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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended August 2, 2003 Commission File Number
0-19517
THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA 17402
(717) 757-7660
INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229
----------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of September 10, 2003 there were 12,157,546 shares of Common Stock,
$0.01 par value per share, and 2,989,853 shares of Class A Common Stock, $0.01
par value per share, outstanding.
===============================================================================
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEEET
August 2, February 1,
(In thousands except share and per share data) 2003 2003
- ----------------------------------------------------------------------------------------------------------------------------------
Assets (Unaudited)
Current assets:
Cash and cash equivalents $ 14,798 $ 16,796
Trade and other accounts receivable, net of allowance for doubtful accounts and sales
returns of $3,598 and $3,540 at August 2, 2003 and February 1, 2003, respectively 39,070 46,735
Merchandise inventories 156,841 148,618
Prepaid expenses and other current assets 13,606 12,958
Deferred income taxes 2,465 3,205
- ----------------------------------------------------------------------------------------------------------------------------------
Total current assets 226,780 228,312
- ----------------------------------------------------------------------------------------------------------------------------------
Property, fixtures and equipment at cost,
less accumulated depreciation and amortization 130,235 136,201
Deferred income taxes - 3,980
Goodwill and intangible assets 9,316 9,511
Other assets 4,296 4,019
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 370,627 $ 382,023
==================================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 57,944 $ 53,367
Accrued payroll and benefits 9,513 14,037
Accrued expenses 18,268 25,546
Current portion of long-term debt 752 715
Current portion of obligations under capital leases 262 250
Income taxes payable - 5,249
- ----------------------------------------------------------------------------------------------------------------------------------
Total current liabilities 86,739 99,164
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Long-term debt, less current maturities 63,608 64,194
Obligations under capital leases, less current maturities 333 468
Deferred income taxes 4,789 -
Other long-term liabilities 4,921 5,851
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 160,390 169,677
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholder's equity
Preferred Stock - authorized 5,000,000 shares at $0.01 par value; no shares issued - -
Common Stock - authorized 40,000,000 shares at $0.01 par value; issued and outstanding
shares of 12,157,546 and 12,200,285 at August 2, 2003 and February 1, 2003, respectively 125 125
Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued and
outstanding shares of 2,989,853 at August 2, 2003 and February 1, 2003 30 30
Treasury stock, at cost - shares of 337,800 and 277,000 at August 2, 2003 and
February 1, 2003, respectively (1,387) (1,132)
Additional paid-in-capital 107,484 107,415
Deferred compensation (232) (222)
Accumulated other comprehensive income (1,319) (1,876)
Retained earnings 105,536 108,006
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 210,237 212,346
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 370,627 $ 382,023
==================================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
2
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
-----------------------------------------------------------
(In thousands except share and per share data) August 2, August 3, August 2, August 3,
(Unaudited) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Net sales $ 153,128 $ 153,890 $ 294,239 $ 304,407
Other income, net 564 553 1,090 1,087
- ------------------------------------------------------------------------------------------------------------
153,692 154,443 295,329 305,494
- ------------------------------------------------------------------------------------------------------------
Costs and expenses:
Costs of merchandise sold 96,311 95,959 185,238 196,356
Selling, general and administrative 49,594 53,733 100,974 104,369
Depreciation and amortization 5,123 4,847 9,887 9,904
- ------------------------------------------------------------------------------------------------------------
Income (loss) from operations 2,664 (96) (770) (5,135)
Interest expense, net 1,302 2,399 2,546 4,376
- ------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes 1,362 (2,495) (3,316) (9,511)
Income tax provision (benefit) 504 (936) (1,226) (3,567)
- ------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 858 $ (1,559) $ (2,090) $ (5,944)
============================================================================================================
PER SHARE AMOUNTS --
BASIC:
Net income (loss) $ 0.06 $ (0.10) $ (0.14) $ (0.39)
============================================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 14,997,502 15,237,911 15,015,424 15,260,464
DILUTED:
Net income (loss) $ 0.06 $ (0.10) $ (0.14) $ (0.39)
============================================================================================================
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,222,031 15,237,911 15,015,424 15,260,464
The accompanying notes are an integral part of these consolidated statements.
