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 1, 1999
Commission file Number 1-11134
BRADLEES, INC.
(Exact name of registrant as specified in its charter)
MASSACHUSETTS
04-3156108 (State or other jurisdiction
(I.R.S. Employer of 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 June 4, 1999: 9,694,224
shares.
Exhibit Index on Page 21
Page 1 of 22 (Excluding Exhibits)
REPORT OF INDEPENDENT
PUBLIC ACCOUNTANTS
To the Board of
Directors and Stockholders of Bradlees, Inc.:
We have reviewed
the accompanying condensed consolidated balance sheets of
Bradlees, Inc. and subsidiaries (the "Company") as of May 1,
1999 and May 2, 1998, and the related condensed consolidated
statements of operations and cash flows for the thirteen-week
periods then ended. These financial statements are the
responsibility of the Company's management.
We conducted our reviews in accordance with standards established
by the American Institute of Certified Public Accountants. A
review of interim financial information consists principally of
applying analytical procedures to financial data and making
inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit
conducted in accordance with generally accepted auditing
standards, the objective of which is the expression of an
opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
On February 2, 1999, the Company emerged from bankruptcy. As
discussed in Notes 1 and 2 to the condensed consolidated
financial statements, effective January 30, 1999, the Company
accounted for the reorganization and adopted "fresh-start
reporting". As a result of the reorganization and adoption of
fresh-start reporting, the condensed consolidated financial
statements as of and for the thirteen-week period ended May 1,
1999 are not comparable to the condensed consolidated financial
statements as of and for the thirteen-week period ended May 2,
1998.
Based on our reviews, we are not aware of any material
modifications that should be made to the condensed consolidated
financial statements referred to above for them to be in
conformity with generally accepted accounting principles.
/s/ARTHUR ANDERSEN LLP
New York, New York
May 20, 1999
BRADLEES, INC.
AND SUBSIDIARIES
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(Dollars in thousands except per share amounts)
13 Weeks Ended
--------------
May 1, 1999 May 2, 1998
----------- -----------
Registrant Predecessor
---------- -----------
Total sales $ 324,842 : $ 293,306
Leased department sales 9,567 : 9,435
--------- : -------
Net sales 315,275 : 283,871
Cost of goods sold 227,113 : 204,201
--------- : ---------
Gross margin 88,162 : 79,670
Leased department and other :
operating income 2,731 : 2,947
--------- : --------
90,893 : 82,617
Selling, store operating, :
administrative and :
distribution expenses 100,204 : 92,701
Depreciation and amortization exp. 7,288 : 8,574
Loss on disposition of properties - : 241
Interest and debt expense 6,882 : 3,625
Reorganization items - : 2,129
--------- : --------
Net loss $ (23,481) : $ (24,653)
========== : =========
Comprehensive loss $ (23,481) : $ (24,653)
========== : =========
Net loss per share $ (2.30) : $ (2.18)
========== : =========
Weighted average shs. outstanding :
(in thousands)-basic and diluted 10,226 : 11,311
========== =========
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
May 1, 1999 Jan. 30, 1999 May 2, 1998
ASSETS ----------- ------------- -----------
Registrant Registrant Predecessor
----------- ------------- -----------
Current assets: :
Unrestricted cash :
and cash equivalents $10,315 $9,485 : $10,281
Restricted cash and :
cash equivalents - - : 24,550
------- ------- : -------
Total cash and :
cash equivalents 10,315 9,485 : 34,831
------- ------- : -------
Accounts receivable 11,002 13,015 : 9,494
Inventories 261,528 232,343 : 260,960
Prepaid expenses 10,435 8,967 : 8,868
Assets held for sale - - : 4,000
------- ------- : -------
Total current assets 293,280 263,810 : 318,153
------- ------- : -------
Property, plant :
and equipment, net: :
Property excluding :
capital leases, net 89,053 93,039 : 127,245
Property under capital :
leases, net 10,037 10,347 : 18,428
------- ------ : -------
Total property, plant :
and equipment, net 99,090 103,386 : 145,673
------- ------- : -------
Other assets: :
Lease interests at :
fair value, net 74,728 75,833 : 140,550
Assets held for sale 14,000 14,000 : -
Other, net 6,354 6,722 : 5,114
------- ------- : --------
Total other assets 95,082 96,555 : 145,664
--------- --------- : --------
Total assets $ 487,452 $ 463,751 : $ 609,490
========= ========= : =========
(Continued)
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(Dollars in thousands)
May 1, 1999 Jan. 30, 1999 May 2, 1998
----------- ------------- -----------
LIABILITIES AND
STOCKHOLDERS' Registrant Registrant Predecessor
EQUITY (DEFICIENCY) ----------- ------------- -----------
:
Current liabilities: :
Accounts payable $ 156,680 $ 119,302 : $ 141,055
Accrued expenses 21,304 29,326 : 17,854
Self-insurance reserves 6,358 6,462 : 6,515
Short-term debt 132,427 114,449 : 116,125
Current portion of :
capital lease obligations :
and notes 2,532 2,089 : 1,038
--------- --------- : --------
Total current liabilities 319,301 271,628 : 282,587
--------- --------- : --------
Long-term liabilities: :
Obligations under :
capital leases 24,824 25,284 : 26,786
Convertible notes payable 28,995 28,995 : -
Deferred income taxes - - : 8,581
Self-insurance reserves 12,908 13,120 : 13,228
Unfavorable lease liab. 44,742 44,581 : -
Other long-term liabs. 25,045 25,143 : 27,980
--------- --------- : --------
Total long-term liabs. 136,514 137,123 : 76,575
--------- --------- : --------
Liabilities subject to :
