UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1998
Commission file Number 1-11134
BRADLEES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS 04-3156108
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
One Bradlees Circle
Braintree, MA 02184
(Address of principal executive offices)
(Zip Code)
(781) 380-3000
(Registrant's telephone number, including area code)
NONE
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
----
Number of shares of the issuer's common stock outstanding as
of May 22, 1998: 11,310,384 shares.
Exhibit Index on Page 19
Page 1 of 20 (Excluding Exhibits)
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Bradlees, Inc., Debtor-in-Possession:
We have reviewed the accompanying condensed consolidated
balance sheet of Bradlees, Inc. and subsidiaries,
Debtor-in-Possession (the "Company"), as of May 2, 1998, and the
related condensed consolidated statements of operations, and
cash flows for the thirteen week period then ended. These
financial statements are the responsibility of the Company's
management.
We conducted our review in
accordance with standards established by the American Institute
of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical
procedures to financial data and making inquiries of persons
responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the
objective of which is the expression of an opinion regarding the
financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we
are not aware of any material modifications that should be made
to such condensed consolidated financial statements for them to
be in conformity with generally accepted accounting principles.
The accompanying condensed
consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed
in Note 1 to the condensed consolidated financial statements
(and Notes 1 and 3 to the annual financial statements for the
year ended January 31, 1998 (not presented herein)], on June 23,
1995, the Company filed a petition for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. In addition, the
Company has experienced operating losses in each of the three
years ended January 31, 1998 and for the thirteen week period
ended May 2, 1998 and at May 2, 1998 had a substantial
stockholders' deficit. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The
Company's ability to continue as a going concern is dependent
upon, among other things, (i) acceptance of a Plan of
reorganization by the Company's creditors with confirmation by
the Bankruptcy Court, (ii) compliance with all debt covenants
under the debtor-in-possession financing, (iii) the success of
future operations, including returning to profitability and
maintaining adequate post bankruptcy financing and liquidity,
and (iv) the resolution of the uncertainties of the
reorganization case discussed in Note 2. Management's plans in
regard to these matters are discussed in Notes 1 and 2 to the
condensed consolidated financial statements.
2
The eventual outcome of these matters discussed in the
previous paragraph is not presently determinable. The condensed
consolidated financial statements do not include any adjustments
relating to the resolution of these uncertainties or the
recoverability and classification of recorded asset amounts or
the amounts and classification of liabilities and changes in
stockholders' equity that might be necessary should the Company
be unable to continue as a going concern.
The accompanying condensed consolidated balance sheet of the
Company as of May 3, 1997 and the related condensed consolidated
statements of operations and cash flows for the thirteen week
period then ended were reviewed by other accountants whose
report was dated May 21, 1997. This report stated that the
other accountants were not aware of any material modifications
that should be made to those statements in order for them to be
in conformity with generally accepted accounting principles and
included explanatory paragraphs relating to (i) the Company's
filing for reorganization under Chapter 11 of the Federal
Bankruptcy Code, and (ii) substantial doubt about the Company's
ability to continue as a going concern.
/s/ ARTHUR ANDERSEN LLP
-----------------------
New York, New York
May 19, 1998
3
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
13 WEEKS ENDED
MAY 2, 1998 MAY 3, 1997
----------- -----------
Total Sales $ 293,306 $ 276,838
Leased department sales 9,435 9,467
--------- --------
Net sales 283,871 267,371
Cost of goods sold 204,201 187,713
--------- -------
Gross margin 79,670 79,658
Leased department and other
operating income 2,773 2,294
--------- --------
82,443 81,952
Selling, store operating, admin.
and distribution expenses 92,527 98,320
Depreciation and
amortization expense 8,574 9,343
Loss on disposition of properties 241 -
Interest and debt expense 3,625 3,535
Reorganization items 2,129 2,747
--------- --------
Net loss $ (24,653) $ (31,993)
========= ========
Comprehensive loss $ (24,653) $ (31,993)
========= ========
Net loss per
share - basic and diluted $ (2.18) $ (2.81)
========= ========
Weighted average shares outstanding
(in thousands) - basic and diluted 11,311 11,393
========= ========
See accompanying notes to condensed consolidated financial
statements.