3
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-SIX
WEEKS ENDED
---------------------------
(In thousands) August 2, August 3,
(Unaudited) 2003 2002
- --------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,090) $ (5,944)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 9,887 9,904
Changes in operating assets and liabilities, net (2,209) 6,792
- --------------------------------------------------------------------------------------------------
Net cash provided by operating activities 5,588 10,752
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (4,134) (3,878)
Proceeds from sale of property, fixtures and equipment 1,310 2
- --------------------------------------------------------------------------------------------------
Net cash used in investing activities (2,824) (3,876)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (73,072) (75,079)
Proceeds from issuance of long-term debt 72,400 75,950
Common shares repurchased (254) (279)
Cash dividends paid (379) -
Decrease in bank overdraft balances, net (3,457) (5,624)
- --------------------------------------------------------------------------------------------------
Net cash used in financing activities (4,762) (5,032)
Net (decrease) increase in cash and cash equivalents (1,998) 1,844
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,796 9,752
- --------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,798 $ 11,596
==================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 4,114 $ 3,891
Net income taxes (refunded) paid $ (2,563) $ 10,785
The accompanying notes are an integral part of these consolidated statements.
4
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated
on January 31, 1996 as the successor of a company incorporated on January 31,
1929 and currently operates as one business segment, through its subsidiaries,
72 retail department stores located in Pennsylvania, New York, New Jersey,
Maryland, Connecticut, Massachusetts, New Hampshire, Vermont and West Virginia.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include accounts of The Bon-Ton Stores, Inc. and all of its wholly owned
subsidiaries (the "Company"). All intercompany transactions and balances have
been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and do not include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (primarily consisting
of normal recurring accruals) considered necessary for a fair presentation of
interim periods have been included. The Company's business is seasonal in nature
and results of operations for interim periods presented are not necessarily
indicative of results for the full fiscal year. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended February 1, 2003 (the "2002 Annual
Report").
2. STOCK-BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for
Stock Issued to Employees," and related interpretations including FASB
Interpretation No. 44, "Accounting for Certain Transactions involving Stock
Compensation, an interpretation of APB Opinion No. 25," issued in March 2000, to
account for its fixed-plan stock options. Under this method, compensation
expense is recorded on the date of the grant only if the current market price of
the underlying stock exceeded the exercise price.
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), established accounting and
disclosure requirements using a fair-value-based method of accounting for
stock-based employee compensation plans. As allowed by SFAS No. 123, the Company
has elected to continue to apply the intrinsic-value-based method of accounting
described above, and has adopted only the disclosure requirements of SFAS No.
123, as amended by Statement of Financial Accounting Standards No. 148,
"Accounting for Stock-Based Compensation--Transition and Disclosure." No
stock-based employee compensation is reflected in net income for stock options,
as all options granted had an exercise price equal to the market value of the
underlying common stock on the date of grant. The following table illustrates
the effect on net income if the fair-value-based method had been applied to all
outstanding and unvested awards in each period:
5
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
---------------------- -----------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 858 $ (1,559) $ (2,090) $ (5,944)
Deduct: Total stock-option-based
employee compensation expense
determined under fair-value-based methods
for all awards, net of related tax effects (83) (104) (166) (208)
- -----------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) $ 775 $ (1,663) $ (2,256) $ (6,152)
=======================================================================================================================
Earnings (loss) per share
Basic As reported $ 0.06 $ (0.10) $ (0.14) $ (0.39)
Pro forma 0.05 (0.11) (0.15) (0.40)
Diluted As reported $ 0.06 $ (0.10) $ (0.14) $ (0.39)
Pro forma 0.05 (0.11) (0.15) (0.40)
The Company used the Black-Scholes option pricing model to calculate the fair
value of the stock options at the grant date.
3. PER SHARE AMOUNTS
The presentation of earnings per share (EPS) requires a reconciliation
of numerators and denominators used in basic and diluted EPS calculations. The
numerator, net income or loss, is identical in both calculations. The following
table presents a reconciliation of weighted average shares outstanding for the
respective calculations for each period presented on the accompanying
consolidated statements of operations:
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
----------------------- -----------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------------
Basic calculation 14,997,502 15,237,911 15,015,424 15,260,464
Effect of dilutive shares ---
Restricted Shares 94,722 - - -
Options 129,807 - - -
- ---------------------------------------------------------------------------------------------------
Diluted calculation 15,222,031 15,237,911 15,015,424 15,260,464
===================================================================================================
6
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The following securities were antidilutive and, therefore, were not
included in the computation of diluted earnings per share amounts for the
periods indicated:
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
----------------------- -----------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------
Antidilutive shares ---
Restricted Shares - 174,988 69,868 178,520
Options 603,839 960,163 775,839 963,773
Certain securities were excluded from the computation of dilutive
shares due to the Company's net loss position in the thirteen weeks ended August
3, 2002 and twenty-six weeks ended August 2, 2003 and August 3, 2002. The
following table shows the approximate effect of dilutive securities had the
Company reported profit for these periods:
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
----------------------- -----------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------
Effect of dilutive securities ---
Restricted Shares 94,722 104,855 95,437 97,724
Options 129,807 120,667 111,779 103,566
4. EXIT OR DISPOSAL ACTIVITIES
In October 2002, the Company announced it would close its York,
Pennsylvania distribution operations in April 2003 and that all merchandise
processing functions would be consolidated into the Company's existing
Allentown, Pennsylvania distribution center. In addition, the Company announced
it would close its Red Bank, New Jersey store in January 2003. The closings were
completed as scheduled.
