5, as filed with the Securities and Exchange
Commission on December 12, 1995.
10.7* Bradlees, Inc. and Bradlees Stores, Inc. Supplemental
Executive Retirement Plan Effective December 1, 1995 is
incorporated by reference from the Company's Form 10-K for
the year ended February 3, 1996, Part IV, Item 14(a)(3),
Exhibit 10.32, as filed with the Securities and Exchange
Commission on May 3, 1996.
10.8 Bradlees, Inc. and Bradlees Stores, Inc. Supplemental
Executive Retirement Plan, Amended and Restated Effective
October 1, 1999. 55
10.9* Form of Senior Vice President Severance Agreement is
incorporated by reference from the Company's Form 10-K for
the year ended February 3, 1996, Part IV, Item 14(a)(3),
Exhibit 10.33, as filed with the Securities and Exchange
Commission on May 3, 1996.
10.10* Form of Revised Senior Vice President Severance Agreement is
incorporated by reference from the Company's Form 10-K for
the fiscal year ended February 1, 1997, Part IV, Item
14(a)(3), Exhibit 10.40, as filed with the Securities and
Exchange Commission on May 2, 1997.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- -------------- ------------------------------------------------------------ -------------
<S> <C> <C>
10.11* Form of Revised Senior Vice President Severance Agreement is
incorporated by reference from the Company's Form 10-Q for
the quarterly period ended May 3, 1997, Part II, Item 6,
Exhibit 10, as filed with the Securities and Exchange
Commission on June 6, 1997.
10.12* Form of Revised Senior Vice President Severance Agreement is
incorporated by reference from the Company's Form 10-K for
the fiscal year ended January 30, 1999, Part IV, Item 14
(a)(3), Exhibit 10.9, as filed with the Securities and
Exchange Commission on April 30, 1999.
10.13* Form of President Severance Agreement is incorporated by
reference from the Company's Form 10-K for the fiscal year
ended February 1, 1997, Part IV, Item 14(a)(3),
Exhibit 10.41, as filed with the Securities and Exchange
Commission on May 2, 1997.
10.14* Corporate Bonus Plan for Fiscal Year Ended January 31, 1998
and Subsequent Fiscal Years is incorporated by reference
from the Company's Form 10-Q for the quarterly period ended
August 2, 1997, Part II, Item 6, Exhibit 10, as filed with
the Securities and Exchange Commission on September 16,
1997.
10.15* Stipulation and Order, dated October 6, 1997, among Bradlees
Stores, Inc., Bradlees, Inc. and their Affiliates and Mark
A. Cohen Settling Claims Arising Under Employment Contract
with Mark A. Cohen and Bar Order, are incorporated by
reference from the Company's Form 10-Q for the quarterly
period ended November 1, 1997, Part II, Item 6, Exhibit 10,
as filed with the Securities and Exchange Commission on
December 16, 1997.
10.16* Revolving Credit and Guaranty Agreement between BankBoston,
N.A. as Administrative Agent and as Issuing Bank, and the
Borrower, Bradlees Stores, Inc., with Bradlees, Inc. as
Guarantor is incorporated by reference from Post-Effective
Amendment No. 1 to the Company's Registration Statement on
Form S-1 (SEC File No. 333-66953), Part II, Item 16,
Exhibit 10.41, as filed with the Securities and Exchange
Commission on February 16, 1999.
10.17* Second Amendment to Credit Agreement dated as of
September 22, 1999, among reorganized Bradlees
Stores, Inc., reorganized Bradlees, Inc. and BankBoston,
N.A., as Agent, is incorporated by reference from the
Company's Form 10-Q for the quarterly period ended
October 30, 1999, Part II, Item 6, Exhibit 10, as filed with
the Securities and Exchange Commission on December 14, 1999.
10.18* Bradlees, Inc. 1999 Stock Option Plan is incorporated by
reference from Pre-Effective Amendment No. 2 to the
Company's Registration Statement on Form S-1 (SEC File
No. 333-66953), Part II, Item 16, Exhibit 10.42, as filed
with the Securities and Exchange Commission on January 28,
1999.
10.19* Bradlees, Inc. and Bradlees Stores, Inc. Management
Emergence Bonus Plan is incorporated by reference from
Pre-Effective Amendment No. 2 to the Company's Registration
Statement on Form S-1 (SEC File No. 333-66953), Part II,
Item 16, Exhibit 10.43, as filed with the Securities and
Exchange Commission on January 28, 1999.
</TABLE>
22
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT SEQUENTIALLY
NO. DESCRIPTION NUMBERED PAGE
- -------------- ------------------------------------------------------------ -------------
<S> <C> <C>
10.20 Bradlees, Inc. 2000 Stock Option and Incentive Plan. 67
21* Subsidiaries of the Registrant is incorporated by reference
from Post-Effective Amendment No. 1 to the Company's
Registration Statement on Form S-1
(SEC File No. 333-66953), Part II, Item 16, Exhibit 21, as
filed with the Securities and Exchange Commission on
February 16, 1999.
23 Consent of Arthur Andersen LLP. 78
27 Financial Data Schedule (a)
</TABLE>
- ------------------------
* Previously filed.
(a) Filed on the SEC's EDGAR system.
23
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of Bradlees, Inc.:
We have audited the accompanying consolidated balance sheets of
Bradlees, Inc. and subsidiaries (the "Company") as of January 29, 2000 and
January 30, 1999, and the related consolidated statements of operations,
stockholders' equity (deficiency) and cash flows for each of the three fiscal
years in the period ended January 29, 2000. 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 auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
On February 2, 1999, the Company emerged from bankruptcy. As discussed in
Notes 1 and 2 to the consolidated financial statements, effective January 30,
1999, the Company accounted for the reorganization and adopted "fresh start
reporting." As a result of the reorganization and adoption of fresh start
reporting, the consolidated statements of operations and cash flows for the
fiscal year ended January 29, 2000 are not comparable to the consolidated
statements of operations and cash flows for the fiscal years ended January 30,
1999 and January 31, 1998, since they present the consolidated results of
operations and cash flows of the reorganized entity.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Bradlees, Inc. and
subsidiaries as of January 29, 2000 and January 30, 1999 and the results of
their operations and their cash flows for each of the three fiscal years in the
period ended January 29, 2000 in conformity with generally accepted accounting
principles in the United States.
<TABLE>
<S> <C>
/S/ ARTHUR ANDERSEN LLP
------------------------------------
</TABLE>
New York, New York
March 14, 2000
24
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
---------------- ---------------- ----------------
REGISTRANT PREDECESSOR PREDECESSOR
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net sales......................................... $1,493,153 : $1,337,197 $1,344,444
Leased department and other operating income...... 13,756 : 12,500 12,913
---------- ---------- ----------
Total revenue..................................... 1,506,909 : 1,349,697 1,357,357
Cost of goods sold................................ 1,044,421 : 944,094 948,087
Selling, store operating, administrative and
distribution expenses........................... 416,432 : 377,561 383,672
Depreciation and amortization expense............. 27,724 : 32,236 36,244
Reorganization items.............................. (778) : 4,561 752
---------- ---------- ----------
Income (loss) from operations................... 19,110 : (8,755) (11,398)
Loss (gain) on disposition of properties.......... -- : 241 (5,425)
Interest and debt expense......................... 29,102 : 16,329 16,584
---------- ---------- ----------
Loss before fresh-start revaluation, income :
taxes, extraordinary item and cumulative :
effect of accounting change................... (9,992) : (25,325) (22,557)
Revaluation of assets and liabilities pursuant to :
adoption of fresh-start reporting............... -- : (108,428) --
---------- ----------
Loss before income taxes, extraordinary item and :
cumulative effect of accounting change........ (9,992) : (133,753) (22,557)
Income taxes...................................... -- : -- --
---------- ----------
Loss before extraordinary item and cumulative :
effect of accounting change................... (9,992) : (133,753) (22,557)
Extraordinary item--gain on debt discharge........ 1,182 : 419,703 --
Cumulative effect of accounting change............ (558) : -- --
---------- ---------- ----------
Net income (loss)............................... $ (9,368) : $ 285,950 $ (22,557)
========== ========== ==========
Comprehensive income (loss)..................... $ (9,368) : $ 285,950 $ (22,557)
========== ========== ==========
Net loss per share--basic and diluted: :
Loss per share before extraordinary item and :
cumulative effect of accounting change.......... $ (1.01) : * $ (1.98)
Extraordinary item................................ 0.12 : * --
Cumulative effect of accounting change............ (0.06) : * --
:
---------- ---------- ----------
Net loss per share--basic and diluted............. $ (0.95) : * $ (1.98)
========== ========== ==========
Weighted average shares outstanding (in :
thousands)--basic and diluted................... 9,912 : * 11,365
========== ========== ==========
</TABLE>
- ------------------------
* Earnings per share was not presented for the fiscal year ended January 30,
1999 because such presentation would not be meaningful. The old stock was
canceled under the plan of reorganization and the new stock was issued
following consummation of the Plan (Note 2).
See accompanying Notes to Consolidated Financial Statements.
25
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
JANUARY 29, 2000 JANUARY 30, 1999
---------------- ----------------
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 9,786 $ 9,485
Accounts receivable....................................... 11,524 13,015
Inventories............................................... 248,151 232,343
Prepaid expenses.......................................... 9,843 8,967
-------- --------
Total current assets.................................... 279,304 263,810
-------- --------
Property, plant and equipment, net.......................... 114,899 103,386
-------- --------
Other assets:
Lease interests, net...................................... 71,478 75,833
Assets held for sale...................................... -- 14,000
Other, net................................................ 7,606 6,722
-------- --------
Total other assets...................................... 79,084 96,555
-------- --------
Total assets............................................ $473,287 $463,751
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $143,111 $119,302
Accrued employee compensation and benefits................ 14,782 11,282
Other accrued expenses.................................... 10,059 18,044
Self-insurance reserves................................... 6,553 6,462
Short-term debt........................................... 129,857 114,449
Current portion of notes and capital lease obligations.... 2,959 2,089
-------- --------
Total current liabilities............................... 307,321 271,628
-------- --------
Obligations under capital leases............................ 26,096 25,284
Convertible notes payable................................... -- 28,995
Lease financing obligation.................................. 17,492 --
Self-insurance reserves..................................... 13,304 13,120
Unfavorable lease liability................................. 45,226 44,581
Other long-term liabilities................................. 17,361 25,143
Commitments and contingencies (Note 13)
Stockholders' equity:
Preferred stock--1,000,000 authorized, none issued; par
value $0.01............................................. -- --
Common stock--40,000,000 authorized, 9,966,720 shares
issued (10,225,711 at 1/30/99); par value $0.01......... 100 102
Additional paid-in-capital................................ 55,755 54,898
Accumulated deficit....................................... (9,368) --
-------- --------
Total stockholders' equity.............................. 46,487 55,000
-------- --------
Total liabilities and stockholders' equity.............. $473,287 $463,751
======== ========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
26
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
REGISTRANT PREDECESSOR PREDECESSOR
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ (9,368) : $ 285,950 $(22,557)
Adjustments to reconcile net income (loss) to cash :
provided by operating activities: :
Depreciation and amortization expense................... 27,724 : 32,236 36,244
Amortization of lease interests and unfavorable lease :
liability, net........................................ 5,000 : -- --
Cumulative effect of accounting change.................. 558 : -- --
Amortization of deferred financing costs................ 1,438 : 2,148 3,750
Reorganization items.................................... (778) : 4,561 752
Loss (gain) on disposition of properties................ -- : 241 (5,425)
Fresh-start revaluation charge.......................... -- : 108,428 --
Extraordinary gain on debt discharge.................... (1,182) : (419,703) --
Increase (decrease) in cash resulting from changes in: :
Accounts receivable..................................... 1,491 : (805) (1,773)
Inventories............................................. (15,808) : 6,029 (1,709)
Prepaid expenses........................................ (876) : (249) (357)
Accounts payable........................................ 23,809 : (5,510) 9,046
Accrued expenses........................................ 377 : (7,139) (6,185)
Other, net.............................................. 336 : 312 (4,547)
-------- --------- --------
Net cash provided by operating activities before :
reorganization items................................ 32,721 : 6,499 7,239
-------- --------- --------
Operating cash flows from reorganization items: :
Interest income received................................ -- : 1,038 420
Bankruptcy-related professional fees paid............... (8,351) : (10,275) (9,626)
Other reorganization expenses paid, net................. (2,175) : (3,796) (7,157)
-------- --------- --------
Net cash used by reorganization items................. (10,526) : (13,033) (16,363)
Net cash provided (used) by operating activities...... 22,195 : (6,534) (9,124)
-------- --------- --------
CASH FLOWS FROM INVESTING ACTIVITIES: :
Capital expenditures, net................................. (22,222) : (17,054) (19,568)
Lease acquisition costs................................... (1,250) : -- --
Decrease (increase) in restricted cash and cash :
equivalents............................................. -- : 16,760 (7,634)
-------- --------- --------
Net cash used in investing activities................. (23,472) : (294) (27,202)
-------- --------- --------
CASH FLOWS FROM FINANCING ACTIVITIES: :
Principal payments on long-term debt...................... (2,806) : (1,149) (1,657)
Principal payments on convertible notes payable........... (28,995) : (11,005) --
Payments of liabilities subject to settlement............. -- : (7,231) (6,467)
Proceeds from sales of assets............................. -- : 23,041 7,967
Proceeds from lease financing............................. 17,500 : -- --
Proceeds received upon exercise of warrants and options... 652 : -- --
Net borrowings under post-emergence revolver.............. 15,408 : 114,449 --
Net borrowings (payments) under DIP facilities............ -- : (84,208) 41,708
Deferred financing costs.................................. (181) : (2,621) (4,301)
Consummation cash distributions........................... -- : (25,912) --
-------- --------- --------
Net cash provided by financing activities............. 1,578 : 5,364 37,250
-------- --------- --------
Net increase (decrease) in unrestricted cash and cash :
equivalents......................................... 301 : (1,464) 924
Unrestricted cash and cash equivalents: :
Beginning of period..................................... 9,485 : 10,949 10,025
-------- --------- --------
End of period........................................... $ 9,786 : $ 9,485 $ 10,949
======== ========= ========
Supplemental disclosure of cash flow information: :
Cash paid for interest.................................. $ 18,280 : $ 13,781 $ 12,807
Cash paid (received) for income taxes................... $ -- : $ (322) $ 109
Supplemental schedule of noncash (investing and financing) :
activities: :
</TABLE>
27
<PAGE>
BRADLEES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
52 WEEKS ENDED 52 WEEKS ENDED 52 WEEKS ENDED
JANUARY 29, 2000 JANUARY 30, 1999 JANUARY 31, 1998
REGISTRANT PREDECESSOR PREDECESSOR
---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Reduction of liabilities subject to settlement due to :
transfer of title to property......................... $ -- : $ 2,000 $ --
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
BRADLEES STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
RETAINED
COMMON STOCK EARNINGS STOCKHOLDERS'
---------------------- ADDITIONAL UNEARNED (ACCUMULATED TREASURY EQUITY
SHARES AMOUNT PAID-IN-CAPITAL COMPENSATION DEFICIT) STOCK (DEFICIENCY)
----------- -------- --------------- ------------ ------------ -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 1, 1997... 11,394,433 $ 115 $ 137,951 $(167) $(400,525) $(667) $(263,293)
Restricted
stock--forfeitures.......... (82,279) -- (130) 137 -- (137) (130)
Restricted
stock--amortization......... -- -- -- 30 -- -- 30
Net loss...................... -- -- -- -- (22,557) -- (22,557)
----------- ----- --------- ----- --------- ----- ---------
BALANCE AT JANUARY 31, 1998... 11,312,154 115 137,821 -- (423,082) (804) (285,950)
- ---------------------------------------------------------------------------------------------------------------------------------
Restricted
stock--forfeitures.......... (1,770) -- -- -- -- -- --
Cancellation of the former
equity interests under plan
of reorganization........... (11,310,384) (115) (137,821) -- 137,132 804 --
Net income.................... -- -- -- -- 285,950 -- 285,950
Issuance of new equity
interests in connection with
emergence from Chapter 11... 10,225,711 102 54,898 -- -- -- 55,000
----------- ----- --------- ----- --------- ----- ---------
BALANCE AT JANUARY 30, 1999... 10,225,711 102 54,898 -- -- -- 55,000
Stock options--amortization... -- -- 205 -- -- -- 205
Adjustment of equity issuance
resulting from resolution of
Chapter 11 claims........... (356,620) (3) 3 -- -- -- --
Exercise of warrants.......... 85,508 1 598 -- -- -- 599
Exercise of options........... 12,121 -- 51 -- -- -- 51
Net loss...................... -- -- -- -- (9,368) -- (9,368)
----------- ----- --------- ----- --------- ----- ---------
BALANCE AT JANUARY 29, 2000... 9,966,720 $ 100 $ 55,755 $ -- $ (9,368) $ -- $ 46,487
=========== ===== ========= ===== ========= ===== =========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BRADLEES, INC. AND SUBSIDIARIES
1. BASIS OF PRESENTATION
Bradlees, Inc. and subsidiaries (collectively "Bradlees" or the "Company")
operate in the discount department store retail segment in the Northeast United
States. Accordingly, there are no specific operating or geographic segment
disclosures, pursuant to Statement of Financial Accounting Standards ("SFAS")
No. 131, "Disclosures about Segments of an Enterprise and Related Information",
other than the consolidated financial position and results of operations. The
Company filed petitions for relief under Chapter 11 of the United States
Bankruptcy Code ("Chapter 11") on June 23, 1995 (the "Filing"). Prior to
emerging from Chapter 11 on February 2, 1999 (the "Effective Date"), the Company
(the "Predecessor") operated its business as a debtor-in-possession subject to
the jurisdiction of the United States Bankruptcy Court for the Southern District
of New York (the "Bankruptcy Court"). The reorganized Company (the "Registrant")
adopted fresh-start reporting (Note 2) and gave effect to its emergence as of
its fiscal 1998 year-end (January 30, 1999).