4
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
MAY 2, 1998 JAN. 31, 1998 MAY 3, 1997
----------- ------------- -----------
ASSETS
Current assets:
Unrestricted cash
& cash equivalents $10,281 $10,949 $12,187
Restricted cash &
cash equivalents 24,550 16,760 9,224
------- ------ ------
Total cash and
cash equivalents 34,831 27,709 21,411
------- ------ ------
Accounts receivable 9,494 10,013 11,604
Inventories 260,960 238,629 254,551
Prepaid expenses 8,868 8,733 8,790
Assets held for sale 4,000 7,754 7,754
------- ------- -------
Total current assets 318,153 292,838 304,110
------- ------- -------
Property, plant and
equipment, net:
Property excluding
capital leases, net 127,245 131,525 136,152
Property under capital
leases, net 18,428 18,959 23,949
------- ------ ------
Total property, plant
and equipment, net 145,673 150,484 160,101
------- ------ -------
Other assets:
Lease interests at
fair value, net 140,550 142,454 148,326
Assets held for sale - 4,000 5,250
Other, net 5,114 5,390 4,986
------- ------- -------
Total other assets 145,664 151,844 158,562
------- ------- -------
Total assets $609,490 $595,166 $622,773
======== ======== ========
(Continued)
5
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
MAY 2, 1998 JAN. 31, 1998 MAY 3, 1997
----------- ------------- -----------
LIABILITIES AND
STOCKHOLDERS'
DEFICIENCY
Current liabilities:
Accounts payable $141,055 $124,361 $133,203
Accrued expenses 23,841 30,516 42,626
Self-insurance
reserves 6,515 6,564 7,328
Short-term debt 116,125 84,208 80,500
Current portion of
capital lease
obligations 1,038 1,038 1,966
------- ------- -------
Total current
liabilities 288,574 246,687 265,623
------- ------- -------
Long-term liabilities:
Obligations under
capital leases 26,786 27,073 32,638
Deferred income taxes 8,581 8,581 8,581
Self-insurance reserves 13,228 13,328 14,879
Other long-term
liabilities 21,993 23,342 28,262
------- ------ ------
Total long-term
liabilities 70,588 72,324 84,360
------- ------ ------
Liabilities subject
to settlement under the
reorganization case 560,931 562,105 568,006
Stockholders' equity
(deficiency):
Common stock-11,310,384
shares outstanding
(11,312,154 at 1/31/98,
11,391,708 at 5/3/97)
Par value 115 115 115
Additional
paid-in-capital 137,821 137,821 137,951
Accumulated deficit (447,735) (423,082) (432,518)
Treasury stock,
at cost (804) (804) (764)
------- ------- -------
Total stockholders'
deficiency (310,603) (285,950) (295,216)
-------- -------- --------
Total liabilities
and stockholders'
deficiency $609,490 $595,166 $622,773
======= ======== =======
See accompanying notes to condensed consolidated financial
statements.
6
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
13 WEEKS ENDED
MAY 2, 1998 MAY 3, 1997
----------- -----------
Cash flows from operating
activities:
Net loss $ (24,653) $ (31,993)
Adjustments to reconcile
net loss to cash used by
operating activities:
Depreciation and amortization
expense 8,574 9,343
Amortization of deferred
financing costs 384 750
Reorganization items 2,129 2,747
Changes in working capital
and other, net (11,185) (3,320)
------ -----
Net cash used by operating
activities before
reorganization items (24,751) (22,473)
------ ------
Reorganization items:
Interest income received 121 118
Chapter 11 professional
fees paid (2,906) (3,329)
Other reorganization expenses
paid, net (2,062) (1,553)
------ -----
Net cash used by reorganization
items (4,847) (4,764)
------ -----
Net cash used by operating
activities (29,598) (27,237)
Cash flows from investing
activities:
Capital expenditures, net (1,644) (3,927)
Increase in restricted cash
and cash equivalents (7,790) (98)
------- ------
Net cash used in investing
activities (9,434) (4,025)
------ -------
Cash flows from financing
activities:
Payments of liabilities
subject to settlement (1,020) (2,486)
Proceeds from sales of
properties 7,754 100
Deferred financing costs - (1,776)
Net borrowings under
the DIP facilities 31,917 38,000
Principal payments on capital
lease obligations (287) (414)
-------- --------
Net cash provided by financing
activities 38,364 33,424
-------- --------
Net increase (decrease)in
unrestricted cash and
cash equivalents (668) 2,162
Unrestricted cash and
cash equivalents:
Beginning of period 10,949 10,025
-------- -------
End of period $ 10,281 $ 12,187
======== =======
Supplemental disclosure of
cash flow information:
Cash paid for interest $ 3,403 $ 2,490
See accompanying notes to condensed consolidated financial
statements.
7
BRADLEES,INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1.Basis of Presentation
The condensed consolidated financial statements of Bradlees,
Inc. and subsidiaries, including Bradlees Stores, Inc.
(collectively "Bradlees" or the "Company"), have been prepared
in accordance with the American Institute of Certified Public
Accountants Statement of Position 90-7: "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP
90-7") and generally accepted accounting principles applicable
to a going concern, which principles, except as otherwise
disclosed, assume that assets will be realized and liabilities
will be discharged in the normal course of business. The
Company filed petitions for relief under Chapter 11 of the
United States Bankruptcy Code ("Chapter 11") on June 23, 1995
(the "Filing"). The Company is presently operating its business
as a debtor-in-possession subject to the jurisdiction of the
United States Bankruptcy Court for the Southern District of New
York (the "Bankruptcy Court").
With respect to the unaudited
condensed consolidated financial statements for the 13 weeks
(first quarter) ended May 2, 1998 and May 3, 1997, it is the
Company's opinion that all necessary adjustments (consisting of
normal and recurring adjustments) have been included to present
a fair statement of results for the interim periods. Certain
prior-year amounts have been reclassified to conform to this
year's presentation.