The Company elected early adoption of SFAS No. 146, "Accounting for
Exit or Disposal Activities," for these exit activities and, accordingly,
recorded charges of $696 in fiscal 2002 relating to the closures. In addition,
the Company recorded charges of $42 in the thirteen weeks ended May 3, 2003. All
charges were included within selling, general and administrative expense and
related primarily to termination benefits for affected associates and other
costs to consolidate the distribution centers.
Total costs relating to the closures are estimated at $738, with $404
for termination benefits and $334 for other costs.
7
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Following is a reconciliation of accruals as of February 1, 2003 and
August 2, 2003 related to the distribution center and store closures:
February 1, August 2,
2003 Fiscal 2003 Fiscal 2003 2003
Balance Provision Payments Balance
- ---------------------------------------------------------------------------------------------------
Termination benefits $ 220 $ 58 $ 278 $ -
Other closing costs 255 (16) 93 146
- ---------------------------------------------------------------------------------------------------
Total $ 475 $ 42 $ 371 $ 146
===================================================================================================
As of August 2, 2003, the remaining York, Pennsylvania distribution
center rental obligation through lease expiration in December 2020 is $9,599.
The Company will continue to utilize a portion of this facility for its data
processing operations center and intends to sublet the remaining space. The
Company anticipates that the fair market value of any sublet income will equal
or exceed its remaining rent obligation.
During the thirteen weeks ended August 2, 2003, the Company sold its
Harrisburg, Pennsylvania distribution center, resulting in a gain on sale of
$933 classified within selling, general and administrative expenses.
5. SALE OF RECEIVABLES
The Company securitizes its proprietary credit card portfolio through
an accounts receivable facility (the "facility"). Under the securitization
agreement, which is contingent upon receivables meeting certain performance
criteria, the Company has the option to sell through The Bon-Ton Receivables
Partnership, LP ("BTRLP"), a wholly owned subsidiary of the Company and
qualifying special purpose entity under SFAS No. 140, up to $150,000 of an
undivided percentage interest in the receivables on a limited recourse basis. In
connection with the securitization agreement, the Company retains servicing
responsibilities, subordinated interests and an interest-only strip, all of
which are retained interests in the securitized receivables. The Company retains
annual servicing fees of 2.0% of the outstanding balance and rights to future
cash flows arising after investors in the securitization have received the
return for which they contracted. The investors have no recourse to the
Company's other assets for failure of debtors to pay when due. The Company's
retained interests are subordinate to the investors' interests. The value of the
retained interest is subject to credit, prepayment and interest rate risks. The
Company does not recognize a servicing asset or liability, as the amount
received for servicing the receivables is a reasonable approximation of market
rates and servicing costs.
As of August 2, 2003 and February 1, 2003, credit card receivables were
sold under the securitization agreement in the amount of $135,033 and $145,000,
respectively, and the Company had subordinated interests of $36,985 and $44,520,
respectively, related to the amounts sold that were included in the accompanying
Consolidated Balance Sheets as trade and other accounts receivable. The Company
accounts for its subordinated interest in the receivables in accordance with
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company has
8
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
not recognized any unrealized gains or losses on its subordinated interest, as
the current carrying value of customer revolving charge accounts receivable is a
reasonable estimate of fair value and average interest rates approximate current
market origination rates. Subordinated interests as of August 2, 2003 and
February 1, 2003 included restricted cash of $6,322 and $6,222, respectively,
required based upon terms of the facility agreement.
New receivables are sold on a continual basis to replenish each
investor's respective level of participation in receivables that have been
repaid by credit card holders.
The Company recognized securitization income of $1,867 and $2,360 on
securitization of credit card loans during the thirteen weeks ended August 2,
2003 and August 3, 2002, respectively, and $4,417 and $5,246 during the
twenty-six weeks ended August 2, 2003 and August 3, 2002, respectively. This
income is reported as a component of selling, general and administrative
expenses.