Under fresh-start reporting, the final consolidated balance sheet as of
January 30, 1999 became the opening consolidated balance sheet of the
reorganized Company. Since fresh-start reporting was reflected in the
accompanying consolidated balance sheet as of January 30, 1999, the consolidated
statement of operations, statement of cash flows and statement of stockholders'
equity for the fiscal year ended January 29, 2000 ("1999") are not comparable in
certain material respects to the prior periods presented. Accordingly, a black
line has been drawn in those statements between the Registrant's and
Predecessor's amounts.
The Company's ability to meet its financial obligations and make planned
capital expenditures will depend on the Company's future operating performance,
which will be subject to financial, economic and other factors affecting the
business and operations of the Company, including factors beyond its control.
Management believes that the availability under its Revolver (Note 6), together
with available cash and expected cash flows from 2000 operations and beyond,
will enable it to fund its expected needs for working capital, capital
expenditures and debt service requirements. The Revolver expires in December,
2001 and will need to be repaid or extended at that time.
2. REORGANIZATION CASE AND FRESH-START REPORTING
REORGANIZATION CASE
During the Chapter 11 case, the Company's ability to continue as a going
concern was dependent upon, among other things, the confirmation of a plan of
reorganization by the Bankruptcy Court. Substantially all liabilities as of the
date of the Filing were subject to settlement under the Company's plan of
reorganization, as modified (the "Plan"), confirmed by the Bankruptcy Court on
January 27, 1999. 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 totaled approximately $30.6 and
$31.1 million for 1998 and 1997, respectively. Also, the 1997 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 would have been necessary as a consequence of
the Plan.
The Company made the following key modifications to its business strategy
during 1997 and 1998 to enhance profitability, improve customer service and
complete its reorganization: (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 department stores; (d) reinstituted a layaway program, while
better controlling promotions of the Bradlees' credit card, and installed new
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
2. REORGANIZATION CASE AND FRESH-START REPORTING (CONTINUED)
in-store directional and departmental signage; (e) revised the Company's
markdown policy to be based on product rate of sale; (f) modified weekly ad
circulars to achieve more item-intensive and price-point oriented ad offerings;
(g) introduced both a "Certified Value" program that highlights certain key
recognizable items at competitive everyday prices and a "WOW!" program which
integrates targeted and mostly unadvertised opportunistic purchases; (h) closed
unprofitable stores; and (i) significantly reduced overhead while improving
operating efficiencies.
The Plan contained distributable value to creditors of approximately
$162 million (as of the Effective Date) which consisted of approximately
$15 million of administrative claim payments (including $4.5 million of
professional fees accrued at January 30, 1999 and paid subsequent to the
Effective Date); $14 million of cash distributions to the pre-Chapter 11 bank
group and the unsecured creditors; $40 million of convertible notes (Note 6)
primarily payable to the pre-Chapter 11 bank group, which were immediately paid
down on the Effective Date by approximately $11 million from the proceeds of the
modification of the lease terms of the Union Square, NY store; certain other
notes totaling $6.2 million (Note 6); other distributions totaling
$1.4 million; approximately ten million shares of new Bradlees Common Stock (the
former Bradlees common stock was canceled) with an estimated value as of the
Effective Date of $85 million (see discussion below); and warrants allowing for
the purchase of up to one million shares of Common Stock, exercisable at $7.00
per share and expiring February 2, 2004. Certain pre-petition claims are still
in the process of being resolved but the ultimate resolution of those claims
will not have any impact on the distributable value.
The determination of equity value included in the distributable value as of
the Effective Date was derived from an estimated enterprise value of the
reorganized Bradlees and reduced by estimated embedded debt levels. The
enterprise value was developed by an independent financial advisor for purposes
of the filing of the Company's Disclosure Statement in the Bankruptcy Court in
October 1998. In developing the determination of the initial equity value, the
financial advisor used various assumptions and estimates, including projected
embedded debt which represented that portion of the ongoing revolver facility
that is estimated to remain after the seasonal clean-up of the facility. As a
result, the initial equity value was assumed to be in the range of $75 to
$90 million. For purposes of the Disclosure Statement, the Company determined
that an equity value of $85 million represented a reasonable estimate of
distributable equity value to the creditors.
Subsequent to the filing of the Company's Disclosure Statement and
occurrence of the Effective Date, a number of events occurred which impacted the
determination of equity value under fresh-start reporting, including but not
limited to, the initial trading prices of the new stock, information regarding
the Company's fourth quarter 1998 performance and final 1999 financial plan, a
settlement with a landlord regarding the disposition of the Union Square, NY
leasehold interest and the liquidation of Caldor Corp., a major competitor of
the Company. The Company employed a similar valuation method under fresh-start
reporting to determine its equity value to that utilized by its independent
financial advisor in the Disclosure Statement and arrived at an estimated equity
value of $55 million.
FRESH-START REPORTING
As discussed above, the Company's Plan was consummated on February 2, 1999
and Bradlees emerged from Chapter 11. Pursuant to the guidance provided by the
American Institute of Certified Public Accountants in Statement of Position
("SOP") 90-7, "Financial Reporting by Entities in Reorganization Under the
Bankruptcy Code", the Company adopted fresh-start reporting and reflected the
consummation distributions in the consolidated balance sheet as of January 30,
1999 to give effect to the reorganization as of year-end. Under fresh-start
reporting, the reorganization value of the
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
2. REORGANIZATION CASE AND FRESH-START REPORTING (CONTINUED)
Company was allocated to the emerging Company's net assets on the basis of the
purchase method of accounting.
The resulting charge of $108.4 million from all fresh-start adjustments,
excluding the write-off of the old stock, was presented as "Revaluation of
assets and liabilities pursuant to adoption of fresh-start reporting" in the
consolidated statement of operations for 1998. In addition, an extraordinary
gain of $419.7 million was recognized in 1998 for the discharge of all
pre-petition debt. Unaudited pro forma summary information assuming the Company
had emerged from Chapter 11 at the beginning of 1998 is presented in Note 4.
The fresh-start reporting reorganization value was primarily based on the
Company's projected earnings before interest, taxes and depreciation and
amortization ("EBITDA") for 1999 (adjusted to exclude the projected EBITDA of
two stores that were previously expected to close at the end of 1999 and certain
non-cash credits), discounted to present value using the Company's weighted
average cost of capital rate of 14%. Only projected 1999 EBITDA was utilized to
calculate the value due to the uncertainties facing the Company, such as
changing competitive conditions, that made future projections less meaningful. A
multiple of 5.0 was applied to the adjusted 1999 EBITDA to assist in calculating
the reorganization value. The multiple was determined after analyzing the
multiples of several publicly-held companies operating in a comparable business.
The discount rate and multiple utilized by the Company reflected a relatively
"high-risk investment". The use of a short projection period placed a greater
emphasis on the accuracy of the multiple.
The Company's reorganization value represented the value of the
"reconstituted entity". This value was viewed as the fair value of the Company
before considering liabilities and approximated the amount a willing buyer would
have paid for the assets of the Company immediately after the reorganization was
completed. The Company's "enterprise value", as defined in the Plan and later
re-estimated by management, represented the reorganization value calculated
above plus expected cash from asset dispositions and cash in excess of normal
operating requirements of the reorganized Company immediately before the
distributions called for by the Plan.
The Company's reorganization value of $464 million was less than the
appraised value of its assets at January 30, 1999, which was approximately
$477 million. Management believes that the creditors accepted the Plan and the
corresponding reorganization value, despite the inherent future business risks,
primarily because the Company had made significant progress in improving its
operating performance in 1997 and 1998, the Company's reorganization value
exceeded its liquidation value, there was a waiver of all preferences, and
certain creditors believed that it was in the Company's best interest to emerge
from bankruptcy at that time. In accordance with the purchase method of
accounting, the excess of the revalued net assets over reorganization value
(negative goodwill) was allocated to reduce proportionately the values assigned
to noncurrent assets in determining their appraised values.
The calculated reorganization value was based upon a variety of estimates
and assumptions about future circumstances and events. Such estimates and
assumptions are inherently subject to significant economic and competitive
uncertainties beyond the control of the Company, including but not limited to
those with respect to the future course of the Company's business activity.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION The consolidated financial statements include
the accounts of subsidiaries. Intercompany transactions have been eliminated in
consolidation.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The Company's fiscal year ends on the Saturday nearest to January 31. The
term "1999" refers to the 52 weeks ended January 29, 2000; "1998" refers to the
52 weeks ended January 30, 1999; and "1997" refers to the 52 weeks ended
January 31, 1998.
LEASED DEPARTMENT SALES The Company leases space in its stores to another
entity for the sale of shoes and uniforms (in certain stores) in return for fees
based on a percentage of such sales. Leased department sales were $47.8, $43.9
and $47.8 million in 1999, 1998 and 1997, respectively. The associated fee
income is included in leased department and other operating income. See also
"Revenue recognition" below.
FAIR VALUE OF FINANCIAL INSTRUMENTS 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 Revolver (Note 6), and
accounts payable approximated the carrying amounts at January 29, 2000 and
January 30, 1999 due to their short maturities or variable-rate nature of the
borrowings. The estimated fair value of the Lease Financing Obligation (Note 6)
approximates its carrying amount at January 29, 2000 based on an evaluation of
market rates for similar transactions. The fair value of the 9% Convertible
Notes (Note 6), which were paid off during 1999, were assumed equal to face
value at January 30, 1999. No fair value was available in 1999 for the Company's
warrants (Note 2), which did not trade on any public market until February,
2000.
GEOGRAPHICAL CONCENTRATION As of January 29, 2000, the Company operated 104
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.
USE OF ESTIMATES The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. The primary
estimates underlying the Company's financial statements include the valuation of
assets and liabilities and the calculation of reorganization value under
fresh-start reporting (Note 2), the estimated useful lives of fixed assets and
lease interests, accruals for a self-insured medical program (beginning in 1998)
and for self-insured workers' compensation and general liability (Note 14),
vacation pay reserves (Note 14), and provisions for rejected leases and
restructuring costs associated with closing stores (Note 7).
COLLECTIVE BARGAINING ARRANGEMENTS Approximately 71% of the Company's labor
force is covered by collective bargaining agreements, of which collective
bargaining agreements affecting approximately 75% of the union 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.
INVENTORIES Substantially all inventories are valued at the lower of cost
(which includes certain warehousing costs) or market, using the last-in,
first-out ("LIFO") retail method. No LIFO charges were recorded by the Company
during the periods presented as there was no excess of current cost over LIFO
cost.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ASSETS HELD FOR SALE Assets held for sale were stated at the lower of net
book value or estimated net realizable value and classified as current or
noncurrent based upon the anticipated time to sell the asset.
PROPERTY, PLANT AND EQUIPMENT Maintenance, repairs and minor renewals are
charged to operations as incurred. Major renewals and betterments which
substantially extend the useful life of the property are capitalized. The costs
of assets sold or retired and the related amounts of accumulated depreciation
are eliminated from the accounts in the year of disposal, with the resulting
gain or loss included in earnings. Depreciation and amortization is 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, and such amortization is included in
depreciation and amortization expense.
<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>
The Company reviews its long-lived assets for any impairment under SFAS
No. 121 whenever events or changes in circumstances indicate that the carrying
amounts of such assets may not be recoverable.
SOFTWARE COSTS Certain costs associated with internally developed computer
software are capitalized in accordance with SOP No. 98-1, "Accounting for the
Costs for Computer Software Developed or Obtained for Internal Use". Such
capitalized costs were approximately $2.2, $1.1 and $1.5 million in 1999, 1998
and 1997, respectively.
LEASE INTERESTS Lease interests represent the values assigned to the
Company's lease rights under fresh-start reporting and are being amortized as a
charge to rent expense over the remaining lease terms. Accumulated amortization
was $4.4 million at January 29, 2000.
The recoverability of the carrying value of lease interests is dependent
upon the Company's ability to generate sufficient future cash flows from
operations at each leased site, or in the case of a sale or disposition of a
lease or leases, the continuation of similar favorable market rents.
Accordingly, recoverability of this asset could be significantly affected by
future economic, market and competitive factors and is subject to the inherent
uncertainty associated with estimates.
UNFAVORABLE LEASE LIABILITY The unfavorable lease liability was recorded as
part of fresh-start reporting and represented the estimated present value
liability related to lease commitments that exceeded market rents for similar
locations. This liability is being amortized as a reduction of rent expense,
$8.8 million in 1999, over the remaining lease terms while the associated
present value discount is being amortized to interest and debt expense,
$9.4 million in 1999, based on the effective interest method.
SELF-INSURANCE RESERVES The Company is primarily self-insured for medical,
workers' compensation and general liability costs. The medical self-insurance
reserve was determined with the assistance of the Company's insurance advisor.
The workers' compensation and general liability self-insurance reserves were
actuarially determined using a discount rate of 6.00% at January 29, 2000 and
January 30, 1999. Self-insurance reserves have been classified as current and
noncurrent in accordance with the estimated timing of the projected payments.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DEFERRED FINANCING COSTS Deferred financing costs are amortized as a charge
to interest and debt expense over the lives of the related financings. Deferred
financing costs at January 29, 2000 and January 30, 1999 were associated with
the Revolver. Accumulated amortization was $1.4 million at January 29, 2000.
ADVERTISING COSTS Advertising costs are expensed in the period in which the
associated advertisements are run. Advertising expenses totaled approximately
$47.6, $46.0 and $49.3 million in 1999, 1998 and 1997, respectively.
STORE OPENING AND CLOSING COSTS Pre-opening costs are expensed as incurred.
Store closing costs were provided for when the decision was made to close such
stores.
STOCK COMPENSATION The Company accounts for stock-based employee
compensation costs using the intrinsic value method (Note 10).
INCOME TAXES The Company provides for income taxes in accordance with SFAS
No. 109, "Accounting for Income Taxes." Deferred income taxes, net of valuation
allowances, are provided to recognize the effect of temporary differences
between financial reporting and income tax reporting of assets and liabilities.
EARNINGS PER SHARE Net loss per share for 1999 and 1997 was computed using
the weighted average number of common shares outstanding. The weighted average
number of shares (in thousands) used in the calculation for both basic and
diluted net loss per share in 1999 and 1997 was 9,912 and 11,365 shares,
respectively. The number of shares used for 1999 was based on shares issued or
presumed issued (Note 9) in accordance with the Plan. Diluted net loss per share
equaled basic net loss per share as the dilutive calculations would have an
anti-dilutive impact as a result of the net loss incurred in each of those
years. Net earnings per share was not presented for 1998 because the old stock
was canceled under the Plan and the new stock was not issued until after
consummation of the Plan.
RECLASSIFICATIONS Certain reclassifications have been made to the 1998 and
1997 financial statements to conform with the 1999 presentation.
REVENUE RECOGNITION Revenue is recognized when customers take possession of
the merchandise (except for leased department sales--see discussion that
follows) and the Company reserves for its best estimate of sales returns based
on its historical experience. The Company recognizes revenue on layaway sales at
the time customers pick-up the merchandise in accordance with Staff Accounting
Bulletin (SAB) No. 101. In December, 1999 the Securities and Exchange Commission
(the "SEC") issued 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 leased department sales not be included in the
presentation of total revenue in SEC filings. Customer deposits for layaway
purchases not yet picked up are included in "Other accrued expenses".
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 for the cumulative effect of a
change in accounting method for layaway sales and excluded leased department
sales from the presentation of total revenue in the accompanying consolidated
statements of operations. The pro forma retroactive effect of the layaway
accounting change on the loss before extraordinary
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
item and fresh-start revaluation charge (1998) and net loss and on per-share
amounts are shown in Note 4 for 1998 and for 1997 was a $0.4 million increase in
the 1997 net loss or approximately $.04 additional net loss per share.
RECENT ACCOUNTING PRONOUNCEMENT In 1998, the Financial Accounting Standards
Board ("FASB") issued SFAS No. 133, "Accounting for Derivatives and Hedging
Activities," which establishes accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. In 1999, the FASB approved SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities--Deferral of the
Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be
effective for all fiscal years beginning after June 15, 2000. The Company is
currently analyzing the impact, if any, from SFAS No. 137 on the Company's
financial position and results of operations.
4. PRO FORMA SUMMARY FINANCIAL INFORMATION (UNAUDITED)
The pro forma summary information is based on the Company's consolidated
statement of operations for 1998 included in this Form 10-K as adjusted to give
effect to the consummation of the Plan (Note 2) as if the Effective Date had
occurred on January 31, 1998 (at the beginning of fiscal 1998) and to give
effect to the change in accounting method for layaway sales (see above). The
unaudited pro forma information is presented for informational purposes only and
does not purport to represent what the Company's results of operations would
actually have been if the Effective Date of the Plan had occurred at the
beginning of 1998, or to project the Company's results of operations for any
future period.
The following unaudited pro forma summary information reflects the
(1) estimated effects of the Plan; (2) elimination of the operating results of
seven stores closed since January 31, 1998 as part of the Company's
reorganization; (3) elimination of reorganization items, emergence-related bonus
provision of $4.4 million, the fresh-start revaluation charge and the
extraordinary gain on debt discharge; (4) retroactive effect on the reported
1998 losses of the change in accounting for layaway sales; and (5) estimated
weighted average number of common shares equal to the number used for 1999.