These statements should be read in
conjunction with the Company's financial statements (Form 10-K)
for the fiscal year ended January 31, 1998 ("1997"). Due to the
seasonal nature of the Company's business, operating results for
the first quarter are not necessarily indicative of results that
may be expected for the fiscal year ending January 30, 1999
("1998"). Certain information and footnote disclosures normally
included in financial statements prepared in accordance with
generally accepted accounting principles have been condensed or
omitted, pursuant to the general rules and regulations
promulgated by the Securities and Exchange Commission (the
"SEC").
The Company's ability to continue as a
going concern is dependent upon the confirmation of a plan of
reorganization by the Bankruptcy Court, the ability to maintain
compliance with debt covenants under the DIP Facility (Note 4),
achievement of profitable operations and maintenance of adequate
financing, and the resolution of the uncertainties of the
reorganization case discussed in Note 2. The Company
experienced significant operating losses in 1996 and 1995.
In an effort to return the Company to
profitability and accomplish its long-term goals, the Company is
focusing on three key merchandise categories: moderately-priced
family apparel, home furnishings and conventional consumable
hardlines products. Bradlees is committed to quality and
fashion, especially in apparel and home furnishings, and to
improved customer service. The Company believes that it can
strategically leverage its strength in the fashion and quality
content of its apparel and decorative home product offerings
while driving traffic with selected hardlines merchandise.
2. Reorganization Case
In the Chapter 11 case, substantially
all liabilities as of the date of the Filing are subject to
settlement under a plan of reorganization to be voted upon by
the Company's creditors and stockholders and confirmed by the
Bankruptcy Court. Schedules have been filed by the Company with
the Bankruptcy Court setting forth the assets and liabilities of
the Company as of the date of the Filing as shown by the
Company's accounting records. Differences between amounts shown
by the Company and claims filed by creditors are being
investigated and resolved. Except for payments of approximately
$2.1 million made in 1997 to settle certain reclamation claims,
the ultimate amount and settlement terms for pre-petition
liabilities are subject to a plan of reorganization, and
accordingly, are not presently determinable. The Company
currently retains the exclusive right to file a plan of
reorganization until August 3, 1998 and to solicit acceptance of
a plan of reorganization until October 5, 1998, each subject to
possible extension as approved by the Bankruptcy Court. The
Company filed its plan of reorganization and related disclosure
statement with the Bankruptcy Court on April 13, 1998 and,
subject to confirmation of the plan of reorganization, currently
anticipates emergence from Chapter 11 during the third quarter
of 1998. A hearing to approve the disclosure statement has been
scheduled for June 16, 1998 with the Bankruptcy Court.
Under the Bankruptcy Code, the Company may elect to assume or
reject real estate leases, employment contracts, personal
property leases, service contracts and other executory
pre-petition leases and contracts, subject to Bankruptcy Court
approval. A liability of approximately $48.1 million was
recorded through May 2, 1998, for rejected leases. This
liability may be subject to future adjustments based on claims
filed by the lessors and Bankruptcy Court actions. Although the
Company does not currently anticipate the rejection of
additional leases, the Company cannot presently determine or
reasonably estimate the ultimate liability which may result from
the filing of claims for any rejected contracts or from any
additional leases which may be rejected at a future date. The
Company believes that it has recorded its best estimate of the
liability for rejected leases based on information available.
The principal categories of claims classified as
"Liabilities subject to settlement under the reorganization
case" are identified below. Deferred financing costs as of the
Filing of $3.4 million, $2.0 million and $2.7 million,
respectively, for the pre-petition revolving loan facility (the
"Revolver") and subordinated debt (the "2002 and 2003 Notes")
have been netted against the related outstanding debt amounts.
In addition, a $9.0 million cash settlement and approximately
$10.9 million of adequate protection payments since the Filing
have been applied to reduce the Revolver debt amount. The cash
settlement relates to a portion of the Company's cash balance as
of the date of the Filing ($9.3 million) which was claimed as
collateral by the pre-petition bank group. The claim was
settled in full for $9.0 million and approved by the Bankruptcy
Court in 1995. All amounts presented below may be subject to
future adjustments depending on Bankruptcy Court actions,
further developments with respect to disputed claims,
determination as to the security of certain claims, the value of
any collateral securing such claims, or other events.
Liabilities Subject to Settlement (000's)
- --------------------------------- ----------------------------
Under The Reorganization Case MAY 2,1998 JAN.31,1998 MAY 3,1997
- --------------------------- ---------- ----------- ----------
Accounts payable $165,170 $165,324 $165,383
Accrued expenses 27,996 27,996 27,932
Revolver 70,205 71,105 73,805
2002 Notes 122,274 122,274 122,274
2003 Notes 97,957 97,957 97,957
Financing obligation 17,951 17,951 17,951
Obligations under capital leases 11,287 11,407 11,767
Provision for rejected leases 48,091 48,091 50,937
------ ------ ------
$560,931 $562,105 $568,006
======= ======== ========
3. Restricted Cash and Cash Equivalents
Restricted cash and cash equivalents at May 2, 1998
were comprised of the following, along with earned interest of
$.7 million: (a) $6.0 million of the $24.5 million federal
income tax refund received in April, 1996; (b) $1.1 million of
forfeited deposits, net of property carrying costs, received in
1996 on a planned sale of an owned undeveloped property that was
not consummated and $7.6 million of net proceeds received when
this property was sold in March, 1998; (c) $8.0 million from the
sale of a closed store in January, 1998; and (d) other funds
($1.2 million) restricted for security deposits for utility
expenses incurred after the Filing.