settlement under :
the reorganization case - - : 560,931
:
Stockholders' equity (deficiency): :
Common stock (new) 10,225,711 shares :
outstanding (10,225,711 at 1/30/99) :
Par value 102 102 : -
Common stock (old) - 11,310,384 :
shares outstanding at 5/2/98 :
Par value - : 115
Additional paid-in-capital 55,016 54,898 : 137,821
Accumulated deficit (23,481) - : (447,735)
Treasury stock, at cost - - : (804)
---------- -------- : --------
Total stockholders' :
equity (deficiency) 31,637 55,000 : (310,603)
---------- -------- : --------
Total liabilities :
and stockholders' :
equity (deficiency) $ 487,452 $ 463,751 : $ 609,490
========== ========== : =========
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(Dollars in thousands)
13 Weeks Ended
---------------
May 1, 1999 May 2, 1998
----------- -----------
Cash flows from operating
activities: Registrant Predecessor
----------- -----------
Net loss $ (23,481) : $ (24,653)
Adjustments to reconcile net :
loss to cash :
used by operating activities: :
Depreciation and amortization exp. 7,288 : 8,574
Amortization of lease interests :
and unfavorable lease liability, net 1,266 : -
Amortization of deferred :
financing costs 377 : 384
Reorganization items - : 2,129
Changes in working capital :
and other, net 4,634 : (11,185)
--------- : --------
Net cash used by :
operating activities before :
reorganization items (9,916) : (24,751)
Reorganization items: --------- : --------
Interest income received - : 121
Chapter 11 professional fees paid (2,858) : (2,906)
Other reorganization exp. paid, net (830) : (2,062)
--------- : --------
Net cash used by :
reorganization items (3,688) : (4,847)
--------- : --------
Net cash used by :
operating activities (13,604) : (29,598)
Cash flows from investing :
activities: :
Capital expenditures, net (2,920) : (1,644)
--------- : ---------
Inc. in restricted cash and :
cash equivalents - : (7,790)
Net cash used in investing :
activities (2,920) : (9,434)
--------- : ---------
Cash flows from financing :
activities: :
Payments of liabilities subject :
to settlement - : (1,020)
Net borrowings under the :
revolver/DIP facility 17,977 : 31,917
Proceeds from sales of properties - : 7,754
Principal payments on notes and :
capital lease obligations (623) : (287)
--------- : ---------
Net cash provided by financing :
activities 17,354 : 38,364
--------- : ---------
Net inc.(dec.) in unrestricted cash :
and cash equivalents 830 : (668)
Unrestricted cash and :
cash equivalents: :
Beginning of period 9,485 : 10,949
---------- : ---------
End of period $ 10,315 : $ 10,281
========== : ==========
Supplemental disclosure of :
cash flow information: :
Cash paid for interest and :
certain debt fees $ 2,618 : $ 3,403
Cash paid for income taxes $ 435 : $ -
See accompanying notes to condensed consolidated financial
statements.
BRADLEES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
Bradlees, Inc. and subsidiaries (collectively "Bradlees" or
the "Company") operate in the discount department store retail
segment in the Northeast United States. The Company emerged
from Chapter 11 of the United States Bankruptcy Code ("Chapter
11") on February 2, 1999 (the "Effective Date"). The Company
had filed petitions for relief under Chapter 11 on June 23, 1995
(the "Filing"). While in Chapter 11, the Company (the
"Predecessor") operated its business as a debtor-in-possession
subject to the jurisdiction of the United States Bankruptcy
Court for the Southern District of New York (the "Bankruptcy
Court"). The reorganized Company (the "Registrant") adopted
fresh-start reporting and gave effect to its emergence as of its
fiscal 1998 year-end (January 30, 1999).
Under fresh-start reporting, the final
consolidated balance sheet as of January 30, 1999 became the
opening consolidated balance sheet of the reorganized Company.
Since fresh-start reporting has been reflected in the
accompanying condensed financial statements as of May 1, 1999
and for the interim period then ended, those statements are not
comparable in certain material respects to the condensed
consolidated financial statements as of May 2, 1998 and for the
interim period then ended. Accordingly, a black line has been
drawn between the Registrant's financial statements and the
Predecessor's financial statements.
With respect to the unaudited
condensed consolidated financial statements for the 13 weeks
(first quarter) ended May 1, 1999 and May 2, 1998, it is the
Company's opinion that all necessary adjustments (consisting of
normal and recurring adjustments) have been included to present
a fair statement of results for the interim periods. Certain
prior-year amounts have been reclassified to conform to this
year's presentation. Basic and diluted shares outstanding and
loss per share were the same for the first quarter ended May 1,
1999, because the inclusion of common stock equivalents
(warrants and stock options) would have reduced the reported
loss per share. The presented shares outstanding presume full
issuance of new Bradlees Common Stock in accordance with the
Company's plan of reorganization (the "Plan") confirmed by the
Bankruptcy Court on January 27, 1999.
These statements should be read in conjunction with the Company's
financial statements (Form 10-K) for the fiscal year ended
January 30, 1999 ("1998"). Due to the seasonal nature of the
Company's business, operating results for the first quarter are
not necessarily indicative of results that may be expected for
the fiscal year ending January 29, 2000 ("1999"). Certain
information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted,
pursuant to the general rules and regulations promulgated by the
Securities and Exchange Commission (the "SEC").
