-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C2f7SMDAsKQz+A67iM77bui3UTJY4AOQDMsEGSSmK2owMdiA2X+bcOqBEMOEtp5B CEjv07XuYlmYK1C8B70OdQ== 0000950130-99-000426.txt : 19990129 0000950130-99-000426.hdr.sgml : 19990129 ACCESSION NUMBER: 0000950130-99-000426 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 25 FILED AS OF DATE: 19990128 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRADLEES INC CENTRAL INDEX KEY: 0000887356 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-VARIETY STORES [5331] IRS NUMBER: 043156108 STATE OF INCORPORATION: MA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-66953 FILM NUMBER: 99514604 BUSINESS ADDRESS: STREET 1: 1 BRADLESS CIRCLE STREET 2: P O BOX 9051 CITY: BRAINTREE STATE: MA ZIP: 02184 BUSINESS PHONE: 7813803000 MAIL ADDRESS: STREET 1: ONE BRADLEES CIRCLE STREET 2: P O BOX 9051 CITY: BRAINTREE STATE: MA ZIP: 02184 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BRADLEES STORES INC CENTRAL INDEX KEY: 0001073116 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 043220855 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-66953-01 FILM NUMBER: 99514605 BUSINESS ADDRESS: STREET 1: ONE BRADLEES CIRCLE CITY: BRAINTREE STATE: MA ZIP: 02184 BUSINESS PHONE: 7813803000 MAIL ADDRESS: STREET 1: ONE BRADLEES CIRCLE CITY: BRAINTREE STATE: MA ZIP: 02184 S-1/A 1 FORM S-1/A As filed with the Securities and Exchange Commission on January 28, 1999 Registration Statement No. 333-66953 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------- PRE-EFFECTIVE AMENDMENT NO. 2 To FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 --------------- BRADLEES, INC. and BRADLEES STORES, INC. (Exact name of Registrant as specified in its charter) Bradlees, Inc.-- 5311 Bradlees, Inc.--04- Massachusetts (Primary Standard 3156108 Bradlees Stores, Inc.-- Industrial Classification Bradlees Stores, Inc.-- Massachusetts Code Number) 04-3220855 (State or other (I.R.S. Employer jurisdiction of Identification No.) incorporation or organization) One Bradlees Circle Braintree, Massachusetts 02184 (781) 380-3000 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive office) PETER THORNER Chairman of the Board and Chief Executive Officer & DAVID L. SCHMITT Senior Vice President, General Counsel Secretary and Clerk (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- Copy to: RAYMOND C. ZEMLIN, P.C. Goodwin, Procter & Hoar LLP Exchange Place Boston, MA 02109 (617) 570-1000 --------------- Approximate date of commencement of proposed sale to the public: From time to time after this Registration Statement becomes effective, which time is to be determined by the Selling Securityholders. All of the Securities offered hereby are offered for the account of the Selling Securityholders. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act Registration Statement number of the earlier effective Registration Statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] --------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this Prospectus is not complete and may be changed. The + +Selling Securityholders may not sell these securities until the Registration + +Statement filed with the Securities and Exchange Commission is effective. + +This Prospectus is not an offer to sell these securities and it is not + +soliciting an offer to buy these securities in any State where the offer or + +sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED JANUARY 28, 1999 PROSPECTUS BRADLEES, INC. 7,267,424 Shares of Common Stock BRADLEES STORES, INC. $36,000,000 of 9% Convertible Notes Bradlees, Inc. and its subsidiary companies operate discount department stores in the Northeast through Bradlees, Inc.'s subsidiary, Bradlees Stores, Inc. The Securities being offered by this Prospectus were issued by us under the terms of our bankruptcy reorganization. This Prospectus relates to: .7,267,424 shares of Common Stock of Bradlees, Inc.; and . $36,000,000 of 9% Convertible Notes issued by Bradlees Stores, Inc. and the Common Stock issuable upon conversion of the Convertible Notes. We are registering these securities on behalf of the Selling Securityholders. The Selling Securityholders received these securities, directly or indirectly, pursuant to our Plan of Reorganization in exchange for the cancellation of various indebtedness owed by us to them. We are not selling any of these securities and we will not receive any proceeds from the sale of these securities. The Selling Securityholders may offer these securities through public or private transactions, on the Nasdaq National Market, at prevailing prices or at privately negotiated prices. The registration of these securities does not necessarily mean that any Selling Securityholder will actually sell such securities. The Common Stock offered by this Prospectus has been accepted for listing on the Nasdaq National Market, subject to official notice of issuance, under the symbol "BRAD." Our principal executive offices are located at One Bradlees Circle, Braintree, Massachusetts 02184. Our telephone number is (781) 380-3000. ----------- Investing in these securities involves certain risks. See "Risk Factors" beginning on page 6. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. ----------- The date of this Prospectus is January , 1999 TABLE OF CONTENTS
Page ---- PROSPECTUS SUMMARY........................................................ 2 The Company.............................................................. 2 The Offering............................................................. 3 Summary Financial Data................................................... 5 RISK FACTORS.............................................................. 6 Economic and Industry Risks.............................................. 6 Competition............................................................. 6 Concentration in the Northeast.......................................... 6 Merchandising Strategy Must Successfully Evolve......................... 6 Labor Negotiations...................................................... 6 Financial Risks.......................................................... 7 High Leverage........................................................... 7 History of Losses....................................................... 7 Restrictions Imposed by the Terms of the BankBoston Facility............ 7 Risk to Continuing Operations if Covenants Not Met...................... 8 Limitations on Future Growth............................................ 8 Liquidity............................................................... 8 Assets Pledged as Collateral under the BankBoston Facility.............. 8 Post-Bankruptcy Risks.................................................... 9 Recent Emergence from Chapter 11 Proceedings............................ 9 Fresh Start Reporting May Make Future Financial Statements Difficult to Compare................................................................ 9 Determination of Equity Value........................................... 9 Tax Consequences of the Plan of Reorganization; Potential Loss of Certain Tax Attributes................................................. 9 Risks Related to the Securities.......................................... 10 Limited Market for Common Stock and Notes............................... 10 Restrictions on Common Stock Dividends.................................. 10 Future Stock Issuances Can Dilute Current Owners........................ 10 Guarantor Does not Have Significant Separate Assets..................... 11 Fraudulent Conveyance Matters........................................... 11 Miscellaneous Business Risks............................................. 11 Dependence on key personnel............................................. 11 Potential Year 2000 Liability........................................... 11 Change of Control not Restricted........................................ 12 Board of Directors May Change........................................... 12 THE COMPANY............................................................... 13 General.................................................................. 13 Background to Our Bankruptcy Reorganization.............................. 13 The Plan of Reorganization............................................... 13 USE OF PROCEEDS........................................................... 18 DIVIDEND POLICY........................................................... 18 CAPITALIZATION............................................................ 19 SELECTED FINANCIAL DATA................................................... 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS............................................................... 30 Results of Operations.................................................... 30 1997 Compared to 1996.................................................... 30 1996 Compared to 1995.................................................... 32 Year-to-Date 1998 Compared to Year-to-Date 1997.......................... 33
(i) Liquidity and Capital Resources............................................ 34 Year 2000 Readiness Disclosure............................................. 35 BUSINESS.................................................................... 37 Company Overview........................................................... 37 Employees and Collective Bargaining Arrangements........................... 38 Competition................................................................ 38 Patents, Trademarks and Licenses........................................... 39 Seasonality................................................................ 39 Credit Facility............................................................ 39 Further Information........................................................ 39 Facilities................................................................. 40 Legal Proceedings.......................................................... 40 MANAGEMENT.................................................................. 41 Directors and Executive Officers........................................... 41 Board of Directors of Bradlees, Inc. and Its Committees.................... 43 Board of Directors of Bradlees Stores, Inc................................. 44 Summary Compensation Table................................................. 45 Corporate Bonus Plan....................................................... 46 Enterprise Appreciation Incentive Plan..................................... 46 Management Emergence Bonus Plan............................................ 46 Severance Program.......................................................... 47 Stock Option Plan for Key Employees........................................ 47 Retirement Plans........................................................... 47 Compensation of Directors.................................................. 48 Employment Agreement with Peter Thorner.................................... 48 Compensation Committee Interlocks and Insider Participation................ 49 PRINCIPAL STOCKHOLDERS...................................................... 50 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................. 51 Other Transactions......................................................... 51 Company Policy............................................................. 51 SELLING SECURITY HOLDERS.................................................... 51 PLAN OF DISTRIBUTION ....................................................... 52 Type of Transactions....................................................... 52 Price of Transaction; Fees................................................. 52 SHARES ELIGIBLE FOR FUTURE SALE............................................. 53 TERMS OF OUTSTANDING INDEBTEDNESS........................................... 53 Credit Agreement........................................................... 53 CAP Notes.................................................................. 54 Cure Notes................................................................. 55 Tax Notes.................................................................. 55 DESCRIPTION OF THE 9% CONVERTIBLE NOTES..................................... 55 General.................................................................... 55 Ranking.................................................................... 55 Redemption................................................................. 56 Limitations on Mergers and Consolidation................................... 56 Guarantee.................................................................. 57 Events of Default, Notice and Waiver....................................... 57 Modification of the Indenture.............................................. 58 Collateral................................................................. 58 Conversion................................................................. 59 Governing Law.............................................................. 59 The Trustee................................................................ 59
(ii) Authentication............................................................. 59 DESCRIPTION OF CAPITAL STOCK................................................ 60 General.................................................................... 60 Authorized and Outstanding Capital Stock................................... 60 Certain Provisions of the Articles and By-laws of Bradlees, Inc............ 60 Massachusetts Anti-takeover Laws........................................... 62 Certain Provisions of the Articles and By-laws of Bradless Stores, Inc. ... 62 Transfer Agent and Registrar............................................... 63 Listing.................................................................... 63 LEGAL MATTERS............................................................... 63 EXPERTS..................................................................... 63 ADDITIONAL INFORMATION...................................................... 63 INDEX TO FINANCIAL STATEMENTS............................................... F-1
(iii) FORWARD-LOOKING STATEMENTS Certain statements incorporated by reference or made in this prospectus under the captions "Prospectus Summary," "Risk Factors" and "The Company," and elsewhere in this Prospectus are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Act of 1934. When we use the words "anticipate," "assume," "believe," "estimate," "expect," "intend," and other similar expressions in this Prospectus, they are generally intended to identify forward-looking statements. In connection with such forward-looking statements, you should consider that they involve known and unknown risks, uncertainties and other factors which are, in some cases, beyond our control and which could materially affect our actual results, performance or achievements. Factors that could cause our actual results, performance or achievements to differ materially from those expressed or implied by such forward-looking statements include, but are not limited to, the following: . international, national, regional and local economic and political conditions; . demographic changes; . competition; . unfavorable changes in interest rates; . unfavorable weather conditions; . loss of significant vendors; . liability and other claims asserted against us; . fluctuations in operating results; . increased costs of key resources; . continued acceptance of merchandising and marketing initiatives; . changes in consumer spending and shopping habits; . availability of new store sites; . changes in import duties, tariffs and quotas; . changes in business strategy; and . the ability to attract and retain qualified personnel. We disclaim any obligation to update any such factors or to publicly announce the result of any revisions to any of these forward-looking statements contained herein to reflect subsequent events or developments. PROSPECTUS SUMMARY This summary highlights information contained elsewhere in this Prospectus. It is not complete and may not contain all of the information that you should consider before investing in the Securities. You should read the entire Prospectus carefully, including the "Risk Factors" section and the financial statements and the notes to those statements. The Company Background Bradlees, Inc. and its subsidiary companies operate discount department stores in the Northeast through Bradlees, Inc.'s subsidiary, Bradlees Stores, Inc. (collectively, the "Company"), primarily in the Boston to Philadelphia corridor. We have been active in the discount department store business for 40 years. On June 23, 1995, we filed a petition for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11"). On January 29, 1999, we completed our reorganization and emerged from bankruptcy. In connection with our reorganization, we took significant steps to improve our operations, including: . Recruiting an experienced management team; . Reintroducing basic convenience and commodity products that our customers expect us to carry; . Revising our pricing policies to increase customer traffic; . Revising our marketing strategy to reduce costly and inefficient advertising and promotional events; and . Reducing costs by improving operating efficiencies. Business Strategy We are focusing on three key merchandise categories: 1. Moderately-priced basic and casual apparel; 2. Basic and fashion items for the home; and 3. Frequently purchased convenience and commodity products. We believe we can strategically leverage our traditional strengths in the fashion and quality of our apparel and decorative home product offerings while driving customer traffic with selected hardlines merchandise. The Reorganization We were compelled to seek the protection of the Bankruptcy Court on June 23, 1995. While in Chapter 11, we continued to manage our affairs as a debtor-in- possession. On October 5, 1998, the first Amended Disclosure Statement relating to our plan of reorganization was approved by the Bankruptcy Court (the "Plan of Reorganization"). The Plan of Reorganization, as subsequently modified, was confirmed by the Bankruptcy Court on January 27, 1999 and became effective on January 29, 1999 (the "Effective Date"). In connection with our reorganization in bankruptcy and our related operational restructuring, all of the equity interests in Bradlees, Inc. that existed immediately prior to the Effective Date were canceled. In addition, we canceled certain indebtedness that existed prior to our entering bankruptcy. Our Plan of Reorganization provided that certain holders of this canceled indebtedness receive an equity interest in the reorganized company and/or 9% Convertible Notes issued by Bradlees Stores, Inc. which pay interest at the rate of 9% per annum and are convertible into our common stock after one year. In connection with the issuance of these securities, we are registering the resale of the securities received by certain of our creditors under the Plan of Reorganization. This Prospectus is part of the Registration Statement we agreed to file. See "The Company--The Plan of Reorganization." 2 THE OFFERING The principal terms of the Common Stock and 9% Convertible Notes (collectively, the "Securities") are summarized below. For a more complete description, see "Description of Capital Stock" and "Description of the 9% Convertible Notes." The Selling Securityholders will receive all of the proceeds from the sale of the Securities offered hereby. We will not receive any proceeds from this Offering. COMMON STOCK: Issuer........................ Bradlees, Inc. Securities Offered (1)........ 7,267,424 shares of Common Stock. Common Stock outstanding (2).. 10,225,711 shares of Common Stock. Voting Rights................. Each share of Common Stock has one vote. Listing....................... We have listed the common stock offered by this Prospectus on the Nasdaq National Market. Trading Symbol................ BRAD
- -------- (1) Under the terms of the Plan of Reorganization, the number of shares issued to the Selling Stockholders varies with the amount of general unsecured claims allowed. The Securities Offered and Common Stock Outstanding assumes that the amount of the general unsecured claims allowed are not less than $225 million and the number of shares issued to the Selling Securityholders is not more than 7,267,424. Excludes an indeterminate number of shares issuable upon conversion of the 9% Convertible Notes. Since the number of shares of Common Stock issuable upon conversion of the 9% Convertible Notes varies as the market price of the Common Stock changes, it is impossible at this time to determine how many shares may be issued upon conversion of the 9% Convertible Notes. (2) Excluding 1,000,000 shares of Common Stock reserved for issuance upon exercise of outstanding warrants as of February 1, 1999 (the "Warrants") and 750,000 shares of Common Stock issuable upon exercise of employee options which we have agreed to issue under the Plan of Reorganization. Also excludes all shares of Common Stock issuable upon conversion of the 9% Convertible Notes. 9% CONVERTIBLE NOTES: Issuer...................... Bradlees Stores, Inc. Securities Offered.......... $36,000,000 aggregate principal amount. 9% Convertible Notes Outstanding................ $40,000,000 aggregate principal amount. Maturity.................... January 29, 2004 Interest Rate............... The 9% Convertible Notes bear interest at a rate of 9% per annum. Interest accrues from the date we issue the Notes and is payable semi-annually in arrears on each January 1 and July 1, commencing July 1, 1999. Guarantor................... The 9% Convertible Notes will be guaranteed by Bradlees, Inc., which owns all of the outstanding capital stock of Bradlees Stores, Inc. If Bradlees Stores, Inc. cannot make payments on the 9% Convertible Notes when they are due, Bradlees, Inc. must make them instead. Liens....................... The 9% Convertible Notes will be secured by (i) a first priority lien on our leasehold interest in our Yonkers, New York store, which we are seeking to sell, (and the net proceeds we receive upon its disposition), (ii) under certain circumstances and subject to certain limitations, first priority liens on our leasehold interests in our Danbury, Connecticut, Norwalk, Connecticut and Saddle Brook, New Jersey stores (none of which we are currently seeking to sell), and (iii) a second priority pledge of all of the outstanding capital stock of New Horizons of Yonkers, Inc. The disposition of the Yonkers, New York store is subject to Bankruptcy Court approval. In addition, pursuant to the Plan of Reorganization we have modified the termination date and certain other provisions of our lease for our Union Square, New York store in exchange for a payment upon the Effective Date of $11.0 million by the landlord. This payment will be applied as a pre-payment to the 9% Convertible Notes. 3 Conversion.................. The 9% Convertible Notes will be convertible any time after the first anniversary of the Effective Date into shares of our Common Stock. The conversion price will initially be the average closing price of our Common Stock on the twenty business days preceding the first anniversary of the Effective Date. Listing..................... We do not intend to apply for listing of the 9% Convertible Notes on any securities exchange or authorization for quotation on the NASDAQ system. We do not expect that an active trading market will develop for the 9% Convertible Notes. 4 Summary Financial Data (In thousands, except per share data) The summary financial data set forth below presents historical and pro forma financial information of the Company. The financial information for the thirty- nine weeks ended October 31, 1998 and November 1, 1997 was derived from the unaudited condensed consolidated financial statements of the Company which, in the opinion of management, include all adjustments, consisting only of normal adjustments necessary for a fair presentation of the results for the periods. The results for the thirty-nine weeks ended October 31, 1998 are not necessarily indicative of the results to be expected for the full year. Fiscal year 1997 refers to the 52 weeks ended January 31, 1998, fiscal year 1996 refers to the 52 weeks ended February 1, 1997 and fiscal year 1995 refers to the 53 weeks ended February 3, 1996. The summary information should be read in conjunction with the financial statements and related notes thereto appearing elsewhere in this Prospectus, "Unaudited Pro Forma Condensed Consolidated Financial Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Fiscal Year 39 Weeks Ended ---------------------------------------------- -------------------------------- 1997 October 31, 1998 ---------------------- ------------------- Pro Pro November 1, Historical Forma(a) 1996 1995 Historical Forma(a) 1997 ---------- ---------- ---------- ---------- ---------- -------- ----------- (in thousands, except ratio and per share amounts) Statement of Operations Data: Net Sales............... $1,344,444 $1,294,748 $1,561,718 $1,780,768 $906,385 $903,074 $895,220 Gross margin............ 396,357 384,457 434,067 491,691 271,002 270,163 269,699 Operating expenses(b)... 401,578 373,281 530,757 612,102 296,180 282,768 308,666 Operating income (loss)................. (5,221) 11,176 (96,690) (120,411) (25,178) (12,605) (38,967) Loss before income taxes.................. (22,557) (18,525) (218,759) (311,946) (34,583) (33,794) (48,480) Income tax benefit...... - - - 104,533 - - - Net loss................ $ (22,557) $ (18,525) $ (218,759) $ (207,413) $(34,583) $(33,794) $(48,480) Loss per share: Basic and diluted...... $ (1.98) $ (1.81) $ (19.17) $ (18.17) $ (3.06) $ (3.30) $ (4.26) Shares used for computation: Basic and diluted...... 11,365 10,226 11,412 11,416 11,311 10,226 11,382 Ratio of earnings to fixed charges(c)....... - - - - - - -
October 31, 1998 -------------------- January 31, Pro 1998 Historical Forma(a) ----------- ---------- -------- Balance Sheet Data: Working capital(d)........................ $ 46,151 $ 10,836 $(15,939) Total assets.............................. 595,166 661,410 596,515 Long-term debt, less current maturities(d)............................ 27,073 26,211 61,440 Total stockholders equity (deficiency).... $(285,950) $(320,532) $ 85,000(e)
- -------- (a) Pro forma information gives effect to the consummation of the Plan, including adjustments for fresh-start reporting. Pro forma condensed consolidated statement of operations data for fiscal year 1997 and the thirty-nine week period ended October 31, 1998 is presented as if the Plan was consummated on February 1, 1997, and the balance sheet data at October 31, 1998 is presented as if the Plan was consummated on such date. See "Unaudited Pro Forma Condensed Consolidated Financial Information." These amounts are presented for informational purposes only and do not purport to represent what the Company's financial position or results of operations would have been if consummation of the Plan had actually occurred on such dates. (b) Net of other income. (c) For the periods presented above, earnings were insufficient to cover fixed charges by the amount of the respective loss before income taxes. As used herein, "earnings" consists of income (loss) before taxes plus fixed charges less capitalized interest. "Fixed charges" consist of interest expense including amortization of debt issuance costs, capitalized interest and a portion of rent expense which is deemed to be representative of an interest factor. (d) Excluding liabilities subject to settlement under the reorganization case. (e) See "Risk Factors--Post Bankruptcy Risks--Determination of Equity Value." 5 RISK FACTORS You should carefully consider the following factors and other information in this Prospectus before deciding to invest in any of the Securities being offered by the Selling Securityholders. Economic and Industry Risks Competition The discount retail business is highly competitive, and many of our competitors have greater resources than we do. We compete against national companies, such as Wal-Mart Stores, Inc., Target Stores and K-Mart Corp. and regional companies, such as Caldor Corp. and Ames Department Stores. Caldor Corp., which has been in bankruptcy since 1995, announced on January 22, 1999 that it intends to close all of its stores and liquidate its assets. Consumers choose among these companies based upon a number of factors, including price, location, product quality, merchandise selection, advertising and service. Other factors in the competition for consumers are generally beyond our control. These factors include: . consumer preferences; . changes in style; and . population trends. If we fail to compete successfully, customer traffic could be reduced, which would negatively impact sales and profits. In addition, while we believe that we are pursuing the proper merchandising and marketing strategies that will allow us to compete effectively in our operating areas, we can not make assurances that these strategies will further improve our performance, or that such strategies will remain valid in the future. Concentration in the Northeast Our stores are located exclusively in the Northeast. This makes us more susceptible to local and regional economic downturns than some of our competitors who are nationally diversified. As with our other competitors, we are also subject to a national economic downturn. Any economic downturn affecting us might cause consumers to reduce their spending, impacting our sales. In addition, our business is seasonal in nature, with a significant portion of our sales occurring in the fourth quarter, which includes the pivotal holiday selling season. If sales for the holiday selling season decline because of a regional or national economic downturn, or for any other reason, our sales and profits will be negatively impacted. In addition, the Northeast is generally a more expensive area of the country in which to own and operate stores. Since we are concentrated in the Northeast, we face higher average costs of operating stores than our national competitors. Merchandising Strategy Must Successfully Evolve Our profitability is dependent upon the success of our merchandising strategy which is to focus on three key merchandise categories: moderately- priced basic and casual apparel; basic and fashion items for the home; and frequently purchased convenience and commodity products. We believe we can strategically leverage our traditional strengths in the fashion and quality of our apparel and decorative home product offerings while driving customer traffic with selected hardlines merchandise. There can be no assurance that this strategy will be successful and, in the future, we must anticipate, gauge and appropriately revise this strategy to meet changing consumer demands. Labor Negotiations Unlike many of our competitors, the majority of our work force is unionized. We cannot predict the effect, if any, that any future collective bargaining agreements with these unions will have on our operations or financial performance. 6 Financial Risks High Leverage After giving effect to the reduction in our outstanding debt pursuant to the Plan of Reorganization, we have a reduced, but nevertheless substantial, amount of debt. Our pro forma consolidated ratio of total debt to total capitalization as of October 31, 1998 was approximately 0.73:1. See "Capitalization." We have a $270 million financing facility with BankBoston, N.A. as Administrative Agent and Issuing Bank (the "BankBoston Facility") under which we are allowed to borrow for general corporate purposes, working capital and inventory purchases. If we are unable to generate sufficient cash flow from operations in the future, or if we fail to satisfy the financial covenants contained in the BankBoston Facility, we could face default on the BankBoston Facility and other financing agreements. The leveraged nature of our capital structure will have several important effects on our operations, including the following: (i) we continue to have significant cash requirements for debt service; (ii) because our indebtedness under the BankBoston Facility bears interest at a floating rate, to the extent we have not hedged our interest rate exposure, we are sensitive to any increase in prevailing interest rates; (iii) funds available for capital expenditures will be limited; and (iv) our ability to meet our debt service obligations (and to satisfy the financial covenants contained therein) may be impaired. Our ability to meet such obligations in the future will be dependent upon our future performance which, in turn, will be subject to general economic conditions and to financial, business and other factors affecting our operations, including factors beyond our control. See "Business-Credit Facility." Our ability to repay such indebtedness at maturity or otherwise may depend upon our ability either to refinance or extend such indebtedness, to repay such indebtedness with proceeds of other capital transactions, such as the issuance of additional equity, or to sell assets. There can be no assurance that such refinancing or extension will be available on reasonable terms or at all, that additional equity will be issued, or that a sale of assets will occur. The inability to repay such indebtedness could have a material adverse effect on us. History of Losses We experienced significant losses from operations in fiscal years 1996 and 1995. In the long term, our ability to continue operations is dependent upon our ability to achieve profitable results of operations and positive cash flows. Although improvements have been made each year since fiscal year 1996, we have continued to incur net losses. For the 39 weeks ended October 31, 1998, we reported a net loss of $34.5 million as compared to a net loss of $48.5 million for the 39 weeks ended November 1, 1997. Additionally, our November and December sales performance was below plan. For fiscal year 1997, we reported a net loss of $22.6 million, for fiscal year 1996 we reported a net loss of $218.8 million and for fiscal year 1995 we reported a net loss of $207.4 million. There can be no assurance that we will achieve or maintain profitability in any future period. See "Management Discussion and Analysis of Financial Condition and Results of Operations." Restrictions Imposed by the Terms of the BankBoston Facility The BankBoston Facility is a $270 million financing facility which includes a $20 million junior secured "last in-last out" subfacility under which we are allowed to borrow for general corporate purposes, working capital and inventory purchases. The BankBoston Facility is a revolving credit facility which has affirmative and negative covenants which substantially restrict many aspects of our operations and finances. The BankBoston Facility is a revolving credit facility that took effect upon the Effective Date. This facility is for a term of up to three years and may not exceed the maximum principal amount of $270 million. Under the terms of the BankBoston Facility, we have agreed to certain financial covenants, including: . maintaining a minimum level of earnings before interest, taxes, depreciation and amortization; . capping our capital expenditures at $20 million annually, subject to certain exceptions; and 7 . agreeing not to let certain financial ratios which measure our debt coverage and accounts payable to inventory ratios drop below specified levels. See also "Terms of Outstanding Indebtedness-Credit Agreement." Risk to Continuing Operations if Covenants Not Met The covenants under the BankBoston Facility will limit our operational and financial flexibility and our ability to respond to changing retail conditions and take advantage of attractive business opportunities. Should we be unable to meet any of these covenants when required, it will be necessary to request waivers and/or amendments of the facility from BankBoston. There can be no assurance that the necessary waivers and/or amendments will be granted or that, if granted, they will be on terms acceptable or favorable to us. Failure to obtain such waivers and/or amendments could result in our obligations under the BankBoston Facility being declared immediately due and payable, in which case BankBoston could foreclose on the collateral securing the BankBoston Facility. See "Terms of Outstanding Indebtedness-Credit Agreement." Limitations on Future Growth Our growth is subject to (i) our ability to maintain or further increase revenues at existing stores, (ii) the availability of capital and new store sites and (iii) the restrictions on capital expenditures set forth in the BankBoston Facility, which prohibits annual capital expenditures in excess of $20 million unless our earnings, as calculated before interest, taxes, depreciation and amortization, are above $40 million annually and we do not default under the BankBoston Facility. There can be no assurance that we will be able to maintain or further increase revenues at current stores or that sufficient capital will be available to us or, if available, that it will be available on terms that we consider reasonable. Our inability or failure to maintain or further increase such revenues or obtain such sufficient capital on favorable terms could have a material adverse effect on our operations, business or financial condition. Our current plans are expected to require annual capital expenditures of approximately $20 million, which are within the restrictions contained in the BankBoston Facility. We are continually evaluating store locations and operations to determine whether to close stores that do not meet our performance objectives. Additionally, we may expand, downsize, relocate, or remodel existing stores. Further, numerous stores and our two distribution centers are in older facilities. The foregoing limitations on capital expenditures could prevent us from modernizing our distribution centers or remodeling our aging stores. Liquidity Although we have entered into the $270 million BankBoston Facility, we can make no assurances that our cash and cash equivalents on hand and our cash availability will be sufficient to meet our anticipated working capital needs and capital expenditures in the future. To finance future expenditures, we may need to issue additional securities and incur additional debt. We may not be able to obtain additional required capital on satisfactory terms, if at all. The failure to raise the funds necessary to finance future cash requirements could materially and adversely affect our operating results in future periods. We plan to sell our leasehold interest in our Yonkers, New York store. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Assets Pledged as Collateral under the BankBoston Facility Obligations under the BankBoston Facility are secured by liens on substantially all of our non-real estate assets. If, after default, BankBoston were to foreclose on the collateral securing the BankBoston Facility or if such assets were liquidated, the proceeds of such assets would be applied to satisfy our obligations under the BankBoston Facility. If this were to happen, it is unlikely that the remaining unencumbered assets would be sufficient to allow our equity holders to recover any significant amount. 8 Post-Bankruptcy Risks Recent Emergence from Chapter 11 Proceedings We emerged from Chapter 11 proceedings on January 29, 1999. Our experience in and recent emergence from Chapter 11 may affect our ability to negotiate favorable trade terms with certain manufacturers and other vendors. The failure to obtain such favorable terms could have a material adverse effect on our operations, business or financial condition. Fresh Start Reporting May Make Future Financial Statements Difficult to Compare For accounting purposes, we plan to use the end of our fiscal year ended January 30, 1999 as our emergence date. In accordance with AICPA Statement of Position 90-7, "Financial Reporting by Entities in Reorganization under the Bankruptcy Code" ("SOP 90-7"), we will adopt "Fresh-Start Reporting" and will reflect the effects of such adoption on our Consolidated Balance Sheet as of January 30, 1999. Accordingly, our Consolidated Balance Sheets after January 30, 1999 and our Consolidated Statements of Operations for periods after January 30, 1999 will not be comparable in certain material respects to the Consolidated Financial Statements for prior periods included elsewhere herein. For example, the Consolidated Statement of Operations for fiscal 1998 will include a gain relating to the debt discharged in the Chapter 11 proceedings. Since our financial statements will not be comparable to our previous financial statements in certain material respects, or the financial statements of our competitors who have not adopted Fresh-Start Reporting, it may be more difficult for third parties to accurately gauge our performance. This might cause the price of our securities to fluctuate more than the prices of the securities of our competitors. Determination of Equity Value The determination of equity value included in the unaudited pro forma condensed consolidated financial statements and elsewhere in this Prospectus was derived from an estimated enterprise value of the reorganized Bradlees and reduced by estimated embedded debt levels. The enterprise value was developed by an independent financial advisor for purposes of the filing of our Disclosure Statement in the United States Bankruptcy Court for the Southern District of New York in October 1998 (the "Disclosure Statement"). In developing the determination of equity value, our financial advisor used various assumptions and estimates, including projected embedded debt of approximately $90 million which represents the ongoing revolver facility that is estimated to remain after the seasonal cleanup of the facility. As a result, the equity value was assumed to be in the range of $75 to $90 million. For purposes of the Disclosure Statement and this Prospectus, we have determined that an equity value of $85 million represents a reasonable estimate of distributable equity value to the creditors. Subsequent to the filing of the Disclosure Statement, a number of events have occurred which may impact the determination of equity value, including but not limited to, information regarding our fourth quarter performance, a settlement with a landlord regarding the disposition of a leasehold interest and the pending liquidation of Caldor, a major competitor. In finalizing our fresh start reporting requirements, we are required to perform a final appraisal of the book value of our equity which will take into account the above matters and other pertinent events, and may likely result in a change to the determination of equity value reflected in the unaudited pro forma financial information. Accordingly, this equity value does not purport to be an estimate of current or future trading prices of securities and actual market prices of such securities after issuance will depend on various factors not possible to predict with certainty. Tax Consequences of the Plan of Reorganization; Potential Loss of Certain Tax Attributes As a result of the implementation of the Plan of Reorganization, we will (i) undergo an "ownership change" (generally, a greater than 50 percentage point change in ownership) for purposes of section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) realize cancellation of indebtedness income 9 ("COI") from the cancellation of certain indebtedness in exchange for Common Stock, 9% Convertible Notes and warrants to purchase shares of Common Stock. Because such ownership change and cancellation of indebtedness arose in a bankruptcy proceeding under Chapter 11, we avoided some of the adverse Federal income tax consequences generally associated with such changes (e.g. the COI realized will not be included in income). Nevertheless, we expect that our ability to offset future taxable income with net operating loss carryforwards ("NOLs"), as well as certain built-in losses and tax credits, will be limited and that certain of our tax attributes, including NOLs, will be reduced (but not eliminated). In addition, the sale of the Common Stock by the Selling Securityholders under this Prospectus, as well as the exercise of the warrants, may cause us to undergo another "ownership change" under Section 382 of the Code and, accordingly, may further limit our NOLs and certain built-in losses and tax credits to income. Risks Related to the Securities Limited Market for Common Stock and Notes Prior to our emergence from bankruptcy, the stock of the pre-reorganization company ("Old Bradlees") traded on the New York Stock Exchange. In October of 1997, the New York Stock Exchange delisted the stock of Old Bradlees. The Common Stock being offered hereby is listed on The Nasdaq National Market. The Notes being offered hereby are not listed on any securities exchange. There can be no assurance that a market will develop for the Securities, or that if a market does develop, that the market will have sufficient liquidity so as not to impact the price of the Securities. In addition, pursuant to our Plan of Reorganization, Shares of Common Stock and Warrants to purchase Common Stock will be issued to certain of our creditors. Some of these creditors may prefer to sell their Common Stock and/or Warrants, rather than to hold them on a long-term basis. The Shares, Notes and Warrants issued in the reorganization to creditors other than the Selling Securityholders will generally be freely tradeable as a result of an exemption from registration provided by the Bankruptcy Code. Accordingly, it is anticipated that the market for our Common Stock, to the extent one exists, will be volatile and the availability for unrestricted sale of such a large number of shares of Common Stock may have the effect of depressing the market price of the Common Stock. Restrictions on Common Stock Dividends Old Bradlees did not declare or pay cash dividends on its common stock ("Old Common Stock") or any other equity security while in Chapter 11, and we do not anticipate paying cash dividends on the Common Stock offered hereby or any other equity security in the foreseeable future. The BankBoston Facility specifically prohibits the payment of any type of dividends on the Common Stock. See "Terms of Outstanding Indebtedness-Credit Agreement." Future Stock Issuances Can Dilute Current Owners As part of the Plan of Reorganization, we have issued Warrants to purchase 1,000,000 shares of Common Stock at $7.00 per share. Pursuant to the Plan of Reorganization, we have also agreed to issue options to purchase 750,000 shares of our Common Stock at an exercise price per share which is the lowest 10-day rolling average of the closing prices of our Common Stock within the period between 60 and 90 days after the Effective Date (March 30, 1999 to April 29, 1999). These options will be issued when their exercise price is determined. Further, we can also issue additional securities (including under our stock option plan) in the future. When we sell a new security, the purchaser of that security is entitled to a proportionate share of the aggregate rights of the holders of that class of security. Thus, it is possible that the value we receive on the sale of a new security will be less than the proportionate value attributable to the existing holders of that security. Since all holders of the same security share proportionately the rights of the security, the pre- existing security holders will receive less value after the new security is issued than if we had not issued the new security. 10 Guarantor Does Not Have Significant Separate Assets Bradlees, Inc., which owns all of the outstanding capital stock of Bradlees Stores, Inc., will fully and unconditionally guarantee the 9% Convertible Notes. Substantially all of the assets of the Companies, on a consolidated basis, are held by Bradlees Stores, Inc. Fraudulent Conveyance Matters--Federal and state statutes allow courts, under specific circumstances, to void guarantees and require note holders to return payments received from guarantors. Under the federal bankruptcy law and comparable provisions of state fraudulent transfer laws, a guarantee could be voided, or claims in respect of a guarantee could be subordinated to all other debts of that guarantor under certain circumstances. In addition, any payment by that guarantor pursuant to its guarantee could be voided and required to be returned to the guarantor, or to a fund for the benefit of the creditors of the guarantor. Miscellaneous Business Risks Dependence on Key Personnel Our future success is largely dependent on the talents and efforts of Peter Thorner, our Chief Executive Officer and Chairman of the Board, and other members of senior management. We entered into an employment agreement with Mr. Thorner in 1995, but do not maintain a key person life insurance policy on the life of Mr. Thorner. The loss of Mr. Thorner or other members of our senior management could have a material adverse effect on our operations, business and financial condition. See "Management--Employment Agreement with Peter Thorner." Potential Year 2000 Liability We have determined that we must modify portions of our software so that our computer systems will properly recognize and use dates beyond December 31, 1999. We believe we can mitigate the impact of the Year 2000 disruption by upgrading or modifying existing software and, in certain instances, converting to new software. However, if the Year 2000 upgrades, modifications and conversions are not made, or are not made in a timely manner, the Year 2000 issue could have a material impact on our operations. We are using both internal and external resources to remediate, replace and test software for Year 2000 compliance. We have entered into a contract with a major outside consulting firm to provide the majority of the resources necessary to identify, and then replace or remediate, our affected systems. We intend to complete our Year 2000 project no later than the beginning of the fourth quarter of fiscal 1999, but currently expect to substantially complete the conversion by the second quarter of fiscal 1999. At this time, we expect the cost of the Year 2000 project to be approximately $3 to $4 million, the majority of which is being incurred in 1998 and included in SG&A expenses. Through October 31, 1998, we have incurred $1.9 million for such expense. The remaining major systems to be remediated or replaced are the Company's merchandise planning system (approximately 50% remediated) and store host systems (approximately 30% remediated) expected to be completed by the end of the first quarter of 1999, and the warehouse management system that is scheduled to be replaced by the end of the second quarter of 1999. A test of all systems, including store support and facility systems, for proper Year 2000 compliance is planned for the end of the second quarter of 1999. We are in the process of developing contingency plans in the event that such replacement or remediation is not fully completed in a timely manner. We have calculated the costs of the Year 2000 project and predicted the dates on which we plan to complete the Year 2000 modifications using our best estimates, which required using a number of assumptions of future events including the continued availability of certain resources, third party modification plans and other factors. However, we can not guarantee that we will achieve the predicted estimates and our actual results could differ materially from those plans. We are also attempting to obtain representations and assurances from our third party providers of services and goods, including vendors of software products, that their software is or will be Year 2000 11 compliant on a timely basis. However, because certain of our processes may be interrelated with, or dependent upon, systems outside our control, we can give no assurances that the implementation of our Year 2000 project will be successful. Change of Control not Restricted Our Plan of Reorganization prohibits us from having anti-takeover measures in our Articles of Organization and By-Laws. Numerous studies have shown that the presence of such anti-takeover provisions in a corporation's organizational documents has the result of increasing shareholder value in any attempted take- over. If we do not subsequently amend these documents to include such provisions, it is possible that our Board of Directors will be limited in its ability to respond to any potential takeover, thus reducing the ability of the Board to obtain maximum value for shareholders in a takeover. Board of Directors May Change Our current Board of Directors consists of 3 representatives chosen by us and 6 representatives chosen by creditors in our Chapter 11 proceeding. It is likely that the composition of our Board will change in the future as current members resign, decline to stand for re-election, or are not re-elected. This turnover in our directors may be more likely than it is for other companies because it is likely that one or more of our creditor constituencies (which some of our directors represent) will dispose of their ownership interests. The changing composition of our Board might result in changing corporate policies. 12 THE COMPANY General Bradlees, Inc. ("Bradlees") and its subsidiary companies operate 103 discount department stores as of January 1, 1999, in seven states in the Northeast, through Bradlees, Inc.'s subsidiary, Bradlees Stores, Inc. (collectively, the "Company") primarily in the heavily populated corridor running from the Boston to the Philadelphia metropolitan areas. One store is planned to be closed in March, 1999. Headquartered in Braintree, Massachusetts, the Company and its predecessor have been active in the discount department store business for 40 years. Background to Our Bankruptcy Reorganization Events Leading to the Chapter 11 Filing. During the early 1990's, Old Bradlees' business strategy relied heavily on opening new stores, remodeling existing locations and competing on the basis of price. From 1992 to January, 1995, we opened 15 new stores (10 in 1994) and remodeled 41 stores at a total capital cost of $182 million. The new stores were generally larger stores with rents that substantially exceeded the chain average rent per square foot. Some of the new stores were also multilevel facilities which further increased their operating costs when compared with other prototypical Bradlees stores. The store expansion and remodeling program marginally increased sales while gross margins declined and operating expenses increased. Old Bradlees' declining operating performance, coupled with the aggressive expansion program, began to erode our liquidity. Old Bradlees' liquidity further eroded in May and June, 1995 because of the unwillingness of factors and vendors to continue to extend trade credit. Old Bradlees, unable to obtain sufficient financing to satisfy factor and vendor concerns, was compelled to seek Bankruptcy Court protection on June 23, 1995. The Chapter 11 Filing. Old Bradlees, and each of its subsidiaries filed petitions for relief under Chapter 11 of the United States Bankruptcy Code on June 23, 1995. Once in bankruptcy, we filed an initial plan of reorganization and related disclosure statement with the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") on April 13, 1998 and filed an Amended Plan of Reorganization and related disclosure statement with the Bankruptcy Court on October 2, 1998. Our Plan of Reorganization was originally confirmed by the Bankruptcy Court on November 18, 1998. The United States District Court for the Southern District of New York reversed this confirmation on December 23, 1998. We modified the Plan of Reorganization, and the modified Plan of Reorganization was confirmed by the Bankruptcy Court on January 27, 1999. The modified Plan of Reorganization became effective on January 29, 1999 (the "Plan of Reorganization"). The Chapter 11 reorganization process and our Plan of Reorganization are discussed below. The Plan of Reorganization The following chart shows the organization of Old Bradlees and the organization of the Company following its reorganization. 13 CORPORATE STRUCTURE PRIOR TO THE REORGANIZATION BRADLEES, INC. BRADLEES ADMINISTRATIVE CO., INC. BRADLEES STORES INC. MAXIMA DOSTRA REALTY NEW HORIZONS NEW HORIZONS NEW HORIZONS SERVICES, CO., INC. OF BUCKNER, OF WESTBURY, OF YONKERS, INC. INC. INC. INC. CORPORATE STRUCTURE AFTER THE REORGANIZATION BRADLEES, INC. BRADLEES STORES, INC. NEW HORIZONS OF YONKERS, INC. 14 The following discussion provides general background information regarding the Chapter 11 process, but is not intended to be an exhaustive summary. CHAPTER 11 REORGANIZATION UNDER THE BANKRUPTCY CODE. After we entered Chapter 11, Section 362 of the Bankruptcy Code did not allow our creditors and other parties in interest to take certain actions without Bankruptcy Court approval. Among other things, they were not allowed to: . Commence or continue a judicial, administrative or other proceeding against us a) which was or could have been commenced prior to commencement of the Chapter 11 proceeding, or b) to recover a claim that arose prior to commencement of the case; . Enforce any judgments against us that existed prior to our entry into bankruptcy; . Take any action to obtain possession of our property or to exercise control over our property or our estates; . Create, perfect or enforce any lien against our property; . Collect, assess or recover claims against us that arose before the commencement of the case; or . Offset any debt owing to us that arose prior to the commencement of the case against a claim of such creditor or party-in-interest against us that arose before the commencement of the case. Although we were authorized to operate our business as a debtor-in- possession, we were not permitted to engage in transactions outside the ordinary course of business without first complying with the notice and hearing provisions of the Bankruptcy Code, and if necessary, obtaining Bankruptcy Court approval. An official unsecured creditors' committee was formed by the United States Trustee. This committee and various other parties in interest, including creditors holding claims, such as the pre-petition bank group, had the right to appear and be heard by the Bankruptcy Court on our applications relating to certain business transactions. We were required to pay certain expenses of the committee, including legal and accounting fees, to the extent allowed by the Bankruptcy Court. In addition, upon the approval of the Bankruptcy Court, we made monthly adequate protection payments of $300,000 to those creditors in the pre-petition bank group, for an aggregate total payment of $13,300,000 as of January 27, 1999. PLAN OF REORGANIZATION - PROCEDURES. A debtor-in-possession has the exclusive right to propose and file with the Bankruptcy Court a plan of reorganization for a period of time which can be extended by the Bankruptcy Court. Given the seasonality and magnitude of our operations, our change in business strategies, and the number of interested parties possessing claims that had to be resolved in this Chapter 11 case, the plan formulation process was complex. Accordingly, we obtained additional extensions of the exclusivity period to August 3, 1998. The Bankruptcy Court approved the disclosure statement on October 5, 1998 and confirmed the modified Plan of Reorganization on January 27, 1999. Our Plan of Reorganization contained distributable value to creditors of approximately $165 million, which consists of: . Approximately $16 million of administrative claim payments; . $14 million in cash to the bank group and the unsecured creditors; . A $40 million note primarily payable to our pre-Chapter 11 bank group, which is anticipated to be primarily paid down through proceeds of sale of our leasehold interest in our Yonkers, New York store and the modification of the lease terms of our Union Square, New York store; 15 . New Bradlees' Common Stock with an estimated value of $85 million. The Old Bradlees Common Stock was canceled; and . Certain notes totalling $7.3 million and other distributions totalling $2.7 million. The Plan of Reorganization became effective January 29, 1999 (the "Effective Date"). Pursuant to the Plan of Reorganization, after giving effect to various elections made by various creditors, the following occurred on the Effective Date: . Although creditors can dispute the disallowance of claims after the Effective Date, the claims of creditors are estimated to be allowed in the aggregate amount of approximately $265 million. The holders of these claims are expected to receive: . $30.6 million in cash; . 9% Convertible Notes in an original aggregate principal amount equal to $40.0 million; . 10,225,711 shares of our Common Stock; . warrants to purchase 1,000,000 shares of our Common Stock at a price of $7.00 per share (which warrants expire on January 29, 2004); . 9% CAP Notes in an original aggregate principal amount of $547,094; . 9% Cure Notes in an original aggregate principal amount of $3.4 million; and . 9% Tax Notes in an original aggregate principal amount of $3.4 million. . The interests of all stockholders holding stock in Old Bradlees were terminated, and the stock of Old Bradlees was canceled. . All outstanding bonds, notes, indentures and like instruments were canceled. . Approximately $250 million in debtor-in-possession financing was paid in full. . We entered into the BankBoston Facility, which provides for a secured revolving line of credit of $270 million with a maximum term of up to 3 years. See "Business -- Credit Facility." . One of our subsidiaries, New Horizons of Yonkers, Inc., will remain in Chapter 11. All of the operations of the Yonkers store were transferred to Bradlees Stores, Inc. . We merged Bradlees Administrative Co., Inc. into Bradlees, Inc. We also merged all of the subsidiaries of Bradlees Stores, Inc., with the exception of New Horizons of Yonkers, Inc. and Dostra Realty Co., Inc., into Bradlees Stores, Inc. . The tenure of the Board of Directors of Bradlees, Inc. terminated on the Effective Date. The following became new members of the Board of Bradlees, Inc. as of the Effective Date: . We selected three members (Messrs. Thorner, Lynn, and Friedman); . The Bank Group selected two members (Messrs. Altschuler and Lieberman); . The Unofficial Committee selected one member (Mr. MacDonald); . The Creditors Committee selected one member (Mr. Clingman,); and . The Bank Group, the Unofficial Committee and the Creditors Committee, acting together, selected two members (Messrs. Blauner and Roth). See "Management--Board of Directors of Bradlees, Inc. and Its Committees." . We will pay an aggregate emergence bonus of $1,000,000 and entered into an agreement to pay additional bonuses of $2,000,000 if certain conditions are met. We also paid deferred bonuses of $1,000,000 to certain executives. See "Executive Compensation -- Management Emergence Bonus Plan and Corporate Bonus Plan." 16 . We determined to grant, on or about April 29, 1999, options to purchase an aggregate of 750,000 shares of Common Stock to certain members of our management. See "Management--Stock Option Plan for Key Employees." . We agreed to register the resale of the Common Stock, the 9% Convertible Notes, the Common Stock issuable upon the Conversion of the Notes and the Common Stock issuable upon exercise of the Warrants received by certain parties, directly or indirectly as a result of their ownership of participation interests in claims resulting in the issuance of such securities with the Securities and Exchange Commission under the Securities Act of 1933. . The Plan of Reorganization also provided for many other matters, including satisfaction of numerous other claims, satisfaction of certain other claims in accordance with negotiated settlement agreements and an agreement to keep in place certain retirement and employment agreements. THE FOREGOING IS A SUMMARY OF THE MATERIAL TERMS OF THE PLAN OF REORGANIZATION. A COMPLETE COPY OF THE PLAN OF REORGANIZATION HAS BEEN FILED AS AN EXHIBIT TO THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART. 17 USE OF PROCEEDS We will not receive any proceeds from the sale of Securities by the Selling Stockholders. DIVIDEND POLICY We do not anticipate paying cash dividends in the foreseeable future. We expect that we will retain all available earnings generated by our operations for the development and growth of our business. Any future determination as to the payment of dividends will be made at the discretion of the Board of Directors and will depend upon our operating results, financial condition, capital requirements, general business conditions and such other factors as the Board of Directors deems relevant. Certain financing agreements, including the BankBoston Facility, restrict our ability to pay cash dividends on the Common Stock and make certain other restricted payments (as defined therein). Specifically, under the terms of the BankBoston Facility, we have agreed not to pay dividends of any kind. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." 18 CAPITALIZATION The following table sets forth the unaudited capitalization of the Company at October 31, 1998, and as adjusted to give pro forma effect to the consummation of the Plan of Reorganization at that date. The presentation does not purport to represent what the Company's actual capitalization would have been had such transactions in fact been consummated on such date. The table should be read in conjunction with the Company's financial statements and the related notes thereto, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Unaudited Pro Forma Condensed Consolidated Financial Information" included elsewhere in this Prospectus.
October 31, 1998 -------------------- Pro Historical Forma ---------- -------- (in thousands) Long-term debt, including current maturities: Liabilities subject to settlement under the reorganization case................................... $ 548,788 $ - (1) DIP facility/BankBoston Facility....................... 157,392 165,963 Notes payable.......................................... - 36,300 (2) Capital lease obligations.............................. 27,249 26,928 --------- -------- Total long-term debt, including current maturities.... 733,429 229,191 Stockholders' equity (deficiency)(3): Common stock........................................... 115 102 (2) Additional paid in capital............................. 137,821 84,898 (2) Accumulated deficit.................................... (457,665) - Treasury stock, at cost................................ (803) - --------- -------- Total stockholders' equity (deficiency)................. (320,532) 85,000 (4) --------- -------- Total capitalization.................................... $ 412,897 $314,191 ========= ========
- -------- (1) Reflects cancellation of liabilities at the Effective Date. (2) Reflects issuance of $40 million of 9% Convertible Notes less $11 million repayment from the Union Square proceeds, and certain other long-term debt and estimated equity value of the new Common Stock and Warrants issued in connection with settlement of claims. (3) Excludes 1,000,000 shares of Common Stock reserved for issuance upon exercise of the Warrants and 750,000 shares of Common Stock reserved for issuance upon exercise of options we have agreed to grant. The Warrants will be valued along with the Common Stock after the Effective Date and the total equity value may be modified as a result. (4) See "Risk Factors--Post Bankruptcy Risks--Determination of Equity Value." 19 SELECTED FINANCIAL DATA The selected data presented below under the captions "Statement of Operations Data" and "Balance Sheet Data" for, and as of the end of, each of the years in the five-year period ended January 31, 1998, are derived from the consolidated financial statements of the Company, which consolidated financial statements have been audited by Arthur Andersen LLP (fiscal year 1997) or Deloitte & Touche LLP (pre-fiscal year 1997), independent certified public accountants. The consolidated financial statements as of January 31, 1998 and February 1, 1997, and for each of the years in the three-year period ended January 31, 1998, and the independent auditors' reports thereon, are included elsewhere in this Prospectus. Fiscal year 1994 refers to the 52 weeks ended January 28, 1995 and fiscal year 1993 refers to the 52 weeks ended January 29, 1994. Certain reclassifications have been made to the operating expenses and operating income of fiscal years 1994 and 1993 to conform to the current presentation. The selected data should be read in conjunction with the consolidated financial statements for the three-year period ended January 31, 1998, the related notes and the independent auditors' reports, which contain explanatory paragraphs for fiscal years 1995-1997 relating to the Company's filing for reorganization under Chapter 11 and raise substantial doubt about its ability to continue as a going concern, appearing elsewhere in this Prospectus. The consolidated financial statements and the selected data do not include any adjustments that might result from the outcome of these uncertainties. As a result of the Company filing a voluntary petition to reorganize under Chapter 11 on June 23, 1995 and operating as a debtor-in-possession thereafter, the selected financial data for periods prior to June 23, 1995 are not comparable in certain material respects to periods subsequent to such date. The selected data presented below for the thirty-nine week periods ended October 31, 1998 and November 1, 1997 and as of October 31, 1998 and November 1, 1997 are derived from the unaudited condensed consolidated financial statements of the Company included elsewhere in this Prospectus.
Unaudited 39 Weeks Ended Fiscal Year ----------------------- ---------------------------------------------------------- October 31, November 1, 1998 1997 1997 1996 1995 1994 1993 ----------- ----------- ---------- ---------- ---------- ---------- ---------- (in thousands, except per share amounts and ratios) Statement of Operations Data: Net sales............... $ 906,385 $ 895,220 $1,344,444 $1,561,718 $1,780,768 $1,916,555 $1,880,511 Gross margin........... 271,002 269,699 396,357 434,067 491,691 591,160 603,504 Operating expenses(a)... 296,180 308,666 401,578 530,757 612,102 549,154 544,386 Operating income (loss)................. (25,178) (38,967) (5,221) (96,690) (120,411) 42,006 59,118 Income (loss) before income taxes and extraordinary items.... (34,583) (48,480) (22,557) (218,759) (311,946) 10,011 26,069 Income tax benefit (expense).............. - - - - 104,533 (4,205) (12,619) Income (loss) before extraordinary items and cumulative effect of accounting changes..... (34,583) (48,480) (22,557) (218,759) (207,413) 5,806 13,450 Extraordinary items(b).. - - - - - - (5,200) Cumulative effect of ac- counting changes(c).... - - - - - (485) (1,475) Net income (loss)....... $ (34,583) $ (48,480) $ (22,557) $ (218,759) $ (207,413) $ 5,321 $ 6,775 Income (loss) per share: Basic and diluted...... $ (3.06) $ (4.26) $ (1.98) $ (19.17) $ (18.17) $ .47 $ .60 Shares used for computation............ 11,311 11,382 11,365 11,412 11,416 11,353 11,273 Ratio of earnings to fixed charges(d)....... - - - - - 1.31 1.81 Balance Sheet Data: Working capital(e)...... $ 10,836 $ 19,530 $ 46,151 $ 68,649 $ 200,195 $ 32,874 $ 88,623 Total assets............ 661,410 700,007 595,166 604,200 798,662 884,814 785,845 Long-term debt, less current maturities(e).. 26,211 32,738 27,073 33,296 53,396 289,643 269,798 Total stockholders' eq- uity (deficiency)...... $(320,532) $(311,705) $ (285,950) $ (263,293) $ (45,010) $ 163,432 $ 163,680
- -------- (a) Net of other income. (b) The extraordinary item in fiscal year 1993 resulted from the refinancing of a credit agreement and the associated write-off of unamortized deferred financing costs. 20 (c) The fiscal year 1994 charge for the cumulative effect of accounting changes resulted from the adoption of Statement of Financial Accounting Standards No. 112, "Employers' Accounting for Postemployment Benefits," and the fiscal year 1993 charge resulted from a change in the method of discounting accrued workers' compensation and general liability claims. (d) For the periods presented since fiscal year 1994, earnings were insufficient to cover fixed charges by the amounts of the respective loss before income taxes. For purposes of computing the ratio of earnings to fixed charges, "earnings" consist of income (loss) before taxes and extraordinary items plus fixed charges less capitalized interest. "Fixed charges" consist of interest expense, including amortization of debt issuance cost, capitalized interest and a portion of rent expense which is deemed to be representative of an interest factor. (e) Excludes liabilities subject to settlement under the reorganization case after the Chapter 11 filing. 21 UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION The following unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statements of operations are based on the statements of Bradlees included elsewhere in this Prospectus as adjusted to give effect to the consummation of the Plan of Reorganization. The unaudited pro forma condensed consolidated statements of operations have been prepared as if the Effective Date of the Plan of Reorganization had occurred on February 1, 1997. The unaudited pro forma condensed consolidated balance sheet has been prepared assuming the Effective Date of the Plan of Reorganization had occurred on October 31, 1998. The unaudited pro forma condensed consolidated financial information and accompanying notes should be read in conjunction with the Company's financial statements and the notes thereto appearing elsewhere in this Prospectus. The Unaudited Pro Forma Condensed Consolidated Financial Information is presented for informational purposes only and does not purport to represent what the Company's financial position or results of operations would actually have been if the Effective Date of the Plan of Reorganization had occurred on such date or at the beginning of the period indicated, or to project the Company's financial position or results of operations at any future date or for any future period. 22 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (in thousands)
Pro Forma Adjustments Pro Forma Oct. 31, 1998 Debits Credits Oct. 31, 1998 ------------- ---------- ----------- ------------- ASSETS Current assets: Unrestricted cash and cash equivalents...... $ 10,959 $ 11,000 $ 11,000 $ 10,959 Restricted cash and cash equivalents...... 25,129 - 23,929(2) 1,200 -------- ---------- ----------- -------- Total cash and cash equivalents.......... 36,088 11,000 34,929 12,159 -------- ---------- ----------- -------- Accounts receivable.... 11,925 11,925 Inventories............ 318,883 1,000(3h) 317,883 Prepaid expenses....... 11,031 - - 11,031 -------- ---------- ----------- -------- Total current assets.. 377,927 11,000 35,929 352,998 -------- ---------- ----------- -------- Property, plant and equipment, net: Property excluding capital leases, net... 123,892 - 11,000(2) 110,692 2,200(3j) Property under capital leases, net........... 17,732 9,196(3b) 5,406(3j) 21,522 -------- ---------- ----------- -------- Total property, plant and equipment, net... 141,624 9,196 18,606 132,214 -------- ---------- ----------- -------- Other assets: Lease interests at fair value, net............ 137,350 - 59,530(3j) 77,820 Assets held for sale... - 3,400(2) - 14,000 10,600(3d) Other, net............. 4,509 2,475(2) 1,222(3g) 4,498 1,264(3i) Reorganization value in excess of revalued assets................ - 14,985(3k) - 14,985 -------- ---------- ----------- -------- Total other assets.... 141,859 31,460 62,016 111,303 -------- ---------- ----------- -------- Total assets.......... $661,410 $ 51,656 $ 116,551 $596,515 ======== ========== =========== ========
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 23 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (in thousands)
Pro Forma Adjustments Pro Forma Oct. 31, 1998 Debits Credits Oct. 31, 1998 ------------- ---------- ----------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable....... $ 179,413 $ - $ - $179,413 Accrued expenses....... 23,221 7,000(2) 2,000(1) 15,746 2,475(3c) Self-insurance reserves.............. 6,027 - - 6,027 Short-term debt........ 157,392 - 8,571(2) 165,963 Current portion of notes and capital lease obligations..... 1,038 - 750(2) 1,788 --------- ---------- ---------- -------- Total current liabilities.......... 367,091 9,475 11,321 368,937 --------- ---------- ---------- -------- Long-term liabilities: Obligations under capital leases........ 26,211 321(3b) - 25,890 Convertible notes payable............... - 11,000 40,000(2) 29,000 Deferred income taxes.. 8,581 8,581(3h) - - Self-insurance reserves.............. 12,237 - - 12,237 Unfavorable lease liability............. - - 45,573(3j) 45,573 Other long-term liabilities........... 19,034 - 2,000(1) 29,878 6,550(2) 2,294(3f) --------- ---------- ---------- -------- Total long-term liabilities.......... 66,063 19,902 96,417 142,578 --------- ---------- ---------- -------- Liabilities subject to settlement under the reorganization case.... 548,788 548,788(2) - - Stockholders' equity (deficiency): Common stock Par value............. 115 115(3a) 102(2) 102 Additional paid-in- capital.............. 137,821 137,821(3a) 84,898(2) 84,898 Accumulated deficit.... (457,665) 4,000(1) 393,463(2) - 68,202(3) Treasury stock, at cost.................. (803) - 803(3a) - --------- ---------- ---------- -------- Total stockholders' equity (deficiency).. (320,532) 141,936 547,468 85,000 --------- ---------- ---------- -------- Total liabilities and stockholders' equity (deficiency)......... $ 661,410 $ 720,101 $ 655,206 $596,515 ========= ========== ========== ========
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 24 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands except per share amounts)
Pro Forma 39 Weeks 39 Weeks Ended Pro Forma Adjustments Ended Oct. 31, 1998 Debits Credits Oct. 31, 1998 ------------- ---------- ----------- ------------- Total sales............. $939,203 3,381(1) - $935,822 Leased department sales.................. 32,818 70(1) - 32,748 -------- -------- Net sales............... 906,385 903,074 Cost of goods sold...... 635,383 - 2,472(1) 632,911 -------- -------- Gross margin............ 271,002 270,163 Leased department and other operating in- come................... 8,757 25(1) - 8,732 -------- -------- 279,759 278,895 Selling, store operating, administrative and distribution expenses.. 280,326 2,967(3) 631(1) 278,498 1,021(6) 5,773(7) 724(10) 136(11) Depreciation and amorti- zation expense......... 24,370 - 3(1) 12,761 5,103(3) 2,253(5) 469(6) 3,781(9) Loss on disposition of properties............. 241 241 Interest and debt ex- pense.................. 11,960 869(4) 1,215(4) 21,189 9,575(8) Reorganization items.... (2,555) 2,555(2) - - -------- -------- Net loss................ $(34,583) $(33,794) ======== ======== Comprehensive loss...... $(34,583) $(33,794) ======== ======== Net loss per share - ba- sic and diluted........ $ (3.06) $ (3.30)(12) ======== ======== Weighted average shares outstanding (in thousands) - basis and diluted................ 11,311 10,226 ======== ========
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 25 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands except per share amounts)
Pro Forma 52 Weeks 52 Weeks Ended Pro Forma Adjustments Ended Jan. 31, 1998 Debits Credits Jan. 31, 1998 ------------- ----------- ----------- ------------- Total sales............. $1,392,250 $ 51,267(1) $1,340,983 Leased sales............ 47,806 1,571(1) 46,235 ---------- ---------- Net sales............... 1,344,444 1,294,748 Cost of goods sold...... 948,087 35,343(1) 910,291 2,453(2) ---------- ---------- Gross margin............ 396,357 384,457 Leased department and other operating income................. 12,151 389(1) 11,762 ---------- ---------- 408,508 396,219 Selling, store operating, administrative and distribution expenses.. 382,910 3,957(4) 14,617(1) 370,556 1,361(7) 7,697(8) 4,879(11) 237(12) Depreciation and amortization expense... 36,244 187(1) 19,912 7,464(4) 3,004(6) 636(7) 5,041(10) Gain on disposition of properties............. (5,425) (5,425) Interest and debt expense................ 16,584 15,510(9) 3,751(5) 29,701 1,358(5) Reorganization items.... 752 752(3) - ---------- ---------- Loss before income taxes.................. (22,557) (18,525) Income taxes............ - - ---------- ---------- Net loss................ $ (22,557) $ (18,525) ========== ========== Net loss per share - basic and diluted..... $ (1.98) $ (1.81)(13) ========== ========== Weighted average shares outstanding (in thousands) - basic and diluted................ 11,365 10,226 ========== ==========
See accompanying notes to unaudited pro forma condensed consolidated financial statements. 26 BRADLEES, INC. NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following notes set forth the explanations and assumptions used and adjustments made in preparing the unaudited pro forma condensed consolidated balance sheet as of October 31, 1998, and the unaudited pro forma condensed consolidated statements of operations for the 52 weeks ended January 31, 1998 and for the 39 weeks ended October 31, 1998. The unaudited pro forma condensed consolidated financial statements reflect the adjustments described under "Pro Forma Adjustments" below, which are based on the assumptions and preliminary estimates described therein, which are subject to change. These statements do not purport to be indicative of the financial position and results of operations of Bradlees as of such dates or for such periods, nor are they indicative of future results. Furthermore, these unaudited pro forma condensed consolidated financial statements do not reflect anticipated changes which may occur as the result of activities before and after the Effective Date of the Plan of Reorganization and other matters. (For the purposes of the unaudited pro forma condensed consolidated financial statements, the "Effective Date" is assumed to be October 31, 1998 for the unaudited pro forma condensed consolidated balance sheet, and February 1, 1997 for the unaudited pro forma condensed consolidated statements of operations.) The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included elsewhere in this Prospectus. PRO FORMA ADJUSTMENTS The unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statements of operations reflect the following pro forma adjustments based on the assumptions described below: October 31, 1998 Balance Sheet Pro Forma Adjustments 1. Reserves established prior to emergence for emergence-related and performance bonuses payable on the Effective Date or subsequent to the Effective Date. 2. Plan consummation distributions that include, among other things, an estimated equity value of $85.0 million, $14.0 million in cash distributions, and 9% Convertible Notes totaling $40.0 million. In connection with the consummation of the Plan, we will receive $11 million in cash for the modification to the Union Square lease and immediately pay down the 9% Convertible Notes. The reduction of $11.0 million in property, plant and equipment, net, includes a write-off of $7.6 million for the Union Square store and a reclassification of $3.4 million to assets held for sale for one store lease that is expected to be sold to help fund the further paydown of the 9% Convertible Notes. The payment of $23.9 million out of restricted funds and $8.6 million out of borrowings is for certain settlements due under the POR and for financing costs of $2.5 million associated with the post-emergence revolver. The total payment of $32.5 million is expected to fund all administrative and convenience claims, including the bonuses due at consummation and the exit financing costs, with the remaining restricted cash held for security deposits for post-emergence payments. 3. Fresh-start accounting adjustments that reflect the estimated adjustments necessary to adopt fresh-start reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Fresh-start reporting requires that the reorganization value of Bradlees be allocated to Bradlees' assets in conformity with APB Opinion 16, "Business Combinations", for transactions reported on the basis of the purchase method. The portion of the assigned reorganization value exceeding the revalued net assets is recorded as a long-term asset. The calculation of the preliminary and estimated new equity value is discussed in detail in Section Three (Subsection XIII) of the Disclosure Statement filed as an exhibit to this Registration Statement. See also "Risk Factors--Post Bankruptcy Risks-- Determination of Equity Value." 27 The fresh-start accounting adjustments are summarized as follows: a. Cancellation of the old common stock pursuant to the Plan and close-out to retained earnings. b. A revaluation of all capital lease obligations and related capital lease assets using our estimated October 31, 1998 borrowing rate (12%) for similar financings. c. Revaluation of the straight-line rent reserve ($2.5 million). Straight-line rent is recalculated on a going-forward basis by the reorganized Bradlees. d. Revaluation of the store lease held for sale to an estimated total net realizable value of $14 million. e. Restatement of LIFO merchandise inventories to estimated fair value approximates FIFO cost. Inventories valued at FIFO cost then become the base year layer for LIFO inventories in the post-consummation financial reporting period. No LIFO adjustment is expected. f. Recording of additional pension plan liability of $4.3 million (excluding the impact from the fourth quarter non-union pension freeze--Note 8 to the October 31, 1998 Form 10-Q) and additional Supplemental Executive Retirement Plan (the "SERP") liability of $1.4 million, reduced by the write-off of the unrecognized FAS No. 106 prior service costs of $3.4 million. g. Revaluation of the intangible SERP asset ($1.2 million) to its estimated net realizable value. h. Write-off ($8.6 million) of deferred income taxes (due to a change in the status of timing differences) and a $1.0 million reduction to reflect inventory at its estimated net realizable value. i. Write-off of the unamortized deferred financing charges ($1.3 million) associated with the terminated Debtor-in-Possession (DIP) bank facility which will be amortized prior to emergence. j. Revaluation of fixed assets and leasehold interests based upon the estimated fair market value of properties and leases while considering the current markets in which Bradlees has locations. This revaluation resulted in, among other things, the recording of a write-down of $59.5 million in favorable lease interests and an unfavorable lease liability of $45.6 million for certain locations. The remaining favorable lease interests and the unfavorable lease liability will both be amortized to rent expense. k. Recording of the reorganization value in excess of the revalued assets at October 31, 1998. The Company expects to incur charges of approximately $5.1 million prior to emergence for an estimated going-out-of-business inventory impairment of $1.5 million and other store closing costs of $3.6 million for two store closings anticipated to occur by the end of fiscal year 1999. Pro Forma Adjustments - Statement of Operations for the Thirty-nine Weeks Ended October 31, 1998 1. To eliminate the sales and expense amounts associated with five stores closed in February, 1998. 2. To eliminate reorganization items. 3. Adjustment in amortization of lease interests revalued under fresh- start reporting. 4. To record amortization of post-emergence deferred financing costs and reverse the historical year to date amortization of deferred financing costs. 28 5. Reduction in depreciation expense due to certain reclassifications to assets held for sale and fixed asset write-offs resulting from fresh-start reporting. 6. To adjust lease rent expense and amortization expense for revised straight-line rent calculations. 7. To adjust lease rent expense for amortization of the unfavorable lease liability. 8. To adjust interest expense for amortization of the discount on the unfavorable lease liability and for increased interest expense resulting from a slightly higher average revolver borrowing level, the 9% Convertible Notes and other issued notes. 9. To record reduction in depreciation and amortization expense resulting from the allocation of the estimated excess of revalued assets over the reorganization value at February 1, 1997. 10. To record additional FAS No. 106 expense as a result of fresh-start reporting. 11. To reduce pension expense as a result of fresh-start reporting. 12. Pro forma earnings per share were computed based on the estimated weighted average number of common shares outstanding during the applicable period assuming that the Plan was effective on February 1, 1997. Pro Forma Adjustments - Statement of Operations for the Fiscal Year Ended January 31, 1998 1. To eliminate the sales and expense amounts associated with six stores closed since February 1, 1997, excluding one store that was assumed to be closed and sold in the ordinary course of business in January, 1998. 2. To eliminate the provision for inventory impairment for the stores closed in 1998. 3. To eliminate reorganization items, which include charges associated with closing the six stores. 4. Adjustment in amortization of lease interests revalued under fresh- start reporting. 5. To record amortization of post-emergence deferred financing costs and reverse the historical fiscal year 1997 amortization of deferred financing costs. 6. Reduction in depreciation expense due to certain reclassifications to assets held for sale and fixed asset write-offs resulting from fresh-start reporting. 7. To adjust lease rent expense and amortization expense for revised straight-line rent calculations. 8. To adjust lease rent expense for amortization of the unfavorable lease liability. 9. To adjust interest expense for amortization of the discount on the unfavorable lease liability and for increased interest expense resulting from a higher average revolver borrowing level and the 9% Convertible Notes and other issued notes. 10. To record reduction in depreciation and amortization expense resulting from the allocation of the estimated excess of revalued assets over the reorganization value at February 1, 1997. 11. To record additional FAS No. 106 expense and eliminate the fiscal year 1997 curtailment gain as a result of the effect of fresh-start reporting and the associated write-off of unamortized prior service costs. 12. To reduce pension and SERP expense as a result of the effect of fresh-start reporting. 13. Pro forma earnings per share were computed based on the estimated weighted average number of common shares outstanding during the applicable period assuming that the Plan was effective on February 1, 1997. 29 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations The following discussion and analysis is based on our results of operations detailed below for the 52 weeks ended January 31, 1998 ("1997"), the 52 weeks ended February 1, 1997 ("1996") and the 53 weeks ended February 3, 1996 ("1995"). The financial information discussed below should be read in conjunction with the Consolidated Financial Statements and Notes thereto included elsewhere in this Prospectus. The following table sets forth information concerning the number of our stores.
Fiscal Year Ended January 31, 1998 February 1, 1997 February 3, 1996 ---------------- ---------------- ---------------- Stores, beginning of period.................... 110 134 136 New stores................. - 3 - Closed stores.............. (1)(a) (27) (2) --- --- --- Stores, end of period...... 109 110 134 === === ===
- -------- (a) Excludes six stores closed in February, 1998. The following table sets forth the amounts (in millions) and the percentages of net sales for the items reflected in our Statements of Operations for the periods indicated.
1997 1996 1995 ---------------- ---------------- --------------- Net sales............... $ 1,344.4 100.0 % $ 1,561.7 100.0 % $1,780.8 100.0 % Cost of goods sold...... 948.0 70.5 % 1,127.6 72.2 % 1,289.1 72.4 % --------- ----- --------- ----- -------- ----- Gross margin............ 396.4 29.5 % 434.1 27.8 % 491.7 27.6 % Leased department and other operating income................. 12.1 0.9 % 13.7 0.9 % 15.1 0.8 % --------- ----- --------- ----- -------- ----- 408.5 30.4 447.8 28.7 % 506.8 28.5 % Selling, store operating, administrative and distribution expenses.. 382.9 28.5 % 504.0 32.3 % 572.8 32.2 % Depreciation and amortization expense... 36.2 2.7 % 42.2 2.7 % 54.4 3.1 % --------- ----- --------- ----- -------- ----- Operating loss.......... (10.6) (0.8)% (98.4) (6.3)% (120.4) (6.8)% Gain on disposition of properties............. (5.4) (0.4)% (1.7) (0.1)% - - Interest and debt expense................ 16.6 1.2 % 11.5 0.7 % 27.2 1.5 % Impairment of long-lived assets................. - - 40.8 2.6 % 99.4 5.6 % Reorganization items.... 0.8 0.1 % 69.8 4.5 % 65.0 3.6 % Income tax benefit...... - - - - (104.6) (5.9)% --------- ----- --------- ----- -------- ----- Net loss................ $ (22.6) (1.7)% $ (218.8) (14.0)% $ (207.4) (11.6)% ========= ===== ========= ===== ======== =====
Our business is seasonal in nature, with a significant portion of our net sales occurring in the fourth quarter, which includes the holiday selling season. Comparable store sales, which include leased shoe department sales, for each year are discussed below and represent percentage increases/decreases over the prior year for stores that were open and operated by Bradlees for at least the prior full fiscal year. The rate of inflation did not have a significant effect on sales during these years. 1997 Compared to 1996 Net sales for 1997 declined $217.3 million or 13.9% from 1996 due primarily to the closing of 27 stores during 1996 and a 5.0% decrease in comparable store sales. The major cause for the decline in comparable 30 store sales was our significant reduction in the number of promotional activities in 1997, which had historically poor profit productivity. We are focusing on three key merchandise categories: moderately priced basic and casual apparel, basic and fashion items for the home, and frequently purchased convenience and commodity products. We believe that we can strategically leverage our strength in the quality and fashion content of our product offerings while driving traffic with selected hardlines merchandise. Management is continuing efforts to improve sales, including the expansion of both the "Wow!" (opportunistic and unadvertised purchases) and "Certified Value" (everyday low prices on selected highly recognizable products) programs that have been particularly successful to-date. Comparable store sales stabilized during the fourth quarter of 1997 (unchanged from 1996). Gross margin declined $37.7 million but increased 1.7% as a percentage of net sales in 1997 compared to 1996. The decline in gross margin dollars was due to the store closings and lower comparable store sales, partially offset by the increase in the gross margin rate. The increase in the rate was primarily due to a lower markdown rate resulting from fewer promotions, improved inventory control and a decrease of $3.7 million in 1997 compared to 1996 in going-out- of-business markdown provisions for closed stores included in cost of goods sold, partially offset by a slightly lower overall initial markup. Leased department income and other operating income declined $1.6 million but was unchanged as a percentage of net sales in 1997 compared to 1996. The decline was primarily due to lower leased shoe department sales partially offset by the benefit of layaway income (classified as other operating income) from the layaway program that was reimplemented in the second half of 1997. Selling, store operating, administrative and distribution ("SG&A") expenses declined $121.1 million and 3.8% as a percentage of net sales in 1997 compared to 1996. The decline in SG&A expenses was due to the closed stores and numerous expense reduction initiatives, including substantial reductions in overhead and advertising costs, designed to begin bringing our SG&A rate to a more competitive level. Included in the 1997 SG&A expense reductions were a $4.5 million expense credit resulting from the elimination of automatic beginning of year vacation vesting for certain pay groups and a $3.9 million curtailment gain associated with a reduction in retiree medical benefits. Depreciation and amortization expense declined $6.0 million in 1997 compared to 1996, primarily as a result of the closed stores and the 1996 year-end write-downs of certain long-lived assets in accordance with SFAS No. 121. However as a percentage of net sales, depreciation and amortization remained unchanged. We sold an owned store in January, 1998 for approximately $8.0 million and recognized a gain of $5.4 million. This store was closed as a result of the sale of the property and the sale was not directly associated with the Chapter 11 proceedings; therefore, the gain was not classified as a reorganization item. The net proceeds from this sale were placed into restricted funds. Interest and debt expense increased $5.1 million or .5% as a percentage of net sales in 1997 compared to 1996 due primarily to higher average borrowings under the debtor-in-possession credit facilities in 1997 and a $1.1 million write-off in 1997 of deferred financing costs associated with the replacement of the prior DIP facility. Interest expense in 1996 includes a credit of $.8 million resulting from a change in the interest rate used to discount self- insurance reserves. Reorganization items resulted in net charges of $.8 and $69.8 million, or .1% and 4.5% of net sales, in 1997 and 1996, respectively. These net charges related directly to the Chapter 11 proceedings and associated restructuring of our operations. We did not incur any income tax expense or benefit in 1997 and 1996. 31 1996 Compared to 1995 Net sales for 1996 declined $219.1 million or 12.3% from 1995 due primarily to the closing of 27 stores in 1996 and a 5.4% decrease in comparable store sales. The major causes for the decline in comparable store sales were our relatively rapid introduction of higher-priced merchandise at the expense of many lower opening price-point merchandise categories, elimination of layaway, significant reduction in the number of basic convenience and commodity items that are generally sold in discount stores, and changes in our advertising strategy that included a reduction in the number of merchandise offerings in our weekly circular. Although we improved the quality and fashion of our merchandise in 1996, the changes that were implemented assumed rapid customer acceptance of the new merchandise mix and significant sales from increased promotional activities. Gross margin declined $57.6 million but increased .2% as a percentage of net sales in 1996 compared to 1995. The decline in gross margin dollars was due to the lower sales, partially offset by the slight increase in the gross margin rate. The increase in the rate was due to a higher overall initial markup and lower inventory shrink, partially offset by a higher markdown rate associated primarily with increased promotional activities and the negative impact of a $6.7 million going-out-of-business markdown provision included in cost of goods sold in 1996. Leased department income and other operating income declined $1.4 million but increased .1% as a percentage of net sales in 1996 compared to 1995. The decline was due to lower leased shoe department sales and the absence of any layaway income since the discontinuance of the layaway program in August, 1995. SG&A expenses declined $68.8 million but increased .1% as a percentage of net sales in 1996 compared to 1995. The decline in SG&A expenses was due to the closed stores and reductions in logistics and certain home office expenses, partially offset by an increase in advertising expenses. The increase in SG&A expenses as a percentage of net sales was due to the sales decline in 1996. Depreciation and amortization expense declined $12.2 million or .4% as a percentage of net sales in 1996 compared to 1995, primarily as a result of the closed stores and the 1995 year-end write-down of certain long-lived assets in accordance with the adoption of SFAS No. 121. We recognized a gain of $1.7 million in 1996 for forfeited deposits received on the unconsummated sale of an owned undeveloped property. Interest and debt expense declined $15.7 million or .8% as a percentage of net sales in 1996 compared to 1995 due primarily to the discontinuance of accruing interest on substantially all pre-petition debt subsequent to our filing for bankruptcy on June 23, 1995. Interest expense includes a credit of $.8 million in 1996 and a $2.9 million charge in 1995 resulting from changes in the interest rate used to discount self-insurance reserves. We incurred charges of $40.8 and $99.4 million, or 2.6% and 5.6% of net sales, in 1996 and 1995, respectively, due to the impairment of certain long- lived assets in accordance with SFAS No. 121. Reorganization items resulted in net charges of $69.8 and $65.0 million, or 4.5% and 3.6% of net sales, in 1996 and 1995, respectively. These net charges related directly to the Chapter 11 proceedings and associated restructuring of our operations. We did not incur any income tax expense or benefit in 1996 compared to an income tax benefit of $104.5 million in 1995. A portion of our 1995 loss before income taxes was utilized in April, 1996 to recover $24.5 million of income taxes previously paid, of which $6.0 million was restricted in April, 1996 pending further order of the Bankruptcy Court. 32 Year-to-Date 1998 Compared to Year-to-Date 1997
39 weeks ended October 31, 1998 November 1, 1997 ---------------- ---------------- Stores, beginning of period................. 109 110 New stores.................................. - - Closed stores............................... (6) (1) ------ ------ Stores, end of period....................... 103 109 ====== ====== Results of operations, summarized in millions of dollars and expressed as a percentage of net sales were as follows for the 39 weeks ended October 31, 1998 ("Year-to-Date 1998") and for the 39 weeks ended November 1, 1997 ("Year-to- Date 1997"): Year to Date Year to Date 1998 1997 ---------------- ---------------- (Dollars in millions except per share amounts) Total sales................................. $939.2 $930.7 Leased dept. sales.......................... 32.8 35.5 ------ ------ Net sales................................... 906.4 895.2 Cost of goods sold.......................... 635.4 625.5 ------ ------ Gross margin................................ 271.0 269.7 Leased dept. and other operating income..... 8.7 8.7 ------ ------ 279.7 278.4 Selling, store operating, administrative and distribution expenses...................... 280.3 289.8 Depreciation and amortization expense....... 24.4 27.5 Loss on disposition of properties........... 0.2 - Interest and debt expense................... 12.0 11.7 Reorganization items........................ (2.6) (2.1) ------ ------ Net loss.................................. $(34.6) $(48.5) ====== ====== Net loss per share........................ $(3.06) $(4.26) ====== ====== Total sales increase (decrease): All stores................................ 0.9% (19.5)% Comparable stores......................... 4.7% (7.6)%
39 Weeks Ended October 31, 1998 November 1, 1997 ---------------- ---------------- As a percentage of net sales, results were as follows: Net sales................................... 100.0 % 100.0 % Cost of goods sold.......................... 70.1 69.9 ----- ----- Gross margin................................ 29.9 30.1 Leased dept. and other operating income..... 0.9 1.0 ----- ----- 30.8 31.1 Selling, store operating, administrative and distribution expenses...................... 30.9 32.3 Depreciation and amortization expense....... 2.7 3.1 Loss on disposition of properties........... - - Interest and debt expense................... 1.3 1.3 Reorganization items........................ (0.3) (0.2) ----- ----- Net loss.................................... (3.8)% (5.4)% ===== =====
33 Year-to-Date 1998 total sales increased $8.5 million or 0.9% from Year-to- Date 1997 due to an increase of 4.7% in comparable store sales, partially offset by the impact from closing six stores in February, 1998. The increase in Year-to-Date 1998 comparable store sales was due primarily to various merchandising and marketing initiatives started in 1997, including the reintroduction of layaway, lower opening price points in certain departments, more item-intensive and price-point oriented circular ad offerings, the addition of certain convenience and commodity products to drive traffic, and the implementation of two key programs: "Certified Value" (highlights certain key recognizable items at competitive everyday prices) and "WOW!" (integrates targeted and unadvertised opportunistic purchases). Gross margin for Year-to-Date 1998 increased $1.3 million, primarily as a result of the strong comparable store sales and decreased 0.2% as a percentage of net sales due primarily to a lower initial markup. Leased department and other operating income was unchanged in Year-to-Date 1998 compared to Year-to- Date 1997, as layaway fee income more than offset the impact from the store closings and unfavorable leased shoe department sales. Year-to-Date 1998 SG&A expenses declined $9.5 million or 1.4% as a percentage of net sales compared to Year-to-Date 1997. The improved SG&A expense performance was due primarily to advertising, home office and benefits expense reductions, partially offset by last year's third quarter reduction of $3.6 million in self-insurance reserves. Depreciation and amortization expense declined $3.1 million or 0.4% as a percentage of net sales in Year-to-Date 1998 compared to Year-to-Date 1997. The decline was primarily due to the closing of six stores in February 1998. Interest and debt expense increased $0.3 million and remained the same as a percentage of net sales in Year-to-Date 1998 from Year-to-Date 1997. Peak and average revolver borrowings were $162 and $116 million, respectively, in Year- to-Date 1998 compared to $144 and $85 million, respectively, in Year-to-Date 1997, and the weighted average revolver interest rate was 7.93% during Year-to- Date 1998 compared to 7.51% in the prior-year period. The unfavorable impact on Year-to-Date 1998 interest expense from these factors was mostly offset by lower bank fees, lower capital lease interest expense and lower amortization of deferred financing costs. Reorganization credits of $2.6 and $2.1 million for Year-to-Date 1998 and Year-to-Date 1997, respectively, were associated with the Chapter 11 proceedings and related restructuring and are discussed in Note 6. We did not record an income tax provision in Year-to-Date 1998 due to the current expectation of no income tax expense or benefit in 1998. There was no income tax expense or benefit recorded in Year-to-Date 1997. Liquidity and Capital Resources We had outstanding borrowings of $157.4 million at October 31, 1998, exclusive of the issuance of letters of credit, under our $250 million DIP Facility (Note 4). As of November 1, 1997, we had outstanding borrowings of $131.5 million, exclusive of the issuance of letters of credit, under the prior DIP facility (Note 4). The increase in borrowings since the end of the third quarter of 1997 relates primarily to the net loss incurred in Year-to-Date 1998, along with payments for Chapter 11 professional fees and other reorganization expenses. We currently expect our borrowings, exclusive of the issuance of letters of credit, for the fourth quarter of 1998 to peak at approximately $167 million in November, 1998 and average approximately $120 million. The revolver amount available to borrow in the fourth quarter of 1998, after deducting expected letters of credit outstanding, is currently expected to peak at approximately $225 million in November, 1998 and average approximately $185 million. 34 Other than payments made to certain pre-petition creditors approved by the Bankruptcy Court (Notes 2 and 4), principal and interest payments on indebtedness, exclusive of certain capital lease obligations, incurred prior to Chapter 11 have not been made and will not be made without Bankruptcy Court approval or until the Plan of Reorganization has been consummated. Virtually all pre-petition indebtedness of Bradlees is subject to settlement under the reorganization case. In Year-to-Date 1998, cash used by operations before reorganization items was $48.8 million, compared to $50.8 million of cash used by operations before reorganization items in Year-to-Date 1997. Net cash used by reorganization items in Year-to-Date 1998 of $10.3 million was comprised of professional fee payments of $7.8 million and store closing and severance costs of $3.2 million, partially offset by interest income on restricted funds of $0.7 million. Inventories at October 31, 1998 decreased $16.5 million from November 1, 1997, due primarily to the closing of six stores in February 1998 (inventories decreased approximately $1.1 million, excluding the impact of the closed stores). Accounts payable at October 31, 1998 decreased $16.9 million from November 1, 1997, mostly due to the decrease in inventories. The increases in inventories and accounts payable from January 31, 1998 were primarily the result of normal seasonal build-ups. Accrued expenses at October 31, 1998 were $7.3 million lower than at January 31, 1998, due primarily to payments made against certain reserves established in or prior to 1997 for performance bonuses, employee severance and termination benefits and store closing costs. Accrued expenses were $11.4 million lower than at November 1, 1997, due primarily to reductions in severance reserves, vacation pay liabilities and store closing costs. We incurred capital expenditures of $10.4 million in Year-to-Date 1998 (compared to $14.7 million in Year-to-Date 1997), primarily for management information systems, store remodels and store maintenance projects. The larger Year-to-Date 1997 total was principally a result of the 1997 expenditures associated with a new merchandise management system. For all of 1998, we expect total capital expenditures to total approximately $18 to $20 million, primarily for management information systems (including the initial expenditures for a warehouse management system expected to be completed in 1999 and enhancements to the new merchandise management system), the remodeling of nine stores, and other store improvements and maintenance. We currently expect to finance these expenditures through internally-generated funds. We believe our business strategies and the availability of our DIP Facility and BankBoston Facility, together with our available cash and expected cash flows from 1998 operations and beyond, will enable us to fund our expected needs for working capital, capital expenditures and debt service requirements. Achievement of expected cash flows from operations will be dependent upon our attainment of sales, gross profit, expense and trade support levels that are reasonably consistent with our financial plans. Such operating performance will be subject to financial, economic and other factors affecting the industry and our operations, including factors beyond our control. Year 2000 Readiness Disclosure We have determined that we must modify portions of our software so that our computer systems will properly recognize and use dates beyond December 31, 1999. We believe we can mitigate the impact of the Year 2000 disruption by upgrading or modifying existing software and, in certain instances, converting to new software. However, if the Year 2000 upgrades, modifications and conversions are not made, or are not made in a timely manner, the Year 2000 issue could have a material impact on our operations. We intend to use both internal and external resources to remediate, replace and test software for Year 2000 compliance. We have entered into a contract with a major outside consulting firm to provide the majority of the resources necessary to identify, and then replace or remediate, our affected systems. We intend to complete our Year 2000 project no later than the beginning of the fourth quarter of fiscal 1999, but currently 35 expect to substantially complete the conversion by the second quarter of fiscal 1999. At this time, we expect the cost of the Year 2000 project to be approximately $3 to $4 million, the majority of which is being incurred in 1998 and included in SG&A expenses. Through October 31, 1998, we have incurred $1.9 million for such expense. The remaining major systems to be remediated or replaced are the Company's merchandise planning system (approximately 50% remediated) and store host systems (approximately 30% remediated) expected to be completed by the end of the first quarter of 1999, and the warehouse management system that is scheduled to be replaced by the end of the second quarter of 1999. A test of all systems, including store support and facility systems, for proper Year 2000 compliance is planned for the end of the second quarter of 1999. We are in the process of developing contingency plans in the event that such replacement or remediation is not fully completed in a timely manner. We have calculated the costs of the Year 2000 project and predicted the dates on which we plan to complete the Year 2000 modifications using our best estimates, which required using a number of assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, we can not guarantee that we will achieve the predicted estimates and our actual results could differ materially from those plans. We are also attempting to obtain representations and assurances from our third party providers of services and goods, including vendors of software products, that their software is or will be Year 2000 compliant on a timely basis. However, because certain of our processes may be interrelated with, or dependent upon, systems outside our control, we can give no assurances that the implementation of our Year 2000 project will be successful. 36 BUSINESS Company Overview We operate 103 discount department stores as of January 1, 1999, in seven states in the Northeast, primarily in the heavily populated corridor running from the Boston to the Philadelphia metropolitan areas. One store is planned to be closed in March, 1999. Headquartered in Braintree, Massachusetts, the Company and its predecessor have been active in the discount department store business for 40 years. Business Strategy. In 1995, we began to implement a strategy to position ourselves between traditional discount stores and department stores. Some of the initiatives associated with this strategy, especially the relatively rapid introduction of higher-price points, an aggressive clearance markdown policy, costly promotions of the Bradlees' credit card and associated elimination of layaway, significant reduction in the number of basic convenience and commodity items that are generally sold in discount stores, along with costly changes in our advertising strategy, resulted in significant sales and margin declines and operating losses. In late December, 1996, our Board of Directors appointed Peter Thorner as Chairman, CEO and President. Prior to joining Bradlees, Mr. Thorner led the successful turnaround of Ames Department Stores, Inc. In April, 1997, Mr. Thorner hired Robert Lynn as President and Chief Merchandising Officer. We made the following key modifications to our business strategy during 1997 to enhance profitability and improve customer service: . Reintroduced lower opening price points in a comprehensive variety of merchandise categories to enhance value and increase customer traffic; . Reduced costly promotional events and thereby reduced the likelihood of substandard profit margins; . Reintroduced certain basic convenience and commodity products that are typical of assortments carried by discount retailers; . Reinstituted a layaway program while controlling promotions of the Bradlees' credit card; . Installed new in-store directional and departmental signage; . Revised our markdown policy based on product rate of sale; . Modified weekly ad circulars to achieve more item-intensive and price- point oriented ad offerings; . Introduced both a "Certified Value" program that highlights certain key recognizable items at competitive everyday prices and a "Wow!" program which integrates targeted and unadvertised opportunistic purchases; and . Significantly reduced overhead while improving operating efficiencies. We are focusing on three key merchandise categories: moderately-priced basic and casual apparel; basic and fashion items for the home; and frequently purchased convenience and commodity products. We believe we can strategically leverage our strength in the fashion and quality content of our apparel and decorative home product offerings while driving traffic with selected hardlines merchandise. Management has continued its efforts to improve sales and profitability in 1998, including the expansion of both the "Wow!" and "Certified Value" programs that have been particularly successful to-date. Merchandise Mix. We provide a broad spectrum of basic and fashion apparel (including private-label brands), basic and fashion home furnishings, convenience hard goods and extensive seasonal offerings. Our 37 average merchandise mix in fiscal year 1997 was comprised of approximately 53% softlines and soft home furnishings and 47% hardlines, versus an estimated industry average of 42% softlines and soft home furnishings and 58% hardlines. Softline products generally have higher gross margins than hardline products. Advertising and Promotional Programs. Our marketing strategy is designed to appeal to our value-oriented customers. Sales are driven from competitive pricing and promotions, primarily in weekly circulars, that feature a large number of special values for the customer throughout the store. Approximately 45% of our sales were derived from our weekly circulars in 1997. Approximately 5.6 million circulars are distributed each week. Although circulars are our major promotional vehicle, we also use newspaper advertising, periodic television broadcasts, Bradlees credit-card statement inserts and in-store promotions. Point-of-purchase advertising, layaway, employee discounts and senior citizen discounts are also used as marketing vehicles. Operations. Several programs have been or are being implemented to improve store organization, thereby focusing us more intently on customer service while at the same time reducing expenses. These improvements included reducing the number of store regions from two to one and the number of store districts from nine to eight. In addition, store managers are using automated staff scheduling programs in 1998 to improve operating efficiency and provide better service to the customer. Management has improved productivity and controls and reduced expenses in other areas. For example, a new merchandising management system was implemented during 1997 and 1998 that facilitates, among other things, tracking merchandise more accurately and efficiently from vendors through distribution centers and to stores. In addition, we have begun developing a warehouse management system that is planned to be completed in 1999. We also installed a new mainframe computer and point-of-sale controllers and modified our point-of-sale equipment and software to allow for additional promotional capabilities, enhanced controls and improved customer service. Store Profitability. We closed six stores in February, 1998. We currently plan to sell our leasehold interests in our Yonkers, New York. We are also in the process of closing our Danvers, Massachusetts store. We continue to closely monitor the profitability of each store and will close, sell or relocate those stores whose performance is inadequate and not responsive to remedial actions. Employees and Collective Bargaining Arrangements As of December 1, 1998, we employed approximately 10,000 people, of which approximately 66% are covered by collective bargaining agreements. Agreements affecting approximately 14% of the labor force will expire within one year and are expected to be renegotiated. We believe our relations with our employees are good. Competition We compete in most of our markets with a variety of national, regional and local discount and other department and specialty stores, which vary by market. Some of these competitors have substantially greater resources than we do. We compete on the basis of product quality and value, merchandise selection, advertising and price. In addition, store location, appearance and customer service are important competitive factors. Our principal discount department store competitors are Caldor, Kmart and Wal-Mart, and in certain locations, Target and Ames. Caldor Corp., which has been in bankruptcy since 1995, announced on January 22, 1999 that it intends to close all of its stores and liquidate its assets. Our principal department store competitors are Sears and J.C. Penney. Target and Kohl's, a department store chain, are opening stores in some areas in which Bradlees operates. Management believes that it is pursuing the proper merchandising and marketing strategies and operating focus that should allow it to compete effectively in its operating areas. However, no assurances can be given that these strategies will further improve performance or that our business and financial performance will not be adversely affected by future competitive pressures. 38 Patents, Trademarks and Licenses The trademark "Bradlees" is registered with the United States Patent and Trademark Office. We have a significant number of other trademarks, trade names, and service marks. We do not consider any of these other trademarks, tradenames or services marks to individually have a material impact on our business. Seasonality Our business is seasonal in nature, with a significant portion of net sales occurring in the fourth quarter, which includes the pivotal holiday selling season. Credit Facility The BankBoston Facility provides us with a $250 million senior secured revolving credit facility (of which $125 million is available for issuance of letters of credit) and a $20 million junior secured "last in-last out" subfacility for a period until December 23, 2001. We can use the BankBoston Facility for working capital, general business needs and to pay off our DIP Facility. The senior secured tranche has an advance rate equal to 80% of the Loan Value of Eligible Receivables, plus generally 72% of the Loan Value of Eligible Inventory, subject to certain adjustments. The Company may also borrow up to an additional $20 million under the junior secured facility provided that the total inventory borrowings do not exceed 93% of the Loan to Value Ratio. The BankBoston Facility permits us to borrow funds under the senior secured tranche at an interest rate per annum equal to (a) the higher of (i) the annual rate of interest as announced by BankBoston as its "Base Rate" and (ii) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System plus 1/2 of 1% per annum; or (b) 2.25% per annum plus the quotient of (i) the LIBOR Rate in effect divided by (ii) a percentage equal to 100% minus the percentage established by the Board of Governors of the Federal Reserve System as the maximum rate for all reserves applicable to any member bank of the Federal Reserve System in respect of Eurocurrency Liabilities. Each of these rates is subject to a 0.50% increase in the event of overadvances. The junior secured subfacility permits us to borrow funds at the "Base Rate" plus 7.00% per annum. In connection with the BankBoston Facility, we have entered into a Security Agreement and a Pledge Agreement with BankBoston. The Security Agreement and the Pledge Agreement cover substantially all of our non-real estate assets. Under the terms of the BankBoston Facility, we have agreed to certain financial covenants including: . maintaining a minimum level of earnings before interest, taxes, depreciation and amortization; . capping our capital expenditures at $20 million annually, subject to certain exceptions; . agreeing not to let certain financial ratios which measure our debt coverage and accounts payable to inventory ratios drop below specified goals. See "Terms of Outstanding Indebtedness-Credit Agreement." Further Information We file annual, quarterly and special reports, proxy statements and other information with the SEC. You may read and copy any document we file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Our SEC filings are also available to the public from the SEC's Website at "http://www.sec.gov." 39 FACILITIES The following chart shows the geographic distribution of our stores as of January 1, 1999: Maine................................................................. 1 New Hampshire......................................................... 8 Massachusetts......................................................... 36 Connecticut........................................................... 17 New York.............................................................. 6 New Jersey............................................................ 29 Pennsylvania.......................................................... 6 --- Total................................................................. 103 ===
We operate stores in a variety of sizes, with the current average store being 75,924 total square feet. Our distribution facilities are located in Edison, New Jersey and Braintree, Massachusetts. The 584,000 square foot Edison facility generally serves as the soft goods processing center for nearly all apparel and softlines merchandise and as the hardlines merchandise distribution facility for the New York, New Jersey and Pennsylvania stores. The 470,000 square foot Braintree facility generally services all stores with basic merchandise items and distributes hardlines merchandise to the New England stores. As of January 1, 1999, our stores, including the one store which is in the process of closing and one store which is expected to close by the end of fiscal year 1999, occupied a total of approximately 7,820,151 square feet of selling area. We lease all of our stores, two distribution centers and central office under long-term leases. Pursuant to the Plan of Reorganization, in exchange for a payment of $11.0 million by the landlord, we have revised certain terms of the lease for our Union Square, New York store, including amending the expiration date of such lease to be March 15, 2000 and eliminating lease terms which allowed for extensions of the lease. In addition, we have agreed to a $1.1 million annual increase in the rent for the remaining term of the lease. LEGAL PROCEEDINGS On June 23, 1995, we filed a voluntary petition in the United States Bankruptcy Court for the Southern District of New York to reorganize under Chapter 11 of the United States Bankruptcy Code. Our modified plan of reorganization was confirmed on January 27, 1999, and became effective on the Effective Date. After the Effective Date, the Bankruptcy Court will retain jurisdiction over us for limited purposes. New Horizons of Yonkers, Inc. will remain in Chapter 11 after the Effective Date until it sells the leasehold interest it holds. Thus, it will continue to be subject to the jurisdiction of the Bankruptcy Court. From time to time, we are party to litigation arising in the ordinary course of business. We believe that no pending legal proceeding will have a material adverse effect on our business, financial condition or results of operations. 40 MANAGEMENT Directors and Executive Officers The names, ages, and current positions of all of the executive officers and directors of Bradlees, Inc. as of January 15, 1999 are listed below along with their business experience during the past five years. The Directors of Bradlees Stores, Inc. are Messrs. Thorner, Moses and Schmitt. The executive officers of Bradlees Stores, Inc. are the same as those of Bradlees, Inc.
Name Age Position - ---- --- -------- Robert A. Alt- schuler....... 42 Director Robert W. Benenati...... 50 Senior Vice President, Logistics Stephen J. Blauner....... 45 Director W. Edward Clingman, Jr. .......... 45 Director Bruce Conforto..... 46 Senior Vice President, Chief Information Officer Gregory K. Dieffenbach.. 49 Senior Vice President, Human Resources Judith D. Dun- ning......... 48 Senior Vice President, Planning and Allocation John M. Fried- man, Jr. .... 54 Director Mark E. James........ 49 Senior Vice President, Marketing Lawrence Lie- berman....... 50 Director Robert G. Lynn......... 48 Director, President and Chief Operating Officer Charles K. MacDonald.... 40 Director Cornelius F. Moses III(1)....... 40 Senior Vice President, Chief Financial Officer Ronald T. Ray- mond......... 55 Senior Vice President, Asset Protection William H. Roth......... 46 Director David L. Schmitt(1)... 48 Senior Vice President, General Counsel, Secretary and Clerk Sandra L. Smith........ 41 Senior Vice President, General Merchandise Manager, Hardlines Thomas N. Smith........ 42 Senior Vice President, Stores James C. Sparks....... 52 Senior Vice President, General Merchandise Manager, Softlines Peter Thorn- er(1)........ 55 Chairman and Chief Executive Officer
- -------- (1) Director of Bradlees Stores, Inc. Mr. Altschuler became a Director of the Company in January 1999. He has served as Vice President and Director of Leasing for Marx Realty & Improvement Co. Inc. since 1987. Mr. Benenati became Senior Vice President, Logistics of the Company in October 1997. He was Senior Vice President, Operations, from February 1997 to October 1997. He was Senior Vice President, Distribution of the Company from June 1995 to February 1997. Prior to joining the Company, he was Senior Vice President, Distribution of QVC, Inc. from August 1994 to June 1995. He was Vice President, Operations and Administration for Simon and Schuster Publishing Co. from prior to 1993 to August 1994. Mr. Blauner became a Director of the Company in January 1999. He has served as a consultant on bankruptcy and distressed investing for a small group of clients since January 1998. In addition, since 1998 Mr. Blauner has served in an Of Counsel position to the law firm of Milbank, Tweed, Hadley & McCloy for the purposes of representing the Loan Syndications and Trading Association, Inc. as its outside general counsel. From prior to 1993 to December 1997, he served as a partner and head of the bankruptcy department at Milbank, Tweed, Hadley & McCloy. Mr. Clingman became a Director of the Company in January 1999. He has served as President and Chief Executive Officer of Best Products Co., Inc. ("Best Products") from January 1997 to the present (during Best Products' liquidation and related wind-down). Prior to serving as President and Chief Executive Officer, Mr. Clingman served as Senior Vice President, General Counsel and Secretary from May 1996 to December 1996. He served as Vice President, General Counsel and Secretary from March 1993 to May 1996. Mr. Clingman serves as a director of Best Products. 41 Mr. Conforto became Senior Vice President, Chief Information Officer of the Company in April 1998. Prior to joining the Company, he was Vice President, Corporate Information Technology of HFS Incorporated from August 1996 to April 1997. He was Vice President of Information Services for Rickel Home Centers, Inc. from prior to 1993 to August 1996. Mr. Dieffenbach became Senior Vice President, Human Resources of the Company in July 1997. Prior to joining the Company, he was Vice President, Human Resources for Uptons Department Stores, Inc. from prior to 1993 to May 1997. Ms. Dunning became Senior Vice President, Planning and Allocation of the Company in February 1997. Ms. Dunning served as Vice President, Strategic Planning of the Company from January 1996 to February 1997. Prior to joining the Company, she was Vice President, Merchandise Planning of Rich's/Lazarus/Goldsmith's, a division of Federated Department Stores, Inc., from February 1995 to January 1996 and Vice President, Merchandise Planning of Lazarus Department Stores, Inc., a division of Federated Department Stores, Inc., from prior to 1993 to February 1995. Mr. Friedman became a Director of the Company in May 1996. Mr. Friedman was a partner at Dewey Ballantine from prior to 1993 to April 1996. Mr. James became Senior Vice President, Marketing of the Company in May 1997. Prior to joining the Company, he was Senior Vice President, Marketing and Advertising for Best Products from prior to 1993 to December 1996. Mr. Lieberman became a Director of the Company in January 1999. He has served as Vice President, Merchandising for ABC Home Furnishings Inc. since December 1990. Mr. Lynn became President and Chief Operating Officer of the Company in April 1998. He served as President and Chief Merchandising Officer of the Company from April 1997 to April 1998. Mr. Lynn was elected a Director of the Company in April 1997. Prior to joining the Company, he was a consultant to various retail and manufacturing clients from January 1996 to April 1997. He was Vice Chairman and Chief Operating Officer of American Eagle Outfitters, Inc. from January 1995 to December 1995 and a Director from April 1994 to December 1995. Mr. Lynn was a retail consultant to the creditors' committee in the McCrory bankruptcy from December 1993 to January 1995. Mr. Lynn served as President and Chief Executive Officer of the United States division of F.W. Woolworth from January 1989 to September 1993. Mr. MacDonald became a Director of the Company in January 1999. He has served as President of Morgandane Management Corp., an investment advisory firm, from 1997 to the present. From prior to 1993 to 1995, he was a portfolio manager for Stonington Management Corp. Mr. MacDonald also serves as a director of Atlantic Gulf Communities Corp. Mr. Moses became Senior Vice President, Chief Financial Officer of the Company in July 1996. Mr. Moses served as Senior Vice President, Finance of the Company from July 1995 to July 1996. Mr. Moses was Vice President, Finance of the Company from April 1995 to July 1995. Prior to joining the Company, Mr. Moses was Senior Vice President, Finance of Ames Department Stores, Inc. ("Ames") from prior to 1993 to April 1995. Mr. Raymond became Senior Vice President, Asset Protection of the Company in July 1995. Prior to joining the Company, he was Senior Vice President, Asset Protection for Ames from prior to 1993 to July 1995. Mr. Roth became a Director of the Company in January 1999. He has served as a partner at the law firm of Kelly & Roth since 1987. 42 Mr. Schmitt has served as Senior Vice President, General Counsel, Secretary and Clerk of the Company since November 1995. He was Vice President, General Counsel, Secretary and Clerk of the Company from July 1995 to November 1995. Prior to joining the Company he was Vice President, Business Development for Wheelabrator Clean Water Systems, Inc. from 1994 to June 1995. He was President of CP Consulting from prior to 1993 to June 1994. Ms. Smith became Senior Vice President, General Merchandise Manager, Hardlines of the Company in July 1995. Ms. Smith served as Vice President, General Merchandise Manager, Hardlines of the Company from February 1994 to July 1995 and Divisional Merchandise Manager, Home Fashions of the Company from prior to 1993 to February 1994. Mr. Smith became Senior Vice President, Stores of the Company in December 1997. Prior to joining the Company, he was Director of Operations and Merchandising for Fry's Electronics from April 1995 to December 1997. He was Division Director for The Home Depot/Crossroads from June 1993 to April 1995. He was Regional Vice President for Wal-Mart from prior to 1993 to April 1993. Mr. Sparks became Senior Vice President, General Merchandise Manager, Softlines of the Company in July 1995. He was Vice President, General Merchandise Manager, Softlines of the Company from October 1994 to July 1995. Prior to joining the Company, Mr. Sparks was Vice President, General Merchandise Manager of Belk Lindsey from prior to 1993 to October 1994. Mr. Thorner has served as Chairman of the Board of Directors and Chief Executive Officer of the Company since April 1997. He served as Chairman of the Board of Directors, President and Chief Executive Officer of the Company from December 1996 to April 1997. He served as President and Chief Operating Officer of the Company from June 1995 to December 1996 and he was elected a Director of the Company in July 1995. He was Vice Chairman of the Company from March 1995 to June 1995. Prior to joining the Company, he was President, Chief Operating Officer and Acting Chief Executive Officer and a member of the Board of Directors of Ames from prior to 1993 to 1994. On September 24, 1996, while Mr. James was Senior Vice President, Marketing and Advertising of Best Products, and Mr. Clingman was Senior Vice President, General Counsel and Secretary of Best Products, Best Products filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Best Products was subsequently liquidated. Mr. Conforto was Vice President of Information Services for Rickel Home Centers, Inc. when they filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Code. Rickel Home Centers, Inc. was subsequently liquidated. Board of Directors of Bradlees, Inc. and Its Committees The business of Bradlees, Inc. is managed under the direction of the Board of Directors. As of the Effective Date, there are nine members of the Board of Directors of Bradlees, Inc. These directors were selected pursuant to the Plan and assumed their positions immediately prior to the Effective Date. The Amended and Restated Articles of Organization of Bradlees, Inc. provide that the members of the Board of Directors shall serve initial terms which will expire upon the election and qualification of directors at each annual meeting of stockholders. At each annual meeting of stockholders, the successors of the directors will be elected by a plurality of the votes cast at such meeting. Bradlees, Inc. intends to hold its first annual meeting after the Effective Date in the Spring of 2000. The Board of Bradlees, Inc. has established an audit committee (the "Audit Committee"), a compensation committee (the "Compensation Committee") and a nominating committee (the "Nominating Committee"). The Audit Committee, which consists solely of outside directors, recommends to the Board of Directors the firm to be appointed as independent accountants to audit financial statements and to perform 43 services related to the audit. The Audit Committee also reviews the scope and results of the audit with the independent accountants, reviews with management and the independent accountants the Company's year-end operating results, considers the adequacy of the internal accounting procedures and considers the effect of such procedures on the accountants' independence. The Compensation Committee, which consists solely of outside directors, reviews and recommends to the Board of Directors the compensation arrangements for all directors and officers, approves such arrangements for other senior level employees and administers and takes such other action as may be required in connection with certain compensation and incentive plans of the Company. The Compensation Committee also determines the number of options to be granted or shares of Common Stock to be issued to eligible persons under our Bradlees, Inc. 1999 Stock Option Plan (the "Stock Plan"). In addition, the Compensation Committee establishes, amends and revokes rules and regulations for administration of the Stock Plan. The Nominating Committee consists of the Chairman of the Board and two other non-employee directors selected by the Chairman of the Board. The purpose of the Nominating Committee is to facilitate the nomination of directors to fill vacancies on the Board. Board of Directors of Bradlees Stores, Inc. The business of Bradlees Stores, Inc. is managed by its Board of Directors. As of the Effective Date, there were three members of its Board of Directors. The Amended and Restated Articles of Organization of Bradlees Stores, Inc. provide that the members of the Board of Directors shall serve initial terms which will expire upon the election and qualification of directors at each annual meeting of stockholders. 44 SUMMARY COMPENSATION TABLE The following table sets forth the earned compensation for the Chief Executive Officer of the Company and our four highest-paid executive officers in 1997 other than the Chief Executive Officer (the "Named Officers") for fiscal years 1997, 1996 and 1995. Summary Compensation Table
Long Term Compensation --------------------------------- Awards ------------------------ Payouts -------- Annual Compensation ------------------------------------ Restricted Securities Name and Other Annual Stock Underlying LTIP All Other Principal Position Year Salary Bonus Compensation Awards Option/SARs Payouts Compensation - ------------------ ---- -------- -------- ------------ ---------- ----------- -------- ------------ Peter Thorner........... 1997 $741,827 $299,063(l) (2) - - $150,000(3) $9,318(4) Chairman and Chief l996 $589,166 - $ 12,961 - - $150,000(3) $9,293 Executive Officer 1995 $440,391 $406,252(5) $ 97,257 $231,250(6) 100,000 $150,000(3) $4,490 Robert G. Lynn.......... 1997 $401,827(7) $196,875(1) $ 29,109(8) - - - $ 840(4) Director, President, and Chief Operating Officer Robert W. Benenati...... 1997 $292,729 $ 90,011(l) (2) - - - $1,113(4) Senior Vice 1996 $205,036 - $ 62,762 - - - $ 850 President, Logistics l995 $141,948 $190,075(5) $ 18,793 - - - $ 596 Cornelius F. l997 $279,175 $ 84,012(l) (2) - - - $1,054(4) Moses, III.............. Senior Vice President 1996 $228,682 - (2) - - - $ 944 and Chief Financial 1995 $162,322 $ 79,453(5) $162,087 - - - $ 216 Officer David L. Schmitt ....... 1997 $243,751 $ 73,500(l) (2) - - - $ 912(4) Senior Vice 1996 $180,024 - (2) - - - $ 748 President, General 1995 $103,860 $ 69,556(5) (2) - - - $ 312 Counsel, Secretary and Clerk
- -------- (1) Includes an earned bonus paid in April, 1998 pursuant to our Corporate Bonus Plan (see below), but excludes the following deferred payments which were paid, with interest, at the Effective Date: Mr. Thorner - $99,688; Mr. Lynn - $65,625; Mr. Benenati - $30,004; Mr. Moses - $28,004; and Mr. Schmitt - $24,500. (2) Perquisites and other personal benefits for the indicated periods did not exceed the lesser of $50,000 or 10% of reported salary and bonus. (3) See Enterprise Appreciation Incentive Plan below. (4) Premiums paid with respect to term life insurance for the calendar year ended December 31, 1997. (5) Includes an earned bonus paid in April, 1996 pursuant to our Retention Bonus Plan, but excludes the following deferred payments which were paid, with interest, at the Effective Date: Mr. Thorner - $68,751; Mr. Benenati - $16,915; Mr. Moses - $18,151; and Mr. Schmitt - $14,852. (6) Based on a fair market value of $9.250, the closing price of the Company's Common Stock on May 11, 1995, the date of grant. The restrictions on these shares lapse at the rate of 20% a year, on or after the third business day following the announcement of annual earnings for the years 1995 through 1999. On January 30, 1998, the last trading day of fiscal 1997, 15,000 shares with a value of $1,875 were still subject to restrictions. The aggregate market value is based on a fair market value of $.125, the closing price of the Company's Common Stock on January 30, 1998. The Common Stock was canceled at the Effective Date. (7) Represents a partial year beginning when Mr. Lynn joined the Company in April, 1997. (8) Includes $27,216 for relocation expenses related to Mr. Lynn's employment as President and Chief Merchandising Officer of the Company and reimbursement for tax liabilities related to such relocation expenses. 45 Corporate Bonus Plan In February 1997 we adopted, and in April 1997 the Bankruptcy Court approved, the Corporate Bonus Plan (the "Corporate Bonus Plan"). The Corporate Bonus Plan provides incentives and rewards for (i) performance of key employees that meets or exceeds expectations and (ii) attainment of threshold performance measurements tied directly to our annual business plan. The amount of the award increases if our performance exceeds the business plan. In addition, a discretionary fund in the amount of $500,000 has been established to provide bonuses to (a) non-bonus eligible employees based upon performance regardless of whether we achieve our target performance level and (b) bonus eligible employees based on performance if we do not achieve our target performance level. Under the Corporate Bonus Plan, we had to obtain a minimum EBITDA (as defined) of $28.1 million for fiscal 1997, net of the anticipated costs of the Corporate Bonus Plan, in order for any employee to be eligible for 100% of an award (except for the discretionary fund mentioned above). For each $5 million of EBITDA improvement over the amount projected, the award increases by 25% of the base award up to a maximum increase of 100% of the award. We achieved an EBITDA of $28.5 million (net of the provision for the bonuses and excluding gains on disposition of properties) for fiscal 1997 and paid total bonuses of $3.9 million to approximately 286 employees under the Corporate Bonus Plan in April 1998. With respect to the Named Officers and certain other members of our senior management, one-quarter of the amount of any bonus payable before such time as we consummated our Chapter 11 plan of reorganization was paid, with interest, on the Effective Date. The remaining three-quarters of the bonuses were previously paid. See "Summary Compensation Table." For fiscal 1998, our Board of Directors adopted threshold performance measurements tied directly to our 1998 business plan. We must obtain a minimum EBITDA of $32 million, net of the anticipated costs of the Corporate Bonus Plan, in order for any employee to be eligible for 100% of an award (except for the discretionary fund mentioned above). Partial awards will be made if we achieve certain levels of EBITDA below $32 million. For each $5 million of EBITDA improvement over $32 million, the award increases by 25% of the base award up to a maximum increase of 100% of the award. In addition, any award may be increased or decreased by 25% based upon an employee's performance. Enterprise Appreciation Incentive Plan In August 1995 we adopted, and in November 1995 the Bankruptcy Court approved, the Enterprise Appreciation Incentive Plan (the "Incentive Plan"). The Incentive Plan was terminated on the Effective Date. The Incentive Plan was intended to provide an incentive to those key executives whose management and individual performance will have a direct impact on increasing the long-term value of the Company. No further payments are expected to be paid under the Incentive Plan, other than the payment of $400,000 with respect to amounts due Mr. Thorner for the remaining term of the Incentive Plan (see Employment Agreement with Peter Thorner below) because the Incentive Plan was canceled. Management Emergence Bonus Plan On the Effective Date, certain executives were selected to participate in our Management Emergence Bonus Plan (the "Emergence Bonus Plan"). The aggregate amount payable to these employees under the Emergence Bonus Plan is $3 million. One million dollars of this was paid on the Effective Date. The remaining $2 million will be paid on the later of (a) the one-year anniversary of the Effective Date and (b) the date upon which the 9% Convertible Notes are fully paid or converted into equity. No payments will be made under the Emergence Bonus Plan if there exists any continuing default under the BankBoston Facility or its successor (as such terms are defined under the Emergence Bonus Plan). If an employee leaves us for any reason, other than an involuntary termination without Cause or a voluntary termination for Good Reason, within one year of receiving a payment under the Emergence Bonus Plan, the payment shall be subject to partial or total 46 recoupment. If an employee is involuntarily terminated without Cause, voluntarily leaves for Good Reason, or leaves due to death or disability, then the employee does not have to return any payments under the Emergence Bonus Plan and is entitled to receive any portion of the payments to be made under the Emergence Bonus Plan within 30 days after the date of termination of employment. Severance Program In August 1995 we adopted, and in November 1995 the Bankruptcy Court approved, a severance program (the "Severance Program") that covers all officers, Vice President and above, and certain other employees of the Company, but not including Mr. Thorner who has a separate employment agreement (see Employment Agreement with Peter Thorner below). If the employment of any participant in the Severance Program is terminated other than for cause, death, disability or by the employee, then salary is guaranteed, subject to mitigation by other employment, for up to eighteen months for the President, Executive Vice Presidents and Senior Vice Presidents and twelve months for Vice Presidents, and a lump-sum payment equal to six months of salary is paid to certain other employees. Certain participants would also receive a lump-sum payment equal to the amount of any incentive payment for the fiscal year in which the termination occurred (the "Severance Lump Sum"). If the employment of any participant is terminated other than for Cause, death, disability or retirement, or is terminated under certain other circumstances, within one year following a change of control of the Company, the employee will receive a lump-sum payment. The payment is the Severance Lump Sum amount plus one and one-half times the annual salary in effect immediately prior to the change of control (the "Annual Salary") for the President and Senior Vice Presidents, one times the Annual Salary for Vice Presidents and one-half times the Annual Salary for certain other employees. For purposes of the Severance Program, a change of control includes but is not limited to the acquisition by any person of beneficial ownership of 50% or more of the Company's outstanding voting securities, or the failure of the individuals who constituted the Board of Directors in August 1995 to continue to constitute a majority of the Board unless the election of the new directors has been approved by the incumbent directors. Consummation of our Plan of Reorganization did not constitute a change of control under the Severance Program. Stock Option Plan for Key Employees There were no options for Old Bradlees' common stock granted or exercised by Named Officers in fiscal 1998. Pursuant to the Plan of Reorganization, all options outstanding immediately prior to the Effective Date were canceled as of the Effective Date. On the Effective Date, the Bradlees, Inc. 1999 Stock Option Plan (the "Stock Plan") became effective. Pursuant to the Plan of Reorganization, we have agreed to grant options to purchase 750,000 shares of our Common Stock to our management. The options will be granted when their exercise price is determined. The exercise price of these options will be the lowest ten-day rolling average of the closing price of our Common Stock within the period between sixty and ninety days after the Effective Date. Retirement Plans We maintain a qualified retirement plan (the "Retirement Plan") for our eligible employees. The retirement benefits under the Retirement Plan are determined pursuant to a benefit formula that takes into account the employee's Final Average Compensation (as defined in the Retirement Plan), and/or years of service, up to 30 years. Effective December 31, 1998, the Retirement Plan for our non-union employees was frozen for credited service and salary adjustments. All benefits under the Retirement Plan, except the minimum benefits, are subject to an integration offset based upon the employee's Covered Compensation (as defined in the Retirement Plan) or Final Average Compensation, if less. We also maintain a non-qualified Supplemental Executive Retirement Plan (the "Supplemental Plan") which, as of December 1, 1995, replaced the Excess Pension Plan which was terminated. Under the Supplemental Plan an eligible employee, upon normal retirement at age 65, may receive supplemental retirement benefits equal to 50% of his Final Average Compensation, minus the sum of his Social Security benefits and the annual benefit payable from the 47 Retirement Plan. The benefits from the Supplemental Plan are payable in the form of a single lump sum amount. The following table shows the estimated annual retirement benefits which will be payable to participating employees from the Retirement Plan and the Supplemental Plan in the form of a straight life annuity upon normal retirement at age 65 after selected periods of service. These benefits presented below do not reflect the Social Security offset described above and do not take into account any reduction for joint and survivor payments. Pension Plan Table Estimated Annual Retirement Benefits
10 Years Final Average of 15 or More Compensation* Service Years of Service - ------------- -------- ---------------- $ 200,000 $ 66,666 $100,000 $ 250,000 $ 83,333 $125,000 $ 300,000 $100,000 $150,000 $ 400,000 $133,333 $200,000 $ 500,000 $166,666 $250,000 $ 600,000 $200,000 $300,000 $ 700,000 $233,333 $350,000 $ 800,000 $266,666 $400,000 $ 900,000 $300,000 $450,000 $1,000,000 $333,333 $500,000 $1,100,000 $366,666 $550,000 $1,200,000 $400,000 $600,000 $1,300,000 $433,333 $650,000
- -------- * Federal law limits the amount of compensation that may be taken into account in calendar year 1998 in calculating benefits under the Retirement Plan to $160,000 and limits the annual benefits that may be payable in calendar year 1998 to $125,000. These tax limits do not apply to benefits payable from the Supplemental Plan. Compensation recognized under the Retirement Plan is the participant's annualized rate of base salary. Compensation under the Supplemental Retirement Plan is the participant's base salary and bonus. The calculation of retirement benefits under both plans is generally based upon the participant's highest annual compensation averaged over three years. As of December 31, 1998, the years of credited service for the Retirement Plan for Messrs. Thorner, Lynn, Benenati, Moses, and Schmitt were 4, 2, 4, 4, and 4, respectively. As of December 31, 1998, the years of credited service for the Supplemental Plan for Messrs. Thorner, Lynn, Benenati, Moses, and Schmitt were 9, 2, 4, 4 and 4, respectively. Compensation of Directors Each director who is not an employee of the Company receives an annual retainer of $30,000. Directors who are also employees of the Company do not receive any remuneration for serving as directors. Employment Agreement with Peter Thorner We have entered into a three-year employment agreement with Mr. Thorner, commencing as of October 26, 1995 and amended as of November 7, 1997. This employment agreement is automatically extended for one additional year each year unless either party gives the other party written notice of its election not to extend the contract. Effective December 24, 1996, concurrent with his then appointment as Chairman, President and Chief Executive Officer, Mr. Thorner received a minimum annual base salary of $725,000 and an annual incentive award of 55% of his base salary. In March 1998, our Board of Directors approved an increase in Mr. Thorner's 48 annual base salary to $850,000 effective February 1, 1998. While in Chapter 11, the annual incentive award was payable pursuant to the Corporate Bonus Plan. The annual incentive award could be increased to 110% of Mr. Thorner's base salary if certain maximum performance goals are met under the Corporate Bonus Plan. Under the employment agreement, one-quarter of the amount of any annual incentive bonus payable before the consummation of the Plan of Reorganization was deferred, and paid with interest on the Effective Date. In addition, the employment agreement provides for the payment by us of an equity incentive bonus (payable in cash, debt and equity securities) pursuant to the Incentive Plan determined by reference to the increase in value of the Company from the date of the bankruptcy filing to the fifth anniversary of the employment agreement, subject generally to vesting over five years. Under the employment agreement, Mr. Thorner is entitled to receive an annual nonrefundable advance of $150,000 towards his benefits under the Incentive Plan while he remains employed by us. The employment agreement also provides that Mr. Thorner's equity incentive bonus under the Incentive Plan would be at least $1,000,000 but would not exceed the lesser of $4,615,385 or 3% of the appreciation in value of the Company. No payments were paid under the Incentive Plan to Mr. Thorner, other than the annual nonrefundable advances and a payment of $400,000 with respect to amounts due Mr. Thorner for the remaining term of the Incentive Plan, which was paid on the Effective Date. The agreement also provides for certain retirement benefits, for reimbursement of certain legal, annual financial counseling and relocation expenses and participation in our employee benefit plans. The employment agreement also provides that in the event of Mr. Thorner's termination of employment by us (including following a change in control of the Company) without Cause or Good Reason (as defined in the Employment Agreement), Mr. Thorner would generally be entitled to all payments and benefits called for under the agreement for the remainder of its term. Compensation Committee Interlocks and Insider Participation All executive officer compensation decisions will be made by the Compensation Committee. The Compensation Committee will review and make recommendations regarding the compensation for our management and key employees, including salaries and bonuses. 49 PRINCIPAL STOCKHOLDERS The following table sets forth certain information with respect to the beneficial ownership of our Common Stock as of January 29, 1999, by (i) each person known by us to beneficially own five percent or more of the outstanding shares of the Common Stock, (ii) each director and certain executive officers, and (iii) all directors, nominees for director and executive officers as a group. Except as otherwise indicated, we believe that the beneficial owners of the Common Stock listed below, based on information furnished by such owners, have sole investment and voting power with respect to such shares, subject to community property laws where applicable. All of the Common Stock of Bradlees Stores, Inc. is owned by Bradlees, Inc.
Directors, Executives Officers, and 5% Beneficial Shares Beneficially Owned Owners(1)(2) Prior to the Offering(2) Percentage(3) --------------------- ------------------------- ------------- Ariel Fund Limited..................... 2,853,981 27.9% Gabriel Capital, L.P. ................. 1,934,578 18.9% Elliott Associates, L.P................ 473,100 4.6% Westgate International, L.P............ 990,046 9.7% Robert A. Altschuler................... 0 * Robert W. Benenati..................... 0 * Stephen J. Blauner..................... 0 * W. Edward Clingman, Jr................. 0 * Bruce Conforto......................... 0 * Gregory Dieffenbach.................... 0 * Judith Dunning......................... 0 * John M. Friedman, Jr. ................. 0 * Mark James............................. 0 * Lawrence Lieberman..................... 0 * Robert Lynn............................ 0 * Charles K. MacDonald................... 0 * Cornelius F. Moses, III................ 0 * Ronald T. Raymond...................... 0 * William H. Roth........................ 0 * David L. Schmitt....................... 0 * Sandra Smith........................... 0 * Thomas N. Smith........................ 0 * James C. Sparks........................ 0 * Peter Thorner.......................... 0 * All directors and executive officers as a group (consisting of 20 people).. 0 *
- -------- * Represents less than 1.0% of the issued and outstanding shares of Common Stock. (1) Unless otherwise indicated, the mailing address for each stockholder and director is c/o the Company, One Bradlees Circle, Braintree, Massachusetts 02184. For Ariel Fund Limited, the mailing address is c/o Maples & Calder, P.O. Box 309, Grand Cayman, Cayman Islands, BWI. For Gabriel Capital, L.P., the mailing address is 450 Park Avenue, New York, New York 10627. For Elliott Associates, L.P. and Westgate International, L.P., the mailing address is 712 Fifth Avenue, 36th Floor, New York, New York 10019. (2) As used in this table, "beneficial ownership" means the sole or shared power to vote or direct the voting of a security, or the sole or shared investment power with respect to a security (i.e., the power to dispose, or direct the disposition of, a security). In computing the number of shares of Common Stock beneficially owned by a person, shares of Common Stock subject to options or warrants held by that person that are currently exercisable or exercisable within 60 days of this Prospectus are deemed outstanding, but are not deemed to be outstanding for the purpose of computing the percentage ownership of any other person. (3) Percentage ownership prior to this Offering is based upon 10,225,711 shares of Common Stock issued and outstanding as of January 29, 1999. 50 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Other Transactions In February 1998, we made a loan in the amount of $100,000 to Thomas N. Smith, Senior Vice President, Stores, in connection with his relocation. This loan is interest-free and payable on January 30, 1999. Any bonus payments payable to Mr. Smith prior to January 30, 1999 shall be used to repay any outstanding balance of the loan. In September 1998, we made a loan in the amount of $100,000 to Bruce Conforto, Senior Vice President and Chief Information Officer, in connection with his relocation. This loan is interest- free and payable on or prior to March 31, 1999. Any bonus payments payable to Mr. Conforto prior to March 31, 1999 shall be used to repay any outstanding balance of this loan. Company Policy We have a policy that any transactions with directors, officers, employees or affiliates be approved in advance by a majority of our Board of Directors, including a majority of the disinterested members of the Board, and be on terms no less favorable to us than we could obtain from non-affiliated parties. SELLING SECURITYHOLDERS The Selling Securityholders are Ariel Fund Limited, Gabriel Capital, L.P., Elliott Associates, L.P. and Westgate International, L.P. The following table sets forth the name of each Selling Securityholder, and the amount of the Securities owned by each such Selling Securityholder which are subject to being offered hereby. This Prospectus relates to the offers and sales of the Securities by the Selling Securityholders, including the shares of Common Stock issuable upon conversion of the 9% Convertible Notes. The Securities subject to offering and sale by the Selling Securityholders pursuant hereto constitute all of the holdings of such securities by such Selling Securityholders. For the respective percentages of the Company's securities beneficially owned by each Selling Securityholder (including such ownership as may be attributed to such securityholders) prior to the offering. See "Principal Stockholders." The following table does not include any Common Stock issuable upon exercise of outstanding options or warrants. Each Selling Stockholder may offer and sell all of the Securities registered hereby. If such Selling Stockholder sells all of the Securities registered hereby, such Selling Stockholder will not beneficially own any of our securities. Inclusion on this list does not imply that any person or entity will actually offer or sell any of the shares registered on his, her or its behalf.
Shares of Principal Amount Common Stock(1) of Notes --------------- ---------------- Ariel Fund Limited(2).......................... 2,853,981 $ 17,421,221 Gabriel Capital, L.P.(2)....................... 1,934,578 $ 11,809,016 Elliott Associates, L.P. ...................... 473,100 $ 540,000 Westgate International, L.P. .................. 990,046 $ 4,532,875 ------------ -------------- TOTAL........................................ 6,251,705(3) $34,303,112(3)
- -------- (1) Excludes an indeterminate number of shares issuable upon conversion of the 9% Convertible Notes. Since the number of shares of Common Stock issuable upon conversion of the 9% Convertible Notes varies as the market price of the Common Stock changes, it is impossible at this time to determine how many shares may be issued upon conversion of the 9% Convertible Notes. (2) J. Ezra Merkin ("Merkin") is the sole general partner of Gabriel Capital, L.P. Gabriel Capital Corp. is the investment advisor for Ariel, and Merkin is the sole shareholder, sole director and president of Gabriel Capital Corp. (3) Additional securities have been registered hereby on behalf of parties which may receive such securities in connection with the Companies' emergence from Chapter 11 and which parties have not yet been identified. Once identified, such parties will be listed above pursuant to a post- effective amendment of the Registration Statement of which this Prospectus forms a part. 51 PLAN OF DISTRIBUTION Type of Transactions. The Selling Securityholders (and donees, pledgees, transferees or other successors in interest receiving Securities from a Selling Securityholder after the date of this Prospectus) may offer and sell all or a portion of their Securities at various times in one or more of the following types of transactions: . In the over-the-counter market; . In private transactions and in transactions other than the over-the- counter market; . In connection with short sales of the Securities; . By pledge to secure debts or other obligations; . In connection with the writing of non-traded and exchange traded call options, swaps or derivatives (exchange-listed or otherwise) and in settlement of other transactions in standardized or over-the- counter options; . cross or block trades; . "at the market" to or through market makers, into an existing market; . direct sales to purchasers, sales effected through agents; . hedging transactions with broker-dealers (who may short the Common Stock); or . In a combination of any of the above transactions. Price of Transaction; Fees. These transactions may be at market price, at prices related to the market price, at negotiated prices or at fixed prices that may be changed. If the Selling Securityholders use the services of an underwriter, broker, dealer or agent to assist with the sale of Securities, the party providing services may be paid for their efforts. The compensation can be paid by either the buyer or the seller of the Securities and can be in the form of a discount, commission or concession. The buyer and the seller will determine how much compensation will be paid and the form in which it will be paid. It is possible that the agent providing these services, or the Selling Securityholders, might be considered to be underwriters under the Securities Act, and any profits received or compensation paid could be considered an underwriting discount or commission under the Securities Act. At the time a particular offer of Securities is made, a prospectus supplement, to the extent required, will be distributed which will set forth the aggregate amount and type of Securities being offered, the names of the Selling Securityholders, the purchase price, the amount of expenses of the offering and the terms of the offering, including the name or names of any underwriters, brokers, dealers or agents, any discounts, commissions and other items constituting compensation from the Selling Securityholders and any discounts, commissions or concessions allowed or reallowed or paid to dealers. Under the Exchange Act and applicable rules and regulations promulgated thereunder, any person engaged in a distribution of any of the Securities may not simultaneously engage in market making activities with respect to the Securities for a period of 5 days prior to the commencement of the distribution, subject to certain exemptions. In addition and without limiting the foregoing, the Selling Securityholders will be subject to applicable provisions of the Exchange Act and the rules and regulations promulgated thereunder, including without limitation Regulation M, which provisions may limit the timing of purchases and sales of any of the Securities by the Selling Securityholders. Under the securities laws of certain states, the Securities may be sold in such states only through registered or licensed brokers or dealers. In addition, in certain states the Securities may not be sold unless the Securities have been registered or qualify for sale in such state or an exemption from registration or qualification is available and is complied with. 52 SHARES ELIGIBLE FOR FUTURE SALE At the Effective Date, we have 10,225,711 shares of Common Stock outstanding. Under the terms of our Plan of Reorganization, the number of shares we issue to our former creditors varies with the amount of general unsecured claims allowed. The number of shares outstanding is based upon an assumption that the amount of general unsecured claims allowed are not less than $225 million and the number of shares issued to the Selling Securityholder's not more than 7,267,424. The number of shares outstanding does not include an indeterminate number of shares of Common Stock which may be issued upon conversion of the 9% Convertible Notes. In addition, we have an aggregate of 1,000,000 shares of Common Stock reserved for issuance upon the exercise of outstanding Warrants and 750,000 shares of Common Stock reserved for issuance upon exercise of Options which we agreed to grant pursuant to the Plan of Reorganization. The offer and sale of 7,267,424 of such shares of Common Stock, plus an indeterminate number of shares issuable upon conversion of the 9% Convertible Notes, are registered under the Securities Act pursuant to the Registration Statement of which this Prospectus is a part. All of the outstanding shares of Common Stock, all of the shares of Common Stock issuable upon exercise of the warrants and options, and all of the shares of Common Stock issuable upon conversion of the 9% Convertible Notes, are freely tradeable without restriction or further registration under the Securities Act, either because such shares were issued or are issuable pursuant to the exemption provided by Section 1145 of the Bankruptcy Code and such shares are not "restricted securities" as defined in Rule 144 under the Securities Act or because the offer and resale of such shares is registered pursuant to the Registration Statement of which this Prospectus forms a part or pursuant to a registration statement on Form S-8 as described below. As of January 29, 1999, a total of 1,000,000 shares of Common Stock were reserved for issuance under the Stock Plan, of which 750,000 shares will be the subject of options we agreed to grant pursuant to the Plan of Reorganization. These options will be granted in April, 1999. In addition, 1,000,000 shares of Common Stock were reserved for issuance under Warrants outstanding as of January 29, 1999. The Warrants will expire on January 29, 2004. We currently intend to file a registration statement on Form S-8 under the Securities Act to register all shares of Common Stock currently issuable pursuant to the Stock Plan. To the extent shares of Common Stock are owned or purchased by our "affiliates" as such term is defined in Rule 144 and are not registered pursuant to this Registration Statement of which this Prospectus forms a part, such restricted shares may generally be sold in compliance with Rule 144. In general under Rule 144 as currently in effect, a person (or persons whose shares are aggregated), including persons deemed to be affiliates, whose restricted securities have been fully paid for and held for at least one year from the later of the date of acquisition from us or any of our affiliates, may sell such securities in brokers' transactions or directly to market makers, provided the number of shares sold in any three-month period does not exceed the greater of 1% of the then outstanding shares of the Common Stock or the average weekly trading volume in the public market during the four calendar weeks immediately preceding the filing of the seller's Form 144. Sales under Rule 144 are also subject to certain notice requirements and availability of current public information concerning us. Pursuant to Rule 144(k), after two years have elapsed from the later of the acquisition of the restricted securities from us or any of our affiliates, such shares may be sold without limitation by persons who have not been our affiliates for at least three months. TERMS OF OUTSTANDING INDEBTEDNESS Credit Agreement As of the Effective Date, we have entered into a $270 million financing facility with BankBoston, N.A. as Administrative Agent and Issuing Bank. The facility is composed of a $250 million senior secured revolving credit facility and a $20 million "last-in last-out" secured subfacility. This facility is for a period expiring on December 23, 2001 and may not exceed a maximum principal amount of $270 million. The initial advances 53 under this BankBoston Facility were used to pay in full all of our obligations under the DIP Facility and the remainder can be used for general corporate purposes, working capital and inventory purchases. No more than $125 million of the advances under the BankBoston Facility are permitted to be in the form of letters of credit. Borrowings under the BankBoston Facility are secured by a first-priority security interest in all of our assets, properties and rights, except for our interest in any owned or leased real property. The security interest of the junior secured facility, though a first-priority interest, ranks behind the security for the senior secured facility. The BankBoston Facility permits us to borrow funds under the senior secured facility at an interest rate per annum equal to (a) the higher of (i) the annual rate of interest as announced by BankBoston as its "Base Rate" and (ii) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System plus 1/2 of 1% per annum; or (b) 2.25% per annum plus the quotient of (i) the LIBOR Rate in effect divided by (ii) a percentage equal to 100% minus the percentage established by the Board of Governors of the Federal Reserve System as the maximum rate for all reserves applicable to any member bank of the Federal Reserve System in respect of Eurocurrency Liabilities. Each of these rates is subject to a 0.50% increase in the event of overadvances. The junior secured subfacility permits us to borrow funds at the "Base Rate" plus 7.00% per annum. We are also required to pay a fee of 1.50% per annum of the average daily balance of the maximum amount that is available at any time for drawing or payment under any outstanding letters of credit. The BankBoston Facility contains a number of significant covenants preventing us from taking certain actions including: . Undergoing a merger or entering into a stock or asset acquisition (subject to certain exceptions); . Making capital expenditures in any fiscal year in excess of $20 million, which limit is subject to increase after twelve months provided we meet certain earnings goals; . Permitting our earnings before interest, taxes, depreciation and amortization ("EBITDA") from dropping below specified levels; . Permitting the ratio of (a) our amount of accounts payable to (b) the value of our inventory to be less than specified percentages (which percentages change on a monthly basis, but are between 37.0% and 42.5%); . Allowing the ratio of (a) our EBITDA less certain capital expenditures to (b) our cash interest expense plus principal payments to be less than 1.00:1; and . Purchasing or guaranteeing any other party's indebtedness, paying dividends, entering into certain transactions with our affiliates and making any investments other than those permitted. If we fail to meet these and other obligations under the BankBoston Facility, the lenders under the BankBoston Facility would have recourse to a number of remedies, including an acceleration of amounts owed and foreclosure on the collateral securing the borrowings. CAP Notes Pursuant to the Plan of Reorganization, Bradlees Stores, Inc. has issued CAP Notes in the aggregate principal amount of $547,094. The CAP Notes bear interest at a rate equal to nine percent (9%) per annum. Principal and accrued interest are payable in twelve equal quarterly installments, commencing three months after the Effective Date. Bradlees Stores, Inc. can prepay these notes, in whole or in part, at any time or from time to time, without premium or penalty. The CAP Notes are secured by a first lien on the property on which the CAP Note holder holds a valid first priority security interest. 54 Cure Notes Pursuant to the Plan of Reorganization, Bradlees Stores, Inc. has issued Cure Notes in the aggregate principal amount of $3.4 million. The Cure Notes are not secured and bear interest at a rate equal to nine percent (9%) per annum. Principal and accrued interest are payable in twelve equal quarterly installments, commencing three months after the Effective Date. Bradlees Stores, Inc. can prepay these notes, in whole or in part, at any time or from time to time, without premium or penalty. Tax Notes Pursuant to the Plan of Reorganization and Section 1129(a)(9)(C) of the Bankruptcy Code, Bradlees Stores, Inc. has agreed to make deferred cash payments in the aggregate principal amount of $3.4 million on account of allowed tax claims. Payments will be made in equal annual installments of principal, plus simple interest accruing from the Effective Date at a rate equal to eight percent (8%) per annum on the unpaid portion of such claims. The first payment is due on the latest of: (i) 30 days after the Effective Date, (ii) 30 days after the date on which an order allowing any such claim becomes a final order, and (iii) such other date as is agreed to by Bradlees Stores, Inc. and by the holder of such claim. Bradlees Stores, Inc. has the right to pay any such claim, or the remaining balance of any such claim, in full, at any time, on or after the Effective Date, without premium or penalty. DESCRIPTION OF THE 9% CONVERTIBLE NOTES The 9% Convertible Notes (as used in this section, the "Notes") were issued under an Indenture dated January 29, 1999 (the "Indenture") between Bradlees, Inc., Bradlees Stores, Inc. and IBJ Whitehall Bank & Trust Company, as trustee (the "Trustee"). The material provisions of the Notes and the Indenture are summarized below. The statements under this caption relating to the Notes and the Indenture are summaries only, however, and do not purport to be complete. Such summaries make use of terms defined in the Indenture and are qualified in their entirety by express reference to the Indenture, which has been filed as an exhibit to the Registration Statement of which this Prospectus is a part. The Notes will be issued by Bradlees Stores, Inc. The Indenture will be subject to and governed by the Trust Indenture Act of 1939, as amended (the "TIA"). General Each Note will mature on January 29, 2004, and will bear interest at the rate of 9% per annum from the date of issuance, payable semi-annually in arrears on January 1 and July 1 of each year, commencing July 1, 1999, to the person in whose name the Note is registered at the close of business on the record date next preceding such interest payment date. Interest will be computed on the basis of a 360-day year comprised of twelve 30-day months. Bradlees Stores, Inc. will only pay the principal on the Notes to each Holder who presents and surrenders such Notes to a Paying Agent on or after January 29, 2004. Bradlees Stores, Inc. will pay principal and interest in U.S. legal tender by Federal funds bank wire transfer or (in the case of payment of interest) by check to the persons who are registered Holders at the close of business on the Record Date next preceding the applicable interest payment date. The aggregate principal amount of the Notes that may be issued will be limited to $40,000,000. The Notes will be transferable and exchangeable at the office of the Security Registrar and will be issued in fully registered form, without coupons, in denominations of $1,000 and any whole multiple thereof. Bradlees Stores, Inc. may require payment of a sum sufficient to cover any transfer tax or other similar governmental charge payable in connection with certain transfers and exchanges. Ranking The indebtedness represented by the Notes will rank equally with other non- subordinated indebtedness of Bradlees Stores, Inc. Each Note will rank on parity with each other Note. 55 Except as described under "Merger, Consolidation or Sale of Assets," or "Limitations on Indebtedness" the Notes do not contain any provisions that would limit the ability of Bradlees Stores, Inc. to incur indebtedness or that would afford holders of Notes protection in the event of (i) a highly leveraged or similar transaction involving Bradlees Stores, Inc., the management of Bradlees Stores, Inc., or any affiliate of any such party, (ii) a change of control, or (iii) a reorganization, restructuring, merger or similar transaction involving Bradlees Stores, Inc. that may adversely affect the holders of the Notes. In addition, subject to the limitations set forth under "Merger, Consolidation or Sale of Assets," Bradlees Stores, Inc. may, in the future, enter into certain transactions, such as the sale of all or substantially all of its assets or the merger or consolidation of the Bradlees Stores, Inc., that would increase the amount of Bradlees Stores, Inc.'s indebtedness or substantially reduce or eliminate Bradlees Stores, Inc.'s assets, which may have an adverse effect on Bradlees Stores, Inc.'s ability to service its indebtedness, including the Notes. Redemption Any Notes outstanding shall be redeemed, along with any accrued and unpaid interest on such Notes, with the net proceeds received upon the disposition of the Yonkers, New York or the Union Square, New York stores or the net proceeds received upon the disposition of the Additional Collateral (as defined below). Additionally, the proceeds of any offering of common stock by Bradlees, Inc., except offerings pursuant to the Plan of Reorganization or pursuant to any benefit plan, shall be used to repay, pro rata, any outstanding Notes plus accrued and unpaid interest. We have the right to redeem the Notes at any time, in whole or in part, by paying the holder the unpaid principal plus accrued and unpaid interest. Limitations on Mergers and Consolidation The Indenture provides that neither Bradlees, Inc. nor Bradlees Stores, Inc. may consolidate or merge with, or sell, assign, transfer, lease or convey all or substantially all of its assets to, any other entity unless (i) either Bradlees, Inc. or Bradlees Stores, Inc., as the case may be, shall be the continuing entity, or the successor entity formed by or resulting from any such consolidation or merger or which shall have received the transfer of such assets, shall expressly assume by supplemental indenture (A) In the case of a transaction involving Bradlees Stores, Inc., Bradlees Stores, Inc.'s obligations to pay principal of (and premium, if any) and interest on all of the Notes, as well as every covenant and obligation of Bradlees Stores, Inc. or (B) in the case of a transaction involving Bradlees, Inc., the guarantee obligations of Bradlees, Inc. (ii) before and immediately after giving effect to such transaction, no event of default under the Indenture, and no event which, after notice or the lapse of time, or both, would become such an event of default, shall have occurred or be continuing and (iii) Bradlees, Inc., Bradlees Stores, Inc. or the successor entity, shall deliver to the Trustee a certificate and an opinion of counsel that such actions comply with the applicable provisions of the Indenture. Limitations on Indebtedness The Indenture provides that neither Bradlees Stores, Inc. nor any of its subsidiaries will incur any Indebtedness (which as defined in the Indenture includes obligations for borrowed money, the defined purchase price of certain assets and guarantees of the foregoing) other than (i) Indebtedness incurred under or permitted by the BankBoston Facility (or any amendment, restatement, modification, renewal, refunding, replacement or refinancing thereof in whole or in part from time to time); (ii) Indebtedness represented by the Notes (or any amendment, restatement, modification, renewal, refunding, replacement or refinancing thereof in whole or in part from time to time); (iii) Indebtedness incurred in connection with the acquisition (by purchase, lease or otherwise) of additional store sites; (iv) Indebtedness incurred to finance or refinance capital expenditures; and (v) Indebtedness incurred in the ordinary course of business. 56 Guarantee Bradlees, Inc. will fully and unconditionally guarantee the obligations of Bradlees Stores, Inc. under the 9% Convertible Notes. The obligations of Bradlees, Inc. under its guarantee will be unsecured obligations of Bradlees, Inc. and will be limited as necessary to prevent the guarantee from constituting a fraudulent conveyance under applicable law. See "Risk Factors-- Fraudulent Conveyance Matters." Events of Default, Notice and Waiver The following events are "Events of Default" with respect to the Notes: (i) default for 15 days in the payment of any installment of interest on any Note; (ii) default in the payment of principal of any Note when it becomes due and payable, at maturity, acceleration, redemption or otherwise; (iii) default in the performance or breach of any other obligation of Bradlees Stores, Inc. or Bradlees, Inc. contained in the Indenture or related security agreement that continues for 30 days after written notice thereof given to Bradlees, Inc. and Bradlees Stores, Inc. as provided in the Indenture; (iv) certain events of bankruptcy, insolvency or reorganization, or court appointment of a receiver, liquidator or trustee of Bradlees, Inc., Bradlees Stores, Inc. or any significant subsidiary of either of these parties; (v) we incur Indebtedness under the BankBoston Facility or any other Indebtedness in an amount exceeding five million dollars that is not paid when due (whether at maturity, by acceleration or otherwise); (vi) any one or more judgments, orders as to liability or debt for payment in excess of five million dollars shall be rendered against us which is not paid or stayed within 30 days, subject to specified limitations; (vii) Bradlees, Inc. fails to deliver Common Stock within three trading days upon conversion of the Notes; (viii) the guarantee of Bradlees, Inc. ceases to be in effect for a period of ten days after notice is provided; and (ix) the lien created by the security agreement shall cease to be enforceable and Bradlees Stores, Inc. does not cure the cessation within 30 days. If an Event of Default under the Indenture occurs and is continuing, then in every such case the holders of at least 25% in principal amount of outstanding Notes have the right to declare the principal amount of all the Notes to be due and payable immediately by written notice thereof to Bradlees Stores, Inc., provided that such acceleration shall not be effective until 24 hours after notice is given to the administration agent under the BankBoston Facility, if any amounts are outstanding under such facility. However, at any time after such a declaration of acceleration with respect to the Notes has been made, the holders of a majority in principal amount of outstanding Notes may rescind and cancel such declaration and its consequences if (i) the recission would not conflict with any judgement or decree; (ii) all events of default, other than the non-payment of accelerated principal (or specified portion thereof), with respect to the Notes have been cured or waived; (iii) to the extent payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid; and (iv) Bradlees Stores, Inc. has paid the Trustee its reasonable compensation. The Indenture also provides that the holders of not less than a majority in principal amount of the outstanding Notes may waive any past default and its consequences, except a default (i) in the payment of the principal of (or premium, if any) or interest on any Note; or (ii) with respect to an obligation contained in the Indenture that cannot be modified or amended without the consent of the holder of each outstanding Note affected thereby. The TIA requires the Trustee to give notice to the holders of the Notes within 90 days of the occurrence of an Event of Default of which it is aware under the Indenture unless such default shall have been cured or waived; provided, however, that such Trustee may withhold notice to the holders of Notes if specified responsible officers, as set forth in the TIA, of such Trustee consider such withholding to be in the interest of such holders. The Indenture provides that no holders of Notes may institute any proceedings, judicial or otherwise, upon or with respect to the Indenture or for any remedy thereunder, except in the case of failure of the Trustee to act within 10 days after it has received a reasonably satisfactory offer of indemnity and a written request to institute proceedings relating to an Event of Default from the holders of not less than 25% aggregate principal 57 amount of the outstanding Notes. This provision will not prevent, however, any holder of Notes from instituting suit for the enforcement of payment of the principal and interest on such Notes at the respective due dates thereof. The holders of not less than a majority in principal amount of the outstanding Notes shall have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Trustee, or of exercising any trust or power conferred upon such Trustee. The Trustee may refuse to follow any direction which is in conflict with any law or the Indenture, which may involve the Trustee in personal liability or which may be unduly prejudicial to the holders of Notes not joining therein, it being understood that the Trustee shall have no duty to ascertain the potential prejudice of any actions. Within 120 days after the close of each fiscal year, Bradlees Stores, Inc. is required to deliver to the Trustee a certificate, signed by one of several specified officers of Bradlees Stores, Inc., stating whether or not such officer has knowledge of any failure by Bradlees Stores, Inc. to comply with any of its obligations under the Indenture. Modification of the Indenture Modifications and amendments of the Indenture, any security documents or the Notes are permitted to be made only with the consent of the holders of a majority in principal amount of all outstanding Notes issued under the Indenture affected by such modification or amendment; provided, however, that no such modification or amendment may, without the consent of the holder of each such Note affected thereby, (i) reduce the principal or change or have the effect of changing the stated maturity of any Notes, or change the date on which any Notes may be subject to redemption, or reduce the redemption price; (ii) reduce the rate of interest, or change or have the effect of changing the stated maturity for payment of interest on the Notes, (iii) change the place of payment or currency for payment of principal or interest on any such Notes; (iv) impair the right to institute suit for the enforcement of any payment on or with respect to any such Notes or permitting the holders of a majority in principal amount of Notes to waive events of default; (v) reduce the above- stated percentage of any outstanding Notes necessary to modify or amend the Indenture with respect to such Notes or to waive compliance with certain provisions thereof or certain Events of Default and consequences thereunder; (vi) change any material provision of any security document; (vii) adversely affect the right of holders of the Notes to convert them into common stock; (viii) waive a default in payment of principal or interest; (ix) release Bradlees, Inc. from its guarantee obligations or release collateral other than as permitted by this Indenture; or (x) modify any of the foregoing provisions to adversely affect the holders of the Notes in any material respects. Any amendment to release the collateral securing the Notes must be unanimously approved by all holders of Notes. Modifications and amendments of the Indenture, any security documents or the Notes will be permitted to be made by Bradlees, Inc, Bradlees Stores, Inc. and the Trustee thereunder without the consent of any holder of the Notes for any of the following purposes: (i) to evidence the succession of another person to Bradlees Stores, Inc. as obligor under the Indenture to the extent permitted under the Indenture; (ii) to provide for the acceptance of appointment by a successor Trustee or facilitate the administration of the trust under the Indenture by more than one Trustee; (iii) to cure any ambiguity, defect or inconsistency in such documents, provided that in the opinion of the Trustee, such action shall not adversely affect the interests of holders of Notes issued under the Indenture; (iv) to provide for uncertificated Notes; (v) to maintain compliance with the requirements of the SEC or to remain qualified under the TIA; (vi) to give effect to the release of any collateral or any lien in accordance with the terms of any security document; (vii) to make any change that does not adversely affect the rights of any Note holders or (viii) to make any change that provides an additional benefit to the holders of the Notes. Collateral The Notes are secured by a first priority lien on our leasehold interest in our Yonkers, New York store and the net proceeds from the disposition of such property. 58 Pursuant to the Plan of Reorganization, we have modified the termination date and certain other provisions of our lease for our Union Square, New York store in exchange for a payment upon the Effective Date of $11.0 million by the landlord. This payment will be applied as a pre-payment to the Notes. In addition, we have pledged, on a second priority basis all of our interest in the capital stock of New Horizons of Yonkers, Inc. as additional security for the Notes. Further, we have granted a first priority lien on our leasehold interests in our stores in Danbury, Connecticut, Norwalk, Connecticut and Saddle Brook, New Jersey (the "Additional Collateral"). The lien on the Additional Collateral shall only secure indebtedness under the Notes equal to the sum of $6.5 million plus an amount from time to time equal to the amount of interest that would accrue on $6.5 million of principal amount of outstanding Notes from January 29, 1999 to the date of calculation of the extent of such lien on the Additional Collateral (but excluding any period for which interest has in fact been paid under the Notes). CONVERSION The Notes will be convertible any time after the first anniversary of the Effective Date into shares of our Common Stock. The conversion price will initially be the arithmetic unweighted average closing price of the Common Stock of Bradlees, Inc. on the twenty business days preceding the first anniversary of the Effective Date. The conversion price may change if we (i) make any distributions in shares of our Common Stock to our stockholders; (ii) issue options, warrants or rights to our stockholders that dilute current owners of Bradlees, Inc. Common Stock; (iii) take any action to increase or decrease the number of shares outstanding which would effectively dilute the value of the convertible feature of the Note; or (iv) distribute any assets (other than cash dividends not exceeding certain levels), evidences of indebtedness or shares of stock. The Notes will not be convertible after the close of business on January 27, 2004, or after the close of business on the second day prior to the date on which the specified Note was to be redeemed. GOVERNING LAW The Indenture and each Note are governed by, and construed in accordance with, the laws of the State of New York, except as may otherwise be required by mandatory provisions at law. THE TRUSTEE IBJ Whitehall Bank & Trust Company will be the Trustee under the Indenture. Its address is One State Street, New York, New York 10004. The Indenture contains certain limitations on the right of the Trustee, should it become a creditor of the Company, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee will be permitted to engage in other transactions; however, if it acquires any conflicting interest (as defined in the TIA), it must eliminate such conflict or resign. The Indenture provides that in case an Event of Default shall occur and be continuing, the Trustee will be required to use the degree of care and skill of a prudent person in the conduct of his or her own affairs. AUTHENTICATION Two officers of Bradlees Stores, Inc. will sign each Note on behalf of Bradlees Stores, Inc., in each case by manual or facsimile signature. A seal of Bradlees Stores, Inc. will be reproduced on each Note and may be in facsimile form. A Note will not be valid until the Trustee or an Authenticating Agent manually signs the certificate of authentication on the Note. Each Note will be dated as of the date of its authentication. 59 DESCRIPTION OF CAPITAL STOCK General The following summary description of the capital stock of Bradlees is qualified in its entirety by reference to the Bradlees Amended and Restated Articles of Organization (the "Articles") and the Bradlees Amended and Restated By-laws (the "By-laws"), copies of which are filed as exhibits to the Registration Statement of which this Prospectus is a part. All of the stock of Bradlees Stores, Inc. is owned by Bradlees. The terms of the common stock of Bradlees Stores, Inc. are contained in the Amended and Restated Articles of Organization and the Amended and Restated By-laws of Bradlees Stores, Inc., copies of which have been filed as exhibits to the Registration Statement of which this Prospectus is a part. Authorized and Outstanding Capital Stock Bradlees has authorized capital stock consisting of 41,000,000 shares, par value $.01 per share, consisting of 40,000,000 shares of Common Stock and 1,000,000 shares of preferred stock. As of January 29, 1999, 10,225,711 shares of Common Stock, held by approximately 2,200 stockholders, are issued and outstanding. As of January 29, 1999, no preferred stock was issued or outstanding. Common Stock. As of January 29, 1999, 10,225,711 shares of Common Stock are issued and outstanding. In addition, the following shares of Common Stock are reserved for issuance: .1,000,000 shares issuable upon exercise of outstanding warrants; and .1,000,000 shares are reserved for issuance under the Stock Plan. In addition, we have agreed to issue an indeterminate number of shares upon the conversion of the 9% Convertible Notes. The holders of Common Stock are entitled to one vote per share on all matters to be voted on by stockholders. Therefore, the holders of a majority of the shares voted in the election of directors can elect all of the directors then standing for election, subject to the rights of the holders of preferred stock, if and when issued. As of January 29, 1999, no preferred stock was issued or outstanding. The holders of Common Stock are entitled to receive such dividends, if any, as may be declared from time to time by our Board of Directors from funds legally available therefor. See "Dividend Policy." The possible issuance of preferred stock with a preference over Common Stock as to dividends could impact that dividend rights of holders of Common Stock. The holders of Common Stock have no preemptive or other subscription rights, and there are no conversion rights or redemption or sinking fund provisions with respect to the Common Stock. All outstanding shares of Common Stock, including the shares offered hereby, are fully paid and non-assessable. Undesignated Preferred Stock. The Board of Directors is authorized, without further action of the stockholders, to issue up to 1,000,000 shares of preferred stock in one or more series and to fix the designations, powers, preferences and the relative, participating, optional or other special rights of the shares of each series and any qualifications, limitations and restrictions thereon as set forth in our Articles of Organization. Any such preferred stock issued by us may rank prior to the Common Stock as to dividend rights, liquidation preference or both, may have full or limited voting rights and may be convertible into shares of Common Stock. Certain Provisions of the Articles and By-laws of Bradlees, Inc. General. Bradlees' Articles and By-laws contain rules of corporate governance and stockholder rights. The Articles and By-laws allow the board of directors to issue shares of preferred stock and to set the voting rights and preferences of that stock. 60 Board of Directors. The Articles and By-laws provide that the initial number of directors shall be 9. The board of directors may increase, but not decrease, the number of directors. The first annual meeting of stockholders will be held in 2000. The initial directors shall serve terms expiring at this annual meeting. Successors will hold office until the next annual meeting of the stockholders in 2001. The initial directors shall hold office until their successors are elected and qualified or until their resignation or removal. Any holder of record of shares of capital stock or the Nominating Committee established by the board of directors may nominate directors. Shareholders who nominate directors are subject to advance notice and disclosure requirements as well as time limits. Shareholders shall elect directors by the affirmative vote of a plurality of the votes cast at the meeting. Removal of Directors. The board of directors may remove any director with or without cause by the vote of a majority of directors then in office. The shareholders may remove any director with the vote of two-thirds ( 2/3) of the shareholders eligible to elect Directors. Meetings of Stockholders. The board of directors may call a special meeting of stockholders. The clerk or in certain circumstances any other officer must call a special meeting of the stockholders upon written application of one or more stockholders who hold at least (1) two-thirds (66 2/3%) in interest of the capital stock entitled to vote at such meeting or (2) such lesser percentage as shall be determined to be the maximum percentage which we are permitted by applicable law to establish for the call of such a meeting. At a special meeting, the shareholders may only act upon those matters set forth in the notice of the special meeting. The By-laws set forth advance notice and disclosure requirements and time limitations on any new business which a stockholder wishes to propose for consideration at an annual meeting of stockholders. Indemnification and Limitation of Liability. The By-laws provide that we shall indemnify our directors and officers to the fullest extent authorized by Massachusetts law against all expense and liabilities reasonably incurred in connection with service for or on behalf of us, unless that director or officer is adjudicated in that proceeding to have breached his or her duty of loyalty to us. We may, in the discretion of the Board of Directors, indemnify our employees and agents as if they were directors or officers, to the fullest extent authorized by Massachusetts law. Pursuant to Massachusetts law and the Articles, a director does not have any liability for monetary damages for breach of fiduciary duty except for: . any breach of the director's duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; . an unauthorized distribution or loan to an officer or director in violation of the Massachusetts General Law; or . any transaction from which the director obtained an improper personal benefit. In addition, Massachusetts law states that a corporation may not indemnify a director, officer or employee who has not acted in good faith in the reasonable belief that his or her action was in the best interest of the corporation. Sale, Lease or Exchange of Assets; Merger. Massachusetts law provides that, unless the articles of organization provide otherwise, two-thirds ( 2/3) of the outstanding shares are required to approve a sale, lease or exchange of all or substantially all of our assets or a merger or consolidation. The Articles do not contain a provision changing this requirement. Amendment of the By-laws. The board of directors or the shareholders may amend or repeal the Articles or By-laws, subject to the following: . The board of directors can amend or repeal the By-laws with a majority vote of the directors in office. Following an amendment, the board of directors must give notice to all shareholders entitled to vote on amendments by the time the board gives notice of the next annual meeting. 61 . The shareholders can amend or repeal the By-laws with a vote of at least two-thirds ( 2/3) of all shareholders eligible to vote. All shares of voting stock vote together as a single class. . If the board of directors recommends an amendment or repeal of the By-laws, the shareholders can amend or repeal with a majority vote of all shareholders eligible to vote. All shares of voting stock vote together as a single class. Amendment of the Articles. The shareholders can amend the Articles at any annual meeting or at a special meeting called to amend the Articles. The shareholders may vote to amend the Articles alone or with the board of directors. The board of directors may not amend the Articles without shareholder approval. . The shareholders can amend the Articles with a vote of at least two- thirds of all shareholders eligible to vote. All shares of voting stock vote together as a single class. . If the board of directors recommends an amendment, the shareholders can amend the Articles with a majority vote of all shareholders eligible to vote. All shares of voting stock vote together as a single class. Massachusetts Anti-takeover Laws Chapter 110F Chapter 110F of the Massachusetts General Laws prohibits corporations from engaging in certain business combinations which include mergers and consolidations and certain stock or assets sales with an interested stockholder. This prohibition extends for three years following the date the stockholder becomes an interested stockholder. An interested stockholder is a holder of five percent (5%) or more of the outstanding stock of the corporation. The statute allows corporations to elect not to be governed by Chapter 110F if a majority of shares entitled to vote approves such election. In its Articles, Bradlees has elected not to be governed by Chapter 110F. The Articles were approved by the Bankruptcy Court in connection with the Plan of Reorganization. This election took effect at the Effective Date. Chapter 110D Chapter 110D of the Massachusetts General Laws governs any person (the "acquiror") who makes a bona fide offer to acquire, or acquires, shares of stock of a Massachusetts corporation that when combined with shares already owned, would increase the acquiror's ownership to at least 20% of the voting stock of such company. To vote his or her shares, an acquiror must obtain the approval of a majority of shares held by all stockholders not including shares of the acquiror, officers or inside directors of the corporation. A Massachusetts corporation may elect not to be governed by Chapter 110D by including a provision to that effect in its articles of organization or by- laws. In its Articles, Bradlees has opted not to be governed by the provisions of Chapter 110D. Certain Provisions of the Articles and By-laws of Bradlees Stores, Inc. The Articles and By-laws of Bradlees Stores, Inc. are substantially the same as the Articles and By-laws of Bradlees, Inc. discussed above, with the following major exceptions .Bradlees Stores, Inc. has only three directors; . Bradlees Stores, Inc. has authorized capital stock consisting of 150,000 shares of common stock and 50,000 shares of preferred stock. All of the issued and outstanding shares of common stock of Bradlees Stores, Inc. is held by Bradlees, Inc. There is no preferred stock of Bradlees Stores, Inc. currently outstanding. 62 Transfer Agent and Registrar We have selected Boston EquiServe as the transfer agent and registrar for the Common Stock. Listing The Common Stock has been accepted for listing, subject to official notice of issuance, on the Nasdaq National Market, under the symbol "BRAD." We do not intend to apply for listing of the Notes on any securities exchange or authorization for quotation on the Nasdaq Stock Market. LEGAL MATTERS Goodwin, Procter & Hoar llp, Boston, Massachusetts will pass upon the validity of the shares of the Common Stock and the Notes offered by this Prospectus. EXPERTS The consolidated balance sheet, statements of operations, stockholder's equity (deficiency), and cash flows of the Company as of January 31, 1998 and for the fiscal year then ended included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their report with respect thereto, and are included herein in reliance upon the authority of said firm as experts in giving said reports. Arthur Andersen LLP's report for the fiscal year ended January 31, 1998 contained an explanatory paragraph that raised substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The consolidated financial statements of Bradlees, Inc. as of February 1, 1997 and for the years ended February 1, 1997 and February 3, 1996 included in this prospectus have been audited by Deloitte & Touche LLP, independent auditors, as stated in their report appearing herein (which report expresses an unqualified opinion and includes explanatory paragraphs referring to (a) the Company's filing for reorganization under Chapter 11 of the Federal Bankruptcy Code, and (b) the Company's 1996 and 1995 losses from operations and stockholders' deficiency, which raise substantial doubt about the Company's ability to continue as a going concern), and have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing. ADDITIONAL INFORMATION We have filed with the Securities and Exchange Commission (the "Commission") a Registration Statement on Form S-1 (including any and all amendments thereto, the "Registration Statement") under the Securities Act and the rules and regulations promulgated thereunder, with respect to the Securities offered hereby. This Prospectus omits certain information contained in the Registration Statement, and reference is made to the Registration Statement and the exhibits and schedules thereto for further information with respect to the Company and the Securities offered hereby. Statements contained in this Prospectus concerning the provisions or contents of any contract, agreement or any other document referred to herein are not necessarily complete with respect to each such contract, agreement or document filed as an exhibit to the Registration Statement, and reference is made to such exhibit for a more complete description of the matters involved, and each such statement shall be deemed qualified by such reference. We are subject to the information requirements of the Exchange Act, and in accordance therewith will file reports, proxy statements and other information with the Commission. Such reports, proxy statements and other information, as well as the 63 Registration Statement, including the exhibits and schedules thereto, may be inspected and copied at the public reference facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of the Commission located at 7 World Trade Center, 13th Floor, New York, New York 10048 and at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials may be obtained from such offices, upon payment of the fees prescribed by the Securities and Exchange Commission. The Commission maintains a Web site (http://www.sec.gov) that contains reports, proxy and information statements and other information regarding registrants that submit electronic filings to the Commission. We intend to furnish our stockholders with annual reports containing audited consolidated financial statements and an opinion thereon expressed by an independent public accounting firm, and with quarterly reports for the first three quarters of each fiscal year containing unaudited interim consolidated financial information. On September 24, 1997, the Audit Committee of the Board of Directors of the Company recommended the appointment of Arthur Andersen LLP as certifying accountants for the Company replacing Deloitte & Touche LLP, who was dismissed, effective September 24, 1997 and the appointment along with the dismissal was approved by the Board of Directors and the United States Bankruptcy Court for the Southern District of New York. There were no disagreements between Deloitte & Touche LLP and the Company's management at the decision-making level during the two most recent fiscal years and the subsequent interim periods (the "Reporting Period"), which disagreements, if not resolved to the satisfaction of Deloitte & Touche LLP, would have caused Deloitte & Touche LLP to make reference to the subject matter of the disagreements in connection with its reports. In addition, there were no reportable events, as defined in Item 304(a)(i)(v) of Regulation S-K, during the Reporting Period. Deloitte & Touche LLP's report on the consolidated financial statements for the year ended February 1, 1997 expressed an unqualified opinion and included explanatory paragraphs relating to the following: February 1, 1997 report: a The Company's filing for reorganization protection under Chapter 11 of the Federal Bankruptcy Code. b. The Company's 1996 and 1995 losses from operations and stockholders' deficiency which raises substantial doubt about the Company's ability to continue as a going concern. During the Reporting Period, neither the Company nor anyone on its behalf consulted Arthur Andersen LLP regarding the application of accounting principles to a specified transaction or the type of audit opinion that might be rendered on the Company's financial statements, and Arthur Andersen LLP did not provide a written or oral report or advice that Bradlees' management concluded was an important factor considered by the registrant in reaching a decision on the issue. 64 INDEX TO FINANCIAL STATEMENTS Bradlees, Inc. and Subsidiaries (Operating as Debtor-in-Possession) Index to Consolidated Financial Statements
Page ---- Condensed Consolidated Financial Statements as of October 31, 1998 (unaudited) Condensed Consolidated Statements of Operations for the thirteen weeks ended October 31, 1998 (unaudited) and November 1, 1997 (unaudited)............................ F-2 Condensed Consolidated Statements of Operations for the thirty-nine weeks ended October 31, 1998 (unaudited) and November 1, 1997 (unaudited)..... F-3 Condensed Consolidated Balance Sheets as of October 31, 1998 (unaudited) and November 1, 1997 (unaudited)........................................ F-4 Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 31, 1998 (unaudited) and November 1, 1997 (unaudited)..... F-6 Notes to Condensed Consolidated Financial Statements (unaudited)......... F-7 Consolidated Financial Statements as of January 31, 1998 Report of Independent Public Accountants-Arthur Andersen LLP............. F-21 Independent Auditors' Report-Deloitte & Touche LLP....................... F-22 Consolidated Statements of Operations for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996......................... F-23 Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997.. F-24 Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, February 1, 1997 and February 1, 1996......................... F-25 Consolidated Statements of Stockholders' Equity (Deficiency) for the fis- cal years ended January 31, 1998, February 1, 1997 and February 3, 1996.................................................................... F-26 Notes to Consolidated Financial Statements............................... F-27
F-1 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 -------------------------- Oct. 31, 1998 Nov. 1, 1997 ------------- ------------ Total sales........................................ $323,106 $342,337 Leased department sales............................ 10,973 11,904 -------- -------- Net sales.......................................... 312,133 330,433 Cost of goods sold................................. 217,394 233,329 -------- -------- Gross margin....................................... 94,739 97,104 Leased department and other operating income....... 3,028 3,282 -------- -------- 97,767 100,386 -------- -------- Selling, store operating, administrative and distribution expenses............................. 95,549 93,796 Depreciation and amortization expense.............. 7,803 9,004 Interest and debt expense.......................... 4,371 4,187 Reorganization items............................... (2,749) (6,978) -------- -------- Net income (loss).................................. $ (7,207) $ 377 ======== ======== Comprehensive income (loss)........................ $ (7,207) $ 377 ======== ======== Net loss per share - basic and diluted............. $ (0.64) $ 0.03 ======== ======== Weighted average shares outstanding (in thousands) - basic and diluted.................... 11,310 11,366 ======== ========
See accompanying notes to condensed consolidated financial statements. F-2 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED) (Dollars in thousands except per share amounts)
39 Weeks Ended -------------------------- Oct. 31, 1998 Nov. 1, 1997 ------------- ------------ Total sales........................................ $939,203 $930,683 Leased department sales............................ 32,818 35,463 -------- -------- Net sales.......................................... 906,385 895,220 Cost of goods sold................................. 635,383 625,521 -------- -------- Gross margin....................................... 271,002 269,699 Leased department and other operating income................................... 8,757 8,722 -------- -------- 279,759 278,421 Selling, store operating, administrative and distribution expenses............................. 280,326 289,844 Depreciation and amortization expense.............. 24,370 27,544 Loss on disposition of properties.................. 241 -- Interest and debt expense.......................... 11,960 11,673 Reorganization items............................... (2,555) (2,160) -------- -------- Net loss........................................... $(34,583) $(48,480) ======== ======== Comprehensive loss................................. $(34,583) $(48,480) ======== ======== Net loss per share - basic and diluted............. $ (3.06) $ (4.26) ======== ======== Weighted average shares outstanding (in thousands) - basic and diluted.................... 11,311 11,382 ======== ========
See accompanying notes to condensed consolidated financial statements. F-3 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands)
Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997 ------------- ------------- ------------ ASSETS Current assets: Unrestricted cash and cash equivalents........................ $ 10,959 $ 10,949 $ 11,291 Restricted cash and cash equivalents........................ 25,129 16,760 9,436 -------- -------- -------- Total cash and cash equivalents... 36,088 27,709 20,727 -------- -------- -------- Accounts receivable................. 11,925 10,013 14,183 Inventories......................... 318,883 238,629 335,359 Prepaid expenses.................... 11,031 8,733 11,087 Assets held for sale................ - 7,754 7,754 -------- -------- -------- Total current assets.............. 377,927 292,838 389,110 Property, plant and equipment, net: Property excluding capital leases, net................................ 123,892 131,525 135,430 Property under capital leases, net.. 17,732 18,959 21,126 -------- -------- -------- Total property, plant and equipment, net................... 141,624 150,484 156,556 -------- -------- -------- Other assets: Lease interests at fair value, net.. 137,350 142,454 144,705 Assets held for sale................ - 4,000 5,250 Other, net.......................... 4,509 5,390 4,386 -------- -------- -------- Total other assets................ 141,859 151,844 154,341 -------- -------- -------- Total assets........................ $661,410 $595,166 $700,007 ======== ======== ========
(Continued) See accompanying notes to condensed consolidated financial statements. F-4 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Dollars in thousands)
Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997 ------------- ------------- ------------ LIABILITIES AND STOCKHOLDERS' DEFICIENCY Current liabilities: Accounts payable.................... $179,413 $124,361 $196,279 Accrued expenses.................... 23,221 30,516 34,619 Self-insurance reserves............. 6,027 6,564 6,144 Short-term debt..................... 157,392 84,208 131,500 Current portion of capital lease obligations........................ 1,038 1,038 1,038 -------- -------- -------- Total current liabilities......... 367,091 246,687 369,580 -------- -------- -------- Long-term liabilities Obligations under capital leases.... 26,211 27,073 32,738 Deferred income taxes............... 8,581 8,581 8,581 Self-insurance reserves............. 12,237 13,328 12,473 Other long-term liabilities......... 19,034 23,342 28,186 -------- -------- -------- Total long-term liabilities....... 66,063 72,324 81,978 -------- -------- -------- Liabilities subject to settlement under the reorganization case........ 548,788 562,105 560,154 Stockholders' deficiency: Common stock - 11,310,384 outstanding (11,312,154 at 1/31/98, 11,387,154 at 11/1/97) Par value.......................... 115 115 115 Additional paid-in-capital......... 137,821 137,821 137,951 Accumulated deficit................. (457,665) (423,082) (449,007) Treasury stock, at cost............. (803) (804) (764) -------- -------- -------- Total stockholders' deficiency.... (320,532) (285,950) (311,705) -------- -------- -------- Total liabilities and stockholders' deficiency......................... $661,410 $595,166 $700,007 ======== ======== ========
See accompanying notes to condensed consolidated financial statements. F-5 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Dollars in thousands)
39 Weeks Ended -------------------------- Oct. 31, 1998 Nov. 1, 1997 ------------- ------------ Cash flows from operating activities: Net loss.......................................... $(34,583) $(48,480) Adjustments to reconcile net loss to cash used by operating activities: Depreciation and amortization expense........... 24,370 27,544 Amortization of deferred financing costs........ 1,215 2,098 Reorganization items............................ (2,555) (2,160) Changes in working capital and other, net....... (37,231) (29,832) -------- -------- Net cash used by operating activities before reorganization items............................. (48,784) (50,830) -------- -------- Reorganization items: Interest income received........................ 746 330 Chapter 11 professional fees paid............... (7,786) (7,877) Other reorganization expenses paid, net......... (3,225) (5,611) -------- -------- Net cash used by reorganization items............. (10,265) (13,158) -------- -------- Net cash used by operating activities............. (59,049) (63,988) Cash flows from investing activities: Capital expenditures, net......................... (10,379) (14,721) Increase in restricted cash and cash equivalents.. (8,369) (310) -------- -------- Net cash used in investing activities............. (18,748) (15,031) -------- -------- Cash flows from financing activities: Payments of liabilities subject to settlement..... (6,551) (5,447) Deferred financing costs.......................... - (2,026) Net borrowings under the DIP facilities........... 73,184 89,000 Proceeds from sales of properties................. 12,036 - Principal payments on capital lease obligations... (862) (1,242) -------- -------- Net cash provided by financing activities......... 77,807 80,285 -------- -------- Net increase (decrease) in unrestricted cash and cash equivalents................................... 10 1,266 Unrestricted cash and cash equivalents: Beginning of period............................... 10,949 10,025 -------- -------- End of period..................................... $ 10,959 $ 11,291 ======== ======== Supplemental disclosure of cash flow information: Cash paid for interest and certain debt fees...... $ 10,282 $ 9,264 Cash received (paid) for income taxes............. $ (279) $ 109 Supplemental schedule of noncash (investing and financing) activities: Reduction of liabilities subject to settlement due to transfer of title to property................. $ 2,000 $ -
See accompanying notes to condensed consolidated financial statements. F-6 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Basis of Presentation The condensed consolidated financial statements of Bradlees, Inc. and subsidiaries, including Bradlees Stores, Inc. (collectively "Bradlees" or the "Company"), have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7: "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") and generally accepted accounting principles applicable to a going concern, which principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business. The Company filed petitions for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") on June 23, 1995 (the "Filing"). The Company is presently operating its business as a debtor-in-possession subject to the jurisdiction of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). With respect to the unaudited condensed consolidated financial statements for the 13 weeks (third quarter) and 39 weeks (year-to-date) ended October 31, 1998 and November 1, 1997, it is the Company's opinion that all necessary adjustments (consisting of normal and recurring adjustments) have been included to present a fair statement of results for the interim periods. Certain prior- year amounts have been reclassified to conform to this year's presentation. These statements should be read in conjunction with the Company's financial statements (Form 10-K) for the fiscal year ended January 31, 1998 ("1997"). Due to the seasonal nature of the Company's business, operating results for the interim periods are not necessarily indicative of results that may be expected for the fiscal year ending January 30, 1999 ("1998"). Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, pursuant to the general rules and regulations promulgated by the Securities and Exchange Commission (the "SEC"). The Company's ability to continue as a going concern is dependent upon the consummation of the Company's amended plan of reorganization (Note 2), the ability to maintain compliance with debt covenants under the DIP Facility (Note 4), achievement of profitable operations, maintenance of adequate financing, and the resolution of the uncertainties of the reorganization case discussed in Note 2. The Company experienced significant operating losses in 1996 and 1995. In an effort to return the Company to profitability and accomplish its long- term goals, the Company is focusing on three core product lines: moderately- priced basic and casual apparel, basic and fashion items for the home, and edited assortments of frequently purchased commodity and convenience products. Bradlees is committed to quality and fashion, especially in apparel and home furnishings, and to improved customer service. The Company believes that it can strategically leverage its strength in the fashion and quality content of its apparel and decorative home product offerings while driving traffic with selected hardlines merchandise. 2. Reorganization Case In the Chapter 11 case, substantially all liabilities as of the date of the Filing are subject to settlement under the amended and modified plan of reorganization (the "Plan") that was confirmed by the Bankruptcy Court on January 27, 1999. The Plan provides for approximately $165 million in distributions to creditors, inclusive of $16 million of administrative claim payments, $7 million in tax and cure notes, $14 million in cash, $40 million in convertible notes primarily payable to the Company's pre-Chapter 11 bank group, new common stock with an estimated value of $85 million, and $3 million in other distributions. As previously reported, all existing stock will be canceled upon the Company's emergence from bankruptcy with no issuance of new stock to current shareholders. A Form 8-K has been filed with the SEC that describes, among other things, the classification and treatment of pre-petition claims under the Plan and conditions to the occurrence of the Plan's effective date. F-7 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued) The Company expects to emerge from Chapter 11 on January 29, 1999. Pro forma financial information has been presented in the Company's Form S-1 Registration Statement ("Form S-1") filed with the SEC in November, 1998 and is updated in Note 11. The Plan was originally confirmed by the Bankruptcy Court on November 18, 1998. The United States District Court for the Southern District of New York reversed this confirmation on December 23, 1998. We modified the Plan and the modified Plan was confirmed by the Bankruptcy Court on January 27, 1999 and became effective on January 29, 1999. Schedules were filed by the Company with the Bankruptcy Court setting forth the assets and liabilities of the Company as of the date of the Filing as shown by the Company's accounting records. Differences between amounts shown by the Company and claims filed by creditors are continuing to be investigated and resolved. Although the ultimate amount and settlement terms for all pre- petition liabilities have not yet been finalized, the Company believes that the total of unsecured claims will not exceed $300 million, a condition precedent to the effectiveness of the Plan. Payments of approximately $2.1 million were made in 1997 to settle certain reclamation claims and two properties that were financed prior to the Filing and held for sale at the beginning of 1998 were either sold or transferred during the second quarter and the associated pre- petition financing obligation was reduced accordingly (Note 7). Under the Bankruptcy Code, the Company may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts and other executory pre-petition leases and contracts, subject to Bankruptcy Court approval. A liability of approximately $45.7 million was recorded through October 31, 1998, for rejected leases and contracts. This liability may be subject to future adjustments based on claims filed and Bankruptcy Court actions. The Company believes that it has recorded its best estimate of the liability for rejected leases and contracts based on information currently available. The principal categories of claims classified as "Liabilities Subject to Settlement Under the Reorganization Case" are identified below. Deferred financing costs as of the Filing of $3.4 million, $2.0 million and $2.7 million, respectively, for the pre-petition revolving loan facility (the "Revolver") and subordinated debt (the "2002 and 2003 Notes") have been netted against the related outstanding debt amounts. In addition, a $9.0 million cash settlement and approximately $12.7 million of adequate protection payments since the Filing have been applied to reduce the Revolver debt amount. The cash settlement relates to a portion of the Company's cash balance as of the date of the Filing ($9.3 million) which was claimed as collateral by the pre-petition bank group. The claim was settled in full for $9.0 million and approved by the Bankruptcy Court in 1995. All amounts presented below may be subject to future adjustments depending on Bankruptcy Court actions, further developments with respect to disputed claims, determination as to the security of certain claims, the value of any collateral securing such claims, or other events.