There was no tax impact from the pro forma adjustments.
PRO FORMA SUMMARY INFORMATION
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
(UNAUDITED)
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
JANUARY 30, 1999
----------------
<S> <C>
Net sales................................................... $1,322,875
Loss before extraordinary item and fresh-start revaluation
charge.................................................... (22,294)
Net loss.................................................... (22,294)
Net loss per share.......................................... $ (2.26)
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
5. PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
(000'S)
-----------------------------------
JANUARY 29, 2000 JANUARY 30, 1999
---------------- ----------------
<S> <C> <C>
Property excluding capital leases:
Buildings and improvements................... $ 69,273 $ 59,935
Equipment and fixtures....................... 49,562 33,104
-------- --------
Subtotal................................... 118,835 93,039
Accumulated depreciation..................... (26,294) --
-------- --------
Property excluding capital leases, net..... 92,541 93,039
-------- --------
Property under capital leases:
Buildings and improvements................... 23,831 10,347
Accumulated amortization..................... (1,473) --
-------- --------
Property under capital leases, net......... 22,358 10,347
-------- --------
Total property, plant and equipment, net....... $114,899 $103,386
======== ========
</TABLE>
6. DEBT
<TABLE>
<CAPTION>
(000'S)
-----------------------------------
JANUARY 29, 2000 JANUARY 30, 1999
---------------- ----------------
<S> <C> <C>
Revolver (8.36%-1999, 7.32%-1998).............. $129,857 $114,449
Lease Financing Obligation (14.8%)............. 17,492 --
Convertible Notes (9.0%)....................... -- 28,995
Cure, CAP & Tax Notes (9.0%)................... 4,926 6,236
Obligations under capital leases (Note 8)...... 27,743 26,322
-------- --------
Total debt..................................... 180,018 176,002
Less:
Short-term debt (Revolver)................... 129,857 114,449
Current portion-capital leases............... 1,647 1,038
Current portion-other........................ 1,312 1,051
-------- --------
Long-term debt................................. $ 47,202 $ 59,464
======== ========
</TABLE>
FINANCING FACILITY Prior to the Effective Date, the Company had a
$250 million financing facility (the "Financing Facility") (of which
$125 million was available for issuance of letters of credit) with BankBoston
Retail Finance, Inc. ("BBNA") as agent, under which the Company was allowed to
borrow for general corporate purposes, working capital and inventory purchases.
The Financing Facility consisted of (a) an up to eighteen-month
debtor-in-possession revolving credit facility in the maximum principal amount
of $250 million (the "DIP Facility") and, subject to meeting certain conditions,
(b) an up to three-year post-emergence credit facility in the maximum principal
amount of $250 million (as modified, the "Revolver"--see below). The outstanding
amount under the DIP Facility was repaid on the Effective Date with proceeds
from the Revolver. The Revolver is scheduled to expire on December 23, 2001.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
6. DEBT (CONTINUED)
Trade and standby letters of credit outstanding under the Revolver were
$11.0 and $21.5 million, respectively, as of January 29, 2000. Trade and standby
letters of credit outstanding under the DIP Facility were $10.8 and
$17.3 million, respectively, as of January 30, 1999.
REVOLVER The Revolver consists of a $250 million senior secured revolving
line of credit (of which $125 million is available for issuance of letters of
credit) and a $20 million junior secured "last in-last out" facility. The
Company expects to use the Revolver primarily for working capital and general
business needs.
The senior secured tranche has an advance rate equal to 80% of the Loan
Value of Eligible Receivables (as defined), plus generally 72% of the Loan Value
of Eligible Inventory (as defined), subject to certain adjustments. Between
March 1 and December 15, the inventory advance rate will be increased to 77% of
the Loan Value of Eligible Inventory provided that the total amount of all
senior secured advances does not exceed 85% of the Loan to Value Ratio (as
defined). The Company may also borrow up to an additional $20 million under the
junior secured facility provided that the total borrowings (senior secured and
junior secured) do not exceed 93% of the Loan to Value Ratio.
The Revolver permits the Company to borrow funds under the senior secured
tranche at an interest rate per annum equal to (a) the higher of (i) the annual
rate of interest as announced by BankBoston as its "Base Rate" and (ii) the
weighted average of the rates on overnight federal funds plus 0.50% per annum;
or (b) 2.25% per annum plus the quotient of (i) the LIBOR Rate in effect divided
by (ii) a percentage equal to 100% minus the percentage established by the
Federal Reserve as the maximum rate for all reserves applicable to any member
bank of the Federal Reserve system in respect of eurocurrency liabilities. Each
of these rates is subject to a 0.50% increase in the event of overadvances. The
weighted average interest rate under the Revolver in 1999 was 7.59% compared to
7.81% under the DIP Facility in 1998. The junior secured facility permits the
Company to borrow funds at the "Base Rate" plus 7.00% per annum.
The Revolver is secured by substantially all of the non-real estate assets
of the Company. The Revolver contains financial covenants including (i) minimum
rolling twelve-month EBITDA at the end of each quarter, (ii) minimum monthly
accounts payable to inventory ratios; (iii) maximum annual capital expenditures;
and (iv) minimum operating cash flow to interest expense ratios (for the fiscal
quarters ending on or about January 31, 2001, and thereafter). The Company is in
compliance with the Revolver covenants.
LEASE FINANCING OBLIGATION In July, 1999, 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 continues to operate as a Bradlees store and the net
proceeds (after certain fees) of $17.2 million were used to pay down
$17.0 million of the Notes (see below) and $0.2 million of associated accrued
interest.
The Lease Financing Obligation is secured by (i) the leasehold interest in
the Yonkers store, (ii) first priority liens on leasehold interests in three
other named stores, as well as any net proceeds received upon any disposition(s)
of such interests, and (iii) a standby letter of credit of $1.1 million.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
6. DEBT (CONTINUED)
In addition, as a result of the lease financing transaction, the underlying
Yonkers operating lease was converted to a capital lease with a $2.9 million
obligation and associated capital lease asset. Also, the prior assets held for
sale of $14 million for Yonkers were reclassified, with $3.4 million
(representing the net book value of the store equipment and leasehold
improvements) added to property excluding capital leases, net and $10.6 million
(representing the remaining incremental lease value previously determined under
fresh-start reporting) added to property under capital leases, net.
9% CONVERTIBLE NOTES The 9% Convertible Notes (the "Notes") were scheduled
to mature on February 3, 2004 and bore interest at the rate of 9% per annum from
the date of issuance, payable semi-annually in arrears on January 1 and July 1
of each year, commencing July 1, 1999. The Notes were convertible any time after
the first anniversary of the Effective Date into shares of the Company's Common
Stock. The conversion price would initially have been the unweighted average
closing price of the Common Stock during the twenty business days preceding the
first anniversary of the Effective Date. 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 exercised an option (see below) to repurchase
$9 million of the Notes at a discount in December, 1999 and recognized an
extraordinary gain of $1.2 million. The remaining outstanding Notes were
redeemed along with associated accrued and unpaid interest in January, 2000.
During the third quarter of 1999, the Company entered into a supplemental
agreement with the holders of approximately $9.0 million, or approximately 75%,
of the $12.0 million of the outstanding Notes (the "Discount Option
Noteholders"). Under the agreement, the Company was allowed to repurchase the
outstanding Notes held by the Discount Option Noteholders (the "Discount Option
Notes") at a purchase price equal to 86% of the outstanding principal amount
(i.e. a 14% discount), plus accrued interest, exercisable for a one-month period
from December 1, 1999 through December 31, 1999 (the "Discount Option"). Each
month thereafter the discount would have decreased by 1% such that the discount
would have been fully eliminated by January 31, 2001. In consideration of the
Discount Option, the Company agreed, among other things, to pay the Discount
Option Noteholders a premium on the closing date of the grant of the option
equal to 0.5% of the outstanding principal amount of the Discount Option Notes.
CURE AND CAP NOTES Pursuant to the Plan, the Company issued Cure Notes in
the aggregate principal amount of $3.3 million. The Cure Notes are not secured
and bear interest at a rate equal to nine percent (9%) per annum. For most of
the Cure Notes, principal and accrued interest are not payable until three years
after the Effective Date. The Company can prepay these notes, in whole or in
part, without premium or penalty. Pursuant to the Plan, the Company also issued
Capital Lease ("CAP") Notes in the aggregate principal amount of $0.5 million.
TAX NOTES Pursuant to the Plan and the Bankruptcy Code, the Company agreed
to make deferred cash payments in the aggregate principal amount of
$2.4 million on account of allowed tax claims. Payments are being made in equal
quarterly installments of principal, plus simple interest accruing from the
Effective Date at a rate equal to nine percent (9%) per annum on the unpaid
portion of such claims. The first payment was generally due 90 days after the
Effective Date. The Company can prepay these notes, in whole or in part, without
premium or penalty.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
7. REORGANIZATION ITEMS
The Company provided for or incurred the following expense and income items
in 1999, 1998 and 1997 directly associated with the Chapter 11 reorganization
proceedings and the resulting restructuring of its operations (in 000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Professional fees............................. $ 1,200 : $12,000 $10,000
Interest income............................... -- : (1,038) (420)
Provision for rejected leases................. -- : (7,156) (2,846)
Net asset/liability write-offs................ -- : 620 (3,408)
Gain on disposition of properties............. -- : (6,153) (1,153)
Provision for occupancy and other store
closing costs............................... (1,608) : 4,868 1,112
Employee severance and termination benefits... (370) : 1,420 (2,813)
Provision for MIS retention bonuses........... -- : -- 280
------- ------- -------
Total reorganization items.................. $ (778) : $ 4,561 $ 752
======= ======= =======
</TABLE>
PROFESSIONAL FEES AND INTEREST INCOME: Professional fees represent
estimates of expenses associated with the Chapter 11 case, primarily for legal,
consulting and accounting services provided to the Company and the creditors
committee (which were required to be paid by the Company). Interest income
represented interest earned on cash invested during the Chapter 11 proceeding.
PROVISION FOR REJECTED LEASES AND NET ASSET/LIABILITY WRITE-OFFS: Under the
Bankruptcy Code, the Company could elect to reject real estate leases, subject
to Bankruptcy Court approval. The liability established for rejected leases
during the Chapter 11 case was subject to future adjustments, including
adjustments based on claims filed by the lessors and Bankruptcy Court actions.
During 1998, the Company obtained confirmation that the lessor of a previously
rejected lease had re-let the premises and, accordingly, the Company reduced its
liability for rejected leases by $4.7 million. Also during 1998, the Company was
notified by two of its former landlords at closed locations that the properties
had been re-let and therefore their claims for rejected lease damages were
reduced by $2.4 million. The Company reduced its rejected lease liability
accordingly. 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.
The Company incurred a net asset write-off in 1998 relating primarily to the
disposal of greeting card fixtures that were replaced as a consequence of the
Company's rejection of its greeting card supply contract. The credit of
$3.4 million in 1997 resulted from the write-off of closed stores' capital lease
obligations that exceeded the sum of the carrying value of the closed stores'
assets plus an adjustment to lower the carrying value of a property held for
sale.
GAIN ON DISPOSITION OF PROPERTIES: The Company sold a previously closed
store in 1998 and recognized a gain of $1.9 million that was classified as a
reorganization item since the associated asset write-offs were previously
included in reorganization items. The Company also recognized a gain, net of the
associated net asset write-off, of $4.3 million in January, 1999 related to the
modification of the Union Square lease terms. The Company sold certain closed
store leases in 1997 and the related gains
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
7. REORGANIZATION ITEMS (CONTINUED)
were classified as reorganization items since the associated net asset
write-offs were also previously included in reorganization items.
STORE CLOSING COSTS: During 1999, the Company entered into a lease
financing transaction (Note 6) which allowed its Yonkers, NY store to continue
in operation and extended its Union Square, NY store lease, resulting in the
reversal of reserves totaling $1.6 million that had been established in 1998 for
the expected store closing costs. The Company recorded a provision of
approximately $4.9 million at the end of 1998 for the estimated closing costs
associated with one store that closed in March, 1999, including the expected
holding costs for that store lease, and for the Yonkers and Union Square, NY
stores that were anticipated to begin closing by the end of 1999 in connection
with the Company's Plan (Note 2). A provision of $0.5 million for an inventory
impairment at the store closed in March, 1999 was charged to cost of sales in
January, 1999.
In December, 1997, the Company approved a restructuring plan to close 6
stores by February, 1998. One of the 6 stores was owned and closed as a result
of the sale of the property in January, 1998. In connection with the plan to
close the 6 stores, the Company rejected certain leases and wrote off a net
liability (see "Provision for rejected leases and net asset/liability
write-offs"). In addition, the Company established provisions in 1997 for the
associated closing costs and for an inventory impairment of $2.9 million for the
6 stores that was charged to cost of sales. This provision for inventory
impairment, along with the January, 1999 provision above, represented the
incremental markdowns required to liquidate the inventory at the closed stores.
Such costs were recorded in accordance with the retail inventory method.
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 1999 totaled approximately $1.6 million.
EMPLOYEE SEVERANCE AND TERMINATION BENEFITS: The Company reversed
approximately $0.4 million of reserves in 1999 for employee severance and
termination benefits that were established in 1998 for the Yonkers and Union
Square, NY stores discussed above. The Company recorded a provision of
approximately $1.4 million at the end of 1998 for severance and termination
benefits for approximately 563 associates at the three stores expected to close
(see above) and for certain central office positions eliminated. The credit to
employee severance and termination benefits of $2.8 million in 1997 resulted
from the reversal of certain severance reserves totaling $3.4 million, including
a significant portion of the severance reserve that had been established in 1996
for Mark Cohen, the Company's former CEO, partially offset by a $0.6 million
charge for severance and termination benefits for 382 store associates at the 6
stores closed in February, 1998. A settlement agreement was reached with
Mr. Cohen in 1997. Approximately $0.6 million of employee severance and
termination benefits were paid in 1999.
MIS RETENTION BONUSES: The Company had a retention bonus program for
certain Management Information System (MIS) employees that provided for bonuses
during the Chapter 11 proceeding for continued employment through April, 1998.
In April, 1998 these bonuses were paid and this program was discontinued.
RESTRUCTURING RESERVES: As of January 29, 2000, the Company had remaining
reserves (included in accrued expenses) totaling approximately $1.6 million for
costs associated with the closing of stores and other restructuring activities.
Most of the remaining reserved costs will be paid within a year.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
7. REORGANIZATION ITEMS (CONTINUED)
Approximately $2.2 million of restructuring costs, including the severance and
termination benefit payments discussed above, were paid in 1999.
CLOSED STORE RESULTS: Net sales and operating losses (exclusive of any
central office expense allocation and prior to interest expense, income taxes
and reorganization items) from the one store closed in March, 1999, the one
store closed in April, 1997 and the 6 stores closed in February, 1998 were (in
000's):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Net sales......................................... $1,341 $14,322 $69,423
Operating loss.................................... $ (70) $ (592) (1,158)
</TABLE>
8. LEASE COMMITMENTS
At January 29, 2000, the Company had various non-cancelable leases in effect
for its stores, distribution centers, and central office building, as well as
for certain equipment. Capital lease obligations were revalued under fresh-start
reporting. Minimum payments due under leases were as follows:
<TABLE>
<CAPTION>
(000'S)
---------------------------------
CAPITAL LEASES OPERATING LEASES
-------------- ----------------
<S> <C> <C>
2000............................................ $ 4,769 $ 52,988
2001............................................ 4,555 54,021
2002............................................ 4,516 48,272
2003............................................ 4,516 42,073
2004............................................ 4,551 34,672
Thereafter...................................... 39,738 265,697
-------- --------
Total minimum payments.......................... 62,645 $497,723
========
Estimated executory costs....................... (4,229)
--------
Net minimum lease payments...................... 58,416
Imputed interest................................ (30,673)
--------
Present value of net minimum lease payments..... 27,743
Less current portion............................ (1,647)
--------
Obligations under capital leases, net of current
portion....................................... $ 26,096
========
</TABLE>
Minimum payments for capital and operating leases have not been reduced by
minimum sublease rentals of $9.5 and $6.3 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.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
8. LEASE COMMITMENTS (CONTINUED)
Total rent expense was as follows:
<TABLE>
<CAPTION>
(000'S)
-------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Operating leases:
Minimum rent............................ $ 47,949 : $ 48,565 $ 48,749
Contingent rent......................... 1,189 : 209 425
Sublease income......................... (10,583) : (10,135) (10,501)
-------- -------- --------
38,555 : 38,639 38,673
-------- -------- --------
Capital leases:
Sublease income......................... (1,402) : (1,265) (1,747)
-------- -------- --------
Total..................................... $ 37,153 : $ 37,374 $ 36,926
======== ======== ========
</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) and sublease rent 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.
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 one-time gain of $2.7 million in the first quarter of fiscal year
2000 associated with the early termination of the related capital lease
obligation. Minimum payments due under the Peabody store lease included in the
table of minimum lease payments totaled $23.8 million over the remaining lease
term of 16 years.
9. CAPITAL STOCK AND ADDITIONAL PAID-IN CAPITAL
Pursuant to the Plan, Bradlees has authorized capital stock consisting of
41,000,000 shares, par value $.01 per share, consisting of 40,000,000 shares of
Common Stock and 1,000,000 shares of Preferred Stock. As of January 29, 2000,
9,966,720 shares of Common Stock were issued or presumed issued in accordance
with the Plan. This includes certain shares expected to be issued as final
unresolved pre-petition claims are settled. As of the Effective Date, 10,225,711
shares of Common Stock had been presumed issued in accordance with the Plan. No
Preferred Stock has been issued.