4. Debt
As a result of the Filing, substantially all debt
(exclusive of the DIP Facility) outstanding at May 2, 1998 was
classified as liabilities subject to settlement (Note 2). No
principal or interest payments are made on any pre-petition debt
(excluding certain capital leases) without Bankruptcy Court
approval or until a reorganization plan defining the repayment
terms has been approved. During 1995, the Company received
Bankruptcy Court approval to make certain adequate protection
payments to the pre-petition bank group. The adequate
protection payments, a cash settlement, and deferred financing
costs have been netted against the related outstanding debt
amounts (Note 2).
Generally, interest on pre-petition
debt ceases accruing upon the filing of a petition under the
Bankruptcy Code; if, however, the debt is collateralized by an
interest in property whose value (minus the cost of preserving
such property) exceeds the amount of the debt, post-petition
interest may be payable. Other than certain adequate protection
payments approved by the Bankruptcy Court, no other
determinations have yet been made regarding the value of the
property interests which collateralize various debts. Although
interest may be paid pursuant to an order of the Bankruptcy
Court, it is uncertain whether any post-petition interest will
be payable or paid. The Company believes at this time that it
is unlikely that such interest will be paid. Contractual
interest expense not recorded on certain pre-petition debt (the
Revolver, 2002 Notes and 2003 Notes) totaled approximately $7.7
million for the first quarter of 1998 and $7.8 million for the
first quarter of 1997.
FINANCING
FACILITY: The Company has a $250 million financing facility (the
"Financing Facility") (of which $125 million is available for
issuance of letters of credit) with BankBoston Retail Finance,
Inc. ("BBNA") as agent, under which the Company is allowed to
borrow for general corporate purposes, working capital and
inventory purchases. The Financing Facility consists of (a) an
up to eighteen month debtor-in-possession revolving credit
facility in the maximum principal amount of $250 million (the
"DIP Facility"-see below) and, subject to meeting certain
conditions, (b) an up to three year post-confirmation revolving
credit facility in the maximum principal amount of $250 million
(the "Exit Facility"-see below). The commitment period for the
combined facility cannot exceed four years.
The DIP Facility replaced a $200 million Debtor-in Possession
Revolving Credit and Guaranty Agreement (the "Prior DIP
Facility") with Chase Manhattan Bank, as agent. There were
outstanding direct borrowings of $116.1 million under the DIP
facilities as of May 2, 1998. Trade and standby letters of
credit outstanding under the DIP facilities were $9.8 and $19.8
million, respectively, at May 2, 1998 and $17.2 and $20.7
million, respectively, at May 3, 1997.
The DIP Facility has an advance rate of 60% of the Loan Value of
Eligible Receivables (as defined), plus 72% of the Loan Value of
Eligible Inventory (as defined). Between March 1 and December
15, the Company can borrow an overadvance amount on the Loan
Value of Eligible Inventory of 5% (the "Overadvance Amount"),
subject to a $20 million limitation. At the Company's option,
the Company may borrow under the DIP Facility at the Alternate
Base Rate (as defined) in effect from time to time (the "Base
Rate Applicable Margin") or the adjusted Eurodollar rate plus
2.25% (the "Eurodollar Applicable Margin") for interest periods
of one, two or three months. The Base Rate Applicable Margin
and Eurodollar Applicable Margin would be increased 0.5% during
any fiscal month that the Company has Overadvance Amounts. The
weighted average interest rate under the DIP Facility was 7.99%
in the first quarter of 1998.
There are no compensating balance requirements under the DIP
Facility but the Company is required to pay an annual commitment
fee of 0.3% of the unused portion. The DIP Facility contains
restrictive covenants including, among other things, limitations
on the incurrence of additional liens and indebtedness,
limitations on capital expenditures and the sale of assets, the
maintenance of minimum operating earnings ("EBITDA") and minimum
accounts payable to inventory ratios. The lenders under the DIP
Facility have a "super-priority claim" against the estate of the
Company. As of May 2, 1998, the Company is in compliance with
the DIP Facility covenants. The DIP Facility expires on the
earlier of June 30, 1999 or the effective date of any plan of
reorganization plan that is confirmed by the Bankruptcy Court.