(000's) Liabilities Subject to Settlement ---------------------------------------- Under the Reorganization Case Oct. 31, 1998 Jan. 31, 1998 Nov. 1, 1997 --------------------------------- ------------- ------------- ------------ Accounts payable................... $166,567 $165,324 $165,016 Accrued expenses................... 26,000 27,996 27,694 Revolver........................... 68,405 71,105 72,005 2002 Notes......................... 122,274 122,274 122,274 2003 Notes......................... 97,957 97,957 97,957 Financing obligation............... 12,460 17,951 17,951 Obligations under capital leases... 9,440 11,407 11,527 Provision for rejected leases...... 45,685 48,091 45,730 -------- -------- -------- $548,788 $562,105 $560,154 ======== ======== ========
F-8 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued) 3. Restricted Cash and Cash Equivalents Restricted cash and cash equivalents at October 31, 1998 were comprised of the following, along with earned interest of $1.2 million: (a) $6.0 million of the $24.5 million federal income tax refund received in April, 1996; (b) $1.1 million of forfeited deposits, net of property carrying costs, received in 1996 on a planned sale of an owned undeveloped property that was not consummated and $7.6 million of net proceeds received when this property was sold in March, 1998; (c) $8.0 million from the sale of a closed store in January, 1998; and (d) other funds ($1.2 million) restricted for security deposits for utility expenses incurred after the Filing. 4. Debt As a result of the Filing, substantially all debt (exclusive of the DIP Facility) outstanding at October 31, 1998, was classified as liabilities subject to settlement (Note 2). No principal or interest payments are made on any pre-petition debt (excluding certain capital leases) without Bankruptcy Court approval or until a reorganization plan defining the repayment terms has been approved. During 1995, the Company received Bankruptcy Court approval to make certain adequate protection payments to the pre-petition bank group. The adequate protection payments, a cash settlement, and deferred financing costs have been netted against the related outstanding debt amounts (Note 2). Generally, interest on pre-petition debt ceases accruing upon the filing of a petition under the Bankruptcy Code. Contractual interest expense not recorded on certain pre-petition debt (the Revolver, 2002 Notes and 2003 Notes) totaled approximately $7.7 and $23.1 million for the third quarter and year-to-date periods of 1998, respectively, and $7.8 and $23.3 million for the third quarter and year-to-date periods of 1997, respectively. Financing Facility. The Company has a $250 million financing facility (the "Financing Facility") (of which $125 million is available for issuance of letters of credit) with BankBoston Retail Finance, Inc. ("BBNA") as agent, under which the Company is allowed to borrow for general corporate purposes, working capital and inventory purchases. The Financing Facility consists of (a) an up to eighteen month debtor-in-possession revolving credit facility in the maximum principal amount of $250 million (the "DIP Facility" - see below) and, subject to meeting certain conditions, (b) an up to three year post- confirmation revolving credit facility in the maximum principal amount of $250 million (the "Exit Facility" - see below). The commitment period for the combined facility cannot exceed four years. The DIP Facility replaced a $200 million Debtor-in Possession Revolving Credit and Guaranty Agreement (the "Prior DIP Facility") with Chase Manhattan Bank, as agent. There were outstanding direct borrowings of $157.4 million under the DIP Facility as of October 31, 1998. Trade and standby letters of credit outstanding under the DIP Facility were $8.5 and $19.3 million, respectively, at October 31, 1998, and $16.1 and $19.7 million, respectively, at November 1, 1997 under the Prior DIP Facility. The DIP Facility has an advance rate of 60% of the Loan Value of Eligible Receivables (as defined), plus 72% of the Loan Value of Eligible Inventory (as defined). Between March 1 and December 15, the Company can borrow an overadvance amount on the Loan Value of Eligible Inventory of 5% (the "Overadvance Amount"), subject to a $20 million limitation. At the Company's option, the Company may borrow under the DIP Facility at the Alternate Base Rate (as defined) in effect from time to time (the "Base Rate Applicable Margin") or the adjusted Eurodollar rate plus 2.25% (the "Eurodollar Applicable Margin") for interest periods of one, two or three months. The Base Rate Applicable Margin and Eurodollar Applicable Margin would be increased 0.5% during any fiscal month that the Company has Overadvance Amounts. The weighted average interest rate under the DIP Facility was 7.92% in the third quarter and 7.93% in the year-to- date period of 1998. F-9 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued) There are no compensating balance requirements under the DIP Facility but the Company is required to pay an annual commitment fee of 0.3% of the unused portion. The DIP Facility contains restrictive covenants including, among other things, limitations on the incurrence of additional liens and indebtedness, limitations on capital expenditures and the sale of assets, the maintenance of minimum operating earnings ("EBITDA") and minimum accounts payable to inventory ratios. The lenders under the DIP Facility have a "super-priority claim" against the estate of the Company. As of October 31, 1998, the Company is in compliance with the DIP Facility covenants. The DIP Facility expires on the earlier of June 30, 1999, or the effective date of the Plan. The Company has received a commitment for the Exit Facility, which consists of a $250 million senior secured revolving line of credit (of which $125 million is available for issuance of letters of credit) and a $20 million junior secured "last in-last out" facility. The Exit Facility is for a term of up to three years. The Company will use the Exit Facility to repay its existing DIP Facility and for working capital and general business needs. The senior secured tranche has an advance rate equal to 80% of the Loan Value of Eligible Receivables, plus the lower of (i) 72% of the Loan Value of Eligible Inventory or (ii) 80% of the ratio of the annual appraised liquidation value to the Loan Value (as defined) of the inventory (the "Loan to Value Ratio"). Between March 1 and December 15, the inventory advance rate will be increased to 77% of the Loan Value of Eligible Inventory. The Company may also borrow up to an additional $20 million under the junior secured facility provided that the total inventory borrowings do not exceed 93% of the Loan to Value Ratio. The Exit Facility permits the Company to borrow funds under the senior secured tranche at an interest rate per annum equal to (a) the higher of (i) the annual rate of interest as announced by BankBoston as its "Base Rate" and (ii) the weighted average of the rates on overnight federal funds plus 0.50% per annum; or (b) 2.25% per annum plus the quotient of (i) the LIBOR Rate in effect divided by (ii) a percentage equal to 100% minus the percentage established by the Federal Reserve as the maximum rate for all reserves applicable to any member bank of the Federal Reserve system in respect of eurocurrency liabilities. Each of these rates is subject to a 0.50% increase in the event of overadvances. The junior secured facility permits the Company to borrow funds at the "Base Rate" plus 7.00% per annum. The Exit Facility is subject to certain conditions being satisfied, including minimum EBITDA performance and minimum borrowing availability on the effective date of the Plan. The Exit Facility will be secured by substantially all of the non-real estate assets of the Company. The Exit Facility contains financial covenants including (i) minimum EBITDA, (ii) minimum accounts payable to inventory; (iii) maximum capital expenditures; and (iv) minimum operating cash flow to interest expense (for the fiscal quarters ending on or about January 31, 2001, and thereafter). 5. Income Taxes The Company provides for income taxes under the provisions of Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes". On an interim basis, the Company provides for income taxes using the estimated annual effective rate method. The Company did not recognize a quarterly or annual income tax expense or benefit in 1997 and also does not expect to recognize a quarterly or annual income tax expense or benefit in 1998. As a result of the implementation of the Plan, the Company will (i) undergo an "ownership change" (generally, a greater than 50 percentage point change in ownership) for purposes of Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), and (ii) realize cancellation of indebtedness income ("COI") from the cancellation of certain indebtedness in exchange for common stock, 9% convertible notes F-10 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued) and warrants to purchase shares of common stock. Because such ownership change and cancellation of indebtedness arise in a bankruptcy proceeding under Chapter 11, the Company will avoid some of the adverse Federal income tax consequences generally associated with such changes (e.g. the COI realized will not be includible in income). Nevertheless, the Company expects that its ability to offset future taxable income with net operating loss carryforwards ("NOLs"), as well as certain built-in losses and tax credits, will be limited and that certain tax attributes, including NOLs, will be reduced (but not eliminated). In addition, if the Company experiences another "ownership change" under Section 382 of the Code subsequent to emergence, there may be further limits on the Company's NOLs and certain built-in losses and tax credits to income. 6. Reorganization Items The Company provided for or incurred the following expense and income items during the third quarter and year-to-date periods of 1998 and 1997, directly associated with the Chapter 11 reorganization proceedings and the resulting restructuring of its operations:
(000's) ------------------------------------ 13 Weeks Ended 39 Weeks Ended ----------------- ----------------- 10/31/98 11/1/97 10/31/98 11/1/97 -------- ------- -------- ------- Professional fees.................... $ 2,250 $ 2,250 $ 6,750 $ 7,500 Interest income...................... (274) (101) (746) (330) Net asset write-off.................. - - 470 - Gain on disposition of properties.... - (800) (1,873) (1,003) Provision for rejected leases........ (4,725) (5,207) (7,156) (5,207) Employee severance and termination benefits............................ - (3,400) - (3,400) Provision for MIS retention bonuses.. - 280 - 280 ------- ------- ------- ------- $(2,749) $(6,978) $(2,555) $(2,160) ======= ======= ======= =======
Professional fees and interest income: Professional fees represent estimates of expenses incurred, primarily for legal, consulting and accounting services provided to the Company and the creditors committee (which are required to be paid by the Company while in Chapter 11). Interest income represents interest earned on cash invested during the Chapter 11 proceeding. Net asset write-off: The Company incurred a $0.5 million net asset write-off in the second quarter of 1998 relating to the disposal of greeting card fixtures that are being replaced as a consequence of the Company's rejection of its greeting card supply contract. Gain on disposition of properties: The Company sold a previously closed store in the second quarter of 1998 (see Note 7) and recognized a gain of $1.9 million that was classified as a reorganization item since the associated asset write-offs were previously included in reorganization items. In 1997, the Company sold three closed stores leases and certain equipment and recorded related gains of $1.0 million, including $0.8 million in the third quarter, as reorganization items. Provision for rejected leases: During the third quarter of 1998, the Company obtained confirmation that the lessor of a previously rejected lease had re-let the premises and, accordingly, the Company reduced its liability for rejected leases by $4.7 million and recognized a reorganization credit for that amount. During the second quarter of 1998, the Company was notified by two of its former landlords at closed locations that the properties had been re-let and therefore their claims for rejected lease damages were reduced by $2.4 million. The Company reduced its rejected lease liability accordingly and recognized a reorganization credit for that F-11 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued) amount in the second quarter. During the third quarter of 1997, the Company sold a closed store lease and reversed the associated $5.2 million rejected lease liability that had previously been recorded at the time of the store- closing announcement when it was expected that the lease would be rejected. Employee severance and termination benefits: The credit of $3.4 million in the third quarter and year-to-date period of 1997 resulted from the reversal of certain executive severance reserves, including a significant portion of the severance reserve that had been established for the Company's former CEO Mark Cohen, whose employment terminated in December 1996, and remaining reserves for certain former executives who found employment. During the third quarter of 1997, a mediated settlement was reached with Mr. Cohen that was subsequently approved by the Bankruptcy Court. MIS retention bonuses: The Company had a retention bonus program for certain Management Information System (MIS) employees that provided for bonuses during the Chapter 11 proceedings for continued employment through April 1998. In April, 1998 these bonuses were paid and this program was then discontinued. Restructuring reserves: The Company closed 6 stores in February, 1998. As of October 31, 1998, the Company had remaining reserves (included in accrued expenses) totaling approximately $1.0 million (exclusive of provisions for rejected leases discussed in Note 2) for costs associated with the closing of the 6 stores and other restructuring activities. Approximately $3.2 million of restructuring costs were paid in the year-to-date period of 1998. The majority of the remaining reserved costs are expected to be paid within a year. The Company expects to incur charges of approximately $5.1 million prior to emergence for an estimated going-out-of-business inventory impairment of $1.5 million (to be recorded as cost of goods sold) and other store closing costs of $3.6 million for two store closings anticipated to occur by the end of fiscal year 1999. 7. Assets Held for Sale The Company had assets held for sale at the beginning of 1998 that consisted of two properties, one of which was sold in the second quarter for approximately $4.3 million. A net gain of approximately $1.9 million was recorded in the second quarter for the sale of that property (Note 6) and the net proceeds from the sale of the property of $3.5 million were utilized to pay down the related pre-petition financing obligation. Title to the other property that had been held for sale was transferred to the related financing group at the end of the second quarter and the pre-petition financing obligation was reduced by the amount of the carrying value of the property ($2 million) pending a final agreement on the economic value of the property (which is currently anticipated to be at or above $2 million). 8. Retirement Plans The Company has a qualified, noncontributory defined benefit pension plan for non-union employees. Plan benefits are based on the participant's compensation and years of service. As of December 31, 1998, the Company will freeze credited service and salary levels in this plan. This change impacts all management and non-union hourly associates. All affected associates were notified of the freeze in November. Vesting service will continue for non- vested associates but no future credited service will be provided. The Company expects to record a gain in the fourth quarter as a result of the freeze. The Company has a 401(k) plan for all active employees in eligible job categories. Employees may contribute a portion of their salary to the plan. As of January 1, 1999, the Company will contribute an amount F-12 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued) equal to 50% of up to 6% of each participant's salary contributed to the plan. This change impacts all management and non-union hourly associates. Currently eligible participants will become fully vested in the Company contribution as required by law, while new hires on or after January 1, 1999 will have a 20% per year vesting schedule with full vesting after 5 years. The Company provides certain health care and life insurance benefits for certain retired non-union employees meeting age and service requirements. The Company accounts for the post retirement plan in accordance with SFAS No. 106, "Employers' Accounting for Post-Retirement Benefits Other Than Pensions," which requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company's post-retirement benefits are funded on a current basis. The SFAS No. 106 valuation at January 31, 1998, along with amortization credits of $1.3 and $4.0 million in the third quarter and year-to-date periods of 1998, respectively, reflected changes that were effective January 1, 1998. The changes represent the elimination of future benefits for active employees who do not become eligible by January 1, 2000, and a phase-out of the Company contributions over the next two years (at 50% per year beginning January 1, 1999) towards the cost of providing medical benefits to eligible retirees. 9. Changes in Accounting Estimates The Company is primarily self-insured for workers' compensation and general liability costs. Actuarial studies of the self-insurance reserves were completed in the third quarters of 1998 and 1997 using a discount rate of 6.0% (the same rate used at January 31, 1998 and February 1, 1997). As a result of the 1997 study, the self-insurance reserves were reduced by $3.6 million in the third quarter of 1997 with a corresponding reduction in SG&A expenses (selling, store operating, administrative and distribution expenses). 10. Summarized Financial Information for Bradlees Stores, Inc. Under the Plan (Note 2), Bradlees, Inc. is issuing common stock and Bradlees Stores, Inc. is issuing certain debt. Bradlees, Inc. operates its stores through Bradlees Stores, Inc., an indirect wholly-owned subsidiary. Bradlees, Inc. is guaranteeing the debt issued by Bradlees Stores, Inc. Substantially all of the assets of the Company, on a consolidated basis, are held by Bradlees Stores, Inc. The following summarized financial information of Bradlees Stores, Inc. is presented in accordance with SEC Staff Accounting Bulletin 53 and Regulation S-X Rule 1-02 (bb):
(000's) ---------------------------- Oct. 31, Jan. 31, Nov. 1, 1998 1998 1997 -------- -------- -------- Current Assets................................... $371,208 $286,332 $382,649 Noncurrent Assets................................ 283,441 302,286 310,855 Current Liabilities.............................. 367,091 246,687 369,580 Payable to Bradlees, Inc......................... 189,735 189,881 189,139 Noncurrent Liabilities........................... 66,063 72,324 81,978 Liabilities Subject to Settlement Under the Reorganization Case............................. $328,557 $341,874 $339,923 Thirty-Nine Weeks Ended ------------------ Oct. 31, Nov. 1, 1998 1997 -------- -------- Net Sales........................................ $906,385 $895,220 Gross Margin..................................... 271,002 269,699 Loss from Continuing Operations.................. (34,689) (48,628) Net Loss......................................... $(34,689) $(48,628)
F-13 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)--(Continued) Upon confirmation of the Plan, Bradlees, Inc. will contribute a portion of its intercompany receivable to the capital of Bradlees Stores, Inc. so that $96 million will be allowed as the final intercompany claim. 11. Pro Forma Financial Information (Unaudited) The following unaudited pro forma summary information, pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statement of operations are based on the statements of Bradlees as adjusted to give effect to the consummation of the Plan (Note 2). The unaudited pro forma summary information, and pro forma condensed consolidated statement of operations have been prepared as if the effective date of the Plan had occurred on February 1, 1997. The unaudited pro forma condensed consolidated balance sheet has been prepared assuming the effective date of the Plan had occurred on October 31, 1998. The unaudited pro forma condensed consolidated financial information and accompanying notes should be read in conjunction with the Company's financial statements and the notes thereto appearing in the Company's Form 10-K for 1997, Form S-1 and elsewhere in these financial statements. The unaudited pro forma condensed consolidated financial information is presented for informational purposes only and does not purport to represent what the Company's financial position or results of operations would actually have been if the consummation of the Plan had occurred on such date or at the beginning of the period indicated, or to project the Company's financial position or results of operations at any future date or for any future period. The following unaudited pro forma summary information for 1997 was derived from the unaudited pro forma condensed consolidated statement of operations for 1997 presented, along with the notes thereto, in the Form S-1: Pro Forma Summary Information (Unaudited) (000's Omitted)
Fiscal Year Ended January 31, 1998 ----------------- Total Sales................................................ $1,340,983 Net Loss................................................... (18,525) Loss Per Common Share...................................... (1.81) Pro Forma Number of Stores................................. 103
The pro forma net loss amount above excludes the gain on debt discharge and fresh-start reporting credit expected to be recorded on the effective date. F-14 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (in thousands)
Pro Forma Adjustments Pro Forma Oct. 31, 1998 Debits Credits Oct. 31, 1998 ------------- ---------- ----------- ------------- ASSETS Current assets: Unrestricted cash and cash equivalents...... $ 10,959 $ 11,000 $ 11,000 $ 10,959 Restricted cash and cash equivalents...... 25,129 - 23,929(2) 1,200 -------- ---------- ----------- -------- Total cash and cash equivalents.......... 36,088 11,000 34,929 12,159 -------- ---------- ----------- -------- Accounts receivable.... 11,925 11,925 Inventories............ 318,883 1,000(3h) 317,883 Prepaid expenses....... 11,031 - - 11,031 -------- ---------- ----------- -------- Total current assets.. 377,927 $ 11,000 35,929 352,998 -------- ---------- ----------- -------- Property, plant and equipment, net: Property excluding capital leases, net... 123,892 - 11,000(2) 110,692 2,200(3j) Property under capital leases, net........... 17,732 9,196(3b) 5,406(3j) 21,522 -------- ---------- ----------- -------- Total property, plant and equipment, net... 141,624 9,196 18,606 132,214 -------- ---------- ----------- -------- Other assets: Lease interests at fair value, net............ 137,350 - 59,530(3j) 77,820 Assets held for sale... - 3,400(2) - 14,000 10,600(3d) Other, net............. 4,509 2,475(2) 1,222(3g) 4,498 1,264(3i) Reorganization value in excess of revalued assets................ - 14,985(3k) - 9,985 -------- ---------- ----------- -------- Total other assets.... 141,859 31,460 62,016 108,303 -------- ---------- ----------- -------- Total assets.......... $661,410 $ 51,656 $ 116,551 $596,515 ======== ========== =========== ========
See accompanying notes to unaudited pro forma condensed consolidated financial statements. F-15 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET (in thousands)
Pro Forma Adjustments Pro Forma Oct. 31, 1998 Debits Credits Oct. 31, 1998 ------------- ---------- ----------- ------------- LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY) Current liabilities: Accounts payable....... $ 179,413 $ - $ - $179,413 Accrued expenses....... 23,221 7,000(2) 2,000(1) 15,746 2,475(3c) Self-insurance reserves.............. 6,027 - - 6,027 Short-term debt........ 157,392 - 8,571(2) 165,963 Current portion of capital lease obligations........... 1,038 - 750(2) 1,788 --------- ---------- ---------- -------- Total current liabilities.......... 367,091 9,475 11,321 368,937 --------- ---------- ---------- -------- Long-term liabilities: Obligations under capital leases........ 26,211 321(3b) - 25,890 Convertible notes payable............... - 11,000 40,000(2) 29,000 Deferred income taxes.. 8,581 8,581(3h) - - Self-insurance reserves.............. 12,237 - - 12,237 Unfavorable lease liability............. - - 45,573(3j) 45,573 Other long-term liabilities........... 19,034 - 2,000(1) 29,878 6,550(2) 2,294(3f) --------- ---------- ---------- -------- Total long-term liabilities.......... 66,063 19,902 96,417 142,578 --------- ---------- ---------- -------- Liabilities subject to settlement under the reorganization case.... 548,788 548,788(2) - - Stockholders' equity (deficiency): Common stock Par value............. 115 115(3a) 102(2) 102 Additional paid-in- capital.............. 137,821 137,821(3a) 84,898(2) 84,898 Accumulated deficit.... (457,665) 4,000(1) 393,463(2) - 68,202(3) Treasury stock, at cost.................. (803) - 803(3a) - --------- ---------- ---------- -------- Total stockholders' equity (deficiency).. (320,532) 141,936 547,468 85,000 --------- ---------- ---------- -------- Total liabilities and stockholders' equity (deficiency)......... $ 661,410 $ 720,101 $ 655,206 $596,515 ========= ========== ========== ========
See accompanying notes to unaudited pro forma condensed consolidated financial statements. F-16 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (Dollars in thousands except per share amounts)
Pro Forma 39 Weeks 39 Weeks Ended Pro Forma Adjustments Ended Oct. 31, 1998 Debits Credits Oct. 31, 1998 ------------- ---------- ----------- ------------- Total sales............. $939,203 3,381(1) - $935,822 Leased department sales.................. 32,818 70(1) - 32,748 -------- -------- Net sales............... 906,385 903,074 Cost of goods sold...... 635,383 - 2,472(1) 632,911 -------- -------- Gross margin............ 271,002 270,163 Leased department and other operating in- come................... 8,757 25(1) - 8,732 -------- -------- 279,759 278,895 Selling, store operating, administrative and distribution expenses.. 280,326 2,967(3) 631(1) 278,498 1,021(6) 5,773(7) 724(10) 136(11) Depreciation and amorti- zation expense......... 24,370 - 3(1) 12,761 5,103(3) 2,253(5) 469(6) 3,781(9) Loss on disposition of properties............. 241 241 Interest and debt ex- pense.................. 11,960 869(4) 1,215(4) 21,189 9,575(8) Reorganization items.... (2,555) 2,555(2) - - -------- -------- Net loss................ $(34,583) $(33,794) ======== ======== Comprehensive loss...... $(34,583) $(33,794) ======== ======== Net loss per share - ba- sic and diluted........ $ (3.06) $ (3.30)(12) ======== ======== Weighted average shares outstanding (in thousands) - basis and diluted................ 11,311 10,226 ======== ========
See accompanying notes to unaudited pro forma condensed consolidated financial statements. F-17 BRADLEES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS The following notes set forth the explanations and assumptions used and adjustments made in preparing the unaudited pro forma condensed consolidated balance sheet as of October 31, 1998, and the unaudited pro forma condensed consolidated statement of operations for the thirty-nine weeks then ended. The unaudited pro forma condensed consolidated financial statements reflect the adjustments described under "Pro Forma Adjustments" below, which are based on the assumptions and preliminary estimates described therein, which are subject to change. These statements do not purport to be indicative of the financial position and results of operations of Bradlees as of such dates or for such periods, nor are they indicative of future results. Furthermore, these unaudited pro forma condensed consolidated financial statements do not reflect the anticipated gain on debt discharge or fresh-start reporting credit which are expected to be incurred as of the effective date of the Plan. (For the purposes of the pro forma financial statements, the "Effective Date" is assumed to be October 31, 1998 for the pro forma balance sheet, and February 1, 1997 for the pro forma statement of operations.) The unaudited pro forma condensed consolidated financial statements should be read in conjunction with the financial statements and the notes thereto included in these financial statements. The unaudited pro forma condensed consolidated balance sheet and unaudited pro forma condensed consolidated statements of operations reflect the following pro forma adjustments based on the assumptions described below: October 31, 1998 Balance Sheet Pro Forma Adjustments 1. Reserves established prior to emergence for emergence-related and performance bonuses payable on the Effective Date or subsequent to the Effective Date. 2. Plan consummation distributions that include, among other things, an estimated equity value of $85.0 million, $14.0 million in cash distributions, and 9% Convertible Notes totaling $40.0 million. In connection with the consummation of the Plan, we will receive $11.0 million in cash for the modification of the Union Square lease and immediately pay down the 9% Convertible Notes. The reduction of $11.0 million in property, plant and equipment, net, includes a write-off of $7.6 million for the Union Square store and a reclassification of $3.4 million to assets held for sale for one store lease that is expected to be sold to help fund the further paydown of the 9% Convertible Notes. The payment of $23.9 million out of restricted funds and $8.6 million out of borrowings is for certain settlements due under the POR and for financing costs of $2.5 million associated with the post-emergence revolver. The total payment of $32.5 million is expected to fund all administrative and convenience claims, including the bonuses due at consummation and the exit financing costs, with the remaining restricted cash held for security deposits for post-emergence payments. 3. Fresh-start accounting adjustments that reflect the estimated adjustments necessary to adopt fresh-start reporting in accordance with Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code". Fresh-start reporting requires that the reorganization value of Bradlees be allocated to Bradlees' assets in conformity with APB Opinion 16, "Business Combinations", for transactions reported on the basis of the purchase method. The portion of the assigned reorganization value exceeding the revalued net assets is recorded as a long-term asset. The calculation of the preliminary and estimated new equity value is discussed in detail in Section Three (Subsection XIII) of the Disclosure Statement filed as an exhibit to this Registration Statement. See also "Risk Factors--Post Bankruptcy Risks-- Determination of Equity Value." F-18 BRADLEES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The fresh-start accounting adjustments are summarized as follows: a. Cancellation of the old common stock pursuant to the Plan and close-out to retained earnings. b. A revaluation of all capital lease obligations and related capital lease assets using our estimated October 31, 1998 borrowing rate (12%) for similar financings. c. Revaluation of the straight-line rent reserve ($2.5 million). Straight-line rent is recalculated on a going-forward basis by the reorganized Bradlees. d. Revaluation of the one store lease held for sale to an estimated total net realizable value of $14 million. e. Restatement of LIFO merchandise inventories to estimated fair value approximates FIFO cost. Inventories valued at FIFO cost then become the base year layer for LIFO inventories in the post-consummation financial reporting period. No LIFO adjustment is expected. f. Recording of additional pension plan liability of $4.3 million (excluding the impact from the fourth quarter non-union pension freeze--Note 8 to the October 31, 1998 Form 10-Q.) and additional Supplemental Executive Retirement Plan (the "SERP") liability of $1.4 million, reduced by the write-off of the unrecognized FAS No. 106 prior service costs of $3.4 million. g. Revaluation of the intangible SERP asset ($1.2 million) to its estimated net realizable value. h. Write-off ($8.6 million) of deferred income taxes (due to a change in the status of timing differences) and a $1.0 million reduction to reflect inventory at its estimated net realizable value. i. Write-off of the unamortized deferred financing charges ($1.3 million) associated with the terminated Debtor-in-Possession (DIP) bank facility which will be amortized prior to emergence. j. Revaluation of fixed assets and leasehold interests based upon the estimated fair market value of properties and leases while considering the current markets in which Bradlees has locations. This revaluation resulted in, among other things, the recording of a write-down of $59.5 million in favorable lease interests and an unfavorable lease liability of $45.6 million for certain locations. The remaining favorable lease interests and the unfavorable lease liability will both be amortized to rent expense. k. Recording of the reorganization value in excess of the revalued assets at October 31, 1998. F-19 BRADLEES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Pro Forma Adjustments - Statement of Operations for the Thirty-nine Weeks Ended October 31, 1998 1. To eliminate the sales and expense amounts associated with five stores closed in February, 1998. 2. To eliminate reorganization items. 3. Adjustment in amortization of lease interests revalued under fresh- start reporting. 4. To record amortization of post-emergence deferred financing costs and reverse the historical year to date amortization of deferred financing costs. 5. Reduction in depreciation expense due to certain reclassifications to assets held for sale and fixed asset write-offs resulting from fresh-start reporting. 6. To adjust lease rent expense and amortization expense for revised straight-line rent calculations. 7. To adjust lease rent expense for amortization of the unfavorable lease liability. 8. To adjust interest expense for amortization of the discount on the unfavorable lease liability and for increased interest expense resulting from a slightly higher average revolver borrowing level, the 9% Convertible Notes and other issued notes. 9. To record reduction in depreciation and amortization expense resulting from the allocation of the estimated excess of revalued assets over the reorganization value at February 1, 1997. 10. To record additional FAS No. 106 expense as a result of fresh-start reporting. 11. To reduce pension expense as a result of fresh-start reporting. 12. Pro forma earnings per share were computed based on the estimated weighted average number of common shares outstanding during the applicable period assuming that the Plan was effective on February 1, 1997. F-20 ARTHUR ANDERSEN LLP REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of Bradlees, Inc., Debtor-in-Possession: We have audited the accompanying consolidated balance sheet of Bradlees, Inc. and subsidiaries, Debtor-in-Possession (the "Company"), as of January 31, 1998, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bradlees, Inc. and subsidiaries as of January 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Notes 1 and 3 to the consolidated financial statements on June 23, 1995, the Company filed a petition for reorganization under Chapter 11 of the U.S. Bankruptcy Code. In addition, the Company has experienced operating losses in each of the three years ended January 31, 1998 and at January 31, 1998 had a substantial stockholders' deficit. These matters raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon, among other things, (i) acceptance of a Plan of reorganization by the Company's creditors with confirmation by the Bankruptcy Court, (ii) compliance with all debt covenants under the debtor-in-possession financing, (iii) the success of future operations, including returning to profitability and maintaining adequate post bankruptcy financing and liquidity and (iv) the resolution of the uncertainties of the reorganization case discussed in Note 3. Management's plans in regard to these matters are also discussed in Note 1 to the financial statements. The eventual outcome of these matters discussed in the previous paragraph is not presently determinable. The consolidated financial statements do not include any adjustments relating to the resolution of these uncertainties or the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. /s/ Arthur Andersen LLP New York, New York March 17, 1998 (except with respect to the matter discussed in Note 16, as to which the date is November 23, 1998) F-21 Deloitte & Touche LLP INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of Bradlees, Inc., Debtor-in-Possession: We have audited the accompanying consolidated balance sheet of Bradlees, Inc. and subsidiaries, Debtor-in-Possession (the "Company"), as of February 1, 1997, and the related consolidated statements of operations, stockholders' equity (deficiency) and cash flows for the years ended February 1, 1997 and February 3, 1996. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Bradlees, Inc. and subsidiaries at February 1, 1997 and the results of its operations and its cash flows for the years ended February 1, 1997 and February 3, 1996 in conformity with generally accepted accounting principles. As discussed in Notes 1 and 3, the Company has filed for reorganization under Chapter 11 of the Federal Bankruptcy Code. The accompanying consolidated financial statements do not purport to reflect or provide for the consequences of the bankruptcy proceedings. In particular, such consolidated financial statements do not purport to show (a) as to assets, their realizable value on a liquidation basis or their availability to satisfy liabilities; (b) as to prepetition liabilities, the amounts that may be allowed for claims or contingencies, or the status and priority thereof; (c) as to stockholder accounts, the effect of any changes that may be made in the capitalization of the Company; or (d) as to operations, the effect of any changes that may be made in its business. The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company's 1996 and 1995 losses from operations and stockholders' deficiency raise substantial doubt about the Company's ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The consolidated financial statements do not include adjustments that might result from the outcome of this uncertainty. /s/ Deloitte & Touche LLP Boston, Massachusetts March 20, 1997 (November 23, 1998 with respect to Note 16) F-22 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share amounts)
52 Weeks ended 52 Weeks ended 53 Weeks ended January 31, 1998 February 1, 1997 February 3, 1996 ---------------- ---------------- ---------------- Total sales................ $ 1,392,250 $1,619,444 $1,840,926 Leased sales............... 47,806 57,726 60,158 ----------- ---------- ---------- Net sales.................. 1,344,444 1,561,718 1,780,768 Cost of goods sold......... 948,087 1,127,651 1,289,077 ----------- ---------- ---------- Gross margin............... 396,357 434,067 491,691 Leased department and other operating income.......... 12,151 13,734 15,130 ----------- ---------- ---------- 408,508 447,801 506,821 Selling, store operating, administrative and distribution expenses.................. 382,910 504,030 572,843 Depreciation and amortization expense...... 36,244 42,200 54,387 Gain on disposition of properties................ (5,425) (1,739) - Interest and debt expense.. 16,584 11,495 27,176 Impairment of long-lived assets.................... - 40,782 99,358 Reorganization items....... 752 69,792 65,003 ----------- ---------- ---------- Loss before income taxes... (22,557) (218,759) (311,946) Income tax benefit......... - - (104,533) ----------- ---------- ---------- Net loss................... $ (22,557) $ (218,759) $ (207,413) =========== ========== ========== Net loss per share - basic and diluted............... $ (1.98) $ (19.17) $ (18.17) =========== ========== ========== Weighted average shares outstanding (in thousands) - basic and diluted................... 11,365 11,412 11,416 =========== ========== ==========
See accompanying Notes to Consolidated Financial Statements. F-23 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) CONSOLIDATED BALANCE SHEETS (Dollars in thousands)
January 31, 1998 February 1, 1997 ---------------- ---------------- Assets Current assets: Unrestricted cash and cash equivalents..... $ 10,949 $ 10,025 Restricted cash and cash equivalents....... 16,760 9,126 --------- --------- Total cash and cash equivalents.......... 27,709 19,151 --------- --------- Accounts receivable.......................... 10,013 8,240 Inventories.................................. 238,629 236,920 Prepaid expenses............................. 8,733 8,466 Assets held for sale......................... 7,754 8,419 --------- --------- Total current assets..................... 292,838 281,196 --------- --------- Property, plant and equipment, net........... 150,484 163,641 --------- --------- Other assets: Lease interests, net....................... 142,454 150,229 Assets held for sale....................... 4,000 5,250 Other, net................................. 5,390 3,884 --------- --------- Total other assets....................... 151,844 159,363 --------- --------- Total assets............................. $ 595,166 $ 604,200 ========= ========= Liabilities and Stockholders' Deficiency Current liabilities: Accounts payable........................... $ 124,361 $ 115,315 Accrued employee compensation and benefits.................................. 17,401 13,317 Self-insurance reserves.................... 6,564 7,086 Other accrued expenses..................... 13,115 32,607 Short-term debt............................ 84,208 42,500 Current portion of capital lease obligations............................... 1,038 1,722 --------- --------- Total current liabilities................ 246,687 212,547 --------- --------- Obligations under capital leases............. 27,073 33,296 Deferred income taxes........................ 8,581 8,581 Self-insurance reserves...................... 13,328 14,386 Other long-term liabilities.................. 23,342 27,642 Liabilities subject to settlement under the reorganization case......................... 562,105 571,041 Commitments and contingencies (Note 13) Stockholders' equity (deficiency): Common stock - 11,312,154 shares outstanding (11,394,433 at 2/1/97) Par value...................................... 115 115 Additional paid-in-capital................. 137,821 137,951 Unearned compensation...................... - (167) Accumulated deficit........................ (423,082) (400,525) Treasury stock, at cost - 155,575 shares (73,296 at 2/1/97)........................ (804) (667) --------- --------- Total stockholders' deficiency........... (285,950) (263,293) ========= ========= Total liabilities and stockholders' deficiency.............................. $ 595,166 $ 604,200 ========= =========
See accompanying Notes to Consolidated Financial Statements. F-24 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
52 Weeks ended 52 Weeks ended 53 Weeks ended January 31, 1998 February 1, 1997 February 3, 1996 ---------------- ---------------- ---------------- Cash Flows From Operating Activities: Net loss................... $(22,557) $(218,759) $(207,413) Adjustments to reconcile net loss to cash provided (used) by operating activities: Depreciation and amortization.............. 36,244 42,200 54,387 Impairment of long-lived assets.................... - 40,782 99,358 Amortization of deferred financing costs........... 3,750 2,154 1,475 Stock compensation......... - - 701 Deferred income taxes...... - - (79,957) Reorganization items....... 752 69,792 65,003 Gain on disposition of properties................ (5,425) (1,739) - Increase (decrease) in cash resulting from changes in: Accounts receivable........ (1,773) 2,296 6,819 Inventories................ (1,709) 44,293 16,848 Prepaid expenses........... (357) 1,542 372 Refundable income taxes.... - 24,576 (24,576) Accounts payable........... 9,046 (32,319) 96,431 Accrued expenses........... (6,185) 580 3,401 Other, net................. (4,547) (1,664) (1,359) -------- --------- --------- Net cash provided (used) by operating activities before reorganization items.................... 7,239 (26,266) 31,490 -------- --------- --------- Operating cash flows from reorganization items: Interest income received... 420 1,445 2,965 Bankruptcy-related professional fees paid.... (9,626) (10,756) (2,250) Other reorganization expenses paid, net........ (7,157) (17,572) (3,084) -------- --------- --------- Net cash used by reorganization items..... (16,363) (26,883) (2,369) -------- --------- --------- Net cash (used) provided by operating activities.. (9,124) (53,149) 29,121 -------- --------- --------- Cash Flows from Investing Activities: Capital expenditures, net.. (19,568) (27,527) (37,029) Increase in restricted cash and cash equivalents...... (7,634) (7,932) (1,194) -------- --------- --------- Net cash used in investing activities............... (27,202) (35,459) (38,223) -------- --------- --------- Cash Flows From Financing Activities: Principal payments on long- term debt................. (1,657) (2,707) (5,794) Payments of liabilities subject to settlement..... (6,467) (5,327) (11,764) Proceeds from sales of assets.................... 7,967 1,739 - Borrowings under pre- petition revolving loan facility.................. - - 72,500 Borrowings under financing obligation................ - - 12,801 Borrowings under DIP facilities................ 41,708 42,500 - Deferred financing costs... (4,301) (584) (4,047) Other common stock activity, net............. - - (18) Dividends paid............. - - (1,712) -------- --------- --------- Net cash provided by financing activities..... 37,250 35,621 61,966 -------- --------- --------- Net increase (decrease) in unrestricted cash and cash equivalents......... 924 (52,987) 52,864 Unrestricted cash and cash equivalents: Beginning of period........ 10,025 63,012 10,148 -------- --------- --------- End of period.............. $ 10,949 $ 10,025 $ 63,012 ======== ========= ========= Supplemental disclosure of cash flow information: Cash paid for interest..... $ 12,807 $ 9,991 $ 16,382 Cash received for income taxes..................... $ 109 $ 25,046 $ 2,869 Supplemental schedule of noncash (investing and financial) activities: Capital lease obligations incurred.................. $ - $ - $ 8,398
See accompanying Notes to Consolidated Financial Statements. F-25 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-in-Possession) (Dollars in thousands except per share amounts) CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
Retained Earnings Stockholders' Common Stock Additional Unearned (Accumulated Treasury Equity Shares Amount Paid-in-Capital Compensation Deficit) Stock (Deficiency) ------------ ------ --------------- ------------ ------------ -------- ------------- Balance at January 28, 1995................... 11,385,254 $113 $138,077 $(1,697) $ 27,359 $(420) $ 163,432 Restricted stock - grant................. 25,000 1 232 (232) - - 1 Restricted stock - revaluation........... - (628) 628 - - - Restricted stock - forfeitures........... (13,139) - - 79 - (79) - Restricted stock - amortization.......... - - - 429 - - 429 Deferred salary option plan grant............. 27,000 1 270 - - - 271 Other treasury stock activity, net.......... (7,459) - - - - (18) (18) Net loss................ - - - - (207,413) - (207,413) Dividends ($0.15 per share)................. - - - - (1,712) - (1,712) ---------- ---- -------- ------- --------- ----- --------- Balance at February 3, 1996................... 1,416,656 115 137,951 (793) (181,766) (517) (45,010) Restricted stock - forfeitures........... (22,223) - - 150 - (150) - Restricted stock - amortization.......... - - - 476 - - 476 Net loss................ - - - - (218,759) - (218,759) ---------- ---- -------- ------- --------- ----- --------- Balance at February 1, 1997................... 11,394,433 115 137,951 (167) (400,525) (667) (263,293) Restricted stock - forfeitures........... (82,279) - (130) 137 - (137) (130) Restricted stock - amortization.......... - - - 30 - - 30 Net loss................ - - - - (22,557) - (22,557) ---------- ---- -------- ------- --------- ----- --------- Balance at January 31, 1998................... 11,312,154 $115 $137,821 - $(423,082) $(804) $(285,950) ========== ==== ======== ======= ========= ===== =========
See accompanying Notes to Consolidated Financial Statements F-26 BRADLEES, INC. AND SUBSIDIARIES (Operating as Debtor-In-Possession) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Basis of Presentation Bradlees, Inc. and its subsidiaries, including Bradlees Stores, Inc. (collectively "Bradlees" or the "Company") is a discount department store retailer operating in the Northeast United States. The Company's consolidated financial statements have been prepared in accordance with the American Institute of Certified Public Accountants Statement of Position 90-7, "Financial Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7") and generally accepted accounting principles applicable to a going concern, which principles, except as otherwise disclosed, assume that assets will be realized and liabilities will be discharged in the normal course of business. The Company filed petitions for relief under Chapter 11 of the United States Bankruptcy Code ("Chapter 11") on June 23, 1995 (the "Filing"). The Company is presently operating its business as a debtor-in-possession subject to the jurisdiction of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"). Bradlees acquired the Bradlees Business from The Stop & Shop Companies, Inc. ("Stop & Shop") with the proceeds from a July 10, 1992 initial public offering of 11,018,625 shares of its common stock ("the Acquisition"). The Bradlees Business was comprised of Bradlees New England Holdings, Inc., Bradlees New York Holdings, Inc. and Stop & Shop Holdings, Inc. ("Holdings") and Holdings' wholly-owned subsidiary, Bradlees New Jersey, Inc. and each of their subsidiaries. Certain real estate subsidiaries of the Bradlees Business were retained by Stop & Shop and the properties owned by these subsidiaries were leased to Bradlees. The Acquisition was accounted for using the purchase method of accounting. The Company's ability to continue as a going concern is dependent upon the confirmation of a plan of reorganization by the Bankruptcy Court, the ability to maintain compliance with debt covenants under the New Financing Facility (Note 6), achievement of profitable operations, and the resolution of the uncertainties of the reorganization case discussed in Note 3. A confirmed plan of reorganization could materially change the amounts reported in the accompanying consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability of the value of recorded asset amounts or the amounts and classification of liabilities that might be necessary as a consequence of a confirmed plan of reorganization. The Company incurred significant operating losses in 1996 and 1995. The Company made the following key modifications to its business strategy during fiscal 1997 to enhance profitability and improve customer service: (a) reintroduced lower opening price points in a comprehensive variety of merchandise categories to enhance value and increase customer traffic; (b) reduced costly promotional events and thereby eliminated or reduced the likelihood of substandard profit margins; (c) reintroduced certain basic convenience and commodity products that are typical of assortments carried by discount retailers; (d) reinstituted a layaway program, while controlling promotions of the Bradlees' credit card, and installed new in-store directional and departmental signage; (e) revised the Company's markdown policy based on product rate of sale; (f) modified weekly ad circulars to achieve more item- intensive and price-point oriented ad offerings; (g) introduced both a "Certified Value" program that highlights certain key recognizable items at competitive everyday prices and a "Wow!" program which integrates targeted and unadvertised opportunistic purchases; and (h) significantly reduced overhead while improving operating efficiencies. The Company continues to focus on three key merchandise categories: moderately priced family apparel, home furnishings and conventional consumable hardlines products. Bradlees is committed to quality and fashion, especially in apparel and home furnishings, and to improving customer service, to differentiate itself from its competition. The Company believes that it can strategically leverage its strength in the quality and fashion content of its apparel and decorative home product offerings while driving traffic with selected hardlines merchandise. F-27 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company closed one store in April, 1997 and, in December, 1997, announced the planned closing of six additional underperforming stores by February, 1998, including one owned store that was being closed as a result of the sale of the property in January, 1998 (for which a gain of $5.4 million was recorded). The Company closed 27 stores in 1996. 2. Summary of Significant Accounting Policies Principles of consolidation The consolidated financial statements include the accounts of all subsidiaries and the accounts of the special purpose entity ("SPE") with which the Company had a financing arrangement for new store sites (Note 8). All intercompany transactions have been eliminated in consolidation. The Company's fiscal year ends on the Saturday nearest to January 31. The term "1997" refers to the 52 weeks ended January 31, 1998; "1996" refers to the 52 weeks ended February 1, 1997; and "1995" refers to the 53 weeks ended February 3, 1996. Fair Value of Financial Instruments Statement of Financial Accounting Standards ("SFAS") No. 107, "Disclosures About Fair Value of Financial Instruments" requires disclosures of estimated fair values of financial instruments both reflected and not reflected in the accompanying financial statements. The estimated fair values of the Company's cash and cash equivalents, accounts receivable, borrowings under the DIP facilities and accounts payable (post-petition) approximate the carrying amounts at January 31, 1998 and February 1, 1997 due to their short maturities or variable-rate nature of the borrowings. The fair value of the Company's liabilities subject to settlement are not presently determinable as a result of the Chapter 11 proceedings. The fair values of the 2002 Notes and 2003 Notes (Note 6) were not obtainable at January 31, 1998 and February 1, 1997. Face values of the 2002 Notes and 2003 Notes were $125,000 and $100,000, respectively, at January 31, 1998 and February 1, 1997. Geographical concentration As of January 31, 1998, the Company operated 109 discount department stores in seven states in the Northeast, primarily in the heavily populated corridor running from Boston to Philadelphia. A significant change in economic or competitive conditions within this area could have a material impact on the Company's operations. The Company closed six additional stores in February, 1998. Use of estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The primary estimates underlying the Company's financial statements include the value of assets held for sale, the estimated useful lives of fixed assets and lease interests, the estimates used in SFAS No. 121 calculations (Note 4), accruals for self-insured workers compensation and general liability (Note 14), vacation pay reserves (Note 14), provisions for rejected leases and restructuring costs associated with closing stores (Note 7), and the classification of liabilities subject to settlement (Note 3). Collective bargaining arrangements Approximately 73% of the Company's labor force is covered by collective bargaining agreements, of which collective bargaining agreements affecting approximately 54% of the labor force will expire within one year and are expected to be renegotiated. Cash and cash equivalents Highly liquid investments with original maturities of 3 months or less when purchased are classified as cash and cash equivalents. Restricted cash and cash equivalents at January 31, 1998 were comprised of the following, along with earned interest of $.5 million: (a) $6.0 million of the $24.5 million federal income tax refund received in April, 1996 held, in escrow pending further order of the Bankruptcy Court; (b) $1.1 million of forfeited deposits, net of property carrying costs, received in 1996 on a F-28 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) planned sale of an owned undeveloped property that was not consummated (pursuant to the Bankruptcy Court order permitting the sale of the property, all proceeds associated with the sale of the property must be maintained in a segregated escrow account pending further order of the Bankruptcy Court); (c) $8.0 million from the sale of a closed store in 1997; and (d) other funds ($1.2 million) restricted for security deposits for utility expenses incurred after the Filing. Inventories Substantially all inventories are valued at the lower of cost (which includes certain warehousing costs) or market, using the last-in, first- out ("LIFO") retail method. No LIFO charge has been recorded by the Company as there has been no excess of current cost over LIFO cost since the Acquisition. Assets held for sale Assets held for sale are stated at the lower of net book value or estimated net realizable value and have been classified as current or noncurrent based upon the anticipated time to sell the asset. Property, plant and equipment Maintenance, repairs and minor renewals are charged to operations as incurred. Major renewals and betterments which substantially extend the useful life of the property are capitalized. The costs of assets sold or retired and the related amounts of accumulated depreciation are eliminated from the accounts in the year of disposal, with the resulting gain or loss included in earnings. Depreciation and amortization are recorded based upon the estimated useful lives under the straight-line method. Leasehold improvements and assets recorded under capital leases are amortized over the lives of the respective leases (including extensions) or the lives of the improvements, whichever is shorter. Buildings............................... 30 years Fixtures, machinery and equipment....... 3 to 10 years Leasehold improvements.................. 10 to 20 years or the term of the lease, if shorter
Lease interests Lease interests represent the lease rights acquired at the Acquisition (Note 1) and are amortized on the straight-line method over the remaining lives of the leases (including option periods) or 40 years, if shorter. Accumulated amortization was $34.8 million at January 31, 1998 and $27.7 million at February 1, 1997. During 1996, accumulated amortization of $3.3 million was eliminated in accordance with SFAS No. 121 (Note 4). Lease interests acquired at the Acquisition represented the value attributed to real estate leased by the Company at July 10, 1992. The lease interests were determined by calculating the present value of the excess of market rent for each lease over the actual rent payable (including percentage rent) over the remaining lease term, including all renewal option periods, discounted at 10%, and then adjusted in accordance with the purchase method of accounting. The recoverability of the remaining carrying value of lease interests is dependent upon the Company's ability to generate sufficient future cash flows from operations at each leased site, or in the case of a sale or disposition of a lease or leases, the continuation of similar favorable market rents. Accordingly, recoverability of this asset could be significantly affected by further economic, market and competitive factors and is subject to the inherent uncertainty associated with estimates. Self-insurance reserves The Company is primarily self-insured for workers' compensation and general liability costs. The self-insurance reserves are actuarially determined using discount rates of 6.00% at January 31, 1998 and February 1, 1997. Self-insurance reserves have been classified as current and noncurrent in accordance with the estimated timing of the projected payments. Deferred financing costs Deferred financing costs (related to the DIP facilities) are amortized over the lives of the related financings. Accumulated amortization was $.1 million at January 31, 1998 and $2.9 million F-29 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) at February 1, 1997. The Company wrote off $1.1 million of unamortized deferred financing costs in 1997 relating to the prior DIP Facility (Note 6) that was replaced in December, 1997. Net deferred financing costs as of the filing date of $3.4 million, $2.0 million, and $2.7 million for the pre-petition revolver, 2002 Notes and 2003 Notes, respectively, were netted against the related outstanding debt subject to settlement during 1995 (Note 3). Store opening and closing costs Pre-opening costs are expensed prior to or when a store opens or, in the case of a remodel, reopens. Store closing costs are provided for when the decision is made to close such stores. Stock compensation The Company accounts for stock-based employee compensation costs using the intrinsic value method. Income taxes The Company provides for income taxes in accordance with SFAS No. 109, "Accounting for Income Taxes." Deferred income taxes, net of valuation allowances, are provided to recognize the effect of temporary differences between financial reporting and income tax reporting of assets and liabilities. Net loss per share Net loss per share is computed using the weighted average number of common shares outstanding, plus the common stock equivalents related to stock options if not anti-dilutive, in accordance with the provisions of the SFAS No. 128 "Earnings Per Share", which was adopted in 1997. The weighted average number of shares (in thousands) used in the calculation for both basic and diluted net loss per share in 1997, 1996 and 1995 was 11,365, 11,412 and 11,416 shares respectively. Diluted earnings per share equals basic earning per share as the dilutive calculations would have an antidilutive impact as a result of the net loss incurred in each of the years. Reclassifications Certain reclassifications have been made to the 1996 and 1995 financial statements to conform with the 1997 presentation. New accounting pronouncements In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income", which is effective for the Company beginning with the fiscal year ending January 30, 1999 ("1998"). SFAS No. 130 will require that total comprehensive income (the change in equity from transactions and other events except those resulting from investment by owners) be reported in the financial statements. The Company does not expect SFAS No. 130 to have any material impact on the Company's financial statements. In June 1997, the FASB also issued SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information", which is effective beginning with 1998. SFAS No. 131 will require that segment financial information be publicly reported on the basis that is used internally for evaluating segment performance. The Company does not expect SFAS No. 131 to have a material effect on its financial statement disclosures. In February, 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about Pensions and Other Post-Retirement Benefits", which is effective beginning with 1998 and which will affect the Company's pension and post- retirement plan disclosures in 1998. SFAS No. 132 requires additional information on changes in the benefit obligations and fair values of plan assets that will facilitate financial analysis, and eliminates certain disclosures. The Company is still reviewing the effect that SFAS No. 132 will have on its 1998 disclosures. F-30 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 3. Reorganization Case During the early 1990's, Bradlees' business strategy relied heavily on opening new stores, remodeling existing locations and competing on the basis of price. From 1992 to January, 1995, Bradlees opened 15 new stores (10 in 1994) and remodeled 41 stores at a total capital cost of $182 million. The new stores were generally larger stores with rents that substantially exceeded the chain average rent per square foot. Some of the new stores were also multilevel facilities which further increased their operating costs when compared with other prototypical Bradlees stores. The store expansion and remodeling program marginally increased sales while gross margins declined and operating expenses increased. Bradlees' declining operating performance, coupled with the aggressive expansion program, began to erode the Company's liquidity. The Company's liquidity further eroded in May and June, 1995, because of the unwillingness of factors and vendors to continue to extend trade credit. Bradlees, unable to obtain sufficient financing to satisfy factor and vendor concerns, was compelled to seek Bankruptcy Court protection on June 23, 1995. In the Chapter 11 case, substantially all liabilities as of the date of the Filing are subject to settlement under a plan of reorganization to be voted upon by the Company's creditors and stockholders and confirmed by the Bankruptcy Court. Schedules have been filed by the Company with the Bankruptcy Court setting forth the assets and liabilities of the Company as of the date of the Filing as shown by the Company's accounting records. Differences between amounts shown by the Company and claims filed by creditors are being investigated and resolved. Except for payments of $2.1 million made in 1997 to settle certain reclamation claims, the ultimate amount and settlement terms for pre-petition liabilities are subject to a confirmed plan of reorganization, and accordingly, are not presently determinable. The Company currently retains the exclusive right to file a plan of reorganization until August 3, 1998 and to solicit acceptance of a plan of reorganization until October 5, 1998, each subject to possible extension as approved by the Bankruptcy Court. The Company filed its plan of reorganization and related disclosure statement with the Bankruptcy Court on April 13, 1998 and, subject to confirmation of the plan of reorganization, currently anticipates emergence from Chapter 11 in August, 1998. A hearing to approve the disclosure statement has been scheduled for May 27, 1998 with the Bankruptcy Court. Under the Bankruptcy Code, the Company may elect to assume or reject real estate leases, employment contracts, personal property leases, service contracts and other executory pre-petition leases and contracts, subject to Bankruptcy Court approval. A liability of approximately $48.1 million has been recorded as of January 31, 1998 for rejected leases. This liability may be subject to future adjustments based on claims filed by the lessors and Bankruptcy Court actions. Although the Company does not currently anticipate the rejection of additional leases, the Company cannot presently determine or reasonably estimate the ultimate liability which may result from the filing of claims for any rejected contracts or from any additional leases which may be rejected at a future date. The Company believes that it recorded its best estimate of the liability for rejected leases based on information available. The principal categories of claims classified as "Liabilities subject to settlement under the reorganization case" are identified below. Deferred financing costs as of the Filing date of $3.4 million, $2.0 million and $2.7 million, respectively, for the pre-petition revolving loan facility (the "Revolver") and subordinated debt (the "2002 and 2003 Notes") have been netted against the related outstanding debt amounts. In addition, a $9.0 million cash settlement and approximately $10 million of adequate protection payments reduced the Revolver debt amount. The cash settlement relates to a portion of the Company's cash balance as of the date of the Filing ($9.3 million) which was claimed as collateral by the pre-petition bank group. The claim was settled in full for $9.0 million and approved by the Bankruptcy Court in 1995. Also, payments of approximately $1.1 and $.8 million were made to IBM Credit Corporation ("IBM") and Comdisco, Inc. ("Comdisco"), respectively, in 1996 for settlement of certain equipment capital lease obligations (Note 6). All amounts presented below may be subject to future adjustments depending on Bankruptcy Court actions, further F-31 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) developments with respect to disputed claims, determination as to the security of certain claims, the value of any collateral securing such claims, or other events.
(000's) --------------------------------- Liabilities Subject to Settlement Under the Reorganization Case January 31, 1998 February 1, 1997 - ------------------------------------------- ---------------- ---------------- Accounts payable............................ $165,324 $167,098 Accrued expenses............................ 27,996 27,932 Revolver.................................... 71,105 75,005 2002 Notes.................................. 122,274 122,274 2003 Notes.................................. 97,957 97,957 SPE financing obligation (Note 8)........... 17,951 17,951 Obligations under capital leases............ 11,407 11,887 Liability for rejected leases............... 48,091 50,937 -------- -------- $562,105 $571,041 ======== ========
4. Statement of Financial Accounting Standards No. 121 In the fourth quarter of 1995, the Company adopted SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" and recorded a charge of approximately $99.4 million to reflect the impairment of certain long-lived assets. In the fourth quarter of 1996, the Company recorded an additional charge of approximately $40.8 million in accordance with SFAS No. 121 based on revisions to cash flow assumptions and as a result of the significant operating loss incurred in 1996. SFAS No. 121 requires that long-lived assets and certain identifiable intangibles to be held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The Company reviewed its long-lived assets for recoverability in both years primarily as a result of the significant operating losses incurred. Because of these prior-year charges and the closings of unprofitable stores, and because the Company met its operating earnings plan in 1997, there was no such SFAS No. 121 charge in 1997. In applying SFAS No. 121 in 1996 and 1995, the Company compared anticipated cash flows over the remaining lease term, including anticipated renewal periods, from each store (excluding closing stores) with the corresponding carrying amount of identified long-lived assets and recorded a reduction in carrying value where such cash flows were not sufficient to recover the related assets over the term of the lease. The fair value of these impaired long-lived assets was determined primarily using the Company's current estimate of the associated future cash flows over the base lease term, including anticipated renewal periods and consideration of the fair market value of the assets at the end of the lease term. The stream of future cash flows by store were discounted at a 20% rate, which the Company believed to be commensurate with the risks involved. There were significant assumptions, primarily future cash flows, inherent in the SFAS No. 121 calculations, particularly given the Company's prior-year operating losses and evolving merchandising strategy. The assumptions utilized in 1996 and 1995 were subject to significant business, economic and competitive uncertainties. The charges in 1996 and 1995 were comprised of the following long-lived asset impairments (in 000's):
1996 1995 ------- ------- Property excluding capital leases, net...................... $10,548 $43,632 Property under capital leases, net.......................... 3,363 21,688 Lease interest and lease acquisition costs, net............. 26,871 34,038 ------- ------- Total long-lived asset impairment........................... $40,782 $99,358 ======= =======
F-32 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 5. Property, Plant and Equipment, Net
(000's) --------------------------------- January 31, 1998 February 1, 1997 ---------------- ---------------- Property excluding capital leases: Buildings and improvements.................. $ 96,678 $ 96,978 Equipment and fixtures...................... 123,603 109,486 Land........................................ - 3,731 -------- -------- Subtotal.................................. 220,281 210,195 Accumulated depreciation.................... (88,756) (70,949) -------- -------- Property excluding capital leases, net.... 131,525 139,246 -------- -------- Property under capital leases: Buildings and improvements.................. 22,682 28,218 Equipment and fixtures...................... 8,395 8,395 -------- -------- Subtotal.................................. 31,077 36,613 Accumulated amortization.................... (12,118) (12,218) -------- -------- Property under capital leases, net........ 18,959 24,395 -------- -------- Total property, plant and equipment, net...... $150,484 $163,641 ======== ========
6. Debt
(000's) --------------------------------- January 31, 1998 February 1, 1997 ---------------- ---------------- DIP facilities (8.5% - 1997, 8.5% - 1996)... $ 84,208 $ 42,500 Pre-petition Revolver (10.25% - 1997, 10.0% - 1996).............................. 71,105 75,005 Pre-petition 2002 Notes (11%)............... 122,274 122,274 Pre-petition 2003 Notes (9.25%)............. 97,957 97,957 SPE financing obligation (7.75%) (Note 8)... 17,951 17,951 Obligations under capital leases (Note 8)... 39,518 46,905 -------- -------- Total debt.................................. 433,013 402,592 Less: Short-term debt (DIP facilities).. 84,208 42,500 Current portion - capital leases........ 1,038 1,722 Less: Debt subject to settlement (Note 3): Prepetition Revolver.................... 71,105 75,005 Prepetition 2002 Notes.................. 122,274 122,274 Prepetition 2003 Notes.................. 97,957 97,957 SPE financing obligation................ 17,951 17,951 Obligations under capital leases........ 11,407 11,887 -------- -------- Long-term debt obligations under capital leases..................................... $ 27,073 $ 33,296 ======== ========
As a result of the Filing, substantially all debt (exclusive of the DIP facilities) outstanding at January 31, 1998 and February 1, 1997 was classified as liabilities subject to settlement (Note 3). No principal or interest payments are made on any pre-petition debt (excluding certain capital leases) without Bankruptcy Court approval or until a reorganization plan defining the repayment terms has been approved. During 1995, the Company received Bankruptcy Court approval to make certain adequate protection payments to the pre-petition bank group. The adequate protection payments, a cash settlement, and deferred financing costs have been netted against the related outstanding debt amounts (Note 3). F-33 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) On June 25, 1996, the Bankruptcy Court approved an agreement between the Company and BTM Capital Corporation ("BTM") that fixed the secured claim of BTM in the amount of $2.25 million, subject to reduction for adequate protection payments also approved by the Bankruptcy Court. On December 17, 1996, the Bankruptcy Court approved agreements between the Company and IBM and between the Company and Comdisco which settled all litigation between the parties regarding the characterization of certain equipment lease agreements. Under these agreements, the Company agreed to pay all amounts due to IBM ($1.1 million in December, 1996) and Comdisco ($.8 million in January, 1997), purchase all the equipment under the IBM equipment lease agreement ($1.4 million in December, 1996) and reject the Comdisco lease effective February 28, 1997. Generally, interest on pre-petition debt ceases accruing upon the filing of a petition under the Bankruptcy Code; if, however, the debt is collateralized by an interest in property whose value (minus the cost of preserving such property) exceeds the amount of the debt, post-petition interest may be payable. Other than those noted above, no other determinations have yet been made regarding the value of the property interests which collateralize various debts. Although interest may be paid pursuant to an order of the Bankruptcy Court, it is uncertain whether any post-petition interest will be payable or paid. The Company believes at this time that it is unlikely that such interest will be paid. Contractual interest expense not recorded on certain pre-petition debt (the Revolver, 2002 Notes and 2003 Notes) totaled approximately $31.1 and $31.3 million for 1997 and 1996, respectively. New Financing Facility The Company obtained a new $250 million financing facility (of which $125 million is available for issuance of letters of credit) in December, 1997 with BankBoston Retail Finance, Inc. ("BBNA") as agent (the "New Facility"), under which the Company is allowed to borrow for general corporate purposes, working capital and inventory purchases. The New Facility consists of (a) an up to eighteen month debtor-in-possession revolving credit facility in the maximum principal amount of $250 million (the "New DIP" - see below) and, subject to meeting certain conditions, (b) an up to three year post-confirmation revolving credit facility in the maximum principal amount of $250 million (the "Exit Facility" - see below). The commitment period for the combined facility cannot exceed four years. The New DIP replaced a $200 million Debtor-in-Possession Revolving Credit and Guaranty Agreement with The Chase Manhattan Bank, as agent (the "Prior DIP Facility"). There were outstanding direct borrowings of $84.2 million under the New DIP as of January 31, 1998. Trade and standby letters of credit outstanding under the DIP facilities were $7.1 and $26.8 million, respectively, at January 31, 1998 and $9.2 and $26.9 million, respectively, as of February 1, 1997. The weighted average borrowings under the DIP facilities in 1997 were $87.2 million. The weighted average interest rate under the DIP facilities in 1997 was 7.54%. The New DIP has an advance rate of 60% of the Loan Value of Eligible Receivables (as defined), plus 72% of the Loan Value of Eligible Inventory (as defined). Between March 1 and December 15, the Company can borrow an overadvance amount on the Loan Value of Eligible Inventory of 5% (the "Overadvance Amount"), subject to a $20 million limitation. At the Company's option, the Company may borrow under the New DIP at the Alternate Base Rate (as defined) in effect from time to time (the "Base Rate Applicable Margin") or the adjusted Eurodollar rate plus 2.25% (the "Eurodollar Applicable Margin") for interest periods of one, two, or three months. The Base Rate Applicable Margin and Eurodollar Applicable Margin will be subject to an additional 0.50% during any fiscal month that the Company has Overadvance Amounts. There are no compensating balance requirements under the New DIP but the Company is required to pay an annual commitment fee of 0.30% of the unused portion of the New DIP. The New DIP contains restrictive covenants including, among other things, limitations of the incurrence of additional liens and indebtedness, limitations on capital expenditures and the sale of assets, the maintenance of minimum operating earnings ("EBITDA"), and minimum accounts payable to inventory ratios. The lenders under the New DIP F-34 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) have a "super-priority claim" against the estate of the Company. As of January 31, 1998, the Company was in compliance with the New DIP covenants. The New DIP expires on the earlier of June 30, 1999 or the effective date of any plan of reorganization that is confirmed by the Bankruptcy Court. In the fourth quarter of 1997, the Company incurred a charge of approximately $1.1 million for the write-off of the Prior DIP Facility's unamortized deferred financing costs and paid approximately $2.3 million for financing fees associated with the New DIP. The Exit Facility has an advance rate equal to 60% of the Loan Value of Eligible Receivables, plus the lower of (i) 72% of the Loan Value of Eligible Inventory or (ii) 80% of the ratio of the annual appraised liquidation value to the Loan Value (as defined) of the inventory (the "Loan to Value Ratio"). Between March 1 and December 15, the Company can borrow an overadvance amount on the Loan Value of Eligible Inventory of 5%, provided the Loan to Value Ratio does not exceed 85%. At the Company's option, the Company may borrow under the Exit Facility at the Base Rate Applicable Margin or the Eurodollar Applicable Margin for interest periods of one, two, or three months. The Base Rate Applicable Margin and Eurodollar Applicable Margin will be subject to an additional 0.50% during any fiscal month that the Company has Overadvance Amounts. The Exit Facility is subject to certain conditions being satisfied, including (i) an all equity plan of reorganization; (ii) minimum EBITDA performance; and (iii) minimum borrowing availability on the effective date of the plan of reorganization. The Company obtained a modification to the commitment letter dated April 7, 1998, from BBNA, as agent, that modifies their commitment so that the plan of reorganization filed by the Company on April 13, 1998, although not an all equity plan, satisfies the conditions for the Exit Facility. The Exit Facility will be secured by all of the assets of the Company, except interests in real property. The Exit Facility contains financial covenants including (i) minimum EBITDA, (ii) minimum accounts payable to inventory, (iii) maximum capital expenditures and (iv) minimum operating cash flow to interest expense (for the fiscal quarters ending on or about January 31, 2000, and thereafter). Prepetition Revolver Prior to the Filing, the Company had a $150 million revolving loan facility ("Revolver"), including outstanding commercial and standby letters of credit. The Revolver had a maturity date of July 31, 1997, and had a variable interest rate based on, among other factors, the Company's elected borrowing period and amount. The weighted average interest rate approximated 10.0% in 1997 and 1996 and 8.1% in 1995. No interest has been paid or accrued on the Revolver since the Filing. Prepetition 2002 Notes and 2003 Notes The 2002 Notes and 2003 Notes are pari passu to each other and subordinated to the Company's senior indebtedness. Beginning on August 1, 1997, the 2002 Notes were to be redeemable, in whole or in part, at the Company's option, at 104%, decreasing annually to par on August 1, 2000. Beginning on March 1, 2000, the 2003 Notes were to be redeemable, in whole or in part, at the Company's option, at par plus accrued interest. Interest on the 2002 Notes and 2003 Notes, due semiannually, has not been paid or accrued since the Filing. F-35 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 7. Reorganization Items The Company provided for or incurred the following expense and income items in 1997, 1996 and 1995 directly associated with the Chapter 11 reorganization proceedings and the resulting restructuring of its operations (in 000's):
1997 1996 1995 ------- ------- ------- Professional fees.................................. $10,000 $10,000 $ 9,200 Interest income.................................... (420) (1,445) (3,078) Provision for rejected leases...................... (2,846) 32,756 18,971 Net asset/liability write-offs..................... (3,408) 4,034 21,548 Gain on disposition of properties.................. (1,153) (1,697) - Provision for inventory impairment................. - (1,000) 7,100 Provision for occupancy and other store closing costs............................................. 1,112 4,102 3,059 Employee severance and termination benefits........ (2,813) 23,042 - Provision for MIS retention bonuses................ 280 - - Chapter 11 customer discounts...................... - - 2,960 Provision for retention bonuses.................... - - 5,243 ------- ------- ------- Total reorganization items........................ $ 752 $69,792 $65,003 ======= ======= =======
Professional fees and interest income: Professional fees represent estimates of expenses incurred, primarily for legal, consulting and accounting services provided to the Company and the creditors committee (which are required to be paid by the Company while in Chapter 11). Interest income represents interest earned on cash invested during the Chapter 11 proceeding. Provision for rejected leases and net asset/liability write-offs: Under the Bankruptcy Code, the Company may elect to reject real estate leases, subject to Bankruptcy Court approval. The Company recorded provisions of approximately $32.8 and $19.0 million in 1996 and 1995, respectively, for rejected leases and anticipated claims for certain closed and closing store leases that were expected to be rejected. In 1997, the Company reversed a rejected lease provision of $5.2 million that had been recorded in 1996 for a store that was subsequently sold in 1997 with no rejection liability. In addition, the Company recorded a provision of approximately $2.4 million in 1997 for four of the six stores closed in February, 1998 whose leases were rejected by the Company. In connection with the store closings and lease rejections, the Company wrote off certain net assets (net liability in 1997), primarily for leasehold improvements, net capital leases and lease interests. The credit of $3.4 million in 1997 resulted from the write-off of closed stores' capital lease obligations that exceeded the carrying value of the closed stores' assets. Net asset write-offs also include adjustments to lower the carrying values of certain properties held for sale to their current net realizable values. The rejected lease liability may be subject to future adjustments based on claims filed by the lessors and Bankruptcy Court actions. The Company cannot presently determine or reasonably estimate the ultimate liability which may result from such claims and actions or from additional leases which may be rejected at a future date. Gain on disposition of properties: The Company sold certain closed store leases in 1997 and 1996 and the related gains were classified as reorganization items since the sales were directly related to the Chapter 11 proceedings and the associated net asset write-offs were previously included in reorganization items. Inventory impairment and store closing costs: In December, 1997, the Company approved a restructuring plan to close 6 stores by February, 1998. One of the 6 stores was owned and closed as a result of the sale of the property in January, 1998. In connection with the plan to close the 6 stores, the Company F-36 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) rejected certain leases and wrote off net assets (see "Provision for rejected leases and net asset/liability write-offs"). In addition, the Company established provisions in 1997 for the associated closing costs and for an inventory impairment for the 6 stores of $2.9 million that was charged to cost of sales. The provision for inventory impairment represented the incremental markdowns required to liquidate the inventory at the closed stores. Such costs are recorded in accordance with the retail inventory method. In January, 1996, the Company approved a restructuring plan to close 13 stores in the first half of 1996. In connection with this plan, the Company also rejected certain leases and wrote off net assets. In addition, the Company established provisions in 1995 for inventory impairment and other closing costs associated with closing the 13 stores. The provision for inventory impairment was reduced by $1 million at the conclusion of the going-out-of-business sales in 1996 when actual results became available. The $1 million reduction was recorded as a credit to reorganization items since the original provision was recorded as a reorganization item in 1995 prior to a Securities and Exchange Commission staff announcement in which it stated that inventory markdowns attributable to a restructuring or exit plan should be classified in the income statement as a component of cost of sales. In July, 1996, the Company approved a restructuring plan to close 14 additional stores in October, 1996. In connection with this plan, the Company also rejected certain leases and wrote off net assets. In addition, the Company established provisions for inventory impairment and other closing costs associated with closing the 14 stores. An inventory impairment charge of $6.7 million for 15 stores (including the one store to be closed in April, 1997) was charged to cost of sales in 1996. Other store closing costs represent incremental asset protection, occupancy and various closing costs associated with the decision to close the stores. Other store closing costs paid in 1997 totaled approximately $3.5 million. Employee severance and termination benefits: The credit to employee severance and termination benefits of $2.8 million in 1997 resulted from the reversal of certain severance reserves totaling $3.4 million, including a significant portion of the severance reserve that had been established in 1996 for Mark Cohen, the Company's former CEO, partially offset by a $0.6 million charge for severance and termination benefits for 382 store associates at the 6 stores closed in February, 1998. A settlement agreement was reached with Mr. Cohen in 1997. Employee severance and termination benefits of $23.0 million in 1996 included the following: (a) $13.5 million for the January 1997 management reorganization and regional and district consolidation; (b) $1.2 million resulting from the 14 stores closed in October, 1996; (c) $4.2 million for central office positions eliminated in September, 1996; (d) $1.1 million resulting from the 13 stores closed in the first half of 1996; and (e) $3.0 million paid to store, district and regional associate positions eliminated as a result of the February, 1996 store management reorganization. Severance and termination benefits paid in 1997 and 1996 totaled approximately $4.5 and $16.6 million, respectively. Chapter 11 customer discounts: The "Chapter 11 customer discounts" reflected a special 5% discount that was provided to customers during a two-week period following the Filing to retain customer loyalty and to compensate customers for the inconvenience of unavailable merchandise. Retention bonuses: During 1995, the Bankruptcy Court approved certain assumed and amended executive contracts and the Company's Retention Bonus Plan (the "Retention Plan") that provided for management bonuses for continued employment during the first fiscal year of Chapter 11 reorganization and through the date of payment. Thereafter, the Retention Plan and executive contracts provided incentives and F-37 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) rewards for performance that met or exceeded established levels, as well as for continued employment. The 1995 provision included the Chapter 11-related bonuses, along with certain executive guaranteed awards related to the Filing. MIS retention bonuses: The Company has a retention bonus program for certain Management Information System (MIS) employees that provides for bonuses during the Chapter 11 proceedings for continued employment through April, 1998. In April, 1998 these bonuses were paid and this program was then discontinued. Closed store results: Net sales and operating losses (exclusive of any central office expense allocation and prior to interest expense, income taxes and reorganization items) from the one store closed in April, 1997, the six stores closed in February, 1998 and the 27 stores closed during 1996 were (in 000's):
1997 1996 1995 ------- -------- -------- Net sales....................................... $61,039 $213,363 $367,693 Operating loss.................................. (251) (28,012) (36,040)
8. Leases At January 31, 1998, the Company had various noncancelable leases in effect for substantially all of its stores, distribution centers, and its office building, as well as certain equipment. In connection with the Filing, all lease contracts whether assumed or rejected are subject to Bankruptcy Court approval. Therefore, the commitments shown below may not reflect actual cash outlays in the future. Payments under certain capital leases which the Company currently believes represent undersecured financings are classified as liabilities subject to settlement and are not presented herein. Minimum payments due under remaining leases, excluding leases which are included in the provision for rejected leases (Notes 3 and 7), are as follows:
(000's) ------------------------------- Capital Leases Operating Leases -------------- ---------------- 1998.......................................... $ 4,645 $ 41,853 1999.......................................... 4,646 40,844 2000.......................................... 4,111 39,357 2001.......................................... 4,132 37,933 2002.......................................... 4,132 36,041 Thereafter.................................... 40,416 220,198 -------- -------- Total minimum payments........................ 62,082 $416,226 ======== Estimated executory costs..................... (2,857) -------- Net minimum lease payments.................... 59,225 Imputed interest.............................. (31,114) -------- Present value of net minimum lease payments... 28,111 Less current portion.......................... (1,038) -------- Obligations under capital leases, net of current portion.............................. $ 27,073 ========
Minimum payments for capital and operating leases have not been reduced by minimum sublease rentals of $11.7 and $10.0 million, respectively, due in the future under noncancelable leases. The minimum payments do not include the contingent rentals that may be payable under certain leases. F-38 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Total rent expense is as follows:
(000's) ------------------------- 1997 1996 1995 ------- ------- ------- Operating leases: Minimum rent....................................... $48,749 $57,352 $60,890 Contingent rent.................................... 425 1,024 972 Sublease income.................................... (7,899) (9,248) (9,585) ------- ------- ------- 41,275 49,128 52,277 ------- ------- ------- Capital leases: Sublease income.................................... (1,297) (1,726) (1,829) ------- ------- ------- Total................................................ $39,978 $47,402 $50,448 ======= ======= =======
Contingent rentals are determined on the basis of a percentage of sales in excess of stipulated minimums for certain stores. Sublease income includes leased department income which is included in leased department and other operating income. Most of the leases require that the Company pay taxes, maintenance, insurance and certain operating expenses. Management expects that, in the normal course of business, expiring leases will be renewed or replaced by other leases. During 1994, the Company entered into a financing facility with a special purpose entity ("SPE") (Note 2) and a group of banks, with Bankers Trust as Agent, that provided a $75 million financing facility for new store sites, which was to expire in 1998. On April 17, 1995, the amount under the financing facility was reduced to $45 million, of which only $30 million could be utilized in 1995. In June, 1995, the amount was further reduced to $24 million, the amount required for the two sites then under development. Under the terms of the financing facility with the SPE, the Company entered into leases with terms of up to six years. Upon expiration of the leases, the Company could purchase the properties, allow the SPE to sell the sites to an unrelated third party (subject to the residual guarantee which, in effect, guarantees 100% of the outstanding borrowings) or extend the lease term. As a result of the guarantee and the Filing, the Company has included the accounts of the SPE in its consolidated financial statements. Borrowings of approximately $18 million at January 31, 1998 and February 1, 1997 are included in liabilities subject to settlement and are collateralized by land and buildings (with a carrying value of $4.0 million) that are classified as long-term assets held for sale. Any proceeds from the sale of these properties will be restricted to pay down the related borrowings. 9. Common Stock and Additional Paid-In Capital The authorized capital stock of the Company consists of 40 million shares of common stock, par value of $0.01 per share ("Common Stock"), of which 11,312,154 shares were outstanding at January 31, 1998, and one million shares of preferred stock, par value of $0.01 per share, none of which were outstanding at January 31, 1998. The Common Stock will be canceled under the Company's filed plan of reorganization. The Company has a Restricted Stock Plan that provides for the award of 277,008 shares of Common Stock ("Restricted Stock") to certain officers and employees. At January 31, 1998, 15,217 shares were outstanding under the Restricted Stock Plan. There have been no awards of Restricted Stock since the Filing. No cash payments are required from Restricted Stock recipients and all issued shares accrue dividends, if any. In general, the shares become unrestricted under a five-year vesting schedule. All shares of Restricted Stock may vest earlier in certain circumstances (death, disability, retirement or a change of control). Shares of Restricted Stock which have not vested are not freely transferable and revert to the Company upon the employee's termination. F-39 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 10. Stock Options The Company has a 1992 Stock Option Plan for Key Employees ("Key Employee Plan") that provides for the grant of options for up to 1,272,283 shares of Common Stock to certain employees. No options have been granted under the Key Employee Plan since the Filing. The options are intended to qualify as incentive stock options or non qualified stock options and generally have a three to five-year vesting schedule. Activity in the Key Employee Plan is as follows:
Weighted Average Shares Exercise Price --------- ---------------- Outstanding at January 28, 1995..................... 1,052,362 $13.65 Granted............................................. 153,000 9.78 Canceled............................................ (261,794) 13.83 Exercised........................................... - - --------- Outstanding at February 3, 1996..................... 943,568 $12.97 Granted............................................. - Canceled............................................ (265,790) $13.46 Exercised........................................... - - --------- Outstanding at February 1, 1997..................... 677,778 $12.78 Granted............................................. - - Canceled............................................ (396,753) $13.32 Exercised........................................... - - --------- ------ Outstanding at January 31, 1998..................... 281,025 $12.30 ========= ====== Exercisable at January 31, 1998..................... 171,997 $12.65 ========= ======
Options outstanding at January 31, 1998, range in exercise price from $6.50 to $18.38 and have a remaining weighted average contractual life of 5.56 years. The Company has a 1993 Non-Employee Directors' Stock Option Plan ("Directors' Plan") that provides for the grant of non qualified options for up to 100,000 shares of Common Stock to non-employee directors. In general, the options have a three-year vesting schedule. During 1997, 1996 and 1995, 30,000, 15,000 and 30,000 options, respectively, were granted under the Directors' Plan. During both 1997 and 1996, 15,000 options were canceled. At January 31, 1998, 90,000 options under the Directors' Plan were outstanding with exercise prices ranging from $0.06 to $15.75 (weighted average exercise price is $7.02). At January 31, 1998, 45,000 of the options were exercisable at a weighted average price of $12.26 and have a weighted average remaining contractual life of 5.26 years. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," effective for the Company's fiscal year beginning February 4, 1996. SFAS No. 123 encourages but does not require the recognition of compensation expense for the fair value of stock option and other equity instruments issued to employees. If the fair-value provisions of SFAS No. 123 are not adopted, certain pro forma amounts of net earnings and earnings per share that would have been reported had these provisions been adopted are required to be disclosed, if material. The Company continues to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" using the intrinsic value method. The difference between accounting for stock-based compensation under APB No. 25 and SFAS No. 123 was not material for 1997, 1996 and 1995, and accordingly the pro forma disclosures have been omitted. F-40 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 11. Employee Benefit Plans Pension plan. Certain union employees are covered by multi-employer defined benefit plans. Expenses for these plans were $.9 million for 1997, $1.1 million for 1996 and $1.3 million for 1995. The Company has a qualified, noncontributory defined benefit pension plan for employees not participating in multi-employer plans. Plan benefits are based on the participant's compensation and/or years of service. The Company funds the net pension costs each year. The plan assets are held in a master trust fund, which invests primarily in equity, fixed income securities and cash and cash equivalents. The Company has several nonqualified, noncontributory defined benefit plans for the benefit of certain highly compensated employees. The plans are unfunded and benefits paid under the plans are based on years of service and employees' compensation. The components of net pension costs for the plans are as follows:
000's ------------------------- 1997 1996 1995 ------- ------- ------- Service costs........................................ $ 3,272 $ 3,897 $ 3,061 Interest costs....................................... 5,054 4,909 4,369 Return on plan assets................................ (9,566) (7,617) (9,165) Net amortization and deferral........................ 4,177 2,993 5,497 Curtailment loss..................................... 126 554 - Special termination benefits......................... (359) 782 - ------- ------- ------- Net pension costs.................................... $ 2,704 $ 5,518 $ 3,762 ======= ======= =======
The funded status is as follows:
(000's) --------------------------------------------- January 31, 1998 February 1, 1997 ---------------------- ---------------------- Qualified Nonqualified Qualified Nonqualified Plan Plans Plan Plans --------- ------------ --------- ------------ Actuarial present value of: Vested benefit obligation..... $61,504 $ 3,046 $55,352 $ 4,444 ======= ======= ======= ======= Accumulated benefit obligation.. $62,656 $ 3,490 $56,183 $ 4,583 ======= ======= ======= ======= Projected benefit obligation.... $72,233 $ 4,236 $66,978 $ 5,126 Plan assets at fair value....... 68,611 - 62,325 - ------- ------- ------- ------- Projected benefit obligation greater than plan assets............... (3,622) (4,236) (4,653) (5,126) Unrecognized prior service cost........................... 518 1,434 576 107 Unrecognized transition obligation..................... - 102 - 1,609 Unrecognized net (gain) loss.... (2,740) 435 313 49 Additional minimum liability (recorded as other assets)............... - (1,225) - (1,222) ------- ------- ------- ------- Accrued pension liability....... $(5,844) $(3,490) $(3,764) $(4,583) ======= ======= ======= =======
The curtailment losses and special termination benefits in 1997 and 1996 result from the employment terminations of several executives and the closing of stores. These costs in 1996 were primarily included in F-41 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) termination benefits as part of reorganization items (Note 7). Certain portions ($1.2 million) of the nonqualified plans' accrued pension liability at January 31, 1998 relate to pre-petition employment contracts and are included in liabilities subject to settlement under the reorganization case. The rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation for the qualified plan was 4.09% for 1997 and 1996; the discount rate was 7.0% for 1997 and 7.25% for 1996; and the expected rate of return on the plan assets was 9.25% for 1997 and 9.0% for 1996. The rate of increase in future compensation levels and discount rate used in determining the actuarial present value of the projected benefit obligation for the non qualified plans was 4.25% for 1997 and 1996 and 7.0% for 1997 and 7.25% for 1996, respectively. Defined Contribution Plan The Company has a 401(k) plan for all active employees in eligible job categories. Employees may contribute a portion of their salary to the plan. The Company's contributions to the plan, which were suspended in 1996, were in the form of cash or common stock of the Company and were based on a percentage of employee contributions. There was no plan expense in 1997 and 1996, as compared to $1.0 million for 1995. Postretirement Plan The Company provides certain health care and life insurance benefits for certain retired non-union employees meeting age and service requirements. The Company accounts for the post- retirement plan in accordance with SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires the Company to accrue the estimated cost of retiree benefit payments during the years the employee provides services. The Company's postretirement benefits are funded on a current basis. The SFAS No. 106 valuation at January 31, 1998, along with the $3.9 million curtailment gain and a $.4 million amortization credit, reflects changes that were effective January 1, 1998. The changes represent the elimination of future benefits for active employees who do not become eligible by January 1, 2000, and a phase-out of the Company contributions over the next two years (at 50% per year beginning January 1, 1999) towards the cost of providing medical benefits to eligible retirees. The status of the plan is as follows:
(000's) --------------------------------- January 31, 1998 February 1, 1997 ---------------- ---------------- Accumulated postretirement benefit obligation for: Retirees.................................. $ 733 $ 1,886 Fully eligible actives.................... 536 1,998 Other actives............................. 439 3,983 ------- -------- 1,708 7,867 Plan assets at fair value................... - - ------- -------- Funded status............................... (1,708) (7,867) Unrecognized prior service cost............. (5,189) (5,313) Unrecognized net (gain)..................... (2,513) (1,203) ------- -------- Accrued postretirement benefit cost......... $(9,410) $(14,383) ======= ========
F-42 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Net postretirement (benefit) cost is as follows:
1997 1996 1995 ------- ----- ----- Service cost.......................................... $ 172 $ 241 $ 338 Interest cost......................................... 429 540 774 Amortization, net..................................... (1,359) (877) (808) Curtailment gain...................................... (3,939) - - ------- ----- ----- Net (benefit) cost.................................... $(4,697) $ (96) $ 304 ======= ===== =====
The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 8.70% for 1997 (6.25% for post-65 coverage) grading down to 4.25% over 10 years and 8.70% for 1996 (6.75% for post-65 coverage) grading down to 4.25% over 10 years. A one percentage point increase in the assumed health care cost trend rate would increase the accumulated postretirement benefit obligation by .56% and the service and interest cost by 3.31%. The assumed discount rate used in determining the accumulated postretirement benefit obligation was 7.25% for 1997 and 1996. 12. Income Taxes There was no income tax expense or benefit in 1997 and 1996. The income tax benefit in 1995 was comprised of the following components:
(000's) --------- 1995 --------- Current: Federal......................................................... $ (24,476) State........................................................... (100) --------- (24,576) --------- Deferred: Federal......................................................... (74,765) State........................................................... (5,192) --------- (79,957) --------- $(104,533) =========
The income tax expense (benefit) differs from the amount computed by applying the statutory Federal income tax rates to the earnings (loss) before income taxes as follows:
1997 1996 1995 ----- ----- ----- Statutory rate..................................... (35.0%) (35.0%) (35.0%) State income taxes, net of Federal income tax benefit........................................... (4.0%) (6.4%) (4.8%) Non-deductible professional fees................... 14.5% 1.5% 1.2% Non-deductible compensation........................ - 1.5% - Valuation allowance................................ 24.5% 38.4% 5.1% ----- ----- ----- 0% 0% (33.5%) ===== ===== =====
F-43 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Deferred taxes represent the differences between financial statement amounts and the tax bases of assets and liabilities. Deferred tax liabilities (assets) are as follows:
(000's) -------------------- 1997 1996 --------- --------- Lease interests........................................ $ 51,399 $ 50,435 Inventories............................................ 11,854 12,916 Other.................................................. 3,295 793 --------- --------- Total liabilities...................................... 66,548 64,144 --------- --------- Net operating loss carryforwards....................... (105,917) (100,392) Self insurance accruals................................ (8,602) (9,018) Rejected lease claims.................................. (20,350) (21,725) Postretirement benefits................................ (3,704) (5,829) Closing costs.......................................... (2,902) (3,278) Property, plant and equipment, net..................... (3,233) (4,294) Capital leases......................................... (10,708) (2,890) Vacation............................................... (2,636) (3,769) Alternative minimum tax credit carryforwards........... (2,144) (2,144) Other.................................................. (3,182) (2,110) --------- --------- (163,378) (155,449) Valuation allowance.................................... 105,411 99,886 --------- --------- Total assets........................................... (57,967) (55,563) --------- --------- Net deferred tax liability............................. $ 8,581 $ 8,581 ========= =========
At January 31, 1998, the Company had net operating loss carryforwards of approximately $260.8 million for Federal income tax purposes which will expire beginning in fiscal year 2011 and alternative minimum tax credit carryforwards of $2.1 million which are available to reduce future Federal regular income taxes over an indefinite period. As part of the Company's filed plan of reorganization, it is anticipated that a major portion of the net operating loss carryforward will be reduced by the cancellation of indebtedness and that the change in ownership resulting from the issuance of new stock will result in a limitation on the remaining amount of net operating loss and tax credit carryovers that can be utilized each year. The Company had a valuation allowance of $99.9 million against deferred tax assets in 1996. During 1997, the valuation allowance was increased by $5.5 million. The realization of the deferred tax assets is dependent upon future taxable income during the Federal and State carryforward periods. 13. Commitments and Contingencies The Company, exclusive of matters relating to the Filing (Note 3), is party to various legal actions and administrative proceedings and subject to various claims arising in the ordinary course of business. The Company believes that the disposition of these matters will not have a material adverse effect on its financial position, results of operations or liquidity. All civil litigation commenced against the Company prior to the Filing has been stayed by operation of law. There were no material legal proceedings pending against the Company prior to the Filing. In February, 1997 the Company adopted the Corporate Bonus Plan (the "Corporate Bonus Plan") that was approved by the Bankruptcy Court. The Corporate Bonus Plan provides incentives and rewards for (i) F-44 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) performance of key employees that meets or exceeds expectations and (ii) attainment of threshold performance measurements tied directly to the Company's 1997 business plan. The amount of the award would increase as the Company's performance exceeds the business plan. In addition, a discretionary fund in the amount of $500,000 has been established to provide bonuses to (a) non-bonus eligible employees based upon performance regardless of whether the Company achieves its target performance level and (b) bonus eligible employees based on performance if the Company does not achieve its target performance level. Under the Corporate Bonus Plan, the Company had to obtain a minimum EBITDA (as defined) of $28.1 million in 1997, net of the anticipated costs of the Corporate Bonus Plan, in order for any employee to be eligible for an award (except for the discretionary fund mentioned above). For each $5 million of EBITDA improvement over the amount projected, the award increases by 25% of the base award up to a maximum increase of 100% of the award. The Company achieved the minimum EBITDA in 1997 and, accordingly, recorded a provision of approximately $4 million for such bonuses in 1997 that was included in selling, store operating, administrative and distribution expenses. These bonuses were paid in April, 1998. With respect to the five-highest paid officers of the Company and certain other members of senior management of the Company, one-quarter of the amount of any bonus payable before such time as the Company has consummated a Chapter 11 plan of reorganization is contingently payable, with interest, at the earlier of the date of consummation of such plan, or the date of termination of employment by the Company without cause, by the officer for good reason, or on account of death or disability. Approximately $.4 million was subject to this deferral under the Corporate Bonus Plan in 1997. This is in addition to approximately $.2 million of bonuses earned under the Retention Plan (Note 7) in 1995 that remains subject to the same deferral. In August, 1995, the Company adopted, and in November, 1995, the Bankruptcy Court approved, the Enterprise Appreciation Incentive Plan (the "Incentive Plan"). All members of the Company's senior management are eligible to be selected by the Board of Directors to participate in the Incentive Plan. Under the Incentive Plan, each participant receives an equity incentive award payable on June 23, 2000 (the fifth anniversary of the Chapter 11 filing date) equal to the increase in the value of the Company (as determined by appraisal) over the five years ending on June 23, 2000. Each participant's interest in the Incentive Plan vests in equal installments over the five-year period, subject to acceleration in certain situations. In the event a participant terminates his or her employment without good reason or is terminated with cause prior to June 23, 2000, then the participant forfeits his or her rights under the Incentive Plan. Awards under the Incentive Plan will be paid promptly following June 23, 2000 in the form of 60% cash and the balance in cash, notes and stock as described thereunder. In no event will the total of all benefits payable under the Incentive Plan exceed the lesser of $20,000,000 or 13% (6% was for the Company's former CEO, Mark Cohen, and is not reallocable) of the total appreciation in the value of the Company during the five year period. No payments are expected to be paid under the Incentive Plan because the Company anticipates that the Incentive Plan will be canceled and replaced by a different incentive plan under the presently proposed terms of the Company's filed plan of reorganization. The Company has entered into a three-year employment agreement with its current CEO, Peter Thorner, commencing as of October 26, 1995 and amended as of November 7, 1997. Mr. Thorner's employment agreement provides for the payment by the Company of an equity incentive bonus (payable in cash, debt and equity securities) pursuant to the Incentive Plan determined by reference to the increase in value of the Company from the date of the bankruptcy filing to the fifth anniversary of the employment agreement, subject generally to vesting over five years. Mr. Thorner's equity incentive bonus under the Incentive Plan would be at least $1,000,000 but would not exceed the lesser of $4,615,385 or 3% of the appreciation in value of the Company. As stated above, no payments, other than annual nonrefundable advances of $150,000 to Mr. F-45 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Thorner, are expected to be paid under the Incentive Plan because the Company anticipates that the Incentive Plan will be canceled and replaced by a different incentive plan under the presently proposed terms of the Company's filed plan of reorganization. The employment agreement also provides that in the event of Mr. Thorner's termination of employment by the Company (including following a change in control of the Company) without Cause or Good Reason (as defined), Mr. Thorner would generally be entitled to all payments and benefits called for under the agreement for the remainder of its term. In August, 1995, the Company adopted and the Bankruptcy Court approved a severance program (the "Severance Program") that covers certain members of management. If the employment of any participant in the Severance Program is terminated other than for cause, death, disability or by the employee, or in connection with a change in control (as defined), then salary and certain incentive payments are guaranteed for periods ranging up to eighteen months, subject to mitigation by other employment. Amounts payable at January 31, 1998 under the Severance Program for management terminations were included in the reserve for termination benefits (Note 7). 14. Changes in Accounting Estimates As discussed in Note 2, the Company is primarily self-insured for workers' compensation and general liability costs. Actuarial studies of the self- insurance reserves were completed in the third quarter of 1997, using a discount rate of 6.0% (the same rate used at February 1, 1997), and in the third quarter of 1996, using a discount rate of 6.0% (compared to 5.3% at February 3, 1996). As a result of the studies, the self-insurance reserves were reduced by $3.6 million in the third quarter of 1997 with a corresponding reduction in SG&A expenses (selling, store operating, administrative and distribution expenses) and by $5.0 million in the third quarter of 1996 with corresponding reductions of $4.2 and $.8 million in SG&A expenses and interest expense, respectively. The reductions in the self-insurance reserves were primarily the result of aggressive claims management and safety initiatives. The Company changed its vacation pay vesting policy for certain pay groups in December, 1997, whereby the employees in those pay groups earn their vacation pay entitlements the course of each calendar year worked (similar to industry practice) rather than being fully vested on the first day of each calendar year. As a result of this change, $4.5 million of the Company's vacation pay reserves as of January 1, 1998 was eliminated with a corresponding credit in SG&A expenses. 15. Summary of Quarterly Results (Unaudited)
($ in thousands except per share data) -------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- -------- -------- ---------- Year Ended January 31, 1998: Net Sales................. $267,371 $297,416 $330,433 $449,224 $1,344,444 Gross Margin.............. 79,658 92,936 97,104 126,658 396,357 Net income (loss)......... (31,993) (16,864) 376 25,925 (22,557) Net income (loss) per share.................... $ (2.81) $ (1.48) $ 0.03 $ 2.29 $ (1.98) Weeks in period........... 13 13 13 13 52 Year Ended February 1, 1997: Net sales................. $337,703 $369,578 $404,456 $449,981 $1,561,718 Gross margin.............. 102,514 101,396 113,061 117,096 434,067 Net loss.................. (53,746) (82,785) (23,073) (59,155) (218,759) Net loss per share........ $ (4.71) $ (7.25) $ (2.02) $ (5.19) $ (19.17) Weeks in period........... 13 13 13 13 52
F-46 BRADLEES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) 16. Summarized Financial Information for Bradlees Stores, Inc. On November 18, 1998, the Company's amended plan of reorganization (the "Plan") was confirmed by the Bankruptcy Court. Under the Plan, Bradlees, Inc. is issuing common stock and Bradlees Stores, Inc. is issuing certain debt. Bradlees, Inc. operates its stores through Bradlees Stores, Inc., an indirect wholly-owned subsidiary. Bradlees, Inc. is guaranteeing the debt issued by Bradlees Stores, Inc. Substantially all of the assets of the Company, on a consolidated basis, are held by Bradlees Stores, Inc. The following summarized financial information of Bradlees Stores, Inc. is presented in accordance with SEC Staff Accounting Bulletin 53 and Regulation S-X Rule 1-02 (bb):
(000's) ----------------------------- January 31, February 1, 1998 1997 -------------- -------------- Current Assets................... $ 286,332 $ 274,980 Noncurrent Assets................ 302,286 322,962 Current Liabilities.............. 246,687 212,547 Payable to Bradlees, Inc......... 189,881 190,038 Noncurrent Liabilities........... 72,324 83,905 Liabilities Subject to Settlement Under the Reorganization Case... $ 341,874 $ 350,810 (000's) -------------------------------------------- 52 Weeks ended 52 Weeks ended 53 Weeks ended January 31, February 1, February 3, 1998 1997 1996 -------------- -------------- -------------- Net Sales........................ $1,344,444 $1,561,718 $1,780,768 Gross Margin..................... 396,357 434,067 491,691 Loss from Continuing Operations.. (22,620) (218,726) (206,870) Net Loss......................... $ (22,620) $ (218,726) $ (206,870)
Upon confirmation of the Plan, Bradlees, Inc. will contribute a portion of its intercompany receivable to the capital of Bradlees Stores, Inc. so that $96 million will be allowed as the final intercompany claim. F-47 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- Prospective investors may rely only on the information contained in this Prospectus. Neither Bradlees, Inc. nor Bradlees Stores, Inc. has authorized anyone to provide prospective investors with information different from that contained in this Prospectus. This Prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this Prospectus is correct only as of the date of this Prospectus, regardless of the time of the delivery of this Prospectus or any sale of these securities. No action is being taken in any jurisdiction outside the United States to permit a public offering of the Securities or possession or distribution of this Prospectus in any such jurisdiction. Persons who come into possession of this Prospectus in jurisdictions outside the United States are required to inform themselves about and to observe any restrictions as to this Offering and the distribution of this Prospectus applicable in that jurisdiction. ---------------- TABLE OF CONTENTS
Page Prospectus Summary....................................................... 2 Risk Factors............................................................. 6 The Company.............................................................. 13 Use of Proceeds.......................................................... 18 Dividend Policy.......................................................... 18 Capitalization........................................................... 19 Selected Financial Data.................................................. 20 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 30 Business................................................................. 37 Management............................................................... 41 Principal Stockholders................................................... 50 Certain Relationships and Related Transactions........................... 51 Selling Securityholders.................................................. 51 Plan of Distribution..................................................... 52 Shares Eligible for Future Sale.......................................... 53 Terms of Outstanding Indebtedness........................................ 53 Description of the 9% Convertible Notes.................................. 55 Description of Capital Stock............................................. 60 Legal Matters............................................................ 63 Experts.................................................................. 63 Additional Information................................................... 63 Index to Financial Statements............................................ F-1
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- BRADLEES, INC. BRADLEES STORES, INC. 7,267,424 Shares of Common Stock $36,000,000 9% Convertible Notes ---------------- PROSPECTUS ---------------- January , 1999 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The following table sets forth the estimated expenses of this Offering (excluding underwriting discounts and commissions):
Nature of Expense Amount(1) ----------------- --------- SEC Registration Fee............................................... $ 27,343 -------- Nasdaq Listing Fee................................................. 77,875 -------- Accounting Fees and Expenses....................................... 185,000 -------- Legal Fees and Expenses............................................ 250,000 -------- Printing Expenses.................................................. 50,000 -------- Trustee's Fees and Expenses........................................ 25,000 -------- Transfer Agent's Fee............................................... 25,000 -------- Miscellaneous...................................................... 9,782 -------- TOTAL............................................................ $650,000 ========
- -------- (1) The amounts set forth above, except for the SEC fee, are in each case estimated. Item 14. Indemnification of Directors and Officers The Company's Amended and Restated Articles of Organization provide that a Director shall not have personal liability to the Company or its stockholders for monetary damages arising out of the Director's breach of fiduciary duty as a Director of the Company to the maximum extent permitted by Massachusetts law. Section 13(b)(1 1/2) of Chapter 156B of the Massachusetts Business Corporation Law provides that the articles of organization of a corporation may state a provision eliminating or limiting the personal liability of a Director to a corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director, provided, however, that such provision shall not eliminate or limit the liability of a Director (i) for any breach of the Director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or knowing violation of law, (iii) under Section 61 or 62 of the Massachusetts Business Corporation Law dealing with liability for unauthorized distributions and loans to insiders, respectively, or (iv) for any transaction from which the Director derived an improper personal benefit. The Company's Amended and Restated By-Laws further provide that the Company shall, to the fullest extent authorized by Chapter 156B of the Massachusetts General Laws, indemnify each person who is, or was or has agreed to become, a Director or officer of the Company or who is or was a Director or employee of the Company and is serving, or shall have served, at the request of the Company, as Director or officer of another organization or in any capacity with respect to any employee benefit plan of the Company, against all liabilities and expenses (including reasonable attorneys' fees), judgments and fines incurred by him or on his behalf in connection with, or arising out of, the defense or disposition of any action, suit or other proceeding, whether civil or criminal, or any appeal therefrom in which they may be involved by reason of being or having been such a Director or officer or as a result of service with respect to any such employee benefit plan. Section 67 of Chapter 156B of the Massachusetts General Laws authorizes a corporation to indemnify its directors, officers, employees and other agents unless such person shall have been adjudicated in any proceeding not to have acted in good faith in the reasonable belief that such action was in the best interests of the corporation or, to the extent such matter is related to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. II-1 The effect of these provisions would be to permit indemnification by the Company for, among other liabilities, liabilities arising out of the Securities Act of 1933, as amended (the "Securities Act"). Section 67 of the Massachusetts Business Corporation Law also affords a Massachusetts corporation the power to obtain insurance on behalf of its directors and officers against liabilities incurred by them in those capacities. We have procured a directors' and officers' liability and company reimbursement liability insurance policy that (i) insures directors and officers of the Company against losses (above a deductible amount) arising from certain claims made against them by reason of certain acts done or attempted by such directors or officers and (ii) insures the Company against losses (above a deductible amount) arising from any such claims, but only if the Company is required or permitted to indemnify such directors or officers for such losses under statutory or common law or under provisions of the Company's Amended and Restated Articles of Organization or Amended and Restated By-Laws. Item 15. Recent Sales of Unregistered Securities On the Effective Date, we issued the following securities in connection with the Effectiveness of our Plan of Reorganization: 1. We issued 10,225,711 shares of our Common Stock to holders of approximately $361 million of allowed prepetition claims against us in satisfaction of such claims in reliance upon the exemption from registration set forth in Section 1145 of the Bankruptcy Code. 2. We issued $40.0 million aggregate principal amount of 9% Convertible Notes to holders of approximately $108 million of allowed prepetition claims against us in satisfaction of such claims in reliance upon the exemption from registration set forth in Section 1145 of the Bankruptcy Code. 3. We issued warrants to purchase 1,000,000 shares of our common stock to holders of approximately $265 million of allowed prepetition claims against us in satisfaction of such claims in reliance upon the exemption from registration set forth in Section 1145 of the Bankruptcy Code. 4. We issued $3.4 million worth of Cure Notes to holders of approximately $3.4 million of allowed prepetition claims against us in satisfaction of such claims in reliance upon the exemption from registration set forth in Section 1145 of the Bankruptcy Code. 5. We issued $587,094 worth of Cap Notes to holders of approximately $547,094 of allowed prepetition claims against us in satisfaction of such claims in reliance upon the exemption from registration set forth in Section 1145 of the Bankruptcy Code. 6. We issued $3.4 million worth of Tax Notes to holders of approximately $3.4 million of allowed prepetition claims against us in satisfaction of such claims in reliance upon the exemption from registration set forth in Section 1145 of the Bankruptcy Code. Item 16. Exhibits and Financial Schedules (a) Exhibits.
Exhibit No. Title ----------- ----- *2.1 --Form of Modified Plan of Reorganization and Plan Disclosure Statement. *2.2 --Form of Indenture. *2.3 --Form of 9% Convertible Note. *2.4 --Form of Leasehold Mortgage. *2.5 --Form of CAP Notes. *2.6 --Form of Cure Note. *2.7 --Form of Tax Note for other priority tax claims. *2.8 --Form of Tax Note for Federal priority tax claims. *2.9 --Form of New Warrant.
II-2
Exhibit No. Title ----------- ----- *3.1 --Amended and Restated Articles of Organization of Bradlees, Inc. *3.2 --Amended and Restated Articles of Organization of Bradlees Stores, Inc. *3.3 --Amended and Restated By-laws of Bradlees, Inc. *3.4 --Amended and Restated By-laws of Bradlees Stores, Inc. *4.1 --Specimen Certificate for shares of Common Stock, $.01 par value, of Bradlees, Inc. *5.1 --Opinion of Goodwin, Procter & Hoar LLP with respect to the legality of the securities being offered. *10.1 --Form of Registration Rights Agreement. 10.22 --Amended and Restated Employment Agreement dated as of October 26, 1995 between and among Bradlees, Inc., Bradlees Stores, Inc. and Peter Thorner is incorporated by reference from the Company's Form 10-Q for the quarterly period ended October 28,1995, Part II, Item 6, Exhibit 10.2, as filed with the Securities and Exchange Commission on December 12, 1995. 10.23 --Amendment to Amended and Restated Employment Agreement, dated as of November 7, 1997, between and among Bradlees, Inc., Bradlees Stores, Inc. and Peter Thorner is incorporated by reference from the Company's Form 10-K for the year ended January 31, 1998, Part IV, Item 14(a)(3), Exhibit 10.23, as filed with the Securities and Exchange Commission on May 1, 1998. 10.25 --Bradlees, Inc. and Bradlees Stores, Inc. Enterprise Appreciation Incentive Plan Effective June 23, 1995 is incorporated by reference from the Company's Form 10-Q for the quarterly period ended October 28, 1995, Part II, Item 6, Exhibit 10.5, as filed with the Securities and Exchange Commission on December 12, 1995. 10.34 --Bradlees, Inc. and Bradlees Stores, Inc. Supplemental Executive Retirement Plan Effective December 1, 1995 is incorporated by reference from the Company's Form 10-K for the year ended February 3, 1996, Part IV, Item 14(a)(3), Exhibit 10.32, as filed with the Securities and Exchange Commission on May 3, 1996. 10.35 --Form of Senior Vice President Severance Agreement is incorporated by reference from the Company's Form 10-K for the year ended February 3, 1996, Part IV, Item 14(a)(3), Exhibit 10.33, as filed with the Securities and Exchange Commission on May 3, 1996. 10.36 --Form of Revised Senior Vice President Severance Agreement is incorporated by reference from the Company's Form 10-K for the fiscal year ended February 1, 1997, Part IV, Item 14(a)(3), Exhibit 10.40, as filed with the Securities and Exchange Commission on May 2, 1997. 10.37 --Form of Revised Senior Vice President Severance Agreement is incorporated by reference from the Company's Form 10-Q for the quarterly period ended May 3, 1997, Part II, Item 6, Exhibit 10, as filed with the Securities and Exchange Commission on June 6, 1997. 10.38 --Form of President Severance Agreement is incorporated by reference from the Company's Form 10-K for the fiscal year ended February 1, 1997, Part IV, Item 14(a)(3), Exhibit 10.41, as filed with the Securities and Exchange Commission on May 2, 1997. 10.39 --Corporate Bonus Plan for Fiscal Year Ended January 31, 1998 and Subsequent Fiscal Years is incorporated by reference from the Company's Form 10-Q for the quarterly period ended August 2, 1997, Part II, Item 6, Exhibit 10, as filed with the Securities and Exchange Commission on September 16, 1997. 10.40 --Stipulation and Order, dated October 6, 1997, among Bradlees Stores, Inc., Bradlees, Inc. and their Affiliates and Mark A. Cohen Settling Claims Arising Under Employment Contract with Mark A. Cohen and Bar Order, are incorporated by reference from the Company's Form 10-Q for the quarterly period ended November 1, 1997, Part II, Item 6, Exhibit 10, as filed with the Securities and Exchange Commission on December 16, 1997. *10.41 --Commitment Letter and Form of Revolving Credit and Guaranty Agreement between BankBoston, N.A. as Administrative Agent and as Issuing Bank, and the Borrower, Bradlees Stores, Inc., with Bradlees, Inc. as Guarantor.
II-3
Exhibit No. Title ----------- ----- *10.42 --Bradlees, Inc. 1999 Stock Option Plan. *10.43 --Bradlees, Inc. and Bradlees Stores, Inc. Management Emergence Bonus Plan. *21 --Subsidiaries of the Registrant. *23.1 --Consent of Counsel (included in Exhibit 5.1 hereto). *23.2 --Consent of Arthur Andersen LLP. *23.3 --Consent of Deloitte & Touche LLP. #24.1 --Power of Attorney. *25.1 --Statement of Eligibility on Form T-1. *99 --Consent of Nominated Directors.
- -------- # Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (SEC File No. 333-66953) filed with the Securities and Exchange Commission on November 6, 1998. *Filed herewith. (b) Financial Statement Schedule filed as part of this Registration Statement is as follows: Condensed Consolidated Financial Statements as of October 31, 1998 (unaudited) Condensed Consolidated Statements of Operations for the thirteen weeks ended October 31, 1998 (unaudited) and November 1, 1997 (unaudited) Condensed Consolidated Statements of Operations for the thirty-nine weeks ended October 31, 1998 (unaudited) and November 1, 1997 (unaudited) Condensed Consolidated Balance Sheets as of October 31, 1998 (unaudited) and November 1, 1997 (unaudited) Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks ended October 31, 1998 (unaudited) and November 1, 1997 (unaudited) Notes to Condensed Consolidated Financial Statements (unaudited) Consolidated Financial Statements as of January 31, 1998 Report of Independent Public Accountants-Arthur Andersen LLP Independent Auditors' Report-Deloitte & Touche LLP Consolidated Statements of Operations for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 Consolidated Balance Sheets as of January 31, 1998 and February 1, 1997 Consolidated Statements of Cash Flows for the fiscal years ended January 31, 1998, February 1, 1997 and February 1, 1996 Consolidated Statements of Stockholders' Equity (Deficiency) for the fiscal years ended January 31, 1998, February 1, 1997 and February 3, 1996 Notes to Consolidated Financial Statements II-4 Item 17. Undertakings Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers, and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrants have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. The undersigned registrants hereby undertake: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this Registration Statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To file during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in "Calculation of Registration Fee" table in the effective registration statement; and (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (4) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. II-5 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, as amended, the registrants have duly caused this Amendment No. 2 to the Registration Statement to be signed on their behalf by the undersigned, thereunto duly authorized, in the City of Braintree, The Commonwealth of Massachusetts on January 27, 1999. BRADLEES, INC. /s/ David L. Schmitt By: _________________________________ Name:David L. Schmitt Office Title: Senior Vice President, General Counsel, Secretary and Clerk BRADLEES STORES, INC. /s/ David L. Schmitt By: _________________________________ Name:David L. Schmitt Office Title: Director, Senior Vice President, General Counsel, Secretary and Clerk Pursuant to the requirements of the Securities Act of 1933, as amended, this Amendment No. 2 to the Registration Statement has been signed below by the following persons in the capacities and on the date indicated. Each person listed below has signed this Amendment No. 2 to the Registration Statement in their capacity as an officer or director of Bradlees, Inc. Messrs. Thorner and Moses are also signing this Registration Statement as officers and directors of Bradlees Stores, Inc. Mr. Lynn is also signing this Registration Statement as an officer of Bradlees Stores, Inc. Mr. Schmitt, in his individual capacity, is signing this Registration Statement solely as a director of Bradlees Stores, Inc. Signature Title Date * Chief Executive January 27, - ------------------------------------- Officer (Principal 1999 Peter Thorner Executive Officer) and Chairman of the Board * Senior Vice January 27, - ------------------------------------- President and Chief 1999 Cornelius F. Moses, III Financial Officer (Principal Financial Officer and Principal Accounting Officer)
* Director, President - ------------------------------------- and Chief Operating January 27, Robert Lynn Officer 1999 * Director - ------------------------------------- January 27, Jack E. Bush 1999 II-6
Signature Title Date * Director January 27, - ------------------------------------- 1999 John A. Curry * Director January 27, - ------------------------------------- 1999 John M. Friedman, Jr. * Director January 27, - ------------------------------------- 1999 Patricia M. Pomerleau * Director January 27, - ------------------------------------- 1999 Sheldon Rutstein * Director January 27, - ------------------------------------- 1999 Willis G. Ryckman /s/ David L. Schmitt Director of Bradlees January 27, - ------------------------------------- Stores, Inc. 1999 David L. Schmitt * /s/ David L. Schmitt - ----------------------------------- David L. Schmitt, Attorney-in-fact
II-7 EXHIBIT INDEX
Exhibit No. Title ----------- ----- *2.1 --Form of Modified Plan of Reorganization and Plan Disclosure Statement. *2.2 --Form of Indenture. *2.3 --Form of 9% Convertible Note. *2.4 --Form of Leasehold Mortgage. *2.5 --Form of CAP Note. *2.6 --Form of Cure Note. *2.7 --Form of Tax Note for priority tax claims. *2.8 --Form of Tax Notes for Federal priority tax claims. *2.9 --Form of New Warrant. *3.1 --Amended and Restated Articles of Organization of Bradlees, Inc. *3.2 --Amended and Restated Articles of Organization of Bradlees Stores, Inc. *3.3 --Amended and Restated By-laws of Bradlees, Inc. *3.4 --Amended and Restated By-laws of Bradlees Stores, Inc. *4.1 --Specimen Certificate for shares of Common Stock, $.01 par value, of Bradlees, Inc. *5.1 --Opinion of Goodwin, Procter & Hoar LLP with respect to the legality of the securities being offered. *10.1 --Form of Registration Rights Agreement. 10.22 --Amended and Restated Employment Agreement dated as of October 26, 1995 between and among Bradlees, Inc., Bradlees Stores, Inc. and Peter Thorner is incorporated by reference from the Company's Form 10-Q for the quarterly period ended October 28,1995, Part II, Item 6, Exhibit 10.2, as filed with the Securities and Exchange Commission on December 12, 1995. 10.23 --Amendment to Amended and Restated Employment Agreement, dated as of November 7, 1997, between and among Bradlees, Inc., Bradlees Stores, Inc. and Peter Thorner is incorporated by reference from the Company's Form 10-K for the year ended January 31, 1998, Part IV, Item 14(a)(3), Exhibit 10.23, as filed with the Securities and Exchange Commission on May 1, 1998. 10.25 --Bradlees, Inc. and Bradlees Stores, Inc. Enterprise Appreciation Incentive Plan Effective June 23, 1995 is incorporated by reference from the Company's Form 10-Q for the quarterly period ended October 28, 1995, Part II, Item 6, Exhibit 10.5, as filed with the Securities and Exchange Commission on December 12, 1995. 10.34 --Bradlees, Inc. and Bradlees Stores, Inc. Supplemental Executive Retirement Plan Effective December 1, 1995 is incorporated by reference from the Company's Form 10-K for the year ended February 3, 1996, Part IV, Item 14(a)(3), Exhibit 10.32, as filed with the Securities and Exchange Commission on May 3, 1996. 10.35 --Form of Senior Vice President Severance Agreement is incorporated by reference from the Company's Form 10-K for the year ended February 3, 1996, Part IV, Item 14(a)(3), Exhibit 10.33, as filed with the Securities and Exchange Commission on May 3, 1996. 10.36 --Form of Revised Senior Vice President Severance Agreement is incorporated by reference from the Company's Form 10-K for the fiscal year ended February 1, 1997, Part IV, Item 14(a)(3), Exhibit 10.40, as filed with the Securities and Exchange Commission on May 2, 1997. 10.37 --Form of Revised Senior Vice President Severance Agreement is incorporated by reference from the Company's Form 10-Q for the quarterly period ended May 3, 1997, Part II, Item 6, Exhibit 10, as filed with the Securities and Exchange Commission on June 6, 1997. 10.38 --Form of President Severance Agreement is incorporated by reference from the Company's Form 10-K for the fiscal year ended February 1, 1997, Part IV, Item 14(a)(3), Exhibit 10.41, as filed with the Securities and Exchange Commission on May 2, 1997. 10.39 --Corporate Bonus Plan for Fiscal Year Ended January 31, 1998 and Subsequent Fiscal Years is incorporated by reference from the Company's Form 10-Q for the quarterly period ended August 2, 1997, Part II, Item 6, Exhibit 10, as filed with the Securities and Exchange Commission on September 16, 1997.
Exhibit No. Title ----------- ----- 10.40 --Stipulation and Order, dated October 6, 1997, among Bradlees Stores, Inc., Bradlees, Inc. and their Affiliates and Mark A. Cohen Settling Claims Arising Under Employment Contract with Mark A. Cohen and Bar Order, are incorporated by reference from the Company's Form 10-Q for the quarterly period ended November 1, 1997, Part II, Item 6, Exhibit 10, as filed with the Securities and Exchange Commission on December 16, 1997. *10.41 --Commitment Letter and Form of Revolving Credit and Guaranty Agreement between BankBoston, N.A. as Administrative Agent and as Issuing Bank, and the Borrower, Bradlees Stores, Inc., with Bradlees, Inc. as Guarantor. *10.42 --Bradlees, Inc., 1999 Stock Option Plan. *10.43 --Bradlees, Inc. and Bradlees Stores, Inc. Management Emergence Bonus Plan. *21 --Subsidiaries of the Registrant. *23.1 --Consent of Counsel (included in Exhibit 5.1 hereto). *23.2 --Consent of Arthur Andersen LLP. *23.3 --Consent of Deloitte & Touche LLP. #24.1 --Power of Attorney. *25.1 --Statement of Eligibility on Form T-1. *99 --Consents of Nominated Directors.
- -------- # Previously filed as an exhibit to the Company's Registration Statement on Form S-1 (SEC File No. 333-66953) filed with the Securities and Exchange Commission on November 6, 1998. * Filed herewith. EX-2.1 2 PLAN OF REORGANIZATION; EXHIBIT 2.1 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - - - - - - - - - - - - - - - - -x : In re : : Chapter 11 BRADLEES STORES, INC., et al., : Case Nos. 95 B 42777 : through 95 B 42784 (BRL) Debtors. : : (Jointly Administered) - - - - - - - - - - - - - - - - -x SECOND AMENDED JOINT PLAN OF REORGANIZATION OF BRADLEES STORES, INC. AND AFFILIATES UNDER CHAPTER 11 OF THE BANKRUPTCY CODE -------------------------------------------------- Stuart Hirshfield Sandor E. Schick Hugh M. McDonald Marc Hirschfield DEWEY BALLANTINE LLP 1301 Avenue of the Americas New York, New York 10019-6092 (212) 259-8000 Attorneys for Bradlees Stores, Inc., New Horizons of Yonkers, Inc., Bradlees, Inc., Bradlees Administrative Co., Inc., Dostra Realty Co., Inc., Maximedia Services, Inc., New Horizons of Bruckner, Inc. and New Horizons of Westbury, Inc., Debtors and Debtors-in- Possession Dated: New York, New York January 26, 1999 TABLE OF CONTENTS
Page ---- ARTICLE I DEFINITIONS, RULES OF INTERPRETATION AND CONSTRUCTION...................... 2 Section 1.01 "Additional Collateral"........................................... 2 Section 1.02 "Additional Quarterly Distribution"............................... 2 Section 1.03 "Adequate Protection Payments".................................... 2 Section 1.04 "Administrative Claim"............................................ 2 Section 1.05 "Affiliates"...................................................... 2 Section 1.06 "Allowed"......................................................... 2 Section 1.07 "Allowed Administrative Claim".................................... 3 Section 1.08 "Allowed Claim"................................................... 3 Section 1.09 "Allowed Convenience Claim"....................................... 3 Section 1.10 "Allowed Intercompany Claim"...................................... 3 Section 1.11 "Allowed Priority Claim".......................................... 3 Section 1.12 "Allowed Reclamation Claim"....................................... 3 Section 1.13 "Amended By-Laws"................................................. 3 Section 1.14 "Amended Certificate of Incorporation"............................ 3 Section 1.15 "Available Unclaimed Property".................................... 4 Section 1.16 "Ballot".......................................................... 4 Section 1.17 "Bank Documents".................................................. 4 Section 1.18 "Bank Group"...................................................... 4 Section 1.19 "Bank Group Claim"................................................ 4 Section 1.20 "Bankruptcy Code"................................................. 4 Section 1.21 "Bankruptcy Court"................................................ 4 Section 1.22 "Bankruptcy Rules"................................................ 4 Section 1.23 "Bonds"........................................................... 4 Section 1.24 "Bond Claims"..................................................... 4 Section 1.25 "Bond Indenture Trustee".......................................... 4 Section 1.26 "Bruckner Escrow Funds"........................................... 4 Section 1.27 "Bruckner Fraction"............................................... 5 Section 1.28 "BTM"............................................................. 5 Section 1.29 "BTM Stipulation"................................................. 5 Section 1.30 "Business Day".................................................... 5 Section 1.31 "Cap Notes"....................................................... 5 Section 1.32 "Capital Lease"................................................... 5 Section 1.33 "Cash"............................................................ 5 Section 1.34 "Cash Distributions".............................................. 5 Section 1.35 "Chapter 11 Cases"................................................ 5 Section 1.36 "Claim"........................................................... 5 Section 1.37 "Class"........................................................... 5 Section 1.38 "Class [___] Claim"............................................... 5 Section 1.39 "Combination Transaction"......................................... 6 Section 1.40 "Combining Debtors"............................................... 6 Section 1.41 "Confirmation Date"............................................... 6
i TABLE OF CONTENTS - continued
Page ---- Section 1.42 "Confirmation Order".............................................. 6 Section 1.43 "Consummation Costs".............................................. 6 Section 1.44 "Consummation Funds".............................................. 6 Section 1.45 "Convenience Claim"............................................... 6 Section 1.46 "Court"........................................................... 6 Section 1.47 "Creditor"........................................................ 6 Section 1.48 "Creditors' Committee"............................................ 6 Section 1.49 "Cure Notes"...................................................... 6 Section 1.50 "Cure Payments"................................................... 6 Section 1.51 "D&O Insurance"................................................... 7 Section 1.52 "Debtor".......................................................... 7 Section 1.53 "Debtors"......................................................... 7 Section 1.54 "DIP Agreement" or "DIP Facility"................................. 7 Section 1.55 "DIP Claims"...................................................... 7 Section 1.56 "Disbursing Agent"................................................ 7 Section 1.57 "Disclosure Statement"............................................ 7 Section 1.58 "Disclosure Statement Order"...................................... 7 Section 1.59 "Disputed Administrative Claims".................................. 7 Section 1.60 "Disputed Claim".................................................. 7 Section 1.61 "Disputed Claims Reserve"......................................... 8 Section 1.62 "Distribution".................................................... 8 Section 1.63 "Distribution Address"............................................ 8 Section 1.64 "Effective Date".................................................. 8 Section 1.65 "Estate".......................................................... 8 Section 1.66 "Exhibit"......................................................... 9 Section 1.67 "Exhibit Filing Date"............................................. 9 Section 1.68 "Face Amount"..................................................... 9 Section 1.69 "Federal Priority Tax Claim"...................................... 9 Section 1.70 "File"............................................................ 9 Section 1.71 "Final Order"..................................................... 9 Section 1.72 "Fractional Shares"............................................... 9 Section 1.73 "GAAP"............................................................ 9 Section 1.74 "General Unsecured Claim"......................................... 9 Section 1.75 "Indenture"....................................................... 9 Section 1.76 "Indenture Trustee"............................................... 9 Section 1.77 "Initial Distribution Date"....................................... 10 Section 1.78 "Intercompany Claim".............................................. 10 Section 1.79 "Interest"........................................................ 10 Section 1.80 "IRS"............................................................. 10 Section 1.81 "M&R"............................................................. 10 Section 1.82 "Majority Banks".................................................. 10 Section 1.83 "Net Proceeds".................................................... 10 Section 1.84 "New Common Stock"................................................ 10 Section 1.85 "New Credit Facility"............................................. 10 Section 1.86 "New Credit Facility Agent"....................................... 10 Section 1.87 "New Credit Facility Notes"....................................... 11 Section 1.88 "New Notes"....................................................... 11
ii TABLE OF CONTENTS - continued
Page ---- Section 1.89 "New Warrants".................................................... 11 Section 1.90 "Old Common Stock of [___]"....................................... 11 Section 1.91 "Ordinary Course Professionals' Compensation Order"............... 11 Section 1.92 "Other Priority Claim"............................................ 11 Section 1.93 "Other Priority Tax Claim"........................................ 11 Section 1.94 "Paying Agent".................................................... 11 Section 1.95 "Person".......................................................... 11 Section 1.96 "Petition Date"................................................... 11 Section 1.97 "Plan"............................................................ 11 Section 1.98 "Post-Effective Date Collateral".................................. 12 Section 1.99 "Prepetition Claim"............................................... 12 Section 1.100 "Primary Obligor"................................................. 12 Section 1.101 "Priority Claim".................................................. 12 Section 1.102 "Priority Tax Claim".............................................. 12 Section 1.103 "Professional Fees"............................................... 12 Section 1.104 "Pro Rata"........................................................ 12 Section 1.105 "Ratable" or "Ratable Share"...................................... 12 Section 1.106 "Record Date"..................................................... 12 Section 1.107 "Reinstated"...................................................... 12 Section 1.108 "Reorganized Corporation"......................................... 13 Section 1.109 "Reorganization Securities"....................................... 13 Section 1.110 "Reorganized [_____]"............................................. 13 Section 1.111 "Required Prepayments"............................................ 13 Section 1.112 "Schedules"....................................................... 13 Section 1.113 "Secondary Liability Claim"....................................... 13 Section 1.114 "Secured Claim"................................................... 13 Section 1.115 "SPE Agent"....................................................... 14 Section 1.116 "SPE Claims"...................................................... 14 Section 1.117 "SPE Deficiency Claim"............................................ 14 Section 1.118 "SPE Documents"................................................... 14 Section 1.119 "SPE Group"....................................................... 14 Section 1.120 "SPE Philadelphia Property"....................................... 14 Section 1.121 "SPE Properties".................................................. 14 Section 1.122 "SPE Providence Property"......................................... 14 Section 1.123 "SPE Stipulation"................................................. 14 Section 1.124 "SPE Transaction"................................................. 14 Section 1.125 "State Street".................................................... 14 Section 1.126 "State Street Administrative Claim"............................... 15 Section 1.127 "Supplemental Bank Group Distribution"............................ 15 Section 1.128 "Supplemental BSI-GEN Distribution"............................... 15 Section 1.129 "Tax Claim"....................................................... 15 Section 1.130 "Tax Note"........................................................ 15 Section 1.131 "Tax Refund"...................................................... 15 Section 1.132 "Trade Vendors' Collateral Agent"................................. 15 Section 1.133 "Trade Vendors' Lien"............................................. 15 Section 1.134 "Trust Indenture"................................................. 15 Section 1.135 "Unclaimed Property".............................................. 15
iii TABLE OF CONTENTS - continued
Page ---- Section 1.136 "Union Square Lease".............................................. 15 Section 1.137 "Union Square Property"........................................... 16 Section 1.138 "Unofficial Committee"............................................ 16 Section 1.139 "Unsecured Claim"................................................. 16 Section 1.140 "Westbury Escrow Funds"........................................... 16 Section 1.141 "Westbury Fraction"............................................... 16 Section 1.142 "Yonkers Confirmation Date"....................................... 16 Section 1.143 "Yonkers Confirmation Order"...................................... 16 Section 1.144 "Yonkers Effective Date".......................................... 16 Section 1.145 "Yonkers Property"................................................ 16 Section 1.146 Generally......................................................... 17 Section 1.147 Exhibits.......................................................... 17 Section 1.148 Time Periods...................................................... 17 Section 1.149 Miscellaneous Rules............................................... 17 ARTICLE II CLASSIFICATION OF CLAIMS AND INTERESTS 17 Section 2.01 General Rules of Classification................................... 17 Section 2.02 Administrative, Tax and Other Priority Claims against any Debtor.. 18 Section 2.03 Undersecured Claims against any Debtor............................ 18 Section 2.04 Capital Lease Claims.............................................. 18 Section 2.05 Mechanic's Lien Claims............................................ 18 Section 2.06 Intercompany Claim................................................ 18 Section 2.07 Unsecured Claims against any Debtor............................... 19 Section 2.08 Allowed Convenience Claims are Classified for BSI................. 19 Section 2.09 Equity Interests in any Debtor.................................... 19 ARTICLE III CLASSIFICATION OF CLAIMS AND INTERESTS BY DEBTOR 19 Section 3.01 Bradlees, Inc..................................................... 19 Section 3.02 Bradlees Administrative Co., Inc.................................. 20 Section 3.03 Bradlees Stores, Inc.............................................. 20 Section 3.04 Dostra Realty Co., Inc............................................ 21 Section 3.05 Maximedia Services, Inc........................................... 21 Section 3.06 New Horizons of Yonkers, Inc...................................... 21 Section 3.07 New Horizons of Bruckner, Inc..................................... 22 Section 3.08 New Horizons of Westbury, Inc..................................... 22 ARTICLE IV REORGANIZATION SECURITIES 22 Section 4.01 Tax Notes......................................................... 23 Section 4.02 New Notes......................................................... 23 Section 4.03 CAP Note.......................................................... 24 Section 4.04 Cure Notes........................................................ 24 Section 4.05 New Warrants...................................................... 24 Section 4.06 New Common Stock of Reorganized BI................................ 24
iv TABLE OF CONTENTS - continued
Page ---- ARTICLE V TREATMENT OF UNIMPAIRED CLASSES 25 Section 5.01 Administrative Claims............................................. 25 Section 5.02 Federal Priority Tax Claims....................................... 25 Section 5.03 Other Priority Tax Claims......................................... 26 Section 5.04 Other Non-Tax Priority Claims..................................... 26 Section 5.05 Convenience Claims................................................ 26 ARTICLE VI TREATMENT OF IMPAIRED CLAIMS AND INTERESTS 26 Section 6.01 Bank Group Claims................................................. 27 Section 6.02 SPE Claims........................................................ 27 Section 6.03 Bradlees, Inc..................................................... 28 Section 6.04 Bradlees Administrative Co., Inc.................................. 28 Section 6.05 Bradlees Stores, Inc.............................................. 28 Section 6.06 Dostra Realty Co., Inc............................................ 29 Section 6.07 Maximedia Services, Inc........................................... 29 Section 6.08 New Horizons of Yonkers, Inc...................................... 30 Section 6.09 New Horizons of Bruckner, Inc..................................... 30 Section 6.10 New Horizons of Westbury, Inc..................................... 30 ARTICLE VII IMPLEMENTATION. 31 Section 7.01 Reorganized BI, Reorganized BSI and Reorganized DOS............... 31 Section 7.02 Directors of the Reorganized Corporations......................... 31 Section 7.03 Employment, Retirement, Indemnification and Other Agreements and Incentive Compensation Programs.................................. 32 Section 7.04 Management Emergence Bonus........................................ 33 Section 7.05 Corporate Action.................................................. 34 Section 7.06 Certain Retiree Health, Medical and Life Insurance Benefits....... 34 Section 7.07 Combination Transactions.......................................... 34 Section 7.08 Distributions to Holders of Claims and Interests.................. 35 Section 7.09 Miscellaneous Distribution Provisions............................. 37 Section 7.10 De Minimis Distributions.......................................... 38 Section 7.11 Compliance with Tax Requirements.................................. 39 Section 7.12 Setoffs........................................................... 39 Section 7.13 Intercompany Claims............................................... 39 Section 7.14 Unclaimed Property................................................ 39 Section 7.15 Withdrawal of the Plan............................................ 40 Section 7.16 Cancellation of Capital Stock..................................... 40 Section 7.17 Surrender of Outstanding Securities............................... 40 Section 7.18 Termination of DIP Facility....................................... 41 Section 7.19 New Credit Facility............................................... 41 Section 7.20 Union Square Property............................................. 42 Section 7.21 Yonkers Property.................................................. 42 Section 7.22 Adequate Protection Payments...................................... 42 Section 7.23 Plan Funding...................................................... 42 Section 7.24 Disputed Payments................................................. 42 Section 7.25 Withholding Taxes................................................. 42
v TABLE OF CONTENTS - continued
Page ---- Section 7.26 Obligations Incurred After the Confirmation Date.................. 43 Section 7.27 Cancellation of Bonds and Agreements.............................. 43 Section 7.28 Instructions to Disbursing Agent.................................. 44 Section 7.29 Record Date for Distributions to Holders of Bonds................. 44 Section 7.30 Termination of Subordination...................................... 44 ARTICLE VIII EFFECT OF THE PLAN ON CLAIMS AND INTERESTS 45 Section 8.01 Discharge......................................................... 45 Section 8.02 Revesting and Vesting............................................. 47 Section 8.03 Secondary Liability Claims........................................ 47 Section 8.04 Release of Primary Obligors....................................... 47 Section 8.05 Survival of Certain Indemnification Obligations................... 48 Section 8.06 Release of Officers, Directors, Employees and Representatives..... 48 Section 8.07 Release of Certain Claims......................................... 49 Section 8.08 Claims and Interest Objections.................................... 49 Section 8.09 Preservation of Insurance......................................... 49 ARTICLE IX EXECUTORY CONTRACTS 50 Section 9.01 Executory Contracts and Unexpired Leases.......................... 50 Section 9.02 Lease Under Which Bradlees Leases Union Square Property........... 50 Section 9.03 Executory Contract of R.R. Donnelly & Sons Company................ 50 Section 9.04 Executory Contract of J.Baker, Inc................................ 50 Section 9.05 Cure.............................................................. 51 Section 9.06 Rejection Damages Bar Date........................................ 51 Section 9.07 Executory Contracts and Unexpired Leases Entered Into and Other Obligations Incurred After the Petition Date..................... 52 Section 9.08 Assumption of Lease Relating to Yonkers Property.................. 52 ARTICLE X CONDITIONS TO CONFIRMATION AND OCCURRENCE OF EFFECTIVE DATE.................. 52 Section 10.01 Conditions to Confirmation........................................ 52 Section 10.02 Conditions to Occurrence of Effective Date........................ 53 Section 10.03 Waiver of Conditions to Confirmation and Occurrence of Effective Date............................................................. 55 Section 10.04 Effect of Nonoccurrence of the Conditions to Occurrence of Effective Date................................................... 55 ARTICLE XI CONFIRMABILITY AND SEVERABILITY OF A PLAN AND CRAMDOWN...................... 56 Section 11.01 Confirmability and Severability of a Plan......................... 56 Section 11.02 Cramdown.......................................................... 56 ARTICLE XII ADMINISTRATIVE PROVISIONS 57 Section 12.01 Retention of Jurisdiction......................................... 57 Section 12.02 Governing Law..................................................... 58
vi TABLE OF CONTENTS - continued
Page ---- Section 12.03 Fees and Expenses of Bank Group................................... 58 Section 12.04 Fees and Expenses of Unofficial Committee......................... 58 Section 12.05 Professional Fees and Expenses of Loomis Sayles................... 58 Section 12.06 Fees and Expenses of Bond Indenture Trustee....................... 58 Section 12.07 Administrative Bar Date........................................... 59 Section 12.08 Corporate Action.................................................. 59 Section 12.09 Effectuating Documents and Further Transactions................... 60 Section 12.10 Limitation of Liability........................................... 60 Section 12.11 Amendments........................................................ 60 Section 12.12 Successors and Assigns............................................ 61 Section 12.13 Confirmation Order and Plan Control............................... 61 Section 12.14 Notices........................................................... 61 Section 12.15 Committees........................................................ 64