COMMON STOCK In addition to the above shares issued or being issued under
the Plan, the following shares of Common Stock are reserved for issuance:
1,000,000 shares issuable upon exercise of outstanding warrants (see below); and
1,000,000 shares are reserved for issuance under the 1999 Option Plan
(Note 10).
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 any
Preferred Stock, if and when issued. The holders of Common Stock are entitled to
receive such dividends, if any, as may be declared from time to time by the
Company's Board of Directors. Dividends cannot be paid under the terms of the
Revolver. The possible issuance of Preferred Stock with a preference over Common
Stock as to any future dividends could impact the dividend rights of holders of
Common
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
9. CAPITAL STOCK AND ADDITIONAL PAID-IN CAPITAL (CONTINUED)
Stock. The holders of Common Stock have no preemptive or other subscription
rights, and there are no conversion rights or redemption or sinking fund
provisions with respect to the Common Stock.
All of the outstanding shares of Common Stock, all of the shares of Common
Stock issuable upon exercise of the warrants and options are freely tradeable
without restriction or further registration under the Securities act, either
because such shares were issued or are issuable pursuant to the exemption
provided by Section 1145 of the Bankruptcy Code and such shares are not
"restricted securities" as defined in Rule 144 under the Securities Act or
because the offer and resale of such shares was registered pursuant to the
Company's Form S-1 Registration Statement or pursuant to a registration
statement on Form S-8.
UNDESIGNATED PREFERRED STOCK The Board of Directors is authorized, without
further action of the stockholders, to issue up to 1,000,000 shares of Preferred
Stock. Any Preferred Stock issued may rank prior to the Common Stock as to
dividend rights, liquidation preference or both, may have full or limited voting
rights and may be convertible into shares of Common Stock.
WARRANTS On the Effective Date, a total of 1,000,000 shares of Common Stock
were reserved for issuance under warrants at an exercise price of $7.00 per
share. The warrants were issued following consummation of the Plan and expire on
February 2, 2004. As of January 29, 2000, 85,508 shares had been issued upon
exercise of warrants and 914,492 warrants remain outstanding or to be issued.
SHAREHOLDER RIGHTS Plan On November 23, 1999, the Company adopted a
shareholder rights plan (the "Rights Plan"). The purpose of the Rights Plan is
to protect stockholders from coercive or otherwise unfair takeover tactics.
Under the terms of the Rights Plan, the Board of Directors declared a dividend
distribution of one Preferred Stock purchase right ("Right") for each
outstanding share of Common Stock. The Rights dividend was paid to stockholders
of record as of November 26, 1999. The Rights become exercisable in the event
that a person or group (an "Acquiring Person") either acquires 15% or more of
the Company's outstanding voting stock or commences a tender offer or exchange
offer to acquire 15% or more of such stock. Once exercisable, each Right will,
depending on the circumstances, entitle a holder, other than an Acquiring
Person, to purchase shares of either the Company or an acquiring company having
market value equal to twice the exercise price.
10. STOCK OPTIONS
On the Effective Date, 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"). Pursuant to the plan of reorganization, the Company agreed to
grant options to purchase 750,000 shares of Common Stock to senior management.
These options vest in one-third increments beginning on the date of the grant
and each of the two anniversaries following the date of grant. In addition,
250,000 additional shares can be granted at such price and on such terms as the
Compensation Committee of the Board of Directors shall determine. During 1999,
the Compensation Committee authorized grants of additional options to purchase
137,050 shares of Common Stock to other members of management at prices equal to
the market prices of the Common Stock on the dates of the grants. These options
vest in one-third increments annually beginning on the first anniversary of the
grant date. All vested options shall be exercisable for a period of 5 years from
the date of the grant. The Company is recording compensation expense related to
all options over the vesting period in accordance with Accounting Principles
Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees"
(intrinsic value method). Accordingly, compensation expense is being measured as
the excess, if any, of the quoted market price
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
10. STOCK OPTIONS (CONTINUED)
of the Company's Common Stock at the date of grant over the exercise price of
the options. The total compensation expense expected to be recorded over the
vesting period for the grant of the 750,000 shares is $0.3 million, of which
$0.2 million was incurred in 1999.
The following table sets forth the stock option activity for 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE
NUMBER OF SHARES PRICE
---------------- --------
<S> <C> <C>
Outstanding at beginning of year.................... -- --
Granted............................................. 887,050 $4.78
Exercised........................................... (12,121) 4.22
Forfeited........................................... (38,017) 5.54
---------
Outstanding at end of year.......................... 836,912 $4.75
=========
Options exercisable at year-end..................... 237,879 $4.22
=========
Weighted average fair value of options granted...... $ 5.39
=========
</TABLE>
The fair value of options granted per the above table and for the pro forma
information below was estimated on the dates of the grants using the
Black-Scholes pricing model with the following assumptions: no dividend yield,
estimated volatility of 68%, weighted average risk-free interest rates of 5.12%,
and an estimated life of 3.0 years from the dates of grants to the estimated
exercise dates.
The following table summarizes information about stock options outstanding
as of January 29, 2000:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
NUMBER NUMBER
OUTSTANDING REMAINING AVERAGE EXERCISABLE AVERAGE
RANGES OF AS OF CONTRACTUAL EXERCISE AS OF EXERCISE
EXERCISE PRICES 1/29/00 LIFE IN YEARS PRICE 1/29/00 PRICE
- --------------------- ----------- ------------- -------- ----------- --------
<S> <C> <C> <C> <C> <C>
$ 4.22 713,637 4.2 $4.22 237,879 $4.22
$ 7.13 114,725 4.3 7.13 -- --
$17.13 8,550 4.5 17.13 -- --
------- --- ----- ------- -----
836,912 4.2 $4.75 237,879 $4.22
======= === ===== ======= =====
</TABLE>
If compensation expense under the 1999 Option Plan had been determined in
accordance with SFAS No. 123, "Accounting for Stock-Based Compensation", the
Company's net loss and net loss per share for 1999 would have approximated the
pro forma amounts below:
<TABLE>
<CAPTION>
1999
-----------------------
AS REPORTED PRO FORMA
----------- ---------
<S> <C> <C>
Net loss (000's)....................................... $(9,368) $(10,449)
Net loss per share--basic and diluted.................. $ (0.95) $ (1.06)
</TABLE>
The Company's stock option plans in existence prior to the Effective Date
were terminated on the Effective Date. The difference between accounting for
stock-based compensation under APB No. 25 and SFAS No. 123 was not material for
1998 and 1997, and, accordingly, the pro forma disclosures were omitted.
44
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
11. EMPLOYEE BENEFIT PLANS
In 1998, the Company adopted SFAS No. 132, "Employers' Disclosures about
Pensions and Other Post-Retirement Benefits", which revised disclosures about
pension and other post-retirement benefit plans. The following information is
provided in accordance with the requirements of SFAS No. 132.
PENSION PLANS Certain union employees are covered by multi-employer defined
benefit plans. Expenses for these plans were approximately $.9 million in each
year presented.
The Company has a qualified, noncontributory defined benefit pension plan
for employees not participating in multi-employer plans. Plan benefits are based
on the participant's compensation and/or years of service. The Company funds the
net pension costs each year. The plan assets are held in a master trust fund,
which invests primarily in equity, fixed income securities and cash and cash
equivalents. Effective December 31, 1998, benefit accruals for specified
employees were frozen and the Company instituted an employer matching
contribution at that time under its 401(k) plan (see below). The freeze
triggered a curtailment gain of $6.2 million in November 1998 and the plan
liabilities and assets were remeasured with the associated net impact included
in the curtailment gain.
The Company has several nonqualified, noncontributory defined benefit plans
for the benefit of certain highly compensated employees. The plans are unfunded
and benefits paid under the plans are based on years of service and employees'
compensation. Effective December 31, 1998, benefit accruals for specified
employees were frozen under the Company's qualified pension plan (see above).
The Supplemental Executive Retirement Plan ("SERP") benefits were adjusted
accordingly to reflect the change in future qualified pension benefits. The SERP
was also amended and restated effective October 1, 1999 to reflect a revised
benefit formula. The benefit formula was converted from an age-based reward
structure to a structure that is based on service and now defines the benefits
in the form of a lump sum.
The components of net pension cost (benefit) for the qualified and
non-qualified plans were as follows:
<TABLE>
<CAPTION>
(000'S)
-----------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Service costs................................ $ 2,306 : $ 3,599 $ 3,272
Interest costs............................... 5,162 : 5,503 5,054
Return on plan assets........................ (15,895) : (12,691) (9,566)
Net amortization and deferral................ 8,903 : 6,762 4,177
Curtailment (gain) loss...................... -- : (6,207) 126
Special termination benefits................. -- : -- (359)
-------- -------- -------
Net pension (cost) benefit................... $ 476 : $ (3,034) $ 2,704
======== ======== =======
</TABLE>
45
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
The funded status was as follows:
<TABLE>
<CAPTION>
(000'S)
---------------------------------------------------------------------------
JANUARY 29, 2000 JANUARY 30, 1999
------------------------------------ ------------------------------------
QUALIFIED PLAN NON-QUALIFIED PLANS QUALIFIED PLAN NON-QUALIFIED PLANS
-------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefit obligation...... $ 71,768 $ 4,232 $71,974 $ 2,697
======== ======= ======= =======
Accumulated benefit
obligation................... $ 72,814 $ 4,950 $73,328 $ 3,077
======== ======= ======= =======
Projected benefit obligation... 72,885 5,383 73,429 4,458
Plan assets at fair value...... 89,830 -- 77,597 --
-------- ------- ------- -------
Projected benefit obligation
less than (greater than) plan
assets....................... 16,945 (5,383) 4,168 (4,458)
Unrecognized prior service
cost......................... -- (119) -- --
Unrecognized net (gain) loss... (12,045) (90) -- --
-------- ------- ------- -------
Prepaid pension cost (accrued
pension liability)........... $ 4,900 $(5,592) $ 4,168 $(4,458)
======== ======= ======= =======
</TABLE>
46
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
Summarized information about the changes in the plans' benefit obligations
and assets and about the assumptions used in determining the plans' information
is as follows:
<TABLE>
<CAPTION>
(000'S)
---------------------------------------------------------------------------------
1999 1998
------------------------------------ ------------------------------------
QUALIFIED PLAN NON-QUALIFIED PLANS QUALIFIED PLAN NON-QUALIFIED PLANS
-------------- ------------------- -------------- -------------------
<S> <C> <C> <C> <C> <C>
Change in benefit
obligation:
Benefit obligation at
beginning of year....... $73,429 $4,458 : $72,233 $4,236
Service cost.............. 1,463 843 : 2,952 648
Interest cost............. 4,794 368 : 5,123 380
Amendments................ -- (123) : 11 351
Actuarial loss (gain) and :
assumption changes...... (3,139) (90) : 6,522 546
Expenses paid............. (679) -- : (556) --
Benefits paid............. (2,983) (73) : (3,149) (12)
Curtailment............... -- -- : (9,707) (1,691)
------- ------ ------- ------
Benefit obligation at end
of
year.................... $72,885 $5,383 : $73,429 $4,458
======= ====== ======= ======
Change in plan assets:
Fair value at beginning of :
year.................... $77,597 $ -- : $68,611 $ --
Actual return on plan
assets.................. 15,895 -- : 12,691 --
Expenses paid............. (679) -- : (556) --
Benefits paid............. (2,983) -- : (3,149) --
------- ------ ------- ------
Fair value of plan assets :
at end of year.......... $89,830 $ -- : $77,597 $ --
======= ====== ======= ======
Weighted average assumptions
at end of year:
Discount rate............. 7.50% 7.50% 6.50% 6.50%
Expected return on plan
assets.................. 9.25% N/A 9.25% N/A
Rate of compensation
increase................ 3.50% 4.00% 3.50% 4.00%
</TABLE>
DEFINED CONTRIBUTION PLAN The Company has a 401(k) plan for all active
employees in eligible job categories. Employees may contribute a portion of
their salary to the plan. The Company's contributions to the plan, which were
suspended in 1996 and reinstated in January, 1999, are in the form of cash and
based on a percentage of employee contributions. Plan contributions for 1999 and
1998 were $1.4 million and $0.1 million, respectively.
POST-RETIREMENT PLAN The Company provides certain health care and life
insurance benefits for certain retired non-union employees meeting age and
service requirements. The Company accounts for the post-retirement plan in
accordance with SFAS No. 106, "Employers' Accounting for
47
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
Post-Retirement Benefits Other Than Pensions," which requires the Company to
accrue the estimated cost of retiree benefit payments during the years the
employee provides services. The Company's post-retirement benefits are funded on
a current basis.
The SFAS No. 106 valuations at January 29, 2000 and January 30, 1999 reflect
changes that were effective January 1, 1998. The changes represent the
elimination of future benefits for active employees who did not become eligible
by January 1, 2000, and a phase-out of the Company contributions over two years
(at 50% per year beginning January 1, 1999) towards the cost of providing
medical benefits to eligible retirees. A curtailment gain of $3.9 million was
recognized in 1997 in connection with those changes.
The status of the plan was as follows:
<TABLE>
<CAPTION>
(000'S)
-----------------------------------
JANUARY 29, 2000 JANUARY 30, 1999
---------------- ----------------
<S> <C> <C>
Accumulated post-retirement benefit obligation
for:
Retirees..................................... $ 611 $ 915
Fully eligible actives....................... 141 430
Other actives................................ 71 153
------- -------
823 1,498
Plan assets at fair value...................... -- --
------- -------
Funded status.................................. (823) (1,498)
Unrecognized net gain.......................... (386) --
------- -------
Accrued post-retirement benefit cost........... $(1,209) $(1,498)
======= =======
</TABLE>
Net post-retirement benefit was as follows:
<TABLE>
<CAPTION>
(000'S)
------------------------------------
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Service cost................................... 5 : $ 8 $ 172
Interest cost.................................. 65 : 102 429
Amortization, net.............................. (76) : (5,681) (1,359)
Curtailment gain............................... -- : -- (3,939)
---- ------- -------
Net benefit.................................... $ (6) : $(5,571) $(4,697)
==== ======= =======
</TABLE>
48
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
11. EMPLOYEE BENEFIT PLANS (CONTINUED)
Summarized information about the changes in the plan benefit obligation
(there are no plan assets) is as follows:
<TABLE>
<CAPTION>
(000'S)
----------------------
1999 1998
-------- --------
<S> <C> <C> <C>
Change in Accumulated Post-Retirement Benefit Obligation
(APBO):
APBO at beginning year.................................... $1,498 : $1,708
Service cost.............................................. 5 : 8
Interest cost............................................. 65 : 102
Amendments................................................ -- : (304)
Actuarial loss (gain) and assumption changes.............. (462) : 345
Benefits paid............................................. (283) : (361)
------ ------
APBO at end of year....................................... $ 823 : $1,498
====== ======
</TABLE>
Assumptions used in determining the plan benefit obligations were as
follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Discount rate............................................... 7.50% 6.50%
Expected return on plan assets.............................. N/A N/A
Rate of compensation increase (life ins.)................... 3.50% 4.00%
</TABLE>
The assumed health care cost trend rate used in measuring the accumulated
post-retirement benefit obligation for 1999 and 1998 was 7.50% (5.50% for
post-65 coverage) grading down to 4.50% over 10 years. A one percentage point
change in the health care cost trend rate would have had the following effects:
<TABLE>
<CAPTION>
(000'S)
----------------------
ONE PERCENTAGE POINT
----------------------
INCREASE DECREASE
-------- --------
<S> <C> <C>
Effect on total service and interest cost components...... $ 2 $ 1
Effect on accumulated benefit obligation.................. $17 $15
</TABLE>
12. INCOME TAXES
There was no income tax expense or benefit in 1999, 1998 or 1997.
49
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
12. INCOME TAXES (CONTINUED)
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>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C> <C>
Statutory rate.................................... (35.0%) : 35.0% (35.0%)
State income taxes, net of Federal income tax :
benefit......................................... (6.0%) : 0.0% (4.0%)
Non-includable fresh-start accounting gain........ -- : (36.4%) --
Non-deductible professional fees.................. -- : 1.0% 14.5%
Non-deductible compensation....................... -- : 0.4% --
Valuation allowance............................... 41.0% : -- 24.5%
------ ------ ------
0% : 0% 0%
====== ====== ======
</TABLE>
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)
-------------------
1999 1998
-------- --------
<S> <C> <C>
Lease interests......................................... $ 2,741 $ 6,639
Inventories............................................. 1,024 4,221
Total liabilities....................................... 3,765 10,860
Net operating loss carryforwards........................ (37,778) (29,065)
Self-insurance accruals................................. (8,141) (8,029)
Post-retirement benefits................................ (2,789) (3,231)
Closing costs........................................... (648) (2,072)
Property, plant and equipment, net...................... (29,071) (24,216)
Capital leases.......................................... (2,208) (6,358)
Vacation pay............................................ (1,807) (1,814)
Alternative minimum tax credit carryforwards............ (3,316) (3,316)
Other................................................... (7,347) (3,900)
-------- --------
(93,105) (82,001)
Valuation allowance..................................... 89,340 71,141
-------- --------
Total assets............................................ (3,765) (10,860)
-------- --------
Net deferred tax liability.............................. $ -- $ --
======== ========
</TABLE>
At January 29, 2000, the Company had net operating loss carryforwards of
approximately $96.5 million for Federal income tax purposes which will expire
beginning in fiscal year 2010 and alternative minimum tax credit carryforwards
of $3.3 million which are available to reduce future Federal regular income
taxes over an indefinite period. As a result of the Company's emergence from
Chapter 11, a portion of the net operating loss carryforwards were reduced by
the cancellation of indebtedness income. Also, a change in ownership occurred on
the Effective Date (due to the issuance of new stock) which will result in a
limitation on the pre-emergence amounts of net operating loss and tax credit
carryforwards that can be utilized each year. This annual limitation will be
based primarily on
50
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
12. INCOME TAXES (CONTINUED)
the value of reorganized Bradlees under Section 382 of the Internal Revenue Code
of 1986 ("IRC Section 382"). In addition, there was a second change in ownership
for tax purposes under IRC Section 382 in 1999 that will further limit the
amounts of net operating loss and tax credit carryforwards that can be utilized
each year. Any tax benefits realized for financial reporting after the Effective
Date resulting from pre-emergence deferred tax assets, including net operating
loss and tax credit carryforwards, will be reported as a reduction to noncurrent
intangible assets until exhausted and thereafter be reported as a direct
addition to paid-in-capital.