The Exit Facility has an advance rate equal to 60% of the Loan
Value of Eligible Receivables, plus the lower of (i) 72% of the
Loan Value of Eligible Inventory or (ii) 80% of the ratio of the
annual appraised liquidation value to the Loan Value (as
defined) of the inventory (the "Loan to Value Ratio"). Between
March 1 and December 15, the Company can borrow an overadvance
amount on the Loan Value of Eligible Inventory of 5% provided
that the overadvance does not cause the Loan Value of Eligible
Inventory to exceed 75% and provided
the Loan to Value Ratio does not exceed 85% At the Company's
option, the Company may borrow under the Exit Facility at the
Base Rate Applicable Margin or the Eurodollar Applicable Margin
for interest periods of one, two, or three months. The Base
Rate Applicable Margin and Eurodollar Applicable Margin would be
increased 0.5% during any fiscal month that the Company has
Overadvance Amounts.
The Exit Facility is subject to certain conditions being
satisfied, including (i) an all-equity plan of reorganization;
(ii) minimum EBITDA performance; and (iii) minimum borrowing
availability on the effective date of the plan of
reorganization. The Company obtained a modification to the
commitment letter dated April 7, 1998, from BBNA, as agent, that
modified their commitment so that the plan of reorganization
filed by the Company on April 13, 1998, although not an
all-equity plan, satisfies the conditions for the Exit Facility.
The Exit Facility will be secured by all of the assets of the
Company, except interest in real property.
The Exit Facility contains financial covenants
including (i) minimum EBITDA, (ii) minimum accounts payable to
inventory; (iii) maximum capital expenditures; and (iv) minimum
operating cash flow to interest expense (for the fiscal quarters
ending on or about January 31, 2000, and thereafter).
5. Income Taxes
The Company provides for income taxes under the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 109, "Accounting for Income Taxes". On an interim
basis, the Company provides for income taxes using the estimated
annual effective rate method. The Company did not recognize a
quarterly or annual income tax expense or benefit in 1997 and
also does not expect to recognize a quarterly or annual income
tax expense or benefit in 1998.
6. Reorganization Items
The Company provided for or incurred
the following expense and income items during the first quarter
of 1998 and 1997, directly associated with the Chapter 11
reorganization proceedings and the resulting restructuring of
its operations:
(000's)
-------
13 Weeks Ended
5/2/98 5/3/97
------ ------
Professional fees $2,250 $3,000
Interest income (121) (118)
Gain on disposition of properties - (135)
----- -----
$2,129 $2,747
===== =====
PROFESSIONAL FEES AND INTEREST
INCOME: Professional fees represent estimates of expenses
incurred, primarily for legal, consulting and accounting
services provided to the Company and the creditors committee
(which are required to be paid by the Company while in Chapter
11). Interest income represents interest earned on cash
invested during the Chapter 11 proceeding.
GAIN ON DISPOSITION OF
PROPERTIES: The Company sold two closed store leases in the
first quarter of 1997 and the related gains totaling
approximately $0.1 million were classified as reorganization
items since the associated net asset write-offs were previously
included in reorganization items.
RESTRUCTURING
RESERVES: The Company closed 6 stores in February, 1998. As of
May 2, 1998, the Company had remaining reserves (included in
accrued expenses) totaling approximately $1.2 million (exclusive
of provisions for rejected leases discussed in Note 2) for costs
associated with the closing of the 6 stores and prior store
closings. Approximately $2.1 million of these costs were paid
in the first quarter of 1998. The majority of the remaining
reserved costs are expected to be paid within a year.
7. Assets Held for Sale
Assets held for sale as of May 2, 1998, consisted of two properties,
one of which was sold on May 8, 1998 for approximately $4.5
million. It is expected that a net gain of approximately $1.8
million will be recorded in the second quarter for the sale of
that property. The proceeds from any sale of the properties are
utilized to pay down the related pre-petition borrowings. The
remaining unsold property, if not sold by August 1, 1998, is
expected to be transferred to the pre-petition financing group
at that time.
8. Post-Retirement Plan
The Company provides certain health care and life insurance
benefits for certain retired non-union employees meeting age and
service requirements. The Company accounts for the post
retirement plan in accordance with SFAS No. 106, "Employers'
Accounting for Post-Retirement Benefits Other Than Pensions,"
which requires the Company to accrue the estimated cost of
retiree benefit payments during the years the employee provides
services. The Company's postretirement benefits are funded on a
current basis.
The SFAS No. 106 valuation at January 31, 1998, along with a
$1.4 million amortization credit in the first quarter of 1998,
reflected changes that were effective January 1, 1998. The
changes represent the elimination of future benefits for active
employees who do not become eligible by January 1, 2000, and a
phase-out of the Company contributions over the next two years
(at 50% per year beginning January 1, 1999) towards the cost of
providing medical benefits to eligible retirees.
BRADLEES, INC.