EXHIBITS A Amended By-Laws of Reorganized BI and Reorganized BSI B Amended Certificates of Incorporation of Reorganized BI and Reorganized BSI C Schedule of BSI-CAP Claims D Schedule of Existing Employment, Retirement and Other Agreements and Incentive Compensation Programs That Are To Remain Effective As Of the Effective Date E New Credit Facility F Intentionally Omitted G Conversion of New Notes H Form of Reorganization Securities I Documents Giving Rise To Trade Vendors' Lien J Trust Indenture K Officers of Reorganized Corporations L Combination Transactions vii INTRODUCTION ------------ Bradlees Stores, Inc. ("BSI"), a Massachusetts corporation, together with its affiliated debtors, Bradlees, Inc. ("BI"), a Massachusetts corporation, Bradlees Administrative Co., Inc. ("BAC"), a Massachusetts corporation, Maximedia Services, Inc. ("MAX"), a Delaware corporation, Dostra Realty Co., Inc. ("DOS"), a Delaware corporation, New Horizons of Yonkers, Inc. ("YON"), a Delaware corporation, New Horizons of Bruckner, Inc. ("BRU"), a Delaware corporation, and New Horizons of Westbury, Inc. ("WES"), a Delaware corporation (collectively, "Bradlees" or the "Debtors"), as debtors and debtors-in- possession in the above-captioned Chapter 11 cases, hereby propose the following second amended joint plan of reorganization (the "Plan") pursuant to section 1121(a) of title 11 of the United States Code. Reference is made to the Debtors' Disclosure Statement (as defined herein) for a discussion of the Debtors' history, businesses, properties, results of operations, projections for future operations, a summary and analysis of the Plan and other related matters. The Debtors are the proponent of the Plan within the meaning of section 1129 of the Bankruptcy Code (as defined herein). These reorganization cases have been consolidated for procedural purposes only and are being jointly administered pursuant to an order of the United States Bankruptcy Court for the Southern District of New York. This Plan does not contemplate the substantive consolidation of any of the Debtors for any purpose, including voting or distribution purposes. Certain of the Debtors will be dissolved or merged (or combined in another form of transaction) with another Debtor as a means of implementing this Plan. For voting and distribution purposes, the Plan contemplates separate classes for each Debtor. The cash and reorganization securities of the Debtors, as reorganized, will be distributed to the claimants and equity interest holders in each of the classes of each of the Debtors, as set forth herein. Under section 1125(b) of the Bankruptcy Code, a vote to accept or reject the Plan cannot be solicited from a holder of a claim or interest until such time as the Disclosure Statement has been approved by the Bankruptcy Court (as defined herein) and distributed to holders of claims and interests. ALL HOLDERS OF CLAIMS AGAINST THE DEBTORS ARE ENCOURAGED TO READ THE PLAN AND THE RELATED DISCLOSURE STATEMENT IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR TO REJECT THE PLAN. SUBJECT TO CERTAIN RESTRICTIONS AND REQUIREMENTS SET FORTH IN THE PLAN, THE DEBTORS RESERVE THE RIGHT TO ALTER, AMEND, MODIFY, REVOKE OR WITHDRAW THE PLAN PRIOR TO ITS SUBSTANTIAL CONSUMMATION. 1 ARTICLE I --------- DEFINITIONS, RULES OF --------------------- INTERPRETATION AND CONSTRUCTION ------------------------------- A. Scope of Definitions. -------------------- Except as expressly provided or unless the context otherwise requires, all capitalized terms not otherwise defined shall have the meanings assigned to them in this Article I. Any term used in the Plan that is not defined herein, but that is used in the Bankruptcy Code or the Bankruptcy Rules, shall have the meaning assigned to that term in the Bankruptcy Code or the Bankruptcy Rules. B. Definitions. ----------- Section 1.01 "Additional Collateral" means BSI's leasehold interest in one or more of its leases, as agreed upon by BSI and the Majority Banks, the value of which shall not exceed in the aggregate $10.5 million, as determined by the appraisal conducted by Cushman & Wakefield, Inc., dated December 1, 1997, subject to appropriate adjustments, which shall secure in part the New Notes, pursuant to Section 4.02 of the Plan. Section 1.02 "Additional Quarterly Distribution" means a Distribution on a Quarterly Distribution Date to each holder of Allowed Claims, as the case may be, from the Disputed Claims Reserve for such holder's Class of Claims. Section 1.03 "Adequate Protection Payments" means the payments made by the Debtors to the Bank Group pursuant to the Agreed Order Regarding Adequate Protection of the Senior Bank Group's Interests and Related Relief, dated October 24, 1995. Section 1.04 "Administrative Claim" means a Claim for costs and expenses of administration allowed under sections 503(b), 507(b) or 1114(e)(2) of the Bankruptcy Code, including: (a) the actual and necessary costs and expenses incurred after the Petition Date of preserving the respective Estates and operating the business of the Debtors (including, without limitation, wages, salaries, commissions for services and payments for inventories, leased equipment and premises); (b) compensation for legal, financial advisory, accounting and other services and reimbursement of expenses awarded or allowed under sections 330(a) or 331 of the Bankruptcy Code; (c) all fees and charges assessed against the Estates under chapter 123 of title 28, United States Code, 28 U.S.C. (S)(S) 1911-1930; and (d) Allowed Reclamation Claims. Section 1.05 "Affiliates" shall have the meaning given such term by section 101(2) of the Bankruptcy Code. Section 1.06 "Allowed" means, with respect to a Claim or Interest, to the extent such Claim or Interest is either: (a) scheduled by a Debtor pursuant to the PLAN-2 Bankruptcy Code and Bankruptcy Rules in a liquidated amount and that is not listed as contingent, unliquidated or disputed; or (b) proof of which has been timely Filed, or deemed timely Filed under applicable law or order of the Court, with the Court pursuant to the Bankruptcy Code, the Bankruptcy Rules and any applicable orders of the Court, or late Filed with leave of the Court after notice and a hearing; and which: (i) has not been objected to within the period fixed by the Bankruptcy Code, the Bankruptcy Rules and applicable orders of the Court; (ii) has otherwise been allowed by a Final Order or as set forth in this Plan. An Allowed Claim: (A) includes a Disputed Claim to the extent such Disputed Claim becomes allowed after the Effective Date in the manner described in section (b)(ii) of this Section, when the context so requires; and (B) shall be net of any valid setoff exercised with respect to such Claim pursuant to the provisions of the Bankruptcy Code. Unless otherwise specified herein, in section 506(b) of the Bankruptcy Code or by order of the Bankruptcy Court, "Allowed Claim," shall not, for purposes of distributions under the Plan, include (x) for Prepetition Claims, interest on such Claim or Claims accruing from or after the Petition Date, (y) punitive or exemplary damages or (z) any fine, penalty or forfeiture. Section 1.07 "Allowed Administrative Claim" means an Administrative Claim to the extent it is Allowed. Section 1.08 "Allowed Claim" means a Claim to the extent it is Allowed. Section 1.09 "Allowed Convenience Claim" means a Convenience Claim to the extent it is Allowed. Section 1.10 "Allowed Intercompany Claim" means an Intercompany Claim to the extent it is Allowed. Section 1.11 "Allowed Priority Claim" means a Priority Claim to the extent it is Allowed. Section 1.12 "Allowed Reclamation Claim" means a Claim arising under section 546(c)(2) of the Bankruptcy Code which has become Allowed pursuant to the Bankruptcy Court Order dated November 12, 1996. Section 1.13 "Amended By-Laws" means the Amended and Restated By-laws of Reorganized BI, Reorganized BSI and Reorganized DOS, a copy of each of which shall be filed with the Bankruptcy Court on or before the Exhibit Filing Date as Exhibit A hereto. Section 1.14 "Amended Certificate of Incorporation" means the Amended and Restated Certificate of Incorporation of Reorganized BI, Reorganized BSI and Reorganized DOS, a copy of each of which shall be filed with the Bankruptcy Court on or before the Exhibit Filing Date as Exhibit B hereto. PLAN-3 Section 1.15 "Available Unclaimed Property" means Unclaimed Property that is unclaimed on the second anniversary of the date of Distribution of such property (together with any interest thereon and proceeds thereof). Section 1.16 "Ballot" means the ballot distributed to a holder of a Claim on which ballot such holder of a Claim may, inter alia, (a) vote for or against the Plan; and (b) to the extent that such holder holds a General Unsecured Claim, elect to have its General Unsecured Claim treated as a Convenience Claim in the relevant Class. Section 1.17 "Bank Documents" means the Credit Agreement among Bradlees, Inc., Various Lending Institutions and Bankers Trust Company, as Agent, dated as of March 3, 1993, as amended, pursuant to which the Debtors maintained a revolving credit facility. Section 1.18 "Bank Group" means Bankers Trust Company, as Agent, and the banks identified as "Banks" in the Bank Documents and their successors and assigns, including, without limitation, Gabriel Capital, L.P. Section 1.19 "Bank Group Claim" means the Claim of the Bank Group, which arises under the Bank Documents against each and every Debtor. Section 1.20 "Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended and codified at title 11 of the United States Code, 11 U.S.C. (S)(S) 101 et seq. -- ---- Section 1.21 "Bankruptcy Court" means the United States Bankruptcy Court for the Southern District of New York which has jurisdiction over the Chapter 11 Cases . Section 1.22 "Bankruptcy Rules" means the Federal Rules of Bankruptcy Procedure and the Official Bankruptcy Forms, as amended, the Federal Rules of Civil Procedure, as amended, as applicable to the Chapter 11 Cases, and the Local Rules of the Bankruptcy Court. Section 1.23 "Bonds" means the (i) 11% Senior Subordinated Notes due August 1, 2002 in the original principal amount of $125,000,000 and (ii) 9- 1/4% Senior Subordinated Notes due March 3, 2003 in the original principal amount of $100,000,000. Section 1.24 "Bond Claims" means the claims arising under the Bonds. Section 1.25 "Bond Indenture Trustee" means State Street Bank and Trust Company as the Indenture Trustee under certain indentures acting on behalf of Bonds. Section 1.26 "Bruckner Escrow Funds" means the funds held in escrow from the sale of the property formerly owned by BRU pursuant to the Bankruptcy Court Order dated January 7, 1998. PLAN-4 Section 1.27 "Bruckner Fraction" means the fraction, the numerator of which shall be the amount of BRU-GEN Claims and the denominator of which shall be the sum of the amount of (a) BRU-BANK Claims, (b) BRU-SPE Claims and (c) BRU- GEN Claims. Section 1.28 "BTM" means BTM Capital Corporation f/k/a BOT Financial Corporation. Section 1.29 "BTM Stipulation" means the Settlement Stipulation dated June 4, 1996, approved by Bankruptcy Court Order dated June 25, 1996, among BSI, BI and BTM. Section 1.30 "Business Day" means any day on which commercial banks are open for business in New York, New York. Section 1.31 "Cap Notes" means the new notes of Reorganized BSI described in Section 4.03 hereof, issued on and after the Effective Date and distributed in the manner provided in this Plan to holders of Capital Lease Claims. Section 1.32 "Capital Lease" means any putative lease of equipment in which any of the Debtors has a financial interest and regarding which the Court has entered an Order holding, or with which the putative lessor is in agreement, that such putative lease constitutes a financing transaction. Section 1.33 "Cash" means cash and cash equivalents. Section 1.34 "Cash Distributions" means a Distribution of Cash. Section 1.35 "Chapter 11 Cases" means case numbers 95 B 42777 through 95 B 42784 (BRL), inclusive, commenced by the Debtors under Chapter 11 of the Bankruptcy Code on the Petition Date in the Bankruptcy Court, and styled "In re Bradlees Stores, Inc., et al., Debtors." Section 1.36 "Claim" means (a) any right to payment from any of the Debtors, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured or (b) any right to an equitable remedy for breach of performance if such breach gives rise to a right of payment from any of the Debtors, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. Section 1.37 "Class" means a category of holders of Claims or Interests as described in Article II. Section 1.38 "Class [___] Claim" means a Claim in the particular Class of Claims identified and described in Article III. PLAN-5 Section 1.39 "Combination Transaction" means a consolidation, merger, contribution of assets or other transaction in which a Combining Debtor merges with or transfers substantially all of its assets and liabilities to Reorganized BSI or an affiliated corporation on or about the Effective Date, as set forth in Exhibit L annexed hereto. Section 1.40 "Combining Debtors" means the Debtors shown as entering into a Combination Transaction in Exhibit L annexed hereto. Section 1.41 "Confirmation Date" means the date on which the Clerk of the Bankruptcy Court enters the Confirmation Order. Section 1.42 "Confirmation Order" means the order, entered by the Bankruptcy Court, confirming the Plan in accordance with the provisions of Chapter 11 of the Bankruptcy Code. Section 1.43 "Consummation Costs" means all Cash Distributions required to be made under, or to give effect to, this Plan on or about the Effective Date other than Cash Distributions made to holders of the Bank Group Claim, SPE Claims, BRU-Gen Claims, BSI-Gen Claims, and WES-Gen Claims. Section 1.44 "Consummation Funds" shall mean: (i) the Westbury Escrow Funds, (ii) the Bruckner Escrow Funds, and (iii) Tax Refund proceeds. Section 1.45 "Convenience Claim" means a Claim against BSI that would otherwise be classified as a Class BSI-GEN Claim that is asserted in the amount of $500 or less or that is more than $500, if the holder has elected on the Ballot, within the time fixed by the Bankruptcy Court for completing and returning such Ballot, to accept $500 in Cash in full satisfaction, discharge and release of such Claim. Section 1.46 "Court" shall have the same meaning as Bankruptcy Court. Section 1.47 "Creditor" means any Person that has a Claim. Section 1.48 "Creditors' Committee" means the Official Committee of Unsecured Creditors originally appointed by the United States Trustee on July 6, 1995 pursuant to Bankruptcy Code section 1102. Section 1.49 "Cure Notes" means the new notes of Reorganized BSI described in Section 4.04 hereof, issued on and after the Effective Date and distributed in the manner provided in this Plan. Section 1.50 "Cure Payments" means the payment in Cash or with a Cure Note with respect to the assumption of an executory contract or unexpired lease, pursuant to section 365(b) of the Bankruptcy Code, of an amount equal to all matured but unpaid monetary obligations, without interest, under such executory contract or unexpired lease to the extent such obligations are enforceable under the Bankruptcy Code and applicable non-bankruptcy law. PLAN-6 Section 1.51 "D&O Insurance" means the officers and directors insurance maintained by the Debtors which covers the Debtors' officers and directors. Section 1.52 "Debtor" means one of the Debtors. Section 1.53 "Debtors" refers collectively to Bradlees Stores, Inc., New Horizons of Yonkers, Inc., Bradlees, Inc., Bradlees Administrative Co., Inc., Dostra Realty Co., Inc., Maximedia Services, Inc., New Horizons of Bruckner, Inc., and New Horizons of Westbury, Inc., debtors-in-possession in the Chapter 11 Cases. Section 1.54 "DIP Agreement" or "DIP Facility" means the Revolving Credit and Guaranty Agreement, dated as of December 23, 1997, as approved by order of the Bankruptcy Court dated December 22, 1997, among BSI (as borrower), BI, BAC and the subsidiaries of BSI (as guarantors), BankBoston, N.A. (as Administrative Agent and as Issuing Bank), BankBoston Retail Finance, Inc., (as Agent), The CIT Group/Business Credit, Inc. and Congress Financial Corporation (New England) (each as Co-Agent) and those entities identified as "Lenders" therein and their respective successors and assigns. Section 1.55 "DIP Claims" means all Claims arising under the DIP Agreement, including Claims against BSI and Claims arising under the guarantees issued by each of the other Debtors. Section 1.56 "Disbursing Agent" means Reorganized BSI or such other person, which shall be duly bonded at all times, as may be retained by Reorganized BSI with approval of the Bankruptcy Court to hold and distribute the Distributions and such other property as may be required by the Bankruptcy Court. Section 1.57 "Disclosure Statement" means the written disclosure statement, dated October 2, 1998, that relates to the Plan, as amended, supplemented or modified from time to time, and as approved by the Bankruptcy Court under section 1125 of the Bankruptcy Code and Bankruptcy Rule 3017. Section 1.58 "Disclosure Statement Order" means the order of the Court approving the Disclosure Statement as containing adequate information pursuant to section 1125 of the Bankruptcy Code. Section 1.59 "Disputed Administrative Claims" means any Administrative Claims as to which the Debtors or any other party in interest has interposed an objection in accordance with the Bankruptcy Code and the Bankruptcy Rules, which objection has not been withdrawn or determined by a Final Order. PLAN-7 Section 1.60 "Disputed Claim" means (a) if no proof of Claim has been timely Filed or deemed timely Filed under applicable law or order of the Court, a Claim that has been listed on a Debtor's Schedules of Liabilities as other than disputed, contingent or unliquidated, but as to which no later than the Effective Date an objection has been Filed; or (b) if a proof of Claim has been Filed or deemed timely Filed under applicable law or order of the Court, a Proof of Claim as to which an objection has been timely Filed and has not been (i) withdrawn, (ii) overruled or denied by a Final Order or (iii) granted in whole by a Final Order. For the purposes of the Plan, a Claim shall be considered a Disputed Claim only if, unless otherwise ordered by the Bankruptcy Court, an objection has been Filed with respect to such Claim no later than the Effective Date or if a Claim is permitted to be Filed thereafter, no later than thirty days after such Claim has been Filed. For purposes of this Plan, a Disputed Claim means only that portion of a Claim which is Disputed (i.e., only to the ---- extent of the difference between the amount asserted in the Proof of Claim and the amount admitted by the Debtors as constituting an Allowed Claim in their objection). The portion of a Claim that is not in dispute pursuant to a timely Filed objection shall be an Allowed Claim and paid upon the Initial Distribution Date pursuant to the Plan. Section 1.61 "Disputed Claims Reserve" means a reserve of Cash or Reorganization Securities for the relevant Class, established herein for, inter alia, the payment of (a) Disputed Claims that become Allowed Claims after the Effective Date, and (b) Additional Quarterly Distributions to holders of previously Allowed Claims, which shall be held in trust for the benefit of the holders of the above-referenced types of Claims and shall not constitute property of the Debtors' estates or the Reorganized Corporations. Section 1.62 "Distribution" means the distribution in accordance with this Plan of: (a) Cash, or (b) Reorganization Securities, as the case may be. Section 1.63 "Distribution Address" means the address set forth in the relevant proof of claim, as such address may have been updated pursuant to Bankruptcy Rule 2002(g). If no proof of claim is Filed in respect of a particular Claim, such defined term means the address set forth in the relevant Debtor's Schedules, as such address may have been updated pursuant to Bankruptcy Rule 2002(g). Section 1.64 "Effective Date" means a Business Day selected by the Debtors which is no later than the first Business Day after the later of (a) sixty (60) days after the Confirmation Order is entered by the Bankruptcy Court, or (b) the first day of the first fiscal year of the Reorganized Debtors after the Confirmation Order is entered; provided, however, that no stay of the Confirmation Order is then in effect. The Effective Date may be extended by the Debtors, upon notice to and subject to the unanimous consent of the Creditors' Committee, the Bank Group and the Unofficial Committee, without leave or order of the Bankruptcy Court and without any other action, or by order of the Bankruptcy Court, if such consent is not obtained. Section 1.65 "Estate" means, as to each Debtor, the estate of such Debtor in its Chapter 11 Case created by section 541 of the Bankruptcy Code upon the commencement of such Chapter 11 Case. PLAN-8 Section 1.66 "Exhibit" means an exhibit to either this Plan or the Disclosure Statement. Section 1.67 "Exhibit Filing Date" means the last date by which forms of the Exhibits to the Plan shall be Filed with the Court, which date shall be as specified in this Plan for each such Exhibit, but in any event, or where no such date is specified, no later than thirty days after the Confirmation Date. Section 1.68 "Face Amount" means (a) with respect to any Claim for which a proof of claim is Filed, an amount equal to: (i) the liquidated amount, if any, set forth therein; and/or (ii) any other amount estimated by the Court in accordance with section 502(c) of the Bankruptcy Code and the relevant provisions of this Plan; or (b) if no proof of claim is Filed and such Claim is scheduled in the relevant Debtor's Schedules, the amount of the Claim scheduled as undisputed, noncontingent and liquidated. Section 1.69 "Federal Priority Tax Claim" means a Claim of the United States of America that is entitled to priority in payment pursuant to section 507(a)(8) of the Bankruptcy Code. Section 1.70 "File" or "Filed" means filed with the Bankruptcy Court in the Chapter 11 Cases. Section 1.71 "Final Order" means an order or judgment, the operation or effect of which has not been stayed, reversed or amended and as to which order or judgment (or any revision, modification or amendment thereof), the time to appeal or seek review or rehearing has expired and as to which no appeal or review or rehearing that was Filed is pending. Section 1.72 "Fractional Shares" means the fractions of New Common Stock or New Warrants not Distributed pursuant to Section 7.09(d) hereof. Section 1.73 "GAAP" means generally accepted accounting principles. Section 1.74 "General Unsecured Claim" shall have the same meaning as Unsecured Claim. Section 1.75 "Indenture" means an agreement to which BI is a party and under which the Bonds were issued. Section 1.76 "Indenture Trustee" means the entity appointed by Reorganized BSI (which is reasonably acceptable to the holders of the Bank Group Claims) which shall (a) serve as indenture trustee with respect to the New Notes and (b) hold all liens with respect to the Post-Effective Date Collateral pursuant to Section 4.02 hereof. PLAN-9 Section 1.77 "Initial Distribution Date" means the applicable date or dates on which initial Distributions are made under this Plan, which shall be the Effective Date or, as soon thereafter as practicable, but in any event no more than thirty (30) days after the Effective Date. Section 1.78 "Intercompany Claim" means the Claim of BI against BSI. The amount of the Intercompany Claim, as allowed pursuant to the provisions of this Plan, gives effect to a previously made (subject to confirmation of the Plan) capital contribution by BI to BSI in an amount equal to $160,181,000. As is set forth in Section 6.05 hereof and after giving effect to BI's capital contribution to BSI, the amount of the Intercompany Claim shall be Allowed, with prejudice and without defense, in the amount of $96.0 million for purposes of this Plan, subject to the entry of the Confirmation Order and the occurrence of the Effective Date. Section 1.79 "Interest" means (a) share in a corporation, whether or not transferable or denominated "stock," or similar security; (b) interest of a limited partner in a limited partnership; (c) warrant or right, other than a right to convert, to purchase, sell or subscribe to a share, security or interest of a kind specified in subparagraphs (a) and (b) of this paragraph; or (d) interest of a general partner in a limited or general partnership. Section 1.80 "IRS" means the Internal Revenue Service. Section 1.81 "M&R" means M&R Heating and Air Conditioning Services, Inc. For purposes of this Plan, M&R shall have an Allowed BSI-MEC Claim in the amount of $4,750.00 and an Allowed BSI-GEN Claim in the amount of $3,950.00. Section 1.82 "Majority Banks" means Gabriel Management, in its capacity as a holder of the Bank Group Claim. Section 1.83 "Net Proceeds" means the proceeds from the sale of a property which is part of the estate of any Debtor minus the Debtors' costs of selling such property. Section 1.84 "New Common Stock" means the shares of common stock of Reorganized BI provided for under the Plan and authorized under the Amended Certificate of Incorporation of such Reorganized Corporation. Section 1.85 "New Credit Facility" means the new Credit Agreement among Reorganized BSI and BankBoston, N.A., as Agent for itself and the other financial institutions signatory thereto, pursuant to which the revolving credit facility as described in Section 7.19 hereof will be offered to Reorganized BSI. Section 1.86 "New Credit Facility Agent" means the entity designated as the "agent" under the New Credit Facility. PLAN-10 Section 1.87 "New Credit Facility Notes" means the new notes of Reorganized BSI described in Section 7.19 hereof, issued on and after the Effective Date and distributed in the manner provided in the New Credit Facility. Section 1.88 "New Notes" means the new notes of Reorganized BSI described in Section 4.02 hereof, issued on and after the Effective Date and distributed in the manner provided in this Plan. Section 1.89 "New Warrants" means the new warrants of Reorganized BI described in Section 4.05 hereof, issued on and after the Effective Date and distributed in the manner provided in this Plan. Section 1.90 "Old Common Stock of [___]" means, when used with reference to a particular Debtor or Debtors, the common stock issued by such Debtor or Debtors and outstanding immediately prior to the Effective Date. Section 1.91 "Ordinary Course Professionals' Compensation Order" means the Bankruptcy Court Order dated December 21, 1995 authorizing the Debtors to retain and compensate Ordinary Course Professionals (as defined in such Order). Section 1.92 "Other Priority Claim" means any Claim, other than a Priority Tax Claim or an Administrative Claim, asserted against the Debtors, which Claim is accorded priority under subsection 507(a) of the Bankruptcy Code. Section 1.93 "Other Priority Tax Claim" means a Claim, other than a Federal Priority Tax Claim, that is entitled to priority in payment pursuant to section 507(a)(8) of the Bankruptcy Code. Section 1.94 "Paying Agent" means the Disbursing Agent, any indenture trustee, stock transfer agents, agents contractually authorized and/or obligated to make Distributions to certain claimants and similar intermediaries and agents participating in making or conveying Distributions as required by the Plan, each of whom shall be duly bonded at all times. Section 1.95 "Person" means an individual, corporation, partnership, joint venture, association, joint stock company, trust, estate, unincorporated organization, government (or agency or political subdivision thereof) or other entity. Section 1.96 "Petition Date" means June 23, 1995, the date on which each of the Debtors filed its voluntary petition for reorganization, thereby commencing the Chapter 11 Cases. Section 1.97 "Plan" means this Chapter 11 plan of reorganization, either in its present form or as it may be altered, amended or modified by the Debtors from time to time. PLAN-11 Section 1.98 "Post-Effective Date Collateral" means assets as to which the Indenture Trustee shall be granted a first priority security interest to secure the obligations of Reorganized BSI under the New Notes. Section 1.99 "Prepetition Claim" means any Allowed Claim against any of the Debtors arising on or prior to the Petition Date. Section 1.100 "Primary Obligor" means a Debtor against whom a Claim has been asserted in respect of which a Secondary Liability Claim is also asserted against another Debtor. Section 1.101 "Priority Claim" means any Claim, if Allowed, which is entitled to priority pursuant to section 507(a) of the Bankruptcy Code, other than: (a) an Administrative Claim; or (b) a Tax Claim. Section 1.102 "Priority Tax Claim" means any Claim, if Allowed, asserted against the Debtors, which Claim is entitled to priority pursuant to section 507(a)(8) of the Bankruptcy Code, other than a Federal Priority Tax Claim. Section 1.103 "Professional Fees" means a Claim of a professional retained in the Chapter 11 Cases pursuant to sections 327 and 1103 of the Bankruptcy Code or otherwise, for compensation or reimbursement of costs and expenses relating to services incurred during the period from the Petition Date through and including the Effective Date, pursuant to sections 330, 331 or 503(b) of the Bankruptcy Code, and unpaid as of the Effective Date. Section 1.104 "Pro Rata" means (a) with regard to a Claim asserted in a particular Class, a proportionate share, so that the ratio of the Distribution on account of an Allowed Claim is the same as the ratio of the amount of the Distribution on account of all of the Allowed Claims and Disputed Claims in the Class of which the Allowed Claim is a member to the total amount of all of the Allowed Claims in such Class and (b) with regard to Classes of Claims, a ratio equal to the amount available for Distribution to such Classes divided by the amount equal to the sum of Allowed Claims and Disputed Claims in such class. Section 1.105 "Ratable" or "Ratable Share" means a number (expressed as a percentage) equal to the proportion that an Allowed Claim in a particular Class bears to the aggregate amount or number of: (a) Allowed Claims plus (b) Disputed Claims (in their aggregate Face Amount) in such Class as of the date of determination. Section 1.106 "Record Date" means the date which is five Business Days following entry of the Confirmation Order. Section 1.107 "Reinstated" means leaving unaltered the legal, equitable and contractual rights to which a Claim entitles the holder of such Claim, in accordance with section 1124 of the Bankruptcy Code, including: (a) curing all prepetition and postpetition defaults other than defaults relating to the insolvency or financial condition PLAN-12 of a Debtor or its status as a debtor under the Bankruptcy Code; (b) reinstating the maturity date of the Claim; and (c) compensating the holder of such Claim for damages incurred as a result of its reasonable reliance on a provision allowing the Claim's acceleration. Section 1.108 "Reorganized Corporation" means each Debtor or its successor corporation, on and after the Effective Date, as reorganized pursuant to the Plan. Section 1.109 "Reorganization Securities" means, collectively: (a) Tax Notes, (b) New Notes, (c) CAP Notes, (d) New Warrants, (e) Cure Notes and (f) New Common Stock. The form of certain Reorganization Securities are annexed hereto as Exhibit H. Section 1.110 "Reorganized [_____]" means, when used with reference to a particular Debtor, such Debtor on and after the Effective Date. Section 1.111 "Required Prepayments" means that portion of the Net Proceeds, not to exceed the aggregate amount of $40 million, arising from the sale of the Yonkers Property and/or the Union Square Property prior to the Effective Date, which shall be distributed on the Effective Date to holders of Claims receiving New Notes under the Plan in lieu of a like amount of New Notes. Section 1.112 "Schedules" means the Schedules of Assets and Liabilities and the Statements of Financial Affairs filed by the Debtors, on October 20, 1995, as subsequently amended, in accordance with section 521 of the Bankruptcy Code and the Official Bankruptcy Forms of the Bankruptcy Rules, as such schedules or statements may be amended or supplemented from time to time in accordance with Bankruptcy Rule 1009. Section 1.113 "Secondary Liability Claim" means a Claim (other than (i) an Intercompany Claim, (ii) Bank Group Claim and (iii) SPE Claim) that arises from a Debtor being liable as a guarantor of, or otherwise jointly, severally or secondarily liable for, any contractual, tort or other obligation of another Debtor, including any Claim based upon: (a) guaranties of payment, collection or performance; (b) indemnity bonds, obligations to indemnify, obligations to hold harmless or for contribution; (c) performance bonds; (d) contingent liabilities arising out of contractual obligations or out of undertakings (including any assignment or other transfer) with respect to leases, operating agreements, management contracts or other similar obligations made or given by a Debtor relating to the performance of a Debtor; (e) vicarious liability; or (f) any other joint or several liability that any Debtor may have in respect of any obligation that is the basis of a Claim. PLAN-13 Section 1.114 "Secured Claim" means a Claim, if Allowed, against any Debtor held by any entity or judgment creditor of such Debtor, to the extent of the value, as determined by the Bankruptcy Court pursuant to subsection 506(a) of the Bankruptcy Code, of any interest in property of the estate securing such Allowed Claim. Section 1.115 "SPE Agent" shall have the meaning which the term "Agent" is given in the SPE Documents. Section 1.116 "SPE Claims" means Claims arising under the SPE Documents of the SPE Group. Section 1.117 "SPE Deficiency Claim" means that Allowed Unsecured Claim, solely against BSI, arising from the SPE Documents, the SPE Transaction, and the SPE Stipulation held by the SPE Group in an amount equal to $12,732,677 less the amount by which the net proceeds actually distributed to the SPE Group - ---- from the sale of the SPE Philadelphia Property exceeds $2,000,000. Section 1.118 "SPE Documents" means the Credit Agreement among State Street Bank and Trust Company, not in its individual capacity, except as expressly stated herein, but solely as Owner Trustee, as Borrower, Various Lending Institutions and Bankers Trust Company, as Agent, dated September 30, 1994, as amended, pursuant to which the SPE Properties were purchased . Section 1.119 "SPE Group" means Bankers Trust Company, as Agent, and the banks identified as "Banks" in the SPE Documents or their respective successors and assigns. Section 1.120 "SPE Philadelphia Property" means the property located in Philadelphia, Pennsylvania which was financed pursuant to the SPE Documents. Section 1.121 "SPE Properties" means together, the SPE Philadelphia Property and the SPE Providence Property. Section 1.122 "SPE Providence Property" means the property located in Providence, Rhode Island, which was financed pursuant to the SPE Documents. Section 1.123 "SPE Stipulation" means that certain Stipulation and Order, dated March 27, 1998, among the Debtors, the SPE Agent, the SPE Group, State Street (as Owner Trustee) and BRE Funding, Inc. pursuant to which, among other things, (a) the SPE Transaction was recharacterized as a financing transaction, (b) the amount of the SPE Claim was fixed and (c) the Debtors' liability for the State Street Administrative Claim was capped. Section 1.124 "SPE Transaction" means the transaction by which the SPE Properties were acquired as provided in the SPE Documents. Section 1.125 "State Street" means State Street Bank and Trust Company. PLAN-14 Section 1.126 "State Street Administrative Claim" means the administrative claim asserted by State Street based upon the SPE Documents, which, pursuant to the SPE Stipulation, is capped at $100,000. Section 1.127 "Supplemental Bank Group Distribution" shall have the meaning ascribed to such term in Section 6.01(iii) hereof. Section 1.128 "Supplemental BSI-GEN Distribution" shall have the meaning ascribed to such term in Section 6.05 hereof. Section 1.129 "Tax Claim" means Other Priority Tax Claims and Federal Priority Tax Claims. Section 1.130 "Tax Note" means a note issued by Reorganized BSI with respect to a particular Tax Claim which has a value equal to the Allowed amount of such Tax Claim payable over the term set forth in section 1129(a)(9)(C) of the Bankruptcy Code, as more particularly described in the Disclosure Statement. Section 1.131 "Tax Refund" means the amount which the Debtors received as a refund for the overpayment of their tax obligations. Pursuant to an Order dated April 29, 1996, such amounts are held in escrow by the Debtors. Section 1.132 "Trade Vendors' Collateral Agent" means the entity appointed by the Creditors' Committee (which is reasonably acceptable to Reorganized BSI), which shall hold all liens with respect to the Trade Vendors' Lien pursuant to Section 10.02(f) hereof. Section 1.133 "Trade Vendors' Lien" means any liens granted to the Trade Vendors' Collateral Agent, as of the Effective Date, pursuant to Section 10.02(f) hereof. Section 1.134 "Trust Indenture" means the trust indenture referenced in Section 4.02 hereof. Section 1.135 "Unclaimed Property" means any Cash and Reorganization Securities unclaimed on or after the applicable Initial Distribution Date or date on which an Additional Quarterly Distribution would have been made in respect of the relevant Allowed Claim. Unclaimed Property shall include: (a) checks (and the funds represented thereby) and Reorganization Securities (i) mailed to a Distribution Address and returned as undeliverable without a proper forwarding address or (ii) not mailed or delivered because no Distribution Address to mail or deliver such property was available, and (b) funds for checks delivered but uncashed. Section 1.136 "Union Square Lease" means that certain lease dated November 26, 1993 between Greenwich Holding Corporation, as lessor, and Bradlees New York, Inc., predecessor in interest to BSI, as lessee, pursuant to which, among other things, BSI operates a Bradlees store. PLAN-15 Section 1.137 "Union Square Property" means that property located at 14th Street and Broadway, New York, New York, which is subject to BSI's leasehold interest pursuant to the Union Square Lease. Section 1.138 "Unofficial Committee" means the Unofficial Committee of Trade Claim Holders formed by Stonington Management Corporation and Anvil Investment Partners. Section 1.139 "Unsecured Claim" means any Claim that is not an Administrative Claim, Bank Group Claim, Intercompany Claim, Other Priority Claim, Other Priority Tax Claim, Priority Claim, Priority Tax Claim, or Secured Claim. Section 1.140 "Westbury Escrow Funds" means the funds held in escrow from the sale of the real property formerly owned by WES pursuant to the Bankruptcy Court Orders dated May 29, 1996 and February 25, 1998. Section 1.141 "Westbury Fraction" means the fraction, the numerator of which shall be the amount of WES-GEN Claims and the denominator of which shall be the sum of the amount of (a) WES-BANK Claims, (b) WES-SPE Claims and (c) WES-GEN Claims. Section 1.142 "Yonkers Confirmation Date" means the date on which the Clerk of the Bankruptcy Court enters the Yonkers Confirmation Order. Section 1.143 "Yonkers Confirmation Order" means the order, entered by the Bankruptcy Court, confirming the Plan as it relates to Yonkers. Section 1.144 "Yonkers Effective Date" means the Business Day which is the later of (a) twenty days after the date on which the sale of the Yonkers Property closes, or (ii) twenty days after the inventory and fixtures located at the Bradlees' store at the Yonkers Property are sold, but in any event a date no later than August 27, 1999, unless YON shall have, subject to Order of the Court, extended such date. Section 1.145 "Yonkers Property" means that certain leasehold interest owned by YON located in Yonkers, New York. PLAN-16 C. Rules of Construction. --------------------- Section 1.146 Generally. For purposes of the Plan, (a) any reference in the Plan to an existing document or Exhibit Filed or to be Filed means such document or Exhibit as it may have been or may be amended, modified or supplemented; (b) unless otherwise specified, all references in the Plan to Sections, Articles, Schedules and Exhibits are references to Sections, Articles, Schedules and Exhibits of or to the Plan; and (c) the rules of construction set forth in section 102 of the Bankruptcy Code and the Bankruptcy Rules shall apply unless superseded herein or in the Confirmation Order. Section 1.147 Exhibits. All Exhibits are incorporated into and are a part of the Plan as if set forth in full herein and, to the extent not annexed hereto, such Exhibits shall be Filed with the Bankruptcy Court on or before the Exhibit Filing Date. Copies of Exhibits can be obtained upon written request to Dewey Ballantine LLP, 1301 Avenue of the Americas, New York, New York 10019-6092 (Attn: Stuart Hirshfield, Esq.), counsel to the Debtors. Section 1.148 Time Periods. In computing any period of time prescribed or allowed by the Plan, the provisions of Bankruptcy Rule 9006(a) shall apply. Section 1.149 Miscellaneous Rules. (i) The words "herein," "hereof," "hereunder," and other words of similar import refer to this Plan as a whole, not to any particular Section, subsection, or clause, unless the context requires otherwise; (ii) whenever it appears appropriate from the context, each term stated in the singular or the plural includes the singular and the plural, and each pronoun stated in the masculine, feminine or neuter includes the masculine, feminine and the neuter; (iii) captions and headings to Articles and Sections of the Plan are inserted for convenience or reference only and are not intended to be a part or to affect the interpretation of the Plan; and (iv) the rules of construction set forth in section 102 of the Bankruptcy Code shall apply, unless superceded herein or in the Confirmation Order. ARTICLE II ---------- CLASSIFICATION OF CLAIMS AND INTERESTS -------------------------------------- Section 2.01 General Rules of Classification. All Claims and Interests, other than Administrative Claims and Tax Claims, if any, have been classified in the Classes set forth below. In accordance with section 1123(a)(1) of the Bankruptcy Code, Administrative Claims and Tax Claims have not been classified and thus are excluded from the Classes set forth below. A Claim or Interest is classified in a particular Class only to the extent that the Claim or Interest falls within the description of that Class and is classified in other Class(es) to the extent that any remainder of the Claim or Interest falls within the description of such other Class(es). PLAN-17 A Claim is also placed in a particular Class for the purpose of receiving Distributions pursuant to the Plan only to the extent that such Claim is an Allowed Claim in that Class and such Claim has not been paid, released, or otherwise settled prior to the Effective Date. Section 2.02 Administrative, Tax and Other Priority Claims against any Debtor. Administrative Claims (including DIP Claims) and Tax Claims are not classified for each Debtor. Priority Claims are classified for each Debtor. For instance, Priority Claims against BI are classified in the BI-PTY Class. Section 2.03 Undersecured Claims against any Debtor. To the extent that the amount of an Allowed Claim is greater than the value of the collateral securing such Claim as of the applicable valuation date, subject to section 1111(b) of the Bankruptcy Code, such Claim is classified in both a Secured Claim Class for the secured portion of such Claim and a General Unsecured Claim Class for the excess of such Claim over the value of the collateral. Each such Secured Claim against a particular Debtor is in a separate Class of such Debtor if the collateral securing such Secured Claim materially differs from the collateral securing other Allowed Secured Claims against the same Debtor. For instance, if two Allowed Secured Claims against BSI are secured by different collateral of BSI, each such Claim is separately classified. Notwithstanding anything to the contrary herein, absent an Order of the Bankruptcy Court or agreement fixing the allowed amount of a Secured Claim or the scheduling of such Claim as liquidated, nondisputed and noncontingent on the relevant Debtor's Schedule, the relevant Debtor is not bound by a classification made or implied herein with respect to any particular Claim. Section 2.04 Capital Lease Claims. Each claim arising from a Capital Lease against BSI is separately classified against BSI. Section 2.05 Mechanic's Lien Claims. The Secured Claim of M&R against BSI is separately classified against BSI. Section 2.06 Intercompany Claim. The Allowed Intercompany Claim is separately classified as a claim against BSI. PLAN-18 Section 2.07 Unsecured Claims against any Debtor. Allowed Unsecured Claims against any Debtor are classified for each such Debtor in separate Unsecured Claims Classes and Convenience Claims Classes. Section 2.08 Allowed Convenience Claims are Classified for BSI. Allowed Convenience Claims are classified against BSI. Each Convenience Claim is a General Unsecured Claim for which the holder thereof has elected on the Ballot to be treated as a Convenience Claim in the relevant Class. Each holder of an Allowed General Unsecured Claim against BSI may elect Convenience Claim treatment for all, but not part, of its aggregate Allowed General Unsecured Claim against BSI. A claimant may elect to treat all, but not a part, of its Allowed General Unsecured Claim against BSI as one Convenience Claim and may retain its Allowed General Unsecured Claim against another Debtor as a General Unsecured Claim against such Debtor. Notwithstanding anything to the contrary herein, each holder of a General Unsecured Claim that is Allowed in an amount that is less than or equal to $500 shall be deemed to have elected to treat such Claim as a Convenience Claim. Section 2.09 Equity Interests in any Debtor. The Interests in each Debtor are separately classified. For instance, the Interests in BSI are classified in the BSI-EQT Class. ARTICLE III ----------- CLASSIFICATION OF CLAIMS AND INTERESTS BY DEBTOR ------------------------------------------------ The following sets forth the classification of each type of Claim against, and Interest in, each of the Debtors. Section 3.01 Bradlees, Inc. Class BI-PTY (BI-Priority Claims): Class BI-PTY consists of all --------------------------------- Priority Claims against BI. Class BI-BANK (BI-Bank Group Claims): Class BI-BANK consists of all ------------------------------------ Bank Group Claims against BI. Class BI-SPE (BI-SPE Claims): Class BI-SPE consists of the SPE Claim ---------------------------- against BI. Class BI-GEN (BI-General Unsecured Claims): Class BI-GEN consists of ------------------------------------------ all General Unsecured Claims, including Bond Claims, against BI. Class BI-EQT (BI-Common Stock Interests): Class BI-EQT consists of ---------------------------------------- all Interests based on the Old Common Stock of BI. PLAN-19 Section 3.02 Bradlees Administrative Co., Inc. Class BAC-PTY (BAC-Priority Claims): Class BAC-PTY consists of all ----------------------------------- Priority Claims against BAC. Class BAC-SPE (BAC-SPE Claims): Class BAC-SPE consists of the SPE ------------------------------ Claim against BAC. Class BAC-BANK (BAC-Bank Group Claims): Class BAC-BANK consists of -------------------------------------- all Bank Group Claims against BAC. Class BAC-GEN (BAC-General Unsecured Claims): Class BAC-GEN consists -------------------------------------------- of all General Unsecured Claims against BAC. Class BAC-EQT (BAC-Common Stock Interests): Class BAC-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of BAC. Section 3.03 Bradlees Stores, Inc. Class BSI-PTY (BSI-Priority Claims): Class BSI-PTY consists of all ----------------------------------- Priority Claims against BSI. Class BSI-CAP (BSI-Capital Lease Claims): Class BSI-CAP consists of ---------------------------------------- all Capital Lease Claims against BSI. Each Creditor holding a BSI-CAP Claim is separately subclassified as set forth in Exhibit C hereto. Class BSI-MEC (BSI-Secured Claim of M&R): Class BSI-MEC consists of ---------------------------------------- the Secured Claim of M&R against BSI. Class BSI-SPE (BSI-SPE Claims): Class BSI-SPE consists of the SPE ------------------------------ Claim against BSI. Class BSI-BANK (BSI-Bank Group Claims): Class BSI-BANK consists of -------------------------------------- all Bank Group Claims against BSI. Class BSI-INTER (BSI-Intercompany Claims): Class BSI-INTER consists ----------------------------------------- of the Intercompany Claims. Class BSI-GEN (BSI-General Unsecured Claims): Class BSI-GEN consists -------------------------------------------- of all General Unsecured Claims against BSI and the SPE Deficiency Claim. Class BSI-CON (BSI-Convenience Claims): Class BSI-CON consists of all -------------------------------------- Convenience Class Claims against BSI. Class BSI-EQT (BSI-Common Stock Interests): Class BSI-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of BSI. PLAN-20 Section 3.04 Dostra Realty Co., Inc. Class DOS-PTY (DOS-Priority Claims): Class DOS-PTY consists of all ----------------------------------- Priority Claims against DOS. Class DOS-SPE (DOS-SPE Claims): Class DOS-SPE consists of the SPE ------------------------------ Claim against DOS. Class DOS-BANK (DOS-Bank Claims): Class DOS-BANK consists of all Bank -------------------------------- Group Claims against DOS. Class DOS-GEN (DOS-General Unsecured Claims): Class DOS-GEN consists -------------------------------------------- of all General Unsecured Claims against DOS. Class DOS-EQT (DOS-Common Stock Interests): Class DOS-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of DOS. Section 3.05 Maximedia Services, Inc. Class MAX-PTY (MAX-Priority Claims): Class MAX-PTY consists of all ----------------------------------- Priority Claims against MAX. Class MAX-SPE (MAX-SPE Claims): Class MAX-SPE consists of the SPE ------------------------------ Claim against MAX. Class MAX-BANK (MAX-Bank Claims): Class MAX-BANK consists of all Bank -------------------------------- Group Claims against MAX. Class MAX-GEN (MAX-General Unsecured Claims): Class MAX-GEN consists -------------------------------------------- of all General Unsecured Claims against MAX. Class MAX-EQT (MAX-Common Stock Interests): Class MAX-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of MAX. Section 3.06 New Horizons of Yonkers, Inc. Class YON-PTY (YON-Priority Claims): Class YON-PTY consists of all ----------------------------------- Priority Claims against YON. Class YON-SPE (YON-SPE Claims): Class YON-SPE consists of the SPE ------------------------------ Claim against YON. Class YON-BANK (YON-Bank Claims): Class YON-BANK consists of all Bank -------------------------------- Group Claims against YON. Class YON-GEN (YON-General Unsecured Claims): Class YON-GEN consists -------------------------------------------- of all General Unsecured Claims against YON. PLAN-21 Class YON-EQT (YON-Common Stock Interests): Class YON-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of YON. Section 3.07 New Horizons of Bruckner, Inc. Class BRU-PTY (BRU-Priority Claims): Class BRU-PTY consists of all ----------------------------------- Priority Claims against BRU. Class BRU-SPE (BRU-SPE Claims): Class BRU-SPE consists of the SPE ------------------------------ Claim against BRU. Class BRU-BANK (BRU-Bank Claims): Class BRU-BANK consists of all Bank -------------------------------- Group Claims against BRU. Class BRU-GEN (BRU-General Unsecured Claims): Class BRU-GEN consists -------------------------------------------- of all General Unsecured Claims against BRU. Class BRU-EQT (BRU-Common Stock Interests): Class BRU-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of BRU. Section 3.08 New Horizons of Westbury, Inc. Class WES-PTY (WES-Priority Claims): Class WES-PTY consists of all ----------------------------------- Priority Claims against WES. Class WES-SPE (WES-SPE Claims): Class WES-SPE consists of the SPE ------------------------------ Claim against WES. Class WES-BANK (WES-Bank Claims): Class WES-BANK consists of all Bank -------------------------------- Group Claims against WES. Class WES-GEN (WES-General Unsecured Claims): Class WES-GEN consists -------------------------------------------- of all General Unsecured Claims against WES. Class WES-EQT (WES-Common Stock Interests): Class WES-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of WES. ARTICLE IV ---------- REORGANIZATION SECURITIES ------------------------- Reorganized BSI shall issue the following new securities on or about the Effective Date to be distributed to holders of certain Allowed Claims of each of the Debtors (as set forth herein): PLAN-22 Section 4.01 Tax Notes. Subject to the election of the relevant Debtor to distribute Cash to any holder of an Allowed Tax Claim, each holder of an Allowed Tax Claim shall receive a Tax Note as set forth in Sections 5.02 and 5.03 of this Plan. Section 4.02 New Notes. Reorganized BSI shall issue to the holders of (i) the Bank Group Claims, (ii) the SPE Claims, (iii) YON-GEN Claims, (iv) BRU-GEN Claims and (v) WES-GEN Claims, New Notes in an aggregate principal amount to be determined prior to the Effective Date equal to the difference between (a) $40 million and (b) any Required Prepayment. Required Prepayments shall be distributed to holders of Claims in the foregoing classes in the following proportion: (a) 0.83 percent to holders of YON-GEN Claims; (b) 0.83 percent to holders of BRU- GEN Claims; (c) 0.83 percent to holders of WES-GEN Claims; (d) 9.75 percent to holder of SPE Claims; and (e) 87.75 percent to holders of the Bank Group Claims. If not paid sooner, all amounts outstanding with respect to the New Notes shall be due on the first Business Day after the date which is five years after the Effective Date. The New Notes shall (a) be a full recourse obligation of Reorganized BSI, (b) be secured by a first lien on the Yonkers Property and the Union Square Property (provided that YON or BSI, as the case may be, have not sold its interest in such property on the date of issuance of such New Notes), Additional Collateral and a pledge of BSI's Interest in the Old Common Stock of YON, (c) be prepaid Pro Rata without penalty from the Net Proceeds of any equity offering and the sale of the Yonkers Property and the Union Square Property and (d) bear interest at a rate equal to nine percent (9%) per annum payable semi- annually on January 1 and July 1 of each year. In the event that the Net Proceeds from the assignment of the Union Square Lease exceed $15.0 million, the lien against the Additional Collateral granted by this Section shall be terminated and released. In the event that the Net Proceeds from the assignment of the Union Square Lease are less than $15.0 million, the holders of the New Notes shall retain a security interest in the Additional Collateral but such collateral only shall secure indebtedness under the New Notes in the amount of the difference between $17.5 million and the Net Proceeds from the assignment of the Union Square Lease, plus interest thereon. Reorganized BSI shall not be under any obligation to seek to sell or assign the Additional Collateral to prepay the New Notes, but shall prepay the New Notes if, and to the extent, any of the Additional Collateral is sold. The lien securing the New Notes, as provided in this Section, shall be held by the Indenture Trustee in accordance with the Trust Indenture. The holders of the New Notes shall have the option to convert the New Notes to New Common Stock of Reorganized BI in accordance with the terms set forth in Exhibit G hereto. The Debtors intend to register the New Notes received by Gabriel Capital L.P., Elliot Associates, L.P. and/or Westgate International, L.P. for resale with the Securities and Exchange Commission under the Securities Act of 1934. The Trust Indenture, a copy of which will be annexed hereto as Exhibit J, will be filed with the Court on or before the Exhibit Filing Date. Reorganized BI will guaranty Reorganized BSI's obligations under the New Notes. PLAN-23 Section 4.03 CAP Note. In accordance with Section 6.05 hereof, Reorganized BSI may issue a CAP Note to the holder of the Class BSI-CAP Claim in the principal amount equal to $627,094 less the amount of all adequate protection payments received by BTM from BSI under the BTM Stipulation after November 13, 1998, which amount shall be calculated as of the Effective Date. The CAP Notes shall bear interest at a rate equal to nine percent (9.0%) per annum, payable quarterly in arrears at such times as principal payments are due. Principal shall be payable in twelve (12) equal successive installments commencing three months following the Effective Date, until the Note, including unpaid interest, is paid in full. The CAP Note delivered to BTM shall be and remain secured by a first lien on the property on which BTM holds a valid first priority security interest as recognized by the BTM Stipulation. Section 4.04 Cure Notes. In accordance with Section 9.05 hereof, Reorganized BSI may issue Cure Notes in conjunction with the assumption of executory contracts in a principal amount to be determined prior to the Effective Date but in any event not to exceed $3,400,000. The Cure Notes shall be unsecured and shall bear interest at the rate of nine percent (9%) per annum. If not paid sooner, all amounts outstanding with respect to the Cure Notes shall be due on the first Business Day after the date which is three years from the Effective Date. Section 4.05 New Warrants. Reorganized BI shall issue to holders of BI-GEN Claims a Ratable Distribution of New Warrants to purchase an aggregate amount of 1,000,000 shares of New Common Stock of Reorganized BI. The New Warrants shall be exercisable over a five-year period after the Effective Date. The exercise price of the New Warrants for each share of New Common Stock of Reorganized BI shall be $7.00 per share. Reorganized BI shall use all reasonable efforts to have the New Warrants listed on a nationally recognized stock exchange after the Effective Date. Section 4.06 New Common Stock of Reorganized BI. Reorganized BI shall issue a single class of up to 40,000,000 shares of New Common Stock. New Common Stock of Reorganized BI is to be distributed under this Plan to holders of Allowed Claims in the BSI-GEN Class, holders of the Bank Group Claim and holders of the SPE Claims. In aggregate, no more than 10,909,090 of such shares shall be distributed to holders of Allowed Claims under this Plan. The Debtors intend to register the New Common Stock to be received by Gabriel Capital L.P., Elliott Associates, L.P. and Westgate International, L.P. for resale with the Securities and Exchange Commission under the Securities Act of 1934 and the Debtors intend to continue to file periodic reports under such Act. Reorganized BI shall use all reasonable efforts to have the New Common Stock listed on a nationally recognized stock exchange after the Effective Date. PLAN-24 ARTICLE V --------- TREATMENT OF UNIMPAIRED CLASSES ------------------------------- Section 5.01 Administrative Claims. (a) Payment of Administrative Claims in General. Except as ------------------------------------------- specified below in this Section 5.01 or otherwise set forth in the Plan, and subject to the bar date provisions herein, each holder of an Allowed Administrative Claim (including an Allowed Reclamation Claim) shall receive Cash equal to the amount of such Administrative Claim (unless the holder of such Claim agrees to other treatment) on the latest of: (i) 30 days after the Effective Date, (ii) the first business date which is 30 days after the date on which an order allowing such Claim becomes a Final Order, and (iii) such other time or times that are agreed on by the holder of the Administrative Claim and the applicable Debtor or Reorganized Corporation. (b) Payment of Statutory Fees. On or before the Effective Date, or ------------------------- as soon thereafter as practicable all fees payable pursuant to section 1930 of Title 28 of the United States Code, 28 U.S.C. (S) 1930, as determined by the Bankruptcy Court at the hearing on Confirmation, shall be paid in cash equal to the amount of such Claim. Subsequent payments after the Effective Date shall be made as required by statute. (c) Payment of DIP Claims. On the Effective Date or at a later --------------------- date pursuant to the DIP Agreement, all DIP Claims against the Debtors under or evidenced by the DIP Agreement shall be paid in Cash in an amount equal to the amount of such DIP Claims. (d) Payment of State Street Administrative Claim. The State Street -------------------------------------------- Administrative Claim shall only be paid to the extent and at the time set forth in the SPE Stipulation. Section 5.02 Federal Priority Tax Claims. Pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, unless otherwise agreed to by the Debtors and the IRS, the IRS shall receive from Reorganized BSI, on account of any Federal Priority Tax Claim, deferred cash payments over a period not exceeding six years from the date of assessment of such Claims. Payments shall be made in equal quarterly installments of principal, plus simple interest accruing from the Effective Date at a rate equal to nine percent (9%) per annum on the unpaid portion of each Federal Priority Tax Claim; provided, however, that in the event that the Effective Date does not occur on or before February 1, 1999, interest on the Tax Note shall begin to accrue on February 1, 1999. The first payment shall be due on the latest of: (i) 90 days after the Effective Date, (ii) 90 days after the date on which an order allowing any PLAN-25 such Claim becomes a Final Order and (iii) such other date that is agreed on by the IRS and BSI or Reorganized BSI; provided, however, that Reorganized BSI shall have the right to pay any Federal Priority Tax Claim, or any remaining balance of such Claim, in full, at any time on or after the Effective Date, without premium or penalty . Section 5.03 Other Priority Tax Claims. Pursuant to section 1129(a)(9)(C) of the Bankruptcy Code, unless otherwise agreed to by the parties, each holder of an Other Priority Tax Claim shall receive from Reorganized BSI, on account of such Claim, deferred cash payments over a period not exceeding six years from the date of assessment of such Claim. Payments shall be made in equal quarterly installments of principal, plus simple interest accruing from the Effective Date at a rate equal to nine percent (9%) per annum on the unpaid portion of each Other Priority Tax Claim; provided, however, that in the event that the Effective Date does not occur on or before February 1, 1999, interest on the Tax Note shall begin to accrue on February 1, 1999. The first payment shall be due on the latest of: (i) 90 days after the Effective Date, (ii) 90 days after the date on which an order allowing any such Claim becomes a Final Order and (iii) such other date that is agreed on by the holder of such Claim and BSI or Reorganized BSI; provided, however, that Reorganized BSI shall have the right to pay any Other Priority Tax Claim, or any remaining balance of such Claim, in full, at any time on or after the Effective Date, without premium or penalty. Section 5.04 Other Non-Tax Priority Claims. Except as otherwise provided below, each holder of an Allowed Priority Claim shall receive one hundred percent (100%) of the allowed amount of such Claim in Cash on the later of: (i) 30 days after the Effective Date or as soon thereafter as reasonably practicable; or (ii) the first Business Day after the date that is 30 days after the date such Claim becomes an Allowed Claim or as soon thereafter as practicable. Section 5.05 Convenience Claims. Each holder of an Allowed Convenience Claim shall be paid one hundred percent (100%) of the amount of such Claim in Cash in an amount not to exceed $500 for each such Claim on the later of (i) 30 days after the Effective Date or as soon thereafter as reasonably practicable; or (ii) the first Business Day after the date that is 30 days after the date such Claim becomes an Allowed Claim or as soon thereafter as practicable. ARTICLE VI ---------- TREATMENT OF IMPAIRED CLAIMS AND INTERESTS ------------------------------------------ Each Debtor shall make the following Distributions, where applicable, on or about the Initial Distribution Date unless another date is otherwise provided herein or elsewhere in this Plan: PLAN-26 Section 6.01 Bank Group Claims. Class BI-BANK, Class BAC-BANK, Class BSI-BANK, Class DOS-BANK, Class -------------------------------------------------------------------- MAX-BANK, Class YON-BANK, Class BRU-BANK and Class WES-BANK. For purposes of - ----------------------------------------------------------- this Plan, the Bank Group Claim shall be allowed, with prejudice and without defense, as a claim against each of the Debtors' estates in the amount of $96 million. Each holder of a BI-BANK Claim, BAC-BANK Claim, BSI-BANK Claim, DOS- BANK Claim, MAX-BANK Claim, YON-BANK Claim, BRU-BANK Claim and WES-BANK Claim shall receive, in respect of its Claim against each of BI, BAC, BSI, DOS, MAX, YON, BRU and WES, and/or retain on the Effective Date, Pro Rata Distributions as follows: (i) Cash equal to the sum of (a) all Adequate Protection Payments heretofore and hereafter received by the Bank Group (less any disbursements thereof made or payments required to be made by Bankers Trust, as the Agent Bank, including without limitation, any professional fees), which shall continue unabated and without modification through the Effective Date (and prorated for the month in which the Effective Date occurs), (b) $7,000,000 and (c) any Required Prepayments applicable to the Bank Group's Distribution of New Notes pursuant to Section 6.01(ii); (ii) New Notes in an original aggregate principal amount equal to $36 million less the sum of (a) any Required Prepayments applicable thereto, and (b) 90%, not to exceed $900,000, in an aggregate principal amount, of the amount of any New Notes distributed to holders of Allowed YON-GEN Claims, Allowed BRU-GEN Claims and Allowed WES-GEN Claims; and (iii) (a) 4,909,091 shares of New Common Stock of Reorganized BI and (b) if the aggregate amount of Allowed General Unsecured Claims and Disputed General Unsecured Claims asserted against BSI (excluding the Bank Group Claim and the Intercompany Claim) is less than $240,000,000, a supplemental Ratable Distribution in the amount of 0.98 shares of New Common Stock of Reorganized BI for every $100 by which the aggregate amount of Allowed General Unsecured Claims plus Disputed General Unsecured Claims against BSI (excluding the Bank Group Claim and the Intercompany Claim) are less than $250,000,000 (such supplemental distribution of shares of New Common Stock, the "Supplemental Bank Group Distribution"). Section 6.02 SPE Claims. Class BI-SPE, Class BAC-SPE, Class DOS-SPE, Class MAX-SPE, Class YON- -------------------------------------------------------------------- SPE, Class BRU-SPE and Class WES-SPE. For purposes of this Plan, the SPE Claims - ------------------------------------ shall be Allowed, with prejudice and without defense, as a claim against each of the Debtors' estates in the amount of $18,232,677 (subject to reduction, pursuant to the PLAN-27 SPE Stipulation, to reflect (a) the amount of Cash received by the SPE Group from the sale of the SPE Providence Property and (b) the net proceeds received by the SPE Group from the SPE Philadelphia Property). Each holder of an Allowed BI-SPE Claim, BAC-SPE Claim, BSI-SPE Claim, DOS-SPE Claim, MAX-SPE Claim, YON- SPE Claim, BRU-SPE Claim and WES-SPE Claim shall receive, in respect of its aggregate Allowed Claim against BI, BAC, BSI, DOS, MAX, YON, BRU and WES, a single Pro Rata Distribution as follows: (i) Cash from any Required Prepayments made to the SPE Group; (ii) New Notes in a principal amount equal to $4,000,000 less the sum of (x) any Cash Distributions received by holders of SPE Claims from any Required Prepayments and (y) ten percent (10%) not to exceed $100,000 of the aggregate original principal amount of all New Notes issued to holders of YON-GEN, WES-GEN and BRU-GEN Claims under this Plan; and (iii) in accordance with Section 3.03 hereof, the SPE Deficiency Claim will be treated as an Allowed BSI-GEN Claim. Section 6.03 Bradlees, Inc. Class BI-GEN (BI-General Unsecured Claims): Each Holder of an Allowed ------------------------------------------ BI-GEN Claim shall receive a Ratable Distribution of New Warrants. For purposes of this Plan, the Bond Claim shall be Allowed with prejudice and without defense as a Claim solely against BI in the amount of $233,417,000. Class BI-EQT (BI-Common Stock Interests): Holders of Allowed BI-EQT ---------------------------------------- Interests shall receive no distribution. Section 6.04 Bradlees Administrative Co., Inc. Class BAC-GEN (BAC-General Unsecured Claims): Holders of Allowed BAC- -------------------------------------------- GEN Claims shall receive no distribution. Class BAC-EQT (BAC-Common Stock Interests): Holders of Allowed BAC- ------------------------------------------ EQT Interests shall retain their Interests in BAC. Section 6.05 Bradlees Stores, Inc. Class BSI-CAP (BSI-Capital Lease Claims): The holder of the Allowed ---------------------------------------- BSI-CAP Claim shall receive a CAP Note, in form and substance reasonably satisfactory to the holder of such BSI-CAP Claim, in such principal amount with such interest rate, and on such other terms as set forth in Section 4.03 hereof. Class BSI-MEC (BSI-Mechanic's Lien Claims): The holder of the Allowed ------------------------------------------ BSI-MEC Claim shall receive a Cash Distribution in the amount of $4,750. PLAN-28 Class BSI-INTER (BSI-Intercompany Claim): After giving effect to BI's ----------------------------------------- prior capital contribution to BSI, the amount of the Intercompany Claim shall be Allowed in the amount of $96.0 million for purposes of this Plan. The entire Class BSI-INTER Claim shall be satisfied through the issuance of shares of the New Common Stock of Reorganized BI and Cash, which Distributions shall be made to the holders of the Bank Group Claims pursuant to Section 6.01 hereof. Class BSI-GEN (BSI-General Unsecured Claims): Each holder of an -------------------------------------------- Allowed BSI-GEN Claim shall receive (i) Cash equal to a Pro Rata Distribution of $7,000,000 (ii) two shares of New Common Stock of Reorganized BI for every $100 in Allowed Claims, and (iii) if the aggregate amount of Allowed General Unsecured Claims and Disputed General Unsecured Claims against BSI (excluding the Bank Group Claim and the Intercompany Claim) is less than $240,000,000, a supplemental Ratable Distribution in the amount of 1.02 shares of New Common Stock for every $100 that the aggregate Allowed General Unsecured Claims plus Disputed General Unsecured Claims against BSI (excluding the Bank Group Claim and the Intercompany Claim) are less than $250,000,000 (such supplemental distribution of shares of New Common Stock, the "Supplemental BSI-GEN Distribution"). To the extent that any Disputed Claim in the BSI-GEN Class becomes disallowed by a Final Order or is withdrawn, then on the next Quarterly Distribution Date thereafter, a supplemental Pro Rata Distribution of that portion of the initial $7,000,000 Cash Distribution to the BSI-GEN Class allocated to such formerly Disputed Claim shall be (x) made to the holders of Allowed Claims in the BSI-GEN Class and (y) in the case of any remaining Disputed Claims in the BSI-GEN Class, held in the Disputed Claims Reserve for such Disputed Claims. Class BSI-CON (BSI-Convenience Claims): Each holder of a BSI-CON -------------------------------------- Claim shall receive a Cash Distribution equal to the lesser of (i) one hundred percent (100%) of their BSI-CON Claim or (ii) $500. Class BSI-EQT (BSI-Common Stock Interests): Holders of BSI-EQT ------------------------------------------ Interests shall retain their Interest in BSI. Section 6.06 Dostra Realty Co., Inc. Class DOS-GEN (DOS-General Unsecured Claims): Holders of DOS-GEN -------------------------------------------- Claims shall receive no distribution. Class DOS-EQT (DOS-Common Stock Interests): Holders of DOS-EQT ------------------------------------------ Interests shall retain their Interest in DOS. Section 6.07 Maximedia Services, Inc. Class MAX-GEN (MAX-General Unsecured Claims): Holders of MAX-GEN -------------------------------------------- Claims shall receive no distribution. Class MAX-EQT (MAX-Common Stock Interests): Holders of MAX-EQT ------------------------------------------ Interests shall retain their Interest in MAX. PLAN-29 Section 6.08 New Horizons of Yonkers, Inc. Class YON-GEN (YON-General Unsecured Claims): On or about the Yonkers -------------------------------------------- Effective Date, each holder of a YON-GEN Claim shall receive a Ratable Distribution of: (i) Cash equal to the Net Proceeds from the sale of the Yonkers Property multiplied by the Yonkers Fraction, but not to exceed 0.83 percent of such Net Proceeds and (ii) New Notes in a principal amount up to 0.83 percent of the aggregate principal amount of the New Notes which are distributed under this Plan minus Cash Distributions made to holders of YON-GEN Claims under this Plan. Class YON-EQT (YON-Common Stock Interests): Holders of YON-EQT ------------------------------------------ Interests shall retain their Interest in YON. Section 6.09 New Horizons of Bruckner, Inc. Class BRU-GEN (BRU-General Unsecured Claims): Each holder of a BRU-GEN -------------------------------------------- Claim shall receive a Ratable Distribution of: (i) Cash equal to the Net Proceeds from the sale of the real property formerly owned by BRU multiplied by the Bruckner Fraction, but not to exceed 0.83 percent of such Net Proceeds, and (ii) New Notes in a principal amount up to 0.83 percent of the aggregate principal amount of the New Notes which are Distributed under this Plan minus Cash Distributions made to holders of BRU-GEN Claims under this Plan. The Cash Distribution set forth in this Section shall be made as soon as practicable after the sale of the Union Square Property, or at such earlier time as the Reorganized Corporations shall decide, but in no event, before the Effective Date. Class BRU-EQT (BRU-Common Stock Interests): Holders of BRU-EQT ------------------------------------------ Interests shall retain their Interest in BRU. Section 6.10 New Horizons of Westbury, Inc. Class WES-GEN (WES-General Unsecured Claims): Each holder of a WES-GEN -------------------------------------------- Claim shall receive a Ratable Distribution of: (i) Cash equal to the Net Proceeds from the sale of the real property formerly owned by WES multiplied by the Westbury Fraction, but not to exceed 0.83 percent of such Net Proceeds, and (ii) New Notes in a principal amount up to 0.83 percent of the aggregate principal amount of the New Notes which are Distributed under this Plan minus Cash Distributions made to holders of WES-GEN Claims under this Plan. The Cash Distribution set forth in this Section shall be made as soon as practicable after the sale of the Union Square Property, or at such earlier time as the Reorganized Corporation shall decide, but in no event, before the Effective Date. Class WES-EQT (WES-Common Stock Interests): Holders of WES-EQT ------------------------------------------ Interests shall retain their Interest in WES. PLAN-30 ARTICLE VII ----------- IMPLEMENTATION -------------- Section 7.01 Reorganized BI, Reorganized BSI and Reorganized DOS. BI, BSI and DOS shall each continue to exist after the Effective Date as Reorganized BI, Reorganized BSI and Reorganized DOS, respectively, each with all of the powers of a corporation under applicable law. The Certificate of Incorporation and Amended By-Laws of each of Reorganized BI, Reorganized BSI and Reorganized DOS shall, inter alia, (i) prohibit the issuance of nonvoting stock to the extent required by section 1123(a) of the Bankruptcy Code and (ii) contain no "anti-takeover" provisions. After the Effective Date, Reorganized BI, Reorganized BSI and Reorganized DOS may each amend or modify their Certificate of Incorporation and Amended By-Laws as permitted under applicable law and/or such certificate of incorporation and Amended By-Laws. Section 7.02 Directors of the Reorganized Corporations. Upon the Effective Date, the existing Board of Directors of each Reorganized Corporation shall be dismissed. Not later than the date of the commencement of the hearing on the confirmation of this Plan, the Debtors shall have disclosed the identity and affiliations of any individuals proposed to serve as Directors for Reorganized BI. The Board of Directors of Reorganized BI shall each consist of nine members, who shall be designated, to serve effective as of the Effective Date, as follows: (i) BI shall designate Peter Thorner, one other member of management of the Debtors and one outside individual; (ii) the Bank Group shall designate two individuals; (iii) the Unofficial Committee shall designate one individual; (iv) the Creditors' Committee shall designate one individual; and (v) the Bank Group, the Unofficial Committee and the Creditors' Committee, acting by unanimous consent, or absent such consent, by vote of two such groups, shall designate two individuals who shall be reasonably acceptable to the Debtors. Notwithstanding the foregoing, in order to be eligible to serve on the Board of Directors of Reorganized BI, (i) each proposed Board Member designated pursuant to this provision shall have relevant experience which would qualify him or her to so serve and (ii) the outside individual selected by BI shall be reasonably acceptable to the Bank Group, Unofficial Committee and Creditors' Committee. The initial term of PLAN-31 each Board Member of Reorganized BI shall be for one year from the Effective Date and Peter Thorner shall serve as Chairman of the Board of Directors of Reorganized BI. The Board of Directors of each of Reorganized BSI and Reorganized DOS shall consist of three members, who shall be designated, to serve effective as of the Effective Date, as follows: (x) the Chief Executive officer of Reorganized BI, (y) the Senior Vice President and Chief Financial Officer of Reorganized BI and (z) Senior Vice President, General Counsel, Clerk and Secretary of Reorganized BI. The initial term of each Board Member of Reorganized BSI and Reorganized DOS shall be for one year from the Effective Date and the Chief Executive Officer of Reorganized BI shall serve as Chairman of the Board of Directors of each of Reorganized BSI and Reorganized DOS. Section 7.03 Employment, Retirement, Indemnification and Other Agreements and Incentive Compensation Programs. To the extent that any of the Debtors have in place as of the Effective Date employment, retirement, indemnification and other agreements with their respective active directors, officers and employees or retirement income plans, welfare benefit plans and other plans for active employees, such agreements, programs and plans shall remain in place after the Effective Date and Reorganized BI, Reorganized BSI and Reorganized DOS, as the case may be, shall continue to honor such agreements, programs and plans. However, as of the Effective Date, Reorganized BI, Reorganized BSI and Reorganized DOS shall each have the authority to terminate, amend or enter into employment, retirement, indemnification and other agreements with their respective active directors, officers and employees and to terminate, amend or implement retirement income plans, welfare benefit plans and other plans for active employees. Such agreements and plans may include equity, bonus and other incentive plans in which officers and other employees of the Reorganized Debtors may be eligible to participate; provided, however, that management of Reorganized BI, Reorganized BSI and Reorganized DOS shall receive stock options in the amount of 750,000 shares of Reorganized BI which shall vest according to the following schedule: one-third on the Effective Date, one-third on the one year anniversary of the Effective Date, and one-third on the two year anniversary of the Effective Date. The exercise price of such options shall be the lowest ten-day rolling average of closing prices of Reorganized BI New Common Stock within the period between sixty and ninety days after the Effective Date. All such options shall be exercisable for a period of five years from the Effective Date. In addition, the Board of Directors of Reorganized BI shall have the right to distribute to management of Reorganized BI, Reorganized BSI and Reorganized DOS options with respect to 250,000 additional shares of Reorganized BI at such price and on such terms as the Board of Directors of Reorganized BI shall determine. In addition, except for the retirement and disability benefit plans referred to below in Section 7.06, on the Exhibit Filing Date, BI, BSI and DOS shall each file a schedule and general summary of the existing employment, retirement, indemnification and other agreements and incentive compensation programs that are to remain in effect as of the Effective Date as Exhibit D to the Plan. By the date of the commencement of the hearing on confirmation of this PLAN-32 Plan, the Debtors shall file with the Court as Exhibit K hereto a schedule disclosing the individuals who are proposed to serve as officers of the Reorganized Corporations following the Effective Date and the nature of the compensation for such individuals. Section 7.04 Management Emergence Bonus. On the Effective Date, the Equity Appreciation Plan which was approved by Order of the Bankruptcy Court dated October 24, 1995 shall be deemed terminated. The Reorganized Corporations shall pay to certain of the Debtors' managerial employees, selected prior to the Effective Date by the Chief Executive Officer of BI and BI's pre-Effective Date Board of Directors, an emergence bonus in Cash in amounts up to the aggregate amount of $3.0 million, which shall be paid to such employees in two installments as follows: (x) on the Effective Date, the amount of $1.0 million and (y) on the later of (i) the one-year anniversary of the Effective Date and (ii) the date that the New Notes are fully repaid or converted to equity, the amount of $2.0 million; provided, however, that no payment of an emergence bonus shall be made in the event there exists any continuing default notice outstanding under the New Credit Facility or any successor working capital facility at the time of such payment; provided, further, however, that if any person who receives an installment of such emergence bonus leaves the employ of either of the Reorganized Corporations within one year after the payment of either such installment by reason of (a) an involuntary separation for "Cause" (as defined in such employee's employment agreement to the extent one exists, or if there is no such employment agreement, as commonly defined) or (b) voluntary separation for other than "Good Reason" (as defined in such employee's employment agreement to the extent one exists, or if there is no such employment agreement, as commonly defined), such person shall (i) be obligated to promptly repay to the Reorganized Corporations an amount equal to the amount of the most recently paid installment multiplied by a fraction, the numerator of which is three hundred sixty-five minus the number of days between the date that the most recently paid installment was required to be paid pursuant to this provision and such person's date of departure from the Reorganized Corporations, and the denominator of which is three hundred sixty- five, and (ii) forfeit any further right to receive an installment of the emergence bonus; provided, further, however, that if any person who would be entitled to receive an emergence bonus leaves the employ of either of the Reorganized Corporations prior to receiving the payment of both installments of the emergence bonus as a result of (a) an involuntary separation for other than for "Cause" (as defined in such employee's employment agreement to the extent one exists, or if there is no such employment agreement, as commonly defined) or (b) voluntary separation for "Good Reason" (as defined in such employee's employment agreement to the extent one exists, or if there is no such employment agreement, as commonly defined), such person shall not be required to return any portion of the emergence bonus previously paid to such person and such person shall be entitled to the immediate accelerated payment of any portion of the emergence bonus not previously paid to such person. PLAN-33 Section 7.05 Corporate Action. Each of the matters provided for under the Plan involving the corporate structure of any Debtor or Reorganized Debtor or corporate action to be taken by or required of any Debtor or Reorganized Debtor shall, as of the Effective Date, be deemed to have occurred and be effective as provided herein, and shall be authorized and approved in all respects without any requirement of further action by stockholders or directors of any of the Debtors or the Reorganized Debtors. Section 7.06 Certain Retiree Health, Medical and Life Insurance Benefits. On and after the Effective Date, pursuant to section 1129(a)(13) of the Bankruptcy Code, Reorganized BSI shall continue to pay all retiree benefits (as defined in section 1114(a) of the Bankruptcy Code) of the Debtors' respective nonunion employees who retired as of or prior to the Petition Date, at the levels and for the duration established prior to the Effective Date in either: (a) a Bankruptcy Court order entered pursuant to section 1114(g) of the Bankruptcy Code or (b) agreements reached pursuant to section 1114(e) of the Bankruptcy Code; provided, however, that prior to the Confirmation Date, the Debtors reserve the right to seek an order declaring that the Debtors may amend or terminate such retiree benefits at the conclusion of the period, if any, that the Debtors are obligated to provide such retiree benefits under the terms of their respective retiree benefit plans. Section 7.07 Combination Transactions. On the Effective Date (or in the case of YON, the Yonkers Effective Date), each Combining Debtor shall take such actions as may be necessary or appropriate to effect the relevant Combination Transaction. Such actions may include: (a) the execution and delivery of appropriate agreements or other documents of merger, consolidation or reorganization containing terms that are consistent with the terms of this Plan and that satisfy the requirements of applicable law; (b) the execution and delivery of appropriate instruments of transfer, assignment, assumption or delegation of any property, right, liability, duty or obligation on terms consistent with the terms of this Plan; (c) the filing of appropriate certificates of merger or consolidation with the appropriate governmental authorities under applicable law; and (d) all other actions that such Debtor determines are necessary or appropriate, including the making of filings or recordings in connection with the relevant Combination Transaction. The form of each Combination Transaction shall be determined by the respective Boards of Directors of such Combining Debtor and Reorganized BI, Reorganized BSI and Reorganized DOS. Upon the consummation of a Combination Transaction, each Combining Debtor shall cease to exist as a separate corporate entity. On and after the Effective Date, Reorganized BSI shall assume and perform the obligations of each Combining Debtor under this Plan. PLAN-34 Section 7.08 Distributions to Holders of Claims and Interests. (a) Source of Cash and Reorganization Securities for Distributions. -------------------------------------------------------------- On the Effective Date, Reorganized BI and Reorganized BSI shall each deliver to the Disbursing Agent sufficient Cash and Reorganization Securities to make Distributions to: (a) the holders of each relevant Debtor's Allowed Claims; and (b) the Disputed Claims Reserves, as set forth below. Without any further act or action required, upon written request by the Disbursing Agent (which may be made by telecopy or other electronic means reducible to written form) received by Reorganized BI or Reorganized BSI at least 10 Business Days prior to the relevant Distribution hereunder, Reorganized BI or Reorganized BSI, as the case may be, is authorized to and shall timely issue sufficient Reorganization Securities to permit the Disbursing Agent to make Distributions required hereunder. Any reference herein to Reorganization Securities in a Disputed Claims Reserve shall include any Reorganization Securities that are available to be issued by the Reorganized Corporation pursuant to this section. (b) Initial Distributions. For each Class, no Distributions will be --------------------- made under the Plan until an Initial Distribution Date is established for such Class. On the applicable Initial Distribution Date, the Disbursing Agent shall make a Distribution to: (i) each holder of an Allowed Claim in an amount equal to its Ratable Share (calculated as of the applicable Initial Distribution Date) of Cash or Reorganization Securities in accordance with the terms of the Plan; (ii) each Paying Agent in an amount equal to the aggregate Ratable Share (calculated as of the applicable Initial Distribution Date) of the Cash or Reorganization Securities in accordance with the terms of the Plan that such Paying Agent shall Distribute to holders of Allowed Claims in the relevant Class; and (iii) if applicable, the Disbursing Agent shall make a Distribution to the relevant Disputed Claims Reserve of the remaining Cash and Reorganization Securities allocated in accordance with the terms of this Plan. The amount of Cash to be paid on the Initial Distribution Date to holders of Allowed BSI-GEN Claims will be calculated as if each Disputed Claim were an Allowed Claim in its Face Amount. (c) Disputed Claims Reserves. On the Effective Date, and after ------------------------ making all Distributions required to be made on the Effective Date, Reorganized BI and Reorganized BSI shall each establish a separate Disputed Claims Reserve for each of its Classes and the Classes of the other Debtors, each of which shall be administered by the Disbursing Agent. Cash placed into the Disputed Claims Reserve shall be held in an interest bearing account. Any payment made to the holder of an Allowed Claim which was previously a Disputed Claim from the Disputed Claims Reserve shall include any accrued interest thereon at the rate earned in such interest bearing account. If the Initial Distribution Date is not the Effective Date for a particular Class, all Cash and Reorganization Securities allocable to the relevant Class hereunder shall be distributed by the Disbursing Agent to the relevant Disputed Claims Reserve on or as soon as practicable after the Effective Date. Each Disputed Claims Reserve shall be terminated by Reorganized BI or Reorganized BSI, as the case may be, upon the receipt of a written certification of the Disbursing Agent that all Distributions and other dispositions of all Cash and/or Reorganization Securities required hereunder have been made in accordance PLAN-35 with the terms of this Plan. Such written certification shall be sent by the Disbursing Agent to Reorganized BI or Reorganized BSI, as the case may be, within 15 days of the satisfaction of the condition set forth in the immediately preceding sentence. With respect to the Reorganization Securities held in the Disputed Claims Reserve, neither the Disbursing Agent, nor any other party, shall be entitled to vote any shares of the New Common Stock held in the Disputed Claims Reserve. In the event that any matter requires the approval of the shareholders of Reorganized BI prior to the Distribution of the Reorganization Securities held in the Disputed Claims Reserve, solely with respect to such vote, the shares of New Common Stock held by the Disbursing Agent shall be deemed not to have been issued. (d) Tax Requirements for Income Generated by Disputed Claims -------------------------------------------------------- Reserves. The Disbursing Agent shall pay, or cause to be paid, out of the funds - -------- held in a particular Disputed Claims Reserve, any tax imposed by any federal, state or local taxing authority on the income generated by the funds held in such Disputed Claims Reserve. The applicable Disbursing Agent shall also File, or cause to be Filed any tax or information return related to the Disputed Claims Reserve that is required by any federal, state or local taxing authority. (e) Estimation of Claims. The Debtors or the Reorganized -------------------- Corporations may, at any time, request that the Bankruptcy Court estimate any Claim subject to estimation under section 502(c) of the Bankruptcy Code and for which the Debtors may be liable under this Plan, including any Claim for Taxes, to the extent permitted by section 502(c) of the Bankruptcy Code regardless of whether the Debtors, the Creditors' Committee, the Unofficial Committee, the Bank Group or the Reorganized Corporations have previously objected to such Claim, and the Bankruptcy Court will retain jurisdiction to estimate any Claim pursuant to section 502(c) of the Bankruptcy Code at any time during litigation concerning any objection to any Claim, including during the pendency of any appeal relating to any such objection. In the event that the Bankruptcy Court estimates any contingent or unliquidated Claim, that estimated amount will constitute either the Allowed amount of such Claim or a maximum limitation on such Claim, as determined by the Bankruptcy Court. If the estimated amount constitutes a maximum limitation on such Claim, the Debtors or the Reorganized Corporations may elect to pursue any supplemental proceedings to object to any ultimate allowance on such Claim. The Debtors may, at any time, request that the Bankruptcy Court estimate any claim pursuant to section 502(c) of the Bankruptcy Code for purposes of satisfying the requirements of Section 10.02(e) hereof. All of the aforementioned Claims objection, estimation and resolution procedures are cumulative and not necessarily exclusive of one another. Claims may be estimated and subsequently compromised, settled, withdrawn or resolved by any mechanism approved by the Bankruptcy Court. (f) Initial Distribution. When a Disputed Claim Becomes an Allowed -------------------------------------------------------------- Claim. On the first Business Day after the end of each calendar quarter (i.e., March 31, June 30, September 30 and December 31 of each calendar year) immediately following the applicable Initial Distribution Date, or as soon thereafter as practicable (the "Quarterly Distribution Date"), the Disbursing Agent shall make Ratable Distributions or PLAN-36 other Distribution in accordance with the provisions of this Plan (calculated as of the later of the: (i) immediately preceding Quarterly Distribution Date, or (ii) the applicable Initial Distribution Date) of Cash or Reorganization Securities reserved for any Disputed Claim that has become an Allowed Claim during the preceding calendar quarter to the holder of such Allowed Claim or the relevant Paying Agent, as the case may be. Holders of Disputed Claims that are ultimately Allowed will also be entitled to receive any dividends or other distributions received on and after the Effective Date on account of the shares of the New Common Stock distributed to such holder on account of its Allowed Claim. (g) Additional Quarterly Distributions on Account of Previously ----------------------------------------------------------- Allowed Claims. On each Quarterly Distribution Date, the Disbursing Agent shall - -------------- distribute to each holder of a previously Allowed Claim or the relevant Paying Agent, as the case may be, on account of such Claim an amount of Cash or Reorganization Securities, as the case may be, equal to: (i) the Distribution from the relevant Disputed Claims Reserve that such claimant would have received in accordance with the Plan had it not received any prior Distributions in respect of its Allowed Claim, less (ii) the total amount of any Distributions previously received in respect of its Allowed Claim. The Supplemental Bank Group Distribution and the Supplemental BSI-GEN Distribution of New Common Stock shall be made from the applicable Disputed Claims Reserve once the General Unsecured Claims against BSI (excluding the Bank Group Claim and the Intercompany Claims) are reduced to below $240 million in accordance with Sections 6.01 and 6.05 hereof. Such Additional Quarterly Distributions shall continue until the relevant Disputed Claims Reserve is depleted of Cash or Reorganization Securities held in such Disputed Claims Reserve, other than as set forth in the next subsection. Notwithstanding anything to the contrary herein, no Distribution shall be made on any Quarterly Distribution Date unless the aggregate Distribution on such Quarterly Distribution Date would be in excess of $10,000 in value (as such value is set forth herein and/or in the Disclosure Statement). The restriction on Additional Quarterly Distributions hereunder imposed by the immediately preceding sentence shall no longer apply as of the date on which all Disputed Claims in the relevant Class have been resolved. Each such Distribution shall also include, on the basis of the amount so distributed, any dividends or other Distributions received on and after the Effective Date on account of the shares of the New Common Stock or interest earned on Cash distributed to each holder receiving a Distribution on a Quarterly Distribution Date on account of its Allowed Claim. Section 7.09 Miscellaneous Distribution Provisions. (a) Method of Cash Distributions. Cash payments made pursuant to ---------------------------- the Plan shall be in United States dollars by checks drawn on a domestic bank selected by the applicable Debtor or Reorganized Corporation, or by wire transfer from a domestic bank, at the option of the applicable Debtor or Reorganized Corporation; provided, however, that cash payments made to foreign creditors, if any, holding Allowed Claims may be paid, at the option of the applicable Debtor or Reorganized Corporation, in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. PLAN-37 (b) Distributions on Non-Business Days. Any payment or Distribution ---------------------------------- due on a day other than a Business Day shall be made, without interest, on the next Business Day. (c) Accrual of Postpetition Interest. Unless otherwise provided -------------------------------- for in the Plan, no holder of a pre-petition Allowed Claim shall be entitled to the accrual of interest on account of such Claim. (d) No Distribution of Fractional Securities. Notwithstanding any ---------------------------------------- other provisions of the Plan, only whole numbers of shares of New Common Stock and New Warrants shall be issued. When any Distribution on account of an Allowed Claim would otherwise result in the issuance of a number of shares of the New Common Stock and New Warrants that is not a whole number, the Disbursing Agent shall aggregate and sell all Fractional Shares of the New Common Stock and New Warrants otherwise then distributable in accordance with the Plan at then prevailing prices and distribute the net proceeds to the Persons otherwise entitled thereto. Notwithstanding the foregoing, if a Person holds more than one claim, the fractional securities that such Person otherwise would be entitled to on account of each such Claim held by such Person shall be aggregated and, after taking into account such aggregation, such Person shall receive on account thereof (in addition to any whole number of shares of New Common Stock, New Warrants or other Distribution such Person is entitled to under this Plan prior to such aggregation) (i) any resulting whole number of shares of New Common Stock and New Warrants and (ii) the net proceeds for any remaining Fractional Share. (e) No Distribution in Excess of Allowed Amount of Claim. ---------------------------------------------------- Notwithstanding anything to the contrary herein, no holder of an Allowed Claim shall receive in respect of such Claim any Distribution (of a value set forth herein or in the Disclosure Statement) in excess of the Allowed Amount of such Claim. Except as expressly provided herein, no Prepetition Claim shall be allowed to the extent that it is for Postpetition Interest or other similar charges. Section 7.10 De Minimis Distributions. Notwithstanding anything to the contrary contained in the Plan, the Disbursing Agents shall not be required to distribute Cash to the holder of an Allowed Claim if the amount of cash to be distributed on account of such Claim is less than $25. Any holder of an Allowed Claim on account of which the amount of Cash to be distributed is less than $25 shall have such Claim discharged and shall be forever barred from asserting any such Claim against the Debtors, the Reorganized Corporation, or their respective property. Any Cash not distributed pursuant to this provision shall be the property of the applicable Reorganized Corporation, free of any restrictions thereon, and any such Cash held by the Disbursing Agent shall be returned to the applicable Reorganized Corporation. PLAN-38 Section 7.11 Compliance with Tax Requirements. In connection with the Plan, to the extent applicable, each Disbursing Agent shall comply with all withholding and reporting requirements imposed on it by federal, state and local taxing authorities, and all Distributions shall be subject to such withholding and reporting requirements. Section 7.12 Setoffs. The Reorganized Corporations are authorized, pursuant to section 553 of the Bankruptcy Code, to set off against any Allowed Claim and the Distributions to be made on account of such Claim, the claims, rights and causes of action of any nature that the applicable Debtor may hold against the holder of such Allowed Claim; provided, however, that neither the failure to effect such a setoff nor the allowance of any Claim hereunder shall constitute a waiver or release by the applicable Debtor of any such claims, rights and causes of action that the Debtors may possess against such holder. Section 7.13 Intercompany Claims. All Claims between and among the Debtors, except the Intercompany Claim, which shall be treated in accordance with the provisions of Section 6.05 hereof, shall be deemed released, waived and discharged as of the Effective Date. All Claims between and among the Debtors and YON shall be deemed released, waived and discharged as of the YON Effective Date. Section 7.14 Unclaimed Property. (a) Escrow of Unclaimed Property. Unclaimed Property (and all ---------------------------- interest, dividends, and other Distributions thereon) shall be delivered promptly to the Disbursing Agent by each Paying Agent. The Disbursing Agent shall deposit such Unclaimed Property and such Unclaimed Property held by the Disbursing Agent in trust (for the benefit of the holders of Claims and Interests entitled thereto under the terms of this Plan) in a subaccount of the relevant Disputed Claims Reserve. For a period of two years following the Effective Date, Unclaimed Property, including any interest, dividends, and other Distributions thereon shall be: (i) held in such subaccount solely for the benefit of the holders of Allowed Claims that have failed to claim such property; and (ii) released from such subaccount and delivered to the holder of an Allowed Claim upon presentation of proper proof by such holder of its entitlement thereto. (b) Investment of Unclaimed Cash. All Cash held in each such ---------------------------- subaccount shall be invested in accordance with section 345 of the Bankruptcy Code, as modified by the relevant Orders of the Court for investments made by the Debtors during the Chapter 11 Cases. The earnings on such investments shall be held in trust as an addition to the balance of the subaccount for the benefit of the holders of Allowed Claims entitled to such Unclaimed Property, and shall not constitute property of the Debtors' estate or of the Reorganized Corporations. PLAN-39 (c) Distribution of Unclaimed Property. At the end of two years ---------------------------------- following the relevant Distribution date of particular Cash or Reorganization Securities, the holders of Allowed Claims theretofore entitled to Unclaimed Property shall cease to be entitled thereto (such holders, the "Unclaimed Holders"), and the Unclaimed Property for each Unclaimed Holder shall then be distributed Pro Rata to the other holders of Allowed Claims in the Class of that Unclaimed Holder in accordance with Section 7.09 hereof. Section 7.15 Withdrawal of the Plan. Each Debtor may only alter, amend, modify, revoke or withdraw this Plan as the plan of reorganization for such Debtor's Case and the Cases of its subsidiaries with the express unanimous consent of the Creditors' Committee, the Bank Group and the Unofficial Committee. Each Debtor reserves the right to make non-substantive changes in any Plan, which changes may be necessary to facilitate the withdrawal of another Debtor from the Plan. Any such revocation or withdrawal by a Debtor shall not affect this Plan as the plan of reorganization of the other Debtors. If a Debtor revokes or withdraws from this Plan: (a) nothing contained herein shall be deemed to constitute a waiver or release of any Claims by or against such Debtor, including (without limitation) the Intercompany Claim or any other claim of one Debtor against another Debtor, or to prejudice in any manner the rights of such Debtor or any persons in any further proceedings involving such Debtor, including (without limitation) objecting to any Intercompany Claim; and (b) any provisions of any Confirmation Order with respect to such Debtor shall be null and void (and such Debtor shall not be benefited by the Confirmation Order) and all such rights of or against such Debtor shall exist as though this Plan had not been filed and no actions taken to effectuate it. Section 7.16 Cancellation of Capital Stock. As of the Effective Date, by virtue of the Plan and in all events without any action on the part of the holders thereof, each share of Old Common Stock of BI issued and outstanding or held in treasury, shall be cancelled and retired and no consideration will be paid or delivered with respect thereto. Notwithstanding anything herein to the contrary, holders of Old Common Stock of BI shall not be required to surrender such stock to the Debtors. Section 7.17 Surrender of Outstanding Securities. Except as otherwise provided herein, each holder of an instrument or certificated security evidencing an Allowed Claim against a Debtor (other than if the Claim or Interest that such instrument or certificated security evidences is Reinstated) shall surrender such instrument or certificated security to the relevant Debtor or Paying Agent with a duly executed letter of transmittal. No Distribution hereunder shall be made to or on behalf of any holder of such Claim unless and until such instrument or certificated security is received or the nonavailability of such instrument or certificated security is established to the satisfaction of the Disbursing Agent or Paying Agent, as the case may be. Such Disbursing Agent or Paying Agent, as the case may be, may PLAN-40 reasonably require security and/or indemnity from the purported holder of such instrument or certificated security to hold it harmless in respect of such instrument or certificated security and any Distributions made in respect thereof. Any such holder that fails to surrender such instrument or satisfactorily explain its nonavailability to the Disbursing Agent or the relevant Paying Agent, as the case may be, within two years of the Effective Date shall be deemed to have no further Claim against the relevant Debtor, Reorganized Corporation or its property in respect of such Claim and shall not participate in any Distribution hereunder. Notwithstanding anything in the immediately preceding sentence, any such holder of a Disputed Claim shall not be required to surrender a required instrument or certificated security until the time such Disputed Claim is allowed or disallowed. Section 7.18 Termination of DIP Facility. Except to the extent that the DIP Facility otherwise provides, on the Effective Date, all obligations of the Debtors under the DIP Facility shall be paid or otherwise satisfied in full in accordance with the terms of the DIP Facility. Without limiting the foregoing, with the consent of the lenders under the DIP Facility, any letters of credit that have not expired shall be replaced or backed-up with letters of credit as a part of Reorganized BSI's New Credit Facility. Upon payment or satisfaction in full of all obligations under the DIP Facility in accordance with the terms thereof, all liens and security interests granted to secure such obligations shall be deemed terminated and shall be of no further force and effect. Section 7.19 New Credit Facility. BSI expects to enter into the New Credit Facility and to issue the New Credit Facility Notes effective as of the Effective Date. The initial advance thereunder shall be used to satisfy in full the Debtors' obligations under the DIP Facility and to provide working capital to Reorganized BSI. Such documents as may exist which evidence the New Credit Facility shall be filed by BSI with the Bankruptcy Court no later than the Exhibit Filing Date as Exhibit E hereto. Copies of, and notice of any modification to, the New Credit Facility after its execution shall be provided to the Creditors' Committee, the Bank Group and the Unofficial Committee. The terms and conditions of the New Credit Facility shall include in all respects the terms and conditions of the commitment letter between BSI and the New Credit Facility Agent and a New Credit Facility term sheet, except to the extent that BSI and the New Credit Facility Agent agree otherwise. BSI shall, on or after the Confirmation Date, execute such other documents as the New Credit Facility Agent may require in order to effectuate the treatment afforded to the lenders under the New Credit Facility. Copies of any such documents shall be provided to the Creditors' Committee, the Bank Group and the Unofficial Committee prior to the Effective Date. PLAN-41 The New Credit Facility Notes shall be in a principal amount to be determined prior to the Effective Date but, in any event, of at least $270 million, on such terms and at such interest rates as shall be agreed upon by Reorganized BSI and the Agent under the New Credit Facility. Section 7.20 Union Square Property. In the event that the Union Square Property remains unsold on the Effective Date, the Union Square Property and the proceeds from any sale of such property shall be pledged to the Indenture Trustee to secure the obligations of Reorganized BSI under the New Notes as is set forth in Section 4.02. The Debtors shall use all reasonable efforts to sell such property. Section 7.21 Yonkers Property. In the event that the Yonkers Property remains unsold on the Effective Date, the Yonkers Property and the proceeds from any sale of such property shall be pledged to the Indenture Trustee to secure the obligations of Reorganized BSI under the New Notes as set forth in Section 4.02. The Debtors shall use all reasonable efforts to sell such property. Section 7.22 Adequate Protection Payments. The Debtors shall continue to pay to the Bank Group through the Effective Date the Adequate Protection Payments in the amounts required by the Agreed Order Regarding Adequate Protection of the Senior Bank Group's Interests and Related Relief, dated October 24, 1995. Section 7.23 Plan Funding. Consummation Costs shall be paid by the Consummation Funds. Section 7.24 Disputed Payments. If any dispute arises as to the identity of a holder of an Allowed Claim who is to receive any Distribution, the Disbursing Agent may, in lieu of making such Distribution to such Person, make such Distribution into an escrow account to be held in trust for the benefit of such holder and shall not constitute property of the Debtors, their estates or the Reorganized Corporations. Such Distribution shall be held in escrow until the disposition thereof shall be determined by order of the Bankruptcy Court or by written agreement among the interested parties to such dispute. Section 7.25 Withholding Taxes. Any federal or state withholding taxes or other amounts required to be withheld under any applicable law shall be deducted and withheld from any Distributions hereunder. PLAN-42 Section 7.26 Obligations Incurred After the Confirmation Date. Payment obligations incurred after the date and time of entry of the Confirmation Order shall not be subject to application or proof of claim and may be paid by the Debtors, Reorganized BI, Reorganized BSI or Reorganized DOS, as the case may be, in the ordinary course of business and without further Bankruptcy Court approval as Administrative Claims. Section 7.27 Cancellation of Bonds and Agreements. On the Effective Date, except as otherwise provided for therein, the Bonds and any other note, bond, indenture or other instrument or document evidencing or creating any indebtedness or obligation of the Debtors will be deemed cancelled and of no further force or effect without any further action on the part of the Bankruptcy Court, any Person or any governmental entity or agency. The holders of such cancelled Bonds and notes will have no rights arising from or relating to such Bonds or the cancellation thereof, except the rights provided pursuant to the Plan. Following the Effective Date, holders of Bonds will receive from the respective indenture trustee, agent, servicer or the Disbursing Agent, specific instructions regarding the time and manner in which the Bonds are to be surrendered. Pending such surrender, such Bonds will be deemed cancelled and shall represent only the right to receive the distributions to which the holder is entitled under this Plan. Any Bond which is lost, stolen, mutilated or destroyed, shall be deemed surrendered when the holder of a Claim or Interest based thereon delivers to the applicable indenture trustee, agent, servicer or the Disbursing Agent (a) evidence satisfactory to the indenture trustee, agent, servicer or the Disbursing Agent of the loss, theft, mutilation or destruction of such instrument or certificate, and (b) such security or indemnity as may be required by the indenture trustee, agent, servicer or the Disbursing Agent to hold each of them harmless with respect thereto. Each indenture or other agreement that governs the rights of the holder of a Claim and that is administered by an indenture trustee, an agent or a servicer shall continue in effect solely for the purposes of (a) allowing such indenture trustee, agent or servicer to make the Distributions to be made on account of such Claims under this Plan, (b) permitting such indenture trustee, agent or servicer to maintain any rights or liens it may have for fees, costs, expenses and indemnification under such indenture or other agreement and to be paid or reimbursed for such prepetition and postpetition fees, costs, expenses and indemnification only from the Distributions (until payment in full of such fees, costs, expenses or indemnification) that are governed by the respective indenture or other agreement in accordance with the provisions set forth therein and (c) the obligations of, and/or Claims against, the Debtors under, relating or pertaining to any agreements, indentures or certificates of designations, governing the Bonds and any other note, bond, indenture or other instrument or documents evidencing or creating any indebtedness or obligation of the Debtors shall be released and discharged; provided, however, that each PLAN-43 indenture or other agreement that governs the rights of the holder of a Claim and that is administered by an indenture trustee, an agent or a servicer shall continue in effect solely for the purposes of allowing such indenture trustee, agent or servicer to make the Distributions to be made on account of such claims under this Plan; provided, further, that the provisions of the foregoing proviso shall not affect the discharge of Debtors' liabilities under the Bankruptcy Code and the Confirmation Order or result in any expense or liability to the Reorganized Corporations. Section 7.28 Instructions to Disbursing Agent. Prior to any Distribution on account of any Bonds, the indenture trustee, agent or servicer of the Bonds shall (a) inform the Disbursing Agent as to the amount of properly surrendered Bonds and (b) instruct the Disbursing Agent, in a form and manner that the Disbursing Agent reasonably determines to be acceptable, of the names of the holders of Bonds with allowed BI-GEN Claims and denominations of New Warrants to be issued and distributed to or on behalf of such holders of Allowed BI-GEN Claims in exchange for properly surrendered Bonds. Section 7.29 Record Date for Distributions to Holders of Bonds. At the close of business on the Record Date, the transfer ledgers of the indenture trustees, agent and servicers of the Bonds shall be closed, and there shall be no further changes in the record holders of the Bonds. The Reorganized Corporations and the indenture trustees, agents and servicers for such Bonds and the Disbursing Agent shall have no obligation to recognize any transfer of such Bonds occurring after the Record Date. The Reorganized Corporations and the indenture trustees, agents and servicers for such Bonds and the Disbursing Agent shall be entitled instead to recognize and deal for all purposes hereunder with only those record holders stated on the transfer ledgers as of the close of business on the Record Date. Section 7.30 Termination of Subordination. Effective as of the date on which each holder of a Bank Group Claim has received all Distributions to which, pursuant to this Plan, each such holder is entitled to receive, each holder of a Bank Group Claim shall be deemed to have waived all contractual, legal and equitable subordination rights which it may have, whether arising under general principles of equitable subordination, section 510(c) of the Bankruptcy Code or otherwise, with respect to the Distribution to be made hereunder to holders of Bond Claims. On the Effective Date, all contractual, legal or equitable subordination rights that each holder of a Bank Group Claim has individually and collectively with respect to any Distribution made pursuant to this Plan to holders of Bond Claims shall be discharged and terminated, and all actions related to the enforcement of such subordination rights will be permanently enjoined. PLAN-44 ARTICLE VIII ------------ EFFECT OF THE PLAN ON CLAIMS AND INTERESTS ------------------------------------------ Section 8.01 Discharge. (a) Scope. Except as otherwise provided in the Plan, Confirmation ----- Order, Yonkers Confirmation Order or DIP Facility, in accordance with section 1141(d)(1) of the Bankruptcy Code, when the Confirmation Order becomes a Final Order, the Plan, the Confirmation Order and the Yonkers Confirmation Order shall discharge, effective as of the Effective Date, or the Yonkers Effective Date, as the case may be, all debts of, Claims against, liens on, and Interests in each of the Debtors, their assets, or properties, which debts, Claims, liens, and Interests arose at any time before the entry of the Confirmation Order and Yonkers Confirmation Order, as the case may be. The discharge of the Debtors shall be effective as to each Claim or Interest, regardless of whether a proof of Claim or Interest therefor was filed, whether the Claim is an Allowed Claim, or whether the holder thereof votes to accept the Plan. On the Effective Date, or the Yonkers Effective Date, as the case may be, as to every discharged Claim and Interest, any holder of such Claim or Interest (including, without limitation, any options to purchase Old Common Stock of BI) shall be precluded from asserting against any Debtor formerly obligated with respect to such Claim or Interest, or against such Debtor's assets or properties, any other or further Claim or Interest based upon any document, instrument, act, omission, transaction, or other activity of any kind or nature that occurred before the Confirmation Date. (b) Injunction. Except as otherwise provided in the Plan or ---------- Confirmation Order, as of the Effective Date, all entities that have held, currently hold or may hold a Claim or other debt or liability that is discharged or an Interest or other right of an equity security holder that is terminated pursuant to the terms of the Plan, are permanently enjoined from taking any of the following actions on account of any such discharged Claims, debts or liabilities or terminated Interests or rights: (1) commencing or continuing in any manner any action or other proceeding against the Debtors, the Reorganized Debtors or their respective property, officers, directors, agents, employees and representatives and others including (without limitation) the Creditors' Committee (including present and former members), the Bank Group (including present and former members), the Unofficial Committee (including present and former members), and professional persons retained by the Debtors, the Creditors' Committee, members of the Creditors' Committee, the Bank Group and the Unofficial Committee; (2) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order against the Debtors, the Reorganized Debtors or their respective property, current and former officers, directors, agents, employees and representatives and others including (without limitation) the Creditors' Committee (including present and former members), the Bank Group (including present and former members), the Unofficial Committee (including present and former members), and professional persons retained by the Debtors, the Creditors' Committee, members of the Creditors' Committee, the Bank Group and the Unofficial Committee; (3) creating, perfecting or enforcing any lien or PLAN-45 encumbrance against the Debtors, the Reorganized Debtors or their respective property, current and former officers, directors, agents, employees and representatives and others including (without limitation) the Creditors' Committee (including present and former members), the Bank Group (including present and former members), the Unofficial Committee (including present and former members), and professional persons retained by the Debtors, the Creditors' Committee, members of the Creditors' Committee, the Bank Group and the Unofficial Committee; (4) asserting a setoff, right of subrogation or recoupment of any kind against any obligation due to the Debtors, the Reorganized Debtors or their respective property, current and former officers, directors, employees and representatives and others including (without limitation) the Creditors' Committee (including present and former members), the Bank Group (including present and former members), the Unofficial Committee (including present and former members), and professional persons retained by the Debtors, the Creditors' Committee, members of the Creditors' Committee, the Bank Group and the Unofficial Committee; and (5) commencing or continuing any action, in any manner, in any place that does not comply with or is inconsistent with the provisions of the Plan. (c) Release of Collateral. Unless a particular Secured Claim is --------------------- Reinstated or the holder thereof receives a Distribution of a Reorganization Security in respect of such Claim under this Plan: (i) each holder of: (A) a Secured Claim; and/or (B) a Claim that is purportedly secured shall on or immediately before the Effective Date: (x) turn over and release to the relevant Debtor (or its successor, as the case may be) any and all property of the relevant Debtor that secures or purportedly secures such Claim; and (y) execute such documents and instruments as such Reorganized Corporation requires to evidence such claimant's release of such property; and (ii) on the Effective Date, all claims, right, title and interest in such property shall revert to the relevant Reorganized Corporation (or the successor to any Debtor that does not survive a Combination Transaction or to Reorganized BSI in respect of the property of a Dissolving Debtor) free and clear of all Claims and Interests, including (without limitation) liens, charges, pledges, encumbrances and/or security interests of any kind. No Distribution hereunder shall be made to or on behalf of any holder of such Claim unless and until such holder executes and delivers to the relevant Debtor or Reorganized Corporation such release of liens. Any such holder that fails to execute and deliver such release of liens within 180 days of the Effective Date shall be deemed to have no further Claim against the relevant Debtor, Reorganized Corporation or their property in respect of such Claim and shall not participate in any Distribution hereunder. Notwithstanding the immediately preceding sentence, any such holder of a Disputed Claim shall not be required to execute and deliver such release of liens until the time such Claim is allowed or disallowed. (d) Applicability. Notwithstanding anything contained herein to ------------- the contrary, none of the provisions of this section shall be deemed applicable to any rights, claim, or cause of action, whether asserted or yet to be asserted, against any person or entity other than as specifically referred to in this Section 8.01. PLAN-46 Section 8.02 Revesting and Vesting. Subject to the Combination Transactions each of the Debtors shall, as a Reorganized Corporation, continue to exist after the Effective Date as a separate corporate entity, with all the powers of a corporation under applicable law, without prejudice to any right to terminate such existence (whether by merger or otherwise) under applicable law after the Effective Date. Except as otherwise provided in this Plan, on the Effective Date, or in the case of YON, the Yonkers Effective Date, all property comprising the Estates of each Debtor (other than a Dissolving Debtor) shall revest in the relevant Reorganized Corporation or its successor as a result of a Combination Transaction, free and clear of all Claims, liens, charges, encumbrances and Interests of creditors and equity security holders (other than as expressly provided herein). On the Effective Date, any property of a Dissolving Debtor not previously distributed under this Plan shall vest in Reorganized BSI, free and clear of all Claims, liens, charges, encumbrances and Interests of creditors and equity security holders of such Dissolving Debtor (other than as expressly provided herein). As of the Effective Date, each Reorganized Corporation may operate its businesses and use, acquire and dispose of property and settle and compromise claims or interests arising after the Effective Date without supervision of the Court free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan and Confirmation Order. Without limiting the foregoing, each Reorganized Corporation may pay the charges it incurs for Professional Fees, disbursements, expenses, or related support services after the Effective Date without any application to the Court. Section 8.03 Secondary Liability Claims. After notice and a hearing, Secondary Liability Claims shall be estimated by the Court under section 502(c) of the Bankruptcy Code. Each such Claim against any Debtor in respect of such Debtor's guaranty of obligations of any Primary Obligor that is a Debtor shall be allowed against such guarantor Debtor in the amount of the deficiency in recovery on the related claim against such Primary Obligor. Section 8.04 Release of Primary Obligors. Except as provided otherwise herein, all holders of Claims against and Interests in any of the Debtors receiving, or entitled to receive, payments or Distributions pursuant to this Plan, in consideration for the promises and obligations of the Debtors under this Plan, shall be deemed to have waived and released all rights or claims they had or might have had against any current or former officer, director or employee of each of the Debtors based upon any claim against a Primary Obligor that also gives rise to a Secondary Liability Claim; provided, however, except as expressly provided above in this subsection, no such Claim or Interest holder shall be deemed by virtue of this subsection to have waived or released any right or claim it may have against any person other than the Debtors or the current and former officers, directors and employees of each of them. The release of any person or entity under this section additionally acts as an injunction against the commencement or continuation of any action, employment of process or act to collect, offset or recover the claims released hereby. PLAN-47 Section 8.05 Survival of Certain Indemnification Obligations. Except as otherwise provided in this Plan, the obligations of the Debtors to indemnify individuals who serve or served as their respective directors, officers, agents, employees, representatives, and others, including (without limitation) professional persons retained by any Debtor, pursuant to such Debtor's respective certificates of incorporation, Amended By-Laws, applicable statutes and agreements in respect of all present and future actions, suits, and proceedings against any of such officers, directors, agents, employees, representatives, and others, including (without limitation) professional persons retained by any Debtor, based upon any act or omission related to service with, for, or on behalf of any of the Debtors on or after the Petition Date as such obligations were in effect at the time of any such act or omission (but excluding such indemnity obligations, if any, arising under the Bank Documents, SPE Documents, Indenture, or any other similar such agreement or any unexpired lease or executory contract which is not assumed by any Debtor or Reorganized Corporation which gave rise to or could give rise to a Claim against any of the Debtors prior to the Petition Date), shall not be discharged or impaired by confirmation or consummation of this Plan but shall survive unaffected by the reorganization contemplated by this Plan and shall be performed and honored by each respective Debtor or Reorganized Corporation (or its successor) regardless of such confirmation, consummation, and reorganization. Section 8.06 Release of Officers, Directors, Employees and Representatives. Except as provided in Section 8.07 hereof, each Debtor (and its successor Reorganized Corporation) hereby waives, releases and discharges: all current and former officers, directors, agents, employees and representatives of the Debtors, members of the Creditors' Committee (including present and former members), members of the Unofficial Committee, members of the Bank Group (including present and former members) and others, including (without limitation) professional persons retained by the Debtors and the Creditors' Committee, the members of the Unofficial Committee, members of the Bank Group, the agent for the Bank Group, from any claim (as such term "claim" is defined in section 101(5) of the Bankruptcy Code) arising prior to the Confirmation Date; provided, however, that to the extent that applicable law would permit a holder of a Tax Claim to seek the payment of such Tax Claim from a current or former officer or director of the Debtors designated as a "responsible person" under such law, nothing herein shall act to discharge or release any such person from any liability with respect to such Tax Claim in the event that any Reorganized Corporation fails to pay any such claim pursuant to the terms of this Plan. With respect to the current and former members of the Creditors' Committee, the Unofficial Committee and the Bank Group, the foregoing release shall only apply to any claims, if any, which one or more of the Debtors may have against such entity or entities in their capacity as a member of the Creditors' Committee, Unofficial Committee or Bank Group, as the case may be. With PLAN-48 respect to the Debtors' current and former officers or directors, the foregoing release shall not apply to claims, if any, which may exist against such persons for which (and only to the extent) there is D&O Insurance. In any proceeding brought with respect to any such claims against the Debtors' current or former officers or directors, any recovery (i) will be limited to amounts which may be payable from the D&O Insurance, and (ii) will not under any circumstances come from the personal assets of any such current or former officer or director, as the case may be, and in no event shall the Debtors, Reorganized Corporations or any other Person seek to execute on any judgment against any current or former officer or director except with respect to the D&O Insurance, even if no D&O Insurance is determined to exist, the D&O carrier declines coverage, or the D&O Insurance coverage is insufficient to satisfy in full any claim or judgment obtained against such current or former officer or director. The foregoing shall not preclude, restrict or limit any officer or director against whom such a claim is asserted from defending against or opposing any such claim. Claimants and holders of Interests in any of the Debtors shall be enjoined from commencing or continuing any action, employment of process or act to collect, offset or recover any such claim that could be brought on behalf of or in the name of any of each such Debtor, without any independent cause of action belonging to the claimant or equity interest holder asserting such claim. Section 8.07 Release of Certain Claims. Notwithstanding anything to the contrary in the Plan or in any instrument, contract, release or other agreement entered into in connection with the Plan or an order of the Bankruptcy Court, on the Effective Date, each Debtor shall be deemed to have released all claims, rights and causes of action arising under section 547 of the Bankruptcy Code. Section 8.08 Claims and Interest Objections. Unless otherwise ordered by the Bankruptcy Court, all Claims objections shall be Filed and served on the applicable claimant by the later of (a) February 1, 1999 or (b) the Effective Date; provided, however, that if a Claim is permitted to be Filed after such date, any Claims objection with respect to such claim may be Filed within thirty (30) days after the date such Claim was Filed. Any Claim which is Allowed under the terms of this Plan or pursuant to an Order of the Bankruptcy Court prior to the applicable date set forth in the first sentence of this Section shall be deemed Allowed for all purposes. Section 8.09 Preservation of Insurance. The provisions of this Plan shall not diminish or impair in any manner the enforceability and coverage of any insurance policies that may cover Claims against the Debtors, Reorganized Corporations or any other Person. PLAN-49 ARTICLE IX ---------- EXECUTORY CONTRACTS ------------------- Section 9.01 Executory Contracts and Unexpired Leases. As of the Effective Date, or in the case of YON, the Yonkers Effective Date, all executory contracts and unexpired leases of each Debtor shall be deemed rejected by such Debtor pursuant to the provisions of section 365 of the Bankruptcy Code, except: (a) any executory contract or unexpired lease that has been or is the subject of a motion to assume or assume and assign filed pursuant to section 365 of the Bankruptcy Code by any of the Debtors before the Effective Date; (b) any executory contract or unexpired lease listed in the "Schedule of Assumed and Assumed and Assigned Executory Contracts and Unexpired Leases" to be filed by the Debtors with the Court before the entry of the Confirmation Order; (c) any executory contract or unexpired lease assumed or assumed and assigned pursuant to the provisions of this Plan; and (d) any agreement, obligation, security interest, transaction or similar undertaking that the relevant Debtor believes is not executory or is not a lease, and which is later determined by the Court to be an executory contract or unexpired lease that is subject to assumption or rejection under section 365 of the Bankruptcy Code. The rejection by any Debtor of an executory contract or unexpired lease shall cause such rejection to be a breach prior to the Petition Date under sections 365(g) and 502(g) of the Bankruptcy Code. Section 9.02 Lease Under Which Bradlees Leases Union Square Property [Intentionally Omitted] Section 9.03 Executory Contract of R.R. Donnelly & Sons Company. BSI's executory contract with R.R. Donnelly & Sons Company ("R.R. Donnelly") shall, as of the Effective Date, (i) be deemed assumed by Reorganized BSI, (ii) R.R. Donnelly shall waive any cure payments upon assumption of such contract to which it might be entitled pursuant to the provisions of the Bankruptcy Code and (iii) BSI shall waive any cause of action which it may have against R.R. Donnelly under section 547 of the Bankruptcy Code. Section 9.04 Executory Contract of J.Baker, Inc. As of the Effective Date, BSI's executory contract with J.Baker, Inc. ("J.Baker") shall be deemed amended to, inter alia, extend the term of the contract for three years following the Effective Date and, as amended, be assumed by Reorganized BSI. In respect of the $1.8 million Claim of J.Baker, Reorganized BSI shall, on the Effective Date or as soon thereafter as practicable, make a Cash Distribution to J.Baker in the amount of $360,000. Reorganized BSI shall make additional Cash Distributions to J.Baker in the amount of $1,440,000, to be paid in equal monthly installments PLAN-50 commencing thirty days after the first payment, with interest at a rate equal to J.Baker's borrowing rate, but not to exceed nine percent (9%); provided, however, that no interest shall accrue during the first six months after the Effective Date; provided, further, however, that the obligation of Reorganized BSI to make the foregoing payments owed to J.Baker shall accelerate and become immediately due and payable should (a) Reorganized BSI enter into a third party transaction which would constitute a change of control or (b) Peter Thorner's employment with Reorganized BSI terminate for any reason. Section 9.05 Cure. At the election of the relevant Debtor, any monetary defaults under each executory contract and unexpired lease to be assumed under this Plan shall be satisfied pursuant to section 365(b)(1) of the Bankruptcy Code, in one of the following ways: (a) by payment of the default amount in Cash on the Effective Date; (b) by issuance of a Cure Note; or (c) on such other terms as agreed to by the parties to such executory contract or unexpired lease; provided, however, any landlord which filed a timely objection with the Court to the First Amended Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates Under Chapter 11 of the Bankruptcy Code, pursuant to the procedures prescribed in the Order dated October 5, 1998, objecting to the cure of defaults under a lease to which such landlord is a party by means of a Cure Note, shall be paid Cash in accordance with the provisions of Section 5.01(a) hereof to cure any defaults under such lease if it is assumed pursuant to the provisions of this Plan. In the event of a dispute regarding: (i) the amount of any Cure Payments; (ii) the ability of the Debtor that is a party thereto to provide adequate assurance of future performance under the contract or lease to be assumed; or (iii) any other matter pertaining to assumption, the cure payments required by section 365(b)(1) of the Bankruptcy Code shall be made following the entry of a Final Order resolving the dispute and approving assumption. Section 9.06 Rejection Damages Bar Date. If the rejection by any Debtor, pursuant to the Plan or otherwise, of an executory contract or unexpired lease results in a Claim, then such Claim shall be forever barred and shall not be enforceable against such Debtor or Reorganized Corporation or the properties of either of them unless a proof of claim is filed with the clerk of the Bankruptcy Court and served upon counsel to the Debtors (i) within fifteen (15) days after service of the later of (a) notice of the Confirmation Order, (b) other notice that the executory contract or unexpired lease has been rejected, or (c) in the event that any Debtor rejects any executory contract or unexpired lease after the Confirmation Date, within fifteen (15) days of the date of such rejection or (ii) within such time as the Bankruptcy Court may order. PLAN-51 Section 9.07 Executory Contracts and Unexpired Leases Entered Into and Other Obligations Incurred After the Petition Date. Executory contracts and unexpired leases entered into and other obligations incurred after the Petition Date by any Debtor shall be performed by such Debtor or by such Reorganized Corporation liable thereunder in the ordinary course of its business. Accordingly, such executory contracts, unexpired leases and other obligations shall survive and remain unaffected by entry of the Confirmation Order. Section 9.08 Assumption of Lease Relating to Yonkers Property. YON shall hereby assume the lease relating to the Yonkers Property as of the Yonkers Confirmation Date. YON has determined that it intends to assign its lease relating to the Yonkers Property to an acceptable purchaser, and will move for such relief, at such time prior to the Yonkers Effective Date and subject to such terms and procedures as YON or the Court may establish, except that YON reserves the right not to assign the lease for the YON Property if it fails to find a buyer which, in its reasonable discretion, has complied with such terms and procedures or is otherwise acceptable. ARTICLE X --------- CONDITIONS TO CONFIRMATION -------------------------- AND OCCURRENCE OF EFFECTIVE DATE -------------------------------- Section 10.01 Conditions to Confirmation. This Plan may not be confirmed unless each of the conditions set forth below is satisfied. Except as provided in Section 10.03 below, any one or more of the following conditions may be waived at any time by the Debtors with the unanimous consent of the Creditors' Committee, the Unofficial Committee and the Bank Group. (a) The Disclosure Statement Order shall have been entered and be a Final Order. (b) The Confirmation Order and the YON Confirmation Order shall be in form reasonably acceptable to Debtors, the Creditors' Committee, the Unofficial Committee and the Bank Group. The Confirmation Order shall, among other things, provide that: (i) The Reorganized Corporation shall be deemed to succeed to, by operation of law, all executory contracts or unexpired leases assumed by the Debtors during the Chapter 11 Cases, (including pursuant to the provisions of the Plan), which contracts and leases shall remain in full force and effect notwithstanding any provision in such contract or lease (including those described in sections 365(b)(2) and (f) of the Bankruptcy Code) that prohibits assignment or transfer or that enables or requires the termination of such contract or lease; PLAN-52 (ii) except as expressly provided in this Plan, the Debtors are discharged effective upon the Effective Date or YON Effective Date, as the case may be, from any "debt" (as that term is defined in section 101(12) of the Bankruptcy Code), and the liability in respect thereof is extinguished completely, whether reduced to judgment or not, liquidated or unliquidated, contingent or noncontingent, asserted or unasserted, fixed or unfixed, matured or unmatured, disputed or undisputed, legal or equitable, known or unknown, or that arose from any agreement of the Debtors entered into or obligation of the Debtors occurred before the Petition Date, or from any conduct of the Debtors prior to the Petition Date, or that arose before the Petition Date, including, without limitation, all interest, if any, on any such debts, whether such interest accrued before or after the Petition Date; (iii) a finding by the Bankruptcy Court that the Plan complies with all applicable provisions of the Bankruptcy Code, including that the Plan was proposed in good faith and that the Confirmation Order and YON Confirmation Order was not procured by fraud; and (iv) except as expressly provided in the Plan, all Interests shall be terminated effective upon the Effective Date. Section 10.02 Conditions to Occurrence of Effective Date. The Effective Date for the Plan may not occur unless each of the conditions set forth below is satisfied. Except as provided in Section 10.03 below, any one or more of the following conditions may be waived at any time by the Debtors with the unanimous consent of the Creditors' Committee, the Unofficial Committee and the Bank Group. (a) The Confirmation Order shall have been entered and be a Final Order. (b) Each Reorganized Debtor's respective Certificate of Incorporation and Amended By-Laws shall have been amended as provided in this Plan. (c) Reorganized BI and Reorganized BSI shall each have sufficient Cash on hand to pay the Consummation Costs and make such other timely Distributions of Cash as may be required hereunder. (d) Reorganized BSI shall have established a revolving line of credit or other liquidity facility with a bank or other financial institution in a drawable principal amount of at least $250 million, with terms satisfactory to Reorganized BSI and the lenders under the New Credit Facility, in their sole discretion. (e) Subject to Section 7.08(e) hereof, the aggregate amount of Allowed General Unsecured Claims and Disputed General Unsecured Claims (i) against BSI (excluding the Bank Group Claim and the Intercompany Claim) shall have been reduced, PLAN-53 either through agreement or order of the Bankruptcy Court, to less than $300 million and (ii) against each Debtor other than BI, BSI and BAC (other than the Intercompany Claims, the Bank Group Claim and SPE Claims) shall have been reduced, either through agreement or order of the Bankruptcy Court, to an amount of less than $1 million. (f) Reorganized BSI shall have granted to vendors who provide retail merchandise to Reorganized BSI after the Effective Date, or who have provided merchandise to BSI before the Effective Date which is not paid for as of the Effective Date, a Trade Vendors' Lien to secure payment to such trade vendors of amounts owed by Reorganized BSI. The Trade Vendors' Lien, which shall be held by the Trade Vendors' Collateral Agent, shall be subordinated to the lien securing the New Credit Facility to the satisfaction of the holders of the liens securing the New Credit Facility and shall attach to all of Reorganized BSI's inventory (but not any other assets of Reorganized BSI). If a new lender or group of lenders replaces the lenders under the New Credit Facility, then the Trade Vendors' Lien shall be subordinated to the liens of such replacement lender or lenders. The Trade Vendors' Lien shall terminate on the earliest to occur of (i) two years after the Plan Effective Date, (ii) at the sole option of Reorganized BSI, the date on which the ratio of the amount of accounts payable of Reorganized BSI to the amount of Inventory of Reorganized BSI, computed on a cost basis, for any rolling three-month period is more than five percentage points less than such ratio on a comparable store basis for the same period in the prior year, (iii) the consummation of a transaction pursuant to which Reorganized BI, Reorganized BSI or Reorganized DOS merges or otherwise combines with another company or companies, (iv) at the sole option of Reorganized BSI, as to any individual trade vendor, at such time as such vendor fails to provide merchandise to Reorganized BSI on terms which are at least as favorable to Reorganized BSI as the credit terms under which such vendor provided merchandise to BSI in the year prior to the Effective Date and (v) at the sole option of Reorganized BSI, as to any individual trade vendor that initially provides retail merchandise to Reorganized BSI after the Effective Date, at such time as such vendor fails to provide retail merchandise to Reorganized BSI on terms which are as favorable to Reorganized BSI as the initial credit terms which such vendor provide retail merchandise to Reorganized BSI; provided, however, that any termination by Reorganized BSI of the Trade Vendors' Lien will not be effective until the thirtieth day after Reorganized BSI gives (a) actual notice to the Trade Vendors' Collateral Agent and (b) (x) in the case of trade vendors generally, notice by publication in The New York Times (national edition), of its intent to terminate the Trade Vendors' Lien and actual notice to trade vendors to whom, according to the books and records of Reorganized BSI, amounts are then due and owing, or (y) in the case of an individual trade vendor, actual notice of such termination to the trade vendor whose Trade Vendors' Lien Reorganized BSI proposes to terminate. The documents giving rise to the Trade Vendors' Lien shall be annexed hereto as Exhibit I and shall be filed with the Court on or before the Exhibit Filing Date. Such documents shall (i) be consistent with the terms of this Plan, and (ii) not provide for payment by the Debtors or the Reorganized Corporations of any legal or other fees or costs except (a) such reasonable fees to the Trade Vendors' Collateral Agent as the Debtors or the Reorganized Corporations and the Trade Vendors' Collateral Agent shall agree to, and (b) such reasonable attorneys' fees as may be incurred in connection with the filing of financing statements with respect to such documents, such modifications or revisions to Exhibit I as the Reorganized Corporations may agree to, or in the event of a default under such documents. PLAN-54 (g) Each of the Creditors' Committee, the Bank Group and the Unofficial Committee have approved in form and substance each of the Exhibits to this Plan, such approval not to be unreasonably withheld. (h) (i) As of or prior to the Effective Date, one or more shelf registration statements, in form and substance reasonably satisfactory to Gabriel Capital L.P. and other members of the Bank Group, pursuant to which those creditors shall have the right to re-sell the New Common Stock and New Notes distributed to them under this Plan (whether as a holder of a Bank Group Claim or a General Unsecured Claim), shall have been declared effective by the Securities and Exchange Commission under applicable securities laws, and (ii) on the Effective Date, Reorganized BI shall have committed to maintain the effectiveness of the foregoing registration statements, pursuant to a reasonably acceptable Registration Rights Agreement, for so long as Gabriel Capital L.P. may be deemed an affiliate of Reorganized BI. However, the foregoing requirement in sub-paragraph (i) shall be deemed waived if, prior to the Effective Date, the Securities and Exchange Commission shall have advised Reorganized BI in writing that such registration statements shall be declared effective subject only to the occurrence of the Effective Date or the issuance of the Reorganization Securities by Reorganized BI. Section 10.03 Waiver of Conditions to Confirmation and Occurrence of Effective Date. Each of the conditions to confirmation of this Plan or to the occurrence of the Effective Date is for the benefit of the Debtors, the Creditors' Committee, the Bank Group and the Unofficial Committee. Other than the requirement that the Disclosure Statement Order and the Confirmation Order must be entered, the requirement that a particular condition be satisfied may be waived in whole or part by the Debtors, with the unanimous consent of the Creditors' Committee, the Bank Group and the Unofficial Committee without notice and a hearing, and the relevant Debtors' benefits under the "mootness doctrine" shall be unaffected by any provision hereof. Section 10.04 Effect of Nonoccurrence of the Conditions to Occurrence of Effective Date. If each of the conditions to the occurrence of the Effective Date have not been satisfied or duly waived on or before the date which is no later than the first Business Day after the later of (a) sixty (60) days after the Confirmation Order is entered, or (b) the first day of the first fiscal year of the Reorganized Corporations after the Confirmation Order is entered, or by such later date as is approved, after notice and a hearing, by the Court, then upon motion by any party in interest made before the time that each of the conditions has been satisfied or duly waived, the Confirmation Order may be vacated by the Court; provided, however, that, notwithstanding the filing of such a PLAN-55 motion, the Confirmation Order shall not be vacated if each of the conditions to occurrence of the Effective Date is either satisfied or duly waived before the Court enters an order granting the relief requested in such motion. If the Confirmation Order is vacated pursuant to this Section, the Plan shall be null and void in all respects, and nothing contained in the Plan shall: (a) constitute a waiver or release of any Claims by or against or Interests in the Debtors; or (b) prejudice in any manner the rights of any of the Debtors or of any other party in interest, including, without limitation, the right to seek a further extension of the exclusivity periods under section 1121(d) of the Bankruptcy Code. ARTICLE XI ---------- CONFIRMABILITY AND SEVERABILITY ------------------------------- OF A PLAN AND CRAMDOWN ---------------------- Section 11.01 Confirmability and Severability of a Plan. The confirmation requirements of section 1129 of the Bankruptcy Code must be satisfied separately with respect to each Debtor. Subject to the unanimous consent of the Creditors' Committee, the Bank Group, and the Unofficial Committee, the Debtors reserve the right to alter, amend, modify, revoke or withdraw the Plan as it applies to any particular Debtor. A determination by the Bankruptcy Court that the Plan, as it applies to any particular Debtor, is not confirmable pursuant to section 1129 of the Bankruptcy Code shall not limit or affect: (1) the confirmability of the Plan as it applies to any other Debtor; or (2) the Debtors' ability to modify the Plan, as it applies to any particular Debtor, to satisfy the confirmation requirements of section 1129 of the Bankruptcy Code. Each provision of this Plan shall be considered separable and, if for any reason any provision or provisions herein are determined to be invalid and contrary to any existing or future law, the balance of this Plan shall be given effect without relation to the invalid provision. Section 11.02 Cramdown. The Debtors request confirmation under section 1129(b) of the Bankruptcy Code if any impaired Class does not accept the Plan pursuant to section 1126 of the Bankruptcy Code. In that event, the Debtors reserve the right to modify the Plan to the extent, if any, that confirmation pursuant to section 1129(b) of the Bankruptcy Code requires modification. PLAN-56 ARTICLE XII ----------- ADMINISTRATIVE PROVISIONS ------------------------- Section 12.01 Retention of Jurisdiction. Notwithstanding confirmation of this Plan or occurrence of the Effective Date, the Court shall retain jurisdiction for all purposes permitted under applicable law, including without limitation the following purposes: (a) Determination of the allowability of Claims and Interests upon objection to such Claims or Interests by a Debtor, the Reorganized Debtors, other successors to any of the Debtors, or any other party in interest and the validity, extent, priority and nonavoidability of consensual and nonconsensual liens and other encumbrances; (b) Determination of tax liability pursuant to section 505 of the Bankruptcy Code; (c) Approval, pursuant to section 365 of the Bankruptcy Code, of all matters related to the assumption, assumption and assignment, or rejection of any executory contract or unexpired lease of any of the Debtors, including, without limitation, the assumption and assignment of the Union Square Lease and the lease relating to the Yonkers Property; (d) Determination of requests for payment of administrative expenses entitled to priority under section 507(a)(1) of the Bankruptcy Code, including compensation of parties entitled thereto under section 330 of the Bankruptcy Code; (e) Resolution of controversies and disputes regarding the interpretation of this Plan; (f) Implementation of the provisions of this Plan and entry of Orders in aid of confirmation and consummation of this Plan, subject to Paragraph 23 of that certain Order dated December 22, 1997 including, without limitation, appropriate Orders to protect the Debtors and their successors from actions by creditors and/or Interest holders of the Debtors or any of them and resolving disputes and controversies regarding property of the Estates and the Reorganized Corporations that is subject to restructuring negotiations on and after the Confirmation Date; (g) Modification of the Plan pursuant to section 1127 of the Bankruptcy Code; (h) Adjudication of any causes of action that arose prior to the Confirmation Date or in connection with the implementation of this Plan, including avoidance actions, brought by a Debtor, Reorganized Corporation, other successors of any of the Debtors as the representative of the Debtors' Estates or a party in interest (as a representative of any Debtor's Estate); and PLAN-57 (i) Entry of a Final Order closing the Chapter 11 Cases. Section 12.02 Governing Law. Except to the extent the Bankruptcy Code, Bankruptcy Rules, or other federal laws apply and except for Reinstated Claims governed by another jurisdiction's law, the rights and obligations arising under this Plan shall be governed by the laws of the State of New York, without giving effect to principles of conflicts of law. Section 12.03 Fees and Expenses of Bank Group. The agent for and certain members of the Bank Group have received reimbursement of or payment for the professionals retained by them during the pendency of these Chapter 11 cases from the Adequate Protection Payments. Such payments shall continue through the Effective Date. Neither the Bank Group, its agents nor its members shall seek reimbursement for the fees and expenses of its professionals other than from the Adequate Protection Payments. No later than ten (10) days after the Effective Date, the Bank Group shall deliver to the Reorganized Corporations a summary in form reasonably satisfactory to the Reorganized Corporations of the fees and expenses paid to all professionals retained by the Bank Group during the Chapter 11 cases. Such summary shall include a month by month breakdown of fees and expenses paid to each such professional by the Bank Group and the net amount of the Adequate Protection Payments remaining after the payment of such professional fees and expenses. Section 12.04 Fees and Expenses of Unofficial Committee. Subject to the approval of the Bankruptcy Court on appropriate application as set forth in Section 12.07(b) hereof, the reasonable fees and expenses of the Unofficial Committee during the course of the Chapter 11 Cases shall be allowed as administrative expenses of BSI, pursuant to 11 U.S.C. (S) 503(b). Section 12.05 Professional Fees and Expenses of Loomis Sayles. Subject to the approval of the Bankruptcy Court on appropriate application as set forth in Section 12.07(b) hereof, the reasonable professional fees and expenses of Loomis Sayles during the course of these cases shall each be allowed as administrative expenses of the Debtors, pursuant to 11 U.S.C. (S) 503(b), not to exceed, in the aggregate, the amount of $300,000. Section 12.06 Fees and Expenses of Bond Indenture Trustee. Subject to the approval of the Bankruptcy Court on appropriate application as set forth in Section 12.07(b) hereof, the reasonable fees and expenses of the Bond Indenture Trustee during the course of the Chapter 11 Cases shall be allowed as administrative expenses of the appropriate Debtor, pursuant to 11 U.S.C. (S) 503(b). PLAN-58 Section 12.07 Administrative Bar Date. (a) General Provisions. Except as provided below in Section 12.07(b) ------------------ for Administrative Claims of Professionals requesting compensation or reimbursement of expenses and in Section 12.07(c) for liabilities incurred by a Debtor in the ordinary course of its business, requests for payment of Administrative Claims must be Filed no later than 30 days after the Effective Date. Holders of Administrative Claims who are required to File a request for payment of such Claims and who do not File such requests by the applicable bar date shall be forever barred from asserting such Claims against the Debtors, the Reorganized Debtors or their respective property. (b) Professionals. All professionals or other entities requesting ------------- compensation or reimbursement of expenses pursuant to sections 327, 328, 330, 331, 503(b) and 1103 of the Bankruptcy Code for services rendered before the Effective Date (including compensation requested by any Professional or other entity for making a substantial contribution in any Case) shall File an application for final allowance of compensation and reimbursement of expenses no later than 45 days after the Effective Date; provided, however, that any Professional who may receive compensation or reimbursement of expenses pursuant to the Ordinary Course Professionals' Compensation Order may continue to receive such compensation and reimbursement of expenses for services rendered before the Effective Date, without further Bankruptcy Court review or approval, pursuant to the Ordinary Course Professionals' Compensation Order. Notwithstanding anything to the contrary contained in the Ordinary Course Professionals' Compensation Order, no Professional subject to that Order shall be required to apply to the Bankruptcy Court for compensation and reimbursement of expenses. Objections to applications of Professionals or other entities for compensation or reimbursement of expenses must be Filed no later than 75 days after the Effective Date. All compensation and reimbursement of expenses allowed by the Bankruptcy Court shall be paid to the applicable Professional on or before ten days after an order allowing such fees and expenses becomes a Final Order, or as soon thereafter as practicable. (c) Ordinary Course Liabilities. Holders of Administrative Claims --------------------------- based on liabilities incurred by a Debtor in the ordinary course of business shall not be required to File any request for payment of such Claims. Such Administrative Claims shall be assumed and paid by the applicable Reorganized Debtor pursuant to the terms and conditions of the particular transaction giving rise to such Administrative Claim, without any further action by the holders of such Claims. Section 12.08 Corporate Action. The adoption of any new or amended and restated Certificates of Incorporation and Amended By-Laws of each Reorganized Corporation, the adoption, PLAN-59 execution, and implementation of any employment agreement described in the Plan and the other matters provided for under the Plan involving the corporate or entity structure of any Debtor, Reorganized Corporation or corporate action, as the case may be, to be taken by or required of any Debtor or Reorganized Corporation, as the case may be, shall be deemed to have occurred and be effective as provided herein and shall be authorized and approved in all respects, without any requirement of further action by stockholders or directors of any of the Debtors or Reorganized Corporations, as the case may be. Without limiting the foregoing, Reorganized BSI shall be authorized, without any further act or action required, to issue all Reorganization Securities, any other securities and any instruments required to be issued hereunder, including sufficient New Common Stock in respect of any exercise of stock options as set forth in the Plan. Section 12.09 Effectuating Documents and Further Transactions. Each Debtor and Reorganized Corporation shall be authorized to execute, deliver, file, or record such documents, contracts, instruments, releases, and other agreements and take such other action as may be necessary to effectuate and further evidence the terms and conditions of the Plan. Section 12.10 Limitation of Liability. Neither the Debtors, the Reorganized Corporations, the Creditors' Committee (including their present and former members), the Unofficial Committee (including their present and former members), the Bank Group (including the Majority Banks) any of their respective officers, directors, employees, agents (acting in such capacity), representatives nor any professional persons employed by any of them shall have or incur any liability to any entity for any action taken or omitted to be taken in connection with or related to (i) the formulation, preparation, dissemination, implementation, confirmation, or consummation of the cases, the Plan, the Disclosure Statement, or any contract, release, or other agreement or document created or entered into, or any other action taken or omitted to be taken in connection with the Plan, and (ii) actions taken or omitted to be taken in connections with the Chapter 11 Cases or the operations of administration of the Debtors during the Chapter 11 Cases that arose out or relate to the period prior to the Effective Date; provided, however, that the provision of this section shall have no effect on the liability of any entity that would otherwise result from any action or omission to the extent that such action or omission is determined in a Final Order to have constituted gross negligence or willful misconduct. Section 12.11 Amendments. (a) Preconfirmation Amendment. Subject to Sections 7.15 and 11.01 of ------------------------- this Plan, the Debtors may modify the Plan at any time prior to the entry of the Confirmation Order provided that the Plan, as modified, and the Disclosure Statement pertaining thereto meet applicable Bankruptcy Code requirements. PLAN-60 (b) Post-confirmation Amendment Not Requiring Resolicitation. After -------------------------------------------------------- the entry of the Confirmation Order, the Debtors may modify the Plan to remedy any defect or omission or to reconcile any inconsistencies in the Plan or in the Confirmation Order, as may be necessary to carry out the purposes and effects of the Plan, provided that: (i) the Debtors obtain approval of the Bankruptcy Court for such modification, after notice and a hearing; and (ii) such modification shall not materially and adversely affect the interests, rights, treatment, or Distributions of any Class under the Plan. (c) Post-confirmation Amendment Requiring Resolicitation. After the ---------------------------------------------------- Confirmation Date and before the Effective Date of the Plan, the Debtors may modify the Plan in a way that materially or adversely affects the interests, rights, treatment, or Distributions of a class of Claims or Interests provided that: (i) the Plan, as modified, meets applicable Bankruptcy Code requirements; (ii) the Debtors obtain Bankruptcy Court approval for such modification, after notice and a hearing; (iii) such modification is accepted by at least two-thirds in amount, and more than one-half in number, of Allowed Claims voting in each class affected by such modification; and (iv) the Debtors comply with section 1125 of the Bankruptcy Code with respect to the Plan as modified. Section 12.12 Successors and Assigns. The rights, benefits, and obligations of any Person named or referred to in the Plan shall be binding upon, and shall inure to the benefit of, the heir, executor, administrator, successor or assign of such Person. Section 12.13 Confirmation Order and Plan Control. To the extent the Confirmation Order and/or this Plan is inconsistent with the Disclosure Statement, any other agreement entered into between or among any Debtor(s), or any of them and any third party, this Plan controls the Disclosure Statement and any such agreements and the Confirmation Order (and any other orders of the Court) controls this Plan. Section 12.14 Notices. Any notice required or permitted to be provided under the Plan shall be in writing and served by either (a) certified mail, return receipt requested, postage prepaid, (b) hand delivery or (c) overnight delivery service, freight prepaid, and addressed as follows: For the Debtors and the Reorganized Corporations ------------------------------------------------ Bradlees Stores, Inc. One Bradlees Circle P.O. Box 9051 Braintree, MA 02184-9051 Attn: David L. Schmitt., Esq. Senior Vice President and General Counsel PLAN-61 with copies to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019-6092 Attn: Stuart Hirshfield, Esq. For the Unofficial Committee ---------------------------- Mr. Daniel Gropper Stonington Management Corp. 712 Fifth Avenue New York, New York 10019 And Mr. Mark Zucker Anvil Capital 100 Wilshire Blvd. Santa Monica, California 90401 with copies to: Milbank, Tweed, Hadley & McCloy 1 Chase Manhattan Plaza New York, New York 10005 Attention: Michael J. Edelman, Esq. For the Bank Group ------------------ Bankers Trust Company 1 Bankers Trust Plaza 130 Liberty Street New York, New York 10006 Attention: Allan M. Stewart with copies to: Skadden, Arps, Slate, Meagher & Flom 333 West Wacker Drive Chicago, IL 60606 Attention: John Wm. Butler, Jr., Esq. For the Majority Banks ---------------------- Gabriel Capital, L.P. 450 Park Avenue New York, NY 10022 Attention: Jack Mayer PLAN-62 With copies to: Kasowitz, Benson, Torres & Friedman 1301 Avenue of the Americas 36th Floor New York, NY 10019 Attention: David Friedman, Esq. For the Creditors' Committee ---------------------------- Copies to: Co-chairs of the Creditors' Committee, c/o Otterbourg Steindler Houston & Rosen, P.C. 230 Park Avenue New York, New York 10169 Attention: Glenn Rice, Esq. PLAN-63 Section 12.15 Committees. On the Effective Date, the Creditors' Committee shall be deemed dissolved and the members of the Creditors' Committee shall be deemed released and discharged from all rights and duties arising from or related to the Chapter 11 Cases. The Professionals retained by the Creditors' Committee and the members thereof shall not be entitled to compensation or reimbursement of expenses for any services rendered after the Effective Date, except for services rendered and expenses incurred in connection with any applications for allowance of compensation and reimbursement of expenses pending on the Effective Date or Filed after the Effective Date pursuant to Section 12.07(b) above. Prior to the dissolution of the Creditors' Committee, the Creditors' Committee may appoint a committee of one or more financial representatives to become effective on the Effective Date, whose sole duties shall be to provide directions, on behalf of the trade vendors, to the Trade Vendors' Collateral Agent referred to in this Plan; provided however, that such appointee or appointees shall serve without right to receive any fees, reimbursement of expenses or other remuneration, directly or indirectly, from the Debtors' estates or the Reorganized Corporations. Dated: Braintree, Massachusetts January 26, 1999 Bradlees Stores, Inc., New Horizons of Yonkers, Inc., Bradlees, Inc., Bradlees Administrative Co., Inc., Dostra Realty Co., Inc., Maximedia Services, Inc., New Horizons of Bruckner, Inc., and New Horizons of Westbury, Inc., Debtors and Debtors-in-Possession By:__________________________ Name: Peter Thorner Title: Chairman and Chief Executive Officer PLAN-64 UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - - - - - - - - - - - - - - - - - -x In re : Chapter 11 BRADLEES STORES, INC., et al., : Case Nos. 95 B 42777 through 95 B 42784 (BRL) Debtors. : (Jointly Administered) - - - - - - - - - - - - - - - - - -x FIRST AMENDED DISCLOSURE STATEMENT PURSUANT TO BANKRUPTCY CODE (S) 1125 FOR JOINT PLAN OF REORGANIZATION OF BRADLEES STORES, INC. AND AFFILIATES UNDER CHAPTER 11 OF THE BANKRUPTCY CODE ----------------------------------------------------------- Stuart Hirshfield (SH-0099) Sandor E. Schick (SS-4991) Hugh M. McDonald (HM-2667) Marc Hirschfield (MH-1537) DEWEY BALLANTINE LLP 1301 Avenue of the Americas New York, New York 10019-6092 (212) 259-8000 Attorneys for Bradlees Stores, Inc., New Horizons of Yonkers, Inc., Bradlees, Inc., Bradlees Administrative Co., Inc., Dostra Realty Co., Inc., Maximedia Services, Inc., New Horizons of Bruckner, Inc. and New Horizons of Westbury, Inc., Debtors and Debtors-in-Possession Dated: New York, New York September 16, 1998 THIS IS NOT A SOLICITATION OF ACCEPTANCE OR REJECTION OF THE PLAN. ACCEPTANCES OR REJECTIONS MAY NOT BE SOLICITED UNTIL THIS DISCLOSURE STATEMENT HAS BEEN APPROVED BY THE BANKRUPTCY COURT. PRELIMINARY STATEMENT AND DISCLAIMER ------------------------------------ THIS DISCLOSURE STATEMENT HAS BEEN PREPARED IN ACCORDANCE WITH SECTION 1125 OF THE BANKRUPTCY CODE AND RULE 3016 OF THE FEDERAL RULES OF BANKRUPTCY PROCEDURE. NO PERSON MAY GIVE ANY INFORMATION ON BEHALF OF THE DEBTORS REGARDING THE PLAN OR THE SOLICITATION OF ACCEPTANCES OF THE PLAN, OTHER THAN THE INFORMATION CONTAINED IN THIS DISCLOSURE STATEMENT. ALL CREDITORS ARE ADVISED AND ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND THE PLAN IN THEIR ENTIRETY BEFORE VOTING TO ACCEPT OR REJECT THE PLAN. PLAN SUMMARIES AND STATEMENTS MADE IN THIS DISCLOSURE STATEMENT ARE QUALIFIED IN THEIR ENTIRETY BY REFERENCE TO THE PLAN (WHICH IS ANNEXED HERETO AS EXHIBIT 1), OTHER EXHIBITS ANNEXED HERETO AND OTHER DOCUMENTS REFERENCED AS FILED WITH THE COURT PRIOR TO OR CONCURRENT WITH THE FILING OF THIS DISCLOSURE STATEMENT. SUBSEQUENT TO THE DATE HEREOF, THERE CAN BE NO ASSURANCE THAT: (A) THE INFORMATION AND REPRESENTATIONS CONTAINED HEREIN ARE MATERIALLY ACCURATE, AND (B) THIS DISCLOSURE STATEMENT CONTAINS ALL MATERIAL INFORMATION. AS TO CONTESTED MATTERS, ADVERSARY PROCEEDINGS AND OTHER ACTIONS OR THREATENED ACTIONS, THIS DISCLOSURE STATEMENT SHALL NOT CONSTITUTE OR BE CONSTRUED AS AN ADMISSION OF ANY FACT, LIABILITY, STIPULATION OR WAIVER BUT RATHER AS A STATEMENT MADE IN SETTLEMENT NEGOTIATIONS. THIS DISCLOSURE STATEMENT SHALL NOT BE ADMISSIBLE IN ANY PROCEEDING INVOLVING THE DEBTORS OR ANY OTHER PARTY, NOR SHALL IT BE CONSTRUED TO BE CONCLUSIVE ADVICE ON THE TAX, SECURITIES LAW OR OTHER LEGAL EFFECTS OF THE PLAN AS TO HOLDERS OF CLAIMS AGAINST OR INTERESTS IN THE DEBTORS. THIS DISCLOSURE STATEMENT HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION ("SEC"), NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED HEREIN. ALL CAPITALIZED TERMS AND PHRASES USED IN THIS DISCLOSURE STATEMENT AND NOT OTHERWISE DEFINED HEREIN SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE PLAN. TABLE OF CONTENTS ----------------- Page ---- INTRODUCTION...................................................................1 - ------------ SECTION ONE: SUMMARY..........................................................3 - ----------- I. Debtors..................................................................3 II. Plan of Reorganization...................................................3 III. Notice to Holders of Claims..............................................3 IV. Disclosure Statement Enclosures..........................................5 V. Voting Procedures, Ballots and Voting....................................5 VI. Convenience Class Election...............................................8 VII. Counting of Ballots for Claims Sold in Parts.............................8 VIII. Hearing on and Objections to the Plan....................................9 IX. Overall Structure of the Plan...........................................10 X. Summary of Classification and Treatment of Claims and Interests.........12 XI. Recommendation..........................................................15 SECTION TWO: GENERAL INFORMATION.............................................15 - ----------- ------------------- XII. Business and Competition................................................15 XIII. Senior Officers and Directors...........................................16 XIV. Corporate Structure.....................................................19 XV. History.................................................................20 A. 1961-1988...........................................................20 B. 1988-1992...........................................................20 C. 1992 - 1995.........................................................21 1. The Initial Public Offering....................................21 2. Operating Downturn.............................................22 3. New Management Team............................................26 4. May 24, 1995 -- Annual Meeting of Shareholders.................26 5. June 22, 1995 -- Layoffs.......................................26 XVI. 1995-present -- The Chapter 11 Cases....................................26 A. Filing..............................................................27 B. Administration of Cases.............................................27 C. Bankruptcy Court First Day Orders...................................27 D. Parties in Interest and Professionals...............................27 1. Bankruptcy Court...............................................27 2. Debtors........................................................27 3. Official Committee of Unsecured Creditors......................28 4. Secured Creditors..............................................28 5. Unofficial Committee of Trade Claim Holders....................29 E. Debtor-in-Possession Financing......................................29 F. Exclusivity Extensions..............................................31 G. Claims Process and Bar Date.........................................33 1. Alternative Dispute Resolution Program.........................33 2. Reconciliation of and Objections to Claims.....................34 3. Reclamation Claims.............................................34 i H. Real Estate Transactions............................................35 1. North Attleboro, Massachusetts.................................35 2. Westbury, New York.............................................35 3. Providence, Rhode Island.......................................36 I. Real Estate Leases and Executory Contracts..........................36 1. 365(d)(4) Extension Motion.....................................37 2. Lease Assumptions and Rejections...............................37 3. Recharacterization of the SPE Facility.........................40 4. Executory Contracts............................................40 J. Vendor Relations....................................................42 1. Merchandise Return Programs....................................42 2. Payment for Goods Delivered Post-Petition......................42 K. Employee Benefits...................................................42 1. Wages and Benefits.............................................43 2. Workers' Compensation..........................................43 3. Employee Bonuses/Retention Policy..............................43 4. Medical Benefits...............................................44 5. Collective Bargaining Agreements...............................45 L. Significant Litigation and Settlements..............................47 1. Westbury.......................................................47 2. Cardiff........................................................47 3. White City.....................................................47 4. Vornado........................................................48 5. Tomarc.........................................................49 6. Ventnor........................................................50 7. Mark Cohen Settlement..........................................50 8. Sybase.........................................................51 9. Homart.........................................................52 M. The IPO Investigation...............................................52 1. The Investigation..............................................52 2. Request for an Examiner........................................53 N. The Tolling Agreements..............................................54 O. Debtors' Common Stock...............................................55 P. Post-Petition Business Strategies and Plans.........................56 1. Cost Reductions................................................57 2. Merchandising Changes..........................................57 3. Marketing Strategy.............................................58 4. Management Changes.............................................59 Q. Marketing of Debtors' Assets........................................59 SECTION THREE: SUMMARY OF THE PLAN............................................61 - ------------- ------------------- I. Overview of the Plan.....................................................61 II. Plan Negotiations........................................................61 III. Classification and Treatment of Claims and Interests.....................62 A. Unclassified Claims.................................................62 1. Administrative Claims..........................................62 2. Federal Priority Tax Claims....................................62 ii 3. Other Priority Tax Claims......................................63 4. Other Non-Tax Priority Claims..................................63 B. Classified Claims...................................................63 1. Bank Group Claim...............................................63 2. SPE Claim......................................................64 3. Other Classified Claims........................................65 4. Operation of Formula Pursuant to which New Common Stock is Distributed....................................................69 IV. Continued Corporate Existence, Board of Directors, Management, and Other Means for Implementation of the Plan...............................70 A. Reorganized BI and Reorganized BSI..................................70 B. Directors of the Reorganized Corporations...........................70 C. Employment, Retirement, Indemnification and Other Agreements and Incentive Compensation Programs.................................71 D. Management Emergence Bonus..........................................72 E. Corporate Action....................................................72 F. Certain Retiree Health, Medical and Life Insurance Benefits..................................................72 G. Combination Transactions............................................72 H. Cancellation of Capital Stock.......................................73 I. Cancellation of Bonds and Agreements................................73 J. Record Date for Distributions to Holders of Securities..............74 K. Surrender of Outstanding Securities.................................74 L. Termination of BankBoston DIP Facility..............................74 M. New Credit Facility.................................................75 N. Sale of Yonkers Property and Union Square Property..................75 O. Adequate Protection Payments........................................76 P. Consummation Funding................................................76 V. Distributions and Objections to Claims...................................76 A. Source of Cash and Reorganization Securities for Distributions......76 B. Initial Distributions...............................................76 C. Disputed Claims Reserves............................................77 D. Tax Requirements for Income Generated by Disputed Claims Reserves...77 E. Estimation of Claims................................................77 F. Initial Distribution When a Disputed Claim Becomes an Allowed Claim.78 G. Additional Quarterly Distributions on Account of Previously Allowed Claims..............................................................78 H. Method of Cash Distributions........................................79 I. Distributions on Non-Business Days..................................79 J. Accrual of Postpetition Interest....................................79 K. No Distribution of Fractional Securities............................79 L. No Distribution in Excess of Allowed Amount of Claim................80 M. De Minimis Distributions............................................80 N. Compliance with Tax Requirements....................................80 O. Setoffs.............................................................80 P. Intercompany Claims.................................................80 Q. Escrow of Unclaimed Property........................................81 iii R. Investment of Unclaimed Cash.......................................81 S. Distribution of Unclaimed Property.................................81 T. Disputed Payments..................................................81 U. Withholding Taxes..................................................81 V. Claims and Interest Objections.....................................82 Termination of Subordination............................................82 VI. Effect of Plan..........................................................82 A. Discharge..........................................................82 1. Scope.........................................................82 2. Injunction....................................................83 3. Release of Collateral.........................................83 B. Revesting and Vesting..............................................84 C. Secondary Liability Claims.........................................84 D. Release of Primary Obligors........................................85 E. Survival of Certain Indemnification Obligations....................85 F. Release of Officers, Directors, Employees, and Representatives.....85 G. Retention of Certain Claims........................................86 H. Preservation of Insurance..........................................86 VII. Executory Contract and Leases...........................................86 A. Executory Contracts and Unexpired Leases...........................86 Lease Under Which Bradlees Leases Union Square Property.................87 B. Executory Contract of R.R. Donnelly & Sons Company.................87 Executory Contract J.Baker, Inc.........................................87 C. Cure Payments......................................................87 D. Rejection Damages Bar Date.........................................88 E. Executory Contracts and Unexpired Leases Entered into and Other Obligations Incurred After the Petition Date.......................88 VIII. Conditions To Confirmation And Occurrence Of Effective Date.............88 A. Conditions to Confirmation.........................................88 B. Conditions to Occurrence of Effective Date.........................89 C. Waiver of Conditions to Confirmation and Occurrence of Effective Date...............................................................91 D. Effect of Nonoccurrence of the Conditions to Occurrence of Effective Date.....................................................91 IX. Retention of Jurisdiction...............................................92 X. Administrative Bar Date.................................................93 A. General Provisions.................................................93 B. Professionals......................................................93 C. Fees and Expenses of Bank Group....................................94 D. Fees and Expenses of Unofficial Committee..........................94 E. Professional Fees and Expenses of Loomis Sayles and Bond Indenture Trustee..................................................94 F. Ordinary Course Liabilities........................................94 XI. Amendments..............................................................94 A. Preconfirmation Amendment..........................................94 B. Post-confirmation Amendment Not Requiring Resolicitation...........95 iv C. Post-confirmation Amendment Requiring Resolicitation..............95 XII. Committees.............................................................95 XIII. Valuation of the Debtors...............................................95 XIV. Estimation of Claims...................................................97 XV. Delivery of Distributions..............................................98 XVI. Undeliverable Distributions............................................98 XVII. Revocation, Withdrawal or Non-Consummation of the Plan.................98 SECTION FOUR: VOTING REQUIREMENTS, ACCEPTANCE, CONFIRMATION AND CONSUMMATION - ----------------------------------------------------------------------------- OF THE PLAN............................................................99 ----------- XVIII. General................................................................99 XIX. Solicitation, Voting and Requirements.................................100 A. Eligibility to Vote..............................................100 B. Estimation and Temporary Allowance of Claims.....................101 C. Acceptance Requirements..........................................101 D. Transmission of Ballots..........................................101 E. Acceptances Required From Impaired Classes.......................101 F. Confirmation Without Acceptance of All Impaired Classes ("Cram-down")....................................................102 G. Feasibility of the Plan..........................................103 H. Best Interests of Creditors......................................104 XX. Certain Factors To Be Considered......................................107 A. Settlements Embodied in the Plan.................................107 B. Risk to Unsecured Creditors and Holders of Interests in the Event of Subsequent Liquidation or Financial Reorganization......108 C. Factors Affecting the Value of the New Common Stock and Lack of an Established Market.........................................108 1. Matters Affecting Trading...................................108 2. Dividends...................................................109 D. Projected Financial Information..................................109 E. Competition......................................................110 F. Dilution and Risk of Actual Distributions Being Less Than Estimates........................................................110 G. Other Factors....................................................111 ------------- XXI. Compliance With Securities Laws.......................................111 A. Issuance of Reorganization Securities............................111 XXII. Subsequent Transfers of Reorganization Securities.....................111 XXIII. Certain Federal Income Tax Consequences...............................112 A. Federal Income Tax Consequences to the Debtors...................113 1. Cancellation of Indebtedness................................113 2. Limitation on Net Operating Losses..........................114 3. Alternative Minimum Tax.....................................114 Deductions of Accrued Interest...................................115 B. Federal Income Tax Consequences to Holders of Claims.............115 1. Tax Consequences to Holders of Claims Generally.............115 2. Holders of BI-GEN Claims....................................116 3. Holders of the BSI-GEN Claims...............................116 4. Holders of the Bank Group Claims............................117 v 5. Holders of the SPE Claims...................................117 6. Other Classes of Creditors..................................118 7. Market Discount.............................................119 8. Accrued Interest............................................120 XXIV. Alternatives To Confirmation Of The Plan..............................121 XXV. Alternative Plans of Reorganization...................................121 XXVI. Liquidation Under Chapter 7 or Chapter 11.............................121 CONCLUSION...................................................................123 - ---------- vi UNITED STATES BANKRUPTCY COURT SOUTHERN DISTRICT OF NEW YORK - - - - - - - - - - - - - - - - x In re : Chapter 11 BRADLEES STORES, INC., et al., : Case Nos. 95 B 42777 through 95 B 42784 (BRL) Debtors. : (Jointly Administered) - - - - - - - - - - - - - - - - x INTRODUCTION ------------ Bradlees Stores, Inc., New Horizons of Yonkers, Inc., Bradlees, Inc., Bradlees Administrative Co., Inc., Dostra Realty Co., Inc., Maximedia Services, Inc., New Horizons of Bruckner, Inc., and New Horizons of Westbury, Inc., debtors and debtors-in-possession (collectively, the "Debtors" or "Plan Proponents") in the above-captioned Chapter 11 cases pending in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court") under Chapter 11 of the United States Bankruptcy Code, 11 U.S.C. (S)(S) 101 et seq. (the "Bankruptcy Code"), filed with the Bankruptcy Court a proposed first amended plan of reorganization dated September 17, 1998 (the "Plan"), a copy of which is annexed hereto as Exhibit "1." The Debtors are distributing this first amended disclosure statement (the "Disclosure Statement") pursuant to Section 1125 of the Bankruptcy Code, to provide the Debtors' creditors with adequate information so that they can make an informed judgment on whether to vote to accept or reject the Plan. Please read this Disclosure Statement and the Plan carefully and follow the instructions set forth below to vote on the Plan. The Plan Proponents seek confirmation of the Plan and submit this Disclosure Statement in connection with their solicitation of acceptances of the Plan. The Debtors believe that the Plan provides the best recoveries possible for the holders of Claims against the Debtors and strongly recommend that you vote to accept the Plan. The Plan is the product of extensive negotiations between and among the Debtors and their major creditors. The Debtors believe that the recoveries provided under the Plan and the other material provisions of the Plan give substantial effect to the stated wishes of such creditors. The requirements for confirmation of the Plan, including the vote of creditors to accept the Plan and certain of the statutory findings that must be made by the Bankruptcy Court, are described below under the caption "Voting Requirements, Acceptance, Confirmation and Consummation of the Plan." The Plan constitutes a separate plan of reorganization for each of the Debtors. Accordingly, the voting and other confirmation requirements of the Bankruptcy Code must be satisfied for each of the Debtors. FOR A DESCRIPTION OF THE OVERALL STRUCTURE OF THE PLAN AND THE DISTRIBUTIONS TO BE MADE THEREUNDER, SEE SECTION THREE OF THIS DISCLOSURE STATEMENT ENTITLED "SUMMARY OF THE PLAN." FOR A GENERAL DESCRIPTION OF THE DEBTORS, THEIR HISTORY AND THE EVENTS WHICH TOOK PLACE DURING THESE CHAPTER 11 CASES, PLEASE SEE SECTION TWO OF THIS DISCLOSURE STATEMENT ENTITLED "GENERAL INFORMATION." Confirmation of the Plan and the occurrence of the Effective Date are subject to a number of material conditions precedent, which are summarized in this Disclosure Statement. There can be no assurance that these conditions will be satisfied. 2 SECTION ONE: SUMMARY ----------- ------- I. Debtors On June 23, 1995, each of the Debtors filed a voluntary petition under Chapter 11 of the Bankruptcy Code and continued to retain its property and manage its business as a debtor-in-possession. No trustee or examiner has been appointed for any of the Debtors or their property. On April 13, 1998, the Debtors filed their Joint Plan of Reorganization. On September 17, 1998, the Debtors filed their First Amended Joint Plan of Reorganization, a copy of which is annexed hereto as Exhibit 1. II. Plan of Reorganization Chapter 11: In General Chapter 11 is the principal business reorganization chapter of the Bankruptcy Code. Upon filing of a petition for reorganization under Chapter 11 an estate is created containing all of the debtor's property and, generally, the debtor remains in control of its property and business as a debtor-in- possession. Under Section 362 of the Bankruptcy Code, the commencement of a case under the Bankruptcy Code invokes an automatic stay of all attempts to collect claims or enforce liens against a debtor or the property of a debtor that arose prior to the commencement of such debtor's case or that otherwise interfere with the debtor's property. Under Chapter 11, a debtor is authorized to reorganize its business and capital structure for the benefit of its estate, creditors and stockholders. The confirmation of a plan of reorganization is the principal objective of a Chapter 11 case. A plan of reorganization sets forth the means for treating claims against, and interests (e.g., common stock) in, a debtor. A claim or interest is impaired under a plan of reorganization if the plan provides that such claim will not be repaid in full or that the legal, equitable or contractual rights of the holder of such claim or interest are altered. A holder of an impaired claim or interest is entitled to vote to accept or reject a plan of reorganization. Chapter 11 does not require every holder of claims and interest to vote in favor of a plan of reorganization in order for the Bankruptcy Court to confirm the plan. However, the Bankruptcy Court must find that the plan of reorganization meets a number of statutory tests before it may confirm, or approve, the plan of reorganization. Many of these tests are designed to protect the interests of holders of claims or interests who do not vote to accept the plan of reorganization but who will nonetheless be bound by the plan's provisions if it is confirmed by the relevant bankruptcy court. Generally, an official committee of unsecured creditors and, sometimes, an official committee of equity interest holders are appointed by the United States Trustee to, among other things, negotiate the plan of reorganization on behalf of their constituencies. Additionally, creditors or stockholders may form unofficial committees to facilitate negotiations. III. Notice to Holders of Claims This Disclosure Statement is being transmitted to holders of impaired Claims against the Debtors that are entitled to vote to accept or reject the Plan (i.e., 3 Classes BI-BANK, BI-GEN, BI-SPE, BSI-CAP, BSI-BANK, BSI-SPE, BSI-GEN, YON-BANK, YON-SPE, YON-GEN, BRU-BANK, BRU-SPE, BRU-GEN, WES-BANK, WES-SPE and WES-GEN). The purpose of this Disclosure Statement is to provide holders of impaired Claims with adequate information to enable such holders to make a reasonably informed decision with respect to the Plan prior to exercising the right to vote to accept or reject the Plan. On September 17, 1998 after notice and a hearing, the Bankruptcy Court approved this Disclosure Statement as containing adequate information, of a kind and in sufficient detail, to enable a hypothetical, reasonable investor typical of holders of impaired claims against the Debtors to make an informed judgment concerning acceptance or rejection of the Plan. THE BANKRUPTCY COURT'S APPROVAL OF THIS DISCLOSURE STATEMENT DOES NOT CONSTITUTE EITHER A GUARANTY OF THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONTAINED HEREIN OR AN ENDORSEMENT OF THE PLAN BY THE BANKRUPTCY COURT. ALL CREDITORS ARE ENCOURAGED TO READ THIS DISCLOSURE STATEMENT AND ITS EXHIBITS CAREFULLY AND IN THEIR ENTIRETY BEFORE DECIDING TO VOTE EITHER TO ACCEPT OR REJECT THE PLAN. This Disclosure Statement contains important information regarding (i) the Debtors' history; (ii) developments in the Chapter 11 cases; (iii) the Plan, including a summary and analysis thereof; and (iv) considerations pertinent to acceptance or rejection of the Plan. THIS DISCLOSURE STATEMENT IS THE ONLY DOCUMENT AUTHORIZED BY THE BANKRUPTCY COURT TO BE USED IN CONNECTION WITH THE SOLICITATION OF VOTES ACCEPTING THE PLAN. No solicitation of votes may be made except pursuant to this Disclosure Statement, and no Person has been authorized by the Bankruptcy Court or the Debtors to use or disclose any information concerning the Debtors other than the information contained herein. Other than as explicitly set forth in this Disclosure Statement, you should not rely upon any information relating to the Debtors, their estates, the value of their assets, the nature or amounts of their liabilities, their Creditors' Claims, or the amount or value of any distributions made under the Plan. All financial information contained in this Disclosure Statement has been provided by the Debtors. THE FINANCIAL INFORMATION CONTAINED HEREIN HAS NOT BEEN THE SUBJECT OF A CERTIFIED AUDIT AND HAS NOT BEEN PREPARED IN ACCORDANCE WITH GENERALLY ACCEPTED ACCOUNTING PRINCIPLES. This Disclosure Statement is accurate to the best of the Debtors' knowledge, information and belief. The Debtors have endeavored to make this Disclosure Statement as clear and comprehensive as possible in order to furnish Creditors with adequate information to make an informed decision regarding acceptance or rejection of the Plan. 4 The Disclosure Statement contains information supplementary to the Plan and is not intended to supplant or substitute for the Plan itself. THE DISCLOSURE STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE SPECIFIC AND DETAILED INFORMATION SET FORTH IN THE PLAN. Any perceived inconsistencies between the information contained in this Disclosure Statement and the terms of the Plan or any Exhibit thereto are to be resolved in favor of the actual terms as set forth in the Plan or its Exhibits. Creditors in Classes BI-BANK, BI-GEN, BI-SPE, BSI-CAP, BSI-BANK, BSI- SPE, BSI-GEN, YON-BANK, YON-SPE, YON-GEN, BRU-BANK, BRU-SPE, BRU-GEN, WES-BANK, WES-SPE and WES-GEN, whose Claims are deemed "impaired," are entitled to vote on the Plan. Generally, for the Plan to be confirmed by the Bankruptcy Court, two- thirds in dollar amount of the Allowed Claims and a majority of the number of Allowed Claims in each impaired Class of Claims that are actually voted must vote to accept the Plan. The Plan, however, may be confirmed under certain circumstances despite dissent by one or more impaired Classes, and the Debtors reserve the right to seek such non-consensual confirmation of the Plan. SEE SECTION 4.II.F OF THIS DISCLOSURE STATEMENT ENTITLED -- "CONFIRMATION WITHOUT ACCEPTANCE OF ALL IMPAIRED CLASSES ("CRAM-DOWN")." IV. Disclosure Statement Enclosures Accompanying this Disclosure Statement are copies of the following: (i) the Order of the Bankruptcy Court dated September 17, 1998 approving, among other things, this Disclosure Statement (the "Disclosure Statement Order"); (ii) the notice of the time for filing acceptances or rejections of the Plan, as well as the date, time and place of the hearing to consider confirmation of the Plan and related matters, and the time for filing any objections to confirmation of the Plan ("Notice of the Confirmation Hearing"); and (iii) one or more Ballots by which holders of impaired Claims may vote for acceptance or rejection of the Plan. V. Voting Procedures, Ballots and Voting If you are the holder of an impaired Claim in Classes BI-BANK, BI-GEN, BI-SPE, BSI-CAP, BSI-BANK, BSI-SPE, BSI-GEN, YON-BANK, YON-SPE, YON-GEN, BRU- BANK, BRU-SPE, BRU-GEN, WES-BANK, WES-SPE and WES-GEN, after carefully reviewing the information contained in this Disclosure Statement, please indicate your acceptance or rejection of the Plan by voting on the enclosed Ballot(s). Each Ballot has been coded to reflect the Class of Claims it represents. Accordingly, in voting to accept or reject the Plan, you must use only the coded Ballot or Ballots sent to you with this Disclosure Statement. Please complete and sign your original Ballot (copies, facsimiles and oral votes will not be accepted), and return it to the Voting Agent at the address set forth on the Ballot. 5 The number, amount, and classification that will be used to tabulate acceptances and rejections of the Plan is exclusively as follows: (a) in the case where no proof of claim has been timely filed or deemed timely filed, the amount of a Claim shall be equal to the amount listed, if any, in respect of such Claim in the relevant Debtor's Schedules of Assets and Liabilities to the extent such Claim is not listed as contingent, unliquidated or disputed, and in the Class specified in the Schedules, and consistent with the relevant Debtor's Schedules of Assets and Liabilities, and the records of the Clerk of the Court ("Clerk") or the authorized claims agent, Donlin, Recano & Company, Inc. ("Donlin, Recano"); (b) in the case where a proof of claim has been timely filed and not objected to on or before the Confirmation Hearing, the amount and classification shall be that specified in the records of the Clerk or Donlin, Recano; (c) in the case where the Debtors have filed an objection to a Claim, the Claim shall not be allowed for voting purposes, unless the Bankruptcy Court, after a notice and a hearing, (a) has allowed such Claim in a specific amount and classification for voting purposes pursuant to Bankruptcy Rule 3018 or (b) has allowed such claim in a specific amount for all purposes; (d) the authority of the signatory of each Ballot to complete and execute the Ballot will be presumed; (e) holders of Claims must vote all of their Claims within a particular Class under the Plan either to accept or reject the Plan and may not split their vote. Accordingly, a Ballot (or multiple Ballots with respect to separate Claims within a Class), that partially rejects and partially accepts the Plan will not be counted. This provision shall not apply to: (i) summary Ballots completed by the servicing agents to lending groups or to the registered holders of the Debtors' securities that reflect the votes of the beneficial owners of such securities or Claims and (ii) Ballots for claims which have been sold in part (see Section 1.VII entitled -- "Counting of Ballots for Claims Sold in Part"); (f) any Ballot that does not indicate whether the holder of the relevant claim is voting for or against the Plan or which indicates a vote both for and against the Plan or that is not signed will be deemed a vote for the Plan; and (g) any holder of a BSI-GEN Claim in excess of $500 may elect to reduce such Claim to an allowed amount of $500. Accordingly, a Ballot of any holder electing such Convenience Claim treatment will not be counted in determining whether the relevant BSI-GEN Claims Class has voted to accept or reject the Plan. Additionally, holders of claims that are deemed to be Convenience Claims under the Plan (i.e. those Allowed Claims for $500 or less) shall not have any vote in respect of such Claims counted in BSI-GEN Class and will not receive a 6 Ballot or Disclosure Statement. See Section 1.VI -- "Convenience Class Election" for the procedures to make such an election. In accordance with Bankruptcy Rule 3017(e), the Debtors will send, where appropriate, Ballots to Intermediaries. Each Intermediary shall be entitled to receive, upon request of the Debtors, reasonably sufficient copies of Ballots to distribute to the beneficial owner of the Claims for which there is an Intermediary, and the Debtors shall be responsible for and pay each Intermediary's reasonable costs and expenses associated with the distribution of Ballots to the beneficial owners of such Claims. Additionally, each Intermediary shall receive returned Ballots and tabulate and return the results to the Debtors in a Summary Ballot by 5:00 p.m., Eastern Time, on ____________, 1998 indicating the number and the dollar amount of cast Ballots in the respective Class voting for the Plan. The Intermediaries must certify that each beneficial holder has not cast more than one vote for any purposes, including the number and Claim amount, even if he, she or it holds securities of the same type in more than one account. IN ORDER FOR YOUR BALLOT TO BE COUNTED, THE ORIGINAL BALLOT MUST BE COMPLETED AND SIGNED AS SET FORTH ABOVE AND RECEIVED EITHER BY HAND, BY MAIL OR BY OVERNIGHT DELIVERY SERVICE TO THE VOTING AGENT AT ONE OF THE ADDRESSES SET FORTH BELOW NOT LATER THAN 5:00 P.M., EASTERN TIME, ON ________ , 1998. BALLOTS SENT BY MAIL SHOULD BE SENT TO THE DEBTORS C/O THEIR CLAIMS AGENT (THE "CLAIMS AGENT"): Bradlees Stores, Inc., et al. c/o Donlin, Recano & Company, Inc. Murray Hill Station P.O. Box 2034 New York, New York 10156-0701 BALLOTS SENT BY HAND SHOULD BE SENT TO: Bradlees Stores, Inc., et al. c/o Donlin, Recano & Company, Inc. Re: Bradlees Stores, Inc. 419 Park Avenue South Suite 1206 New York, New York 10016 BALLOTS DELIVERED VIA FACSIMILE WILL NOT BE ACCEPTED. If you have a Claim that is impaired under the Plan, thereby entitling you to vote, but did not receive a Ballot, received a damaged Ballot, or lost your Ballot, or if you have any questions regarding the procedures for voting your Claims, please contact: 7 Donlin, Recano & Company, Inc. Re: Bradlees Stores, Inc. 419 Park Avenue South Suite 1206 New York, New York 10016 Tel: (212) 481-1411 As of the Effective Date, by virtue of the Plan and in all events without any action on the part of the holders thereof, each share of Old Common Stock of BI issued and outstanding or held in treasury, will be cancelled and retired and no consideration will be paid or delivered with respect thereto. In addition, holders of Classes BI-EQT, BAC-GEN, DOS-GEN and MAX-GEN will not receive or retain any property under the Plan, and are therefore deemed to have rejected the Plan pursuant to Section 1126(g) of the Bankruptcy Code. VI. Convenience Class Election If you hold a General Unsecured Claim against BSI in excess of $500 that would otherwise be classified in an Unsecured Claims Class under the Plan, you may also indicate on the Ballot whether you wish to elect to reduce any such Claim to $500 and waive the balance of your Claim in such BSI-GEN Class. If you make such election, you will have your reduced Claim treated as a Claim in the BSI-CON Class and be paid in full (up to $500), in Cash, in such reduced amount. Under the Plan, you may elect to have your BSI-GEN treated as a Convenience Claim only if you agree to reduce your General Unsecured Claim to $500. In the case of Split Claims (as defined in Section 1. VII) in the BSI-GEN Class, all portions of the Split Claim must elect to have the Split Claim treated as a BSI- CON Claim in order for such Split Claim to be so treated; a portion of a Split Claim may not elect convenience class status. If your Allowed Claim totals $500 --- or less, without any agreed reduction, such Claim will be treated solely as a Convenience Class Claim without any election and be paid in full in Cash, in the allowed amount of your Claim. If you elect to treat your Claim as a Convenience Claim, your vote will not be counted in determining whether the BSI-GEN Class has voted to accept or reject the Plan. VII. Counting of Ballots for Claims Sold in Parts Pursuant to section 1126(c), each Claim filed shall be entitled to only one vote, regardless of whether such Claim has been sold in portions ("Split Claims"). The procedures for counting and balloting of such Split Claims shall be as follows: (i) provided that the transferee of a Split Claim shall have filed evidence of its interest in a Claim as required by Bankruptcy Rule 3001(e) on or before the date set by the Bankruptcy Court, Donlin Recano shall send to each transferee of a Split Claim a Ballot which represents such transferee's proportionate interest in such Clam; (ii) a mini-vote within the Split Claim shall then be held (the "Mini-Vote") with the vote of each transferee counted as a proportion of the amount transferred to the total amount of such Allowed Split Claim; and (iii) if a voting majority (weighted by dollar amount) of such 8 Split Claim should vote to accept the Plan in the Mini-Vote, then the holders of the Split Claim shall be deemed to have cast one vote in the amount of the Split Claim in favor of confirmation of the Plan (conversely, if the voting majority (weighted by dollar amount) of such Split Claim should vote to reject the Plan in the Mini-Vote, then the holders of the Split Claim shall be deemed to have cast one vote in the amount of the Split Claim to reject the Plan). In tabulating the Mini-Vote, only those claimants actually submitting valid Ballots shall be counted. In the event that the Mini-Vote yields an equal vote, with exactly half voting to confirm and exactly half voting to reject the Plan, then such Split Claim shall be deemed to have voted to confirm the Plan. For example, Split Claim Y totals $60,000. There are three transferees of Split Claim Y with such transfers duly evidenced by filings pursuant to Bankruptcy Rule 3001: (i) claimant A holds $10,000 in amount, (ii) claimant B holds $20,000 and (iii) claimant C holds $30,000. If in the Mini- Vote, C votes in favor of the Plan, A votes against the Plan and B does not vote, Split Claim Y is deemed to have cast one vote to accept the Plan since B's ballot is not counted, and C's vote counts for more than A's vote since C's weighted interest in the Mini-Vote is greater than A's interest. VIII. Hearing on and Objections to the Plan Confirmation Hearing The hearing to consider confirmation of the Plan (the "Confirmation Hearing") has been scheduled for _________________, 1998 at 10:00 a.m., Eastern Daylight Savings Time, in Room 623, United States Bankruptcy Court, The Alexander Hamilton Customs House, One Bowling Green, New York, New York 10004. Date Set for Filing Objections to Confirmation of the Plan All objections to confirmation of the Plan must be filed with the Bankruptcy Court in accordance with the Court's Order dated February 29, 1996 establishing electronic filing and notice requirements for these Chapter 11 Cases (with a courtesy copy delivered to the chambers of the Honorable Burton Lifland) and received by the parties set forth below by 5:00 p.m., Eastern Standard Time, on _________________, 1998: DEWEY BALLANTINE LLP 1301 AVENUE OF THE AMERICAS NEW YORK, NEW YORK 10019-6092 (ATTN: STUART HIRSHFIELD, ESQ.) COUNSEL TO THE DEBTORS OTTERBOURG, STEINDLER, HOUSTON & ROSEN, P.C. 230 PARK AVENUE NEW YORK, NY 10169 (ATTN: GLENN B. RICE, ESQ.) 9 COUNSEL TO THE OFFICIAL COMMITTEE OF UNSECURED CREDITORS IX. Overall Structure of the Plan The Debtors' Chapter 11 Cases have been consolidated for procedural purposes only and are being jointly administered pursuant to an order of the Bankruptcy Court. The Plan, as presently constituted, does not contemplate the substantive consolidation of any of the Debtors for any purpose, including voting and Distribution purposes. For voting and Distribution purposes, the Plan contemplates separate Classes for each Debtor. Cash and Reorganization Securities of the Debtors, as reorganized, will be distributed to the claimants and equity interest holders of Claims or Interests in each of the Classes of each of the Debtors, as set forth in the Plan and herein. Under the Plan, the Debtors will Distribute Cash and Reorganization Securities, consisting of Tax Notes, New Notes, New Credit Facility Notes, CAP Notes, Cure Notes, New Warrants and New Common Stock. Forms of certain Reorganization Securities are annexed hereto as Exhibit 2. 1. Reorganization Securities The following discussion summarizes the material terms and provisions of the Reorganization Securities but is subject in its entirety by reference to the provisions set forth in each instrument, as well as the provisions of the Restated Certificates and By-laws of Reorganized BI and Reorganized BSI. (a) Tax Notes --------- Subject to the election of the relevant Debtor to distribute Cash to any holder of an Allowed Tax Claim, each holder of an Allowed Tax Claim shall receive a Tax Note. Tax Notes will be issued by Reorganized BSI with respect to a particular Tax Claim which has a value equal to the Allowed amount of such Tax Claim payable over the term set forth in Section 1129(a)(9)(C) of the Bankruptcy Code. (b) New Notes --------- Reorganized BSI shall issue to the holders of (i) the Bank Group Claims, (ii) the SPE Claims, (iii) YON-GEN Claims, (iv) BRU-GEN Claims and (v) WES-GEN Claims, New Notes in an aggregate principal amount to be determined prior to the Effective Date in an aggregate amount equal to the difference between (a) $40 million and (b) any Required Prepayment. Required Prepayments shall be distributed to holders of Claims in the foregoing classes in the following proportion: (a) 0.83 percent to holders of YON-GEN Claims; (b) 0.83 percent to holders of BRU-GEN Claims; (c) 0.83 percent to holders of WES-GEN Claims; (d) 9.75 percent to holder of SPE Claims; and (e) 87.75 percent to holders of the Bank Group Claims. If not paid sooner, all amounts outstanding with respect to the New Notes shall be due on the first Business Day after the date which is five years after the Effective Date. The New Notes shall (a) be a full recourse obligation of Reorganized BSI, (b) be secured by a first lien on the Yonkers Property and 10 the Union Square Property (provided that YON or BSI, as the case may be, have not sold its interest in such property on the date of issuance of such New Notes), (c) be prepaid Pro Rata without penalty from the Net Proceeds of any equity offering and the sale of the Yonkers Property and the Union Square Property and (d) bear interest at a rate equal to nine percent (9%) per annum payable semi-annually on January 1 and July 1 of each year. The lien securing the New Notes, as provided in this Section, shall be held by the Collateral Agent in accordance with the Collateral Agent Agreement. The holders of the New Notes shall have the option to convert the New Notes in accordance with the terms set forth in Exhibit I to the Plan. (c) New Credit Facility Notes ------------------------- Reorganized BSI shall issue New Credit Facility Notes in a principal amount to be determined prior to the Effective Date but in any event of at least $250 million, on such reasonable terms and at such interest rates as shall be agreed upon by Reorganized BSI and the Agent under the New Credit Facility. (d) CAP Notes --------- In accordance with Section 6.05 of the Plan, Reorganized BSI may issue CAP Notes to holders of Class BSI-CAP Claims in a principal amount to be determined prior to the Effective Date but, in any event, not to exceed $560,000. The CAP Notes shall bear interest at a rate equal to nine percent (9.0%) per annum, payable semi-annually on January 1 and July 1 of each year. If not paid sooner, all amounts outstanding with respect to the CAP Notes shall be due on the first Business Date after the date which is six years after the Effective Date. Each of the CAP Notes shall be secured by a first lien on the property on which the holder of a Class BSI-CAP Claim holds a valid first priority security interest. (e) Cure Notes ---------- In accordance with Section 9.05 of the Plan, Reorganized BSI may issue Cure Notes in conjunction with the assumption of executory contracts in a principal amount to be determined prior to the Effective Date but in any event not to exceed $3,400,000. The Cure Notes shall be unsecured and shall bear interest at the rate of nine percent (9%) per annum. If not paid sooner, all amounts outstanding with respect to the Cure Notes shall be due on the first Business Day after the date which is three years from the Effective Date. (f) New Warrants ------------ Reorganized BI shall issue to holders of BI-GEN Claims a Ratable Distribution of New Warrants to purchase an aggregate amount of 1,000,000 shares of New Common Stock of Reorganized BI. The New Warrants shall be exercisable over a five-year period after the Effective Date. The exercise price of the New Warrants for each share of New Common Stock of Reorganized BI shall be $7.00 per share. The Debtors intend to register the New Warrants with the Securities and Exchange Commission under the Securities Act of 1934. The Debtors intend to register the New 11 Warrants with the Securities and Exchange Commission under the Securities Act of 1934. Reorganized BI shall use all reasonable efforts to have the New Warrants listed on a nationally recognized stock exchange after the Effective Date. The Debtors are currently not in a position to provide an opinion with respect to the value, if any, of the New Warrants distributed pursuant to the Plan. (a) New Common Stock of Reorganized BI ---------------------------------- Reorganized BI shall issue a single class of up to 40,000,000 shares of New Common Stock. New Common Stock of Reorganized BI is to be distributed under the Plan to holders of Allowed Claims in the BSI-GEN Class, holders of the Bank Group Claim, and holders of the SPE Claim. In aggregate, no more than 10,909,090 of such shares shall be distributed to holders of Allowed Claims under the Plan. Reorganized BI shall use all reasonable efforts to have its New Common Stock listed on a nationally recognized stock exchange after the Effective Date. The Debtors believe that there will be approximately 3,500 to 4,000 holders of New Common Stock. The Debtors intend to register the New Common Stock with the Securities and Exchange Commission under the Securities Act of 1934, and the Debtors intend to continue to file periodic reports under such Act. X. Summary of Classification and Treatment of Claims and Interests
Summary of Estimated Distributions with respect to Classes of Estimated Allowed Claims and Interest ($ in thousands) Estimated Total Amount of New Total Estimated Allowed Tax Cap and Common Estimated Recovery Debtor/Claim Class Claims(1) Cash(2) Notes Cure Notes New Notes Stock(4) Recovery Percentage - -------------------------------------------------------------------------------------------------------------------------------- All Debtors Chapter 11 administrative, $23,808 $18,128 $3,286 $3,394 $24,808 100.0% priority claims and cure costs (exclusive of DIP Claims) BANK Claims 96,000 7,000 36,000 29,088 72,088 75.1 SPE Claims(3) 11,742 208 4,000 918 5,126 43.7 Bradlees, Inc. BI-PTY $0 N/A 0 BI-GEN 264,833 0 BI-EQT(6) N/A N/A ---------------------------------------------------------------------------------- $264,833 $0 $0 $0 $0 ---------------------------------------------------------------------------------- Bradlees Administrative Co., Inc. BAC-PTY $0 0 BAC-GEN 0 0 BAC-EQT(6) N/A N/A ---------------------------------------------------------------------------------- $0 ---------------------------------------------------------------------------------- Bradlees Stores, Inc.