The Company had a valuation allowance of $89.3 million against deferred tax
assets at January 29, 2000. The realization of the deferred tax assets is
dependent upon future taxable income during the Federal and State carryforward
periods.
13. COMMITMENTS AND CONTINGENCIES
GENERAL The Company is party to various legal actions and administrative
proceedings and subject to various claims arising in the ordinary course of
business. The Company believes that the disposition of these matters will not
have a material adverse effect on its financial position, results of operations
or liquidity.
TRADE VENDORS' Lien On the Effective Date, the Company entered into an
agreement for the benefit of its trade vendors which grants such trade vendors a
subordinated security interest in the Company's inventory (the "Trade Vendors'
Lien"). The Trade Vendors' Lien, which is subordinated to the lien securing the
Revolver (Note 6), attaches to the Company's inventory (but not any other
assets). The Trade Vendors' Lien shall terminate on the earliest to occur of
(i) two years after the Effective Date, (ii) at the sole option of the Company,
the date on which the ratio of the amount of accounts payable to the amount of
inventory computed on a cost basis, for any rolling three-month period is more
than five percentage points less than such ratio on a comparable store basis for
the same period in the prior year, (iii) the consummation of a transaction
pursuant to which the Company merges or otherwise combines with another company
or companies, (iv) at the sole option of the Company, as to any individual trade
vendor, at such time as such vendor fails to provide merchandise to the Company
on terms which are at least as favorable as the credit terms under which such
vendor provided merchandise in the year prior to the Effective Date and (v) at
the sole option of the Company, as to any individual trade vendor that initially
provides retail merchandise after the Effective Date, at such time as such
vendor fails to provide retail merchandise on terms which are as favorable as
the initial credit terms which such vendor provided retail merchandise to the
reorganized Bradlees; provided, however, that any termination by the Company of
the Trade Vendors' Lien will not be effective until the thirtieth (30th) day
after the Company gives (a) actual notice to the Trade Vendors' Collateral Agent
(as defined) and (b) (x) in the case of trade vendors generally, notice by
publication in THE NEW YORK TIMES (national edition), of its intent to terminate
the Trade Vendors' Lien and actual notice to trade vendors to whom amounts are
then due and owing, or (y) in the case of an individual trade vendor, actual
notice of such termination to the trade vendor whose Trade Vendors' Lien the
Company proposes to terminate.
CORPORATE BONUS PLAN In February, 1997 the Company adopted the Corporate
Bonus Plan (the "Corporate Bonus Plan") that was approved by the Bankruptcy
Court. The Corporate Bonus Plan provides incentives and rewards for
(i) performance of key employees that meets or exceeds expectations and
(ii) attainment of threshold performance measurements tied directly to the
Company's
51
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
annual business plan. For each $5 million of EBITDA (as defined) improvement,
net of the provision for the additional earned bonuses, over the amount
projected, the award increases by 25% of the base award up to a maximum increase
of 100% of the award. In addition, a discretionary fund in the amount of
$500,000 is available to provide bonuses to employees to reward them for
superior performance or the performance of acts of special note.
Under the Corporate Bonus Plan, the Company had to obtain a minimum EBITDA
of $40.0, $32.0 and $28.1 million in 1999, 1998 and 1997, respectively, net of
the anticipated costs of the Corporate Bonus Plan, in order for any employee to
be eligible for 100% of an award (except for the discretionary fund mentioned
above). The Company achieved an EBITDA of $46.1 million in 1999 and achieved the
minimum EBITDA in 1998 and in 1997 and, accordingly, recorded provisions of
approximately $6.7, $4.8 and $4.0 million for such bonuses in 1999, 1998 and
1997, respectively, that were included in selling, store operating,
administrative and distribution ("SG&A) expenses. These bonuses were paid in
April of the following year.
Mr. Robert Lynn, President and Chief Operating Officer, is eligible for a
special incentive award of up to a total of $0.5 million for 1999 and 2000
(combined) at the discretion of Mr. Peter Thorner (CEO and Chairman). This bonus
eligibility is for the same reasons as for Mr. Thorner's special annual
incentive award (see "CEO Contract" below) and is payable on the same terms,
except that Mr. Lynn was paid $0.1 million in February, 2000. Through April,
2000, Mr. Thorner has elected to award $0.2 million to Mr. Lynn.
MANAGEMENT EMERGENCE BONUS PLAN On the Effective Date, certain executives
were selected to participate in the Company's Management Emergence Bonus Plan
(the "Emergence Bonus Plan"). The aggregate amount payable to these employees
under the Emergence Bonus Plan was $3 million and a provision for such was
accrued in January, 1999. One million dollars of this was paid on the Effective
Date. The remaining $2 million was paid in February, 2000 following the full
payment of the outstanding 9% Convertible Notes (Note 6) at the end of January,
2000. If an employee leaves the Company for any reason, other than an
involuntary termination without Cause (as defined) or a voluntary termination
for Good Reason (as defined), within one year of receiving a payment under the
Emergence Bonus Plan, the payment shall be subject to partial or total
recoupment. If an employee is involuntarily terminated without Cause,
voluntarily leaves for Good Reason, or leaves due to death or disability, then
the employee does not have to return any payments under the Emergence Bonus Plan
and is entitled to receive any portion of the payments to be made under the
Emergence Bonus Plan within 30 days after the date of termination of employment.
CEO CONTRACT The Company entered into a three-year employment agreement
with its current CEO, Mr. Thorner, commencing as of October 26, 1995 and amended
as of November 7, 1997 and as of May 3, 1999. This agreement is automatically
extended for one additional day each day unless either party gives the other
party written notice of its election not to extend the agreement. Under the
agreement, Mr. Thorner is entitled to an annual incentive award of 55% of his
base salary pursuant to the Corporate Bonus Plan (see above). The annual
incentive award could be increased to 110% of Mr. Thorner's base salary if
certain maximum performance goals are met under the Corporate Bonus Plan. The
agreement also provides for certain retirement benefits, for reimbursement of
certain legal, annual financial counseling and relocation expenses and
participation in the Company's employee benefit plans. The 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
52
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
13. COMMITMENTS AND CONTINGENCIES (CONTINUED)
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. Upon the Company's emergence from Chapter 11, a $3.0 million letter of
credit was provided to Mr. Thorner pursuant to the terms of the agreement.
In September, 1999, the Compensation Committee of the Company's Board of
Directors, awarded Mr. Thorner a special annual incentive award of $1.0 million
for 1999 both as a retention incentive and in recognition of, among other
things, the Company's strong operating performance since emerging from
bankruptcy. A provision of $1.0 million was recorded in 1999 and included in
SG&A expenses. One-half of this bonus was paid in January, 2000 and the
second-half is payable on April 15, 2001 subject to the satisfaction of certain
conditions, and subject to an obligation on Mr. Thorner's part to repay all or a
portion of each bonus payment should he voluntarily leave the employ of the
Company for other than Good Reason within approximately fifteen months of the
January, 2000 payment or within twelve months of the April, 2001 payment.
SEVERANCE PROGRAM The Company has a severance program (the "Severance
Program") that covers all officers, Vice President and above, and certain other
employees of the Company, but not including Mr. Thorner who has a separate
employment agreement (see above). If the employment of any participant in the
Severance Program is terminated other than for cause, death, disability or by
the employee, then salary is guaranteed, subject to mitigation by other
employment, for up to eighteen months for the President and Senior Vice
Presidents, twelve months for Vice Presidents and certain other employees, and
six months for certain other employees. Certain participants would also receive
a lump-sum payment equal to the amount of any target incentive payment for the
fiscal year in which the termination occurred (the "Severance Lump Sum").
If the employment of certain participants is terminated other than for Cause
(as defined), death, disability or retirement, or is terminated under certain
other circumstances, within one year following a change of control of the
Company, the employee will receive a lump-sum payment. The payment is the
Severance Lump Sum amount plus one and one-half times the annual salary in
effect immediately prior to the change of control (the "Annual Salary") for the
President and Senior Vice Presidents and one times the Annual Salary for Vice
Presidents. The other participants will receive up to one times their Annual
Salary, payable over a period of up to one year and subject to mitigation by
other employment. 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 incumbent members of the Board of Directors to continue to
constitute a majority of the Board unless the election of the new directors has
been approved by the incumbent directors.
2000 STOCK OPTION AND INCENTIVE PLAN In March, 2000 the Board of Directors
voted to adopt 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. The 2000 Stock Plan is subject to
shareholder approval.
14. CHANGES IN ACCOUNTING ESTIMATES
As discussed in Note 3, the Company is primarily self-insured for workers'
compensation and general liability costs. Actuarial studies of the
self-insurance reserves (using a discount rate of 6.0%)
53
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
14. CHANGES IN ACCOUNTING ESTIMATES (CONTINUED)
were completed in the third quarter of each year presented. 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).
The Company changed its vacation pay vesting policy for certain pay groups
in December, 1997, whereby the employees in those pay groups now earn their
vacation pay entitlements over the course of each calendar year worked (similar
to industry practice) rather than being fully vested on the first day of each
calendar year. As a result of this change, $4.5 million of the Company's
vacation pay reserves as of January 1, 1998 was eliminated with a corresponding
credit in SG&A expenses.
15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED)
The unaudited quarterly results for 1999 below reflect the adoption of SAB
No. 101 for the change in method of accounting for layaway sales as of the
beginning of the year (Note 3). Additions of the quarterly earnings per share
amounts for 1999 do not equal the total per share amounts presented due
54
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
BRADLEES, INC. AND SUBSIDIARIES
15. SUMMARY OF QUARTERLY RESULTS (UNAUDITED) (CONTINUED)
to the change in shares outstanding and the use of common stock equivalents in
the diluted per share amounts in the second and fourth quarters.
<TABLE>
<CAPTION>
($ IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
-------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C>
YEAR ENDED JANUARY 29, 2000
Net sales................................ $312,337 $369,148 $344,346 $467,322 $1,493,153
Gross margin............................. 87,781 118,965 105,100 136,886 448,732
Income (loss) before extraordinary item
and cumulative effect of accounting
change................................. (23,862) 3,677 (7,603) 17,796 (9,992)
Net income (loss)........................ (24,420) 3,677 (7,603) 18,978 (9,368)
Basic income (loss) per share before
extraordinary item and cumulative
effect of accounting change............ $ (2.33) $ 0.36 $ (0.76) $ 1.79 $ (1.01)
Basic net income (loss) per share........ $ (2.39) $ 0.36 $ (0.76) $ 1.91 $ (0.95)
Diluted net income (loss) per share...... $ (2.39) $ 0.29 $ (0.76) $ 1.69 $ (0.95)
Weeks in period.......................... 13 13 13 13 52
- -------------------------------------------------------------------------------------------------
YEAR ENDED JANUARY 30, 1999
Net sales................................ $283,871 $310,381 $312,133 $430,812 $1,337,197
Gross margin............................. 79,670 96,593 94,739 122,101 393,103
Income (loss) before fresh-start
revaluation charge and extraordinary
item................................... (24,653) (2,722) (7,207) 9,257 (25,325)
Net income (loss)........................ (24,653) (2,722) (7,207) 320,532 285,950
Income (loss) per share before
fresh-start revaluation charge and
extraordinary item..................... $ (2.18) $ (0.24) $ (0.64) * *
Net income (loss) per share.............. $ (2.18) $ (0.24) $ (0.64) * *
Weeks in period.......................... 13 13 13 13 52
</TABLE>
- ------------------------
* Earnings per share was not presented for the quarter and fiscal year ended
January 30, 1999 because such presentation would not be meaningful. The
former stock was canceled under the Plan and the new stock was not issued
until after consummation.
16. EXTRAORDINARY ITEMS AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE
An extraordinary gain of $1.2 million, or $.12 per share, was recognized in
the fourth quarter of 1999 for the early extinguishment of the 9% Convertible
Notes (Note 6). Also in 1999, the Company adopted SAB No. 101 (Note 3) and
recognized a charge of $0.6 million, or $.06 per share, in the first quarter for
the effect of the accounting change. Neither of these items had an associated
tax effect because no income tax expense or benefit was recorded in 1999
(Note 12). In 1998, an extraordinary gain of $419.7 million was recognized in
the fourth quarter, with no income tax effect, for the discharge of pre-petition
debt (Note 2).
55
<PAGE>
Exhibit 10.8
BRADLEES STORES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
AMENDED AND RESTATED
EFFECTIVE OCTOBER 1, 1999
November 15, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
PREAMBLE.................................................................................................1
ARTICLE I DEFINITIONS
1.01 "Accrued Benefit" or "Benefit".............................................................1
1.02 "Beneficiary"..............................................................................1
1.03 "Boards of Directors"......................................................................1
1.04 "Change in Control"........................................................................1
1.05 "Code".....................................................................................2
1.06 "Committee"................................................................................2
1.07 "Company" or "Companies"...................................................................2
1.08 "Compensation".............................................................................2
1.09 "Effective Date"...........................................................................2
1.10 "Final Average Compensation"...............................................................2
1.11 "Normal Retirement Date" ..................................................................3
1.12 "Participant"..............................................................................3
1.13 "Participating Company"....................................................................3
1.14 "Pension Benefit" .........................................................................3
1.15 "Plan".....................................................................................3
1.16 "Plan Year"................................................................................3
1.17 "Social Security Taxable Wage Base" .......................................................3
1.18 "Year of Service"..........................................................................3
ARTICLE II PLAN PARTICIPATION
2.01 Plan Participation .........................................................................4
ARTICLE III BENEFITS
3.01 Amount of Benefit..........................................................................4
3.02 Payment of Benefits .......................................................................5
3.03 Death of a Participant ....................................................................5
ARTICLE IV VESTING
4.01 Nonforfeitable Amounts.....................................................................5
4.02 Change in Control..........................................................................5
4.03 Termination or Amendment...................................................................5
</TABLE>
<PAGE>
TABLE OF CONTENTS
Continued
<TABLE>
<CAPTION>
PAGE
<S> <C>
ARTICLE V GENERAL PROVISIONS
5.01 Plan Unfunded..............................................................................6
5.02 Unsecured Creditor.........................................................................6
5.03 Amendment and Termination..................................................................6
5.04 Assignment of Benefits.....................................................................6
5.05 Employment Not Guaranteed by Plan..........................................................6
5.06 Taxes......................................................................................6
5.07 Construction...............................................................................7
5.08 Form of Communication......................................................................7
5.09 Captions...................................................................................7
5.10 Severability...............................................................................7
5.11 Expenses...................................................................................7
5.12 Plan Interpretation and Administration.....................................................7
5.13 Binding Agreement..........................................................................7
5.14 Participant Statement......................................................................7
5.15 Dispute Mediation..........................................................................7
APPENDIX A PARTICIPANTS...............................................................................9
</TABLE>
<PAGE>
PREAMBLE
WHEREAS, Bradlees, Inc. and Bradlees Stores, Inc. (collectively, the
"Company") adopted a nonqualified retirement plan, effective as of December 1,
1995, for the benefit of certain highly compensated employees by providing
supplemental retirement income to certain key members of the senior management
group and to replace certain benefits lost due to the limitations placed on the
amount of retirement benefits payable under qualified retirement plans by
sections 401(a)(17) and 415 of the Internal Revenue Code, and
WHEREAS, the Company wishes to foster and enhance the interests of the
Company by revising the formula for determining supplemental retirement income
to such above mentioned employees,
NOW, THEREFORE, effective as of October 1, 1999, the Bradlees Stores, Inc.
Supplemental Executive Retirement Plan is amended and restated as hereinafter
set forth:
ARTICLE I
DEFINITIONS
1.01 "ACCRUED BENEFIT" or "BENEFIT" means, as of any date of reference, the
lump sum payment determined in accordance with Section 3.01, based upon the
Participant's Final Average Compensation, Years of Service, Pension Benefit, and
the Social Security Taxable Wage Base, all determined as of such date of
reference.
1.02 "BENEFICIARY" means any person entitled to receive benefits under this
Plan upon the death of a Participant, as designated in writing on a Beneficiary
Designation Form provided by and filed with the Committee. In the event no
beneficiary is designated, the Participant's Beneficiary shall be deemed to be
the Participant's spouse, if any, or the Participant's estate, if there is no
spouse.
1.03 "BOARD" means the Board of Directors of Bradlees, Inc., as constituted
at any point in time.