AND SUBSIDIARIES
(Operating as Debtor-in-Possession)
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- -----------------------
Results of operations expressed in millions and as a percentage
of net sales were as follows for the 13 weeks ended May 2, 1998
("First Quarter 1998") and May 3, 1997 ("First Quarter 1997"):
13 Weeks Ended
--------------
May 2, 1998 May 3, 1997
----------- ----------
(Dollars in millions except
per share amounts)
Total sales $293.3 $276.8
Leased department sales 9.4 9.5
------ ------
Net sales 283.9 100.0 % 267.3 100.0 %
Cost of goods sold 204.2 71.9 187.7 70.2
----- ----- ----- -----
Gross margin 79.7 28.1 79.6 29.8
Leased department and other
operating income 2.7 0.9 2.3 0.8
----- ----- ---- ----
82.4 29.0 81.9 30.6
Selling, store operating,
administrative and
distribution expenses 92.5 32.6 98.3 36.8
Depreciation and
amortization expense 8.6 3.0 9.3 3.5
Loss on disposition of
property 0.3 0.1 - -
Interest and debt expense 3.6 1.3 3.5 1.3
Reorganization items 2.1 0.7 2.8 1.0
---- ---- ---- ----
Net loss ($24.7) (8.7)% ($32.0) (12.0)%
====== ===== ====== =====
Net loss per share $(2.18) $(2.18)
====== ======
Total sales incr.(decr.):
All stores 6.0 % (20.9)%
Comparable stores 10.0 % (5.9)%
Number of stores in operation
at end of period 103 109
The following discussions, as well as other portions of this
document, include certain statements which are or may be
construed as forward looking about the Company's business, sales
and expenses, and operating and capital requirements. Any such
statements are subject to risks that could cause the actual
results or requirements to vary materially. For example, the
Company's statements regarding expected 1998 levels of
borrowings, amounts available to borrow and capital expenditures
are dependent on the Company's future operating performance and
ability to meet its financial obligations, which is further
dependent upon, among other things, continued acceptance of the
Company's new merchandising and marketing initiatives,
competitive conditions, changes in consumer spending and
consumer spending habits, weather and economic conditions,
availability and cost of sufficient labor, and changes in import
duties, tariffs and quotas.
First Quarter 1998 Compared to First Quarter 1997
Total sales for First Quarter 1998 increased $16.5 million
or 6.0% from First Quarter 1997 due to an increase of 10.0% in
comparable store sales (including leased shoe department sales),
partially offset by the impact from closing six stores in
February, 1998 and one store in April, 1997. The increase in
comparable store sales was due primarily to the various
merchandising and marketing initiatives implemented throughout
1997, including the reintroduction of lower opening price points
and layaway, more item-intensive and price-point oriented
circular ad offerings, the addition of certain convenience and
commodity products to drive traffic, and the implementation of
the "Certified Value" (highlights highly recognizable items at
competitive everyday prices) and "WOW" (integrates targeted and
unadvertised opportunistic purchases) programs. There were
strong sales of both hardlines and softlines in First Quarter
1998. Comparable store sales were also strong for the
fiscal month of May, 1998.
Gross margin increased $0.1 million despite the closing
of the seven stores since First Quarter 1997, but declined 1.7%
as a percentage of net sales in First Quarter 1998 from First
Quarter 1997. The decrease in the gross margin rate was due
primarily to a lower initial markup, partially offset by fewer
clearance markdowns.
Leased department and other operating income increased
$.4 million or 0.1% as a percentage of net sales in First
Quarter 1998 compared to First Quarter 1997. Layaway fee
income and positive comparable leased shoe department sales more
than offset the impact from the store closings.
Selling, store operating, administrative and
distribution ("SG&A") expenses declined $5.8 million or 4.2% as
a percentage of net sales in First Quarter 1998 from First
Quarter 1997. The improved SG&A expense performance was due
primarily to the store closings and reductions in overhead
costs, including a $1.4 million decrease in benefits expense in
First Quarter 1998 resulting from a reduction in retiree medical
benefits and improved monitoring of vendor account activities.
Depreciation and amortization expense declined $0.7
million or 0.5% as a percentage of net sales in First Quarter
1998 from First Quarter 1997 due primarily to the impact of the
closed stores.
The Company recognized a $0.3 million loss in First
Quarter 1998 associated with the sale of undeveloped property
in Westbury, NY, that had been held for sale. The net proceeds
from this sale of $7.6 million are included in restricted cash
and cash equivalents.
Interest and debt expense increased $0.1 million and
remained the same as a percentage of net sales in First Quarter
1998 from First Quarter 1997. Interest costs in First Quarter
1998 were impacted by higher seasonal borrowings compared to the
prior-year period. Peak and average revolver borrowings were
$122.5 and $99.5 million, respectively, in First Quarter 1998
compared to $94.0 and $67.0 million, respectively, in First
Quarter 1997, and the weighted average revolver interest rate in
First Quarter 1998 (7.99%) was up from the prior-year period
(7.34%). The unfavorable impact on interest expense from these
factors was mostly offset by lower capital lease interest
expense and lower amortization of deferred financing costs in
First Quarter 1998.
The charges in reorganization items of $2.1
million in First Quarter 1998 and $2.8 million in First Quarter
1997 were directly associated with the Chapter 11 proceedings
and related restructuring and are discussed in Note 6.
The Company did not record an income tax provision
in First Quarter 1998 due to the current expectation of no
income tax expense or benefit in 1998. There was also no income
tax expense or benefit recorded in First Quarter 1997.