12
Summary of Estimated Distributions with respect to Classes of Estimated Allowed Claims and Interest ($ in thousands) Estimated Total Amount of New Total Estimated Allowed Tax Cap and Common Estimated Recovery Debtor/Claim Class Claims(1) Cash(2) Notes Cure Notes New Notes Stock(4) Recovery Percentage - -------------------------------------------------------------------------------------------------------------------------------- BSI-CAP 560 $560 560 100.0 BSI-GEN(5) 253,090 6,792 29,994 36,786 14.5 BSI-CON(7) 1,000 1,000 1,000 100.0 BSI-EQT(6) N/A N/A ---------------------------------------------------------------------------------- $254,650 $7,792 $560 $29,994 $38,346 ---------------------------------------------------------------------------------- Dostra Realty Co., Inc. DOS-PTY $0 100.0 DOS-GEN 0 0 DOS-EQT(5) N/A N/A ---------------------------------------------------------------------------------- $0 ---------------------------------------------------------------------------------- Maximedia Services, Inc. MAX-PTY $0 100.0 MAX-GEN 0 0 MAX-EQT(6) N/A N/A ---------------------------------------------------------------------------------- $0 ---------------------------------------------------------------------------------- New Horizons of Yonkers, Inc. YON-PTY $0 100.0 YON-GEN 0 0 YON-EQT(6) N/A N/A ---------------------------------------------------------------------------------- $0 ---------------------------------------------------------------------------------- New Horizons of Bruckner, Inc. BRU-PTY $0 100.0 BRU-GEN 0 0 BRU-EQT(6) N/A N/A ---------------------------------------------------------------------------------- $0 ---------------------------------------------------------------------------------- New Horizons of Westbury, Inc. WES-PTY $0 100.0 WES-GEN 0 0 WES-EQT(6) N/A N/A ---------------------------------------------------------------------------------- $0 ---------------------------------------------------------------------------------- Total All Debtors $33,128 $3,286 $3,954 $40,000 $60,000 $140,368 =====================================================================
Note 1 -- Estimated Amount of Allowable Claims The Estimated amount of Allowed Claims represent the Debtors' best estimate of the amount of pre-petition obligations that would be Allowed against each of the respective 13 Debtors under a plan or reorganization. There can be no assurance, however, that such estimates will prove accurate, actual amounts could be greater or less than the amounts estimated and such differences could be material. Note 2 -- Cash Distributions Cash Distributions under the Plan will be adjusted to the extent that actual Administrative Claims are greater than or less than the estimates contained herein. Cash Distributions will also be adjusted to the extent that holders of Allowed Claims in the BSI-GEN Claim Class elect to reduce the amount of their Claims to $500 as Convenience Claims. The Plan provides that holders of Convenience Claims receive Cash Distributions. Convenience Claim payments are expected to aggregate approximately $1.0 million. Note 3 -- BANK and SPE Claims For purposes of this presentation and in accordance with the treatment of the BANK and SPE Claims provided for in the Plan, all Claims against each Debtor and the related recoveries have been aggregated. The SPE Group has received property in the amount of $11.742 million in respect of the SPE Claims on account of the payments to the SPE Group from the sale of the SPE Providence Property and the transfer of title of SPE Philadelphia Property to the SPE Group. Note 4 -- New Common Stock For purposes of calculating distributions to be made under the Plan, the Debtors have estimated the aggregate value of New Common Stock at approximately $60.0 million or approximately $5.93 per share of New Common Stock based on an estimated distribution of 10,125,911 shares. The estimate of value of the New Common Stock does not purport to reflect or constitute appraisals or estimates of the value that may be realized through the sale of any Reorganization Securities to be issued under the Plan in public or private markets, which may be significantly different than the estimated values set forth in the Plan and herein. See "Plan of Reorganization Plan Negotiations Valuation of the Debtors' Business" Note 5 -- BSI-Gen Claims Exclusive of the SPE Deficiency Claim and related recovery. Note 6 -- Equity Claims In accordance with the terms of the Plan, allowed Interests do not receive any distribution. Note 7 -- Convenience Claims In accordance with Sections 2.07 and 6.05 of the Plan, certain claimants may elect Convenience Claim treatment, reducing their Claim in Class BSI-GEN to $500 and 14 receiving full payment in Cash. The Debtors estimate that approximately $1.0 million in cash payments will be made for Claims that elect or are deemed to have elected Convenience Claim treatment. The Debtors do not know, however, the ultimate amount of Claims that holders of which will elect Convenience Claim treatment. XI. Recommendation THE DEBTORS BELIEVE THAT CONFIRMATION OF THE PLAN IS DESIRABLE AND IN THE BEST INTEREST OF THE CREDITORS. The Plan provides for an equitable and quick distribution to Creditors. Any alternative to confirmation of the Plan, such as conversion to a Chapter 7 case or attempts by another party-in-interest to file a plan, would result in significant delays, litigation and cost. FOR THESE REASONS, THE DEBTORS URGE YOU TO RETURN YOUR BALLOT ACCEPTING THE PLAN. SECTION TWO: GENERAL INFORMATION ----------- ------------------- The Debtors have been a leading discount retailer in the Northeast for more than thirty years. The Debtors' stores are generally located in shopping centers situated in high traffic areas, and appeal to consumers seeking a wide range of value-priced merchandise and shopping convenience. As of June 23, 1995 (the "Petition Date"), the date the Debtors filed their bankruptcy petitions, the Debtors operated 136 stores. As a result of store closings during the Debtors' Chapter 11 cases, the Debtors currently operate 103 stores primarily located in the heavily populated corridor running from the Boston to the Philadelphia metropolitan areas. The Debtors' executive offices are located at One Bradlees Circle, Braintree, Massachusetts 02184-9051. From their inception through the 1980's, the Debtors' share of the Northeastern discount retail market grew steadily. However, during the early 1990s, due to a number of factors, including an urban expansion program, the Debtors' financial position began to deteriorate. After expanding into costly urban locations and becoming highly illiquid, the Debtors were forced to file for Chapter 11 protection on June 23, 1995. While in Chapter 11, the Debtors have implemented strategies to reverse the downward spiral. Specifically, the Debtors have (i) significantly reduced operating costs, (ii) refocused the merchandising strategy closer to that of a traditional discount retailer, (iii) improved the quality of merchandise, especially in apparel and home decor and (iv) redesigned the Debtors' marketing efforts to focus on their core customer. The results of these initiatives have been positive. I. Business and Competition The Debtors' business is seasonal in nature (as it is generally within the retail industry), with a significant portion of its net sales occurring in the fourth quarter, which includes the pivotal holiday selling season. The Debtors compete in most of their market regions with a variety of national, regional and local discounters, as well as other department and specialty stores. The Debtors' principal discount department store 15 competitors are Caldor Corp., Kmart Corp. and Wal-Mart Stores Inc. and, in certain limited markets, Target Stores and Ames Department Stores, Inc. II. Senior Officers and Directors
Name Title - ---- ----- Peter Thorner Chairman of the Board of Directors and Chief Executive Officer Robert Lynn President and Chief Operating Officer, Director Robert W. Benenati Senior Vice President, Logistics Gregory Dieffenbach Senior Vice President, Human Resources Judith Dunning Senior Vice President, Planning and Allocation Mark James Senior Vice President, Marketing Cornelius F. Moses, III Senior Vice President, Chief Financial Officer Ronald T. Raymond Senior Vice President, Asset Protection David L. Schmitt Senior Vice President, General Counsel, Secretary and Clerk Sandra Smith Senior Vice President, General Merchandise Manager-Hardlines Thomas N. Smith Senior Vice President, Stores James C. Sparks Senior Vice President, General Merchandise Manager-Softlines Jack E. Bush Director John A. Curry Director John M. Friedman, Jr. Director Patricia M. Pomerleau Director Sheldon Rutstein Director
16 Willis G. Ryckman Director Mr. Thorner became Chairman and Chief Executive Officer ("CEO") of the Debtors in December 1996. He was President and Chief Operating Officer ("COO") of the Debtors from June 1995 until December 1996, and he was elected a Director of the Board of Directors in July 1995. He was Vice Chairman of the Debtors from March 1995 to June 1995. Prior to joining the Debtors, he was President and COO, Acting CEO and a member of the Board of Directors of Ames Department Stores, Inc. from 1992 to 1994, which he led out of Chapter 11 and returned to profitability. He was Executive Vice President and Chief Financial Officer ("CFO") of Ames Department Stores, Inc. prior to 1992. Mr. Lynn became Director, President and Chief Merchandising Officer of the Debtors in April 1997. He was promoted to Chief Operating Officer in May 1998. Prior to joining the Debtors, he was a consultant to various retail and manufacturing clients from December 1995 to April 1997. He was Vice Chairman and COO of American Eagle Outfitters, Inc. from January 1995 to December 1995. Mr. Lynn was a retail consultant to the creditors' committee in the McCrory bankruptcy from December 1993 to January 1995. Mr. Lynn served as President and CEO of the United States Division of F.W. Woolworth from prior to 1992 to September 1993. Mr. Benenati became Senior Vice President, Logistics of the Debtors in February 1997. He was Senior Vice President, Distribution of the Debtors from June 1995 to February 1997. Prior to joining the Debtors, he was Senior Vice President, Distribution of QVC, Inc. from 1994 to June 1995. He was Vice President, Operations and Administration for Simon and Schuster Publishing Co. from 1992 to 1994. Mr. Dieffenbach became Senior Vice President, Human Resources of the Debtors in July 1997. Prior to joining the Debtors, Mr. Dieffenbach served as Vice President, Human Resources for Uptons Department Stores, Inc. from prior to 1992 until May 1997. Ms. Dunning became Senior Vice President, Planning and Allocation of the Debtors in February 1997. Ms. Dunning served as Vice President, Strategic Planning of the Debtors from January 1996 to February 1997. Prior to joining the Debtors, she was Vice President, Merchandise Planning of Rich's/Lazarus/Goldsmith's, a Division of Federated Department Stores, Inc., from February 1995 to January 1996 and Vice President, Merchandise Planning of Lazarus from 1992 to February 1995. Mr. James became Senior Vice President, Marketing of the Debtors in May 1997. Prior to joining the Debtors, Mr. James served as Senior Vice President, Marketing and Advertising for Best Products from 1992 until 1997. Mr. Moses became Senior Vice President, CFO of the Debtors in July 1996. He was Senior Vice President, Finance from July 1995 to July 1996. Mr. Moses was Vice President, Finance for the Debtors from April 1995 to July 1995. Prior to 17 joining the Debtors, Mr. Moses was Senior Vice President, Finance of Ames Department Stores, Inc. from 1992 to 1995. Mr. Raymond became Senior Vice President, Asset Protection of the Debtors in July 1995. Prior to joining the Debtors, he was Senior Vice President, Asset Protection for Ames Department Stores, Inc. from 1992 to July 1995. Mr. Schmitt became Senior Vice President, General Counsel, Secretary and Clerk of the Debtors in November 1995. He was Vice President, General Counsel, Secretary and Clerk of the Debtors from July 1995 to November 1995. Prior to joining the Debtors, he was Vice President, Business Development for Wheelabrator Clean Water Systems, Inc. from 1994 to June 1995. He was President of CP Consulting from 1992 to 1994. Ms. Sandra Smith became Senior Vice President, General Merchandise Manager - Hardlines of the Debtors in July 1995. She was Vice President, General Merchandise Manager - Hardlines of the Debtors from February 1994 to July 1995 and Divisional Merchandise Manager, Home Fashions of the Debtors from prior to 1992 to February 1994. Mr. Tom Smith became Senior Vice President, Stores in December 1997. He was previously Director of Operations & Merchandising for Fry's Electronics, a rapidly growing $1.6 billion retailer based in San Jose, California, which he joined in 1995. He was Division Director for The Home Depot/Crossroads from June 1993 to April 1995. He was Regional Vice President for Wal-Mart from prior to 1993 to April 1993. Mr. Sparks became Senior Vice President, General Merchandise Manager - Softlines of the Debtors in July 1995. He was Vice President, General Merchandise Manager - Softlines of the Debtors from October 1994 to July 1995. Prior to joining the Debtors, Mr. Sparks was Vice President, General Merchandise Manager of Belk Lindsey from August 1992 to October 1994. He was Senior Vice President, General Merchandise Manager, Mens and Childrens of Caldor, Inc. from prior to 1992 to August 1992. Mr. Bush became a Director of the Debtors in July 1997. He founded Raintree Partners, Inc. in 1995, which provides consulting services to retail and service companies. He previously served as President and as a Director of Michaels Stores, Inc. from prior to 1992 to 1995. Mr. Curry became a Director of the Debtors in January 1994. He has also served as President Emeritus of Northeastern University since September 1996. Mr. Friedman became a Director of the Debtors in May 1996. Mr. Friedman was a partner at Dewey Ballantine LLP (formerly Dewey Ballantine) from 1978 to April 1996. Ms. Pomerleau became a Director of the Debtors in March 1993. She has also served as President and CEO of AlphaSight Online Strategists since April 1996. She 18 was Managing Partner of Pomerleau Associates from October 1995 to March 1996. Prior to founding Pomerleau Associates, she was Managing Partner of ADS Consulting from November 1994 to October 1995. Ms. Pomerleau was Executive Vice President, COO of South Shore Hospital, Inc. and South Shore Health and Educational Corporation and a member of the Board of Directors of each from prior to 1991 to 1994. Mr. Rutstein became a Director of the Debtors in April 1995. He has served as a Consultant for Raytheon Co. since December 1994. He was Senior Vice President and CFO of Raytheon Co. from February 1992 to December 1994. Mr. Rutstein was Senior Vice President and Controller of Raytheon Co. prior to 1992. Mr. Ryckman became a Director of the Debtors in June 1997. He founded WGR, Inc. in 1990, and WGR Gold LP in 1994. He currently serves as the Chairman of the Board of Tri Tech Labs, Inc. and Irma Shorell, Inc. and COO of Associated Capital. He also serves as a Director of Omni Capital, Banyan Hotel Management Corporation, Krasdale Foods, Inc., Arby Foods Development Corp., National Propane Corp., and Panavision Inc. III. Corporate Structure Bradlees, Inc., is a publicly-owned Massachusetts corporation whose sole business is holding the shares of common stock of Bradlees Administrative Co., Inc. ("Admin"), a Massachusetts corporation, which in turn holds all of the issued and outstanding shares of Bradlees Stores, Inc. ("Stores"), also a Massachusetts corporation. As of the Petition Date, Stores operated 136 retail discount department stores in the Northeast and was the parent company of five subsidiaries related to the Bradlees' businesses (as shown on the following organizational chart): [FLOW CHART APPEARS HERE] Bradlees, Inc. Bradlees Administrative Co., Inc. Bradlees Stores, Inc. Maximedia Dostra New New New Services, Realty Horizons Horizons Horizons Inc. Co., Inc. of Bruckner, of Westbury, of Yonkers, Inc. Inc. Inc. 19 IV. History Until the mid-1990s, the Debtors enjoyed growth and success. The history of the Debtors may be divided into four distinct periods, each of which is discussed below in greater detail: . 1961 - 1988. Bradlees/1/ was owned by and operated as a division of The Stop & Shop Companies, Inc. ("Stop & Shop"). During this period, Bradlees grew from a small enterprise to become one of the leading discount retail chains in the East. . 1988 - 1992. In 1988, following a leveraged buy-out, the Bradlees' businesses were incorporated as separate companies and became wholly-owned subsidiaries of Stop & Shop. During this period, Bradlees continued to enjoy growth in both sales and earnings. . 1992 - 1995. In 1992, Stop & Shop "spun off" the Bradlees' businesses through an initial public offering of Bradlees' stock. Following the spin-off, Bradlees became an independent public company. Although investors and analysts had great expectations for the company, during this period Bradlees began a costly expansion to urban areas and saw its profit margins decline drastically. . 1995 - Present. The first eighteen months after the Debtors' filed their Chapter 11 petitions were difficult, as revenues, margins and earnings declined substantially. With the implementation of new strategies, initiatives and cost reduction programs, beginning in late 1996, the Debtors have begun to see significant improvements in sales and earnings. A. 1961-1988 Stop & Shop acquired the Bradlees' businesses in 1961 (which consisted of six stores) and, until approximately 1988, the Bradlees' businesses were operated as divisions of Stop & Shop and/or its affiliates. As divisions of Stop & Shop, Bradlees operated with its own operating management, offices and distribution facilities. During this period, Bradlees grew steadily and eventually became one of the leading discount retailers in the East. B. 1988-1992 In 1988, Stop & Shop agreed to a leveraged buyout ("LBO") proposed by Kohlberg Kravis Roberts & Company ("KKR"). As part of the LBO, an acquisition subsidiary of KKR tendered for all of the shares of Stop & Shop at a price of $44 per - ---------------- /1/ "Bradlees" refers to the Debtors as they existed prior to the Petition Date. 20 share, for a total purchase price of approximately $1.2 billion. The amounts due under the various debt agreements were allocated to Stop & Shop and its various subsidiaries, including the Bradlees' businesses. As part of the post-LBO structure, the Bradlees' businesses were allocated, for accounting purposes, 44% of all debt of the Stop & Shop entities on a consolidated basis. Thus, Stop & Shop allocated the Bradlees' businesses almost $600 million of debt arising out of the LBO. After the LBO, the Bradlees' businesses were organized in a number of affiliated, separately incorporated companies focusing on different regions and functions. Specifically, the Bradlees' businesses were divided into three regions, New England, New York, and New Jersey, with operating companies managing the stores and holding companies holding the stock. All of these entities were wholly-owned subsidiaries of Stop & Shop. In January of 1989, as part of an internal restructuring, Bradlees closed and sold thirty-seven stores located in Virginia, North Carolina, Maryland and Delaware. Following the LBO, the businesses of Bradlees and Stop & Shop continued to be closely intertwined. Bradlees continued to share certain facilities and work functions with Stop & Shop -- including their corporate headquarters, computer services, warehouse facilities, and trucking capacity. In addition, Stop & Shop often purchased merchandise for the entire Stop & Shop consolidated businesses, including the Bradlees' businesses. During this period, the number of Bradlees' stores and its earnings continued to grow, and investor interest in the Bradlees' businesses and a possible stock offering began to materialize. Among the factors which made Bradlees an enticing investment opportunity at that time were that (i) Bradlees had a leading market share in the Northeast as well as desirable and hard-to- duplicate store locations, (ii) Bradlees emphasized soft goods, which had higher margins than hard goods, and had recently invested in new technologies and store layouts, and (iii) Bradlees had improving "EBITDA" (earnings before interest, taxes, depreciation and amortization) even during the extended recession in the Northeast. C. 1992 - 1995 1. The Initial Public Offering --------------------------- In 1992, Stop & Shop desired to capitalize on the growing investor interest in the Bradlees' businesses. Accordingly, Stop & Shop sought to spin- off the Bradlees' businesses and make Bradlees an independent public company. As part of this process, an initial public offering ("IPO") was scheduled for July 9, 1992. In projections distributed to lending institutions, Stop & Shop projected that Bradlees' operating profit margin would grow from 3.54% in 1991 to 4.81% in 1997, and that net earnings would grow at a rate of 20-25% through 1997. At this rate, Bradlees was projected to attain earnings per share of $5.58 in 1997. In preparation for the IPO, Bradlees, Inc. was incorporated for the purpose of acquiring the Bradlees' businesses. On May 6, 1992, the IPO and the intent to sell between 11 and 12 million shares of Bradlees, Inc. were announced. On July 9, 1992 (the 21 "Spin-Off Date"), the IPO and spin-off (the "Spin-Off") were effectively consummated. As part of the Spin-Off, the parties carried out a number of transactions, including: (a) certain directors of Bradlees' subsidiaries resigned. (b) Bradlees, Inc. issued 11,018,625 shares of common stock in the IPO for $13 per share, receiving net proceeds of $135,728,156.30. (c) Bradlees, Inc. transferred the net proceeds of the IPO of $135,728,156.30 as a capital contribution to Admin. (d) Admin purchased the stock of the following entities from Stop & Shop, using the downstreamed net proceeds from the IPO: (i) NE Holdings for $75,003,379.15; (ii) NY Holdings for $7,152,873.83; and (iii) Bradlees NJ for $53,571,903.27. The total purchase price for the Spin-Off, including all stock and all debt repayments, totaled $340,311,970.16. Of this amount, the purchase of stock by Admin from Stop & Shop accounted for $135,728,156.30, and the repayment of certain intercompany obligations between Bradlees and Stop & Shop accounted for the remaining $204,583,813.86. The repayment of the intercompany obligations was financed by the net proceeds of a $115 million bank term loan ("Term Loan") and the issuance of a $100 million subordinated seller note ("Seller Note") to Stop & Shop. In August of 1992, the Company issued in the public market $125 million senior subordinated notes due 2002, the net proceeds of which were used to pay off the Seller Note and to pay down a portion of the Term Loan. In March of 1993, the Company issued $100 million subordinated notes due 2003, the net proceeds of which were used to pay off the balance of the Term Loan. 2. Operating Downturn ------------------ Although the Bradlees' businesses had been projected to excel during the years following the Spin-Off, the projections never materialized. Nationally, total sales in the retail market increased from $95 billion in 1991 to $137.5 billion in 1994 or approximately twelve percent (12%) annually. However, Bradlees' own sales did not keep pace with those of other retailers. While the bankruptcies of discount retailers such as Ames, Jamesway and Hills, and the publicly reported financial difficulties of Kmart, indicated that Bradlees' problems were not unique, other retailers such as Wal-Mart, and certain department store chains, grew and even thrived in the period from 1992- 1995. During this period, Bradlees developed profound and fundamental problems. Indeed, before Bradlees filed their Chapter 11 petitions, Bradlees' businesses had lost focus. Rather than appealing primarily to middle-market consumers -- as Bradlees had successfully done during the 1980's -- Bradlees drifted further and further into the realm of the low-end discount retailers (such as Kmart and Wal-Mart) without the attendant benefit of a low-cost operating infrastructure common to such retailers. Not 22 only did the quality of Bradlees' merchandise decline during the early 1990's, but so did the gross margins on many of the hard goods being offered for sale. In addition, in the three-years following the Spin-Off, Bradlees entered into a significant number of costly leases to open new store locations primarily in urban areas. These new store openings eroded Bradlees' cash resources and reduced its borrowing capacity. Among the numerous factors which led to Bradlees' downturn and eventual Chapter 11 filing, the following may be considered the most important: (a) Increased Competition From 1992 to 1995, competition in the discount department store industry increased in the already competitive Northeast region with the entry of several new competitors into the area (such as Wal-Mart), and the expansion of the operations of traditional competitors of Bradlees, such as Kmart and Caldor. During this period, Wal-Mart, Kmart, and Caldor opened 53, 12, and 11 new stores in the Northeast, respectively. Bradlees responded to the increase in competition by deviating from its traditional merchandising and marketing strategies. Bradlees had generally differentiated itself from its competitors by emphasizing soft-line goods and higher quality merchandise. In the post-Spin-Off period, however, in order to increase store traffic, Bradlees changed its emphasis to commodity-type goods, which yielded lower margins. In addition, Bradlees began to compete on the basis of price alone. Although sales increased somewhat, the lower margins ultimately hurt Bradlees' bottom line. (b) Failure to Effectively Implement Programs to Expand Operations Management's growth strategy relied heavily on increasing revenues by remodeling existing stores and opening new stores in both existing market areas and new markets. In 1990, Bradlees launched a program to remodel existing stores based upon a new store prototype. Bradlees had planned to remodel 75% of its stores by the end of 1994 and open four to six new stores per year in malls and shopping centers, locations in which Bradlees' stores typically had been successful. However, Bradlees deviated considerably from this plan -- the store remodeling program was substantially reduced and the new stores did not open on time. The performance of remodeled and new stores did not meet projections and management expended more capital on expansion than the businesses were generating. In addition, despite the reduction in the number of remodeled and new stores, the cost overruns for remodeling and new store preparation and fixturing totaled $19.1 million. Although Bradlees traditionally believed that one of its competitive advantages was the hard-to-duplicate locations of Bradlees' stores in established retail markets in the Northeast, Bradlees pursued certain new markets that required large investments in real estate as well as higher operating costs. Bradlees invested $39.9 million in land and lease acquisitions from the Spin-Off Date through January 1995 that was not anticipated in its projections. These expenditures impaired Bradlees' liquidity, 23 causing Bradlees to further curtail its remodeling program in favor of maintaining the pace of new store openings. In total, Bradlees invested an additional $59.0 million over budget in capital expenditures, land and lease acquisitions while only marginally increasing sales. (c) Liquidity Problems By the end of 1994, the increased competition, poor performance of the new and remodeled stores, and the expanded investment in capital expenditures had seriously eroded Bradlees' liquidity. Bradlees' attempts to generate additional capital through the refinancing of existing debt and other credit facilities were insufficient to cover the excessive spending on new stores and remodeling, and the shortfall in earnings from the Spin-Off Date through January 28, 1995. By early 1995, Bradlees had utilized $135 million of its $150 million revolving credit facility established pursuant to the Credit Agreement among Bradlees, Inc., various lending institutions and Bankers Trust Company, as Agent, dated as of March 3, 1993. Additionally, working capital as of May 20, 1995 had eroded to just $2.9 million. In addition, Bradlees had violated its loan covenants and was unable to negotiate satisfactory waivers and new covenants. As such, Bradlees did not have the resources to purchase fall merchandise for the "back-to-school" selling period and factors were increasingly unwilling to extend credit to vendors. In sum, Bradlees faced a (i) revolving credit facility approaching its limit on borrowings, and (ii) diminished working capital position. (d) Off-balance Sheet Financing As part of Bradlees' efforts to increase new store openings, it entered into an off-balance sheet financing arrangement. Specifically, in 1994 Bradlees entered into a $75 million lease financing revolving line of credit (the "Lease Credit Line") to fund future store development. The Lease Credit Line, provided by a syndicate of banks led by Bankers Trust (the "SPE Group"), was intended to be a ready source of interim construction financing, with permanent financing to be obtained separately on a store-by-store basis -- as construction was completed and the stores were refinanced (most likely on a sale-leaseback basis). In connection with the Lease Credit Line, the parties thereto executed that certain Credit Agreement dated as of March 3, 1993, as amended, among Bradlees, Inc., Various Lending Institutions and Bankers Trust Company, as Agent, dated September 30, 1994, as amended (the "SPE Facility"). Through a series of reductions, the amount of the Lease Credit Line was reduced to $24 million. In order to obtain off-balance sheet treatment for the Lease Credit Line, all loans had to be made directly to special purpose entities unaffiliated with Bradlees. The basic structure of the Lease Credit Line was that the Banks lent 97% of the development cost of a property to State Street Bank and Trust Company, as trustee (the "SPE Owner Trustee") for the special purpose entity, which loans were guaranteed by each of the Debtors. The remaining 3% was provided in the form of a 3% equity investment in the SPE Owner Trustee by another special purpose entity, BRE Funding, Inc. (the "Investor"). The SPE Owner Trustee was a grantor trust created by the Investor, and the Investor owned the entire beneficial interest in the SPE Owner Trustee. The Investor was 24 a Delaware corporation, all the stock of which was owned by JH Holdings Corporation, as trustee of the BRE Trust, a charitable trust ultimately for the benefit of Harvard University. The 3% invested by the Investor was financed entirely by a loan from the SPE Group to the Investor. As a consequence, the SPE Group essentially financed 100% of the development costs of the properties involved. The SPE Owner Trustee used the loans at the direction of Bradlees to acquire fee title and develop the properties. At the time a property was first financed through the Lease Credit Line, the SPE Owner Trustee leased the property to BSI pursuant to a master lease and lease supplement under which BSI agreed to pay as rent amounts sufficient to amortize all of the loans. Each of the other Debtors guaranteed the leases. All loans made under the Lease Credit Line were secured by senior mortgages on the properties involved (including real property, fixtures and related equipment). The loans were also secured by assignments from the SPE Owner Trustee of the leases and its assignment of the development-related contracts (e.g., agency agreement, development agreement, construction agreement, completion guaranty and assignment of contracts). Two properties, Philadelphia and Providence (the "SPE Properties"), were financed through the Lease Credit Line, and the aggregate outstanding principal balance at the time of the Petition Date was approximately $18.2 million. (e) Management In addition to its operating and expansion difficulties after the IPO, Bradlees suffered from a lack of experienced management. Bradlees' two top post-Spin-Off officers were relatively inexperienced in the discount retail industry. Barry Berman, Chairman, President and CEO of Bradlees, had a background in accounting and food marketing for the Supermarket Division of Stop & Shop until March 1990, but no significant background in discount merchandising. Samuel Mandell, who held the position of Executive Vice President and COO of Bradlees (and later President) after the Spin-Off, had been General Counsel of Stop & Shop with responsibility for a myriad of non-sales functions, including legal and real estate. The third highest executive position, CFO, was unfilled at the time of, and for two months after, the Spin- Off. Joseph McGlinchey, CFO for pre-Spin-Off Bradlees and Stop & Shop, remained behind at Stop & Shop, along with most of his staff. The initial post-Spin-Off Board of Directors of Bradlees similarly lacked discount merchandising experience. At the time of the Spin-Off, the Board consisted of Messrs. Berman and Mandell, Lewis Schaeneman -- the Chairman and CEO of Stop & Shop -- and James Greene, Paul Raether and Clifton Robbins -- three executives and partners of KKR. Notably absent from the Board immediately following the Spin-Off were any independent directors. 25 3. New Management Team ------------------- On December 3, 1994, Bradlees hired Mark A. Cohen to be Chairman and CEO. Mr. Cohen had previously been the Chairman and CEO of Lazarus Department Stores, a 51-store division of Federated Department Stores, Inc. ("Federated"). Mr. Cohen had more than 23 years of experience in the retail industry, and he had held key executive positions in both department and chain store companies. Mr. Cohen had joined Federated in 1987 as President and COO of Federated's Goldsmith's Department Stores division. In 1988, he joined Lazarus Department Stores as President and COO and was named Chairman and CEO in 1989. Bradlees hired, through the latter part of 1994 and early 1995, several additional senior level employees to serve on Mr. Cohen's management team. 4. May 24, 1995 -- Annual Meeting of Shareholders ---------------------------------------------- In light of the difficulties facing Bradlees, on the eve of its May 24, 1995 annual meeting of shareholders, Bradlees made several announcements: (a) Bradlees expected to report a loss of $2.25 to $2.75 per share when it released the fiscal first-quarter earnings in mid- June. This expected loss was nearly twice as large as market analysts had projected, as several analysts had projected losses of approximately $1.40 per share. (b) Bradlees would delay the store openings which it had planned for 1996. Bradlees had expected to open at least five new stores in 1996. (c) Bradlees would suspend its dividend payment. Bradlees common stock had paid a quarterly cash dividend of 15 cents per share since the Spin-Off. Bradlees supported this announcement by noting that the elimination of the dividend would save the company approximately $6.8 million per year. 5. June 22, 1995 -- Layoffs ------------------------ On or about June 22, 1995, Bradlees terminated several senior employees, including: Samuel Mandell, President and COO; Anne Terhune, Vice President and General Counsel; and Barry Horowitz, Vice President, Marketing. V. 1995-present -- The Chapter 11 Cases As a result of increased competition, expansion into costly urban locations, and resulting illiquidity, as discussed above, Bradlees was compelled to seek Bankruptcy Court protection on June 23, 1995. 26 A. Filing On June 23, 1995, the Debtors each filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code in the Bankruptcy Court. Pursuant to an Order of the Bankruptcy Court dated June 23, 1995, the Debtors' Chapter 11 cases were consolidated for procedural purposes only and are being jointly administered. B. Administration of Cases Since the commencement of the Chapter 11 cases, the Debtors have continued to operate their businesses and manage their properties as debtors-in- possession pursuant to Bankruptcy Code Sections 1107(a) and 1108, subject to the jurisdiction and supervision of the Bankruptcy Court. No trustee or examiner has been appointed in these cases. C. Bankruptcy Court First Day Orders On the first day of the Chapter 11 cases, the Bankruptcy Court entered a number of orders granting the Debtors various forms of relief. In particular, the Debtors obtained orders authorizing: (i) the joint administration of the Debtors' Chapter 11 cases; (ii) the maintenance of business forms, bank accounts, cash management system, and exempting the Debtors from investment and certain bonding requirements of the Bankruptcy Code; (iii) the honoring of certain prepetition obligations to customers; (iv) the payment of prepetition wages, salaries and commissions; (v) the retention of Dewey Ballantine LLP (formerly Dewey Ballantine) as bankruptcy counsel; and (vi) the retention of Goodwin, Procter & Hoar as special corporate counsel to the Debtors. D. Parties in Interest and Professionals The parties described below have been the major parties in interest in the Chapter 11 Cases to date: 1. Bankruptcy Court ---------------- The Honorable Burton R. Lifland, United States Bankruptcy Judge, has presided over the Debtors' Chapter 11 Cases since the Petition Date. 2. Debtors ------- During the pendency of the Chapter 11 Cases, it was necessary for the Debtors to retain professionals to assist in a variety of areas: Dewey Ballantine LLP Bankruptcy counsel. Goodwin, Procter & Hoar LLP Special corporate counsel. Zolfo Cooper, LLC -- Special financial advisors and bankruptcy consultants. 27 Deloitte & Touche, LLP -- Accountants and auditors from September 15, 1995 through September 24, 1997. Arthur Andersen LLP -- Accountants and auditors commencing on September 24, 1997. Schottenstein Bernstein Capital Group, LLC; Gordon Brothers Partners, Inc.; the Nassi Group LLC; and Alco Capital, Inc. -- Consultants to assist in certain going-out-of-business sales. Squire, Sanders & Dempsey LLP -- Special real estate counsel. Donlin, Recano & Company, Inc. -- Official Claims Agent for the Clerk of the Bankruptcy Court. In addition, other counsel have been retained to prosecute and defend, to the limited extent necessary during the pendency of the Chapter 11 Cases, actions which were pending as of the Petition Date. By Order dated December 21, 1995, the Bankruptcy Court authorized the Debtors to retain and compensate these and various other professionals in the ordinary course of business. 3. Official Committee of Unsecured Creditors ----------------------------------------- On July 6, 1995, the United States Trustee for the Southern District of New York appointed an Official Committee of Unsecured Creditors (the "Creditors' Committee"). The following professionals have been retained by order of the Bankruptcy Court to act on behalf of the Creditors' Committee: Otterbourg, Steindler, Houston & Rosen, P.C. -- Counsel to the Creditors' Committee. Ernst & Young LLP -- Accountants for the Creditors' Committee. 4. Secured Creditors ------------------ The Principal secured creditors in the cases are comprised of two groups of lending institutions: (i) those lending institutions which are parties to the Credit Agreement among Bradlees, Inc., various lending institutions and Bankers Trust Company, as Agent, dated as of March 3, 1993 (the "Bank Group"), and (ii) the SPE Group, i.e., those lending institutions providing a revolving line of credit to fund future store development. (See Section 2.IV.C.2.(d) entitled "Off-Balance Sheet Financing," above.) The following professionals have been retained by the Secured Creditors: Skadden, Arps, Slate, Meagher & Flom -- Counsel to the Bank Group. Kasowitz Benson Torres & Friedman LLP -- Counsel to Gabriel Capital, L.P., the majority holder of the Bank Group Claim. 28 Policano & Manzo, LLC Financial advisors to the Bank Group. 5. Unofficial Committee of Trade Claim Holders -------------------------------------------- The Unofficial Committee was formed to represent the interests of those members of the Unofficial Committee who had purchased claims in Bradlees Stores, Inc.'s Chapter 11 case. The current members of the Unofficial Committee are Stonington Management Corporation and Anvil Investment Partners. The Unofficial Committee retained the following professional: Milbank, Tweed, Hadley & McCloy Counsel to the Unofficial Committee. E. Debtor-in-Possession Financing As previously mentioned, in the months prior to the Petition Date, the Debtors were facing a severe liquidity crisis. As such, many of the Debtors' vendors refused to ship goods and certain factors refused to extend credit based upon shipments to the Debtors. In an effort to alleviate these problems, and in order to continue to operate their businesses in a Chapter 11 context, on June 23, 1995, the Debtors entered into an agreement to provide them with a working capital facility to meet their ongoing cash and credit requirements during these Chapter 11 cases (the "Chase DIP Facility"). The Chase DIP Facility had a two- year term, with an original maturity date of June 23, 1997. The Chase DIP Facility was originally entered into by the Debtors and Chemical Bank and was subsequently syndicated. The Chase Manhattan Bank ("Chase Bank") (successor by merger with Chemical Bank) was agent under the Chase DIP Facility. By Order dated June 26, 1995, the Bankruptcy Court authorized the Debtors to obtain interim DIP financing in the amount of $100 million. On July 11, 1995, the Bankruptcy Court entered a Final Order authorizing and approving the Chase DIP Facility in the full amount of $250 million. With the Chase DIP Facility in place, vendors resumed shipments to the Debtors of new inventory on normal business terms. During the course of the Chapter 11 Cases, the Debtors have negotiated several amendments to the Chase DIP Facility. The following table summarizes the dates of each Amendment and the primary function, inter alia, of each Amendment: Amendment Date Purpose - ---------------- ------------- ----------------------------- First Amendment June 30, 1995 Modified certain definitions contained in the Chase DIP Facility. Second Amendment August 9, 1995 Provided for the syndication of loans to be made under the Chase DIP Facility to a group of banks. 29 Third Amendment March 15, 1996 Modified certain definitions and financial covenants contained in the Chase DIP Facility. Amendment by August 15, 1996 Permitted the closing of Letter Agreement fourteen stores and the establishment of a markdown reserve in connection therewith. Fourth Amendment September 13, 1996 Provided for a reduction in the funds available under the DIP line due to closure of store locations and modified certain financial covenants contained in the Chase DIP Facility. Fifth Amendment January 13, 1997 Provided for a modification of the EBITDA covenant contained in Section 6.05 of the Chase DIP Facility. Amendment by February 20, 1997 Permitted the closure of Letter Agreement the store located in New Hyde Park, New York. Sixth Amendment March 20, 1997 Extended the maturity date of the Chase DIP Facility for one year. Seventh Amendment/2/ October 29, 1997 Increased the borrowing base, increasing the amount of available credit to the Debtors. In connection with the Chase DIP Facility, the Debtors also negotiated with the Debtors' Bank Group and Chase Bank to obtain stand-by letters of credit from Chase Bank to "back up" existing letters of credit issued by the Bank Group. This enabled the Debtors, inter alia, to obtain certain imported goods which vendors were unwilling to ship absent such assurances. Toward the end of 1997, the Debtors believed that additional availability under a new financing was necessary to provide liquidity levels during the 1998 fiscal year which would be sufficient to satisfy the vendor community. Thus, in anticipation of an exit from Chapter 11 in 1998, the Debtors sought to replace their Chase DIP Facility - -------------------- /2/ Technically, the Seventh Amendment to the Chase Dip Facility is the First Amendment to the "Amended and Restated Revolving Credit and Guaranty Agreement" which was executed as part of the Sixth Amendment, and restates and incorporates all of the previous Amendments. 30 with (a) a financing which would provide the Debtors with additional availability by further increasing the percentage of eligible inventory on which borrowing is based, and by defining eligible inventory more liberally and (b) which would be convertible by replacement into an exit financing upon emergence from Chapter 11. After exploring the possibility of obtaining such financing and soliciting bids from a number of financial institutions, the Debtors determined that BankBoston, N.A. ("BankBoston") submitted the most favorable bid. On December 3, 1997, the Debtors filed an Application with the Court seeking authorization to obtain DIP Financing from BankBoston. On December 22, 1997, the Bankruptcy Court entered an Order authorizing the Debtors to enter into the DIP agreement with BankBoston (the "BankBoston DIP Facility"). As compared to the Chase DIP Facility, the BankBoston DIP Facility provides the Debtors with greater availability, and hence liquidity, for lesser fees and for a longer term. The BankBoston DIP Facility is convertible by replacement, upon the satisfaction of certain conditions, into exit financing for a term equal to the earlier of (a) three years from the date of closing of the exit facility or (b) four years from December 23, 1997. The possibility of converting the BankBoston DIP Facility into exit financing was one of the reasons that Bradlees elected to enter into the BankBoston DIP Facility. F. Exclusivity Extensions Section 1121 of the Bankruptcy Code grants a debtor-in-possession the exclusive right to file a plan of reorganization for 120 days after the filing of a voluntary petition for relief under Chapter 11 and the exclusive right to solicit acceptances of that filed plan for 180 days after the date of the petition. Section 1121 additionally provides that each of these periods may be extended for cause before its expiration. Because of the size and complexity of the Debtors' cases and the significant progress that the Debtors have made towards reorganization, the Debtors' exclusivity periods have been extended five times by Orders of the Bankruptcy Court. . Toward the end of the Debtors' initial exclusivity period, which expired on October 23, 1995, the Debtors successfully demonstrated to the Bankruptcy Court that sufficient cause existed to extend the Debtors' exclusive periods on the basis that the Debtors' management had expended significant time since the Petition Date responding to numerous inquiries and information requests made by the Creditors' Committee, the Bank Group, vendors, customers and landlords. In addition, during their exclusive periods, the Debtors had negotiated a DIP agreement and merchandise return program and that additional time was needed to attend to Bradlees' other operational problems. By Order dated November 20, 1995, the Debtors' motion was granted and the exclusive filing period was extended through June 30, 1996 and the exclusive solicitation period through August 29, 1996. . On June 7, 1996, the Debtors filed a motion seeking to extend their exclusivity periods. In the motion, the Debtors asserted that they needed additional time to fully implement their business plan and evaluate the business plan's results under the leadership of Mark Cohen (see discussion of Mark Cohen's initiatives, below). 31 Following a hearing held before the Bankruptcy Court on June 25, 1996, the Bankruptcy Court signed an Order extending the Debtors' exclusive periods to file a plan of reorganization through February 1, 1997, and extending the Debtors' exclusive periods in which to solicit acceptances of a plan through April 2, 1997. . On January 10, 1997, the Debtors filed a motion with the Bankruptcy Court seeking an additional extension of their exclusivity periods. In the motion, the Debtors informed the Bankruptcy Court of the recent appointment of Peter Thorner as Chairman and CEO (who replaced Mark Cohen in this position). The Debtors asserted that additional time was needed to successfully implement Mr. Thorner's strategies (see discussion of Peter Thorner's initiatives, below). The Bankruptcy Court signed an Order on January 21, 1997, extending the Debtors' exclusive periods to file a plan of reorganization through August 4, 1997, and extending the exclusive periods to solicit acceptances of a plan through October 3, 1997. . On July 3, 1997, the Debtors, with the support of the Official Committee of Unsecured Creditors, filed a motion seeking the entry of an order extending the Debtors' exclusive periods to file a plan of reorganization and solicit acceptances of the plan through February 2, 1998 and April 3, 1998, respectively. In the motion, the Debtors asserted that although the early signs from Peter Thorner's initiatives were positive, the Debtors required additional time to reorganize their operations and that the extension was necessary to maintain the confidence of the vendor and factor communities and to preserve continued credit support from these groups. By Order dated July 15, 1997, the Bankruptcy Court authorized the extension of exclusivity over the objections of certain creditor constituencies. . On December 8, 1997, the Debtors with the support of the Official Committee of Unsecured Creditors filed a motion with the Bankruptcy Court seeking the entry of an order extending the Debtors' exclusive periods to file a plan of reorganization and solicit acceptances of the Plan through August 3, 1998 and October 5, 1998, respectively. In the motion, the Debtors stated that although the Debtors were at their healthiest position since entering Chapter 11, they were not yet ready to emerge from bankruptcy. The Debtors stated that the additional time would allow for two pivotal steps toward the successful confirmation of a plan of reorganization to occur: (i) the continued strengthening of the Debtors' operational performance, and (ii) an agreement among the Debtors' creditors on how their interests in the Debtors' estates should be distributed among the creditors. Following the objections of several parties to the Debtors' motion, the Bankruptcy Court, in an Order dated December 22, 1997, granted the Debtors' motion but provided that if the Debtors did not by April 1, 1998 (or under certain circumstances, a later date), file a plan or plans of reorganization and disclosure statement (a) that is reasonably capable of obtaining exit financing and either (b) that is supported by each of the principal interests in the case including the pre-petition bank groups, the Official Creditors' Committee, the Unofficial Committee of Trade Claimants and the Subordinated Debt, or (c) which, if not supported by each of the principal interests referred to in (b) above, is supported by the beneficial holders of a majority in amount of the pre-petition revolving bank debt and the pre-petition vendor-trade claims as then reflected in the Debtors' books and records, then certain creditors can also file and seek 32 confirmation of a plan of reorganization. The Debtors believe that the proposed Plan filed herewith is reasonably capable of obtaining financing and is supported by each of the principal interests in these Chapter 11 cases and accordingly, complies with the December 22, 1997 Order. G. Claims Process and Bar Date Because of the large number of creditors, the Debtors were required to and did retain Donlin, Recano to receive and process the proofs of claim which would be filed. The Debtors filed their Schedules of Assets and Liabilities on October 20, 1995, and Stores amended its schedules on December 18, 1995./3/ Thereafter, by Order dated February 6, 1996, the Bankruptcy Court established April 1, 1996 as the final time for filing proofs of claim in the Chapter 11 cases (the "Bar Date"). The Debtors, working closely with Donlin, Recano, served notices of the Bar Date via first-class mail to the creditors and by publication in four national newspapers: The New York Times (national edition), ------------------ The Wall Street Journal (national edition), The Boston Globe and Women's Wear - ----------------------- ---------------- ------------ Daily. - ----- 1. Alternative Dispute Resolution Program -------------------------------------- The Debtors have commenced a claims reconciliation process to resolve several difficulties frequently encountered in cases of this magnitude, including ascertaining claims which: (i) are filed in duplicate; (ii) consist of amendments to previously filed claims; (iii) are asserted against multiple Debtors; (iv) do not allege an obligation of any of the Debtors; (v) assert contingent claims against multiple Debtors; or (vi) include postpetition interest and other disallowable charges. See Section 3.XIV of Disclosure Statement entitled "Estimation of Claims." Specifically, the Debtors filed a Motion on August 26, 1996, seeking authorization to establish an Alternative Dispute Resolution Procedures Program (the "ADR Program") for Personal Injury and Tort Claims. Under the ADR Program, the Debtors should initially attempt to settle, through negotiation or mediation, all tort claims. The ADR Program established steps which the parties must follow in attempting to settle a claim. By an Order dated September 12, 1996, the Bankruptcy Court authorized the implementation of the ADR Program. Pursuant to the ADR Program, the Debtors have filed four Applications for Omnibus Settlement of Personal Injury and Tort Claims, all of which have been approved by the Bankruptcy Court. Filing Date of Order Number of Claims Settled - ---------------------------- ------------- ------------------------ First Omnibus Settlement 10/23/97 50 Second Omnibus Settlement 10/29/97 64 Third Omnibus Settlement 11/17/97 45 - -------------- /3/ The Debtors' schedules of assets and liabilities have been amended various times to settle injury claims which were late-filed. However, these changes are de minimis and such amendments were for the convenience of Donlin, Recano to better track such settlements. 33 Fourth Omnibus Settlement 2/17/98 55 Fifth Omnibus Settlement 2/24/98 24 Sixth Omnibus Settlement 3/23/98 14 Seventh Omnibus Settlement 7/9/98 17 The Debtors have also obtained approval from the Court for numerous individual settlements of personal injury claims. To the extent that any personal injury claims have been allowed, such claims have been allowed against BSI. 2. Reconciliation of and Objections to Claims ------------------------------------------ Similarly, the Debtors filed a Motion on September 29, 1997, seeking authorization to establish Procedures for Reconciliation of and Objection to Claims (the "Procedures"). The Procedures include five steps to be followed in resolving claims disputes. By an Order of the Court dated October 23, 1997, the Court authorized the Procedures. On January 29, 1998 and March 10, 1998, the Debtor, filed First and Second, respectively, Omnibus Objections to Claims, in which the Debtors sought to, inter alia, object to certain duplicate and other claims. On May 7, 1998 and June 18, 1998, the Debtors filed the Third and Fourth Omnibus Objections to Claims, respectively, in which the Debtors sought to, inter alia, reduce and allow certain claims. On July 17, 1998, the Debtors filed the Fifth and Sixth Omnibus Objections to Claims, in which the Debtors sought to, inter alia, expunge certain claims. 3. Reclamation Claims ------------------ During the course of the case, Bradlees had received approximately 290 reclamation demands seeking the return of goods with invoice values totaling more than $27,400,000, which goods had allegedly been delivered during the statutory reclamation period. Bradlees believes, however, that the actual amount of valid reclamation claims is approximately $9.3 million. Certain vendors proceeded to commence adversary proceedings against Bradlees in an effort to reclaim their goods. Bradlees desired to adopt a uniform procedure for determining and settling all reclamation claims, so that litigation concerning such claims could not continue to interfere with Bradlees' reorganization efforts. Accordingly, on or about May 1, 1996, Bradlees filed a Motion with the Court seeking approval of certain procedures to be used in settling and paying reclamation claims. The first step of the procedure called for Bradlees to reach an agreement with its vendors regarding the amount of each reclamation claim. Once the amount of the claim was agreed upon, vendors holding such reclamation claims were entitled to select one of two options for payment: (i) payment in Cash of sixty-five percent of the amount of the reclamation claim within forty-five days of agreement or approval of agreement, or (ii) an allowed administrative claim in the full amount of the claim which will be paid pursuant to the Debtors' Plan of Reorganization. 34 On November 12, 1996, the Court signed an Order affording the relief sought in the Motion. Since the Order was signed the Debtors have noticed three omnibus settlements settling reclamation claims in accordance with the terms of the above program. H. Real Estate Transactions During the latter stages of the Debtors' cases, the Debtors determined that certain real property which was owned by the Debtors should be sold. Such properties include (i) a store located in North Attleboro, Massachusetts, (ii) unimproved real property located in Hempstead, New York and (iii) a store located in Providence, Rhode Island. 1. North Attleboro, Massachusetts ------------------------------ After receiving an attractive offer for Bradlees' North Attleboro, Massachusetts store, the Debtors determined in late 1997 that the store in North Attleboro (the "N.A. Store") should be closed. The N.A. Store's performance was resulting in marginal cash flow, and the N.A. Store was under intense competitive pressure from other retailers nearby. The Debtors applied to the Bankruptcy Court and received authorization to close the N.A. Store and conduct a going-out-of-business sale. On December 24, 1997, the Debtors filed a motion seeking authorization to sell the N.A. Store to Beckenstein Enterprises No. Attleboro L.L.C. ("Beckenstein") for a payment in the amount of $8,400,000, subject to higher or better offers. At a hearing held on the motion on January 7, 1998, Beckenstein's offer was deemed to be the highest and best offer and the Bankruptcy Court authorized the sale of the N.A. Store. 2. Westbury, New York ------------------ The Debtors had originally purchased property in Hempstead, New York (the "Westbury Property") in 1994 for the purpose of building a new store on the site. The Debtors' bankruptcy filing affected their plans to expand, however, and management determined that the Debtors' efforts to reorganize would best be served by selling the Westbury Property. In 1996, the Debtors reached an agreement with Ellison Management Corporation ("Ellison") to sell the Westbury Property to Ellison for $12,000,000. However, Ellison never consummated the purchase. Pursuant to the Purchase Agreement, the Debtors retained liquidated damages in the amount of $1,600,000 which Ellison had provided to the Debtors as liquidated damages. Following the aborted sale to Ellison, the Debtors resumed their efforts to sell the Westbury Property. Although the Debtors received several offers, none were as high as the $12,000,000 offered by Ellison. In mid-1997, the Debtors received an offer from RM Westbury LLC ("RM") which the Debtors determined to accept. RM agreed to purchase the "Westbury Property" for $7,844,150, subject to higher and better offers. At 35 a hearing held on February 24, 1998, the Westbury Property was sold for the contract price. 3. Providence, Rhode Island ------------------------ As stated above (see Section 2.IV.C.2, supra), in order to fund future --- store development, Bradlees entered into an off-balance sheet financing arrangement. Specifically, in 1994 Bradlees entered into a $75 million lease financing revolving line of credit (the "Lease Credit Line") with a syndicate of banks led by Bankers Trust (the "SPE Group"). Two properties, one in Providence, Rhode Island and one in Philadelphia, Pennsylvania, were financed through the Lease Credit Line. Bradlees constructed and opened a Bradlees store in Providence, Rhode Island and operated the store through September 1996. In August 1996, however, Bradlees received the Court's authorization to close the store. Immediately after closing the store, Bradlees began efforts to sell the property. Bradlees utilized the services of two real estate brokers to assist in marketing the property. Bradlees received an offer from AAA Southern New England to purchase the property for $4,250,000. On April 13, 1998, Bradlees filed a Motion with the Court seeking authorization to sell the property and to enter into a listing agreement to pay the real estate broker upon the closing of the sale from the proceeds of the sale. On May 6, 1998, the Court signed an Order authorizing Bradlees to sell the Property and pay the commissions to the real estate broker. 4. Philadelphia, Pennsylvania -------------------------- Bradlees partially constructed a store at the Philadelphia location,/4/ and, in the first quarter of 1996, decided not to complete such store. In early 1998, Bradlees' efforts to sell the Philadelphia property were unsuccessful. Pursuant to a Stipulation and Order entered by the Court on May 5, 1998, Bradlees agreed that if the Philadelphia property was not sold by August 1, 1998, than Bradlees would, inter alia, be deemed to have deeded the Philadelphia property to State Street Bank and Trust Company. The Philadelphia property was not sold by August 1, 1998, and pursuant to the Stipulation and Order, the property was deeded to State Street Bank and Trust Company. I. Real Estate Leases and Executory Contracts Prior to the Petition Date and continuing during the pendency of the Chapter 11 cases, the Debtors have continually conducted reviews and analyses of their operations, and, specifically, the past and potential contributions of each store location. As of the Petition Date, the Debtors operated 136 stores. Due to management's decisions regarding each store's potential profitability, the Debtors have closed thirty-six stores - --------------- /4/ As set forth above, the Philadelphia property, like the Providence property, was financed through the Lease Credit Line. 36 while opening three stores, and currently operate 103 stores. As is set forth below, in order to complete their review and analyses, the Debtors requested, on several occasions, that the court extend their time, pursuant to Section 365 of the Bankruptcy Code, to assume or reject certain leases. 1. 365(d)(4) Extension Motion -------------------------- As of the Petition Date, the Debtors were party to nearly 200 leases of real property. In order to afford the Debtors an opportunity to review each of their leases in light of their overall Business Plan and reorganization prospects, the Debtors filed a Motion on August 3, 1995 (the "August 3, 1995 Motion"), seeking to extend, through the date of confirmation of a plan or plans of reorganization, the Debtors' time within which to assume or reject such leases. The vast majority of the landlords under the Debtors' leases did not object to the motion and, following a hearing, the Bankruptcy Court entered an Order dated August 16, 1995, extending through confirmation of a plan or plans of reorganization the Debtors' time to assume or reject their non-residential leases with respect to the non-objecting landlords. With respect to those landlords who did object to the motion, the Debtors negotiated with such landlords and, eventually, settled each such objection. Specifically, the Debtors and each objecting landlord agreed that the Debtors' time to assume or reject such leases would be extended through June 30, 1996. The Bankruptcy Court approved each such settlement (each, a "Landlord Stipulation"). By a Motion dated June 7, 1996, the Debtors again moved the Bankruptcy Court for the entry of an order extending through the date of confirmation of a plan or plans of reorganization this time to assume or reject each of the leases which were the subject of a Landlord Stipulation. The majority of the landlords under such leases did not object to the relief requested in the motion. However, three landlords did object and each of their objections were overruled by the Bankruptcy Court by orders which extended the Debtors' time to assume or reject such leases through confirmation of a plan or plans of reorganization. 2. Lease Assumptions and Rejections -------------------------------- As the Debtors have completed their reviews of each individual store, they have, on several occasions, made determinations as to whether to assume or reject the various leases. In those situations, the Debtors have filed the appropriate motions with the Bankruptcy Court seeking such authorization. (a) Assumptions The Debtors have been authorized by the Bankruptcy Court to assume two leases: (i) the lease for the store located in Peabody, Massachusetts, pursuant to a Stipulation and Consent Order signed by the Bankruptcy Court on November 14, 1995, and (ii) the lease for a second store located in Worcester, Massachusetts, by Order dated November 21, 1995. 37 (b) Assumptions and Assignments With the approval of the Bankruptcy Court, the following leases have been assigned by the Debtors: Lease Location Date Assigned -------------- ------------- Schenectady, NY November 19, 1996 Marlton, NJ January 9, 1997 E. Hanover, NJ January 5, 1997 Montgomeryville, PA December 27, 1996 Troy, NY December 27, 1996 Meriden, CT January 21, 1997 New Hyde Park, NY September 16, 1997 Shrewsbury, MA March 18, 1997 (c) Rejections and GOB Sales Following the Debtors' review of the leases, the Debtors have decided to close certain stores and, in certain cases, to reject certain leases. In connection with this process, the Debtors sought and obtained Bankruptcy Court authorization to close the stores and conduct going-out-of-business sales (the "GOB Sales"). For several of the GOB Sales, the Debtors retained consultants to assist them with such sales. See Section 2.V.D hereof, entitled "Parties in Interest and Professionals." The Debtors have received Bankruptcy Court authorization to reject 28 leases as listed below: Lease Location Lease Type Date Rejected - -------------- ---------- ------------- Henrico, VA Store August 21, 1995 Cheltenham, PA Store October 23, 1995 Hempstead, NY Store September 1, 1995 73 Baystate Drive, Braintree, MA Office/Warehouse November 15, 1995 38 Bridgeport, CT Off-site/Warehouse November 15, 1995 Staten Island, NY Store November 30, 1995 Medford, MA Off-site November 15, 1995 Dedham, MA Distribution Facility November 30, 1995 75 Northfield Avenue, Edison, NJ Office/Warehouse March 1, 1996 North Bergen, NJ Store December 14, 1995 106 Northfield Avenue, Edison, NJ Office/Warehouse March 1, 1996 Topsham, ME Store July 1, 1996 N. Windham, ME Store July 1, 1996 Lewiston, ME Store July 1, 1996 N. Brunswick, NJ Store July 1, 1996 Franklin Mills (Philadelphia), PA Store November 4, 1996 Jersey City, NJ Store November 4, 1996 Paramus, NJ Store November 4, 1996 Seekonk, MA Store November 4, 1996 Warwick, RI Store November 4, 1996 Latham, NY Store November 4, 1996 Burlington, NJ Store February 12, 1997 Levittown, PA Store November 4, 1996 Newington, CT Store November 4, 1996 Bensalem, PA Store November 4, 1996 Groton, CT Store March 13, 1998 Allentown, PA Store March 13, 1998 Utica, NY Store March 17, 1998 39 3. Recharacterization of the SPE Facility -------------------------------------- Pursuant to a Stipulation and Order Among the Debtors, State Street Bank and Trust Company, as Owner Trustee, Bankers Trust Company, et al., dated March 27, 1998 (the "SPE Stipulation"), the SPE Facility was recharacterized to give effect to its actual substance a loan from the SPE Banks to BSI. In addition, by virtue of the recharacterization of the SPE Facility, legal title to the SPE Properties was deemed to vest with BSI, thereby permitting BSI to sell the SPE Properties, subject to Bankruptcy Court approval. The SPE Stipulation also addressed the distribution of the proceeds of the sale of either of the SPE Properties and provided for the reimbursement of eighty percent of Bradlees' costs, fees and expenses incurred in connection with the maintenance and preservation of the SPE Properties since the Petition Date. Finally, the SPE Stipulation limited the amount of the administrative claim that could be asserted by State Street Bank and Trust Company based upon the SPE Facility to $100,000, which amount is to be paid from the proceeds of the sale of the Providence, Rhode Island property. On May 5, 1998, the Court approved the SPE Stipulation. 4. Executory Contracts ------------------- (a) Private Label Credit Card Program --------------------------------- Prior to the Petition Date, the Debtors entered into an agreement with Citicorp Retail Services, Inc. ("CRS") for the service of the Debtors' private label credit card program. CRS had been providing the Debtors such services since 1986 pursuant to a Purchase and Service Agreement dated March 31, 1986. After the commencement of these Chapter 11 cases, the Debtors determined that the retention of the private label credit card program was in the best interests of the Debtors' businesses and estates. However, because the original agreement had been amended many times and numerous provisions contained in such agreement were no longer applicable, the Debtors and CRS decided that the original agreement should be amended and restated before being assumed by the Debtors. The Debtors negotiated with CRS and prepared an amended and restated agreement. After the Debtors and CRS finalized the terms of the amended and restated agreement, the Debtors filed a motion dated November 1, 1995 seeking the Bankruptcy Court's authorization for the Debtors to assume the agreement with CRS as amended and restated, and by Order of the Bankruptcy Court dated November 20, 1995, the Bankruptcy Court granted the motion. The agreement with CRS provided that after July 31, 1998, either Bradlees or CRS could terminate the agreement upon six months prior written notice to the other party. In order to provide assurance to both parties regarding the continuity of Bradlees' credit card program, Bradlees sought to enter into a new agreement with Citibank (South Dakota), N.A. ("Citibank"), an affiliate of CRS, which would enable Bradlees to continue its credit card program on terms that were similar to those contained in the agreement with CRS. On August 4, 1998, the Debtors filed a motion with the Court seeking authorization to enter into the agreement with Citibank. On August 17, 1998, the Court signed an Order approving the agreement with Citibank. 40 (b) Comdisco and IBM ---------------- On or about May 24, 1996 and June 25, 1996, Comdisco, Inc. ("Comdisco") and IBM Credit Corporation ("IBM"), respectively, filed motions with the Bankruptcy Court seeking to compel the Debtors to assume or reject certain equipment leases (the "Equipment Leases") and to pay certain alleged administrative expenses. The Equipment Leases covered point of sale and related equipment including cash registers, computer inventory systems, and other point of sale equipment necessary for the continued operations of the Debtors (collectively, the "Equipment"). The Debtors were able to negotiate resolutions with respect to both the Comdisco and IBM motions. Negotiations with Comdisco ultimately concluded in a settlement agreement, the terms of which were set forth in a stipulation (the "Comdisco Stipulation") filed with the Bankruptcy Court and approved on or about December 12, 1996, which allowed the Debtors to use the Equipment during the 1996 holiday season and provided a means for the parties to terminate the Comdisco Equipment Lease. The Comdisco Stipulation provided for the rejection of all the equipment leases between the Debtors and Comdisco effective as of February 28, 1997. In addition, the Comdisco Stipulation required the Debtors to make a payment to Comdisco in the amount of approximately $1.1 million representing all post-petition amounts owed to Comdisco by the Debtors on account of the equipment leases and set forth procedures for the return of the equipment to Comdisco. The Debtors also reached a settlement with IBM for the continued use of the IBM Equipment. This stipulation (the "IBM Stipulation") was submitted to the Court and was approved by Order dated December 12, 1996. The IBM Stipulation provided for the purchase by the Debtors of the IBM equipment for $1.85 million as well as an additional payment of approximately $1.7 million representing outstanding post-petition amounts owed to IBM by the Debtors. In addition, the IBM Stipulation provided for the exchange of general releases by each party regarding all potential claims (except as enumerated therein) against the other party arising out of the leases or the equipment, and waiver of all penalties and interest charges. The settlements reached by the Debtors with Comdisco and IBM saved the Debtors approximately $2 million, while maintaining the continuity of the Debtors' point of sale system. (c) Ambassador Greeting Cards ------------------------- Prior to the Petition Date, the Debtors had entered into a contract with The Ambassador Division of Hallmark Marketing Corporation ("Ambassador"), under which Ambassador was required to supply Bradlees with greeting cards and related products for sale in all of Bradlees' stores. During the Debtors' Chapter 11 case, the Debtors had become dissatisfied with the service they received from Ambassador. Accordingly, on July 31, 1998, Bradlees filed a Motion with the Court seeking authorization to reject the contract with Ambassador. On August 13, 1998, the Court entered an Order authorizing the rejection of the contract with Ambassador. 41 Bradlees has entered into an agreement with American Greeting Corporation, under which American Greeting Corporation has replaced Ambassador as Bradlees' primary supplier of greeting cards. J. Vendor Relations Immediately after the Petition Date, the Debtors sought to re- establish good relationships with vendors. As part of this process, the Debtors undertook several initiatives: 1. Merchandise Return Programs --------------------------- Historically, vendors accepted returns of goods that were: (1) out of season; (2) skewed the balanced mix of sizes and colors; (3) were slow to sell; (4) were damaged; or (5) did not conform to the Debtors' purchase orders. However, after the Debtors filed for Chapter 11 protection, they were required - -- absent authority from the Bankruptcy Court -- to suspend their regular merchandise return programs in respect of goods that had been delivered prepetition. Merchandise vendors were also unwilling to accept returns of prepetition merchandise for credit against postpetition invoices. As a result, unwanted and unsellable merchandise accumulated. The Debtors' inability to return these unwanted goods for credit severely limited the Debtors' access to a new supply of fresh and sellable goods, thereby hampering the Debtors' ability to compete effectively with other retailers. To alleviate this problem, the Debtors formulated a merchandise return program with its vendors, which program was approved by the Bankruptcy Court pursuant to interim and final Orders dated August 2 and 22, 1995, respectively. The implementation of the merchandise return program enabled the Debtors to stock its stores with fresh sellable merchandise. 2. Payment for Goods Delivered Post-Petition ----------------------------------------- Prior to the Petition Date, the Debtors had numerous purchase orders outstanding. However, many vendors who had received such purchase orders declined to fill them because, as they advised the Debtors, they feared that their claims for payment for goods they had shipped after the Petition Date would be relegated to a prepetition claim. To allay these fears, the Debtors sought and obtained Bankruptcy Court authorization pursuant to an order dated July 6, 1995, to treat obligations with respect to goods delivered after the Petition Date as administrative claims payable in the ordinary course of business. K. Employee Benefits The commencement and continuation of the Chapter 11 cases led, not unexpectedly, to uncertainty among the Debtors' employees regarding their future with the Debtors. The Debtors found it increasingly difficult to retain key personnel given the uncertainties which necessarily attend a restructuring pursuant to a Chapter 11 proceeding. The Debtors realized that the departure of experienced employees would significantly impair their ability to successfully reorganize and would dampen employee 42 morale. As such, after the Petition Date, the Debtors took numerous steps to reduce departures and improve employee morale: 1. Wages and Benefits ------------------ On the Petition Date, the Debtors sought and the Bankruptcy Court entered an Order authorizing the Debtors to pay certain prepetition employee obligations in the nature of wages, salary and other compensation earned within the ninety days prior to the Petition Date and to honor certain employee reimbursement requests incurred in a manner consistent with the Debtors' prepetition practices and policies. The Debtors were also authorized to continue to honor and pay all employee benefit plans and policies for medical, dental, disability and other types of insurance. 2. Workers' Compensation --------------------- Prior to the Petition Date, the Debtors were self-insured for workers' compensation coverage in seven of the nine states in which they operated. The Debtors were concerned that their Chapter 11 filings would affect their continued ability to remain self-insured for workers' compensation coverage. After researching the issue, the Debtors determined that it was vital that they continue to pay pre-petition workers' compensation claims, or they would risk losing their right to self-insure -- and lose the attendant cost savings. Accordingly, the Debtors sought and obtained authorization from the Bankruptcy Court by Order dated July 6, 1995 to pay such claims in an aggregate amount not to exceed $2,000,000. 3. Employee Bonuses/Retention Policy --------------------------------- Shortly after the Debtors filed their Chapter 11 petitions, on or about September 22, 1995, the Debtors moved, inter alia, for an order approving and amending the Debtors' pre-petition employee incentives programs so as to provide a select group of the Debtors' employees with certain incentives, such as bonuses, in addition to their base salaries, in order to encourage a higher level of performance and continued employment throughout the Chapter 11 cases. Several creditor constituencies objected to the motion on the grounds that the bonuses to be paid under the programs were unduly high and not sufficiently tied to the Debtors' performance/5/. This motion was granted by Orders of the Bankruptcy Court dated October 24, 1995 and November 14, 1995 after the Debtors reached a compromise with the objecting creditor groups. Specifically, two general employee incentive programs were approved: (1) the Enterprise Appreciation Incentive Plan (which covers the CEO, COO, CFO and members of the Senior Management Group, as defined within the program) and provides cash benefits measured by the growth in the value of the Debtors from the date of grant to the cash-out date; and (2) the Retention Bonus Plan which provided for an annual cash payment to selected upper and mid-level - -------------------------- /5/ The creditors' objections were primarily directed at the compensation of Mark Cohen. (See Section 2.V.L.7 of the Disclosure Statement). 43 employees, which payments were contingent upon a certain threshold performance by the Debtors and continued employment of such employees with the Debtors. On or about March 27, 1997, the Debtors moved to replace the Retention Bonus Plan, with a "Corporate Bonus Plan" that provides annual bonuses to certain eligible employees based upon the Debtors' performance as established in their business plan and the eligible employee's performance review. Under the Corporate Bonus Plan, the Debtors had to attain a minimum level of EBITDA of $28 million for the 1997 fiscal year before any employees are eligible for bonuses. The EBITDA target was fixed by Bradlees' Board of Directors with input from the Debtors' creditor constituencies. A "Discretionary Fund" in the amount of $500,000 was also established to enable the Debtors to compensate an employee solely based upon the employee's superior performance (therefore, even if the Debtors were not to meet the minimum level of EBITDA or if an employee were not otherwise eligible for a bonus under the plan, the Debtors can still provide a bonus to recognize an employee's superior performance as an incentive for maintenance of that performance level). As with the Retention Bonus Plan, under the Corporate Bonus Plan, the CEO, the COO and members of the Senior Management Group are subject to a 25% holdback on all the bonuses, which will be paid upon the earliest of the date of substantial consummation of the plan or plans of reorganization or the date of the termination of employment "without cause," as that term is defined under the program. The Debtors met their minimum EBITDA level for 1997 and paid bonuses in 1998, in respect of the prior fiscal year, in the aggregate amount of approximately $3.9 million. 4. Medical Benefits ---------------- Prior to the Petition Date, Blue Cross and Blue Shield of Massachusetts ("Blue Cross") provided administrative services to the Debtors under a self-insured plan called the Blue Cross and Blue Shield Indemnity Medical Benefits Plan (the "Indemnity Plan"). Blue Cross received and processed medical claims submitted by the Debtors' employees and then made appropriate payments either to the employees or directly to the medical service providers. The Debtors in due course reimbursed Blue Cross and were charged an administrative fee of approximately $1.4 million. After the Petition Date, however, the Debtors determined that it was in their best interests, both economically and administratively, to discontinue the Indemnity Plan and enter into a new point of service medical benefits plan with Blue Cross (the "POS Plan"). The Debtors sought authorization from the Bankruptcy Court (i) to enter into the POS Plan which would cover approximately 2,000 of the Debtors' employees and, (ii) in connection with the approval of the new plan, to reimburse Blue Cross for payments it made under the Indemnity Plan for medical benefits that accrued prepetition but were not reported and paid by Blue Cross until after the commencement of the Debtors' Chapter 11 cases. On July 30, 1996, the Bankruptcy Court entered an order approving the POS Plan and authorizing the Debtors to make the requested payment to Blue Cross. 44 5. Collective Bargaining Agreements -------------------------------- During the course of the Debtors' Chapter 11 cases, several of the collective bargaining agreements ("CBA") between the Debtors and the various unions expired. Following negotiations with union representatives, the Debtors have, on several occasions, requested and obtained authorization from the Bankruptcy Court to enter into new CBAs with the various unions: (a) United Food and Commercial Workers Local 72 ------------------------------------------- Approximately 140 employees at two of the Debtors' stores were members of the United Food and Commercial Workers Local 72 ("Local 72"). A prior CBA with Local 72 had expired on February 5, 1995. In a Motion dated July 12, 1996, the Debtors sought authority to enter into a new CBA which was in large measure consistent with the Debtors' pre-petition CBA. However, the new CBA authorized the Debtors to pay retroactive salary increases not exceeding $20,000, a portion of which accrued pre-petition. On July 30, 1996, the Bankruptcy Court entered an Order authorizing the Debtors to enter into the CBA with Local 72. (b) United Food and Commercial Workers Locals 56, 1500 (North), 1500 (South) and 1776 ---------------------------------------------- Approximately 1,578 employees (the "UFCW Employees") -- consisting of 359 full-time and 1,219 part-time employees -- at seventeen of the Debtors' stores were members of the United Food and Commercial Workers ("UFCW") Locals 56, 1500 (North), 1500 (South) and 1776. The UFCW Employees were employed pursuant to four CBAs, which the Debtors had entered into pre-petition. On March 7, 1997, the Debtors sought entry of an Order approving and authorizing the Debtors to enter into new CBAs with these four UFCW local unions. The new CBAs differed from the prior CBAs in that the new CBAs contained provisions for (a) severance payments and (b) establishment of certain privileges enabling an employee to transfer to another store, both being effective only in the event that the Debtors closed any of the stores at which the UFCW Employees were employed. By Order dated March 18, 1997, the Bankruptcy Court granted the Debtors' motion. (c) Refrigeration, Air Conditioning and Oil Burner Division of Local 537 of the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada, AFL-CIO ---------------------------------------------------------- Approximately 20 of the Debtors' employees in the Debtors' headquarters and warehouse were members of the Refrigeration, Air Conditioning and Oil Burner Division of Local 537 of the United Association of Journeymen and Apprentices of the Plumbing and Pipe Fitting Industry of the United States and Canada, AFL-CIO ("Local 45 537"), and were employed pursuant to a CBA which the Debtors had entered into pre-petition. The CBA expired on April 26, 1997. The Debtors filed an Application dated June 13, 1997 seeking approval to enter into the new CBA. The new CBA was substantially similar to the prior CBA but provided for modest increases in wages and pension payments, which were consistent with those provided in previous contracts. In addition, the increase in pension payments contemplated by the new CBA would not be effective until January 1, 1999, and only for future years of service. By Order dated June 25, 1997, the Bankruptcy Court authorized the Debtors to enter into the new CBA with Local 537. (d) International Brotherhood of Teamsters, Teamster Local Union Number 25 -------------------------------------- Approximately 202 employees were employed at the Debtors' distribution facility in Braintree, Massachusetts, pursuant to a pre-petition CBA with the International Brotherhood of Teamsters, Teamster Local Union Number 25 ("Local 25"), which expired on January 18, 1997. By Motion dated August 1, 1997, the Debtors sought authorization to enter into a CBA with Local 25. The new CBA was substantially similar to the prior CBA. Wage increases and other payments contemplated by the new CBA were expected to increase only modestly under the new CBA. Certain provisions of the new CBA also promoted and enhanced the flexibility of the Debtors' operations. In particular, the new CBA reduced the number of official company holidays and reduced "functional reporting areas" of the facilities for full-time employees from seven to five areas, which translated into a reduced need for supervisors. In addition, the new CBA reduced the guaranteed minimum number of hours for weekend and holiday overtime for full-time and part-time employees by three and two hours, respectively. By Order dated August 12, 1997, the Bankruptcy Court granted the Debtors' motion. (e) United Food and Commercial Workers International Union, Local Union Numbers 328 and 1445 -------------------------------- Approximately 658 employees -- consisting of 267 full-time and 391 part-time employees -- were members of the United Food and Commercial Workers International Union, Local Union Number 328 ("Local 328"). Similarly, approximately 1644 employees -- consisting of 602 full-time and 1042 part-time employees -- were members of the United Food and Commercial Workers International Union, Local Union Number 1445 ("Local 1445"). The terms of the CBAs with Local 328 and Local 1445 expired on June 13, 1998. On August 24, 1998, the Debtors filed a motion seeking the entry of an order approving and authorizing the Debtors to enter into new CBAs with Local 328 and Local 1445. The new CBAs were substantially similar to the prior CBAs, but provided for, inter alia, modest increases in wages and lump sum longevity payments. The Motion was approved by the Court on September 10, 1998. 46 L. Significant Litigation and Settlements The Debtors have been involved in various litigations and settlements since the Petition Date. The majority of the litigation arose from disputes with the Debtors' various landlords. The following summarizes the significant litigations and settlements: 1. Westbury -------- In November 1995, Westbury Real Estate Ventures, Inc. ("Ventures") commenced an adversary proceeding against the Debtors seeking (i) specific performance of an alleged option agreement to sell the Debtors' Westbury, New York property (the "Westbury Property") to Ventures, (ii) an order enjoining the Debtors from transferring the Westbury Property to any other party and (iii) an administrative claim against the Debtors in an amount of not less than $5 million. Because the Debtors wished to sell the Westbury Property and had located a willing buyer, the Debtors sought to dispose of the adversary proceeding quickly by moving for dismissal with prejudice of the complaint, or in the alternative, the awarding of summary judgment to the Debtors. The Bankruptcy Court, in a published decision, granted the Debtors' motion to dismiss. See Westbury Real Estate Ventures, Inc. v. Bradlees, Inc. (In re ----------------------------------------------------- ----- Bradlees Stores, Inc.), 194 B.R. 555 (Bankr. S.D.N.Y. 1996) (the "Memorandum - ---------------------- Decision"). Thereafter, after failing in attempts to have the Bankruptcy Court reconsider its decision, on July 24, 1996, Ventures filed an appeal of the Bankruptcy Court's decisions to the United States District Court for the Southern District of New York. The Debtors asserted that the District Court should not hear the appeal because the Bankruptcy Court's decision was interlocutory. In addition, the Debtors argued that the Bankruptcy Court correctly dismissed Ventures' Complaint on Rule Against Perpetuities grounds. On July 25, 1997, the District Court issued an order dismissing Ventures' appeal. See Westbury Real Estate Ventures, Inc. v. Bradlees, Inc. (In re ----------------------------------------------------- ----- Bradlees Stores, Inc.), 210 B.R. 506 (S.D.N.Y. 1997). - ---------------------- 2. Cardiff ------- On November 13, 1995, Cardiff Associates, L.P. ("Cardiff") filed a motion seeking to compel the Debtors to shorten the time within which to assume a non-residential real property lease with Cardiff (for the premises located at Cardiff Circle Shopping Center, Egg Harbor Township, New Jersey) to December 31, 1995. The Debtors opposed the motion and following a hearing held on December 7, 1995, the Bankruptcy Court denied Cardiff's motion. On December 18, 1995, Cardiff filed a Motion for Reconsideration, which Cardiff subsequently withdrew. 3. White City ---------- On or about November 22, 1995, White City Shopping Centers, L.P. ("White City") filed an Application seeking relief from the automatic stay or, alternatively, requiring the Debtors to provide White City with adequate protection for the Debtors' continued use of the premises. White City was the owner of property located 47 at 50 Boston Turnpike, Shrewsbury, Massachusetts. The Debtors were "anchor tenants" in the shopping center on the property under a lease dated August 8, 1962 (the "White City Lease"). White City alleged that the Debtors had failed to meet its maintenance obligations in violation of the White City Lease, and White City was, therefore, entitled to relief from the automatic stay to evict the Debtors. On January 5, 1996, the Debtors filed an objection to the Application of White City, arguing that (i) the Debtors were current on their postpetition rent and maintenance obligations at the store, so there was no postpetition default under the lease, (ii) certain of the conditions about which White City complained existed prepetition and were not subject to Section 365(d)(3) of the Bankruptcy Code, and (iii) in the alternative, the requested repairs were not "obligations" within the meaning of that term under Section 365(d)(3) of the Bankruptcy Code. The Bankruptcy Court denied White City's efforts to terminate the lease. On October 4, 1996, White City again filed a motion with the Bankruptcy Court seeking an order shortening the Debtors' time to assume or reject its unexpired nonresidential real property lease with White City or, in the alternative, an order granting relief from the automatic stay. The White City Lease provided that if the Debtors ceased operating at the store for six months, the landlord could terminate the lease at any time after the expiration of the six month period (the "Go Dark Provision"). The Debtors had closed the White City store on or about March 1, 1996, and consequently had ceased operations at that location. White City requested an order either shortening the Debtors' time to assume or reject the lease or, alternatively, an order lifting the stay to allow White City to proceed with eviction proceedings in state court because the Debtors had been closed for over six months. On December 9, 1996, the Debtors filed an Objection to the motion of White City, arguing that White City should be denied its request for two reasons. First, the Go Dark Provision conflicted with the policies behind Section 365 of the Bankruptcy Code and did not create an obligation that must be timely performed under Section 365(d)(3) of the Bankruptcy Code. Second, contrary to White City's allegations, neither White City nor the tenants of White City were being materially harmed by the closing of the store. At a hearing to consider the Motion, the Bankruptcy Court established a "drop dead" date of February 28, 1997 for the Debtors to file a motion to assume or assign the lease. If no motion were filed by such date, the lease would be deemed rejected. The Debtors subsequently filed an Order to Show Cause seeking a hearing to consider an extension of the Debtors' time to assume or reject the lease. The Debtors finally determined to assign the lease back to White City. Pursuant to an Order dated March 18, 1997, the Debtors were authorized to assign the lease to White City. 4. Vornado ------- The Debtors were party to twenty-one leases with Vornado Realty Trust ("Vornado") covering twenty-one of the Debtors' stores. Nineteen of the leases were 48 assigned to the Debtors in 1992 by Stop & Shop. To overcome the objections of Vornado regarding such assignment, prior to the Petition Date, Vornado, the Debtors, and Stop & Shop entered into a Master Agreement and Guaranty (the "Lease Modification Agreement") pursuant to which, inter alia, (i) Vornado authorized the assignment of the leases and (ii) the leases were modified in certain respects. Among the modifications to the nineteen underlying leases, Vornado purported to impose certain restrictions on the Debtors' ability to assume, assign, or reject one or more of the leases. The Debtors commenced an adversary proceeding on October 10, 1996 against Vornado and Stop & Shop seeking, inter alia, (i) a declaration that certain provisions of the Lease Modification Agreement were invalid and (ii) the award of certain monetary damages. In addition, on October 14 and 24, 1996, respectively, the Debtors filed two motions seeking to (a) assume and assign one lease with Vornado, (b) reject three leases with Vornado and (c) have declared invalid certain provisions of the Lease Modification Agreement. The Debtors and Vornado settled their disputes on terms set forth in the Stipulation and Order, which was approved by the Bankruptcy Court on December 23, 1996. In particular, the parties agreed that the adversary proceeding should be dismissed without prejudice, the Debtors could assume and assign one lease and reject three others, and certain ground rules for addressing future dispositions of the remaining leases should be implemented. The settlement allowed the Debtors to close the assignment of one lease for $1.0 million, and to cease lease and other related payments for several non-operating stores. 5. Tomarc ------ On August 14, 1996, The Tomarc Company ("Tomarc"), the lessor of property leased in Clark, New Jersey (the "Clark Lease"), filed a Motion seeking an Order compelling the Debtors to reject the Clark Lease or, in the alternative, deeming the Clark Lease rejected. Tomarc purportedly sought such relief because (i) the insurance which the Debtors maintained with respect to the property was inadequate and (ii) the Debtors did not adequately maintain the property. The Debtors opposed Tomarc's Motion and following a hearing before the Bankruptcy Court, the Bankruptcy Court issued a Memorandum Decision and Order Denying Landlord's Motion to Compel Debtors to Reject Lease or Deem Lease Rejected dated December 30, 1996. On January 21, 1997, Tomarc filed a Motion to Deem the Extension of the Lease Invalid and the Lease Terminated, and, to the Extent Not Granted, to Compel the Debtors to Assume or Reject the Lease Prior to Confirmation of a Plan. On February 28, 1997, the Debtors filed a Motion for Summary Judgment, asserting that Tomarc's motion should be denied because (i) it was procedurally improper because Tomarc could only obtain the declaratory relief it sought through an adversary proceeding, (ii) the motion was untimely, and (iii) the Bankruptcy Court had already denied the requested relief. In a Memorandum Decision and Order dated October 9, 1997, the Bankruptcy Court granted summary judgment in favor of the Debtors as to that part of Tomarc's motion seeking to deem the extension of the lease invalid. The Bankruptcy Court, however, denied the 49 Debtors' motion for summary judgment as to that part of Tomarc's motion seeking to shorten the Debtors' time to assume or reject the lease. The Bankruptcy Court held that there was an outstanding question of fact whether the uncertainty of the Debtors' continued tenancy was adversely impacting Tomarc's ability to obtain new financing which precluded the granting of summary judgment. 6. Ventnor ------- On May 2, 1997, Ventnor Plaza Company ("Ventnor") filed a motion with the Bankruptcy Court seeking relief from the automatic stay. Ventnor was the owner of a community shopping center located in Ventnor City, New Jersey. The initial term of Bradlees' lease with Ventnor (the "Ventnor Lease") expired on April 30, 1997, but contained five options to renew for five consecutive five- year terms, provided that the option was exercised by giving notice to Ventnor at least six months before the expiration of the term in effect. The exercise of the option was conditioned upon (a) the tenant's exercise of all prior options, and (b) there being no existing material default at the time of the exercise. At least six months prior to the expiration of the Ventnor Lease, the Debtors, by a letter dated October 18, 1996, attempted to exercise the option to extend the lease for an additional five-year period. Ventnor argued that the option to renew could not be exercised by the Debtors because there existed material pre- and post-petition defaults under the lease. Specifically, Ventnor alleged that the Debtors had not paid their management fee portion of the cost of operating and maintaining the common facilities. Ventnor requested relief from the stay to allow Ventnor to commence appropriate proceedings either in the Bankruptcy Court or in a state court having jurisdiction over the property, in order to terminate the Debtors' possession and occupancy of the property. On July 31, 1997, the Debtors filed a Preliminary Objection to Ventnor's motion, asserting that Ventnor's motion should be denied for numerous reasons, including: (i) under the terms of the Ventnor Lease, the Debtors had no obligation to pay the management fee, (ii) even if such an obligation existed, Ventnor had waived any contractual right to the management fee by failing to seek to collect it for almost twelve years, (iii) the Debtors actually paid what they believed was the post-petition amount of the disputed management fee in October 1996 at the time of the lease extension, (iv) even if the Debtors were in default, it was not a "material default" to invalidate the extension, and (v) even if a "material default" did exist, Ventnor waived any right to object to the Debtors' lease extension by accepting the Debtors' rent payments for six months after the Debtors extended the term of the lease. As of the date hereof, the matter is still pending before the Court. 7. Mark Cohen Settlement --------------------- Mark Cohen served as the Debtors' Chairman and CEO until the Board of Directors voted on December 24, 1996 to relieve him of his duties. He had entered into a pre-petition employment contract with the Debtors dated December 3, 1994, which contract was assumed, as modified, by agreement among the creditor constituencies and 50 approved, as amended, by the Bankruptcy Court by Order dated October 24, 1995/6/. Under the terms of Mr. Cohen's amended employment contract, the Debtors were required to issue a letter of credit (the "Letter of Credit") after his departure in the amount of $5.0 million. After issuance of the Letter of Credit, Mr. Cohen thereafter drew the amount of $5.0 million. Subsequent to his departure, disputes arose between Mr. Cohen, the Debtors and certain creditor constituencies, regarding such issues as the amount of severance payments, bonus and salary payments, retirement benefits and other monetary benefits to which Mr. Cohen was entitled pursuant to the terms of his employment contract. After extensive negotiations, the Debtors subsequently entered into a confidential stipulation with Mr. Cohen which, upon approval by the Bankruptcy Court, would have settled their disputes. On May 19, 1997, the Debtors sought Bankruptcy Court approval for the terms of their settlement. However, disputes arose among the Debtors and their creditor constituencies, with certain creditor groups objecting to the terms of the settlement reached by the Debtors and Mark Cohen. The matter was ultimately referred by the Bankruptcy Court to mediation by Order dated July 2, 1997 and Thomas J. Moloney, Esq., was appointed the mediator. Mediation sessions commenced in early July 1997. Eventually as a result of the mediation, the parties reached an agreement on the appropriate severance benefits to which Mr. Cohen was entitled. This settlement which was filed with the Bankruptcy Court under seal was approved by Order of the Bankruptcy Court dated October 6, 1997. 8. Sybase ------ On or about March 25, 1994, Bradlees Stores, Inc. entered into a software licensing agreement with Sybase, Inc. ("Sybase") under which Sybase agreed to provide software which Bradlees intended to use as a key part of its enterprise-wide client/server computing environment and which was anticipated to support all aspects of Bradlees' business. However, the Sybase software was incompatible with other software used by Bradlees and therefore did not perform as Bradlees had expected. Accordingly, on June 10, 1997, Bradlees commenced a lawsuit in the United States District Court for the District of Massachusetts seeking damages from Sybase as well as an Order rescinding the contract. On April 9, 1998, Bradlees filed with the Court a Motion seeking to have the Sybase litigation assigned to mediation. Bradlees argued that mediation was necessary because the Sybase litigation was languishing in the Massachusetts District Court, and there was little prospect of the Sybase litigation concluding at any time in the near future. On May 5, 1998, the Court entered a Stipulation and Order referring the Sybase litigation to mediation. As a result of the mediation process, Bradlees and Sybase - ------------------------ /6/ The creditor constituencies had objected to the terms of his contract arguing that they were overgenerous and above the market norm for positions in the retail industry. 51 reached a settlement of their dispute, the terms of which were set forth in a Settlement Agreement. On August 4, 1998, Bradlees filed a Motion with the Court seeking approval of the Settlement Agreement, and on August 25, 1998, the Court entered an order approving the settlement agreement. 9. Homart ------ Among Bradlees' assets is a certain sublease under which Bradlees leases a store located in Framingham, Massachusetts. The landlord of the overlease is Sears Development Corporation, formerly known as Homart Development Company ("Sears"). On March 31, 1995, Bradlees commenced a civil action in the United States District Court for the District of Massachusetts alleging that Sears had breached the overlease. Sears defended its actions on the grounds that Bradlees' use of the premises was not a permitted use under the overlease because Stop & Shop was no longer the tenant under the overlease. On October 31, 1997, Bradlees filed a Motion with the Bankruptcy Court seeking to enjoin Sears from continuing to contest the validity of Bradlees sublease because such action violates the automatic stay and could have a collateral estoppel effect should Bradlees seek in the future to assume and assign the sublease. After Sears responded to the Motion, the Court directed the parties to mediation. Following numerous mediation sessions over a two-month period, Bradlees and the other parties reached an agreement. On April 8, 1998, Bradlees filed a Motion seeking approval of a settlement among Bradlees, Sears, and Shoppers World Community Center, L.P. ("Shoppers World"). The settlement resolved all of the disputed matters between the parties. Under the settlement, inter alia, Sears agreed to pay Bradlees $600,000 in full settlement of its claims against Sears, and Shoppers World agreed to recognize Bradlees' occupancy of the Framingham Store. On May 5, 1998, the Court signed an Order approving the Settlement. M. The IPO Investigation 1. The Investigation ----------------- Throughout these Chapter 11 cases, the series of transactions which culminated in the IPO and the Spin-Off were the subject of discussions among the Debtors and various interested creditor constituencies. The discussions focused on the possible existence of causes of action against third parties and the validity of certain intercompany claims which arose as a result of the Spin-Off. As of the Petition Date, the operating subsidiaries of Bradlees, Inc. owed Bradlees, Inc. approximately $281.8 million resulting from the IPO and Spin-Off. This intercompany debt was composed of three components: 52 (a) $104.6 million in proceeds from the Term Loan related to the Spin-Off "downstreamed" by Bradlees, Inc. to the operating subsidiaries. (b) $100 million related to the repayment by Bradlees, Inc. of the Stop & Shop Subordinated Note given in satisfaction of debt originally owed by NE Holdings to Stop & Shop. (c) $93.5 million relating to the amount of proceeds from the Revolver Facility that had been downstreamed by Bradlees, Inc. to the subsidiaries for their operation. At a chambers conference on August 8, 1995, the Bankruptcy Court, in an effort to avoid duplication of work by professionals, directed that one fiduciary of the Debtors' estates conduct a thorough legal and factual investigation into whether the estates had any causes of action arising out of the Spin-Off. The parties agreed that the Debtors' professionals, Dewey Ballantine LLP and Zolfo Cooper, LLC, would conduct the investigation and report their findings to the other parties. Accordingly, a thirteen-month investigation followed. As part of the investigation, the Debtors' professionals engaged in extensive research regarding at least ten potential theories of recovery. Following the investigation, the professionals concluded, in a 162-page report, that the Debtors had no viable claims against third parties arising out of the Spin-Off and that the debt incurred by the Debtors in connection with the Spin- Off was not avoidable under Sections 544 or 548 of the Bankruptcy Code. The investigation did conclude, however, that the intercompany debt, while valid on its face, may be susceptible to challenge by creditors of Bradlees Stores, Inc., on various theories -- including recharacterization of the debt as equity or the subordination thereof. 2. Request for an Examiner ----------------------- On May 22, 1997, the Unofficial Committee filed a motion (the "Examiner Motion") requesting an order directing the appointment of an examiner pursuant to Section 1104(c) of the Bankruptcy Code to: (i) re-examine the possible claims which arose from the Spin-Off and (ii) prosecute any litigation on behalf of Bradlees Stores, Inc. The Debtors, and nearly every other interested party/7/, filed objections to the Examiner Motion arguing that the initial investigation was sufficient and that the Claims Traders had waived their right to be heard by their own delay. Following a hearing before the Bankruptcy Court on June 4, 1997, the Bankruptcy Court issued an - --------------------------- /7/ Among the parties objecting to the Examiner Motion were the Senior Bank Agent, State Street Bank and Trust Company, the Creditors' Committee and Stop & Shop. 53 opinion in which it denied the motion to appoint an examiner. See In re Bradlees -------------- Stores, Inc., 209 B.R. 36 (Bankr. S.D.N.Y. 1997). On June 13, 1997, the Claims - ----------- Traders filed a Notice of Appeal, appealing the Bankruptcy Court's decision to the United States District Court for the Southern District of New York. The Unofficial Committee requested several adjournments of the hearing to consider its appeal, and as of the date of the Disclosure Statement, the District Court has not heard oral argument on the appeal. N. The Tolling Agreements After extensive review and research regarding potential avoidance actions pursuant to Sections 547 and 553 of the Bankruptcy Code, the Debtors determined that they were not in a position to commence any actions prior to the expiration of the two year statute of limitations under Section 546(a) of the Bankruptcy Code/8/. The Debtors believed that commencement of avoidance actions at that time would have complicated plan negotiations and prematurely affected the ultimate structure of the Debtors' plan or plans of reorganization while diverting the Debtors' valuable time and resources at a crucial time in the Debtors' Chapter 11 cases. In addition, the Debtors reasoned that if the avoidance actions were commenced, the vendor constituencies' willingness to extend trade credit to the Debtors may be impaired. Accordingly, the Debtors and the Creditors' Committee determined that the Debtors should enter into tolling agreements with individual creditors who were determined to have received potentially significant avoidable transfers. After an analysis by the Debtors and their professionals, the Debtors identified the major creditors and insiders who may have potentially received avoidable transfers. The Debtors subsequently entered into eighteen individual tolling agreements with those identified creditors and insiders, including an inter- company tolling agreement by and among the individual Debtors themselves. However, to enter into individual tolling agreements with all of the creditors who may have potentially received any avoidable transfers would have been prohibitively expensive and impractical. Accordingly, on or about May 7, 1997, the Debtors and the Creditors' Committee jointly moved under Section 105(a) of the Bankruptcy Code to extend the statute of limitations under Section 546(a) of the Bankruptcy Code with respect to non-intercompany actions to the later of either (a) 90 days after the date of the consummation of the Debtors' plan or plans of reorganization or (b) June 23, 1998. This joint motion was granted by the Bankruptcy Court by Order dated June 9, 1997. Two of the individual tolling agreements -- the inter-company tolling agreement by and among the individual Debtors themselves and the tolling agreement - ----------------------- /8/ Pursuant to Section 546(a), the Debtors had until two years after the Petition Date, or June 23, 1997, to commence avoidance actions pursuant to, inter alia, Sections 547 and 553 of the Bankruptcy Code. 54 with the OBS Bank Group -- were set to expire on June 23, 1998. Accordingly, in June 1998, the Debtors sought to extend such tolling agreements. On June 5, 1998, the Debtors filed a motion seeking approval of a Stipulation, pursuant to which, each of the Debtors agreed to further toll the statutes of limitations for all causes of action, if any, specified in Section 546(a) of the Bankruptcy Code which one Debtor might bring against one or more of the other Debtors. The Debtors sought to extend the statute of limitations until the earlier of June 23, 1999 or the effective date of a plan of reorganization. On June 10, 1998, the Court approved and signed the tolling stipulation. Similarly, in order to further toll the statute of limitations for all avoidance claims which the Debtors could assert against the OBS Bank Group, and with respect to any counterclaims which could be raised by the OBS Bank Group, the Debtors prepared a tolling stipulation which further tolled the statute of limitations until July 31, 1998. On June 23, 1998, the Court approved the tolling stipulation. At the end of July 1998, the tolling stipulation was once again set to expire. Accordingly, the Debtors prepared a new tolling stipulation further tolling the statute of limitations until the earlier of confirmation of a plan of reorganization or September 30, 1998. On July 29, 1998, the Court approved the tolling stipulation. O. Debtors' Common Stock Since the IPO, the Debtors' common stock (NYSE Symbol: BLE) was listed on the New York Stock Exchange. As of April 1, 1998, the Debtors' common stock was held by approximately 669 shareholders. Since the IPO, the Debtors' common stock traded in the following price ranges: Year High Low ---- ---- --- 7/10/92 - 1/30/93 $20.13 $10.63 Year Ended 1/29/94 $19.25 $11.00 Year Ended 1/28/95 $17.25 $10.00 Year Ended 2/3/96 $12.00 $0.88 Year Ended 2/1/97 $2.50 $0.62 Year Ended 1/31/98 $1.00 $0.03 In May of 1997, the Debtors issued a statement that the Debtors expected to issue new stock and cancel its current common stock pursuant to any plan of reorganization that they might file. As a result of the announcement and the Debtors' inability to meet certain New York Stock Exchange listing criteria -- including net tangible assets, net income and value of all outstanding stock -- the New York Stock Exchange suspended trading in the Debtors' common stock, and the stock was subsequently delisted. 55 P. Post-Petition Business Strategies and Plans Commencing immediately after the Petition Date, the Debtors concentrated their efforts on: (i) repositioning Bradlees between traditional discounters and department stores by focusing on better quality, higher margin merchandise with an emphasis on softlines; (ii) evaluating each of the Debtors' store locations, identifying underperforming stores, attempting to rehabilitate such locations and closing those locations which could not be successfully rehabilitated; (iii) implementing a new merchandising information system; and (iv) undertaking other operating changes designed to enhance the Debtors' operating efficiency. Although entered into with high expectations, these initiatives, as a whole, were largely unsuccessful. Rather than increasing profits, the Debtors continued to lose money. In response to the continuing losses, on December 24, 1996, the Debtors' Board of Directors voted to relieve Mr. Cohen of his duties. On that date, the Board of Directors, with the support of the Creditors' Committee and the Bank Group, appointed Peter Thorner, the Debtors' then President and COO, as Chairman and CEO. Since Mr. Thorner accepted his position as CEO, the Debtors have implemented the following initiatives: . Implementing further cost reductions resulting from realignment of the organization and improved operating efficiencies. . Reintroducing certain basic convenience and commodity products which are typical of a discount store and which are consistent with customer expectations. . Revising the markdown policy to better match seasonality attributes and actual sales, thereby reducing unnecessary markdowns on merchandise that is either selling well or that would otherwise be subsequently repurchased, while improving margins. . Reevaluating the Debtors' pricing policies and scaling back opening price points on certain items to enhance the value of goods offered, increase customer traffic and benefit margins. . Reducing expenditures on less productive advertising media and focusing on making the weekly circular more item intensive and price point oriented, while at the same time expanding circular distribution. . Re-instituting the layaway program to recapture certain incremental sales that may have been lost when the Debtors' layaway program was eliminated. .Eliminating a 10% discount given on initial charge purchases made by new Bradlees' credit card applicants. 56 . Introducing directional and departmental signage for each department within each store. . Instituting both a "Certified Value" program that provides competitive everyday prices on certain highly recognizable items and a "WOW" program that provides for opportunistic purchasing of goods to enhance value of unadvertised merchandise. . Attracting an experienced Management Team. 1. Cost Reductions --------------- Late in 1996, the Debtors began an aggressive cost reduction program. This program resulted in the elimination of approximately $100 million in operating costs (excluding store closings) over a fifteen month period. 2. Merchandising Changes --------------------- Prior to Mr. Thorner's promotion to CEO, the Debtors' merchandising strategy sought to position the Debtors between traditional discount stores and department stores. Pursuant to that merchandising strategy, the Debtors had increased the quality of their merchandise and offered such merchandise at higher prices. In carrying out this strategy, the Debtors abandoned or significantly reduced sales of certain commodity goods traditionally found in discount stores as well as certain merchandise which, in the past, had proven popular with the Debtors' customers. The merchandising strategy did not appear to be accepted by most of the Debtors' customers, many of whom resisted the higher prices and the "department store" choice of merchandise. The Debtors have endeavored to return to being a more traditional discount retailer, carrying a selection of goods, albeit still of a higher quality than most of its discount store competition, which are more consistent with that of a traditional discount retailer and at competitive prices. The Debtors believe that these merchandising changes have resulted in increased customer traffic, and have begun to generate increased sales and will translate into a more successful company. The Debtors are 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 improving customer service, to differentiate itself from its competition. The Debtors believe they can strategically leverage their strength in the fashion and quality content of its apparel and decorative home product offerings while driving traffic with selected hardlines merchandise. In addition to the changes in the merchandising mix, the Debtors have also changed their clearance markdown strategies to reflect the sell-through pattern of merchandise, in contrast to the markdown policy based on elapsed time used previously. Previously, in addition to the customary practice of taking seasonal markdowns, the 57 Debtors took markdowns in merchandise categories which were not subject to either seasonal fluctuations or aging on the shelf. The change in the markdown strategy will enable the Debtors to better control clearance markdowns and will result in higher margins on such merchandise. The Debtors have also lowered their opening price points on many merchandise categories without sacrificing either the quality of the goods offered or the margins earned on such goods. The Debtors have accomplished this by obtaining better pricing from existing suppliers, modifying product specifications to limit certain more fashionable components associated with upscale products and identifying new sources for merchandise. The reduction of the opening price points is intended to bring the Debtors' prices more in line with their competitors. In addition, Bradlees has developed two innovative programs designed to demonstrate to Bradlees' customers that Bradlees' prices are competitive. Highly recognizable goods sold under Bradlees' "Certified Value" program are consistently offered for sale at everyday prices which are competitive with the prices of Bradlees' competitors, thereby assuring Bradlees' customers that they are paying a reasonable price. Bradlees' "WOW" program enables Bradlees to offer certain goods for sale at exceptionally favorable prices which are not advertised and therefore create a level of excitement within the store which, in turn, encourages consumers to shop Bradlees more frequently. 3. Marketing Strategy ------------------ Following the Petition Date, the Debtors changed their weekly circular to mirror that of a department store. The cover of the circular most often advertised one item in that week's theme rather than a variety of traffic building products as is more typical for a discount retailer. When it became apparent that the theme-oriented circular was not producing sufficient sales, Bradlees abandoned the theme-oriented circular in favor of a more traditional circular. By departing from the theme orientation and implementing an item- intensive, price-point oriented strategy, the Debtors have been able to increase dramatically the productivity of the weekly circulars. The Debtors have also decreased their use of television advertising and eliminated the use of direct mail. The Debtors found that direct mail was not effective and that the heavy use of television was costly and not an efficient way of attracting customers. Instead, the Debtors have increased the distribution of their circular by approximately seventeen percent, which equates to approximately 800,000 households per week. The Debtors also reintroduced the layaway program in 1997 which was discontinued in 1995. Layaway had been popular with the Debtors' customers and provided approximately $104 million of annual sales in 1994. Management believed that the discontinuance of the Debtors' layaway program resulted in a decrease of as much as $20 million in gross margin dollars as well as the loss of some customers to other discount retailers who continued to offer a layaway option. The Debtors anticipated that by reintroducing the layaway program the Debtors would be able to recapture many of 58 the sales lost to their competitors. During the 1997 fall season, the reintroduction of layaway produced sales of approximately $30 million. In conjunction with the discontinuance of the layaway program, the Debtors had promoted heavily the use of their proprietary credit card through signage, promotional events and a ten-percent discount on the initial purchase. The promotion of the credit card was intended to replace the credit given to customers under the prior layaway program as well as to generate additional sales. This strategy proved to be unsuccessful as credit card sales failed to replace the lost sales from layaway. In addition, the program proved to be costly. The total cost of the credit card promotion, including initial discounts for usage and additional credit card fees, was estimated at approximately $12 million. With the return of layaway, the Debtors, while maintaining the Bradlees' credit card as a possible competitive advantage, have de-emphasized the credit card program and have eliminated most related promotions, including the ten-percent discount. The Debtors have also installed directional signage and reintroduced Departmental signage for each department in their stores, which will allow the customer to readily locate the department and merchandise sought at the stores. Departmental signage had been removed from the stores because it was not considered visually appealing to the customer. However, subsequent customer research in early 1997 indicated that customers found that directional signage permitted them to shop more efficiently. 4. Management Changes ------------------ Mr. Thorner has succeeded in attracting executives who share his discount store philosophy. The most significant additions were Robert Lynn, who joined the Debtors as its President and Chief Merchant and was subsequently promoted to Chief Operating Officer, Mark James, who joined the Debtors as Senior Vice President for Marketing, Thomas Smith, who joined the Debtors as Senior Vice President, Stores and Gregory Dieffenbach, who joined the Debtors as Senior Vice President, Human Resources. Q. Marketing of Debtors' Assets In conjunction with the Debtor's Motion in June 1996 to extend their exclusive periods within which to file and solicit acceptances of a plan of reorganization, the Debtors and the Creditors' Committee entered into a Memorandum of Understanding. Pursuant to this agreement, which was filed with the Bankruptcy Court under seal, the Debtors and the Creditors' Committee agreed that in addition to pursuing a stand alone plan of reorganization, in order to maximize creditor recoveries, the Debtors should seek, through a limited, discreet marketing process a going concern sale of substantially all of their assets. Ernst & Young LLP ("E&Y"), the Creditors' Committee's financial advisors, was selected by the Debtors and the Creditors' Committee to pursue the marketing of the Debtors' assets. 59 During the summer of 1996, the Debtors and E&Y worked to identify potential strategic and financial buyers who might be interested in acquiring the Debtors' assets. A list of entities was prepared and E&Y solicited such entities regarding their possible interest in a possible transaction with the Debtors. While since the summer of 1996 several potential strategic and financial acquirers executed confidentiality agreements and visited a due diligence data room established by the Debtors, no going concern offer was ever made for the Debtors' assets and accordingly, the Debtors determined to proceed with a stand-alone plan of reorganization. 60 SECTION THREE: SUMMARY OF THE PLAN ------------- ------------------- THIS SECTION PROVIDES A SUMMARY OF THE STRUCTURE, CLASSIFICATION, TREATMENT AND IMPLEMENTATION OF THE PLAN. THIS DISCLOSURE STATEMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE MORE SPECIFIC DETAILED INFORMATION SET FORTH IN THE PLAN, A COPY OF WHICH IS ATTACHED TO THIS DISCLOSURE STATEMENT AS EXHIBIT 1, AND TO ALL EXHIBITS ANNEXED THERETO. The Plan is the product of diligent efforts by the Debtors and their creditor constituencies to formulate a plan which provides for a fair allocation of the Debtors' assets in an orderly manner, consistent with the mandates of the Bankruptcy Code and other applicable law. I. Overview of the Plan Under the Plan, which does not contemplate the substantive consolidation of any of the Debtors for any purpose (including voting or distribution purposes), Claims against and Interests in the Debtors are divided into classes according to their seniority and other criteria. If the Plan is confirmed by the Bankruptcy Court and is then consummated, as is set forth below, holders of Claims in certain classes will receive Cash or Reorganization Securities. The terms of the Plan are based, among other things, upon the Debtors' assessment of their ability to make the distributions under the Plan and repay their remaining obligations. In conjunction with the Plan, the Debtors have made financial projections of earnings and cash flows for each of the fiscal years 1998 through 2000, which financial statements are attached as Exhibit 3 to this Disclosure Statement. II. Plan Negotiations During the course of the Debtors' Chapter 11 Cases, numerous discussions have been held between and among the Debtors, the Creditors' Committee, the Bank Group, and the Unofficial Committee with respect to the formulation of the Plan. On or about January 11, 1998, the Bank Group and the Unofficial Committee provided a term sheet to the Debtors which formed the basis for the Plan. After delivery of the term sheet, various discussions were held among the parties in interest regarding, inter alia, the amount of total Claims, the terms and allocation of Cash and Reorganization Securities, tax issues and valuation of the Debtors. Among the factors considered in the discussions were the effect of various possible organizational structures on tax attributes, the amount and nature of claims asserted in different Classes of Debtors, including the amount and nature of the Disputed Claims, the feasibility of various capital structures and the time and expense involved in resolving Plan disputes, as well as the potential adverse impact on the business of the Debtors of prolonged Chapter 11 Cases. 61 The terms of the Plan are the result of negotiations with many parties and the weighing of a matrix of complex and competing considerations. III. Classification and Treatment of Claims and Interests A. Unclassified Claims 1. Administrative Claims --------------------- Administrative Claims include the costs and expenses of administration of the Chapter 11 Cases of a kind specified in Section 503(b) of the Bankruptcy Code and entitled to priority under Section 507(a)(1) of the Bankruptcy Code, including, among other things, (a) the actual, necessary costs and expenses incurred after the Petition Date, of operating the Debtors' businesses and preserving the Debtors' Estates, (b) Professional Fees for the legal, financial and other advisors to the Debtors and the Creditors' Committee to the extent Allowed by the Bankruptcy Court under Section 330(a) of the Bankruptcy Code and (c) any fees or charges assessed against the Debtors' estates pursuant to Section 1930, Chapter 123 of Title 28 of the United States Code. Each holder of an Allowed Administrative Claim will receive (a) Cash equal to the full unpaid portion of the Allowed Administrative Claim on the day, if any, specified by any order of the Bankruptcy Court for payment of such Allowed Administrative Claim, or if no such order exists, then on the later of (i) the Effective Date or (ii) the date on which such Allowed Administrative Claim becomes due by its own term; or (b) such other treatment as to which the Debtors and the holder of an Allowed Administrative Claim shall agree upon in writing. The Debtors estimate that the amount of Allowed Administrative Claims (exclusive of the amount of the outstanding obligations, under the DIP Facility) will aggregate $18.1 million. Of this amount, approximately $5.0 million is represented by fees of professionals. 2. Federal Priority Tax Claims --------------------------- Federal Priority Tax Claims are claims of the United States of a kind specified in Section 507(a)(8) of the Bankruptcy Code. Pursuant to Section 1129(a)(9)(C) of the Bankruptcy Code, unless otherwise agreed to by the Debtors and the IRS, the IRS shall receive from Reorganized BSI, on account of any Allowed Federal Priority Tax Claims, deferred cash payments over a period not exceeding six years from the date of assessment of such Claims. Payments shall be made in six equal annual installments of principal, plus simple interest accruing from the Effective Date at eight percent (8%) per annum on the unpaid portion of each Federal Priority Tax Claim. The first payment shall be due on the latest of: (i) 30 days after the Effective Date, (ii) 30 days after the date on which an order allowing any such Claim becomes a Final Order and (iii) such other date that is agreed on by the IRS and BSI or Reorganized BSI; provided, however, that Reorganized BSI shall have the right to pay any Allowed Federal Priority Tax Claim, or any remaining balance of such Claim, in full, at any time on or after the Effective Date, without premium or penalty. 62 The Debtors estimate that the amount of Allowed Federal Priority Tax Claims will aggregate $0. 3. Other Priority Tax Claims ------------------------- Other Priority Tax Claims are claims (other than claims of the United States of America) that are entitled to priority in payment pursuant to Section 507(a)(8) of the Bankruptcy Code, other than a Federal Priority Tax Claim. Pursuant to Section 1129(a)(9)(C) of the Bankruptcy Code, unless otherwise agreed to by the parties, each holder of an Allowed Other Priority Tax Claim shall receive from Reorganized BSI, on account of such Claim, deferred cash payments over a period not exceeding six years from the date of assessment of such Claim. Payments shall be made in six equal annual installments of principal, plus simple interest accruing from the Effective Date at a rate equal to eight percent (8%) per annum on the unpaid portion of each Other Priority Tax Claim. The first payment shall be due on the latest of: (i) 30 days after the Effective Date, (ii) 30 days after the date on which an order allowing any such Claim becomes a Final Order and (iii) such other date that is agreed on by the holder of such Claim and BSI or Reorganized BSI; provided, however, that Reorganized BSI shall have the right to pay any Allowed Other Priority Tax Claim, or any remaining balance of such Claim, in full, at any time on or after the Effective Date, without premium or penalty. The Debtors estimate that the amount of Allowed Other Priority Tax Claims will aggregate $3.3 million. 4. Other Non-Tax Priority Claims ----------------------------- Priority Claims are claims, if Allowed, which are entitled to priority pursuant to Section 507(a) of the Bankruptcy Code, other than: (a) Administrative Claims or (b) Tax Claims. Except as otherwise provided below, each holder of an Allowed Priority Claim shall receive one hundred percent (100%) of the allowed amount of such Claim in Cash on the later of: (i) 30 days after the Effective Date or as soon thereafter as reasonably practicable; or (ii) the first Business Day after the date that is 30 days after the date such Claim becomes an Allowed Claim or as soon thereafter as practicable. The Debtors estimate that the amount of Allowed Other Non-Tax Priority Claims will aggregate $4,000. B. Classified Claims 1. Bank Group Claim ---------------- The Bank Group Claim consists of the Claims of the Bank Group against each and every Debtor which arise under the Credit Agreement among Bradlees, Inc., Various Lending Institutions and Bankers Trust Company, as Agent, dated as of March 3, 1993, pursuant to which the Debtors maintained a revolving credit facility. For purposes of the Plan, the Bank Group Claim shall be allowed, with prejudice and without defense, as a claim against each of the Debtors' estates in the amount of $96 million. Each holder 63 of a BI-BANK Claim, BAC-BANK Claim, BSI-BANK Claim, DOS-BANK Claim, MAX-BANK Claim, YON-BANK Claim, BRU-BANK Claim and WES-BANK Claim shall receive, in respect of its Claim against each of BI, BAC, BSI, DOS, MAX, YON, BRU and WES, and/or retain on the Effective Date, Pro Rata Distributions as follows: (a) Cash equal to the sum of (a) all Adequate Protection Payments heretofore and hereinafter received by the Bank Group (less any disbursements thereof made or payments required to be made by Bankers Trust, as the Agent Bank, including without limitation any professional fees), which shall continue unabated and without modification through the Effective Date (and prorated for the month in which the Effective Date occurs), (b) $7,000,000 and (c) any Required Prepayments applicable to the Bank Group's Distribution of New Notes pursuant to section 6.01(ii) of the Plan; (b) New Notes in an original aggregate principal amount equal to $36 million less the sum of (a) any Required Prepayments applicable thereto, and (b) 90%, not to exceed $900,000, in an aggregate principal amount, of the amount of any New Notes distributed to holders of Allowed YON-GEN Claims, Allowed BRU- GEN Claims and Allowed WES-GEN Claims; and (c) 4,909,091 shares of New Common Stock of Reorganized BI and (b) if the aggregate amount of Allowed General Unsecured Claims and Disputed General Unsecured Claims asserted against BSI (excluding the Bank Group Claim and the Intercompany Claim) is less than $240,000,000, a supplemental Ratable Distribution in the amount of 0.98 shares of New Common Stock of Reorganized BI for every $100 by which the aggregate amount of Allowed General Unsecured Claims plus Disputed General Unsecured Claims against BSI (excluding the Bank Group Claim and the Intercompany Claim) are less than $250,000,000 (such supplemental distribution of shares of New Common Stock, the "Supplemental Bank Group Distribution"). 2. SPE Claim --------- The SPE Claim consists of the Claims of the SPE Group arising under the SPE Facility pursuant to which the SPE Properties were purchased. Each holder of an Allowed BI-SPE Claim, BAC-SPE Claim, BSI-SPE Claim, DOS-SPE Claim, MAX-SPE Claim, YON-SPE Claim, BRU-SPE Claim and WES-SPE Claim shall receive, in respect of its aggregate Allowed Claim against BI, BAC, BSI, DOS, MAX, YON, BRU and WES, a single Pro Rata Distributions as follows: 64 (a) Cash from any Required Prepayments; (b) New Notes in a principal amount equal to $4,000,000 less the sum of (x) any Cash Distributions received by holders of SPE Claims from any Required Prepayments and (y) 10 percent (10%) of the aggregate original principal amount of all New Notes issued to holders of YON-GEN, WES-GEN and BRU-GEN Claims under this Plan; and (c) in accordance with Section 3.03 of the Plan, the SPE Deficiency Claim will be treated as a BSI-GEN Claim. The SPE Deficiency Claim (which is estimated to be approximately $11,742,000) represents the aggregate amount of the SPE Claim ($18,233,000) minus the sum of (i) the amount paid to the SPE Group from the sale of SPE Providence Property ($3,491,000) and (ii) the estimated value of the SPE Philadelphia Property ($3,000,000). 3. Other Classified Claims ----------------------- (i) Bradlees, Inc. Class BI-GEN (BI-General Unsecured Claims): Class BI-GEN ------------------------------------------ consists of all General Unsecured Claims against BI, including Bond Claims. Each holder of an Allowed BI-GEN Claim shall receive a Ratable Distribution of New Warrants. For purposes of the Plan, the Bond Claims shall be Allowed with prejudice and without defense as Claims solely against BI in the aggregate amount of $233,417,000. The Debtors estimate that the aggregate amount of Allowed BI-GEN Claims will be approximately $264,330,000. Class BI-EQT (BI-Common Stock Interests): Class BI-EQT ---------------------------------------- consists of all Interests based on the Old Common Stock of BI. The holders of Allowed BI-EQT Interests will not receive any distribution of property under the Plan on account of their BI-EQT Interests. BI-EQT Interests are impaired under the Plan but pursuant to Section 1126(g) of the Bankruptcy Code, are conclusively deemed to reject the Plan. (ii) Bradlees Administrative Co., Inc. Class BAC-GEN (BAC-General Unsecured Claims): Class BAC-GEN -------------------------------------------- consists of all General Unsecured Claims against BAC. The holders of Allowed BAC-GEN Claims will not receive any distribution of property under the Plan on account of their BAC-GEN Claims. BAC-GEN Claims are impaired under the Plan but pursuant to Section 1126(g) of the Bankruptcy Code, are conclusively deemed to reject the Plan. Class BAC-EQT (BAC-Common Stock Interests): Class BAC-EQT ------------------------------------------ consists of all Interests based on the Old Common Stock of BAC. The holders of Allowed BAC-EQT Interests will retain their Interests in BAC-EQT. BAC-EQT 65 Interests are unimpaired and, therefore, are conclusively presumed to accept the Plan pursuant to Section 1126(f) of the Bankruptcy Code. (iii) Bradlees Stores, Inc. Class BSI-CAP (BSI-Capital Lease Claims): Class BSI-CAP ---------------------------------------- consists of all Capital Lease Claims against BSI. Each Creditor holding a BSI- CAP claim is separately subclassified as set forth in Exhibit C to the Plan. Each holder of an Allowed BSI-CAP Claim shall receive, at the option of BSI, (i) Cash or (ii) a CAP Note in an amount equal to the value of its collateral, or (iii) the return of its collateral. Notwithstanding anything to the contrary set forth in this Section, BSI shall continue to adhere to the terms of the Settlement Stipulation dated June 4, 1996, approved by Bankruptcy Court Order dated June 25, 1996, among BSI, BI and BTM Capital Corporation f/k/a BOT Financial Corporation, with respect to the treatment hereunder of the claim of BTM. The Debtors estimate that the amount of Allowed BSI-CAP Claims will be approximately $560,000. Class BSI-INTER (BSI-Intercompany Claims): Class BSI-INTER ----------------------------------------- consists of all Intercompany Claims of BI against BSI. The amount of the Intercompany Claim, as allowed pursuant to the provisions of the Plan, gives effect to a previous capital contribution by BI to BSI in an amount equal to approximately $160.2 million. After giving effect to BI's capital contribution to BSI, the amount of the Intercompany Claim shall be Allowed, with prejudice and without defense in the amount of $96.0 million for purposes of the Plan subject to the entry of the Confirmation Order and the occurrence of the Effective Date. The entire Class BSI-INTER Claim shall be satisfied through the issuance of shares of the New Common Stock of Reorganized BI and Cash, which Distributions shall be made to the holders of the Bank Group Claims pursuant to Section 6.01 of the Plan. Class BSI-GEN (BSI-General Unsecured Claims): Class BSI-GEN -------------------------------------------- consists of all General Unsecured Claims against BSI, including personal injury claims, and the SPE Deficiency Claims. Each holder of an Allowed BSI-GEN Claim shall receive (i) Cash equal to a Pro Rata Distribution of $7,000,000, (ii) two shares of New Common Stock of Reorganized BI for every $100 in Allowed Claims, and (iii) if the aggregate amount of Allowed General Unsecured Claims and Disputed General Unsecured Claims against BSI (excluding the Bank Group Claim and the Intercompany Claim) is less than $240,000,000, a supplemental Ratable Distribution in the amount of 1.02 shares of New Common Stock for every $100 that the aggregate Allowed General Unsecured Claims plus Disputed General Unsecured Claims against BSI (excluding the Bank Group Claim and the Intercompany Claim) are less than $250,000,000 (such supplemental distribution of shares of New Common Stock, the "Supplemental BSI-Gen Distribution"). The Debtors estimate that the aggregate amount of Allowed BSI- GEN Claims will be approximately $253.1 million. 66 Class BSI-EQT (BSI-Common Stock Interests): Class BSI-EQT ------------------------------------------ consists of all Interests based on the Old Common Stock of BSI. The holders of Allowed BSI-EQT Interests will retain their Interests in BSI-EQT. BSI-EQT Interests are unimpaired and, therefore, are conclusively presumed to accept the Plan pursuant to Section 1126(f) of the Bankruptcy Code. (iv) Dostra Realty Co., Inc. ----------------------- Class DOS-GEN (DOS-General Unsecured Claims): Class DOS-GEN -------------------------------------------- consists of all General Unsecured Claims against DOS. The holders of Allowed DOS-GEN Claims will not receive any distribution of property under the Plan on account of their DOS-GEN Claims. DOS-GEN Claims are impaired under the Plan, but pursuant to Section 1126(g) of the Bankruptcy Code, are conclusively deemed to reject the Plan. Class DOS-EQT (DOS-Common Stock Interests): Class DOS-EQT ------------------------------------------ consists of all Interests based on the Old Common Stock of DOS. The holders of Allowed DOS-EQT Interests will retain their Interests in DOS-EQT. DOS-EQT Interests are unimpaired and, therefore, are conclusively presumed to accept the Plan pursuant to Section 1126(f) of the Bankruptcy Code. (v) Maximedia Services, Inc. ------------------------ Class MAX-GEN (MAX-General Unsecured Claims): Class MAX-GEN -------------------------------------------- consists of all General Unsecured Claims against MAX. The holders of Allowed MAX-GEN Claims will not receive any distribution of property under the Plan on account of their MAX-GEN Claims. MAX-GEN Claims are impaired under the Plan, but pursuant to Section 1126(g) of the Bankruptcy Code, are conclusively deemed to reject the Plan. Class MAX-EQT (MAX-Common Stock Interests): Class MAX-EQT ------------------------------------------ consists of all Interests based on the Old Common Stock of MAX. The holders of Allowed MAX-EQT Interests will retain their Interests in MAX-EQT. MAX-EQT Interests are unimpaired and, therefore, are conclusively presumed to accept the Plan pursuant to Section 1126(f) of the Bankruptcy Code. (vi) New Horizons of Yonkers, Inc. ----------------------------- Class YON-GEN (YON-General Unsecured Claims): Class YON-GEN -------------------------------------------- consists of all General Unsecured Claims against YON. On or about the Yonkers Effective Date, each holder of a YON-GEN Claim shall receive a Ratable Distribution of: (i) Cash equal to the Net Proceeds from the sale of the Yonkers Property multiplied by the Yonkers Fraction, but not to exceed 0.83 percent of such Net Proceeds and (ii) New Notes in a principal amount up to 0.83% of the aggregate principal amount of the New Notes which are distributed under the Plan minus Cash Distributions made to holders of YON-GEN Claims under the Plan. The Yonkers Fraction is a fraction, the numerator of which shall be the amount of YON-GEN Claims and the denominator of which shall be the sum of the amount of (a) YON-Bank Claims, (b) YON-SPE Claims, and (c) YON-GEN Claims. 67 The Debtors estimate that the amount of Allowed YON-GEN Claims will aggregate $0. Class YON-EQT (YON-Common Stock Interests): Class YON-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of YON. The holders of Allowed YON- EQT Interests will retain their Interests in YON-EQT. YON-EQT Interests are unimpaired and, therefore, are conclusively presumed to accept the Plan pursuant to Section 1126(f) of the Bankruptcy Code. (vii) New Horizons of Bruckner, Inc. Class BRU-GEN (BRU-General Unsecured Claims): Class BRU-GEN consists -------------------------------------------- of all General Unsecured Claims against BRU. Each holder of a BRU-GEN Claim shall receive a Ratable Distribution of: (i) Cash equal to the Net Proceeds from the sale of the real property formerly owned by BRU multiplied by the Bruckner Fraction, and (ii) New Notes in a principal amount up to 0.83 percent of the aggregate principal amount of the New Notes which are Distributed under the Plan minus Cash Distributions made to holders of BRU-GEN Claims under the Plan. The Cash Distribution set forth in this Section shall be made as soon as practicable after the sale of the Union Square Property, or at such earlier time as the Reorganized Corporations shall decide, but in no event, before the Effective Date. The Bruckner Fraction is the fraction, the numerator of which shall be the amount of BRU-GEN Claims and the denominator of which shall be the sum of the amount of (a) BRU-BANK Claims, (b) BRU-SPE Claims and (c) BRU-GEN Claims. The Debtors estimate that the amount of Allowed BRU-GEN Claims will aggregate $0. Class BRU-EQT (BRU-Common Stock Interests): Class BRU-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of BRU. The holders of Allowed BRU- EQT Interests will retain their Interests in BRU-EQT. BRU-EQT Interests are unimpaired and, therefore, are conclusively presumed to accept the Plan pursuant to Section 1126(f) of the Bankruptcy Code. (viii) New Horizons of Westbury, Inc. Class WES-GEN (WES-General Unsecured Claims): Class WES-GEN consists -------------------------------------------- of all General Unsecured Claims against WES. Each holder of a WES-GEN Claim shall receive a Ratable Distribution of: (i) Cash equal to the Net Proceeds from the sale of the real property formerly owned by WES multiplied by the Westbury Fraction, but not to exceed 0.83 percent of such Net Proceeds, and (ii) New Notes in a principal amount up to 0.83 percent of the aggregate principal amount of the New Notes which are Distributed under the Plan minus Cash Distributions made to holders of WES-GEN Claims under the Plan. The Cash Distribution set forth in this Section shall be made as soon as practicable after the sale of the Union Square Property, or at such earlier time as the Reorganized Corporations shall decide, but in no event, before the Effective Date. The Westbury Fraction is the fraction, the numerator of which shall be the amount of 68 WES-GEN Claims and the denominator of which shall be the sum of the amount of (a) WES-BANK Claims, (b) WES-SPE Claims and (c) WES-GEN Claims. The Debtors estimate that the amount of Allowed WES-GEN Claims will aggregate $0. Class WES-EQT (WES-Common Stock Interests): Class WES-EQT consists of ------------------------------------------ all Interests based on the Old Common Stock of WES. The holders of Allowed BRU- EQT Interests will retain their Interests in BRU-EQT. BRU-EQT Interests are unimpaired and, therefore, are conclusively presumed to accept the Plan pursuant to Section 1126(f) of the Bankruptcy Code. 4. Operation of Formula Pursuant to which New Common Stock is ---------------------------------------------------------- Distributed ----------- Set forth below is a chart which depicts the recoveries which various entities are estimated to receive under the Plan depending on the amount which BSI-GEN Claims total pursuant to the formula contained in Section 6.01 of the Plan under which New Common Stock is granted: Share Distribution % of Equity Distribution ------------------ ------------------------ BSI-GEN Claims $ Amount Bank BSI-GEN Total Bank BSI-GEN Total - ------------ --------- --------- ---------- ----- -------- ------ $300,000,000 4,909,091 6,000,000 10,909,091 45.0% 55.0% 100.0% $290,000,000 4,909,091 5,800,000 10,709,091 45.8% 54.2% 100.0% $280,000,000 4,909,091 5,600,000 10,509,091 46.7% 53.3% 100.0% $270,000,000 4,909,091 5,400,000 10,309,091 47.6% 52.4% 100.0% $260,000,000 4,909,091 5,200,000 10,109,091 48.6% 51.4% 100.0% $250,000,000 4,909,091 5,000,000 9,909,091 49.5% 50.5% 100.0% $240,000,000 4,909,091 4,800,000 9,709,091 50.6% 49.4% 100.0% If the aggregate allowed Unsecured Claims asserted against BSI are less than $240,000,000 (excluding the Bank Group Claim and the Intercompany Claim), the formula provides for the incremental two shares between the aggregate allowed Unsecured Claims and $250,000,000 to be split among BSI-Bank and BSI-Gen with 0.98 shares (or 49%) provided to the BSI-Bank and 1.02 shares (or 51%) provided to BSI-Gen.
Share Distribution % of Equity Distribution ------------------ ------------------------ BSI-GEN Claims $ Amount Bank BSI-GEN Total Bank BSI-GEN Total -------------- ----------- ------------ ----------- -------- -------- --------- Initial Share $235,000,000 4,909,091 4,700,000 9,609,091 51.1% 48.9% 100.0% Incremental Share 147,000 153,000 300,000 49.0% 51.0% 100.0% Total Share 5,056,091 4,853,000 9,909,091 51.0% 49.0% 100.0% Initial Share $230,000,000 4,909,091 4,600,000 9,509,091 51.6% 48.4% 100.0% Incremental Share 196,000 204,000 400,000 49.0% 51.0% 100.0% Total Shares 5,105,091 4,804,000 9,909,091 51.5% 48.5% 100.0%
69 Initial Share $225,000,000 4,909,091 4,500,000 9,409,091 52.2% 47.8% 100.0% Incremental Shares 245,000 255,000 500,000 49.0% 51.0% 100.0% Total Shares 5,154,091 4,755,000 9,909,091 52.0% 48.0% 100.0% Initial Share $220,000,000 4,909,091 4,400,000 9,309,091 52.7% 47.3% 100.0% Incremental Shares 294,000 306,000 600,000 49.0% 51.0% 100.0% Total Shares 5,203,091 4,706,000 9,909,091 52.5% 47.5% 100.0%
IV. Continued Corporate Existence, Board of Directors, Management, and Other Means for Implementation of the Plan A. Reorganized BI and Reorganized BSI BI and BSI shall each continue to exist after the Effective Date as Reorganized BI and Reorganized BSI, respectively, each with all of the powers of a corporation under applicable law. The Certificate of Incorporation and Amended By-Laws of each of Reorganized BI and Reorganized BSI shall, inter alia, (i) prohibit the issuance of nonvoting stock to the extent required by Section 1123(a) of the Bankruptcy Code and (ii) to the extent permitted by applicable state law, contain no "anti-takeover" provisions. After the Effective Date, Reorganized BI and Reorganized BSI may each amend or modify their Certificate of Incorporation and Amended By- Laws as permitted under applicable law and/or such certificate of incorporation and Amended By-Laws. B. Directors of the Reorganized Corporations Upon the Effective Date, the existing Board of Directors of each Reorganized Corporation shall be dismissed. At least 15 days before the commencement of the hearing on the confirmation of the Plan, the Board of Directors for Reorganized BI and Reorganized BSI, which shall each consist of nine members, shall be selected as follows: . BI and BSI shall designate Peter Thorner, one other member of management of the Debtors and one outside individual; . the Bank Group shall designate two individuals; . the Unofficial Committee shall designate one individual; . the Creditors' Committee shall designate one individual; and . the Bank Group, the Unofficial Committee and the Creditors' Committee, acting collectively, shall designate two individuals who shall be reasonably acceptable to the Debtors. Notwithstanding the foregoing selection process, in order to be eligible to serve on the Board of Directors of each of Reorganized BI and Reorganized BSI, (i) each proposed Board Member designated pursuant to this provision shall have relevant 70 experience which would qualify him or her to so serve and (ii) the outside individual selected by BI and BSI shall be reasonably acceptable to the Bank Group, Unofficial Committee and Creditors' Committee. The initial term of each Board Member shall be for one year from the Effective Date and Peter Thorner shall serve as Chairman of the Board of Directors of each of Reorganized BI and Reorganized BSI. C. Employment, Retirement, Indemnification and Other Agreements and Incentive Compensation Programs To the extent that any of the Debtors have in place as of the Effective Date employment, retirement, indemnification and other agreements with their respective active directors, officers, and employees or retirement income plans, welfare benefit plans and other plans for active employees, such agreements, programs and plans shall remain in place after the Effective Date and Reorganized BI and Reorganized BSI, as the case may be, shall continue to honor such agreements, programs and plans including, without limitation, the Bradlees Stores, Inc. Retirement Plan (the "Pension Plan"). However, as of the Effective Date, Reorganized BI and Reorganized BSI shall each have the authority to terminate, amend or enter into employment, retirement, indemnification and other agreements with their respective active directors, officers and employees and to terminate, amend or implement retirement income plans, welfare benefit plans and other plans for active employees. Such agreements and plans may include equity, bonus and other incentive plans in which officers and other employees of the Reorganized Corporations may be eligible to participate; provided, however, that management of Reorganized BI and Reorganized BSI shall receive stock options in the amount of 750,000 shares of Reorganized BI which vest according to the following schedule: one-third on the Effective Date, one- third on the one year anniversary of the Effective Date, and one-third on the two year anniversary of the Effective Date. All such options shall be exercisable for a period of five years from the Effective Date. The exercise price of such options shall be the lowest ten-day rolling average of closing prices of Reorganized BI New Common Stock within the period between sixty and ninety days after the Effective Date. In addition, the Board of Directors of Reorganized BI shall have the right to distribute to management of Reorganized BI and Reorganized BSI options with respect to 250,000 additional shares of Reorganized BI at such price and on such terms as the Board of Directors of Reorganized BI shall determine. On or before the Exhibit Filing Date, the Debtors shall File forms of any such agreements or plans that are not in effect prior to the Exhibit Filing Date and that are to take effect as of the Effective Date as Exhibit D to the Plan. In addition, except for the retirement and disability benefit plans referred to below in Section 3.IV.F, on the Exhibit Filing Date, BI and BSI shall each file a schedule and general summary of the existing employment, retirement, indemnification and other agreements and incentive compensation programs that are to remain in effect as of the Effective Date as Exhibit E to the Plan. The Pension Benefit Guaranty Corporation ("PBGC") has advised the Debtors that it takes the position that if the Pension Plan is terminated, pursuant to 29 U.S.C. (S)(S) 1341 or 1342, before the confirmation of a Plan of Reorganization the statutory liability, under 29 U.S.C. (S) 1362, arising from the termination would be a non-contingent claim against Debtors' estates. The PBGC has filed contingent claims for estimated unfunded benefit liabilities of the Pension Plan totaling $18,050,000. 71 D. Management Emergence Bonus Except as provided in Section 7.03 of the Plan, the Plan provides no Distribution to management as an emergence bonus. Management of the Debtors believes that the Plan does not contain Distributions which adequately compensate management for their efforts in reorganizing the Debtors or which are sufficient to assure retention of the management of Reorganized BI. Accordingly, the Debtors intend, subject to appropriate authorization from the Board of Directors of the Debtors, to apply to the Bankruptcy Court for approval of an emergence bonus payable in Cash, commencing on the Effective Date, outside the scope of this Plan. The Debtors do not expect the cost of such cash emergence bonus to exceed $5 million, do not intend to seek payment of the full amount of such emergence bonus on the Effective Date, and do not believe that, if the Bankruptcy Court fully approves the Debtors' application, there will be any material effect on the financial condition of Reorganized BSI. The Debtors are not able to predict what effect, if any, the absence of a management emergence bonus may have on the ability of Reorganized BSI to retain management, but do not expect the judicial resolution of this to affect the entry of the Confirmation Order. E. Corporate Action Each of the matters provided for under the Plan involving the corporate structure of any Debtor or Reorganized Corporation or corporate action to be taken by or required of any Debtor or Reorganized Corporation shall, as of the Effective Date, be deemed to have occurred and be effective as provided herein, and shall be authorized and approved in all respects without any requirement of further action by stockholders or directors of any of the Debtors or the Reorganized Corporations. F. Certain Retiree Health, Medical and Life Insurance Benefits On and after the Effective Date, pursuant to Section 1129(a)(13) of the Bankruptcy Code, Reorganized BSI shall continue to pay all retiree benefits (as defined in Section 1114(a) of the Bankruptcy Code) of the Debtors' respective nonunion employees who retired as of or prior to the Petition Date, at the levels and for the duration established prior to the Effective Date in either: (a) a Bankruptcy Court order entered pursuant to Section 1114(g) of the Bankruptcy Code or (b) agreements reached pursuant to Section 1114(e) of the Bankruptcy Code; provided, however, that prior to the Confirmation Date, the Debtors reserve the right to seek an order declaring that the Debtors may amend or terminate such retiree benefits at the conclusion of the period, if any, that the Debtors are obligated to provide such retiree benefits under the terms of their respective retiree benefit plans. G. Combination Transactions On the Effective Date (or in the case of YON, the Yonkers Effective Date), each Combining Debtor shall take such actions as may be necessary or appropriate to effect the relevant Combination Transaction. A Schedule of Combining Debtors is annexed hereto as Exhibit 4. Such actions may include: (a) the execution and delivery of 72 appropriate agreements or other documents of merger, consolidation or reorganization containing terms that are consistent with the terms of the Plan and that satisfy the requirements of applicable law; (b) the execution and delivery of appropriate instruments of transfer, assignment, assumption or delegation of any property, right, liability, duty or obligation on terms consistent with the terms of the Plan; (c) the filing of appropriate certificates of merger or consolidation with the appropriate governmental authorities under applicable law; and (d) all other actions that such Debtor determines are necessary or appropriate, including the making of filings or recordings in connection with the relevant Combination Transaction. The form of each Combination Transaction shall be determined by the respective Boards of Directors of such Combining Debtor and Reorganized BI and Reorganized BSI. As set forth on Exhibit 4 hereto, BAC and BSI shall merge with BSI as the surviving entity. BI will then exchange its shares of BAC for the shares of BSI previously held by BAC. In addition, all of the subsidiaries of BSI (MAX, DOS, YON, BRU and WES) and BSI shall merge with BSI as the surviving entity. The final corporate structure, after giving effect to the Combination Transactions, will have BI directly holding all of the shares of BSI. Upon the consummation of a Combination Transaction, each Combining Debtor shall cease to exist as a separate corporate entity. On and after the Effective Date, Reorganized BSI shall assume and perform the obligations of each Combining Debtor under the Plan. H. Cancellation of Capital Stock As of the Effective Date, by virtue of the Plan and in all events without any action on the part of the holders thereof, each share of Old Common Stock of BI issued and outstanding or held in treasury, will be cancelled and retired and no consideration will be paid or delivered with respect thereto. Holders of Old Common Stock of BI shall not be required to surrender such stock to the Debtors. I. Cancellation of Bonds and Agreements. On the Effective Date, except as otherwise provided for therein, (a) the Bonds and any other note, bond, indenture or other instrument or document evidencing or creating any indebtedness or obligation of the Debtors shall be cancelled, (b) permitting such indenture trustee, agent or servicer to maintain any rights or liens it may have for fees, costs, expenses and indemnification under such indenture or other agreement and to be paid or reimbursed for such prepetition and postpetition fees, costs, expenses and indemnification only from the Distributions (until payment in full of such fees, costs, expenses or indemnification) that are governed by the respective indenture or other agreement in accordance with the provisions set forth therein and (c) the obligations of, and /or Claims against, the Debtors under, relating or pertaining to any agreements, indentures or certificates of designations, governing the Bonds and any other note, bond, indenture or other instrument or documents evidencing or creating any indebtedness or obligation of the Debtors shall be released and discharged; provided, however, that each indenture or other agreement that governs the rights of the holder of a Claim and that is administered by an indenture trustee, an agent or a servicer shall continue in effect solely for the purposes of allowing such indenture trustee, agent or servicer to make the Distributions to be made on account of such claims under this Plan; provided, further, 73 that the provisions of the foregoing proviso shall not affect the discharge of Debtors' liabilities under the Bankruptcy Code and the Confirmation Order or result in any expense or liability to the Reorganized Corporations. J. Record Date for Distributions to Holders of Securities The record date, for purposes of distribution to holders of Bond Claims will be five (5) Business Days following entry of the Confirmation Order (the "Record Date"). At the close of business on the Record Date, the transfer ledgers of the Reorganized Corporations and of the indenture trustees, agents and servicers for such Bonds shall be closed, and there shall be no further changes in the record holders of such Bonds. The Reorganized Corporations and the indenture trustees, agents and servicers for such Bonds, and the Disbursing Agent, will have no obligation to recognize any transfer of such Bonds occurring on or after the Record Date. The Reorganized Corporations and the indenture trustees, agents and servicers for such Bonds, and the Disbursing Agent will be entitled instead to recognize and deal for all purposes under the Plan with only those record holders set forth on the transfer ledgers for such Securities as of the close of business on the Record Date. K. Surrender of Outstanding Securities Except as otherwise provided in the Plan, each holder of an instrument or certificated security evidencing an Allowed Claim against a Debtor (other than if the Claim or Interest that such instrument or certificated security evidences is Reinstated) shall surrender such instrument or certificated security to the relevant Debtor or Paying Agent with a duly executed letter of transmittal. No Distribution hereunder shall be made to or on behalf of any holder of such Claim unless and until such instrument or certificated security is received or the nonavailability of such instrument or certificated security is established to the satisfaction of the Disbursing Agent or Paying Agent, as the case may be. Such Disbursing Agent or Paying Agent, as the case may be, may reasonably require security and/or indemnity from the purported holder of such instrument or certificated security to hold it harmless in respect of such instrument or certificated security and any Distributions made in respect thereof. Any such holder that fails to surrender such instrument or satisfactorily explain its nonavailability to the Disbursing Agent or the relevant Paying Agent, as the case may be, within 180 days of the Effective Date shall be deemed to have no further Claim against the relevant Debtor, Reorganized Corporation or its property in respect of such Claim and shall not participate in any Distribution hereunder. Notwithstanding anything in the immediately preceding sentence, any such holder of a Disputed Claim shall not be required to surrender a required instrument or certificated security until the time such Disputed Claim is allowed or disallowed. L. Termination of BankBoston DIP Facility Except to the extent that the DIP Facility otherwise provides, on the Effective Date, all obligations of the Debtors under the BankBoston DIP Facility shall be paid or otherwise satisfied in full in accordance with the terms of the BankBoston DIP 74 Facility. Without limiting the foregoing, with the consent of the lenders under the BankBoston DIP Facility, any letters of credit that have not expired shall be replaced with or collateralized, by new letters of credit as a part of Reorganized BSI's New Credit Facility. Upon payment or satisfaction in full of all obligations under the BankBoston DIP Facility in accordance with the terms thereof, all liens and security interests granted to secure such obligations shall be deemed terminated and shall be of no further force and effect. M. New Credit Facility BSI expects to enter into a New Credit Facility and to issue the New Credit Facility Notes effective as of the Effective Date. The initial advance thereunder shall be used to satisfy in full the Debtors' obligations under the BankBoston DIP Facility and to provide working capital to Reorganized BSI. A copy of the New Credit Facility will be filed by BSI with the Bankruptcy Court no later than the Exhibit Filing Date as Exhibit G to the Plan. Notice of any modification to the New Credit Facility after its filing with the Bankruptcy Court shall be provided to the Creditors' Committee, the Bank Group and the Unofficial Committee. The terms and conditions of the New Credit Facility shall include in all respects the terms and conditions of the commitment letter which will be executed between BSI and the bank agent of the New Credit Facility and a New Credit Facility term sheet, except to the extent that BSI and the bank agent agree otherwise. BSI shall, on or after the Confirmation Date, execute such other documents as the bank agent under the New Credit Facility may require in order to effectuate the treatment afforded to the lenders under the New Credit Facility. Copies of any such documents shall be provided to the Creditors' Committee, the Bank Group and the Unofficial Committee. N. Sale of Yonkers Property and Union Square Property Pursuant to the Section 9.02 of the Plan, Reorganized BSI shall have until the date that is one year after the occurrence of the Effective Date, or such later period as the Bankruptcy Court may grant, to exercise its rights under sections 363 and 365 of the Bankruptcy Code with respect to BSI's unexpired real property lease pursuant to which BSI leases the Union Square Property, including, without limitation, the right to assume, assume and assign or reject such lease. It is contemplated that YON will remain in Chapter 11 until such time as the Yonkers Property is sold. In the event that either or both of the Yonkers Property and the Union Square Property remains unsold on the Effective Date, the Yonkers Property and the Union Square Property, as the case may be, shall be pledged to the Collateral Agent pursuant to a first mortgage lien to secure obligations of Reorganized BSI under the New Notes as is set forth in Section 4.02 of the Plan and Reorganized BSI and Reorganized YON, as the case may be, shall continue the Debtors' efforts to sell such properties. The Debtors shall use all reasonable efforts to sell such properties. The Collateral Agent, who shall be reasonably acceptable to Reorganized BSI shall be appointed by holders of the Bank Group Claim. 75 O. Adequate Protection Payments The Debtors will continue to pay to the Bank Group, through the Effective Date, the Adequate Protection Payments in the amounts required by the Agreed Order Regarding Adequate Protection of the Senior Bank Group's Interests and Related Relief, dated October 24, 1995. P. Consummation Funding Consummation Costs shall be paid by the following: (i) the Westbury Escrow Funds; (ii) the Bruckner Escrow Funds and (iii) the Tax Refund proceeds. V. Distributions and Objections to Claims A. Source of Cash and Reorganization Securities for Distributions On the Effective Date, Reorganized BI and Reorganized BSI shall each deliver to the Disbursing Agent sufficient Cash and Reorganization Securities to make Distributions to: (a) the holders of each relevant Debtor's Allowed Claims; and (b) the Disputed Claims Reserves, as set forth below. Without any further act or action required, upon written request by the Disbursing Agent (which may be made by telecopy or other electronic means reducible to written form) received by Reorganized BI or Reorganized BSI at least 10 Business Days prior to the relevant Distribution hereunder, Reorganized BI or Reorganized BSI, as the case may be, is authorized to and shall timely issue sufficient Reorganization Securities to permit the Disbursing Agent to make Distributions required hereunder. Any reference herein to Reorganization Securities in a Disputed Claims Reserve shall include any Reorganization Securities that are available to be issued by the Reorganized Corporations pursuant to this section. B. Initial Distributions For each Class, no Distributions will be made under the Plan until an Initial Distribution Date is established for such Class. The Initial Distribution Date shall be the Effective Date, or as soon thereafter as practicable. On the applicable Initial Distribution Date, the Disbursing Agent shall make a Distribution to: (i) each holder of an Allowed Claim in an amount equal to its Ratable Share (calculated as of the applicable Initial Distribution Date) of Cash or Reorganization Securities in accordance with the terms of the Plan; (ii) each Paying Agent in an amount equal to the aggregate Ratable Share (calculated as of the applicable Initial Distribution Date) of the Cash or Reorganization Securities in accordance with the terms of the Plan that such Paying Agent shall Distribute to holders of Allowed Claims in the relevant Class; and (iii) if applicable, the Disbursing Agent shall make a Distribution to the relevant Disputed Claims Reserve of the remaining Cash and Reorganization Securities allocated in accordance with the terms of the Plan. The amount of Cash to be paid on the Initial Distribution Date to holders of Allowed BSI-GEN Claims will be calculated as if each Disputed Claim were an Allowed Claim in its Face Amount. 76 C. Disputed Claims Reserves On the Effective Date, and after making all Distributions required to be made on the Effective Date, Reorganized BI and Reorganized BSI shall each establish a separate Disputed Claims Reserve for each of its Classes and the Classes of the other Debtors, each of which shall be administered by the Disbursing Agent. Cash placed into the Disputed Claims Reserve shall be held in an interest bearing account. Any payment made to the holder of an Allowed Claim which was previously a Disputed Claim from the Disputed Claims Reserve shall include any accrued interest thereon at the rate earned in such interest bearing account. If the Initial Distribution Date is not the Effective Date for a particular Class, all Cash and Reorganization Securities allocable to the relevant Class hereunder shall be distributed by the Disbursing Agent to the relevant Disputed Claims Reserve on or as soon as practicable after the Effective Date. Each Disputed Claims Reserve shall be terminated by Reorganized BI or Reorganized BSI, as the case may be, upon the receipt of a written certification of the Disbursing Agent that all Distributions and other dispositions of all Cash and/or Reorganization Securities required hereunder have been made in accordance with the terms of the Plan. Such written certification shall be sent by the Disbursing Agent to Reorganized BI or Reorganized BSI, as the case may be, within 15 days of the satisfaction of the condition set forth in the immediately preceding sentence. With respect to the Reorganization Securities held in the Disputed Claims Reserve, neither the Disbursing Agent, nor any other party, shall be entitled to vote any shares of the New Common Stock held in the Disputed Claims Reserve. In the event that any matter requires the approval of the shareholders of Reorganized BI prior to the Distribution of the Reorganization Securities held in the Disputed Claims Reserve, solely with respect to such vote, the shares of New Common Stock held by the Disbursing Agent shall be deemed not to have been issued. D. Tax Requirements for Income Generated by Disputed Claims Reserves The Disbursing Agent shall pay, or cause to be paid, out of the funds held in a particular Disputed Claims Reserve, any tax imposed by any federal, state or local taxing authority on the income generated by the funds held in such Disputed Claims Reserve. The applicable Disbursing Agent shall also file, or cause to be filed any tax or information return related to the Disputed Claims Reserve that is required by any federal, state or local taxing authority. E. Estimation of Claims The Debtors or the Reorganized Corporations may, at any time, request that the Bankruptcy Court estimate any Claim subject to estimation under Section 502(c) of the Bankruptcy Code and for which the Debtors may be liable under the Plan, including any Claim for Taxes, to the extent permitted by section 502(c) of the Bankruptcy Code regardless of whether the Debtors, the Creditors' Committee, the Unofficial Committee, the Bank Group or the Reorganized Corporations have previously objected to such Claim, and the Bankruptcy Court will retain jurisdiction to estimate any Claim pursuant to Section 502(c) of the Bankruptcy Code at any time during litigation 77 concerning any objection to any Claim, including during the pendency of any appeal relating to any such objection. In the event that the Bankruptcy Court estimates any contingent or unliquidated Claim, that estimated amount will constitute either the Allowed amount of such Claim or a maximum limitation on such Claim, as determined by the Bankruptcy Court. If the estimated amount constitutes a maximum limitation on such Claim, the Debtors or the Reorganized Corporations may elect to pursue any supplemental proceedings to object to any ultimate allowance on such Claim. The Debtors may, at any time, request that the Bankruptcy Court estimate any claim pursuant to Section 502(c) of the Bankruptcy Code for purposes of satisfying the requirements of Section 10.02(e) of the Plan. All of the aforementioned Claims objection, estimation and resolution procedures are cumulative and not necessarily exclusive of one another. Claims may be estimated and subsequently compromised, settled, withdrawn or resolved by any mechanism approved by the Bankruptcy Court. F. Initial Distribution When a Disputed Claim Becomes an Allowed Claim On the first Business Day after the end of each calendar quarter (i.e., March 31, June 30, September 30 and December 31 of each calendar year) immediately following the applicable Initial Distribution Date, or as soon thereafter as practicable (the "Quarterly Distribution Date"), the Disbursing Agent shall make Ratable Distributions or other Distribution in accordance with the provisions of the Plan (calculated as of the later of the: (i) immediately preceding Quarterly Distribution Date, or (ii) the applicable Initial Distribution Date) of Cash or Reorganization Securities reserved for any Disputed Claim that has become an Allowed Claim during the preceding calendar quarter to the holder of such Allowed Claim or the relevant Paying Agent, as the case may be. Holders of Disputed Claims that are ultimately Allowed will also be entitled to receive any dividends or other distributions received on and after the Effective Date on account of the shares of the New Common Stock distributed to such holder on account of its Allowed Claim. G. Additional Quarterly Distributions on Account of Previously Allowed Claims On each Quarterly Distribution Date, the Disbursing Agent shall distribute to each holder of a previously Allowed Claim or the relevant Paying Agent, as the case may be, on account of such Claim an amount of Cash or Reorganization Securities, as the case may be, equal to: (i) the Distribution from the relevant Disputed Claims Reserve that such claimant would have received in accordance with the Plan had it not received any prior Distributions in respect of its Allowed Claim, less (ii) the total amount of any Distributions previously received in respect of its Allowed Claim. The Supplemental Bank Group Distribution and the Supplemental BSI-Gen Distribution shall be made from the applicable Disputed Claims Reserve once the General Unsecured Claims against BSI (excluding the Bank Group Claim and the Intercompany Claims) are reduced to below $240 million in accordance with Sections 6.01 and 6.05 of the Plan. Such Additional Quarterly Distributions shall continue until the relevant Disputed Claims Reserve is depleted of Cash or Reorganization Securities held in such Disputed Claims Reserve, 78 other than as set forth in the next subsection. Notwithstanding anything to the contrary herein, no Distribution shall be made on any Quarterly Distribution Date unless the aggregate Distribution on such Quarterly Distribution Date would be in excess of $10,000 in value (as such value is set forth herein and/or in the Disclosure Statement). The restriction on Additional Quarterly Distributions hereunder imposed by the immediately preceding sentence shall no longer apply as of the date on which all Disputed Claims in the relevant Class have been resolved. Each such Distribution shall also include, on the basis of the amount so distributed, any dividends or other Distributions received on and after the Effective Date on account of the shares of the New Common Stock or interest earned on Cash distributed to each holder receiving a Distribution on a Quarterly Distribution Date on account of its Allowed Claim. H. Method of Cash Distributions Cash payments made pursuant to the Plan shall be in United States dollars by checks drawn on a domestic bank selected by the applicable Debtor or Reorganized Corporation, or by wire transfer from a domestic bank, at the option of the applicable Debtor or Reorganized Corporation; provided, however, that cash payments made to foreign creditors, if any, holding Allowed Claims may be paid, at the option of the applicable Debtor or Reorganized Corporation, in such funds and by such means as are necessary or customary in a particular foreign jurisdiction. I. Distributions on Non-Business Days Any payment or Distribution due on a day other than a Business Day shall be made, without interest, on the next Business Day. J. Accrual of Postpetition Interest Unless otherwise provided for in the Plan, no holder of an Allowed Prepetition Claim shall be entitled to the accrual of postpetition interest on account of such Claim. K. No Distribution of Fractional Securities Notwithstanding any other provisions of the Plan, only whole numbers of shares of New Common Stock shall be issued. When any Distribution on account of an Allowed Claim would otherwise result in the issuance of a number of shares of the New Common Stock that is not a whole number, the Disbursing Agent shall aggregate and sell all fractional shares of the New Common Stock otherwise then distributable in accordance with the Plan at then prevailing prices and distribute the net proceeds to the Persons otherwise entitled thereto. Notwithstanding the foregoing, if a Person holds more than one claim, the fractional securities that such Person otherwise would be entitled to on account of each such Claim held by such Person shall be aggregated and, after taking into account such aggregation, such Person shall receive on account thereof (in addition to any whole number of shares of New Common Stock or other Distribution such Person is entitled to under the Plan prior to such aggregation) (i) any resulting whole 79 number of shares of New Common Stock and (ii) the net proceeds for any remaining fractional share. L. No Distribution in Excess of Allowed Amount of Claim Notwithstanding anything to the contrary in the Plan, no holder of an Allowed Claim shall receive in respect of such Claim any Distribution (of a value set forth herein or in the Plan) in excess of the Allowed Amount of such Claim. Except as expressly provided herein, no Prepetition Claim shall be allowed to the extent that it is for Postpetition Interest or other similar charges. M. De Minimis Distributions Notwithstanding anything to the contrary contained in the Plan, the Disbursing Agents shall not be required to distribute Cash to the holder of an Allowed Claim if the amount of cash to be distributed on account of such Claim is less than $25. Any holder of an Allowed Claim on account of which the amount of Cash to be distributed is less than $25 shall have such Claim discharged and shall be forever barred from asserting any such Claim against the Debtors, the Reorganized Corporations or their respective property. Any Cash not distributed pursuant to this provision shall be the property of the applicable Reorganized Corporation, free of any restrictions thereon, and any such Cash held by the Disbursing Agent shall be returned to the applicable Reorganized Corporation. N. Compliance with Tax Requirements In connection with the Plan, to the extent applicable, each Disbursing Agent shall comply with all withholding and reporting requirements imposed on it by federal, state and local taxing authorities, and all Distributions pursuant to the Plan shall be subject to such withholding and reporting requirements. O. Setoffs The Reorganized Corporations are authorized, pursuant to Section 553 of the Bankruptcy Code, to set off against any Allowed Claim and the distributions to be made pursuant to the Plan on account of such Claim, the claims, rights and causes of action of any nature that the applicable Debtor may hold against the holder of such Allowed Claim; provided, however, that neither the failure to effect such a setoff nor the allowance of any Claim hereunder shall constitute a waiver or release by the applicable Debtor of any such claims, rights and causes of action that the Debtors may possess against such holder. P. Intercompany Claims All Claims between and among the Debtors, except the Intercompany Claim, which shall be treated in accordance with the provisions of Section 6.05 of the Plan, shall be deemed released, waived and discharged as of the Effective Date. 80 Q. Escrow of Unclaimed Property Unclaimed Property (and all interest, dividends, and other Distributions thereon) shall be delivered promptly to the Disbursing Agent by each Paying Agent. The Disbursing Agent shall deposit such Unclaimed Property and such Unclaimed Property held by the Disbursing Agent in trust (for the benefit of the holders of Claims and Interests entitled thereto under the terms of the Plan) in a subaccount of the relevant Disputed Claims Reserve. For a period of two years following the Effective Date, Unclaimed Property, including any interest, dividends, and other Distributions thereon shall be: (i) held in such subaccount solely for the benefit of the holders of Allowed Claims that have failed to claim such property; and (ii) released from such subaccount and delivered to the holder of an Allowed Claim upon presentation of proper proof by such holder of its entitlement thereto. R. Investment of Unclaimed Cash All Cash held in each such subaccount shall be invested in accordance with Section 345 of the Bankruptcy Code, as modified by the relevant Orders of the Court for investments made by the Debtors during the Chapter 11 Cases. The earnings on such investments shall be held in trust as an addition to the balance of the subaccount for the benefit of the holders of Allowed Claims entitled to such Unclaimed Property, and shall not constitute property of the Debtors' estate or the Reorganized Corporation. S. Distribution of Unclaimed Property At the end of two years following the relevant Distribution date of particular Cash or Reorganization Securities, the holders of Allowed Claims theretofore entitled to Unclaimed Property shall cease to be entitled thereto (such holders, the "Unclaimed Holders"), and the Unclaimed Property for each Unclaimed Holder shall then be distributed Pro Rata to the other holders of Allowed Claims in the Class of that Unclaimed Holder in accordance with Section 7.08 of the Plan. T. Disputed Payments If any dispute arises as to the identity of a holder of an Allowed Claim who is to receive any Distribution, the Disbursing Agent may, in lieu of making such Distribution to such Person, make such Distribution into an escrow account to be held in trust for the benefit of such holder and shall not constitute property of the Debtors, their estates or the Reorganized Corporations. Such Distribution shall be held in escrow until the disposition thereof shall be determined by order of the Bankruptcy Court or by written agreement among the interested parties to such dispute. U. Withholding Taxes Any federal or state withholding taxes or other amounts required to be withheld under any applicable law shall be deducted and withheld from any Distributions hereunder. 81 V. Claims and Interest Objections Unless otherwise ordered by the Bankruptcy Court, all Claims objections shall be Filed and served on the applicable claimant no later than the Effective Date or, if a Claim is permitted to be Filed thereafter, within thirty (30) days after such Claim has been Filed. Any Claim which is (a) Allowed under the terms of the Plan or pursuant to an Order of the Bankruptcy Court prior to the Effective Date or (b) not the subject of a Claim objection pending before the Bankruptcy Court by the Effective Date shall be deemed Allowed for all purposes. After the Effective Date, subject to the procedures set forth in Section 8.02 of the Plan, the Debtors and the Reorganized Corporations may settle or compromise any Disputed Claim without prior approval of the Bankruptcy Court. Termination of Subordination. As of the Effective Date, each holder of a Bank Group Claim shall be deemed to have waived all contractual, legal and equitable subordination rights which it may have, whether arising under general principles of equitable subordination, section 510(c) of the Bankruptcy Code or otherwise, with respect to the Distribution to be made hereunder to holders of Bond Claims. On the Effective Date, all contractual, legal or equitable subordination rights that each holder of a Bank Group Claim has individually and collectively with respect to any Distribution made pursuant to the Plan to holders of Bond Claims shall be discharged and terminated, and all actions related to the enforcement of such subordination rights will be permanently enjoined. VI. Effect of Plan A. Discharge. 1. Scope ----- Except as otherwise provided in the Plan, Confirmation Order or DIP Facility, in accordance with Section 1141(d)(1) of the Bankruptcy Code, when the Confirmation Order becomes a Final Order, this shall act as a discharge effective as of the Effective Date of all debts of, Claims against, liens on, and Interests in each of the Debtors, their assets, or properties, which debts, Claims, liens, and Interests arose at any time before the entry of the Confirmation Order. The discharge of the Debtors shall be effective as to each Claim or Interest, regardless of whether a proof of Claim or Interest therefor was filed, whether the Claim is an Allowed Claim, or whether the holder thereof votes to accept the Plan. On the Effective Date, as to every discharged Claim and Interest, any holder of such Claim or Interest (including, without limitation, any options to purchase Old Common Stock of BI) shall be precluded from asserting against any Debtor formerly obligated with respect to such Claim or Interest, or against such Debtor's assets or properties, any other or further Claim or Interest based upon any document, instrument, act, omission, transaction, or other activity of any kind or nature that occurred before the Confirmation Date. 82 2. Injunction ---------- Except as otherwise provided in the Plan or Confirmation Order, as of the Effective Date, all entities that have held, currently hold or may hold a Claim or other debt or liability that is discharged or an Interest or other right of an equity security holder that is terminated pursuant to the terms of the Plan are permanently enjoined from taking any of the following actions on account of any such discharged Claims, debts or liabilities or terminated Interests or rights: (1) commencing or continuing in any manner any action or other proceeding against the Debtors, the Reorganized Debtors or their respective property, officers, directors, agents, employees and representatives, and others, including (without limitation) the Creditors' Committee (including present and former members), the Bank Group, the Unofficial Committee and professional persons retained by the Debtors, the Creditors' Committee, members of the Creditors' Committee, the Bank Group and the Unofficial Committee; (2) enforcing, attaching, collecting or recovering in any manner any judgment, award, decree or order against the Debtors, the Reorganized Debtors or their respective property, current and former officers, directors, agents, employees and representatives, and others, including (without limitation) the Creditors' Committee (including present and former members), the Bank Group, the Unofficial Committee and professional persons retained by the Debtors, the Creditors' Committee, members of the Creditors' Committee, the Bank Group and the Unofficial Committee; (3) creating, perfecting or enforcing any lien or encumbrance against the Debtors, the Reorganized Debtors or their respective property, current and former officers, directors, agents, employees and representatives, and others including (without limitation) the Creditors' Committee (including present and former members), the Bank Group, the Unofficial Committee and professional persons retained by the Debtors, the Creditors' Committee, members of the Creditors' Committee, the Bank Group and the Unofficial Committee; (4) asserting a setoff, right of subrogation or recoupment of any kind against any obligation due to the Debtors, the Reorganized Debtors or their respective property, current and former officers, directors, employees and representatives, and others, including (without limitation) the Creditors' Committee (including present and former members), the Bank Group, the Unofficial Committee and professional persons retained by the Debtors, the Creditors' Committee, members of the Creditors' Committee, the Bank Group and the Unofficial Committee; and (5) commencing or continuing any action, in any manner, in any place that does not comply with or is inconsistent with the provisions of the Plan. 3. Release of Collateral --------------------- Unless a particular Secured Claim is Reinstated or the holder thereof receives a Distribution of a Reorganization Security in respect of such Claim under the Plan: (i) each holder of: (A) a Secured Claim; and/or (B) a Claim that is purportedly secured shall on or immediately before the Effective Date: (x) turn over and release to the relevant Reorganized Corporation (or its successor, as the case may be) any and all property of the relevant Debtor that secures or purportedly secures such Claim; and (y) execute such documents and instruments as such Reorganized Corporation requires to evidence such claimant's release of such property; and (ii) on the Effective Date, all claims, right, title and interest in such property shall revert to the relevant Reorganized 83 Corporation (or the successor to any Debtor that does not survive a Combination Transaction or to Reorganized BSI in respect of the property of a Dissolving Debtor) free and clear of all Claims and Interests, including (without limitation) liens, charges, pledges, encumbrances and/or security interests of any kind. No Distribution under the Plan shall be made to or on behalf of any holder of such Claim unless and until such holder executes and delivers to the relevant Debtor or Reorganized Corporation such release of liens. Any such holder that fails to execute and deliver such release of liens within 180 days of the Effective Date shall be deemed to have no further Claim against the relevant Debtor, Reorganized Corporation or their property in respect of such Claim and shall not participate in any Distribution hereunder. Notwithstanding the immediately preceding sentence, any such holder of a Disputed Claim shall not be required to execute and deliver such release of liens until the time such Claim is allowed or disallowed. B. Revesting and Vesting Subject to the Combination Transactions each of the Debtors shall, as a Reorganized Corporation, continue to exist after the Effective Date as a separate corporate entity, with all the powers of a corporation under applicable law, without prejudice to any right to terminate such existence (whether by merger or otherwise) under applicable law after the Effective Date. Except as otherwise provided in the Plan, on the Effective Date all property comprising the Estates of each Debtor (other than a Dissolving Debtor) shall revest in the relevant Reorganized Corporation or its successor as a result of a Combination Transaction, free and clear of all Claims, liens, charges, encumbrances and Interests of creditors and equity security holders (other than as expressly provided herein). On the Effective Date, any property of a Dissolving Debtor not previously distributed under the Plan shall vest in Reorganized BSI, free and clear of all Claims, liens, charges, encumbrances and Interests of creditors and equity security holders of such Dissolving Debtor (other than as expressly provided herein). As of the Effective Date, each Reorganized Corporation may operate its businesses and use, acquire and dispose of property and settle and compromise claims or interests arising after the Effective Date without supervision of the Court free of any restrictions of the Bankruptcy Code or Bankruptcy Rules, other than those restrictions expressly imposed by the Plan and Confirmation Order. Without limiting the foregoing, each Reorganized Corporation may pay the charges it incurs for Professional Fees, disbursements, expenses, or related support services after the Effective Date without any application to the Court. C. Secondary Liability Claims After notice and a hearing, Secondary Liability Claims shall be estimated by the Court under Section 502(c) of the Bankruptcy Code. Each such Claim against any Debtor in respect of such Debtor's guaranty of obligations of any Primary Obligor that is a Debtor shall be allowed against such guarantor Debtor in the amount of the deficiency in recovery on the related claim against such Primary Obligor. 84 D. Release of Primary Obligors Except as otherwise provided in the Plan, all holders of Claims against and Interests in any of the Debtors receiving, or entitled to receive, payments or Distributions pursuant to the Plan, in consideration for the promises and obligations of the Debtors under the Plan, shall be deemed to have waived and released all rights or claims they had or might have had against any current or former officer, director or employee of each of the Debtors based upon any claim against a Primary Obligor that also gives rise to a Secondary Liability Claim; provided, however, except as expressly provided above in this subsection, no such Claim or Interest holder shall be deemed by virtue of this subsection to have waived or released any right or claim it may have against any person other than the Debtors or the current and former officers, directors and employees of each of them. The release of any person or entity under this section additionally acts as an injunction against the commencement or continuation of any action, employment of process or act to collect, offset or recover the claims released hereby. E. Survival of Certain Indemnification Obligations Except as otherwise provided in the Plan, the obligations of the Debtors to indemnify individuals who serve or served as their respective directors, officers, agents, employees, representatives, and others, including (without limitation) professional persons retained by any Debtor, pursuant to such Debtors' respective certificates of incorporation, Amended By-Laws, applicable statutes and agreements in respect of all present and future actions, suits, and proceedings against any of such officers, directors, agents, employees, representatives, and others, including (without limitation) professional persons retained by any Debtor, based upon any act or omission related to service with, for, or on behalf of any of the Debtors on or after the Petition Date as such obligations were in effect at the time of any such act or omission, (but excluding such indemnity obligations, if any, arising under the Bank Documents, SPE Documents, Indenture, or any other similar such agreement, or any unexpired lease or executory contract which is not assumed by any Debtor or Reorganized Corporation which gave rise to or could give rise to a Claim against any of the Debtors prior to the Petition Date) shall not be discharged or impaired by confirmation or consummation of the Plan but shall survive unaffected by the reorganization contemplated by the Plan and shall be performed and honored by each respective Debtor or Reorganized Corporation (or its successor) regardless of such confirmation, consummation, and reorganization. F. Release of Officers, Directors, Employees, and Representatives Except as provided in Section 8.07 of the Plan, each Debtor (and its successor Reorganized Corporation) hereby waives, releases and discharges: all current and former officers, directors, agents, employees and representatives of the Debtors, members of the Creditors' Committee, members of the Unofficial Committee, members of the Bank Group and others including (without limitation) professional persons retained by the Debtors and the Creditors' Committee, the members of the Unofficial Committee, members of the Bank Group from any claim (as such term "claim" is defined in section 101(5) of the Bankruptcy Code) arising prior to the Confirmation Date. Claimants and 85 holders of Interests in any of the Debtors shall be enjoined from commencing or continuing any action, employment of process or act to collect, offset or recover any such claim that could be brought on behalf of or in the name of any of each such Debtor, without any independent cause of action belonging to the claimant or equity interest holder asserting such claim. G. Retention of Certain Claims Except as otherwise provided in the Plan, or in any contract, instrument, release or other agreement entered into in connection with the Plan or by order of the Court, in accordance with section 1123(b) of the Bankruptcy Code, the Reorganized Corporations shall release any claims, rights and causes of action that any Debtor or estate may hold (including a cause of action held by a Dissolving Debtor or a Debtor that does not survive a Combination Transaction), including, without limitation, any claims, rights or causes of action under sections 544 through 550, inclusive, of the Bankruptcy Code. Notwithstanding anything to the contrary in the Plan or in any instrument, contract, release or other agreement entered into in connection with the Plan or an order of the Bankruptcy Court, on the Effective Date, each Debtor shall be deemed to have released all claims, rights and causes of action arising under section 547 of the Bankruptcy Code. H. Preservation of Insurance. The provisions of the Plan shall not diminish or impair in any manner the enforceability and coverage of any insurance policies that may cover Claims against the Debtors, Reorganized Corporations or any other Person. VII. Executory Contract and Leases A. Executory Contracts and Unexpired Leases On the date which is thirty days after the date of entry of the Confirmation Order (the "Final Rejection Date"), all executory contracts and unexpired leases of each Debtor shall be deemed rejected by such Debtor pursuant to the provisions of section 365 of the Bankruptcy Code, except: (a) any executory contract or unexpired lease that has been or is the subject of a motion to assume or assume and assign filed pursuant to section 365 of the Bankruptcy Code by any of the Debtors before the Final Rejection Date; (b) any executory contract or unexpired lease listed in the "Schedule of Assumed and Assumed and Assigned Executory Contracts and Unexpired Leases" to be filed by the Debtors with the Court before the entry of the Confirmation Order; (c) any executory contract or unexpired lease assumed or assumed and assigned pursuant to the provisions of this Plan; (d) any agreement, obligation, security interest, transaction or similar undertaking that the relevant Debtor believes is not executory or is not a lease, and which is later determined by the Court to be an executory contract or unexpired lease that is subject to assumption or rejection under section 365 of the Bankruptcy Code, and (e) the Union Square Property which is subject to the provisions of Section 9.02 of the Plan. Any order entered after the Confirmation Date by the Court authorizing the rejection of 86 an executory contract or unexpired lease shall cause such rejection to be a breach prior to the Petition Date under sections 365(g) and 502(g) of the Bankruptcy Code, as if such relief was granted and such order was entered prior to the Confirmation Date. Lease Under Which Bradlees Leases Union Square Property Reorganized BSI shall have until the date that is one year after the occurrence of the Effective Date, or such later period as the Bankruptcy Court may grant, to exercise its rights under sections 363 and 365 of the Bankruptcy Code with respect to BSI's unexpired real property lease pursuant to which BSI leases the Union Square Property, including, without limitation, the right to assume, assume and assign or reject the lease under which Bradlees leases the Union Square Property. The Bankruptcy Court shall retain jurisdiction with respect to such rights and any issues related thereto. B. Executory Contract of R.R. Donnelly & Sons Company BSI's executory contract with R.R. Donnelly & Sons Company ("R.R. Donnelly") shall, as of the Effective Date, be deemed assumed by Reorganized BSI. Pursuant to an agreement between BSI and R.R. Donnelly, (i) R.R. Donnelly has agreed to waive any cure payments upon assumption of such executory contract to which it might be entitled pursuant to the provisions of the Bankruptcy Code and (ii) BSI will waive any cause of action which it may have against R.R. Donnelly under Section 547 of the Bankruptcy Code. Executory Contract J.Baker, Inc. As of the Effective Date, BSI's executory contract with J.Baker, Inc. ("J.Baker") shall be deemed amended to, inter alia, extend the term of the contract for three years following the Effective Date and, as amended, be assumed by Reorganized BSI. In respect of the $1.8 million Claim of J.Baker, Reorganized BSI shall, on the Effective Date or as soon thereafter as practicable, make a Cash Distribution to J.Baker in the amount of $360,000. Reorganized BSI shall make additional Cash Distributions to J.Baker in the amount of $1,440,000, to be paid in equal monthly installments commencing thirty days after the first payment with interest at a rate equal to J.Baker's borrowing rate, but not to exceed nine percent (9%); provided, however, that no interest shall be payable for the period through the end of Reorganized BSI's 1998 fiscal year; provided, further, however, that the obligation of Reorganized BSI to make the foregoing payments owed to J.Baker shall accelerate and become immediately due and payable should (a) Reorganized BSI enter into a third party transaction which would constitute a change of control or (b) Peter Thorner's employment with Reorganized BSI terminate for any reason. C. Cure Payments At the election of the relevant Debtor, any monetary defaults under each executory contract and unexpired lease to be assumed under the Plan shall be satisfied pursuant to Section 365(b)(1) of the Bankruptcy Code, in one of the following ways: (a) by payment of the default amount in Cash on the Effective Date; (b) by issuance of a Cure Note; or (c) on such other terms as agreed to by the parties to such executory contract or unexpired lease. In the event of a dispute regarding: (i) the amount of any Cure Payments; (ii) the ability of the Debtor that is a party thereto to provide adequate assurance of future performance under the contract or lease to be assumed; or (iii) any other matter pertaining to assumption, the cure payments required by Section 365(b)(1) of the Bankruptcy Code shall be made following the entry of a Final Order resolving the dispute and approving assumption. 87 D. Rejection Damages Bar Date If the rejection by any Debtor, pursuant to the Plan or otherwise, of an executory contract or unexpired lease results in a Claim, then such Claim shall be forever barred and shall not be enforceable against such Debtor or Reorganized Corporation or the properties of either of them unless a proof of claim is filed with the clerk of the Bankruptcy Court and served upon counsel to the Debtors within fifteen (15) days after service of the earlier of (a) notice of the Confirmation Order, (b) other notice that the executory contract or unexpired lease has been rejected, or (c) in the event that any Debtor rejects any executory contract or unexpired lease after the Confirmation Date, within fifteen (15) days of the date of such rejection. E. Executory Contracts and Unexpired Leases Entered into and Other Obligations Incurred After the Petition Date Executory contracts and unexpired leases entered into and other obligations incurred after the Petition Date by any Debtor shall be performed by the Debtor or Reorganized Corporation liable thereunder in the ordinary course of its business. Accordingly, such executory contracts, unexpired leases and other obligations shall survive and remain unaffected by entry of the Confirmation Order. VIII. Conditions To Confirmation And Occurrence Of Effective Date A. Conditions to Confirmation The Plan may not be confirmed unless each of the conditions set forth below is satisfied. Except as provided in section 10.03 of the Plan, any one or more of the following conditions may be waived at any time by the Debtors with the unanimous consent of the Creditors' Committee, the Unofficial Committee and the Bank Group. 1. The Disclosure Statement Order shall have been entered and be a Final Order. 2. The Confirmation Order shall be in form reasonably acceptable to the Debtors, the Creditors' Committee, the Unofficial Committee and the Bank Group. The Confirmation Order shall, among other things, provide that: (a) The Reorganized Corporation shall be deemed to succeed to, by operation of law, all executory contracts or unexpired 88 leases assumed by the Debtors during the Chapter 11 Case (including pursuant to the provisions of the Plan), which contracts and leases shall remain in full force and effect notwithstanding any provision in such contract or lease (including those described in Sections 365(b)(2) and (f) of the Bankruptcy Code) that prohibits assignment or transfer or that enables or requires the termination of such contract or lease; (b) except as expressly provided in the Plan, the Debtors are discharged effective upon the Effective Date from any "debt" (as that term is defined in Section 101(12) of the Bankruptcy Code), and the liability in respect thereof is extinguished completely, whether reduced to judgment or not, liquidated or unliquidated, contingent or noncontingent, asserted or unasserted, fixed or unfixed, matured or unmatured, disputed or undisputed, legal or equitable, known or unknown, or that arose from any agreement of the Debtors entered into or obligation of the Debtors occurred before the Petition Date, or from any conduct of the Debtors prior to the Petition Date, or that arose before the Petition Date, including, without limitation, all interest, if any, on any such debts, whether such interest accrued before or after the Petition Date; (c) a finding by the Bankruptcy Court that the Plan complies with all applicable provisions of the Bankruptcy Code, including that the Plan was proposed in good faith and that the Confirmation Order was not procured by fraud; and (d) except as expressly provided in the Plan, all Interests shall be terminated effective upon the Effective Date. B. Conditions to Occurrence of Effective Date The Effective Date for the Plan may not occur unless each of the conditions set forth below is satisfied. Except as provided in section 10.03 of the Plan, any one or more of the following conditions may be waived at any time by the Debtors with the unanimous consent of the Creditors' Committee, the Unofficial Committee and the Bank Group. 1. The Confirmation Order shall have been entered and be a Final Order. 2. Each Reorganized Debtor's respective Certificate of Incorporation and Amended By-Laws shall have been amended as provided in the Plan. 89 3. Reorganized BI and Reorganized BSI shall each have sufficient Cash on hand to pay the Consummation Costs and make such other timely Distributions of Cash as may be required hereunder. 4. Reorganized BSI shall have established a revolving line of credit or other liquidity facility with a bank or other financial institution in a drawable principal amount of at least $250 million, with terms satisfactory to Reorganized BSI and the lenders under the New Credit Facility, in their sole discretion. 5. The aggregate amount of Allowed General Unsecured Claims and Disputed General Unsecured Claims (i) against BSI (excluding the Bank Group Claim and the Intercompany Claim) shall have been reduced, either through agreement or order of the Bankruptcy Court, to less than $300 million and (ii) against each Debtor other than BI, BSI and BAC (other than the Intercompany Claims, the Bank Group Claim and SPE Claims) shall have been reduced, either through agreement or order of the Bankruptcy Court, to an amount of less than $1 million. 6. Reorganized BSI shall have granted to vendors who provide retail merchandise to Reorganized BSI after the Effective Date, or who have provided merchandise to BSI before the Effective Date which is not paid for as of the Effective Date, a Trade Vendors' Lien to secure payment to such trade vendors of amounts owed by Reorganized BSI. The Trade Vendors' Lien, which shall be held by the Trade Vendors' Collateral Agent, shall be subordinated to the lien securing the New Credit Facility to the satisfaction of the holders of the liens securing the New Credit Facility and shall attach to all of Reorganized BSI's inventory (but not any other assets of Reorganized BSI). If a new lender or group of lenders replaces the lenders under the New Credit Facility, then the Trade Vendors' Lien shall be subordinated to the liens of such replacement lender or lenders. The Trade Vendors' Lien shall terminate on the earliest to occur of (i) two years after the Plan Effective Date, (ii) at the sole option of Reorganized BSI the date on which the ratio of the amount of accounts payable of Reorganized BSI to the amount of Inventory of Reorganized BSI, computed on a cost basis, for any rolling three-month period is more than five percentage points less than such ratio on a comparable store basis for the same period in the prior year, (iii) the consummation of a transaction pursuant to which Reorganized BI or Reorganized BSI merges or otherwise combines with another company or companies, (iv) at the sole option of Reorganized BSI as to any individual trade vendor, at such time as such vendor fails to provide merchandise to Reorganized BSI on terms which are at least as favorable to Reorganized BSI as the 90 credit terms under which such vendor provided merchandise to BSI in the year prior to the Effective Date and (v) at the sole option of Reorganized BSI as to any individual trade vendor that initially provides retail merchandise to Reorganized BSI after the Effective Date, at such time as such vendor fails to provide retail merchandise to Reorganized BSI on terms which are as favorable to Reorganized BSI as the initial credit terms which such vendor provide retail merchandise to Reorganized BSI; provided, however, that any termination by Reorganized BSI of the Trade Vendors' Lien will not be effective until the thirtieth (30th) day after Reorganized BSI gives (a) actual notice to the Trade Vendors' Collateral Agent and (b) (x) in the case of trade vendors generally, notice by publication in The New York Times ------------------ (national edition), of its intent to terminate the Trade Vendors Lien or (y) in the case of an individual trade vendor, actual notice of such termination to the trade vendor whose Trade Vendors' Lien Reorganized BSI proposes to terminate. On or prior to the Exhibit Filing Date, BSI shall file with the Bankruptcy Court the form of all documents which will give rise to the Trade Vendors' Lien pursuant to the Plan. 7. Each of the Creditors' Committee, the Bank Group and the Unofficial Committee have approved in form and substance each of the Exhibits to the Plan, such approval not to be unreasonably withheld. C. Waiver of Conditions to Confirmation and Occurrence of Effective Date Each of the conditions to confirmation of the Plan or to the occurrence of the Effective Date is for the benefit of the Debtors, the Creditors' Committee, the Bank Group and the Unofficial Committee. Other than the requirement that the Disclosure Statement Order and the Confirmation Order must be entered, the requirement that a particular condition be satisfied may be waived in whole or part by the Debtors, with the unanimous consent of the Creditors' Committee, the Bank Group and the Unofficial Committee, without notice and a hearing, and the relevant Debtors' benefits under the "mootness doctrine" shall be unaffected by any provision hereof. D. Effect of Nonoccurrence of the Conditions to Occurrence of Effective Date If each of the conditions to the occurrence of the Effective Date have not been satisfied or duly waived on or before the date which would be the Effective Date, or by such later date as is proposed by the Debtors and approved, after notice and a hearing, by the Court, then upon motion by any party-in-interest made before the time that each of the conditions has been satisfied or duly waived, the Confirmation Order may be vacated by the Court; provided, however, that notwithstanding the filing of such a motion, the 91 Confirmation Order shall not be vacated if each of the conditions to the occurrence of the Effective Date is either satisfied or duly waived before the Court enters an order granting the relief requested in such motion. If the Confirmation Order is vacated pursuant to Section 10.04 of the Plan, the Plan shall be null and void in all respects, and nothing contained in the Plan shall: (a) constitute a waiver or release of any Claims by or against or Interests in the Debtors; or (b) prejudice in any manner the rights of any of the Debtors or of any party in interest, including (without limitation) the right to seek a further extension of the exclusivity periods under Section 1121(d) of the Bankruptcy Code. IX. Retention of Jurisdiction Notwithstanding confirmation of the Plan or occurrence of the Effective Date, the Court shall retain jurisdiction for all purposes permitted under applicable law, including without limitation the following purposes: (a) Determination of the allowability of Claims and Interests upon objection to such Claims or Interests by a Debtor, the Reorganized Corporations, other successors to any of the Debtors, or any other party-in-interest and the validity, extent, priority and nonavoidability of consensual and nonconsensual liens and other encumbrances; (b) Determination of tax liability pursuant to Section 505 of the Bankruptcy Code; (c) Approval, pursuant to Section 365 of the Bankruptcy Code, of all matters related to the assumption, assumption and assignment, or rejection of any executory contract or unexpired lease of any of the Debtors, including, without limitation, assumption and assignment of the Union Square Property; (d) Determination of requests for payment of administrative expenses entitled to priority under Section 507(a)(1) of the Bankruptcy Code, including compensation of parties entitled thereto under Section 330 of the Bankruptcy Code; (e) Resolution of controversies and disputes regarding the interpretation of the Plan; (f) Implementation of the provisions of the Plan and entry of Orders in aid of confirmation and consummation of the Plan including, without limitation, appropriate Orders to protect the Debtors and their successors from actions by creditors and/or Interest holders of the Debtors or any of them and resolving disputes and controversies regarding property of the Estates and the Reorganized Corporations that is subject to restructuring negotiations on and after the Confirmation Date; 92 (g) Modification of the Plan pursuant to Section 1127 of the Bankruptcy Code; (h) Adjudication of any causes of action that arose prior to the Confirmation Date or in connection with the implementation of the Plan, including avoidance actions, brought by a Debtor, Reorganized Corporation, other successors of any of the Debtors as the representative of the Debtors' Estates or a party-in- interest (as a representative of any Debtor's Estate); and (i) Entry of a Final Order closing the Chapter 11 Cases. X. Administrative Bar Date A. General Provisions Except as provided in Section 12.06(b) of the Plan for Administrative Claims of Professionals requesting compensation or reimbursement of expenses and in Section 12.06(c) of the Plan for liabilities incurred by a Debtor in the ordinary course of its business, requests for payment of Administrative Claims must be Filed no later than 30 days after the Effective Date. Holders of Administrative Claims who are required to File a request for payment of such Claims and who do not File such requests by the applicable bar date shall be forever barred from asserting such Claims against the Debtors, the Reorganized Corporations or their respective property. B. Professionals All professionals or other entities requesting compensation or reimbursement of expenses pursuant to Sections 327, 328, 330, 331, 503(b) and 1103 of the Bankruptcy Code for services rendered before the Effective Date (including compensation requested by any Professional or other entity for making a substantial contribution in any Case) shall File an application for final allowance of compensation and reimbursement of expenses no later than 45 days after the Effective Date; provided, however, that any Professional who may receive compensation or reimbursement of expenses pursuant to the Ordinary Course Professionals' Compensation Order may continue to receive such compensation and reimbursement of expenses for services rendered before the Effective Date, without further Bankruptcy Court review or approval, pursuant to the Ordinary Course Professionals' Compensation Order. Notwithstanding anything to the contrary contained in the Ordinary Course Professionals Compensation Order, no Professional subject that Order shall be required to apply to the Bankruptcy Court for compensation and reimbursement of expenses. Objections to applications of Professionals or other entities for compensation or reimbursement of expenses must be Filed no later than 75 days after the Effective Date. All compensation and reimbursement of expenses allowed by the Bankruptcy Court shall be paid to the applicable Professional on or before ten days after an order allowing such fees and expenses becomes a Final Order, or as soon thereafter as practicable. 93 C. Fees and Expenses of Bank Group Subject to the approval of the Bankruptcy Court on appropriate application as set forth in Section 12.06(b) of the Plan, the reasonable fees and expenses of the Bank Group during the course of the Chapter 11 Cases shall be allowed as administrative expenses of BSI, pursuant to 11 U.S.C. (S) 503(b). To the extent that the Bank Group seeks to recover its fees and expenses, the Debtors shall only pay such amounts to the extent that such fees and expenses exceed the amount of the Adequate Protection Payments paid to the Bank Group. D. Fees and Expenses of Unofficial Committee Subject to the approval of the Bankruptcy Court on appropriate application as set forth in Section 12.06(b) of the Plan, the reasonable fees and expenses of the Unofficial Committee during the course of the Chapter 11 Cases shall be allowed as administrative expenses of BSI, pursuant to 11 U.S.C. (S) 503(b). E. Professional Fees and Expenses of Loomis Sayles and Bond Indenture Trustee Subject to the approval of the Bankruptcy Court on appropriate application as set forth in Section 12.06(b) hereof, the reasonable fees and expenses of Loomis Sayles and the Bond Indenture Trustee during the course of these cases shall each be allowed as administrative expenses of the Debtors, pursuant to 11 U.S.C. (S) 503(b), not to exceed, in the aggregate, the amount of $600,000. In the event that the aggregate fees and expenses sought by such professionals exceed the amount of $600,000, such professionals shall receive a Pro Rata share of $600,000. F. Ordinary Course Liabilities Holders of Administrative Claims based on liabilities incurred by a Debtor in the ordinary course of business shall not be required to File any request for payment of such Claims. Such Administrative Claims shall be assumed and paid by the applicable Reorganized Corporation pursuant to the terms and conditions of the particular transaction giving rise to such Administrative Claim, without any further action by the holders of such Claims. XI. Amendments A. Preconfirmation Amendment The Debtors may modify the Plan at any time prior to the entry of the Confirmation Order provided that the Plan, as modified, and this Disclosure Statement pertaining thereto meet applicable Bankruptcy Code requirements. 94 B. Post-confirmation Amendment Not Requiring Resolicitation After the entry of the Confirmation Order, the Debtors may modify the Plan to remedy any defect or omission or to reconcile any inconsistencies in the Plan or in the Confirmation Order, as may be necessary to carry out the purposes and effects of the Plan, provided that: (i) the Debtors obtain approval of the Bankruptcy Court for such modification, after notice and a hearing; and (ii) such modification shall not materially and adversely affect the interests, rights, treatment, or Distributions of any Class under the Plan. C. Post-confirmation Amendment Requiring Resolicitation After the Confirmation Date and before the Effective Date of the Plan, the Debtors may modify the Plan in a way that materially or adversely affects the interests, rights, treatment, or Distributions of a class of Claims or Interests, provided that: (i) the Plan, as modified, meets applicable Bankruptcy Code requirements; (ii) the Debtors obtain Bankruptcy Court approval for such modification, after notice and a hearing; (iii) such modification is accepted by at least two-thirds in amount, and more than one-half in number, of Allowed Claims voting in each class affected by such modification; and (iv) the Debtors comply with Section 1125 of the Bankruptcy Code with respect to the Plan as modified. XII. Committees On the Effective Date, the Creditors' Committee shall be deemed dissolved and the members of the Creditors' Committee shall be deemed released and discharged from all rights and duties arising from or related to the Cases. The Professionals retained by the Creditors' Committee and the members thereof shall not be entitled to compensation or reimbursement of expenses for any services rendered after the Effective Date, except for services rendered and expenses incurred in connection with any applications for allowance of compensation and reimbursement of expenses pending on the Effective Date or Filed after the Effective Date pursuant to Section 12.06(b) of the Plan. Prior to the dissolution of the Creditors' Committee, the Creditors' Committee may appoint a committee of one or more financial representatives to become effective on the Effective Date, whose sole duties shall be to provide directions, on behalf of the trade vendors, to the Trade Vendors' Collateral Agent appointed pursuant to this Plan; provided however, that such appointee or appointees shall serve without right to receive any fees, reimbursement of expenses or other remuneration, directly or indirectly, from the Debtors' estates or the Reorganized Corporations. XIII. Valuation of the Debtors For purposes of the Plan and to assist the creditors in assessing their respective recoveries under the Plan, the Debtors directed its financial advisors, Zolfo Cooper, LLC ("ZC") to estimate the range of enterprise value of Reorganized BI and Subsidiary as of January 30, 1999, the expected consummation date. 95 In developing the estimated range of enterprise value, ZC, analyzed the information set forth in this Disclosure Statement, the exhibits hereto, and other information provided by management. Specifically, ZC considered: (i) the Debtors' historical financial and operating information; (ii) management prepared prospective financial and operating data for the ongoing business of Reorganized BI and Subsidiary, including financial projections through February 3, 2001 included in Exhibit 3 to this Disclosure Statement; (iii) market values of certain publicly traded companies whose operating businesses are believed to be comparable to that of Reorganized BI and Subsidiary; (iv) the selling price, to the extent available, of recently acquired companies whose operating businesses are believed to be comparable to that of Reorganized BI and Subsidiary; (v) general economic and industry conditions; (vi) the terms of the Plan on a consensual basis; and (vii) other information as ZC deemed necessary or appropriate. In performing the valuation, ZC used information provided by management, other firms retained by the Debtors or publicly available information without independent challenge or verification as to their completeness or accuracy. Thus, the range of enterprise value estimated by ZC depends on the Debtors' achieving their financial projections, including their projected revenue and sales growth, improvements in operating margins, earnings and cash flows, management of inventory turns and working capital, expense achievement goals and other elements of the projected financial information (prior to as well as subsequent to the consummation of the Plan). Certain of the projected results are materially better than recent historical results of operations. To the extent that the analysis is dependent upon Reorganized BI and Subsidiary achieving the projections, the analysis must be considered speculative. The analysis contemplates a successful reorganization of the Debtors' business and finances in accordance with the terms of the Plan, the Debtors obtaining exit financing on commercially acceptable terms and many other transactions and conditions as forth in management's financial projections including, but not limited to, the continuity of the present senior management of the Debtors following consummation of the Plan and that the general financial and market conditions as of the expected Consummation Date of the Plan will not differ materially from those conditions prevailing as of the date of this Disclosure Statement. Therefore, no assurance can be given that the projected results will be achieved. As a result of its analyses, discussions and other considerations, ZC estimated that the enterprise value of Reorganized BI and Subsidiary as of the expected Consummation Date of the Plan would be in a range of $205 million to $225 million. ZC based its estimate of the range of reorganized enterprise value of Reorganized BI and Subsidiary on a multiple of normalized EBITDA (earnings before interest, taxes, depreciation and amortization). The reorganized enterprise value represents the estimated going concern value of Reorganized BI and Subsidiary on an unleveraged basis. Based upon the estimated reorganization enterprise value of Reorganized BI and Subsidiary projected embedded debt of approximately $90 million (that portion of the ongoing revolver facility that remains after the seasonal cleanup of the facility); the liquidation of New Notes from the proceeds from certain assets sales with no remaining amount due under the New Notes, and other terms and conditions as set forth in the Plan, the Debtors have employed an assumed range of distributable equity value of approximately $50 million to $65.0 million or approximately $4.94 per share to $6.42 per 96 share of New Common Stock based upon a distribution of 10,125,711 of shares of New Common Stock (if the maximum number of shares of New Common Stock distributable under the Plan of 10,909,090 were issued, the range of distributable equity value would approximate $4.58 to $5.96). For purposes of calculating distributions to be made under the Plan, the Debtors have estimated the aggregate value of Reorganized BI's New Common Stock at approximately $60 million (approximately $5.93 per share of New Common Stock or approximately $5.50 per share if the maximum number of shares of New Common Stock distributable under the Plan of 10,909,090 were issued). The value of an operating business such as the Debtors' is subject to uncertainties and contingencies that are difficult to predict and will fluctuate with changes in factors affecting the financial conditions and prospects of such a business. As a result, the estimate of the reorganization value set forth herein is not necessarily indicative of actual outcomes, which may be significantly more or less favorable than those set forth herein. Because such estimates are inherently subject to uncertainties, neither the Debtors, nor ZC nor any other person assumes responsibility for its accuracy. Estimates of value do not purport to be appraisals or necessarily reflect the values which may be realized if assets are sold. Such valuations reflect computations of the estimated reorganization enterprise value of Reorganized BI and Subsidiary derived through the applications of various valuation techniques and do not purport to reflect or constitute appraisals or estimates of value that may be realized through the sale of any Reorganized Security to be issued pursuant to the Plan in Public or Private markets, to the extent one exists which may be significantly different than the amounts set forth herein, which amounts are based on the estimated reorganization enterprise value used by the Debtors. The valuation of newly issued securities is subject to uncertainties and contingencies, all of which are difficult to predict. Actual market prices of such securities at issuance will depend upon prevailing interest rates, market conditions and prospects, financial and otherwise of the Debtors, including the anticipated initial securities holdings of prepetition creditors some of which may prefer to liquidate their investment rather than hold it on a long-term basis, and other factors which generally influence the price of securities. Actual market prices of such securities may be affected by the Debtors' history in its Chapter 11 cases or by other factors not possible to predict. Many of the analytical assumptions upon which this valuation is based are beyond the Debtors' control and there will be variations between such assumptions and actual facts. These variations may be material. See "Certain Factors to be Considered" for a discussion of various other factors which could materially affect the value of Reorganization Securities distributed pursuant to the Plan. XIV. Estimation of Claims At the outset of these Chapter 11 cases, the Debtors formed a team to evaluate and estimate Claims. Initially, an exhaustive review of the Debtors' legal files was conducted for potential direct and indirect liability to the Debtors' estates. Legal documents relating to the leased properties which the Debtors expected to reject were given especially close scrutiny as were guaranty and indemnity agreements. The Debtors 97 also reviewed debt agreements and their related covenants. After reviewing these documents and after consulting, as necessary, with the Debtors' professionals, the teams determined the liability of the Debtors with respect to Claims relating to each document. The final result of this process was a schedule of estimated Allowed Claims by the Debtors which provided the basis for the classifications in the Plan. XV. Delivery of Distributions Distributions to holders of Allowed Claims will be made by the Disbursing Agent selected by the Debtors (a) to the addresses set forth on the proofs of claims filed by such holder; or (b) if no proof of claim has been filed, to the address reflected in the Debtors' Schedules and Statements of Financial Affairs; or (c) to the addresses set forth in any written notices of transfer of Claim delivered to and actually received by the Debtors, the Claims Agent or the Disbursing Agent. XVI. Undeliverable Distributions If a distribution of Cash is returned to the Debtors or the Disbursing Agent, or if such Distribution is in the form of a check and is not presented for payment within three months after delivery is attempted, or if distribution of Reorganization Securities is returned to the Debtors or the Disbursing Agent after two attempts of delivery, no further distribution will be made unless and until the Debtors or the Disbursing Agent is notified in writing of the Claim holder's then current address, at which time the previously undeliverable distribution(s) will be made to the Claim holder without interest. For the purposes of the Plan, undeliverable Distributions shall include checks sent to the Claim Holders as Distributions, which checks have not been cashed within three months following the date of issuance of such checks. Undeliverable Distributions, including Cash held in connection with the uncashed checks, will remain in the possession of the Disbursing Agent until the earlier of (a) such time when the relevant distribution becomes deliverable or (b) one year after the Effective Date. XVII. Revocation, Withdrawal or Non-Consummation of the Plan Each Debtor may only alter, amend, modify, revoke or withdraw the Plan as the plan of reorganization for such Debtor's Case and the Cases of its subsidiaries with the express unanimous consent of the Creditors' Committee, the Bank Group and the Unofficial Committee. Each Debtor reserves the right to make non-substantive changes in any Plan, which changes may be necessary to facilitate the withdrawal of another Debtor from the Plan. See Section 3.XI hereof entitled "Amendments". Any such revocation or withdrawal by a Debtor shall not affect the Plan as the plan of reorganization of the other Debtors. If a Debtor revokes or withdraws from the Plan: (a) nothing contained in the Plan shall be deemed to constitute a waiver or release of any Claims by or against such Debtor, including (without limitation) the Intercompany Claim or any other claim of one Debtor against another Debtor, or to prejudice in any manner the rights of such Debtor or any persons in any further proceedings involving such Debtor, including (without limitation) objecting to any Intercompany Claim; and (b) any 98 provisions of any Confirmation Order with respect to such Debtor shall be null and void (and such Debtor shall not be benefited by the Confirmation Order) and all such rights of or against such Debtor shall exist as though the Plan had not been filed and no actions taken to effectuate it. If the Debtors withdraw or revoke the Plan, or if the Confirmation Date does not occur, then the plan, any settlement or compromise thereunder, the assumption or rejection of the executory contracts and unexpired leases and any document or agreement executed pursuant to the Plan shall be null and void, and nothing in the Plan shall: (a) constitute a waiver or release of any Claims by or against, or any Interest in, the Debtors; (b) prejudice in any manner the rights of the Debtors or any Person in any further proceedings involving the Debtors; or (c) constitute an admission of any sort by the Debtors or any other Person. SECTION FOUR: VOTING REQUIREMENTS, ACCEPTANCE, ------------ -------------------------------- CONFIRMATION AND CONSUMMATION OF THE PLAN ----------------------------------------- I. General To confirm the Plan, the Bankruptcy Code requires that the Bankruptcy Court make a series of findings concerning the Plan and the Debtors, including that: (i) the Plan classifies Claims and Interests in a permissible manner; (ii) the Plan complies with the applicable provisions of the of the Bankruptcy Code; (iii) the Debtors comply with the applicable provisions of the Bankruptcy Code; (iv) the Debtors have proposed the Plan in good faith and not by any means forbidden by law; (v) the disclosure required by Section 1125 of the Bankruptcy Code has been made; (vi) the Plan has been accepted by the requisite votes of holders of Claims or Interests (except to the extent that "cram-down" is available under Section 1129(b) of the Bankruptcy Code (see Section 4.II.F entitled "Confirmation Without Acceptance of All Impaired Classes ("Cram-down"), (vii) the Plan is feasible and Confirmation will not likely be followed by the liquidation or the need for further financial reorganization of the Debtors; (viii) the Plan is in the "best interests" of all holders of Claims or Interests in an impaired Class by providing to such holders on account of their Claims or Interests property of a value, as of the Effective Date, that is not less than the amount that such holder would receive or retain in a Chapter 7 liquidation, unless each holder of a Claim or Interest in such Class has accepted the Plan (see Section 4.II.H entitled "Best Interests of Creditors"); (ix) all fees and expenses payable under 28 U.S.C. (S) 1930 (relating to bankruptcy fees payable to the clerk of the Bankruptcy Court and the office of the United States Trustee) have been paid or the Plan provides for the payment of such fees on the Effective Date; (x) the Plan provides for the continuation after the Effective Date of all retiree benefits, as defined in Section 1114 of the Bankruptcy Code, at the level established at any time prior to Confirmation pursuant to Section 1114 of the Bankruptcy Code, for the duration of the period that the Debtors have obligated themselves to provide such benefits; and (xi) the Plan Proponents must have disclosed the identity and affiliations of any individual proposed to serve, after confirmation of the Plan, as a director or officer of the Debtors or a successor to the Debtors under the Plan, and the appointment to or continuance in such office by such individual must be consistent with public policy. 99 The Plan constitutes a separate plan of reorganization for each of the Debtors. Accordingly, for the plan to be confirmed for a particular Debtor, the voting requirements described herein must be met for each such Debtor. The Debtors believe that the Plan satisfies all of the statutory requirements of Chapter 11 of the Bankruptcy Code. Certain of these requirements are discussed in more detail below. The Debtors have proposed the Plan in good faith. II. Solicitation, Voting and Requirements A. Eligibility to Vote Pursuant to the Bankruptcy Code, only classes of claims against or equity interests of a debtor that are "impaired" (within the meaning of 1124 of the Bankruptcy Code) under the terms and provisions of a plan of reorganization are entitled to vote to accept or reject a plan. A class is "impaired" if the legal, equitable, or contractual rights attaching to the claims or interests of that class are modified, other than by curing defaults and reinstating maturity or by payment in full in cash. Classes of claims and interests that are not impaired are not entitled to vote on a plan and, under Section 1126(f) of the Bankruptcy Code, are conclusively presumed to have accepted a plan. Therefore, holders of such unimpaired classes are not being solicited. In addition, under 1126(g), classes of claims and interests that receive no distributions are deemed to have rejected the Plan and the votes of such holders will not be solicited. See "Summary of Estimated Distributions With Respect to Classes of Estimated Allowed Claims and Interests" for a summary of the classification and treatment of Claims and Interests under the Plan, as well as a designation of whether each Class is impaired or unimpaired. The holder of a Claim in Classes BI-BANK, BI-GEN, BI-SPE, BSI-CAP, BSI-BANK, BSI-SPE, BSI-GEN, YON-BANK, YON-SPE, YON-GEN, BRU-BANK, BRU-SPE, BRU- GEN, WES-BANK, WES-SPE and WES-GEN is entitled to vote to accept or reject the Plan if (a) such holder's Claim has been scheduled by the Debtors and such Claim is not scheduled as disputed, contingent or unliquidated, or (b) such holder has --- filed a proof of claim on or before April 1, 1996, pursuant to Section 502(a) of the Bankruptcy Code, Bankruptcy Rule 3003 and the Bar Date Order, except where the Debtors have specifically agreed to a late filed proof of claim. Any Claim in the aforesaid Classes as to which an objection has been filed and has not been withdrawn or dismissed is not entitled to vote unless the Bankruptcy Court, ------ pursuant to Bankruptcy Rule 3018(a) and upon application of the holder whose Claim has been objected to, temporarily allows the Claim in an amount that the Bankruptcy Court deems proper solely for the purpose of accepting or rejecting the Plan (See Section 4.II.B entitled "Estimation and Temporary Allowance of Claims," below). A vote may be disregarded if the Bankruptcy Court determines, pursuant to Section 1126(e) of the Bankruptcy Code, that it was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code. 100 B. Estimation and Temporary Allowance of Claims Pursuant to Section 502 of the Bankruptcy Code and Bankruptcy Rule 3018, the Bankruptcy Court may estimate and temporarily allow a Claim for voting and other purposes. The Debtors or holders of particular Claims may seek an order of the Bankruptcy Court temporarily allowing, for voting purposes only, certain Disputed Claims. C. Acceptance Requirements The Bankruptcy Code defines acceptance of a plan by a class of claims as acceptance by creditors that hold at least two-thirds in dollar amount and more than one-half in number of the allowed claims of such class who actually vote for acceptance or rejection of a plan. The vote of a holder of a claim may be disregarded if the bankruptcy court determines, after notice and a hearing, that the acceptance or rejection was not solicited or procured in good faith or in accordance with the provisions of the Bankruptcy Code. D. Transmission of Ballots All record holders of undisputed, Allowed Claims which are impaired (including any Claims that are temporarily Allowed for voting purposes) as of the date the order approving this Disclosure Statement was entered by the Bankruptcy Court are entitled to vote to accept or reject the Plan and may do so by completing the appropriate ballot which is enclosed with this Disclosure Statement. In most cases, each ballot enclosed with this Disclosure Statement has been encoded with the amount of your Claim for voting purposes (if your Claim is a Disputed Claim, this amount may not be the amount ultimately allowed for purposes of distributions under the Plan) and the Debtor and Class to which your Claim relates. See also Section 1.V above entitled "Voting Procedures, Ballots and Voting." PLEASE FOLLOW THE INSTRUCTIONS ACCOMPANYING THE ENCLOSED BALLOT CAREFULLY. VOTING ON THE PLAN BY EACH HOLDER OF AN IMPAIRED CLAIM ENTITLED TO VOTE ON THE PLAN IS IMPORTANT. IF YOU HOLD CLAIMS IN MORE THAN ONE CLASS FOR A PARTICULAR DEBTOR, OR AGAINST MORE THAN ONE DEBTOR, YOU MAY RECEIVE MORE THAN ONE BALLOT. YOU SHOULD COMPLETE SIGN, AND RETURN EACH BALLOT THAT YOU RECEIVE. E. Acceptances Required From Impaired Classes In order for a plan to be confirmed without resort to the "cram-down" provisions of the Bankruptcy Code, each Class of "impaired" Claims and Interests must be determined to have accepted the Plan. As previously mentioned, each Class of "impaired" Claims and Interests will be determined to have accepted the Plan if Creditors and Interest holders who actually vote, accept the plan by votes (i) representing at least two-thirds in amount of Allowed Claims or Interests in such impaired Class and (ii) more than one-half in number of Allowed Claims in such Class. 101 Each of the following Classes of Claims is "impaired" under the Plan, and the Debtors are soliciting acceptances for the Plan from the holders of Claims in these Classes: BI-BANK, BI-GEN, BI-SPE, BSI-CAP, BSI-BANK, BSI-SPE, BSI-GEN, YON-BANK, YON-SPE, YON-GEN, BRU-BANK, BRU-SPE, BRU-GEN, WES-BANK, WES-SPE and WES-GEN. All other Classes are either unimpaired under the Plan (Classes BI- PTY, BAC-PTY, BSI-PTY, BSI-CON, DOS-PTY, MAX-PTY, YON-PTY, BRU-PTY and WES-PTY) and are deemed to have accepted the Plan or will receive no distribution under -- the Plan (Classes, BI-EQT, BAC-GEN, DOS-GEN) and MAX-GEN and are deemed to have rejected the Plan. BAC-EQT, BSI-EQT, DOS-EQT, MAX-EQT, YON-EQT, BRU-EQT and WES-EQT are not entitled to vote to accept or reject the Plan. F. Confirmation Without Acceptance of All Impaired Classes ("Cram-down") In the event that a plan otherwise satisfies the Bankruptcy Code's requirements for confirmation, but one or more classes of Claims or Interests votes to reject the Plan, a debtor has the right to seek confirmation of its plan under the "cram-down" provisions of the Bankruptcy Code. The Debtors intend to exercise their right to "cram-down" the Plan. The Bankruptcy Court can "cram-down" the Plan at the Debtors' request only if at least one impaired Class of Claims (excluding the votes of insiders) in Classes BI-BANK, BI-GEN, BI-SPE, BSI-CAP, BSI-BANK, BSI-SPE, BSI-GEN, YON- BANK, YON-SPE, YON-GEN, BRU-BANK, BRU-SPE, BRU-GEN, WES-BANK, WES-SPE and WES- GEN has accepted the Plan and all other requirements of Section 1129(a) of the Bankruptcy Code are satisfied. In addition, the Bankruptcy Court must find that, as to each impaired Class that has not accepted the Plan, the Plan does not "discriminate unfairly" and is "fair and equitable" with respect to such non-accepting Class. Because Classes BI-EQT, BAC-GEN, DOS-GEN and MAX-GEN are deemed to have rejected the Plan, the Bankruptcy Court will have to determine at the Confirmation Hearing whether the Plan is fair and equitable to, and does not discriminate unfairly against, Classes BI-EQT, BAC-GEN, DOS-GEN and MAX-GEN and any rejecting impaired Class of Claims. A plan does not "discriminate unfairly" within the meaning of the Bankruptcy Code if the dissenting class will receive value relatively equal to the value given to all other similarly situated classes. A plan of reorganization is "fair and equitable" within the meaning of the Bankruptcy Code if no class receives more than it is legally entitled to receive for its claims or interests. 102 A plan is "fair and equitable" as to a class of secured claims that rejects a plan if the plan provides (a)(i) that the holders of claims included in the rejecting class retain the liens securing those claims whether the property subject to those liens is retained by the debtors or transferred to another entity, to the extent of the allowed amount of such claims, and (ii) that each holder of a claim of such class receives on account of that claim deferred cash payments totaling at least the allowed amount of that claim, of a value, as of the effective date of the plan, equal to at least the value of the holder's interest in the estate's interest in such property; or (b) for the realization by such holders of the indubitable equivalent of such claims. If a class of unsecured claims rejects a plan, the plan may still be confirmed as long as the plan provides (a) for each holder of a claim included in the rejecting class to receive or retain on account of that claim property that has a value, as of the effective date of the plan, equal to the allowed amount of such claim, or (b) that the holder of any claim or any interest that is junior to the claims of such class will not receive or retain on account of such junior claim or interest any property at all. If a class of interests rejects a plan, the plan may still be confirmed as long as the plan provides (a) that each holder of an interest included in the rejecting class receive or retain on account of that interest property that has a value, as of the effective date of the plan, equal to the greatest of the allowed amount of any fixed liquidation preference to which such holder is entitled, any fixed redemption price to which such holder is entitled, or the value of such interest, or (b) that the holder of any interest that is junior to the interest of such class will not receive or retain under the plan on account of such junior interest any property at all. Holders of Classes BI-EQT, BAC-GEN, DOS-GEN and MAX-GEN will not receive or retain any property under the Plan, and are therefore deemed to have rejected the Plan pursuant to Section 1126(g) of the Bankruptcy Code. Accordingly, the Debtors intend to seek confirmation of the Plan pursuant to the "cram-down" provisions of Section 1129(b) of the Bankruptcy Code. The Debtors further believe that the Plan satisfies the requirements of Section 1129(b) since the aforementioned Class will not receive any property under the Plan. G. Feasibility of the Plan The Debtors believe that, if they meet their current financial projections, they will be able to perform their obligations under the Plan and continue to operate their businesses without further financial reorganization or liquidation. In connection with confirmation of the Plan, the Bankruptcy Court will have to determine that the Plan is feasible pursuant to Section 1129(a)(11), which means that confirmation of the Plan is not likely to be followed by the liquidation or the need for further financial reorganization of the Debtors. To support their belief in the Plan's feasibility, the Debtors have prepared financial projections for fiscal years 1998 through 2000, which projections are set forth in Exhibit 3 to this Disclosure Statement. 103 THE PROJECTIONS WERE NOT PREPARED WITH A VIEW TOWARD COMPLIANCE WITH THE GUIDELINES ESTABLISHED BY THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS. FURTHERMORE, THE PROJECTIONS HAVE NOT BEEN AUDITED BY THE DEBTORS' INDEPENDENT CERTIFIED ACCOUNTANTS. THE PROJECTIONS ARE BASED UPON A VARIETY OF ASSUMPTIONS, WHICH ARE SUBJECT TO BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND CONTINGENCIES, MANY OF WHICH ARE BEYOND THE CONTROL OF THE DEBTORS. CONSEQUENTLY, THE PROJECTIONS SHOULD NOT BE REGARDED AS A REPRESENTATION OR WARRANTY BY THE DEBTORS, OR ANY OTHER PERSON, THAT THE PROJECTIONS WILL BE REALIZED. ACTUAL RESULTS MAY VARY FROM THOSE PRESENTED IN THE PROJECTIONS. SEE SECTION ENTITLED "CERTAIN FACTORS, TO BE CONSIDERED - --- PROJECTED FINANCIAL INFORMATION. H. Best Interests of Creditors To confirm the Plan over the objections of dissenting holders of Claims and Interests, the Bankruptcy Court must also independently determine that the Plan is in the "best interests" of all dissenting holders of Claims and Interests impaired under the Plan. Under the "best interests" test, the Bankruptcy Court must find that the Plan provides to each dissenting holder of an impaired Claim or Interest a recovery of a value at least equal to the value, as of the Effective Date, of the distribution that each such holder would receive were the Debtors liquidated under Chapter 7 of the Bankruptcy Code. As demonstrated in the liquidation analysis attached as Exhibit 5 to this Disclosure Statement, the Debtors believe that a liquidation of the Debtors' assets would produce lower recoveries for Persons seeking payment of Administrative Claims and holders of Priority Tax Claims and no recovery for the holders of Unsecured Claims. To calculate the distribution that members of each impaired Class of Claims and Interests would receive if the Debtors were liquidated under Chapter 7, the dollar amount generated from a liquidation would first be determined. The amount of liquidation value available to Unsecured Creditors would be reduced, first, by the Claims of Secured Creditors to the extent of the value of their collateral and, second, by the costs and expenses of liquidation, as well as by other administrative expenses and costs of both the Chapter 7 cases and the Chapter 11 Cases. Costs of liquidation under Chapter 7 of the Bankruptcy Code would include the compensation of a trustee, as well as of counsel and other professionals retained by the trustee, asset disposition expenses, all unpaid expenses incurred by the Debtors in the Chapter 11 Cases (such as compensation of attorneys, financial advisors and accountants) that are allowed in the Chapter 7 cases, and claims arising from the Debtors' operations during the pendency of the Chapter 11 cases. Once the court ascertains the recoveries in liquidation of secured Creditors and priority claimants, it must then determine what General Unsecured Creditors would receive out of the available proceeds. These recoveries are then compared with the value of the distributions offered to Classes of Allowed Claims and Interests under the Plan. The following chart depicts recoveries under the Plan and a hypothetical liquidation: 104