1.04 "CHANGE IN CONTROL" shall mean the occurrence of one or more of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d)(2)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act')) becomes
a "beneficial owner" (as such term is defined in Rule 13d-3 promulgated under
the Exchange Act) (other than the Company, any trustee or fiduciary holding
securities under an employee benefit plan of either of the Companies, or any
corporation owned directly or indirectly by the stockholders of either of the
Companies, in substantially the same proportions as their ownership of stock of
the Companies), directly or indirectly, of securities of either of the Companies
representing 50% or more of the combined voting power of either of the
Companies' then outstanding securities; or
(ii) persons who, as of the Effective Date, constituted either
Companies' Board of Directors (the "Incumbent Board") cease for any reason,
including without limitation as a result of tender offer, proxy contest, merger
or similar transaction, to constitute at least a majority of the Board, provided
that any person becoming a director of either of the Companies subsequent to the
Effective
1
<PAGE>
Date whose election was approved by at least a majority of the directors then
comprising the Incumbent Board shall, for purposes of this definition, be
considered a member of the Incumbent Board; or
(iii) the stockholders of the Company approve a merger or
consolidation of the Company with any other corporation or other entity, other
than (A) a merger or consolidation which would result in the voting securities
of the Company outstanding immediately prior thereto continuing to represent
(either by remaining outstanding or by being converted into voting securities of
the surviving entity) more than 50% of the combined voting power of the voting
securities of the Companies or such surviving entity outstanding immediately
after such merger or consolidation or (B) a merger or consolidation effected to
implement a recapitalization of the Company (or similar transaction) in which no
"person" (as herein above defined) acquires more than 50% of the combined voting
power of the Company's then outstanding securities; or
(iv) the stockholders of either of the Companies approve a plan of
complete liquidation of the Company or an agreement for the sale or disposition
by the Company of all or substantially all of the Company's assets.
1.05 "CODE" means the Internal Revenue Code of 1986, as amended, and any
regulations issued thereunder.
1.06 "COMMITTEE" means the individuals appointed by the Board to supervise
the administration of the Plan.
1.07 "COMPANY" OR "COMPANIES" means Bradlees, Inc. and Bradlees Stores,
Inc. and any successor companies.
1.08 "COMPENSATION" means the sum of the amounts determined under (a), (b),
and (c):
(a) for each calendar month, a Participant's highest rate of monthly
base salary paid by the Company in such month prior to any salary
reduction pursuant to Section 125 or 401(k) of the Code;
(b) amounts paid in cash under an annual bonus plan (including the
Retention Bonus Plan, Emergence Bonus Plan, and the Annual
Incentive Plan), attributed evenly over the months in the fiscal
year during which such bonus was earned; and
(c) the "Severance Lump Sum" payment as such payment is defined in
the Participant's individual severance agreement with the
Company.
The above amount in Paragraph 1.08(c) will be attributed to the
Participant's final month of employment.
1.09 "EFFECTIVE DATE" means December 1, 1995. The effective date of the
amended and restated Plan is October 1, 1999.
1.10 "FINAL AVERAGE COMPENSATION" means the Participant's Compensation
averaged over the thirty-six (36) consecutive months, out of the last
eighty-four (84) months (or less if the
2
<PAGE>
Participant has worked less than eighty-four (84) months) preceding the
Participant's termination of employment which produce the highest average,
multiplied by twelve (12). If a Participant has less than thirty-six (36)
consecutive months of Compensation, then the number of months included in the
average shall be equal to the Participant's completed months of Compensation and
such average shall be multiplied by twelve (12).
1.11 "NORMAL RETIREMENT DATE" means the first day of the month coincident
with or next following a Participant's sixty-fifth birthday.
1.12 "PARTICIPANT" means a member of the Senior Management Group of the
Company currently set forth in Appendix A, and any subsequent addition to such
group who is approved by the Board as a Participant in this Plan.
1.13 "PARTICIPATING COMPANY" means the Company and each other organization
authorized by the Board to adopt this Plan.
1.14 "PENSION BENEFIT" shall have the meaning as defined in Section 3.01.
1.15 "PLAN" means the Bradlees Stores, Inc. Supplemental Executive
Retirement Plan, as set forth herein.
1.16 "PLAN YEAR" will run concurrently with the fiscal year of the Company.
1.17 "SOCIAL SECURITY TAXABLE WAGE BASE" shall have the meaning as defined
in Section 3.01.
1.18 "YEAR OF SERVICE" A Participant shall earn one-twelfth of a Year of
Service for each calendar month during which the Participant is paid by the
Company for the performance of duties. A Participant shall also earn one-twelfth
of a Year of Service for each calendar month during which the Participant is not
paid by the Company for the performance of duties, but is considered by the
Company as an active employee or is on a Company approved leave of absence.
For purposes of determining the Participant's Accrued Benefit only and not
for purposes of determining vesting under Article IV, Years of Service shall not
include any period of employment prior to the later of:
(a) February 1, 1995; or
(b) the date the Participant became a Participant in this Plan.
Years of Service shall not include any period during which the Participant
is receiving severance pay.
3
<PAGE>
ARTICLE II
PLAN PARTICIPATION
2.01 PLAN PARTICIPATION
A Participant shall participate in the Plan as of the date so designated by
the Board of Directors of the Company.
ARTICLE III
BENEFITS
3.01 AMOUNT OF BENEFIT
The benefit shall be a single lump sum in cash payable to the Participant
in an amount equal to (a) minus (b) minus (c), the result multiplied by (d),
where:
(a) is the Participant's Final Average Compensation;
(b) is one-half (1/2) of the Social Security Taxable Wage Base;
(c) is the Participant's Pension Benefit; and
(d) is the percentage in the table below that corresponds to the
Participant's Years of Service rounded up to the next full year.
LUMP SUM PERCENTAGE FACTOR
BASED ON YEARS OF SERVICE SINCE DATE OF PARTICIPATION IN THE PLAN
<TABLE>
<CAPTION>
YEARS PERCENT YEARS PERCENT OF
OF SERVICE OF BENEFIT OF SERVICE BENEFIT
<S> <C> <C> <C>
1 10% 9 165%
2 25% 10 190%
3 40% 11 225%
4 55% 12 260%
5 75% 13 295%
6 95% 14 340%
7 115% 15 or more 385%
8 140%
</TABLE>
For purposes of this subsection 3.01,
(i) "Social Security Taxable Wage Base" means the contribution and
benefit limit in effect under Section 230 of the Social Security Act on the
first day of the Plan Year preceding the Participant's termination of employment
date; and
4
<PAGE>
(ii) "Pension Benefit" means the annual benefit the Participant is
eligible to receive, expressed in the form of a single life annuity commencing
at Normal Retirement Date (or actual termination of employment date, if later),
under the Bradlees Stores, Inc. Retirement Plan.
Notwithstanding above, such Participant's Accrued Benefit under this
Section 3.01 shall not be less than the lump sum value of the benefit the
Participant had accrued on September 30, 1999 under the terms of the Plan in
effect prior to this October 1, 1999 amendment and restatement.
3.02 PAYMENT OF BENEFITS
Each Participant who has a vested nonforfeitable interest in his Accrued
Benefit and whose employment terminates shall be entitled to receive his Accrued
Benefit, determined as of his termination of employment date, and payable in a
lump sum in cash as soon as practicable following the Participant's termination
of employment date but no later than thirty (30) days following termination of
employment.
3.03 DEATH OF A PARTICIPANT
Upon the death of a Participant while in the employment of the Company, he
shall have a vested nonforfeitable interest in his Accrued Benefit and his
Beneficiary shall be entitled to receive the Participant's Accrued Benefit,
determined as if the Participant terminated employment on the date of his death.
Such amount shall be paid in a lump sum in cash as soon as practicable following
the Participant's death but no later than thirty (30) days following date of
death.
ARTICLE IV
VESTING
4.01 NONFORFEITABLE AMOUNTS
A Participant shall have a 100% vested nonforfeitable interest in his
Accrued Benefit upon completion of three or more Years of Service from the
Participant's employment commencement date with the Company.
Notwithstanding above, such Participant's nonforfeitable interest under
this Section 4.01 shall not be less than the nonforfeitable interest the
Participant had earned on September 30, 1999 under the terms of the Plan in
effect prior to this October 1, 1999 amendment and restatement.
4.02 CHANGE IN CONTROL
In the event of a Change in Control as defined in Paragraph 1.04, each
Participant hereunder shall have a 100% vested nonforfeitable interest in his
Accrued Benefit under the Plan.
4.03 TERMINATION OR AMENDMENT
In the event of the termination of the Plan, or any amendment to the Plan
which reduces or otherwise curtails the rate of future benefit accruals
hereunder, each Participant shall become fully
5
<PAGE>
vested in his Accrued Benefit, as determined on the day before such termination
or amendment to the Plan is effective.
ARTICLE V
GENERAL PROVISIONS
5.01 PLAN UNFUNDED
The Plan shall be unfunded and no assets shall be set aside for the payment
of benefits under the Plan. All benefits shall be paid from the general assets
of the Company, which remain subject to the claims of all general creditors of
the Company and to unrestricted use by the Company until benefit payments are
made.
5.02 UNSECURED CREDITOR
The right of a Participant or his Beneficiary to benefits under this Plan
shall be solely that of an unsecured creditor of the Company and any
Participating Company.
5.03 AMENDMENT AND TERMINATION
The Board may at any time amend or terminate the Plan, subject to
Participants' vested rights under Article IV. The Board may not reduce or modify
an Accrued Benefit which has accrued under Article III without the written
consent of the Participant, or if a Participant is deceased, the Participant's
Beneficiary.
5.04 ASSIGNMENT OF BENEFITS
Neither a Participant nor any Beneficiary under the Plan shall have any
right to assign, transfer, pledge or otherwise encumber the right to receive any
benefits hereunder, and any attempted assignment, transfer, pledge or other
encumbrance shall be void and have no effect.
5.05 EMPLOYMENT NOT GUARANTEED BY PLAN
Participation in the Plan shall not be deemed to be consideration for, or
an inducement to, or a condition of the employment of any employee. Nothing
contained in this Plan shall be deemed to give any Participants the right to be
retained in the employment of the Company, nor shall any Participant, retired
Participant, deceased Participant, disabled Participant, or terminated
Participant have any right to any payment, except as such payment may be
provided under the terms of this Plan.
5.06 TAXES
The Company shall be entitled to withhold from all benefit payments made to
a Participant or any Beneficiary all applicable federal, state or local taxes
required by law to be withheld from such payments.
6
<PAGE>
5.07 CONSTRUCTION
This Plan shall be construed according to the laws of the Commonwealth of
Massachusetts, except to the extent preempted by federal law.
5.08 FORM OF COMMUNICATION
Any election, claims, notice or other communication required or permitted
to be made by a Participant under this Plan shall be made in writing and in such
form as shall be prescribed by the Committee. Such communication shall be
effective upon receipt, if hand delivered or sent by first class mail, postage
pre-paid, return receipt requested to the Retirement Plan Committee, Bradlees,
Inc., One Bradlees Circle, Braintree, MA 02185-9051.
5.09 CAPTIONS
The captions at the head of a paragraph of this Plan are designed for
convenience of reference only and are not to be resorted to for the purpose of
interpreting any provision of this Plan.
5.10 SEVERABILITY
The invalidity of any portion of this Plan shall not invalidate the
remainder, and the remainder shall continue in full force and effect.
5.11 EXPENSES
All expenses incurred in administering the Plan shall be paid by the
Company.
5.12 PLAN INTERPRETATION AND ADMINISTRATION
The Committee shall have complete discretion to interpret all provisions of
the Plan and to establish reasonable rules and procedure to facilitate the
administration of the Plan.
5.13 BINDING AGREEMENT
The provisions of this Plan shall be binding upon the Participants and the
Company and their successors, assigns, heirs, executors and beneficiaries.
5.14 PARTICIPANT STATEMENT
Once each calendar year, a Participant may request a statement of his
Accrued Benefit earned to date under this Plan, which the Committee shall
provide as soon as practicable following the date of such request.
5.15 DISPUTE MEDIATION
In the event of any dispute regarding a Participant's entitlement of any
benefit hereunder, if agreement satisfactory to both the Participant and the
Committee cannot be reached, said dispute shall be submitted to the American
Mediation Service for binding resolution.
7
<PAGE>
<TABLE>
<S> <C>
ATTEST: BRADLEES, INC.
/s/ DAVID L. SCHMITT By: /s/ PETER THORNER
- ----------------------------------------- ------------------------------------
David L. Schmitt Peter Thorner
Senior Vice President and General Counsel Chairman and Chief Executive Officer
Date: NOVEMBER 15, 1999
ATTEST: BRADLEES STORES, INC.
/s/DAVID L. SCHMITT By: /s/ PETER THORNER
- ----------------------------------------- -------------------------------------
David L. Schmitt Peter Thorner
Senior Vice President and General Counsel Chairman and Chief Executive Officer
Date: NOVEMBER 15, 1999
</TABLE>
8
<PAGE>
APPENDIX A
PARTICIPANTS OF THE BRADLEES STORES, INC.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
EFFECTIVE OCTOBER 1, 1999
<TABLE>
<CAPTION>
PARTICIPANT DATE OF PARTICIPATION
<S> <C> <C>
1. Peter Thorner (subject to March 27, 1995
provisions of employment agreement)
2. Bruce Conforto April 27, 1998
3. Gregory K. Dieffenbach July 14, 1997
4. Judy Dunning January 1, 1996
5. Mark James May 27, 1997
6. Robert G. Lynn April 22, 1997
7. Cornelius Moses April 28, 1995
8. Ronald T. Raymond July 31, 1995
9. David Schmitt July 3, 1995
10. Sandra Smith February 1, 1995
11. Thomas N. Smith December 8, 1997
12. James Sparks February 1, 1995
</TABLE>
9
<PAGE>
Exhibit 10.20
BRADLEES, INC.
2000 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
The name of the plan is the Bradlees, Inc. 2000 Stock Option and Incentive
Plan (the "Plan"). The purpose of the Plan is to encourage and enable the
officers, full and part-time employees, Independent Directors and other key
persons (including consultants and prospective employees) of Bradlees, Inc. (the
"Company") and its Subsidiaries upon whose judgment, initiative and efforts the
Company largely depends for the successful conduct of its business to acquire a
proprietary interest in the Company. It is anticipated that providing such
persons with a direct stake in the Company's welfare will assure a closer
identification of their interests with those of the Company, thereby stimulating
their efforts on the Company's behalf and strengthening their desire to remain
with the Company.
The following terms shall be defined as set forth below:
"ACT" means the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
"ADMINISTRATOR" is defined in Section 2(a).
"AWARD" or "AWARDS", except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Stock Appreciation Rights, Deferred Stock Awards, Restricted Stock
Awards, Unrestricted Stock Awards and Performance Share Awards.
"BOARD" means the Board of Directors of the Company.
"CHANGE OF CONTROL" is defined in Section 16.
"CODE" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"COVERED EMPLOYEE" means an employee who is a "Covered Employee" within the
meaning of Section 162(m) of the Code.
"DEFERRED STOCK AWARD" means Awards granted pursuant to Section 8.
"EFFECTIVE DATE" means the date on which the Plan is approved by
stockholders as set forth in Section 18.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"FAIR MARKET VALUE" of the Stock on any given date means the fair market
value of the Stock determined in good faith by the Administrator; provided,
however, that if the Stock is admitted to quotation on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ"), NASDAQ National
System or a national securities exchange, the determination shall be made by
reference to market quotations. If there are no market quotations for such date,
the determination shall be made by reference to the last date preceding such
date for which there are market quotations.
"INCENTIVE STOCK OPTION" means any Stock Option designated and qualified as
an "incentive stock option" as defined in Section 422 of the Code.
"INDEPENDENT DIRECTOR" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
<PAGE>
"NON-QUALIFIED STOCK OPTION" means any Stock Option that is not an
Incentive Stock Option.
"OPTION" or "STOCK OPTION" means any option to purchase shares of Stock
granted pursuant to Section 5.
"PERFORMANCE CYCLE" means one or more periods of time, which may be of
varying and overlapping durations, as the Administrator may select, over which
the attainment of one or more performance criteria will be measured for the
purpose of determining a grantee's right to and the payment of a Performance
Share Award, Restricted Stock Award or Deferred Stock Award.
"PERFORMANCE SHARE AWARD" means Awards granted pursuant to Section 10.
"RESTRICTED STOCK AWARD" means Awards granted pursuant to Section 7.
"STOCK" means the Common Stock, par value $.01 per share, of the Company,
subject to adjustments pursuant to Section 3.
"STOCK APPRECIATION RIGHT" means any Award granted pursuant to Section 6.
"SUBSIDIARY" means any corporation or other entity (other than the Company)
in any unbroken chain of corporations or other entities beginning with the
Company if each of the corporations or entities (other than the last corporation
or entity in the unbroken chain) owns stock or other interests possessing 50
percent or more of the economic interest or the total combined voting power of
all classes of stock or other interests in one of the other corporations or
entities in the chain.
"UNRESTRICTED STOCK AWARD" means any Award granted pursuant to Section 9.
SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT GRANTEES
AND DETERMINE AWARDS
(a) COMMITTEE. The Plan shall be administered by the Compensation Committee
of the Board, except as contemplated by Section 2(c), which shall include not
less than two Independent Directors (the "Administrator").