2. REORGANIZATION CASE AND FRESH-START REPORTING
The Plan contained distributable value to creditors of
approximately $162 million (as of the Effective Date) which
consisted of approximately $15 million of administrative claim
payments (including $4.5 million of professional fees paid
subsequent to the Effective Date and accrued at January 30,
1999); $14 million of cash distributions to the pre-Chapter 11
bank group and the unsecured creditors; a $40 million note
primarily payable to the pre-Chapter 11 bank group, which was
paid down on the Effective Date by approximately $11 million
from the proceeds of the modification of the lease terms of the
Union Square, NY store; certain notes totaling $6.2 million;
other distributions totaling $1.4 million; 10.2 million shares
of new Bradlees Common Stock with an estimated value as of the
Effective Date of $85 million; and warrants allowing for the
purchase of one million shares of Common Stock, exercisable at
$7.00 per share and expiring February 2, 2004.
The Plan was consummated on February 2, 1999 and
Bradlees emerged from Chapter 11. Pursuant to the guidance
provided by the American Institute of Certified Public
Accountants in Statement of Position ("SOP") 90-7, "Financial
Reporting by Entities in Reorganization Under the Bankruptcy
Code", the Company adopted fresh-start reporting and reflected
the consummation distributions in the consolidated balance sheet
as of January 30, 1999 to give effect to the reorganization as
of year-end. Under fresh-start reporting, the reorganization
value of the Company was allocated to the emerging Company's net
assets on the basis of the purchase method of accounting.
Subsequent to the filing of the Company's Disclosure
Statement and occurrence of the Effective Date, a number of
events occurred which impacted the determination of equity value
under fresh-start reporting, including but not limited to, the
initial trading prices of the new stock, information regarding
the Company's fourth quarter performance and final fiscal 1999
financial plan, a settlement with a landlord regarding the
disposition of the Union Square, NY leasehold interest and the
liquidation of Caldor, a major competitor of the Company. The
Company employed a similar valuation method under fresh-start
reporting to determine its equity value to that utilized by its
independent financial advisor in the Disclosure Statement and
arrived at an estimated equity value of $55 million.
During the Chapter 11 case, the Company received Bankruptcy
Court approval to make certain adequate protection payments to
the pre-petition bank group. Contractual interest expense not
recorded on certain pre-petition debt totaled approximately $7.7
million for the first quarter of 1998.
3. RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents at May 2, 1998
represented certain funds received by the Company during the
Chapter 11 case that were required to be restricted. These
funds were utilized on the Effective Date for the consummation
payments.
4. DEBT
Financing Facility: Prior to the Effective Date, the Company
had a $250 million financing facility (the "Financing Facility")
(of which $125 million was available for issuance of letters of
credit) with BankBoston Retail Finance, Inc. ("BBNA") as agent,
under which the Company was allowed to borrow for general
corporate purposes, working capital and inventory purchases.
The Financing Facility consisted of (a) an up to eighteen-month
debtor-in-possession revolving credit facility in the maximum
principal amount of $250 million (the "DIP Facility") and,
subject to meeting certain conditions, (b) an up to three-year
post-emergence credit facility in the maximum principal amount
of $250 million (as modified, the "Revolver" - see below). The
outstanding amount under the DIP Facility was repaid on the
Effective Date with proceeds from the Revolver. The Revolver
expires on December 23, 2001.
Trade and standby letters of credit outstanding under the
Revolver were $9.5 and $20.0 million, respectively, as of May 1,
1999. The DIP Facility had replaced a $200 million
Debtor-in-Possession Revolving Credit and Guaranty Agreement
with The Chase Manhattan Bank, as agent. Trade and standby
letters of credit outstanding under the DIP facilities were $9.8
and $19.8 million, respectively, as of May 2, 1998.
Revolver: The Revolver consists of a $250 million
senior secured revolving line of credit (of which $125 million
is available for issuance of letters of credit) and a $20
million junior secured "last in-last out" facility. The Company
expects to use the Revolver primarily for working capital and
general business needs.
The senior secured tranche has an advance rate equal
to 80% of the Loan Value of Eligible Receivables (as defined),
plus generally 72% of the Loan Value of Eligible Inventory (as
defined), subject to certain adjustments. Between March 1 and
December 15, the inventory advance rate will be increased to 77%
of the Loan Value of Eligible Inventory provided that the total
amount of all senior secured advances does not exceed 85% of the
Loan to Value Ratio (as defined). The Company may also borrow
up to an additional $20 million under the junior secured
facility provided that the total borrowings (senior secured and
junior secured) do not exceed 93% of the Loan to Value Ratio.
The Revolver permits the Company to borrow funds under
the senior secured tranche at an interest rate per annum equal
to (a) the higher of (i) the annual rate of interest as
announced by BankBoston as its "Base Rate" and (ii) the weighted
average of the rates on overnight federal funds plus 0.50% per
annum; or (b) 2.25% per annum plus the quotient of (i) the LIBOR
Rate in effect divided by (ii) a percentage equal to 100% minus
the percentage established by the Federal Reserve as the maximum
rate for all reserves applicable to any member bank of the
Federal Reserve system in respect of eurocurrency liabilities.
Each of these rates is subject to a 0.50% increase in the event
of overadvances. The junior secured facility permits the
Company to borrow funds at the "Base Rate" plus 7.00% per annum.
The Revolver is secured by substantially all of
the non-real estate assets of the Company. The Revolver
contains financial covenants including (i) minimum rolling
twelve-month EBITDA at the end of each quarter, (ii) minimum
monthly accounts payable to inventory; (iii) maximum annual
capital expenditures; and (iv) minimum operating cash flow to
interest expense (for the fiscal quarters ending on or about
January 31, 2001, and thereafter). The Company is in compliance
with the Revolver covenants.