Liquidation Estimated Plan Recovery Recovery(3) ($ in thousands) Allowable Claims Percentage (2) Percentage ------------------ ------------------ ------------------ All Debtors DIP BORROWINGS $103,344 100% 100% CHAPTER 11 ADMINISTRATIVE CLAIMS 17,124 100% 100% Bank Claims 96,000 75.1% 29.0% SPE Claims 11,742 43.7% 36.2% Bradlees, Inc. BI-PTY $0 0% 0% BI-GEN 264,833 0% 0% BI-EQT(5) N/A N/A N/A Bradlees Administrative Co., Inc. BAC-PTY $0 0% 0% BAC-GEN 0 0% 0% BAC-EQT(5) N/A N/A N/A Bradlees Stores, Inc. BSI-PTY $3,290 100% 0% BSI-CAP 560 100% 0% BSI-GEN(6) 253,090 14.5% 1% BSI-CON(4) 1,000 N/A N/A BSI-EQT(5) N/A N/A N/A Dostra Realty Co., Inc. DOS-PTY $0 0% 0% DOS-GEN 0 0% 0% DOS-EQT(5) N/A N/A N/A Maximedia Services, Inc. MAX-PTY $0 0% 0% MAX-GEN 0 0% 0% MAX-EQT(5) N/A N/A N/A New Horizons of Yonkers, Inc. YON-PTY $0 0% 0% YON-GEN 0 0% 0% YON-EQT(5) N/A N/A N/A New Horizons of Bruckner, Inc. BRU-PTY $0 0% 0% BRU-GEN 0 0% 0% BRU-EQT(5) N/A N/A N/A New Horizons of Westbury, Inc. WES-PTY $0 0% 0% WES-GEN 0 0% 0% WES-EQT(5) N/A N/A N/A
Note 1 -Estimated Allowable Claims Estimated Allowed Claims represents the Debtors' best estimate of the amount of prepetition obligations that would be allowed in each of the Respective Debtors under a plan of reorganization. There can be no assurance, however, that such estimates will prove accurate. The estimated amount of Allowed Claims does not reflect adjustments within Claim Classes for reductions in asset values due to liquidation. Under a liquidation scenario substantial amounts of additional Claims could be expected to be filed, resulting from rejection of unexpired leases and executory contracts, employee severance and other obligations that would arise from the liquidation, which amounts could be material. See Exhibit 5, "Liquidation Analysis". 105 Note 2 - Percentage Plan Recovery Plan Recovery Percentages represent the estimated recovery percent by Class of estimated Allowed Claims. See "Summary of Estimated Distributions with Respect to Classes of Estimated Allowed Claims and Interests". Note 3 - Liquidation Recovery Percentage Liquidation Recovery Percentages are based on the estimated recoveries by Class of estimated Allowed Claims under a Chapter 7 liquidation scenario. See Exhibit 5, "Liquidation Analysis". Note 4 - Convenience Claim In accordance with Sections 2.07 and 6.05 of the Plan, certain claimants may elect Convenience Claim treatment, reducing their Claim in General Unsecured Classes to $500 and receiving full payment in Cash. The Debtors estimate that approximately $1.0 million in cash payments will be made for Claims which elect or are deemed to elect Convenience Claim treatment. If the Debtors were liquidated under Chapter 7 of the Bankruptcy Code, no Claims would be allowed as Convenience Claims and such Claims would be treated under the respective General Unsecured Claim Classes. Note 5 - Equity Claims Under both the Plan and a liquidation scenario, allowed interest claims are not expected to receive a recovery. Note 6 - BSI-GEN Exclusive of the SPE Deficiency Claim and related recovery. Conclusion In summary, the Debtors believe that a chapter 7 liquidation of the Debtors would result in substantial diminution in the value to be realized under the Plan by holders of Claims because of, among other factors; (a) the failure to realize the maximum value of the Debtors' assets as a going concern, (b) additional administrative expenses involved in the appointment of a trustee, attorneys, accountants and other professionals to assist in the Chapter 7 liquidation of the estate, (c) the loss of certain tax benefits and potential incurrence of additional tax liabilities in the event of liquidation, (d) additional expenses and Claims, (e) potential litigation for inter-Debtor Claims or preference actions, and (f) substantial time which would elapse prior to creditors receiving any distribution against their respective Claims. Consequently, the Debtors believe that the Plan, which provides for the continuation of the Debtors' businesses, will provide a substantially greater ultimate return to holders of Allowed Claims in all Classes of all Debtors than would a liquidation. 106 III. Certain Factors To Be Considered The holder of an impaired Claim should consider carefully the following risk factors as well as all of the other information contained in this Disclosure Statement, including the Plan and other exhibits hereto, before deciding whether to vote to accept or reject the Plan. The formulation of a plan of reorganization is the principal purpose of a Chapter 11 case. The Plan sets forth the means for satisfying the holders of Claims against the Debtors. The reorganization of the Debtors under the proposed Plan will preserve jobs for over 10,000 people currently employed by the Debtors and will avoid the potentially adverse impact of a liquidation on the thousands of trade vendors, other suppliers of goods and services and lessors of the Debtors. A. Settlements Embodied in the Plan The Plan contains various debtor-creditor and inter-creditor settlements that are reflected in the relative recoveries of the creditor groups and that are designed to achieve a global resolution of these Chapter 11 Cases. The Plan is premised upon settlement, rather than litigation of these disputes. The Plan represents, in effect, a linked series of concessions by creditors in separate classes of Claims. In proposing the Plan, the Debtors intend to offer a non-litigation alternative to creditors in the context of the reorganization of the Debtors' businesses. The Debtors believe that settlement of these disputes is the best way to ensure a prompt resolution of the Chapter 11 Cases. They further believe that although litigation may produce somewhat different absolute and relative recoveries from those embodied in the Plan, such litigation may not increase the values to be distributed under the Plan and may not be finally resolved for years, thus delaying distributions to creditors and will be costly to the Estates. Thus, the settlement of the following disputes is the cornerstone of the Plan: (i) Any disputes regarding the validity and amount of the Intercompany Claim. (ii) Any disputes regarding preferential transfer and fraudulent transfer claims, including the amount of the potential preference claims of BSI against persons that sold merchandise to BSI (or that factored invoices from such vendors to BSI). 107 B. Risk to Unsecured Creditors and Holders of Interests in the Event of Subsequent Liquidation or Financial Reorganization Upon consummation of the Plan, Reorganized BI and Reorganized BSI will have a significant amount of debt on their balance sheets and the financial obligations borne by Reorganized BSI, as compared to its ability to generate cash flow, could impair its ability to respond appropriately to changing economic or market conditions. In addition, forecasting sales and operating results during the Chapter 11 Cases has been difficult, and the Debtors have revised their business plan and financial projections downward on several occasions during the course of the Chapter 11 Cases. Moreover, the success of the Plan also depends upon the ability of BSI to continue to obtain merchandise on reasonable credit terms. Although the Debtors' management believes that (a) the Debtors will meet their current financial projections, and most important, their sales and EBITDA projections for the next several months, and (b) the confirmation of the Plan is not likely to be followed by a liquidation, or the need for further financial reorganization, of Reorganized BI or Reorganized BSI, there can be no assurance that such liquidation will not occur or that the need for such financial reorganization will not arise. Under the Plan, substantially all the assets of Reorganized BSI will be pledged to secure new borrowings under the New Credit Facility. Accordingly, after consummation of the Plan, if Reorganized BSI and Reorganized BI were to be liquidated or if the need for a further financial reorganization were to arise, in the opinion of the Debtors and their financial advisors, the unencumbered assets of Reorganized BSI probably would be insufficient to provide the holders of (i) unsecured claims against BSI with a significant recovery and (ii) equity interests in Reorganized BI with any recovery. Such holders of unsecured Claims against, or interests in, Reorganized BSI and Reorganized BI might include holders of Allowed Claims that are entitled to, but have not yet received, Reorganization Securities under the Plan. Post-consummation trade credit of Reorganized BSI will be secured by a subordinate lien on BSI's inventory and hence would be paid off before general unsecured claims are paid to the extent that the lien held by the trade vendors has value. C. Factors Affecting the Value of the New Common Stock and Lack of an Established Market The following additional matters should be considered in evaluating the Plan, particularly with respect to the value of the New Common Stock and the Warrants, the reorganization value of BSI, the liquidation analysis, and the financial projections. (See "Section Four entitled VOTING REQUIREMENTS, ACCEPTANCE, CONFIRMATION AND CONSUMMATION OF THE PLAN. -- D. Best Interest of Holders of Claims and Interests; -- E. Liquidation Analysis; -- F. Reorganization Value; and -- G. Feasibility of the Plan".) 1. Matters Affecting Trading ------------------------- There is no assurance that an active market will exist for trading the New Common Stock or the Warrants. No trading market currently exists for the New 108 Common Stock or the Warrants. The Debtors will use all reasonable efforts to have the New Common Stock listed on a national exchange. The New Common Stock will be issued pursuant to the Plan to prepetition creditors, some of whom may prefer to liquidate their New Common Stock rather than to hold it on a long-term basis. Accordingly, it is anticipated that the market, to the extent one exists, may be volatile. Moreover, while the Plan was developed based upon an estimated range of possible values of the price per share of New Common Stock, such valuation was not an estimate of the prices at which the New Common Stock may trade in the market, and the Debtors have not attempted to make any such estimate in connection with the development of the Plan. No assurance can be given as to the market price that will prevail following the Effective Date. On the Effective Date, holders of Bank Group Claims will be issued New Common Stock representing approximately 48.5% of the voting stock of Reorganized BI based on the Debtors' estimate of Allowed Claims. A large amount of shares of New Common Stock will also be distributed on the Effective Date to holders of Allowed BSI-GEN claims. The issuance of substantial amounts of New Common Stock on the Effective Date may result in a low market price for the New Common Stock for some time following the Effective Date and may restrict the marketability of the New Common Stock. Sales of or offers to sell a substantial number of the shares of the New Common Stock could affect adversely the market for and price of the New Common Stock. 2. Dividends --------- Reorganized BI does not anticipate that any dividends will be paid with respect to the New Common Stock in the near term. The projections contemplate no payment of dividends through fiscal year 2000. (See "IX. VOTING REQUIREMENTS, ACCEPTANCE AND CONFIRMATION OF THE PLAN. -- G. Feasibility of the Plan.") D. Projected Financial Information The financial projections included in this Disclosure Statement are dependent upon the successful implementation of the Debtors' Business Plan and the reliability of the assumption contained therein. These projections reflect numerous assumptions, including confirmation and consummation of the Plan in accordance with its terms, the anticipated future performance of Reorganized BSI, industry performance, general business and economic conditions and other matters, most of which are beyond the control of Reorganized BI and Reorganized BSI and some of which may well not materialize. In addition, unanticipated events and circumstances occurring subsequent to the preparation of the projections may affect the actual financial results of Reorganized BSI. Therefore, the actual results achieved throughout the period covered by the projections will vary from the projected results. The variations may be material. 109 E. Competition Reorganized BSI will be subject to the risk generally related to businesses operating in a highly competitive business. As a result, Reorganized BSI will be subject to continued competitive pressure from regional and national competitors as such competitors open new stores and strive to gain market share. F. Dilution and Risk of Actual Distributions Being Less Than Estimates A substantial amount of time may elapse between the Effective Date and the receipt of total Distributions under the Plan for certain Classes. Also, if there are substantial Disputed Claims in any particular Class, the Distribution made in respect of Allowed Claims in such Class on the Initial Distribution Date (which will occur on or shortly after the Effective Date for all Classes) may be small compared to the ultimate Distribution to be received by the holder of such Claim over time as Additional Quarterly Distributions. The Distributions and recoveries set forth herein are based on the Debtors' estimate of Allowed Claims against each Debtor. The Debtors project that the Claims asserted against them will be resolved in and reduced to an amount that approximates the Debtors' estimates. There can be no assurance that any of such estimates will prove accurate. Therefore, the estimates set forth herein could significantly differ from the actual Distributions made under the Plan. The risk that actual Distributions will differ from the Debtors' estimates set forth herein is particularly applicable to General Unsecured Claims Classes by reason of the nature of the Claims filed in those Classes (i.e., many disputed, contingent and unliquidated Claims) in comparison to Classes that contain Claims for funded debt where there are few, if any, Disputed Claims. Also, the Debtors reserve the right to object to the amount of classification of any Claim. Thus, the estimates set forth in this Disclosure Statement cannot be relied upon by any creditor whose Claim is subject to a successful objection. Any such creditor may not receive the estimated Distributions set forth herein. Additionally, in respect of holders of Bond Claims, the Indenture Trustee under the Indenture has the right under the terms of such Indenture to liquidate New Warrants to pay its fees and expenses received for Distribution to such holders. The Indenture Trustee for the holders of Bond Claims has estimated that its aggregate costs and expenses will be approximately $________ (it being understood that such estimate is not a guarantee of or limitation on the total amount of expenses which may accrue). Such liquidation of New Warrants could be made at a time when few holders of New Warrants would exist. Therefore, such Indenture Trustee may need to sell more shares of New Warrants at a lower price than the market price that might exist if all shares of New Warrants were fully distributed under the Plan and such shares were more widely held. See "Risk Factors to be Considered--Lack of Established Market for the Reorganization Securities; Volatility" and "Plan of Reorganization--Plan Negotiations--Valuation of the Debtors." Any such liquidation would reduce or eliminate Distributions to such holders from the estimated amounts set forth herein. 110 G. Other Factors ------------- Management of the Debtors believes that the Plan does not provide Distribution, which are sufficient to assure retention of the management of Reorganized BI. For this reason, the Debtors intend, subject to appropriate authorization from the Board of Directors of the Debtors, to apply to the Bankruptcy court for approval of an emergence bonus payable in Cash. IV. Compliance With Securities Laws Certain creditors of the Debtors will receive Reorganization Securities pursuant to the Plan. Section 1145 of the Bankruptcy Code provides certain exemptions from the securities registration requirements of the federal and state securities laws with respect to the Distribution of Reorganization Securities pursuant to the Plan. A. Issuance of Reorganization Securities Section 1145 of the Bankruptcy Code exempts the original issuance of securities under a plan of reorganization from registration under the Securities Act of 1933, as amended (the "Securities Act") and state law. Under Section 1145, the issuance of the Reorganization Securities is exempt from registration if three principal requirements are satisfied: (1) the securities must be issued by a debtor, its successor, or an affiliate participating in a joint plan of reorganization with the debtor; (2) the recipients of the securities must hold a claim against the debtor or such affiliate, an interest in the debtor or such affiliate; and (3) the securities must be issued entirely in exchange for the recipient's claim against or interest in the debtor or such affiliate; or "principally" in such exchange and "partly" for cash or property. The Debtors believe that the issuance of the Reorganization Securities under the Plan will satisfy all three conditions because: (a) the issuance of such securities are expressly contemplated under the Plan; (b) the recipients are holders of "Claims" against the Debtors; and (c) the recipients would obtain the Reorganization Securities in exchange for their pre-petition Claims. Notwithstanding the foregoing, the Debtors intend to register the New Common Stock and New Warrants with the Securities and Exchange Commission, for the reasons described below. V. Subsequent Transfers of Reorganization Securities The Reorganization Securities to be issued pursuant to the Plan may be freely transferred by most recipients following Distribution under the Plan, and all the re-sales and subsequent transactions in the Reorganization Securities are exempt from federal and state securities registration under federal and state securities laws, unless the holder is an "underwriter" with respect to such securities. Section 1145(b) of the Bankruptcy Code defines four types of "underwriters:" (i) persons who purchase a claim against, an interest in, or a claim for an administrative expense against the debtor with a view to distributing any security received in exchange for such a claim or interest; 111 (ii) persons who offer to sell securities offered under a plan for the holders of such securities; (iii) persons who offer to buy such securities for the holders of such securities, if the offer to buy is: (a) with a view to distributing such securities; or (b) made under a distribution agreement; and (iv) a person who is an "issuer" with respect to the securities, as the term "issuer" is defined in Section 2(11) of the Securities Act. Under Section 2(11) of the Securities Act, an "issuer" includes any person directly or indirectly controlling or controlled by the issuer, or any person under direct or indirect common control of the issuer. To the extent that persons who are deemed to be "underwriters" receive Reorganization Securities or other securities under the Plan, re-sales by such persons would not be exempted by Section 1145 of the Bankruptcy Code from registration under the Securities Act or other applicable law. Persons deemed to be underwriters, however, may be able to sell such securities without registration pursuant to the provisions of Rule 144 under the Securities Act, which permits the public sale of securities received pursuant to the Plan by "underwriters," subject to the availability to the public of current information regarding the issuer and to volume limitations and certain other conditions. Whether or not any particular person would be deemed to be an "underwriter" with respect to any Reorganization Securities or other security issued pursuant to the Plan would depend upon various facts and circumstances applicable to that person. Accordingly, the Debtors express no view as to whether any particular person receiving Distributions under the Plan would be an "underwriter" with respect to any Reorganization Security or other security to be issued pursuant to the Plan. GIVEN THE COMPLEX AND SUBJECTIVE NATURE OF THE QUESTION OF WHETHER A PARTICULAR HOLDER MAY BE AN UNDERWRITER, THE DEBTORS MAKE NO REPRESENTATION CONCERNING THE RIGHT OF ANY PERSON TO TRADE IN THE REORGANIZATION SECURITIES. THE DEBTORS RECOMMEND THAT POTENTIAL RECIPIENTS OF REORGANIZATION SECURITIES CONSULT WITH THEIR OWN COUNSEL CONCERNING WHETHER THEY MAY FREELY TRADE SUCH SECURITIES WITHOUT COMPLIANCE WITH THE SECURITIES ACT. VI. Certain Federal Income Tax Consequences The following is a general summary of certain material federal income tax consequences of the Plan to the Debtors and their creditors. This summary does not discuss all aspects of federal income taxation that may be relevant to the Debtors or to a particular creditor in light of its personal investment circumstances or to certain creditors subject to special treatment under the federal income tax laws (for example, life insurance companies, tax-exempt organizations, foreign corporations and individuals who are not citizens or residents of the United States) and does not discuss any aspects of state, local 112 or foreign taxation. The summary does not discuss the tax consequences to the current stockholders of BI who will not receive any distribution under the Plan in exchange for their equity interests and, accordingly, such stockholders should consult their own tax advisors regarding their ability to recognize a loss for tax purposes and any other tax consequences to them of the Plan. This summary is based upon the Internal Revenue Code of 1986, as amended (the "Tax Code"), the Treasury regulations (including temporary regulations) promulgated thereunder, judicial authorities and current administrative rulings, all as in effect on the date hereof and all of which are subject to change (possibly with retroactive effect) by legislation, administrative action or judicial decision. Moreover, due to a lack of definitive judicial or administrative authority and interpretation, substantial uncertainties exist with respect to various tax consequences of the Plan as discussed herein. FOR THE FOREGOING REASONS, CREDITORS ARE URGED TO CONSULT WITH THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES (FEDERAL, STATE, LOCAL AND FOREIGN) TO THEM OF THE PLAN. THE DEBTORS ARE NOT MAKING ANY REPRESENTATIONS REGARDING THE PARTICULAR TAX CONSEQUENCES OF THE CONFIRMATION AND CONSUMMATION OF THE PLAN AS TO ANY CREDITOR, NOR ARE THE DEBTORS OR THEIR COUNSEL RENDERING ANY FORM OF LEGAL OPINION AS TO SUCH TAX CONSEQUENCES. No private letter rulings have been or are expected to be requested from the Internal Revenue Service (the "Service") concerning any of the tax matters described herein, and there can be no assurance that the Service will not challenge the positions taken or expected to be taken by the Debtors with respect to any of the issues addressed herein or that a court would not sustain such a challenge. A. Federal Income Tax Consequences to the Debtors In general, the Debtors do not expect to recognize a significant amount of taxable income, and accordingly do not expect to incur any substantial tax liability as a result of implementation of the Plan. Moreover, the Debtors expect that in the future an amount of their potential taxable income will be able to be sheltered by existing net operating loss carryovers despite reductions and limitations on the utilization of such tax attributes caused by the issuance of substantial amounts of stock and warrants to creditors, as discussed below. 1. Cancellation of Indebtedness ---------------------------- Under general tax principles, each Debtor would realize cancellation of debt ("COD") income to the extent that such Debtor pays a creditor pursuant to the Plan an amount of consideration in respect of a Claim against such Debtor that is worth less than the amount of such Claim. For this purpose, the amount of consideration paid to a creditor generally would equal the amount of cash or the fair market value of the Reorganization Securities or other property paid to such creditor. However, because each Debtor will be in a bankruptcy case at the time the COD income is realized, under Tax 113 Code section 108 the relevant Debtor will not be required to include COD income in gross income, but rather will be required to reduce certain of its tax attributes by the amount of COD income so excluded. A portion of the Intercompany Claim that is not an Allowed Claim was previously contributed to the capital of BSI (subject to confirmation of the Plan). BI and BSI intend, for U.S. federal income tax purposes, to treat such contribution as a nonrecognition event, but there can be no assurance that such treatment will be respected. Under the general rules of Tax Code section 108, the required attribute reduction would be applied first to reduce the relevant Debtor's net operating loss carry-forwards ("NOLs") to the extent of such NOLs, with any excess excluded COD income applied to reduce certain other tax attributes. Tax Code section 108(b)(5) provides an election pursuant to which the relevant Debtor can elect to apply the required attribute reduction to first reduce the basis of its depreciable property to the extent of such basis, with any excess applied next to reduce its NOLs and then certain other tax attributes. 2. Limitation on Net Operating Losses ---------------------------------- BI will experience an "ownership change" (within the meaning of Tax Code section 382) on the Effective Date as a result of the issuance of New Common Stock of Reorganized BI to holders of the BSI-GEN Claims, the Bank Group Claims and the SPE Claims. As a result, Reorganized BI's ability to use any pre-Effective Date NOL's, capital loss carryovers and certain net unrealized built-in losses (as defined in section 382(h) of the Tax Code) to offset its income in any post-Effective Date taxable year (and in the portion of the taxable year of the ownership change following the Effective Date) to which such a carryover is made, generally (subject to various exceptions and adjustments, some of which are described below) will be limited to the sum of (i) a regular annual limitation (prorated for the portion of the taxable year of the ownership change following the Effective Date), (ii) the amount of the "recognized built- in gain" for the year which does not exceed the excess of its "net unrealized built-in gain" over previously recognized built-in gains (as the quoted terms are defined in section 382(h) of the Tax Code) and (iii) any carryforward of unused amounts described in (i) and (ii) from prior years. The regular annual limitation will generally be equal to the product of (x) the value of the stock of Reorganized BI (increased to reflect the increase in value of Reorganized BI resulting from the surrender of the creditors' Claims under the Plan) and (y) the "long-term tax-exempt rate" (as defined in Tax Code section 382(f)). In September 1998, the long-term tax-exempt rate was 5.88 %; however, the rate in effect on the Effective Date may be different from the September 1998 rate. The loss carryovers will be subject to further limitations if Reorganized BI experiences additional future ownership changes or if it does not continue its business enterprise for at least two years following the Effective Date. 3. Alternative Minimum Tax ----------------------- For purposes of computing the Debtors' regular tax liability, all of the taxable income recognized in a taxable year generally may be offset by the carryover of tax attributes (to the extent permitted under, among other sections, sections 269, 382, and 114 383 of the Tax Code). Although all of the Debtors' regular tax liability for a given year may be reduced to zero by virtue of their tax attributes, the Debtors in any given year may be subject to the alternative minimum tax ("AMT"). The AMT imposes a tax equal to the amount by which 20% of a corporation's alternative minimum taxable income ("AMTI") exceeds the corporation's regular tax liability. AMTI is calculated pursuant to specific rules in the Tax Code which eliminate or limit the availability of certain tax deductions and other beneficial allowances and which include as income certain amounts not generally included in computing regular tax liability, but, significantly, do not include discharge of indebtedness income excluded under section 108 of the Tax Code. Of particular importance to the Debtors is that in calculating AMTI, only 90% of a corporation's AMTI may be offset by net operating losses. Thus, in any year for which either Debtor may be subject to the AMTI, such Debtor may not totally eliminate all tax liability on recognized income through the use of net operating losses. Any AMTI would be taxable at an effective rate of 2% (i.e., 10% of the 20% AMT tax rate). Deductions of Accrued Interest ------------------------------ To the extent a portion of the consideration issued to creditors pursuant to the Plan is attributable to accrued and unpaid interest on their Claims, the relevant Debtor should be entitled to interest deductions in the amount of such accrued interest, to the extent it has not already deducted such amounts. B. Federal Income Tax Consequences to Holders of Claims The federal income tax consequences of the implementation of the Plan to a creditor will depend upon a number of factors, including whether the creditor is deemed to have participated in an exchange for federal income tax purposes, and, if so, whether such exchange transaction constitutes a tax-free recapitalization or a taxable transaction, whether the creditor's present debt claim constitutes a "security" for federal income tax purposes, the type of consideration received by the creditor in exchange for its Allowed Claim, and whether the creditor reports the income on the accrual basis. 1. Tax Consequences to Holders of Claims Generally ----------------------------------------------- When a holder of an Allowed Claim receives a distribution of cash or, unless as part of a reorganization in whole or in part, other property pursuant to the Plan in satisfaction of such Allowed Claim, it will realize income, gain or loss measured by the difference between (i) the cash and the fair market value of the property received (or in the case of property that constitutes a debt instrument for U.S. federal income tax purposes the issue price of such debt instrument as determined under sections 1273 and 1274 of the Tax Code) and (ii) its adjusted tax basis in the Claim. Subject to the market discount rules discussed below, this income, gain or loss will be a capital gain or loss if the Allowed Claim was a capital asset in the holder's hands. Such gain or loss will be long-term capital gain or loss if such holder's holding period for the Claim surrendered exceeded one year at the time of the exchange. If the distribution is in satisfaction of accounts or other receivables acquired by a holder of an Allowed Claim in the ordinary course of its business for the performance of services or for the sale of inventory, any 115 income, gain or loss recognized will be characterized as ordinary income, gain or loss. Moreover, if a holder of a Claim has claimed an ordinary deduction for the worthlessness of the Claim under Tax Code section 166 in a prior taxable year, any income or gain realized will be taxed as ordinary income to the extent of the ordinary deduction. 2. Holders of BI-GEN Claims ------------------------ The issuance of the New Warrants to holders of the BI-GEN Claims pursuant to the Plan will each constitute an exchange for federal income tax purposes. The federal income tax consequences of such exchange will depend on whether the obligations underlying such Claims and the New Warrants both constitute "securities." The term "security" is not defined in the Tax Code or applicable Regulations and has not been clearly defined by court decisions. Whether an instrument constitutes a "security" for federal income tax purposes depends upon all of the facts and circumstances including the term of the instrument, security for the instrument, the degree of subordination of the instrument, the ratio of debt-to-equity of the issuer, the riskiness of the business of the issuer and the negotiability of the instrument. Generally (as described above), a holder of the BI-GEN Claims will realize gain or loss on the exchange in an amount equal to the difference between (i) the "amount realized" in respect of such Claim and (ii) the holder's tax basis in his existing claim (other than any claim in respect of accrued interest). For these purposes, the "amount realized" will be equal to the fair market value of the New Warrants on the Effective Date. If the obligations underlying the BI-GEN Claims and the New Warrants for which they are exchanged pursuant to the Plan both constitute securities, the exchange of such Claims should qualify as a "recapitalization." In such case, the entire amount of the holder's realized gain or loss would not be recognized for federal income tax purposes and the initial tax basis of the New Warrants would generally be equal to the adjusted tax basis of the obligations underlying the Claims surrendered (other than any claims in respect of accrued interest). Moreover, if the obligations underlying the BI-GEN Claims are securities but the New Warrants are not for purposes of section 368 of the Tax Code, it is possible that, if one of the exchanges discussed below constitutes a recapitalization, the exchange of the BI-GEN Claims for the New Warrants may be considered part of such recapitalization, with the same results as described in the second sentence of this paragraph. 3. Holders of the BSI-GEN Claims ----------------------------- Because the majority of BSI-GEN Claims relate to claims of trade creditors, which type of obligations are not generally considered "securities," it is likely that the federal income tax consequences to holders of the BSI-GEN Claims of receiving New Common Stock in Reorganized BI in exchange for such Claims will be that such holders recognize gain or loss on the exchange. In such case, a holder's tax basis in the New Common Stock will be equal to the fair market value of such stock on the Effective Date. 116 If, however, any such exchanged obligations were to constitute securities, the federal income tax consequences to holders of such Claims could be similar to those described with respect to the SPE Claims relating to the receipt of New Common Stock of Reorganized BI. As with the SPE Claims, holders are urged to consult their own tax advisors. 4. Holders of the Bank Group Claims -------------------------------- The federal income tax consequences to holders of the Bank Group Claims of receiving New Notes and New Common Stock of Reorganized BI in exchange for such Claims will depend on whether the obligations underlying the Bank Group Claims constitute securities. With respect to any such obligation that does not constitute a security, the holder thereof will recognize gain or loss on the exchange and such holder's tax basis in the New Notes and the New Common Stock, respectively, will be equal to the issue price of such notes (determined under sections 1273 and 1274 of the Tax Code) and the fair market value of such stock on the Effective Date. However, with respect to any such exchanged obligations that constitute securities, the exchange for New Common Stock and New Notes should qualify as a "recapitalization" for federal income tax purposes. In such case, holders of such Claims may recognize gain, but not loss, on receipt of the Cash, New Notes and New Common Stock. If the New Notes are not securities, the amount of the holders' gain realized on the exchange will not exceed the issue price of the New Notes and the amount of the Cash received. If the New Notes do constitute securities, then no gain should be recognized on the exchange unless Cash is received, and then only to the extent of such Cash. In the case of a recapitalization, if the New Notes are securities, the holder's initial tax basis, respectively, in the New Notes and the New Common Stock will be equal to such holder's adjusted tax basis in the obligations underlying the Bank Group Claims, allocated between the New Notes and the New Common Stock in accordance with their relative fair market values on the Effective Date. If on the other hand the New Notes are not securities, the holder's initial tax basis in the New Common Stock will be equal to such holder's adjusted tax basis in the obligations underlying the Bank Group Claims increased by the amount of gain recognized on the exchange and such holder's initial basis in the New Notes will be equal to the issue price. 5. Holders of the SPE Claims -------------------------- The federal income tax consequences to holders of the SPE Claims of receiving New Notes and New Common Stock in Reorganized BI in exchange for such Claims will depend, in part, on whether the obligations underlying such Claims constitute securities. If the obligations underlying such claims do not constitute securities, then a holder of such claims will recognize gain or loss on the exchange and such holder's tax 117 basis, respectively, in the New Notes and New Common Stock will be equal to the issue price of such notes and the fair market value of such stock on the Effective Date. If, on the other hand, such exchanged obligations constitute securities, it is possible that the exchange for New Notes and New Common Stock would be deemed for federal income tax purposes to be a "recapitalization" of BSI, whereby holders of the SPE Claims would be deemed to receive stock and notes in BSI, followed by a tax-free exchange of such BSI stock for New Common Stock and in certain circumstances, a tax-free exchange of such BSI notes for New Notes. In such case, the holders of the SPE Claims would not recognize gain or loss on the exchange. A holder's initial tax basis in the New Common Stock and New Notes would generally be equal in the aggregate to the holder's adjusted tax basis in the obligations underlying the SPE Claims surrendered (other than any such claims in respect of accrued interest). It is also possible that the exchange with respect to the New Common Stock, but not with respect to the New Notes, would qualify as a "recapitalization" of BSI followed by a tax-free exchange of the BSI stock for the New Common Stock, and the exchange with respect to the New Notes would cause a holder of the SPE Claims to recognize gain or loss on the receipt of New Notes. In short, there is no definitive authority indicating whether an exchange may qualify as a "recapitalization" and a tax-free exchange where a creditor exchanges a security evidencing the obligation of one entity (BSI) for a security evidencing the obligation of an entity that is the 100 percent parent (Reorganized BI) of the first entity (BSI). Thus, as is touched upon by the foregoing, there are at least several possible alternative characterizations of the exchange of the obligations underlying the SPE Claims for New Notes and New Common Stock for federal income tax purposes, which alternative characterizations could result in varying federal income tax consequences. Moreover, in light of the uncertainty, the tax consequences of any of such alternative characterizations could vary in one or more respects from the consequences articulated above. Accordingly, holders of the SPE Claims are advised to consult their own tax advisors concerning the tax consequences of the satisfaction of their Claims with New Common Stock and New Notes. 6. Other Classes of Creditors -------------------------- Under the Plan, other classes of creditors will (i) be paid in full on the Effective Date, (ii) have their Allowed Claims reinstated pursuant to their original terms, (iii) be paid in full the amount of their Allowed Claims over time with interest, or (iv) receive no consideration for their Allowed Claims. The tax consequences to such creditors of receiving, having a right to receive, or not receiving payments under the Plan will depend on, among other things, whether the holder of the Allowed Claim acquired it in exchange for goods or services provided to any of the Debtors or acquired it from a third party, whether the holder is a cash or accrual method taxpayer, whether the right to receive payments under the Plan constitutes a new property right separate from the original Claim and whether the Claim is held as a capital asset. Accordingly, other 118 classes of creditors should consult their tax advisors in determining the specific tax consequences of the Plan to them. 7. Market Discount --------------- To the extent (i) the instruments constituting creditors' Allowed Claims are "market discount bonds" for federal income tax purposes, (ii) the creditors acquired such instruments other than at original issue, and (iii) the creditors holding such instruments would recognize gain upon consummation of the transactions contemplated by the Plan, all or a portion of such gain may be recharacterized as ordinary interest income for federal income tax purposes, up to the amount of accrued "market discount" on the relevant instrument. In general, a "market discount bond" is any bond with an original term in excess of one year, other than bonds acquired by the holder upon their original issue, for which the holder's tax basis immediately after the holder acquired the bond was less than the face amount of the bond (or, in the case of a bond having OID, its issue price as increased by the amounts of undistributed OID accrued by previous holders) by more than a de minimis amount. Instruments (including contracts) the terms of which provide for payment over one year after issuance may constitute "bonds" for these purposes. Upon disposition of a market discount bond, including the receipt of cash, New Common Stock of Reorganized BI, New Notes, New Warrants or other consideration, the holder must treat any gain recognized as ordinary interest income to the extent of such holder's "accrued market discount," provided such holder has not previously elected to include market discount in gross income on a current basis. A holder's "accrued market discount" at the time of a disposition is determined by first calculating the aggregate market discount on the relevant bond, and then calculating the portion of such market discount that has accrued to the date of disposition. The aggregate market discount is the excess of the bond's face amount (or, if the bond had original issue discount, its revised issue price) over the holder's tax basis immediately after acquisition of the bond (generally, the amount paid therefor). The portion of such market discount that has accrued on the date of disposition is a fraction, the numerator of which is the number of days after the date the holder acquired the bond up to (and including) the date of disposition, and the denominator of which is the number of days after the date the holder acquired the bond up to (and including) the original maturity date. Alternatively, a holder may elect to accrue market discount with respect to a particular bond on a constant yield to maturity basis, similar to that used in accruing OID for federal income tax purposes, which will result in smaller amounts of accrued market discount prior to maturity of the bond. Because the distribution of New Common Stock to holders of the BSI-GEN Claims, the Bank Group Claims and the SPE Claims may qualify as an exchange under Tax Code section 351 as well as a recapitalization, it is possible that Treasury regulations authorized but not yet promulgated will provide that holders of such Claims 119 will be required to recognize accrued but unrecognized market discount upon such exchange to the extent of gain realized. Each holder of an Allowed Claim hereunder should consult its own tax advisor regarding the market discount rules and the elections available to such holder under these rules. 8. Accrued Interest ---------------- To the extent that the provisions of the Plan do not provide for any portion of the New Notes or the New Warrants to be paid in consideration of accrued interest, the holders of any Allowed Claims that receive New Notes or New Warrants and that have not previously included in income accrued but unpaid interest attributable to such Claims may recognize an ordinary loss on the exchange of such Claims for such New Notes or New Warrants, as the case may be. However, to the extent that all or any portion of the New Notes or New Warrants, as the case may be, received by such a holder in exchange for its Allowed Claim, are considered for federal income tax purposes to be attributable to accrued but unpaid interest (not previously included in income) attributable to such Claim, such creditor would recognize ordinary income in the amount of such interest, whether or not the creditor realizes an overall gain or loss upon the surrender of its Claim or whether such gain or loss is recognized. Under the Plan, some New Common Stock may be distributed to holders of Allowed Claims with respect to their Claims for accrued interest. Holders of such Claims for accrued interest which have not previously included such accrued interest in taxable income will be required to recognize ordinary income equal to the fair market value of the New Common Stock received with respect to such Claims for accrued interest. Holders of such Claims for accrued interest which have included such accrued interest in taxable income generally may take an ordinary deduction to the extent that such Claim is not fully satisfied under the Plan (after allocating the distribution between principal and accrued interest), even if the underlying Claim is held as a capital asset. The tax basis of the New Common Stock received in exchange for such Claims for accrued interest will be the fair market value of such New Common Stock on the Effective Date. 9. Original Issue Discount ----------------------- The Tax Code and regulations thereunder provide rules for the inclusion of "original issue discount" ("OID") income by holders of debt instruments. Under such rules, the Cure Notes would be issued with OID because their "stated redemption price at maturity" exceeds their "issue price." A debt instrument's "stated redemption price at maturity" includes all payments required to be made over the term of the instrument other than payments of interest which are actually and unconditionally payable at fixed, periodic intervals of one year or less (called qualified stated interest). Because no interest will be due on the Cure 120 Notes and, therefore, no qualified stated interest, the "stated redemption price at maturity" of the Cure Notes will be their principal amount. The "issue price" of Cure Notes will be such Cure Notes' "imputed principal amount." The "imputed principal amount" of the Cure Notes will be the sum of the present values of all payments due under the instruments, discounted from the date of payment to the issue date at the appropriate "applicable Federal rate" published by the Service. Holders of the Cure Notes will generally be required to include in gross income an amount equal to the sum of the "daily portions" of such OID for all days during the taxable year in which it holds the debt instrument. These daily portions will be determined based on a constant yield method by allocating to each day during the taxable year a pro rata portion of the OID on such debt instrument which is attributable to the "accrual period" in which such day is included. The amount of the OID that is attributable to each full accrual period will be the product of the Cure Note's adjusted issue price at the beginning of such accrual period, multiplied by the yield to maturity of the debt instrument (as determined by semi-annual compounding). The adjusted issue price of the Cure Notes will initially be equal to their issue price. Thereafter, the adjusted issue price at the beginning of any subsequent accrual period will be equal to the adjusted issue price at the beginning of the preceding accrual period, plus the amount of OID allocable to the preceding accrual period, minus any payments of amounts other than qualified periodic payments made during the preceding accrual period. VII. Alternatives To Confirmation Of The Plan The Debtors believe that the Plan affords the holders of Claims the potential for the greatest realization on the Debtors' assets and, thus, is in the best interests of such holders. If the Plan is not confirmed, however, alternatives include (a) alternative plans of reorganization or (b) liquidation of the Debtors under Chapter 7 or Chapter 11. VIII. Alternative Plans of Reorganization If the Plan is not confirmed, the Debtors, or if the Bankruptcy Court did not grant further extensions of the Debtors' exclusive period in which to solicit votes for a plan of reorganization, any other party-in-interest in the Chapter 11 cases could propose a different plan or plans. Such plans might involve either a reorganization and continuation of the Debtors' businesses, or an orderly liquidation of its assets or a combination of both. The Debtors do not believe that an alternative plan could provide greater recoveries than those provided in the Plan. Moreover, the filing of alternative plans would result in additional costs in administering the Chapter 11 cases and significant delays in making distributions. IX. Liquidation Under Chapter 7 or Chapter 11 Another alternative to confirmation of the Plan would be liquidation of the Debtors' assets under either Chapter 7 or Chapter 11 of the Bankruptcy Code. If the 121 Chapter 11 Cases are converted to Chapter 7 cases, a trustee would be elected or appointed to liquidate the assets of the Debtors. The Debtors' liquidation value is approximately $125 million less than their reorganization value. Moreover, in a liquidation under Chapter 7, before creditors receive any distribution, additional administrative expenses would be incurred as a result of the appointment of a trustee, and attorneys, accountants and other professionals to assist the trustee. These costs and expenses would exhaust the value that would remain for holders of Unsecured Claims after distributions are made to holders of Secured Claims. The Debtors' assets may also be liquidated pursuant to a Chapter 11 plan of liquidation. This would allow the sale of the Debtors' assets to occur in a more orderly fashion over an extended period of time, which could result in larger recoveries than under a Chapter 7 liquidation. While the fees and expenses associated with the appointment of a Chapter 7 trustee and his professionals would be avoided, substantial administrative expenses would be incurred as a result of the asset sales and a continuation of the Chapter 11 cases. In addition, distributions under a Chapter 11 plan of liquidation would be delayed substantially. The Debtors' liquidation analysis, a copy of which is attached as Exhibit 5 to this Disclosure Statement, assumes a liquidation under Chapter 7 of the Bankruptcy Code. The analysis takes into account the nature and realizable value of their assets in a Chapter 7 liquidation, and the extent to which these assets are subject to liens and security interests. Based upon this analysis, it is clear that a liquidation of the Debtors' assets would produce far less value available for distribution to Creditors than Creditors are receiving under the Plan. 122 CONCLUSION ---------- This Disclosure Statement was approved by the Bankruptcy Court after notice and a hearing. The Bankruptcy Court has determined that this Disclosure Statement contains information adequate to permit holders of Claims to make an informed judgment about the Plan. Such approval, however, does not mean that the Bankruptcy Court recommends either acceptance or rejection of the Plan. THE DEBTORS BELIEVE THAT CONFIRMATION OF THE PLAN IS DESIRABLE. The Plan provides for an equitable and early distribution to most classes of Creditors. Any alternative to confirmation of the Plan, such as liquidation or attempts by another party-in-interest to file a Plan, would result in significant delays and additional administrative expenses. Moreover, as described in "VOTING REQUIREMENTS, ACCEPTANCE, CONFIRMATION AND CONSUMMATION OF THE PLAN -- 'Best Interests of Creditors'," the Debtors believe that their Creditors will receive greater and earlier recoveries under the Plan than those that could be achieved in liquidation. FOR THESE REASONS, THE DEBTORS URGE YOU TO RETURN YOUR BALLOT ACCEPTING THE PLAN. Dated: Braintree, Massachusetts September __, 1998 Bradlees Stores, Inc., New Horizons of Yonkers, Inc., Bradlees, Inc., Bradlees Administrative Co., Inc., Dostra Realty Co., Inc., Maximedia Services, Inc., New Horizons of Bruckner, Inc., and New Horizons of Westbury, Inc., Debtors and Debtors- in-Possession By: -------------------------- Name: Peter Thorner Title: Chairman and Chief Executive Officer 123 EX-2.2 3 FORM OF INDENTURE EXHIBIT 2.2 ----------------------------------------------------- INDENTURE dated as of [ ], 1999 between BRADLEES STORES, INC., as Issuer, BRADLEES, INC., and [ ], as Trustee ----------------------------------------------------- DB DRAFT 12/18/98 TABLE OF CONTENTS ARTICLE 1.................. DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION........................................... 2 SECTION 1.1 Definitions; Construction......................................................................... 2 SECTION 1.2 Compliance Certificates and Opinions.............................................................. 8 SECTION 1.3 Form of Documents Delivered to Trustee............................................................ 9 SECTION 1.4 When Securities Disregarded....................................................................... 9 SECTION 1.5 Conflict with Trust Indenture Act................................................................. 10 SECTION 1.6 Execution in Counterparts......................................................................... 10 SECTION 1.7 Effect of Headings and Table of Contents.......................................................... 10 SECTION 1.8 Successors and Assigns............................................................................ 10 SECTION 1.9 Severability Clause............................................................................... 10 SECTION 1.10 Benefits of Indenture............................................................................. 10 SECTION 1.11 GOVERNING LAW..................................................................................... 10 SECTION 1.12 Legal Holidays.................................................................................... 10 SECTION 1.13 No Recourse Against Others........................................................................ 11 SECTION 1.14 Notices........................................................................................... 11 ARTICLE 2.................. THE NOTES......................................................................................... 12 SECTION 2.1 Title and Terms................................................................................... 12 SECTION 2.2 Execution, Authentication, Delivery and Dating.................................................... 13 SECTION 2.3 Temporary Notes................................................................................... 13 SECTION 2.4 Registration; Registration of Transfer and Exchange............................................... 14 SECTION 2.5 Mutilated, Destroyed, Lost and Stolen Notes....................................................... 15 SECTION 2.6 Payments; Interest and Principal Rights Preserved................................................. 16 SECTION 2.7 Persons Deemed Owners............................................................................. 17 SECTION 2.8 Cancellation; Purchase by the Issuer.............................................................. 17 SECTION 2.9 Dating of Notes................................................................................... 17 SECTION 2.10 CUSIP Numbers..................................................................................... 17 SECTION 2.11 Parity and Ranking of Notes....................................................................... 17 SECTION 2.12 Book Entry........................................................................................ 17 ARTICLE 3.................. REDEMPTION OF NOTES............................................................................... 18 SECTION 3.1 Mandatory Redemption of Notes..................................................................... 18 SECTION 3.2 Optional Redemption of Notes...................................................................... 18 SECTION 3.3 Delivery of Notices, Certificates and Opinions.................................................... 18 SECTION 3.4 Redemption of and Payment on Notes................................................................ 19 SECTION 3.5 Notes Redeemed in Part............................................................................ 20
SECTION 3.6 Cancellation of Notes............................................................................. 20 ARTICLE 4.................. CONCERNING THE TRUSTEE............................................................................ 20 SECTION 4.1 Duties and Responsibilities of Trustee; During Default; Prior to Default.......................... 20 SECTION 4.2 Certain Rights and Duties of Trustee.............................................................. 21 SECTION 4.3 Trustee Not Responsible for Recitals, Etc......................................................... 23 SECTION 4.4 Trustee and Others May Hold Notes................................................................. 23 SECTION 4.5 Monies Held by Trustee or Paying Agent............................................................ 23 SECTION 4.6 Compensation of Trustee and Its Lien.............................................................. 23 SECTION 4.7 Right of Trustee to Rely on Officer's Certificates and Opinions of Counsel........................ 24 SECTION 4.8 Persons Eligible for Appointment as Trustee....................................................... 24 SECTION 4.9 Conflicting Interests; Resignation and Removal of Trustee; Appointment of Successor............... 24 SECTION 4.10 Acceptance of Appointment by Successor Trustee.................................................... 26 SECTION 4.11 Merger, Conversion or Consolidation of Trustee.................................................... 26 SECTION 4.12 Preferential Collection of Claims Against Issuer.................................................. 26 SECTION 4.13 Maintenance of Offices and Agencies............................................................... 27 SECTION 4.14 Trustee Risk...................................................................................... 29 ARTICLE 5.................. HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ISSUER.................................................. 29 SECTION 5.1 Issuer to Furnish Trustee Names and Addresses of Holders.......................................... 29 SECTION 5.2 Preservation of Information; Communications to Holders............................................ 29 SECTION 5.3 Reports by Trustee................................................................................ 30 SECTION 5.4 Reports by Issuer and BI.......................................................................... 30 ARTICLE 6.................. COVENANTS......................................................................................... 30 SECTION 6.1 Payment of Notes.................................................................................. 30 SECTION 6.2 Corporate Existence............................................................................... 30 SECTION 6.3 Compliance Certificate; Notice of Default......................................................... 31 SECTION 6.4 Impairment of Security Interest................................................................... 31 SECTION 6.5 Amendments to Security Documents.................................................................. 31 SECTION 6.6 Reports of Holders................................................................................ 31 ARTICLE 7.................. SUCCESSOR CORPORATION; MERGER, CONSOLIDATION AND SALE OF ASSETS 32 SECTION 7.1 Merger, Consolidation and Sale of Assets.......................................................... 32 SECTION 7.2 Successor Corporation Substituted................................................................. 32
ARTICLE 8.................. DEFAULT........................................................................................... 32 SECTION 8.1 Events of Default................................................................................. 32 SECTION 8.2 Acceleration...................................................................................... 33 SECTION 8.3 Collection of Indebtedness by Trustee; Trustee May Prove Debt..................................... 34 SECTION 8.4 Application of Proceeds........................................................................... 34 SECTION 8.5 Other Remedies.................................................................................... 35 SECTION 8.6 Restoration of Rights on Abandonment of Proceedings............................................... 35 SECTION 8.7 Limitations on Suits by Noteholders............................................................... 35 SECTION 8.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of Default........................... 36 SECTION 8.9 Control by Noteholders............................................................................ 36 SECTION 8.10 Waiver of Defaults................................................................................ 37 SECTION 8.11 Unconditional Right of Holders to Receive Principal and Interest.................................. 37 SECTION 8.12 Undertaking for Costs............................................................................. 37 SECTION 8.13 Trustee May File Proofs of Claim.................................................................. 37 ARTICLE 9.................. CONVERSION OF NOTES............................................................................... 38 SECTION 9.1 Conversion Privilege.............................................................................. 38 SECTION 9.2 Exercise of Conversion Privilege.................................................................. 38 SECTION 9.3 Fractional Interests.............................................................................. 39 SECTION 9.4 Conversion Price.................................................................................. 40 SECTION 9.5 Adjustment of Conversion Price; Notice of Adjustments............................................. 40 SECTION 9.6 Continuation of Conversion Privilege in Case of Reclassification, Change, Merger, Consolidation or Sale of Assets................................................................................... 44 SECTION 9.7 Notice of Certain Events.......................................................................... 45 SECTION 9.8 Taxes on Conversion............................................................................... 46 SECTION 9.9 BI to Provide Stock............................................................................... 46 SECTION 9.10 Disclaimer of Responsibility for Certain Matters.................................................. 47 SECTION 9.11 Return of Funds Deposited for Redemption of Converted Notes....................................... 47 SECTION 9.12 Registrar and Paying Agent........................................................................ 47 ARTICLE 10................. SATISFACTION AND DISCHARGE........................................................................ 48 SECTION 10.1 Defeasance of Notes............................................................................... 48 SECTION 10.2 Satisfaction and Discharge of the Indenture....................................................... 49 SECTION 10.3 Application of Trust Money........................................................................ 50
SECTION 10.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for One Year.......................... 50 ARTICLE 11................. AMENDMENTS, SUPPLEMENTS AND WAIVERS............................................................... 50 SECTION 11.1 Without Consent of Holders........................................................................ 50 SECTION 11.2 With Consent of Holders........................................................................... 51 SECTION 11.3 Compliance with Trust Indenture Act............................................................... 52 SECTION 11.4 Revocation and Effect of Consents................................................................. 52 SECTION 11.5 Notation on or Exchange of Notes.................................................................. 53 SECTION 11.6 Trustee To Sign Amendments, Etc................................................................... 53 ARTICLE 12................. COLLATERAL AND SECURITY DOCUMENTS................................................................. 53 SECTION 12.1 Collateral and Security Documents................................................................. 53 SECTION 12.2 Release of Lien................................................................................... 53 SECTION 12.3 Recording, Certificates and Opinions.............................................................. 54 SECTION 12.4 Authorization of Actions to Be Taken by the Trustee Under the Security Documents.................. 54 SECTION 12.5 Authorization of Receipt of Funds by the Trustee Under the Security Documents..................... 55 SECTION 12.6 Trustee's Disclaimer.............................................................................. 55 SECTION 12.7 Release upon Termination of the Issuer's Obligations.............................................. 55 ARTICLE 13................. GUARANTEE......................................................................................... 55 SECTION 13.1 Guarantee......................................................................................... 55 SECTION 13.2 Guarantee Subordinated to Credit Facility Guarantee............................................... 56 SECTION 13.3 Liquidation, Dissolution, Bankruptcy.............................................................. 56 SECTION 13.4 Default on Credit Facility Guarantee.............................................................. 57 SECTION 13.5 When Distribution Must Be Paid Over............................................................... 57 SECTION 13.6 Relative Rights................................................................................... 57 SECTION 13.7 Rights of Trustee and Paying Agent................................................................ 57 SECTION 13.8 Trustee Entitled to Rely.......................................................................... 57 SECTION 13.9 Trustee to Effectuate Subordination............................................................... 58 SECTION 13.10 Trustee not Fiduciary for Holders of the Credit Facility Guarantee................................ 58 SECTION 13.11 Execution and Delivery of Guarantee............................................................... 58 SECTION 13.12 Limitation of BI's Liability...................................................................... 58
EXHIBIT A FORM OF NOTE INDENTURE, dated as of [ ], 1999, among Bradlees Stores, Inc., a Massachusetts corporation, as reorganized pursuant to the Plan described below (together with its successors and assigns, the "Issuer"), [ ], a New York banking corporation (the "Trustee") and Bradlees, Inc., a Massachusetts corporation, as reorganized pursuant to the Plan (together with its successors and assigns, "BI"). W I T N E S S E T H: WHEREAS, the Issuer and certain of its Affiliates filed a voluntary petition (Case Nos. 95 B 42777 through 95 B 42784 (BRL)) (the "Bankruptcy Proceeding") under Chapter 11 of the Bankruptcy Code on June 23, 1995 with the United States Bankruptcy Court Southern District of New York (the "Bankruptcy Court"); WHEREAS, the Bankruptcy Court confirmed the First Amended Joint Plan of Reorganization of Bradlees Stores, Inc. and Certain Affiliates Under Chapter 11 of the Bankruptcy Code on November 17, 1998 (the "Plan"); WHEREAS, the Plan contemplates the issuance of the Notes (as hereinafter defined) hereunder to certain of the Issuer's pre-petition creditors (together with certain other consideration provided for in the Plan) in exchange for relinquishment by such creditors of their claims filed in connection with the Bankruptcy Proceeding; WHEREAS, as contemplated by the Plan, the Notes issued hereunder shall be a full recourse obligation of the Issuer and shall be secured by a first priority Lien on the Yonkers Property and the Union Square Property and the Proceeds of the conversion of the Yonkers Property and the Union Square Property, as described hereunder and in the Security Documents (as hereinafter defined); WHEREAS, BI has duly authorized the full and unconditional guarantee on an unsecured basis by BI of the Issuer's due and punctual payment of the principal of and interest on the Notes and any other amounts payable on the Notes, whether at maturity, by declaration of acceleration, upon redemption or otherwise; WHEREAS, all acts necessary (i) to make this Indenture a valid and binding agreement and instrument for the security of the Notes, in accordance with its and their terms and (ii) to make the Notes, when executed by the Issuer and authenticated and delivered by the Trustee, valid and binding obligations of the Issuer, have been done, and the Issuer has duly authorized the execution and delivery of this Indenture to secure the Notes and to provide for the authentication and delivery thereof by the Trustee; NOW, THEREFORE, THIS INDENTURE WITNESSETH, that, for and in consideration of the premises and of the covenants continued herein, it is mutually covenanted and agreed, for the benefit of the parties hereto and the equal and proportionate benefit of all Noteholders, as follows: DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION SECTION 1.1 Definitions; Construction. ------------------------- (a) For all purposes of this Indenture capitalized terms used herein shall have the meanings set forth below. For purposes of this Indenture, except as otherwise expressly provided or unless the context otherwise requires: "Acceleration Notice" has the meaning specified in Section 8.2. "Affiliate" means, with respect to any Person, any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control," when used with respect to any specified Person, means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. "Authenticating Agent" shall mean any Person acting as Authenticating Agent hereunder pursuant to Section 4.13. "Authorized Agent" shall mean any Paying Agent, Authenticating Agent or Security Registrar or other agent appointed by the Trustee in accordance with this Indenture to perform any function that this Indenture authorizes the Trustee or such agent to perform. "Authorized Representative" means, with respect to any Person, the officer or officers authorized to act on behalf of such Person by its Board of Directors or any other governing body of such Person in matters relating to the Notes and this Indenture. "Authorized Signatory" shall mean any officer of the Trustee or any other individual who shall be duly authorized by appropriate corporate action on the part of the Trustee to authenticate Notes. "Bankruptcy Code" means the Bankruptcy Reform Act of 1978, as amended, as codified under Title 11 of the United States Code, 11 U.S.C. (S)(S) 101 et -- seq., and the Bankruptcy Rules promulgated thereunder, as the same may be in - --- effect from time to time. "Bankruptcy Court" shall have meaning specified in the recitals hereto. "Bankruptcy Law" means Title 11 of the United States Code, or any similar Federal or state law for the relief of debtors. "Bankruptcy Proceeding" shall have meaning specified in the recitals hereto. 2 "BI" has the meaning specified in the introductory paragraph hereof. "Board of Directors", when used with respect to a corporation, shall mean either the board of directors of the corporation, or any committee of that board duly authorized to act for it hereunder. "Board Resolution" shall mean a copy of a resolution certified by the Secretary or an Assistant Secretary of the Issuer to have been adopted by the Board of Directors of the Issuer and to be in full force and effect on the date of such certification, and delivered to the Trustee. "Business Day" means any day other than a Saturday, a Sunday or a day on which banking institutions in New York, New York, or in the city and State where the Trustee's Corporate Trust Office is located, are authorized or obligated by law, executive order or governmental decree to be closed. "Collateral" means, collectively, all of the property and assets that are from time to time subject to the Lien of any of the Security Documents. "Conversion Price" has the meaning specified in Section 9.4. "Conversion Shares" has the meaning specified in Section 9.5(k). "Corporate Trust Office" means the principal office of the Trustee at which any particular time corporate trust business of the Trustee shall be administered, which at the date hereof is [ ], or such other office as may be designated by the Trustee to the Issuer and each Noteholder. "Credit Facility Guarantee" means the indebtedness represented by the guarantee by BI of the Obligations of the Borrower (each as defined in the New Credit Facility) under the New Credit Facility. "Custodian" means any receiver, trustee, assignee, liquidator or similar official under the Bankruptcy Law. "Date of Conversion" has the meaning specified in Section 9.2. "Depository" means DTC, together with any Person succeeding thereto by merger, consolidation or acquisition of all or substantially all of its assets, including substantially all of its securities payment and transfer operations. "Distribution Date" has the meaning specified in Section 9.5(k). "Dollars" means the lawful currency of the United States of America. "DTC" means The Depository Trust Company, having a principal office at 55 Water Street, New York, New York 10041-0099. 3 "Equity Offering" shall mean an offering for cash by BI of its common stock, other than offerings to officers, directors, employees or consultants pursuant to the Plan or pursuant to any compensation, incentive or benefit plan or arrangement adopted by BI. "Events of Default" has the meaning specified in Section 8.1 hereof. "`ex' date" has the meaning specified in Section 9.5(f). "Exchange Act" means the United States Securities Exchange Act of 1934, as amended, and the rules and regulations of the SEC promulgated thereunder. "Expiration Date" has the meaning specified in Section 9.5(e). "GAAP" means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar function of comparable stature and authority within the accounting profession), or in such other statements by such other entity as may be in general use by significant segments of the U.S. accounting profession, which are applicable to the circumstances as of the date of determination. "Global Note" means any global security in registered form representing all or a portion of the Notes. "Guarantee" means the guarantee by BI of the Guarantee Obligations, as provided in Article 13. "Guarantee Obligations" has the meaning specified in Section 13.1. "Indenture" means this instrument as amended or supplemented from time to time pursuant to the terms hereof. "Issue Date" means the date the Notes are issued pursuant to this Indenture. "Issuer" means Bradlees Stores, Inc., a Massachusetts corporation, together with its successors and assigns. "Issuer Request" and "Issuer Order" mean, respectively, a written request or order signed in the name of the Issuer by its Authorized Representative and delivered to the Trustee. "Last Sale Price" has the meaning specified in Section 9.3. "Leasehold Mortgage" means the Leasehold Mortgage and Security 4 Agreement from New Horizons and Bradlees to the Trustee, on behalf of the Holders, dated as of ________, 1998, as the same may be amended from time to time in accordance with its terms. "Lien" means any lien, mortgage, deed of trust, pledge, security interest, charge or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof and any agreement to give any security interest). "Maturity Date" means the date, as set forth on the face of the Notes, on which the Notes will mature. "Mortgagee" and "Mortgagor" have the meanings specified in the Leasehold Mortgage. "Net Proceeds" means, as appropriate, (i) the proceeds of an Equity Offering minus all costs of such Equity Offering or (ii) the proceeds of the sale of the Yonkers Property or the Union Square Property minus all costs of such sale. For purposes of clause (ii) hereof, "Net Proceeds" shall be deemed to be all proceeds required to be paid to the Mortgagee upon a sale of the Yonkers Property or the Union Square Property, as the case may be, in order to release such property from the Lien of the Leasehold Mortgage. "New Common Stock" means the common stock, par value $____, of BI authorized under the amended certificate of incorporation of BI and issued pursuant to the Plan. "New Credit Facility" has the meaning specified in the Plan. "non-electing shares" has the meaning specified in Section 9.6. "Notes" means the notes issued to the Holders in accordance with the terms of this Indenture. "Noteholders" or "Holders" means the registered owners of the Notes as shown on the Security Register maintained for that purpose. "Offer" has the meaning specified in Section 9.5(e). "Officer's Certificate" of any Person means a certificate signed by an Authorized Representative of such Person. "Opinion of Counsel" means a written opinion of counsel for any Person reasonably satisfactory to the intended recipient thereof. "Outstanding" shall mean, as of the date of determination, all Notes theretofore authenticated and delivered under this Indenture, except: 5 (i) Notes theretofore cancelled by the Trustee or delivered to the Trustee for cancellation; (ii) Notes or portions thereof deemed to have been paid within the meaning of Section 10.1; (iii) Notes in exchange for or in lieu of which other Notes have been authenticated and delivered pursuant to this Indenture; and (iv) Notes converted to New Common Stock pursuant to Article 9; provided, however, that in determining whether the Holders of the requisite principal of Notes outstanding have given any request, demand, authorization, direction, notice, consent or waiver hereunder or whether or not a quorum is present at a meeting of Holders, Notes owned by the Issuer or any Affiliate thereof shall be disregarded and deemed not to be outstanding as provided in Section 1.4. "Paying Agent" means any Person acting as Paying Agent pursuant to this Indenture. "Person" means an individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, limited liability partnership, institution, public benefit corporation, firm, joint stock company, estate, government (or agency or political subdivision thereof) or other entity. "Place of Payment", when used with respect to the Notes, shall mean the office or agency maintained pursuant to Section 2.4 hereof. "Plan" shall have the meaning specified in the recitals hereto. "Predecessor Notes", with respect to any particular Note, shall mean any previous Note evidencing all or a portion of the same debt as that evidenced by such particular Note; for the purposes of this definition, any Note authenticated and delivered under Section 2.5 in lieu of a lost, destroyed or stolen Note shall be deemed to evidence the same debt as the lost, destroyed or stolen Note. "Proceeds" has the meaning specified in the Leasehold Mortgage. "Purchased Shares" has the meaning specified in 9.5(e). "Redemption Date" means a date set forth for the redemption of Notes pursuant to Section 3.3. "Redemption Price" means the price to be paid by the Issuer for the Notes that are redeemed under Article 3. 6 "Registered Depositary" shall mean DTC, together with any Person succeeding thereto by merger, consolidation or acquisition of all or substantially all of its assets, including substantially all of its securities payment and transfer operations. "Regular Record Date", for the Stated Maturity of any installment of principal of any Note or payment of interest thereon, shall mean the 15th day (whether or not a Business Day) next preceding such Stated Maturity, or any other date specified for such purpose in the form of the Note. "Responsible Officer" means, when used with respect to the Trustee, any officer assigned to the Corporate Trust Office, including any managing director, vice president, assistant vice president, assistant treasurer, assistant secretary or any other officer of the Trustee customarily performing functions similar to those performed by any of the above designated officers and having direct responsibility for the administration of this Indenture, and also, with respect to a particular matter, any other officer, to whom such matter is referred because of such officer's knowledge of and familiarity with the particular subject. "SEC" means the Securities and Exchange Commission of the United States or any successor agency. "Securities Act" means the United States Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder. "Security Documents" means the Leasehold Mortgage and any other instruments or documents entered into in connection therewith, as such instruments and documents may from time to time be amended in accordance with the terms hereof and thereof. "Security Register" means any register which the Issuer shall cause to be kept at the Corporate Trust Office of the Trustee (and in any other office or agency of the Issuer in a place of payment) in which, subject to such reasonable regulations as it may prescribe, the Issuer provides for the registration of Notes and of transfers and exchanges of Notes. "Security Registrar" means any person acting as Security Registrar pursuant to this Indenture. "Stated Maturity" when used with respect to any Note or any installment of principal thereof or payment of interest thereon, shall mean the date specified in such Note as the fixed date on which such Note or such installment of principal or payment of interest is due and payable. "Surviving Entity" has the meaning specified in Section 7.1. "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and 7 Friday, other than any day on which securities are not traded on the NASDAQ. "Trustee" means [ ], named as "Trustee" in the introductory paragraph hereof until a successor Trustee shall have been appointed pursuant to the applicable provisions hereof, and thereafter means such successor Trustee. "Trust Indenture Act" shall mean the Trust Indenture Act of 1939, as amended, and the rules and regulations promulgated thereunder. "Union Square Property" means that certain leasehold interest owned by the Issuer, located at 14th Street and Broadway in New York, New York, as further described in the Leasehold Mortgage. "Yonkers Property" means that certain leasehold interest owned by New Horizons located in Yonkers, New York, as further described in the Leasehold Mortgage. (i) the terms defined in this Indenture have the meanings assigned to them in this Indenture and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender; (ii) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with GAAP as in effect on the date hereof; (iii) references herein to "Articles", "Sections", "Subsections", "Paragraphs" and other subdivisions without reference to a document are to designated Articles, Sections, Subsections, Paragraphs and other subdivisions of this Indenture; (iv) a reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to Paragraphs and other subdivisions; (v) the words "herein", "hereof", "hereunder" and other words of similar import refer to this Indenture as a whole and not to any particular provision; and (vi) the term "include" or "including" shall mean without limitation by reason of enumeration. SECTION 1.2 Compliance Certificates and Opinions. ------------------------------------ Except as otherwise expressly provided by this Indenture, upon any application or request by the Issuer to the Trustee to take any action under any provision of this Indenture, the Issuer shall furnish to the Trustee an Officer's Certificate stating that all conditions precedent, if any, provided for in this Indenture relating to the proposed action have been complied with and an Opinion of Counsel stating that in the opinion of such counsel all such conditions precedent, if any, have been complied with, except that in the case of any particular application or request as to which the furnishing of documents is specifically required by any provision of this Indenture relating to such particular 8 application or request, no additional certificate or opinion need be furnished. Every certificate or opinion with respect to compliance with a condition or covenant provided for in this Indenture shall include: (a) a statement that each individual signing such certificate or opinion or such other officer or employee of the Issuer on whom such individual has relied in good faith has read such covenant or condition and the definitions relating thereto; (b) a brief statement as to the nature and scope of the examination or investigation upon which the statements or opinions contained in such certificate or opinion are based; (c) a statement that, in the opinion of each such individual, or such officer or employee, such examination or investigation as is necessary to enable such individual to express an informed opinion as to whether or not such covenant or condition has been complied with has been made; (d) a statement as to whether, in the opinion of each such individual, such condition or covenant has been complied with; and (e) in the case of an Officer's Certificate, a statement that no Event of Default has occurred and is continuing. SECTION 1.3 Form of Documents Delivered to Trustee. -------------------------------------- In any case where several matters are required to be certified by or covered by an opinion of any specified Person, it is not necessary that all such matters be certified by or covered by the opinion of only one such Person, or that they be so certified by only one document, but one such Person may certify or give an opinion with respect to some matters and one or more other such Persons as to other matters, and any such Person may certify or give an opinion as to such matter in one or several documents. Any certificate or opinion of an officer of the Issuer may be based, insofar as it relates to legal matters, upon a certificate or opinion of, or representations by, counsel, unless such officer knows or has reason to believe that the certificate or opinion or representations with respect to the matters upon which his certificate or opinion is based are erroneous. Any such certificate, opinion or an Opinion of Counsel may be based, insofar as it relates to factual matters, upon a certificate or opinion of, or representations by, an officer or officers of the Issuer stating that the information with respect to each factual matters is in the possession of the Issuer unless such counsel knows or in the exercise of reasonable care (without independent investigation) should know that the certificate or opinion or representations with respect to such matters are erroneous. Any Opinion of Counsel stated to be based on the opinion of other counsel shall be accompanied by a copy of such other opinion. 9 Where any Person is required to make, give or execute two or more applications, requests, consents, certificates, statements, opinions or other instruments under this Indenture, they may, but need not, be consolidated and form one instrument. SECTION 1.4 When Securities Disregarded. --------------------------- In determining whether the Holders of the required principal amount of Notes have concurred in any direction, waiver or consent, Notes owned by the Issuer or by any Person directly or indirectly controlling or controlled by or under direct or indirect common control with the Issuer shall be disregarded and deemed not to be outstanding, except that, for the purpose of determining whether the Trustee shall be protected in relying on any such direction, waiver or consent, only Notes which the Trustee knows are so owned shall be so disregarded. Also, subject to the foregoing, only Outstanding Notes shall be considered in any such determination. SECTION 1.5 Conflict with Trust Indenture Act. --------------------------------- If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Indenture by any of the provisions of the Trust Indenture Act, such required provisions shall control. SECTION 1.6 Execution in Counterparts. ------------------------- This instrument may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one of the same instrument. SECTION 1.7 Effect of Headings and Table of Contents. ---------------------------------------- The Article and Section headings herein and the Table of Contents are for convenience only and shall not affect the construction hereof. SECTION 1.8 Successors and Assigns. ---------------------- All covenants and agreements in this Indenture by the Trustee, the Issuer and BI shall bind and, to the extent permitted hereby, shall inure to the benefit of and be enforceable by their respective successors and assigns, whether so expressed or not. The Issuer may not assign or otherwise transfer any of its rights under this Agreement. SECTION 1.9 Severability Clause. ------------------- In case any provision in this Indenture or in the Notes shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. SECTION 1.10 Benefits of Indenture. --------------------- 10 . Nothing in this Indenture or in the Notes, expressed or implied, shall give to any Person, other than the parties hereto and their successors hereunder and the Holders of Notes, any benefit or any legal or equitable right, remedy or claim under this Indenture. SECTION 1.11 GOVERNING LAW. ------------- THIS INDENTURE AND THE NOTES SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 1.12 Legal Holidays. -------------- In any case where the Redemption Date or the Stated Maturity of any Note or of any installment of principal thereof or payment of interest thereon, is proposed to be paid, shall not be a Business Day, then (notwithstanding any other provision of this Indenture or such Note) payment of interest or principal, if any, need not be made on such date, but may be made on the next succeeding Business Day with the same force and effect as if made on the Redemption Date or at the Stated Maturity, and if such payment is timely made, no interest shall accrue for the period from and after such Redemption Date or Stated Maturity, as the case may be, to the date of such payment. SECTION 1.13 No Recourse Against Others. -------------------------- A director, officer, employee, stockholder or incorporator, as such, of the Issuer or BI shall not have any liability for any obligations of the Issuer or BI under the Notes or this Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Notes. SECTION 1.14 Notices. ------- Any notices or other communications required or permitted hereunder shall be in writing, and shall be sufficiently given if made by hand delivery, by commercial courier service, by telex, by telecopier or registered or certified mail, postage prepaid, return receipt requested, addressed as follows: (a) if to the Issuer, to: Bradlees Stores, Inc. ____________________________________________ ____________________________________________ ____________________________________________ Attention: ________________________ Telephone: _______________________ Telecopy: ________________________ (b) if to BI, to: 11 Bradlees, Inc. ____________________________________________ ____________________________________________ ____________________________________________ Attention: ________________________ Telephone: _______________________ Telecopy: ________________________ and (c) if to the Trustee, to: ____________________________________________ ____________________________________________ ____________________________________________ Attention: ________________________ Telephone: _______________________ Telecopy: ________________________ Each of the Issuer, BI and the Trustee by written notice to each other such Person may designate additional or different addresses for notices to such Person. Any notice or communication to the Issuer, BI or the Trustee shall be deemed to have been given or made as of the date so delivered if personally delivered; when receipt is confirmed if delivered by commercial courier service; when answered back, if telexed; when receipt is acknowledged, if faxed; and five (5) calendar days after mailing if sent by registered or certified mail, postage prepaid (except that a notice of change of address shall not be deemed to have been given until actually received by the addressee). Any notice or communication mailed to a Holder shall be mailed to him by first class mail or other equivalent means at his address as it appears on the registration books of the Security Registrar and shall be sufficiently given to him if so mailed within the time prescribed. Failure to mail a notice or communication to a Holder or any defect in it shall not affect its sufficiency with respect to other Holders. If a notice or communication is mailed in the manner provided above, it is duly given, whether or not the addressee receives it. ARTICLE 2 THE NOTES SECTION 2.1 Title and Terms. --------------- The aggregate principal amount of Notes which may be authenticated and delivered under this Indenture is limited to $[40,000,000], except for Notes authenticated and delivered upon registration of transfer of, or in exchange for, or in lieu of, other Notes 12 pursuant to Sections 2.3, 2.4, 2.5 or 3.5. The Maturity Date of the Notes shall be [January 31, 2004] and they shall bear interest at the rate of 9% per annum, from and including the date of issuance thereof until maturity or earlier redemption, payable semi-annually on January 1 and July 1, commencing July 1, 1999, until the principal thereof is paid or made available for payment. It is acknowledged and agreed that the principal of the Notes may not be repaid prior to the Maturity Date except as specifically provided in this Indenture. The principal of and interest on the Notes shall be payable at the office or agency of the Issuer maintained by the Issuer for such purpose; provided, however, that at the option of the Issuer, payment of interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Security Register. The Notes shall be redeemable as provided in Article 3. The Notes shall be convertible as provided in Article 9. The Notes shall be secured by a Lien on (i) the leasehold interest of New Horizons in the Yonkers Property, (ii) the leasehold interest of the Issuer in the Union Square Property and (iii) the Proceeds of the conversion of the Yonkers Property and the Union Square Property, as provided in Article 12. The Guarantee Obligations under the Notes shall be fully and unconditionally guaranteed on an unsecured basis by BI, as provided in Article 13. SECTION 2.2 Execution, Authentication, Delivery and Dating. ---------------------------------------------- The Notes shall be executed on behalf of the Issuer by two Authorized Representatives of the Issuer. The signature of any Authorized Representative on the Notes may be manual or facsimile. Notes bearing the manual or facsimile signatures of individuals who were at the time of execution the proper officers of the Issuer shall bind the Issuer, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of such Notes or did not hold such offices at the date of such Notes. Subject to Section 2.4 hereof, the Issuer shall deliver the Notes executed by the Issuer to the Trustee for authentication, together with an Issuer Order for the authentication and delivery of such Notes, and the Trustee in accordance with the Issuer Order shall authenticate and deliver the Notes. The Trustee shall at all times act as the sole authenticating agent for the authentication of the Notes hereunder unless, and until, the Trustee may appoint a successor Authenticating Agent pursuant to Section 4.13(c) hereof. 13 No Note shall be entitled to any benefit under this Indenture or be valid or obligatory for any purpose unless there appears on such Note a certificate of authentication substantially in the form provided for herein executed by the Trustee by manual signature, and such certificate upon any Note shall be conclusive evidence, and the only evidence, that such Note has been duly authenticated and delivered hereunder. Notwithstanding the foregoing, if any Note shall have been authenticated and delivered hereunder but never issued and sold by the Issuer, and the Issuer shall deliver such Note to the Trustee for cancellation as provided in Section 2.8 hereof, for all purposes of this Indenture such Note shall be deemed never to have been authenticated and delivered hereunder and shall never be entitled to the benefits of this Indenture. SECTION 2.3 Temporary Notes. --------------- Pending the preparation of definitive Notes, the Issuer may execute, and upon Issuer Order the Trustee shall authenticate and deliver, temporary Notes which are printed, lithographed, typewritten, mimeographed or otherwise produced, in any authorized denomination, substantially of the tenor of the definitive Notes in lieu of which they are issued and with such appropriate insertions, omissions, substitutions and other variations as the officers of the Issuer executing the same may determine, as evidenced by their execution of such Notes. If temporary Notes are issued, the Issuer will cause definitive Notes to be prepared without unreasonable delay. After the preparation of definitive Notes, the temporary Notes shall be exchangeable for definitive Notes upon surrender of the temporary Notes at the office or agency of the Issuer in a Place of Payment, without charge to the Holder. Upon surrender for cancellation of any one or more temporary Notes, the Issuer shall execute and the Trustee shall authenticate and deliver in exchange therefor one or more definitive Notes of any authorized denominations and of like tenor and aggregate principal amount. Until so exchanged, the temporary Notes shall in all respects be entitled to the same benefits under this Indenture as definitive Notes. SECTION 2.4 Registration; Registration of Transfer and Exchange. --------------------------------------------------- (a) General. The Issuer shall cause to be kept at the Corporate Trust Office of the Trustee a register (the register maintained in such office and in any other office or agency of the Issuer in a Place of Payment being herein sometimes collectively referred to as the "Security Register") in which, subject to such reasonable regulations as it may prescribe, the Issuer shall provide for the registration of Notes and of transfers and exchanges of Notes. The Trustee is hereby appointed "Security Registrar" for the purpose of registering Notes and transfers and exchanges of Notes as herein provided. Notwithstanding anything to the contrary set forth herein, the Trustee shall not be required and shall have no obligation to monitor compliance with any federal or state securities laws. Upon surrender for registration of transfer of any Notes at the office or 14 agency of the Issuer in a Place of Payment, the Issuer shall execute, and the Trustee shall authenticate and deliver, in the name of the designated transferee or transferees, one or more new Notes of any authorized denominations and of like tenor and aggregate principal amount. At the option of the Holder, Notes may be exchanged for other Notes, of any authorized denominations and of like tenor and aggregate principal amount, upon surrender of the Notes to be exchanged at such office or agency. Whenever any Notes are so surrendered for exchange, the Issuer shall execute, and the Trustee shall authenticate and deliver, the Notes which the Holder making the exchange is entitled to receive. All Notes issued upon any registration of transfer or exchange of Notes shall be the valid obligations of the Issuer, evidencing the same debt, and entitled to the same benefits under this Indenture, as the Notes surrendered upon such registration of transfer or exchange. Every Note presented or surrendered for registration of transfer or for exchange shall be duly endorsed, or be accompanied by a written instrument of transfer in form satisfactory to the Issuer and the Security Registrar duly executed, by the Holder thereof or its attorney duly authorized in writing. No service charge shall be made for any registration of transfer or exchange of Notes, but the Issuer may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with any registration of transfer or exchange of Notes, other than exchanges pursuant to Section 2.3, 2.4, 2.5, or 3.5 hereof not involving any transfer. If any Notes are to be redeemed in part, the Issuer shall not be required (A) to issue, register the transfer or exchange such Notes during a period beginning at the opening of business 15 days before the day of the mailing of a notice of redemption of any such Notes selected for redemption under Section 3.4 hereof and ending at the close of business on the day of such mailing or (B) to issue, register the transfer of or exchange any Note so selected for redemption in whole or in part, except the unredeemed portion of any Note being redeemed in part. As used in this Section 2.4, the term "transfer" encompasses any sale, pledge or other transfer of any Notes referred to herein. (b) Global Notes. This Section 2.4(b) shall apply to Global Notes. (i) Each Global Note authenticated under this Indenture shall be registered in the name of the Depositary designated for such Global Note or a nominee thereof and delivered to such Depositary or a nominee thereof or custodian therefor, and each such Global Note shall constitute a single Note for all purposes of this Indenture. The Notes may be represented by one or more Global Notes. 15 (ii) Notwithstanding any other provision in this Indenture, no Global Note may be exchanged in whole or in part for Notes registered, and no transfer of a Global Note in whole or in part may be registered, in the name of any Person other than the Depositary for such Global Note or a nominee thereof unless (A) such Depositary (1) has notified the Issuer that it is unwilling or unable to continue as Depositary for such Global Note or (2) has ceased to be a clearing agency registered under the Exchange Act, and, in either case, a successor Depositary is not appointed within 90 days thereof, (B) the Issuer executes and delivers to the Trustee an Issuer Order providing that such Global Note shall be so transferable, registrable and exchangeable, and such transfers shall be registrable or (C) there shall have occurred and be continuing an Event of Default with respect to the Notes. Any Global Note exchanged pursuant to subclause (A) above shall be so exchanged in whole and not in part and any Global Note exchanged pursuant to subclause (B) or (C) above may be exchanged in whole or from time to time in part as directed by the Depositary for such Global Note. Notwithstanding any other provision in this Indenture, a Global Note to which the restriction set forth in the second preceding sentence shall have ceased to apply may be transferred only to, and may be registered and exchanged for Notes registered only in the name or names of, such Person or Persons as the Depositary for such Global Note shall have directed, and no transfer thereof other than such a transfer may be registered. (iii) Subject to clause (ii) above, any exchange of a Global Note for other Notes may be made in whole or in part, and all Notes issued in exchange for a Global Note or any portion thereof shall be registered in such name or names as the Depositary for such Global Note shall direct. (iv) Every Note authenticated and delivered upon registration of transfer of, or in exchange for or in lieu of, a Global Note or any portion thereof, whether pursuant to this Section, Section 2.3 or 3.5 hereof or otherwise, shall be authenticated and delivered in the form of, and shall be, a Global Note, unless such Note is registered in the name of a Person other than the Depositary for such Global Note or a nominee thereof. SECTION 2.5 Mutilated, Destroyed, Lost and Stolen Notes. ------------------------------------------- If (a) any mutilated Note is surrendered to the Trustee or the Issuer, or if the Security Registrar and the Trustee receive evidence to their satisfaction of the destruction, loss or theft of any Note and (b) there is delivered to the Issuer, the Security Registrar and the Trustee evidence to their satisfaction of the ownership and authenticity thereof, and such security or indemnity as may be required by them to save each of them harmless, then, in the absence of notice to the Issuer, the Security Registrar or the Trustee that such Note has been acquired by a bona fide purchaser, the Issuer shall execute and, upon the Issuer's request, the Trustee shall authenticate and make available for delivery in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Note, a new Note, of like tenor (including the same date of issuance) and equal face amount of principal, registered in the same manner, dated the date of its authentication and bearing interest from the date to which interest has been paid on such Note, in lieu of and substitution for such Note. If, after delivery of such new Note, a bona fide purchaser of the original Note in lieu of 16 which such new Note was issued presents for payment such original Note, the Issuer and the Trustee shall be entitled to recover such new Note from the Person to whom it was delivered or any Person taking therefrom, except a bona fide purchaser, and shall be entitled to recover upon the security or indemnity provided therefor to the extent of any loss, damage, cost or expenses incurred by the Issuer or the Trustee in connection therewith. In case any such mutilated, destroyed, lost or stolen Note has become or is about to become due and payable (excluding any payment of principal other than the final installment of principal) the Issuer in its discretion may, instead of issuing a new Note, pay such Note without surrender thereof (except in the case of a mutilated Note) if the applicant for such payment shall furnish to the Issuer and the Trustee such reasonable security or indemnity as they may require to save each of them harmless, and in case of destruction, loss or theft, evidence to the satisfaction of the Issuer and the Trustee of the destruction, loss or theft of such Note. Upon the issuance of any new Note under this Section, the Issuer may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in relation thereto and any other expenses (including the fees and expenses of the Trustee) connected therewith. Every new Note issued pursuant to this Section in lieu of any destroyed, lost or stolen Note shall constitute an original additional contractual obligation of the Issuer, whether or not the destroyed, lost or stolen Note shall be at any time enforceable by anyone, and shall be entitled to all the security and benefits of this Indenture equally and proportionately with any and all other Notes duly issued hereunder. The provisions of this Section are exclusive and shall preclude (to the extent lawful) all other rights and remedies with respect to the replacement or payment of mutilated, destroyed, lost or stolen Notes. SECTION 2.6 Payments; Interest and Principal Rights Preserved. ------------------------------------------------- Principal and interest on any Note which is payable, and is punctually paid or duly provided for, on any Stated Maturity shall be paid to the Person in whose name that Note (or one or more Predecessor Notes) is registered at the close of business on the Regular Record Date for such principal or interest. Each Note delivered under this Indenture upon registration of transfer of or in exchange for or in lieu of any other Note shall carry the rights to interest accrued and unpaid, and to accrue, which were carried by such other Note. SECTION 2.7 Persons Deemed Owners. --------------------- Subject to Section 2.4, prior to due presentment of a Note for registration of transfer, the Issuer, the Trustee and any agent of the Issuer or the Trustee shall treat the Person in whose name such Note is registered as the owner of such Note for the purpose of 17 receiving payment of principal of and any interest on such Note and for all other purposes whatsoever, whether or not such Note be overdue, and neither the Issuer, the Trustee nor any agent of the Issuer or the Trustee shall be affected by notice to the contrary. SECTION 2.8 Cancellation; Purchase by the Issuer. ------------------------------------ All Notes surrendered for payment, redemption, conversion, registration of transfer or exchange or for credit against any sinking fund payment shall, if surrendered to any Person other than the Trustee, be delivered to the Trustee and shall be promptly canceled by it. The Issuer may at any time deliver to the Trustee for cancellation any Notes previously authenticated and delivered hereunder which the Issuer may have acquired in any manner whatsoever, and may deliver to the Trustee (or to any other Person for delivery to the Trustee) for cancellation any Notes previously authenticated hereunder which the Issuer has not issued and sold, and all Notes so delivered shall be promptly canceled by the Trustee. No Notes shall be authenticated in lieu of or in exchange for any Notes canceled as provided in this Section, except as expressly permitted by this Indenture. All canceled Notes held by the Trustee shall be disposed of in accordance with its customary procedure in effect from time to time. SECTION 2.9 Dating of Notes. --------------- Each Note shall be dated the date of its authentication. SECTION 2.10 CUSIP Numbers. ------------- The Issuer in issuing the Notes may use "CUSIP" numbers (if then generally in use), and, if so, the Trustee shall use "CUSIP" numbers in notices of redemption and related materials as a convenience to Holders; provided that the Trustee shall assume no responsibility for the accuracy of such numbers and any such redemption or other notice shall not be affected by any defect in or omission of such numbers. SECTION 2.11 Parity and Ranking of Notes. --------------------------- All Notes issued and Outstanding hereunder rank on a parity with each other Note, and each Note shall be guaranteed equally and ratably under the Guarantee and secured equally and ratably by this Indenture and the Security Documents. SECTION 2.12 Book Entry. ---------- In the event the Notes are issued as Global Notes with the Depository: (i) the Trustee may deal with the Depository as the authorized representative of the Holders; (ii) the rights of the Holders shall be exercised only through the Depository and shall be limited to those established by law and agreement between the Holders and the Depository and/or direct participants of the Depository; (iii) the Depository will make book-entry transfers among the direct participants of the Depository and will receive and transmit distributions of principal and interest on the Notes to such direct participants; and (iv) the direct 18 participants of the Depository shall have no rights under this Indenture under or with respect to any of the Notes held on their behalf by the Depository, and the Depository may be treated by the Trustee and its agents, employees, officers and directors as the absolute owner of the Notes for all purposes whatsoever. ARTICLE 3 REDEMPTION OF NOTES SECTION 3.1 Mandatory Redemption of Notes. ----------------------------- The Outstanding Notes shall be redeemed pro rata with (a) the Net Proceeds of the sale of the Yonkers Property, (b) the Net Proceeds of the sale of the Union Square Property and (c) the Net Proceeds of any Equity Offering. The Redemption Price shall equal 100% of the unpaid principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon to the Redemption Date. The Redemption Date shall be a date determined by the Issuer which shall be no later than 60 days following receipt by the Trustee or the Issuer, as the case may be, of the Net Proceeds referred to in the first sentence of this Section 3.1. SECTION 3.2 Optional Redemption of Notes. ---------------------------- The Issuer shall have the right at any time and from time to time to redeem the Outstanding Notes, in whole or in part, at a Redemption Price equal to 100% of the unpaid principal amount thereof plus accrued and unpaid interest thereon to the Redemption Date. The Redemption Date shall be a date determined by the Issuer. SECTION 3.3 Delivery of Notices, Certificates and Opinions. ---------------------------------------------- (a) The Issuer shall notify the Trustee of any mandatory or optional redemption of Notes at least 10 days prior to the applicable Redemption Date (unless a shorter notice shall be satisfactory to the Trustee), specifying the Redemption Date and the principal amount of Notes to be redeemed. In the case of an optional redemption, such notice shall be accompanied by an Issuer Order. In the case of a mandatory redemption, such notice shall be accompanied by a written calculation by the Issuer of the amount of the Net Proceeds, which amount shall be used for the redemption. (b) Notice of redemption shall be given by first-class mail, postage prepaid, mailed not less than 5 days prior to the Redemption Date, to each Holder of Notes to be redeemed, at his or her address, appearing in the Security Register. All notices of redemption shall state: (1) the Redemption Date, (2) the Redemption Price, (3) if less than all the Outstanding Notes are to be redeemed, the identification (and, in the 19 case of partial redemption, the principal amounts) of the particular Notes to be redeemed, (4) that on the Redemption Date the Redemption Price will become due and payable upon each such Note to be redeemed and that interest thereon will cease to accrue on and after said date, (5) the Conversion Price, the date on which the right to convert the principal of the Notes to be redeemed will terminate and the place or places where such Notes may be surrendered for conversion, and (6) the place or places where such Notes are to be surrendered for payment of the Redemption Price. Notice of redemption of Notes to be redeemed at the election of the Issuer shall be given by the Issuer or, at the Issuer's request, by the Trustee in the name and at the expense of the Issuer. (c) If fewer than all the Notes are to be redeemed, the Trustee shall select the Notes to be redeemed pro rata or by lot or by a method that complies with applicable legal and securities exchange requirements, if any, and that the Trustee in its sole discretion considers fair and appropriate; provided, however, that in the case of a mandatory redemption, selection of the portion of Notes for redemption shall be made by the Trustee only on a pro rata basis unless such method is otherwise prohibited by law. Notes and portions thereof that the Trustee selects shall be in amounts of $1,000 or a whole multiple of $1,000. Provisions of this Indenture that apply to Notes called for redemption also apply to portions of Notes called for redemption. The Trustee shall notify the Issuer promptly of the Notes or portions of Notes to be redeemed. SECTION 3.4 Redemption of and Payment on Notes. ---------------------------------- Notice of redemption having been given as aforesaid, and the conditions, if any, set forth in such notice having been satisfied, the Notes or portions thereof so to be redeemed shall, on the Redemption Date, become due and payable, and from and after such date such Notes or portions thereof shall cease to bear interest. Upon delivery of any notice of redemption pursuant to Section 3.3 hereof, the Trustee shall establish a special purpose account (the "Redemption Account"). Following the sale of each of the Yonkers Property and the Union Square Property, the Trustee, prior to the Redemption Date, shall, in accordance with the terms of the Security Documents, transfer the full Redemption Price in Dollars to the Redemption Account which shall be held by the Trustee in the Redemption Account and applied to the redemption of such Notes on the Redemption Date. Following any Equity Offering, the Issuer shall transfer, or cause to be transferred, to the Trustee, prior to the Redemption Date, the full Redemption Price in Dollars, which amount after transfer to the Trustee by the Issuer shall be held by the Trustee in the Redemption Account and applied to the redemption of such Notes on the Redemption Date. Upon surrender of any such Note for redemption in accordance with the notice thereof to Holders sent pursuant to Section 3.3 hereof, the Trustee shall pay an amount in 20 respect of such Note or portion thereof as provided in such notice; provided, however, that any payment of interest on any Note, the Stated Maturity of which payment of interest is on or prior to the Redemption Date, shall be payable to the Holder of such Note or one or more Predecessor Notes, registered as such at the close of business on the related Regular Record Date according to the terms of such Note and subject to the provisions of Section 2.6 hereof. SECTION 3.5 Notes Redeemed in Part. ---------------------- Any Note that is to be redeemed only in part shall be surrendered at a Place of Payment therefor (with due endorsement by, or a written instrument of transfer in form satisfactory to the Issuer and the Trustee duly executed by, the Holder thereof or its attorney duly authorized in writing), and the Issuer shall execute, and the Trustee shall authenticate and make available for delivery to the Holder of such Note without service charge, a new Note or Notes, of any authorized denomination requested by such Holder and of like tenor and in aggregate principal amount equal to and in exchange for the remaining unpaid principal amount of the Note so surrendered. SECTION 3.6 Cancellation of Notes. --------------------- All Notes redeemed under any of the provisions of this Indenture shall forthwith be canceled. ARTICLE 4 CONCERNING THE TRUSTEE SECTION 4.1 Duties and Responsibilities of Trustee; During Default; Prior to ---------------------------------------------------------------- Default. - ------- With respect to the Holders of Notes issued hereunder, the Trustee, prior to the occurrence of an Event of Default with respect to the Notes and after the curing or waiving of all Events of Default which may have occurred with respect to the Notes, undertakes to perform such duties and only such duties as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee. In case an Event of Default with respect to the Notes has occurred (which has not been cured or waived), the Trustee shall exercise such of the rights and powers vested in it by this Indenture, and use the same degree of care and skill in their exercise, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that (a) prior to the occurrence of an Event of Default with respect to the Notes and after the curing or waiving of all such Events of Defaults with respect to the Notes which may have occurred: 21 (i) the duties and obligations of the Trustee with respect to the Notes shall be determined solely by the express provisions of this Indenture, and the Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Indenture, and no implied covenants or obligations shall be read into this Indenture against the Trustee; and (ii) in the absence of bad faith on the part of the Trustee, the Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any statements, certificates or opinions furnished to the Trustee and conforming to the requirements of this Indenture; but in the case of any such statements, certificates or opinions which by any provision hereof are specifically required to be furnished to the Trustee, the Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Indenture (but need not confirm or investigate the accuracy of mathematical computations or other facts stated therein); (b) the Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer or Responsible Officers of the Trustee, unless it shall be proved that the Trustee was negligent in ascertaining the pertinent facts; (c) the Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders relating to the time, method and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred upon the Trustee, under this Indenture; and (d) none of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if there shall be reasonable ground for believing that the repayment of such funds or adequate indemnity against such liability is not reasonably assured to it. Except as otherwise specifically provided herein, (i) all references in this Indenture to the Trustee shall be deemed to refer to the Trustee in its capacity as Trustee and in its capacity as Security Registrar and Paying Agent and (ii) every provision of this Indenture relating to the conduct or affecting the liability or offering protection, immunity or indemnity to the Trustee shall be deemed to apply with the same force and effect to the Trustee acting in its capacity as Security Registrar and Paying Agent. SECTION 4.2 Certain Rights and Duties of Trustee. ------------------------------------ Subject to Section 4.1 hereof and the Trust Indenture Act, in performing its duties and exercising its powers hereunder: (a) The Trustee may conclusively rely and shall be fully protected in acting, or refraining from acting, upon any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, bond, debenture or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties or with respect to any action it takes or omits to take in good faith in accordance with a direction 22 received by it from Holders holding a sufficient percentage of Notes to give such direction as permitted by this Indenture. (b) Any request, direction, order or demand of the Issuer or BI mentioned herein shall be sufficiently evidenced by an instrument signed in the name of the Issuer or BI, as the case may be, by an Authorized Representative (unless other evidence in respect thereof be herein specifically prescribed); and any Board Resolution may be evidenced to the Trustee by a copy thereof certified by the Secretary or an Assistant Secretary of the Issuer. (c) The Trustee may consult with counsel, and the advice of counsel or any Opinion of Counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon. (d) The Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Indenture and may refuse to perform any duty or exercise any such rights or powers unless it shall have been offered security or indemnity satisfactory to it against the costs, expenses and liabilities which may be incurred therein or thereby. (e) The Trustee shall not be liable for any action taken, suffered or omitted by it in good faith and reasonably believed by it to be authorized or within the discretion or rights or powers conferred upon it by this Indenture or with respect to any action it takes or omits to take in good faith in accordance with a direction received by it from Holders holding a sufficient percentage of Notes to give such direction as permitted by this Indenture. (f) The Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, appraisal, bond, debenture or other paper or document unless requested in writing so to do by the Holders of not less than a majority in aggregate principal amount of the Notes then Outstanding; provided, that, if the payment within a reasonable time to the Trustee of the costs, expenses or liabilities likely to be incurred by it in the making of such investigation is, in the opinion of the Trustee, not reasonably assured to the Trustee by the security afforded to it by the terms of this Indenture, the Trustee may require reasonable indemnity against such expenses or liabilities as a condition to so proceeding. The reasonable expense of every such investigation shall be paid by the Issuer or, if paid by the Trustee, shall be repaid by the Issuer upon demand. (g) The Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through agents or attorneys, and the Trustee shall not be responsible for the willful misconduct or negligence on the part of or for the supervision of any agent or attorney appointed with due care by it hereunder. (h) If an Event of Default known to the Trustee has occurred and is continuing, the Trustee shall exercise such of the rights and powers vested in it by this Indenture and use the same degree of care and skill in their exercise as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (i) Every provision of this Indenture that in any way relates to the Trustee is subject to this Article 4. 23 (j) The Trustee shall not be charged with knowledge of an Event of Default unless a Responsible Officer of the Trustee obtains actual knowledge of such event or the Trustee receives written notice of such event from the Issuer, BI or Holders owning Notes aggregating not less than 10% of the outstanding principal amount of the Notes. (k) The Trustee shall have no duty to monitor the performance of the Issuer, nor shall it have any liability in connection with the malfeasance or nonfeasance by the Issuer or BI. The Trustee shall have no liability in connection with compliance by the Issuer or BI with statutory or regulatory requirements related to the transactions contemplated by this Indenture and the Security Documents. SECTION 4.3 Trustee Not Responsible for Recitals, Etc. ----------------------------------------- The recitals contained herein and in the Notes, except the Trustee's certificate of authentication, shall be taken as the statements of the Issuer or BI, as the case may be, and the Trustee assumes no responsibility for the correctness of the same. The Trustee makes no representations as to the validity or sufficiency of this Indenture or of the Notes or of the offering materials used in connection with the offering for sale or sale of the Notes. The Trustee shall not be accountable for the use or application by the Issuer of any of the Notes or of the proceeds of such Notes. SECTION 4.4 Trustee and Others May Hold Notes. --------------------------------- The Trustee, or any Paying Agent or Security Registrar or any other Authorized Agent of the Trustee, or any Affiliate thereof, in its individual or any other capacity, may become the owner or pledgee of Notes and may otherwise deal with the Issuer or any other obligor on the Notes with the same rights it would have if it were not Trustee, Paying Agent, Security Registrar or such other Authorized Agent. SECTION 4.5 Monies Held by Trustee or Paying Agent. -------------------------------------- All monies received by the Trustee or any Paying Agent shall, until used or applied as herein provided, be held in trust for the purposes for which they were received, but need not be segregated from other funds except to the extent required by law. SECTION 4.6 Compensation of Trustee and Its Lien. ------------------------------------ The Issuer covenants and agrees to pay to the Trustee (all references in this Section 4.6 to the Trustee shall be deemed to apply to the Trustee in its capacities as Trustee, Paying Agent and Securities Registrar) from time to time, and the Trustee shall be entitled to, compensation for all services rendered by it hereunder in such amounts as may be agreed to from time to time by the Trustee and the Issuer, and, except as herein otherwise expressly provided, the Issuer will pay or reimburse the Trustee upon its request for all reasonable expenses and disbursements incurred or made by the Trustee in accordance with any of the provisions of this Indenture and the Security Documents (including the reasonable compensation and the reasonable expenses and disbursements of its counsel 24 and of all persons not regularly employed by it) except any such expense or disbursement as may arise from its negligence or bad faith. If any property other than cash shall at any time be subject to the Lien of this Indenture, the Trustee, if and to the extent authorized by a receivership or bankruptcy court of competent jurisdiction or by the supplemental instrument subjecting such property to such Lien, shall be entitled, but shall not be required, to make advances for the purpose of preserving such property or of discharging tax liens or other prior liens or encumbrances thereon. The Issuer also covenants and agrees to indemnify the Trustee and its officers, directors, employees and agents for, and to hold them harmless against, any loss, liability, claim, damage or expense (including the reasonable compensation and expenses and disbursements of its counsel) incurred without negligence or bad faith on the part of the Trustee, arising out of or in connection with the acceptance or administration of the trust or trusts hereunder and the performance of its duties and the exercise of its powers under this Indenture and the Security Documents, including the costs and expenses of defending itself against any claim or liability in the premises. The obligations of the Issuer under this Section 4.6 shall constitute additional indebtedness hereunder. The rights of the Trustee and the obligations of the Issuer under this Section 4.6 shall survive the resignation or removal of the Trustee, the payment of the Notes, and the satisfaction, discharge or termination of this Indenture. When the Trustee incurs expenses or renders services in connection with an Event of Default specified in Section 8.1(d) or (e) hereof, the expenses (including the reasonable charges and expenses of its counsel) and the compensation for the services are intended to constitute expenses of administration under any applicable Federal or state bankruptcy, insolvency or other similar law. SECTION 4.7 Right of Trustee to Rely on Officer's Certificates and Opinions --------------------------------------------------------------- of Counsel. - ---------- Before the Trustee acts or refrains from acting with respect to any matter contemplated by this Indenture, it may require an Officer's Certificate or an Opinion of Counsel, which shall conform to the provisions of Section 1.2 hereof. The Trustee shall not be liable for any action it takes or omits to take in good faith in reliance on such certificate or opinion. SECTION 4.8 Persons Eligible for Appointment as Trustee. ------------------------------------------- The Trustee shall at all times be a corporation which complies with the requirements of the Trust Indenture Act, having a combined capital and surplus of at least US$100,000,000. If such corporation publishes reports of condition at least annually, then, for the purposes of this Section 4.8, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. In case at any time the Trustee shall cease to be eligible in accordance with this Section 4.8, the Trustee shall resign immediately in the manner and with the effect specified in Section 4.9 hereof. SECTION 4.9 Conflicting Interests; Resignation and Removal of Trustee; ---------------------------------------------------------- Appointment of Successor. - ------------------------ 25 (a) If the Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Indenture. To the extent permitted by the Trust Indenture Act, the Trustee shall not be deemed to have a conflicting interest by virtue of being a trustee under this Indenture with respect to the Notes. (b) The Trustee, or any trustee or trustees hereafter appointed, may at any time resign by giving written notice to the Issuer and by giving notice of such resignation to the Holders of such Notes in the manner provided in Section 1.14 hereof. Upon receiving such notice of resignation, the Issuer shall promptly appoint a successor trustee or trustees by written instrument executed by order of the Board of Directors, one copy of which instrument shall be delivered to each of the resigning trustee and the successor trustee. If no successor trustee shall have been so appointed and shall have accepted appointment within 30 days after the mailing of such notice of resignation, the resigning trustee may petition any court of competent jurisdiction for the appointment of a successor trustee, or any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any such court for the appointment of a successor trustee. Such court may thereupon after such notice, if any, as it may deem proper, appoint a successor trustee. (c) In case at any time any of the following shall occur: (i) the Trustee shall cease to be eligible under Section 4.8 hereof with respect to the Notes and shall fail to resign after written request therefor by the Issuer or by any Holder, or (ii) the Trustee shall become incapable of acting with respect to the Notes, or shall be adjudged bankrupt or insolvent, or a receiver of the Trustee or of its property shall be appointed, or any public officer shall take charge or control of the Trustee or of its property or affairs for the purpose of rehabilitation, conservation or liquidation; then, in any such case, the Issuer may remove the Trustee with respect to the Notes and appoint a successor trustee by written instrument, in duplicate, executed by order of the Board of Directors of the Issuer, one copy of which instrument shall be delivered to each of the Trustee so removed and the successor Trustee, or, subject to the Trust Indenture Act, any Holder who has been a bona fide Holder of a Note for at least six months may, on behalf of himself and all others similarly situated, petition any court of competent jurisdiction for the removal of the Trustee and the appointment of a successor Trustee. Such court may thereupon after such notice, if any, as it may deem proper and prescribe, remove the Trustee and appoint a successor Trustee. (d) The Holders of a majority in aggregate principal amount of the Notes at the time Outstanding may at any time remove the Trustee and appoint a successor Trustee by delivering to the Trustee so removed, the successor Trustee so appointed and the Issuer a written instrument executed by such Holders evidencing the action taken by the Holders. 26 (e) Any resignation or removal of the Trustee and any appointment of a successor Trustee pursuant to this Section 4.9 shall become effective only upon acceptance of appointment by the successor Trustee as provided in Section 4.10 hereof. SECTION 4.10 Acceptance of Appointment by Successor Trustee. ---------------------------------------------- Any successor Trustee appointed under Section 4.9 hereof shall execute, acknowledge and deliver to the Issuer and to its predecessor Trustee an instrument accepting such appointment hereunder, and thereupon the resignation or removal of the predecessor Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts, duties and obligations of its predecessor Trustee hereunder, with like effect as if originally named as Trustee herein; but, nevertheless, on the written request of the Issuer or of the successor Trustee, the Trustee ceasing to act shall, upon payment of any such amounts then due it pursuant to the provisions of Section 4.6 hereof, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the Trustee so ceasing to act. Upon request of any such successor Trustee, the Issuer shall execute any and all instruments in writing for more fully and certainly vesting in and confirming to such successor Trustee all such rights and powers. Any Trustee ceasing to act shall, nevertheless, retain a Lien upon all property or funds held or collected by such Trustee to secure any amounts then due it pursuant to Section 4.6 hereof. No successor Trustee shall accept appointment as provided in this Section unless at the time of such acceptance such successor Trustee shall be qualified under the requirements of the Trust Indenture Act and eligible under the provisions of Section 4.8. Upon acceptance of appointment by a successor Trustee, the Issuer shall give notice of the succession of such Trustee hereunder to the Holders of Notes in the manner provided in Section 1.14 hereof. If the Issuer fails to give such notice within 10 days after acceptance of appointment by the successor Trustee, the successor Trustee shall cause such notice to be given at the expense of the Issuer. SECTION 4.11 Merger, Conversion or Consolidation of Trustee. ---------------------------------------------- Any Person into which the Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which the Trustee shall be a party, or any Person succeeding to all or substantially all the corporate trust business of the Trustee, shall be the successor of the Trustee hereunder without the execution or filing of any paper or any further act on the part of any of the parties hereto, provided that such successor Trustee shall be eligible under the provisions of Section 4.8 hereof and Section 310(a) of the Trust Indenture Act. SECTION 4.12 Preferential Collection of Claims Against Issuer. ------------------------------------------------ If and when the Trustee shall be or become a creditor of the Issuer (or any other obligor upon the Notes), the Trustee shall be subject to the provisions of the Trust Indenture Act 27 regarding the collection of claims against the Issuer (or any such other obligor). SECTION 4.13 Maintenance of Offices and Agencies. ----------------------------------- (a) There shall at all times be maintained in the Borough of Manhattan, The City of New York, an office or agency where Notes may be presented or surrendered for registration of transfer or exchange and for payment of principal and interest, and where notices and demands to or upon the Trustee in respect of such Notes or this Indenture may be served. Such office or agency shall be initially at the Corporate Trust Office. Written notice of the location of each of such other office or agency and of any change of location thereof shall be given by the Trustee to the Issuer and the Holders in the manner specified in Section 1.14 hereof. In the event that no such office or agency shall be maintained or no such notice of location or of change of location shall be given, presentations, surrenders and demands may be made and notices may be served at the Corporate Trust Office. (b) There shall at all times be a Security Registrar and a Paying Agent hereunder. Any Paying Agent (other than the Trustee) from time to time appointed hereunder shall execute and deliver to the Trustee an instrument in which said Paying Agent shall agree with the Trustee, subject to the provisions of this Section 4.13, that such Paying Agent will: (i) hold all sums held by it for the payment of principal and interest on the Notes in trust for the benefit of the Persons entitled thereto until such sums shall be paid to such Persons or otherwise disposed of as herein provided; (ii) give the Trustee within five days thereafter notice of any default by any obligor upon the Notes in the making of any such payment of principal or interest; and (iii) at any time during the continuance of any such default, upon the written request of the Trustee, forthwith pay to the Trustee all sums so held in trust by such Paying Agent. Notwithstanding any other provision of this Indenture, any payment required to be made to or received or held by the Trustee may, to the extent authorized by written instructions of the Trustee, be made to or received or held by a Paying Agent in the Borough of Manhattan, The City of New York, for the account of the Trustee. The Trustee at its Corporate Trust Office is hereby appointed as a Paying Agent hereunder. (c) At any time when any Notes remain Outstanding, the Trustee may appoint an Authenticating Agent or Agents with respect to the Notes which shall be authorized to act on behalf of the Trustee to authenticate Notes issued upon original issuance, exchange, registration of transfer or partial redemption thereof or pursuant to Section 2.4 hereof, and Notes so authenticated shall be entitled to the benefits of this Indenture and shall be valid and obligatory for all purposes as if authenticated by the Trustee hereunder (it being understood that wherever reference is made in this Indenture to the authentication and 28 delivery of Notes by the Trustee or the Trustee's certificate of authentication, such reference shall be deemed to include authentication and delivery on behalf of the Trustee by an Authenticating Agent and a certificate of authentication executed on behalf of the Trustee by an Authenticating Agent). If an appointment of an Authenticating Agent shall be made pursuant to this Section 4.13(c) with respect to the Notes, the Notes may have endorsed thereon, in addition to the Trustee's certificate of authentication, an alternate certificate of authentication in the following form: This Note is one of the Notes referred to in the within-mentioned Indenture. [ ], as Trustee By: Authenticating Agent By: Authorized Signatory (d) Any Authorized Agent shall be a bank or trust company, shall be a Person organized and doing business under the laws of the United States or any State thereof, with a combined capital and surplus of at least US$100,000,000, and shall be authorized under such laws to exercise corporate trust powers, subject to supervision by Federal or state authorities. If such Authorized Agent publishes reports of its condition at least annually, pursuant to law or to the requirements of the aforesaid supervising or examining authority, then for the purposes of this Section 4.13, the combined capital and surplus of such Authorized Agent shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time an Authorized Agent shall cease to be eligible in accordance with the provisions of this Section 4.13, such Authorized Agent shall resign immediately in the manner and with the effect specified in this Section 4.13. (e) Any Person into which any Authorized Agent may be merged or converted or with which it may be consolidated, or any Person resulting from any merger, consolidation or conversion to which any Authorized Agent shall be a party, or any corporation succeeding to the corporate trust business of any Authorized Agent, shall be the successor of such Authorized Agent hereunder, if such successor Person is otherwise eligible under this Section 4.13, without the execution or filing of any paper or any further act on the part of the parties hereto or such Authorized Agent or such successor Person. (f) Any Authorized Agent may at any time resign by giving written notice of resignation to the Trustee and the Issuer. The Issuer may, and at the request of the Trustee shall, at any time, terminate the agency of any Authorized Agent by giving written notice of such 29 termination to the Authorized Agent and to the Trustee. Upon the resignation or termination of an Authorized Agent or in case at any time any such Authorized Agent shall cease to be eligible under this Section 4.13 (when, in either case, no other Authorized Agent performing the functions of such Authorized Agent shall have been appointed), the Issuer shall promptly appoint one or more qualified successor Authorized Agents approved by the Trustee to perform the functions of the Authorized Agent which has resigned or whose agency has been terminated or who shall have ceased to be eligible under this Section 4.13. The Issuer shall give written notice of any such appointment to all Holders pursuant to Section 1.14 hereof. (g) The Paying Agent shall comply with all applicable withholding, information reporting and back-up withholding tax requirements under the United States Internal Revenue Code of 1986, as amended, and the Treasury regulations issued thereunder in respect of any payment on, or in respect of a Note. SECTION 4.14 Trustee Risk. ------------ None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if it shall have reasonable ground for believing that the repayment of such funds or liability is not reasonably assured to it. Whether or not expressly provided herein, every provision of this Indenture relating to the conduct or affecting the liability of or affording protection to the Trustee shall be subject to Section 4.2 hereof and the requirements of the Trust Indenture Act. ARTICLE 5 HOLDERS' LISTS AND REPORTS BY TRUSTEE AND ISSUER SECTION 5.1 Issuer to Furnish Trustee Names and Addresses of Holders. -------------------------------------------------------- The Issuer will furnish or cause to be furnished to the Trustee (1) semi-annually, not later than January 15 and July 15 in each year, a list, in such form as the Trustee may reasonably require, of the names and addresses of the Holders of Notes as of a date not more than 15 days prior to the time such list is furnished, and (2) at such other times as the Trustee may request in writing, within 30 days after the receipt by the Issuer of any such request, a list of similar form and content as of a date not more than 15 days prior to the time such list is furnished; excluding from any such list names and addresses received by the Trustee in its capacity as Security Registrar. SECTION 5.2 Preservation of Information; Communications to Holders. ------------------------------------------------------ 30 The Trustee shall preserve, in as current a form as is reasonably practicable, the names and addresses of Holders contained in the most recent list furnished to the Trustee as provided in Section 5.1 and the names and addresses of Holders received by the Trustee in its capacity as Security Registrar. The Trustee may destroy any list furnished to it as provided in Section 5.1 upon receipt of a new list so furnished. The rights of Holders to communicate with other Holders with respect to their rights under this Indenture or under the Notes, and the corresponding rights and privileges of the Trustee, shall be as provided by the Trust Indenture Act. Every Holder of Notes, by receiving and holding the same, agrees with the Issuer and the Trustee that neither the Issuer nor the Trustee nor any agent of either of them shall be held accountable by reason of any disclosure of information as to names and addresses of Holders made pursuant to the Trust Indenture Act. SECTION 5.3 Reports by Trustee. ------------------ On or before June 1 in every year, so long as any Notes are Outstanding hereunder, the Trustee shall transmit to the Holders a brief report, dated as of the preceding December 31, to the extent required by Section 313(a) of the Trust Indenture Act in accordance with the procedures set forth in said Section. The Trustee shall also transmit to the Holders any report required by Section 313(b) during the time specified in such subsection. A copy of each such report at the time of its mailing to Holders shall be filed with the SEC and each stock exchange, if any, on which the Notes are listed. The Issuer shall promptly notify the Trustee if the Notes become listed on any stock exchange, and the Trustee shall comply with Section 313(d) of the Trust Indenture Act. SECTION 5.4 Reports by Issuer and BI. ------------------------ The Issuer and BI shall file with the Trustee and the SEC, and transmit to Holders, such information, documents and other reports, and such summaries thereof, as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant to such Act. ARTICLE 6 COVENANTS SECTION 6.1 Payment of Notes. ---------------- The Issuer shall pay the principal of and interest on the Notes on the dates and in the manner provided in the Notes and in this Indenture. An installment of principal of or interest on the Notes shall be considered paid on the date it is due if the Trustee or Paying Agent holds on that date U.S. legal tender designated for and sufficient to pay the installment in full and is not prohibited from paying such money to the Holders pursuant to the terms of this Indenture. Notwithstanding anything to the contrary contained in this 31 Indenture, the Issuer may, to the extent it is required to do so by law, deduct or withhold income or other similar taxes imposed by the United States of America from principal or interest payments hereunder. SECTION 6.2 Corporate Existence. ------------------- Except as otherwise permitted by Article 7, the Issuer shall do or cause to be done, at its own cost and expense, all things necessary to preserve and keep in full force and effect its corporate existence in accordance with its organizational documents. SECTION 6.3 Compliance Certificate; Notice of Default. ----------------------------------------- (a) The Issuer shall deliver to the Trustee within 120 days after the end of the Issuer's fiscal year, an Officer's Certificate stating that a review of its activities and the activities of its subsidiaries during the preceding fiscal year, has been made under the supervision of the signing officer with a view to determining whether the Issuer has complied with its obligations under this Indenture and further stating that to the best of such officer's knowledge the Issuer during such preceding fiscal year has complied with each and every such covenant and no Event of Default occurred during such year and at the date of such certificate there is no Event of Default that has occurred and is continuing or, if such officer does know of such Event of Default, the certificate shall describe the Event of Default and its status with particularity. (b) Upon becoming aware of any Event of Default in the performance of any covenant agreement or condition contained in this Indenture, the Issuer shall deliver to the Trustee, at its address set forth in Section 1.14 hereof, by registered or certified mail or by telegram, telex or facsimile transmission followed by hard copy by registered or certified mail, an Officer's Certificate specifying such event, notice or other action. SECTION 6.4 Impairment of Security Interest. ------------------------------- The Issuer shall not, and the Issuer shall not permit any of its subsidiaries to, take or knowingly or negligently omit to take, any action which would have the result of impairing or adversely affecting the security interest with respect to the Collateral for the benefit of the Holders of the Notes. Notwithstanding the foregoing, nothing herein or in the Security Documents shall prohibit (i) the sale, at any time and from time to time, of all or any portion of the Collateral so long as the Net Proceeds of any such sale are applied in accordance with the provisions of the Security Documents and this Indenture or (ii) the release of any Collateral or Lien in accordance with the provisions of the Security Documents. SECTION 6.5 Amendments to Security Documents. -------------------------------- The Issuer shall not, and the Issuer shall not permit any of its subsidiaries to, amend, modify or supplement, or permit or consent to any amendment, modification or supplement of, the Security Documents in any way that would be adverse 32 to the Holders of the Notes, other than amendments, modifications or supplements which are otherwise permitted pursuant to the provisions of this Indenture and the Security Documents. SECTION 6.6 Reports of Holders. ------------------ The Issuer will file with the Trustee and provide to the Holders of the Notes, within 15 days after it files them with the SEC, copies of the quarterly and annual reports and of the information, documents and other reports (or copies of such portions of any of the foregoing as the SEC may by rules and regulations prescribe) which the Issuer files with the SEC pursuant to the Section 13 or 15(d) of the Exchange Act. ARTICLE 7 SUCCESSOR CORPORATION; MERGER, CONSOLIDATION AND SALE OF ASSETS SECTION 7.1 Merger, Consolidation and Sale of Assets. ---------------------------------------- The Issuer will not, in a single transaction or series of related transactions, consolidate or merge with or into any Person, or sell, assign, transfer, lease, convey or otherwise dispose all or substantially all of the Issuer's assets whether as an entirety or substantially as an entirety to any Person unless: (i) either (1) the Issuer shall be the surviving or continuing entity or (2) the Person (if other than the Issuer) formed by such consolidation or into which the Issuer is merged or the Person which acquires by sale, assignment, transfer, lease, conveyance or other disposition the properties and assets of the Issuer substantially as an entirety (the "Surviving Entity") shall expressly assume, by supplemental indenture (in form and substance satisfactory to the Trustee), executed and delivered to the Trustee, the due and punctual payment of the principal and interest on all of the Notes and the performance of every covenant of the Notes and the Indenture on the part of the Issuer to be performed or observed; (ii) immediately before and immediately after giving effect to such transaction and the assumption contemplated above, no Event of Default shall have occurred or be continuing; and (iii) the Issuer or the Surviving Entity shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that such consolidation, merger, sale, assignment, transfer, lease, conveyance or other disposition and, if a supplemental indenture is required in connection with such transaction, such supplemental indenture comply with the applicable provisions of this Indenture and that all conditions precedent in this Indenture relating to such transaction have been satisfied. Notwithstanding clause (ii) of the preceding sentence, (a) any subsidiary of the Issuer may consolidate with, merge into or transfer all or part of its properties and assets to the Issuer; (b) the Issuer may merge with an Affiliate incorporated solely for the purpose of reincorporating the Issuer in another jurisdiction; and (c) the Issuer may merge with or into BI. SECTION 7.2 Successor Corporation Substituted. --------------------------------- Upon any consolidation, combination or merger or any transfer of all or substantially all 33 of the assets of the Issuer in accordance with the foregoing, in which the Issuer is not the continuing corporation, the successor Person formed by such consolidation or into which the Issuer is merged or to which such conveyance, lease or transfer is made shall succeed to, and be substituted for, and may exercise every right and power of, the Issuer under this Indenture and the Notes with the same effect as if such surviving entity had been named as such. ARTICLE 8 DEFAULT SECTION 8.1 Events of Default. ----------------- It shall be an Event of Default hereunder if any of the following events shall have occurred and be continuing: (a) the Issuer fails to pay interest on any Notes when the same becomes due and payable and such default continues for a period of 30 days; or (b) failure to pay the principal on any Notes when such principal becomes due and payable, at maturity, upon redemption or otherwise; or (c) the Issuer or BI defaults in the observance or performance of any other covenant or agreement on its part contained in this Indenture, which default continues for a period of 60 days after the Issuer and BI receive written notice specifying the default (and demanding that such default be remedied) from the Holders of at least a majority of the outstanding principal amount of the Notes; or (d) the Issuer or BI (A) commences a voluntary case or proceeding under any Bankruptcy Law with respect to itself, (B) consents to the entry of a judgment, decree or order for relief against it in an involuntary case or proceeding under any Bankruptcy Law, (C) consents to the appointment of a Custodian of it or for substantially all of its property, (D) consents to or acquiesces in the institution of a bankruptcy or an insolvency proceeding against it, (E) makes a general assignment for the benefit of its creditors, or (F) takes any corporate action to authorize or effect any of the foregoing; or (e) a court of competent jurisdiction enters a judgment, decree or order for relief in respect of the Issuer or BI in an involuntary case or proceeding under any Bankruptcy Law, which shall (A) approve as properly filed a petition seeking reorganization, arrangement, adjustment or composition in respect of the Issuer or BI, (B) appoint a Custodian of the Issuer or BI or for substantially all of its property or (C) order the winding-up or liquidation of the affairs of the Issuer or BI; and such judgment, decree or order shall remain unstayed and in effect for a period of 60 consecutive days; or (f) the Lien created by the Security Documents shall cease to be enforceable and of the same effect and priority purported to be created thereby, which cessation has a material adverse effect on the Holders; provided that the Issuer shall have 30 days to cure any such cessation (or, to the extent such default is curable but cannot be cured 34 within such 30 day period, so long as the Issuer is diligently pursuing a cure, such longer period of time which may be necessary in good faith to cure the same, but in no event to exceed 120 days). SECTION 8.2 Acceleration. ------------ If an Event of Default (other than an Event of Default specified in Section 8.1(d) or (e) with respect to the Issuer or BI) occurs and is continuing and has not been waived pursuant to Section 8.10, then the Holders of at least a majority in principal amount of outstanding Notes may declare the principal of and accrued interest on all the Notes to be due and payable by notice in writing to the Issuer and the Trustee specifying the respective Event of Default and that it is a "notice of acceleration" (the "Acceleration Notice"), and the same shall become immediately due and payable after receipt by the Issuer of such Acceleration Notice but only if such Event of Default is then continuing. Upon any such declaration, but subject to the immediately preceding sentence, such amount shall be immediately due and payable. If an Event of Default specified in Section 8.1(d) or (e) occurs and is continuing with respect to the Issuer or BI, all unpaid principal and accrued and unpaid interest on all of the outstanding Notes shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any Holder. At any time after a declaration of acceleration with respect to the Notes in accordance with this Section 8.2, the Holders of a majority in principal amount of the outstanding Notes may, on behalf of the Holders of all of the Notes, rescind and cancel such declaration and its consequences (i) if the rescission would not conflict with any judgment or decree, (ii) if all existing Events of Default have been cured or waived except nonpayment of principal or interest that has become due solely because of the acceleration, (iii) to the extent the payment of such interest is lawful, interest on overdue installments of interest and overdue principal, which has become due otherwise than by such declaration of acceleration, has been paid and, (iv) if the Issuer has paid the Trustee its reasonable compensation and reimbursed the Trustee for its expenses, disbursements and advances, and all other amounts due the Trustee under Section 4.6. No such rescission shall affect any subsequent Event of Default or impair any right consequent thereto. SECTION 8.3 Collection of Indebtedness by Trustee; Trustee May Prove Debt. ------------------------------------------------------------- In case the Issuer shall default in its obligations to pay the principal of or interest on, each of the Notes, the Trustee, in its own name and as trustee of an express trust, shall be entitled and empowered to institute any action or proceedings at law or in equity for the collection of the sums so due and unpaid, and may prosecute any such action or proceedings to judgment or final decree, and may enforce any such judgment or final decree against the Issuer upon such Notes and collect in the manner provided by law out of the property of the Issuer upon such Notes, wherever situated, the moneys adjudged or decreed to be payable. 35 All rights of action and of asserting claims under this Indenture or under any of the Notes may be enforced by the Trustee without the possession of any of the Notes or the production thereof on any trial or other proceedings relative thereto, and any such action or proceedings instituted by the Trustee shall be brought in its own name as trustee of an express trust, and any recovery of judgment, subject to the payment of the expenses, disbursements and compensation of the Trustee, each predecessor Trustee and their respective agents and attorneys, shall be for the ratable benefit of the Holders of the Notes in respect of which such action was taken. In any proceedings brought by the Trustee (and also any proceedings involving the interpretation of any provision of this Indenture to which the Trustee shall be a party), the Trustee shall be held to represent all the Holders of the Notes in respect to which such action was taken, and it shall not be necessary to make any Holders of such Notes parties to any such proceedings. SECTION 8.4 Application of Proceeds. ----------------------- If the Trustee collects any money or property pursuant to this Article 8, it shall pay out the money in the following order: First: to the Trustee for amounts due under Section 4.6; ----- Second: to Holders for amounts due and unpaid on the Notes for ------ principal and interest, ratably, without preference or priority of any kind, according to the amounts due and payable on the Notes for principal and interest, respectively; and Third: to the Issuer or any other obligor on the Notes, as their ----- interests may appear, or as a court of competent jurisdiction may direct. The Trustee, upon prior notice to the Issuer, may fix a record date and payment date for any payment to Holders pursuant to this Section 8.4. SECTION 8.5 Other Remedies. -------------- If an Event of Default occurs and is continuing, the Trustee may pursue any available remedy by proceeding at law or in equity to collect the payment of principal of or interest on the Notes or to enforce the performance of any provision of the Notes, this Indenture or the Security Documents. Each Noteholder, by accepting a Note, acknowledges that the exercise of remedies by the Trustee with respect to the Collateral is subject to the terms and conditions of the Security Documents and the proceeds received upon realization of the Collateral shall be applied by the Trustee in accordance with Section 8.4 hereof and applicable law. SECTION 8.6 Restoration of Rights on Abandonment of Proceedings. --------------------------------------------------- 36 In case the Trustee shall have proceeded to enforce any right under this Indenture or the Security Documents and such proceedings shall have been discontinued or abandoned for any reason, or shall have been determined adversely to the Trustee, then and in every such case the Issuer and the Trustee shall be restored respectively to their former positions and rights hereunder, and all rights, remedies and powers of the Issuer, the Trustee and the Noteholders shall continue as though no such proceedings had been taken. SECTION 8.7 Limitations on Suits by Noteholders. ----------------------------------- No Holder of any Note shall have any right by virtue or by availing itself of any provision of this Indenture or of the Notes to institute any action or proceeding at law or in equity or in bankruptcy or otherwise upon or under or with respect to this Indenture or the Security Documents, or for the appointment of a trustee, receiver, liquidator, custodian or other similar official or for any other remedy hereunder or under the Notes, unless such Holder previously shall have given to the Trustee written notice of default and of the continuance thereof, as hereinbefore provided, and unless also the Holders of not less than a majority in aggregate principal amount of the Notes then Outstanding shall have made written request upon the Trustee to institute such action or proceedings in its own name as trustee hereunder and shall have offered to the Trustee such reasonable indemnity as it may require against the costs, expenses and liabilities to be incurred therein or thereby and the Trustee for 60 days after its receipt of such notice, request and offer of indemnity shall have failed to institute any such action or proceeding and no direction inconsistent with such written request shall have been given to the Trustee pursuant to Section 8.9, it being understood and intended, and being expressly covenanted by the taker and Holder of every Note with every other taker and Holder and the Trustee, that no one or more Holders of Notes shall have any right in any manner whatever by virtue or by availing itself of any provision of this Indenture to affect, disturb or prejudice the rights of any other Holder of Notes, or to obtain or seek to obtain priority over or preference to any other Holder or to enforce any right under this Indenture or under the Notes, except in the manner herein provided and for the equal, ratable and common benefit of all Holders of Notes. For the protection and enforcement of the provisions of this Section, each and every Noteholder and the Trustee shall be entitled to such relief as can be given either at law or in equity. SECTION 8.8 Powers and Remedies Cumulative; Delay or Omission Not Waiver of --------------------------------------------------------------- Default. - ------- Except as provided in Section 8.5 and 8.6 hereof, no right or remedy herein conferred upon or reserved to the Trustee or to the Noteholders is intended to be exclusive or any other right or remedy, and every right and remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other appropriate right or remedy. 37 No delay or omission of the Trustee or of any Noteholder to exercise any right or power accruing upon any Event of Default occurring and continuing as aforesaid shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or an acquiescence therein; and, subject to Section 8.5 hereof and Section 8.6 hereof, every power and remedy given by this Indenture or the Security Documents or by law to the Trustee or to the Noteholders may be exercised from time to time, and as often as shall be deemed expedient, by the Trustee or by the Noteholders. SECTION 8.9 Control by Noteholders. ---------------------- The Holders of a majority in aggregate principal amount of the Notes at the time Outstanding shall have the right to direct the time, method, and place of conducting any proceeding for any remedy available to the Trustee, or exercising any trust or power conferred on the Trustee with respect to the Notes by this Indenture or the Security Documents; provided that such direction shall not be otherwise than in accordance with applicable law (including, without limitation, the Trust Indenture Act) and the provisions of this Indenture and provided further that (subject to the provisions of Section 4.1 hereof) the Trustee shall have the right to decline to follow any such direction if the Trustee, being advised by counsel, shall determine that the action or proceeding so directed may not lawfully be taken or if the Trustee in good faith by action of Responsible Officers of the Trustee shall determine that the action or proceedings so directed would involve the Trustee in personal liability or if the Trustee in good faith shall so determine that the actions or forbearance specified in or pursuant to such direction would be unduly prejudicial to the interests of Holders of the Notes not joining in the giving of said direction, it being understood that (subject to Section 4.1 hereof) the Trustee shall have no duty to ascertain whether or not such actions or forbearance are unduly prejudicial to such Holders. Nothing in this Indenture or the Security Documents shall impair the right of the Trustee in its discretion to take any action deemed proper by the Trustee and which is not inconsistent with such direction or directions by Noteholders. SECTION 8.10 Waiver of Defaults. ------------------ The Holders of a majority of the aggregate principal amount of the Notes Outstanding (or of such lesser percentage as may act at a meeting of Noteholders) may on behalf of the Holders of all the Notes Outstanding waive any past default or Event of Default with respect to the Notes, except a default in the payment of the principal of or interest on any Note or a default in respect of a covenant or provision hereof that cannot be modified or amended without the consent of each Holder affected as provided in Section 11.2 hereof. In case of any such waiver, the Issuer, the Trustee and the Holders of the Notes shall be restored to their former positions and rights hereunder, respectively. Upon any such waiver, such default shall cease to exist and be deemed to have been cured and not to have occurred, and any Event of Default arising therefrom shall be deemed to have been cured, and not to have occurred for every purpose of this 38 Indenture; but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent thereon. SECTION 8.11 Unconditional Right of Holders to Receive Principal and Interest. ---------------------------------------------------------------- Notwithstanding any other provision in this Indenture, the Holder of any Note shall have the right, which is absolute and unconditional, to receive payment of the principal of and interest on such Note on its Stated Maturity as expressed in such Note (or, in the case of redemption, on the Redemption Date) and to institute suit for the enforcement of any such payment, and such rights shall not be impaired without the consent of such Holder. SECTION 8.12 Undertaking for Costs. --------------------- All parties to this Indenture agree, and each Holder of any Note by his acceptance thereof shall be deemed to have agreed, that any court may in its discretion require, in any suit for the enforcement of any right or remedy under this Indenture, or in any suit against the Trustee for any action taken, suffered or omitted by it as Trustee, the filing by any party litigant in such suit other than the Trustee of an undertaking to pay the costs of such suit and that such court may in its discretion assess reasonable costs, including reasonable attorneys' fees, against any party litigant in such suit, having due regard to the merits and good faith of the claims or defenses made by such party litigant; but the provisions of this Section shall not apply to any suit instituted by the Trustee, to any suit instituted by any Noteholder or group of Noteholders holding in aggregate more than 10% in principal amount of Outstanding Notes, or any suit instituted by a Noteholder for enforcement of payment of the principal of, or interest on, any Note on or after the date such amount is required to be paid or for the enforcement of the right to convert any Note in accordance with Article 9. SECTION 8.13 Trustee May File Proofs of Claim. -------------------------------- In case of any judicial proceeding relative to the Issuer (or any other obligor upon the Notes), its property or its creditors, the Trustee shall be entitled and empowered, by intervention in such proceeding or otherwise, to take any and all actions authorized under the Trust Indenture Act in order to have claims of the Holders and the Trustee allowed in any such proceeding. In particular, the Trustee shall be authorized to collect and receive any moneys or other property payable or deliverable on any such claims and to distribute the same; and any custodian, receiver, assignee, trustee, liquidator, sequestrator or other similar official in any such judicial proceeding is hereby authorized by each Holder to make such payments to the Trustee and, in the event that the Trustee shall consent to the making of such payments directly to the Holders, to pay to the Trustee any amount due it for the reasonable compensation, expenses, disbursements and advances of the Trustee, its agents and counsel, and any other amounts due the Trustee under Section 4.6. No provision of this Indenture shall be deemed to authorize the Trustee to authorize or consent to or accept or adopt on behalf of any Holder any plan of 39 reorganization, arrangement, adjustment or composition affecting the Notes or the rights of any Holder thereof or to authorize the Trustee to vote in respect of the claim of any Holder in any proceeding; provided, however, that the Trustee may, on behalf of the Holders, vote for the election of a trustee in bankruptcy or similar official and be a member of a creditors' or other similar committee. ARTICLE 9 CONVERSION OF NOTES SECTION 9.1 Conversion Privilege. -------------------- Subject to and upon compliance with the provisions of this Article 9, at the option of the Holder thereof, the then outstanding principal amount of any Note may at any time after the first anniversary of the original issuance of the Notes be converted, in whole, or in part in multiples of $1,000 principal amount, into fully paid and non-assessable shares of New Common Stock issuable upon conversion of the Notes, at the Conversion Price in effect at the Date of Conversion, until and including, but not after the close of business on the second Business Day prior to the Maturity Date, or unless such Note or some portion thereof shall have been called for redemption prior to such date and no default is made in making due provision for the payment of the Redemption Price in accordance with the terms of this Article 9 and the Notes, in which case, with respect to such Note or portion thereof as has been so called for redemption, such Note or portion thereof may be so converted until and including, but not after, the close of business on the second Business Day prior to the Redemption Date for such Note, unless the Issuer subsequently fails to pay the applicable Redemption Price. SECTION 9.2 Exercise of Conversion Privilege. -------------------------------- In order to exercise the conversion privilege, the Holder of any Note to be converted shall surrender such Note to BI at any time during usual business hours at its office or agency maintained for the purpose as provided in this Indenture, accompanied by a fully executed written notice, in substantially the form set forth on the reverse of the Note, that the Holder elects to convert such Note or a stated portion thereof constituting a multiple of $1,000 principal amount, and, if such Note is surrendered for conversion during the period between the close of business on any Regular Record Date and the opening of business on the next following Stated Maturity for the payment of interest and has not been called for redemption on a Redemption Date which occurs within such period, accompanied also by payment to the Issuer of an amount equal to the interest payable on such Stated Maturity on the principal amount of the Note being surrendered for conversion, notwithstanding such conversion. The Holder of any Note at the close of business on a Regular Record Date will be entitled to receive the interest payable on such Note on the corresponding Stated Maturity for the payment of interest notwithstanding the conversion thereof after such Regular Record Date. The interest payment with respect to a Note called for redemption on a date during the period from the close of business on or after any Determination Date to the close of business on the Business Day following 40 the corresponding Payment Date to the registered Holder at the close of business on that Determination Date (notwithstanding the conversion of such Note after the corresponding Payment Date) and a Holder who elects to convert need not include funds equal to the interest paid. A notice of conversion shall state the name or names (with address) in which the certificate or certificates for shares of New Common Stock shall be issued. Notes surrendered for conversion shall (if reasonably required by BI or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to BI duly executed by the Holder or his attorney duly authorized in writing. As promptly as practicable after the receipt of such notice and the surrender of such Note as aforesaid, BI shall, subject to the provisions of Section 9.9 herein, issue and deliver at such office or agency to such Holder, or in accordance with the written instruction of the Holder, a certificate or certificates for the number of full shares of New Common Stock issuable on such conversion of New Notes in accordance with the provisions of this Article 9 and cash, as provided in Section 9.3 in respect of any fraction of a share of New Common Stock otherwise issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the date (the "Date of Conversion") on which such Note shall have been surrendered as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of New Common Stock shall be issuable upon such conversion shall be deemed to have become on the Date of Conversion the holder or holders of record of the shares represented thereby; provided, however, that any such surrender on any date when the stock transfer books of BI are closed shall cause the person or persons in whose name or names the certificate or certificates for such shares are to be issued to be deemed to have become the recordholder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open but such conversion shall nevertheless be at the Conversion Price in effect at the close of business on the date when such Note shall have been so surrendered with the conversion notice. In the case of conversion of a portion, but less than all, of a Note, the Issuer shall as promptly as practicable execute, and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Issuer, a Note or Notes in the aggregate principal amount of the unconverted portion of the Note surrendered. Except as otherwise expressly provided in this Indenture, no payment or adjustment shall be made for interest accrued on any Note (or portion thereof) converted or for dividends or distributions on any New Common Stock issued upon conversion of any Note. SECTION 9.3 Fractional Interests. -------------------- No fractions of shares or scrip representing fractions of shares shall be issued upon conversion of any Note. If more than one Note shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of 41 the Notes so surrendered. If any fraction of a share of New Common Stock would, except for the foregoing provisions of this Section 9.3, be issuable on the conversion of any Note or Notes, The Issuer shall make payment in lieu thereof in an amount of cash equal to the value of such fraction computed on the basis of the last sale price of the New Common Stock as reported on the NASDAQ (or if not listed for trading thereon, then on the principal national securities exchange on which the New Common Stock is listed or admitted to trading) at the close of business on the Date of Conversion or if no such sale takes place on such day, the last sale price for such day shall be the average of the closing bid and asked prices regular way on the NASDAQ (or if not listed for trading thereon, on the principal national securities exchange on which the New Common Stock is listed or admitted to trading) for such day (any such last sale price, the "Last Sale Price"). If on such Trading Day the New Common Stock is not quoted by any such organization, the closing price on the prior Trading Day shall be used. SECTION 9.4 Conversion Price. ---------------- The Conversion Price per share of New Common Stock issuable upon conversion of the Notes shall initially be the price equal to the arithmetic unweighted average closing price of such stock during the 20 Business Days prior to the one year anniversary of the original issuance of the Notes. SECTION 9.5 Adjustment of Conversion Price; Notice of Adjustments. ----------------------------------------------------- The Conversion Price shall be subject to adjustment from time to time as follows: (a) In case BI shall (1) make or pay a dividend (or other distribution) in shares of New Common Stock on any class of capital stock of BI, (2) subdivide its outstanding shares of New Common Stock into a greater number of shares, or (3) combine or reclassify its outstanding shares of New Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such action shall be adjusted so that the Holder of any Note thereafter surrendered for conversion shall be entitled to receive the number of shares of New Common Stock that such Holder would have owned immediately following such action had such Note been converted immediately prior thereto. An adjustment made pursuant to this subsection (a) shall become effective immediately, except as provided in subsection (h) below, after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) In case BI shall issue rights, options or warrants to all holders of New Common Stock entitling them to subscribe for or purchase shares of New Common Stock at a price per share less than the then current market price per share of the New Common Stock (as determined pursuant to subsection (f) below) on the record date mentioned below, the Conversion Price shall be adjusted to a price, computed to the nearest cent, so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of issuance of such rights or warrants by a fraction of which: 42 (i) the numerator shall be (A) the number of shares of New Common Stock outstanding on the date of issuance of such rights, options or warrants, immediately prior to such issuance, plus (B) the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase at such current market price (determined by multiplying such total number of shares by the exercise price of such rights, options or warrants and dividing the product so obtained by such current market price); and (ii) the denominator shall be (A) the number of shares of New Common Stock outstanding on the date of issuance of such rights, options or warrants, immediately prior to such issuance, plus (B) the number of additional shares of New Common Stock which are so offered for subscription or purchase. Such adjustment shall become effective immediately, except as provided in subsection (h) below, after the record date for the determination of holders entitled to receive such rights, options or warrants; provided, however, that if any such rights, options or warrants issued by BI as described in this subsection (b) are only exercisable upon the occurrence of certain triggering events relating to control and provided for in shareholder rights plans, then the Conversion Price will not be adjusted as provided in this subsection (b) until such triggering events occur. (c) In case BI or any subsidiary of BI shall distribute to all holders of New Common Stock, any of its assets, evidences of indebtedness, cash or other assets or shares of capital stock other than New Common Stock (including securities, but other than (x) dividends or distributions exclusively in cash or (y) any dividend or distribution for which an adjustment is required to be made in accordance with subsection (a) or (b) above), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the then current market price per share of the New Common Stock (determined as provided in subsection (f) below) on the record date mentioned below less the then fair market value (as reasonably determined in good faith by the Board of Directors of BI) of the portion of the assets so distributed applicable to one share of New Common Stock, and of which the denominator shall be such current market price per share of the New Common Stock. Such adjustment shall become effective immediately, except as provided in subsection (h) below, after the record date for the determination of stockholders entitled to receive such distribution. Notwithstanding the foregoing, in the event that the fair market value of the assets, evidences of indebtedness or other securities so distributed applicable to one share of New Common Stock equals or exceeds such current market price per share of New Common Stock, or such current market price exceeds such fair market value by less than $0.10 per share, the Conversion Price shall not be adjusted pursuant to this subsection (c) and, to the extent applicable, the provisions of subsection (k) shall apply to such distribution. (d) In case BI or any subsidiary of BI shall make any distribution consisting exclusively of cash 43 (excluding any cash portion of distributions for which an adjustment is required to be made in accordance with (c) above, or cash distributed upon a merger or consolidation) to all holders of New Common Stock in an aggregate amount that, combined together with (i) all other such all-cash distributions made within the then preceding 12 months in respect of which no adjustment has been made and (ii) any cash and the fair market value of other consideration paid or payable in respect of any tender offer by BI or any of its subsidiaries for New Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 15% of BI's market capitalization (defined as being the product of the then current market price of the New Common Stock (determined as provided in subsection (f) below) times the number of shares of New Common Stock then outstanding) on the record date of such distribution, then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the then current market price per share of the New Common Stock on such record date less the amount of the cash so distributed applicable to one share of New Common Stock, and of which the denominator shall be such current market price per share of the New Common Stock. Such adjustment shall become effective immediately, except as provided in subsection (h) below, after the record date for the determination of stockholders entitled to receive such distribution. Notwithstanding the foregoing, in the event that the cash so distributed applicable to one share of New Common Stock equals or exceeds such current market price per share of New Common Stock, or such current market price exceeds such amount of cash by less than $0.10 per share, the Conversion Price shall not be adjusted pursuant to this subsection (d), and, to the extent applicable, the provisions of subsection (k) shall apply to such distribution. (e) In case there shall be completed a tender or exchange offer made by BI or any subsidiary of BI for all or any portion of the New Common Stock (any such tender or exchange offer being referred to as an "Offer") that involves an aggregate consideration having a fair market value as of the expiration of such Offer (the "Expiration Date") that, together with (i) any cash and the fair market value of any other consideration payable in respect of any other Offer, as of the expiration of such other Offer, expiring within the 12 months preceding the expiration of such Offer and in respect for which no Conversion Price adjustment pursuant to this subsection (e) has been made and (ii) the aggregate amount of any all-cash distributions referred to in subsection (d) of this Section 9.5 to all holders of New Common Stock within the 12 months preceding the expiration of such Offer for which no conversion price adjustment pursuant to such subsection (d) has been made, exceeds 15% of the product of the then current market price per share (determined as provided in subsection (f) below) of the New Common Stock on the Expiration Date times the number of shares of New Common Stock outstanding (including any tendered shares) on the Expiration Date, the Conversion Price shall be reduced by multiplying such Conversion Price in effect immediately prior to the Expiration Date by a fraction of which the numerator shall be (i) the product of the then current market price per share (determined as provided in subsection (f) below) of the New Common Stock on the Expiration Date times the number of shares of New Common Stock outstanding 44 (including any tendered shares) on the Expiration Date minus (ii) the fair market value of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the Offer) of all shares validly tendered and not withdrawn as of the Expiration Date (the shares deemed so accepted being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such current market price per share on the Expiration Date times (ii) such number of outstanding shares on the Expiration Date less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Date. For purposes of this subsection (e), the fair market value of any consideration with respect to an Offer shall be reasonably determined in good faith by the Board of Directors of BI and described in a board resolution. (f) For the purpose of any computation under subsections (b), (c), (d) and (e) above, the current market price per share of New Common Stock on any date shall be deemed to be the average of the Last Sale Prices of a share of New Common Stock for the five consecutive Trading Days selected by BI commencing not more than 20 Trading Days before, and ending not later than the earlier of the date in question and the date before the "`ex' date" with respect to the issuance, distribution or Offer requiring such computation. If on any such Trading Day the New Common Stock is not quoted by any organization referred to in the definition of Last Sale Price in Section 9.3, the fair value of the New Common Stock on such day, as reasonably determined in good faith by the Board of Directors of BI, shall be used. For purposes of this paragraph, the term "`ex' date" when used with respect to any issuance, distribution or payments with respect to an Offer, means the first date on which the New Common Stock trades regular way on the NASDAQ (or if not listed or admitted to trading thereon, then on the principal national securities exchange on which the New Common Stock is listed or admitted to trading) without the right to receive such issuance, distribution or Offer. (g) In addition to the foregoing adjustments in subsections (a), (b), (c), (d) and (e) above, BI will be permitted to make such reductions in the Conversion Price as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will not be taxable to the holders of the shares of New Common Stock. (h) In the event BI elects to make such a reduction in the Conversion Price, BI will comply with the requirements of Rule 14e-1 of the Exchange Act and any other Federal and state laws and regulations thereunder if and to the extent that such laws and regulations are applicable in connection with the reduction of the Conversion Price of the Notes; provided that any provisions of this Indenture which conflict with such laws shall be deemed to be superseded by the relevant provisions of such laws. (i) In any case in which this Section 9.5 shall require that an adjustment (including by reason of the last sentence of subsection (a) or (c) above) be made immediately following a record date, BI may elect to defer the effectiveness of such adjustment (but in no event until a date later than the effective time of the event giving rise to such adjustment), in which case BI shall, with respect to any Note converted after such record date and on and 45 before such adjustment shall have become effective, (i) defer paying any cash payment pursuant to Section 9.3 or issuing to the Holder of such Note the number of shares of New Common Stock and other capital stock of BI (or other assets or securities) issuable upon such conversion in excess of the number of shares of New Common Stock and other capital stock of BI issuable thereupon only on the basis of the Conversion Price prior to adjustment, and (ii) not later than five Business Days after such adjustment shall have become effective, pay to such Holder the appropriate cash payment pursuant to Section 9.3 of this Article 9 and issue to such Holder the additional shares of New Common Stock and other capital stock of BI issuable on such conversion. (j) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least one percent (1.0%) of the Conversion Price; provided, that any adjustments which by reason of this subsection (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Article 9 shall be made to the nearest cent or to the nearest one-hundredth of a share, as the case may be. Whenever the Conversion Price is adjusted as herein provided, BI shall promptly (i) file with the Trustee and each conversion agent an Officer's Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment, and (ii) mail or cause to be mailed a notice of such adjustment to each Holder of Notes at the Holder's address as the same appears on the Security Register. (k) In the event that BI distributes rights (including rights to distributions referred to by paragraphs (c) and (d) of this Section 9.5 to the extent this paragraph (k) applies thereto) or warrants (other than those referred to in subsection (b) above) pro rata to holders of New Common Stock, so long as any such rights or warrants have not expired or been redeemed by BI, BI shall make proper provision so that the Holder of any Note surrendered for conversion will be entitled to receive upon such conversion, in addition to the shares of New Common Stock issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a number of shares of New Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the rights or warrants, and (ii) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of New Common Stock into which the principal amount of such Note so converted was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants. SECTION 9.6 Continuation of Conversion Privilege in Case of Reclassification, ---------------------------------------------------------------- Change, Merger, Consolidation or Sale of Assets - ----------------------------------------------- 46 . If any of the following shall occur, namely: (a) any reclassification or change of outstanding shares of New Common Stock issuable upon conversion of the Notes (other than a change in par value, or from par value to no par value, or from no par value, to par value, or as a result of a subdivision or combination), (b) any consolidation or merger of BI with or into any other Person, or the merger of any other Person with or into BI (other than a merger which does not result in any reclassification, change, conversion, exchange or cancellation of outstanding shares of New Common Stock) or (c) any sale, transfer or conveyance of all or substantially all of the assets of BI (computed on a consolidated basis), then BI, or such successor or purchasing entity, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale or conveyance, execute and deliver to the Trustee a supplemental indenture providing that the Holder of each Note then outstanding shall have the right to convert such Note only into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance by a holder of the number of shares of New Common Stock issuable upon conversion of such Note immediately prior to such reclassification, change, consolidation, merger, sale, transfer or conveyance assuming such holder of New Common Stock of BI failed to exercise his rights of an election, if any, as to the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance (provided that if the kind or amount of securities, cash, and other property receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance is not the same for each share of New Common Stock of BI held immediately prior to such reclassification, change, consolidation, merger, sale, transfer or conveyance in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this Section 9.6 the kind and amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non- electing shares). Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Article 9. If, in the case of any such consolidation, merger, sale or conveyance, securities and property (including cash) receivable thereupon by a holder of shares of New Common Stock includes shares of stock or other securities and property (including cash) of a corporation other than the successor or purchasing corporation, as the case may be, in such consolidation, merger, sale or conveyance, then such supplemental indenture shall also be executed by such other corporation and shall contain such additional provisions to protect the interests of the Holders of the Notes as the Board of Directors of BI shall reasonably consider necessary by reason of the foregoing. The provisions of this Section 9.6 shall similarly apply to successive consolidations, mergers, sales or conveyances. Notice of the execution of each such supplemental indenture shall be mailed to each Holder of Notes at his address as the same appears in the Security Register. 47 SECTION 9.7 Notice of Certain Events. ------------------------ In the event (a) BI shall declare a dividend (or any other distribution) payable to the holders of New Common Stock (other than cash dividends); (b) BI shall authorize the grant to holders of New Common Stock of rights, warrants or options to subscribe for or purchase any shares of stock of any class or of any other rights; (c) BI shall authorize any reclassification or change of the New Common Stock (including a subdivision or combination of its outstanding shares of New Common Stock), or any consolidation or merger to which BI is a party and for which approval of any stockholders of BI is required, or the sale or conveyance of all or substantially all the property or business of BI; (d) there shall be proposed any voluntary or involuntary dissolution, liquidation or winding-up of BI; or (e) BI or any of its subsidiaries shall complete an Offer; then, BI shall cause to be filed at the office or agency maintained for the purpose of conversion of the Notes as provided in Section 9.12 and shall cause to be mailed to each Holder of Notes, at its address as it shall appear on the registry books of BI, at least 20 days before the date hereinafter specified (or the earlier of the dates hereinafter specified, in the event that more than one date is specified), a notice stating the date on which (1) a record is expected to be taken for the purpose of such dividend, distribution, rights, warrants or options or Offer, or if a record is not to be taken, the date as of which the holders of New Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options or to participate in such Offer are to be determined, or (2) such reclassification, change, consolidation, merger, sale, conveyance, dissolution, liquidation or winding-up is expected to become effective and the date, if any is to be fixed, as of which it is expected that holders of New Common Stock of record shall be entitled to exchange their shares of New Common Stock for securities or other property deliverable upon such reclassification, change, consolidation, merger, sale, conveyance, dissolution, liquidation or winding-up. SECTION 9.8 Taxes on Conversion. ------------------- BI will pay any and all documentary, stamp or similar taxes payable to the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery of shares of New Common Stock on conversion of Notes pursuant thereto; provided, however, that BI shall not be required to pay any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of New Common Stock in a name other than that of the Holder of the Notes to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to BI the amount of any such tax or has established, to the 48 satisfaction of BI, that such tax has been paid. BI extends no protection with respect to any other taxes imposed in connection with conversion of Notes. SECTION 9.9 BI to Provide Stock. ------------------- BI shall reserve, free from preemptive rights, out of its authorized but unissued shares, sufficient shares to provide for the conversion of the Notes from time to time as such Notes are presented for conversion, provided, that nothing contained herein shall be construed to preclude BI from satisfying its obligations in respect of the conversion of Notes by delivery of repurchased shares of New Common Stock which are held in the treasury of BI. If any shares of New Common Stock to be reserved for the purpose of conversion of Notes hereunder require registration with or approval of any governmental authority under any Federal or state law before such shares may be validly issued or delivered upon conversion, then BI covenants that it will in good faith and as expeditiously as possible use its best efforts to secure such registration or approval, as the case may be, provided, however, that nothing in this Section 9.9 shall be deemed to limit in any way the obligations of BI provided in this Article 9. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the New Common Stock, BI will take all corporate action which may be necessary in order that BI may validly and legally issue fully paid and non-assessable shares of New Common Stock at such adjusted Conversion Price. BI covenants that all shares of New Common Stock which may be issued upon conversion of Notes will upon issue be fully paid and non-assessable by BI and free of preemptive rights. SECTION 9.10 Disclaimer of Responsibility for Certain Matters. ------------------------------------------------ Neither the Trustee nor any agent of the Trustee shall at any time be under any duty or responsibility to any Holder of Notes to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the Officer's Certificate referred to in Section 9.5 or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. Neither the Trustee nor any agent of the Trustee shall be accountable with respect to the validity or value (or the kind or amount) of any shares of New Common Stock, or of any securities or property (including cash), which may at any time be issued or delivered upon the conversion of any Note; and neither the Trustee nor any conversion agent makes any representation with respect thereto. Neither the Trustee nor any agent of the Trustee shall be responsible for any failure of BI to issue, register the transfer of or deliver any shares of New Common Stock or stock certificates or other securities or property (including cash) upon the surrender of any Note for the purpose of conversion or to comply with any of the 49 covenants of BI contained in this Article 9. SECTION 9.11 Return of Funds Deposited for Redemption of Converted Notes. ----------------------------------------------------------- Any funds which at any time shall have been deposited with the Trustee or any other Paying Agent for the purpose of paying the principal of and interest on any of the Notes and which shall not be required for such purposes because of the conversion of such Notes, as provided in this Article 9, shall after such conversion be repaid to the Issuer by the Trustee or such other Paying Agent. SECTION 9.12 Registrar and Paying Agent. -------------------------- The Issuer shall maintain or cause to be maintained an office or agency in the Borough of Manhattan, The City of New York, where Notes may be presented for conversion and where notices and demands to or upon the Issuer in respect of the conversion of the Notes may be served. Such office or agency shall initially be the Corporate Trust Office. ARTICLE 10 SATISFACTION AND DISCHARGE SECTION 10.1 Defeasance of Notes ------------------- . Except as otherwise provided in the terms of any Notes, the Issuer shall be deemed to have made all payments due on the Notes prior to the Maturity Date thereof for all purposes of this Indenture, and the entire indebtedness of the Issuer in respect thereof shall be deemed to have been satisfied and discharged, upon satisfaction of each of the following conditions: (a) The Issuer shall have irrevocably deposited with the Trustee, in trust, for the benefit of the Holders, cash in Dollars or obligations of the United States Government, or a combination thereof, in such amount as will be sufficient, in the opinion of a nationally recognized firm of independent public accountants, to pay the principal of and interest on, the Outstanding Notes on and prior to the Maturity Date thereof or upon redemption; (b) If any such deposit of money shall have been made prior to the Maturity Date or Redemption Date of such Notes, the Issuer shall have delivered to the Trustee an Issuer Order stating that such money shall be held by the Trustee, in trust, as provided in Section 10.3 hereof; (c) In the case of redemption of Notes, the notice requisite to the validity of such redemption shall have been given, or irrevocable instructions shall have been given by the Issuer to the Trustee to give such notice, under arrangements satisfactory to the Trustee; (d) The Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that the Holders of the Outstanding Notes will not recognize income, gain or loss for U.S. federal income tax purposes as a result of such defeasance as set forth in this Section 10.1 and will be subject to U.S. federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance had not occurred, and 50 such opinion must refer to and be based upon a published ruling of the U.S. Internal Revenue Service or a change in applicable federal U.S. income tax laws since the date hereof; (e) No Event of Default shall have occurred and be continuing on the date of such deposit; (f) The Issuer shall have delivered to the Trustee an Opinion of Counsel to the effect that, after the 91st day following the deposit referred to above, the trust funds will not be subject to the effect of any applicable bankruptcy, insolvency, reorganization or similar laws affecting creditors' rights generally; and (g) The Issuer shall have delivered to the Trustee an Officer's Certificate and an Opinion of Counsel satisfactory to the Trustee which, taken together, shall state that all conditions precedent under this Indenture to such defeasance have been complied with. Upon satisfaction of the aforesaid conditions with respect to the Notes, the Trustee shall, upon receipt of an Issuer Request, acknowledge in writing that the Notes are deemed to have been paid for all purposes of this Indenture and that the entire indebtedness of the Issuer in respect thereof is deemed to have been satisfied and discharged. In the event that Notes which shall be deemed to have been paid as provided in this Section 10.1 do not mature and are not to be redeemed within the 60-day period commencing on the date of the deposit with the Trustee of monies, the Issuer shall, as promptly as practicable, give or cause to be given a notice, in the same manner as a notice of redemption with respect to such Notes, to the Holders of such Notes to the effect that the Issuer is deemed to have made full payment on such Notes and the circumstances thereof. Notwithstanding the satisfaction and discharge of any Notes as aforesaid, the obligations of the Issuer and the Trustee in respect of such Notes under Sections 2.5, 2.6, 2.7 and 2.12, Section 4.6 and this Article 10 hereof shall survive. SECTION 10.2 Satisfaction and Discharge of the Indenture. ------------------------------------------- This Indenture shall upon Issuer Request cease to be of further effect (except as hereinafter expressly provided), and the Trustee, at the expense of the Issuer, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture, when: (a) the Issuer has paid and discharged the entire indebtedness by (i) paying in full the outstanding principal of, and accrued and unpaid interest, on, the Notes as and when payable, (ii) depositing with the Trustee cash in a sufficient amount to redeem all outstanding Notes in accordance with their terms together with proof that notice of redemption has been given or waived or an irrevocable order of the Issuer directing the Trustee to give such notice together with an amount sufficient to pay any and all amounts 51 due and owing to the Trustee or (iii) delivering to the Trustee for cancellation all Outstanding Notes; and (b) the Issuer has delivered to the Trustee an Officer's Certificate and an Opinion of Counsel, each stating that all conditions precedent herein provided for relating to the satisfaction and discharge of this Indenture have been complied with. Upon satisfaction of the aforesaid conditions, the Trustee shall, upon receipt of an Issuer Request, acknowledge in writing the satisfaction and discharge of this Indenture and take all other action reasonably requested by the Issuer to evidence the termination of any and all Liens created by or with respect to this Indenture. Notwithstanding the satisfaction and discharge of this Indenture as aforesaid, the obligations of the Issuer and the Trustee under Sections 2.5, 2.6, 2.7 and 2.14, Section 4.6 and this Article 10 hereof shall survive. Upon satisfaction and discharge of this Indenture as provided in this Section 10.2, the Trustee shall assign, transfer and turn over to or upon the order of the Issuer any and all money, securities and other property then held by the Trustee for the benefit of the Holders, other than money deposited with the Trustee pursuant to Section 10.1(a) hereof and interest and other amounts earned or received thereon. SECTION 10.3 Application of Trust Money. -------------------------- The money deposited with the Trustee pursuant to Section 10.1 hereof shall not be withdrawn or used for any purpose other than, and shall be held in trust for, the payment of the principal of, and interest on, the Notes or portions of principal amount thereof in respect of which such deposit was made. SECTION 10.4 Return of Moneys Held by Trustee and Paying Agent Unclaimed for --------------------------------------------------------------- One Year. - -------- Unless otherwise required by mandatory provisions of the applicable escheat or abandoned or unclaimed property law, any moneys deposited with or paid to the Trustee or any Paying Agent for the payment of principal of, or interest on, any Note, other than amounts held pursuant to Section 10.1 hereof and not applied but remaining unclaimed for one year after the date upon which such principal or interest shall have become due and payable, shall, upon written request of the Issuer, unless otherwise required by mandatory provisions of applicable escheat or abandoned or unclaimed property law, be repaid to the Issuer by the Trustee or such Paying Agent, and the Holder of such Note shall thereafter look only to the Issuer for any payment that such Holder may be entitled to collect, and all liability of the Trustee or any paying agent with respect to such moneys shall thereupon cease. ARTICLE 11 AMENDMENTS, SUPPLEMENTS AND WAIVERS 52 SECTION 11.1 Without Consent of Holders. -------------------------- The Issuer, when authorized by a Board Resolution, BI and the Trustee, together, may amend or supplement this Indenture, any Security Document or the Notes without notice to or consent of any Holder: (a) to cure any ambiguity, defect or inconsistency, provided that such amendment or supplement does not, in the opinion of the Trustee, adversely affect the rights of any Holder in any material respect; in formulating its opinion on such matters, the Trustee will be entitled to rely on such evidence as it deems appropriate, including, without limitation, solely an Opinion of Counsel; (b) to give effect to the release of any Collateral or of any Lien in accordance with the provisions of the Security Documents; (c) to provide for uncertificated Notes in addition to or in place of certificated Notes; (d) to make any other change that does not adversely affect the rights of any Noteholder hereunder in any material respect; (e) to maintain compliance with any requirements of the SEC in order to effect or maintain the qualification of this Indenture under the Trust Indenture Act; (f) to evidence the succession of another Person to the Issuer as obligor under the Indenture; (g) to provide for the acceptance of appointment by a successor Trustee or facilitate the administration of the trust under the Indenture by more than one Trustee; or (h) to make any change that would provide any additional benefit or rights to the Holders or that does not adversely affect in any material respect the rights of any Holder; provided that the Issuer has delivered to the Trustee an Opinion of Counsel and an Officer's Certificate, each stating that such amendment or supplement complies with the provisions of this Section 11.1. SECTION 11.2 With Consent of Holders. ----------------------- The Issuer, when authorized by a Board Resolution, BI and the Trustee, together, with the written consent of the Holder or Holders of at least a majority in aggregate principal amount of the outstanding Notes, may amend or supplement this Indenture, any Security Document or the Notes, without notice to any other Holders or other holders, and the Holder or Holders of a majority in aggregate principal amount of the outstanding Notes may waive compliance by the Issuer with any provision of this Indenture or the Notes without notice to any other Holder; provided, however, no amendment, supplement or waiver, including a waiver pursuant to Section 8.10, shall, without the consent of each Holder of each Note: (a) reduce the percentage of any outstanding Notes necessary to modify or amend the 53 Indenture with respect to such Notes or to waive compliance with certain provisions thereof or certain Events of Default and consequences thereunder; (b) reduce the rate of or change or have the effect of changing the Stated Maturity for payment of interest on any Notes; (c) reduce the principal of or change or have the effect of changing the Stated Maturity of any Notes, or change the date on which any Notes may be subject to redemption, or reduce the Redemption Price therefor; (d) change the Place of Payment or make any Notes payable in money other than that stated in the Notes; (e) make any change in the provisions of this Indenture protecting the right of each Holder to receive payment of principal of and interest on such Note on or after the due date thereof or to bring suit to enforce such payment, or permitting Holders of a majority in principal amount of Notes to waive Events of Default; (f) change any material provision of any of the Security Documents that releases the Collateral securing the Notes (other than a release in accordance with the provisions of the Security Documents) or adversely affects the interest of any Holder of the Notes; (g) adversely affect the right of the Holders of the Notes to convert the Notes into New Common Stock as provided in Article 9; or (h) amend, modify, change or waive any provision of this Section 11.2 to adversely affect the Holders of the Notes in any material respect. It shall not be necessary for the consent of the Holders under this Section 11.2 to approve the particular form of any proposed amendment, supplement or waiver, but it shall be sufficient if such consent approves the substance thereof. After an amendment, supplement or waiver under this Section 11.2 becomes effective, the Issuer shall mail to the Holders affected thereby a notice briefly describing the amendment, supplement or waiver. Any failure of the Issuer to mail such notice, or any defect therein, shall not, however, in any way impair or affect the validity of any such amendment, supplement or waiver. SECTION 11.3 Compliance with Trust Indenture Act. ----------------------------------- Every amendment, waiver or supplement of this Indenture or the Notes shall comply with the Trust Indenture Act as then in effect. SECTION 11.4 Revocation and Effect of Consents. --------------------------------- Until an amendment, waiver or supplement becomes effective, a consent to it by a Holder is a continuing consent by the Holder and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note, even if 54 notation of the consent is not made on any Note. Subject to the following paragraph, any such Holder or subsequent Holder may revoke the consent as to such Holder's Note or portion of such Note by notice to the Trustee or the Issuer received before the date on which the Trustee receives an Officer's Certificate certifying that the Holders of the requisite principal amount of outstanding Notes have consented (and not theretofore revoked such consent) to the amendment, supplement or waiver (at which time such amendment, supplement or waiver shall become effective). The Issuer may, but shall not be obligated to, fix a record date for the purpose of determining the Holders entitled to consent to any amendment, supplement or waiver. If a record date is fixed, then notwithstanding the last sentence of the immediately preceding paragraph, those Persons who were Holders at such record date (or their duly designated proxies), and only those Persons, shall be entitled to revoke any consent previously given, whether or not such Persons continue to be Holders after such record date. No such consent shall be valid or effective for more than 90 days after such record date. After an amendment, supplement or waiver becomes effective, it shall bind every Holder, unless it makes a change described in any of clauses (a) through (h) of Section 11.2, in which case, the amendment, supplement or waiver shall bind only each Holder of a Note who has consented to it and every subsequent Holder of a Note or portion of a Note that evidences the same debt as the consenting Holder's Note; provided that any such waiver shall not impair or affect the right of any Holder to receive payment of principal of and interest on a Note, on or after the respective due dates expressed in such Note, or to bring suit for the enforcement of any such payment on or after such respective dates without the consent of such Holder. SECTION 11.5 Notation on or Exchange of Notes. -------------------------------- If an amendment, supplement or waiver changes the terms of a Note, the Trustee may require the Holder of such Note to deliver it to the Trustee. The Trustee may place an appropriate notation on the Note about the changed terms and return it to the Holder. Alternatively, if the Issuer or the Trustee so determines, the Issuer in exchange for the Note shall issue and the Trustee shall authenticate a new Note that reflects the changed terms. Any such notation or exchange shall be made at the sole cost and expense of the Issuer. SECTION 11.6 Trustee To Sign Amendments, Etc. ------------------------------- The Trustee shall execute any amendment, supplement or waiver authorized pursuant to this Article 11; provided that the Trustee may, but shall not be obligated to, execute any such amendment, supplement or waiver which affects the Trustee's own rights, duties or immunities under this Indenture. The Trustee shall be entitled to receive, and shall be fully protected in relying upon, an Opinion of Counsel and an Officer's Certificate each complying with Sections 11.4 and 11.5 and stating that the execution of any amendment, supplement or waiver authorized pursuant to this Article 11 is authorized or permitted by 55 this Indenture. Such Opinion of Counsel shall not be an expense of the Trustee. ARTICLE 12 COLLATERAL AND SECURITY DOCUMENTS SECTION 12.1 Collateral and Security Documents. ---------------------------------- (a) To secure the due and punctual payment of the principal of and interest on the Notes when and as the same shall become due and payable, whether on an interest payment date, at maturity, by acceleration, redemption or otherwise, and the performance of all other obligations of the Issuer to the Holders under this Indenture and the Notes, the Issuer, New Horizons and the Trustee have entered into the Security Documents pursuant to which the Issuer and New Horizons have granted to the Trustee, for the benefit of the Holders, a Lien on the Union Square Property and the Yonkers Property and the Proceeds of the conversion of the Yonkers Property and the Union Square Property, respectively, which Lien shall be a first priority Lien. Such Lien shall be subject to modification, and certain portions of the Collateral shall be subject to release, upon the terms and provisions set forth in the Security Documents. (b) Each Holder of a Note, by accepting a Note, agrees to all of the terms and provisions of the Security Documents, as the same may be amended from time to time pursuant to the provisions of the Security Documents and this Indenture. SECTION 12.2 Release of Lien. --------------- The Trustee, in its capacity as trustee for the Holders under this Indenture, will not at any time permit the release of any Collateral from the security interest created by the Security Documents unless such release is in accordance with the provisions of this Indenture and the Security Documents. To the extent applicable, the Issuer shall cause (S) 314(d) of the Trust Indenture Act relating to the release of property or securities from the security interest pursuant hereto and the Security Documents to be complied with. Any certificate or opinion required by (S) 314(d) of the Trust Indenture Act may be made by an Officer of the Issuer, except in cases which (S) 314(d) of the Trust Indenture Act requires that such certificate or opinion be made by an independent person. SECTION 12.3 Recording, Certificates and Opinions. ------------------------------------ (a) The Issuer will take or cause to be taken all action required to perfect, maintain, preserve and protect the security interest in the Collateral granted by or pursuant to this Indenture and the Security Documents. (b) The Issuer shall deliver to the Trustee promptly after the execution and delivery of this Indenture, an Opinion of Counsel either stating that in the opinion of such counsel the Indenture has been properly recorded and filed so as to perfect and make effective the security interest intended to be created for the benefit of the Holders of Notes, and reciting the details of such action, or stating that in the opinion of such counsel no such action is necessary to perfect 56 and make effective such security interest. (c) The Issuer shall deliver to the Trustee on or before [January 1] of each year, an Opinion of Counsel either stating that in the opinion of such counsel such action has been taken with respect to the recording, filing, re-recording and re-filing of the Indenture as is necessary to maintain the security interest intended to be created thereby for the benefit of the Holders of Notes, and reciting the details of such action, or stating that in the opinion of such counsel no such action is necessary to maintain such security interest. (d) The Issuer shall comply with Trust Indenture Act (S) 314(d), relating to, among other matters, the release of Collateral from the Lien of the Security Documents and Officer's Certificates or other documents regarding fair value of the Collateral, to the extent such provisions are applicable. Any certificate or opinion required by Trust Indenture Act (S) 314(d) may be executed and delivered by an Authorized Representative of the Issuer to the extent permitted by Trust Indenture Act (S) 314(d). SECTION 12.4 Authorization of Actions to Be Taken by the Trustee Under the ------------------------------------------------------------- Security Documents. - ------------------ Subject to the provisions of the Security Documents, (i) the Trustee, in its sole discretion and without the consent of the Holders, may take all actions it deems necessary or appropriate in order to (x) enforce any of the terms of the Security Documents, and (y) collect and receive any and all amounts payable in respect of the obligations of the Issuer; and (ii) the Trustee may institute and maintain such suits and proceedings, as it may deem expedient to prevent any impairment of the Collateral by any acts that may be unlawful or in violation of this Indenture or the Security Documents, and such suits and proceedings as the Trustee may deem expedient to preserve or protect its interests and the interests of the Holders in the Collateral (including the power to institute and maintain suits or proceedings to restrain the enforcement of or compliance with any legislative or other governmental enactment, rule or order that may be unconstitutional or otherwise invalid if the enforcement of, or compliance with, such enactment, rule or order would impair the security interest thereunder or be prejudicial to the interests of the Holders or of the Trustee). Article 4 of this Indenture applies to all duties and obligations of the Trustee with respect to the Security Documents and the Collateral. SECTION 12.5 Authorization of Receipt of Funds by the Trustee Under the ---------------------------------------------------------- Security Documents. - ------------------ The Trustee is authorized to receive any funds for the benefit of Holders received under the Security Documents, and to make further distributions of such funds to the Holders in accordance with the provisions of this Indenture, the Security Documents and applicable law. SECTION 12.6 Trustee's Disclaimer. -------------------- The Trustee shall not be responsible for and makes no representation as to the validity or adequacy of the Security Documents, the Collateral or the perfection of the Collateral (except with respect to taking the actions specifically set forth in Opinions of Counsel 57 delivered to the Trustee pursuant to Section 12.3(b) with respect to the perfection of the Collateral) and it shall not be responsible for any statement contained in the Security Documents. SECTION 12.7 Release upon Termination of the Issuer's Obligations. ---------------------------------------------------- In the event that the Issuer delivers an Officer's Certificate certifying that all the obligations under this Indenture, the Notes and the Security Documents have been satisfied and discharged by complying with the provisions of Article 10, the Trustee shall deliver to the Issuer a notice stating that the Trustee, on behalf of the Holders, disclaims and gives up any and all rights it has in or to the Collateral and any rights it has under the Security Documents, and, upon and after receipt by the Issuer of such notice, the Trustee shall not be deemed to hold a Lien in the Collateral for the benefit of the Holders. ARTICLE 13 GUARANTEE SECTION 13.1 Guarantee. --------- BI hereby fully and unconditionally guarantees to each Holder of a Note authenticated and delivered by the Trustee, and to the Trustee on behalf of each such Holder, the due and punctual payment of the principal of and interest on such Note, and the due and punctual payment of any redemption payment with respect to such Note, when and as the same shall become due and payable, whether at Stated Maturity, upon redemption, upon acceleration or otherwise, according to the terms thereof and of this Indenture (the "Guarantee Obligations"). In case of the failure of the Issuer punctually to pay any such principal, interest or redemption payment, BI hereby agrees to cause any such payment to be made punctually when and as the same shall become due and payable, whether at Stated Maturity, upon redemption, upon declaration of acceleration or otherwise, as if such payment were made by the Issuer. BI hereby agrees that its Guarantee Obligations hereunder shall be as if it were principal debtor and not merely surety and shall be absolute and unconditional, irrespective of the validity, regularity or enforceability of any such Note or this Indenture, the absence of any action to enforce the same, any waiver or consent by the Holder of any such Note with respect to any provisions thereof, the recovery of any judgment against the Issuer or any action to enforce the same, or any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor. BI hereby waives diligence, presentment, demand of payment, filing of claims with a court in the event of insolvency or bankruptcy of the Issuer, any right to require a proceeding first against the Issuer, protest, notice and all demands whatsoever and covenants that its Guarantee will not be discharged except by complete performance of its obligations contained in such Note and in this Guarantee. BI agrees, to the fullest extent that it may lawfully do so, that, as between 58 BI, on the one hand, and the Holders and the Trustee, on the other hand, the maturity of the obligations guaranteed hereby may be accelerated as provided in Article 8 hereof for the purposes of this Guarantee, notwithstanding any stay, injunction or other prohibition extant under any applicable bankruptcy law preventing such acceleration in respect of the obligations guaranteed hereby. BI shall be subrogated to all rights of the Holders of the Notes against the Issuer in respect of any amounts paid by BI on account of such Notes or this Indenture; provided, however, that BI shall not be entitled to enforce or to receive any payments arising out of, or based upon, such right of subrogation until the principal of and interest, if any, on all such Notes shall have been paid in full. SECTION 13.2 Guarantee Subordinated to Credit Facility Guarantee. --------------------------------------------------- BI and the Trustee each covenants and agrees, and each Holder, by its acceptance of a Note and the corresponding Guarantee, likewise covenants and agrees, that the Guarantee Obligations shall, to the extent and in the manner set forth in this Article 13, be unsecured obligations of the Guarantor, ranking equally in right of payment with other nonsubordinated indebtedness of BI, except that the Guarantee Obligations shall be expressly subordinated in right of payment to the Credit Facility Guarantee. SECTION 13.3 Liquidation, Dissolution, Bankruptcy. ------------------------------------ Upon any payment or distribution of the assets of BI to creditors upon a liquidation or dissolution of BI or in a bankruptcy, reorganization, insolvency, receivership or similar proceeding relating to BI or its property: (1) holders of the Credit Facility Guarantee shall be entitled to receive payment in full of such Credit Facility Guarantee in cash or cash equivalents before Noteholders shall be entitled to receive any payment pursuant to the Guarantee Obligations; and (2) until the Credit Facility Guarantee is paid or discharged in full, any distribution to which Noteholders would be entitled but for this Article 13 shall be made to holders of such Credit Facility Guarantee as their interests may appear, except that Noteholders may receive shares of stock and any debt securities of BI that are subordinated to the Credit Facility Guarantee, and to any debt securities received by holders of such Credit Facility Guarantee, of BI to at least the same extent as the Guarantee Obligations are subordinated to the Credit Facility Guarantee. SECTION 13.4 Default on Credit Facility Guarantee. ------------------------------------ BI may not make any payment pursuant to the Guarantee Obligations ("pay its Guarantee") if the Credit Facility Guarantee is not paid when due unless the Credit Facility Guarantee has been paid or discharged in full; provided, however, that BI 59 may pay its Guarantee without regard to the foregoing if BI and the Trustee receive written notice approving such payment from the representative of the holders of the Credit Facility Guarantee. SECTION 13.5 When Distribution Must Be Paid Over. ----------------------------------- If a distribution is made to Noteholders that because of this Article 13 should not have been made to them, the Noteholders who receive the distribution shall hold it in trust for holders of the Credit Facility Guarantee and pay it over to them or their representative as their interests may appear. SECTION 13.6 Relative Rights. --------------- This Article 13 defines the relative rights of holders of Notes and holders of the Credit Facility Guarantee. Nothing in this Indenture shall: (1) impair, as between BI and the holders of Notes, the obligation of BI, which is absolute and unconditional, to pay its Guarantee Obligations to the extent set forth in this Article 13; or (2) prevent the Trustee or any holder of Notes from exercising its available remedies upon a default by BI under its Guarantee Obligations, subject to the rights of holders of the Credit Facility Guarantee to receive distributions otherwise payable to holders of Notes. SECTION 13.7 Rights of Trustee and Paying Agent. ---------------------------------- The Trustee or Paying Agent may continue to make payments pursuant to the Guarantee and shall not be charged with knowledge of the existence of facts that would prohibit the making of any such payments unless BI and a trust officer of the Trustee receives written notice from the representative of the Credit Facility Guarantee that payments may not be made under this Article 13. SECTION 13.8 Trustee Entitled to Rely. ------------------------ Upon any payment or distribution pursuant to this Article 13, the Trustee and the holders of Notes shall be entitled to rely (i) upon any order or decree of a court of competent jurisdiction in which any proceedings of the nature referred to in Section 13.3 are pending, (ii) upon a certificate of the liquidating trustee or agent or other Person making such payment or distribution to the Trustee or to the holders of Notes or (iii) upon the representative for the holders of the Credit Facility Guarantee for the purpose of ascertaining the Persons entitled to participate in such payment or distribution, the holders of such Credit Facility Guarantee, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 13. In the event that the Trustee determines, in good faith, that evidence is required with respect to the right of any Person as a holder of the Credit Facility 60 Guarantee to participate in any payment or distribution pursuant to this Article 13, the Trustee may request such Person to furnish evidence to the reasonable satisfaction of the Trustee as to the amount of the Credit Facility Guarantee held by such Person, the extent to which such Person is entitled to participate in such payment or distribution and other facts pertinent to the rights of such Person under this Article 13, and, if such evidence is not furnished, the Trustee may defer any payment to such Person pending judicial determination as to the right of such person to receive such payment. SECTION 13.9 Trustee to Effectuate Subordination. ----------------------------------- Each holder of Notes by accepting a Note authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to acknowledge or effectuate the subordination between the holders of Notes and the holders of the Credit Facility Guarantee as provided in this Article 13 and appoints the Trustee as attorney-in-fact for any and all such purposes. SECTION 13.10 Trustee not Fiduciary for Holders of the Credit Facility -------------------------------------------------------- Guarantee. - --------- The Trustee shall not be deemed to owe any fiduciary duty to the holders of the Credit Facility Guarantee and shall not be liable to any such holders if it shall mistakenly pay over or distribute to holders of Notes or the Issuer or any other Person money or assets to which any holders of such Credit Facility Guarantee shall be entitled by virtue of this Article 13 or otherwise. SECTION 13.11 Execution and Delivery of Guarantee. ----------------------------------- To evidence its Guarantee with respect to the Notes, BI hereby agrees to execute the Guarantee, substantially in the form of Exhibit B hereto, to be endorsed on each Note authenticated and delivered by the Trustee. Each such Guarantee shall be executed on behalf of BI by an Authorized Representative and attested by its Secretary or one of its Assistant Secretaries or an Authorized Representative. The signature of any of these officers on the Guarantee may be manual or facsimile. A Guarantee bearing the manual or facsimile signatures of the individuals who were the proper officers of BI shall bind BI, notwithstanding that such individuals or any of them have ceased to hold such offices prior to the authentication and delivery of the Notes upon which such Guarantee is endorsed or did not hold such offices at the date of such Notes. The delivery of any Notes by the Trustee, after the authentication thereof hereunder, shall constitute due delivery of the Guarantee endorsed thereon on behalf of BI. BI hereby agrees that its Guarantee set forth in this Article shall remain in full force and effect notwithstanding any failure to endorse on each Note a notation of such Guarantee. SECTION 13.12 Limitation of BI's Liability. ---------------------------- 61 BI, and by its acceptance of a Note each Holder, hereby confirms that it is the intention of all such parties that in no event shall any Guarantee Obligations under the Guarantee constitute or result in a fraudulent transfer or conveyance for purposes of, or resulting a violation of, any United States federal, or applicable United States state, fraudulent transfer or conveyance or similar law. To effectuate the foregoing intention, in the event that the Guarantee Obligations, if any, in respect of the Notes would, but for this sentence, constitute or result in such a fraudulent transfer or conveyance or violation, then the liability of BI under its Guarantee in respect of the Notes shall be reduced to the extent necessary to eliminate such fraudulent transfer or conveyance or violation under the applicable fraudulent transfer or conveyance or similar law. 62 IN WITNESS WHEREOF, the parties have caused this Indenture to be duly executed by their respective officers duly authorized as of the day and year first above written. BRADLEES STORES, INC., as the Issuer By:________________________________ Name: _________________________ Title: _________________________ BRADLEES, INC. By:________________________________ Name: _________________________ Title: _________________________ [ ], as Trustee By:________________________________ Name: _________________________ Title: _________________________ 63 EXHIBIT A --------- FORM OF NOTE EXHIBIT B --------- FORM OF NOTATION RELATING TO GUARANTEED EX-2.3 4 FORM OF 9% CONVERTIBLE NOTE EXHIBIT 2.3 FORM OF NOTE BRADLEES STORES, INC. 9% SECURED CONVERTIBLE NOTE DUE 2004 Number: CUSIP Number: Principal Amount Maturity Date Issue Date ------ ------------- ---------- $__________ $_________, 2004 __________, 1999 REGISTERED HOLDER: _______________________ PRINCIPAL AMOUNT: _______________________ Dollars INTEREST RATE: Nine percent (9%) per annum BRADLEES STORES, INC., a corporation duly organized and existing under the laws of the Commonwealth of Massachusetts (hereinafter called the "Issuer", which term includes any successor or assign under the Indenture referred to below), for value received hereby promises to pay to [_____________], or its registered assigns, the outstanding Principal Amount hereof on the Maturity Date set forth above, and to pay interest on the unpaid portion of the Principal Amount semi-annually on January 1 and July 1 of each year (each of such dates and the Maturity Date are hereinafter individually referred to as the "Stated Maturity") at the Interest Rate set forth above from the most recent Stated Maturity for which interest has been paid or duly provided for or, if no interest has been paid or duly provided for, from the Issue Date set forth above, until the Principal Amount is paid in full or payment thereof is duly provided for. It is acknowledged and agreed that the principal of the Notes may not be repaid prior to the Maturity Date except as specifically provided in the Indenture (as hereinafter defined). The principal and interest so payable on any Stated Maturity shall, as provided in the Indenture, be paid to the person in whose name this Note is registered in the Security Register at the close of business on the Regular Record Date for such payment of principal and interest, which shall be the fifteenth day preceding each Stated Maturity, respectively. Any such principal and interest not so punctually paid or duly provided for shall forthwith cease to be payable to the person in whose name this Note was registered in the Security Register at the close of business on such Regular Record Date, and may be paid to the person in whose name this Note is registered at the close of business on a special record date for the payment of such overdue interest and/or overdue principal, to be fixed by the Trustee, notice of which shall be given to the Holder hereof at least 15 days prior to such special record date, or may be paid at any time in any other lawful manner. Payment of the principal amount of this Note (or any outstanding installment thereof) upon final maturity (whether by redemption, acceleration or otherwise) shall be made only upon presentation and surrender of this Note. All payments in respect of this Note shall be made in such coin or currency of the United States of America as at the time of payment is legal tender for payment of debts. Whenever any amount to be paid hereunder is stated to be due on a day that is not a Business Day, such amount shall be payable on the next succeeding Business Day and shall continue to bear interest at the rate set forth herein until paid. This Note is one of an authorized issue of Notes of the Issuer known as its 9% Secured Convertible Notes Due ______, 2004 (the "Notes") and ranks equally in right of payment with other non-subordinated indebtedness of the Issuer. The Notes are issued under the Indenture, dated as of January ___, 1999 (the "Indenture"), among the Issuer, [ ] (the "Trustee," which term includes any successor indenture trustee under the Indenture) and, solely for the purposes of the conversion provisions therein, Bradlees, Inc. ("BI"). All capitalized terms used herein, unless defined herein, shall have the meanings ascribed to them in the Indenture. All rights, powers and remedies available to any Holder of this Note shall be subject to the provisions of the Indenture. Reference is hereby made to the Indenture for a description of the nature and extent of the Notes and the respective rights of the Holders of the Notes, the Indenture Trustee, the Issuer and BI in respect of the Notes and the terms upon which the Notes are made and are to be authenticated and delivered. The principal of, and interest on, and all other amounts payable under this Note are secured by a first priority Lien on the Yonkers Property and the Union Square Property and the Proceeds of the conversion of the Yonkers Property and the Union Square Property as described in the Indenture and the Security Documents. Such Lien shall be subject to modification, and certain portions of the Collateral shall be subject to release, upon the terms and provisions set forth in the Security Documents. Each Holder of a Note, by accepting a Note, shall be deemed to have agreed to all of the terms and provisions of the Security Documents, as the same may be amended from time to time pursuant to the provisions thereof, the Notes and the Indenture. Payment and performance of the Guarantee Obligations in connection with the Notes are fully and unconditionally guaranteed on an unsecured basis by BI in accordance with the terms of Article 13 of the Indenture. The Indenture permits, with certain exceptions, as therein provided, the amendment thereof and the Security Documents and the modification of the rights and obligations of the Issuer and the rights of the Holders of the Notes to be affected under the Indenture or the Security Documents at any time by the Issuer with the consent of the Holders of a majority in aggregate principal amount of the Outstanding Notes. The Indenture also contains provisions permitting the Holders of a majority in aggregate principal amount of the Outstanding Notes, on behalf of the Holders of all the Notes, to waive compliance by the Issuer with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver or direction by the Holder of this Note shall be conclusive and binding upon such Holder and upon all future Holders of this Note and of any security issued upon the transfer hereof or in exchange hereof or in lieu hereof whether or not notation of such consent or waiver is made upon this Note. The Notes shall be redeemed pro rata with (a) the Net Proceeds of the sale of the Yonkers Property, (b) the Net Proceeds of the sale of the Union Square Property and (c) the Net Proceeds of any Equity Offering, in each case at a Redemption Price equal to 100% of the unpaid principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon to the Redemption Date. The Notes may be redeemed in whole or in part at any time at the option of the Issuer at a Redemption Price equal to 100% of the unpaid principal amount thereof plus accrued and unpaid interest thereon to the Redemption Date. Notice of any redemption of Notes will be given at least 5 days before the Redemption Date to each Holder at its registered address. Notes (or portions thereof as aforesaid) for the redemption of which provision is made in accordance with the Indenture shall thereupon cease to be entitled to the Lien of the Security Documents and shall cease to bear interest from and after the Redemption Date. The Notes are, subject to the terms of the Indenture, convertible in whole or in part at the option of the Holder thereof into shares of New Common Stock of BI at any time after the first anniversary of the original issuance of the Notes. The Conversion Price per share of New Common Stock shall initially be equal to the arithmetic unweighted average closing price of such stock during the 20 Business Days prior to the first anniversary of the original issuance of the Notes. The Conversion Price shall be adjusted from time to time in the case of certain dividends and distributions in respect of the New Common Stock, in the event of certain tender or exchange offers for the New Common Stock and under certain other circumstances, as further provided in the Indenture. If an Event of Default occurs and is continuing, the Holders of at least a majority in aggregate principal amount of the Notes Outstanding may declare the principal amount of, and any accrued and unpaid interest on, all the Notes to be due and payable immediately; provided, that in the case of an Event -------- of Default arising from certain events of bankruptcy or insolvency with respect to the Issuer, all outstanding Notes shall become due and payable immediately without further action or notice. The Notes are in registered form without coupons in denominations of $1,000 and integral multiples of $1,000. The transfer of Notes may be registered and Notes may be exchanged as provided in the Indenture. The Registrar and the Trustee may require a Noteholder, among other things, to furnish appropriate endorsements and transfer documents and to pay any taxes and fees required by law or permitted by the Indenture. The person in whose name this Note is registered shall be deemed to be the owner and holder hereof for the purpose of receiving payment as herein provided and for all other purposes. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK. A director, officer, employee, stockholder or incorporator, as such, of the Issuer or BI shall not have any liability for any obligations of the Issuer under the Notes or the Indenture or for any claim based on, in respect of or by reason of such obligations or their creation. Each Holder by accepting a Note waives and releases all such liability. Such waiver and release are part of the consideration for the issuance of the Notes. Unless the certificate of authentication hereon has been executed by the Indenture Trustee by manual or facsimile signature, this Note shall not be entitled to any benefit under such Indenture, or be valid or obligatory for any purpose. IN WITNESS WHEREOF, the Issuer has caused this instrument to be duly executed. BRADLEES STORES, INC. By: Name: Title: By: Name: Title: CERTIFICATE OF AUTHENTICATION This is one of the Notes referred to in the within-mentioned Indenture. [ ], as Indenture Trustee By: Authorized Signatory EXHIBIT A CONVERSION NOTICE To BRADLEES STORES, INC. and BRADLEES, INC. The undersigned registered holder of this Note hereby irrevocably exercises the option to convert this Note, or portion hereof, which is $1,000 or a multiple thereof below designated into shares of common stock of BRADLEES, INC. in accordance with the terms of the Indenture referred to in this Note and directs that the shares issuable and deliverable upon the conversion, together with any check in payment for fractional shares be issued and delivered to the registered holder hereof unless a different name has been indicated below. Unless otherwise directed, a new Note representing any unconverted principal amount hereof shall be delivered to the registered holder hereof. If shares are to be issued in the name of a person other than the undersigned, this Note must be duly endorsed by or accompanied by instruments of transfer in form satisfactory to BRADLEES STORES, INC. and BRADLEES, INC. duly executed by the undersigned and the undersigned will pay all transfer taxes payable with respect thereto. Any amount required to be paid by the undersigned on account of interest accompanies this Note. Dated: If different from that of Noteholder, print name, address (including ZIP code) and Social Security or other Signature of Noteholder taxpayer identification number of person in whose name the New Common Signature Guaranteed Stock will be issued. SOCIAL SECURITY OR OTHER Principal amount to be TAXPAYER IDENTIFYING NUMBER converted (if less than all) Name ($1,000 or an integral multiple thereof) Address $ EXHIBIT A TRANSFER FORM FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s) unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE Please print or typewrite name and address including postal zip code of assignee the within Note and all rights thereunder, hereby irrevocably constituting and appointing attorney to transfer said Note on the books of the Company, with full power of substitution in the premises. Signature: Dated: Signature Guaranteed: NOTICE: The signature to this assignment must correspond with the name as written upon the face of the within instrument in every particular, without alteration or enlargement or any change whatever. EXHIBIT B FORM OF NOTATION RELATING TO GUARANTEE Bradlees, Inc. ("BI") has fully and unconditionally guaranteed, to the extent set forth in Article 13 of the Indenture and subject to the provisions of the Indenture, the complete and punctual payment by the Issuer of the Guarantee Obligations in connection with the Notes. The Guarantee Obligations shall rank equally in right of payment with other non-subordinated indebtedness of BI, except that the Guarantee Obligations shall be expressly subordinated in right of payment to the Credit Facility Guarantee, as more particularly set forth in the Indenture. The obligations of BI to the Holders of Notes and to the Trustee pursuant to the Guarantee are expressly set forth in Article 13 of the Indenture and reference is hereby made to the Indenture for the precise terms of the Guarantee. Capitalized terms used herein and not defined herein have the meanings ascribed thereto in the Indenture. BRADLEES, INC. By Title: Attest: Title: EX-2.4 5 LEASEHOLD MORTGAGE EXHIBIT 2.4 If Premises located in State of New York: SECTION _____ BLOCK _____ LOT _____ Premises: As of November ___, 1998 LEASEHOLD MORTGAGE AND SECURITY AGREEMENT ("this Mortgage") FROM NEW HORIZONS OF YONKERS, INC., a Delaware corporation and BRADLEES STORES, INC., a Massachusetts corporation (collectively, "Mortgagor") Address of Mortgagor: One Bradlees Circle Braintree, Massachusetts 02184 TO [______________________________________] ("Mortgagee") Address of Mortgagee: _____________________________ _____________________________ _____________________________ Mortgage Amount: $40,000,000.00 This instrument prepared by, and after recording please return to: Dewey Ballantine LLP 1301 Avenue of the Americas New York, New York 10019-6092 TABLE OF CONTENTS -----------------