Liquidity and Capital Resources
The Company had outstanding borrowings of $116.1
million at May 2, 1998, exclusive of the issuance of letters of
credit, under the Company's $250 million DIP Facility (Note 4).
As of May 3, 1997, the Company had outstanding borrowings of
$80.5 million, exclusive of the issuance of letters of credit,
under the Prior DIP Facility (Note 4). The increase in
borrowings since the end of First Quarter 1997 relates to the
operating loss in First Quarter 1998 and the 1997 net loss and
capital expenditures.
The Company currently expects its
borrowings, exclusive of the issuance of letters of credit, for
the full year of 1998 to peak at approximately $170 million in
October or November, 1998 and average approximately $120
million. The amount available to borrow in 1998, after
deducting expected letters of credit outstanding, is currently
expected to peak at approximately $220 million in October or
November, 1998 and average approximately $175 million.
Other than payments
made to certain pre-petition creditors approved by the
Bankruptcy Court (Notes 2 and 4), principal and interest
payments on indebtedness, exclusive of certain capital lease
obligations, incurred prior to the Filing have not been made and
will not be made without Bankruptcy Court approval or until a
reorganization plan defining the repayment terms has been
confirmed by the Bankruptcy Court. Virtually all pre-petition
indebtedness of Bradlees is subject to settlement under the
reorganization case.
In First Quarter 1998, cash used by operations before
reorganization items was $24.8 million, compared to $22.5
million of cash used by operations before reorganization items
in First Quarter 1997. This increase in cash usage despite the
improvement in operating results was primarily due to a
reduction in accrued expenses (see discussion below).
Net cash used by reorganization items in First Quarter
1998 of $4.8 million was comprised of professional fee payments
of $2.9 million and store closing and severance costs of $2.0
million, partially offset by interest income of $0.1 million.
Inventories at May 2, 1998, increased $6.4 million from May 3,
1997, due primarily to low prior-year inventory levels
resulting, in part, from some credit issues following
disappointing fiscal 1996 results, and increased $22.3 million
from January 31, 1998, due primarily to a normal seasonal
build-up.
Accounts payable at May 2, 1998,
increased $7.9 million from May 3, 1997 due primarily to the
increase in inventories. Accounts payable increased $16.7
million from January 31, 1998, due to the associated normal
seasonal build-up of inventories.
Accrued expenses
at May 2, 1998, were $6.7 million lower than at January 31,
1998, due primarily to payments made against certain reserves
established in 1997 for performance bonuses and for employee
severance and termination benefits and store closing costs.
Accrued expenses were $18.8 million lower than at May 3, 1997,
due primarily to reductions in post-retirement medical benefits
and vacation pay liabilities, and to certain payments of
severance and store closing costs that had been reserved for
prior to May 3, 1997.
The Company incurred capital expenditures of $1.6 million in
First Quarter 1998 (compared to $3.9 million in First Quarter
1997), primarily for management information systems and various
store improvements and maintenance projects. For all of 1998,
the Company expects total capital expenditures to be
approximately $20 million, primarily for management information
systems (including the initial expenditures for a warehouse
management system and enhancements to the new merchandise
management system), the remodeling of ten stores, and other
store improvements. The Company currently expects to finance
these expenditures through internally-generated funds.
The Company believes its business strategies and the
availability of its DIP Facility and Exit Facility (Note 4),
together with the Company's available cash and expected cash
flows from 1998 operations and beyond, will enable Bradlees to
fund its expected needs for working capital, capital
expenditures and debt service requirements. Achievement of
expected cash flows from operations will be dependent upon the
Company's attainment of sales, gross profit, expense and trade
support levels that are reasonably consistent with its financial
plans. Such operating performance will be subject to financial,
economic and other factors affecting the industry and operations
of the Company, including factors beyond its control.
Year 2000 Project
There have been no significant changes
to the Company's Year 2000 project as reported in its Form 10-K
for the fiscal year ended January 31, 1998. The Year 2000
project is proceeding as planned and its cost is estimated to be
approximately $3 to $4 million, primarily to be incurred in
1998. The Company has not yet incurred most of such costs. The
Company expects that the Year 2000 project will be substantially
complete by the second quarter of 1999.
The costs of the Year 2000
project and the dates on which the Company plans to complete
Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of
future events including the continued availability of certain
resources, third party modification plans and other factors.
However, there can be no guarantee that these estimates will be
achieved and actual results could differ materially from those
plans.
BRADLEES, INC.
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits
and Reports on Form 8-K
(a) Index to
Exhibits
EXHIBIT NO. EXHIBIT PAGE NO.
10 Supplement to Amended and Restated 21
Employment Agreement dated as of
April 15,1998, between and among Bradlees,
Inc., Bradlees Stores, Inc. and Peter Thorner.
15 Letter re: unaudited interim financial 23
information.
(b) Reports
on Form 8-K
The following reports on Form 8-K were filed during the
quarterly period ended May 2, 1998.