9% Convertible Notes:
The 9% Convertible Notes (the "Notes") were issued by Bradlees
Stores, Inc. (Note 9). Each Note will mature on February 3,
2004 and bears interest at the rate of 9% per annum from the
date of issuance, payable semi-annually in arrears on January 1
and July 1 of each year, commencing July 1, 1999. The aggregate
principal amount of the Notes outstanding as of May 1, 1999 was
$28,995,000 (which reflects the $11.0 million aggregate
principal amount that was pre-paid on the Effective Date). The
indebtedness represented by the Notes ranks equally with the
Company's other non-subordinated indebtedness.
The outstanding Notes are expected to be paid down, along with any
accrued and unpaid interest on the prepaid Notes, with the
estimated net proceeds of $17.2 million to be received upon the
planned sale and leaseback of the leasehold interest in the
Company's Yonkers, NY store (Note 10). The Company has the
right to redeem the Notes at any time, in whole or in part, by
paying the holder the unpaid principal plus accrued and unpaid
interest (see also Note 10).
The Notes are secured by (i) a first priority lien
on the leasehold interest in the Yonkers, New York store and the
net proceeds received upon its lease disposition, (ii) first
priority liens on leasehold interests in three other named
stores (the "Additional Collateral"), as well as any net
proceeds received upon any dispositions(s), and (iii) a first
priority pledge of all of the outstanding capital stock of New
Horizons of Yonkers, Inc. (Note 9).
The lien on the Additional Collateral
secures indebtedness under the Notes equal to the sum of $6.5
million plus an amount from time to time equal to the amount of
interest that would accrue on $6.5 million of principal amount
of outstanding Notes from February 2, 1999 to the date of
calculation of the extent of such lien (see also Note 10).
The Notes are convertible any
time after the first anniversary of the Effective Date into
shares of the Company's Common Stock. The conversion price will
initially be the unweighted average closing price of the Common
Stock during the twenty business days preceding the first
anniversary of the Effective Date.
5. INCOME TAXES
The Company
provides for income taxes under the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes". On an interim basis, the Company provides for
income taxes using the estimated annual effective rate method.
The Company did not recognize a quarterly or annual income tax
expense or benefit in 1998 and also does not expect to recognize
a quarterly or annual income tax expense or benefit in 1999.
6. REORGANIZATION ITEMS
The Company incurred $2.1 million of expenses, primarily for
professional fees, during the first quarter of 1998, directly
associated with the Chapter 11 reorganization proceedings.
As of May 1, 1999, the Company had remaining reserves
totaling approximately $5.8 million for costs associated with
the prior closing and planned closing of stores and other
restructuring activities. A portion of these reserves ($1.1
million) was established at the end of 1998 for the planned
closing of the Yonkers, NY store which is now expected to remain
in operation (Note 10). As a result, that portion of the
reserves is expected to reduce the carrying value of the
property prior to the calculation of any deferred gain resulting
from the sale/leaseback. Approximately $0.8 million of
restructuring costs were paid in the first quarter of 1999. The
majority of the remaining reserved costs are expected to be paid
within a year.
7. ASSETS HELD FOR SALE
Assets held for sale at May 1, 1999 represented the
estimated net realizable value (assigned under fresh-start
reporting) of the Company's Yonkers, NY store lease. As
discussed in Note 10, the Company received Bankruptcy Court
approval to enter into a sale/leaseback agreement for the
Yonkers store lease subsequent to the end of the first quarter.
Assets held for sale as of May 2, 1998, consisted of two
properties, one of which was sold in the second quarter of 1998
for approximately $4.5 million and the net proceeds of the sale
were utilized to pay down the related pre-petition borrowings.
The other property held for sale was later transferred to the
pre-petition financing group.
8. POST-RETIREMENT AND
STOCK OPTION PLANS
The Company provides
certain health care and life insurance benefits for certain
retired non-union employees meeting age and service
requirements. The Company accounts for the post-retirement plan
in accordance with SFAS No. 106, "Employers' Accounting for
Post-Retirement Benefits Other Than Pensions," which requires
the Company to accrue the estimated cost of retiree benefit
payments during the years the employee provides services. The
Company's post-retirement benefits are funded on a current
basis.
Effective January 1, 1998, changes were made to the
post-retirement plan that included the elimination of future
benefits for active employees who do not become eligible by
January 1, 2000, and a phase-out of the Company contributions
over two years (at 50% per year beginning January 1, 1999)
towards the cost of providing medical benefits to eligible
retirees. Under SFAS No. 106, a $1.4 million amortization
credit was recorded in the first quarter of 1998 to reflect
these changes to the post-retirement plan. As a consequence of
the adoption of fresh-start reporting at January 30, 1999 (Note
2), no amortization credit was recorded in the first quarter of
1999.
Pursuant to the Plan, the Company agreed to grant
options to purchase 750,000 shares of new Bradlees Common Stock
to the Company's senior management. Those options were granted
under the Bradlees, Inc. 1999 Stock Option Plan (the "Stock
Plan") which allows for the granting of one million options,
when their exercise price was determined in April, 1999 and will
vest in one-third increments beginning on the date of grant and
each of the two anniversaries following the date of grant.
These options are exercisable for a period of five years from
the date of grant. Compensation expense related to these
options began to be recorded over the vesting period in
accordance with Accounting Principles Board (APB) Opinion No.
25, "Accounting for Stock issued to Employees" (intrinsic value
method). On April 28, 1999, additional options were granted to
other members of management to purchase 127,500 shares of new
Bradlees Common Stock at a price equal to the market price of
the Common Stock on that date.
9. SUMMARIZED FINANCIAL INFORMATION FOR
BRADLEES STORES, INC. AND NEW HORIZONS OF YONKERS, INC.