(b) POWERS OF ADMINISTRATOR. The Administrator shall have the power and
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select the individuals to whom Awards may from time to time be
granted;
(ii) to determine the time or times of grant, and the extent, if any, of
any Award or any combination of Awards granted to any one or more grantees;
(iii) to determine the number of shares of Stock to be covered by any
Award;
(iv) to determine and modify from time to time the terms and conditions,
including restrictions, not inconsistent with the terms of the Plan, of any
Award, which terms and conditions may differ among individual Awards and
grantees, and to approve the form of written instruments evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting of all or any
portion of any Award;
(vi) subject to the provisions of Section 5(a)(ii), to extend at any time
the period in which Stock Options may be exercised;
(vii) to determine at any time whether, to what extent, and under what
circumstances distribution or the receipt of Stock and other amounts payable
with respect to an Award shall be deferred either automatically or at the
election of the grantee and whether and to what extent the Company shall pay or
credit amounts constituting interest (at rates determined by the Administrator)
or dividends or deemed dividends on such deferrals; and
(viii) at any time to adopt, alter and repeal such rules, guidelines and
practices for administration of the Plan and for its own acts and proceedings as
it shall deem advisable; to interpret the terms and provisions of the Plan and
any Award (including related written instruments); to make all determinations it
deems advisable for the administration of the Plan; to decide all disputes
arising in connection with the Plan; and to otherwise supervise the
administration of the Plan.
<PAGE>
All decisions and interpretations of the Administrator shall be binding on
all persons, including the Company and Plan grantees.
(c) DELEGATION OF AUTHORITY TO GRANT AWARDS. The Administrator, in its
discretion, may delegate to the Chief Executive Officer of the Company all or
part of the Administrator's authority and duties with respect to the granting of
Awards at Fair Market Value, to individuals who are not subject to the reporting
and other provisions of Section 16 of the Exchange Act or Covered Employees. The
Administrator may revoke or amend the terms of a delegation at any time but such
action shall not invalidate any prior actions of the Administrator's delegate or
delegates that were consistent with the terms of the Plan.
(d) INDEMNIFICATION. Neither the Board nor the Compensation Committee, nor
any member of either or any delegatee thereof, shall be liable for any act,
omission, interpretation, construction or determination made in good faith in
connection with the Plan, and the members of the Board and the Compensation
Committee (and any delegatee thereof) shall be entitled in all cases to
indemnification and reimbursement by the Company in respect of any claim, loss,
damage or expense (including, without limitation, reasonable attorneys' fees)
arising or resulting therefrom to the fullest extent permitted by law and/or
under any directors' and officers' liability insurance coverage which may be in
effect from time to time.
SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
(a) STOCK ISSUABLE. The maximum number of shares of Stock reserved and
available for issuance under the Plan shall be 1,250,000 shares, subject to
adjustment as provided in Section 3(b). For purposes of this limitation, the
shares of Stock underlying any Awards which are forfeited, canceled, reacquired
by the Company, satisfied without the issuance of Stock or otherwise terminated
(other than by exercise) shall be added back to the shares of Stock available
for issuance under the Plan. Subject to such overall limitation, shares of Stock
may be issued up to such maximum number pursuant to any type or types of Award;
provided, however, that Stock Options or Stock Appreciation Rights with respect
to no more than 500,000 shares of Stock may be granted to any one individual
grantee during any one calendar year period. The shares available for issuance
under the Plan may be authorized but unissued shares of Stock or shares of Stock
reacquired by the Company and held in its treasury.
(b) CHANGES IN STOCK. Subject to Section 3(c) hereof, if, as a result of
any reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar change in the Company's capital
stock, the outstanding shares of Stock are increased or decreased or are
exchanged for a different number or kind of shares or other securities of the
Company, or additional shares or new or different shares or other securities of
the Company or other non-cash assets are distributed with respect to such shares
of Stock or other securities, or, if, as a result of any merger or
consolidation, sale of all or substantially all of the assets of the Company,
the outstanding shares of Stock are converted into or exchanged for a different
number or kind of securities of the Company or any successor entity (or a parent
or subsidiary thereof), the Administrator shall make an appropriate or
proportionate adjustment in (i) the maximum number of shares reserved for
issuance under the Plan, (ii) the number of Stock Options or Stock Appreciation
Rights that can be granted to any one individual grantee and the maximum number
of shares that may be granted under a performance-based Award, (iii) the number
and kind of shares or other securities subject to any then outstanding Awards
under the Plan, (iv) the repurchase price for each share subject to any then
outstanding Restricted Stock Award, and (v) the price for each share subject to
any then outstanding Stock Options and Stock Appreciation Rights under the Plan,
without changing the aggregate exercise price (i.e., the exercise price
multiplied by the number of Stock Options and Stock Appreciation Rights) as to
which such Stock Options and Stock Appreciation Rights remain exercisable. The
adjustment by the Administrator shall be final, binding and conclusive. No
fractional shares of Stock shall be issued under the Plan resulting from any
such adjustment, but the Administrator in its discretion may make a cash payment
in lieu of fractional shares.
The Administrator may also adjust the number of shares subject to
outstanding Awards and the exercise price and the terms of outstanding Awards to
take into consideration material changes in accounting practices or principles,
extraordinary dividends, acquisitions or dispositions of stock or property or
any other event if it is determined by the Administrator that such adjustment is
appropriate to avoid distortion in the operation of the Plan, provided that no
such
<PAGE>
adjustment shall be made in the case of an Incentive Stock Option, without the
consent of the grantee, if it would constitute a modification, extension or
renewal of the Option within the meaning of Section 424(h) of the Code.
(c) MERGERS AND OTHER TRANSACTIONS. In the case of and subject to the
consummation of (i) the dissolution or liquidation of the Company, (ii) the sale
of all or substantially all of the assets of the Company on a consolidated basis
to an unrelated person or entity, (iii) a merger, reorganization or
consolidation in which the outstanding shares of Stock are converted into or
exchanged for a different kind of securities of the successor entity and the
holders of the Company's outstanding voting power immediately prior to such
transaction do not own a majority of the outstanding voting power of the
successor entity immediately upon completion of such transaction, or (iv) the
sale of all of the Stock of the Company to an unrelated person or entity (in
each case, a "Sale Event"), all Options and Stock Appreciation Rights that are
not exercisable immediately prior to the effective time of the Sale Event shall
become fully exercisable as of the effective time of the Sale Event and all
other Awards with conditions and restrictions relating solely to the passage of
time and continued employment shall become fully vested and nonforfeitable as of
the effective time of the Sale Event, except as otherwise provided in the
applicable Awards agreement. Upon the effective time of the Sale Event, the Plan
and all outstanding Awards granted hereunder shall terminate, unless provision
is made in connection with the Sale Event in the sole discretion of the parties
thereto for the assumption or continuation of Awards theretofore granted by the
successor entity, or the substitution of such Awards with new Awards of the
successor entity or parent thereof, with appropriate adjustment as to the number
and kind of shares and, if appropriate, the per share exercise prices, as such
parties shall agree (after taking into account any acceleration hereunder). In
the event of such termination, each grantee shall be permitted, within a
specified period of time prior to the consummation of the Sale Event as
determined by the Administrator, to exercise all outstanding Options and Stock
Appreciation Rights held by such grantee, including those that will become
exercisable upon the consummation of the Sale Event; provided, however, that the
exercise of Options and Stock Appreciation Rights not exercisable prior to the
Sale Event shall be subject to the consummation of the Sale Event.
Notwithstanding anything to the contrary in this Section 3(c), in the event
of a Sale Event pursuant to which holders of the Stock of the Company will
receive upon consummation thereof a cash payment for each share surrendered in
the Sale Event, the Company shall have the right, but not the obligation, to
make or provide for a cash payment to the grantees holding Options and Stock
Appreciation Rights, in exchange for the cancellation thereof, in an amount
equal to the difference between (A) the value as determined by the Administrator
of the consideration payable per share of Stock pursuant to the Sale Event (the
"Sale Price") times the number of shares of Stock subject to outstanding Options
and Stock Appreciation Rights (to the extent then exercisable at prices not in
excess of the Sale Price) and (B) the aggregate exercise price of all such
outstanding Options and Stock Appreciation Rights.
(d) SUBSTITUTE AWARDS. The Administrator may grant Awards under the Plan in
substitution for stock and stock based awards held by employees, directors or
other key persons of another corporation in connection with the merger or
consolidation of the employing corporation with the Company or a Subsidiary or
the acquisition by the Company or a Subsidiary of property or stock of the
employing corporation. The Administrator may direct that the substitute awards
be granted on such terms and conditions as the Administrator considers
appropriate in the circumstances. Any substitute Awards granted under the Plan
shall not count against the share limitation set forth in Section 3(a).
SECTION 4. ELIGIBILITY
Grantees under the Plan will be such full or part-time officers and other
employees, Independent Directors and key persons (including consultants and
prospective employees) of the Company and its Subsidiaries as are selected from
time to time by the Administrator in its sole discretion.
SECTION 5. STOCK OPTIONS
Any Stock Option granted under the Plan shall be in such form as the
Administrator may from time to time approve.
Stock Options granted under the Plan may be either Incentive Stock Options
or Non-Qualified Stock Options. Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary that is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code. To the extent that any Option
does not qualify as an Incentive Stock Option, it shall be deemed a
Non-Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after March 1,
2010.
<PAGE>
(a) STOCK OPTIONS. Stock Options granted pursuant to this Section 5(a)
shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan, as
the Administrator shall deem desirable. If the Administrator so determines,
Stock Options may be granted in-lieu-of cash compensation at the optionee's
election, subject to such terms and conditions as the Administrator may
establish.
(i) EXERCISE PRICE. The exercise price per share for the Stock covered
by a Stock Option granted pursuant to this Section 5(a) shall be
determined by the Administrator at the time of grant but shall not be
less than 100 percent of the Fair Market Value on the date of grant in
the case of Incentive Stock Options, or 85 percent of the Fair Market
Value on the date of grant, in the case of Non-Qualified Stock Options
(other than options granted in lieu of cash compensation). If an employee
owns or is deemed to own (by reason of the attribution rules of Section
424(d) of the Code) more than 10 percent of the combined voting power of
all classes of stock of the Company or any parent or subsidiary
corporation and an Incentive Stock Option is granted to such employee,
the option price of such Incentive Stock Option shall be not less than
110 percent of the Fair Market Value on the grant date.
(ii) OPTION TERM. The term of each Stock Option shall be fixed by the
Administrator, but no Stock Option shall be exercisable more than 10
years after the date the Stock Option is granted. If an employee owns or
is deemed to own (by reason of the attribution rules of Section 424(d) of
the Code) more than 10 percent of the combined voting power of all
classes of stock of the Company or any parent or subsidiary corporation
and an Incentive Stock Option is granted to such employee, the term of
such Stock Option shall be no more than five years from the date of
grant.
(iii) EXERCISABILITY; RIGHTS OF A STOCKHOLDER. Stock Options shall
become exercisable at such time or times, whether or not in installments,
as shall be determined by the Administrator at or after the grant date.
The Administrator may at any time accelerate the exercisability of all or
any portion of any Stock Option. An optionee shall have the rights of a
stockholder only as to shares acquired upon the exercise of a Stock
Option and not as to unexercised Stock Options.
(iv) METHOD OF EXERCISE. Stock Options may be exercised in whole or in
part, by giving written notice of exercise to the Company, specifying the
number of shares to be purchased. Payment of the purchase price may be
made by one or more of the following methods to the extent provided in
the Option Award agreement:
(A) In cash, by certified or bank check or other
instrument acceptable to the Administrator;
(B) Through the delivery (or attestation to the ownership)
of shares of Stock that have been purchased by the optionee on the
open market or that have been beneficially owned by the optionee
for at least six months and are not then subject to restrictions
under any Company plan. Such surrendered shares shall be valued at
Fair Market Value on the exercise date;
(C) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable instructions to
a broker to promptly deliver to the Company cash or a check
payable and acceptable to the Company for the purchase price;
provided that in the event the optionee chooses to pay the
purchase price as so provided, the optionee and the broker shall
comply with such procedures and enter into such agreements of
indemnity and other agreements as the Administrator shall
prescribe as a condition of such payment procedure; or
(D) By the optionee delivering to the Company a promissory
note if the Board has expressly authorized the loan of funds to
the optionee for the purpose of enabling or assisting the optionee
to effect the exercise of his Stock Option; provided that at least
so much of the exercise price as represents the par value of the
Stock shall be paid other than with a promissory note if otherwise
required by state law.
Payment instruments will be received subject to collection. The delivery of
certificates representing the shares of Stock to be purchased pursuant to the
exercise of a Stock Option will be contingent upon receipt from the optionee (or
a purchaser acting in his stead in accordance with the provisions of the Stock
Option) by the Company of the full purchase price for such shares and the
fulfillment of any other requirements contained in the Option Award agreement or
applicable provisions of laws. In the event an optionee chooses to pay the
purchase price by previously-owned shares of Stock through the attestation
method, the number of shares of Stock transferred to the optionee upon the
exercise of the Stock Option shall be net of the number of shares attested to.
<PAGE>
(v) ANNUAL LIMIT ON INCENTIVE STOCK OPTIONS. To the extent required
for "incentive stock option" treatment under Section 422 of the Code, the
aggregate Fair Market Value (determined as of the time of grant) of the
shares of Stock with respect to which Incentive Stock Options granted
under this Plan and any other plan of the Company or any of its
subsidiary corporations become exercisable for the first time by an
optionee during any calendar year shall not exceed $100,000. To the
extent that any Stock Option exceeds this limit, it shall constitute a
Non-Qualified Stock Option.
(b) RELOAD OPTIONS. At the discretion of the Administrator, Options
granted under the Plan may include a "reload" feature pursuant to which an
optionee exercising an option by the delivery of a number of shares of Stock in
accordance with Section 5(a)(iv)(B) hereof would automatically be granted an
additional Option (with an exercise price equal to the Fair Market Value of the
Stock on the date the additional Option is granted and with such other terms as
the Administrator may provide) to purchase that number of shares of Stock equal
to the sum of (i) the number delivered to exercise the original Option and (ii)
the number withheld to satisfy tax liabilities, with an Option term equal to the
remainder of the original Option term unless the Administrator otherwise
determines in the Award agreement for the original Option grant.
(c) STOCK OPTIONS GRANTED TO INDEPENDENT DIRECTORS. Each Independent
Director who is serving as Director of the Company on the fifth business day
after each annual meeting of shareholders, beginning with the 2000 annual
meeting, shall automatically be granted on such day a Non-Qualified Stock Option
to acquire 2,500 shares of Stock. The exercise price per share for the Stock
covered by a Stock Option granted under this Section 5(c) shall be equal to the
Fair Market Value of the Stock on the date the Stock Option is granted. The
Board, in its discretion, may grant additional Non-Qualified Stock Options to
one or more Independent Directors in recognition of past or expected future
performance of extraordinary duties or responsibilities by such Independent
Directors. Any such grant may vary among individual Independent Directors. In
the event an Independent Director first becomes a Director within eleven months
after any annual meeting, then the Administrator may grant such Independent
Director a Non-Qualified Stock Option to acquire a portion of 2,500 shares of
Stock based on the number of Director meetings such Independent Director is
expected to attend during the annual period ending on the annual meeting next
following the date such Independent Director first becomes a Director. Unless
otherwise determined by the Administrator, an Option granted under Section 5(c)
shall be exercisable only after the first anniversary of the grant date.
(d) NON-TRANSFERABILITY OF OPTIONS. No Stock Option shall be transferable
by the optionee otherwise than by will or by the laws of descent and
distribution and all Stock Options shall be exercisable, during the optionee's
lifetime, only by the optionee, or by the optionee's legal representative or
guardian in the event of the optionee's incapacity. Notwithstanding the
foregoing, the Administrator, in its sole discretion, may provide in the Award
agreement regarding a given Option that the optionee may transfer his
Non-Qualified Stock Options to members of his immediate family, to trusts for
the benefit of such family members, or to partnerships in which such family
members are the only partners, provided that the transferee agrees in writing
with the Company to be bound by all of the terms and conditions of this Plan and
the applicable Option.
SECTION 6. STOCK APPRECIATION RIGHTS.
(a) NATURE OF STOCK APPRECIATION RIGHTS. A Stock Appreciation Right is an
Award entitling the recipient to receive an amount in cash or shares of Stock or
a combination thereof having a value equal to the excess of the Fair Market
Value of the Stock on the date of exercise over the exercise price of the Stock
Appreciation Right, which price shall not be less than 85 percent of the Fair
Market Value of the Stock on the date of grant (or more than the option exercise
price per share, if the Stock Appreciation Right was granted in tandem with a
Stock Option) multiplied by the number of shares of Stock with respect to which
the Stock Appreciation Right shall have been exercised, with the Administrator
having the right to determine the form of payment.
(b) GRANT AND EXERCISE OF STOCK APPRECIATION RIGHTS. Stock Appreciation
Rights may be granted by the Administrator in tandem with, or independently of,
any Stock Option granted pursuant to Section 5 of the Plan. In the case of a
Stock Appreciation Right granted in tandem with a Non-Qualified Stock Option,
such Stock Appreciation Right may be granted either at or after the time of the
grant of such Option. In the case of a Stock Appreciation Right granted in
tandem with an Incentive Stock Option, such Stock Appreciation Right may be
granted only at the time of the grant of the Option.
<PAGE>
A Stock Appreciation Right or applicable portion thereof granted in
tandem with a Stock Option shall terminate and no longer be exercisable upon the
termination or exercise of the related Option.
(c) TERMS AND CONDITIONS OF STOCK APPRECIATION RIGHTS. Stock Appreciation
Rights shall be subject to such terms and conditions as shall be determined from
time to time by the Administrator, subject to the following:
(i) Stock Appreciation Rights granted in tandem with Options shall be
exercisable at such time or times and to the extent that the related
Stock Options shall be exercisable.
(ii) Upon exercise of a Stock Appreciation Right, the applicable
portion of any related Option shall be surrendered.
(iii) All Stock Appreciation Rights shall be exercisable during the
grantee's lifetime only by the grantee or the grantee's legal
representative.