DATE OF REPORT DATE OF FILING ITEM NUMBER DESCRIPTION
February 11, 1998 February 13, 1998 5 Disclosure of
fiscal 1998
summary
financial plan.
March 17, 1998 March 18, 1998 5 Disclosure of
fourth quarter
1997 results
compared to plan.
19
BRADLEES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
BRADLEES, INC.
Date: June 4, 1998 By /s/ PETER THORNER
Peter Thorner
Chairman and Chief Executive
Officer
Date: June 4, 1998 By /s/ CORNELIUS F. MOSES III
Cornelius F. Moses III
Senior Vice President,
Chief Financial Officer
20
SUPPLEMENT TO AMENDED Exhibit 10
AND RESTATED EMPLOYMENT AGREEMENT
THIS SUPPLEMENT TO AMENDED AND RESTATED AGREEMENT,dated as
of this 15th day of April, 1998, is made by, between and among
Bradlees, Inc., a Massachusetts corporation, Bradlees Stores,
Inc., a Massachusetts Corporation (either of which are herein
called the "Company" and both of which are called the
"Companies"), and Peter Thorner (the "Executive").
WHEREAS, the Companies have entered into an employment agreement
with the Executive dated October 26, 1995, as amended November
7th, 1997 (the "Amended and Restated Employment Agreement"); and
WHEREAS, pursuant to Section 5.1 of the Amended and Restated
Employment Agreement, Executive's "...Annual Base Salary may be
increased at any time and from time to time as may be determined
from time to time by the Boards or the Compensation Committee
designated by the Boards."; and
WHEREAS, the Board of Directors of the Company has accepted the
recommendation of its Compensation Committee made after full and
complete consideration of salary and other compensation
information of similarly sized and profiled retailers as
provided by consultants retained by the Company's Compensation
Committee to increase Executive's Annual Base Salary; and
WHEREAS, the Executive and the Companies are desirous
of formally recognizing wording changes to the Amended and
Restated Employment Agreement to reflect such increase in
Executive's Annual Base Salary
NOW THEREFORE, the Companies and the Executive
agree as follows:
1. Article II, Section 2.29 shall now be worded
as follows:
"2.29 "Highest Average Annual Compensation"
means the average of the Executive's highest
consecutive three years of salary and bonus; provided,
however, that in no event will Executive's Highest Average
Annual Compensation be less than $1,317,500 ($850,000 salary
and bonus at target); and provided, further, that if
the Executive is terminated Without Cause or the
Executive terminates his employment for Good Reason and the
Executive receives Severance Payments, Executive will be
treated as earning salary and bonus in the amount used to
calculate the Severance Payments for each respective
year for which the Severance Payments are
calculated"."
21
2. Article V, Section 5.1 is changed effective as of February 1,
1998, by the deletion of the dollar value "$725,000" in line 3,
and the insertion of the dollar value "$850,000" in lieu
thereof.
3. All other terms and conditions of the Amended and Restated
Employment Agreement shall remain unchanged, and are in full
force and effect.
IN WITNESS WHEREOF, the parties have executed this Supplement to
the Amended and Restated Employment Agreement on the date first
above written.
Attest: Bradlees Stores, Inc.
/s/CORNELIUS F. MOSES, III By: /s/DAVID L. SCHMITT
Senior Vice President, Its: Senior Vice President, Chief
Financial Officer General Counsel,
Secretary and Clerk
Attest: Bradlees, Inc.
/s/CORNELIUS F. MOSES, III By: /s/DAVID L. SCHMITT
Senior Vice President, Its: Senior Vice President, Chief
Financial Officer General Counsel,
Secretary and Clerk
Attest: Executive
/s/CORNELIUS F. MOSES, III /s/ PETER THORNER
Senior Vice President,
Chief Financial Officer
22
EXHIBIT 15
May 19, 1998
Bradlees, Inc.
One Bradlees Circle
Braintree, MA 02184
We have made a review,
in accordance with standards established by the Amercian
Institute of Certified Public Accountants, of the unaduited
interim financial information of Bradlees, Inc. and
subsidiaries, Debtor-in-Possession, for the 13-week period ended
May 2, 1998 as indicated in our report dated May 19, 1998 which
included a going concern paragraph relating to (i) the Company's
filing for reorganization under Chapter 11 of the U.S.
Bankruptcy Code (ii) certain matters which raise substantial
doubt about the Company's ability to continue as a going
concern. Because we did not perform an audit, we expressed no
opinion on that information.
We are aware that our report referred to above,
which is included in your Quarterly Report on Form 10-Q for the
quarter ended May 2, 1998, is incorporated by reference in
Registration Statement Nos. 33-64850, 33-64858, 33-80896,
33-86954, 33-86956 and 33-92178.
We are also aware that the aforementioned
report, pursuant to Rule 436(c) under the Securities Act of
1933, is not considered a part of the Registration Statement
prepared or certified by an accountant or a report prepared or
certified by an accountant within the meaning of Sections 7 and
11 of that Act.
/s/ ARTHUR ANDERSEN LLP
23