Under the Plan, Bradlees, Inc. issued
the securities and Bradlees Stores, Inc. issued the Notes (Note
4). Bradlees, Inc. operates its stores through Bradlees Stores,
Inc., a direct wholly-owned subsidiary. Bradlees, Inc. is
guaranteeing the Notes issued by Bradlees Stores, Inc.
Substantially all of the assets of the Company, on a
consolidated basis, are held by Bradlees Stores, Inc. The
following summarized financial information of Bradlees Stores,
Inc. is presented in accordance with SEC Staff Accounting
Bulletin 53 and Regulation S-X Rule 1-02 (bb):
(000's)
May 1, 1999 May 2, 1998
----------- -----------
Current Assets $293,280 | $311,588
Due from New Horizons of Yonkers, Inc. 14,000 | -
Noncurrent Assets 194,172 | 291,295
Current Liabilities 319,301 | 282,587
Payable to Bradlees, Inc. 54,930 | 189,943
Noncurrent Liabilities 136,514 | 76,575
Liabilities Subject to Settlement Under |
the Reorganization Case $ - | $340,400
(000's)
-------------------------------
13 Weeks ended 13 Weeks ended
May 1, 1999 May 2, 1998
--------------- --------------
Net Sales $315,275 | $283,871
Gross Margin 88,162 | 79,670
Loss from Continuing Operations (23,293) | (24,603)
Net Loss $(23,293) | $(24,603)
New Horizons of Yonkers, Inc. ("New Horizons"), a
subsidiary of Bradlees Stores, Inc., is the lessee of Bradlees'
Yonkers, New York store lease, which it subleases to Bradlees
Stores, Inc. New Horizons' financial activity was limited to
rent expense under the lease and rental income from the sublease
during the periods presented. New Horizons, which remained in
Chapter 11 to facilitate the planned disposition of its
leasehold interest, is also fully and unconditionally
guaranteeing the Notes issued by Bradlees Stores, Inc. The
following summarized financial information of New Horizons is
presented in accordance with SEC Staff Accounting Bulletin 53
and Regulation S-X Rule 1-02 (bb):
(000's)
---------------------------
May 1, 1999 May 2, 1998
------------- ------------
Asset Held for Sale $14,000 | $ -
Due to Bradlees Stores, Inc. 13,999 | 1
Stockholders' Equity $ 1 | $ 1
(000's)
---------------------------------
13 Weeks ended 13 Weeks ended
May 1, 1999 May 2, 1998
----------- -----------
Rental Income $147 | $147
Rent Expense $147 | $147
10. SUBSEQUENT EVENTS
On May 20, 1999, the Bankruptcy Court
approved a binding letter of intent between New Horizons and
AFC Realty Capital, Inc. ("AFC") for a sale and leaseback of the
Yonkers, NY store lease. Under this agreement, expected to be
consummated by the end of July, 1999 following completion of
AFC's financing arrangements, New Horizons will sell its lease
interest in that store for $17.5 million and lease back the
store in exchange for annual incremental payments of $2.6
million over the remainder of the lease term, including option
periods, which totals 35 years. The store will continue in
business as a Bradlees store and the expected net proceeds of
$17.2 million after certain estimated fees and expenses will be
used to pay down the Notes (Note 4).
Also on May 20, 1999,
the Company entered into an agreement with the holders of $20.7
million, or approximately 71%, of the $29.0 million of
outstanding Notes (the "Discount Option Noteholders"). Under
the agreement, which is subject to definitive documentation, the
Company can repurchase the outstanding Notes expected to be held
by the Discount Option Noteholders after the paydown from the
Yonkers sale/leaseback proceeds (the "Discount Option Notes").
The purchase price is equal to 86% of the outstanding principal
amount, plus accrued interest, exercisable for a one-month time
period from December 1, 1999 through December 31, 1999 (the
"Discount Option"). The Company can repurchase the Discount
Option Notes each month thereafter, but the discount will
decrease by 1% per month such that the discount will be fully
eliminated by January 31, 2001. In consideration of the
Discount Option, the Company has agreed to pay the Discount
Option Noteholders a premium on the closing date of the grant of
the option equal to 0.5% of the outstanding principal amount of
the Discount Option Notes, grant the Discount Option Noteholders
second priority leasehold mortgages on the Additional Collateral
(Note 4),and subject to substitution in certain circumstances
and provide a put option exercisable on or after February 3,
2003 to sell the Discount Option Notes to the Company at a price
equal to the then outstanding principal amount, if any, of the
Discount Option Notes, plus accrued interest. In accordance
with applicable SEC rules, the Company intends to offer to enter
into similar agreements with all of the other Noteholders and
complete the offer by the end of July, 1999.
Both the sale/leaseback transaction and the transaction with the
Discount Option Noteholders described above require the consent of
the lenders under the Revolver (Note 4). Based on discussions to
date with such lenders, the Company believes it will receive
such consent.
On May 26, 1999, after appropriate landlord review and approval,
the Bankruptcy Court in Caldor Corporation's Chapter 11 case
approved the Company's purchase of two former Caldor store
leases, one in Philadelphia, PA and one in Hamilton, NJ, for a
total cost of $1.25 million. The Company expects to open the
two stores in early October.