Page ---- RECITAL 1 CERTAIN DEFINITIONS AND RULES OF CONSTRUCTION 1 GRANTING CLAUSE 2 ARTICLE I COVENANTS OF MORTGAGOR 3 Section 1.01. Warranty of Title; Power and Authority......... 3 Section 1.02. Good Faith Contests............................ 3 Section 1.03. Taxes on Mortgagee............................. 3 Section 1.04. Insurance...................................... 3 ARTICLE II EVENTS OF DEFAULTS AND REMEDIES 3 Section 2.01. Events of Default and Certain Remedies......... 3 ARTICLE III MISCELLANEOUS 4 Section 3.01. Modifications and Waivers in Writing........... 4 Section 3.02. Security Agreement............................. 4 Section 3.03. Notices........................................ 4 Section 3.04. Successors and Assigns......................... 4 Section 3.05. Counterparts................................... 4 Section 3.06. Substitute Mortgages........................... 5 Section 3.07. Releases....................................... 5 Section 3.08. No Merger of Interests......................... 5 Section 3.09. New York Provisions............................ 5 Section 3.10. Further Encumbrances........................... 6
DOCUMENT NUMBER: 250418.6 ATTORNEY NAME: Napjus ROOM: 2942 PHONE: 6306 CLIENT NAME/NUMBER: 020513 MATTER NAME/NUMBER: 53311 DOCUMENT NAME: Leasehold Mortgage Attention: Val A. Soupios, Esq. THE AMOUNT OF THIS MORTGAGE IS FORTY MILLION AND NO/100THS DOLLARS ($40,000,000). RECITAL New Horizons of Yonkers, Inc., a wholly owned subsidiary of Bradlees Stores, Inc., is the owner of a leasehold interest in the premises described in SCHEDULE A-1 (the "Yonkers Property") and Bradlees Stores, Inc. is the owner of a leasehold interest in the premises described in SCHEDULE A-2 (the "Union Square Property") (Schedule A-1 and Schedule A-2, collectively, "Schedule A"). Bradlees Stores, Inc. ("Issuer") will issue notes in an aggregate amount of FORTY MILLION AND NO/100THS DOLLARS ($40,000,000) (the "Loan") to "Noteholders" pursuant to the Indenture identified below, and in order to secure FORTY MILLION AND NO/100THS DOLLARS ($40,000,000) (the "Mortgage Amount") of the obligations of Issuer under the Notes, Mortgagor has granted this Mortgage to Mortgagee as Trustee for the Noteholders. The maximum amount secured hereby at execution or which under any contingency may become secured hereby at any time hereafter is the Mortgage Amount and all interest in respect thereof, plus all amounts expended by Mortgagee following a default hereunder in respect of insurance premiums and real estate taxes. CERTAIN DEFINITIONS AND RULES OF CONSTRUCTION Mortgagor and Mortgagee agree that, unless otherwise defined herein or unless the context otherwise specifies or requires, capitalized terms in the Recital and elsewhere in this Mortgage shall have the meanings ascribed to them in the Indenture. "Events of Default" means the events and circumstances described as such in Section 2.01. "Ground Lease" means the leases identified in SCHEDULE A covering the property described in SCHEDULE A. "Improvements" means the leasehold interest in all structures or buildings, and replacements thereof, now or hereafter located upon the Premises created by the Ground Lease. "Indenture" means that certain Indenture by and among Bradlees Stores, Inc., Bradlees, Inc. and [TRUSTEE] dated the date hereof, as the same may hereafter be amended, modified or supplemented from time to time. "Loan" means the loan made by Mortgagee to Issuer pursuant to the Indenture evidenced by the Notes and secured hereby. "Premises" means the leasehold interests in the premises described in SCHEDULE A created by the Ground Lease, including all of the easements, rights, privileges and appurtenances (including air or development rights) thereunto belonging or in anywise appertaining, and all of the estate, right, title, interest, claim or demand whatsoever of Mortgagor therein and in the streets and ways adjacent thereto, either in law or in equity, in possession or expectancy, now or hereafter acquired, and as used herein shall, unless the context otherwise requires, be deemed to include the Improvements. "Proceeds" means all proceeds of the conversion, voluntary or involuntary, of any of the Premises or Improvements into cash or liquidated claims, including, without limitation, proceeds of any sale or assignment of the Premises, insurance and condemnation awards. Except as expressly indicated otherwise, when used in this Mortgage (i) "or" is not exclusive, (ii) "hereunder", "herein", "hereof" and the like refer to this Mortgage as a whole, (iii) "Article", "Section" and "Schedule" refer to Articles, Sections and Schedules of this Mortgage, (iv) terms defined in the singular have a correlative meaning when used in the plural and vice versa, (v) a reference to a law or statute includes any amendment or modification to, or replacement of, such law or statute and (vi) a reference to an agreement, instrument or document means such agreement, instrument or document as the same may be amended, modified or supplemented from time to time in accordance with its terms and as permitted hereby and by the other documents executed or delivered to Mortgagee in connection with the Loan. The cover page and all Schedules hereto are incorporated herein and made a part hereof. Any table of contents and the headings and captions herein are for convenience only and shall not affect the interpretation or construction hereof. Unless the context otherwise requires, the term "Mortgagor" as used herein shall mean New Horizons of Yonkers, Inc. with respect to the Yonkers Property and Bradlees Stores, Inc. with respect to the Union Square Property, mutatis mutandis. GRANTING CLAUSE NOW, THEREFORE, Mortgagor, in consideration of the premises and in order to secure the payment of both the principal of, and the interest and any other sums payable under the Notes or the Indenture and the performance and observance of all the provisions hereof and of the Notes or the Indenture, hereby gives, grants, bargains, sells, warrants, aliens, remises, releases, conveys, assigns, transfers, mortgages, hypothecates, deposits, pledges, sets over and confirms unto Mortgagee, all its estate, right, title and interest in, to and under the Premises and the Improvements (hereinafter, the "Mortgaged Property") whether now owned or held or hereafter acquired and all Proceeds. TO HAVE AND TO HOLD unto Mortgagee, its successors and assigns forever, provided, however, that this Mortgage is being delivered to you upon the express condition that if the Loan is repaid in full in accordance with the Indenture, this Mortgage and the lien created hereby shall cease, terminate and be void. ARTICLE I 4 COVENANTS OF MORTGAGOR Mortgagor covenants and agrees as follows: Section 1.01. Warranty of Title; Power and Authority. - ------------- -------------------------------------- Mortgagor warrants that it is the owner of a valid and subsisting interest as tenant under the Ground Lease, that the Ground Lease is in full force and effect, that the Ground Lease is subject to no lien, charge or encumbrance of any kind except as disclosed pursuant to the Bankruptcy Proceedings. Section 1.02. Good Faith Contests. - ------------- ------------------- Nothing in this Article shall require the payment or discharge of any obligation imposed upon Mortgagor by this Article so long as Mortgagor shall in good faith and at its own expense contest the same or the validity thereof by appropriate legal proceedings which shall operate to prevent the collection thereof or other realization thereon and the sale or forfeiture of the Mortgaged Property or any part thereof to satisfy the same. Section 1.03. Taxes on Mortgagee. - ------------- ------------------ Mortgagor will pay any taxes, except income taxes, imposed on Mortgagee by reason of its ownership of the Notes or this Mortgage. Section 1.04. Insurance. - ------------- --------- Mortgagor will at all times provide, maintain and keep in force the insurance required by the Ground Lease. ARTICLE II EVENTS OF DEFAULTS AND REMEDIES Section 2.01. Events of Default and Certain Remedies. - ------------- -------------------------------------- If an Event of Default occurs and is continuing under the Indenture, or then, upon acceleration of the obligations incurred by the Notes: I. Mortgagee, with or without entry, personally or by its agents or attorneys, insofar as applicable, may : (1) sell the Mortgaged Property to the extent permitted and pursuant to the procedures provided by law, and all estate, right, title and interest, claim and demand therein, and right of redemption thereof, at one (1) or more sales as an entity or in parcels or parts, and at such time and place upon such terms and after such notice thereof as may be required or permitted by law; or (2) institute proceedings for the complete or partial foreclosure hereof; or 5 (3) take such steps to protect and enforce its rights whether by action, suit or proceeding in equity or at law, or in aid of the execution of any power herein granted, or for any foreclosure hereunder, or for the enforcement of any other appropriate legal or equitable remedy or otherwise as Mortgagee shall elect. ARTICLE III MISCELLANEOUS Section 3.01. Modifications and Waivers in Writing. - ------------- ------------------------------------ No provision hereof may be changed, waived, discharged or terminated orally or by any other means except an instrument in writing signed by the party against whom enforcement of the change, waiver, discharge or termination is sought. Any agreement hereafter made by Mortgagor and Mortgagee relating hereto shall be superior to the rights of the holder of any intervening or subordinate lien or encumbrance. Section 3.02. Security Agreement. - ------------- ------------------ This Mortgage constitutes a security agreement under the applicable Uniform Commercial Code with respect to the Proceeds. In addition to the rights and remedies granted to Mortgagee by other applicable law or hereby, Mortgagee shall have all of the rights and remedies with respect to the Proceeds as are granted to a secured party under the applicable Uniform Commercial Code. Upon Mortgagee's request, Mortgagor shall promptly make the Proceeds available to Mortgagee in a manner acceptable to Mortgagee. Any notice of sale, disposition or other intended action by Mortgagee with respect to Proceeds sent to Mortgagor in accordance with the provisions hereof at least five (5) days prior to such action shall constitute reasonable notice to Mortgagor. The proceeds of any such sale or disposition, or any part thereof, shall be applied by Mortgagee to the payment of the indebtedness secured hereby in accordance with the applicable provisions of the Indenture. Section 3.03. Notices. - ------------- ------- All notices, demands, consents, approvals and statements required or permitted hereunder shall be in writing and shall be deemed to have been sufficiently given or served for all purposes, if to Mortgagor or Mortgagee at its respective address stated above, when given or served in accordance with the terms and provisions of Section 1.15 of the Indenture, or at such other address of which a party shall have notified the party giving such notice in accordance with the provisions of this Section. Section 3.04. Successors and Assigns. - ------------- ---------------------- All of the grants, covenants, terms, provisions and conditions herein shall run with the land and shall apply to, bind and inure to the benefit of, the respective successors and assigns of Mortgagor and Mortgagee. Section 3.05. Counterparts. - ------------- ------------ This Mortgage may be executed in any number of counterparts and each of such 6 counterparts shall for all purposes be deemed to be an original; and all such counterparts shall together constitute but one and the same mortgage. Section 3.06. Substitute Mortgages. ------------- -------------------- Mortgagor and Mortgagee shall, upon their mutual agreement to do so, execute such documents as may be necessary in order to effectuate the modification hereof, including the execution of substitute mortgages, so as to create two (2) or more liens on the Mortgaged Property in such amounts as may be mutually agreed upon but in no event to exceed, in the aggregate, the Mortgage Amount; in such event, Mortgagor covenants and agrees to pay the reasonable fees and expenses of Mortgagee and its counsel in connection with any such modification. Section 3.07. Releases. ------------- -------- Mortgagee agrees to release the Premises and the Improvements in the Union Square Property or the Yonkers Property, as the case may be, from the lien of this Mortgage upon the sale thereof pursuant to an agreement approved by Mortgagor's Board of Directors (the "Sale Agreement") and the receipt by Mortgagee of the proceeds payable to Mortgagor pursuant to the Sale Agreement net of (i) all costs arising from or relating to the sale of the Mortgaged Property (including, but not limited to, attorneys' fees) and (ii) adjustments applicable to title closings as recommended by the Real Estate Board of New York, Inc.; Mortgagee agrees to release the Premises and the Improvements in the Union Square Property or the Yonkers Property, as the case may be, from the lien of this Mortgage upon receipt by Mortgagee of a written request therefor accompanied by a copy of a written notice of default from the landlord under the Ground Lease in question citing the granting of this Mortgage as the basis for the default so noticed (the "Default Release Request"). Any release requested by Mortgagor pursuant to (b) above shall not include a release of the security interest in the Proceeds created hereby and any release pursuant to (b) above shall expressly reserve Mortgagee's security interest in the Proceeds. Mortgagee agrees to deliver a release pursuant to a Default Release Request no later than five days prior to the expiration of any grace period provided for in the notice of default accompanying the Default Release Request. Section 3.08. No Merger of Interests. ------------- ---------------------- Unless expressly provided otherwise, in the event that ownership hereof and title to the fee and/or leasehold estates in the Premises encumbered hereby shall become vested in the same person or entity, this Mortgage shall not merge in said title but shall continue to be and remain a valid and subsisting lien on said estates in the Premises for the amount secured hereby. Section 3.09. New York Provisions. ------------- ------------------- Mortgagor hereby makes the following statements: "This Mortgage does not cover real property principally improved or to be improved by one (1) or more structures containing 7 in the aggregate not more than six (6) residential dwelling units, each having its own separate cooking facilities." and (b) the covenants and conditions contained herein, other than those included in the New York Statutory Short Form of Mortgage, shall be construed as affording to Mortgagee rights additional to, and not exclusive of, the rights conferred under the provisions of Sections 254, 271 and 272 of the Real Property Law of the State of New York, all of which are incorporated herein by reference to the extent applicable. Section 3.10. Further Encumbrances. ------------- -------------------- In consideration of the granting of this Mortgage, Mortgagee hereby agrees that Mortgagor may grant easements, enter into subleases or other agreements further encumbering the Mortgaged Property without the consent of Mortgagee. Mortgagee agrees that at the request of Mortgagor, Mortgagee shall consent to and subordinate the lien of this Mortgage to any easements, subleases or further encumbrances against the Mortgaged Property. Notwithstanding the foregoing, no encumbrance securing any indebtedness will be permitted unless such encumbrance is expressly subordinate to this Mortgage. IN WITNESS WHEREOF, this Mortgage has been duly executed and delivered by Mortgagor. BRADLEES STORES, INC. By [SEAL] Name: Title: NEW HORIZONS OF YONKERS, INC. By [SEAL] Name: Title: Attest: ____________________ Name: Title: Witnesses: 8 ____________________ Name: ____________________ Name: 9 State of New York ) ) ss.: County of New York ) On the ____ day of _____________ in the year 1998, before me, the undersigned, a notary public in and for said state, personally appeared _______________ ______________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ______________________________ Notary Public My Commission Expires: _____________________ 10 State of New York ) ) ss.: County of New York ) On the ____ day of _____________ in the year 1998, before me, the undersigned, a notary public in and for said state, personally appeared _______________ ______________, personally known to me or proved to me on the basis of satisfactory evidence to be the individual whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his capacity, and that by his signature on the instrument, the individual, or the person upon behalf of which the individual acted, executed the instrument. ______________________________ Notary Public My Commission Expires: _____________________ 11 SCHEDULE A-1 [Legal Description of Yonkers Property] 12 SCHEDULE A-2 [Legal Description of Union Square Property] 13 EX-2.5 6 FORM OF CAP NOTE EXHIBIT 2.5 FORM OF CAP NOTE ---------------- THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER SAID ACT AND SUCH LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. ______________________________________ $___________ ___________, 199_ FOR VALUE RECEIVED, the undersigned, Bradlees Stores, Inc., a Massachusetts corporation (the "Company"), hereby covenants and promises to pay to the order of __________ (the "Holder"), the principal sum of ________ Dollars ($________) in twelve equal quarterly installments commencing on _______, 1999, together with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal amount at a rate of nine percent (9%) per annum, also payable quarterly on the same date as principal is paid hereon. Upon payment in full, this Note shall be cancelled and returned to the Company. This Note is a CAP Note which is referred to in the Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates under Chapter 11 of the Bankruptcy Code confirmed by the United States Bankruptcy Court, Southern District of New York on November 18, 1998 (the "Plan"). Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Plan. The Company shall have the right to prepay this Note, in whole or in part, at any time or from time to time, without premium or penalty. Payments of principal shall be made in lawful currency of the United States of America by wire transfer of immediately available funds to the account of _________________ at _____________, or in such other manner or such other place in the United States of America as the Holder shall designate to the Company in writing. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first-class mail addressed, if to the Company, to Bradlees Stores, Inc., One Bradlees Circle, P.O. Box 9051, Braintree, Massachusetts 02184-9051, Attn: General Counsel, and if to the Holder, to ___________________________. The Company or the Holder by notice to the other may designate additional or different addresses for subsequent notices or communications. If a payment date is a legal holiday for banks at a place of payment, payment may be made at that place on the next succeeding day that is not a legal holiday for banks, and no interest shall accrue for the intervening period. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the Holder or his attorney duly authorized in writing, a new Note will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company shall treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. Upon the occurrence of an Event of Default hereunder, the undersigned agrees to pay all of the Holder's costs of collection, including reasonable attorneys' fees and disbursements of counsel. No delay or omission on the part of the Holder in exercising any right hereunder shall operate as a waiver of such right or of any other rights under this Note. No waiver of any right shall be effective unless in writing and signed by the Holder nor shall a waiver on one occasion be construed as a bar to or waiver of any such right on any future occasion. An Event of Default shall have occurred and this Note shall become due and payable immediately, without notice or demand, upon the occurrence of any one of the following events in respect to the undersigned: (a) the failure of the undersigned to pay any quarterly installment due hereunder; provided however, that Bradlees shall have the right within seven (7) days of receipt of notice from the Holder of such a default to cure any such default, and upon such cure, Holder may not treat such default as an Event of Default; (b) the making by the undersigned of an assignment for the benefit of creditors, or the consent of the undersigned to the appointment of a receiver, or the appointment without its consent, of a receiver for the undersigned or for a substantial part of its property; (c) the institution by the undersigned of any bankruptcy or reorganization proceeding; and (d) the institution against the undersigned of any bankruptcy or reorganization proceeding not dismissed within forty-five (45) days after commencement. For the purposes of subparagraph (a) above, notice of a default shall be sufficient if delivered in person or via certified or registered mail, return receipt requested to the following: Bradlees Stores, Inc. One Bradlees Circle Braintree, Massachusetts 02184-9051 Attention: Chief Financial Officer with a copy to: Bradlees Stores, Inc. One Bradlees Circle Braintree, Massachusetts 02184-9051 Attention: General Counsel A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under this Note or for any claim based on, in respect of or by reason of such obligation or their creation. This Note has been executed in the State of New York and is governed by and is to be interpreted in accordance with the laws of the State of New York, without regard to the law thereof with respect to conflict of laws. IN WITNESS HEREOF, the Company has executed and delivered this Note as of the date first written above. BRADLEES STORES, INC. By: -------------------------- Name: Title: This Note is secured by a security interest in certain personal property as more particularly described and/or referenced in the Plan. EX-2.6 7 FORM OF CURE NOTE EXHIBIT 2.6 FORM OF CURE NOTE ----------------- THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER SAID ACT AND SUCH LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. ________________________________________ $_____________ ________________, 199_ FOR VALUE RECEIVED, the undersigned, Bradlees Stores, Inc., a Massachusetts corporation (the "Company"), hereby covenants and promises to pay ________________ (the "Holder"), the principal sum of ______________________ Dollars ($__________) on __________________ [three years after Effective Date] (the "Maturity Date") together with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal amount hereunder at a rate of nine percent (9%) per annum. Upon payment in full, this Note shall be cancelled and returned to the Company. This Note is one of the Cure Notes referred to in the Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates under Chapter 11 of the Bankruptcy Code confirmed by the United States Bankruptcy Court, Southern District of New York on ___________________, 199_ (the "Plan"). Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Plan. The Company shall have the right to prepay this Note, in whole or in part, at any time or from time to time, without premium or penalty. Payments of principal shall be made in lawful currency of the United States of America by wire transfer of immediately available funds to the account of ________________________ at ___________________, or in such other manner or such other place in the United States of America as the Holder shall designate to the Company in writing. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first-class mail addressed, if to the Company, to Bradlees Stores, Inc., One Bradlees Circle, P.O. Box 9051, Braintree, Massachusetts 02184-9051, Attn: General Counsel, and if to the Holder, to ______________________. The Company or the Holder by notice to the other may designate additional or different addressed for subsequent notices or communications. If a payment date is a legal holiday for banks at a place of payment, payment may be made at that place on the next succeeding day that is not a legal holiday for banks, and no interest shall accrue for the intervening period. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the Holder or his attorney duly authorized in writing, a new Note will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company shall treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. A director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under this Note or for any claim based on, in respect of or by reason of such obligation or their creation. This Note has been executed in the State of New York and is governed by and is to be interpreted in accordance with the laws of the State of New York, without regard to the law thereof with respect to conflict of laws. IN WITNESS HEREOF, the Company has executed and delivered this Note as of the date first written above. BRADLEES STORES, INC. By: ________________________________ Name: Title: 2 EX-2.7 8 FORM OF TAX NOTE FOR PRIORITY TAX CLAIMS EXHIBIT 2.7 FORM OF TAX NOTE ---------------- FOR OTHER PRIORITY TAX CLAIMS ----------------------------- THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER SAID ACT AND SUCH LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. ______________________________________ $__________ ___________, 199_ FOR VALUE RECEIVED, the undersigned, Bradlees Stores, Inc., a Massachusetts corporation (the "Company"), hereby covenants and promises to pay __________ (the "Holder"), the principal sum of ________ Dollars ($________) on __________, ______ (the "Maturity Date") in equal quarterly installments, together with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal amount accruing after the earlier of (a) the Effective Date and (b) February 1, 1999, at a rate of nine percent (9%) per annum, also payable annually on the same date as principal is paid hereon. The first payment shall be due on the latest of: (i) 90 days after the Effective Date, (ii) 90 days after the date on which an order allowing the Other Priority Tax Claim of the Holder becomes a Final Order, and (iii) such other date that is agreed upon by the Holder and the Company. Upon payment in full, this Note shall be cancelled and returned to the Company. This Note is one of the Tax Notes referred to in the Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates under Chapter 11 of the Bankruptcy Code confirmed by the United States Bankruptcy Court, Southern District of New York on __________, 199_ (the "Plan"). Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Plan. The Company shall have the right to prepay this Note, in whole or in part, at any time or from time to time after the Effective Date, without premium or penalty. Payments of principal and interest shall be made in lawful currency of the United States of America by wire transfer of immediately available funds to the account of __________ at __________, or in such other manner or such other place in the United States of America as the Holder shall designate to the Company in writing. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first-class mail addressed, if to the Company, to Bradlees Stores, Inc., One Bradlees Circle, P.O. Box 9051, Braintree, Massachusetts 02184-9051, Attn: General Counsel, and if to the Holder, to ___________________________. The Company or the Holder by notice to the other may designate additional or different addresses for subsequent notices or communications. If a payment date is a legal holiday for banks at a place of payment, payment may be made at that place on the next succeeding day that is not a legal holiday for banks, and no interest shall accrue for the intervening period. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the Holder or his attorney duly authorized in writing, a new Note will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company shall treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. Except to the extent the Plan otherwise provides, a director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under this Note or for any claim based on, in respect of or by reason of such obligation or their creation. This Note has been executed in the State of New York and is governed by and is to be interpreted in accordance with the laws of the State of New York, without regard to the law thereof with respect to conflict of laws. IN WITNESS HEREOF, the Company has executed and delivered this Note as of the date first written above. BRADLEES STORES, INC. By: Name: Title: EX-2.8 9 FORM OF TAX NOTES FOR FEDERAL PRIORITY TAX CLAIMS EXHIBIT 2.8 FORM OF TAX NOTE ---------------- FOR FEDERAL PRIORITY TAX CLAIMS ------------------------------- THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY STATE. THIS NOTE MAY BE OFFERED OR SOLD ONLY IF REGISTERED UNDER SAID ACT AND SUCH LAWS OR IF AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE. _____________________________ $________ ________,199_ FOR VALUE RECEIVED, the undersigned, Bradlees Stores, Inc., a Massachusetts corporation (the "Company"), hereby covenants and promises to pay __________ (the "Holder"), the principal sum of ________ Dollars ($________) on __________, ____ (the "Maturity Date") in equal quarterly installments, together with interest (computed on the basis of a 360-day year of twelve 30-day months) on the unpaid principal amount accruing after the earlier of (a) Effective Date and (b) February 1, 1999, at a rate of nine percent (9%) per annum, also payable annually on the same date as principal is paid hereon. The first payment shall be due on the latest of: (i) 90 days after the Effective Date, (ii) 90 days after the date on which an order allowing the Federal Priority Tax Claim of the Holder becomes a Final Order, and (iii) such other date that is agreed upon by the Holder and the Company. Upon payment in full, this Note shall be cancelled and returned to the Company. This Note is one of the Tax Notes referred to in the Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates under Chapter 11 of the Bankruptcy Code confirmed by the United States Bankruptcy Court, Southern District of New York on __________, 199_ (the "Plan"). Capitalized terms used herein and not otherwise defined herein shall have the meanings set forth in the Plan. The Company shall have the right to prepay this Note, in whole or in part, at any time or from time to time after the Effective Date, without premium or penalty. Payments of principal and interest shall be made in lawful currency of the United States of America by wire transfer of immediately available funds to the account of __________ at __________, or in such other manner or such other place in the United States of America as the Holder shall designate to the Company in writing. Any notice or communication shall be sufficiently given if in writing and delivered in person or mailed by first-class mail addressed, if to the Company, to Bradlees Stores, Inc., One Bradlees Circle, P.O. Box 9051, Braintree, Massachusetts 02184-9051, Attn: General Counsel, and if to the Holder, to ___________________________. The Company or the Holder by notice to the other may designate additional or different addresses for subsequent notices or communications. If a payment date is a legal holiday for banks at a place of payment, payment may be made at that place on the next succeeding day that is not a legal holiday for banks, and no interest shall accrue for the intervening period. Upon surrender of this Note for registration of transfer, duly endorsed, or accompanied by a written instrument of transfer duly executed, by the Holder or his attorney duly authorized in writing, a new Note will be issued to, and registered in the name of, the transferee. Prior to due presentment for registration of transfer, the Company shall treat the person in whose name this Note is registered as the owner hereof for the purpose of receiving payment and for all other purposes, and the Company shall not be affected by any notice to the contrary. Except to the extent the Plan otherwise provides, a director, officer, employee or stockholder, as such, of the Company shall not have any liability for any obligations of the Company under this Note or for any claim based on, in respect of or by reason of such obligation or their creation. This Note has been executed in the State of New York and is governed by and is to be interpreted in accordance with the laws of the State of New York, without regard to the law thereof with respect to conflict of laws. IN WITNESS HEREOF, the Company has executed and delivered this Note as of the date first written above. BRADLEES STORES, INC. By: Name: Title: EXHIBIT G CONVERSION OF NEW NOTES SECTION 1.01 CONVERSION PRIVILEGE. -------------------- Subject to and upon compliance with the provisions of this Exhibit G, at the option of the holder thereof, any New Note may at any time after the first anniversary of their issuance be converted, in whole, or in part in multiples of $1,000 principal amount, into fully paid and non-assessable shares of New Common Stock issuable upon conversion of the New Notes, at the Conversion Price in effect at the Date of Conversion, until and including, but not after the close of business on the second Business Day prior to Stated Maturity, or unless such New Note or some portion thereof shall have been called for redemption or delivered for repurchase prior to such date and no default is made in making due provision for the payment of the redemption price in accordance with the terms of the Plan (including this Exhibit) and the New Notes, in which case, with respect to such New Note or portion thereof as has been so called for redemption or delivered for repurchase, such New Note or portion thereof may be so converted until and including, but not after, the close of business on the Second Business Day prior to the Redemption Date or Repurchase Date, as applicable, for such New Note, unless the Reorganized BSI subsequently fails to pay the applicable Redemption Price or Repurchase Price, as the case may be. SECTION 1.02 EXERCISE OF CONVERSION PRIVILEGE. -------------------------------- In order to exercise the conversion privilege, the Holder of any New Note to be converted shall surrender such New Note to the Reorganized BI at any time during usual business hours at its office or agency maintained for the purpose as provided in this Indenture, accompanied by a fully executed written notice, in substantially the form set forth on the reverse of the New Note, that the Holder elects to convert such New Note or a stated portion thereof constituting a multiple of $1,000 principal amount, and, if such New Note is surrendered for conversion during the period between the close of business on any Record Date and the opening of business on the next following Interest Payment Date and has not been called for redemption on a Redemption Date which occurs within such period, accompanied also by payment to the Reorganized BSI of an amount equal to the interest payable on such Interest Payment Date on the principal amount of the New Note being surrendered for conversion, notwithstanding such conversion. The Holder of any New Note at the close of business on a Record Date will be entitled to receive the interest payable on such New Note on the corresponding Interest Payment Date notwithstanding the conversion thereof after such Record Date. The interest payment with respect to a Note called for redemption on a date during the period from the close of business on or after any Record Date to the close of business on the Business Day following the corresponding Interest Payment Date will be payable on the corresponding Interest Payment Date to the registered Holder at the close of business on that Record Date (notwithstanding the conversion of such Note before the corresponding Interest Payment Date) and a Holder who elects to convert need not include funds equal to the interest paid. Such notice of conversion shall also state the name or names (with address) in which the certificate or certificates for shares of New Common Stock shall be issued. New Notes surrendered for conversion shall (if reasonably required by the Reorganized BI or the Trustee) be duly endorsed by, or be accompanied by a written instrument or instruments of transfer in form satisfactory to the Reorganized BI duly executed by, the Holder or his attorney duly authorized in writing. As promptly as practicable after the receipt of such notice and the surrender of such New Note as aforesaid, the Reorganized BI shall, subject to the provisions of Section 1.08 of this Exhibit I, issue and deliver at such office or agency to such Holder, or on his written order, a certificate or certificates for the number of full shares of New Common Stock issuable on such conversion of New Notes in accordance with the provisions of this Exhibit I and Cash, as provided in Section 1.03 of this Exhibit I, in respect of any fraction of a share of New Common Stock otherwise issuable upon such conversion. Such conversion shall be deemed to have been effected immediately prior to the close of business on the date (herein called the "Date of Conversion") on which such New Note shall have been surrendered as aforesaid, and the person or persons in whose name or names any certificate or certificates for shares of New Common Stock shall be issuable upon such conversion shall be deemed to have become on the Date of Conversion the holder or holders of record of the shares represented thereby; provided, -------- however, that any such surrender on any date when the stock transfer books of - ------- the Reorganized BI shall be closed shall cause the person or persons in whose name or names the certificate or certificates for such shares are to be issued to be deemed to have become the recordholder or holders thereof for all purposes at the opening of business on the next succeeding day on which such stock transfer books are open but such conversion shall nevertheless be at the Conversion Price in effect at the close of business on the date when such New Note shall have been so surrendered with the conversion notice. In the case of conversion of a portion, but less than all, of a New Note, the Reorganized Corporations shall as promptly as practicable execute, and the Trustee shall authenticate and deliver to the Holder thereof, at the expense of the Reorganized BI, a New Note or New Notes in the aggregate principal amount of the unconverted portion of the New Note surrendered. Except as otherwise expressly provided in this Indenture, no payment or adjustment shall be made for interest accrued on any New Note (or portion thereof) converted or for dividends or distributions on any New Common Stock issued upon conversion of any New Note. SECTION 1.03 FRACTIONAL INTERESTS. -------------------- No fractions of shares or scrip representing fractions of shares shall be issued upon conversion of New Notes. If more than one New Note shall be surrendered for conversion at one time by the same holder, the number of full shares which shall be issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the New Notes so surrendered. If any fraction of a share of New Common Stock would, except for the foregoing provisions of this Section 1.03, be issuable on the conversion of any New Note or New Notes, the Reorganized BSI shall make payment in lieu thereof in an amount of Cash equal to the value of such fraction computed on the basis of the last sale price of the New Common Stock as reported on the NASDAQ (or if not listed for trading thereon, then on the principal national securities exchange on which the New Common Stock is listed or admitted to trading) at the close of business on the Date of Conversion or if no such sale takes place on such day, the last 2 sale price for such day shall be the average of the closing bid and asked prices regular way on the NASDAQ (or if not listed for trading thereon, on the principal national securities exchange on which the New Common Stock is listed or admitted to trading) for such day (any such last sale price being hereinafter referred to as the "Last Sale Price"). If on such Trading Day the New Common Stock is not quoted by any such organization, the closing price on the prior Trading Day shall be used. SECTION 1.04 CONVERSION PRICE. ---------------- The Conversion Price per share of New Common Stock issuable upon conversion of the New Notes shall initially be the price equal to the arithmetic unweighted average closing price of such stock during the twenty (20) business days prior to the one year anniversary of the issuance of the New Notes. SECTION 1.05 ADJUSTMENT OF CONVERSION PRICE. ------------------------------ The Conversion Price (herein called the "Conversion Price") shall be subject to adjustment from time to time as follows: (a) In case the Reorganized BI shall (1) make or pay a dividend (or other distribution) in shares of New Common Stock on any class of Capital Stock of the Reorganized BI, (2) subdivide its outstanding shares of New Common Stock into a greater number of shares or (3) combine or reclassify its outstanding shares of New Common Stock into a smaller number of shares, the Conversion Price in effect immediately prior to such action shall be adjusted so that the Holder of any New Note thereafter surrendered for conversion shall be entitled to receive the number of shares of New Common Stock that he would have owned immediately following such action had such New Note been converted immediately prior thereto. An adjustment made pursuant to this subsection (a) shall become effective immediately, except as provided in subsection (h) below, after the record date in the case of a dividend or distribution and shall become effective immediately after the effective date in the case of a subdivision or combination. (b) In case the Reorganized BI shall issue rights, options or warrants to all holders of New Common Stock entitling them to subscribe for or purchase shares of New Common Stock at a price per share less than the then current market price per share of the New Common Stock (as determined pursuant to subsection (f) below) on the record date mentioned below, the Conversion Price shall be adjusted to a price, computed to the nearest cent, so that the same shall equal the price determined by multiplying: (i) the Conversion Price in effect immediately prior to the date of issuance of such rights or warrants by a fraction, of which (ii) the numerator shall be (A) the number of shares of New Common Stock outstanding on the date of issuance of such rights, options or warrants, immediately prior to such issuance, plus (B) the number of shares which the aggregate offering price of the total number of shares so offered for subscription or purchase would purchase at such current market price (determined by multiplying such total number of shares by the 3 exercise price of such rights, options or warrants and dividing the product so obtained by such current market price), and of which (iii) the denominator shall be (A) the number of shares of New Common Stock outstanding on the date of issuance of such rights, options or warrants, immediately prior to such issuance, plus (B) the number of additional shares of New Common Stock which are so offered for subscription or purchase. Such adjustment shall become effective immediately, except as provided in subsection (h) below, after the record date for the determination of holders entitled to receive such rights, options or warrants; provided, however, that if -------- ------- any such rights, options or warrants issued by the Reorganized BI as described in this subsection (b) are only exercisable upon the occurrence of certain triggering events relating to control and provided for in shareholder rights plans, then the Conversion Price will not be adjusted as provided in this subsection (b) until such triggering events occur. (c) In case the Reorganized BI or any subsidiary of the Reorganized BI shall distribute to all holders of New Common Stock, any of its assets, evidences of indebtedness, cash or other assets or shares of Capital Stock other than New Common Stock (including securities, but other than (x) dividends or distributions exclusively in cash or (y) any dividend or distribution for which an adjustment is required to be made in accordance with subsection (a) or (b) above), then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the then current market price per share of the New Common Stock (determined as provided in subsection (f) below) on the record date mentioned below less the then fair market value (as reasonably determined in good faith by the Board of Directors of the Reorganized BI) of the portion of the assets so distributed applicable to one share of New Common Stock, and of which the denominator shall be such current market price per share of the New Common Stock. Such adjustment shall become effective immediately, except as provided in subsection (h) below, after the record date for the determination of stockholders entitled to receive such distribution. Notwithstanding the foregoing, in the event that the fair market value of the assets, evidences of indebtedness or other securities so distributed applicable to one share of New Common Stock equals or exceeds such current market price per share of New Common Stock, or such current market price exceeds such fair market value by less than $0.10 per share, the Conversion Price shall not be adjusted pursuant to this subsection (c) and, to the extent applicable, the provisions of subsection (k) shall apply to such distribution. (d) In case the Reorganized BI or any subsidiary of the Reorganized BI shall make any distribution consisting exclusively of cash (excluding any cash portion of distributions for which an adjustment is required to be made in accordance with (c) above, or cash distributed upon a merger or consolidation) to all holders of New Common Stock in an aggregate amount that, combined together with (i) all other such all-cash distributions made within the then preceding 12 months in respect of which no adjustment has been made and (ii) any cash and the fair market value of other consideration paid or payable in respect of any tender offer by the Reorganized BI or any of its subsidiaries for New Common Stock concluded within the preceding 12 months in respect of which no adjustment has been made, exceeds 15% of the 4 Reorganized BI's market capitalization (defined as being the product of the then current market price of the New Common Stock (determined as provided in subsection (f) below) times the number of shares of New Common Stock then outstanding) on the record date of such distribution, then in each such case the Conversion Price shall be adjusted so that the same shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the date of such distribution by a fraction of which the numerator shall be the then current market price per share of the New Common Stock on such record date less the amount of the cash so distributed applicable to one share of New Common Stock, and of which the denominator shall be such current market price per share of the New Common Stock. Such adjustment shall become effective immediately, except as provided in subsection (h) below, after the record date for the determination of stockholders entitled to receive such distribution. Notwithstanding the foregoing, in the event that the cash so distributed applicable to one share of New Common Stock equals or exceeds such current market price per share of New Common Stock, or such current market price exceeds such amount of cash by less than $0.10 per share, the Conversion Price shall not be adjusted pursuant to this subsection (d), and, to the extent applicable, the provisions of subsection (k) shall apply to such distribution. (e) In case there shall be completed a tender or exchange offer made by the Reorganized BI or any subsidiary of the Reorganized BI for all or any portion of the New Common Stock (any such tender or exchange offer being referred to as an "Offer") that involves an aggregate consideration having a fair market value as of the expiration of such Offer (the "Expiration Time") that, together with (i) any cash and the fair market value of any other consideration payable in respect of any other Offer, as of the expiration of such other Offer, expiring within the 12 months preceding the expiration of such Offer and in respect for which no Conversion Price adjustment pursuant to this subsection (e) has been made and (ii) the aggregate amount of any all-cash distributions referred to in subsection (d) of this Section 1.05 to all holders of New Common Stock within the 12 months preceding the expiration of such Offer for which no conversion price adjustment pursuant to such subsection (d) has been made, exceeds 15% of the product of the then current market price per share (determined as provided in subsection (f) below) of the New Common Stock on the Expiration Time times the number of shares of New Common Stock outstanding (including any tendered shares) on the Expiration Time, the Conversion Price shall be reduced by multiplying such Conversion Price in effect immediately prior to the Expiration Time by a fraction of which the numerator shall be (i) the product of the then current market price per share (determined as provided in subsection (f) below) of the New Common Stock on the Expiration Time times the number of shares of New Common Stock outstanding (including any tendered shares) on the Expiration Time minus (ii) the fair market value of the aggregate consideration payable to stockholders based on the acceptance (up to any maximum specified in the terms of the Offer) of all shares validly tendered and not withdrawn as of the Expiration Time (the shares deemed so accepted being referred to as the "Purchased Shares") and the denominator shall be the product of (i) such current market price per share on the Expiration Time times (ii) such number of outstanding shares on the Expiration Time less the number of Purchased Shares, such reduction to become effective immediately prior to the opening of business on the day following the Expiration Time. For purposes of this subsection (e), the fair market value of any consideration with respect to an Offer shall be reasonably determined in good faith by the Board of Directors of the Reorganized 5 BI and described in a Board Resolution. (f) For the purpose of any computation under subsections (b), (c), (d) and (e) above, the current market price per share of New Common Stock on any date shall be deemed to be the average of the Last Sale Prices of a share of New Common Stock for the five consecutive Trading Days selected by the Reorganized BI commencing not more than 20 Trading Days before, and ending not later than, the earlier of the date in question and the date before the " `ex' date," with respect to the issuance, distribution or Offer requiring such computation. If on any such Trading Day the New Common Stock is not quoted by any organization referred to in the definition of Last Sale Price in Section 1.03 of this Exhibit I, the fair value of the New Common Stock on such day, as reasonably determined in good faith by the Board of Directors of the Reorganized BI, shall be used. For purposes of this paragraph, the term "'ex' date," when used with respect to any issuance, distribution or payments with respect to an Offer, means the first date on which the New Common Stock trades regular way on the NASDAQ (or if not listed or admitted to trading thereon, then on the principal national securities exchange on which the New Common Stock is listed or admitted to trading) without the right to receive such issuance, distribution or Offer. (g) In addition to the foregoing adjustments in subsections (a), (b), (c), (d) and (e) above, the Reorganized BI will be permitted to make such reductions in the Conversion Price as it considers to be advisable in order that any event treated for Federal income tax purposes as a dividend of stock or stock rights will not be taxable to the holders of the shares of New Common Stock. (h) In the event the Reorganized BI elects to make such a reduction in the Conversion Price, the Reorganized BI will comply with the requirements of Rule 14e-1 of the Exchange Act and any other Federal and state laws and regulations thereunder if and to the extent that such laws and regulations are applicable in connection with the reduction of the Conversion Price of the New Notes; provided that any provisions of this Indenture which conflict with such laws shall be deemed to be superseded by the provisions of such laws. (i) In any case in which this Section 1.05 shall require that an adjustment (including by reason of the last sentence of subsection (a) or (c) above) be made immediately following a record date, the Reorganized BI may elect to defer the effectiveness of such adjustment (but in no event until a date later than the effective time of the event giving rise to such adjustment), in which case the Reorganized BI shall, with respect to any New Note converted after such record date and on and before such adjustment shall have become effective (i) defer paying any Cash payment pursuant to Section 1.03 of this Exhibit I or issuing to the Holder of such New Note the number of shares of New Common Stock and other Capital Stock of the Reorganized BI (or other assets or securities) issuable upon such conversion in excess of the number of shares of New Common Stock and other Capital Stock of the Reorganized BI issuable thereupon only on the basis of the Conversion Price prior to adjustment, and (ii) not later than five Business Days after such adjustment shall have become effective, pay to such Holder the appropriate Cash payment pursuant to Section 1.03 of this Exhibit I and issue to such Holder the additional shares of New Common Stock and other Capital Stock of the Reorganized BI issuable on such conversion. 6 (j) No adjustment in the Conversion Price shall be required unless such adjustment would require an increase or decrease of at least one percent (1.0%) of the Conversion Price; provided, that any adjustments which by -------- reason of this subsection (i) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Exhibit I shall be made to the nearest cent or to the nearest one- hundredth of a share, as the case may be. Whenever the Conversion Price is adjusted as herein provided, the Reorganized BI shall promptly (i) File with the Trustee and each conversion agent an Officers' Certificate setting forth the Conversion Price after such adjustment and setting forth a brief statement of the facts requiring such adjustment, which certificate shall be conclusive evidence of the correctness of such adjustment, and (ii) mail or cause to be mailed a notice of such adjustment to each holder of New Notes at his address as the same appears on the registry books of the Reorganized BI. (k) In the event that the Reorganized BI distributes rights (including rights to distributions referred to by paragraphs (c) and (d) of this Section 1.05 to the extent this paragraph (k) applies thereto) or warrants (other than those referred to in subsection (b) above) pro rata to holders of New Common Stock, so long as any such rights or warrants have not expired or been redeemed by the Reorganized BI, the Reorganized BI shall make proper provision so that the Holder of any New Note surrendered for conversion will be entitled to receive upon such conversion, in addition to the shares of New Common Stock issuable upon such conversion (the "Conversion Shares"), a number of rights or warrants to be determined as follows: (i) if such conversion occurs on or prior to the date for the distribution to the holders of rights or warrants of separate certificates evidencing such rights or warrants (the "Distribution Date"), the same number of rights or warrants to which a holder of a number of shares of New Common Stock equal to the number of Conversion Shares is entitled at the time of such conversion in accordance with the terms and provisions of and applicable to the rights or warrants, and (ii) if such conversion occurs after such Distribution Date, the same number of rights or warrants to which a holder of the number of shares of New Common Stock into which the principal amount of such Note so converted was convertible immediately prior to such Distribution Date would have been entitled on such Distribution Date in accordance with the terms and provisions of and applicable to the rights or warrants. SECTION 1.06 CONTINUATION OF CONVERSION PRIVILEGE IN CASE OF RECLASSIFICATION, ----------------------------------------------------------------- CHANGE, MERGER, CONSOLIDATION OR SALE OF ASSETS. - ----------------------------------------------- If any of the following shall occur, namely: (a) any reclassification or change of outstanding shares of New Common Stock issuable upon conversion of the New Notes (other than a change in par value, or from par value to no par value, or from no par value, to par value, or as a result of a subdivision or combination), (b) any consolidation or merger of the Reorganized BI with or into any other Person, or the merger of any other Person with or into the Reorganized BI (other than a merger which does not result in any reclassification, change, conversion, exchange or cancellation of outstanding shares of New Common Stock) or (c) any sale, transfer or conveyance of all or substantially all of the assets of the Reorganized BI (computed on a consolidated basis), then the Reorganized BI, or such successor or purchasing 7 entity, as the case may be, shall, as a condition precedent to such reclassification, change, consolidation, merger, sale or conveyance, execute and deliver to the Trustee a supplemental indenture providing that the Holder of each New Note then outstanding shall have the right to convert such New Note only into the kind and amount of shares of stock and other securities and property (including cash) receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance by a holder of the number of shares of New Common Stock issuable upon conversion of such New Note immediately prior to such reclassification, change, consolidation, merger, sale, transfer or conveyance assuming such holder of New Common Stock of the Reorganized BI failed to exercise his rights of an election, if any, as to the kind or amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance (provided that if -------- the kind or amount of securities, cash, and other property receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance is not the same for each share of New Common Stock of the Reorganized BI held immediately prior to such reclassification, change, consolidation, merger, sale, transfer or conveyance in respect of which such rights of election shall not have been exercised ("non-electing share"), then for the purpose of this Section 1.06 the kind and amount of securities, cash and other property receivable upon such reclassification, change, consolidation, merger, sale, transfer or conveyance by each non-electing share shall be deemed to be the kind and amount so receivable per share by a plurality of the non-electing shares). Such supplemental indenture shall provide for adjustments which shall be as nearly equivalent as may be practicable to the adjustments provided for in this Exhibit I. If, in the case of any such consolidation, merger, sale or conveyance, securities and property (including cash) receivable thereupon by a holder of shares of New Common Stock includes shares of stock or other securities and property (including cash) of a corporation other than the successor or purchasing corporation, as the case may be, in such consolidation, merger, sale or conveyance, then such supplemental indenture shall also be executed by such other corporation and shall contain such additional provisions to protect the interests of the Holders of the New Notes as the Board of Directors of the Reorganized BI shall reasonably consider necessary by reason of the foregoing. The provisions of this Section 1.06 shall similarly apply to successive consolidations, mergers, sales or conveyances. Notice of the execution of each such supplemental indenture shall be mailed to each Holder of New Notes at his address as the same appears on the registry books of the Reorganized BI. SECTION 1.07 NOTICE OF CERTAIN EVENTS. In case: (a) the Reorganized BI shall declare a dividend (or any other distribution) payable to the holders of New Common Stock (other than cash dividends); (b) the Reorganized BI shall authorize the granting to the holders of New Common Stock of rights, warrants or options to subscribe for or purchase any shares of stock of any class or of any other rights; (c) the Reorganized BI shall authorize any reclassification or change of the 8 New Common Stock (including a subdivision or combination of its outstanding shares of New Common Stock), or any consolidation or merger to which the Reorganized BI is a party and for which approval of any stockholders of the Reorganized BI is required, or the sale or conveyance of all or substantially all the property or business of the Reorganized BI; (d) there shall be proposed any voluntary or involuntary dissolution, liquidation or winding-up of the Reorganized BI; or (e) the Reorganized BI or any of its subsidiaries shall complete an Offer; then, the Reorganized BI shall cause to be Filed at the office or agency maintained for the purpose of conversion of the New Notes as provided in the Section 1.12 of this Exhibit I, and shall cause to be mailed to each Holder of New Notes, at his address as it shall appear on the registry books of the Reorganized BI, at least 20 days before the date hereinafter specified (or the earlier of the dates hereinafter specified, in the event that more than one date is specified), a notice stating the date on which (1) a record is expected to be taken for the purpose of such dividend, distribution, rights, warrants or options or Offer, or if a record is not to be taken, the date as of which the holders of New Common Stock of record to be entitled to such dividend, distribution, rights, warrants or options or to participate in such Offer are to be determined, or (2) such reclassification, change, consolidation, merger, sale, conveyance, dissolution, liquidation or winding-up is expected to become effective and the date, if any is to be fixed, as of which it is expected that holders of New Common Stock of record shall be entitled to exchange their shares of New Common Stock for securities or other property deliverable upon such reclassification, change, consolidation, merger, sale, conveyance, dissolution, liquidation or winding-up. SECTION 1.08 TAXES ON CONVERSION. ------------------- The Reorganized BI will pay any and all documentary, stamp or similar taxes payable to the United States of America or any political subdivision or taxing authority thereof or therein in respect of the issue or delivery of shares of New Common Stock on conversion of New Notes pursuant thereto; provided, however, that the Reorganized BI shall not be required to pay -------- ------- any tax which may be payable in respect of any transfer involved in the issue or delivery of shares of New Common Stock in a name other than that of the Holder of the New Notes to be converted and no such issue or delivery shall be made unless and until the person requesting such issue or delivery has paid to the Reorganized BI the amount of any such tax or has established, to the satisfaction of the Reorganized BI, that such tax has been paid. The Reorganized BI extends no protection with respect to any other taxes imposed in connection with conversion of New Notes. SECTION 1.09 REORGANIZED BI TO PROVIDE STOCK. ------------------------------- The Reorganized BI shall reserve, free from preemptive rights, out of its authorized but unissued shares, sufficient shares to provide for the conversion of the New Notes from time to time as such New Notes are presented for conversion, provided, that nothing contained herein shall be construed to -------- preclude the Reorganized BI from satisfying its obligations in respect of the conversion of New Notes by delivery of repurchased shares of New 9 Common Stock which are held in the treasury of the Reorganized BI. If any shares of New Common Stock to be reserved for the purpose of conversion of New Notes hereunder require registration with or approval of any governmental authority under any Federal or state law before such shares may be validly issued or delivered upon conversion, then the Reorganized BI covenants that it will in good faith and as expeditiously as possible use its best efforts to secure such registration or approval, as the case may be, provided, however, that nothing in this Section 1.09 shall be deemed to limit in - -------- ------- any way the obligations of the Reorganized BI provided in this Exhibit I. Before taking any action which would cause an adjustment reducing the Conversion Price below the then par value, if any, of the New Common Stock, the Reorganized BI will take all corporate action which may be necessary in order that the Reorganized BI may validly and legally issue fully paid and non- assessable shares of New Common Stock at such adjusted Conversion Price. The Reorganized BI covenants that all shares of New Common Stock which may be issued upon conversion of New Notes will upon issue be fully paid and non-assessable by the Reorganized BI and free of preemptive rights. SECTION 1.10 DISCLAIMER OF RESPONSIBILITY FOR CERTAIN MATTERS. ------------------------------------------------ Neither the Trustee nor any agent of the Trustee shall at any time be under any duty or responsibility to any Holder of New Notes to determine whether any facts exist which may require any adjustment of the Conversion Price, or with respect to the Officers' Certificate referred to in Section 1.05 of this Exhibit I, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed, or herein or in any supplemental indenture provided to be employed, in making the same. Neither the Trustee nor any agent of the Trustee shall be accountable with respect to the validity or value (or the kind or amount) of any shares of New Common Stock, or of any securities or property (including cash), which may at any time be issued or delivered upon the conversion of any New Note; and neither the Trustee nor any conversion agent makes any representation with respect thereto. Neither the Trustee nor any agent of the Trustee shall be responsible for any failure of the Reorganized BI to issue, register the transfer of or deliver any shares of New Common Stock or stock certificates or other securities or property (including cash) upon the surrender of any New Note for the purpose of conversion or to comply with any of the covenants of the Reorganized BI contained in this Exhibit I. SECTION 1.11 RETURN OF FUNDS DEPOSITED FOR REDEMPTION OF CONVERTED NEW NOTES. --------------------------------------------------------------- Any funds which at any time shall have been deposited by the Reorganized BSI or on its behalf with the Trustee or any other Paying Agent for the purpose of paying the principal of and interest on any of the New Notes and which shall not be required for such purposes because of the conversion of such New Notes, as provided in this Exhibit I, shall after such conversion be repaid to the Reorganized BSI by the Trustee or such other Paying Agent. 10 SECTION 1.12 REGISTRAR AND PAYING AGENT. -------------------------- Reorganized BSI shall maintain an office or agency in the Borough of Manhattan, The City of New York, where New Notes may be presented for registration of transfer or for exchange ("Registrar") and an office or agency where New Notes may be presented for payment ("Paying Agent") and where notices and demands to or upon Reorganized BSI in respect of the New Notes may be served. Except as otherwise prohibited in the New Notes, Reorganized BSI may act as Registrar or Paying Agent. The Registrar shall keep a register of the New Notes and of their transfer and exchange. Reorganized BSI may have one or more co-Registrars and one or more additional Paying Agents. The term "Paying Agent" includes any additional Paying Agent. Reorganized BSI hereby initially appoints ______________ as Registrar and Paying Agent, and ________ has agreed to so act. Reorganized BSI shall enter into an appropriate written agency agreement with any Agent, which agreement shall implement the provisions of the Plan, the New Notes and this Exhibit I that relate to such Agent. Reorganized BSI shall promptly notify the Trustee in writing of the name and address of any such Agent. If Reorganized BSI fails to maintain a Registrar or Paying Agent, the Trustee shall act as such. SECTION 1.13 DEFINITIONS USED IN EXHIBIT I. ----------------------------- As used in Exhibit I, the following terms shall have the meanings set forth below. Capitalized terms not otherwise defined below shall have the meanings ascribed to such terms in the Plan. Article I of the Plan shall apply to this Exhibit I. "Agent" means any Registrar, Paying Agent or co-Registrar. ----- "Capital Stock" means, with respect to any corporation, any and ------------- all shares, interests, rights to purchase (other than convertible or exchangeable indebtedness), warrants, options, participations or other equivalents of or interests (however designated) in stock issued by that corporation. "Conversion Price" shall have the meaning specified in Section ---------------- 1.05 of this Exhibit I. "Conversion Shares" shall have the meaning specified in Section ----------------- 1.05 of this Exhibit I. "Date of Conversion" shall have the meaning specified in Section ------------------ 1.02 of this Exhibit I. "Distribution Date" shall have the meaning specified in Section ----------------- 1.05 of this Exhibit I. "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended, and the rules and regulations promulgated by the United States Securities and Exchange Commission thereunder. "Expiration Time" shall have the meaning specified in Section --------------- 1.05 of this 11 Exhibit I. "Holder" means the person in whose name a New Note is registered ------ on the Registrar's books. "Interest Payment Date" means the stated due date of an --------------------- installment of interest on the New Notes. "Last Sale Price" shall have the meaning specified in Section --------------- 1.03 of this Exhibit I. "non-electing share" shall have the meaning specified in Section ------------------ 1.06 of this Exhibit I. "Offer" shall have the meaning specified in Section 1.05 of this ----- Exhibit I. "Officers' Certificate" means, with respect to the Reorganized --------------------- BI, a certificate signed by two officers of the Reorganized BI and otherwise in form and substance acceptable to the Trustee. "Paying Agent" shall have the meaning specified in Section 1.12 ------------ of this Exhibit I. "Purchased Shares" shall have the meaning specified in Section ---------------- 1.05 of this Exhibit I. "Record Date" means a Record Date specified in the New Notes ----------- whether or not such Record Date is a Business Day. "Registrar" shall have the meaning specified in Section 1.12 of --------- this Exhibit I. "Redemption Date," when used with respect to any New Note to be ---------------- redeemed, means the date fixed for such redemption pursuant to the terms of the New Note. "Redemption Price," when used with respect to any New Note to be ---------------- redeemed, means the redemption price for such redemption pursuant to the terms of the New Note, which shall include, without duplication, in each case, accrued and unpaid interest, if any, to and including the Redemption Date, excluding the date of issuance. "Repurchase Date" shall have the meaning ascribed to such term in --------------- the New Note. "Repurchase Price" shall have the meaning specified the New ---------------- Notes. "Stated Maturity," when used with respect to any New Note, means ---------------- August 1, 2003. "Trading Day" means each Monday, Tuesday, Wednesday, Thursday and ----------- Friday, other than any day on which securities are not traded on the NASDAQ. "Trustee" means the ___________, the trustee for the New Notes. ------- 12 EX-2.9 10 FORM OF WARRANT EXHIBIT 2.9 FORM OF NEW WARRANT ------------------- THIS WARRANT AND THE SHARES OF COMMON STOCK PURCHASABLE UPON EXERCISE OF THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, NOR REGISTERED OR QUALIFIED UNDER ANY STATE SECURITIES LAWS, AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF UNLESS SO REGISTERED OR AN EXCEPTION THEREFROM IS AVAILABLE. WARRANT TO PURCHASE COMMON STOCK OF BRADLEES, INC. _____________, 199__ Bradlees, Inc., a corporation organized under the laws of the Commonwealth of Massachusetts (the "Company"), hereby certifies that, for value received, _____________, or registered assigns (the "Holder"), is entitled, subject to the terms set forth below, to purchase from the Company at any time or from time to time during the five-year period following the Effective Date (as defined in the Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates under Chapter 11 of the Bankruptcy Code (the "Plan")) and before 5:00 p.m., New York time on ____________, 200__ (the "Expiration Date"), up to __________ fully paid and nonassessable shares of Common Stock (as hereinafter defined), ___________ Dollars ($________) par value per share, of the Company, at a purchase price of Seven Dollars ($7.00) per share (the "Purchase Price"). The number and character of such shares of Common Stock and the Purchase Price are subject to adjustment as provided herein. As used herein the following terms, unless the context otherwise requires, have the following respective meanings: (a) The term Company shall include Bradlees, Inc. and any corporation which shall succeed or assume the obligations of Bradlees, Inc. hereunder. (b) The term "Common Stock" includes (i) the shares of the Company's common stock provided for under the Plan and authorized under the amended and restated articles of organization of the Company, and (ii) any other securities into which or for which any of the securities described in (i) may be converted or exchanged pursuant to a plan of recapitalization, reorganization, merger, sale of assets or otherwise. (c) The term "Plan Warrants" shall mean warrants to purchase Common Stock, of a like term to this Warrant, 1,000,000 shares originally issued on ________ pursuant to the Plan. Section 1. Exercise of Warrant. ------------------- 1.1. Number of Shares Issuable upon Exercise. The Holder shall be ---- --------------------------------------- entitled to receive, upon exercise of this Warrant in whole in accordance with the terms of subsection 1.2 or upon exercise of this Warrant in part in accordance with subsection 1.3, shares of Common Stock, subject to adjustment pursuant to Section 5. 1.2. Full Exercise. This Warrant may be exercised in full by the ---- ------------- Holder by surrender of this Warrant, with the form of subscription attached as Exhibit A hereto (the "Subscription Form") duly executed by the Holder, to the Company at its principal office or at the office of its Warrant agent (as provided in Section 11), accompanied by payment in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock for which this Warrant is then exercisable by the Purchase Price then in effect. 1.3. Conversion. The Holder may convert this Warrant (the ---- ---------- "Conversion Right"), in whole or in part, into the number of shares of Common Stock of the Company calculated pursuant to the following formula by surrendering this Warrant (with the notice of exercise form attached hereto as Exhibit C duly executed) at the principal office of the Company specifying the number of shares of Common Stock of the Company, the rights to purchase which the Holder desires to convert: Y (A - B) --------- X = A where: X = the number of shares of Common Stock to be issued to the Holder; Y = the number of shares of Common Stock subject to this Warrant for which the Conversion Right is being exercised; A = the Fair Market Value of one share of Common Stock (as calculated in Section 1.5 hereof); B = the Purchase Price The Company agrees that the shares so converted shall be deemed to be issued to the holder hereof as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered as aforesaid. In the event of any conversion of this Warrant, certificates for the shares of stock so converted shall be delivered to the holder hereof within 15 days thereafter and, unless this Warrant has been fully converted or expired, a new Warrant representing the portion of the shares, if 2 any, with respect to which this Warrant shall not then have been converted, shall also bc issued to the holder hereof within such 15 day period. 1.4. Partial Exercise. This Warrant may be exercised in part (but ---- ---------------- not for a fractional share) by surrender of this Warrant in the manner and at the place provided in subsection 1.2 except that the amount payable by the Holder on such partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock designated by the Holder in the Subscription Form by (b) the Purchase Price then in effect. The method of payment shall be as permitted by Section 1.2. On any such partial exercise, the Company, at its expense, will forthwith issue and deliver to or upon the order of the Holder a new Warrant of like tenor, in the name of the Holder hereof or as the Holder (upon payment by such Holder of any applicable transfer taxes), may request, subject to compliance with applicable securities laws, exercisable for the number of shares of Common Stock not purchased under this Warrant. 1.5. Fair Market Value. Fair Market Value of a share of Common ---- ----------------- Stock as of a particular date (the "Determination Date") shall mean: (a) If the Common Stock is traded on an exchange or is quoted on the National Association of Securities Dealers, Inc. Automated Quotation ("NASDAQ") National Market System, then the average of the closing or last sale price, respectively, reported for the five business days immediately preceding the Determination Date. (b) If the Common Stock is not traded on an exchange or on the NASDAQ National Market System but is traded in the over- the-counter market or other similar organization (including the Bulletin Board), then the average of the mean of the closing bid and asked prices reported for the five business days immediately preceding the Determination Date. (c) If the Common Stock is not traded as provided above, then the price determined in good faith by the Board of Directors of the Company, provided that (1) the basis or bases of each such determination shall be set forth in the corporate records of the Company pertaining to meetings and other actions of such board, and (2) such records are available to the Holder for inspection during normal business hours of the Company upon the giving of reasonable prior notice. (d) If the Determination Date is the date of a 3 liquidation, dissolution or winding up, or any event deemed to be a liquidation, dissolution or winding up pursuant to the Company's charter, then all amounts to be payable per share to Holders of the Common Stock pursuant to the charter in the event of such liquidation, dissolution or winding up, plus all other amounts to be payable per share in respect of the Common Stock in liquidation under the charter, assuming for the purposes of this clause (d) that all of the shares of Common Stock then issuable upon exercise of all of the Plan Warrants are outstanding at the Determination Date. 1.6. Company Acknowledgment. The Company will, at the time of the ---- ---------------------- exercise of this Warrant, upon the request of the Holder acknowledge in writing its continuing obligation to afford to the Holder any rights to which the Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant. If the Holder shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford to the Holder any such rights. 1.7. Trustee for Warrant Holders. In the event that a bank or ---- --------------------------- trust company shall have been appointed as trustee for the Holder pursuant to Subsection 4.2, such bank or trust company shall have all the powers and duties of a Warrant agent appointed pursuant to Section 11 and shall accept, in its own name for the account of the Company or such successor person as may be entitled thereto, all amounts otherwise payable to the Company or such successor, as the case may be, on exercise of this Warrant pursuant to this Section 1. Section 2. Delivery of Stock Certificates, etc. on Exercise. The ------------------------------------------------ Company agrees that the shares of Common Stock purchased upon exercise of this Warrant shall be deemed to be issued to the Holder as the record owner of such shares as of the close of business on the date on which this Warrant shall have been surrendered and payment made for such shares as aforesaid. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within 10 days thereafter, the Company at its expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder, or as the Holder (upon payment by such Holder of any applicable transfer taxes) may direct, subject to compliance with applicable securities laws, a certificate or certificates for the number of duly and validly issued, fully paid and nonassessable shares of Common Stock to which the Holder shall be entitled on such exercise, plus, in lieu of any fractional share to which the Holder would otherwise be entitled, cash equal to such fraction multiplied by the then Fair Market Value of one full share, together with any other stock or other securities and property (including cash, where applicable) to which the Holder is entitled upon such exercise pursuant to Section 1 or otherwise. Section 3. Adjustment for Dividends in Other Stock, ---------------------------------------- 4 Property, etc. Reclassification. In case at any time or from time to time, the - ------------------------------- holders of Common Stock shall have received, or (on or after the record date fixed for the determination of shareholders eligible to receive) shall have become entitled to receive, without payment therefor, any of the following: (a) other or additional stock or other securities or property (other than cash) by way of dividend (other than a dividend of shares of Common Stock which is covered by Section 5 hereof), or (b) any cash (excluding cash dividends payable solely out of earnings or earned surplus of the Company), or (c) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement, other than additional shares of Common Stock issued as a stock dividend or in a stock split (adjustments in respect of which are provided for in Section 5), then and in each such case the Holder, on the exercise hereof as provided in Section 1, shall be entitled to receive the amount of stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) which the Holder would hold on the date of such exercise if on the date of original issuance of this Warrant the Holder had been the holder of record of the number of shares of Common Stock called for on the face of this Warrant and had thereafter, during the period from the date hereof to and including the date of such exercise, retained such shares and all such other or additional stock and other securities and property (including cash in the cases referred to in subdivisions (b) and (c) of this Section 3) receivable by the Holder as aforesaid during such period, giving effect to all adjustments called for during such period by Section 4 and 5. Section 4. Adjustment for Reorganization Consolidation, Merger, etc. --------------------------------------------------------- 4.1. Reorganization, Consolidation, Merger etc. In case at any time ---- ------------------------------------------ or from time to time, the Company shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, as a condition to the consummation of such a transaction, proper and adequate provision shall be made by the Company whereby the Holder, on the exercise hereof as provided in Section 1 at any time after the consummation of such reorganization, consolidation or merger or the 5 effective date of such dissolution, as the case may be, shall receive, in lieu of the Common Stock issuable on such exercise prior to such consummation, the stock and other securities ("Other Securities") and property (including cash) to which the Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if the Holder had so exercised this Warrant, immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 3 and 5. 4.2. Dissolution. In the event of any dissolution of the Company ---- ----------- following the transfer of all or substantially all of its properties or assets in a transaction contemplated by subsection 4.1(c), the Company, prior to such dissolution, shall at its expense deliver or cause to be delivered the stock and other securities and property (including cash, where applicable) receivable by the Holder after the effective date of such dissolution pursuant to this Section 4 to a bank or trust company having its principal office in New York, New York, as trustee for the Holder. 4.3. Continuation of Terms. Upon any reorganization, consolidation, ---- --------------------- merger or transfer (and any dissolution following any transfer) referred to in this Section 4, this Warrant shall continue in full force and effect and the terms hereof shall be applicable to the shares of stock and other securities and property receivable on the exercise of this Warrant after the consummation of such reorganization, consolidation or merger or the effective date of dissolution following any such transfer, as the case may be, and shall be binding upon the issuer of any such stock or other securities, including, in the case of any such transfer, the person acquiring all or substantially all of the properties or assets of the Company, whether or not such person shall have expressly assumed the terms of this Warrant. Section 5. Extraordinary Events Regarding Common Stock. In the ------------------------------------------- event that the Company shall (a) issue additional shares of the Common Stock as a dividend or other distribution on outstanding Common Stock, (b) subdivide its outstanding shares of Common Stock, or (c) combine its outstanding shares of the Common Stock into a smaller number of shares of the Common Stock, then, in each such event, the Purchase Price shall, simultaneously with the happening of such event, be adjusted by multiplying the then Purchase Price by a fraction, the numerator of which shall be the number of shares of Common Stock outstanding immediately prior to such event and the denominator of which shall be the number of shares of Common Stock outstanding immediately after such event, and the product so obtained shall thereafter be the Purchase Price then in effect. The Purchase Price, as so adjusted, shall be readjusted in the same manner upon the happening of any successive event or events described herein in this Section 5. The number of shares of Common Stock that the Holder shall thereafter, on the exercise hereof as provided in Section 1, be entitled to receive shall be adjusted to a number determined by multiplying the number of shares of Common Stock that would otherwise (but for the provisions of this Section 5) be issuable on such exercise by a fraction of which (a) the numerator is the Purchase Price that would otherwise (but for the provisions of this Section 5) be in effect, and (b) the denominator is the Purchase Price in effect on the date of such exercise. 6 Section 6. Chief Financial Officer's Certificate as to Adjustments. ------------------------------------------------------- In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable on the exercise of the Warrants, the Company at its expense will promptly cause its Chief Financial Officer to compute such adjustment or readjustment in accordance with the terms of the Warrant and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, including a statement of [(a) the consideration received or receivable by the Company for any additional shares of Common Stock issued or sold or deemed to have been issued or sold, (b) the number of shares of Common Stock outstanding or deemed to be outstanding,] and (c) the Purchase Price and the number of shares of Common Stock to be received upon exercise of this Warrant, in effect immediately prior to such adjustment or readjustment and as adjusted or readjusted as provided in this Warrant. The Company will forthwith mail a copy of each such certificate to the Holder and any Warrant agent of the Company (appointed pursuant to Section 11 hereof). Section 7. Reservation of Stock etc. Issuable on Exercise of -------------------------------------------------- Warrant. Upon the Effective Date (as that term is defined in the Plan), the - ------- Company will at all times reserve and keep available, solely for issuance and delivery on the exercise of this Warrant, all shares of Common Stock (or Other Securities) from time to time issuable on the exercise of this Warrant. Section 8. Assignment; Exchange of Warrant. Subject to compliance ------------------------------- with applicable Securities laws, this Warrant, and the rights evidenced hereby, may be transferred by the Holder (the "Transferor") with respect to any or all of the shares of Common Stock underlying this Warrant. On the surrender for exchange of this Warrant, with the Transferor's endorsement in the form of Exhibit B attached hereto (the "Transferor Endorsement Form"), to the Company, the Company at its expense (but with payment by the Transferor of any applicable transfer taxes) will issue and deliver to or on the order of the Transferor thereof a new Warrant or Warrants of like tenor, in the name of the Transferor and/or the transferee(s) specified in such Transferor Endorsement Form (each a "Transferee"), calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant so surrendered by the Transferor. Each Transferee shall be entitled (pro rata according to the number of shares of Common Stock issuable under the Transferee's new Warrant) to those benefits accruing to the Transferor under this Warrant prior to the date of issue of such new Warrant or Warrants. Section 9. Registration Rights; Procedure; Indemnification. ----------------------------------------------- 9.1. Registration Rights ---- ------------------- (a) On one occasion, on and after the date hereof (exercisable immediately) but not later than the anniversary date of this Warrant, the Company, upon a 7 written request therefor from any registered holder or holders of more than [fifty percent (50%)] of the total number of shares of Common Stock owned or to be owned upon exercise of this Warrant and all other Plan Warrants (the "Warrant Stock"), shall prepare and file a registration statement with the Securities and Exchange Commission (the "Commission'') under the Securities Act of 1933, as amended (the "Securities Act"), covering the Warrant Stock that is the subject of such request to the extent required to permit the sale or other disposition of the Warrant Stock so registered by the holders thereof (collectively, the "Seller"). The underwriter, if any, of an offering registered pursuant to this Subsection 9.1(a) shall be selected by the holders or persons entitled to be holders of at least a majority of the Warrant Stock for which registration has been requested and shall be reasonably acceptable to the Company. In the event the Warrant Stock is included in a registration statement that includes securities to be sold for the account of the Company, such written request for registration shall be deemed to have been given pursuant to Subsection 9.1(b), rather than this Subsection 9.1(a), and the rights of the holders of Warrant Stock covered by such written request shall be governed by Subsection 9.1(b). (b) On and after the date hereof, if the Company at any time proposes to register any of its securities under the Securities Act for sale to the public, whether for its own account or for the account of other security holders (including a registration requested by other Holders of Plan Warrants under Section 9.1(a)) or both (except with respect to registration statements on Forms S-4, S-8 or another form not available for registering the Common Stock that may be acquired upon exercise of this Warrant for sale to the public), it shall give at least 45 days' prior written notice to the Holder of its intention to do so. Upon the written request of the Holder, received by the Company within 30 days after the giving of any such notice by the Company, to register any of the Warrant Stock owned or to be owned by the Holder pursuant to the exercise of this Warrant, the Company will cause such Warrant Stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent required to permit the sale or other disposition of the Warrant Stock so registered by the Seller. In the event that 8 any registration pursuant to this Section 9 shall be, in whole or in part, an underwritten public offering of Common Stock for the account of the company, the number of shares of Warrant Stock to be included in such an underwriting may be reduced by the Company and the managing underwriter if and to the extent that the Company and the underwriter shall be of the opinion that such inclusion would adversely affect the marketing of the securities to be sold by the Company therein; provided, however, that the Company shall notify the Seller in writing of any such reduction. Notwithstanding the forgoing provisions, the Company may withdraw any registration statement referred to in this Section 9 without thereby incurring any liability to the Seller. 9.2. Registration Procedures. If and whenever the Company is ---- ----------------------- required by the provisions hereof to effect the registration of any shares of Warrant Stock under the Securities Act, the company will, as expeditiously as possible: (a) prepare and file with the Securities and Exchange Commission (the "Commission") a registration statement with respect to such securities and use its best efforts to cause such registration statement to become and remain effective for the period of the distribution contemplated thereby (determined as hereinafter provided): (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the period specified in paragraph (a) above and comply with the provisions of the Securities Act with respect to the disposition of all of the Warrant Stock covered by such registration statement in accordance with the Seller's intended method of disposition set forth in such registration statement for such period; (c) furnish to the Seller, and to each underwriter, if any, such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) as such persons reasonably may request in order to facilitate the public sale or their disposition of the securities covered by such registration statement; 9 (d) use its best efforts to register or qualify the Seller's Warrant Stock covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the Seller or, in the case of an underwritten public offering, the managing underwriter reasonably shall request, provided, however, that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any such jurisdiction; (e) list the Warrant Stock covered by such registration statement with any securities exchange or quotation system on which the Common Stock of the Company is then listed or traded; (f) immediately notify the Seller and each underwriter, if any, at any time when a prospectus relating to the Warrant Stock is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which such prospectus, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; (g) make available for inspection by the Seller, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by the Seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by the Seller, underwriter, attorney, accountant or agent in connection with such registration statement. For purposes of this Section 9, the period of distribution of securities in a firm commitment underwritten public offering shall be deemed to extend until each underwriter has completed the distribution of all securities purchased by it, or sooner if the managing underwriter consents, and the period of distribution of securities in any other registration shall be deemed to extend until the earlier of the sale of all securities covered thereby and one year after the effective date thereof. 10 In connection with each registration hereunder, the Seller will furnish to the Company in writing such information with respect to itself and the proposed distribution by it as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. In connection with each registration pursuant to this Section 9 covering an underwritten public offering, the Company and the Seller agree to enter into a written agreement with the managing underwriter in such form and containing such provisions as are customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature. 9.3. Expenses. All expenses incurred by the Company in complying ---- -------- with this Section 9, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., transfer taxes, fees of transfer agents and registrars and costs of insurance are called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Warrant Stock, including any fees and disbursements of any special counsel to the Seller, are called "Selling Expenses." The Company will pay all Registration Expenses in connection with up to the registration statement filed under Section 9.1(a) and all Registration Expenses in connection with any registration statement filed under 9.1(b). All Selling Expenses in connection with each registration statement under this Section 9 shall be borne by the Seller in proportion to the number of shares sold by the Seller relative to the number of shares sold under such registration statement or as all sellers thereunder may agree. 9.4. Indemnification and Contribution. ---- -------------------------------- (a) In the event of a registration of any Warrant Stock under the Securities Act pursuant to this Section 9, the Company will indemnify and hold harmless the Seller, each underwriter of such Warrant Stock thereunder and each other person, if any, who controls such Seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which the Seller, or such underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Warrant Stock was registered under the Securities Act pursuant to this Section 9, any preliminary prospectus or final prospectus contained 11 therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Seller, each such underwriter and each such controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such Seller, the underwriter or any such controlling person in writing specifically for use in such registration statement or prospectus. (b) In the event of a registration of any of the Warrant Stock under the Securities Act pursuant to Section 9, the Seller will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter, and each person who controls any underwriter within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Warrant Stock was registered under the Securities Act pursuant to this Section 9, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, and will reimburse the Company and each such officer, director, underwriter and controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, 12 damage, liability or action; provided, however, that the Seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such Seller, as such, furnished in writing to the Company by such Seller specifically for use in such registration statement or prospectus, and provided, further, however, that the liability of the Seller hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the Warrant Stock sold by the Seller under such registration statement bears to the total public offering price of all securities sold thereunder, but not in any event to exceed the proceeds received by the Seller from the sale of Warrant Stock covered by such registration statement. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 9.4(c) and shall only relieve it from any liability which it may have to such indemnified party under this Section 9.4(c) if and to the extent the indemnifying party is prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel reasonably satisfactory to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 9.4(c) for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected; provided, however, that, if the defendants in any such action include both the 13 indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to it which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party or if the indemnifying party shall not have assumed or undertaken the defense of such action with counsel reasonably satisfactory to such indemnified party, the indemnified party shall have the right to select one separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) the Seller, or any controlling person of the Seller, makes a claim for indemnification pursuant to this Section 9.4 but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact that this Section 9.4 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of the Seller or controlling person of the Seller in circumstances for which indemnification is provided under this Section 9.4; then, and in each such case, the Company and the Seller will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that the Seller is responsible for the portion represented by the percentage that the public offering price of its securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, and the Company is responsible for the remaining portion; provided, however, that, in any such case, (A) the Seller will not be required to contribute any amount in excess of the public offering price of all such securities offered by it pursuant to such registration statement; and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 10(f) of the Securities Act) will be entitled to contribution from any 14 person or entity who was not guilty of such fraudulent misrepresentation. Section 10. Replacement of Warrant. On receipt of evidence ---------------------- reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of this Warrant and, in the case of any such loss, theft or destruction of this Warrant, on delivery of an indemnity agreement or security reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, on surrender and cancellation of this Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor. Section 11. Warrant Agent. The Company may, by written notice to ------------- the Holder, appoint an agent having an office in New York, New York for the purpose of issuing Common Stock on the exercise of this Warrant pursuant to Section 1, exchanging this Warrant pursuant to Section 8, and replacing this Warrant pursuant to Section 10, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent. Section 12. Transfer on the Company's Books. Until this Warrant is ------------------------------- transferred on the books of the Company, the Company may treat the registered holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary. Section 13. Notices. Any notice pursuant to this Warrant by the ------- Company or the Holder shall be mailed by first class registered or certified mail, postage prepaid, to (a) the Company, at its principal office at One Bradlees Circle, P.O. Box 9051, Braintree, MA 02184-9051, Attention: David L. Schmitt, Esq.; or (b) the Holder, at its principal office at _______________, Attention: __________. Notices shall be deemed given 48 hours after mailing. Section 14. Miscellaneous. This Warrant and any term hereof may be ------------- changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant shall be construed and enforced in accordance with and governed by the laws of the State of New York. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof. The invalidity or unenforceability of any provision hereof shall in no way affect the validity or enforceability of any other provision. IN WITNESS WHEREOF, the Company has executed this Warrant under seal as of the date first written above. BRADLEES, INC. By: 15 Name: Title: Attest: By: Title: 16 Exhibit A FORM OF SUBSCRIPTION (To be signed only on exercise of Warrant) TO: BRADLEES, INC. The undersigned, the Holder of the within Warrant, hereby irrevocably elects to exercise this Warrant for, and to purchase thereunder, __________ shares of Common Stock of Bradlees, Inc. and herewith makes payment of $______________ therefor, and requests that the certificates for such shares be issued in the name of, and delivered to _______________________ whose address is ______________________________. Dated: (Signature must conform to name of Holder as specified on the face of the Warrant) (Address) Exhibit B FORM OF TRANSFEROR ENDORSEMENT (To be signed only on transfer of Warrant) For value received, the undersigned hereby sells, assigns, and transfers unto the person(s) named below under the heading "Transferee" the right represented by the within Warrant to purchase the number of shares of Common Stock of Bradlees, Inc. to which the within Warrant relates specified under the heading "Number Transferred," respectively, opposite the name(s) of such person(s) and appoints each such person Attorney to transfer its respective right on the books of Bradlees, Inc. with full power of substitution in the premises. - -------------------------------------------------------------------------------- Transferee Percentage Number ---------- Transferred Transferred ----------- ----------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Dated: ___________________, 19__ (Signature must conform to name of Holder as specified on the face of the warrant) Signed in the presence of: (Name) (Address) ACCEPTED AND AGREED: [TRANSFEREE] (Address) (Name) (Address Cont.) Exhibit C NOTICE OF EXERCISE TO: BRADLEES, INC. 1. Check Box that Applies: [_] The undersigned hereby elects to purchase _____ shares of Common Stock of BRADLEES, INC. pursuant to the terms of the attached Warrant, and tenders herewith payment of the purchase price of such shares in fall. [_] The undersigned hereby elects to convert the attached warrant into _____ shares of Common Stock of BRADLEES, Inc. pursuant to the terms of the attached Warrant. 2. Please issue a certificate or certificates representing said shares of' Common Stock in the name of the undersigned or in such other name as is specified below: -------------------------------------------- (Name) -------------------------------------------- -------------------------------------------- (Address) 3. The undersigned represents that the aforesaid shares of Common Stock are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such shares. Signature EX-3.1 11 RESTATED ARTICLES OF ORGANIZATION BRADLEES, INC. Exhibit 3.1 FEDERAL IDENTIFICATION NO. __________________ __________ The Commonwealth of Massachusetts Examiner William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) __________ Name Approved We, Robert G. Lynn, , *President ---------------------------------------------------------------- and David L. Schmitt , *Clerk -------------------------------------------------------------------- of Bradlees, Inc. , ----------------------------------------------------------------------------- (Exact name of corporation) located at One Bradlees Circle, Braintree, MA 02184 , -------------------------------------------------------------------- (Street address of corporation Massachusetts) do hereby certify that the following Restatement of the Articles of Organization was duly adopted on __________________________, 19__ by order of the Bankruptcy Court ____ shares of ________________________________ of ____ shares outstanding, (type, class & series, if any) ____ shares of ________________________________ of ____ shares outstanding, and (type, class & series, if any) ____ shares of ________________________________ of ____ shares outstanding, (type, class & series, if any) **being at least a majority of each type, class or series outstanding and entitled to vote thereon: /**being at least two-thirds of each type, class or series outstanding and entitled to vote thereon and each type, class or series of stock whose rights are adversely affected thereby: C [_] ARTICLE I P [_] The name of the corporation is: M [_] R.A. [_] Bradlees, Inc. ARTICLE II The purpose of the corporation is to engage in the following business activities: 1. To own, operate and maintain discount department stores, and 2. to conduct all lawful acts and activities for which corporations may be organized under the Massachusetts Business Corporation Law. __________ P.C. *Delete the inapplicable words. **Delete the inapplicable clause. Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper with a left margin of at least 1 inch. Additions to more than one article may be made on a single sheet so long as each article requiring each addition is clearly indicated. ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue: - -------------------------------------------------------------------------------- WITHOUT PAR VALUE WITH PAR VALUE - -------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - -------------------------------------------------------------------------------- Common: Common: 40,000,000 $.01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Preferred: Preferred: 1,000,000 $.01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See Addendum A. ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None. ARTICLE VI **Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Addendum B. **If there are no provisions state "None". Note: The preceding six (6) articles are considered to be permanent and may ONLY be changed by filing appropriate Articles of Amendment. ARTICLE VII The effective date of the restated Articles of Organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII The information contained in Article VIII is not a permanent part of the Articles of Organization. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: One Bradlees Circle, Braintree, MA 02184 b. The name, residential address and post office address of each director and officer of the corporation is as follows: NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Robert G. Lynn 35 Cattle Pen Lane One Bradlees Circle Ridgefield, CT 06877 Braintree, MA 02184 Treasurer: Paul R. McKelvey 30 Planting Field Road One Bradlees Circle Medfield, MA 02052 Braintree, MA 02184 Clerk: David L. Schmitt 84 Broadreach Road, #601B One Bradlees Circle Weymouth, MA 02191 Braintree, MA 02184 Directors: See Addendum C. c. The fiscal year (i.e., tax year) of the corporation shall end on the Saturday nearest January 31 of each year. d. The name and business address of the resident agent, if any, of the corporation is: ** We further certify that the foregoing Restated Articles of Organization affect no amendments to the Articles of Organization of the corporation as heretofore amended, except amendments to the following articles. Briefly describe amendments below: See Addendum D. SIGNED UNDER THE PENALTIES OF PERJURY, this ______day of _______________,19____. /s/ Robert G. Lynn , *President - -------------------------------------------------------------- /s/ David L. Schmitt , *Clerk - ----------------------------------------------------------------- *Delete the inapplicable words. **If there are no amendments, state "None". THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) ================================================================================ I hereby approve the within Restated Articles of Organization and, the filing fee in the amount of $ __________ having been paid, said articles are deemed to have been filed with me this _______ day of _______________, 19__. Effective Date: _______________________________________________________________ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: William V. Buccella - -------------------------------------------------------------------------------- Goodwin, Procter & Hoar LLP - -------------------------------------------------------------------------------- 53 State Street - -------------------------------------------------------------------------------- Exchange Place Boston, MA 02109-2881 Telephone: (617) 570-1000 ---------------------------------------------------------------------- EXHIBIT 3.1 ADDENDA TO THE RESTATED ARTICLES OF ORGANIZATION OF BRADLEES, INC. Addendum A ---------- ARTICLE IV CAPITAL STOCK ------------- The authorized capital stock of BRADLEES, INC. (the "Corporation") shall consist of (i) common stock, $.01 par value per share (the "Common Stock"), and (ii) preferred stock, $.01 par value per share (the "Preferred Stock"). A. Common Stock ------------ 1. The holders of shares of Common Stock shall be entitled to one vote for each share so held with respect to all matters voted on by the stockholders of the Corporation, subject in all cases to the voting rights of any holders of Preferred Stock. 2. Subject to the rights of the Preferred Stock upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights and interests. 3. Subject to the rights, if any, of any holders of Preferred Stock, dividends may be paid on the Common Stock as and when declared by the Board of Directors of the Corporation (the "Board of Directors") out of funds legally available therefor. B. Preferred Stock --------------- Subject to any limitations prescribed by law or these Articles, the Board of Directors or any authorized committee thereof is expressly authorized to provide for the issuance of up to 1,000,000 shares of Preferred Stock in one or more series of stock, and by filing a certificate pursuant to applicable law of the Commonwealth of Massachusetts, to establish or change from time to time the number of shares to be included in each series, and to fix the designation, voting powers, preferences, qualifications, privileges and rights of the shares of each series and any qualifications, limitations and restrictions thereof. The Board of Directors or any authorized committee thereof shall have the right to determine or fix by vote or votes providing for the issuance of the shares thereof one or more of the following with respect to each series of such Preferred Stock: 1. The distinctive serial designation and the number of shares constituting such series; 2. The dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating and other rights, if any, with respect to dividends; 3. The voting powers, full or limited, of the shares of such series; 4. Whether the shares of such series shall be redeemable (at the option of the holder or of the Corporation or otherwise) and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed; 5. The amount or amounts payable upon the shares of such series and any preferences applicable thereto in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; 6. Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such fund; 7. Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other series of the same or any other class or classes of stock of the Corporation or the securities of any other entity or any other assets and, if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; 8. The price or other consideration for which the shares of such series shall be issued; 9. Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of Preferred Stock and whether such shares may be reissued as shares of the same or any other class or series of stock; and 10. Such other powers, preferences, rights, qualifications, limitations and restrictions thereof as the Board of Directors or any authorized committee thereof may deem advisable. 2 Subject to the authority of the Board of Directors or any authorized committee thereof as set forth in Paragraph 9 above, any shares of Preferred Stock shall, upon reacquisition thereof by the Corporation, be restored to the status of authorized but unissued Preferred Stock under this Section B. Except as specifically provided in these Articles, the holders of Preferred Stock or Common Stock shall not be entitled to any vote and shall not have any voting rights concerning the designation or issuance of any shares of Preferred Stock authorized by and complying with the conditions of these Articles, and subject to the authority of the Board of Directors or any authorized committee thereof as set forth above, the right to any such vote is expressly waived by all present and future holders of the capital stock of the Corporation. C. Issuance of Capital Stock ------------------------- The Corporation shall not (a) issue non-voting equity securities, (b) create a class of equity securities having a preference over any other class of equity securities with respect to dividends unless adequate provision is made for the election of Directors representing the preferred class in the event of a default in the payment of its dividends, or (c) create any other class of equity securities unless an appropriate distribution of voting power is made among all such classes. 3 Addendum B ---------- ARTICLE VI (A) CLASSIFICATION OF DIRECTORS --------------------------- The initial Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1999, which meeting shall be held no sooner than following the close of the 1999 fiscal year. At each annual meeting of stockholders, the successors of the Directors whose term expires at such meeting shall be elected by a plurality of the votes cast at such meeting and shall hold office for a term expiring at the annual meeting of stockholders held in the year following the year of their election. The Directors elected shall hold office until their successors are duly elected and qualified or until their earlier resignation or removal. ARTICLE VI (B) LIMITATION OF LIABILITY OF DIRECTORS ------------------------------------ A. No Director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director notwithstanding any provision of law imposing such liability; provided, however, that this Article shall not eliminate or limit any liability of a Director (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Sections 61 or 62 of Chapter 156B of the General Laws of the Commonwealth of Massachusetts, or (iv) with respect to any transaction from which the Director derived an improper personal benefit. B. No amendment or repeal of this Article shall adversely affect the rights and protection afforded to a Director of this Corporation under this Article for acts or omissions occurring prior to such amendment or repeal. If the Massachusetts Business Corporation Law is hereafter amended to further eliminate or limit the personal liability of Directors or to authorize corporate action to further eliminate or limit such liability, then the liability of the Directors of this Corporation shall be eliminated or limited to the fullest extent permitted by the Massachusetts Business Corporation Law as so amended. 4 ARTICLE VI (C) TRANSACTIONS WITH INTERESTED PERSONS ------------------------------------ A. Unless entered into in bad faith, no contract or transaction by the Corporation shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. B. For the purposes of this Article, "Interested Person" means any person or organization in any way interested in the Corporation whether as an officer, Director, stockholder, employee or otherwise, and any other entity in which any such person or organization or the Corporation is in any way interested. C. Unless such contract or transaction was entered into in bad faith, no Interested Person, because of such interest, shall be liable to the Corporation or to any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. D. The provisions of this Article shall be operative notwithstanding the fact that the presence of one or more Interested Persons was necessary to constitute a quorum at a meeting of Directors or stockholders of the Corporation at which such contract or transaction was authorized or that the vote of one or more Interested Persons was necessary for the authorization of such contract or transaction. E. Business Combination with Interested Shareholders. The provisions of ------------------------------------------------- Chapter 110F of the General Laws of the Commonwealth of Massachusetts ("Chapter 110F"), as it may be amended from time to time, shall, except to the extent set forth in Chapter 110F, not apply to "business combinations with interested shareholders" of the Corporation within the meaning of Chapter 110F. ARTICLE VI (D) STOCKHOLDERS' MEETINGS ---------------------- A. Action by Written Consent ------------------------- Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, provided that all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting of stockholders. B. Location of Meetings -------------------- Meetings of stockholders of the Corporation may be held anywhere within the United States. 5 ARTICLE VI (E) ACTING AS A PARTNER ------------------- The Corporation may be a partner in any business enterprise which it would have power to conduct by itself. ARTICLE VI (F) EXAMINATION OF BOOKS -------------------- Except as otherwise provided by law, no stockholder shall have any right to examine any property or any books, accounts or other writings of the Corporation if there is reasonable ground for belief that such examination will for any reason be adverse to the interests of the Corporation, and a vote of the Directors refusing permission to make such examination and setting forth that in the opinion of the Directors such examination would be adverse to the interests of the Corporation shall be prima facie evidence that such examination would be adverse to the interests of the Corporation. Every such examination which is permitted shall be subject to such reasonable requirements as the Corporation may establish in regard thereto. ARTICLE VI (G) AMENDMENT OF BY-LAWS -------------------- A. Amendment by Directors ---------------------- Except as otherwise required by law, the By-laws of the Corporation may be amended or repealed by the affirmative vote of a majority of the Directors then in office. Not later than the time of giving notice of the annual meeting of stockholders next following the amending or repealing by the Directors of any By-law, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-laws. B. Amendment by Stockholders ------------------------- The By-laws of the Corporation may be amended or repealed at any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least two-thirds of the total votes eligible to be cast on such amendment or repeal by holders of voting stock, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of a majority of the total votes eligible to be cast on such amendment or repeal by holders of voting stock, voting together as a single class. 6 ARTICLE VI (H) STOCKHOLDER VOTE REQUIRED FOR AMENDMENT OF ------------------------------------------ ARTICLES OF ORGANIZATION ------------------------ These Articles may be amended at any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least two-thirds of the total votes eligible to be cast on such amendment by holders of voting stock, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment at such meeting of stockholders, such amendment shall only require the affirmative vote of a majority of the total votes eligible to be cast on such amendment by holders of voting stock, voting together as a single class. 7 Addendum C ----------
POST OFFICE NAME RESIDENTIAL ADDRESS ADDRESS ---- ------------------- ----------- Directors Peter Thorner 1243 Adams Street Bradlees, Inc. Dorchester, MA 02124 One Bradlees Circle Braintree, MA 02184 Robert G. Lynn 35 Cattle Pen Lane Bradlees, Inc. Ridgefield, CT 06877 One Bradlees Circle Braintree, MA 02184 Robert Altschuler 200 Long Lots Road Marx Realty & Westport, CT 06880 Improvement Co., Inc. 708 Third Avenue New York, NY 10017 Lawrence Lieberman 64 Wright Street 888 Broadway Westport, CT 06880 New York, NY 10003 William H. Roth 144 East 84th Street 36 West 44th Street New York, NY 10028 New York, NY 10036 Charles K. MacDonald 5120 NE 29th Avenue Mongandane Management Corp. Lighthouse Point, FL 33064 5120 NE 29th Avenue Lighthouse Point, FL 33064 Stephen J. Blauner 449 Hudson Street One Chase Manhattan Plaza New York, NY 10014 New York, NY 10005 W. Edward Clingman, Jr. 7371 Beulah Church Road c/o Best Products Co., Inc. Mechanicsville, VA 23111 P. O. Box 26303 Richmond, VA 23260 John M. Friedman, Jr. 62 Barner Road 62 Barner Road New Milford, CT 06776 New Milford, CT 06776
8 Addendum D ---------- Article IV(A) Description of Voting Rights, Liquidation Rights, and Dividends of Common Stock. Article IV(B) Description of powers and rights of Board of Directors with respect to Preferred Stock. Article IV(C) Description of the Corporation's rights with respect to issuance of capital stock. Article VI(A) Provision regarding classification of directors. Article VI(B) Provision regarding the limitation of liability of directors. Article VI(C) Provision regarding transactions with interested persons. Article VI(D) Provision regarding action of stockholders by written consent and location of stockholder meetings. Article VI(E) Provision permitting the Corporation to act as a partner in any business enterprise. Article VI(F) Provision regarding stockholders' rights to examine books of the Corporation. Article VI(G) Provision regarding amendment of the By-laws of the Corporation. Article VI(H) Provision describing stockholder vote required for amendment of the Articles of Organization of the Corporation. 9 EX-3.2 12 RESTATED ARTICLES OF ORGANIZATION BRADLEES STORES Exhibit 3.2 FEDERAL IDENTIFICATION NO. __________________ __________ The Commonwealth of Massachusetts Examiner William Francis Galvin Secretary of the Commonwealth One Ashburton Place, Boston, Massachusetts 02108-1512 RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) __________ Name Approved We, Robert G. Lynn, , *President ---------------------------------------------------------------- and David L. Schmitt , *Clerk -------------------------------------------------------------------- of Bradlees Stores, Inc. , ----------------------------------------------------------------------------- (Exact name of corporation) located at One Bradlees Circle, Braintree, MA 02184 , -------------------------------------------------------------------- (Street address of corporation Massachusetts) do hereby certify that the following Restatement of the Articles of Organization was duly adopted on __________________________, 19__ by order of the Bankruptcy Court ____ shares of ________________________________ of ____ shares outstanding, (type, class & series, if any) ____ shares of ________________________________ of ____ shares outstanding, and (type, class & series, if any) ____ shares of ________________________________ of ____ shares outstanding, (type, class & series, if any) **being at least a majority of each type, class or series outstanding and entitled to vote thereon: /**being at least two-thirds of each type, class or series outstanding and entitled to vote thereon and each type, class or series of stock whose rights are adversely affected thereby: C [_] ARTICLE I P [_] The name of the corporation is: M [_] R.A. [_] Bradlees Stores, Inc. ARTICLE II The purpose of the corporation is to engage in the following business activities: 1. To own, operate and maintain discount department stores, and 2. to conduct all lawful acts and activities for which corporations may be organized under the Massachusetts Business Corporation Law. __________ P.C. *Delete the inapplicable words. **Delete the inapplicable clause. Note: If the space provided under any article or item on this form is insufficient, additions shall be set forth on separate 8 1/2 x 11 sheets of paper with a left margin of at least 1 inch. Additions to more than one article may be made on a single sheet so long as each article requiring each addition is clearly indicated. ARTICLE III State the total number of shares and par value, if any, of each class of stock which the corporation is authorized to issue: - -------------------------------------------------------------------------------- WITHOUT PAR VALUE WITH PAR VALUE - -------------------------------------------------------------------------------- TYPE NUMBER OF SHARES TYPE NUMBER OF SHARES PAR VALUE - -------------------------------------------------------------------------------- Common: Common: 150,000 $.01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Preferred: Preferred: 50,000 $.01 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ARTICLE IV If more than one class of stock is authorized, state a distinguishing designation for each class. Prior to the issuance of any shares of a class, if shares of another class are outstanding, the corporation must provide a description of the preferences, voting powers, qualifications, and special or relative rights or privileges of that class and of each other class of which shares are outstanding and of each series then established within any class. See Addendum A. ARTICLE V The restrictions, if any, imposed by the Articles of Organization upon the transfer of shares of stock of any class are: None. ARTICLE VI **Other lawful provisions, if any, for the conduct and regulation of the business and affairs of the corporation, for its voluntary dissolution, or for limiting, defining, or regulating the powers of the corporation, or of its directors or stockholders, or of any class of stockholders: See Addendum B. **If there are no provisions state "None". Note: The preceding six (6) articles are considered to be permanent and may ONLY be changed by filing appropriate Articles of Amendment. ARTICLE VII The effective date of the restated Articles of Organization of the corporation shall be the date approved and filed by the Secretary of the Commonwealth. If a later effective date is desired, specify such date which shall not be more than thirty days after the date of filing. ARTICLE VIII The information contained in Article VIII is not a permanent part of the Articles of Organization. a. The street address (post office boxes are not acceptable) of the principal office of the corporation in Massachusetts is: One Bradlees Circle, Braintree, MA 02184 b. The name, residential address and post office address of each director and officer of the corporation is as follows:
NAME RESIDENTIAL ADDRESS POST OFFICE ADDRESS President: Robert G. Lynn 35 Cattle Pen Lane One Bradlees Circle Ridgefield, CT 06877 Braintree, MA 02184 Treasurer: Paul R. McKelvey 30 Planting Field Road One Bradlees Circle Medfield, MA 02052 Braintree, MA 02184 Clerk: David L. Schmitt 84 Broadreach Road, #601B One Bradlees Circle Weymouth, MA 02191 Braintree, MA 02184 Directors: Peter Thorner 1243 Adams Street One Bradlees Circle Dorchester, MA 02124 Braintree, MA 02184 David L. Schmitt 84 Broadreach Road, #601B One Bradlees Circle Weymouth, MA 02191 Braintree, MA 02184 Cornelius F. Moses, III 8 Quail Run One Bradlees Circle Medfield, MA 02052 Braintree, MA 02184
c. The fiscal year (i.e., tax year) of the corporation shall end on the Saturday nearest January 31 of each year. d. The name and business address of the resident agent, if any, of the corporation is: ** We further certify that the foregoing Restated Articles of Organization affect no amendments to the Articles of Organization of the corporation as heretofore amended, except amendments to the following articles. Briefly describe amendments below: See Addendum C. SIGNED UNDER THE PENALTIES OF PERJURY, this ______day of _______________,19____. /s/ Robert G. Lynn , *President - -------------------------------------------------------------- /s/ David L. Schmitt , *Clerk - ----------------------------------------------------------------- *Delete the inapplicable words. **If there are no amendments, state "None". THE COMMONWEALTH OF MASSACHUSETTS RESTATED ARTICLES OF ORGANIZATION (General Laws, Chapter 156B, Section 74) ================================================================================ I hereby approve the within Restated Articles of Organization and, the filing fee in the amount of $ __________ having been paid, said articles are deemed to have been filed with me this _______ day of _______________, 19__. Effective Date: _______________________________________________________________ WILLIAM FRANCIS GALVIN Secretary of the Commonwealth TO BE FILLED IN BY CORPORATION Photocopy of document to be sent to: William V. Buccella - -------------------------------------------------------------------------------- Goodwin, Procter & Hoar LLP - -------------------------------------------------------------------------------- 53 State Street - -------------------------------------------------------------------------------- Exchange Place Boston, MA 02109-2881 Telephone: (617) 570-1000 ---------------------------------------------------------------------- ADDENDA TO THE RESTATED ARTICLES OF ORGANIZATION OF BRADLEES STORES, INC. Addendum A ---------- ARTICLE IV CAPITAL STOCK ------------- The authorized capital stock of BRADLEES STORES, INC. (the "Corporation") shall consist of (i) common stock, $.01 par value per share (the "Common Stock"), and (ii) preferred stock, $.01 par value per share (the "Preferred Stock"). A. Common Stock ------------ 1. The holders of shares of Common Stock shall be entitled to one vote for each share so held with respect to all matters voted on by the stockholders of the Corporation, subject in all cases to the voting rights of any holders of Preferred Stock. 2. Subject to the rights of the Preferred Stock upon any voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation, the net assets of the Corporation shall be distributed pro rata to the holders of the Common Stock in accordance with their respective rights and interests. 3. Subject to the rights, if any, of any holders of Preferred Stock, dividends may be paid on the Common Stock as and when declared by the Board of Directors of the Corporation (the "Board of Directors") out of funds legally available therefor. B. Preferred Stock --------------- Subject to any limitations prescribed by law or these Articles, the Board of Directors or any authorized committee thereof is expressly authorized to provide for the issuance of up to 50,000 shares of Preferred Stock in one or more series of stock, and by filing a certificate pursuant to applicable law of the Commonwealth of Massachusetts, to establish or change from time to time the number of shares to be included in each series, and to fix the designation, voting powers, preferences, qualifications, privileges and rights of the shares of each series and any qualifications, limitations and restrictions thereof. The Board of Directors or any authorized committee thereof shall have the right to determine or fix by vote or votes providing for the issuance of the shares thereof one or more of the following with respect to each series of such Preferred Stock: 1. The distinctive serial designation and the number of shares constituting such series; 2. The dividend rates or the amount of dividends to be paid on the shares of such series, whether dividends shall be cumulative and, if so, from which date or dates, the payment date or dates for dividends, and the participating and other rights, if any, with respect to dividends; 3. The voting powers, full or limited, of the shares of such series; 4. Whether the shares of such series shall be redeemable (at the option of the holder or of the Corporation or otherwise) and, if so, the price or prices at which, and the terms and conditions on which, such shares may be redeemed; 5. The amount or amounts payable upon the shares of such series and any preferences applicable thereto in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation; 6. Whether the shares of such series shall be entitled to the benefit of a sinking or retirement fund to be applied to the purchase or redemption of such shares, and if so entitled, the amount of such fund and the manner of its application, including the price or prices at which such shares may be redeemed or purchased through the application of such fund; 7. Whether the shares of such series shall be convertible into, or exchangeable for, shares of any other series of the same or any other class or classes of stock of the Corporation or the securities of any other entity or any other assets and, if so convertible or exchangeable, the conversion price or prices, or the rate or rates of exchange, and the adjustments thereof, if any, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange; 8. The price or other consideration for which the shares of such series shall be issued; 9. Whether the shares of such series which are redeemed or converted shall have the status of authorized but unissued shares of Preferred Stock and whether such shares may be reissued as shares of the same or any other class or series of stock; and 10. Such other powers, preferences, rights, qualifications, limitations and restrictions thereof as the Board of Directors or any authorized committee thereof may deem advisable. 2 Subject to the authority of the Board of Directors or any authorized committee thereof as set forth in Paragraph 9 above, any shares of Preferred Stock shall, upon reacquisition thereof by the Corporation, be restored to the status of authorized but unissued Preferred Stock under this Section B. Except as specifically provided in these Articles, the holders of Preferred Stock or Common Stock shall not be entitled to any vote and shall not have any voting rights concerning the designation or issuance of any shares of Preferred Stock authorized by and complying with the conditions of these Articles, and subject to the authority of the Board of Directors or any authorized committee thereof as set forth above, the right to any such vote is expressly waived by all present and future holders of the capital stock of the Corporation. C. Issuance of Capital Stock ------------------------- The Corporation shall not (a) issue non-voting equity securities, (b) create a class of equity securities having a preference over any other class of equity securities with respect to dividends unless adequate provision is made for the election of Directors representing the preferred class in the event of a default in the payment of its dividends, or (c) create any other class of equity securities unless an appropriate distribution of voting power is made among all such classes. 3 Addendum B ---------- ARTICLE VI (A) CLASSIFICATION OF DIRECTORS --------------------------- The initial Directors shall serve for a term expiring at the annual meeting of stockholders to be held in 1999, which meeting shall be held no sooner than following the close of the 1999 fiscal year. At each annual meeting of stockholders, the successors of the Directors whose term expires at such meeting shall be elected by a plurality of the votes cast at such meeting and shall hold office for a term expiring at the annual meeting of stockholders held in the year following the year of their election. The Directors elected shall hold office until their successors are duly elected and qualified or until their earlier resignation or removal. ARTICLE VI (B) LIMITATION OF LIABILITY OF DIRECTORS ------------------------------------ A. No Director of the Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as a Director notwithstanding any provision of law imposing such liability; provided, however, that this Article shall not eliminate or limit any liability of a Director (i) for any breach of the Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (iii) under Sections 61 or 62 of Chapter 156B of the General Laws of the Commonwealth of Massachusetts, or (iv) with respect to any transaction from which the Director derived an improper personal benefit. B. No amendment or repeal of this Article shall adversely affect the rights and protection afforded to a Director of this Corporation under this Article for acts or omissions occurring prior to such amendment or repeal. If the Massachusetts Business Corporation Law is hereafter amended to further eliminate or limit the personal liability of Directors or to authorize corporate action to further eliminate or limit such liability, then the liability of the Directors of this Corporation shall be eliminated or limited to the fullest extent permitted by the Massachusetts Business Corporation Law as so amended. 4 ARTICLE VI (C) TRANSACTIONS WITH INTERESTED PERSONS ------------------------------------ A. Unless entered into in bad faith, no contract or transaction by the Corporation shall be void, voidable or in any way affected by reason of the fact that it is with an Interested Person. B. For the purposes of this Article, "Interested Person" means any person or organization in any way interested in the Corporation whether as an officer, Director, stockholder, employee or otherwise, and any other entity in which any such person or organization or the Corporation is in any way interested. C. Unless such contract or transaction was entered into in bad faith, no Interested Person, because of such interest, shall be liable to the Corporation or to any other person or organization for any loss or expense incurred by reason of such contract or transaction or shall be accountable for any gain or profit realized from such contract or transaction. D. The provisions of this Article shall be operative notwithstanding the fact that the presence of one or more Interested Persons was necessary to constitute a quorum at a meeting of Directors or stockholders of the Corporation at which such contract or transaction was authorized or that the vote of one or more Interested Persons was necessary for the authorization of such contract or transaction. E. Business Combination with Interested Shareholders. The provisions of ------------------------------------------------- Chapter 110F of the General Laws of the Commonwealth of Massachusetts ("Chapter 110F"), as it may be amended from time to time, shall, except to the extent set forth in Chapter 110F, not apply to "business combinations with interested shareholders" of the Corporation within the meaning of Chapter 110F. ARTICLE VI (D) STOCKHOLDERS' MEETINGS ---------------------- A. Action by Written Consent ------------------------- Any action required or permitted to be taken at any annual or special meeting of stockholders may be taken without a meeting, provided that all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting of stockholders. B. Location of Meetings -------------------- Meetings of stockholders of the Corporation may be held anywhere within the United States. 5 ARTICLE VI (E) ACTING AS A PARTNER ------------------- The Corporation may be a partner in any business enterprise which it would have power to conduct by itself. ARTICLE VI (F) EXAMINATION OF BOOKS -------------------- Except as otherwise provided by law, no stockholder shall have any right to examine any property or any books, accounts or other writings of the Corporation if there is reasonable ground for belief that such examination will for any reason be adverse to the interests of the Corporation, and a vote of the Directors refusing permission to make such examination and setting forth that in the opinion of the Directors such examination would be adverse to the interests of the Corporation shall be prima facie evidence that such examination would be adverse to the interests of the Corporation. Every such examination which is permitted shall be subject to such reasonable requirements as the Corporation may establish in regard thereto. ARTICLE VI (G) AMENDMENT OF BY-LAWS -------------------- A. Amendment by Directors ---------------------- Except as otherwise required by law, the By-laws of the Corporation may be amended or repealed by the affirmative vote of a majority of the Directors then in office. Not later than the time of giving notice of the annual meeting of stockholders next following the amending or repealing by the Directors of any By-law, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-laws. B. Amendment by Stockholders ------------------------- The By-laws of the Corporation may be amended or repealed at any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least two-thirds of the total votes eligible to be cast on such amendment or repeal by holders of voting stock, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of a majority of the total votes eligible to be cast on such amendment or repeal by holders of voting stock, voting together as a single class. 6 ARTICLE VI (H) STOCKHOLDER VOTE REQUIRED FOR AMENDMENT OF ------------------------------------------ ARTICLES OF ORGANIZATION ------------------------ These Articles may be amended at any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least two-thirds of the total votes eligible to be cast on such amendment by holders of voting stock, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment at such meeting of stockholders, such amendment shall only require the affirmative vote of a majority of the total votes eligible to be cast on such amendment by holders of voting stock, voting together as a single class. 7 Addendum C ---------- Article IV(A) Description of Voting Rights, Liquidation Rights, and Dividends of Common Stock. Article IV(B) Description of powers and rights of Board of Directors with respect to Preferred Stock. Article IV(C) Description of the Corporation's rights with respect to issuance of capital stock. Article VI(A) Provision regarding classification of directors. Article VI(B) Provision regarding the limitation of liability of directors. Article VI(C) Provision regarding transactions with interested persons. Article VI(D) Provision regarding action of stockholders by written consent and location of stockholder meetings. Article VI(E) Provision permitting the Corporation to act as a partner in any business enterprise. Article VI(F) Provision regarding stockholders' rights to examine books of the Corporation. Article VI(G) Provision regarding amendment of the By-laws of the Corporation. Article VI(H) Provision describing stockholder vote required for amendment of the Articles of Organization of the Corporation. 8 EX-3.3 13 AMENDED AND RESTATED BY-LAWS BRADLEES, INC. EXHIBIT 3.3 AMENDED AND RESTATED BY-LAWS ---------------------------- of BRADLEES, INC. ARTICLE I --------- Stockholders ------------ 1. Annual Meeting. The annual meeting of stockholders shall be held at -------------- the hour, date and place within or without the United States which is fixed by the majority of the Board of Directors, the Chairman of the Board or the President, which time, date and place may subsequently be changed at any time by vote of the Board of Directors. The purposes for which such annual meeting is to be held, in addition to those prescribed by law, by the Articles of Organization (which, as used herein, means the Restated Articles of Organization of the Corporation, as amended and restated from time to time), or by these By- laws (which, as used herein, means the Amended and Restated By-laws of the Corporation, as amended and restated from time to time) may be specified by the Board of Directors, the Chairman of the Board or the President. If no annual meeting of stockholders has been held within six months after the end of the fiscal year of the Corporation, a special meeting in lieu thereof may be held, and such special meeting shall have, for purposes of these By-laws or otherwise, all the force and effect of an annual meeting. Any and all references hereafter in these By-laws to an annual meeting or annual meetings shall be deemed to refer also to any special meeting(s) in lieu thereof. 2. Special Meetings. Special meetings of stockholders may be called by ---------------- the Board of Directors. Special meetings shall be called by the Clerk or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer, upon written application of one or more stockholders who hold at least (i) a majority in interest of the capital stock entitled to vote at such meeting or (ii) such lesser percentage, if any, as shall be determined to be the maximum percentage which the Corporation is permitted by applicable law to establish for the call of such a meeting. Application to a court pursuant to Section 34(b) of Chapter 156B of the General Laws of the Commonwealth of Massachusetts requesting the call of a special meeting of stockholders because none of the officers is able and willing to call such a meeting may be made only by stockholders who hold at least (i) a majority in interest of the capital stock entitled to vote at such meeting or (ii) such lesser percentage, if any, as shall be determined to be the maximum percentage which the Corporation is permitted by applicable law to establish for the call of such a meeting. The hour, date and place of any special meeting and the record date for determining the stockholders having the right to notice of and to vote at such meeting shall be determined by the Board of Directors or the President. At a special meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been stated in the written notice of the special meeting and otherwise properly brought before the special meeting. 3. Matters to be Considered at Annual Meetings. At any annual meeting of ------------------------------------------- stockholders or any special meeting in lieu of annual meeting of stockholders (the "Annual Meeting"), only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before such Annual Meeting. To be considered as properly brought before an Annual Meeting, business must be: (a) specified in the notice of meeting, (b) otherwise properly brought before the meeting by, or at the direction of, the Board of Directors, or (c) otherwise properly brought before the meeting by any holder of record (both as of the time notice of such proposal is given by the stockholder as set forth below and as of the record date for the Annual Meeting in question) of any shares of capital stock of the Corporation entitled to vote at such Annual Meeting who complies with the requirements set forth in this By-law. In addition to any other applicable requirements, for business to be properly brought before an Annual Meeting by a stockholder of record of any shares of capital stock entitled to vote at such Annual Meeting, such stockholder shall: (i) give timely notice as required by this By-law to the Clerk of the Corporation and (ii) be present at such meeting, either in person or by a representative. For the first Annual Meeting following the Effective Date of the Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates under Chapter 11 of the Bankruptcy Code (the "Effective Date"), a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (A) the 75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For all subsequent Annual Meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not less than 75 days nor more than 120 days prior to the anniversary date of the immediately preceding Annual Meeting (the "Anniversary Date"); provided, however, that in the event the Annual Meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (A) the 75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For purposes of these By-laws, "public announcement" shall mean: (i) disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, (ii) a report or other document filed publicly with the Securities and Exchange Commission (including, without limitation, a Form 8-K), or (iii) a letter or report sent to stockholders of record of the Corporation at the time of the mailing of such letter or report. A stockholder's notice to the Clerk shall set forth as to each matter proposed to be brought before an Annual Meeting: (i) a brief description of the business the stockholder 2 desires to bring before such Annual Meeting and the reasons for conducting such business at such Annual Meeting, (ii) the name and address, as they appear on the Corporation's stock transfer books, of the stockholder proposing such business, (iii) the class and number of shares of the Corporation's capital stock beneficially owned by the stockholder proposing such business, (iv) the names and addresses of the beneficial owners, if any, of any capital stock of the Corporation registered in such stockholder's name on such books, and the class and number of shares of the Corporation's capital stock beneficially owned by such beneficial owners, (v) the names and addresses of other stockholders known by the stockholder proposing such business to support such proposal, and the class and number of shares of the Corporation's capital stock beneficially owned by such other stockholders, and (vi) any material interest of the stockholder proposing to bring such business before such meeting (or any other stockholders known to be supporting such proposal) in such proposal. If the Board of Directors or a designated committee thereof determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this By-law or that the information provided in a stockholder's notice does not satisfy the information requirements of this By-law in any material respect, such proposal shall not be presented for action at the Annual Meeting in question. If neither the Board of Directors nor such committee makes a determination as to the validity of any stockholder proposal in the manner set forth above, the presiding officer of the Annual Meeting shall determine whether the stockholder proposal was made in accordance with the terms of this By-law. If the presiding officer determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this By-law or that the information provided in a stockholder's notice does not satisfy the information requirements of this By-law in any material respect, such proposal shall not be presented for action at the Annual Meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a stockholder proposal was made in accordance with the requirements of this By-law, the presiding officer shall so declare at the Annual Meeting and ballots shall be provided for use at the meeting with respect to such proposal. Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder with respect to the matters set forth in this By-law and nothing in this By-law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 4. Notice of Meetings. A written notice of each meeting of stockholders ------------------ (other than adjournments governed by Section 5 of this Article I) stating the place, date and hour and the purpose or purposes of such meeting shall be given by the Clerk or an Assistant Clerk (or other officer designated by the Board of Directors) at least 7 days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, under the Articles of Organization or under these By-laws, is entitled to such notice, by delivering such notice 3 to him or by mailing it, postage prepaid, and addressed to such stockholder at his address as it appears in the Corporation's stock transfer books. Such notice shall be deemed to be delivered when hand delivered to such address or deposited in the mail so addressed, with postage prepaid. Notice of an annual or special meeting of stockholders need not be given to a stockholder if a written waiver of notice is signed before or after such meeting by such stockholder or such stockholder's authorized attorney, if communication with such stockholder is unlawful, or if such stockholder attends such meeting, unless such attendance was for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any annual Meeting or special meeting of stockholders need be specified in any written waiver of notice. 5. Rescheduling of Meetings; Adjournments. The Board of Directors may -------------------------------------- postpone and reschedule any previously scheduled annual or special meeting of stockholders, and a record date with respect thereto, regardless of whether any notice or public disclosure with respect to any such meeting or record date has been sent or made pursuant to Section 3 of this Article I or Section 3 of Article II hereof or otherwise. In no event shall the public announcement of an adjournment, postponement or rescheduling of any previously scheduled Annual Meeting of stockholders commence a new time period for the giving of a stockholder's notice under Section 3 of Article I and Section 3 of Article II of these By-laws. When any meeting is convened, the presiding officer may adjourn the meeting if (a) no quorum is present for the transaction of business, (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders, or (c) the Board of Directors determines that adjournment is otherwise in the best interests of the Corporation. When any annual Meeting or special meeting of stockholders is adjourned to another hour, date or place, notice need not be given of the adjourned meeting other than an announcement at the meeting at which the adjournment is taken of the hour, date and place to which the meeting is adjourned. 6. Quorum. The holders of a majority in interest of all capital stock of ------ the Corporation issued, outstanding and entitled to vote at a meeting of stockholders shall constitute a quorum, but if a quorum is not present, a majority in interest of the stockholders present or the presiding officer may adjourn the meeting from time to time and the meeting may be held as adjourned without further notice other than an announcement at the meeting at which the adjournment is taken of the hour, date and place to which the meeting is adjourned. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 4 7. Voting and Proxies. Unless otherwise provided by law or by the ------------------ Articles of Organization, stockholders shall have one vote for each share of stock entitled to vote owned by them of record according to the books of the Corporation. Stockholders entitled to vote may vote either in person or by written proxy dated not more than six months before the meeting named therein, unless the proxy is coupled with an interest and provides otherwise. Except as otherwise permitted by law or limited therein, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting but shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by one of them unless at or prior to exercise of the proxy the Corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. The Corporation shall not directly or indirectly vote any share of its own stock. 8. Action at Meeting. When a quorum is present, any matter before a ----------------- meeting of stockholders shall be decided by vote of the holders of a majority of the shares of stock voting on such matter, except where a larger vote is required by law, by the Articles of Organization or by these By-laws. Any election by stockholders shall be determined by a plurality of the votes cast, except where a greater vote is required by law, by the Articles of Organization or by these By-laws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. 9. Action without Meeting. Any action required or permitted to be taken ---------------------- at any annual or special meeting of stockholders (including any actions or powers reserved to the stockholders under these By-laws) may be taken without a meeting, provided that all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting. 10. Control Share Acquisition. The provisions of Chapter 110D of the ------------------------- General Laws of the Commonwealth of Massachusetts ("Chapter 110D"), as it may be amended from time to time, shall not apply to "control share acquisitions" of the Corporation within the meaning of Chapter 110D. 11. Presiding Officer. The Chairman or, in his absence, the President or, ----------------- in his absence, such other officer as shall be designated by the Board of Directors, shall preside at all annual or special meetings of stockholders and shall have the power, among other things, to 5 adjourn such meetings at any time and from time to time in accordance with the provisions of Sections 5 and 6 of this Article I. The order of business and all other matters of procedure at any meeting of the stockholders shall be determined by the presiding officer. 12. Voting Procedures and Inspectors of Elections. In advance of any --------------------------------------------- meeting of stockholders, the Board of Directors may appoint one or more inspectors to act at an annual or special meeting of stockholders and make a written report thereon. Any inspector may, but need not, be an officer, employee or agent of the Corporation. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspector(s) may appoint or retain other persons or entities to assist the inspector(s) in the performance of the duties of the inspector(s). The presiding officer may review all determinations made by the inspector(s), and in so doing the presiding officer shall be entitled to exercise his sole judgment and discretion and he shall not be bound by any determinations made by the inspector(s). All determinations by the inspector(s) and, if applicable, presiding officer shall be subject to further review by any court of competent jurisdiction. ARTICLE II ---------- Directors --------- 1. Classes of Directors; Term of Office; Qualification. The number of --------------------------------------------------- Directors of the Corporation shall be fixed at nine or such larger number of directors as may be fixed by the Board of Directors from time to time after the annual meeting of the Corporation for the fiscal year 1999. The Directors shall hold office in the manner provided in the Articles. No Director need be a stockholder of the Corporation. 2. Powers. The business of the Corporation shall be managed by a Board ------ of Directors who may exercise all the powers of the Corporation except as otherwise provided by law, by the Articles of Organization or by these By-laws. In particular, and without limiting the generality of the foregoing, the Directors may at any time issue all or from time to time any part of the unissued capital stock of the Corporation from time to time authorized under the Articles of Organization and may determine, subject to any requirements of law, the consideration for which stock is to be issued and the manner of allocating such consideration between capital and surplus. 6 3. Director Nominations. Nominations of candidates for election as -------------------- Directors of the Corporation at any Annual Meeting may be made only (a) by, or at the direction of, the Nominating Committee established in accordance with Article II, Section 14 of these By-laws or (b) by any holder of record (both as of the time notice of such nomination is given by the stockholder as set forth below and as of the record date for the Annual Meeting in question) of any shares of the capital stock of the Corporation entitled to vote at such Annual Meeting who complies with the timing, informational and other requirements set forth in this By-law. Any stockholder who has complied with the timing, informational and other requirements set forth in this By-law and who seeks to make such a nomination, or his, her or its representative, must be present in person at the Annual Meeting. Only persons nominated in accordance with the procedures set forth in this By-law shall be eligible for election as Directors at an Annual Meeting. Nominations, other than those made by, or at the direction of, the Nominating Committee, shall be made pursuant to timely notice in writing to the Clerk of the Corporation as set forth in this By-law. For the first Annual Meeting following the Effective Date, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (A) the 75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For all subsequent Annual Meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not less than 75 days nor more than 120 days prior to the Anniversary Date; provided, however, that in the event the Annual Meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed and received by, the Corporation at its principal executive office not later than the close of business on the later of (i) the 75th day prior to the scheduled date of such Annual Meeting or (ii) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. A stockholder's notice to the Clerk shall set forth as to each person whom the stockholder proposes to nominate for election or re-election as a Director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation's capital stock which are beneficially owned by such person on the date of such stockholder notice, and (iv) the consent of each nominee to serve as a Director if elected. A stockholder's notice to the Clerk shall further set forth as to the stockholder giving such notice (i) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder and of the beneficial owners (if any) of the Corporation's capital stock registered in such stockholder's name and the name and address of other stockholders known by such stockholder to be supporting such nominee(s), (ii) the class and number of shares of the Corporation's capital stock which are held of record, beneficially owned or represented by proxy by such 7 stockholder and by any other stockholders known by such stockholder to be supporting such nominee(s) on the record date for the Annual Meeting in question (if such date shall then have been made publicly available) and on the date of such stockholder's notice, and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder. If the Board of Directors or a designated committee thereof determines that any stockholder nomination was not made in accordance with the terms of this By- law or that the information provided in a stockholder's notice does not satisfy the informational requirements of this By-law in any material respect, then such nomination shall not be considered at the Annual Meeting in question. If neither the Board of Directors nor such committee makes a determination as to whether a nomination was made in accordance with the provisions of this By-law, the presiding officer of the Annual Meeting shall determine whether a nomination was made in accordance with such provisions. If the presiding officer determines that any stockholder nomination was not made in accordance with the terms of this By-law or that the information provided in a stockholder's notice does not satisfy the informational requirements of this By-law in any material respect, then such nomination shall not be considered at the Annual Meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a nomination was made in accordance with the terms of this By-law, the presiding officer shall so declare at the Annual Meeting and ballots shall be provided for use at the meeting with respect to such nominee. Notwithstanding anything to the contrary in the second sentence of the second paragraph of this By-law, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 75 days prior to the Anniversary Date, a stockholder's notice required by this By- law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if such notice shall be delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which such public announcement is first made by the Corporation. No person shall be elected by the stockholders as a Director of the Corporation unless nominated in accordance with the procedures set forth in this By-law. Election of Directors at the Annual Meeting need not be by written ballot, unless otherwise provided by the Board of Directors or presiding officer at such Annual Meeting. If written ballots are to be used, ballots bearing the names of all the persons who have been nominated for election as Directors at the Annual Meeting in accordance with the procedures set forth in this Section shall be provided for use at the Annual Meeting. 8 4. Application of Section 50A of Chapter 156B of the General Laws of the --------------------------------------------------------------------- Commonwealth of Massachusetts. Notwithstanding anything to the contrary in the - ----------------------------- Articles of Organization or these By-laws, the provisions of Section 50A of Chapter 156B of Massachusetts General Laws shall not be applicable to the Corporation. 5. Vacancies. The Board of Directors may act notwithstanding a vacancy --------- or vacancies in its membership. Any and all vacancies in the Board of Directors, however occurring including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a Director shall be nominated by the Nominating Committee and shall be filled by the affirmative vote of a majority of the Directors then in office, even though less than a quorum. Any Director elected in accordance with this Section 5 shall hold office for the remainder of the full term of the vacancy filled and until his or her successor is duly elected and qualified. 6. Resignation. Any Director may resign by delivering his written ----------- resignation to the Corporation at its principal executive office or to the President or Clerk. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 7. Removal. ------- (a) Removal by Directors. Except as set forth in the following sentence, -------------------- a Director may not be removed by the other Directors then in office. A Director who (i) is the subject of any regulatory or judicial order or decree barring or suspending such individual from engaging in any activity related to the purchase, sale or trading of securities or commodities, or (ii) is indicted for any criminal charge relating to the purchase, sale or trading of securities or commodities, may be removed by a vote of a majority of the other Directors then in office. (b) Removal by Stockholders. Stockholders may remove a Director only with ----------------------- cause and only by the affirmative vote of at least two-thirds of the total votes which would be eligible to be cast by stockholders in the election of such Director. For purposes of this Section 7, "cause," with respect to the removal of any Director shall mean only (i) conviction of a felony, (ii) declaration of unsound mind by order of court, (iii) gross dereliction of duty, (iv) commission of any action involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Corporation. A Director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing removal. 8. Meetings. Regular meetings of the Board of Directors may be held -------- without notice at such time, date and place as the Board of Directors may from time to time determine provided that reasonable notice of the first regular meeting following such determination shall be given to absent Directors. A regular meeting of the Board of Directors may be held without notice at the same place as the annual meeting of stockholders, or the special meeting held in lieu thereof, following such meeting of stockholders. 9 Special meetings of the Board of Directors may be called, orally or in writing, by the Board of Directors, by the Chairman of the Board or by the President designating the time, date and place thereof. 9. Notice of Meetings. Notice of the time, date and place of all special ------------------ meetings of the Board of Directors shall be given to each Director by the Clerk or Assistant Clerk, or in case of the death, absence, incapacity or refusal of such persons, by the officer or one of the Directors calling the meeting. Notice shall be given to each Director in person or by telephone or by facsimile sent to his business or home address, at least twenty-four hours in advance of the meeting, or by written notice mailed to his business or home address at least forty-eight hours in advance of the meeting. Notice need not be given to any Director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 10. Quorum. At any meeting of the Board of Directors, a majority of the ------ Directors then in office shall constitute a quorum. Less than a quorum may adjourn any meeting from time to time and the meeting may be held as adjourned without further notice. 11. Action at Meeting. At any meeting of the Board of Directors at which ----------------- a quorum is present, a majority of the Directors present may take any action on behalf of the Board of Directors, unless a larger number is required by law, by the Articles of Organization or by these By-laws. 12. Presence Through Communications Equipment. Unless otherwise provided ----------------------------------------- by law or the Articles of Organization, members of the Board of Directors may participate in a meeting of the Board of Directors by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. 13. Action by Consent. Unless the Articles of Organization otherwise ----------------- provide, any action by the Board of Directors may be taken without a meeting if all the Directors consent to the action in writing and the written consents are filed with the records of the meetings of the Board of Directors. Such consents shall be treated for all purposes as a vote at a meeting of the Board of Directors. 14. Nominating Committee. The Board of Directors shall establish and at -------------------- all times maintain a Nominating Committee consisting of the Chairman of the Board and two non-employee Directors selected by the Chairman of the Board. The duties and responsibilities of the Nominating Committee shall be to select and nominate candidates for election as Directors of the Corporation. 10 15. Audit Committee. The Board of Directors shall establish and at all --------------- times maintain an Audit Committee consisting of three non-employee Directors selected by a vote of a majority of the members of the Board of Directors. The duties and responsibilities of the Audit Committee shall be determined by the Board of Directors from time to time. 16. Compensation Committee. The Board of Directors shall establish and at ---------------------- all times maintain a Compensation Committee consisting of three non-employee Directors selected by a vote of a majority of the members of the Board of Directors. The duties and responsibilities of the Compensation Committee shall be determined by the Board of Directors from time to time. 17. Other Committees. In addition to the Nominating Committee provided ---------------- for in Article III, Section 14 of these By-laws, the Audit Committee provided for in Article III, Section 15 of these By-laws and the Compensation Committee provided for in Article III, Section 16 of these By-laws, the Board of Directors, by vote of a majority of the Directors then in office, may elect from its number an Executive Committee or other committees and may delegate thereto some or all of its powers except those which by law, by the Articles of Organization, or by these By-laws may not be delegated. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-laws for the Board of Directors. All members of such committees shall hold such offices at the pleasure of the Board of Directors. The Board of Directors by vote of a majority of the Directors then in office may abolish any such committee at any time. Any committee to which the Board of Directors delegates any of its powers or duties shall keep records of its meetings and shall report its action to the Board of Directors. The Board of Directors shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect. ARTICLE III ----------- Officers -------- 1. Enumeration. The officers of the Corporation shall consist of a ----------- Chairman of the Board, a President, a Treasurer, a Clerk, and such other officers, including a Chairman of the Board or one or more Vice Presidents, Assistant Treasurers or Assistant Clerks, as the Board of Directors may determine. 2. Election. The Chairman of the Board, President, Treasurer and Clerk -------- shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be chosen by the Board of Directors at such meeting or at any other meeting. 3. Qualification. No officer need be a Director of the Corporation ------------- except for the Chairman of the Board. Any two or more offices may be held by any person. The Clerk shall be a resident of Massachusetts unless the Corporation has a resident agent appointed for the purpose of service of process. Any officer may be required by the Board of Directors to give bond for the faithful performance of his duties in such amount and with such sureties as the Board of Directors may determine. 4. Tenure. Except as otherwise provided by law, by the Articles of ------ Organization or by these By-laws, the Chairman of the Board, the President, Treasurer and Clerk shall hold office until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified; and all other officers shall hold office until the first meeting of the Board of Directors following the next 11 annual meeting of stockholders and until their successors are chosen and qualified, or for such shorter term as the Board of Directors may fix at the time such officers are chosen. 5. Resignation. Any officer may resign by delivering his written ----------- resignation to the Corporation at its principal office, to the Chairman of the Board or to the President or Clerk, and such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 6. Removal. The Board of Directors may remove any officer with or ------- without cause by a vote of a majority of the entire number of Directors then in office; provided, that an officer may be removed for cause only after reasonable notice and opportunity to be heard by the Board of Directors. 7. Vacancies. Any vacancy in any office may be filled for the unexpired --------- portion of the term by the Board of Directors. The Board of Directors shall elect a successor if the office of Chairman of the Board, President, Treasurer or Clerk becomes vacant and may elect a successor if any other office becomes vacant. 8. Chairman of the Board. The Chairman of the Board shall preside at all --------------------- meetings of the Stockholders and of the Board of Directors. Unless the Board of Directors shall otherwise determine, the Chairman of the Board shall be the Chief Executive Officer and general manager of the Corporation, shall in general supervise and control all of the business and affairs of the Corporation, and shall perform all duties incident to the office of Chairman of the Board and such other duties as may be prescribed by the Board of Directors from time to time. 9. President and Vice Presidents. The President shall, in the absence of ----------------------------- the Chairman of the Board preside, when present, at all meetings of stockholders and, if the Chairman of the Board is absent, at meetings of the Board of Directors. The President shall exercise and perform such other powers and duties as the Board of Directors or these By-laws may designate. Any Vice President shall have such powers and shall perform such duties as the Board of Directors may from time to time designate. 10. Chief Financial Officer, Treasurer and Assistant Treasurers. The ----------------------------------------------------------- Chief Financial Officer or the Treasurer shall, subject to the direction of the Board of Directors, have general charge of the financial affairs of the Corporation and shall cause to be kept accurate books of account. Such officer shall have custody of all funds, securities, and valuable documents of the Corporation, except as the Board of Directors may otherwise provide. 12 Any Assistant Treasurer shall have such powers and perform such duties as the Board of Directors may from time to time designate. 11. Clerk and Assistant Clerks. The Clerk shall keep a record of the -------------------------- meetings of stockholders. In case a Clerk is not elected or is absent, the Clerk or an Assistant Clerk shall keep a record of the meetings of the Board of Directors. In the absence of the Clerk from any meeting of stockholders, an Assistant Clerk if one be elected, otherwise a Temporary Clerk designated by the person presiding at the meeting, shall perform the duties of the Clerk. 12. Other Powers and Duties. Subject to these By-laws, each officer of ----------------------- the Corporation shall have in addition to, and to the extent not inconsistent with, the duties and powers specifically set forth in these By-laws, such duties and powers as are customarily incident to his office, and such duties and powers as may be designated from time to time by the Board of Directors. ARTICLE IV ---------- Capital Stock ------------- 1. Certificates of Stock. The Board of Directors may provide by --------------------- resolution that some or all of any or all classes and series of shares shall be uncertificated shares. Unless such a resolution has been adopted, each stockholder shall be entitled to a certificate of the capital stock of the Corporation in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer. Such signatures may be facsimile if the certificate is signed by a transfer agent, or by a registrar, other than a Director, officer or employee of the Corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall contain such legend with respect thereto as is required by law. 2. Transfers. Subject to any restrictions on transfer, shares of stock --------- may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with transfer stamps (if necessary) affixed, and with such proof of the authenticity of signature as the Corporation or its transfer agent may reasonably require. 3. Record Holders. Except as may be otherwise required by law, by the -------------- Articles of Organization or by these By-laws, the Corporation shall be entitled to treat the record holder 13 of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-laws. It shall be the duty of each stockholder to notify the Corporation of his post office address. 4. Record Date. The Board of Directors may fix in advance a time of not ----------- more than sixty days preceding the date of any meeting of stockholders, or the date for the payment of any dividend or the making of any distribution to stockholders, or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting, and any adjournment thereof, or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Corporation after the record date. Without fixing such record date the Board of Directors may for any of such purposes close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed, (a) the record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, and (b) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto. 5. Replacement of Certificates. In case of the alleged loss, destruction --------------------------- or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms as the Board of Directors may prescribe. 6. Issuance of Capital Stock. The Board of Directors shall have the ------------------------- authority to issue or reserve for issue from time to time the whole or any part of the capital stock of the Corporation which may be authorized from time to time, to such persons or organizations, for such consideration, whether cash, property, services or expenses, and on such terms as the Board of Directors may determine, including without limitation the granting of options, warrants, or conversion or other rights to subscribe to said capital stock. The Board of Directors may delegate some or all of its authority under this Section 6 to one or more committees of Directors. 14 ARTICLE V --------- Indemnification --------------- 1. Actions, Suits and Proceedings. The Corporation shall indemnify each ------------------------------ person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a Director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a Director or officer of, or in a similar capacity with, another organization or in any capacity with respect to any employee benefit plan of the Corporation or any subsidiary of the Corporation (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted to be taken in such capacity, against all expenses (including reasonable attorneys' fees), judgments and fines incurred by him or on his behalf in connection with such action, suit, proceeding or investigation, and any appeal therefrom, unless the Indemnitee shall be finally adjudicated in such action, suit, proceeding or investigation, not to have acted in good faith in the reasonable belief that his action was in the best interests of the Corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. Notwithstanding anything to the contrary in this Article V, except as set forth in Section 7 of this Article V, the Corporation shall not indemnify an Indemnitee seeking indemnification in connection with an action, suit, proceeding or investigation (or part thereof) initiated by the Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. 2. Employees and Agents. The Corporation may, at the discretion of the -------------------- Board of Directors, indemnify employees and agents of the Corporation as if they were included in Section 1 of this Article V. 3. Settlements. The right to indemnification conferred in this Article V ----------- shall include the right to be paid by the Corporation for amounts paid in settlement of any such action, suit, proceeding or investigation and any appeal therefrom, and all expenses (including reasonable attorneys' fees) incurred in connection with such settlement, pursuant to a consent decree or otherwise, unless and to the extent it is determined pursuant to Section 6 of this Article V that the Indemnitee did not act in good faith in the reasonable belief that his or her action was in the best interests of the Corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. 4. Notification and Defense of Claim. As a condition precedent to his or --------------------------------- her right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving such Indemnitee or with respect to which indemnity will or could be sought. With respect to any action, suit, proceeding or 15 investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the Corporation to the Indemnitee of its election so to assume such defense, the Corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such claim, other than as provided below in this Section 4 of this Article V. The Indemnitee shall have the right to employ his of her own counsel in connection with such claim, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Article V. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. 5. Advance of Expenses. Subject to the provisions of Section 6 of this ------------------- Article V, in the event that the Corporation does not assume the defense, or unless and until the Corporation assumes the defense, pursuant to Section 4 of this Article V of any action, suit, proceeding or investigation of which the Corporation receives notice under this Article V, any expenses (including reasonable attorneys' fees) incurred by an Indemnitee in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter, provided, however, that the payment of such expenses incurred by an Indemnitee - -------- ------- in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article V. Such undertaking may be accepted without reference to the financial ability of the Indemnitee to make such repayment. 6. Procedure for Indemnification. In order to obtain indemnification or ----------------------------- advancement of expenses pursuant to Sections 1, 3 or 5 of this Article V, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification or advancement of expenses. Any such indemnification pursuant to Section 1 of this Article V shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless a court of competent jurisdiction finally adjudicates that the Indemnitee did not meet the applicable standard of conduct set forth in Section 1 of this 16 Article V. Any such indemnification pursuant to Section 3 of this Article V or advancement of expenses pursuant to Section 5 of this Article V shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless the Corporation determines, by clear and convincing evidence, within such 60-day period that the Indemnitee did not meet the applicable standard of conduct set forth in Sections 1 or 3 of this Article V, as the case may be. Such determination by the Corporation shall be made in each instance by (a) a majority vote of a quorum of the Directors of the Corporation, (b) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for Directors, voting as a single class, which quorum shall consist of stockholders who are not at that time parties to the action, suit, proceeding or investigation in question, or (c) independent legal counsel (who may be regular legal counsel to the Corporation). 7. Remedies. The right to indemnification or advances as granted by this -------- Article V shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within the 60-day period referred to above in Section 6 of this Article V. Unless otherwise provided by law, the Corporation shall have the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under this Article V. Neither the failure of the Corporation to have made a determination prior to the commencement of any such action by the Indemnitee that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 6 of this Article V that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. 8. Subsequent Amendment. No amendment, termination or repeal of this -------------------- Article V or of the relevant provisions of Chapter 156B of the Massachusetts General Laws or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal. 9. Other Rights. The indemnification and advancement of expenses ------------ provided by this Article V shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or Directors or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a Director or officer, and shall inure to the benefit of the estate, heirs, executors, personal representatives and administrators of the Indemnitee. Nothing contained in this Article V shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers 17 and Directors providing indemnification rights and procedures different from those set forth in this Article V. In addition, the Corporation may, to the extent authorized from time to time by its Board of Directors pursuant to Section 2 of this Article V or otherwise, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article V. 10. Partial Indemnification. If an Indemnitee is entitled under any ----------------------- provision of this Article V to indemnification by the Corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by such Indemnitee or on such Indemnitee's behalf in connection with any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including reasonable attorneys' fees), judgments, fines or amounts paid in settlement to which such Indemnitee is entitled. 11. Insurance. The Corporation may purchase and maintain insurance, at --------- its expense, to protect itself and any Director, officer, employee or agent of the Corporation, any subsidiary, another organization or employee benefit plan against any expense, liability or loss incurred by him of her in any such capacity, or arising out of his of her status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Chapter 156B of the Massachusetts General Laws. 12. Merger or Consolidation. If the Corporation is merged into or ----------------------- consolidated with another corporation and the Corporation is not the surviving corporation, the surviving Corporation shall assume the obligations of the Corporation under this Article V with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring at or prior to the date of such merger or consolidation. 13. Savings Clause. If this Article V or any portion hereof shall be -------------- invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any expenses (including reasonable attorneys' fees), judgments, fines and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article V that shall not have been invalidated and to the fullest extent permitted by applicable law. 14. Subsequent Legislation. If the Massachusetts General Laws are amended ---------------------- after adoption of this Article V to expand further the indemnification permitted to Indemnitees, then the Corporation shall indemnify such persons to the fullest extent permitted by the Massachusetts General Laws, as so amended. 18 ARTICLE VI ---------- Miscellaneous Provisions ------------------------ 1. Fiscal Year. Except as otherwise determined by the Board of ----------- Directors, the fiscal year of the Corporation shall be the twelve months ending on the Saturday nearest January 31 of each year. 2. Seal. The Board of Directors shall have power to adopt and alter the ---- seal of the Corporation. 3. Execution of Instruments. All deeds, leases, transfers, contracts, ------------------------ bonds, notes and other obligations to be entered into by the Corporation in the ordinary course of its business without Director action, may be executed on behalf of the Corporation by the President or the Treasurer except as the Board of Directors may generally or in particular cases otherwise determine. 4. Voting of Securities. Unless otherwise provided by the Board of -------------------- Directors, the President or Treasurer may waive notice of and act on behalf of this Corporation, or appoint another person or persons to act as proxy or attorney in fact for this Corporation with or without discretionary power and/or power of substitution, at any meeting of stockholders or shareholders of any other corporation or organization, any of whose securities are held by this Corporation. 5. Resident Agent. The Board of Directors may appoint a resident agent -------------- upon whom legal process may be served in any action or proceeding against the Corporation. Said resident agent shall be either an individual who is a resident of and has a business address in Massachusetts, a corporation organized under the laws of Massachusetts, or a corporation organized under the laws of any other state of the United States, which has qualified to do business in, and has an office in, Massachusetts. 6. Corporate Records. The original, or attested copies, of the Articles ----------------- of Organization, By-laws and records of all meetings of the incorporators and stockholders, and the stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in Massachusetts at the principal office of the Corporation, or at an office of its transfer agent, Clerk or resident agent, and shall be open at all reasonable times to the inspection of any stockholder for any proper purpose, but not to secure a list of stockholders for the purpose of selling said list or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the Corporation. 19 7. Articles of Organization. All references in these By-laws to the ------------------------ Articles of Organization shall be deemed to refer to the Amended and Restated Articles of Organization of the Corporation, as amended and in effect from time to time. 8. Amendment --------- (a) Amendment by Directors. Except with respect to any provisions of these ---------------------- By-laws which by law, the Articles of Organization or these By-laws require action by the stockholders, these By-Laws may be amended or repealed by the affirmative vote of a majority of the Directors then in office. Not later than the time of giving notice of the annual meeting of stockholders next following the amending or repealing by the Directors of any By-law, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-laws. (b) Amendment by Stockholders. These By-laws may be amended or repealed at ------------------------- any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least two-thirds of the total votes eligible to be cast on such amendment or repeal by holders of voting stock, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of a majority of the total votes eligible to be cast on such amendment or repeal by holders of voting stock, voting together as a single class. Notwithstanding the foregoing, no shareholder approval shall be required unless mandated by the Articles of Organization, these By-laws, or other applicable law. 20 EX-3.4 14 AMENDED AND RESTATED BY-LAWS BRADLEES STORES EXHIBIT 3.4 AMENDED AND RESTATED BY-LAWS ---------------------------- of BRADLEES STORES, INC. ARTICLE I --------- Stockholders ------------ 1. Annual Meeting. The annual meeting of stockholders shall be -------------- held at the hour, date and place within or without the United States which is fixed by the majority of the Board of Directors, the Chairman of the Board or the President, which time, date and place may subsequently be changed at any time by vote of the Board of Directors. The purposes for which such annual meeting is to be held, in addition to those prescribed by law, by the Articles of Organization (which, as used herein, means the Restated Articles of Organization of the Corporation, as amended and restated from time to time), or by these By-laws (which, as used herein, means the Amended and Restated By-laws of the Corporation, as amended and restated from time to time) may be specified by the Board of Directors, the Chairman of the Board or the President. If no annual meeting of stockholders has been held within six months after the end of the fiscal year of the Corporation, a special meeting in lieu thereof may be held, and such special meeting shall have, for purposes of these By-laws or otherwise, all the force and effect of an annual meeting. Any and all references hereafter in these By-laws to an annual meeting or annual meetings shall be deemed to refer also to any special meeting(s) in lieu thereof. 2. Special Meetings. Special meetings of stockholders may be ---------------- called by the Board of Directors. Special meetings shall be called by the Clerk or in case of the death, absence, incapacity or refusal of the Clerk, by any other officer, upon written application of one or more stockholders who hold at least (i) a majority in interest of the capital stock entitled to vote at such meeting or (ii) such lesser percentage, if any, as shall be determined to be the maximum percentage which the Corporation is permitted by applicable law to establish for the call of such a meeting. Application to a court pursuant to Section 34(b) of Chapter 156B of the General Laws of the Commonwealth of Massachusetts requesting the call of a special meeting of stockholders because none of the officers is able and willing to call such a meeting may be made only by stockholders who hold at least (i) a majority in interest of the capital stock entitled to vote at such meeting or (ii) such lesser percentage, if any, as shall be determined to be the maximum percentage which the Corporation is permitted by applicable law to establish for the call of such a meeting. The hour, date and place of any special meeting and the record date for determining the stockholders having the right to notice of and to vote at such meeting shall be determined by the Board of Directors or the President. At a special meeting of stockholders, only such business shall be conducted, and only such proposals shall be acted upon, as shall have been stated in the written notice of the special meeting and otherwise properly brought before the special meeting. 3. Matters to be Considered at Annual Meetings. At any annual ------------------------------------------- meeting of stockholders or any special meeting in lieu of annual meeting of stockholders (the "Annual Meeting"), only such business shall be conducted, and only such proposals shall be acted upon, as shall have been properly brought before such Annual Meeting. To be considered as properly brought before an Annual Meeting, business must be: (a) specified in the notice of meeting, (b) otherwise properly brought before the meeting by, or at the direction of, the Board of Directors, or (c) otherwise properly brought before the meeting by any holder of record (both as of the time notice of such proposal is given by the stockholder as set forth below and as of the record date for the Annual Meeting in question) of any shares of capital stock of the Corporation entitled to vote at such Annual Meeting who complies with the requirements set forth in this By-law. In addition to any other applicable requirements, for business to be properly brought before an Annual Meeting by a stockholder of record of any shares of capital stock entitled to vote at such Annual Meeting, such stockholder shall: (i) give timely notice as required by this By-law to the Clerk of the Corporation and (ii) be present at such meeting, either in person or by a representative. For the first Annual Meeting following the Effective Date of the Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates under Chapter 11 of the Bankruptcy Code (the "Effective Date"), a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (A) the 75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For all subsequent Annual Meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not less than 75 days nor more than 120 days prior to the anniversary date of the immediately preceding Annual Meeting (the "Anniversary Date"); provided, however, that in the event the Annual Meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (A) the 75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For purposes of these By-laws, "public announcement" shall mean: (i) disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service, (ii) a report or other document filed publicly with the Securities and Exchange Commission (including, without limitation, a Form 8-K), or (iii) a letter or report sent to stockholders of record of the Corporation at the time of the mailing of such letter or report. A stockholder's notice to the Clerk shall set forth as to each matter proposed to be brought before an Annual Meeting: (i) a brief description of the business the stockholder 2 desires to bring before such Annual Meeting and the reasons for conducting such business at such Annual Meeting, (ii) the name and address, as they appear on the Corporation's stock transfer books, of the stockholder proposing such business, (iii) the class and number of shares of the Corporation's capital stock beneficially owned by the stockholder proposing such business, (iv) the names and addresses of the beneficial owners, if any, of any capital stock of the Corporation registered in such stockholder's name on such books, and the class and number of shares of the Corporation's capital stock beneficially owned by such beneficial owners, (v) the names and addresses of other stockholders known by the stockholder proposing such business to support such proposal, and the class and number of shares of the Corporation's capital stock beneficially owned by such other stockholders, and (vi) any material interest of the stockholder proposing to bring such business before such meeting (or any other stockholders known to be supporting such proposal) in such proposal. If the Board of Directors or a designated committee thereof determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this By-law or that the information provided in a stockholder's notice does not satisfy the information requirements of this By-law in any material respect, such proposal shall not be presented for action at the Annual Meeting in question. If neither the Board of Directors nor such committee makes a determination as to the validity of any stockholder proposal in the manner set forth above, the presiding officer of the Annual Meeting shall determine whether the stockholder proposal was made in accordance with the terms of this By-law. If the presiding officer determines that any stockholder proposal was not made in a timely fashion in accordance with the provisions of this By-law or that the information provided in a stockholder's notice does not satisfy the information requirements of this By-law in any material respect, such proposal shall not be presented for action at the Annual Meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a stockholder proposal was made in accordance with the requirements of this By-law, the presiding officer shall so declare at the Annual Meeting and ballots shall be provided for use at the meeting with respect to such proposal. Notwithstanding the foregoing provisions of this By-law, a stockholder shall also comply with all applicable requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the rules and regulations thereunder with respect to the matters set forth in this By-law and nothing in this By-law shall be deemed to affect any rights of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act. 4. Notice of Meetings. A written notice of each meeting of ------------------ stockholders (other than adjournments governed by Section 5 of this Article I) stating the place, date and hour and the purpose or purposes of such meeting shall be given by the Clerk or an Assistant Clerk (or other officer designated by the Board of Directors) at least 7 days before the meeting to each stockholder entitled to vote thereat and to each stockholder who, by law, under the Articles of Organization or under these By-laws, is entitled to such notice, by delivering such notice to 3 him or by mailing it, postage prepaid, and addressed to such stockholder at his address as it appears in the Corporation's stock transfer books. Such notice shall be deemed to be delivered when hand delivered to such address or deposited in the mail so addressed, with postage prepaid. Notice of an annual or special meeting of stockholders need not be given to a stockholder if a written waiver of notice is signed before or after such meeting by such stockholder or such stockholder's authorized attorney, if communication with such stockholder is unlawful, or if such stockholder attends such meeting, unless such attendance was for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. Neither the business to be transacted at, nor the purpose of, any annual Meeting or special meeting of stockholders need be specified in any written waiver of notice. 5. Rescheduling of Meetings; Adjournments. The Board of Directors -------------------------------------- may postpone and reschedule any previously scheduled annual or special meeting of stockholders, and a record date with respect thereto, regardless of whether any notice or public disclosure with respect to any such meeting or record date has been sent or made pursuant to Section 3 of this Article I or Section 3 of Article II hereof or otherwise. In no event shall the public announcement of an adjournment, postponement or rescheduling of any previously scheduled Annual Meeting of stockholders commence a new time period for the giving of a stockholder's notice under Section 3 of Article I and Section 3 of Article II of these By-laws. When any meeting is convened, the presiding officer may adjourn the meeting if (a) no quorum is present for the transaction of business, (b) the Board of Directors determines that adjournment is necessary or appropriate to enable the stockholders to consider fully information which the Board of Directors determines has not been made sufficiently or timely available to stockholders, or (c) the Board of Directors determines that adjournment is otherwise in the best interests of the Corporation. When any annual Meeting or special meeting of stockholders is adjourned to another hour, date or place, notice need not be given of the adjourned meeting other than an announcement at the meeting at which the adjournment is taken of the hour, date and place to which the meeting is adjourned. 6. Quorum. The holders of a majority in interest of all capital ------ stock of the Corporation issued, outstanding and entitled to vote at a meeting of stockholders shall constitute a quorum, but if a quorum is not present, a majority in interest of the stockholders present or the presiding officer may adjourn the meeting from time to time and the meeting may be held as adjourned without further notice other than an announcement at the meeting at which the adjournment is taken of the hour, date and place to which the meeting is adjourned. At such adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally noticed. The stockholders present at a duly constituted meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 4 7. Voting and Proxies. Unless otherwise provided by law or by the ------------------ Articles of Organization, stockholders shall have one vote for each share of stock entitled to vote owned by them of record according to the books of the Corporation. Stockholders entitled to vote may vote either in person or by written proxy dated not more than six months before the meeting named therein, unless the proxy is coupled with an interest and provides otherwise. Except as otherwise permitted by law or limited therein, proxies shall entitle the persons authorized thereby to vote at any adjournment of such meeting but shall not be valid after final adjournment of such meeting. A proxy with respect to stock held in the name of two or more persons shall be valid if executed by one of them unless at or prior to exercise of the proxy the Corporation receives a specific written notice to the contrary from any one of them. A proxy purporting to be executed by or on behalf of a stockholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest on the challenger. The Corporation shall not directly or indirectly vote any share of its own stock. 8. Action at Meeting. When a quorum is present, any matter before ----------------- a meeting of stockholders shall be decided by vote of the holders of a majority of the shares of stock voting on such matter, except where a larger vote is required by law, by the Articles of Organization or by these By-laws. Any election by stockholders shall be determined by a plurality of the votes cast, except where a greater vote is required by law, by the Articles of Organization or by these By-laws. No ballot shall be required for any election unless requested by a stockholder present or represented at the meeting and entitled to vote in the election. 9. Action without Meeting. Any action required or permitted to be ---------------------- taken at any annual or special meeting of stockholders (including any actions or powers reserved to the stockholders under these By-laws) may be taken without a meeting, provided that all stockholders entitled to vote on the matter consent to the action in writing and the written consents are filed with the records of the meetings of stockholders. Such consents shall be treated for all purposes as a vote at a meeting. 10. Control Share Acquisition. The provisions of Chapter 110D of ------------------------- the General Laws of the Commonwealth of Massachusetts ("Chapter 110D"), as it may be amended from time to time, shall not apply to "control share acquisitions" of the Corporation within the meaning of Chapter 110D. 11. Presiding Officer. The Chairman or, in his absence, the ----------------- President or, in his absence, such other officer as shall be designated by the Board of Directors, shall preside at all annual or special meetings of stockholders and shall have the power, among other things, to 5 adjourn such meetings at any time and from time to time in accordance with the provisions of Sections 5 and 6 of this Article I. The order of business and all other matters of procedure at any meeting of the stockholders shall be determined by the presiding officer. 12. Voting Procedures and Inspectors of Elections. In advance of --------------------------------------------- any meeting of stockholders, the Board of Directors may appoint one or more inspectors to act at an annual or special meeting of stockholders and make a written report thereon. Any inspector may, but need not, be an officer, employee or agent of the Corporation. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector(s) shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspector(s) may appoint or retain other persons or entities to assist the inspector(s) in the performance of the duties of the inspector(s). The presiding officer may review all determinations made by the inspector(s), and in so doing the presiding officer shall be entitled to exercise his sole judgment and discretion and he shall not be bound by any determinations made by the inspector(s). All determinations by the inspector(s) and, if applicable, presiding officer shall be subject to further review by any court of competent jurisdiction. ARTICLE II ---------- Directors --------- 1. Classes of Directors; Term of Office; Qualification. The number --------------------------------------------------- of Directors of the Corporation shall be fixed at three or such larger number of directors as may be fixed by the Board of Directors from time to time after the annual meeting of the Corporation for the fiscal year 1999. The Directors shall hold office in the manner provided in the Articles. No Director need be a stockholder of the Corporation. 2. Powers. The business of the Corporation shall be managed by a ------ Board of Directors who may exercise all the powers of the Corporation except as otherwise provided by law, by the Articles of Organization or by these By-laws. In particular, and without limiting the generality of the foregoing, the Directors may at any time issue all or from time to time any part of the unissued capital stock of the Corporation from time to time authorized under the Articles of Organization and may determine, subject to any requirements of law, the consideration for which stock is to be issued and the manner of allocating such consideration between capital and surplus. 6 3. Director Nominations. Nominations of candidates for election as -------------------- Directors of the Corporation at any Annual Meeting may be made only (a) by, or at the direction of, the Nominating Committee established in accordance with Article II, Section 14 of these By-laws or (b) by any holder of record (both as of the time notice of such nomination is given by the stockholder as set forth below and as of the record date for the Annual Meeting in question) of any shares of the capital stock of the Corporation entitled to vote at such Annual Meeting who complies with the timing, informational and other requirements set forth in this By-law. Any stockholder who has complied with the timing, informational and other requirements set forth in this By-law and who seeks to make such a nomination, or his, her or its representative, must be present in person at the Annual Meeting. Only persons nominated in accordance with the procedures set forth in this By-law shall be eligible for election as Directors at an Annual Meeting. Nominations, other than those made by, or at the direction of, the Nominating Committee, shall be made pursuant to timely notice in writing to the Clerk of the Corporation as set forth in this By-law. For the first Annual Meeting following the Effective Date, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the later of (A) the 75th day prior to the scheduled date of such Annual Meeting or (B) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. For all subsequent Annual Meetings, a stockholder's notice shall be timely if delivered to, or mailed to and received by, the Corporation at its principal executive office not less than 75 days nor more than 120 days prior to the Anniversary Date; provided, however, that in the event the Annual Meeting is scheduled to be held on a date more than 30 days before the Anniversary Date or more than 60 days after the Anniversary Date, a stockholder's notice shall be timely if delivered to, or mailed and received by, the Corporation at its principal executive office not later than the close of business on the later of (i) the 75th day prior to the scheduled date of such Annual Meeting or (ii) the 15th day following the day on which public announcement of the date of such Annual Meeting is first made by the Corporation. A stockholder's notice to the Clerk shall set forth as to each person whom the stockholder proposes to nominate for election or re-election as a Director (i) the name, age, business address and residence address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of the Corporation's capital stock which are beneficially owned by such person on the date of such stockholder notice, and (iv) the consent of each nominee to serve as a Director if elected. A stockholder's notice to the Clerk shall further set forth as to the stockholder giving such notice (i) the name and address, as they appear on the Corporation's stock transfer books, of such stockholder and of the beneficial owners (if any) of the Corporation's capital stock registered in such stockholder's name and the name and address of other stockholders known by such stockholder to be supporting such nominee(s), (ii) the class and number of shares of the Corporation's capital stock which are held of record, beneficially owned or represented by proxy by such 7 stockholder and by any other stockholders known by such stockholder to be supporting such nominee(s) on the record date for the Annual Meeting in question (if such date shall then have been made publicly available) and on the date of such stockholder's notice, and (iii) a description of all arrangements or understandings between such stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by such stockholder. If the Board of Directors or a designated committee thereof determines that any stockholder nomination was not made in accordance with the terms of this By-law or that the information provided in a stockholder's notice does not satisfy the informational requirements of this By-law in any material respect, then such nomination shall not be considered at the Annual Meeting in question. If neither the Board of Directors nor such committee makes a determination as to whether a nomination was made in accordance with the provisions of this By-law, the presiding officer of the Annual Meeting shall determine whether a nomination was made in accordance with such provisions. If the presiding officer determines that any stockholder nomination was not made in accordance with the terms of this By-law or that the information provided in a stockholder's notice does not satisfy the informational requirements of this By- law in any material respect, then such nomination shall not be considered at the Annual Meeting in question. If the Board of Directors, a designated committee thereof or the presiding officer determines that a nomination was made in accordance with the terms of this By-law, the presiding officer shall so declare at the Annual Meeting and ballots shall be provided for use at the meeting with respect to such nominee. Notwithstanding anything to the contrary in the second sentence of the second paragraph of this By-law, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 75 days prior to the Anniversary Date, a stockholder's notice required by this By-law shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if such notice shall be delivered to, or mailed to and received by, the Corporation at its principal executive office not later than the close of business on the 15th day following the day on which such public announcement is first made by the Corporation. No person shall be elected by the stockholders as a Director of the Corporation unless nominated in accordance with the procedures set forth in this By-law. Election of Directors at the Annual Meeting need not be by written ballot, unless otherwise provided by the Board of Directors or presiding officer at such Annual Meeting. If written ballots are to be used, ballots bearing the names of all the persons who have been nominated for election as Directors at the Annual Meeting in accordance with the procedures set forth in this Section shall be provided for use at the Annual Meeting. 8 4. Application of Section 50A of Chapter 156B of the General Laws -------------------------------------------------------------- of the Commonwealth of Massachusetts. Notwithstanding anything to the contrary - ------------------------------------ in the Articles of Organization or these By-laws, the provisions of Section 50A of Chapter 156B of Massachusetts General Laws shall not be applicable to the Corporation. 5. Vacancies. The Board of Directors may act notwithstanding a --------- vacancy or vacancies in its membership. Any and all vacancies in the Board of Directors, however occurring including, without limitation, by reason of an increase in size of the Board of Directors, or the death, resignation, disqualification or removal of a Director shall be nominated by the Nominating Committee and shall be filled by the affirmative vote of a majority of the Directors then in office, even though less than a quorum. Any Director elected in accordance with this Section 5 shall hold office for the remainder of the full term of the vacany filled and until his or her successor is duly elected and qualified. 6. Resignation. Any Director may resign by delivering his written ----------- resignation to the Corporation at its principal executive office or to the President or Clerk. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 7. Removal. ------- (a) Removal by Directors. Except as set forth in the following -------------------- sentence, a Director may not be removed by the other Directors then in office. A Director who (i) is the subject of any regulatory or judicial order or decree barring or suspending such individual from engaging in any activity related to the purchase, sale or trading of securities or commodities, or (ii) is indicted for any criminal charge relating to the purchase, sale or trading of securities or commodities, may be removed by a vote of a majority of the other Directors then in office. (b) Removal by Stockholders. Stockholders may remove a Director ----------------------- only with cause and only by the affirmative vote of at least two-thirds of the total votes which would be eligible to be cast by stockholders in the election of such Director. For purposes of this Section 7, "cause," with respect to the removal of any Director shall mean only (i) conviction of a felony, (ii) declaration of unsound mind by order of court, (iii) gross dereliction of duty, (iv) commission of any action involving moral turpitude, or (v) commission of an action which constitutes intentional misconduct or a knowing violation of law if such action in either event results both in an improper substantial personal benefit and a material injury to the Corporation. A Director may be removed for cause only after reasonable notice and opportunity to be heard before the body proposing removal. 8. Meetings. Regular meetings of the Board of Directors may be -------- held without notice at such time, date and place as the Board of Directors may from time to time determine 9 provided that reasonable notice of the first regular meeting following such determination shall be given to absent Directors. A regular meeting of the Board of Directors may be held without notice at the same place as the annual meeting of stockholders, or the special meeting held in lieu thereof, following such meeting of stockholders. Special meetings of the Board of Directors may be called, orally or in writing, by the Board of Directors, by the Chairman of the Board or by the President designating the time, date and place thereof. 9. Notice of Meetings. Notice of the time, date and place of all ------------------ special meetings of the Board of Directors shall be given to each Director by the Clerk or Assistant Clerk, or in case of the death, absence, incapacity or refusal of such persons, by the officer or one of the Directors calling the meeting. Notice shall be given to each Director in person or by telephone or by facsimile sent to his business or home address, at least twenty-four hours in advance of the meeting, or by written notice mailed to his business or home address at least forty-eight hours in advance of the meeting. Notice need not be given to any Director if a written waiver of notice, executed by him before or after the meeting, is filed with the records of the meeting, or to any Director who attends the meeting without protesting prior thereto or at its commencement the lack of notice to him. A notice or waiver of notice of a meeting of the Board of Directors need not specify the purposes of the meeting. 10. Quorum. At any meeting of the Board of Directors, a majority of ------ the Directors then in office shall constitute a quorum. Less than a quorum may adjourn any meeting from time to time and the meeting may be held as adjourned without further notice. 11. Action at Meeting. At any meeting of the Board of Directors at ----------------- which a quorum is present, a majority of the Directors present may take any action on behalf of the Board of Directors, unless a larger number is required by law, by the Articles of Organization or by these By-laws. 12. Presence Through Communications Equipment. Unless otherwise ----------------------------------------- provided by law or the Articles of Organization, members of the Board of Directors may participate in a meeting of the Board of Directors by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other at the same time and participation by such means shall constitute presence in person at a meeting. 13. Action by Consent. Unless the Articles of Organization ----------------- otherwise provide, any action by the Board of Directors may be taken without a meeting if all the Directors consent to the action in writing and the written consents are filed with the records of the meetings of the Board of Directors. Such consents shall be treated for all purposes as a vote at a meeting of the Board of Directors. 10 14. Nominating Committee. The Board of Directors shall establish and -------------------- at all times maintain a Nominating Committee consisting of the Chairman of the Board and two other Directors selected by the Chairman of the Board. The duties and responsibilities of the Nominating Committee shall be to select and nominate candidates for election as Directors of the Corporation. 15. Other Committees. In addition to the Nominating Committee ---------------- provided for in Article III, Section 14 of these By-laws, the Board of Directors, by vote of a majority of the Directors then in office, may elect from its number an Executive Committee or other committees and may delegate thereto some or all of its powers except those which by law, by the Articles of Organization, or by these By-laws may not be delegated. Except as the Board of Directors may otherwise determine, any such committee may make rules for the conduct of its business, but unless otherwise provided by the Board of Directors or in such rules, its business shall be conducted so far as possible in the same manner as is provided by these By-laws for the Board of Directors. All members of such committees shall hold such offices at the pleasure of the Board of Directors. The Board of Directors by vote of a majority of the Directors then in office may abolish any such committee at any time. Any committee to which the Board of Directors delegates any of its powers or duties shall keep records of its meetings and shall report its action to the Board of Directors. The Board of Directors shall have power to rescind any action of any committee, but no such rescission shall have retroactive effect. ARTICLE III ----------- Officers -------- 1. Enumeration. The officers of the Corporation shall consist of a ----------- Chairman of the Board, a President, a Treasurer, a Clerk, and such other officers, including a Chairman of the Board or one or more Vice Presidents, Assistant Treasurers or Assistant Clerks, as the Board of Directors may determine. 2. Election. The Chairman of the Board, President, Treasurer and -------- Clerk shall be elected annually by the Board of Directors at its first meeting following the annual meeting of stockholders. Other officers may be chosen by the Board of Directors at such meeting or at any other meeting. 3. Qualification. No officer need be a Director of the Corporation ------------- except for the Chairman of the Board. Any two or more offices may be held by any person. The Clerk shall be a resident of Massachusetts unless the Corporation has a resident agent appointed for the purpose of service of process. Any officer may be required by the Board of Directors to give bond for the faithful performance of his duties in such amount and with such sureties as the Board of Directors may determine. 11 4. Tenure. Except as otherwise provided by law, by the Articles of ------ Organization or by these By-laws, the Chairman of the Board, the President, Treasurer and Clerk shall hold office until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their respective successors are chosen and qualified; and all other officers shall hold office until the first meeting of the Board of Directors following the next annual meeting of stockholders and until their successors are chosen and qualified, or for such shorter term as the Board of Directors may fix at the time such officers are chosen. 5. Resignation. Any officer may resign by delivering his written ----------- resignation to the Corporation at its principal office, to the Chairman of the Board or to the President or Clerk, and such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. 6. Removal. The Board of Directors may remove any officer with or ------- without cause by a vote of a majority of the entire number of Directors then in office; provided, that an officer may be removed for cause only after reasonable notice and opportunity to be heard by the Board of Directors. 7. Vacancies. Any vacancy in any office may be filled for the --------- unexpired portion of the term by the Board of Directors. The Board of Directors shall elect a successor if the office of Chairman of the Board, President, Treasurer or Clerk becomes vacant and may elect a successor if any other office becomes vacant. 8. Chairman of the Board. The Chairman of the Board shall preside --------------------- at all meetings of the Stockholders and of the Board of Directors. Unless the Board of Directors shall otherwise determine, the Chairman of the Board shall be the Chief Executive Officer and general manager of the Corporation, shall in general supervise and control all of the business and affairs of the Corporation, and shall perform all duties incident to the office of Chairman of the Board and such other duties as may be prescribed by the Board of Directors from time to time. 9. President and Vice Presidents. The President shall, in the ----------------------------- absence of the Chairman of the Board preside, when present, at all meetings of stockholders and, if the Chairman of the Board is absent, at meetings of the Board of Directors. The President shall exercise and perform such other powers and duties as the Board of Directors or these By-laws may designate. Any Vice President shall have such powers and shall perform such duties as the Board of Directors may from time to time designate. 10. Chief Financial Officer, Treasurer and Assistant Treasurers. The ----------------------------------------------------------- Chief Financial Officer or the Treasurer shall, subject to the direction of the Board of Directors, have general charge of the financial affairs of the Corporation and shall cause to be kept 12 accurate books of account. Such officer shall have custody of all funds, securities, and valuable documents of the Corporation, except as the Board of Directors may otherwise provide. Any Assistant Treasurer shall have such powers and perform such duties as the Board of Directors may from time to time designate. 11. Clerk and Assistant Clerks. The Clerk shall keep a record of the -------------------------- meetings of stockholders. In case a Clerk is not elected or is absent, the Clerk or an Assistant Clerk shall keep a record of the meetings of the Board of Directors. In the absence of the Clerk from any meeting of stockholders, an Assistant Clerk if one be elected, otherwise a Temporary Clerk designated by the person presiding at the meeting, shall perform the duties of the Clerk. 12. Other Powers and Duties. Subject to these By-laws, each officer ----------------------- of the Corporation shall have in addition to, and to the extent not inconsistent with, the duties and powers specifically set forth in these By-laws, such duties and powers as are customarily incident to his office, and such duties and powers as may be designated from time to time by the Board of Directors. ARTICLE IV ---------- Capital Stock ------------- 1. Certificates of Stock. The Board of Directors may provide by --------------------- resolution that some or all of any or all classes and series of shares shall be uncertificated shares. Unless such a resolution has been adopted, each stockholder shall be entitled to a certificate of the capital stock of the Corporation in such form as may from time to time be prescribed by the Board of Directors. Such certificate shall be signed by the President or a Vice President and by the Treasurer or an Assistant Treasurer. Such signatures may be facsimile if the certificate is signed by a transfer agent, or by a registrar, other than a Director, officer or employee of the Corporation. In case any officer who has signed or whose facsimile signature has been placed on such certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if he were such officer at the time of its issue. Every certificate for shares of stock which are subject to any restriction on transfer and every certificate issued when the Corporation is authorized to issue more than one class or series of stock shall contain such legend with respect thereto as is required by law. 2. Transfers. Subject to any restrictions on transfer, shares of --------- stock may be transferred on the books of the Corporation by the surrender to the Corporation or its transfer agent of the certificate therefor properly endorsed or accompanied by a written assignment and power of attorney properly executed, with transfer stamps (if necessary) affixed, and with such 13 proof of the authenticity of signature as the Corporation or its transfer agent may reasonably require. 3. Record Holders. Except as may be otherwise required by law, by -------------- the Articles of Organization or by these By-laws, the Corporation shall be entitled to treat the record holder of stock as shown on its books as the owner of such stock for all purposes, including the payment of dividends and the right to vote with respect thereto, regardless of any transfer, pledge or other disposition of such stock, until the shares have been transferred on the books of the Corporation in accordance with the requirements of these By-laws. It shall be the duty of each stockholder to notify the Corporation of his post office address. 4. Record Date. The Board of Directors may fix in advance a time of ----------- not more than sixty days preceding the date of any meeting of stockholders, or the date for the payment of any dividend or the making of any distribution to stockholders, or the last day on which the consent or dissent of stockholders may be effectively expressed for any purpose, as the record date for determining the stockholders having the right to notice of and to vote at such meeting, and any adjournment thereof, or the right to receive such dividend or distribution or the right to give such consent or dissent. In such case only stockholders of record on such record date shall have such right, notwithstanding any transfer of stock on the books of the Corporation after the record date. Without fixing such record date the Board of Directors may for any of such purposes close the transfer books for all or any part of such period. If no record date is fixed and the transfer books are not closed, (a) the record date for determining stockholders having the right to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, and (b) the record date for determining stockholders for any other purpose shall be at the close of business on the day on which the Board of Directors acts with respect thereto. 5. Replacement of Certificates. In case of the alleged loss, --------------------------- destruction or mutilation of a certificate of stock, a duplicate certificate may be issued in place thereof, upon such terms as the Board of Directors may prescribe. 6. Issuance of Capital Stock. The Board of Directors shall have the ------------------------- authority to issue or reserve for issue from time to time the whole or any part of the capital stock of the Corporation which may be authorized from time to time, to such persons or organizations, for such consideration, whether cash, property, services or expenses, and on such terms as the Board of Directors may determine, including without limitation the granting of options, warrants, or conversion or other rights to subscribe to said capital stock. The Board of Directors may delegate some or all of its authority under this Section 6 to one or more committees of Directors. 14 ARTICLE V --------- Indemnification --------------- 1. Actions, Suits and Proceedings. The Corporation shall indemnify ------------------------------ each person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, by reason of the fact that he is or was, or has agreed to become, a Director or officer of the Corporation, or is or was serving, or has agreed to serve, at the request of the Corporation, as a Director or officer of, or in a similar capacity with, another organization or in any capacity with respect to any employee benefit plan of the Corporation or any subsidiary of the Corporation (all such persons being referred to hereafter as an "Indemnitee"), or by reason of any action alleged to have been taken or omitted to be taken in such capacity, against all expenses (including reasonable attorneys' fees), judgments and fines incurred by him or on his behalf in connection with such action, suit, proceeding or investigation, and any appeal therefrom, unless the Indemnitee shall be finally adjudicated in such action, suit, proceeding or investigation, not to have acted in good faith in the reasonable belief that his action was in the best interests of the Corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. Notwithstanding anything to the contrary in this Article V, except as set forth in Section 7 of this Article V, the Corporation shall not indemnify an Indemnitee seeking indemnification in connection with an action, suit, proceeding or investigation (or part thereof) initiated by the Indemnitee unless the initiation thereof was approved by the Board of Directors of the Corporation. 2. Employees and Agents. The Corporation may, at the discretion of -------------------- the Board of Directors, indemnify employees and agents of the Corporation as if they were included in Section 1 of this Article V. 3. Settlements. The right to indemnification conferred in this ----------- Article V shall include the right to be paid by the Corporation for amounts paid in settlement of any such action, suit, proceeding or investigation and any appeal therefrom, and all expenses (including reasonable attorneys' fees) incurred in connection with such settlement, pursuant to a consent decree or otherwise, unless and to the extent it is determined pursuant to Section 6 of this Article V that the Indemnitee did not act in good faith in the reasonable belief that his or her action was in the best interests of the Corporation or, to the extent such matter relates to service with respect to an employee benefit plan, in the best interests of the participants or beneficiaries of such employee benefit plan. 4. Notification and Defense of Claim. As a condition precedent to --------------------------------- his or her right to be indemnified, the Indemnitee must notify the Corporation in writing as soon as practicable of any action, suit, proceeding or investigation involving such Indemnitee or with respect to which indemnity will or could be sought. With respect to any action, suit, proceeding or 15 investigation of which the Corporation is so notified, the Corporation will be entitled to participate therein at its own expense and/or to assume the defense thereof at its own expense, with legal counsel reasonably acceptable to the Indemnitee. After notice from the Corporation to the Indemnitee of its election so to assume such defense, the Corporation shall not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with such claim, other than as provided below in this Section 4 of this Article V. The Indemnitee shall have the right to employ his of her own counsel in connection with such claim, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnitee unless (i) the employment of counsel by the Indemnitee has been authorized by the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded that there may be a conflict of interest or position on any significant issue between the Corporation and the Indemnitee in the conduct of the defense of such action or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel for the Indemnitee shall be at the expense of the Corporation, except as otherwise expressly provided by this Article V. The Corporation shall not be entitled, without the consent of the Indemnitee, to assume the defense of any claim brought by or in the right of the Corporation or as to which counsel for the Indemnitee shall have reasonably made the conclusion provided for in clause (ii) above. 5. Advance of Expenses. Subject to the provisions of Section 6 of ------------------- this Article V, in the event that the Corporation does not assume the defense, or unless and until the Corporation assumes the defense, pursuant to Section 4 of this Article V of any action, suit, proceeding or investigation of which the Corporation receives notice under this Article V, any expenses (including reasonable attorneys' fees) incurred by an Indemnitee in defending a civil or criminal action, suit, proceeding or investigation or any appeal therefrom shall be paid by the Corporation in advance of the final disposition of such matter, provided, however, that the payment of such expenses incurred by an Indemnitee in advance of the final disposition of such matter shall be made only upon receipt of an undertaking by or on behalf of the Indemnitee to repay all amounts so advanced in the event that it shall ultimately be determined that the Indemnitee is not entitled to be indemnified by the Corporation as authorized in this Article V. Such undertaking may be accepted without reference to the financial ability of the Indemnitee to make such repayment. 6. Procedure for Indemnification. In order to obtain ----------------------------- indemnification or advancement of expenses pursuant to Sections 1, 3 or 5 of this Article V, the Indemnitee shall submit to the Corporation a written request, including in such request such documentation and information as is reasonably available to the Indemnitee and is reasonably necessary to determine whether and to what extent the Indemnitee is entitled to indemnification or advancement of expenses. Any such indemnification pursuant to Section 1 of this Article V shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless a court of competent jurisdiction finally adjudicates that the Indemnitee did not meet the applicable standard of conduct set forth in Section 1 of this 16 Article V. Any such indemnification pursuant to Section 3 of this Article V or advancement of expenses pursuant to Section 5 of this Article V shall be made promptly, and in any event within 60 days after receipt by the Corporation of the written request of the Indemnitee, unless the Corporation determines, by clear and convincing evidence, within such 60-day period that the Indemnitee did not meet the applicable standard of conduct set forth in Sections 1 or 3 of this Article V, as the case may be. Such determination by the Corporation shall be made in each instance by (a) a majority vote of a quorum of the Directors of the Corporation, (b) a majority vote of a quorum of the outstanding shares of stock of all classes entitled to vote for Directors, voting as a single class, which quorum shall consist of stockholders who are not at that time parties to the action, suit, proceeding or investigation in question, or (c) independent legal counsel (who may be regular legal counsel to the Corporation). 7. Remedies. The right to indemnification or advances as granted by -------- this Article V shall be enforceable by the Indemnitee in any court of competent jurisdiction if the Corporation denies such request, in whole or in part, or if no disposition thereof is made within the 60-day period referred to above in Section 6 of this Article V. Unless otherwise provided by law, the Corporation shall have the burden of proving that the Indemnitee is not entitled to indemnification or advancement of expenses under this Article V. Neither the failure of the Corporation to have made a determination prior to the commencement of any such action by the Indemnitee that indemnification is proper in the circumstances because the Indemnitee has met the applicable standard of conduct, nor an actual determination by the Corporation pursuant to Section 6 of this Article V that the Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in connection with successfully establishing his right to indemnification, in whole or in part, in any such proceeding shall also be indemnified by the Corporation. 8. Subsequent Amendment. No amendment, termination or repeal of -------------------- this Article V or of the relevant provisions of Chapter 156B of the Massachusetts General Laws or any other applicable laws shall affect or diminish in any way the rights of any Indemnitee to indemnification under the provisions hereof with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of such amendment, termination or repeal. 9. Other Rights. The indemnification and advancement of expenses ------------ provided by this Article V shall not be deemed exclusive of any other rights to which an Indemnitee seeking indemnification or advancement of expenses may be entitled under any law (common or statutory), agreement or vote of stockholders or Directors or otherwise, both as to action in his or her official capacity and as to action in any other capacity while holding office for the Corporation, and shall continue as to an Indemnitee who has ceased to be a Director or officer, and shall inure to the benefit of the estate, heirs, executors, personal representatives and administrators of the Indemnitee. Nothing contained in this Article V shall be deemed to prohibit, and the Corporation is specifically authorized to enter into, agreements with officers 17 and Directors providing indemnification rights and procedures different from those set forth in this Article V. In addition, the Corporation may, to the extent authorized from time to time by its Board of Directors pursuant to Section 2 of this Article V or otherwise, grant indemnification rights to other employees or agents of the Corporation or other persons serving the Corporation and such rights may be equivalent to, or greater or less than, those set forth in this Article V. 10. Partial Indemnification. If an Indemnitee is entitled under any ----------------------- provision of this Article V to indemnification by the Corporation for some or a portion of the expenses (including attorneys' fees), judgments, fines or amounts paid in settlement actually and reasonably incurred by such Indemnitee or on such Indemnitee's behalf in connection with any action, suit, proceeding or investigation and any appeal therefrom but not, however, for the total amount thereof, the Corporation shall nevertheless indemnify the Indemnitee for the portion of such expenses (including reasonable attorneys' fees), judgments, fines or amounts paid in settlement to which such Indemnitee is entitled. 11. Insurance. The Corporation may purchase and maintain insurance, --------- at its expense, to protect itself and any Director, officer, employee or agent of the Corporation, any subsidiary, another organization or employee benefit plan against any expense, liability or loss incurred by him of her in any such capacity, or arising out of his of her status as such, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under Chapter 156B of the Massachusetts General Laws. 12. Merger or Consolidation. If the Corporation is merged into or ----------------------- consolidated with another corporation and the Corporation is not the surviving corporation, the surviving Corporation shall assume the obligations of the Corporation under this Article V with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring at or prior to the date of such merger or consolidation. 13. Savings Clause. If this Article V or any portion hereof shall be -------------- invalidated on any ground by any court of competent jurisdiction, then the Corporation shall nevertheless indemnify each Indemnitee as to any expenses (including reasonable attorneys' fees), judgments, fines and amounts paid in settlement in connection with any action, suit, proceeding or investigation, whether civil, criminal or administrative, including an action by or in the right of the Corporation, to the fullest extent permitted by any applicable portion of this Article V that shall not have been invalidated and to the fullest extent permitted by applicable law. 14. Subsequent Legislation. If the Massachusetts General Laws are ---------------------- amended after adoption of this Article V to expand further the indemnification permitted to Indemnities, then the Corporation shall indemnify such persons to the fullest extent permitted by the Massachusetts General Laws, as so amended. 18 ARTICLE VI ---------- Miscellaneous Provisions ------------------------ 1. Fiscal Year. Except as otherwise determined by the Board of ----------- Directors, the fiscal year of the Corporation shall be the twelve months ending on the Saturday nearest January 31 of each year. 2. Seal. The Board of Directors shall have power to adopt and ---- alter the seal of the Corporation. 3. Execution of Instruments. All deeds, leases, transfers, ------------------------ contracts, bonds, notes and other obligations to be entered into by the Corporation in the ordinary course of its business without Director action, may be executed on behalf of the Corporation by the Chairman of the Board, the President, any Vice President or the Treasurer except as the Board of Directors may generally or in particular cases otherwise determine. 4. Voting of Securities. Unless otherwise provided by the Board of -------------------- Directors, the President or Treasurer may waive notice of and act on behalf of this Corporation, or appoint another person or persons to act as proxy or attorney in fact for this Corporation with or without discretionary power and/or power of substitution, at any meeting of stockholders or shareholders of any other corporation or organization, any of whose securities are held by this Corporation. 5. Resident Agent. The Board of Directors may appoint a resident -------------- agent upon whom legal process may be served in any action or proceeding against the Corporation. Said resident agent shall be either an individual who is a resident of and has a business address in Massachusetts, a corporation organized under the laws of Massachusetts, or a corporation organized under the laws of any other state of the United States, which has qualified to do business in, and has an office in, Massachusetts. 6. Corporate Records. The original, or attested copies, of the ----------------- Articles of Organization, By-laws and records of all meetings of the incorporators and stockholders, and the stock and transfer records, which shall contain the names of all stockholders and the record address and the amount of stock held by each, shall be kept in Massachusetts at the principal office of the Corporation, or at an office of its transfer agent, Clerk or resident agent, and shall be open at all reasonable times to the inspection of any stockholder for any proper purpose, but not to secure a list of stockholders for the purpose of selling said list or copies thereof or of using the same for a purpose other than in the interest of the applicant, as a stockholder, relative to the affairs of the Corporation. 19 7. Articles of Organization. All references in these By-laws to the ------------------------ Articles of Organization shall be deemed to refer to the Amended and Restated Articles of Organization of the Corporation, as amended and in effect from time to time. 8. Amendment --------- (a) Amendment by Directors. Except with respect to any provisions of ---------------------- these By-laws which by law, the Articles of Organization or these By-laws require action by the stockholders, these By-Laws may be amended or repealed by the affirmative vote of a majority of the Directors then in office. Not later than the time of giving notice of the annual meeting of stockholders next following the amending or repealing by the Directors of any By-law, notice thereof stating the substance of such change shall be given to all stockholders entitled to vote on amending the By-laws. (b) Amendment by Stockholders. These By-laws may be amended or ------------------------- repealed at any annual meeting of stockholders, or special meeting of stockholders called for such purpose, by the affirmative vote of at least two-thirds of the total votes eligible to be cast on such amendment or repeal by holders of voting stock, voting together as a single class; provided, however, that if the Board of Directors recommends that stockholders approve such amendment or repeal at such meeting of stockholders, such amendment or repeal shall only require the affirmative vote of a majority of the total votes eligible to be cast on such amendment or repeal by holders of voting stock, voting together as a single class. Notwithstanding the foregoing, no shareholder approval shall be required unless mandated by the Articles of Organization, these By-laws, or other applicable law. 20 EX-4.1 15 SPECIMEN OF BRADLEES, INC. EXHIBIT 4.1 BRADLEES NUMBER SHARES BRADLEES, INC. INCORPORATED UNDER THE LAWS OF THE COMMONWEALTH OF MASSACHUSETTS THIS CERTIFICATE IS TRANSFERABLE SEE REVERSE FOR IN BOSTON, MA OR NEW YORK, NY CERTAIN DEFINITIONS AND TRANSFER RESTRICTIONS COMMON STOCK - -------------------------------------------------------------------------------- THIS IS TO CERTIFY THAT CUSIP 104449 20 7 IS THE OWNER OF - -------------------------------------------------------------------------------- FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK, PAR VALUE $.01 PER SHARE, OF BRADLEES, INC. (hereinafter called the "Corporation") transferable on the books of the Corporation by the holder of record hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed or assigned. This Certificate and the shares represented hereby are issued and held subject to the laws of the Commonwealth of Massachusetts and the Amended and Restated Articles of Organization and Amended and Restated Bylaws of the Corporation, each as from time to time amended (copies of which are on file with the Corporation), to all of which the holder, by acceptance hereof, assents. This Certificate is not valid until countersigned by the Transfer Agent and registered by the Registrar. IN WITNESS WHEREOF, Bradlees, Inc. has caused this Certificate to be executed by the facsimile signatures of its duly authorized officers and sealed with the facsimile seal of the Corporation. Dated /s/ Paul R. McKelvey /s/ Peter Thorner __________________________ --------------------------- TREASURER CHAIRMAN OF THE BOARD COUNTERSIGNED AND REGISTERED: BankBoston, N.A. TRANSFER AGENT AND REGISTRAR BY AUTHORIZED SIGNATURE [SEAL OF BRADLEES, INC. APPEARS HERE] BRADLEES, INC. The Corporation has more than one class of stock authorized to be issued. The Corporation will furnish without charge to each stockholder upon written request a copy of the full text of the preferences, voting powers, qualifications and special and relative rights of the shares of each class of stock (and any series thereof) authorized to be issued by the Corporation as set forth in the Amended and Restated Articles of Organization and amendments thereto filed with the Secretary of State of the Commonwealth of Massachusetts. The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as through they were written out in full according to applicable laws or regulations: TEN COM -- as tenants in common TEN ENT -- as tenants by the entireties UNIF GIFT MIN ACT--....... Custodian............... JT TEN -- as joint tenants with right - (Cust) (Minor) or survivorship and not as under Uniform Gifts to Minors tenants in common Act.......................................... (State)