SECTION 7. RESTRICTED STOCK AWARDS
(a) NATURE OF RESTRICTED STOCK AWARDS. A Restricted Stock Award is an
Award entitling the recipient to acquire, at such purchase price as determined
by the Administrator, shares of Stock subject to such restrictions and
conditions as the Administrator may determine at the time of grant ("Restricted
Stock"). Conditions may be based on continuing employment (or other service
relationship) and/or achievement of pre-established performance goals and
objectives. The grant of a Restricted Stock Award is contingent on the grantee
executing the Restricted Stock Award agreement. The terms and conditions of each
such agreement shall be determined by the Administrator, and such terms and
conditions may differ among individual Awards and grantees.
(b) RIGHTS AS A STOCKHOLDER. Upon execution of a written instrument
setting forth the Restricted Stock Award and payment of any applicable purchase
price, a grantee shall have the rights of a stockholder with respect to the
voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the
Administrator shall otherwise determine, certificates evidencing the Restricted
Stock shall remain in the possession of the Company until such Restricted Stock
is vested as provided in Section 7(d) below, and the grantee shall be required,
as a condition of the grant, to deliver to the Company a stock power endorsed in
blank.
(c) RESTRICTIONS. Restricted Stock may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of except as
specifically provided herein or in the Restricted Stock Award agreement. If a
grantee's employment (or other service relationship) with the Company and its
Subsidiaries terminates for any reason, the Company shall have the right to
repurchase Restricted Stock that has not vested at the time of termination at
its original purchase price, from the grantee or the grantee's legal
representative.
(d) VESTING OF RESTRICTED STOCK. The Administrator at the time of grant
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the
non-transferability of the Restricted Stock and the Company's right of
repurchase or forfeiture shall lapse. Subsequent to such date or dates and/or
the attainment of such pre-established performance goals, objectives and other
conditions, the shares on which all restrictions have lapsed shall no longer be
Restricted Stock and shall be deemed "vested." Except as may otherwise be
provided by the Administrator either in the Award agreement or, subject to
Section 14 below, in writing after the Award agreement is issued, a grantee's
rights in any shares of Restricted Stock that have not vested shall
automatically terminate upon the grantee's termination of employment (or other
service relationship) with the Company and its Subsidiaries and such shares
shall be subject to the Company's right of repurchase as provided in Section
7(c) above.
(e) WAIVER, DEFERRAL AND REINVESTMENT OF DIVIDENDS. The Restricted Stock
Award agreement may require or permit the immediate payment, waiver, deferral or
investment of dividends paid on the Restricted Stock.
SECTION 8. DEFERRED STOCK AWARDS
(a) NATURE OF DEFERRED STOCK AWARDS. A Deferred Stock Award is an Award
of phantom stock units to a grantee, subject to restrictions and conditions as
the Administrator may determine at the time of grant. Conditions may be based on
continuing employment (or other service relationship) and/or achievement of
pre-established performance goals and objectives. The grant of a Deferred Stock
Award is contingent on the grantee executing the Deferred Stock Award
<PAGE>
agreement. The terms and conditions of each such agreement shall be determined
by the Administrator, and such terms and conditions may differ among individual
Awards and grantees. At the end of the deferral period, the Deferred Stock
Award, to the extent vested, shall be paid to the grantee in the form of shares
of Stock.
(b) ELECTION TO RECEIVE DEFERRED STOCK AWARDS IN LIEU OF COMPENSATION.
The Administrator may, in its sole discretion, permit a grantee to elect to
receive a portion of the cash compensation or Restricted Stock Award otherwise
due to such grantee in the form of a Deferred Stock Award. Any such election
shall be made in writing and shall be delivered to the Company no later than the
date specified by the Administrator and in accordance with rules and procedures
established by the Administrator. The Administrator shall have the sole right to
determine whether and under what circumstances to permit such elections and to
impose such limitations and other terms and conditions thereon as the
Administrator deems appropriate.
(c) RIGHTS AS A STOCKHOLDER. During the deferral period, a grantee shall
have no rights as a stockholder; provided, however, that the grantee may be
credited with dividend equivalent rights with respect to the phantom stock units
underlying his Deferred Stock Award, subject to such terms and conditions as the
Administrator may determine.
(d) RESTRICTIONS. A Deferred Stock Award may not be sold, assigned,
transferred, pledged or otherwise encumbered or disposed of during the deferral
period.
(e) TERMINATION. Except as may otherwise be provided by the Administrator
either in the Award agreement or, subject to Section 14 below, in writing after
the Award agreement is issued, a grantee's right in all Deferred Stock Awards
that have not vested shall automatically terminate upon the grantee's
termination of employment (or cessation of service relationship) with the
Company and its Subsidiaries for any reason.
SECTION 9. UNRESTRICTED STOCK AWARDS
GRANT OR SALE OF UNRESTRICTED STOCK. The Administrator may, in its sole
discretion, grant (or sell at par value or such higher purchase price determined
by the Administrator) an Unrestricted Stock Award to any grantee pursuant to
which such grantee may receive shares of Stock free of any restrictions
("Unrestricted Stock") under the Plan. Unrestricted Stock Awards may be granted
in respect of past services or other valid consideration, or in lieu of cash
compensation due to such grantee.
SECTION 10. PERFORMANCE SHARE AWARDS
(a) NATURE OF PERFORMANCE SHARE AWARDS. A Performance Share Award is an
Award entitling the recipient to acquire shares of Stock upon the attainment of
specified performance goals. The Administrator may make Performance Share Awards
independent of or in connection with the granting of any other Award under the
Plan. The Administrator in its sole discretion shall determine whether and to
whom Performance Share Awards shall be made, the performance goals, the periods
during which performance is to be measured, and all other limitations and
conditions.
(b) RIGHTS AS A STOCKHOLDER. A grantee receiving a Performance Share
Award shall have the rights of a stockholder only as to shares actually received
by the grantee under the Plan and not with respect to shares subject to the
Award but not actually received by the grantee. A grantee shall be entitled to
receive a stock certificate evidencing the acquisition of shares of Stock under
a Performance Share Award only upon satisfaction of all conditions specified in
the Performance Share Award agreement (or in a performance plan adopted by the
Administrator).
(c) TERMINATION. Except as may otherwise be provided by the Administrator
either in the Award agreement or, subject to Section 14 below, in writing after
the Award agreement is issued, a grantee's rights in all Performance Share
Awards shall automatically terminate upon the grantee's termination of
employment (or cessation of service relationship) with the Company and its
Subsidiaries for any reason.
(d) ACCELERATION, WAIVER, ETC. At any time prior to the grantee's
termination of employment (or other service relationship) by the Company and its
Subsidiaries, the Administrator may in its sole discretion accelerate, waive or,
subject to Section 14, amend any or all of the goals, restrictions or conditions
applicable to a Performance Share Award.
<PAGE>
SECTION 11. PERFORMANCE-BASED AWARDS TO COVERED EMPLOYEES
Notwithstanding anything to the contrary contained herein, if any
Restricted Stock Award, Deferred Stock Award or Performance Share Award granted
to a Covered Employee is intended to qualify as "Performance-based Compensation"
under Section 162(m) of the Code and the regulations promulgated thereunder (a
"Performance-based Award"), such Award shall comply with the provisions set
forth below:
(a) PERFORMANCE CRITERIA. The performance criteria used in performance
goals governing Performance-based Awards granted to Covered Employees may
include any or all of the following: (i) the Company's return on equity, assets,
capital or investment; (ii) pre-tax or after-tax profit levels of the Company or
any Subsidiary, a division, an operating unit or a business segment of the
Company, or any combination of the foregoing; (iii) comparable store sales
results; (iv) total shareholder return; (v) changes in the market price of the
Stock; (vi) sales or market share; (vii) earnings per share; or (viii) a change
in the number of stores.
(b) GRANT OF PERFORMANCE-BASED AWARDS. With respect to each
Performance-based Award granted to a Covered Employee, the Administrator shall
select, within the first 90 days of a Performance Cycle (or, if shorter, within
the maximum period allowed under Section 162(m) of the Code) the performance
criteria for such grant, and the achievement targets with respect to each
performance criterion (including a threshold level of performance below which no
amount will become payable with respect to such Award). Each Performance-based
Award will specify the amount payable, or the formula for determining the amount
payable, upon achievement of the various applicable performance targets. The
performance criteria established by the Administrator may be (but need not be)
different for each Performance Cycle and different goals may be applicable to
Performance-based Awards to different Covered Employees.
(c) PAYMENT OF PERFORMANCE-BASED AWARDS. Following the completion of a
Performance Cycle, the Administrator shall meet to review and certify in writing
whether, and to what extent, the performance criteria for the Performance Cycle
have been achieved and, if so, to also calculate and certify in writing the
amount of the Performance-based Awards earned for the Performance Cycle. The
Administrator shall then determine the actual size of each Covered Employee's
Performance-based Award, and, in doing so, may reduce or eliminate the amount of
the Performance-based Award for a Covered Employee if, in its sole judgment,
such reduction or elimination is appropriate.
(d) MAXIMUM AWARD PAYABLE. The maximum Performance-based Award payable to
any one Covered Employee under the Plan for a Performance Cycle is 500,000
Shares (subject to adjustment as provided in Section 3(b) hereof).
SECTION 12. TAX WITHHOLDING
(a) PAYMENT BY GRANTEE. Each grantee shall, no later than the date as of
which the value of an Award or of any Stock or other amounts received thereunder
first becomes includable in the gross income of the grantee for Federal income
tax purposes, pay to the Company, or make arrangements satisfactory to the
Administrator regarding payment of, any Federal, state, or local taxes of any
kind required by law to be withheld with respect to such income. The Company and
its Subsidiaries shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment of any kind otherwise due to the grantee. The
Company's obligation to deliver stock certificates to any grantee is subject to
and conditioned on tax obligations being satisfied by the grantee.
(b) PAYMENT IN STOCK. Subject to approval by the Administrator, a grantee
may elect to have the minimum required tax withholding obligation satisfied, in
whole or in part, by (i) authorizing the Company to withhold from shares of
Stock to be issued pursuant to any Award a number of shares with an aggregate
Fair Market Value (as of the date the withholding is effected) that would
satisfy the withholding amount due, or (ii) transferring to the Company shares
of Stock owned by the grantee with an aggregate Fair Market Value (as of the
date the withholding is effected) that would satisfy the withholding amount due.
SECTION 13. TRANSFER, LEAVE OF ABSENCE, ETC.
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or from
the Company to a Subsidiary, or from one Subsidiary to another; or
<PAGE>
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to
re-employment is guaranteed either by a statute or by contract or under the
policy pursuant to which the leave of absence was granted or if the
Administrator otherwise so provides in writing.
SECTION 14. AMENDMENTS AND TERMINATION
The Board may, at any time, amend or discontinue the Plan and the
Administrator may, at any time, amend or cancel any outstanding Award for the
purpose of satisfying changes in law or for any other lawful purpose, but no
such action shall adversely affect rights under any outstanding Award without
the holder's consent. If and to the extent determined by the Administrator to be
required by the Code to ensure that Incentive Stock Options granted under the
Plan are qualified under Section 422 of the Code or to ensure that compensation
earned under Awards qualifies as performance-based compensation under Section
162(m) of the Code, if and to the extent intended to so qualify, Plan amendments
shall be subject to approval by the Company stockholders entitled to vote at a
meeting of stockholders. Nothing in this Section 14 shall limit the
Administrator's authority to take any action permitted pursuant to Section 3(c).
SECTION 15. STATUS OF PLAN
With respect to the portion of any Award that has not been exercised and
any payments in cash, Stock or other consideration not received by a grantee, a
grantee shall have no rights greater than those of a general creditor of the
Company unless the Administrator shall otherwise expressly determine in
connection with any Award or Awards. In its sole discretion, the Administrator
may authorize the creation of trusts or other arrangements to meet the Company's
obligations to deliver Stock or make payments with respect to Awards hereunder,
provided that the existence of such trusts or other arrangements is consistent
with the foregoing sentence.
SECTION 16. CHANGE OF CONTROL PROVISIONS
Upon the occurrence of a Change of Control as defined in this Section 16:
(a) Except as otherwise provided in the applicable Award agreement, each
outstanding Stock Option and Stock Appreciation Right shall automatically become
vested and fully exercisable.
(b) Except as otherwise provided in the applicable Award Agreement,
conditions and restrictions on each outstanding Restricted Stock Award, Deferred
Stock Award and Performance Share Award which relate solely to the passage of
time and continued employment will be removed. Performance or other conditions
(other than conditions and restrictions relating solely to the passage of time
and continued employment) will continue to apply unless otherwise provided in
the applicable Award agreement.
(c) "CHANGE OF CONTROL" shall have the meaning defined in each Plan
participant's employment agreement to the extent one exists, or if there is no
such employment agreement, Change of Control shall mean the occurrence of any
one of the following events:
(i) any "PERSON," as such term is used in Sections 13(d) and 14(d) of
the Act (other than the Company, any of its Subsidiaries, or any trustee,
fiduciary or other person or entity holding securities under any employee
benefit plan or trust of the Company or any of its Subsidiaries),
together with all "affiliates" and "associates" (as such terms are
defined in Rule 12b-2 under the Act) of such person, shall become the
"beneficial owner" (as such term is defined in Rule 13d-3 under the Act),
directly or indirectly, of securities of the Company representing 30
percent or more of the combined voting power of the Company's then
outstanding securities having the right to vote in an election of the
Company' Board of Directors ("Voting Securities") (in such case other
than as a result of an acquisition of securities directly from the
Company); or
(ii) persons who, as of the Effective Date, constitute the Company's
Board of Directors (the "Incumbent Directors") cease for any reason,
including, without limitation, as a result of a tender offer, proxy
contest, merger or similar transaction, to constitute at least a majority
of the Board, provided that any person becoming a director of the Company
subsequent to the Effective Date shall be considered an Incumbent
Director if such person's election was approved by or such person was
nominated for election by either (A) a vote of at least a majority of the
Incumbent Directors or (B) a vote of at least a majority of the Incumbent
Directors who are members of a nominating committee comprised, in the
majority, of Incumbent Directors; but provided further, that any such
person whose
<PAGE>
initial assumption of office is in connection with an actual
or threatened election contest relating to the election of members of the
Board of Directors or other actual or threatened solicitation of proxies
or consents by or on behalf of a Person other than the Board, including
by reason of agreement intended to avoid or settle any such actual or
threatened contest or solicitation, shall not be considered an Incumbent
Director; or
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company where the stockholders of the
Company, immediately prior to the consolidation or merger, would not,
immediately after the consolidation or merger, beneficially own (as such
term is defined in Rule 13d-3 under the Act), directly or indirectly,
shares representing in the aggregate more than 50% of the voting shares
of the corporation issuing cash or securities in the consolidation or
merger (or of its ultimate parent corporation, if any), (B) any sale,
lease, exchange or other transfer (in one transaction or a series of
transactions contemplated or arranged by any party as a single plan) of
all or substantially all of the assets of the Company or (C) any plan or
proposal for the liquidation or dissolution of the Company.
SECTION 17. GENERAL PROVISIONS
(a) NO DISTRIBUTION; COMPLIANCE WITH LEGAL REQUIREMENTS. The
Administrator may require each person acquiring Stock pursuant to an Award to
represent to and agree with the Company in writing that such person is acquiring
the shares without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Administrator may require the placing of
such stop-orders and restrictive legends on certificates for Stock and Awards as
it deems appropriate.
(b) DELIVERY OF STOCK CERTIFICATES. Stock certificates to grantees under
this Plan shall be deemed delivered for all purposes when the Company or a stock
transfer agent of the Company shall have mailed such certificates in the United
States mail, addressed to the grantee, at the grantee's last known address on
file with the Company.
(c) OTHER COMPENSATION ARRANGEMENTS; NO EMPLOYMENT RIGHTS. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of this
Plan and the grant of Awards do not confer upon any employee any right to
continued employment with the Company or any Subsidiary.
(d) LOANS TO GRANTEES. The Company shall have the authority to make loans
to grantees of Awards hereunder (including to facilitate the purchase of shares)
and shall further have the authority to issue shares for promissory notes
hereunder.
(e) DESIGNATION OF BENEFICIARY. Each grantee to whom an Award has been
made under the Plan may designate a beneficiary or beneficiaries to exercise any
Award or receive any payment under any Award payable on or after the grantee's
death. Any such designation shall be on a form provided for that purpose by the
Administrator and shall not be effective until received by the Administrator. If
no beneficiary has been designated by a deceased grantee, or if the designated
beneficiaries have predeceased the grantee, the beneficiary shall be the
grantee' estate.
SECTION 18. EFFECTIVE DATE OF PLAN
This Plan shall become effective upon approval by the holders of a
majority of the votes cast at a meeting of stockholders at which a quorum is
present. Subject to such approval by the stockholders and to the requirement
that no Stock may be issued hereunder prior to such approval, Stock Options and
other Awards may be granted hereunder on and after adoption of this Plan by the
Board.
SECTION 19. GOVERNING LAW
This Plan and all Awards and actions taken thereunder shall be governed
by, and construed in accordance with, the laws of the Commonwealth of
Massachusetts, applied without regard to conflict of law principles.
DATE APPROVED BY BOARD OF DIRECTORS: March 1, 2000
DATE APPROVED BY STOCKHOLDERS:
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to incorporation of our
reports included in this Form 10-K, into Bradlees, Inc. and Subsidiaries'
previously filed Registration Statement File No. 33-77555.
/s/ Arthur Andersen LLP
New York, New York
April 26, 2000
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