BRADLEES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATION
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 1, 1999
("First Quarter 1999") and May 2, 1998 ("First Quarter 1998"):
13 Weeks Ended
---------------------------------
May 1, 1999 May 2, 1998
----------- -----------
Registrant Predecessor
---------- -----------
(Dollars in millions except
per share amounts)
Total sales $ 324.8 : $ 293.3
Leased department sales 9.5 : 9.4
------ : ------
Net sales 315.3 100.0%: 283.9 100.0 %
Cost of goods sold 227.1 72.0 : 204.2 71.9
------ ----- : ------ ------
Gross margin 88.2 28.0 : 79.7 28.1
Leased department and other :
operating income 2.7 0.9 : 2.9 1.0
----- ----- : ------ ------
90.9 28.9 : 82.6 29.1
Selling, store operating, :
administrative and :
distribution expenses 100.2 31.8 : 92.7 32.7
Depreciation and :
amortization expense 7.3 2.3 : 8.6 3.0
Loss on disposition of property - - : 0.3 0.1
Interest and debt expense 6.9 2.2 : 3.6 1.3
Reorganization items - - : 2.1 0.7
----- -----: ----- -----
Net loss ($23.5) (7.4): ($24.7) (8.7)%
====== ======: ======= =====
:
Net loss per share $ (2.30) : $ (2.18)
======= : =======
Total sales increase (decrease):
All stores 10.7 % 6.0 %
Comparable stores 12.6 10.0 %
Number of stores in operation
at end of period 102 103
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 1999 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 merchandising and marketing initiatives, competitive
conditions, changes in consumer spending and consumer spending
habits, continued vendor support, weather and economic
conditions, availability and cost of sufficient labor, and
changes in import duties, tariffs and quotas.
Since fresh-start reporting (Note 2) has been reflected in
the accompanying condensed financial statements as of May 1,
1999 and for First Quarter 1999, those statements are not
comparable in certain material respects to the condensed
consolidated financial statements as of May 2, 1998 and for
First Quarter 1998. Accordingly, a black line has been drawn
between the Registrant's financial statements and the
Predecessor's financial statements. Management has attempted to
indicate, where feasible, the major effects on comparability
from fresh-start reporting in the following discussion and
analysis of financial condition and results of operations for
First Quarter 1999.
FIRST QUARTER 1999 COMPARED
TO FIRST QUARTER 1998
Total sales for First
Quarter 1999 increased $31.5 million or 10.7% from First Quarter
1998 due to an increase of 12.6% 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 March, 1999. Management believes that the increase in
comparable store sales was due primarily to continued favorable
customer response to the Company's merchandising and marketing
initiatives and the first-quarter liquidation of one of the
Company's major competitors (Caldor Corp.). Over the last two
years, the Company has lowered opening price points, developed
more item-intensive and price-point oriented circular ad
offerings, reintroduced certain convenience and commodity
products, and implemented and expanded two successful programs:
"Certified Value" (highlights highly recognizable items at
competitive everyday prices) and "WOW" (integrates targeted and
mostly unadvertised opportunistic purchases). There were strong
sales of both hardlines and softlines in First Quarter 1999,
with hardlines experiencing the larger increase. Comparable
store sales also increased 12.6% during the fiscal month of May,
1999.
Gross margin increased $8.5
million due to the higher comparable store sales, partially
offset by the impact from the closing of the seven stores since
the beginning of 1998. The gross margin rate of 28.0% remained
virtually the same as in the prior year period (28.1%). Leased
department and other operating income had a slight decrease of
$0.2 million or 0.1% as a percentage of net sales in First
Quarter 1999 compared to First Quarter 1998.
Selling, store operating,
administrative and distribution ("SG&A") expenses increased $7.5
million but dropped 0.9% as a percentage of net sales (due to
the improved sales performance) in First Quarter 1999 from First
Quarter 1998. The higher SG&A expenses were primarily due to
certain incremental expenses, such as store payroll and other
store expenses, logistics expenses and advertising costs,
incurred to handle the higher sales volume and attract former
Caldor customers and a $1.4 million decrease in benefits expense
in First Quarter 1998 that resulted from a reduction in retiree
medical benefits (Note 8). These factors were partially offset
by the beneficial impact on SG&A expenses from the store
closings.
Depreciation and amortization expense declined $1.3 million or
0.7% as a percentage of net sales in First Quarter 1999 from
First Quarter 1998 due primarily to the impact of fresh-start
reporting.
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 were placed into restricted cash and
cash equivalents at that time.
Interest and debt expense increased $3.3 million or 0.9% as a
percentage of net sales in First Quarter 1999 from First Quarter
1998. This increase was due primarily to $2.3 million of
noncash interest expense resulting from the amortization of the
discount associated with the unfavorable lease liability
recorded under fresh-start reporting and accrued interest of
$0.8 million on the new notes issued under the plan of
reorganization. Interest costs in First Quarter 1999 were
slightly impacted by higher seasonal borrowings compared to the
prior-year period (see Liquidity and Capital Resources).
The charges in reorganization items of
$2.1 million in First Quarter 1998 were directly associated with
the Chapter 11 proceedings and are discussed in Note 6.
The Company did not record an income tax
provision in First Quarter 1999 due to the current expectation
of no income tax expense or benefit in 1999. There was also no
income tax expense or benefit recorded in First Quarter 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company had outstanding borrowings of
$132.4 million at May 1, 1999, exclusive of the issuance of
letters of credit, under the Company's $270 million Revolver
(Note 4) compared to outstanding borrowings of $116.1 million at
May 2, 1998, exclusive of the issuance of letters of credit,
under the DIP Facility (Note 4). The increase in borrowings
since the end of First Quarter 1998 related primarily to
reorganization expenses paid since that period. Peak and
average revolver borrowings were $136.1 and $121.8 million,
respectively, in First Quarter 1999 compared to $122.5 and $99.5
million, respectively, in First Quarter 1998, however the
associated weighted average interest rate in First Quarter 1999
(7.31%) was down from the prior-year period (7.99%).