Additional abbreviations may also be used through not in the above list. For Value Received, ____________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - --------------------------------------- - --------------------------------------- ________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ________________________________________________________________________________ ________________________________________________________________________________ __________________________________________________________________________Shares of the common shares represented by the within Certificate, and do hereby irrevocably constitute and appoint ________________________________________________________________________Attorney to transfer the said shares on the books of the within named Corporation with full power or substitution in the premises. Dated___________________ ______________________________________________________________________ NOTICE: THE SIGNATURE TO THE ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. Signature(s) Guaranteed: __________________________________________________ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO SEC RULE 17Ad-15. EX-5.1 16 OPINION OF GOODWIN, PROCTOR & HOAR LLP Exhibit 5.1 [LETTERHEAD OF GOODWIN, PROCTER & HOAR LLP] January 27, 1999 Bradlees, Inc. and Bradlees Stores, Inc. One Bradlees Circle Braintree, MA 02184 Re: Registration Statement on Form S-1 Ladies and Gentlemen: This opinion is delivered in our capacity as corporate counsel to Bradlees, Inc. ("Bradlees") and Bradlees Stores, Inc. ("Bradlees Stores" and together with Bradlees, the "Companies") in connection with the preparation and filing with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Act") of a Registration Statement on Form S-1 (the "Registration Statement") relating to 7,267,424 shares of Common Stock, par value $.01 per share (the "Shares"), of Bradlees and $36,000,000 aggregate principal amount of 9% Convertible Notes (the "Notes") of Bradlees Stores to be offered from time to time by certain selling securityholders pursuant to Rule 415 promulgated under the Act. The securities are being issued by each of the Companies pursuant to the Companies' plan of reorganization under Chapter 11 of the United States Bankruptcy Code, as described in the Registration Statement (the "Plan of Reorganization"). As counsel for the Companies, we have examined the Companies' Plan of Reorganization, the Articles of Organization and By-laws of each of the Companies, each as presently in effect, the indenture under which the Notes will be issued, as described in the Registration Statement (the "Indenture") and such records, certificates and other documents of each of the Companies as we have deemed necessary or appropriate for the purposes of this opinion. We are attorneys admitted to practice in the Commonwealth of Massachusetts. We express no opinion concerning the laws of any jurisdiction other than the laws of the United States of America and the Commonwealth of Massachusetts. Based on the foregoing, we are of the opinion that: 1. The Shares have been duly authorized by all necessary corporate action on the part of Bradlees and upon issuance of the Shares pursuant to and in accordance with the Plan of Reorganization, will be legally issued, fully paid and non-assessable by Bradlees under the Massachusetts Business Corporation Law; and 2. The Notes have been duly authorized by all necessary corporate action on the part of Bradlees Stores and, upon issuance of the Notes pursuant to and in accordance with the Plan of Reorganization and the Indenture, will constitute valid and binding obligations of Bradlees Stores, enforceable in accordance with their terms, except as limited by (i) applicable bankruptcy, insolvency, reorganization, moratorium and similar laws now or hereafter in effect regarding creditors' rights generally and (ii) principles of equity (regardless of whether enforceability is considered in a proceeding at law or in equity). In rendering the opinions set forth above, we express no opinion as to the adequacy or sufficiency of the consideration received or to be received in connection with the Plan of Reorganization. We hereby consent to being named as counsel to the Company in the Registration Statement, to the references therein to our firm under the caption "Legal Matters," and to the inclusion of this opinion as an exhibit to the Registration Statement. Very truly yours, GOODWIN, PROCTER & HOAR LLP EX-10.1 17 REGISTRATION RIGHTS AGREEMENT Exhibit 10.1 REGISTRATION RIGHTS AGREEMENT ----------------------------- This Registration Rights Agreement (this "Agreement") is entered into as of January __, 1999 by and between Bradlees, Inc., a Massachusetts corporation ("BI"), Bradlees Stores, Inc., a Massachusetts corporation ("BSI" and, collectively with BI, the "Companies") and each of the parties executing a signature page hereto (each a "Holder" and collectively the "Holders"). WHEREAS, the Holders are to receive a number of shares of common stock, $.01 par value (together with any additional shares of Common Stock that may be issued upon the conversion of the Notes (as defined below), the "Common Stock") of BI and certain 9% Convertible Notes, due 2004, of BSI (the "Notes"), issued in connection with the Plan of Reorganization of BI and BSI on the date prescribed therein (the "Effective Date") without registration under the Securities Act of 1933, as amended (the "Securities Act"), pursuant to the exemption under Section 1145 of the Bankruptcy Code from the registration requirements of Section 5 of the Securities Act. WHEREAS, the Holders may, as a result of the amount of Common Stock and/or Notes they hold, be restricted under applicable securities laws in their ability to freely transfer or resell the shares of Common Stock or Notes held by them absent the registration of such transfer or resale of such securities under the Securities Act. NOW, THEREFORE, in consideration of the mutual promises and agreements set forth herein, and other valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto hereby agree as follows: 1. Registration of Securities. -------------------------- (a) Filing of Registration Statement. As of or prior to the Effective -------------------------------- Date, the Companies shall cause to be filed a registration statement (the "Registration Statement") under Rule 415 promulgated under the Securities Act relating to the sale by such Holders of their shares of Common Stock and their Notes (the "Registered Securities") in accordance with the terms hereof. Thereupon, the Companies shall use their best efforts to cause such Registration Statement to be filed and declared effective by the Securities and Exchange Commission (the "SEC") for all Registered Securities as soon as practicable thereafter, but in any event prior to the Effective Date. The Companies agree, subject to the provisions of Sections 2, 5, 6 and 7 hereof, to use reasonable efforts to maintain the continuous effectiveness of the Registration Statement, and to update and correct the information contained in the Registration Statement, until the date on which no Holder holds 10% or more of the BI's outstanding Common Stock, provided that if one or more Holders hold less than 10% of BI's outstanding Common Stock but greater than 5% of BI's outstanding Common Stock, such Holder or Holders may request that the Companies continue to attempt to maintain the effectiveness of the Registration Statement at the expense of such Holder or Holders as provided in Section 3. (b) Conditions to Companies' Obligations. The Companies shall have no ------------------------------------ obligation to a Holder under Section 1(a) unless such Holder provides to the Companies all of the information regarding the Holders and their affiliates required to be included in the Registration Statement for it to be complete. 2. Registration Procedures. ----------------------- (a) The Companies shall notify each Holder of the effectiveness of the Registration Statement and shall furnish to each such Holder such number of copies of the Registration Statement (including any amendments, supplements and exhibits), the prospectus contained therein, any documents incorporated by reference in the Registration Statement and such other documents as such Holder may reasonably request in order to facilitate its sale of the Registered Securities in the manner described in the Registration Statement. (b) The Companies shall prepare and file with the SEC from time to time such amendments and supplements to the Registration Statement and prospectus used in connection therewith as may be necessary to keep the Registration Statement effective and to comply with the provisions of the Securities Act with respect to the disposition of all the Registered Securities until the date on which the Registration Statement ceases to be effective in accordance with the terms of Section 1. The Companies shall promptly respond to all comments from the SEC regarding the Registration Statement and any amendments and/or supplements thereto. Upon twenty (20) business days' written notice from any Holder, the Companies shall file any supplement or post- effective amendment to the Registration Statement with respect to such Holder's interests in or plan of distribution of Registered Securities that is reasonably necessary to permit the sale of the Holder's Registered Securities pursuant to the Registration Statement. For so long as the Companies are obligated to maintain the effectiveness of the Registration Statement with respect to Registered Securities owned by any Holder under this Agreement, such Holder shall be afforded a reasonable opportunity to review the Registration Statement and any amendments and/or supplements thereto prior to filing. (c) The Companies shall notify each Holder of any request by the SEC for amendments or supplements to the Registration Statement or the prospectus related thereto or for additional information. In addition, the Companies shall notify each such Holder of the filing of the Registration Statement, any prospectus supplement related thereto or any post-effective amendment to the Registration Statement and the effectiveness of any post-effective amendment. (d) For so long as the Registration Statement remains effective, the Companies shall promptly notify each Holder of the happening of any event as a result of which the prospectus included in the Registration Statement, as then in effect, includes an untrue statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which 2 they were made, not misleading. In such event and subject to Sections 2(b), 6 and 7 of this Agreement, the Companies shall prepare and furnish to each such Holder a reasonable number of copies of a supplement to or an amendment of such prospectus as may be necessary so that, as thereafter delivered to the purchasers of Registered Securities, such prospectus shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they are made, not misleading. (e) Subject to the conditions set forth in this Agreement, the Companies shall, upon the reasonable request of any Holder, file such documents as may be necessary to register or qualify the Registered Securities under the state securities or "Blue Sky" laws of such states as any Holder requesting registration may reasonably request, and the Companies shall use reasonable efforts to cause such filings to become qualified; provided, however, that -------- ------- neither of the Companies shall be obligated to qualify as a foreign corporation to do business under the laws of any such state in which it is not then qualified or to file any general consent to service of process in any such state. Once qualified, the Companies shall use reasonable efforts to keep such filings qualified until the earlier of (a) such time as all of the Registered Securities have been disposed of in accordance with the intended methods of disposition by the Holder as set forth in the Registration Statement, (b) in the case of a particular state, a Holder has notified the Companies that it no longer requires qualified filing in such state in accordance with its original request for filing or (c) the date on which the Registration Statement ceases to be effective with the SEC. The Companies shall promptly notify each Holder requesting registration of, and confirm in writing, the receipt by the Companies of any notification with respect to the suspension of the qualification of the Registered Shares for sale under the securities or "Blue Sky" laws of any jurisdiction or the initiation or threat of any proceeding for such purpose, and shall use its reasonable efforts to cause the termination of any such suspension or proceeding. (f) BI will use its best efforts to cause the listing of the Common Stock on the NASDAQ National Market System ("NASDAQ") and prepare any related filings necessary to maintain such listing. 3. Expenses. -------- (a) Subject to the provisions of Section 3(b), the Companies shall bear all expenses incurred in connection with the registration of the Registered Securities until such time as no Holder holds 10% or more of the outstanding Common Stock of BI. Such expenses shall include, without limitation, all printing, legal and accounting expenses incurred by the Companies and all registration and filing fees imposed by the SEC or the principal national securities exchange or national market system on which the Registered Securities are then traded or quoted (the "Registration Expenses"). The Holders shall be responsible for any brokerage or underwriting commissions and taxes of any kind (including, without limitation, transfer taxes) with respect to any disposition, sale or transfer of Registered Securities and for 3 any legal, accounting and other expenses incurred by them in connection with the Registration Statement. (b) After such time as no Holder holds 10% or more of the outstanding Common Stock of BI, in the event that one or more Holders hold less than 10% of the BI's outstanding Common Stock but greater than 5% of the BI's outstanding Common Stock, such Holder or Holders may request that the Companies continue to maintain the effectiveness of the Registration Statement, provided that such Holder or Holders bear all of the Registration Expenses associated with such maintenance of the effectiveness of the Registration Statement. (c) For the purposes of Section 1(a) and this Section 3, Holders that would constitute a group for the purposes of Section 13(d) of the Securities Exchange Act of l934, as amended, shall be aggregated to determine whether the 5% or 10% ownership levels referred therein are met. 4. Indemnification by the Companies. Each of the Companies jointly and -------------------------------- severally agrees to indemnify each of the Holders and their respective officers, directors, employees, agents, representatives, partners and affiliates, and each person or entity, if any, that controls a Holder within the meaning of the Securities Act, and each other person or entity, if any, subject to liability because of his, her or its connection with a Holder, and any underwriter and any person who controls the underwriter within the meaning of the Securities Act (an "Indemnitee") against any and all losses, claims, damages, actions, liabilities, costs and expenses (including without limitation reasonable attorneys' fees, expenses and disbursements documented in writing), joint or several, arising out of or based upon any untrue or alleged untrue statement of material fact contained in the Registration Statement or any prospectus contained therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, except insofar as and to the extent that such statement or omission arose out of or was based upon information regarding the Indemnitee or its plan of distribution which was furnished to the Companies in writing by the Indemnitee for use therein, provided, further that the Companies shall not be liable to any person who participates as an underwriter in the offering or sale of Registered Securities or any other person, if any, who controls such underwriter within the meaning of the Securities Act, in any such case to the extent that any such loss, claim, damage, liability (or action or proceeding in respect thereof) or expense arises out of or is based upon (i) an untrue statement or alleged untrue statement or omission or alleged omission made in such Registration Statement, final prospectus, amendment or supplement in reliance upon and in conformity with information furnished to the Companies for use in connection with the Registration Statement or the prospectus contained therein by such Indemnitee or (ii) such Indemnitee's failure to send or give a copy of the prospectus, amendment or supplement furnished to it by the Companies at or prior to the time such action is required by the Securities Act to the person claiming an untrue statement or alleged untrue statement or omission or alleged omission if such statement or omission was corrected in such prospectus, amendment or supplement. The obligations of the Companies under this Section 4 shall survive the completion of any offering of Registered 4 Securities pursuant to the Registration Statement and shall survive the termination of this Agreement. 5. Covenants of Holders. Each of the Holders hereby severally and not -------------------- jointly agrees (a) to cooperate with the Companies and to furnish to the Companies all such information in connection with the preparation of the Registration Statement as the Companies may reasonably request, (b) to the extent required by the Securities Act, to deliver or cause delivery of the prospectus contained in the Registration Statement to any purchaser of the securities covered by the Registration Statement from the Holder, (c) to promptly notify the Companies of any sale of Registered Securities by such Holder that results in such Holder holding less than either 10% or 5% of BI's outstanding Common Stock and upon any change in the information regarding such Holder in the Registration Statement that would require amendment of the Registration Statement and (d) to indemnify the Companies, their respective officers, directors, employees, agents, representatives and affiliates, and each person, if any, who controls either of the Companies within the meaning of the Securities Act, and each other person, if any, subject to liability because of his connection with the Companies, against any and all losses, claims, damages, actions, liabilities, costs and expenses arising out of or based upon (i) any untrue statement or alleged untrue statement of material fact contained in either the Registration Statement or the prospectus contained therein, or any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading, if and to the extent that such statement or omission was based upon information regarding the Holder or its plan of distribution which was furnished to the Companies in writing by the Holder for use therein, or (ii) the failure by the Holder to deliver or cause to be delivered the prospectus contained in the Registration Statement (as amended or supplemented, if applicable) furnished by the Companies to the Holder to any purchaser of the Securities covered by the Registration Statement from the Holder. Notwithstanding the foregoing, the total amount for which a Holder shall be liable under this Section 5 shall not in any event exceed the aggregate proceeds received by him or it from the sale of the Holder's Registered Securities in such registration. The obligations of the Holders under this Section 5 shall survive the completion of any offering of Registered Securities pursuant to the Registration Statement and shall survive the termination of this Agreement. 6. Suspension of Registration Requirement. -------------------------------------- (a) The Companies shall promptly notify each Holder requesting registration of, and confirm in writing, the issuance by the SEC of any stop order suspending the effectiveness of the Registration Statement or the threat of or initiation of any proceedings for that purpose. The Companies shall use their reasonable efforts to prevent the issuance of or to obtain the withdrawal of any SEC order suspending the effectiveness of the Registration Statement the earliest possible time. (b) Notwithstanding anything to the contrary set forth in this Agreement, the Companies' obligation under this Agreement to use reasonable efforts to amend or supplement 5 the Registration Statement shall be suspended in the event of the occurrence of an event that would require additional disclosure of material information by the Companies in the Registration Statement and the Board of Directors of the Companies in good faith determine that the disclosure relating to such event or pending transaction would have a material adverse effect upon the Companies (such circumstances being hereinafter referred to as a "Suspension Event"), but such suspension shall continue only for so long as such event or pending transaction is continuing and the Companies shall use reasonable efforts to cause any such suspension to terminate at the earliest possible date. In any event, the Companies agree not to exercise the rights set forth in this Section 7(b) more than three times in any twelve month period, one period which shall not exceed forty-five (45) days, one period which shall not exceed twenty-five (25) days, and one period which shall not exceed fifteen (15) days. (c) Each holder of Registered Securities agrees if requested by the managing underwriter or underwriters in a fixed price, firm commitment underwritten offering by either of the Companies of any of its securities (an "Offering"), not to effect any public sale or distribution of any of the Registered Securities, during the 5-day period prior to, and during the 10-day period (or such longer period as may be required by the managing underwriter or underwriters) beginning on, the date of pricing of each Offering, to the extent timely notified in writing by the Companies or the managing underwriters. Furthermore, notwithstanding anything to the contrary set forth in this Agreement, the Companies' obligation under this Agreement to amend or supplement the Registration Statement shall be suspended in the event and during such period as BI or BSI are proceeding with an Offering if the Companies are advised by the underwriters that the sale of Registered Securities under the Registration Statement would have a material adverse effect on the Offering. 7. Black-Out Period. Following the effectiveness of the Registration ---------------- Statement, the Holders agree that they will not effect any sales of the Registered Securities pursuant to the Registration Statement at any time after they have received notice from the Companies to suspend sales (i) as a result of the occurrence or existence of any Suspension Event, (ii) pursuant to Section 6(c) hereof as a result of any Offering, or (iii) so that the Companies may correct or update the Registration Statement or such filing pursuant to Section 2(c) or 2(d) of this Agreement. The Holder may recommence effecting sales of the Registered Securities pursuant to the Registration Statement following further notice to such effect from the Companies as soon as practicable after the conclusion of any such Suspension Event or Offering. 8. Remedies. -------- (a) In the event that the Registration Statement has not been declared effective prior to the Effective Date, then the Company shall pay in cash to each Holder, on the request of such Holder, a default payment equal to one percent (1%) for the first 30-day period or portion thereof and two percent (2%) for each subsequent 30-day period or portion thereof, beginning on the 1st day after the Effective Date, of (a) the Outstanding Principal Amount of the Notes held by such Holder (the "Note Amount"); and (b) the Fair Market Value 6 of the shares of Common Stock held by such Holder. The "Fair Market Value" shall be (i) the average of the closing or last sale price of the Common Stock on NASDAQ reported for the five immediately prior business days, or (ii) if the Common Stock is not then traded on NASDAQ but is traded on the over-the-counter market or other similar market, then the average of the closing bid and asked prices on such market reported for the five immediately prior business days, or (iii) if the Common Stock is not traded on either the NASDAQ or an over-the- counter market, the price determined in good faith by the Company's Board of Directors. (b) In the event that, as a result of the willful breach or gross negligence of the Company, the Company fails or refuses to cause the Registered Securities covered by the Registration Statement to be listed on NASDAQ at all times during the period ("Listing Period") from the Effective Date until the date the Registration Statement is no longer required to be effective with respect to such Holder's Registered Securities pursuant to Section 1(a) or 1(b) hereunder, then the Company shall pay in cash to each Holder, at the request of such Holder, a default payment at a rate equal to 1% for the first 30-day period (or portion thereof), and equal to 2% for each 30-day period (or portion thereof) thereafter during the Listing Period from and after such failure or refusal to so list the Registered Securities until the Registered Securities are so listed, of (a) as to the Notes held by such Holder, the Note Amount and of (b) as to the shares of Common Stock held by such Holder, the Fair Market Value of such shares. (c) In the event that, as a result of the willful breach or gross negligence of the Company, any Holder's ability to sell Registered Securities under the Registration Statement is suspended more than three times in any twelve month period, one period which shall not exceed forty-five (45) days, one period which shall not exceed twenty-five (25) days, and one period which shall not exceed fifteen (15) days (any such period, a "Suspension Grace Period"), including without limitation by reason of a suspension of trading of the Common Stock on NASDAQ, any suspension or stop order with respect to the Registration Statement or the fact that an event has occurred as a result of which the prospectus (including any supplements thereto) included in such Registration Statement then in effect includes an untrue statement of material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein no misleading in light of the circumstances then existing, or is undeliverable for any other reason, then, commencing with the expiration of the Suspension Grace Period, the Company shall pay in cash to each Holder a default payment at a rate equal to one percent (1%) for the first 30-day period or portion thereof and two percent (2%) for each subsequent 30-day period or portion thereof, of the Note Amount for the Notes held by such Holder and of the Fair Market Value of the shares of Common Stock held by such Holder. (d) In the event that, as a result of the willful breach or gross negligence of the Company, the Company does not have a sufficient number of shares of Common Stock available to satisfy the Company's obligations to any Holder upon receipt of a [Conversion Notice] (as defined in the Note) or is otherwise unable or unwilling to issue such shares of 7 Common Stock (each, a "Conversion Deficiency") in accordance with the terms of the Note for any reason after receipt of a [Conversion Notice], then the Company shall pay in cash to each Holder a default payment at a rate equal to one percent (1%) for the first 30-day period or portion thereof and two percent (2%) for each subsequent 30-day period or portion thereof, of the Note Amount for the Notes held by such Holder, commencing on the date that the Company fails or refuses to issue the shares of Common Stock in accordance with the Note. (e) Notwithstanding the foregoing, in no event shall the Companies be required to make any default payments under this Section 8 in excess of Two Hundred Thousand Dollars ($200,000) in the aggregate. (f) The Company acknowledges that any failure, refusal or inability by the Company to perform the obligations described in the foregoing paragraphs (i) through (iv) as a result of the willful breach or gross negligence of the Company will cause the Holders to suffer damages in an amount that will be difficult to ascertain, including without limitation damages resulting from the loss of liquidity in the Registered Securities and the additional investment risk in holding the Registered Securities. Accordingly, the parties agree, after consulting with counsel, that it is appropriate to include in this Agreement the foregoing provisions for default adjustments in order to compensate the Holders for such damages. The parties acknowledge and agree that the default adjustments set forth above represent the parties' good faith effort to quantify such damages and, as such, agree that the form and amount of such default adjustments are reasonable and will not constitute a penalty. 9. Contribution. If the indemnification provided for in Sections 4 and 5 ------------ is unavailable to an indemnified party with respect to any losses, claims, damages, actions, liabilities, costs or expenses referred to therein or is insufficient to hold the indemnified party harmless as contemplated therein, then the indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, actions, liabilities, costs or expenses in such proportion as is appropriate to reflect the relative fault of the Companies, on the one hand, and the Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, actions, liabilities, costs or expenses as well as any other relevant equitable considerations. The relative fault of the Companies, on the one hand, and of the Holder, on the other hand, shall be determined by reference to, among other factors, whether the untrue or alleged untrue statement of a material fact or omission to state a material fact relates to information supplied by the Companies or by the Holder and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission; provided, however, that in no event shall the obligation of any indemnifying - -------- ------- party to contribute under this Section 9 exceed the amount that such indemnifying party would have been obligated to pay by way of indemnification if the indemnification provided for under Sections 4 or 5 hereof had been available under the circumstances. The Companies and the Holders agree that it would not be just and equitable if contribution pursuant to this Section 9 were determined by pro rata allocation or by any other 8 method of allocation that does not take account of the equitable considerations referred to in the immediately preceding paragraph. No indemnified party guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any indemnifying party who was not guilty of such fraudulent misrepresentation. The obligation of the parties under this Section 9 shall survive the completion of any offering of Registered Securities pursuant to the Registration Statement and the termination of this Agreement. 10. Certificates. All certificates evidencing shares of Common Stock ------------ issued to the Holders shall be delivered free of any legends or stop transfer restrictions unless required by Massachusetts law or the federal securities laws. 11. Amendments and Waivers. The provisions of this Agreement may not be ---------------------- amended, modified or supplemented without the prior written consent of each of the Companies and Holders holding in excess of 50% of the outstanding shares of Common Stock and principal amount of the Notes, provided that each Holder shall receive notice of such amendment or modification. 12. Notices. Except as set forth below, all notices and other ------- communications provided for or permitted hereunder shall be in writing and shall be deemed to have been duly given if delivered personally or sent by telex or telecopier, registered or certified mail (return receipt requested), postage prepaid or courier or overnight delivery service to the Companies at the following addresses and to the Holder at the address set forth on his or her signature page to this Agreement (or at such other address for any party as shall be specified by like notice, provided that notices of a change of address shall be effective only upon receipt thereof), and further provided that in case of notifications to amend the Registration Statement pursuant to Section 2(b) or 2(e) or notifications pursuant to Section 5, the sender must confirm such notice in writing by overnight express delivery: If to BI or BSI: Bradlees, Inc. Bradlees Stores, Inc. One Bradlees Circle Braintree, MA 02184 Attn: Peter Thorner, Chief Executive Officer David Schmitt, Senior Vice President and General Counsel Telephone: (781) 380-3000 Telecopy: (781) 380-8096 9 With a copy to: Goodwin, Procter & Hoar LLP Exchange Place Boston, MA 02109 Attn: Raymond C. Zemlin, P.C. Telephone: (617) 570-1000 Telecopy: (617) 523-1231 13. Successors and Assigns. This Agreement shall be binding upon and ---------------------- inure to the benefit of the successors and assigns of the Companies. This Agreement may not be assigned by any Holder other than as permitted by Section 16 and any attempted assignment hereof by any Holder other than as permitted by Section 16 will be void and of no effect and shall terminate all obligations of the Companies hereunder with respect to such Holder. 14. Information by Holders. Each Holder shall furnish to the Companies ---------------------- such information regarding such Holder and the distribution and/or sale proposed by such Holder as the Companies may reasonably request in writing and as shall be reasonably required in connection with any registration, qualification or compliance referred to in this Agreement. If necessary for the Holder to effect such disposition and/or sale covering the Registered Securities, the intended method or methods of disposition and/or sale of such securities as so provided by such Holder shall be included without alteration in the Registration Statement and shall not be changed without written consent of such Holder. 15. Replacement Certificates. The certificate(s) representing the shares ------------------------ of Common Stock held by any Holder may be exchanged by such Holder at any time and from time to time for certificates with different denominations representing an equal aggregate number of shares of Common Stock, as reasonably requested by such Holder upon surrendering the same. No service charge will be made for such registration or transfer or exchange. 16. Transfer or Assignment. Except as otherwise provided herein, this ---------------------- Agreement shall be binding upon and inure to the benefit of the parties and their successors and permitted assigns. The rights granted to the Holders by the Companies under this Agreement may only be transferred or assigned (in whole or in part) to a transferee or assignee of Registered Securities that receives an amount of Registered Securities equal to at least [50,000 shares of] Common Stock of BI (or, in the case of Notes, which are convertible into at least [50,000 shares of] Common Stock of BI); provided that the Companies must be given written notice by such Holder at the time of or within a reasonable time after said transfer or assignment, stating the name and address of said transferee or assignee and identifying the securities with respect to which such registration rights are being transferred or assigned; and provided further that the transferee or assignee of such rights agrees in writing to be bound by the registration provisions of this Agreement. 10 17. Miscellaneous. ------------- (a) Remedies. The Companies and the Holders acknowledge and agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent or cure breaches of the provisions of this Agreement and to enforce specifically the terms and provisions thereof, in addition to any other remedy to which any of them may be entitled by law or equity. (b) Jurisdiction. The Companies and each of the Holders (i) hereby irrevocably submit to the exclusive jurisdiction of the United States District Court, the Massachusetts State Courts and other courts of the United States sitting in Boston, Massachusetts for the purposes of any suit, action or proceeding arising out of or relating to this Agreement and (ii) hereby waive, and agree not to assert in any such suit action or proceeding, any claim that it is not personally subject to the jurisdiction of such court, suit, action or proceeding is brought in an inconvenient forum or that the venue of the suit, action or proceeding is improper. The Companies and each of the Holders consent to process being served in any such suit, action or proceeding by mailing a copy thereof to such party at the address in effect for notices to it under this Agreement and agree that such service shall constitute good and sufficient serve of process and notice thereof. Nothing in this paragraph shall affect or limit any right to serve process in any other manner permitted by law. (c) Waivers. No waiver by any party of any default with respect to any provision, condition or requirement of this Agreement shall be deemed to be a continuing waiver in the future or a waiver of any other provision, condition or requirement hereof, nor shall any delay or omission of any party to exercise any right hereunder in any manner impair the exercise of any such right accruing to it thereafter. (d) Severability. The parties acknowledge and agree that the Holders are not agents, affiliates or partners of each other, that all representations, warranties, covenants and agreements of the Holders hereunder are several and not joint, that no Holder shall have any responsibility or liability for the representations, warrants, agreements, acts or omissions of any other Holder, and that any rights granted to "Holders" hereunder shall be enforceable by each Holder hereunder. (e) Titles. The titles used in this Agreement are for convenience only and are not to be considered in construing or interpreting this Agreement. (f) No Strict Construction. The language used in this Agreement will be deemed to be the language chose by the parties to express their mutual intent, and no rule of strict consideration will be applied against any party. 11 (g) Jury Trial. Each party hereto waives the right to a trial by jury. 18. Counterparts. This Agreement may be executed in any number of ------------ counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 19. Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of The Commonwealth of Massachusetts applicable to contracts made and to be performed wholly within said Commonwealth. 20. Severability. In the event that any one or more of the provisions ------------ contained herein, or the application thereof in any circumstances, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be in any way impaired thereby, it being intended that all of the rights and privileges of the parties hereto shall be enforceable to the fullest extent permitted by law. 21. Entire Agreement. This Agreement is intended by the parties as a ---------------- final expression of their agreement and intended to be the complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein, with respect to such subject matter. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter. [Remainder of Page Intentionally Left Blank] 12 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. BRADLEES, INC. -------------------------------- Name: Title: BRADLEES STORES, INC. -------------------------------- Name: Title: 13 Registration Rights Agreement Holder Signature Page HOLDER -------------------------------- Name: Address for Notice: -------------------------------- -------------------------------- -------------------------------- -------------------------------- 14 EX-10.41 18 COMMITMENT LETTER & FORM OF REVOLVING CREDIT [EXECUTION COPY] EXHIBIT 10.41 December 16, 1998 Bradlees Stores, Inc. One Bradlees Circle, P.O. Box 859051 Braintree, MA 02185-9051 Attention: Cornelius F. Moses, III Senior Vice President and Chief Financial Officer Re: Second Consent to Modification of Commitment Letter --------------------------------------------------- Gentlemen: Reference is made to (i) that certain commitment letter (including the Term Sheet attached thereto, the "Commitment Letter"), dated December 23, 1997, ----------------- among Bradlees Stores, Inc., as debtor and debtor-in-possession (the "Debtor") ------ in a case (the "Case") filed under Chapter 11 of the United States Bankruptcy ---- Code (the "Code") in the United States Bankruptcy Court for the Southern ---- District of New York (the "Bankruptcy Court"), and the lenders party thereto ---------------- (the "Lenders"), regarding post-confirmation financing in connection with a plan ------- of reorganization to be filed by the Debtor with the Bankruptcy Court and (ii) that certain consent to modification of commitment letter, dated as of April 7, 1998, among the Debtor and the Lenders (the "Consent," and the Commitment Letter ------- as modified by the Consent, the "Existing Commitment Letter"). Capitalized -------------------------- terms used herein without definition shall have the meanings given to such terms in the Commitment Letter or the Consent, as applicable. You have advised the Lenders that the Debtor currently anticipates seeking confirmation of a plan of reorganization (the "Plan") that will not ---- satisfy all of the conditions to the Lenders' commitment under the Existing Commitment Letter (the "Existing Commitment"), thus rendering the Existing ------------------- Commitment and the Existing Commitment Letter null and void and of no further force or effect. In addition, you have informed us that the Debtor wishes to make certain further modifications to the Existing Commitment Letter. Therefore, the Debtor has requested that the Lenders consent to a modification of the Existing Commitment Letter to provide for (i) additional availability to the Debtor under a "Tranche B" facility to be provided by certain Lenders and other lenders (collectively, the "Tranche B Lenders") and (ii) certain other ----------------- modifications to the Facility as more specifically set forth herein. Subject to such approval by the Bankruptcy Court as may be necessary in the opinion of the Administrative Agent of the Consent and this letter agreement (including all exhibits, annexes and schedules hereto, this "Second ------ Consent"), the Existing Commitment Letter - ------- Bradlees Stores, Inc December 16,1998 Page 2 as modified by this Second Consent (the "Modified Commitment Letter"), and the -------------------------- transactions contemplated by the Modified Commitment Letter, including such approval by the Bankruptcy Court as may be necessary in the opinion of the Administrative Agent of payment by the Debtor of the expenses (the "Expenses") -------- set forth in the Modified Commitment Letter (such approval of the Bankruptcy Court being evidenced by the entry of one or more orders satisfactory in form and substance to the Lenders, which orders shall not vary the express terms of the Consent, the Second Consent or the Modified Commitment Letter), and subject to the payment of the Second Consent Fee set forth below and payment of the fees set forth in that separate fee letter of even date herewith (the "Tranche B Fee ------------- Letter") between the Debtor and BankBoston, N.A., as agent for the Tranche B - ------ Lenders (the "Tranche B Agent"), the Lenders' commitment to provide the Facility --------------- as set forth in the Existing Commitment Letter is modified as set forth in the modifications summary attached hereto as Exhibit A (which modifications shall include several changes required by the Lenders in exchange for their consent hereto)./1/ In consideration for the Lenders' agreement to modify the Existing Commitment Letter as set forth herein, the Debtor shall pay to the Administrative Agent, for the pro rata benefit of the Lenders, a consent fee equal to $750,000 (the "Second Consent Fee"), payable in immediately available ------------------ funds on the Plan Effective Date. Such Second Consent Fee supersedes and replaces the Consent Fee set forth in the Consent. Except as specifically provided herein, this Second Consent does not in any way affect or impair the terms, conditions and other provisions of the Commitment Letter, the Existing Commitment Letter or the Consent and all terms, conditions (including all conditions precedent, except as provided in paragraph 3 of the Consent) and other provisions of the Commitment Letter, the Existing Commitment Letter and the Consent shall remain in full force and effect. Any modifications or amendments herein are limited to the specific provisions described and shall not be deemed to (i) be amendments of any other term or condition of the Commitment Letter, the Existing Commitment Letter or the Consent or (ii) prejudice any rights not specifically addressed herein which the Debtor, the Administrative Agent, any Lender or any Tranche B Lender may now have or may have in the future under the Commitment Letter, the Existing Commitment Letter or the Consent. Furthermore, nothing herein shall be deemed to be a waiver of such rights as the Lenders (as Lenders under the DIP Facility) may otherwise have to object to any Plan as creditors under such facility. _____________________ /1/ Exhibit A is only a summary of the agreed upon modifications to the Commitment Letter. The actual language to be included in the Form Credit Agreement to reflect these changes--as well as any additional changes necessitated thereby--are subject to the approval of the Debtor, the Administrative Agent, the Lenders and the Tranche B Lenders. Bradlees Stores, Inc December 16,1998 Page 3 For the avoidance of doubt, the terms and conditions of the Lenders' and the Tranche B Lenders' commitment under the Modified Commitment Letter with respect to the Facility are not limited to the terms and conditions set forth in the Commitment Letter, the Existing Commitment Letter, the Consent or this Second Consent (the "Commitment Documents"). Those matters that are not covered -------------------- by or made clear under the provisions of the Commitment Documents are subject to the approval and agreement of the Lenders, the Tranche B Lenders and the Debtor. The expense reimbursement, indemnity and confidentiality provisions of the Commitment Letter shall apply with equal force to this Second Consent except as expressly modified herein. This Second Consent shall be governed by, and construed in accordance with, the laws of the State of New York. If the foregoing correctly sets forth our agreement, please indicate your acceptance of the terms hereof by signing and returning to the Administrative Agent by telecopy not later than 5:00 p.m., Boston time, on December 16, 1998 (with an original to follow by overnight mail), the enclosed duplicate original of this Second Consent. The modifications to the Existing Commitment Letter contained herein shall terminate if (a) you shall have failed to accept this Second Consent in the time and manner set forth in the previous sentence or (b) the Administrative Agent, the Lenders, the Tranche B Lenders or the Tranche B Agent, as applicable, shall not have received payment of the Expenses, the Second Consent Fee and the fees set forth in the Tranche B Fee Letter no later than the Plan Effective Date. By executing this Second Consent, the Tranche B Lenders agree to be bound by the terms of the Modified Commitment Letter and the Debtor agrees that the Tranche B Lenders shall be entitled to all of the benefits inuring to the "Lenders" thereunder. Bradlees Stores, Inc December 16,1998 Page 4 This Second Consent may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. Without limiting the other conditions set forth herein, this Second Consent shall not be effective unless and until signed by all of the Lenders, all of the Tranche B Lenders and the Debtor. Very truly yours, BANKBOSTON, N.A. By: Name: Title: JACKSON NATIONAL LIFE INSURANCE COMPANY, as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] FIRSTRUST BANK, as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] FLEET NATIONAL BANK, as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] THE CIT GROUP/BUSINESS CREDIT, INC., as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] CONGRESS FINANCIAL CORPORATION (NEW ENGLAND), as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] FREMONT FINANCIAL CORPORATION, as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] GREEN TREE FINANCIAL SERVICING CORPORATION, as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] HELLER FINANCIAL, INC., as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] NATIONAL CITY COMMERCIAL FINANCE, INC., as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] FOOTHILL CAPITAL CORPORATION, as a Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] LASALLE BUSINESS CREDIT, INC. as a Lender By: --------------------------- Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] BANKBOSTON, N.A., as a Tranche B Lender By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] ACKNOWLEDGED: BANKBOSTON, N.A., as Administrative Agent By:______________________________ Name: Title: Agreed to and accepted as of the date first above written: BRADLEES STORES, INC., as Debtor and Debtor-in-Possession By: ------------------------------ Name: Title: Exhibit A to Second Consent to Modification of Commitment Letter ---------------------------------------------------------------- Capitalized terms used herein without definition shall have the meanings given to such terms in the Second Consent to Modification of Commitment Letter to which this Exhibit A is attached or in the Commitment Letter or the Consent, as applicable. MODIFICATIONS TO COMMITMENT LETTER: The Facility may include up to an additional $20,000,000 of availability pursuant to a "Tranche B" facility (the "Tranche B Facility"), substantially on the terms set forth on Annex I hereto (with such other modifications to the Form Credit Agreement as are necessary in the opinion of the Lenders and the Tranche B Lenders to reflect the inclusion of such Tranche B (including, without limitation, intercreditor arrangements between the Lenders and the Tranche B Lenders)). In addition to the modifications to the Plan set forth in the Consent, the Plan may also provide for the following: (a) The issuance of warrants for the purchase of up to 1,000,000 shares of common stock of BI in the aggregate, on the terms set forth in the Plan and otherwise reasonably acceptable to the Administrative Agent; (b) the issuance of stock options to certain members of management of the Debtor and BI for the purchase of up to 750,000 shares of common stock of BI in the aggregate, on the terms set forth in the Plan; (c) cash payments not in excess of $14,000,000 in the aggregate to certain creditors of the Debtor as set forth in the Plan; and (d) such other cash payments to be made on or about the Plan Effective Date in respect of (i) allowed administrative claims (the total dollar amount of all such payments the Debtor currently estimates in good faith to be approximately $16,000,000), (ii) allowed "convenience claims" (the total dollar amount of all such payments the Debtor currently estimates in good faith to be approximately $1,000,000) and (iii) an allowed pre-petition claim evidenced by a mechanic's lien (the dollar amount of such payment the Debtor currently estimates in good faith to be approximately $5,000). The maximum permissible interest rate for the Cure Notes shall be 9% per annum (in lieu of 8%). In addition, the Debtors shall be permitted to pay cash to certain landlords in lieu of the issuance of Cure Notes in an aggregate amount which the Debtor currently estimates in good faith to be approximately $650,000. The maximum permissible interest rate for the CAP Notes shall be 9% per annum (in lieu of 8%) and the maximum aggregate principal amount thereof shall not exceed $628,000. In addition, the CAP Notes shall have a term of not less than three years (in lieu of six years) and shall require principal to be paid in 12 equal quarterly installments commencing three months following the Plan Effective Date. Accrued interest on the CAP Notes shall be paid on each principal payment date. In addition to prepayments from the sale of the Permissible Collateral (as defined in the Consent), the Notes may be prepaid by the Debtor (i) with the proceeds of any equity offering by reorganized Bradlees, Inc., consummated after the Plan Effective Date or (ii) with other funds, provided that, with respect to this clause (ii), immediately after giving effect to such prepayment the Debtor has excess borrowing availability under the Facility of at least the amount set forth below opposite the month in which such prepayment occurs: February $39,000,000 March $46,000,000 April $49,000,000 May $48,000,000 June $36,000,000 July $38,000,000 August $31,000,000 September $34,000,000 October $47,000,000 November $43,000,000 December $47,000,000 January $46,000,000
No other prepayments of the Notes shall be permitted. For the avoidance of doubt, the "Permissible Collateral" shall not include any Inventory. The Debtor's obligations under the Notes shall be guaranteed by reorganized Bradlees, Inc.; provided, however, that such guaranty shall be unsecured, shall be expressly subordinate to the guaranty by reorganized Bradlees, Inc., of the obligations of the Debtor under the Facility and shall be otherwise reasonably satisfactory to the Administrative Agent. The advance rate to be applied against the Loan Value of Eligible Receivables shall be increased from 60% to 80%. The Form Credit Agreement shall be revised to make clear that the Collateral shall include substantially all assets (other than Real Property) of the Debtor and the Guarantors. --- The definition of "Closing Date" in the Form Credit Agreement shall be revised to make clear that the Closing Date shall not occur unless all conditions precedent thereto have been satisfied or waived in writing by the Administrative Agent, the Tranche B Agent, the Issuing Bank the Collateral Agent and the Required Lenders. 2 The definition of "Eligible Receivables" in the Form Credit Agreement shall be revised to permit such Receivables to be subject to the Lien of the Collateral Agent and other Permitted Liens (provided that the Collateral Agent's Lien is first-priority). The definition of "Obligations" in the Form Credit Agreement shall be revised to include the due and punctual payment of any obligations of the Debtor and the Guarantors under (i) interest rate agreements entered into with BBNA and (ii) that certain Master Lease Agreement, as amended, between BankBoston Leasing, Inc., as lessor, and the Debtor, as lessee (the "Master ------ Lease Agreement"), concerning lighting fixtures in certain of the Debtor's --------------- stores. In addition, upon the occurrence and during the continuance of a Default or an Event of Default under the Facility, the Administrative Agent shall be entitled to create a reserve against the Borrowing Base for amounts outstanding under the Master Lease Agreement. The definition of "Overadvance Amount" in the Form Credit Agreement shall be revised by changing the figure "75%" to "77%". The definition of "Permitted Investments" in the Form Credit Agreement shall be revised by replacing the designation "A2" with the designation "P- 2". Supermajority and tiered voting provisions will be added to the Form Credit Agreement with respect to certain matters to be agreed between the Lenders and the Tranche B Lenders and reasonably acceptable to the Debtor. By way of example, any agreement to permit the Debtor to permanently close more than the number of its retail locations permitted under the Credit Agreement will require the consent of a majority of the Lenders and the Tranche B Lenders (taken as two separate groups, and determined based on Loans outstanding or Commitment amounts, as applicable). Section 2.14 of the Form Credit Agreement shall be revised to include in the payment "waterfall" those amounts received by the Administrative Agent, the Tranche B Agent, the Issuing Bank, the Collateral Agent, the Co-Agents, any Lender or any Tranche B Lender as contemplated by Section 2.17 of the Form Credit Agreement. The tax and ERISA provisions in the Form Credit Agreement shall be updated. Section 3.04 of the Form Credit Agreement shall be revised to reflect the new corporate structure of the Debtor and the Guarantors as contemplated by the Plan. A standard representation and warranty regarding Year 2000 issues shall be added to the Form Credit Agreement. Section 4.01 of the Form Credit Agreement shall be revised to include as conditions precedent delivery by the Borrower of (i) a certificate of good standing for the Borrower and any each Guarantor from each state where the Borrower or such Guarantor is qualified to do business and (ii) a standard compliance certificate (i.e., no defaults, all representations and warranties true, all covenants complied with , all corporate fees and 3 franchise taxes paid, etc,). The required EBITDA condition precedent set forth in Section 4.01 (t) of the Form Credit Agreement shall be revised (i) to exclude from cash restructing costs (which are subtracted from the calculation of EBITDA under such section) up to $3,500,000 of cash restructuring costs incurred during the 12-month period ending on the Closing Date and (ii) to add back to EBITDA up to $4,400,000 of "SG&A" expenses relating to emergence and other bonuses. The required excess availability condition precedent set forth in Section 4.01(u) of the Form Credit Agreement shall be revised as follows: (i) the introductory sentence to this subsection shall be replaced in its entirety with a statement which conveys that the minimum excess availability required to exit will be determined after giving effect to the repayment in full of the Existing Credit Facility and to the cash payments under the Plan of Reorganization to be made on or shortly after the Plan Effective Date (such determination of excess availability will specifically exclude payments under the Tax Payment Plan), (ii) by replacing the figure "$42,000,000" with "$35,000,000" and (iii) by replacing the figure "$53,000,000" with "$40,000,000". The date "January 30, 1999" shall be inserted in subsections 5.01(b) and (d) of the Form Credit Agreement. A covenant regarding the use of proceeds of the Loans (similar in substance to the representation and warranty contained in Section 3.10 of the Form Credit Agreement) shall be added to the Form Credit Agreement. Section 6.03 of the Form Credit Agreement shall be revised to permit the incurrence of Indebtedness (not in excess of $3,300,000) pursuant to the Tax Payment Plan. Section 6.04 of the Form Credit Agreement shall be revised to permit the carryover to the immediately following fiscal year of up to $5,000,000 of the permitted Capital Expenditures basket unused in a given fiscal year. Section 6.05 of the Form Credit Agreement shall be revised by replacing (i) the figure "$15,000,000" with the figure "$17,500,000"; (ii) the figure "$17,500,000" with the figure "$20,000,000"; (iii) the figure "$20,000,000" with the figure "$22,500,000"; and (iv) the figure "$25,000,000" with the figure "$27,500,000". Section 6.06 of the Form Credit Agreement shall be revised by replacing the (i) the figure "32.5%" with the figure "37%" and (ii) each "37.5%" figure with the figure "40.0%". Section 6.07 of the Form Credit Agreement shall be revised by postponing the first test of the Debtor's debt coverage ratio to the fiscal quarter of the Borrower ending on or about January 31, 2001, and reducing the required minimum debt coverage ratio of the Debtor for such fiscal quarter to 1:1. 4 Subsection 6.13(c) of the Form Credit Agreement shall be revised by inserting at the end thereof (before the period) the following clause: "and except as set forth in subsection 7.01(k)". A covenant shall be added to the Form Credit Agreement prohibiting any amendments to the documents evidencing the Notes, the CAP Notes, the Cure Notes, the Tax Payment Plan or the Trade Lien, or any prepayment with respect to any of the foregoing not expressly permitted under the Modified Commitment Letter, in each case without the prior written consent of the Administrative Agent. Subsection 7.01(h) of the Form Credit Agreement shall be revised to remove clause (ii) thereof. Subsection 7.01(k) of the Form Credit Agreement shall be revised by inserting immediately after the word "close" therein the following parenthetical: "(temporarily or otherwise)". Subsection 7.01(s) of the Form Credit Agreement shall be revised by: (i) changing the term "Filing Date" to "Plan Effective Date"; (ii) changing the phrase "fifty percent (50%)" to the phrase "thirty percent (30%); provided -------- that, with respect only to direct purchasers from Gabriel Capital L.P. ("Gabriel") and Elliott Associates, L.P. and Westgate International, L.P. ------- (collectively, "Elliott") of shares of voting securities owned by Gabriel ------- or Elliott on the Plan Effective Date representing more than thirty percent (30%) of the voting securities of BI, the applicable percentage shall be fifty percent (50%)"; and (iii) making clear that when calculating the amount of voting stock of BI owned by any Person, such calculation shall be made on a fully-diluted basis. Section 10.01 of the Form Credit Agreement shall be revised to reflect the Debtor's correct P.O. Box (9051) and area code (781). Section 10.03 of the Form Credit Agreement shall be revised to add to those issues with respect to which a participant may be given the right to consent the release of a material portion of the Collateral (other than as expressly permitted under the Loan Documents). The Form Credit Agreement shall be revised to make clear that the "Borrower" under the Facility will be the reorganized Bradlees Stores, Inc. (as contemplated by the Plan) and the "Guarantors" will include the reorganized Bradlees, Inc. (as contemplated by the Plan) and all present and future direct and indirect subsidiaries of each such entity. Certain typographical errors and other minor inconsistencies in the Form Credit Agreement shall be corrected and certain drafting clarifications shall be made. 5 ANNEX I TO EXHIBIT A TO SECOND CONSENT TO MODIFICATION OF COMMITMENT LETTER --------------------------------------------------------------------------- BRADLEES STORES, INC. PROPOSED TERMS AND CONDITIONS FOR TRANCHE B FACILITY Capitalized terms used herein without definition shall have the meanings given to such terms in the Second Consent to Modification of Commitment Letter to which this Annex I is attached (as an annex to Exhibit A thereto) or in the Commitment Letter or the Consent, as applicable. Borrower: Reorganized Bradlees Stores, Inc. (the "Borrower"). - -------- -------- Guarantors: Reorganized Bradlees, Inc. ("BI"), and all present and future - ---------- -- direct and indirect subsidiaries of BI and the Borrower (collectively, the "Guarantors"). ---------- Agent: BankBoston, N.A. (the "Tranche B Agent"). - ----- --------------- Lenders: The banks and other financial institutions party to the - ------- Second Consent as "Tranche B Lenders" and their successors and assigns (the "Tranche B Lenders"). ----------------- Facility: $20,000,000 junior secured "last in-last out"/1/ subfacility - -------- (the "Tranche B Facility") under the Facility (that portion of ------------------ the Facility other than the Tranche B Facility is referred to herein as the "Senior Facility"). Except as provided herein, --------------- or as otherwise agreed among the Lenders, the Tranche B Lenders and the Borrower, the Tranche B Lenders shall be entitled to all of the benefits inuring to the "Lenders" under the Facility (including, without limitation, provisions relating to expense reimbursement and indemnity and all representations, warranties and covenants of the Borrower and the Guarantors contained therein) and the administrative and mechanical provisions of the Credit Agreement will apply with equal force to the Tranche B Facility. Availability: Availability under the Tranche B Facility will be limited to - ------------ the lesser of (i) $20,000,000 and (ii) when combined with amounts borrowed under the Senior Facility, 93% of the net recovery value of Eligible Inventory (as determined by the Tranche B Agent). Based on current estimates, the advance rates to be applied against Eligible Inventory are expected to be as follows (subject to an initial appraisal and continued validations by periodic appraisals): _____________________________ \1\ i.e., no principal payments on outstanding amounts under Tranche B Facility until Senior Facility is paid in full (with exceptions for permanent reduction or termination of Tranche B Facility).
SENIOR FACILITY TRANCHE B FACILITY INVENTORY INVENTORY PERIOD ADVANCE RATE ADVANCE RATE ---------------------------------------------------------------------- March 1 - June 30 77% 85% ---------------------------------------------------------------------- July 1 - Sept. 30 77% 84% ---------------------------------------------------------------------- Oct. 1 - Dec. 15 77% 85% ---------------------------------------------------------------------- Dec. 16 - Feb. 28 72% 80% ----------------------------------------------------------------------
Purpose: Same as for Senior Facility (other than to support the - ------- issuance of Letters of Credit). Final Maturity: Three years from the Closing Date. The Borrower may cancel - -------------- the Tranche B Facility at any time if it has excess borrowing availability under the Facility of at least the amount set forth below opposite the month in which such prepayment occurs (after giving effect to the cancellation of the Tranche B Facility): February $ 39,000,000 March $ 46,000,000 April $ 49,000,000 May $ 48,000,000 June $ 36,000,000 July $ 38,000,000 August $ 31,000,000 September $ 34,000,000 October $ 47,000,000 November $ 43,000,000 December $ 47,000,000 January $ 46,000,000 Any optional permanent reduction by the Borrower of the maximum amount of the Senior Facility shall require a pro --- rata reduction of the Tranche B Facility as well. ---- Security: Last-out position in the Collateral securing the Facility - -------- (substantially all assets of the Borrower and the Guarantors (excluding Real Property)). Interest Rate: Prime plus 7%, payable monthly. - ------------- Fees: As set forth in the Tranche B Fee Letter. - ----- Defaults: Same as under the Senior Facility; provided that, except in - -------- -------- the case of certain "super-defaults" to be agreed between the Lenders and the Tranche B Lenders, in the event of a Default or an Event of Default under the Facility, and prior to any acceleration by the Lenders under the Senior Facility, the Tranche B Lenders will be obligated to continue to make Loans under the Tranche B Facility for ten (10) additional days in an amount not to exceed $5,000,000 (provided that borrowing availability exists under 2 the Tranche B Facility). Conditions Precedent: In addition to those contained in the Modified - -------------------- Commitment Letter, completion of an appraisal of the Borrower's Inventory satisfactory to the Tranche B Agent by a third-party appraiser satisfactory to the Borrower and the Tranche B Agent. Voting: "Supermajority" and tiered voting provisions will be - ------ included in the Facility where appropriate to reflect the relationship between the Lenders and the Tranche B Lenders. Intercreditor Issues: The Facility will be revised as necessary in the - --------------------- opinion of the Lenders and the Tranche B Lenders to reflect the intercreditor arrangements contemplated by this Annex I. Tranche B Agent: The Tranche B Agent will be entitled to all indemnity, - --------------- exculpation and expense reimbursement provisions applicable to the Administrative Agent. Governing Law: State of New York. - ------------- 3 Bradlees Stores, Inc. April 7, 1998 Page 1 [EXECUTION COPY] April 7, 1998 Bradlees Stores, Inc. One Bradlees Circle, P.O. Box 859051 Braintree, MA 02185-9051 Attention: Cornelius F. Moses, III Senior Vice President and Chief Financial Officer Re: Consent to Modification of Commitment Letter -------------------------------------------- Gentlemen: Reference is made to that certain commitment letter (including the Term Sheet attached thereto, the "Commitment Letter") dated December 23, 1997, among Bradlees Stores, Inc., as debtor and debtor-in-possession (the "Debtor") in a case (the "Case") filed under Chapter 11 of the United States Bankruptcy Code (the "Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"), and the lenders party thereto (the "Lenders"), regarding post-confirmation financing in connection with a plan of reorganization to be filed by the Debtor with the Bankruptcy Court. Capitalized terms used herein without definition shall have the meanings given to such terms in the Commitment Letter. You have advised the Lenders that the Debtor currently anticipates seeking confirmation of a plan of reorganization (the "Plan") that will not satisfy all of the conditions to the Lenders' commitment under the Commitment Letter (the "Commitment") and, thus, would render the Commitment and the Commitment Letter null and void and of no further force or effect. Therefore, the Debtor has requested that the Lenders consent to a modification of the Commitment Letter to provide for (i) the issuance of certain specified secured indebtedness to certain pre-petition creditors of the Debtor and (ii) the granting to certain of the Debtor's pre-petition trade creditors of a second- priority lien on the Debtor's Bradlees Stores, Inc. April 7, 1998 Page 2 Inventory, in each case in connection with the Plan and as more specifically set forth below. Subject to the approval by the Bankruptcy Court of all aspects of this letter agreement (this "Consent"), the Commitment Letter as modified by this Consent (the "Modified Commitment Letter"), and the transactions contemplated by the Modified Commitment Letter (such approval of the Bankruptcy Court being evidenced by the entry of one or more orders satisfactory in form and substance to the Lenders), and subject to the payment of the Consent Fee set forth below, the Lenders' commitment to provide the Facility as set forth in the Commitment Letter is modified as follows: 1. The Plan may provide for the issuance of notes by the Debtor in an aggregate principal amount not to exceed $40,000,000 bearing interest at a rate not to exceed 9% per annum (the "Notes") in favor of (to the extent provided in the Plan) (i) the banks and other financial institutions (the "Pre-Petition Revolver Bank Group") holding pre- petition claims under that certain Credit Agreement among Bradlees, Inc., the Pre-Petition Revolver Bank Group and Bankers Trust Company, as Agent, dated as of March 3, 1993, (ii) the banks and other financial institutions (the "SPE Group") holding pre-petition claims under the SPE Documents (as defined in the Plan)/1/ and (iii) to the extent allowed by order of the Bankruptcy Court, holders of pre- petition, general unsecured claims against certain of the Debtor's subsidiaries, in partial satisfaction of such claims. a. The Notes shall have a term of not less than five (5) years from date of issuance, may require equal semi-annual payments of accrued interest (but not principal), and shall be subject to prepayment without penalty from the proceeds of the sale of the Permissible Collateral (as defined below) and the net proceeds of any equity offering by the Debtor on or after the Plan Effective Date. b. The Notes may be secured by the Debtors's or the Guarantors' interest in the real property and improvements located at the site of the Debtor's locations in Yonkers, New York (the "Yonkers Store") and Union Square, New York, New York (the "Union Square Store") (and the proceeds of any disposition of any of the foregoing) (collectively, the "Permissible Collateral"). /1/ When this Consent refers to definitions contained in "the Plan", such definitions are those contained in the draft Plan, dated March 27, 1998, provided to the Administrative Agent on March 30, 1998. Bradlees Stores, Inc. April 7, 1998 Page 3 c. All other terms and provisions of the Notes, as well as all documentation relating to the Permissible Collateral, shall be reasonably satisfactory to the Administrative Agent and, in any event, shall not contain any cross-default or cross-acceleration rights to the Facility. 2. The Plan may also provide for the issuance by the Debtor of unsecured notes in an aggregate principal amount not to exceed $3.5 million bearing interest at a rate not to exceed 8% per annum (the "Cure Notes") in favor of non-debtor parties to executory contracts that are to be assumed pursuant to the Plan for the purpose of paying "cure amounts" as required by section 365 of the Bankruptcy Code. a. The Cure Notes shall have a term of not less than three years and may be subject to equal periodic payments of principal and accrued interest over such three-year period. In addition, the Cure Notes may be prepaid by the Debtor, without premium or penalty, with the prior written consent of the Administrative Agent, such consent not to be unreasonably withheld. b. All other terms and provisions of the Cure Notes shall be reasonably satisfactory to the Administrative Agent and, in any event, shall not contain any cross-default or cross-acceleration rights to the Facility. 3. The Plan may also provide for the issuance of notes by the Debtor in an aggregate principal amount not to exceed $840,000 bearing interest at a rate not to exceed 8% per annum (the "CAP Notes") in favor of the holders of Capital Lease Claims (as defined in the Plan). a. The CAP Notes shall have a term of not less than six years and may require equal semi-annual payments of accrued interest (but not principal). In addition, the CAP Notes may be prepaid by the Debtor, without premium or penalty, with the prior written consent of the Administrative Agent, such consent not to be unreasonably withheld. b. The CAP Notes may be secured by a first lien on the property on which the holder of a Capital Lease Claim is determined by the Bankruptcy Court to have held a valid first priority security interest as of the Petition Date (the "CAP Collateral"). c. All other terms and provisions of the CAP Notes, as well as all documentation related to the CAP Collateral, shall be reasonably Bradlees Stores, Inc. April 7, 1998 Page 4 satisfactory to the Administrative Agent and, in any event, shall not contain any cross-default or cross-acceleration rights to the Facility. 4. The Plan may also provide that certain trade creditors of the Debtor be granted a second-priority Lien on the Debtor's Inventory to secure the extension of trade credit by such trade creditors subsequent to confirmation of the Plan (the "Trade Lien"). All terms and conditions of the Trade Lien (including all documentation relating thereto) shall be reasonably satisfactory to the Administrative Agent and, in any event, shall include the following: a. The Trade Lien shall be junior and subordinate to the Lien of the Lenders securing the Obligations and shall provide that the holders of the Trade Lien shall have no right to exercise or enforce any rights with respect to the Trade Lien or the Inventory (or to consent to or approve any such exercise or enforcement by the Administrative Agent), or to receive any payment from the proceeds of the Inventory, unless and until the Obligations are finally and indefeasibly paid in full. b. The documentation evidencing the Trade Lien shall not contain any cross-default or cross-acceleration rights to the Facility. In addition, the holders of the Trade Lien shall have no right to consent to or approve any amendments, modifications, refinancings or other changes to the Facility, including, without limitation, increases in advance rates, interest rates and principal amount and the creation or elimination of any reserves or categories of ineligible Inventory. c. The Trade Lien shall be available to vendors who provide retail merchandise to the reorganized Debtor after the Plan Effective Date or to vendors who have provided retail merchandise to the Debtor before the Plan Effective Date which is not paid for as of the Plan Effective Date, in each case subject to the release provisions set forth in paragraph d. below. d. The Trade Lien shall be automatically released upon the earliest to occur of (i) two (2) years after the Plan Effective Date, (ii) the date on which the ratio of the amount of accounts payable of the Debtor to the amount of Inventory of the Debtor, computed on a cost basis, for any rolling three-month period is more than five percentage points less than such ratio on a comparable store basis for the same period in the prior year, (iii) the consummation of a transaction pursuant to which the reorganized Debtor or the reorganized Bradlees, Inc. merges or otherwise combines with another company or companies, (iv) as to any Bradlees Stores, Inc. April 7, 1998 Page 5 individual trade vendor that has provided retail merchandise during the pendency of the Case, at such time as such vendor fails to provide retail merchandise to the Debtor on terms which are at least as favorable to the Debtor as the credit terms under which such vendor provided retail merchandise to the Debtor in the year prior to the Plan Effective Date and (v) as to any individual trade vendor that initially provides retail merchandise to the Debtor after the Plan Effective Date, at such time as such vendor fails to provide retail merchandise to the Debtor on terms which are as least as favorable to the Debtor as the initial credit terms under which such vendor first provided retail merchandise to the Debtor. The Administrative Agent shall have access to all information necessary to determine if the vendors are providing sufficient credit support, as determined by the formulas set forth in subparagraphs (ii) and (iv) above, and shall have the authority to execute and file all documents necessary to effectuate any such release. 5. In connection with the above-described modifications to the Commitment Letter, the Debtor and the Lenders agree that the EBITDA condition precedent to lending set forth in Sections 4.01(t) of the Term Sheet shall be calculated without giving effect to any revenues attributable ------- to the operations of the Yonkers Store and the Union Square Store for the entire periods for which such condition precedent is measured. In consideration for the Lenders' agreement to modify the Commitment Letter as set forth above, the Debtor shall pay to the Administrative Agent, for the pro rata benefit of the Lenders, a consent fee equal to $500,000 (the "Consent Fee"), payable in immediately available funds on the Plan Effective Date. Except as specifically provided herein, this Consent does not in any way affect or impair the terms, conditions and other provisions of the Commitment Letter, and all terms, conditions (including all conditions precedent, except as provided in paragraph 3 above) and other provisions of the Commitment Letter shall remain in full force and effect. Any modifications or amendments herein are limited to the specific provisions described and shall not be deemed to (i) be amendments of any other term or condition of the Commitment Letter or (ii) prejudice any rights not specifically addressed herein which the Administrative Agent or any Lender may now have or may have in the future under the Commitment Letter. Furthermore, nothing herein shall be deemed to be a waiver of the rights of the Lenders (as Lenders under the DIP Facility) to object to any Plan as creditors under such facility. For the avoidance of doubt, the terms and conditions of the Lenders' commitment under the Modified Commitment Letter with respect to the Facility are not limited to the terms and conditions set forth in the Modified Commitment Letter or this Bradlees Stores, Inc. April 7, 1998 Page 6 Consent. Those matters that are not covered by or made clear under the provisions of the Modified Commitment Letter or this Consent are subject to the approval and agreement of the Lenders and the Debtor. The expense reimbursement, indemnity and confidentiality provisions of the Commitment Letter shall apply with equal force to this Consent. This Consent shall be governed by, and construed in accordance with, the laws of the State of New York. If the foregoing correctly sets forth our agreement, please indicate your acceptance of the terms hereof by signing and returning to the Administrative Agent by telecopy not later than 5:00 p.m., Boston time, on April __, 1998 (with an original to follow by overnight mail), the enclosed duplicate original of this Consent. The modifications to the Commitment Letter contained herein shall terminate if (a) you shall have failed to accept this Consent in the time and manner set forth in the previous sentence or (b) the Lenders shall not have received payment of the Consent Fee no later than the Plan Effective Date. This Consent may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. Very truly yours, BANKBOSTON, N.A. By:__________________________ Name: Elizabeth A. Ratto Title: Vice President Bradlees Stores, Inc. April 7, 1998 Page 7 [OTHER LENDERS] [SIGNATURES CONTINUED ON NEXT PAGE] Agreed to and accepted as of the date first above written: BRADLEES STORES, INC., as Debtor and Debtor-in-Possession By: Name: Title: Bradlees Stores, Inc. December 23, 1997 Page 1 Commitment Letter ----------------- December 23, 1997 Bradlees Stores, Inc. One Bradlees Circle, P.O. Box 859051 Braintree, MA 02185-9051 Attention: Cornelius F. Moses, III Senior Vice President and Chief Financial Officer Re: Commitment Letter ----------------- Gentlemen: You have advised BankBoston, N.A. ("BBNA") and the other financial institutions listed on Schedule A to this Commitment Letter (together with BBNA, the "Lenders") that Bradlees Stores, Inc., as debtor and debtor-in-possession (the "Debtor") in a case (the "Case") filed under Chapter 11 of the United States Bankruptcy Code (the "Code") in the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"), is seeking post- confirmation financing in connection with a plan of reorganization to be filed by the Debtor (the "Plan"). In that regard, the Lenders are pleased to advise you of their commitment, upon the terms and subject to the conditions set forth in this Commitment Letter and in the Term Sheet attached as Exhibit A to this Commitment Letter and incorporated herein by this reference (including the Schedules attached thereto, the "Term Sheet")/1/ (this Commitment Letter and the Term Sheet are referred to collectively /1/ Not later than the closing date of the DIP Facility (as defined below), the Term Sheet shall be replaced by a Form of Revolving Credit and Guarantee Agreement (the "Form Credit Agreement") which will incorporate the terms of the Term Sheet and will otherwise be satisfactory in form and substance to the Lenders and the Borrower, after which time the defined term "Term Sheet," as used herein, will be deemed to refer to the Form Credit Agreement. Bradlees Stores, Inc. December 23, 1997 Page 2 herein as the "Commitment Letter"), to provide a senior secured $250,000,000 revolving credit facility (the "Facility") to the post-confirmation reorganized Debtor. It is the understanding of the Lenders that the proceeds of the Facility will be used for the working capital and general business needs of the Debtor following the effective date of the Plan (the "Plan Effective Date"), as well as to repay in full the Debtor's debtor-in-possession credit facility, dated the date hereof (the "DIP Facility"), among the Debtor, as borrower, Bradlees, Inc., Bradlees Administrative Co., Inc., and each of the subsidiaries of the Debtor, as guarantors (the "Guarantors"), the lenders party thereto, BBNA, as administrative agent and as issuing bank, and BankBoston Retail Finance, Inc., as agent. Each Lender, severally and not jointly, agrees to provide its share of the Facility as set forth opposite its name on Schedule A attached hereto. The Lenders' commitment to provide the Facility in accordance with Schedule A hereto is subject to the negotiation, execution and delivery of a Revolving Credit and Guarantee Agreement which shall be substantially in the form of the Form Credit Agreement (with such changes as the parties shall agree) (the "Credit Agreement"), appropriate security documents in connection Bradlees, Stores, Inc. December 23, 1997 Page 3 therewith and other definitive documentation (collectively, the "Definitive Documentation") with respect to the Facility, satisfactory in form and substance to the Lenders and the Borrower. The Lenders' commitment to provide the Facility is also subject to: (A) The approval by the Bankruptcy Court of all aspects of this Commitment Letter and the transactions contemplated by this Commitment Letter. Such approval of the Bankruptcy Court shall be evidenced by the entry of one or more orders satisfactory in form and substance to the Lenders; (B) The satisfaction of each of the conditions precedent to effectiveness and to funding set forth in the Term Sheet and in the Credit Agreement, including, without limitation: (i) The final terms of the Plan and the order of the Bankruptcy Court approving the Plan (the "Confirmation Order") shall be reasonably satisfactory to the Requisite Lenders (as defined in the DIP Facility) and shall provide that all pre-petition claims of creditors of the Debtor and the Guarantors will be, on or prior to the Plan Effective Date, converted into equity interests of the Debtor; (ii) All conditions precedent to the confirmation of the Plan and to the Plan Effective Date shall have been met (or the waiver thereof shall have been consented to by the Administrative Agent (as defined below)) and the Plan Effective Date and substantial consummation of the Plan shall have occurred or shall be scheduled to occur, except for the initial extension of credit under the Facility; (iii) Except as consented to by the Administrative Agent, the Bankruptcy Court's retention of jurisdiction under the Confirmation Order shall not govern the enforcement of the Definitive Documentation after the Plan Effective Date or any rights or remedies relating thereto; (iv) There shall exist no defaults or events of defaults under the DIP Facility or prospective defaults based on projections provided by the Debtor in connection with the Facility; and Bradlees Stores, Inc. December 23, 1997 Page 4 (v) Each financial closing condition set forth on Schedule A to ---------- the Term Sheet shall be satisfied; and (C) There not having occurred or become known to any Lender any material adverse change in the condition (financial and otherwise), operations or assets of the Debtor or the Guarantors (including, without limitation, any material reduction in the value of the assets of the Debtor and the Guarantors) from that shown in the information made available to the Lenders on or prior to the date of this Commitment Letter. The terms and conditions of the Lenders' commitment under this Commitment Letter with respect to the Facility are not limited to the terms and conditions set forth in this Commitment Letter. Those matters that are not covered by or made clear under the provisions of this Commitment Letter (including, without limitation, the Term Sheet) are subject to the approval and agreement of the Lenders and the Debtor. Although the Term Sheet sets forth the principal terms of the proposed financing, you should understand that we reserve the right to propose terms in addition to those terms which will not materially change or alter the terms of this Commitment Letter (including the Term Sheet). We understand that you reserve the right to propose such additional terms as well (other than any modifications of the conditions precedent to effectiveness and lending contained herein and in the Term Sheet). Each Lender reserves the right, prior to or after the execution of the Definitive Documentation, to syndicate part of its commitment to one or more banks, commercial finance companies or other financial institutions that will become parties to such Definitive Documentation, with each syndicate member having a minimum commitment of at least $7,500,000. Accordingly, you agree to actively assist the Lenders in completing a timely syndication that is reasonably satisfactory to them. Such assistance shall be accomplished by a variety of means, including direct contact during the syndication process between senior officers and representatives of the Debtor and the Guarantors and representatives of advisors and consultants retained by the Debtor on the one hand, and the proposed syndicate assignees and participants, on the other hand, and the participation at reasonably convenient times and places by senior officers and representatives of the Debtor and the Guarantors (and representatives of advisors and consultants retained by the Debtor) in one or more meetings to be arranged by the Lenders with the proposed syndicate assignees and participants. To assist the Lenders in their syndication efforts, you agree promptly to provide, and to cause your advisors to provide, the Lenders, upon request, with all information deemed reasonably necessary by the Lenders to complete successfully the syndication, including, without limitation, all information that is reasonably available and Bradlees Stores, Inc. December 23, 1997 Page 5 projections prepared by you or on your behalf relating to the transactions contemplated hereby. You hereby represent and covenant that (a) all information concerning the Debtor and the Guarantors (the "Information") that has been or will be made available to the Lenders and any other financial institutions that become parties to the Facility by you or any of your authorized representatives in connection with the transactions contemplated by this Commitment Letter is and will be, as of the date when so made available (or, if later, the date of this Commitment Letter), complete and correct in all material respects and does not and will not, as of the date when so made available (or, if later, the date of this Commitment Letter), contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained in such Information, taken as a whole, not materially misleading in light of the circumstances under which such statements are made and (b) all financial projections concerning the Debtor and the Guarantors (the "Projections") that have been or will be prepared by you and made available to the Lenders have been or will be prepared in good faith based upon reasonable assumptions. You agree to revise the Information and Projections from time to time in order that the foregoing representations and warranties remain true from time to time. In arranging and syndicating the Facility, the Lenders will be using and relying on the Information and Projections. BBNA will serve as administrative agent (the "Administrative Agent") for the Lenders and will perform the customary duties related to that function. In addition, BankBoston Retail Finance, Inc., an affiliate of BBNA, will act as collateral agent (the "Collateral Agent") for itself and the Lenders and will perform the customary duties related to that function. By your signature below, you further agree (a) to pay all reasonable out-of-pocket costs and expenses incurred by BBNA, the Administrative Agent and the Collateral Agent in connection with this Commitment Letter, the fee letter of even date herewith (the "Agent's Fee Letter") concerning fees payable to the Administrative Agent in connection with the Facility, the transactions contemplated hereby and thereby (including, without limitation, preparation of the Definitive Documentation) and BBNA's ongoing due diligence in connection therewith (including, without limitation, reasonable travel expenses; reasonable attorneys' fees and expenses; reasonable asset evaluation and audit expenses (including, without limitation, tradename appraisals); reasonable syndication expenses; and other reasonable charges and disbursements and any other reasonable out-of-pocket costs and expenses of BBNA, the Administrative Agent and the Collateral Agent), from time to time promptly upon request whether or not such transactions are consummated, (b) to pay all fees and other amounts contemplated by this Commitment Letter and the Agent's Fee Letter when such amounts are due and (c) to indemnify and hold harmless the Administrative Agent, the Collateral Agent, BancBoston Securities Inc., the Issuing Bank (as defined in the Term Sheet), the Lenders, the other financial institutions that become parties to the Credit Agreement and Bradlees Stores, Inc. December 23, 1997 Page 6 each of their respective officers, directors, partners, beneficiaries, trustees, employees, professionals, affiliates, agents and controlling persons (collectively, the "Indemnified Persons") from and against any and all losses, claims, damages and liabilities to which any such Indemnified Person may become subject arising out of, or in connection with, this Commitment Letter or the Agent's Fee Letter, the transactions contemplated hereby or thereby or any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any of such Indemnified Persons is a party thereto, and to reimburse each of such Indemnified Persons, from time to time upon their demand, for any reasonable legal or other expenses incurred in connection with investigating or defending any of the foregoing, whether or not the transactions contemplated hereby or thereby are consummated, provided that the foregoing -------- indemnity set forth in this clause (c) will not, as to any Indemnified Person, apply to losses, claims, damages, liabilities or related expenses to the extent that they have been determined by a court of competent jurisdiction by final non-appealable order to arise from the bad faith, willful misconduct or gross negligence of such Indemnified Person. All such out-of-pocket costs and expenses, fees and other amounts and indemnities shall be considered and treated as superpriority administrative expenses of the Debtor in the Case and in any subsequent or superseding bankruptcy proceeding of the Debtor. You agree that this Commitment Letter and the Agent's Fee Letter are for your confidential use only and that they will not be disclosed by you or any of the Guarantors to any person (including any lender bidding for any portion of the financing contemplated by this Commitment Letter) other than to your employees, officers, accountants, attorneys, and other advisors (subject to appropriate confidentiality restrictions) and, to the extent necessary for acceptance of this Commitment Letter and the Agent's Fee Letter, to the Bankruptcy Court (and any creditors' committee of the Debtor) and then only in connection with the transactions contemplated hereby and thereby and on a confidential basis. However, upon your acceptance of this Commitment Letter and the Agent's Fee Letter, this Commitment Letter and the Agent's Fee Letter may be disclosed in connection with obtaining Bankruptcy Court approval of the terms and conditions contemplated herein and therein. Each Lender agrees to keep any information delivered or made available by you to it confidential from anyone other than such Lenders' employees, officers, partners, beneficiaries, trustees, attorneys and other advisors who are or are expected to become engaged in evaluating, approving, structuring or administering the Facility or rendering legal advice in connection therewith, provided that nothing herein shall prevent the Lenders from disclosing such - -------- information (a) upon the order of any court or administrative agency or upon the request of any administrative agency or authority, (b) upon the request or demand of any regulatory agency or authority, (c) to the extent that such information has been publicly disclosed other than as a result of a disclosure by the Lenders, (d) to any other Lender, (e) to any actual or potential syndicate assignee or participant, provided that each such assignee or participant has been notified of the provisions of this paragraph and agrees to be bound by them, or (f) otherwise as required by law. Bradlees Stores, Inc. December 23, 1997 Page 7 For the avoidance of doubt, you hereby agree that your obligation to repay all amounts outstanding under the DIP Facility on the Termination Date (as defined therein) is absolute and unconditional and not subject to or conditioned upon the closing of the Facility or the making of any loans thereunder. This Commitment Letter shall not be assignable by you without the prior written consent of the Lenders and may not be amended or any provision hereof waived or modified except by an instrument in writing signed by you and the Lenders. This Commitment Letter supersedes all our prior letters to you regarding the subject of this Commitment Letter. This Commitment Letter shall be governed by, and construed in accordance with, the laws of the State of New York. If the foregoing correctly sets forth our agreement, please indicate your acceptance of the terms hereof by signing and returning to the Administrative Agent by telecopy not later than 5:00 p.m., Boston time, today, December 23, 1997 (with an original to follow by overnight mail), the enclosed duplicate originals of this Commitment Letter and the Agent's Fee Letter. The commitments contained herein shall be terminated if (a) you shall have failed to accept this Commitment Letter and the Agent's Fee Letter in the time and manner set forth in the previous sentence or (b) the Lenders shall not have received evidence of the Bankruptcy Court's approval of your executing this Commitment Letter and the Agent's Fee Letter, and the payment of the fees, expenses or other amounts as contemplated hereby and thereby on or prior to December 23, 1997. If the initial funding under the Credit Agreement has not previously or contemporaneously occurred, this Commitment Letter (other than the indemnity and confidentiality provisions hereof) shall expire and be of no further force and effect on the earlier to occur of (i) termination of the DIP Facility in accordance with the terms thereof and (ii) one (1) Business Day (as defined in the DIP Facility) after the Plan Effective Date. This Commitment Letter may be executed in any number of counterparts, each of which shall be an original and all of which, when taken together, shall constitute one agreement. We are pleased to have been given the opportunity to participate in the transaction contemplated hereby. Very truly yours, Bradlees Stores, Inc. December 23, 1997 Page 8 BANKBOSTON, N.A. By: ____________________________ Name: Elizabeth A. Ratto Title: Vice President [LENDER] By: __________________________ Name: Title: Schedule A to Commitment Letter -------------------------------
Commitment Commitment Lender Percentage Amount - ------ ---------- ------------ BankBoston, N.A. 22% $ 55,000,000 The CIT Group/Business Credit, Inc. 10% $ 25,000,000 Congress Financial Corporation 16% $ 40,000,000 (New England) FirstTrust Bank 4% $ 10,000,000 AT&T Commercial Finance Corporation 6% $ 15,000,000 Green Tree Financial 8% $ 20,000,000 Heller Financial,Inc. 8% $ 20,000,000 Fremont Financial Corporation 6% $ 15,000,000 Fleet National Bank 6% $ 15,000,000 National City Commercial Finance, Inc. 6% $ 15,000,000 LaSalle National Bank 8% $ 20,000,000 ---- ------------ Total 100% $250,000,000 =====
Agreed to and accepted as of the date first above written: BRADLEES STORES, INC., as Debtor and Debtor-in-Possession By: Name: Title: REVOLVING CREDIT AND GUARANTY AGREEMENT REVOLVING CREDIT AND GUARANTY AGREEMENT (as amended, supplemented or otherwise modified from time to time, this "Agreement"), dated as of ________, --------- 199_, among BRADLEES STORES, INC., a Massachusetts corporation (the "Borrower"), -------- BRADLEES, INC., a Massachusetts corporation ("BI"), BRADLEES ADMINISTRATIVE CO., -- INC., a Massachusetts corporation ("BAC"), and each of the other guarantors --- listed in Schedule 3.04 (together with BI and BAC, each a "Guarantor" and collectively, the "Guarantors"), the Lenders named on Annex A hereto and each ---------- other Person from time to time party hereto as a Lender, BANKBOSTON, N.A., a national banking association ("BBNA"), as the issuer of Letters of Credit (in ---- such capacity, together with any successor issuer of Letters of Credit hereunder, the "Issuing Bank") and as administrative agent for the Issuing Bank, ------------ the Collateral Agent and the Lenders (in such capacity, the "Administrative -------------- Agent"), BANKBOSTON RETAIL FINANCE, INC., a subsidiary of BBNA ("BBRF"), as - ----- ---- collateral agent (in such capacity, the "Collateral Agent"), and THE CIT ---------------- GROUP/BUSINESS CREDIT, INC. and CONGRESS FINANCIAL CORPORATION (NEW ENGLAND), each as co-agents (collectively, the "Co-Agents"). --------- INTRODUCTORY STATEMENT On June 23, 1995, the Borrower and the Guarantors filed voluntary petitions with the Bankruptcy Court, each initiating a case under Chapter 11 of the Bankruptcy Code (the cases of the Borrower and the Guarantors, each a "Case" and ---- collectively, the "Cases"), and have continued in the possession of their assets ----- and in the management of their businesses pursuant to Sections 1107 and 1108 of the Bankruptcy Code. The Borrower and Guarantors currently are parties to a $250,000,000 debtor-in-possession Revolving Credit and Guaranty Agreement (as amended, the "Existing Credit Facility"), dated as of December 23, 1997, with ------------------------ the Lenders, the Issuing Bank, the Administrative Agent, the Co-Agents and the Collateral Agent. The Borrower has applied to the Lenders and the Issuing Bank for a revolving credit and letter of credit facility in an aggregate principal amount not to exceed $250,000,000, all of the Borrower's obligations under which are to be guaranteed by the Guarantors and secured by substantially all assets (other than Real Property) of the Borrower. The extensions of credit hereunder will be used, first, to repay in full all amounts outstanding under the Existing Credit Facility and thereafter to provide working capital for and to finance Inventory purchases by the Borrower and otherwise for general corporate purposes. Accordingly, the parties hereto hereby agree as follows: I. DEFINITIONS SECTION 1.01. DEFINED TERMS. ------------- As used in this Agreement, the following terms shall have the meanings specified below: "ABR Loan" shall mean any Loan bearing interest at a rate determined by -------- reference to the Alternate Base Rate in accordance with the provisions of Article II. "Accounts Payable" shall mean amounts owing by the Borrower on open account ---------------- to creditors for purchases of goods and services, determined on a consolidated basis pursuant to GAAP. "Adjusted LIBOR Rate" shall mean, with respect to any Eurodollar Borrowing ------------------- for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the quotient of (a) the LIBOR Rate in effect for such Interest Period divided by (b) a percentage (expressed as a decimal) equal to 100% minus Statutory Reserves. "Affiliate" shall mean, as to any Person, any other Person which, directly --------- or indirectly, is in control of, is controlled by, or is under common control with such Person. For purposes of this definition, a Person (a "Controlled ---------- Person") shall be deemed to be "controlled by" another Person (a "Controlling - ------ ----------- Person") if the Controlling Person possesses, directly or indirectly, power to - ------ direct or cause the direction of the management and policies of the Controlled Person whether by contract or otherwise. "Agent Advance" shall mean a Loan made by the Administrative Agent to the ------------- Borrower pursuant to Section 2.03(c) hereof. "Agents" shall mean the Administrative Agent and the Collateral Agent. ------ "Agreement" shall mean this Revolving Credit and Guaranty Agreement, as the --------- same may from time to time be amended, modified or supplemented. "Alternate Base Rate" shall mean, for any day, the higher of (a) the annual ------------------- rate of interest then most recently announced by BBNA at its head office in Boston, Massachusetts as its "Base Rate" and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1% (0.50%) per annum. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations thereof in accordance with the terms hereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition, until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in BBNA's Base Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in BBNA's Base Rate or the Federal Funds Effective Rate, respectively. "Assignment and Acceptance" shall mean an assignment and acceptance entered ------------------------- into by a Lender and an Eligible Assignee, and accepted by the Administrative Agent, in a form supplied by the Administrative Agent. "Bankruptcy Code" shall mean The Bankruptcy Reform Act of 1978, codified as --------------- 11 U.S.C. 2 Section 101 et seq., as heretofore and hereafter amended from time to time, and any successor act or statute. "Bankruptcy Court" shall mean the United States Bankruptcy Court for the ---------------- Southern District of New York, or any other court having jurisdiction over the Cases. "BBNA Concentration Account" shall have the meaning set forth in Section -------------------------- 2.13(a). "BBNA Disbursement Accounts" shall have the meaning set forth in Section -------------------------- 2.13(d). "Blocked Account Agreements" has the meaning set forth in Section 2.13(a). -------------------------- "Blocked Account Banks" shall mean the banks with whom the Borrower has --------------------- entered into Blocked Account Agreements. "Blocked Accounts" shall have the meaning set forth in Section 2.13(a). ---------------- "Board" shall mean the Board of Governors of the Federal Reserve System of ----- the United States. "Borrowing" shall mean the incurrence of Loans of a single Type made from --------- all the Lenders on a single date and having, in the case of Eurodollar Loans, a single Interest Period (with any ABR Loan made pursuant to Section 2.16 being considered a part of the related Borrowing of Eurodollar Loans). "Borrowing Base" shall mean, on any day, an amount equal to (a) 60% of the -------------- then Loan Value of the then Eligible Receivables, plus (b) the Exit Base Advance ---- Rate multiplied by the then Loan Value of Eligible Inventory and (without duplication) the Exit Base Advance Rate multiplied by the then Loan Value of the then applicable Eligible LC Inventory Sublimit plus (c) the Overadvance Amount, ---- if any, minus (d) the then amount of all Borrowing Base Reserves. ----- "Borrowing Base Certificate" shall mean a certificate substantially in the -------------------------- form of Exhibit A-1 or, in the case of the first Borrowing Base Certificate that is delivered after the close of each of the Borrower's fiscal months, Exhibit A- 2 (in each case with such changes therein as may be required by the Administrative Agent to reflect the components of, and reserves against, the Borrowing Base as provided for hereunder from time to time), executed and certified by a Financial Officer of the Borrower, which shall include appropriate exhibits and schedules as referred to therein. "Borrowing Base Reserves" shall mean such reserves against the Borrowing ----------------------- Base as the Administrative Agent from time to time may elect, in its reasonable discretion and on 7 days' notice to the Borrower, to apply for purposes of determining the Borrowing Base on account of any matter, contingency or risk which the Administrative Agent may in good faith deem potentially material to the prospect of payment of the Credit Extensions, including (by way solely of illustration and without in any manner limiting the Administrative Agent's right to apply a reserve on account of any other matter, contingency or risk, whether similar or not) such items as the Customer Credits Reserve. "Breakage Costs" shall have the meaning set forth in Section 2.11(b). -------------- "BSI" shall mean BancBoston Securities Inc. --- 3 "Business Day" shall mean any day other than a Saturday, Sunday or other ------------ day on which banks in the States of New York or Massachusetts are required or permitted to close (and, for a Letter of Credit, other than a day on which the bank issuing such Letter of Credit is closed); provided, however, that when used -------- ------- in connection with a Eurodollar Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in dollar deposits on the London interbank market. "Business Plan" shall mean a three year business plan prepared by the ------------- Borrower, dated ________________, setting forth the business objectives for the Borrower and the Guarantors for the _____, ______ and ______ fiscal years, which plan includes, among other things: for the first fiscal year, a monthly, and for the following two fiscal years, a yearly (i) balance sheet, (ii) income statement, and (iii) statement of cash flows. "Capital Expenditures" shall mean, for any period, the aggregate of all -------------------- expenditures (whether paid in cash or accrued as liabilities during such period and excluding that portion of Capitalized Leases which is capitalized on the consolidated balance sheet of the Borrower and the Guarantors) by the Borrower and the Guarantors during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant, equipment or intangibles or similar fixed asset accounts reflected in the consolidated balance sheet of the Borrower and the Guarantors net of cash amounts received during such period in reimbursement of Capital Expenditures made by the Borrower and the Guarantors, excluding interest capitalized during construction, by the Borrower and the Guarantors during such period that, in conformity with GAAP, are required to be included in or reflected by the property, plant, equipment or intangibles or similar fixed asset accounts reflected in the consolidated balance sheet of the Borrower and the Guarantors (including equipment which is purchased simultaneously with the trade-in of existing equipment owned by the Borrower or any of the Guarantors to the extent of the gross amount of such purchase price less the book value of the equipment being traded in at such time), but excluding expenditures made in connection with the replacement or restoration of assets to the extent reimbursed or financed from insurance proceeds paid on account of the loss of or the damage to the assets being replaced or restored, or from awards of compensation arising from the taking by condemnation or eminent domain of such assets being replaced. "Capitalized Lease" shall mean, as applied to any Person, any lease of ----------------- property by such Person as lessee which would be capitalized on a balance sheet of such Person prepared in accordance with GAAP. "Cases" shall have the meaning set forth in the introductory paragraph to ----- this Agreement. "Cash Collateral Account" shall mean an interest-bearing account ----------------------- established by the Borrower with the Administrative Agent at BBNA under the sole and exclusive dominion and control of the Administrative Agent at the office of BBNA at 100 Federal Street, Boston, Massachusetts 02110 designated as the "Bradlees Stores, Inc. Cash Collateral Account" that shall be used solely for the purposes set forth in Sections 2.02, 2.10(a) and 2.14. "Cash Receipts" shall have the meaning set forth in Section 2.13(a). ------------- "Closing Date" shall mean the date on which this Agreement has been ------------ executed and the conditions precedent to the making of the initial Loans set forth in Sections 4.01 and 4.02 have been 4 satisfied or waived in writing by the Administrative Agent, the Issuing Bank, the Collateral Agent and the Required Lenders, which date shall occur on or within one (1) Business Day after the Plan Effective Date. "Closing Documents List" shall mean the list of required closing documents ---------------------- attached hereto as Schedule 4.01(q). "Code" shall mean the Internal Revenue Code of 1986, as amended. ---- "Collateral" shall mean any and all assets, properties, and rights of the ---------- Borrower pledged from time to time pursuant hereto or to the Security Documents as security for the Obligations, which shall include, without limitation, substantially all assets, properties and rights of the Borrower (other than Real Property) and all proceeds thereof. "Collateral Access Agreements" shall mean any landlord waivers, mortgagee ---------------------------- waivers, bailee letters or any similar acknowledgment agreements of any warehouseman or processor in possession of Inventory of the Borrower or any Guarantor, in form and substance satisfactory to the Collateral Agent. "Commitment" shall mean, with respect to each Lender, the aggregate ---------- commitment of such Lender hereunder in the amount set forth opposite its name on Annex A hereto or as may subsequently be set forth in the Register from time to time, as the same may be reduced from time to time pursuant to Section 2.07. "Commitment Fee" shall have the meaning set forth in Section 2.20. -------------- "Commitment Percentage" shall mean at any time, with respect to each --------------------- Lender, the percentage obtained by dividing its Commitment at such time by the Total Commitment at such time. "Confirmation Order" means an order of the Bankruptcy Court confirming the ------------------ Plan of Reorganization pursuant to sections 1128 and 1129 of the Bankruptcy Code. "Credit Card Obligor" shall mean any of National Bancard Corporation, Novus ------------------- Services, Inc., American Express Travel Related Services Company, Inc. and Citicorp Retail Services, Inc., and any other Person acceptable to the Administrative Agent in its sole discretion, provided that each of the above entities and each such other Person has executed and delivered to the Administrative Agent a Payment Direction Agreement with respect to the Receivables due to the Borrower from such Obligor. "Credit Extensions" shall be equal, as of any day, to the sum of (a) the ----------------- principal balance of all Loans then outstanding, and (b) the then amount of the Letter of Credit Outstandings. "Customer Credits Reserve" shall mean a reserve established by the ------------------------ Administrative Agent from time to time in an amount equal to the sum of (i) fifty percent (50%) of the dollar value of gift certificates outstanding and (ii) fifty percent (50%) of the dollar value of customer merchandise credits. "Default" shall mean any event which, upon the giving of any notice or the ------- lapse of any period of time expressly set forth in Section 7.01, or both, would constitute an Event of Default. 5 "Dollars" and "$" shall mean lawful money of the United States of America. ------- - "EBITDA" shall mean, for any period, all as determined in accordance with ------ GAAP, the net income (or net loss) of the Borrower for such period, plus (to the ---- extent taken into account in determining such net income or net loss) (a) the sum of (i) depreciation expense, (ii) amortization expense, (iii) provision for LIFO adjustment for Inventory valuation, (iv) net total Federal, state and local income tax expense, (v) gross interest expense for such period less gross interest income for such period, (vi) any non-recurring charge or restructuring charge which in accordance with GAAP is excluded from operating income, (vii) the cumulative effect of any change in accounting principles, (viii) extraordinary losses and (ix) "Chapter 11 expenses" (or "administrative costs reflecting Chapter 11 expenses") as shown on the Borrower's statement of income for such period, minus (b) extraordinary gains, and plus (c) the amount of cash ----- ---- received (and minus the amount of cash expended) in such period in respect of any amount which, under clause (vi) above, was taken into account in determining EBITDA for such or any prior period. "Eligible Assignee" shall mean (a) a commercial bank having total assets in ----------------- excess of $500,000,000, (b) a finance company, insurance company or other financial institution (in each case with total assets in excess of $200,000,000) or fund (with total assets in excess of $50,000,000) reasonably acceptable to the Administrative Agent which in the ordinary course of business extends credit or purchases debt of the type evidenced by the Notes and whose becoming an assignee would not constitute a prohibited transaction under Section 4975 of ERISA, and (c) any other financial institution, fund or other Person reasonably satisfactory to the Administrative Agent and approved by the Borrower, which approval shall not be unreasonably withheld or delayed, and which approval shall not be required upon the occurrence and during the continuance of an Event of Default. "Eligible Inventory" shall mean, as of the date of determination thereof, ------------------ items of Inventory of the Borrower that are finished goods, merchantable and readily saleable to the public in the ordinary course and goods ("L/C Goods") as --------- to which a documentary Letter of Credit has been issued and which, if in the possession of the Borrower, would be treated as the Borrower's Inventory hereunder, but only if such goods have been consigned to the Issuing Bank or the Borrower (along with delivery to the Issuing Bank or the Borrower, as applicable, of the documents of title with respect thereto), in each case deemed by the Administrative Agent in its reasonable discretion to be eligible for inclusion in the calculation of the Borrowing Base. Without limiting the foregoing, unless otherwise approved in writing by the Administrative Agent, none of the following shall be deemed to be Eligible Inventory, and Eligible Inventory shall be reduced by the following: (a) Inventory (other than L/C Goods) that is not owned solely by the Borrower or with respect to which the Borrower does not have good, valid and marketable title, free and clear of any Lien; (b) Inventory that is not located on, or in transit directly to, property leased by the Borrower or in a contract warehouse or other third party location, in each case, located in the United States and segregated or otherwise separately identifiable from goods of others, if any, stored on the premises; (c) Inventory that is not reflected in the Borrower's stock ledger report, warehouse status report or the "in-transit" account in the general ledger; (d) Inventory that has been returned or rejected by any of the Borrower's 6 customers and which is damaged or defective or to be returned to vendor; (e) Inventory not held for resale in the ordinary course, including samples, publicity, display or demonstration Inventory, packaway Inventory, and piece goods; (f) consigned and leased Inventory; (g) special order Inventory; (h) supplies and packing or shipping materials; (i) Inventory in which the Collateral Agent does not have a first- priority perfected security interest pursuant to the Security Agreement or which is not in transit to a location where the Collateral Agent will immediately have such a first-priority perfected security interest therein; and (j) Inventory reserves that may be required by the Administrative Agent in the exercise of its reasonable discretion and on 7 days' notice to the Borrower based on a change in the value of the Inventory as determined by the Administrative Agent in its reasonable discretion (including, by way of example, a Shrink Reserve, inventory obsolescence, seasonality, imbalance, change in Inventory character, composition or mix, change in mark-down practices both permanent and point of sale and change in retail mark-on or mark-up practices). "Eligible LC Inventory" shall mean, as of the date of determination --------------------- thereof, documentary Letters of Credit (i) that have been issued with an expiry date within 75 days of such date of determination, (ii) that have been issued for the acquisition by the Borrower of Inventory which would otherwise be Eligible Inventory if owned by the Borrower, and (iii) that may include Letters of Credit issued as described in the third paragraph of the Introductory Statement above, so long as such Letter of Credit would otherwise satisfy the requirements hereof. "Eligible LC Inventory Sublimit" shall mean, for any fiscal month of the ------------------------------ Borrower, the dollar amount set forth opposite such fiscal month below: Month Eligible LC Inventory Sublimit ----- ------------------------------ January $20,000,000 February $20,000,000 March $20,000,000 April $24,000,000 May $33,000,000 June $34,000,000 July $35,000,000 August $38,000,000 September $30,000,000 October $20,000,000 November $20,000,000 December $20,000,000 "Eligible Receivables" shall mean, as of the date of determination thereof, -------------------- Receivables of the Borrower payable in Dollars and deemed by the Administrative Agent in its reasonable discretion to 7 be eligible for inclusion in the calculation of the Borrowing Base. Without limiting the foregoing, unless otherwise approved in writing by the Administrative Agent, none of the following shall be deemed to be Eligible Receivables: (a) Receivables that have been outstanding for more than 5 Business Days; (b) Receivables not owned solely by the Borrower or the Borrower does not have good, valid and marketable title thereto, free and clear of any Lien; (c) Receivables which the Administrative Agent determines in its reasonable discretion to be uncertain of collection; and (d) with respect to Receivables created under the Purchase and Service Agreement, a notice of termination has been delivered thereunder. "Environmental Lien" shall mean a Lien in favor of any Governmental ------------------ Authority for (i) any liability under federal or state environmental laws or regulations, or (ii) damages arising from or costs incurred by such Governmental Authority in response to a release or threatened release of a hazardous or toxic waste, substance or constituent, or other substance into the environment. "Equity Interests" shall mean any and all shares, interests, participations ---------------- or other equivalents (however designated) of capital stock in a corporation and all warrants or options to purchase any of the foregoing. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as ----- amended from time to time, and the regulations promulgated and rulings issued thereunder. "ERISA Affiliate" shall mean any trade or business (whether or not --------------- incorporated) which is a member of a group of which the Borrower is a member and which is under common control within the meaning of Section 414(b) or (c) of the Code and the regulations promulgated and rulings issued thereunder. "Escrow Proceeds" shall have the meaning set forth in Section 2.13(c). --------------- "Eurocurrency Liabilities" shall have the meaning assigned thereto in ------------------------ Regulation D issued by the Board, as in effect from time to time. "Eurodollar Applicable Margin" shall mean 2.25% per annum. ---------------------------- "Eurodollar Borrowing" shall mean a Borrowing comprised of Eurodollar -------------------- Loans. "Eurodollar Interest Rate" shall have the meaning set forth in Section ------------------------ 2.05(b). "Eurodollar Loan" shall mean any Loan bearing interest at a rate determined --------------- by reference to Adjusted LIBOR Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning set forth in Section 7.01. ---------------- "Exit Base Advance Rate" shall mean, on any date, the lesser of (a) 72% or ---------------------- (b) 80% of the 8 Loan to Value Ratio on such date. "Federal Funds Effective Rate" shall mean, for any day, the rate per annum ---------------------------- equal to the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York or, if such rate is not published for any day that is a Business Day, the average of the quotations for such day on such transactions received by the Administrative Agent from three funds brokers of recognized standing selected by the Administrative Agent. "Fee Letter" shall mean that certain agent's fee letter, dated December 23, ---------- 1997, between the Borrower and the Administrative Agent. "Fees" shall collectively mean the Commitment Fees, the Letter of Credit ---- Fees, the fees and charges described in Section 2.02(c) and the fees referred to in Section 2.19. "Filing Date" shall mean June 23, 1995. ----------- "Financial Officer" shall mean the Chief Executive Officer, the Chief ----------------- Financial Officer, the Vice President - Controller or the Treasurer of the Borrower. "GAAP" shall mean generally accepted accounting principles applied on a ---- basis consistent with those used in preparing the financial statements referred to in Section 3.05. "Governmental Authority" shall mean any Federal, state, municipal or other ---------------------- governmental department, commission, board, bureau, agency or instrumentality or any court, in each case whether of the United States or any foreign jurisdiction. "Guaranteed Parties" shall mean the Lenders, the Administrative Agent, the ------------------ Collateral Agent, the Co-Agents and the Issuing Bank. "Indebtedness" shall mean, at any time and with respect to any Person, (i) ------------ all indebtedness of such Person for borrowed money, (ii) all indebtedness of such Person for the deferred purchase price of property or services (other than property, including inventory, and services purchased, and expense accruals and deferred compensation items arising, in the ordinary course of business), (iii) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments (other than performance, surety and appeal bonds arising in the ordinary course of business), (iv) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (v) all obligations of such Person under leases which have been or should be, in accordance with GAAP, recorded as capital leases, to the extent required to be so recorded, (vi) all reimbursement, payment or similar obligations of such Person, contingent or otherwise, under acceptance, letter of credit or similar facilities, (vii) all Indebtedness referred to in clauses (i) through (vi) above guaranteed directly or indirectly by such Person, or in effect guaranteed directly or indirectly by such Person through an agreement (A) to pay or purchase such Indebtedness or to advance or supply funds for the payment or purchase of such Indebtedness, (B) to purchase, sell or lease (as lessee or lessor) property, or to purchase or sell services, primarily for the purpose of enabling the debtor to make payment of such Indebtedness or to assure the holder of such Indebtedness 9 against loss in respect of such Indebtedness, (C) to supply funds to or in any other manner invest in the debtor (including any agreement to pay for property or services irrespective of whether such property is received or such services are rendered) or (D) otherwise to assure a creditor against loss in respect of such Indebtedness, and (viii) all Indebtedness referred to in clauses (i) through (vii) above secured by (or for which the holder of such Indebtedness has an existing right, contingent or otherwise, to be secured by) any Lien upon or in any property owned by such Person, even though such Person has not assumed or become liable for the payment of such Indebtedness. "Insufficiency" shall mean, with respect to any Plan, the amount, if any, ------------- of its unfunded benefit liabilities within the meaning of Section 4001(a)(18) of ERISA. "Interest Coverage Ratio" shall mean, for each fiscal quarter of the ----------------------- Borrower, the ratio of the Borrower's (a) EBITDA less Capital Expenditures to ---- (b) cash Interest Expense, for the 12-month period ending on the last day of such fiscal quarter. "Interest Expense" shall mean interest expense as determined in accordance ---------------- with GAAP. "Interest Payment Date" shall mean (i) as to any Eurodollar Loan having an --------------------- Interest Period of 1, 2 or 3 months, the last day of such Interest Period and (ii) as to all ABR Loans outstanding at any time during any month, the first Business Day of the next succeeding month. "Interest Period" shall mean, as to any Borrowing of Eurodollar Loans, the --------------- period commencing on and including the date of such Borrowing (including as a result of a refinancing of ABR Loans) or on the last day of the preceding Interest Period applicable to such Borrowing and ending on and excluding the numerically corresponding day (or if there is no corresponding day, the last day) in the calendar month that is 1, 2 or 3 months thereafter, as the Borrower may elect in the related notice delivered pursuant to Sections 2.03(b) or 2.09; provided, however, that (i) if any Interest Period would end on a day which - -------- ------- shall not be a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day, and (ii) no Interest Period shall end later than the Termination Date. "Inventory" shall mean all goods, wares and merchandise owned and held for --------- sale by the Borrower. "Investments" shall have the meaning set forth in Section 6.11. ----------- "Lenders" shall mean the Persons identified on Annex A hereto and each ------- assignee that becomes a party to this Agreement as set forth in Section 10.03(b). "Letter of Credit" shall mean a letter of credit that is (i) issued for ---------------- account of the Borrower, (ii) a standby or documentary letter of credit, (iii) issued in connection with the purchase of Inventory by the Borrower and for other purposes for which the Borrower has historically obtained letters of credit, or for any other purpose that is reasonably acceptable to the Administrative Agent (including, without limitation, the Letters of Credit issued as described in the third paragraph of the Introductory Statement above), and (iv) in form and substance reasonably satisfactory to the Issuing Bank. "Letter of Credit Fees" shall mean the fees payable in respect of Letters --------------------- of Credit pursuant to Section 2.21. 10 "Letter of Credit Outstandings" shall mean, at any time, the sum of (a) ----------------------------- with respect to Letters of Credit outstanding at such time, the aggregate maximum amount that then is or at any time thereafter may become available for drawing or payment thereunder plus (b) all amounts theretofore drawn or paid ---- under Letters of Credit for which the Issuing Bank has not then been reimbursed. "LIBOR Rate" shall mean, for any Interest Period for any Eurodollar ---------- Borrowing, the rate (rounded upwards, if necessary, to the next 1/16 of 1%) at which dollar deposits approximately equal in principal amount to such Eurodollar Borrowing and for a maturity comparable to such Interest Period are offered to the principal London office of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" shall mean any mortgage, pledge, security interest, encumbrance, ---- lien or charge of any kind whatsoever (including any conditional sale or other title retention agreement or any lease in the nature thereof). "Loan Documents" shall mean this Agreement, the Notes, the Letters of -------------- Credit, the Fee Letter, all Borrowing Base Certificates, the Blocked Account Agreements, the Access Agreements, the Payment Direction Agreements, the Security Documents and any other instrument or agreement executed and delivered in connection herewith. "Loan to Value Ratio" shall mean the ratio expressed as a percentage of (i) ------------------- the annual average net appraised liquidation value at cost of the Borrower's Inventory on or about the Plan Effective Date to (ii) the Loan Value of the Debtor's Inventory. "Loan Value" shall mean the amount determined by the Administrative Agent ---------- from time to time, in its reasonable discretion and consistent with the Administrative Agent's usual business practices and policies for similar borrowers similarly situated, as an appropriate estimate of the value of Eligible Receivables, Eligible LC Inventory (which shall not exceed the amount that may be drawn under such Letters of Credit), and Eligible Inventory (which determination shall take into account the following factors, among others: (i) the cost thereof, (a) as determined under the retail method of accounting as reflected in the Borrower's stock ledger (the cost value of the Inventory in the stock ledger will be adjusted based upon the lowest ticketed retail price at which such Inventory is offered to the public, after all permanent mark-downs (whether or not such price is then reflected on the Borrower's accounting system)) or, (b) with respect to warehouse and in-transit inventory, determined under the cost method of accounting, (ii) the first-in, first-out accounting valuation method, (iii) the Borrower's accounting practices, known to the Administrative Agent and in effect on the date hereof, and (iv) excluding any capitalization costs or other non-purchase price charges (other than "freight- in"), such as intracompany freight, used in the Borrower's calculation of cost of goods sold. "Loans" shall mean all loans (including, without limitation, Agent ----- Advances) at any time made to the Borrower or for account of the Borrower pursuant to this Agreement. "Maturity Date" shall mean the earlier to occur of (a) three years from the ------------- Closing Date or (b) four years from the closing date of the Existing Credit Facility. "Multiemployer Plan" shall mean a "multiemployer plan" as defined in ------------------ Section 4001(a)(3) of ERISA to which the Borrower or any ERISA Affiliate is making or accruing an obligation to make 11 contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "Multiple Employer Plan" shall mean a Single Employer Plan, which (i) is ---------------------- maintained for employees of the Borrower or an ERISA Affiliate and at least one Person other than the Borrower and its ERISA Affiliates or (ii) was so maintained and in respect of which the Borrower or an ERISA Affiliate could have liability under Section 4064 or 4069 of ERISA in the event such Plan has been or were to be terminated. "Notes" shall mean the promissory notes of the Borrower (i) substantially ----- in the form of Exhibit B-1, each payable to the order of a Lender, evidencing the Loans and (ii) substantially in the form of Exhibit B-2, payable to the Administrative Agent, evidencing the Agent Advances. "Obligations" shall mean (a) the due and punctual payment of principal of ----------- and interest on the Loans and the Notes and the reimbursement of all amounts drawn under Letters of Credit, and (b) the due and punctual payment of the Fees and all other present and future, fixed or contingent, monetary obligations of the Borrower and the Guarantors to the Lenders, the Issuing Bank, the Collateral Agent, the Co-Agents and the Administrative Agent under the Loan Documents. "Other Taxes" shall have the meaning set forth in Section 2.18(b). ----------- "Overadvance Amount" shall mean on any day from and including March 1 ------------------ through and including December 15 of any year, the lesser of (x) up to 5% of the then Loan Value of the then Eligible Inventory plus (without duplication) 5% of ---- the then Loan Value of the then Eligible LC Inventory; provided, that the -------- overadvance rate and the Exit Base Advance Rate, when combined, shall not cause the advance rate applied against Eligible Inventory and the Eligible LC Inventory Sublimit to be greater than 75%, and (y) an amount, when added to an amount represented by the Exit Base Advance Rate, will not cause the Loan to Value Ratio to exceed 85%. "Overadvance Margin" shall mean (i) .50% per annum for any month in which ------------------ the Borrower has any Loans outstanding by utilizing the Overadvance Amount under the Borrowing Base, or (ii) at all other times, zero. "Payment Direction Agreement" shall mean an agreement among the Borrower, --------------------------- the Administrative Agent and each Credit Card Obligor, in form and substance satisfactory to the Administrative Agent, providing for the direct payment to the BBNA Concentration Account of all amounts due to the Borrower from such Credit Card Obligor "PBGC" shall mean the Pension Benefit Guaranty Corporation, or any ---- successor agency or entity performing substantially the same functions. "Pension Plan" shall mean a defined benefit pension or retirement plan ------------ which meets and is subject to the requirements of Section 401(a) of the Code. "Permitted Investments" shall mean: --------------------- (a) direct obligations of, or obligations the principal of and interest on which are unconditionally guaranteed by, the United States of America (or by any agency thereof to the extent such obligations are backed by the full faith and credit of the United States of America), in each case 12 payable in Dollars and maturing within twelve months from the date of acquisition thereof; (b) investments in certificates of deposit, banker's acceptances and time deposits (including Eurodollar time deposits) payable in Dollars and maturing within six months from the date of acquisition thereof issued or guaranteed by or placed with (i) any domestic office of the Administrative Agent or (ii) any domestic office of any other commercial bank of recognized standing organized under the laws of the United States of America or any State thereof that has a combined capital and surplus and undivided profits of not less than $250,000,000 and is the principal banking Subsidiary of a bank holding company having a long-term unsecured debt rating of at least "A" or the equivalent thereof from Standard & Poor's Corporation or at least "A2" or the equivalent thereof from Moody's Investors Service, Inc.; (c) investments in commercial paper payable in Dollars and maturing within six months from the date of acquisition thereof and issued by (i) the holding company of the Administrative Agent or (ii) the holding company of any other commercial bank of recognized standing organized under the laws of the United States of America or any State thereof that has (A) a combined capital and surplus in excess of $250,000,000 and (B) commercial paper rated at least "A" or the equivalent thereof from Standard & Poor's Corporation or of at least "A2" or the equivalent thereof from Moody's Investors Service, Inc.; (d) investments in repurchase obligations payable in Dollars with a term of not more than seven days for underlying securities of the types described in clause (a) above entered into with any office of a bank or trust company meeting the qualifications specified in clause (b) above; (e) investments in money market funds substantially all the assets of which are comprised of securities of the types described in clauses (a) through (d) above; and (f) to the extent owned on the Closing Date, investments in the capital stock or partnership interests of any direct or indirect subsidiary of the Borrower. "Permitted Liens" shall mean (i) Liens imposed by law (other than --------------- Environmental Liens and any Lien imposed under ERISA) for taxes, assessments or charges of any Governmental Authority for claims not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (ii) statutory Liens of landlords and Liens of carriers, warehousemen, mechanics, materialmen and other Liens (other than Environmental Liens and any Lien imposed under ERISA) imposed by law created in the ordinary course of business for amounts not yet due or which are being contested in good faith by appropriate proceedings and with respect to which adequate reserves or other appropriate provisions are being maintained in accordance with GAAP; (iii) Liens (other than any Lien imposed under ERISA) incurred or deposits made in the ordinary course of business (including, without limitation, surety bonds and appeal bonds) in connection with workers' compensation, unemployment insurance and other types of social security benefits or to secure the performance of tenders, bids, leases, contracts (other than for the repayment of Indebtedness), statutory obligations and other similar obligations or arising as a result of progress payments under government contracts; (iv) easements (including, without limitation, reciprocal easement agreements and utility agreements), rights-of- way, covenants, consents, reservations, encroachments, variations and zoning and other restrictions, charges or encumbrances (whether or not recorded), which do not interfere materially with the ordinary conduct of the business of the Borrower or any Guarantor, as the case may be, and which do not materially detract from the value of the property to which they attach 13 or materially impair the use thereof to the Borrower or any Guarantor, as the case may be; (v) purchase money Liens (a) existing on the Closing Date upon or in any property (other than Inventory) acquired or held in the ordinary course of business to secure the purchase price of such property and (b) to secure Indebtedness permitted by Section 6.03(ii) and solely for the purpose of financing the acquisition of such property and (vi) extensions, renewals or replacements of any Lien referred to in paragraphs (i) through (v) above; provided that the principal amount of the obligation secured thereby is not - -------- increased and that any such extension, renewal or replacement is limited to the property originally encumbered thereby. "Person" shall mean any natural person, corporation, partnership, limited ------ liability company, trust, joint venture, association, company, estate, unincorporated organization or government or any agency or political subdivision thereof. "Plan" shall mean a Single Employer Plan or a Multiemployer Plan. ---- "Plan Effective Date" shall have the meaning set forth in Section 4.01(e). ------------------- "Plan of Reorganization" shall mean a plan of reorganization under chapter ---------------------- 11 of the Bankruptcy Code for all of the debtors in the Cases. "Pledge Agreement" shall have the meaning set forth in Section 4.01(g). ---------------- "Purchase and Service Agreement" shall mean that certain Amended and ------------------------------ Restated Purchase and Service Agreement dated as of August 1, 1995, among Bradlees Stores, Inc., as seller, Bradlees, Inc., as guarantor, and Citicorp Retail Services, Inc., as purchaser and servicer. "Real Property" shall mean all interests of the Borrower and the ------------- Guarantors, as applicable, in their respective owned or leased real property. "Receivables" shall mean, with respect to any Credit Card Obligor, the ----------- indebtedness of such Credit Card Obligor to the Borrower under a charge account agreement arising from a sale of merchandise or services by the Borrower. "Register" shall have the meaning set forth in Section 10.03(d). -------- "Required Lenders" shall mean, at any time, Lenders having Loans ---------------- outstanding representing at least 51% of the total Loans outstanding; provided, -------- however, that if no Loans are outstanding, Required Lenders shall be those - ------- Lenders having Commitments representing at least 51% of the Total Commitment (without giving effect to any termination of all of the Commitments pursuant to Section 7.01). "Security Agreement" shall have the meaning set forth in Section 4.01(f). ------------------ "Security Documents" shall mean the Security Agreement, the Pledge ------------------ Agreement, the Trademark Security Agreement and each other document executed in connection with the grant by the Borrower of a security interest in the Collateral to the Collateral Agent, for its benefit and the ratable benefit of the Administrative Agent, the Issuing Bank, the Co-Agents and the Lenders. "Settlement Date" shall have the meaning set forth in Section 2.03(d). --------------- 14 "Shrink Reserve" shall mean, as of the date of any determination thereof, -------------- (A) the positive result, if any, of subtracting (i) the shrinkage percentage reserve then maintained by the Borrower in its stock ledger from (ii) shrinkage (book to physical differences), calculated as a percentage of cumulative net sales since the last physical inventory, for the Borrower's most recent physical inventory with respect to Inventory located at stores and distribution centers, multiplied by (B) cumulative sales since the last physical adjustment by the - ------------- Borrower. "Single Employer Plan" shall mean a single employer plan, as defined in -------------------- Section 4001(a)(15) of ERISA, that (i) is maintained for employees of the Borrower or an ERISA Affiliate or (ii) was so maintained and in respect of which the Borrower could have liability under Section 4069 of ERISA in the event such Plan has been or were to be terminated. "Specified Location Sales" shall have the meaning set forth in Section ------------------------ 2.13(c). "Statutory Reserves" shall mean, on any date, the percentage (expressed as ------------------ a decimal) established by the Board and any other banking authority which is the then stated maximum rate for all reserves (including but not limited to any emergency, supplemental or other marginal reserve requirements) applicable to any member bank of the Federal Reserve System in respect of Eurocurrency Liabilities (or any successor category of liabilities under Regulation D issued by the Board, as in effect from time to time). Such reserve percentages shall include, without limitation, those imposed pursuant to said Regulation. The Statutory Reserves shall be adjusted automatically on and as of the effective date of any change in such percentage. "Subsidiary" shall mean, with respect to any Person (herein referred to as ---------- the "parent"), any corporation, association or other business entity (whether ------ now existing or hereafter organized) of which at least a majority of the securities or other ownership interests having ordinary voting power for the election of directors is, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Tax Payment Plan" shall have the meaning set forth in Section 4.01(c). ---------------- "Tax Refund Account" shall have the meaning set forth in Section 2.13(c). ------------------ "Taxes" shall have the meaning set forth in Section 2.18(a). ----- "Termination Date" shall mean the earliest to occur of (i) the Maturity ---------------- Date and (ii) the date on which the maturity of the Loans is accelerated and the commitments of the Lenders are terminated in accordance with Section 7.01. "Termination Event" shall mean (i) a "reportable event", as such term is ----------------- described in Section 4043 of ERISA and the regulations issued thereunder (other than a "reportable event" not subject to the provision for 30-day notice to the PBGC under Section 4043 of ERISA or such regulations) or an event described in Section 4068 of ERISA excluding events described in Section 4043(c)(9) of ERISA or 29 CFR 2615.21 or 2615.23, or (ii) the withdrawal of the Borrower or any ERISA Affiliate from a Multiple Employer Plan during a plan year in which it was a "substantial employer", as such term is defined in Section 4001(c) of ERISA, or the incurrence of liability by the Borrower or any ERISA Affiliate under Section 4064 of ERISA upon the termination of a Multiple Employer Plan, or 15 (iii) providing notice of intent to terminate a Plan pursuant to Section 4041(c) of ERISA or the treatment of a Plan amendment as a termination under Section 4041 of ERISA, or (iv) the institution of proceedings to terminate a Plan by the PBGC under Section 4042 of ERISA, or (v) any other event or condition which would reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of or the appointment of a trustee to administer, any Plan, or the imposition of any liability under Title IV of ERISA (other than for the payment of premiums to the PBGC). "Total Commitment" shall mean, at any time, the sum of the Commitments at ---------------- such time. "Trademark Security Agreement" shall have the meaning set forth in Section ---------------------------- 4.01(h). "Transferee" shall have the meaning set forth in Section 2.18(a). ---------- "Type" when used in respect of any Loan or Borrowing shall refer to the ---- rate of interest by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. "Unused Commitment" shall mean, on any day, (a) the then aggregate amount ----------------- of the Commitments minus (b) the sum of (i) the principal amount of Loans then ----- outstanding and (ii) the then Letter of Credit Outstandings. "Withdrawal Liability" shall have the meaning set forth under Part I of -------------------- Subtitle E of Title IV of ERISA. "Yonkers Location Sale" shall have the meaning set forth in Section --------------------- 2.13(c). SECTION 1.02. TERMS GENERALLY. The definitions in Section 1.01 shall --------------- apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP, as in effect from time to time; provided, however, that for purposes of -------- ------- determining compliance with any covenant set forth in Article VI, such terms shall be construed in accordance with GAAP as in effect on the date of this Agreement applied on a basis consistent with the application used in the Borrower's audited financial statements for the fiscal year ended on February 1, 1997. II. AMOUNT AND TERMS OF CREDIT SECTION 2.01. COMMITMENT OF THE LENDERS. ------------------------- (a) Each Lender severally and not jointly with any other Lender agrees, upon the terms and subject to the conditions herein set forth, to extend credit to the Borrower on a revolving basis, in the form of Credit Extensions and in an amount equal to such Lender's Commitment Percentage thereof, subject to the following limitations: (1) The aggregate outstanding amount of the Credit Extensions shall not at any time exceed the lowest of (i) $250,000,000 or any lesser amount to which the 16 Commitments have then been reduced by the Borrower pursuant to Sections 2.07 or 2.10, and (ii) the then amount of the Borrowing Base, plus the cash held in the Cash Collateral Account pursuant to Sections 2.02, 2.10(a) and 2.14(a) (item "fourth"). ------ (2) No Lender shall be obligated to issue any Letter of Credit, and Letters of Credit shall be available from the Issuing Bank, subject to the ratable participation of all Lenders, as set forth in Section 2.02. The Borrower will not at any time permit the aggregate Letter of Credit Outstandings to exceed $125,000,000. (3) Subject to all of the other provisions of this Agreement, Loans that are repaid may be reborrowed prior to the Termination Date. No new Credit Extension, however, shall be made to the Borrower after the Termination Date. (b) Each Borrowing of Loans (other than Agent Advances) shall be made by the Lenders pro rata in accordance with their respective Commitments. The --- ---- failure of any Lender to make any such Loan shall neither relieve any other Lender of its obligation to fund its Loan in accordance with the provisions of this Agreement nor increase the obligation of any such other Lender. SECTION 2.02. LETTERS OF CREDIT. ----------------- (a) Upon the terms and subject to the conditions herein set forth, the Borrower may request the Issuing Bank, at any time and from time to time after the date hereof and prior to the Termination Date, to issue, and subject to the terms and conditions contained herein, the Issuing Bank shall issue, for the account of the Borrower one or more Letters of Credit; provided that no Letter -------- of Credit shall be issued if after giving effect to such issuance (i) the aggregate Letter of Credit Outstandings shall exceed $125,000,000, or (ii) the aggregate Credit Extensions would exceed the limitation set forth in Section 2.01(a)(1); and provided further that no Letter of Credit shall be issued if the -------- ------- Issuing Bank shall have received notice from the Administrative Agent or the Required Lenders that the conditions to such issuance have not been met. (b) No Letter of Credit shall have an Expiry Date later than the 90th day after the Maturity Date. In the case of each Letter of Credit issued with an expiry date later than the Termination Date, the Borrower shall, on or prior to the Termination Date, either (i) cause such Letter of Credit to be returned to the Issuing Bank undrawn and marked "cancelled" and otherwise discharged in a manner satisfactory to the Issuing Bank or (ii) if the Borrower is unable to return and discharge such Letter of Credit, either (x) provide a "back-to-back" letter of credit issued by a bank and on terms in form and substance satisfactory to the Issuing Bank and the Administrative Agent (in their sole and absolute discretion), in an amount equal to 105% of the undrawn amount of such Letter of Credit or (y) deposit cash in the Cash Collateral Account in an amount equal to 105% of the undrawn amount under such Letter of Credit. (c) The Borrower shall pay to the Administrative Agent, for the account of the Issuing Bank and in addition to all Letter of Credit Fees provided for in Section 2.21, a fronting fee equal to 0.125% per annum of the average daily balance of the maximum amount that at any time is available for drawing or payment under each Letter of Credit, payable quarterly in arrears, as well as such fees and charges in connection with the issuance, negotiation, settlement, amendment and processing of each Letter of Credit issued by the Issuing Bank as are customarily imposed by the Issuing Bank from time to time in connection with letter of credit transactions. 17 (d) Drafts drawn under each Letter of Credit shall be reimbursed by the Borrower in Dollars not later than the first Business Day following the date of draw and shall bear interest from the date of draw until the first Business Day following the date of draw at a rate per annum equal to the Alternate Base Rate and thereafter until reimbursed in full at a rate per annum equal to the Alternate Base Rate plus 2.00% per annum (computed on the basis of the actual ---- number of days elapsed over any year of 360 days). The Borrower shall effect such reimbursement (x) if such draw occurs prior to the Termination Date (or the earlier date of termination of the Total Commitment), through a Borrowing of Loans without the satisfaction of the conditions precedent set forth in Section 4.02, or (y) if such draw occurs on or after the Termination Date (or the earlier date of termination of the Total Commitment), in cash. Each Lender agrees to fund its Commitment Percentage of the Loans described in clause (x) of the preceding sentence notwithstanding a failure to satisfy the applicable lending conditions thereto or the provisions of Sections 2.01 and 2.02 or the occurrence of the Termination Date. (e) Immediately upon the issuance of any Letter of Credit by the Issuing Bank, the Issuing Bank shall be deemed to have sold to each Lender and each such Lender shall be deemed unconditionally and irrevocably to have purchased from the Issuing Bank, without recourse or warranty, an undivided interest and participation, to the extent of such Lender's Commitment Percentage, in such Letter of Credit, each drawing thereunder and the obligations of the Borrower and the Guarantors under this Agreement with respect thereto. Upon any change in the Commitments pursuant to Section 10.03, it is hereby agreed that with respect to all Letter of Credit Outstandings, there shall be an automatic adjustment to the participations hereby created to reflect the new Commitment Percentages of the assigning and assignee Lenders. Any action taken or omitted by the Issuing Bank under or in connection with a Letter of Credit, if taken or omitted in the absence of gross negligence or wilful misconduct, shall not create for the Issuing Bank any resulting liability to any Lender. (f) In the event that the Issuing Bank makes any payment under any Letter of Credit and the Borrower shall not have reimbursed such amount in full to the Issuing Bank pursuant to this Section 2.02, the Issuing Bank shall promptly notify the Administrative Agent, which shall promptly notify each Lender of such failure, and each Lender shall promptly and unconditionally pay to the Administrative Agent for the account of the Issuing Bank the amount of such Lender's Commitment Percentage of such unreimbursed payment in Dollars and in same day funds. If the Issuing Bank so notifies the Administrative Agent, and the Administrative Agent so notifies the Lenders prior to 11:00 a.m., Boston time, on any Business Day, each such Lender shall make available to the Issuing Bank such Lender's Commitment Percentage of the amount of such payment on such Business Day in same day funds. If and to the extent such Lender shall not have so made its Commitment Percentage of the amount of such payment available to the Issuing Bank, such Lender agrees to pay to the Issuing Bank, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent for the account of the Issuing Bank at the Federal Funds Effective Rate. The failure of any Lender to make available to the Issuing Bank its Commitment Percentage of any payment under any Letter of Credit shall neither relieve any Lender of its obligation hereunder to make available to the Issuing Bank its Commitment Percentage of any payment under any Letter of Credit on the date required, as specified above, nor increase the obligation of such other Lender. Whenever any Lender has made payments to the Issuing Bank in respect of any reimbursement obligation for any Letter of Credit, such Lender shall be entitled to share ratably, based on its Commitment Percentage, in all payments and collections thereafter received on account of such reimbursement obligation. 18 (g) Whenever the Borrower desires that the Issuing Bank issue a Letter of Credit, it shall give to the Issuing Bank at least two Business Days' prior written (including telegraphic, telex, facsimile or cable communication) notice (or such shorter period as may be agreed upon in writing by the Issuing Bank and the Borrower) specifying the date on which the proposed Letter of Credit is to be issued (which shall be a Business Day), the stated amount of the Letter of Credit so requested, the expiration date of such Letter of Credit, the name and address of the beneficiary thereof, and the provisions thereof. (h) The obligations of the Borrower to reimburse the Issuing Bank for drawings made under any Letter of Credit shall be unconditional and irrevocable and shall be paid strictly in accordance with the terms of this Agreement under all circumstances, including, without limitation (it being understood that any such payment by the Borrower shall be without prejudice to, and shall not constitute a waiver of, any rights the Borrower might have or might acquire as a result of the payment by the Issuing Bank of any draft or the reimbursement by the Borrower thereof): (i) any lack of validity or enforceability of any Letter of Credit; (ii) the existence of any claim, setoff, defense or other right which the Borrower or any Guarantor may have at any time against a beneficiary of any Letter of Credit or against any of the Lenders, whether in connection with this Agreement, the transactions contemplated herein or any unrelated transaction; (iii) any draft, demand, certificate or other document presented under any Letter of Credit proving to be forged, fraudulent, invalid or insufficient in any respect or any statement therein being untrue or inaccurate in any respect; (iv) payment by the Issuing Bank of any Letter of Credit against presentation of a demand, draft or certificate or other document which does not comply with the terms of such Letter of Credit; (v) any other circumstance or happening whatsoever, whether or not similar to any of the foregoing; or (vi) the fact that any Event of Default shall have occurred and be continuing. SECTION 2.03. MAKING OF LOANS. --------------- (a) Except as set forth in Section 2.09, Loans by the Lenders shall be either ABR Loans or (so long as no Event of Default has occurred and is continuing and the making of Eurodollar Loans by any Lender is not illegal or impractical) Eurodollar Loans as the Borrower may request subject to and in accordance with this Section 2.03. All Loans made pursuant to the same Borrowing shall, unless otherwise specifically provided herein, be Loans of the same Type. Each Lender may fulfill its Commitment with respect to any Loan by causing any lending office of such Lender to make such Loan; but any such use of a lending office shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of the applicable Note. Each Lender shall, subject to its overall policy considerations, use reasonable efforts (but shall not be obligated) to select a lending office which will not result in the payment of increased costs by the Borrower pursuant to Section 2.15. Subject to the other provisions of this Section 2.03 and the provisions of Section 2.16, Borrowings of Loans of more than one Type may be incurred at the same time, but no more than five Borrowings of Eurodollar Loans may be outstanding at any time. (b) The Borrower shall give the Administrative Agent two business days' prior notice of each Borrowing of Eurodollar Loans and same-day notice of each Borrowing of ABR Loans, so long as notice is given prior to 12:00 Noon, Boston time. Such notice shall be irrevocable and shall specify the amount of the proposed Borrowing (which shall not be less than $1,000,000 in the case of Eurodollar Loans) and the date thereof (which shall be a Business Day) and shall contain disbursement instructions. Such notice, to be effective, must be received by the Administrative Agent not later than 1:00 p.m., Boston time, on the second Business Day in the case of Eurodollar Loans and 19 not later than 12:00 Noon, Boston time, on the same day in the case of ABR Loans, on which such Borrowing is to be made. Such notice shall specify whether the Borrowing then being requested is to be a Borrowing of ABR Loans or Eurodollar Loans and, if Eurodollar Loans, the Interest Period with respect thereto. If no election of Interest Period is specified in any such notice for a Borrowing of Eurodollar Loans, such notice shall be deemed a request for an Interest Period of one month. If no election is made as to the Type of Loan, such notice shall be deemed a request for Borrowing of ABR Loans (subject to Section 2.03(a)). The Administrative Agent shall promptly notify each Lender of its proportionate share of such Borrowing, the date of such Borrowing, the Type of Borrowing being requested and the Interest Period or Interest Periods applicable thereto, as appropriate. On the borrowing date specified in such notice, each Lender shall make its share of the Borrowing available at the office of the Administrative Agent at 100 Federal Street, Boston, Massachusetts 02110, no later than 3:00 p.m., Boston time, in immediately available funds. Upon receipt of the funds made available by the Lenders to fund any borrowing hereunder, the Administrative Agent shall disburse such funds in the manner specified in the notice of borrowing delivered by the Borrower and shall use reasonable efforts to make the funds so received from the Lenders available to the Borrower no later than 4:00 p.m., Boston time. (c) The Administrative Agent is authorized by the Lenders, but is not obligated, to make Agent Advances up to $15,000,000 in the aggregate outstanding at any time, consisting only of ABR Loans upon a notice of Borrowing received by the Administrative Agent (which notice, at the Administrative Agent's discretion, may be submitted prior to 12:00 Noon, Boston time, on the same day for which such Agent Advance is requested). Agent Advances (together with all other Credit Extensions) may not at any time cause the Borrower to be in violation of the provisions of Section 2.10(a) hereof. Agent Advances shall be subject to periodic settlement with the Lenders under the following subsection. (d) (i) The amount of each Lender's Commitment Percentage of outstanding Loans (including Agent Advances) shall be computed weekly (or more frequently in the Administrative Agent's discretion) and shall be adjusted upward or downward based on all Loans (including Agent Advances) and repayments of Loans (including Agent Advances) received by the Administrative Agent as of 3:00 p.m., Boston time, on the first Business Day following the end of the period specified by the Administrative Agent (such date, the "Settlement Date"). --------------- (ii) The Administrative Agent shall deliver to each of the Lenders promptly after the Settlement Date a summary statement of the amount of outstanding Loans (including Agent Advances) for the period and the amount of repayments received for the period. As reflected on the summary statement: (x) the Administrative Agent shall transfer to each Lender its Commitment Percentage of repayments (after accounting for unreimbursed Agent Advances) and (y) each Lender shall transfer to the Administrative Agent (as provided below), or the Agent shall transfer to each Lender, such amounts as are necessary to insure that, after giving effect to all such transfers, the amount of Loans made by each Lender with respect to Loans (including Agent Advances) shall be equal to such Lender's Commitment Percentage of Loans outstanding as of such Settlement Date. If the summary statement requires transfers to be made to the Administrative Agent by the Lenders and is received prior to 12:00 Noon, Boston time, on a Business Day, such transfers shall be made in immediately available funds no later than 3:00 p.m., Boston time, that day; and, if received after 12:00 Noon, Boston time, then no later than 3:00 p.m., Boston time, on the next Business Day. The obligation of each Lender to transfer such funds is irrevocable, unconditional and without recourse to or warranty by the Administrative Agent and, notwithstanding the foregoing, on the day that the Administrative Agent makes an Agent Advance hereunder, each Lender shall be deemed to have made 20 its Commitment Percentage of such Agent Advance on such day. If and to the extent any Lender shall not have so made its transfer to the Administrative Agent, such Lender agrees to pay to the Administrative Agent, forthwith on demand such amount, together with interest thereon, for each day from such date until the date such amount is paid to the Administrative Agent at the Federal Funds Effective Rate. SECTION 2.04. NOTES; REPAYMENT OF LOANS. ------------------------- (a) The Loans outstanding to each Lender (and to the Administrative Agent, with respect to Agent Advances) shall be evidenced by a Note duly executed on behalf of the Borrower, dated the Closing Date, in substantially the form attached hereto as Exhibit B-1 or B-2, as applicable, payable to the order of such Lender (or the Administrative Agent, as applicable) in an aggregate principal amount equal to such Lender's Commitment (or, in the case of the Note evidencing the Agent Advances, $15,000,000). (b) The outstanding principal balance of all Loans, as evidenced by such Notes, shall be payable on the Termination Date (subject to earlier repayment as provided below). Each Note shall bear interest from the date thereof on the outstanding principal balance thereof as set forth in this Article II. Each Lender is hereby authorized by the Borrower to endorse on a schedule attached to each Note delivered to such Lender (or on a continuation of such schedule attached to such Note and made a part thereof), or otherwise to record in such Lender's internal records, an appropriate notation evidencing the date and amount of each Loan from such Lender, each payment and prepayment of principal of any such Loan, each payment of interest on any such Loan and the other information provided for on such schedule; provided, however, that the -------- ------- failure of any Lender to make such a notation or any error therein shall not affect the obligation of the Borrower to repay the Loans made by such Lender in accordance with the terms of this Agreement and the applicable Notes. SECTION 2.05. INTEREST ON LOANS. ----------------- (a) Subject to Section 2.06, each ABR Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum that shall be equal to the then Alternate Base Rate, plus the Overadvance Margin. - ---- (b) Subject to Section 2.06, each Eurodollar Loan shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal, during each Interest Period applicable thereto, to the Adjusted LIBOR Rate for such Interest Period, plus the Eurodollar ---- Applicable Margin, plus the Overadvance Margin (the "Eurodollar Interest Rate"); ---- ------------------------ provided that, after the first anniversary of the Closing Date, if the - -------- Borrower's Interest Coverage Ratio as measured at the end of any fiscal quarter is greater than or equal to 2.5:1, then each Eurodollar Interest Rate outstanding during the following fiscal quarter shall bear interest during such fiscal quarter at a rate per annum equal to the applicable Eurodollar Interest Rate less 0.25%. ---- (c) Accrued interest on all Loans shall be payable in arrears on each Interest Payment Date applicable thereto, at maturity (whether by acceleration or otherwise), after such maturity on demand and (with respect to Eurodollar Loans) upon any repayment or prepayment thereof (on the amount prepaid). (d) All outstanding Loans that on any day are not, in accordance with the provisions of this Agreement, Eurodollar Loans shall, for such day, constitute ABR Loans and, 21 subject to Section 2.06, shall bear interest with reference to the Alternate Base Rate as set forth in Section 2.05(a). SECTION 2.06. DEFAULT INTEREST. Effective upon the occurrence of any ---------------- Event of Default and at all times thereafter while such Event of Default is continuing, interest shall accrue on all outstanding Loans (after as well as before judgment) at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the Alternate Base Rate plus ---- 2.00% per annum, and such interest shall be payable on demand. SECTION 2.07. OPTIONAL TERMINATION OR REDUCTION OF COMMITMENTS. Upon at ------------------------------------------------ least two Business Days' prior written notice to the Administrative Agent, the Borrower may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Commitments. Each such reduction shall be in the principal amount of $5,000,000 or any integral multiple thereof. Such reduction or termination shall be applied ratably to the Commitment of each Lender and shall be irrevocable when given. At the effective time of each such reduction or termination, the Borrower shall pay to the Administrative Agent (i) all Commitment Fees accrued on the amount of the Commitments so terminated or reduced through the date thereof, (ii) any amount by which the Credit Extensions outstanding on such date exceed the amount to which the Commitments, as the case may be, are to be reduced effective on such date and (iii) all earned and unpaid Fees with respect to such Credit Extensions, in each case pro rata based on the --- ---- amount prepaid. SECTION 2.08. ALTERNATE RATE OF INTEREST. In the event, and on each -------------------------- occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurodollar Loan the Administrative Agent shall have determined (which determination shall be conclusive and binding upon the Borrower absent manifest error) that reasonable means do not exist for ascertaining the applicable Adjusted LIBOR Rate, the Administrative Agent shall, as soon as practicable thereafter, give written or telegraphic notice of such determination to the Borrower and the Lenders. After such notice shall have been given and until the circumstances giving rise to such notice no longer exist, any request by the Borrower for any funding as, continuation of or conversion into a Eurodollar Borrowing shall be deemed a request for a Borrowing of ABR Loans. SECTION 2.09. REFINANCING OF LOANS. The Borrower shall have the right at -------------------- any time, on two Business Days' prior irrevocable notice to the Administrative Agent (which notice, to be effective, must be received by the Administrative Agent not later than 1:00 p.m., Boston time, on the second Business Day preceding the date of any refinancing), (x) to refinance any outstanding Borrowing or Borrowings of Loans of one Type (or a portion thereof) with a Borrowing of Loans of the other Type or (y) to continue an outstanding Borrowing of Eurodollar Loans for an additional Interest Period, subject to the following: (a) no Borrowing or Loans may be refinanced into, or continued as, Eurodollar Loans at any time when an Event of Default has occurred and is continuing; (b) if less than a full Borrowing of Loans is refinanced, such refinancing shall be made pro rata among the Lenders, as applicable, in --- ---- accordance with the respective principal amounts of the Loans comprising such Borrowing held by such Lenders immediately prior to such refinancing; (c) the aggregate principal amount of Loans being refinanced into or continued as Eurodollar Loans shall be at least $1,000,000; 22 (d) each Lender shall effect each refinancing by applying the proceeds of its new Eurodollar Loan or ABR Loan, as the case may be, to its Loan being refinanced; (e) the Interest Period with respect to a Borrowing of Eurodollar Loans effected by a refinancing or in respect to the Borrowing of Eurodollar Loans being continued as Eurodollar Loans shall commence on the date of refinancing or the expiration of the current Interest Period applicable to such continuing Borrowing, as the case may be; (f) a Borrowing of Eurodollar Loans may be refinanced only on the last day of an Interest Period applicable thereto; (g) each request for a refinancing with a Borrowing of Eurodollar Loans which fails to state an applicable Interest Period shall be deemed to be a request for an Interest Period of one month; and (h) no more than five Borrowings of Eurodollar Loans may be outstanding at any time. If the Borrower does not give notice to refinance any Borrowing of Eurodollar Loans, or does not give notice to continue, or does not have the right to continue, any Borrowing as Eurodollar Loans, in each case as provided above, such Borrowing shall automatically be refinanced with a Borrowing of ABR Loans at the expiration of the then-current Interest Period. The Administrative Agent shall, after it receives notice from the Borrower, promptly give each Lender notice of any refinancing, in whole or part, of any Loan made by such Lender. SECTION 2.10. MANDATORY PREPAYMENT; COMMITMENT TERMINATION; CASH -------------------------------------------------- COLLATERAL. The outstanding Obligations shall be subject to mandatory prepayment - ---------- as follows: (a) If at any time the amount of the Credit Extensions exceeds the lower of (i) the then amount of the Commitments and (ii) the then amount of the Borrowing Base, plus the cash held in the Cash Collateral Account pursuant to Sections 2.02 and 2.14, the Borrower will within one Business Day (i) prepay the Loans in an amount necessary to eliminate such excess and (ii) if, after giving effect to the prepayment in full of all outstanding Loans such excess has not been eliminated, deposit cash to the Cash Collateral Account in an amount equal to 105% of the remaining amount of such excess. (b) Upon the Termination Date, the credit facility provided hereunder shall be terminated in full and the Borrower shall pay, in full and in cash, all outstanding Loans and all other outstanding Obligations, except that if any Letter of Credit then remains outstanding, the Borrower shall with respect to outstanding Letters of Credit, (i) deposit into the Cash Collateral Account an amount sufficient to cause the funds on deposit in the Cash Collateral Account to be equal to 105% of the sum of then Letter of Credit Outstandings or (ii) secure its reimbursement obligations thereunder with a letter of credit in form and substance and from an issuer satisfactory to the Issuing Bank in its sole discretion. SECTION 2.11. OPTIONAL PREPAYMENT OF LOANS; REIMBURSEMENT OF LENDERS. ------------------------------------------------------ (a) The Borrower shall have the right at any time and from time to time to prepay 23 outstanding Loans in whole or in part, (x) with respect to Eurodollar Loans, upon at least two Business Days' prior written, telex or facsimile notice to the Administrative Agent prior to 1:00 p.m., Boston time, and (y) with respect to ABR Loans, on the same Business Day if written, telex or facsimile notice is received by the Administrative Agent prior to 3:00 p.m., Boston time, subject to the following limitations: (1) All prepayments shall be paid to the Administrative Agent for application, first, to the prepayment of outstanding Agent Advances, ----- second, to the prepayment of outstanding Loans ratably in accordance with ------ each Lender's Commitment Percentage, and third, to the funding of a cash ----- collateral deposit in the Cash Collateral Account in an amount equal to 105% of all Letter of Credit Outstandings. (2) Subject to the foregoing, outstanding ABR Loans shall be prepaid before outstanding Eurodollar Loans are prepaid. Each partial prepayment of Eurodollar Loans shall be in an integral multiple of $1,000,000. No prepayment of Eurodollar Loans shall be permitted pursuant to this Section 2.11(a) other than on the last day of an Interest Period applicable thereto, unless the Borrower simultaneously reimburses the Lenders for all "Breakage Costs" (as defined below) associated therewith. No partial prepayment of a Borrowing of Eurodollar Loans shall result in the aggregate principal amount of the Eurodollar Loans remaining outstanding pursuant to such Borrowing being less than $1,000,000. (3) Each notice of prepayment shall specify the prepayment date, the principal amount and Type of the Loans to be prepaid and, in the case of Eurodollar Loans, the Borrowing or Borrowings pursuant to which such Loans were made. Each notice of prepayment shall be irrevocable and shall commit the Borrower to prepay such Loan by the amount and on the date stated therein. The Administrative Agent shall, promptly after receiving notice from the Borrower hereunder, notify each Lender of the principal amount and Type of the Loans held by such Lender which are to be prepaid, the prepayment date and the manner of application of the prepayment. (b) The Borrower shall reimburse each Lender on demand for any loss incurred or to be incurred by it in the reemployment of the funds released (i) resulting from any prepayment (for any reason whatsoever, including, without limitation, refinancing with ABR Loans) of any Eurodollar Loan required or permitted under this Agreement, if such Loan is prepaid other than on the last day of the Interest Period for such Loan or (ii) in the event that after the Borrower delivers a notice of borrowing under Section 2.03 in respect of Eurodollar Loans, such Loans are not made on the first day of the Interest Period specified in such notice of borrowing for any reason other than a breach by such Lender of its obligations hereunder. Such loss shall be the amount as reasonably determined by such Lender as the excess, if any, of (A) the amount of interest which would have accrued to such Lender on the amount so paid or not borrowed at a rate of interest equal to the Adjusted LIBOR Rate for such Loan, for the period from the date of such payment or failure to borrow to the last day (x) in the case of a payment or refinancing with ABR Loans other than on the last day of the Interest Period for such Loan, of the then current Interest Period for such Loan or (y) in the case of such failure to borrow, of the Interest Period for such Loan which would have commenced on the date of such failure to borrow, over (B) the amount of interest which would have accrued to such Lender on such amount by placing such amount on deposit for a comparable period with leading banks in the London interbank market (collectively, "Breakage Costs"). Any Lender demanding reimbursement for such loss shall - --------------- deliver to the Borrower from time to time one or more 24 certificates setting forth the amount of such loss as determined by such Lender. (c) In the event the Borrower fails to prepay any Loan on the date specified in any prepayment notice delivered pursuant to Section 2.11(a), the Borrower on demand by any Lender shall pay to the Administrative Agent for the account of such Lender any amounts required to compensate such Lender for any loss incurred by such Lender as a result of such failure to prepay, including, without limitation, any loss, cost or expenses incurred by reason of the acquisition of deposits or other funds by such Lender to fulfill deposit obligations incurred in anticipation of such prepayment. Any Lender demanding such payment shall deliver to the Borrower from time to time one or more certificates setting forth the amount of such loss as determined by such Lender. (d) Whenever any partial prepayment of Loans are to be applied to Eurodollar Loans, such Eurodollar Loans shall be prepaid in the chronological order of their Interest Payment Dates. SECTION 2.12. MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF ACCOUNT. -------------------------------------------------- (a) The Administrative Agent shall maintain an account on its books in the name of the Borrower (the "Loan Account") in which the Borrower will be ------------ charged with (i) all Agent Advances and all loans and advances made by the Lenders to the Borrower or for the Borrower's account, including the Loans, (ii) all Letter of Credit reimbursement obligations, Fees and interest that have become payable as herein set forth, and (iii) if an Event of Default has occurred and is continuing, any and all other Obligations that have become payable. The charging of any Obligations to the Loan Account shall not excuse the Borrower from paying such Obligations in cash when due and shall not cure or waive any Default or Event of Default that may have resulted from non- payment thereof or any right or remedy consequent thereon. (b) The Loan Account will be credited with all amounts received by the Administrative Agent from the Borrower or from others for the Borrower's account, including all amounts received in the BBNA Concentration Account from the Blocked Account Banks, and the amounts so credited shall be applied as set forth in Sections 2.14(a) and (b). In no event shall prior recourse to any deposit or other accounts, or any other assets, be a prerequisite to the Administrative Agent's right to demand payment of any Obligation upon its maturity. Further, the Administrative Agent shall have no obligation whatsoever to perform in any respect any of the Borrower's contracts or obligations relating to any of such accounts. After the end of each month, the Administrative Agent shall send to the Borrower a statement accounting for the charges, loans, advances and other transactions occurring among and between the Administrative Agent, the Lenders and the Borrower during that month. The monthly statements shall, absent manifest error, be an account stated, which is final, conclusive and binding on the Borrower. SECTION 2.13. CASH RECEIPTS. ------------- (a) On or prior to the Closing Date, the Borrower and the Administrative Agent shall have entered into agency agreements with the banks maintaining the deposit accounts identified on Schedule 3.11(b) (collectively, the "Blocked Accounts"), which agreements (the "Blocked Account Agreements") ---------------- -------------------------- shall be in form and substance satisfactory to the Administrative Agent and shall require the sweep on each Business Day (in accordance with the Borrower's customary cash deposit procedures outlined in Schedule 2.13 (as such procedures may be amended from time to time with the consent of the Administrative Agent)) of all available cash receipts from the sale of Inventory and 25 other assets, all collections of Receivables and other accounts, and all other cash payments received by the Borrower or any Guarantor from any Person or from any source or on account of any sale or other transaction or event, except only the proceeds of the Loans (all such non-excluded cash receipts and collections, "Cash Receipts"), from Blocked Accounts in excess of the amount in each such ------------- account set forth on Schedule 3.11(b) (except upon the occurrence and during the continuance of an Event of Default, when all such amounts in such accounts will be swept) to a concentration account maintained by the Administrative Agent at BBNA (the "BBNA Concentration Account"). All Cash Receipts shall be deposited -------------------------- into a Blocked Account or the BBNA Concentration Account in accordance with the Borrower's customary cash deposit procedures outlined in Schedule 2.13. The Borrower shall accurately report to the Administrative Agent all amounts deposited in the Blocked Accounts to ensure the proper transfer of funds as set forth above. If at any time other than the times set forth above any cash or cash equivalents owned by the Borrower or any Guarantor are deposited to any account, or held or invested in any manner, otherwise than in a Blocked Account that is subject to a Blocked Account Agreement, the Administrative Agent may require the Borrower to close such Blocked Account and have all funds therein transferred to an account maintained by the Administrative Agent at BBNA and all future deposits made to a Blocked Account which is subject to a Blocked Account Agreement. (b) The Borrower may request that the Administrative Agent close Blocked Accounts and/or open new Blocked Accounts (or, in either case, permit the Borrower to do so), subject to the execution and delivery to the Administrative Agent of appropriate Blocked Account Agreements (unless expressly waived by the Administrative Agent) consistent with the provisions of this Section 2.13 and otherwise satisfactory to the Administrative Agent. Unless consented to in writing by the Administrative Agent, the Borrower and the Guarantors may not maintain any bank accounts other than the ones expressly contemplated herein. (c) Notwithstanding anything contained herein to the contrary, so long as no default or event of default has occurred and is continuing under the Existing Credit Facility on the Closing Date, and all Obligations under the Existing Credit Facility have been paid in full, the Borrower may utilize up to $25,000,000 in proceeds, if any, remaining in the Tax Refund Account (as defined in the Existing Credit Facility) and from the Specified Location Sales (as defined in the Existing Credit Facility) (collectively, the "Escrow Proceeds"), --------------- other than the Yonkers Location Sale (as defined in the Existing Credit Facility) to pay on or after the Closing Date any costs directly associated with or claims payable under the Plan of Reorganization; provided that such funds are -------- held in a segregated account at BBNA and subject to the Lien of the Collateral Agent until such application. (d) The Borrower may also maintain with the Administrative Agent at BBNA one or more disbursement accounts with a balance at any time not in excess of the amounts set forth on Schedule 2.13 (the "BBNA Disbursement Accounts") to -------------------------- be used by the Borrower for disbursements and payments (including payroll) in the ordinary course of business or as otherwise permitted hereunder; provided -------- that, upon the occurrence and during the continuance of an Event of Default, all amounts in such accounts may be swept by the Administrative Agent into the BBNA Cash Concentration Account for application in accordance with Sections 2.14(a) and (b). (e) Notwithstanding the foregoing, so long as no Default or Event of Default has occurred and is continuing, and the Administrative Agent shall not have issued a "Notice of Redirection" under the Blocked Account Agreements, the Borrower shall be permitted to make cash withdrawals from the Blocked Accounts in accordance with its customary procedures as set forth on Schedule 2.13 in effect on the date hereof to fund the ordinary-course cash operating needs of its 26 stores (such as change for registers and funds to cash employees' paychecks (otherwise commonly referred to as "coin orders")), provided that all such -------- withdrawals are replaced in accordance with the Borrower's customary practices. (f) Notwithstanding anything in this Agreement to the contrary, the Borrower's failure to comply with the cash deposit and sweep requirements set forth in Section 2.13(a) due directly to earthquake, landslide, hurricane, tornado, fire, flood, material disruption in armored car service, blizzard, act of God or the public enemy, act of war, public disorder, rebellion, sabotage, revolution, epidemic, riot or quarantine shall not be an Event of Default hereunder unless such failure continues for 3 days. SECTION 2.14. APPLICATION OF PAYMENTS. ----------------------- (a) All amounts received in the BBNA Concentration Account from any source, including the Blocked Account Banks shall be credited to the Loan Account (effective as of the Business Day as of which the Administrative Agent determines in good faith that it has received, prior to 2:00 p.m., Boston time, immediately available funds therefor) and such credits shall be applied in the following order: first, to pay interest due and payable on Credit Extensions ----- and to pay Fees and expense reimbursements and indemnification then due and payable to the Administrative Agent, BSI, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders; second, to repay outstanding Agent ------ Advances; third, to repay outstanding Loans that are ABR Loans and all ----- outstanding reimbursement obligations for Letters of Credit; fourth, to repay ------ outstanding Loans that are Eurodollar Loans and all LIBOR breakage losses due in respect of such repayment pursuant to Section 2.11(b) or, at the Borrower's option (if no Default or Event of Default has occurred and is then continuing), to fund a cash collateral deposit to the Cash Collateral Account sufficient to pay, and with direction to pay, all such outstanding Eurodollar Loans on the last day of the then-pending Interest Period therefor; fifth, if any Default or ----- Event of Default has occurred and is continuing, to fund a cash collateral deposit in the Cash Collateral Account in an amount equal to 105% of the aggregate maximum amount that then is or at any time may become available for drawing or payment under all outstanding Letters of Credit; provided, however, -------- ------- that if such Default or Event of Default shall be cured, corrected or waived pursuant to the terms hereof, such cash collateral shall be released and applied pursuant to clause sixth below or pursuant to Section 2.14(b), as the case may ----- be; and sixth, to pay all other Obligations that are then outstanding and ----- payable. (b) Any amounts received in the BBNA Concentration Account at any time when all of the applications set forth in Section 2.14(a) have been and remain fully funded shall be remitted to the Borrower, if and as the Borrower may request. (c) If any item deposited to the BBNA Concentration Account and credited to the Loan Account is dishonored or returned unpaid for any reason, whether or not such return is rightful or timely, the Administrative Agent shall have the right to reverse such credit and charge the amount of such item to the Loan Account and the Borrower shall indemnify the Administrative Agent, the Collateral Agent, the Issuing Bank, the Co-Agents and the Lenders against all claims and losses resulting from such dishonor or return. SECTION 2.15. INCREASED COSTS. --------------- (a) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any 27 governmental authority charged with the interpretation or administration thereof (whether or not having the force of law) shall change the basis of taxation of payments to any Lender of the principal of or interest on any Eurodollar Loan or ABR Loan made by such Lender or any fees or other amounts payable hereunder (other than changes in respect of Taxes, Other Taxes and taxes imposed on, or measured by, the net income or overall gross receipts or franchise taxes of such Lender by the jurisdiction in which such Lender has its principal office or by any political subdivision or taxing authority therein), or shall impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by such Lender (except any such reserve requirement which is reflected in the Adjusted LIBOR Rate) or shall impose on such Lender or the London interbank market any other condition affecting this Agreement or the Eurodollar Loans made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or to reduce the amount of any sum received or receivable by such Lender hereunder or under the Notes (whether of principal, interest or otherwise) by an amount deemed by such Lender to be material, then the Borrower will pay to such Lender in accordance with paragraph (c) below such additional amount or amounts as will compensate such Lender for such additional costs incurred or reduction suffered. (b) If any Lender shall have determined that the applicability of any law, rule, regulation or guideline adopted pursuant to or arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption or effectiveness after the date hereof of any law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any governmental authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any Lending office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement, the Loans made by such Lender pursuant hereto, such Lender's Commitment hereunder or the issuance of, or participation in, any Letter of Credit by such Lender to a level below that which such Lender or such Lender's holding company could have achieved but for such adoption, change or compliance (taking into account such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount deemed by such Lender to be material, then from time to time the Borrower shall pay to such Lender such additional amount or amounts as will compensate such Lender or such Lender's holding company of any such reduction suffered. (c) A certificate of each Lender setting forth such amount or amounts as shall be necessary to compensate such Lender or its holding company as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay each Lender the amount shown as due on any such certificate delivered to it within 10 days after its receipt of the same. Any Lender receiving any such payment shall promptly make a refund thereof to the Borrower if the law, regulation, guideline or change in circumstances giving rise to such payment is subsequently deemed or held to be invalid or inapplicable. (d) Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to 28 such period or any other period. The protection of this Section 2.15 shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. SECTION 2.16. CHANGE IN LEGALITY. ------------------ (a) Notwithstanding anything to the contrary contained elsewhere in this Agreement, if (x) any change in any law or regulation or in the interpretation thereof by any governmental authority charged with the administration thereof shall make it unlawful for a Lender to make or maintain a Eurodollar Loan or to give effect to its obligations as contemplated hereby with respect to a Eurodollar Loan or (y) at any time any Lender determines that the making or continuance of any of its Eurodollar Loans has become impracticable as a result of a contingency occurring after the date hereof which adversely affects the London interbank market or the position of such Lender in the London interbank market, then, by written notice to the Borrower, such Lender may (i) declare that Eurodollar Loans will not thereafter be made by such Lender hereunder, whereupon any request by the Borrower for a Eurodollar Borrowing shall, as to such Lender only, be deemed a request for an ABR Loan unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurodollar Loans made by it be converted to ABR Loans, in which event all such Eurodollar Loans shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under clause (i) or (ii) of this paragraph (a), all payments and prepayments of principal which would otherwise have been applied to repay the Eurodollar Loans that would have been made by such Lender or the converted Eurodollar Loans of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurodollar Loans. (b) For purposes of this Section 2.16, a notice to the Borrower by any Lender pursuant to paragraph (a) above shall be effective, if lawful, and if any Eurodollar Loans shall then be outstanding, on the last day of the then-current Interest Period; and otherwise such notice shall be effective on the date of receipt by the Borrower. SECTION 2.17. PAYMENTS; NO SETOFF. (a) All payments received by the ------------------- Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents or any Lender for application to or on account of any of the Obligations, whether received as a deposit to the BBNA Concentration Account or as a payment made by the Borrower or any Guarantor or from the enforcement of the Liens or against any property of the Borrower or any Guarantor shall be applied in the order of priority set forth in Section 2.14(a) and shall be applied ratably to the payment of all outstanding Obligations. All payments by the Borrower or any Guarantor under this Agreement and under the Notes shall be (i) net of any tax applicable to the Borrower or Guarantor and (ii) made in Dollars in immediately available funds at the office of the Administrative Agent by 2:00 p.m., Boston time, on the date on which such payment shall be due. Interest in respect of any Loan hereunder shall accrue from and including the date of such Loan to but excluding the date on which such Loan is paid in full or converted to a Loan of a different Type. (b) All payments by the Borrower hereunder to or for the benefit of any Lender, the Issuing Bank, the Collateral Agent or the Administrative Agent shall be made without setoff, counterclaim or other defense. SECTION 2.18. TAXES. ----- 29 (a) Any and all payments by the Borrower or any Guarantor hereunder and under the Notes shall be made free and clear of and without deduction or withholding for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding taxes imposed on or measured by the net income or overall gross - --------- receipts (if the overall gross receipts are used in lieu of net income of the Administrative Agent, the Collateral Agent or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity being called a "Transferee")) and franchise taxes imposed on the Administrative Agent, the ---------- Collateral Agent or any Lender (or Transferee), in each instance if and to the extent imposed by the jurisdiction under the laws of which the Administrative Agent, the Collateral Agent or any such Lender (or Transferee) is organized or any political subdivision thereof or by any other jurisdiction or by any political subdivision or taxing authority therein other than a jurisdiction in which the Administrative Agent, the Collateral Agent or such Lender would not be subject to tax but for the execution and performance of this Agreement and (ii) taxes, levies, imposts, deductions, charges or withholdings ("Amounts") with ------- respect to payments hereunder or under the Notes to a Lender (or Transferee) in accordance with laws in effect on the later of the date of this Agreement and the date such Lender (or Transferee) becomes a Lender (or Transferee, as the case may be), but not excluding, with respect to such Lender (or Transferee), any increase in such Amounts solely as a result of any change in such laws occurring after such later date or any Amounts that would not have been imposed but for actions (other than actions contemplated by this Agreement or the Notes) taken by the Borrower after such later date (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities being hereinafter referred to as "Taxes"). If the Borrower or any Guarantor shall be required by ----- law to deduct or withhold any Taxes from or in respect of any sum payable hereunder to the Lenders (or any Transferee), the Collateral Agent or the Administrative Agent, (i) the sum payable shall be increased by the amount necessary so that after making all required deductions or withholding (including deductions or withholding applicable to additional sums payable under this Section 2.18) such Lender (or Transferee), the Collateral Agent or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions or withholding been made, (ii) the Borrower shall make such deductions or withholding and (iii) the Borrower shall pay the full amount deducted or withheld to the relevant taxing authority or other Governmental Authority in accordance with applicable law. (b) In addition, the Borrower agrees to pay to the relevant Governmental Authority in accordance with applicable laws any current or future stamp or documentary taxes or any other excise or property taxes, charges, assessments or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document (hereinafter referred to as "Other Taxes"). ----------- (c) The Borrower will indemnify each Lender (or Transferee), the Collateral Agent and the Administrative Agent for the full amount of Taxes and Other Taxes paid by such Lender (or Transferee), the Collateral Agent or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant taxing authority or other Governmental Authority. A certificate as to the amount of such payment or liability prepared by a Lender (or Transferee), the Collateral Agent or the Administrative Agent, as applicable, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date any Lender (or Transferee), the Collateral Agent or the Administrative Agent, as the case may be, makes written demand therefor. If any Lender (or Transferee), the Collateral Agent or the Administrative Agent receives a refund in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrower pursuant to this Section 30 2.18, it shall within 30 days after receipt of such refund, repay such refund to the Borrower (to the extent of amounts that have been paid by the Borrower under this Section 2.18 with respect to the Taxes or Other Taxes that give rise to such refund, net of all out-of-pocket expenses of such Lender (or Transferee), Agent or Administrative Agent and with any interest thereon that is received by the Lender (or Transferee), the Collateral Agent or the Administrative Agent as part of the refund; provided that the Borrower, upon the request of such Lender -------- (or Transferee), the Collateral Agent or the Administrative Agent agrees to return such refund (plus penalties, interest or other charges) to such Lender (or Transferee), the Collateral Agent or the Administrative Agent in the event such Lender (or Transferee), the Collateral Agent or the Administrative Agent is required to repay such refund and such additions thereto to the relevant Governmental Authority. Nothing contained in this Section 2.18 shall require any Lender (or Transferee), the Collateral Agent or the Administrative Agent to make available any of its tax returns (or any other information relating to its taxes that it deems to be confidential). (d) Within 30 days after the date of any payment of Taxes or Other Taxes by the Borrower to the relevant Governmental Authority, the Borrower will furnish to the Administrative Agent, at its address referred to on the signature pages hereof, the original or a certified copy of a receipt issued by the Governmental Authority evidencing payment thereof. (e) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.18 shall survive the payment in full of the principal of and interest on all Loans made hereunder. (f) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a "Non-U.S. Lender") shall, if legally able to do so, deliver to the --------------- Borrower such certificates, documents or other evidence, as required by the Code or Treasury Regulations issued pursuant thereto, including without limitation (A) in the case of a Non-U.S. Lender claiming exemption from United States Federal withholding tax under Code Section 871(h) or 881(c) with respect to payments of "portfolio interest", a Form W-8, or any subsequent versions thereof or successors thereto, together with a certificate representing that such Non- U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10-percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Borrower and is not a controlled foreign corporation related to the Borrower (within the meaning of Section 864(d)(4) of the Code) or (B) Internal Revenue Service Form 4224 or any subsequent version thereof or successor thereto, establishing that such payment is not subject to United States Federal withholding tax under the Code because such payment is effectively connected with the conduct by such Lender (or Transferee) of a trade or business in the United States or (C) Internal Revenue Service Form 1001 or any subsequent version thereof or successor thereto, establishing that such payment is totally exempt from United States Federal withholding tax or subject to a reduced rate of such tax under a provision of an applicable tax treaty. Unless the Borrower and the Administrative Agent have received forms or other documents satisfactory to them indicating that such payments hereunder or under the Notes are not subject to United States Federal withholding tax or are subject to such tax at a rate reduced by an applicable tax treaty, the Borrower or the Administrative Agent shall withhold taxes from such payments at the applicable statutory rate. Such forms and certifications shall be delivered by each Non-U.S. Lender claiming an exemption from or reduction in applicable United States Federal withholding tax (i) on or before the date it becomes a party to this Agreement or, in the case of a Transferee, on or before the date it becomes a Transferee, and (ii) promptly upon the obsolescence or invalidity of any form so delivered by such Non-U.S. Lender. 31 (g) The Borrower shall not be required to pay any additional amounts to any Lender (or Transferee) in respect of United States Federal withholding tax pursuant to Section 2.18(a) if the obligation to pay such additional amounts would not have arisen but for a failure by such Lender (or Transferee) to comply with the provisions of Section 2.18(f). (h) Any Lender (or Transferee) claiming any additional amounts payable pursuant to this Section 2.18 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Borrower or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts that may thereafter accrue and would not, in the sole reasonable determination of such Lender or Transferee, be otherwise materially disadvantageous to such Lender (or Transferee). SECTION 2.19. CERTAIN FEES. The Borrower shall pay to the Administrative ------------ Agent, for the account of the Administrative Agent, the fees set forth in the Fee Letter as and when payment of such fees is due as therein set forth. SECTION 2.20. UNUSED COMMITMENT FEE. The Borrower shall pay to the --------------------- Administrative Agent for the account of the Lenders, based upon their pro rata --- ---- share of the Credit Extension, a commitment fee (the "Commitment Fee") computed -------------- by applying 0.30% per annum (on the basis of actual days elapsed in a year of 360 days) to the average daily balance of the Unused Commitment for each day commencing on and including the Closing Date and ending on but excluding the Termination Date; provided that, after the first anniversary of the Closing -------- Date, if the Borrower's Interest Coverage Ratio as measured at the end of any fiscal quarter is greater than or equal to 2.5:1, then the Commitment Fee during the following fiscal quarter shall be computed by applying 0.25% per annum (on the basis of actual days elapsed in a year of 360 days) to the average daily balance of the Unused Commitment for each day during such fiscal quarter. Except as otherwise provided herein, the Commitment Fee so accrued in any calendar month shall be payable on the first Business Day of the immediately succeeding calendar month, except that all Commitment Fees so accrued as of the Termination Date shall be payable on the Termination Date. SECTION 2.21. LETTER OF CREDIT FEES. The Borrower shall pay to the --------------------- Administrative Agent for the account of the Lenders a letter of credit fee (the "Letter of Credit Fee") computed by applying 1.50% per annum (on the basis of -------------------- actual days elapsed in a year of 360 days) to the average daily balance of the maximum amount that at any time is available for drawing or payment under any and all outstanding Letters of Credit; provided that, after the first -------- anniversary of the Closing Date, if the Borrower's Interest Coverage Ratio as measured at the end of a fiscal quarter is greater than or equal to 2.5:1, then the Letter of Credit Fee for each Letter of Credit outstanding during the following fiscal quarter shall be computed by applying 1.25% per annum (on the basis of actual days elapsed in a year of 360 days) to the average daily balance of the maximum amount that at any time is available for drawing or payment under any and all such Outstanding Letters of Credit. The Letter of Credit Fee so accrued in any calendar month shall be payable on the first Business Day of the immediately succeeding calendar month, except that all Letter of Credit Fees so accrued as of the Termination Date shall be payable on the Termination Date. SECTION 2.22. NATURE OF FEES. All Fees shall be paid on the dates due, in -------------- immediately available funds, to the Administrative Agent for the respective accounts of the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders, as provided herein and in the Fee Letter. Once paid, all fees shall be fully-earned and shall not be refundable under any circumstances. 32 SECTION 2.23. SECURITY INTEREST IN COLLATERAL. To secure its Obligations ------------------------------- under this Agreement and the other Loan Documents, the Borrower shall grant to the Collateral Agent, for its benefit and the ratable benefit of the Administrative Agent, the Issuing Bank and the Lenders, a first-priority security interest in all of the Collateral pursuant hereto and to the Security Documents. SECTION 2.24. RIGHT OF SET-OFF. ---------------- (a) Subject to the provisions of Section 7.01, upon the occurrence and during the continuance of any Event of Default, the Administrative Agent, the Issuing Bank, the Collateral Agent, each Co-Agent and each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and each such Lender to or for the credit or the account of the Borrower or any Guarantor against any and all of the obligations of such Borrower or Guarantor now or hereafter existing under the Loan Documents, irrespective of whether or not such Lender shall have made any demand under any Loan Document and although such obligations may be unmatured. The rights of each Lender, the Issuing Bank, the Collateral Agent, each Co-Agent and the Administrative Agent under this Section are in addition to other rights and remedies which such Lender, the Issuing Bank, the Collateral Agent, such Co- Agent and the Administrative Agent may have upon the occurrence and during the continuance of any Event of Default. (b) The provisions of Section 2.24(a) shall not qualify or limit the provisions of Sections 2.13 and 2.14. SECTION 2.25. SECURITY INTEREST IN DEPOSIT ACCOUNTS. The Borrower and the ------------------------------------- Guarantors hereby assign and pledge to the Collateral Agent, for its benefit and for the ratable benefit of the Administrative Agent, the Issuing Bank, the Co- Agents and the Lenders, and hereby grant to the Collateral Agent, for its benefit and for the ratable benefit of the Administrative Agent, the Issuing Bank, the Co-Agents and the Lenders, a first priority security interest, senior to all other Liens, if any, in all of the Borrower's and the Guarantors' right, title and interest in and to the Cash Collateral Account, the BBNA Disbursement Accounts, the BBNA Concentration Account, any and all Blocked Accounts and all other deposit accounts, Permitted Investments and other cash equivalents of every type and description and any direct investment of the funds contained therein. The Collateral Agent (or the Administrative Agent, as agent for the Collateral Agent (as provided below)) shall have sole dominion and control over all such accounts. With respect to the Cash Collateral Accounts, the BBNA Disbursement Accounts, the BBNA Concentration Account and all such other deposit accounts maintained at BBNA, the Collateral Agent hereby appoints the Administrative Agent as its agent with respect thereto and the Administrative Agent agrees to hold such accounts on behalf of the Collateral Agent and for the benefit of the Collateral Agent, the Administrative Agent, the Issuing Bank, the Co-Agents and the Lenders. SECTION 2.26. PAYMENT OF OBLIGATIONS. Upon the maturity (whether by ---------------------- acceleration or otherwise) of any Loans, Letter of Credit reimbursement obligations or any other Obligations, the Lenders shall be entitled to immediate payment of such Loans, reimbursement obligations, liabilities and other Obligations. 33 III. REPRESENTATIONS AND WARRANTIES In order to induce the Lenders to make Loans and participate in Letters of Credit and the Issuing Bank to issue Letters of Credit, the Borrower and each of the Guarantors jointly and severally represent and warrant as follows: SECTION 3.01. ORGANIZATION AND AUTHORITY. Each of the Borrower and the -------------------------- Guarantors (i) is a corporation duly organized and validly existing under the laws of the State of its incorporation and is duly qualified as a foreign corporation and is in good standing in each jurisdiction in which the failure to so qualify would have a material adverse effect on the financial condition, operations, business, properties or assets of the Borrower and the Guarantors taken as a whole; (ii) has the requisite corporate power and authority to effect the transactions contemplated hereby, and by the other Loan Documents, and (iii) has all requisite corporate power and authority and the legal right to own, pledge, mortgage and operate its properties, and to conduct its business as now or currently proposed to be conducted. Schedule 3.01 lists all jurisdictions in which the Borrower and the Guarantors are qualified to do business as of the Closing Date. SECTION 3.02. DUE EXECUTION. The execution, delivery and performance by ------------- each of the Borrower and the Guarantors of each of the Loan Documents to which it is a party (i) are within the respective corporate powers of each of the Borrower and the Guarantors, have been duly authorized by all necessary corporate action, including the consent of shareholders where required, and do not (A) contravene the charter or by-laws of any of the Borrower or the Guarantors, (B) violate any law (including, without limitation, the Securities Exchange Act of 1934) or regulation (including, without limitation, Regulations G, T, U or X of the Board of Governors of the Federal Reserve System), or any order or decree of any court or governmental instrumentality, (C) conflict with or result in a breach of, or constitute a default under, any material indenture, mortgage or deed of trust or any material lease, agreement or other instrument binding on the Borrower or the Guarantors or any of their properties, or (D) result in or require the creation or imposition of any Lien upon any of the property of any of the Borrower or the Guarantors, other than the Liens granted pursuant to this Agreement; and do not require the consent, authorization by or approval of or notice to or filing or registration with any Governmental Authority or any other Person. This Agreement has been duly executed and delivered by each of the Borrower and the Guarantors. This Agreement is, and each of the other Loan Documents to which the Borrower and each of the Guarantors is or will be a party, when delivered hereunder or thereunder, will be, a legal, valid and binding obligation of the Borrower and each Guarantor, as the case may be, enforceable against the Borrower and the Guarantors, as the case may be, in accordance with its terms. SECTION 3.03. STATEMENTS MADE. The statements, written or oral, which --------------- have been made by the Borrower or any of the Guarantors to the Administrative Agent or to the Bankruptcy Court in connection with any Loan Document, and any financial statement delivered pursuant hereto or thereto (other than to the extent that any such statements constitute projections), taken as a whole and in light of the circumstances in which made, contain no untrue statement of a material fact and do not omit to state a material fact necessary to make such statements not misleading; and, to the extent that any such written statements constitute projections, such projections were prepared in good faith on the basis of assumptions, methods, data, tests and information believed by the Borrower or such Guarantor to be valid and accurate at the time such projections were furnished to the Lenders. SECTION 3.04. OWNERSHIP. BAC is a wholly-owned Subsidiary of BI. The --------- Borrower is a wholly-owned Subsidiary of BAC. Each of the Guarantors listed on Schedule 3.04 (other than BI and 34 BAC) is a wholly-owned Subsidiary of the Borrower, and the Borrower owns no other Subsidiaries, whether directly or indirectly, other than the Guarantors (other than BI and BAC). No Subsidiary of the Borrower, BI or BAC exists which is not a Guarantor (other than the Borrower). SECTION 3.05. FINANCIAL STATEMENTS AND BANKRUPTCY FILINGS. ------------------------------------------- (a) The Borrower has furnished the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders with copies of (i) the audited consolidated financial statement and schedules of BI for the most recently completed fiscal year for which such statements are available and (ii) the unaudited consolidated financial statement and schedules of BI for the most recently completed fiscal quarter for which such statements are available. Such financial statements present fairly the financial condition and results of operations of BI, the Borrower and the other Guarantors on a consolidated basis as of such dates and for such periods; such balance sheets and the notes thereto disclose all liabilities, direct or contingent, of BI, the Borrower and the other Guarantors as of the dates thereof required to be disclosed by GAAP and such financial statements were prepared in a manner consistent with GAAP, subject (in the case of such fiscal quarter statement) to normal year end adjustments. No material adverse change in the financial condition, operations, business, properties or assets of the Borrower and the Guarantors, taken as a whole, has occurred from that set forth in BI's consolidated financial statements referenced in this Section 3.05. All other financial information required to be delivered by the Borrower under this Agreement (including, without limitation, all information delivered to the Administrative Agent to determine the Borrower's compliance with Sections 4.01(t) and (u)) are accurate in all respects. (b) The Borrower has furnished to the Administrative Agent and its counsel copies of all pleadings, motions, applications, judicial information, financial information and other documents filed by or on behalf of the Borrower or any of the Guarantors with the Bankruptcy Court in the Cases or distributed by or on behalf of the Borrower or any of the Guarantors to any official committee appointed in the Cases or served upon the Borrower or any Guarantor in any of the Cases. SECTION 3.06. LIENS. There are no Liens of any nature whatsoever on any ----- property of the Borrower or any Guarantor (including, without limitation, the Collateral) except, (i) Permitted Liens and (ii) Liens granted in favor of the Collateral Agent, for its benefit and the ratable benefit of the Lenders, the Administrative Agent, the Co-Agents and the Issuing Bank pursuant to the Loan Documents. Neither the Borrower nor the Guarantors are parties to any contract, agreement, lease or instrument the performance of which, either unconditionally or upon the happening of an event, will result in or require the creation of a Lien on any property of the Borrower or any Guarantor or otherwise result in a violation of this Agreement. The Liens granted by the Borrower in the Collateral pursuant to the Loan Documents are fully-perfected first-priority security interests, subject only to Permitted Liens. SECTION 3.07. COMPLIANCE WITH LAW. ------------------- (a) The operations of the Borrower and each of the Guarantors are not in violation of any applicable federal, state or local environmental, health or safety statutes (including, without limitation, the Occupational Health and Safety Act), regulations, directions, ordinances, criteria or guidelines. (b) Neither the Borrower nor any of the Guarantors has received notice that any of the operations of the Borrower or any of the Guarantors is the subject of any judicial or administrative 35 proceeding alleging the violation of any federal, state or local environmental, health or safety statute, regulation, direction, ordinance, criteria or guideline. (c) None of the operations of the Borrower or any of the Guarantors is the subject of any federal, state or local investigation involving allegations or potential allegations that the Borrower or any of the Guarantors disposed of any hazardous or toxic waste, substance or constituent or other pollutant, contaminant or substance (including, without limitation, petroleum) at any site that may require remedial action, or any federal, state or local investigation evaluating whether any remedial action is needed to respond to a release or threatened release of any hazardous or toxic waste, substance or constituent, or other pollutant, contaminant or substance (including, without limitation, petroleum) into the environment. (d) Neither the Borrower nor any of the Guarantors has filed any notice under any federal, state or local law indicating past or present treatment, storage or disposal of a hazardous waste or reporting a spill or release or threatened release of a hazardous or toxic waste, substance or constituent, or other pollutant, contaminant or substance (including, without limitation, petroleum) into the environment. (e) Neither the Borrower nor any of the Guarantors has any contingent liability of which any of them has knowledge or reasonably should have knowledge in connection with any release or threatened release of any hazardous or toxic waste, substance or constituent, or other pollutant, contaminant or substance (including, without limitation, petroleum) into the environment, nor has the Borrower or any of the Guarantors received any notice, letter or other indication of potential liability arising from the disposal of any hazardous or toxic waste, substance or constituent or other pollutant, contaminant or substance (including, without limitation, petroleum) into the environment which, in any such case referred to in this Section or in the aggregate, could have a material adverse effect on the financial condition, operations, business, properties or assets of the Borrower and the Guarantors taken as a whole. SECTION 3.08. INSURANCE. All policies of insurance of any kind or --------- nature owned by or issued to the Borrower and the Guarantors, including, without limitation, policies of life, fire, theft, product liability, public liability, property damage, other casualty, employee fidelity, workers' compensation, employee health and welfare, title, property and liability insurance, are in full force and effect and are of a nature and provide such coverage as is sufficient and as is customarily carried by companies of the size and character of the Borrower and the Guarantors. All liability policies of the Borrower name the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders as additional insureds and all casualty policies name the Collateral Agent as loss payee. SECTION 3.09. THE CONFIRMATION ORDER. On the date of the making of the ---------------------- initial Loans or the issuance of the initial Letters of Credit hereunder, whichever first occurs, the Plan of Reorganization shall be effective and the Confirmation Order will have been entered and will not have been stayed, amended, vacated, reversed or rescinded and the Bankruptcy Court's retention of jurisdiction, if any, under the Confirmation Order shall not govern the enforcement of this Agreement and the other Loan Documents or any rights or remedies relating thereto after the Plan Effective Date. On the date of the making of any Loan or the issuance of any Letter of Credit, the Plan of Reorganization will be effective and the Confirmation Order will have been entered and will not have been amended, stayed, vacated or rescinded. Upon the maturity (whether by the acceleration or otherwise) of any of the Obligations of the Borrower and the Guarantors hereunder and under the 36 other Loan Documents, the Lenders shall, subject to the provisions of Section 7.01, be entitled to immediate payment of such obligations, and to enforce the remedies provided for hereunder and under the other Loan Documents. SECTION 3.10. USE OF PROCEEDS. The proceeds of the Loans shall be used, --------------- first, to repay in full all loans, letter of credit liabilities and other obligations outstanding under or in respect of the Existing Credit Facility and thereafter may be used to provide working capital for and to finance Inventory purchases by the Borrower and otherwise for general corporate purposes. [The Borrower will not use the proceeds of any Loans or any other property of the Borrower to make any intercompany or Affiliate advances other than those intercompany or Affiliate advances from the Borrower to its Subsidiaries, New Horizons of Bruckner, Inc., and New Horizons of Westbury,. Inc., acceptable to the Administrative Agent to be used for Real Property carrying costs of such Subsidiaries and not in excess of $[1,000,000] in the aggregate (it being understood that proceeds of the Loans used for ordinary-course operating expenses of the Bradlees stores located in Yonkers, New York, and North Attleboro, Massachusetts (so long as such stores remain open) shall be deemed to be a permitted use of proceeds hereunder).] SECTION 3.11. STORE LOCATIONS; BANK ACCOUNTS; INVENTORY. ----------------------------------------- (a) Set forth on Schedule 3.11(a) hereto is a complete and accurate list of the names and addresses of all the retail stores, warehouses and distribution centers operated by the Borrower on the Closing Date, which are all locations where any Inventory of the Borrower is maintained. (b) Set forth on Schedule 3.11(b) hereto is a complete and accurate list of all bank accounts, money market accounts and other deposit or investment accounts for cash, cash equivalents or investments maintained by the Borrower or any Guarantor or in which the Borrower or any Guarantor has any interest. (c) No Guarantor owns any Inventory or operates any retail stores, warehouses or distribution centers. No Guarantor owns any other material assets other than as set forth on Schedule 3.11(c) (which schedule also sets forth the Borrower's good faith estimate of the book value of such assets). (d) The assets of the Borrower (including, without limitation, the Inventory and the Receivables) are substantially in the amounts and of the quality previously represented to the Administrative Agent in the most recent Borrowing Base Certificate delivered to the Administrative Agent. SECTION 3.12. LITIGATION AND CLAIMS. --------------------- (a) There are no actions, suits or proceedings pending or, to the knowledge of the Borrower or the Guarantors, threatened against or affecting the Borrower or the Guarantors or any of its properties, including (without limitation) the Inventory, before any court or governmental department, commission, board, bureau, agency or instrumentality, domestic or foreign, that is (i) not fully reserved for under the Plan of Reorganization and (ii) reasonably likely to be determined adversely to the Borrower or the Guarantors and, if so determined adversely to the Borrower or the Guarantors would have a material adverse effect on the financial condition, business, properties, operations or assets of the Borrower and the Guarantors, taken as a whole. 37 (b) There are no pre-petition or administrative claims or Liens other than those contemplated by the Plan of Reorganization to survive the Plan Effective Date and consented to by the Administrative Agent. SECTION 3.13. MATERIAL ADVERSE CHANGE. No event or series of events have ----------------------- occurred since the date of the Borrower's financial statements reflecting the Plan of Reorganization that has or have materially and adversely affected (i) the assets, liabilities, business, operations, condition (financial or otherwise) or prospects of the Borrower or any Guarantor or (ii) the enforceability of the rights and remedies of the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders under the Loan Documents (including, without limitation, the Liens granted to the Collateral Agent, for its benefit and the benefit of the Administrative Agent, the Issuing Bank, the Co-Agents and the Lenders, under the Loan Documents), or (iii) the ability of the Borrower or the Guarantors to pay the Obligations when due and to perform their covenants and agreements under the Loan Documents. SECTION 3.14. PAYMENT OF OBLIGATIONS. The Borrower and each Guarantor ---------------------- have paid when due all rents under any unexpired leases to which the Borrower or any Guarantor is party as lessee and all other material liabilities incurred by the Borrower or any Guarantor (other than any such rents or liabilities the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or the Guarantor, as the case may be). SECTION 3.15. TAXES AND TAX RETURNS. The Borrower and each Guarantor have --------------------- filed or caused to be filed all material tax returns which are required to be filed and has paid all taxes shown to be due and payable on said returns or on any assessments made against it or any of its property and all other material taxes, fees or other charges imposed on it or any of its property by any Governmental Authority (other than any such taxes, assessments, fees or other charges the amount or validity of which are currently being contested in good faith by appropriate proceedings and with respect to which reserves in conformity with GAAP have been provided on the books of the Borrower or the Guarantor, as the case may be). SECTION 3.16. FRANCHISES, LICENSES, PERMITS, LEASES, PATENTS, COPYRIGHTS, ----------------------------------------------------------- TRADEMARKS, AND TRADE NAMES. The Borrower and each of the Guarantors have - --------------------------- obtained and hold in full force and effect, all franchises, licenses, leases, permits, certificates, authorizations, qualifications, easements, rights of way and other rights and approvals which are necessary or advisable for the operation of its businesses as presently conducted and as proposed to be conducted. Neither the Borrower nor any of the Guarantors is in violation of the terms of any such franchise, license, lease, permit, certificate, authorization, qualification, easement, right of way, right or approval. The Borrower possesses or has the legal right to use such assets, licenses, patents, patent applications, copyrights, service marks, trademarks and trade names as are necessary or advisable to continue to conduct its present and proposed business activities and such assets, licenses, patents, patent applications, copyrights, service marks, trademarks and trade names are valid and in full force and effect. SECTION 3.17. LABOR MATTERS. ------------- (a) There are no controversies pending or, to the best of the Borrower's knowledge after diligent inquiry, threatened between the Borrower or any of the Guarantors, on the one hand, and any of their respective employees, on the other hand, which could have a material 38 adverse effect on the financial condition, operations, business, properties or assets of the Borrower and the Guarantors taken as a whole. (b) Neither the Borrower nor any of the Guarantors is engaged in any unfair labor practice. There is (i) no unfair labor practice complaint pending against the Borrower or any of the Guarantors or, to the best knowledge of the Borrower, threatened against any of them, before the National Labor Relations Board, and no grievance or significant arbitration proceeding arising out of or under collective bargaining agreements is so pending against the Borrower or any of the Guarantors or, to the best knowledge of the Borrower, threatened against any of them, (ii) no strike, labor dispute, slowdown or stoppage pending against either of the Borrower or any of the Guarantors or, to the best knowledge of the Borrower, threatened against any of them and (iii) no union representation question with respect to the employees of the Borrower or any Guarantors and no union organizing activities. SECTION 3.18. ERISA. None of the Borrower, any Guarantor or any ERISA ----- Affiliate maintains or contributes to any Plan other than those listed on Schedule 3.18. Each Plan has been and is being maintained and funded in accordance with its terms and in compliance with all provisions of ERISA and the Code applicable thereto. The Borrower, each of the Guarantors and each ERISA Affiliate have fulfilled all obligations related to the minimum funding standards of ERISA and the Code for each Plan, are in compliance with the currently applicable provisions of ERISA and of the Code and have not incurred any liability (other than routine liability for premiums) under Title IV of ERISA. No Termination Event has occurred nor has any other event occurred that may result in a Termination Event. No event or events have occurred in connection with which the Borrower, any of the Subsidiaries, any ERISA Affiliate, any fiduciary of a Plan or any Plan, directly or indirectly, could be subject to any liability, individually or in the aggregate, under ERISA, the Code or any other requirement of law or under any agreement, instrument, statute, rule of law or regulation pursuant to or under which any such entity has agreed to indemnify or is required to indemnify any person against liability incurred under, or for a violation or failure to satisfy the requirements of, any such statute, regulation or order. The Borrower has delivered or caused to be delivered to the Administrative Agent: (i) a copy of each Plan (or, where any such plan is not in writing, a complete description thereof) (and, if applicable, related trust agreements or other funding instruments) and all amendments thereto, all written interpretations thereof and written descriptions thereof that have been distributed to employees or former employees of the Borrower or the Guarantors; (ii) the most recent determination letter issued by the Internal Revenue Service with respect to each Plan; (iii) for the three most recent plan years, Annual Reports on Form 5500 Series required to be filed with any governmental agency for each Plan; (iv) all actuarial reports prepared for the last three plan years for each Plan; (v) a listing of all Multiemployer Plans, with the aggregate amount of the most recent annual contributions required to be made by the Borrower or any ERISA Affiliate to each such plan and copies of the collective bargaining agreements requiring such contributions; (vi) any information that has been provided to the Borrower or any ERISA Affiliate regarding withdrawal liability under any Multiemployer Plan; and (vii) the aggregate amount of the most recent annual payments made to former employees of the Borrower or any ERISA Affiliate under any retiree health Plan. SECTION 3.19. ACCOUNTS RECEIVABLE FINANCING. Neither the Borrower nor any ----------------------------- of the Guarantors is party to any accounts receivable financing arrangements whereby sales of Inventory are conducted through the use of an in-store credit card or through the use of a credit card offered by a third party lender (it being understood that the acceptance by the Borrower of credit cards issued by Visa, Mastercard or similar processors that does not entail an extension of credit by the Borrower to its own customers (and is non-recourse to the Borrower (other than, with respect to accounts financed 39 under the Purchase and Service Agreement, to the limited extent set forth therein)) shall not be deemed to constitute such an accounts receivable financing arrangement, even if the Borrower's name or imprint appears on such Visa, Mastercard or similar credit cards). SECTION 3.20. INVESTMENT COMPANY; HOLDING COMPANY. Neither the Borrower ----------------------------------- nor any of the Guarantors is (i) an investment company or a company controlled by an investment company within the meaning of the Investment Company Act of 1940, as amended, (ii) a holding company or a Subsidiary company of a holding company, or an Affiliate of a holding company or of a Subsidiary company of a holding company, within the meaning of the Public Utility Holding Company Act of 1935, as amended, or (iii) subject to any other law which purports to regulate or restrict its ability to borrow money or to consummate the transactions contemplated by this Agreement or the other Loan Documents or to perform its obligations hereunder or thereunder. IV. CONDITIONS OF LENDING SECTION 4.01. CONDITIONS PRECEDENT TO INITIAL LOANS AND INITIAL LETTERS OF ------------------------------------------------------------ CREDIT. The obligation of the Lenders to make the initial Loans or the Issuing - ------ Bank to issue the initial Letter of Credit, whichever may occur first, is subject to the following conditions precedent: (a) Supporting Documents. The Administrative Agent shall have -------------------- received for each of the Borrower and the Guarantors: (i) a copy of such entity's certificate of incorporation, as amended, certified as of a recent date by the Secretary of State of the state of its incorporation or a senior officer of such entity; (ii) a certificate of such Secretary of State, dated as of a recent date, as to the good standing of that entity and as to the charter documents on file in the office of such Secretary of State; (iii) a certificate of the Secretary or an Assistant Secretary of that entity dated the date of the initial Loans or the initial Letter of Credit hereunder, whichever first occurs, and certifying (A) that attached thereto is a true and complete copy of the by-laws of that entity as in effect on the date of such certification, (B) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of that entity authorizing the Borrowings and Letter of Credit extensions hereunder, the execution, delivery and performance in accordance with their respective terms of this Agreement, the Notes to be executed by it, the Loan Documents and any other documents required or contemplated hereunder or thereunder and the granting of the security interest in the Cash Collateral Account contemplated hereby, (C) that the certificate of incorporation of that entity has not been amended since the date of the last amendment thereto indicated on the certificate of the Secretary of State furnished pursuant to clause (i) above, and (D) as to the incumbency and specimen signature of each officer of that entity executing this Agreement, the Notes to be executed by it and the Loan Documents or any other document delivered by it in connection herewith or therewith (such certificate to contain a certification by another officer of that entity as to the incumbency and signature of the officer signing the certificate referred to in this clause (iii)). 40 (b) Notes. On or before the date of the initial Loans or the issuance ----- of the initial Letter of Credit hereunder, whichever first occurs, the Administrative Agent shall have received Notes executed on behalf of the Borrower, dated the Closing Date, payable to the order of each of the Lenders, in the form of Exhibit B-1, in an amount equal to such Lender's Commitment and in the form of Exhibit B-2 in an amount equal to $15,000,000 to be delivered to the Administrative Agent for the Agent Advances. (c) The Plan of Reorganization. The Plan of Reorganization shall be -------------------------- reasonably satisfactory to the Requisite Lenders and shall provide, among other things, that all claims of the creditors (including trade creditors) of the Borrower and the Guarantors which arose, or are deemed to have arisen, prior to the Filing Date shall be converted into Equity Interests of the Borrower. The terms of all Equity Interests (including, without limitation, all preferred stock issued or to be issued (if any) by the Borrower related to the Plan of Reorganization) and indebtedness of the Borrower and the Guarantors to be outstanding after giving effect to the Plan of Reorganization shall be reasonably satisfactory in all respects to the Administrative Agent, provided, -------- that any pre-petition tax claims may be paid subsequent to the Plan Effective Date pursuant to a payment plan (the "Tax Payment Plan") that is reasonably ---------------- satisfactory to the Administrative Agent. (d) The Confirmation Order. At the time of the making of the initial ---------------------- Loans or at the time of the issuance of the initial Letter of Credit, whichever first occurs, the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders shall have received a certified copy of the Confirmation Order in the form attached hereto as Exhibit C and the Confirmation Order shall be reasonably satisfactory to the Requisite Lenders. The Confirmation Order shall not have been reversed, modified or amended and shall not be stayed or subject to a motion to stay and, unless otherwise agreed by the Administrative Agent, all appeal periods relating to the Confirmation Order shall have expired, and no appeals from the Confirmation Order shall be outstanding. Except as consented to by the Administrative Agent, the Bankruptcy Court's retention of jurisdiction under the Confirmation Order shall not govern the enforcement of this Agreement and the other Loan Documents or any rights or remedies relating thereto after the Plan Effective Date, (e) Plan Effective Date. All conditions precedent to the confirmation ------------------- of the Plan of Reorganization and to the "effective date" (or such similar term) of the Plan of Reorganization (the "Plan Effective Date") shall have been met ------------------- (or the waiver thereof shall have been consented to by the Administrative Agent) and the Plan Effective Date and substantial consummation of the Plan of Reorganization shall have occurred or shall be scheduled to occur but for the making of the initial Loan hereunder. (f) Security Agreement. The Borrower shall have duly executed and ------------------ delivered to the Collateral Agent a Security Agreement in substantially the form of Exhibit E (the "Security Agreement"). ------------------ (g) Pledge Agreement. The Borrower shall have duly executed and ---------------- delivered to the Collateral Agent a Pledge Agreement in substantially the form of Exhibit E (the "Pledge Agreement"). ---------------- (h) Trademark Security Agreement. The Borrower shall have duly ---------------------------- executed and delivered to the Collateral Agent a Security Agreement and Mortgage - - Trademarks in substantially the form of Exhibit E (the "Trademark Security ------------------ Agreement"). - --------- 41 (i) Business Plan. The Borrower shall have delivered to the ------------- Administrative Agent at least sixty (60) days prior to the Plan Effective Date the Business Plan in form and substance satisfactory to the Administrative Agent. (j) Opinions of Counsel to the Borrower. The Administrative Agent, ----------------------------------- the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders shall have received the favorable written opinion of Dewey Ballantine, counsel to the Borrower and the Guarantors, and of such other counsel as is acceptable to the Administrative Agent, in each case dated the date of the initial Loans or the issuance of the initial Letter of Credit, whichever first occurs, substantially in the forms attached as Exhibit D. (k) Payment of Fees. Concurrent with the initial Borrowing, the --------------- Borrower shall have paid to the Administrative Agent, the Issuing Bank, the Collateral Agent and the Lenders the then unpaid balance of all accrued and unpaid Fees owed under and pursuant to this Agreement and the Fee Letter referred to in Section 2.19. (l) Corporate and Judicial Proceedings. All corporate and judicial ---------------------------------- proceedings and all instruments and agreements in connection with the transactions among the Borrower, the Guarantors, the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders contemplated by this Agreement shall be reasonably satisfactory in form and substance to the Administrative Agent, and the Administrative Agent shall have received all information and copies of all documents and papers, including records of corporate and judicial proceedings, which the Administrative Agent may have reasonably requested in connection therewith, such documents and papers where appropriate to be certified by proper corporate, governmental or judicial authorities. (m) Lien Searches. On or before the Closing Date, the Administrative ------------- Agent shall have received the results of UCC-1 and other Lien searches conducted in State and county levels in jurisdictions in which the Borrower and the Guarantors conduct business and in the United States Patent and Trademark Office, which searches shall reflect the absence of Liens on the assets (including Inventory and Receivables) of the Borrower and the Guarantors, other than (i) Permitted Liens or Liens for which duly-completed and executed termination statements and releases reasonably satisfactory to the Administrative Agent have been tendered prior to or concurrently with the initial Credit Extension and (ii) Permitted Liens or Liens which have been duly terminated no later than the Closing Date by an order of the Bankruptcy Court in form and substance reasonably satisfactory to the Administrative Agent. (n) Filings. All filings and other actions required to create and ------- perfect a first priority security interest in favor of the Collateral Agent, for its benefit and the ratable benefit of the Administrative Agent, the Issuing Bank, the Co-Agents and the Lenders, on all Collateral owned or to be owned by the Borrower shall have been duly made or taken. (o) Environmental Compliance. The Borrower and the Guarantors shall ------------------------ have granted the Administrative Agent access to and the right to inspect all reports, audits and other internal information of the Borrower and the Guarantors relating to environmental matters, and any third party verification of certain matters relating to compliance with environmental laws and regulations requested by the Administrative Agent, and the Administrative Agent shall be satisfied that the Borrower and the Guarantors are in compliance in all material respects with all applicable environmental laws and regulations and be satisfied with the costs of maintaining such compliance. 42 (p) Accounts Receivable Financing. Neither the Borrower nor any of ----------------------------- the Guarantors shall be party to any accounts receivable financing arrangements whereby sales of Inventory are conducted through the use of an in-store credit card or through the use of a credit card offered by a third party lender (it being understood that the acceptance by the Borrower of credit cards issued by Visa, Mastercard or similar processors that does not entail an extension of credit by the Borrower to its own customers (and is non-recourse to the Borrower (other than, with respect to accounts financed under the Purchase and Service Agreement, to the limited extent set forth therein)) shall not be deemed to constitute such an accounts receivable financing arrangement, even if the Borrower's name or imprint appears on such Visa, Mastercard or similar credit cards). (q) Cash Management System. The cash management system required to be ---------------------- maintained as of the date hereof pursuant to Sections 2.13 and 2.14 shall be in place in all material respects, as determined by the Administrative Agent in its sole and absolute discretion. (r) Existing Credit Facility. There shall exist no defaults, events ------------------------ of defaults or prospective defaults (based on projections provided by the Borrower) under the Existing Credit Facility and all principal, interest, fees, and any other obligations under the Existing Facility shall have been, or on the Closing Date will be, paid in full. (s) Accounts Payable. All undisputed Accounts Payable outstanding at ---------------- the time of the Closing Date shall be reasonably paid to date within the terms of the applicable Accounts Payable, as agreed to by the Borrower. (t) EBITDA. The Borrower's EBITDA (after cash restructuring costs ------ (but excluding cash restructuring costs incurred in fiscal year 1997 up to an aggregate of $6,500,000)) for the 12-month period ending on the Closing Date shall not be less than that specified below opposite the applicable period:
Period During Which Closing Date Occurs EBITDA --------------------------------------- ------ on or prior to August 1998 $20,000,000 September 1998 to November 1998 $25,000,000 December 1998 and thereafter $30,000,000
(u) Excess Availability under Existing Credit Facility. As measured -------------------------------------------------- on the Closing Date, the amount available to be borrowed by the Borrower under the Existing Credit Facility using the borrowing base under the Existing Credit Facility (after giving effect to the repayment of all amounts outstanding under the Existing Credit Facility, all present and future payments contemplated under the Tax Payment Plan and all payments required under the Plan of Reorganization (other than payments to be made with the Escrow Proceeds)) shall not be less than the amount specified opposite the Borrower's fiscal month in which the Closing Date is to take place.