The Company currently
expects its borrowings, exclusive of the issuance of letters of
credit, for the full year of 1999 to peak at approximately $180
million in October and/or November, 1999 and average
approximately $140 million. The amount available to borrow in
1999 is currently expected to peak at approximately $270 million
in October and/or November, 1999 and average approximately $230
million.
Other than payments made to certain pre-petition creditors approved
by the Bankruptcy Court (Note 2), payments on indebtedness, exclusive
of certain capital lease obligations, incurred prior to the
Filing were not made until after consummation of the Company's
plan of reorganization. Virtually all pre-petition indebtedness
of Bradlees was subject to settlement under the reorganization
case.
In First Quarter 1999, cash used
by operations before reorganization items was $9.9 million,
compared to $24.8 million of cash used by operations before
reorganization items in First Quarter 1998. This improvement in
first-quarter cash usage was due primarily to the improvement in
operating results and improved vendor terms.
Net cash used by reorganization items
in First Quarter 1999 of $3.7 million was comprised of
professional fee payments of $2.9 million and store closing and
severance costs of $0.8 million.
Inventories at May 1, 1999
increased only $0.6 million from May 2, 1998, despite the higher
sales volume, and increased $29.2 million from January 30, 1999
due primarily to a normal seasonal build-up.
Accounts payable at May
1, 1999, increased $15.6 million from May 2, 1998 due to
improved vendor terms and increased $37.4 million from January
30, 1999 due to the associated normal seasonal build-up of
inventories and improved vendor terms.
Accrued expenses
at May 1, 1999 were $8.0 million lower than at January 30, 1999
due to payments made against reserves established prior to 1999
for the 1998 performance bonuses, Chapter 11 professional fees,
and employee severance and termination benefits and store
closing costs. Accrued expenses were $3.4 million higher than
at May 2, 1998 due primarily to the reserves established at the
end of 1998 for anticipated store closing costs.
The Company incurred
capital expenditures of $2.9 million in First Quarter 1999
(compared to $1.6 million in First Quarter 1998), primarily for
a warehouse management system that will begin being implemented
in 1999 and various store improvements. For all of 1999, the
Company expects total capital expenditures to be approximately
$20 million, primarily for the warehouse management system and
other management information systems, two new stores (Note 10)
and various store improvements. The Company currently expects
to finance these expenditures through internally-generated
funds.
The Company
believes that the availability under its Revolver, together with
its available cash and expected cash flows from 1999 operations
and beyond, will enable it to fund its expected needs for
working capital, capital expenditures and debt service
requirements. The Company expects to utilize internally
generated funds or funds available under its Revolver if it
decides to exercise the option to prepay the Notes (Note 10).
The Company's ability to meet its financial obligations, make
planned capital expenditures and implement its strategic
initiatives will depend on the Company's 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 its control. Further
improvements in operating profitability and achievement of
expected cash flows from operations is critical to providing
adequate liquidity and is dependent upon the Company's
attainment of comparable store sales increases, along with gross
margin and expense levels that are reasonably consistent with
its financial plans.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 project is proceeding as planned
and the cost of remediation is currently estimated to total
approximately $4 million, $3.3 million of which has been
incurred to-date including $0.9 million in the first quarter of
1999 that was included in SG&A expenses. The Company expects
that the Year 2000 project will be substantially completed by
the end of the second quarter of 1999.
In 1998, to address compliance of its
information technology systems, the Company contracted with a
major outside consulting firm to provide the resources required
to identify Year 2000 issues and remediate the Company's systems
as necessary. In some cases, non-compliant software has been
replaced through upgrades provided by manufacturers of the
respective software or by installation of compliant replacement
systems. The Company has also addressed embedded systems and
computer-controlled devices in its stores, distribution centers
and central office and is taking the necessary steps to ensure
Year 2000 compliance. As of April, 1999, the Year 2000 project
was approximately 90% complete, excluding the third-party
compliance evaluation and contingency plans discussed below.
The Company believes the critical
systems it operates will be Year 2000 compliant by the end of
the second quarter of 1999, and believes it is not likely to
encounter significant 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 the potential failure of
the Company to discover all of its own susceptible internal
systems. The risk to the Company resulting from the failure of
third-party or internal systems is similar to other retailers
and, for the most part, to other businesses. The Company is
taking steps to minimize this risk by surveying its suppliers
and business partners to assess their Year 2000 readiness, which
will be determined by the end of June 1999.
A reasonable worst case
scenario could involve the failure of the Company's systems or
its supplier and business partner systems which would cause a
material disruption to the Company's operations. For example,
this could result in an interruption of certain normal business
activities and operations such as a temporary inability to
process sales transactions or transmit data either internally or
to suppliers and business partners. If the worst case scenario
should occur for any significant duration, it could have a
material adverse impact on the Company's business, results of
operations, liquidity and financial position. However, at this
time the Company is unable to determine completely the financial
consequences of such potential Year 2000 failures.
While the Company expects its efforts
will provide reasonable assurance that material disruptions will
not occur, the potential for disruptions cannot be fully
identified. The Company is therefore developing contingency
plans based on the successful completion of the Year 2000
project, results of testing of internal systems, embedded
systems and other computer-controlled devices, and assessment of
third-party compliance. The contingency plans will provide for
alternative courses of action to mitigate material individual
system or process failures due to Year 2000 issues, and are
expected to be in place by the end of August 1999. At this
time, the Company cannot estimate the additional cost, if any,
that might be incurred from the implementation of such
contingency plans.
The costs of the
Year 2000 project and the dates on which 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 Amendment to Amended and Restated 23
Employment Agreement dated as of
May 3, 1999, between Bradlees, Inc.,
Bradlees Stores, Inc. and Peter Thorner.
15 Letter re: unaudited interim financial 26
information.
(b) Reports on
Form 8-K
The following
report on Form 8-K was filed during the quarterly
period ended May 1, 1999:
Date of Report Date of Filing Item Number Description
April 1, 1999 April 1, 1999 5 Disclosure of
fourth quarter 1998
results compared to
plan and 1999
summary financial
plan.
BRADLEES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
BRADLEES, INC.
Date: June 10, 1999 By /s/ PETER THORNER
Peter Thorner
Chairman and Chief Executive
Officer
Date: June 10, 1999 By /s/ CORNELIUS F. MOSES III
Cornelius F. Moses III
Senior Vice President, Chief
Financial Officer
Exhibit 10
AMENDMENT TO AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT,
dated as of this 3rd day of May, 1999, 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, and as further supplemented (to reflect
compensation adjustments) April 15, 1998 (the "Amended and
Restated Employment Agreement"); and
WHEREAS, the Amended and Restated Employment Agreement was
entered into when the Companies were operated under the
protection of Chapter 11 of the United States Bankruptcy Code;
and
WHEREAS, on February 2, 1999 the Companies substantially
consummated a Plan of Reorganization for the Companies (as
defined in the Amended and Restated Employment Agreement, the
"Consummation Date"); and
WHEREAS, as of the Consummation Date, that certain benefit
program identified as the "Enterprise Appreciation Plan" was
discontinued, and certain other benefit and/or compensation
programs initiated; and
WHEREAS, the Companies and the Executive are desirous of
further amending the Amended and Restated Employment Agreement
to accurately reflect the Companies' benefit programs from and
after the Consummation Date, and to make current certain other
provisions of the Amended and Restated Employment Agreement; and
WHEREAS, the Executive's Compensation has been reviewed and
modified by the Compensation Committee and the Board of
Directors of the Company, and the parties are desirous of
amending relevant provisions of the Amended and Restated
Employment Agreement to reflect such modified compensation.
NOW THEREFORE, the Companies and the
Executive agree as follows:
1. In recognition of the discontinuance
of the Enterprise Appreciation Plan, all provisions of the
Amended and Restated Employment Agreement related to
the Enterprise Appreciation Plan are hereby rendered
void, including, without limitation, definitional
Sections 2.04, 2.20, 2.23, 2.28, 2.31, 2.34, 2.35,
2.41,2.46, 2.52, and Article X, entitled "Equity
Incentive", including Sections 10.1 through 10.10. The
Companies hereby ratifies, affirms and agrees that the
Executive was due to be paid, and was paid, the
minimum sum of $1,000,000 pursuant to Section 10.7, and
the Executive hereby confirms final receipt of such sum.
2. As provided for in Section 6.1 of the Amended and
Restated Employment Agreement, entitled "Incentive,
Savings and Retirement Plans", the Executive shall be
entitled to participate in the Company's recently
established "Emergence Bonus Plan" as reflected by
Attachment "A" which is hereby incorporated herein, and the
"Incentive Stock Award Plan" as reflected by Attachment "B"
which is hereby incorporated herein.
3. Article III, 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 $1,433,750 ($925,000 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"."
4. Article V, Section 5.1 is changed effective as of
February 1, 1999, by the deletion of the dollar value
"$850,000" in line 3, and the insertion of the dollar
value "$925,000" in lieu thereof.
5. Section 2.30 is hereby modified by the deletion of the
words "8 Messex Lane, Weston, Connecticut", and the
insertion of "3 Meadow Brook Lane, Westport, Connecticut
06880", in lieu thereof.
IN WITNESS WHEREOF, the parties have executed this Agreement on
the date first above written.
Attest: BRADLEES, INC.
/s/DAVID L. SCHMITT By: /s/CORNELIUS F. MOSES, III
Its: Senior Vice President, Senior Vice President,
General Counsel, Secretary Chief Financial Officer
and Clerk
Attest: BRADLEES STORES, INC.
/s/DAVID L. SCHMITT By: /s/CORNELIUS F. MOSES, III
Its: Senior Vice President, Senior Vice President,
General Counsel, Secretary Chief Financial Officer
and Clerk
Attest: EXECUTIVE
/s/DAVID L. SCHMITT /s/ PETER THORNER
Its: Senior Vice President, Peter Thorner
General Counsel, Secretary
and Clerk
Exhibit 15
June 10, 1999
Bradlees, Inc
One Bradlees Circle
Braintree, Massachusetts 02184
We have made a review, in accordance with standards established
by the American Institute of Certified Public Accountants, of
the unaudited interim financial information of Bradlees, Inc.,
and subsidiaries, for the 13-week periods ended May 1, 1999 and
May 2, 1998 as indicated in our report dated May 20, 1999, which
included an explanatory paragraph relating to the Company's
emergence from bankruptcy on February 2, 1999, and adoption of
"fresh-start reporting." Because we did not perform an audit,
we expressed no opinion on that information.
We are aware that our report referred to above, which is
included in your Quarterly Report on Form 10-Q for the quarter
ended May 1, 1999, is incorporated by reference in Registration
Statement No.333-77555.
We also are aware that the aforementioned report,
pursuant to Rule 436 (c) under the Securities Act of 1933, is
not considered a part of the Registration Statement prepared or
certified by an accountant or a report prepared or certified by
an accountant within the meaning of Sections 7 and 11 of that
Act.
/s/ARTHUR
ANDERSEN LLP