Required Excess Fiscal Month Availability ------------ ------------ February $42,000,000 March $53,000,000 April $39,000,000 May $40,000,000 June $25,000,000 July $25,000,000
43 August $36,000,000 September $37,000,000 October $35,000,000 November $35,000,000 December $38,000,000 January $37,000,000
(v) Consents and Approvals. The Administrative Agent shall be ---------------------- satisfied in its sole discretion that all insurance, Blocked Account Agreements, Payment Direction Agreements and other consents and approvals required or necessary hereunder have been received and are in full force and effect. (w) Other Information. On or before the Closing Date, the ----------------- Administrative Agent shall have received an inventory analysis conducted by an inventory liquidation analysis firm retained by the Collateral Agent and a follow up review of the Borrower's books and records conducted by a commercial financial audit firm retained by the Collateral Agent and such other information (financial or otherwise) as it may have reasonably requested. (x) No Material Adverse Change. No event or series of events shall -------------------------- have occurred at any time after November 2, 1997, which the Required Lenders in good faith determine to constitute a material adverse change in (i) the assets, liabilities, business, operations, condition (financial or otherwise) or prospects of the Borrower or any Guarantor, or (ii) the enforceability of the Liens, rights and remedies of the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders under the Loan Documents, (iii) the ability of the Borrower or the Guarantors to pay the Obligations when due and to perform their covenants and agreements under the Loan Documents, or (iv) the value of the assets of the Borrower and the Guarantors. (y) Insurance. The Collateral Agent shall be reasonably satisfied --------- with the public liability insurance, third party property damage insurance and casualty insurance required to be maintained by the Borrower pursuant to Section 5.03 of this Agreement and the Borrower shall have delivered to the Collateral Agent all documentation required in connection with such insurance. (z) Collateral Access Agreements. The Administrative Agent shall be ---------------------------- satisfied in its sole discretion that the Borrower shall have used its best efforts to obtain and deliver to the Collateral Agent Collateral Access Agreements duly-executed by the Borrower and each of the landlords of (i) the Borrower's warehouses located in Braintree, Massachusetts and Edison, New Jersey and (ii) any inventory location for which the landlord of such location is entitled under applicable law to a statutory lien for unpaid rent (as determined by the Collateral Agent). (aa) Litigation. As of the Plan Effective Date, the Administrative ---------- Agent shall be reasonably satisfied that no litigation commenced or threatened against the Borrower and its Affiliates could have a material adverse effect on the Borrower's or any Guarantor's financial condition, operations, assets or ability to repay the Loans and other Obligations under this Agreement and the other Loan Documents; (bb) Other Closing Documents. The Administrative Agent shall have ----------------------- received all other documents, certificates and instruments required to be delivered to it pursuant to this Agreement and on the Closing Documents List (including, without limitation, executed copies of this Agreement, all other Loan Documents and a Borrowing Base Certificate) and such documents shall be satisfactory 44 in form and substance to the Administrative Agent. (cc) Other Financial Requirements. The financial condition, capital ---------------------------- structure, liabilities and financial projections, including, without limitation, cash flow, of the Borrower shall be reasonably satisfactory to the Administrative Agent in all respects. (dd) Closing Date. The initial Credit Extension hereunder shall occur ------------ no later than one (1) Business Day after the Plan Effective Date. SECTION 4.02. CONDITIONS PRECEDENT TO EACH LOAN AND EACH LETTER OF CREDIT. ----------------------------------------------------------- The obligation of the Lenders to make each Loan and of the Issuing Bank to issue each Letter of Credit, including the initial Loan and the initial Letter of Credit, is subject to the following conditions precedent: (a) Notice. The Administrative Agent shall have received a notice ------ with respect to such borrowing or issuance, as the case may be, as required by Article II. (b) Representations and Warranties. All representations and ------------------------------ warranties contained in this Agreement and the other Loan Documents or otherwise made in writing in connection herewith or therewith shall be true and correct in all material respects on and as of the date of each Borrowing or the issuance of each Letter of Credit hereunder with the same effect as if made on and as of such date, other than representations and warranties that relate solely to an earlier date. (c) No Default. On the date of each Borrowing hereunder and the ---------- issuance of each Letter of Credit, the Borrower and Guarantors shall be in compliance with all of the terms and provisions set forth herein to be observed or performed and no Default or Event of Default shall have occurred and be continuing. (d) Borrowing Base Certificate. The Administrative Agent shall have -------------------------- received the timely delivery of the most recently required Borrowing Base Certificate within three (3) Business Days following the end of each business week (ending on the Saturday of such week), with each such Borrowing Base Certificate including schedules as required by the Collateral Agent. (e) Payment of Fees. The Borrower shall have paid to the --------------- Administrative Agent the then unpaid balance of all accrued and unpaid Fees then payable under and pursuant to this Agreement and the Fee Letter. The request by the Borrower for, and the acceptance by the Borrower of, each extension of credit hereunder shall be deemed to be a representation and warranty by the Borrower that the conditions specified in this Section 4.02 have been satisfied at that time and that after giving effect to such extension of credit the Borrower shall continue to be in compliance with the Borrowing Base. V. AFFIRMATIVE COVENANTS From the date hereof and for so long as any Commitment shall be in effect or any Loan, Letter of Credit or other Obligation shall remain outstanding (unless such Letter of Credit is fully collateralized to the satisfaction of the Administrative Agent), the Borrower and each of the Guarantors agree that, unless the Required Lenders shall otherwise consent in writing, the Borrower 45 and each Guarantor will: SECTION 5.01. FINANCIAL STATEMENTS, REPORTS, ETC. In the case of the ----------------------------------- Borrower and the Guarantors, (i) deliver to the Administrative Agent, the Issuing Bank, the Collateral Agent and each of the Lenders: (a) Within 90 days after the end of each fiscal year of BI, BI's consolidated and the Borrower's consolidated balance sheet and related statement of income and cash flows, showing the financial condition of BI, the Borrower and the Guarantors on a consolidated basis and the Borrower on a consolidated basis as of the close of such fiscal year and the results of their respective operations during such year, to be audited by Arthur Andersen or other independent public accountants of recognized national standing acceptable to the Required Lenders and accompanied by an opinion of such accountants (which shall not be qualified in any material respect) and to be certified by a Financial Officer of the Borrower to the effect that such consolidated financial statements fairly present the financial condition and results of operations of BI, the Borrower and the Guarantors on a consolidated basis and the Borrower on a consolidated in accordance with GAAP consistently applied; (b) Within 45 days after the end of the first three fiscal quarters of BI (commencing with the fiscal quarter ending on or about __________, 199_) and within 60 days after the end of the fourth fiscal quarter of each fiscal year of BI, BI's consolidated and the Borrower's consolidated balance sheets and related statements of income and cash flows, showing the financial condition of BI, the Borrower, and the Guarantors on a consolidated basis and the Borrower on a consolidated basis as of the close of such fiscal quarter and the results of their respective operations during such fiscal quarter and the then elapsed portion of the fiscal year, each certified by a Financial Officer as fairly presenting the financial condition and results of operations of BI, the Borrower and the Guarantors on a consolidated basis and the Borrower on a consolidated basis in accordance with GAAP consistently applied, subject to normal year-end audit adjustments; (c) Concurrently with any delivery of financial statements under (a) or (b) above, a certificate of the accounting firm or a Financial Officer, as the case may be, opining on or certifying such statements (i) certifying that no Default or Event of Default has occurred, or, if such a Default or Event of Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto and (ii) setting forth computations in reasonable detail satisfactory to the Administrative Agent demonstrating compliance with the provisions of Sections 6.04, 6.05, 6.06 and 6.07 hereof; (d) Within 30 days of the end of each fiscal month of BI (commencing with the fiscal month ending on or about ___________, 199_) (or 45 days with respect to the fiscal month ending at the end of each fiscal quarter of BI), the unaudited monthly income statement, balance sheet and cash flow report of BI, the Borrower and the Guarantors on a consolidated basis and the Borrower on a consolidated basis as of the close of such fiscal month and the results of their respective operations during such fiscal period and the then elapsed portion of the fiscal year (and such other cash flow reports and operating statements as the Administrative Agent, the Issuing Bank, the Collateral Agent or any Lender may reasonably request), all certified by a Financial Officer as fairly presenting the results of operations of BI, the Borrower and the Guarantors on a consolidated basis and the Borrower on a consolidated basis, subject to normal year-end audit adjustments; (e) To the extent not otherwise required under this Section 5.01, those additional reports listed on Schedule 5.01(e) hereto; 46 (f) Promptly after the same become publicly available, copies of all periodic and other reports, proxy statements and other materials filed by it with the Securities and Exchange Commission, or any governmental authority succeeding to any of or all the functions of said commission, or with any national securities exchange, as the case may be; (g) As soon as available and in any event (A) within 30 days after the Borrower or any of its ERISA Affiliates knows or has reason to know that any Termination Event described in clause (i) of the definition of Termination Event with respect to any Single Employer Plan of the Borrower or such ERISA Affiliate has occurred and (B) within 10 days after the Borrower or any of its ERISA Affiliates knows or has reason to know that any other Termination Event with respect to any such Plan has occurred, a statement of a Financial Officer describing such Termination Event and the action, if any, which the Borrower or such ERISA Affiliate proposes to take with respect thereto; (h) Promptly and in any event within 10 days after receipt thereof by the Borrower or any of its ERISA Affiliates from the PBGC copies of each notice received by the Borrower or any such ERISA Affiliate of the PBGC's intention to terminate any Single Employer Plan of the Borrower or such ERISA Affiliate or to have a trustee appointed to administer any such Plan; (i) Promptly and in any event within 30 days after the filing thereof with the Internal Revenue Service, copies of each Schedule B (Actuarial Information) to the annual report (Form 5500 Series) with respect to each Single Employer Plan of the Borrower or any of its ERISA Affiliates; (j) Within 10 days after notice is given or required to be given to the PBGC under Section 302(f)(4)(A) of ERISA of the failure of the Borrower or any of its ERISA Affiliates to make timely payments to a Plan, a copy of any such notice filed and a statement of a Financial Officer of the Borrower setting forth (A) sufficient information necessary to determine the amount of the lien under Section 302(f)(3), (B) the reason for the failure to make the required payments and (C) the action, if any, which the Borrower or any of its ERISA Affiliates proposed to take with respect thereto; (k) Promptly and in any event within 10 days after receipt thereof by the Borrower or any ERISA Affiliate from a Multiemployer Plan sponsor, a copy of each notice received by the Borrower or any ERISA Affiliate concerning (A) the imposition of Withdrawal Liability by a Multiemployer Plan, (B) the determination that a Multiemployer Plan is, or is expected to be, in reorganization within the meaning of Title IV of ERISA, (C) the termination of a Multiemployer Plan within the meaning of Title IV of ERISA, or (D) the amount of liability incurred, or which may be incurred, by the Borrower or any ERISA Affiliate in connection with any event described in clause (A), (B) or (C) above; and (l) Promptly, from time to time, such other information regarding the operations, business affairs and financial condition of the Borrower or any Guarantor, or compliance with the terms of any material loan or financing agreements as the Administrative Agent, the Issuing Bank, the Collateral Agent or any Lender may reasonably request. (ii) Furnish to the Administrative Agent and its counsel promptly after the same is available, copies of all pleadings, motions, applications, judicial information, financial information and other documents filed by or on behalf of the Borrower or any of the Guarantors with the Bankruptcy Court or any other court of competent jurisdiction. 47 SECTION 5.02. CORPORATE EXISTENCE. Do or cause to be done and cause each ------------------- of the Guarantors to do or cause to be done all things necessary to preserve, renew and keep in full force and effect its corporate existence, material rights, licenses, permits and franchises and comply in all material respects with all laws and regulations applicable to it; provided that nothing in this -------- Section 5.02 shall prohibit any Guarantor from being merged into the Borrower in accordance with Section 6.02 of this Agreement. SECTION 5.03. INSURANCE. --------- (a) Keep its insurable properties (including, without limitation, the Collateral) insured at all times, against such casualty risks, including fire and other risks insured against by extended coverage, as is customary with companies of the same or similar size in the same or similar businesses in amounts and coverages reasonably satisfactory to the Collateral Agent in its sole discretion. Such casualty insurance policies shall name the Collateral Agent as loss payee and shall contain such other provisions as the Collateral Agent may reasonably require to fully protect the Collateral Agent's interest in the Collateral and to any payments to be made under such policies in excess of $25,000 per occurrence. The Borrower shall diligently file and prosecute its claim or claims for any award or payment in connection with any casualty loss and the Borrower shall deposit in the BBNA Concentration Account, promptly upon receipt thereof, any and all insurance proceeds and payments by the Borrower on account of any such casualty loss. After the occurrence and during the continuance of an Event of Default, (i) no settlement on account of any such casualty loss shall be made without the consent of the Lenders and (ii) the Collateral Agent may participate in any such proceedings and the Borrower shall deliver to the Collateral Agent such documents as may be requested by the Collateral Agent to permit such participation and shall consult with the Collateral Agent, its attorneys and agents in the making and prosecution of such claim or claims. The Borrower hereby irrevocably authorizes and appoints the Collateral Agent its attorney-in-fact, after the occurrence and during the continuance of an Event of Default, to collect and receive any such award or payment and to file and prosecute such claim or claims, which power of attorney shall be irrevocable and shall be deemed to be coupled with an interest, and the Borrower shall, upon demand of the Collateral Agent, make, execute and deliver any and all assignments and other instruments sufficient for the purpose of assigning any such award or payment to the Collateral Agent for the benefit of the Lenders, free and clear of any encumbrances of any kind or nature whatsoever. (b) Maintain in full force and effect public liability insurance against claims for personal injury or death or property damage occurring upon, in, about or in connection with the use of any properties owned, occupied or controlled by the Borrower or any Subsidiary, as the case may be, in such amounts and with such deductibles as are customary with companies of the same or similar size in the same or similar businesses and in the same geographic area in amounts and coverages reasonably satisfactory to the Collateral Agent in its sole discretion. (c) Maintain such other insurance as may be required by law. (d) Maintain the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents, BSI and the Lenders as additional insureds on all liability policies of the Borrower and the Guarantors. SECTION 5.04. OBLIGATIONS AND TAXES. With respect to the Borrower and --------------------- each Guarantor, pay all its material obligations in accordance with their terms and pay and discharge promptly all material taxes, assessments and governmental charges or levies imposed upon it or upon 48 its income or profits or in respect of its property before the same shall become in default, as well as all material lawful claims for labor, materials and supplies or otherwise which, if unpaid, might become a Lien or charge upon such properties or any part thereof; provided, however, that the Borrower and each -------- ------- Guarantor shall not be required to pay and discharge or to cause to be paid and discharged any such tax, assessment, charge, levy or claim so long as the validity or amount thereof shall be contested in good faith by appropriate proceedings (if the Borrower and the Guarantors shall have set aside on their books adequate reserves therefor). SECTION 5.05. NOTICE OF EVENT OF DEFAULT, ETC. Promptly give to the ------------------------------- Administrative Agent, the Issuing Bank, the Collateral Agent and each Lender notice in writing of any Default or Event of Default or any threatened or pending litigation that could reasonably be expected to have a material adverse effect on the Borrower if adversely determined. SECTION 5.06. BORROWING BASE CERTIFICATE. Furnish to the Administrative -------------------------- Agent as soon as available and in any event on or before Thursday of each week a Borrowing Base Certificate for the week ending on the immediately preceding Saturday, substantially in the form of Exhibit A-1 or A-2, as the case may be. SECTION 5.07. ACCESS TO BOOKS AND RECORDS; INSPECTIONS. ---------------------------------------- (a) Maintain or cause to be maintained at all times true and complete books and records of the financial operations of the Borrower and the Guarantors. (b) Provide the Administrative Agent, the Issuing Bank, the Collateral Agent, the Lenders and their representatives access to all such books and records (to the extent not covered by a legal privilege and if any such materials are so privileged, subject to the Administrative Agent's ability to discuss with the Borrower, the Guarantors and their professional advisors the matters contained in such privileged materials and otherwise be satisfied with respect thereto, as determined by the Administrative Agent) during regular business hours, in order that they may examine and make abstracts or copies from such books, accounts, records and other papers (including, but not limited to, pertaining to Inventory and Receivables included in the Borrowing Base) for the purpose of verifying the accuracy of any information delivered by the Borrower or the Guarantors to the Administrative Agent, the Issuing Bank, the Collateral Agent or the Lenders pursuant to this Agreement or for any other purpose reasonably related to this Agreement. (c) At any reasonable time and from time to time during regular business hours, permit the Administrative Agent, the Issuing Bank, the Collateral Agent, either Co-Agent, any Lender or any representatives of the Administrative Agent, the Issuing Bank, the Collateral Agent, either Co-Agent or any such Lender (including, without limitation, examiners, appraisers and consultants) thereof to visit and/or inspect the properties and assets (whether owned, leased or rented), systems and procedures (including those relating to cash management) of the Borrower and the Guarantors, to conduct Collateral examinations and verify the components of the Borrowing Base and to discuss the assets, liabilities, business, operations, systems, procedures, conditions or prospects of the Borrower or any Guarantor with its directors, officers, employees, advisors and consultants. (d) Permit the Administrative Agent, the Issuing Bank, the Collateral Agent, any Lender or any representatives thereof to discuss directly with the Borrower's independent certified public accountants the business, financial condition and other affairs of the Borrower. 49 SECTION 5.08. FEES. In addition to the other Fees and expenses due ----- hereunder, pay on demand all reasonable fees and expenses of any consultants, appraisers and advisors retained by either of the Agents in connection herewith or any other Loan Document. SECTION 5.09. PROJECTIONS; BUSINESS PLAN. As soon as practicable, but in --------------------------- no event later than 60 days prior to each fiscal year end, furnish to the Administrative Agent the Borrower's preliminary business plan and financial projections for the 12-month fiscal period ending on or about January 31 in the next succeeding year (with the corresponding final business plan to follow within 30 days after the end of such fiscal year), in each case in form and substance satisfactory to the Administrative Agent, and make a Financial Officer available to meet and discuss the same with the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders. At any time that the Borrower believes the assumptions, assertions or other information set forth in the Business Plan are no longer accurate or are outdated, as soon as practicable thereafter, the Borrower shall deliver a revised business plan for the remainder of such 12-month fiscal period. SECTION 5.10. ERISA. The Borrower shall establish, maintain and operate ------ all Plans to comply in all material respects with the provisions of ERISA, the Code, and all other requirements of Law, other than to the extent that the Borrower is in good faith contesting by appropriate proceedings and with adequate reserves the validity or application of any such provision, law, rule, regulation or interpretation. SECTION 5.11. ENVIRONMENTAL AND OTHER MATTERS. The Borrower and its -------------------------------- Guarantors will conduct their businesses so as to comply in all material respects with all applicable federal, state and local laws, regulations, directions, ordinances, criteria and guidelines, including, without limitation, environmental, land use, occupational safety and health laws, regulations, directions, ordinances, criteria, guidelines, requirements and permits in all jurisdictions in which any of them is or may at any time be doing business, except to the extent that the Borrower or any of the Guarantors are contesting, in good faith by appropriate legal proceedings, any such law, regulation, direction, ordinance, criteria, guideline or interpretation thereof or application thereof; provided, further, that the Borrower and each of the -------- ------- Guarantors shall comply with the order of any court or other Governmental Authority relating to such laws unless the Borrower or the Guarantors shall currently be prosecuting an appeal or proceedings for review and shall have secured a stay of enforcement or execution postponing enforcement or execution pending such appeal or proceedings for review. The Borrower shall promptly take all actions necessary to prevent the imposition of any Liens on any of its properties arising out of or related to any environmental matters or otherwise. At the request of the Administrative Agent, and at the sole cost and expense of the Borrower, the Borrower shall provide the Administrative Agent with any additional information or reports relating to environmental matters and any potential related liability resulting therefrom as the Administrative Agent may reasonably request. In addition, the Borrower shall provide the Administrative Agent, at the Borrower's sole cost and expense, with copies of any environmental audits, surveys or reports conducted in connection with the purchase or sale by the Borrower of any real property. SECTION 5.12. MAINTAIN CASH CONCENTRATION SYSTEM. Maintain the BBNA ----------------------------------- Concentration Account and otherwise comply with the provisions of Section 2.13 of this Agreement. SECTION 5.13. MAINTAIN SECURITY INTEREST. In the case of the Borrower, --------------------------- execute, acknowledge and deliver, or cause the execution, acknowledgement and delivery of, and thereafter register, file or record, or cause to be registered, filed or recorded, in an appropriate governmental office, any document or instrument supplemental to or confirmatory of the Security Documents or 50 otherwise reasonably deemed by the Collateral Agent necessary or desirable for the continued validity, perfection and first-priority status of the Liens on the Collateral covered thereby. If at any time following the Closing Date the Borrower shall acquire property of any nature whatsoever (other than Real Property) which is intended to be by the terms of the applicable Security Documents and is not otherwise subject to the Lien created by such Security Documents, as soon as possible and in no event later than ten (10) days after the relevant acquisition date, the Borrower shall grant to the Collateral Agent, for its benefit and the ratable benefit of the Administrative Agent, the Issuing Bank, the Co-Agents and the Lenders, a first priority Lien on such property as collateral security for the Obligations pursuant to documentation reasonably satisfactory in form and substance to the Collateral Agent. SECTION 5.15. COLLATERAL ACCESS AGREEMENTS. Until such time as the ----------------------------- Administrative Agent otherwise notifies the Borrower in writing, obtain and deliver as soon as practicable to the Collateral Agent Collateral Access Agreements duly-executed by the Borrower and each of the landlords of (i) the Borrower's warehouses located in Braintree, Massachusetts and Edison, New Jersey and (ii) any inventory location for which the landlord of such location is entitled under applicable law to a statutory lien for unpaid rent (as determined by the Collateral Agent). SECTION 5.15. INVENTORY. Cause all Inventory to be (i) located at such ---------- places, (ii) in such amounts and (iii) of the quality and value represented to the Collateral Agent by the Borrower on or about the Closing Date. SECTION 5.16. FURTHER ASSURANCES. Take all such further actions and ------------------- execute all such further documents and instruments as the Administrative Agent or the Collateral Agent may at any time reasonably determine in its sole discretion to be necessary or desirable to further carry out and consummate the transactions contemplated by this Agreement and the other Loan Documents, to cause the execution, delivery and performance of this Agreement and the other Loan Documents to be duly authorized and to perfect or protect the Liens (and the priority status thereof) of the Collateral Agent in the Collateral. VI. NEGATIVE COVENANTS From the date hereof and for so long as any Commitment shall be in effect or any Loan, Letter of Credit, or other Obligation shall remain outstanding unless such Letter of Credit is fully collateralized to the satisfaction of the Administrative Agent, the Borrower and each of the Guarantors agree that, unless the Required Lenders shall otherwise consent in writing, the Borrower and each of the Guarantors will not (and will not apply to the Bankruptcy Court for authority to): SECTION 6.01. LIENS. Incur, create, assume or suffer to exist any Lien on ------ any property of the Borrower or the Guarantors whether now owned or hereafter acquired by the Borrower, other than (i) Permitted Liens; (ii) Liens in favor of the Collateral Agent, for its benefit and the ratable benefit of the Administrative Agent, the Issuing Bank, the Co-Agents and the Lenders pursuant to the Loan Documents; or (iii) Liens on any interests in Real Property securing Indebtedness permitted under Section 6.03(iii). SECTION 6.02. MERGER, ETC. Consolidate or merge with or into another ------------ Person (other than with Subsidiaries or BI so long as the Borrower is the surviving entity) or enter into any stock or asset acquisitions. 51 SECTION 6.03. INDEBTEDNESS. Contract, create, incur, assume or suffer to ------------- exist any Indebtedness, except for (i) Indebtedness arising under this Agreement and any other Loan Document; (ii) Indebtedness secured by purchase money Liens and Capitalized Leases in an aggregate amount not to exceed $10,000,000 incurred after the Closing Date; and (iii) Indebtedness secured by any interests in Real Property owned or leased by the Borrower or any Guarantor that is non-recourse to the Borrower and the Guarantors and is otherwise on terms and conditions reasonably satisfactory to the Administrative Agent and the proceeds of which are deposited in the BBNA Concentration Account for application to the Obligations in accordance with Section 2.14. SECTION 6.04. CAPITAL EXPENDITURES. Make Capital Expenditures in any -------------------- fiscal year in excess of $20,000,000; provided, that, so long as there is no -------- Default or Event of Default, if, as of the end of the Borrower's fiscal year, the Borrower's EBITDA for the previous 12-month period exceeds $40,000,000, the Borrower may increase its Capital Expenditures above $20,000,000 for the next fiscal year by the lesser of (x) 50% of the EBITDA in excess of $40,000,000, and (y) $10,000,000. SECTION 6.05. EBITDA. Permit EBITDA (after cash restructuring costs (but ------ excluding cash restructuring costs incurred in fiscal year 1997 (up to $6,500,000))) for the 12-month period ending on or about the date set forth below to be less than the amount specified opposite such date:
Fiscal Quarter of the Borrower Ending Rolling EBITDA ------------------------------------- -------------- on or about April 30, 1998 $ 5,000,000 on or about July 31, 1998 $ 5,000,000 on or about October 31, 1998 $10,000,000 on or about January 31, 1999 $15,000,000 on or about April 30, 1999 $17,500,000 on or about July 31, 1999 $20,000,000 on or about October 31, 1999 $25,000,000 on or about January 31, 2000 $30,000,000 and each fiscal quarter thereafter
SECTION 6.06. ACCOUNTS PAYABLE TO INVENTORY RATIO. Permit the ratio of ----------------------------------- the amount of Accounts Payable to the value of Inventory of the Borrower (valued on a first in - first out basis at the lower of cost or market calculated on the retail method in accordance with GAAP and shown on the Borrower's financial statements), expressed as a percentage, at the end of each month in any year set forth below to be less than the percentage specified opposite such month: Month Minimum Percentage ----- ------------------ January 32.5% February 37.5% March 37.5% April 37.5% May 37.5% June 37.5% July 37.5% August 42.5% September 42.5% October 42.5% 52 November 42.5% December 37.5% SECTION 6.07. DEBT COVERAGE RATIO. For the fiscal quarter of the Borrower ------------------- ending on or about January 31, 2000, and ending on each fiscal quarter thereafter, permit the Borrower's ratio of (a) EBITDA less Capital Expenditures ---- to (b) cash Interest Expense plus principal payments on any Indebtedness, for ---- the 12-month period ending on the last day of each such fiscal quarters to be less 1.25:1. SECTION 6.08. GUARANTEES AND OTHER LIABILITIES. Purchase or repurchase -------------------------------- (or agree, contingently or otherwise, so to do) the Indebtedness of, or assume, guarantee (directly or indirectly or by an instrument having the effect of assuring another's payment or performance of any obligation or capability of so doing, or otherwise), endorse or otherwise become liable, directly or indirectly, in connection with the obligations, stock or dividends of any Person, or permit any Subsidiary or Guarantor to do so, except for the Guaranty of the Guarantors hereunder. SECTION 6.09. DIVIDENDS; CAPITAL STOCK. Declare or pay, directly or ------------------------- indirectly, any dividends or make any other distribution or payment, whether in cash, property, securities or a combination thereof, with respect to (whether by reduction of capital or otherwise) any shares of capital stock (or any options, warrants, rights or other equity securities or agreements relating to any capital stock), or set apart any sum for the aforesaid purposes; provided that -------- any subsidiary of the Borrower may pay dividends to the Borrower. SECTION 6.10. TRANSACTIONS WITH AFFILIATES. Sell or transfer any property ---------------------------- or assets to, or otherwise engage in any other transactions with, any of its shareholders or Affiliates, except that the Borrower or any Guarantor may engage in any of the foregoing transactions in the ordinary course of business at prices and on terms and conditions not less favorable to the Borrower or such Guarantor than could be obtained on an arm's-length basis from unrelated third parties and which are consistent with past practices. [Notwithstanding the foregoing, the Borrower may not transfer any assets to any Guarantor except for proceeds of the loans to the extent provided in Section 3.10.] SECTION 6.11. INVESTMENTS, LOANS AND ADVANCES. Purchase, hold or acquire ------------------------------- any capital stock, evidences of indebtedness or other securities of, make or permit to exist any loans or advances to, or make or permit to exist any investment or any other interest in, any other Person (all of the foregoing, "Investments"), except for (i) ownership of the capital stock of BAC by BI, the ----------- Borrower by BAC and each of the Guarantors listed on Schedule 3.04 (other than BI and BAC) by the Borrower, (ii) relocation or similar type loans or advances to new employees not in excess of $750,000 in the aggregate during the term of this Agreement, (iii) Permitted Investments [and (iv) as provided in Section 3.10]. SECTION 6.12. DISPOSITION OF ASSETS. Sell or otherwise dispose of any --------------------- assets (including, without limitation, the capital stock of any Subsidiary), except for (a) sales of Inventory in arm's-length transactions in the ordinary course of business and (b) so long as no Default or Event of Default has occurred or is continuing or would occur after giving effect to such sale or disposition, (i) sales of Inventory, furniture, fixtures and equipment located in the retail stores set forth on Schedule 6.12 that are closed or otherwise disposed of, (ii) the sale of obsolete or worn out equipment disposed of in the ordinary course of business, and (iii) the sale or other transfer of Real Property, the proceeds of which are deposited in the BBNA Concentration Account for application to the Obligations in accordance 53 with Section 2.14; provided that the return to vendors of out-of-season, -------- defective, damaged or nonconforming Inventory or negotiated returns for credit shall not be deemed prohibited by this Agreement. SECTION 6.13. NATURE OF BUSINESS. ------------------ (a) Modify or alter in any material manner the nature and type of its business as conducted at the Closing Date or the manner in which such business is conducted. (b) Change, in any material respect, any of its inventory or sales accounting, invoicing or billing practices or management information or reporting systems except for the change of the Borrower's Inventory tracking and accounting system reasonably satisfactory to the Administrative Agent (provided -------- that, after such change, the Borrower continues to use accounting and tracking methodologies consistent with those currently used by the Borrower). (c) Close any retail store, except as projected in the Plan of Reorganization and/or the Business Plan. (d) Move Inventory from other than the locations listed on Schedule 3.11(a). SECTION 6.14. CONFLICTING AGREEMENTS, ORDERS OR ACTIONS. Enter into any ----------------------------------------- stipulation or agreement, request or permit or suffer itself or any Guarantor to take any other action which does or could conflict or materially interfere with any of the rights, privileges, benefits or remedies of the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents or any of the Lenders under any of the Loan Documents, or materially diminish or impair the practical realization of any such right, privilege, benefit or remedy. VII. EVENTS OF DEFAULT SECTION 7.01. EVENTS OF DEFAULT. If any of the following events (each, ----------------- an "Event of Default") occurs: ---------------- (a) any material representation or warranty made by the Borrower or any Guarantor in this Agreement or in any Loan Document or in connection with this Agreement or with the execution and delivery of the Notes or the credit extensions hereunder or any material statement or representation made in any report, financial statement, certificate or other document furnished by the Borrower or any Guarantors to the Administrative Agent, the Issuing Bank, the Collateral Agent or any of the Lenders under or in connection with this Agreement or any other Loan Document, shall prove to have been false or misleading in any material respect when made or delivered; or (b) default shall be made in the payment of any (i) Fees or interest on the Loans when due, and such default shall continue unremedied for more than three (3) Business Days or (ii) principal of the Loans or other amounts payable by the Borrower hereunder (including, without limitation, reimbursement obligations or cash collateralization in respect of Letters of Credit), when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; or (c) default shall be made by the Borrower or any Guarantor in the due observance or 54 performance of any covenant, condition or agreement contained in Article VI hereof; or (d) default shall be made by the Borrower or any Guarantor in the due observance or performance of any other covenant, condition or agreement to be observed or performed pursuant to the terms of this Agreement or any of the other Loan Documents and, with respect to Sections 5.01, 5.02 or 5.10, such default shall continue unremedied for more than five (5) Business Days; or (e) dissolution, liquidation, winding up or cessation of the Borrower's or any Guarantor's businesses, or the failure of the Borrower or any Guarantor to meet its debts as they mature, or the calling of one or more meetings of the Borrower's or any Guarantor's major creditors for purposes of obtaining a moratorium on payment or a compromise of the Borrower's or any Guarantor's debts; or (f) the insolvency of the Borrower or any Guarantor or the commencement by or against the Borrower or any Guarantor of any bankruptcy, insolvency, arrangement, reorganization, receivership or similar proceedings under any federal or state law and, in the event any such proceeding is commenced against the Borrower or any Guarantor, such proceeding is not dismissed within thirty (30) days; or (g) the loss by the Borrower or any Guarantor of any lease, permit, franchise or agreement, the loss of which could reasonably be expected to have a material adverse effect on the financial condition, operations or assets of the Borrower or the Guarantors, or their ability to repay the Obligations or of the Collateral Agent to realize on the Collateral; or (h) failure of (i) Peter Thorner or some other person reasonably acceptable to the Administrative Agent, to participate in the affairs of the Borrower and Guarantors as Chairman of the Board of Directors and Chief Executive Officer with no diminution in the present responsibilities and authority related to this executive management position and (ii) Cornelius F. Moses, III or some other person reasonably acceptable to the Administrative Agent, to act as Senior Vice President and Chief Financial Officer, with no diminution in the present responsibilities and authority related to this executive management position; or (i) the occurrence of a default or event of default (in each case without regard to any applicable grace periods) which permits, or could permit, the acceleration of the maturity of, any note, agreement or instrument evidencing any other Indebtedness of the Borrower or any of the Guarantors, and the aggregate principal amount of all such Indebtedness with respect to which such a default or an event of default has occurred, or the maturity of which is permitted to be accelerated, exceeds $10,000,000; or (j) (A) any material provision of any Loan Document shall, for any reason, cease to be valid and binding on the Borrower or any of the Guarantors or (B) any Lien granted to the Collateral Agent under any Loan Document shall cease to be a first-priority perfected Lien (subject only to Permitted Liens), or, in the case of (A) or (B) the Borrower or any of the Guarantors shall so assert in any pleading filed in any court; or (k) greater than fifty percent (50%) of the Borrower's stores close for more than seven (7) consecutive days, unless such closures are covered by business interruption insurance; or (l) any one or more judgments or orders as to a liability or debt for the payment of money (not covered by insurance and workers' compensation payments) in excess of $5,000,000 in the 55 aggregate shall be rendered against the Borrower or any of the Guarantors and either (i) enforcement proceedings shall have been commenced and shall be continuing by any creditor upon such judgment or order or (ii) there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal, payment or otherwise, shall not be in effect; or (m) any non-monetary judgment or order shall be rendered against the Borrower or any of the Guarantors which does or would reasonably be expected to (i) cause a material adverse change in the financial condition, business, operations or assets of the Borrower and the Guarantors taken as a whole on a consolidated basis, (ii) have a material adverse effect on the ability of the Borrower or any of the Guarantors to perform their respective obligations under any Loan Document, or (iii) have a material adverse effect on the Collateral or on the rights and remedies of the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents or any Lender under any Loan Document, and there shall be any period of 10 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect; or (n) any Termination Event described in clauses (iii) or (iv) of the definition of such term shall have occurred and shall continue unremedied for more than 10 days and the sum (determined as of the date of occurrence of such Termination Event) of the Insufficiency of the Plan in respect of which such Termination Event shall have occurred and be continuing and the Insufficiency of any and all other Plans with respect to which such a Termination Event (described in such clauses (iii) or (iv)) shall have occurred and then exist is equal to or greater than $5,000,000; or (o) (i) the Borrower or any ERISA Affiliate thereof shall have been notified by the sponsor of a Multiemployer Plan that it has incurred Withdrawal Liability to such Multiemployer Plan, (ii) the Borrower or such ERISA Affiliate does not have reasonable grounds to contest such Withdrawal Liability and is not in fact contesting such Withdrawal Liability in a timely and appropriate manner, and (iii) the amount of such Withdrawal Liability specified in such notice, when aggregated with all other amounts required to be paid to Multiemployer Plans in connection with Withdrawal Liabilities (determined as of the date of such notification), exceeds $5,000,000 allocable to post-petition obligations or requires payments exceeding $500,000 per annum, in excess of the annual payments made with respect to such MultiEmployer Plans by the Borrower or such ERISA Affiliate for the plan year immediately preceding the plan year in which such notification is received; or (p) the Borrower or any ERISA Affiliate thereof shall have been notified by the sponsor of a Multiemployer Plan that such Multiemployer Plan is in reorganization or is being terminated, within the meaning of Title IV of ERISA, if as a result of such reorganization or termination the aggregate annual contributions of the Borrower and its ERISA Affiliates to all Multiemployer Plans that are then in reorganization or being terminated have been or will be increased over the amounts contributed to such Multiemployer Plans for the plan years that include the date hereof by an amount exceeding $5,000,000; or (q) the Borrower or any ERISA Affiliate shall have committed a failure described in Section 302(f) (1) of ERISA (other than the failure to make any contribution accrued and unpaid as of the Filing Date) and the amount determined under Section 302 (f) (3) of ERISA is equal to or greater than $5,000,000; or (r) it shall be determined (whether by the Bankruptcy Court or by any other judicial or administrative forum) that the Borrower is liable for the payment of claims arising out of any failure to 56 comply (or to have complied) with applicable environmental laws or regulations the payment of which will have a material adverse effect on the financial condition, business, properties, operations or assets of the Borrower or the Borrower and/or the Guarantors, taken as a whole; or (s) any Person or group (as defined in the Securities Exchange Act of 1934, as amended), other than the holders of voting stock of BI as of the Filing Date, shall acquire for the first time the direct or indirect ownership (constructive or otherwise), or the direct or indirect power to vote more than fifty percent (50%) of the outstanding voting stock of BI; then, and in every such event and at any time thereafter during the continuance of such event, the Administrative Agent may, and at the request of the Required Lenders shall, by notice (a "Default Notice") to the Borrower take one or more of the following -------------- actions, at the same or different times: (i) terminate forthwith all obligations of the Lenders and the Issuing Bank to extend credit under this Agreement, including any and all obligations to make Loans or to issue Letters of Credit; (ii) declare the Loans then outstanding to be forthwith due and payable, whereupon the principal of all outstanding Loans together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower and the Guarantors, anything contained herein or in any other Loan Document to the contrary notwithstanding; (iii) require the Borrower and the Guarantors to deposit in the Cash Collateral Account, no later than the first Business Day after such Default Notice is given, cash in an amount equal to the sum of 105% of the aggregate amounts that then are or thereafter may become available for drawing or payment under all outstanding Letters of Credit and (without limiting or restricting any application permitted under Sections 2.13 and 2.14) to the extent the Borrower and the Guarantors shall fail to furnish such funds as demanded by the Administrative Agent, the Administrative Agent shall be authorized to debit the accounts of the Borrower and the Guarantors maintained with the Administrative Agent in such amount; (iv) set-off amounts in the Cash Collateral Account or any other accounts maintained by the Administrative Agent and apply such amounts to the obligations of the Borrower and the Guarantors hereunder and in the other Loan Documents (but this clause (iv) shall not limit or restrict any application permitted under Sections 2.13 and 2.14); (v) instruct the Collateral Agent to exercise its remedies under the Security Documents (including, without limitation, foreclosure upon and taking possession of the Collateral) and (vi) exercise any and all remedies under the Loan Documents and applicable law available to the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders. SECTION 7.02. WHEN CONTINUING. For all purposes under this Agreement, --------------- each Default that has occurred and each Event of Default that has occurred shall be deemed to be continuing at all times thereafter unless it either (a) is cured or corrected to the reasonable written satisfaction of the Required Lenders or (b) is waived in writing by the Required Lenders. VIII. THE AGENTS SECTION 8.01. ADMINISTRATION BY ADMINISTRATIVE AGENT. The general -------------------------------------- administration of the Loan Documents shall be by the Administrative Agent. The Lenders, the Collateral Agent and the Issuing Bank each hereby irrevocably authorizes the Administrative Agent, at its discretion, to take or refrain from taking such actions as agent on its behalf and to exercise or refrain from exercising such powers under the Loan Documents and the Notes as are delegated by the terms hereof or thereof, as appropriate, together with all powers reasonably incidental thereto. The Administrative Agent shall 57 have no duties or responsibilities except as set forth in this Agreement and the remaining Loan Documents. SECTION 8.02. THE COLLATERAL AGENT. Each Lender hereby irrevocably -------------------- designates BBRF as Collateral Agent under this Agreement and the other Loan Documents. All Collateral shall be held or administered by the Collateral Agent (or its duly-appointed agent) for its benefit and for the ratable benefit of the Lenders, the Administrative Agent, the Co-Agents and the Issuing Bank. Any proceeds received by the Collateral Agent from the foreclosure, sale, lease or other disposition of any of the Collateral and any other proceeds received pursuant to the terms of the Security Documents or the other Loan Documents shall be paid over to the Administrative Agent for application as provided in Sections 2.14(a) and (b). SECTION 8.03. ADVANCES AND PAYMENTS. --------------------- (a) On the date of each Loan, the Administrative Agent shall be authorized (but not obligated) to advance, for the account of each of the Lenders, the amount of the Loan to be made by it in accordance with its Commitment hereunder. Should the Administrative Agent do so, each of the Lenders agrees forthwith to reimburse the Administrative Agent in immediately available funds for the amount so advanced on its behalf by the Administrative Agent, together with interest at the Federal Funds Effective Rate if not so reimbursed on the date due from and including such date but not including the date of reimbursement. (b) Any amounts received by the Administrative Agent in connection with this Agreement or the other Loan Documents (other than amounts to which the Administrative Agent is entitled pursuant to Sections 2.19, 5.08, 8.06, 10.05 and 10.06), the application of which is not otherwise provided for in this Agreement shall be applied in the order of priority set forth in Sections 2.14(a) and (b). All amounts to be paid to a Lender, the Collateral Agent, either Co-Agent or the Issuing Bank by the Administrative Agent shall be credited to that Lender, the Collateral Agent, such Co-Agent or the Issuing Bank, as applicable, after collection by the Administrative Agent, in immediately available funds either by wire transfer or deposit in the correspondent account of that Lender, the Collateral Agent, such Co-Agent or the Issuing Bank with the Administrative Agent, as such Lender, the Collateral Agent, such Co-Agent or the Issuing Bank and the Administrative Agent shall from time to time agree. SECTION 8.04. SHARING OF EXCESS PAYMENTS. Each of the Lenders, the -------------------------- Collateral Agent, each Co-Agent and the Issuing Bank agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim against the Borrower or any Guarantor, including, but not limited to, a secured claim under Section 506 of the Bankruptcy Code or other security or interest arising from, or in lieu of, such secured claim and received by such Lender, the Collateral Agent, such Co-Agent or the Issuing Bank under any applicable bankruptcy, insolvency or other similar law, or otherwise, obtain payment in respect of its Obligations owed it (an "excess payment") as a result of which -------------- such Lender, the Collateral Agent, such Co-Agent or the Issuing Bank has received payment of any Loans or other Obligations outstanding to it in excess of the amount that it would have received if all payments at any time applied to the Loans and other Obligations had been applied in the order of priority set forth in Section 2.14, then such Lender, the Collateral Agent, such Co-Agent or the Issuing Bank shall promptly purchase at par (and shall be deemed to have thereupon purchased) from the other Lenders, the Collateral Agent, each Co-Agent and the Issuing Bank, as applicable, a participation in the Loans and Obligations outstanding to such other Persons, in an amount determined by the Administrative Agent in good faith as the amount necessary to ensure that the economic benefit 58 of such excess payment is reallocated in such manner as to cause such excess payment and all other payments at any time applied to the Loans and other Obligations to be effectively applied in the order of priority set forth in Section 2.14; provided, that if any such excess payment is thereafter recovered -------- or otherwise set aside such purchase of participations shall be correspondingly rescinded (without interest). The Borrower expressly consents to the foregoing arrangements and agrees that any Lender, the Collateral Agent, any Co-Agent or the Issuing Bank holding (or deemed to be holding) a participation in any Loan or other Obligation may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing by the Borrower to such Lender, the Collateral Agent, such Co-Agent or the Issuing Bank as fully as if such Lender, the Collateral Agent, such Co-Agent or the Issuing Bank held a Note and was the original obligee thereon, in the amount of such participation. SECTION 8.05. AGREEMENT OF REQUIRED LENDERS. Upon any occasion requiring ----------------------------- or permitting an approval, consent, waiver, election or other action on the part of the Required Lenders, action shall be taken by the Agents for and on behalf or for the benefit of all Lenders upon the direction of the Required Lenders, and any such action shall be binding on all Lenders. No amendment, modification, consent, or waiver shall be effective except in accordance with the provisions of Section 10.10. SECTION 8.06. LIABILITY OF AGENTS. ------------------- (a) Each of the Agents, when acting on behalf of the Lenders and the Issuing Bank, may execute any of its respective duties under this Agreement by or through any of its respective officers, agents and employees, and neither of the Agents nor their respective directors, officers, agents or employees shall be liable to the Lenders, the Co-Agents or the Issuing Bank or any of them for any action taken or omitted to be taken in good faith, or be responsible to the Lenders, the Co-Agents or the Issuing Bank or to any of them for the consequences of any oversight or error of judgment, or for any loss, except to the extent of any liability imposed by law by reason of such Agent's own gross negligence or willful misconduct. The Agents and their respective directors, officers, agents and employees shall in no event be liable to the Lenders, the Co-Agents or the Issuing Bank or to any of them for any action taken or omitted to be taken by them pursuant to instructions received by them from the Required Lenders or in reliance upon the advice of counsel selected by it. Without limiting the foregoing, neither of the Agents, nor any of their respective directors, officers, employees, or agents shall be responsible to any Lender, the Co-Agents or the Issuing Bank for the due execution, validity, genuineness, effectiveness, sufficiency, or enforceability of, or for any statement, warranty or representation in, this Agreement, any Loan Document or any related agreement, document or order, or shall be required to ascertain or to make any inquiry concerning the performance or observance by the Borrower or any Guarantor of any of the terms, conditions, covenants, or agreements of this Agreement or any of the Loan Documents. (b) Neither of the Agents nor any of their respective directors, officers, employees, or agents shall have any responsibility to the Borrower or the Guarantors on account of the failure or delay in performance or breach by any Lender, either Co-Agent or the Issuing Bank or by the Borrower or the Guarantors of any of their respective obligations under this Agreement or the Notes or any of the Loan Documents or in connection herewith or therewith. (c) The Administrative Agent and the Collateral Agent, in such capacities hereunder, shall be entitled to rely on any communication, instrument, or document reasonably believed by such person to be genuine or correct and to have been signed or sent by a person or 59 persons believed by such person to be the proper person or persons, and, such person shall be entitled to rely on advice of legal counsel, independent public accountants, and other professional advisers and experts selected by such person. SECTION 8.07. REIMBURSEMENT AND INDEMNIFICATION. Each Lender agrees (i) --------------------------------- to reimburse (x) each Agent for such Lender's Commitment Percentage of any expenses and fees incurred by such Agent for the benefit of the Lenders, the Co- Agents or the Issuing Bank under this Agreement, the Notes and any of the Loan Documents, including, without limitation, counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, the Co-Agents or the Issuing Bank, and any other expense incurred in connection with the operations or enforcement thereof not reimbursed by the Borrower or the Guarantors and (y) each Agent for such Lender's Commitment Percentage of any expenses of such Agent incurred for the benefit of the Lenders, the Co-Agents or the Issuing Bank that the Borrower has agreed to reimburse pursuant to Section 10.05 and has failed to so reimburse and (ii) to indemnify and hold harmless the Agents and any of their directors, officers, employees, or agents, on demand, in the amount of such Lender's Commitment Percentage, from and against any and all liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses, or disbursements of any kind or nature whatsoever which may be imposed on, incurred by, or asserted against it or any of them in any way relating to or arising out of this Agreement, the Notes or any of the Loan Documents or any action taken or omitted by it or any of them under this Agreement, the Notes or any of the Loan Documents to the extent not reimbursed by the Borrower or the Guarantors (except such as shall result from their respective gross negligence or willful misconduct). SECTION 8.08. RIGHTS OF AGENTS. It is understood and agreed that each of ---------------- BBNA and BBRF shall have the same rights and powers hereunder (including the right to give such instructions) as the other Lenders and may exercise such rights and powers, as well as its rights and powers under other agreements and instruments to which it is or may be party, and engage in other transactions with the Borrower or any Guarantor, as though it were not the Administrative Agent or the Collateral Agent, respectively, of the Lenders under this Agreement. SECTION 8.09. INDEPENDENT LENDERS AND ISSUING BANK. The Lenders and the ------------------------------------ Issuing Bank each acknowledges that it has decided to enter into this Agreement and to make the Loans or issue the Letters of Credit hereunder based on its own analysis of the transactions contemplated hereby and of the creditworthiness of the Borrower and the Guarantors and agrees that the Agents shall bear no responsibility therefor. SECTION 8.10. NOTICE OF TRANSFER. The Agents may deem and treat a Lender ------------------ party to this Agreement as the owner of such Lender's portion of the Loans for all purposes, unless and until, and except to the extent, an Assignment and Acceptance shall have become effective as set forth in Section 10.03(b). SECTION 8.11. SUCCESSOR ADMINISTRATIVE AGENT AND COLLATERAL AGENT. The --------------------------------------------------- Administrative Agent and the Collateral Agent may resign at any time by giving five (5) Business Days' written notice thereof to the Lenders, the Issuing Bank, the other Agent and the Borrower. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent or Collateral Agent, as the case may be, which shall be reasonably satisfactory to the Borrower. If no successor Administrative Agent or Collateral Agent, as the case may be, shall have been so appointed by the Required Lenders and shall have accepted such appointment, within 30 days after the retiring Agent's giving of notice of resignation, the retiring Agent may, on behalf of the 60 Lenders, the other Agent and the Issuing Bank, appoint a successor Administrative Agent or Collateral Agent, as the case may be, which shall be a commercial bank (or affiliate thereof) organized under the laws of the United States of America or of any State thereof and having a combined capital and surplus of a least $100,000,000, which, so long as there is no Default or Event of Default, shall be reasonably satisfactory to the Borrower. Upon the acceptance of any appointment as Administrative Agent or Collateral Agent hereunder by a successor Administrative Agent or Collateral Agent, as the case may be, such successor Administrative Agent or Collateral Agent shall thereupon succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as such Agent, the provisions of this Article VIII shall inure to its benefit as to any actions taken or omitted to be taken by it while it was such Agent under this Agreement. SECTION 8.12. REPORTS AND FINANCIAL STATEMENTS. Promptly after receipt -------------------------------- thereof from the Borrower, the Administrative Agent shall remit to each Lender, the Collateral Agent and the Issuing Bank copies of all financial statements and reports required to be delivered by the Borrower hereunder. IX. GUARANTY SECTION 9.01. GUARANTY. -------- (a) Each of the Guarantors unconditionally and irrevocably guarantees the due and punctual payment and performance by the Borrower of the Obligations. Each of the Guarantors further agrees that the Obligations may be extended or renewed, in whole or in part, without notice to or further assent from it, and it will remain bound upon this guaranty notwithstanding any extension or renewal of any of the Obligations. The Obligations of the Guarantors shall be joint and several. (b) Each of the Guarantors waives presentation to, demand for payment from and protest to the Borrower or any other Guarantor, and also waives notice of protest for nonpayment. The obligations of the Guarantors hereunder shall not be affected by (i) the failure of the Administrative Agent, the Collateral Agent, the Issuing Bank, either Co-Agent or a Lender to assert any claim or demand or to enforce any right or remedy against the Borrower or any other Guarantor under the provisions of this Agreement or any other Loan Document or otherwise; (ii) any extension or renewal of any provision hereof or thereof; (iii) any rescission, waiver, compromise, acceleration, amendment or modification of any of the terms or provisions of any of the Loan Documents; (iv) the release, exchange, waiver or foreclosure of any security held by the Administrative Agent or the Collateral Agent for the Obligations or any of them; (v) the failure of the Administrative Agent, the Issuing Bank, the Collateral Agent, either Co-Agent or a Lender to exercise any right or remedy against any other Guarantor; (vi) the release or substitution of any Guarantor or any other Guarantor or (vii) any bankruptcy, insolvency, reorganization, arrangement, adjustment, composition, liquidation or the like of the Borrower or any Guarantor including, but not limited to, (x) any Guaranteed Party's election, in any proceeding instituted under the Bankruptcy Code, of the application of Section 1111(b)(2) of the Bankruptcy Code, (y) any borrowing or grant of a Lien by the Borrower or any Guarantor as debtor-in-possession, under Section 364 of the Bankruptcy Code, or (z) the disallowance of all or any portion of any Guaranteed Party's claim(s) for repayment of the Obligations under Section 502 of the Bankruptcy Code. 61 (c) Each of the Guarantors further agrees that this guaranty constitutes a guaranty of performance and of payment when due and not just of collection, and waives any right to require that any resort be had by the Administrative Agent, the Issuing Bank, the Collateral Agent, either Co-Agent or a Lender to any security held for payment of the Obligations or to any balance of any deposit, account or credit on the books of the Administrative Agent, the Issuing Bank, the Collateral Agent, either Co-Agent or a Lender in favor of the Borrower or any other Guarantor, or to any other Person. (d) Each of the Guarantors hereby waives any defense that it might have based on a failure to remain informed of the financial condition of the Borrower and of any other Guarantor and any circumstances affecting the ability of the Borrower to perform under this Agreement. (e) Each Guarantor's guaranty shall not be affected by the genuineness, validity, regularity or enforceability of the obligations, the Notes or any other instrument evidencing any Obligations, or by the existence, validity, enforceability, perfection, or extent of any collateral therefor or by any other circumstance relating to the obligations which might otherwise constitute a defense to this Guaranty. None of the Administrative Agent, the Issuing Bank, the Collateral Agent, either Co-Agent or any of the Lenders makes any representation or warranty in respect to any such circumstances or shall have any duty or responsibility whatsoever to any Guarantor in respect of the management and maintenance of the obligations. (f) Subject to the provisions of Section 7.01, upon the Obligations becoming due and payable (by acceleration or otherwise), the Lenders, the Issuing Bank, the Collateral Agent, the Co-Agents and the Administrative Agent shall be entitled to immediate payment of such obligations by the Guarantors upon written demand by the Administrative Agent. SECTION 9.02. NO IMPAIRMENT OF GUARANTY. The obligations of the ------------------------- Guarantors hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including, without limitation, any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or set-off, counterclaim, recoupment, or termination whatsoever by reason of the invalidity, illegality or unenforceability of the obligations. Without limiting the generality of the obligations of the Guarantors hereunder shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agent, the Issuing Bank, the Collateral Agent, either Co-Agent or a Lender to assert any claim or demand or to enforce any remedy under this Agreement or any other agreement, by any waiver or modification of any provision thereof, by any default, failure or delay, willful or otherwise, in the performance of the Obligations, or by any other act or thing or omission or delay to do any other act or thing which may or might in any manner or to any extent vary the risk of the Guarantors or would otherwise operate as a discharge of the Guarantors as a matter of law, unless and until the obligations are paid in full. SECTION 9.03. SUBROGATION. Upon payment by any Guarantor of any sums to ----------- the Administrative Agent, the Issuing Bank, the Collateral Agent, either Co- Agent or a Lender hereunder, all rights of such Guarantor against the Borrower arising as a result thereof by way of right of subrogation or otherwise, shall in all respects be subordinate and junior in right of payment to the prior final and indefeasible payment in full of all the Obligations. If any amount shall be paid to such Guarantor for the account of the Borrower, such amount shall be held in trust for the benefit of the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders and shall forthwith be paid to the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders to be credited and applied to the Obligations, whether matured or unmatured. 62 SECTION 9.04. CREDIT AGREEMENT. Each of the Guarantors acknowledges that ---------------- it has read the Loan Documents and agrees to perform and observe all the of the terms and provisions herein and therein applicable thereto. SECTION 9.05. MAXIMUM GUARANTEED AMOUNT. Notwithstanding any other ------------------------- provision of this Guarantee to the contrary, if the obligations of any Guarantor hereunder would otherwise be held or determined by a court of competent jurisdiction in any action or proceeding involving any state corporate law or any state or Federal bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or other law affecting the rights of creditors generally, to be void, invalid or unenforceable to any extent on account of the amount of such Guarantor's liability under this Guaranty, then notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by such Guarantor or any other Person, be automatically limited and reduced to the highest amount which is valid and enforceable as determined in such action or proceeding. X. MISCELLANEOUS SECTION 10.01. NOTICES. Notices and other communications provided for ------- herein shall be in writing (including telegraphic, telex, facsimile or cable communication) and shall be mailed, telegraphed, telexed, telecopied, transmitted, cabled or delivered to the Borrower or any Guarantor at One Bradlees Circle, P.O. Box 859051, Braintree, MA 02185-9051, Attention: Chief Financial Officer (telecopy number: (617) 380-8096), and to a Lender, the Issuing Bank, the Collateral Agent, either Co-Agent or the Administrative Agent to it at its address set forth on the signature pages of this Agreement, or such other address as such party may from time to time designate by giving written notice to the other parties hereunder. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the fifth Business Day after the date when sent by registered or certified mail, postage prepaid, return receipt requested, if by mail; or when delivered to the telegraph company, charges prepaid, if by telegram; or when receipt is acknowledged, if by any telegraphic communications or facsimile equipment of the sender; in each case addressed to such party as provided in this Section 10.01 or in accordance with the latest unrevoked written direction from such party; provided, however, that in the case of -------- ------- notices to the Administrative Agent notices pursuant to the preceding sentence and pursuant to Article II shall be effective only when received by the Administrative Agent. Copies of all notices and other communications given to the Borrower shall go to Dewey Ballantine, 1301 Avenue of the Americas, New York, New York 10019, Attn: Stuart Hirshfield, Esq. SECTION 10.02. SURVIVAL OF AGREEMENT, REPRESENTATIONS AND WARRANTIES, ETC. ----------------------------------------------------------- All warranties, representations and covenants made by the Borrower or any Guarantor herein or in any certificate or other instrument delivered by it or on its behalf in connection with this Agreement shall be considered to have been relied upon by the Lenders, the Issuing Bank, the Collateral Agent, the Co- Agents and the Administrative Agent and shall survive the making of the Loans and the issuance of Letters of Credit herein contemplated and the issuance and delivery of the Notes and the Letters of Credit, regardless of any investigation made by any Lender, the Issuing Bank, the Collateral Agent, either Co-Agent and the Administrative Agent or on its behalf and shall continue in full force and effect so long as any amount due or to become due hereunder is outstanding and unpaid and so long as the Commitments have not been terminated. All statements in any such certificate or other instrument shall constitute representations and warranties by the Borrower and the Guarantors hereunder with respect to the Borrower. 63 SECTION 10.03. SUCCESSORS AND ASSIGNS. ---------------------- (a) This Agreement shall be binding upon and inure to the benefit of the Borrower, the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders and their respective successors and assigns. Neither the Borrower nor any of the Guarantors may assign or transfer any of their rights or obligations hereunder without the prior written consent of all of the Lenders, the Issuing Bank, the Collateral Agent, the Co-Agents and the Administrative Agent. Each Lender may sell participations to any Person in all or part of any Loan, or all or part of its Note or Commitment, in which event, without limiting the foregoing, the provisions of Section 2.15 and 2.18 shall inure to the benefit of each purchaser of a participation (provided that such -------- participant shall look solely to the seller of such participation for such benefits and the Borrower's and the Guarantors' liability, if any, under Sections 2.15 and 2.18 shall not be increased as a result of the sale of any such participation) and the treatment of payments pursuant to Section 2.17, shall be determined as if such Lender had not sold such participation. In the event any Lender shall sell any participation, such Lender shall retain the sole right and responsibility to enforce the obligations of the Borrower and each of the Guarantors relating to the Loans, including, without limitation, the right to approve any amendment, modification or waiver of any provision of this Agreement other than amendments, modifications or waivers which (i) reduce any Fees payable hereunder to the Lenders, (ii) reduce the amount of any scheduled principal payment on any Loan or reduce the principal amount of any Loan or the rate of interest payable hereunder or (iii) extend the maturity of the Borrower's obligations hereunder. The sale of any such participation, shall not alter the rights and obligations of the Lender selling such participation hereunder with respect to the Borrower. (b) Each Lender may assign to one or more Lenders or Eligible Assignees all or a portion of its interests, rights and obligations under this Agreement; provided, however, that (i) other than in the case of an assignment -------- ------- to a Person at least 50% owned by the assignor Lender, or by a common parent of both, or to another Lender, the Administrative Agent and the Issuing Bank must give their prior written consent, which consent will not be unreasonably withheld, (ii) the aggregate amount of the Commitment and/or Loans held by each of the assigning and assignee Lenders subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent and after giving effect to such assignment) shall, unless otherwise agreed to in writing by the Borrower (so long as there is no Event of Default) and the Administrative Agent, in no event be less than $7,500,000 (unless the assigning Lender assigns its entire remaining Commitment, in which case such assigning Lender's Commitment shall be $0), and (iii) the parties to each such assignment shall execute and deliver to the Administrative Agent, for its acceptance and recording in the Register (as defined below), an Assignment and Acceptance with blanks appropriately completed, together with any Note subject to such assignment and a processing and recordation fee of $3,000. Upon such execution, delivery, acceptance and recording, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be within ten Business Days after the execution thereof (unless otherwise agreed to in writing by the Administrative Agent), (A) the assignee thereunder shall be a party hereto and, to the extent provided in such Assignment and Acceptance, have the rights and obligations of a Lender hereunder and (B) the Lender thereunder shall, to the extent provided in such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto). The Borrower shall have no liability for the $3,000 processing and recordation fee, but shall be responsible for its own expenses and the expenses of the Administrative Agent. Notwithstanding the foregoing, unless and until an 64 Event of Default has occurred, BBNA and BBRF agree to hold, between them, Commitments totalling at least $25,000,000 in the aggregate; provided that, if -------- BBNA and BBRF's combined Commitment or, if greater, the aggregate amount of their Loans outstanding, is reduced below the lesser of (x) 2.5% of the then Total Commitments or total Loans outstanding, as applicable or (y) $5,000,000 after the occurrence of an Event of Default, BBNA will, upon the request of the Required Lenders, resign as Administrative Agent hereunder pursuant to Section 8.10. (c) By executing and delivering an Assignment and Acceptance, the Lender assignor thereunder and the assignee thereunder confirm to and agree with each other and the other parties hereto as follows: (i) other than the representation and warranty that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim, such Lender assignor makes no representation or warranty and assumes no responsibility with respect to any statements warranties or representations made in or in connection with this Agreement or any of the other Loan Documents or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any of the other Loan Documents; (ii) such Lender assignor makes no representation or warranty and assumes no responsibility with respect to the financial condition of the Borrower or any Guarantor or the performance or observance by the Borrower or any Guarantor of any of its obligations under this Agreement or any of the other Loan Documents or any other instrument or document furnished pursuant hereto; (iii) such assignee confirms that it has received a copy of this Agreement and the other Loan Documents, together with copies of the financial statements referred to in Section 3.04 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (iv) such assignee will, independently and without reliance upon the Administrative Agent, such Lender assignor or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (v) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms thereto, together with such powers as are reasonably incidental thereto; and (vi) such assignee agrees that it will perform in accordance with their terms all obligations that by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at its office a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders and the Commitments of, and principal amount of the Loans owing to, each Lender from time to time (the "Register"). The entries in the Register shall be conclusive, in the absence of -------- manifest error, and the Borrower, the Guarantors, the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders shall treat each Person the name of which is recorded in the Register as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by the Borrower or any Lender at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of an Assignment and Acceptance executed by an assigning Lender and the assignee thereunder together with any Note subject to such assignment and the fee payable in respect thereto, the Administrative Agent shall, if such Assignment and Acceptance has been completed with blanks appropriately filled, (i) accept such Assignment and Acceptance, (ii) record the information contained therein in the Register and (iii) give prompt written notice thereof to the Borrower (together with a copy thereof). Within five Business Days after receipt of notice, the Borrower, at its own expense, shall execute and deliver to the Administrative Agent in exchange for 65 the surrendered Note a new Note to the order of such assignee in an amount equal to the Commitment and/or Loans assumed by it pursuant to such Assignment and Acceptance and, if the assigning Lender has retained Commitments and/or Loans hereunder, a new Note to the order of the assigning Lender in an amount equal to the Commitment and/or Loans retained by it hereunder. Such new Notes shall be in an aggregate principal amount equal to the aggregate principal amount of such surrendered Note, shall be dated the effective date of such Assignment and Acceptance and shall otherwise be in substantially the form of the surrendered Note. Thereafter, such surrendered Note shall be marked canceled and returned to the Borrower. (f) Any Lender may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section 10.03, disclose to the assignee or participant or proposed assignee or participant, any information relating to the Borrower or any of the Guarantors furnished to such Lender by or on behalf of the Borrower or any of the Guarantors; provided that -------- prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall agree in writing to be bound by the provisions of Section 10.04. (g) The Borrower hereby agrees to actively assist and cooperate with the Administrative Agent in the Administrative Agent's efforts to sell participations herein (as set forth in Section 10.03(a)) and assign to one or more Lenders or Eligible Assignees a portion of its interests, rights and obligations as a Lender under this Agreement (as set forth in Section 10.03(b)). (h) Notwithstanding the provisions of this Section 10.03, each Lender may at any time pledge or assign its interest in any Loans or other Obligations to any Reserve Bank in the Federal Reserve System. SECTION 10.04. CONFIDENTIALITY. Each Lender agrees to keep, and to cause --------------- its agents, attorneys and financial advisors to keep, any information delivered or made available by the Borrower or any of the Guarantors to it confidential from anyone other than persons employed or retained by such Lender who are or are expected to become engaged in evaluating, approving, structuring or administering the Loans; provided that nothing herein shall prevent any Lender -------- from disclosing such information (i) to any other Lender, (ii) to any other person if reasonably incidental to the administration of the Loans, (iii) upon the order of any court or administrative agency, (iv) upon the request or demand of any regulatory agency or authority, (v) which has been publicly disclosed other than as a result of a disclosure by the Administrative Agent or any Lender which is not permitted by this Agreement, (vi) in connection with any litigation to which the Administrative Agent, the Collateral Agent, any Lender, the Issuing Bank, either Co-Agent or their respective Affiliates may be a party, (vii) to the extent reasonably required in connection with the exercise of any remedy hereunder, (viii) to such Lender's legal counsel and independent auditors, (ix) to any actual or proposed participant or assignee of all or part of its rights hereunder subject to the proviso in Section 10.03(f) and (x) to the extent required by law. SECTION 10.05. EXPENSES; DOCUMENTARY TAXES. Whether or not the --------------------------- transactions hereby contemplated shall be consummated, the Borrower and the Guarantors jointly and severally agree to pay all reasonable out-of-pocket expenses incurred by the Administrative Agent and the Collateral Agent (including but not limited to the reasonable fees and disbursements of Latham & Watkins, special counsel for the Administrative Agent and the Collateral Agent, and any other replacement counsel that the Administrative Agent and the Collateral Agent shall retain) in connection with the preparation, execution, delivery and administration of this Agreement, the Notes and the other Loan Documents, the making of the Loans and the issuance of the Letters of Credit, the syndication of the 66 transactions contemplated hereby, the reasonable costs, fees and expenses of the Administrative Agent and the Collateral Agent (including but not limited to the reasonable fees and disbursements of internal and third-party consultants and auditors) in connection with their periodic field audits and appraisals, monitoring and valuation of Collateral (including, without limitation, Inventory and Receivables) and reasonable syndication expenses of the Administrative Agent, all reasonable out-of-pocket expenses incurred by the Lenders, the Issuing Bank, the Collateral Agent, the Co-Agents and the Administrative Agent in the enforcement or protection of the rights of any one or more of the Lenders, the Issuing Bank, the Collateral Agent, the Co-Agents or the Administrative Agent in connection with this Agreement, the Notes or the other Loan Documents, including but not limited to the reasonable fees and disbursements of any counsel for the Lenders, the Issuing Bank, the Collateral Agent, the Co-Agents or the Administrative Agent incurred in the protection, enforcement and foreclosure of their Liens on the Collateral and of the Collateral Agent in the creation and maintenance of the perfection of such Liens. Such payments shall be made on the Closing Date and thereafter on demand. Whether or not the transactions hereby contemplated shall be consummated, the Borrower and the Guarantors agree to reimburse the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders for the Fees and expenses required by the Fee Letter and the reimbursement provisions thereof are hereby incorporated herein by reference. The obligations of the Borrower and the Guarantors under this Section 10.05 shall survive the termination of this Agreement and/or the payment of the Loans and/or the reimbursement of the Letters of Credit. The fees and expenses payable hereunder are in addition to those payable by the Borrower or the Guarantors under any other Loan Document. SECTION 10.06. INDEMNITY. The Borrower and each of the Guarantors jointly --------- and severally agree to defend, indemnify and hold harmless the Administrative Agent, the Issuing Bank, the Collateral Agent, BSI, BBNA, BBRF, the Co-Agents and each Lender and their respective Affiliates and each of their respective directors, officers, employees, attorneys, partners, beneficiaries, trustees and agents (each an "Indemnified Party") from and against any and all losses, ----------------- claims, damages, liabilities, costs and expenses (whether or not suit is brought) incurred by such Indemnified Party arising out of claims made by any Person in any way relating to the transactions contemplated hereby or by the other Loan Documents or any litigation, investigation or proceeding related hereto or thereto but excluding therefrom, in the case of an Indemnified Party, all losses, claims, damages, liabilities, costs and expenses arising out of or resulting from conduct to the extent determined by final order of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnified Party. SECTION 10.07. CHOICE OF LAW. THIS AGREEMENT, THE NOTES AND THE OTHER ------------- LOAN DOCUMENTS SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE. SECTION 10.08. NO WAIVER. No failure on the part of the Administrative --------- Agent, the Issuing Bank, the Collateral Agent, either Co-Agent or any of the Lenders to exercise, and no delay in exercising, any right, power or remedy hereunder or under the Notes or any of the other Loan Documents shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. All remedies hereunder are cumulative and are not exclusive of any other remedies provided by law. 67 SECTION 10.09. EXTENSION OF MATURITY. Except as otherwise set forth in --------------------- the definition of "Interest Period," if any payment of principal of or interest on the Notes or any other amount due hereunder becomes due and payable on a day other than a Business Day, the maturity thereof shall be extended to the next succeeding Business Day and, in the case of principal, interest shall be payable thereon at the rate herein specified during such extension. SECTION 10.10. AMENDMENTS, ETC. ---------------- (a) No modification, amendment or waiver of any provision of this Agreement, and no consent to any departure by the Borrower or any Guarantor therefrom, shall in any event be effective unless the same shall be in writing and signed by the Required Lenders, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given; provided, however, that: - -------- ------- (1) No such modification, amendment or waiver shall without the written consent of all of the Lenders (i) amend or modify any provision of this Agreement which provides for the unanimous consent or approval of the Lenders, (ii) amend this Section 10.10 or the definition of Required Lenders, (iii) release any material portion of the Collateral from the Lien of the Loan Documents (except in connection with permitted asset dispositions under Section 6.12), (iv) amend Section 6.01 so as to permit any Lien on any assets of the Borrower or the Guarantors not otherwise permitted on the Closing Date, (v) increase the Commitment of a Lender (it being understood that a waiver of an Event of Default shall not constitute an increase in the Commitment of a Lender), (vi) reduce the principal amount of any Loan or the rate of interest payable thereon, (vii) extend any date for the payment of interest hereunder, (viii) reduce any Fees payable hereunder, (ix) extend the Maturity Date, (x) increase advance rates above the level in effect on the Closing Date, (xi) increase the Overadvance Amount or (xii) permit the sale of a material portion of the assets of the Borrower and the Guarantors (except as expressly permitted under Section 6.12). (2) No such amendment, modification or waiver may adversely affect the rights and obligations of the Administrative Agent, the Collateral Agent, either Co-Agent or the Issuing Bank hereunder without its prior written consent. (3) No notice to or demand on the Borrower or any Guarantor shall entitle the Borrower or any Guarantor to any other or further notice or demand in the same, similar or other circumstances. Each holder of a Note shall be bound by any amendment, modification, waiver or consent authorized as provided herein, whether or not a Note shall have been marked to indicate such amendment, modification, waiver or consent and any consent by a Lender, or any holder of a Note, shall bind any Person subsequently acquiring a Note, whether or not a Note is so marked. No amendment to this Agreement shall be effective against the Borrower or any Guarantor unless signed by the Borrower or such Guarantor, as the case may be. (b) Notwithstanding anything to the contrary contained in Section 10.10(a), in the event that the Borrower requests that this Agreement be modified, amended or waived in a manner which would require the unanimous consent of all of the Lenders and such amendment is approved by the Required Lenders, but not unanimously by the Lenders, the Borrower and the Required Lenders shall be permitted to amend this Agreement without the consent of the Lender or Lenders which did not agree to the modification or amendment requested by the Borrower (such Lender or Lenders, 68 collectively the "Minority Lenders") to provide for (w) the termination of the ---------------- Commitment of each of the Minority Lenders, (x) the addition to this Agreement of one or more other financial institutions (each of which shall be an Eligible Assignee), or an increase in the Commitment of one or more of the Required Lenders, so that the Total Commitment after giving effect to such amendment shall be in the same amount as the Total Commitment immediately before giving effect to such amendment, (y) if any Loans are outstanding at the time of such amendment, the making of such additional Loans by such new or increasing Lender or Lenders, as the case may be, as may be necessary to repay in full the outstanding Loans of the Minority Lenders immediately before giving effect to such amendment and (z) such other modifications to this Agreement as may be appropriate. SECTION 10.11. SUBMISSION TO JURISDICTION; WAIVER. THE BORROWER AND EACH ---------------------------------- OF THE GUARANTORS HEREBY IRREVOCABLY AND UNCONDITIONALLY: (a) SUBMITS FOR ITSELF AND ITS PROPERTY IN ANY LEGAL ACTION OR PROCEEDING RELATING TO THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS TO WHICH IT IS A PARTY, OR FOR RECOGNITION AND ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF, TO THE NON-EXCLUSIVE GENERAL JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK, THE COURTS OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK AND APPELLATE COURTS FROM ANY THEREOF; (b) CONSENTS THAT ANY SUCH ACTION OR PROCEEDING MAY BE BROUGHT IN SUCH COURTS AND WAIVES ANY OBJECTION THAT IT MAY NOW OR HEREAFTER HAVE TO THE VENUE OF ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT OR THAT SUCH ACTION OR PROCEEDING WAS BROUGHT IN AN INCONVENIENT COURT AND AGREES NOT TO PLEAD OR CLAIM THE SAME; (c) AGREES THAT SERVICE OF PROCESS IN ANY SUCH ACTION OR PROCEEDING MAY BE EFFECTED BY MAILING A COPY THEREOF BY REGISTERED OR CERTIFIED MAIL (OR ANY SUBSTANTIALLY SIMILAR FORM OF MAIL), POSTAGE PREPAID, TO THE BORROWER OR SUCH GUARANTOR AT ITS ADDRESS SET FORTH IN SECTION 10.1 OR AT SUCH OTHER ADDRESS OF WHICH THE ADMINISTRATIVE AGENT SHALL HAVE BEEN NOTIFIED PURSUANT THERETO; AND (d) AGREES THAT NOTHING HEREIN SHALL AFFECT THE RIGHT TO EFFECT SERVICE OF PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR SHALL LIMIT THE RIGHT TO SUE IN ANY OTHER JURISDICTION. SECTION 10.12. SEVERABILITY. Any provision of this Agreement which is ------------ prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions hereof, and any such prohibition or unenforceability in any jurisdiction shall not invalidate or render unenforceable such provision in any other jurisdiction. SECTION 10.13. HEADINGS. Section headings used herein are for convenience -------- only and are not to affect the construction of or be taken into consideration in interpreting this Agreement. SECTION 10.14. EXECUTION IN COUNTERPARTS. This Agreement may be executed ------------------------- in any number of counterparts, each of which shall constitute an original, but all of which taken together 69 shall constitute one and the same instrument. SECTION 10.15. PRIOR AGREEMENTS. This Agreement and the other Loan ---------------- Documents represent the entire agreement of the parties with regard to the subject matter hereof and thereof and the terms of any letters and other documentation entered into between the Borrower or a Guarantor and any Lender, the Issuing Bank, the Collateral Agent, the Co-Agents or the Administrative Agent prior to the execution of this Agreement which relate to Loans or Letters of Credit to be made or issued hereunder shall be replaced by the terms of this Agreement. SECTION 10.16. FURTHER ASSURANCES. Whenever and so often as reasonably ------------------ requested by the Administrative Agent or the Collateral Agent, the Borrower and the Guarantors will promptly execute and deliver or cause to be executed and delivered all such other and further instruments, documents or assurances, and promptly do or cause to be done all such other and further things as may be necessary and reasonably required in order to further and more fully vest in the Administrative Agent, the Issuing Bank, the Collateral Agent, the Co-Agents and the Lenders, as applicable, all rights, Liens, interests, powers, benefits, privileges and advantages conferred or intended to be conferred by this Agreement and the other Loan Documents. SECTION 10.17. WAIVER OF JURY TRIAL. EACH OF THE BORROWER, THE -------------------- GUARANTORS, THE ADMINISTRATIVE AGENT, THE ISSUING BANK, THE COLLATERAL AGENT, THE CO-AGENTS AND EACH LENDER HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR RELATING TO ANY OF THE LOAN DOCUMENTS OR THE TRANSACTIONS CONTEMPLATED THEREBY. 70 IN WITNESS WHEREOF, the parties hereto have caused this Revolving Credit and Guaranty Agreement to be duly executed as of the day and the year first, written. BRADLEES STORES, INC., as Borrower By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] GUARANTORS: BRADLEES, INC. BRADLEES ADMINISTRATIVE CO., INC. DOSTRA REALTY CO., INC. MAXIMEDIA SERVICES, INC. NEW HORIZONS OF BRUCKNER, INC. NEW HORIZONS OF WESTBURY, INC. NEW HORIZONS OF YONKERS, INC., each as a Guarantor By: ______________________________ Name: Title: [SIGNATURES CONTINUED ON NEXT PAGE] BANKBOSTON, N.A., as Administrative Agent, as Issuing Bank and as a Lender By: ______________________________ Name: Title: Address: 100 Federal Street, 9th Floor Boston, MA 02110 Telephone: (617) 434-4113 Telecopy: (617) 434-4339 [SIGNATURES CONTINUED ON NEXT PAGE] BANKBOSTON RETAIL FINANCE, INC., as Collateral Agent By: ______________________________ Name: Title: Address: 40 Broad Street, 10th Floor Boston, MA 02109 Telephone: (617) 434-4113 Telecopy: (617) 434-4339 [SIGNATURES CONTINUED ON NEXT PAGE] THE CIT GROUP/BUSINESS CREDIT, INC., as Co-Agent and as a Lender By: _____________________________________________ Name: Title: Address: [SIGNATURES CONTINUED ON NEXT PAGE] CONGRESS FINANCIAL CORPORATION (NEW ENGLAND), as Co-Agent and as a Lender By: ________________________________________ Name: Title: Address: ANNEX A TO REVOLVING CREDIT AND GUARANTY AGREEMENT ------------------ ANNEX A to REVOLVING CREDIT AND GUARANTY AGREEMENT Dated as of , 1997 -----------------------------
Name of Commitment Commitment Lender Amount Percentage - ------ ---------- ---------- BankBoston, N.A. $ 55,000,000 22% The CIT Group/Business Credit, Inc. $ 25,000,000 10% Congress Financial Corporation (New $ 40,000,000 16% England) FirstTrust Bank $ 10,000,000 4% AT&T Commercial Finance Corporation $ 15,000,000 6% Green Tree Financial $ 20,000,000 8% Heller Financial, Inc. $ 20,000,000 8% Fremont Financial Corporation $ 15,000,000 6% Fleet National Bank $ 15,000,000 6% National City Commercial Finance, Inc. $ 15,000,000 6% LaSalle National Bank $ 20,000,000 8% ------------ --- Total $250,000,000 100% =====
Exhibit A to Commitment Letter ------------------------------ FORM OF REVOLVING CREDIT AND GUARANTY AGREEMENT Among [BRADLEES STORES, INC.], as Borrower, ----------- [BRADLEES, INC.], [BRADLEES ADMINISTRATIVE CO., INC.], and EACH OF THE SUBSIDIARIES OF THE BORROWER NAMED HEREIN, each as a Guarantor, ------------------- THE LENDERS PARTY HERETO, BANKBOSTON, N.A., as Administrative Agent and as Issuing Bank, ------------------------------------------- BANKBOSTON RETAIL FINANCE, INC., as Collateral Agent, ------------------- THE CIT GROUP/BUSINESS CREDIT INC. and CONGRESS FINANCIAL CORPORATION (NEW ENGLAND), each as Co-Agent ---------------- Dated as of ________________ ___, 199_ 77 TABLE OF CONTENTS
PAGE INTRODUCTORY STATEMENT.................................................... 1 I. DEFINITIONS.......................................................... 2 SECTION 1.01. Defined Terms......................................... 2 SECTION 1.02. Terms Generally....................................... 16 II. AMOUNT AND TERMS OF CREDIT........................................... 16 SECTION 2.01. Commitment of the Lenders............................. 16 SECTION 2.02. Letters of Credit..................................... 17 SECTION 2.03. Making of Loans....................................... 19 SECTION 2.04. Notes; Repayment of Loans............................. 20 SECTION 2.05. Interest on Loans..................................... 21 SECTION 2.06. Default Interest...................................... 21 SECTION 2.07. Optional Termination or Reduction of Commitments...... 21 SECTION 2.08. Alternate Rate of Interest............................ 22 SECTION 2.09. Refinancing of Loans.................................. 22 SECTION 2.10. Mandatory Prepayment; Commitment Termination; Cash Collateral........................................... 23 SECTION 2.11. Optional Prepayment of Loans; Reimbursement of Lenders.............................................. 23 SECTION 2.12. Maintenance of Loan Account; Statements of Account.... 24 SECTION 2.13. Cash Receipts......................................... 25 SECTION 2.14. Application of Payments............................... 26 SECTION 2.15. Increased Costs....................................... 27 SECTION 2.16. Change in Legality.................................... 28 SECTION 2.17. Payments; No Setoff................................... 29 SECTION 2.18. Taxes................................................. 29 SECTION 2.19. Certain Fees.......................................... 31 SECTION 2.20. Unused Commitment Fee................................. 31 SECTION 2.21. Letter of Credit Fees................................. 32 SECTION 2.22. Nature of Fees........................................ 32 SECTION 2.23. Security Interest..................................... 32 SECTION 2.24. Right of Set-Off...................................... 32 SECTION 2.25. Security Interest in Deposit Accounts................. 32 SECTION 2.26. Payment of Obligations................................ 33 III. REPRESENTATIONS AND WARRANTIES....................................... 33 SECTION 3.01. Organization and Authority............................ 33 SECTION 3.02. Due Execution......................................... 33 SECTION 3.03. Statements Made....................................... 34 SECTION 3.04. Ownership............................................. 34 SECTION 3.05. Financial Statements.................................. 34 SECTION 3.06. Liens................................................. 34 SECTION 3.07. Compliance with Law................................... 35 SECTION 3.08. Insurance............................................. 35
79
PAGE SECTION 3.09. The Confirmation Order................................ 36 SECTION 3.10. Use of Proceeds....................................... 36 SECTION 3.11. Store Locations; Bank Accounts; Inventory............. 36 SECTION 3.12. Litigation and Claims................................. 37 SECTION 3.13. Material Adverse Change............................... 37 SECTION 3.14. Payment of Obligations................................ 37 SECTION 3.15. Taxes and Tax Returns................................. 37 SECTION 3.16. Franchises, Licenses, Permits, Leases, Patents, Copyrights, Trademarks, and Trade Names.............. 37 SECTION 3.17. Labor Matters......................................... 38 SECTION 3.18. ERISA................................................. 38 SECTION 3.19. Accounts Receivable Financing......................... 39 SECTION 3.20. Investment Company; Holding Company................... 39 IV. CONDITIONS OF LENDING................................................ 39 SECTION 4.01. Conditions Precedent to Initial Loans and Initial Letters of Credit.................................... 39 SECTION 4.02. Conditions Precedent to Each Loan and Each Letter of Credit............................................... 44 V. AFFIRMATIVE COVENANTS................................................. 45 SECTION 5.01. Financial Statements, Reports, etc..................... 45 SECTION 5.02. Corporate Existence.................................... 47 SECTION 5.03. Insurance.............................................. 47 SECTION 5.04. Obligations and Taxes.................................. 48 SECTION 5.05. Notice of Event of Default, etc........................ 48 SECTION 5.06. Borrowing Base Certificate............................. 48 SECTION 5.07. Access to Books and Records; Inspections............... 48 SECTION 5.08. Fees................................................... 49 SECTION 5.09. Projections; Business Plan............................. 49 SECTION 5.10. ERISA.................................................. 49 SECTION 5.11. Environmental and Other Matters........................ 49 SECTION 5.12. Maintain Cash Concentration System..................... 50 SECTION 5.13. Maintain Security Interest............................. 50 SECTION 5.15. Collateral Access Agreements........................... 50 SECTION 5.15. Inventory.............................................. 50 SECTION 5.16. Further Assurances..................................... 50 VI. NEGATIVE COVENANTS.................................................... 50 SECTION 6.01. Liens.................................................. 51 SECTION 6.02. Merger, etc............................................ 51 SECTION 6.03. Indebtedness........................................... 51 SECTION 6.04. Capital Expenditures................................... 51 SECTION 6.05. EBITDA................................................. 51 SECTION 6.06. Accounts Payable to Inventory Ratio.................... 51 SECTION 6.07. Debt Coverage Ratio.................................... 52 SECTION 6.08. Guarantees and Other Liabilities....................... 52 SECTION 6.09. Dividends; Capital Stock............................... 52 SECTION 6.10. Transactions with Affiliates........................... 52
80
PAGE SECTION 6.11. Investments, Loans and Advances....................... 52 SECTION 6.12. Disposition of Assets................................. 53 SECTION 6.13. Nature of Business.................................... 53 SECTION 6.14. Conflicting Agreements, Orders or Actions............. 53 VII. EVENTS OF DEFAULT.................................................... 53 SECTION 7.01. Events of Default..................................... 53 SECTION 7.02. When Continuing....................................... 56 VIII. THE AGENTS........................................................... 57 SECTION 8.01. Administration by Administrative Agent................ 57 SECTION 8.02. The Collateral Agent.................................. 57 SECTION 8.03. Advances and Payments................................. 57 SECTION 8.04. Sharing of Excess Payments............................ 57 SECTION 8.05. Agreement of Required Lenders......................... 58 SECTION 8.06. Liability of Agents................................... 58 SECTION 8.07. Reimbursement and Indemnification..................... 59 SECTION 8.08. Rights of Agents...................................... 59 SECTION 8.09. Independent Lenders and Issuing Bank.................. 59 SECTION 8.10. Notice of Transfer.................................... 59 SECTION 8.11. Successor Administrative Agent and Collateral Agent... 59 SECTION 8.12. Reports and Financial Statements...................... 60 IX. GUARANTY............................................................. 60 SECTION 9.01. Guaranty.............................................. 60 SECTION 9.02. No Impairment of Guaranty............................. 61 SECTION 9.03. Subrogation........................................... 61 SECTION 9.04. Credit Agreement...................................... 62 SECTION 9.05. Maximum Guaranteed Amount............................. 62 X. MISCELLANEOUS........................................................ 62 SECTION 10.01. Notices............................................... 62 SECTION 10.02. Survival of Agreement, Representations and Warranties, etc... 62 SECTION 10.03. Successors and Assigns................................ 63 SECTION 10.04. Confidentiality....................................... 65 SECTION 10.05. Expenses; Documentary Taxes........................... 65 SECTION 10.06. Indemnity............................................. 66 SECTION 10.07. CHOICE OF LAW......................................... 66 SECTION 10.08. No Waiver............................................. 66 SECTION 10.09. Extension of Maturity................................. 66 SECTION 10.10. Amendments, etc....................................... 67 SECTION 10.11. SUBMISSION TO JURISDICTION; WAIVER.................... 68 SECTION 10.12. Severability.......................................... 68 SECTION 10.13. Headings.............................................. 68 SECTION 10.14. Execution in Counterparts............................. 68 SECTION 10.15. Prior Agreements...................................... 68 SECTION 10.16. Further Assurances.................................... 69 SECTION 10.17. WAIVER OF JURY TRIAL.................................. 69
81 ANNEXES Annex A Commitment Amounts EXHIBITS Exhibit A-1 Form of Borrowing Base Certificate (Weekly) Exhibit A-2 Form of Borrowing Base Certificate (Monthly) Exhibit B-1 Form of Note Exhibit B-2 Form of Agent Advance Note Exhibit C Form of Confirmation Order Exhibit D Forms of Opinions of Counsel to the Borrower Exhibit E Form of Security Agreement Exhibit F Form of Pledge Agreement Exhibit G Form of Trademark Security Agreement SCHEDULES Schedule 2.13 Cash Deposit Procedures Schedule 3.01 Jurisdictions of Qualification Schedule 3.04 Subsidiaries Schedule 3.06A Pre-Filing Liens Schedule 3.06B Post-Filing Liens Schedule 3.11(a) Location of Stores, Warehouses and Distribution Centers (Inventory Locations) Schedule 3.11(b) Bank Accounts and Cash Baskets Schedule 3.11(c) Assets of Guarantors Schedule 3.12 Claims Schedule 3.15 Taxes and Tax Returns Schedule 3.18 ERISA Plans Schedule 4.01(q) Closing Documents List Schedule 5.01(e) Required Reports Schedule 6.07 Existing Contingent Obligations Schedule 6.12 Closing Stores Schedule 7.01(f) Excepted Foreclosures 83 EX-10.42 19 1999 STOCK OPTION PLAN EXHIBIT 10.42 BRADLEES, INC. 1999 STOCK OPTION PLAN SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS ---------------------------------------- The name of the plan is the Bradlees, Inc. 1999 Stock Option Plan (the "Plan"). The purpose of the Plan is to encourage and enable the officers, employees and other key persons of Bradlees, Inc. (the "Company") and its Subsidiaries upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company's welfare will assure a closer identification of their interests with those of the Company, thereby stimulating their efforts on the Company's behalf and strengthening their desire to remain with the Company. The following terms shall be defined as set forth below: "Act" means the Securities Exchange Act of 1934, as amended. "Administrator" is defined in Section 2(a). "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as amended, and any successor Code, and related rules, regulations and interpretations. "Compensation Committee" shall have the meaning referred to in Section 2. "Elliott" shall have the meaning given in the Company's Plan of Reorganization (as defined below). "Effective Date" shall mean the date on which the Company emerges from Chapter 11 bankruptcy. "Fair Market Value" of the Stock on any given date means (i) if the Stock is admitted to quotation on the National Association of Securities Dealers Automated Quotation System ("NASDAQ"), the Fair Market Value on any given date shall be the average of the highest bid and lowest asked prices of the Stock reported for such date or, if no bid and asked prices were reported for such date, for the last day preceding such date for which such prices were reported; or (ii) if the Stock is admitted to trading on a national securities exchange or the NASDAQ National Market System, then clause (i) shall not apply and the Fair Market Value on any date shall be the closing price reported for the Stock on such exchange or system for such date or, if no sales were reported for such date, for the last date preceding such date for which a sale was reported; and (iii) if the Stock is not publicly traded on a securities exchange or traded in the over-the-counter market or, if traded or quoted, there are no transactions or quotations within the last ten trading days or trading has been halted for extraordinary reasons, the Fair Market Value on any given date shall be determined in good faith by the Compensation Committee with reference to the rules and principles of valuation set forth in Section 20.2031-2 of the Treasury Regulations. "Gabriel" shall have the meaning given in the Company's Plan of Reorganization (as defined below). "Independent Director" means a member of the Board who is not also an employee of the Company or any Subsidiary. "Non-Qualified Stock Option" means any Stock Option that is not designated and qualified as an Incentive Stock Option as defined in Section 422 of the Code. "Option" or "Stock Option" means any non-qualified option to purchase shares of Stock granted pursuant to Section 5. "Plan of Reorganization" shall mean the Joint Plan of Reorganization of Bradlees Stores, Inc. and Affiliates Under Chapter 11 of the Bankruptcy Code, as confirmed by the United States Bankruptcy Court on November 18, 1998. "Stock" means the Common Stock, par value $.01 per share, of the Company, subject to adjustments pursuant to Section 3. "Subsidiary" means any corporation or other entity (other than the Company) in any unbroken chain of corporations or other entities beginning with the Company if each of the corporations or entities (other than the last corporation or entity in the unbroken chain) owns stock or other interests possessing 50 percent or more of the economic interest or the total combined voting power of all classes of stock or other interests in one of the other corporations or entities in the chain. SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT --------------------------------------------------------- PARTICIPANTS AND DETERMINE OPTION GRANTS. ---------------------------------------- (a) Committee. The Plan shall be administered by the Compensation --------- Committee of the Board, except as contemplated by Section 2(c), which shall include not less than two Independent Directors (the "Administrator"). (b) Powers of Administrator. The Administrator shall have the power and ----------------------- authority to grant Options consistent with the terms of the Plan, including the power and authority: (i) to determine the time or times of grant, and the extent, if any, of Options granted to any one or more participants; (ii) to determine the number of shares of Stock to be covered by any Option; 2 (iii) to determine and modify from time to time the terms and conditions, including restrictions, not inconsistent with the terms of the Plan, of any Options, which terms and conditions may differ among individual Option grants and participants, and to approve the form of written instruments evidencing the Options; (iv) to accelerate at any time the exercisability or vesting of all or any portion of any Option granted; (v) subject to the provisions of Section 5(b)(ii), to extend at any time the period in which Options may be exercised; (vi) at any time to adopt, alter and repeal such rules, guidelines and practices for administration of the Plan and for its own acts and proceedings as it shall deem advisable; to interpret the terms and provisions of the Plan and any Option grant (including related written instruments); to make all determinations it deems advisable for the administration of the Plan; to decide all disputes arising in connection with the Plan; and to otherwise supervise the administration of the Plan. All decisions and interpretations of the Administrator shall be binding on all persons, including the Company and Plan participants. (c) Delegation of Authority to Grant Options. The Administrator, in its ---------------------------------------- discretion, may delegate to the Chief Executive Officer of the Company all or part of the Administrator's authority and duties with respect to the granting of Options, to individuals who are not subject to the reporting and other provisions of Section 16 of the Act or "covered employees" within the meaning of Section 162(m) of the Code. The Administrator may revoke or amend the terms of a delegation at any time but such action shall not invalidate any prior actions of the Administrator's delegate or delegates that were consistent with the terms of the Plan. SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION ---------------------------------------------------- (a) Stock Issuable. The maximum number of shares of Stock reserved and -------------- available for issuance under the Plan shall be 1,000,000 shares. For purposes of this limitation, the shares of Stock underlying any Options which are forfeited, canceled, reacquired by the Company, satisfied without the issuance of Stock or otherwise terminated (other than by exercise) shall be added back to the shares of Stock available for issuance under the Plan. Subject to such overall limitation, shares of Stock may be issued up to such maximum number pursuant to any Options granted; provided, however, that Options with respect to no more than 500,000 shares of Stock may be granted to any one individual participant during any one calendar year period. The shares available for issuance under the Plan may be authorized but unissued shares of Stock or shares of Stock reacquired by the Company and held in its treasury. 3 (b) Changes in Stock. If, as a result of any reorganization, ---------------- recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar change in the Company's capital stock, the outstanding shares of Stock are increased or decreased or are exchanged for a different number or kind of shares or other securities of the Company, or additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Stock or other securities, the Administrator shall make an appropriate or proportionate adjustment in (i) the maximum number of shares reserved for issuance under the Plan, (ii) the number of Options that can be granted to any one individual participant, (iii) the number of shares subject to any then outstanding Options under the Plan, and (iv) the price for each share subject to any then outstanding Options under the Plan, without changing the aggregate exercise price (i.e., the exercise price multiplied by the number of Options) as to which such Stock Options remain exercisable. The adjustment by the Administrator shall be final, binding and conclusive. No fractional shares of Stock shall be issued under the Plan resulting from any such adjustment, but the Administrator in its discretion may make a cash payment in lieu of fractional shares. The Administrator may also adjust the number of shares subject to outstanding Options and the exercise price and the terms of outstanding Options to take into consideration material changes in accounting practices or principles, extraordinary dividends, acquisitions or dispositions of stock or property or any other event if it is determined by the Administrator that such adjustment is appropriate to avoid distortion in the operation of the Plan. (c) Mergers and Other Transactions. In the case of and subject to the ------------------------------ consummation of (i) the dissolution or liquidation of the Company, (ii) the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity, (iii) a merger, reorganization or consolidation in which the holders of the Company's outstanding voting power immediately prior to such transaction do not own a majority of the outstanding voting power of the surviving or resulting entity immediately upon completion of such transaction, (iv) the sale of all of the Stock of the Company to an unrelated person or entity or (v) any other transaction in which the owners of the Company's outstanding voting power prior to such transaction do not own at least a majority of the outstanding voting power of the relevant entity after the transaction (in each case, a "Covered Transaction"), all Options that are not exercisable shall become fully exercisable except as the Administrator may otherwise specify with respect to particular Option grants. Upon the consummation of the Covered Transaction, the Plan and all outstanding Options granted hereunder shall terminate, unless provision is made in connection with the Covered Transaction for the assumption of Options heretofore granted, or the substitution of such Options with new Options of the successor entity or parent thereof, with appropriate adjustment as to the number and kind of shares and, if appropriate, the per share exercise prices, as provided in Section 3(b) above. In the event of such termination, each optionee shall be permitted, within a specified period of time determined by the Administrator prior to consummation of the Covered Transaction, to exercise all outstanding Options held by such optionee, including those that are not then exercisable, subject to the consummation of the Covered Transaction. 4 (d) Substitute Options. The Administrator may grant Options under the ------------------ Plan in substitution for stock and stock based awards held by employees of another corporation who become employees of the Company or a Subsidiary as the result of a merger or consolidation of the employing corporation with the Company or a Subsidiary or the acquisition by the Company or a Subsidiary of property or stock of the employing corporation. The Administrator may direct that the substitute awards be granted on such terms and conditions as the Administrator considers appropriate in the circumstances. Any substitute Options granted under the Plan shall not count against the share limitation set forth in Section 3(a). SECTION 4. ELIGIBILITY ----------- Participants in the Plan will be such full or part-time officers, other employees and key persons (including prospective employees) of the Company and its Subsidiaries as are selected from time to time by the Administrator in its sole discretion. SECTION 5. STOCK OPTIONS ------------- (a) Options Granted. Any Options granted under the Plan shall be in such --------------- form as the Administrator may from time to time approve. Stock Options granted under the Plan shall be Non-Qualified Stock Options. (b) Options Granted to Employees and Key Persons. Options granted under -------------------------------------------- the Plan shall be subject to the following terms and conditions and shall contain such additional terms and conditions, not inconsistent with the terms of the Plan, as the Administrator shall deem desirable. If the Administrator so determines, Options may be granted in lieu of cash compensation at the participant's election, subject to such terms and conditions as the Administrator may establish. (i) Exercise Price. The exercise price per share for the Stock -------------- covered by an Option granted pursuant to this Section 5(b) shall be determined by the Administrator at the time of grant; provided, however, that pursuant to and in accordance with the Company's Plan of Reorganization, the initial grant of Options to purchase 750,000 shares of Stock ("Initial Options") shall be at an exercise price equal to the lowest ten day rolling average of the closing price of the Stock within the period between 60 and 90 days after the Company emerges from Chapter 11 bankruptcy. (ii) Option Term. The term of each Option shall be fixed by the ----------- Administrator, but no Option shall be exercisable more than ten years after the date the Option is granted. Pursuant to and in accordance with the Company's Plan of Reorganization, the Initial Options shall not be exercisable more than five years after the date of grant. 5 (iii) Exercisability; Rights of a Stockholder. Options shall become --------------------------------------- exercisable at such time or times, whether or not in installments, as shall be determined by the Administrator at or after the grant date. The Administrator may at any time accelerate the exercisability of all or any portion of any Option. An optionee shall have the rights of a stockholder only as to shares acquired upon the exercise of an Option and not as to unexercised Options. (iv) Method of Exercise. Options may be exercised in whole or in ------------------ part, by giving written notice of exercise to the Company, specifying the number of shares to be purchased. Payment of the purchase price may be made by one or more of the following methods to the extent provided in the Option agreement: (A) In cash, by certified or bank check or other instrument acceptable to the Administrator; (B) Through the delivery (or attestation to the ownership) of shares of Stock that have been purchased by the optionee on the open market or that have been beneficially owned by the optionee for at least six months and are not then subject to restrictions under any Company plan. Such surrendered shares shall be valued at Fair Market Value on the exercise date; (C) By the optionee delivering to the Company a properly executed exercise notice together with irrevocable instructions to a broker to promptly deliver to the Company cash or a check payable and acceptable to the Company for the purchase price; provided that in the event the optionee chooses to pay the purchase price as so provided, the optionee and the broker shall comply with such procedures and enter into such agreements of indemnity and other agreements as the Administrator shall prescribe as a condition of such payment procedure; or (D) By the optionee delivering to the Company a promissory note, but only if the Board has expressly authorized the loan of funds to the optionee for the purpose of enabling or assisting the optionee to effect the exercise of his Option; provided that at least so much of the exercise price as represents the par value of the Stock shall be paid other than with a promissory note. Payment instruments will be received subject to collection. The delivery of certificates representing the shares of Stock to be purchased pursuant to the exercise of an Option will be contingent upon receipt from the optionee (or a purchaser acting in his stead in accordance with the provisions of the Option) by the Company of the full purchase price for such shares and the fulfillment of any other requirements contained in the Option or applicable provisions of laws. In the event an optionee chooses to pay the purchase price by previously-owned shares of Stock through the attestation method, the 6 number of shares of Stock transferred to the optionee upon the exercise of the Option shall be net of the number of shares attested to. (c) Non-transferability of Options. No Option shall be transferable by ------------------------------ the optionee otherwise than by will or by the laws of descent and distribution and all Options shall be exercisable, during the optionee's lifetime, only by the optionee, or by the optionee's legal representative or guardian in the event of the optionee's incapacity. Notwithstanding the foregoing, the Administrator, in its sole discretion, may provide in the Option agreement regarding a given Option that the optionee may transfer his Options to members of his immediate family, to trusts for the benefit of such family members, or to partnerships in which such family members are the only partners, provided that the transferee agrees in writing with the Company to be bound by all of the terms and conditions of this Plan and the applicable Option. SECTION 6. TAX WITHHOLDING --------------- (a) Payment by Participant. Each participant shall, no later than the ---------------------- date as of which the value of any Stock or other amounts received thereunder first becomes includable in the gross income of the participant for Federal income tax purposes, pay to the Company, or make arrangements satisfactory to the Administrator regarding payment of, any Federal, state, or local taxes of any kind required by law to be withheld with respect to such income. The Company and its Subsidiaries shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the participant. The Company's obligation to deliver stock certificates to any participant is subject to and conditioned on tax obligations being satisfied by the participant. (b) Payment in Stock. Subject to approval by the Administrator, a ---------------- participant may elect to have such tax withholding obligation satisfied, in whole or in part, by (i) authorizing the Company to withhold from shares of Stock to be issued pursuant to any Options granted a number of shares with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due, or (ii) transferring to the Company shares of Stock owned by the participant with an aggregate Fair Market Value (as of the date the withholding is effected) that would satisfy the withholding amount due. SECTION 7. TRANSFER, LEAVE OF ABSENCE, ETC. ------------------------------- For purposes of the Plan, the following events shall not be deemed a termination of employment: (a) a transfer to the employment of the Company from a Subsidiary or from the Company to a Subsidiary, or from one Subsidiary to another; or (b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the employee's right to re- employment is guaranteed 7 either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Administrator otherwise so provides in writing. SECTION 8. AMENDMENTS AND TERMINATION -------------------------- The Board may, at any time, amend or discontinue the Plan and the Administrator may, at any time, amend or cancel any outstanding Options for the purpose of satisfying changes in law or for any other lawful purpose, but no such action shall adversely affect rights under any outstanding Option grant without the holder's consent. Nothing in this Section 8 shall limit the Administrator's authority to take any action permitted pursuant to Section 3(c). SECTION 9. STATUS OF PLAN -------------- With respect to the portion of any Option grant that has not been exercised and any payments in cash, Stock or other consideration not received by a participant, a participant shall have no rights greater than those of a general creditor of the Company unless the Administrator shall otherwise expressly determine in connection with any Option grant. In its sole discretion, the Administrator may authorize the creation of trusts or other arrangements to meet the Company's obligations to deliver Stock or make payments with respect to Options granted hereunder, provided that the existence of such trusts or other arrangements is consistent with the foregoing sentence. SECTION 10. CHANGE OF CONTROL PROVISIONS ---------------------------- Upon the occurrence of a Change of Control as defined in this Section 10: (a) Except as otherwise provided in the applicable Option agreement, each outstanding Option shall automatically become fully exercisable. (b) "Change of Control" shall have the meaning defined in each Plan participant's employment agreement to the extent one exists, or if there is no such employment agreement, Change of Control shall mean the occurrence of any one of the following events: (i) any "Person," as such term is used in Sections 13(d) and 14(d) of the Act (other than the Company, any of its Subsidiaries, or any trustee, fiduciary or other person or entity holding securities under any employee benefit plan or trust of the Company or any of its Subsidiaries), together with all "affiliates" and "associates" (as such terms are defined in Rule 12b-2 under the Act) of such person, shall become the "beneficial owner" (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 30 percent or more (or, in the case only of direct purchasers from Gabriel or Elliott of shares of voting securities of the Company owned by Gabriel or Elliott on the effective date of the Plan of Reorganization, 50%) of the combined voting power of the Company's then outstanding securities having the right to vote in an election of the Company's Board of Directors 8 ("Voting Securities") (in such case other than as a result of an acquisition of securities directly from the Company); or (ii) persons who, as of the Effective Date, constitute the Company's Board of Directors (the "Incumbent Directors") cease for any reason, including, without limitation, as a result of a tender offer, proxy contest, merger or similar transaction, to constitute at least a majority of the Board, provided that any person becoming a director of the Company subsequent to the Effective Date shall be considered an Incumbent Director if such person's election was approved by or such person was nominated for election by either (A) a vote of at least a majority of the Incumbent Directors or (B) a vote of at least a majority of the Incumbent Directors who are members of a nominating committee comprised, in the majority, of Incumbent Directors; but provided further, that any such person whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of members of the Board of Directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, including by reason of agreement intended to avoid or settle any such actual or threatened contest or solicitation, shall not be considered an Incumbent Director; or (iii) the stockholders of the Company shall approve (A) any consolidation or merger of the Company where the stockholders of the Company, immediately prior to the consolidation or merger, would not, immediately after the consolidation or merger, beneficially own (as such term is defined in Rule 13d-3 under the Act), directly or indirectly, shares representing in the aggregate more than 50% of the voting shares of the corporation issuing cash or securities in the consolidation or merger (or of its ultimate parent corporation, if any), (B) any sale, lease, exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company or (C) any plan or proposal for the liquidation or dissolution of the Company. SECTION 11. GENERAL PROVISIONS ------------------ (a) No Distribution; Compliance with Legal Requirements. The Administrator --------------------------------------------------- may require each person acquiring Stock pursuant to an Option grant to represent to and agree with the Company in writing that such person is acquiring the shares without a view to distribution thereof. No shares of Stock shall be issued pursuant to an Option grant until all applicable securities law and other legal and stock exchange or similar requirements have been satisfied. The Administrator may require the placing of such stop-orders and restrictive legends on certificates for Stock as it deems appropriate. (b) Delivery of Stock Certificates. Stock certificates to participants ------------------------------ under this Plan shall be deemed delivered for all purposes when the Company or a stock transfer agent of the 9 Company shall have mailed such certificates in the United States mail, addressed to the participant, at the participant's last known address on file with the Company. (c) Other Compensation Arrangements; No Employment Rights. Nothing ----------------------------------------------------- contained in this Plan shall prevent the Board from adopting other or additional compensation arrangements, including trusts, and such arrangements may be either generally applicable or applicable only in specific cases. The adoption of this Plan and the grant of options do not confer upon any employee any right to continued employment with the Company or any Subsidiary. (d) Trading Policy Restrictions. Option exercises under the Plan shall --------------------------- be subject to such Company's insider trading policy, as in effect from time to time. SECTION 12. EFFECTIVE DATE OF PLAN ---------------------- This Plan shall become effective upon the effective date of the Company's Plan of Reorganization, as confirmed by the United States Bankruptcy Court on November 18, 1998. SECTION 1. GOVERNING LAW ------------- This Plan and all Options granted and actions taken thereunder shall be governed by, and construed in accordance with, the laws of the Commonwealth of Massachusetts, applied without regard to conflict of law principles. 10 EX-10.43 20 MANAGEMENT EMERGENCE BONUS PLAN EXHIBIT 10.43 BRADLEES, INC. AND BRADLEES STORES, INC. MANAGEMENT EMERGENCE BONUS PLAN 1. Purpose. This Plan is intended as an incentive for a select group of senior ------- executive employees of the Company that will align the interests of these executives with creditors in their pursuit of successful emergence from Chapter 11. 2. Definitions. Capitalized terms not otherwise defined herein shall have the ----------- meanings set forth below: (a) "Board of Directors" shall mean the Board of Directors of Bradlees, ------------------ Inc. (b) "Bonus Pool" shall mean the three million dollar aggregate amount ---------- payable to Participants of the Plan. (c) "Cause" shall with respect to any Participant have the meaning defined ----- in such Participant's employment agreement to the extent one exists, or if there is no such employment agreement, Cause shall mean: (i) dishonest statements or acts of the Participant with respect to the Company or any subsidiary or affiliate thereof; (ii) the Participant's commission of (A) a felony or (B) a misdemeanor involving moral turpitude, deceit, dishonesty or fraud; (iii) material failure to perform to the reasonable satisfaction of the Chief Executive Officer a substantial portion of the Participant's duties and responsibilities hereunder, which failure continues after written notice given to the Participant by the Chief Executive Officer; (iv) gross negligence or willful misconduct of the Participant with respect to the Company or any subsidiary or affiliate thereof; or (v) material breach by the Participant of any of the Participant's obligations to the Company. (d) "Company" shall mean Bradlees, Inc. and Bradlees Stores, Inc. ------- (e) "Contingent Award" shall mean the award granted to each Participant ---------------- calculated by multiplying the Contingent Award Percentage by the Bonus Pool, the payment of which will be contingent on the achievement of Successful Emergence from Chapter 11. (f) "Contingent Award Percentage" shall mean the award percentage granted --------------------------- to each Participant by the Compensation Committee. (g) "Credit Facility" shall mean the two hundred and seventy million --------------- dollar financing facility with BankBoston, N.A. as Administrative Agent and Issuing Bank (as amended, supplemented, extended, refinanced, replaced or otherwise modified from time to time), under which the Company is allowed to borrow for general corporate purposes, working capital and inventory purposes. (h) "Effective Date" shall mean the date on which the Company emerges from -------------- Chapter 11 bankruptcy. (i) "Good Reason" shall have the meaning defined in such Participant's ----------- employment agreement to the extent one exists or if there is no such employment agreement, Good Reason shall mean the occurrence of any one of the following events: (i) substantial adverse change in the Participant's responsibilities and duties with regard to his/her employment with the Company, (ii) a reduction in salary, (iii) elimination of participation in any senior management incentive plan maintained by the Company (but Good Reason shall not exist by virtue of this clause (iii) if participation in such senior management incentive plan is eliminated for all members of senior management), (iv) the relocation of the offices at which such Participant is principally employed to a location more than fifty miles from the Company's offices in Braintree, Massachusetts. (j) "9% Convertible Notes" shall mean the notes issued to members of the --------------------- Bank Group (as defined in the Company's Plan of Reorganization) by Bradlees Stores, Inc. and guaranteed by the Company, which bear interest at a rate of 9% per annum and are convertible into shares of the Company's common stock at any time after the first anniversary of the Effective Date. (k) "Payment" shall mean the portion of a Contingent Award that has been ------- paid out in cash to a Participant. (l) "Participant" shall mean any officer designated as eligible to ----------- participate in the Plan by the Compensation Committee. 2 (m) "Plan" shall mean the Bradlees, Inc. Management Emergence Bonus Plan, ---- as amended from time to time. (n) "Successful Emergence from Chapter 11" shall mean the Company has ------------------------------------ received confirmation of a consensual Plan of Reorganization promulgated by management or by creditors that results in the Company's emergence from Chapter 11 bankruptcy. 3. Administration. The Plan shall be administered by the Compensation -------------- Committee of the Board of Directors of the Company, based upon the recommendations by the Chief Executive Officer. The Compensation Committee may in its sole discretion interpret the Plan, prescribe, amend and rescind any rules and regulations necessary or appropriate for administration of the Plan and make such other determinations and take such action as it deems necessary or advisable. Any interpretation, determination, or other action made or taken by the Board shall be final, binding and conclusive. Contingent Award Percentages will be determined by the Chief Executive Officer subject to the approval of the Compensation Committee, except with respect to awards to the Chief Executive Officer. The Compensation Committee's exercise of this discretionary authority shall at all times be in accordance with the terms of the Plan and shall be entitled to deference upon review by any court, agency or other entity empowered to review its decision, and shall be enforced provided that it is not arbitrary, capricious or fraudulent. 4. Contingent Awards ----------------- 4.1 Granting of Contingent Awards. The Company shall grant to each ----------------------------- Participant a Contingent Award representing a percentage of the Bonus Pool. In no event shall Contingent Awards representing more than one hundred percent (100%) of the Bonus Pool be granted to Participants. The Company shall notify each Participant of the grant of a Contingent Award in such manner as it shall deem appropriate. 4.2 Payments to Participants. One-third (1/3) of each Contingent Award ------------------------ shall be paid to each Participant in cash on the Effective Date. The remaining amount of each Contingent Award will be paid to each Participant on the later of (a) the one-year anniversary of the Effective Date and (b) the date upon which the 9% Convertible Notes are fully repaid or converted into equity securities of the Company. No Payments will be made under the Plan if there exists any continuing event of default under the Credit Facility. 5. Termination of Employment. ------------------------- 5.1 Involuntary Termination for Cause or Voluntary Termination without ------------------------------------------------------------------ Good Reason. If a Participant ceases to be employed by the Company by reason of - ----------- an involuntary separation for Cause or a voluntary separation for other than Good Reason, such person shall (i) be obligated to repay promptly to the Company an amount equal to a portion of the payment made within the last twelve months as determined in accordance with the immediately 3 following sentence. To determine the amount that each Participant must repay to the Company, the Participant shall multiply each Payment made to him or her within the last twelve months by a fraction, the numerator of which is 365 minus the number of days between the date of said Payment and such Participant's date of departure from the Company and the denominator of which is 365. In addition, such Participant shall forfeit all rights to any subsequent installment of his or her Contingent Award. Any such forfeiture (which shall include amounts required to be repaid to the Company under this Section 5.1) shall automatically be reallocated among all remaining Participants on a pro rata basis by adding to the Contingent Award of each remaining Participant an amount equal to the forfeited sum multiplied by a fraction, the numerator of which is each such Participant's original Contingent Award Percentage and the denominator of which is the sum of the Contingent Award Percentages of all Participants remaining in the Plan. 5.2 Termination for other than Cause or Voluntary Termination for Good ------------------------------------------------------------------ Reason. If any Participant leaves the employ of the Company after the Effective - ------ Date but prior to receiving the Payment of any installment as set out in Section 4.2 as a result of (i) involuntary termination other than for Cause, (ii) voluntarily separation for Good Reason or (iii) the death or disability of the Participant, the Participant shall not be required to return any portion of the Payments paid and shall be entitled to payment of the balance of his or her Contingent Award. Payments shall be made within 30 days after the date of termination of employment. 6. Limitation of Company's Liability. Subject to its obligation to make --------------------------------- payments as provided for hereunder, neither the Company nor any person acting on behalf of the Company shall be liable for any act performed or the failure to perform any act with respect to this Plan. The Company is under no obligation to grant any Contingent Award with respect to any of the payments required to be made hereunder or to fund any payment with respect to any Contingent Award in advance of their actual payment or to establish any reserves with respect to this Plan. Any benefits which become payable hereunder shall be paid from the general assets of the Company. No Participant, or his or her beneficiary or beneficiaries, shall have any right, other than the right of an unsecured general creditor, against the Company in respect of the benefits to be paid hereunder. 7. Withholding of Tax. Anything to the contrary notwithstanding, all payments ------------------ required to be made by the Company hereunder shall be subject to the withholding of such amounts as the Company reasonably may determine that it is required to withhold pursuant to applicable federal, state or local law or regulation. 8. Assignability. Except as otherwise provided by law, no benefit hereunder ------------- shall be assignable, or subject to alienation, garnishment, execution or levy of any kind, and any attempt to cause any benefit to be so subject shall be void. 4 9. Right to Set Off. The Company shall be entitled to set off from any ---------------- amounts payable to any Participant by the Company hereunder an amount sufficient to repay in full all loans outstanding from the Company to such Participant. 10. No Right to Continued Employment. Neither the establishment of the Plan, -------------------------------- the participation by an employee in the Plan nor the payment of any award hereunder or any other action pursuant to the Plan shall be held or construed to confer on any Participant the right to continue in the employ of the Company or affect any right which the Company may have to terminate at will the employment of any such Participant. 11. Governing Law. This Plan shall be construed, administered, and enforced in ------------- accordance with the laws of the Commonwealth of Massachusetts. 12. Relationships to Other Plans. Participation and payments under the Plan ---------------------------- shall not affect or be affected by participation or payments under any other plan of the Company except as otherwise specifically provided by the Company. 5 BRADLEES, INC. MANAGEMENT EMERGENCE BONUS PLAN Appendix A ---------- Participants Percentage of Bonus Pool ------------ ------------------------ Total Pool: 100% A-1 EX-21 21 LIST OF SUBSIDIARIES OF BRADLEES Exhibit 21 List of Subsidiaries of Bradless, Inc. Jurisdiction ------------ Name Of Incorporation - ---- ---------------- Bradless Stores, Inc. Massachusetts New Horizons of Yonkers, Inc. Delaware Dostra Realty Co., Inc. Massachusetts EX-23.2 22 CONSENT OF ARTHUR ANDERSEN LLP Exhibit 23.2 [AA Letterhead] Consent of Independent Public Accountants As independent public accountants, we hereby consent to the use of our report (and to all references to our Firm) included in or made part of this Registration Statement No. 333-66953. /s/ Arthur Andersen LLP New York, New York January 27, 1999 EX-23.3 23 CONSENT OF DELOITTE & TOUCHE LLP Exhibit 23.3 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Amendment No. 2 to Registration Statement No. 333-66953 of Bradlees, Inc. and Bradlees Stores, Inc. of our report dated March 20, 1997 (November 23, 1998 with respect to Note 16) on Bradlees, Inc. consolidated financial statements (which expresses an unqualified opinion and includes explanatory paragraphs relating to (a) the Company's filing for reorganization under Chapter 11 of the Federal Bankruptcy Code, and (b) the Company's 1996 and 1995 losses from operations and stockholders' deficiency, which raise substantial doubt about the Company's ability to continue as a going concern) appearing in the Prospectus, which is part of this Registration Statement. We also consent to the reference to us under the headings "Selected Financial Data" and "Experts" in such Prospectus. /s/ Deloitte & Touche LLP Boston, Massachusetts January 27, 1999 EX-25.1 24 STATEMENT OF ELIGIBILITY ON FORM T-1 Exhibit 25.1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 -------------------- FORM T-1 STATEMENT OF ELIGIBILITY UNDER THE TRUST INDENTURE ACT OF 1939 OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE CHECK IF AN APPLICATION TO DETERMINE ELIGIBILITY OF A TRUSTEE PURSUANT TO SECTION 305(b)(2)__ --------------------- IBJ WHITEHALL BANK & TRUST COMPANY (Exact name of trustee as specified in its charter) New York 13-6022258 (Jurisdiction of incorporation (I.R.S. employer or organization if not a U.S. national bank) identification No.) One State Street, New York, New York 10004 (Address of principal executive offices) (Zip code) LUIS PEREZ, ASSISTANT VICE PRESIDENT IBJ WHITEHALL BANK & TRUST COMPANY One State Street New York, New York 10004 (212) 858-2000 (Name, address and telephone number of agent for service) BRADLEES, INC. and BRADLEES STORES, INC. (Exact name of Registrant as specified in its charter) Bradlees, Inc. - Massachusetts 04-3156108 Bradlees Stores, Inc. - Massachusetts 04-3220855 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification No.) One Bradlees Circle Braintree, Massachusetts 02184 (Address of principal executive offices) (Zip code) 9% Secured Convertible Notes Due 2004 -------------------- (Title of indenture securities) Item 1. General information Furnish the following information as to the trustee: (a) Name and address of each examining or supervising authority to which it is subject. New York State Banking Department Two Rector Street New York, New York Federal Deposit Insurance Corporation Washington, D.C. Federal Reserve Bank of New York Second District, 33 Liberty Street New York, New York (b) Whether it is authorized to exercise corporate trust powers. Yes Item 2. Affiliations with the Obligor. If the obligor is an affiliate of the trustee, describe each such affiliation. The obligor is not an affiliate of the trustee. Item 13. Defaults by the Obligor. (a) State whether there is or has been a default with respect to the securities under this indenture. Explain the nature of any such default. None 2 (b) If the trustee is a trustee under another indenture under which any other securities, or certificates of interest or participation in any other securities, of the obligors are outstanding, or is trustee for more than one outstanding series of securities under the indenture, state whether there has been a default under any such indenture or series, identify the indenture or series affected, and explain the nature of any such default. None Item 16. List of exhibits. List below all exhibits filed as part of this statement of eligibility. 1. A copy of the Charter of IBJ Whitehall Bank & Trust Company (formerly known as IBJ Schroder Bank & Trust Company) as amended to date. *2. A copy of the Certificate of Authority of the trustee to Commence Business (Included in Exhibit 1 above). *3. A copy of the Authorization of the trustee to exercise corporate trust powers, as amended to date (See Exhibit 4 to Form T-1, Securities and Exchange Commission File No. 22-19146). *4. A copy of the existing By-Laws of the trustee, as amended to date (See Exhibit 4 to Form T-1, Securities and Exchange Commission File No. 22-19146). 5. Not Applicable 6. The consent of United States institutional trustee required by Section 321(b) of the Act. 7. A copy of the latest report of condition of the trustee published pursuant to law or the requirements of its supervising or examining authority. * The Exhibits thus designated are incorporated herein by reference as exhibits hereto. Following the description of such Exhibits is a reference to the copy of the Exhibit heretofore filed with the Securities and Exchange Commission, to which there have been no amendments or changes. 3 NOTE ---- In answering any item in this Statement of Eligibility which relates to matters peculiarly within the knowledge of the obligor and its directors or officers, the trustee has relied upon information furnished to it by the obligor. Inasmuch as this Form T-1 is filed prior to the ascertainment by the trustee of all facts on which to base responsive answers to Item 2, the answer to said Item is based on incomplete information. Item 2, may, however, be considered as correct unless amended by an amendment to this Form T-1. Pursuant to General Instruction B, the trustee has responded to Items 1, 2 and 16 of this form since to the best knowledge of the trustee as indicated in Item 13, the obligor is not in default under any indenture under which the applicant is trustee. 4 SIGNATURE --------- Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, IBJ Whitehall Bank & Trust Company, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility & qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 25th day of January, 1999. IBJ WHITEHALL BANK & TRUST COMPANY By: --------------------------------- Luis Perez Assistant Vice President 5 SIGNATURE --------- Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee, IBJ Whitehall Bank & Trust Company, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility & qualification to be signed on its behalf by the undersigned, thereunto duly authorized, all in the City of New York, and State of New York, on the 25th day of January, 1999. IBJ WHITEHALL BANK & TRUST COMPANY By: /s/Luis Perez --------------------------------- Luis Perez Assistant Vice President 6 EX-99 25 CONSENTS OF NOMINATED DIRECTORS Exhibit 99 I hereby consent to the reference to me, Peter Thorner, included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ Peter Thorner ------------------- Name: Peter Thorner Braintree, Massachusetts January 26, 1999 I hereby consent to the reference to me, Robert Lynn, included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ Robert Lynn ------------------- Name: Robert Lynn Braintree, Massachusetts January 26, 1999 I hereby consent to the reference to me, Stephen J. Blauner, included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ Stephen J. Blauner ------------------------ Name: Stephen J. Blauner Braintree, Massachusetts January 26, 1999 I hereby consent to the reference to me, Robert A. Altschuler, included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ Robert A. Altschuler -------------------------- Name: Robert A. Altschuler Braintree, Massachusetts January 26, 1999 I hereby consent to the reference to me, Lawrence Lieberman, included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ Lawrence Lieberman ------------------------ Name: Lawrence Lieberman Braintree, Massachusetts January 26, 1999 I hereby consent to the reference to me, Charles K. MacDonald, included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ Charles K. MacDonald -------------------------- Name: Charles K. MacDonald Braintree, Massachusetts January 26, 1999 I hereby consent to the reference to me, W. Edward J. Clingman, Jr., included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ W. Edward J. Clingman, Jr. -------------------------------- Name: W. Edward J. Clingman, Jr. Braintree, Massachusetts January 26, 1999 I hereby consent to the reference to me, John M. Friedman, Jr., included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ John M. Friedman, Jr. --------------------------- Name: John M. Friedman, Jr. Braintree, Massachusetts January 26, 1999 I hereby consent to the reference to me, William H. Roth, included in or made a part of the Registration Statement on Form S-1 (File No. 333-66953) of Bradlees, Inc., and any amendments thereto, including but not limited to those references under the captions "Management", "Principal Stockholders" and "Selling Security Holders." /s/ William H. Roth --------------------- Name: William H. Roth Braintree, Massachusetts January 26, 1999 -----END PRIVACY-ENHANCED MESSAGE-----