The Company retained net proceeds from servicing fees, which it
reported as a component of selling, general and administrative expenses, of $690
and $724 for the thirteen weeks ended August 2, 2003 and August 3, 2002,
respectively and $1,376 and $1,465 for the twenty-six weeks ended August 2, 2003
and August 3, 2002, respectively. As of August 2, 2003, $4,368 of the total
managed credit card receivables were sixty-one days or more past due. Net credit
losses on the total managed credit card receivables were $1,793 and $1,672 for
the thirteen weeks ended August 2, 2003 and August 3, 2002, respectively, and
$3,718 and $3,452 for the twenty-six weeks ended August 2, 2003 and August 3,
2002, respectively.
6. STOCK REPURCHASES
On February 7, 2002, the Company announced a stock repurchase program
authorizing the purchase of up to $2,500 of Company stock from time to time. For
the thirteen weeks ended August 2, 2003, the Company purchased 2,600 shares at a
cost of $12. For the twenty-six weeks ended August 2, 2003, the Company
purchased 60,800 shares at a cost of $254. On a cumulative basis, since February
7, 2002 the Company has purchased 337,800 shares at a cost of $1,387 pursuant to
this stock purchase program. Treasury stock is accounted for by the cost method.
7. IMPLEMENTATION OF NEW ACCOUNTING STANDARD
As is standard industry practice, the Company receives allowances from
merchandise vendors as reimbursement for charges incurred on marked-down
merchandise. Vendor allowances are credited to costs of goods sold, provided the
allowance is: (1) collectable, (2) for merchandise either permanently marked
down or sold, (3) not predicated on a future purchase, (4) not predicated on a
future increase in the purchase price from the vendor, and (5) authorized by
internal management. If the aforementioned criteria are not met, the Company
reflects the allowances as an adjustment to the cost of merchandise capitalized
in inventory.
9
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Additionally, the Company receives allowances from vendors in
connection with cooperative advertising programs. These amounts are recognized
by the Company as a reduction of the related advertising costs that have been
incurred and reflected in selling, general and administrative expenses.
In November 2002, the Emerging Issues Task Force issued Consensus No.
02-16, "Accounting by a Customer (Including a Reseller) for Certain
Consideration Received from a Vendor" ("EITF 02-16"), which is effective
prospectively for all vendor arrangements entered into after December 31, 2002.
EITF 02-16 requires that consideration received from vendors be considered a
reduction of the prices of vendors' products and shown as a reduction of cost of
sales when recognized in the income statement of the customer. If the
consideration represents a reimbursement of specific incremental identifiable
costs incurred, these amounts should be offset against the related costs with
any excess consideration recorded in cost of sales. The Company's current
accounting policies are consistent with the provisions of EITF 02-16 and,
therefore, adoption of EITF 02-16 did not have a material impact on the
Company's financial position or results of operations in fiscal 2002 or the
thirteen and twenty-six weeks ended August 2, 2003.
8. SUBSEQUENT EVENTS
On September 9, 2003, the Company announced a quarterly cash dividend
of $0.025 per share on Class A Common Stock and Common Stock, payable October
15, 2003 to shareholders of record as of October 1, 2003.
On September 15, 2003, the Company announced that it has proposed to
acquire all of the outstanding shares of common stock of The Elder-Beerman
Stores Corp. ("EBSC") for $8.00 per share in cash. As of the current date, EBSC
and the Company have not entered into any definitive acquisition agreement and
there can be no assurance that any transaction between EBSC and the Company will
be consummated. The proposed acquisition would involve a cash tender offer by
the Company for all of the outstanding shares of EBSC and the subsequent merger
of EBSC with a subsidiary of the Company. EBSC operates sixty-eight department
stores in Ohio, West Virginia, Indiana, Michigan, Illinois, Kentucky, Wisconsin,
Pennsylvania and Iowa. In connection with the proposed acquisition of EBSC, the
Company has obtained commitments from financial institutions to refinance the
debt facilities and the receivable securitization facilities of both the Company
and EBSC. The new financings are conditioned upon, among other things,
consummation of the tender offer.
10
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes changes in selected operating indicators
of the Company, illustrating the relationship of various income and expense
items to net sales for the respective periods presented:
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
--------------------- ---------------------
August 2, August 3, August 2, August 3,
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income, net 0.4 0.4 0.4 0.4
- -----------------------------------------------------------------------------------------------
100.4 100.4 100.4 100.4
- -----------------------------------------------------------------------------------------------
Costs and expenses:
Costs of merchandise sold 62.9 62.4 63.0 64.5
Selling, general and administrative 32.4 34.9 34.3 34.3
Depreciation and amortization 3.3 3.1 3.4 3.3
- -----------------------------------------------------------------------------------------------
Income (loss) from operations 1.7 (0.1) (0.3) (1.7)
Interest expense, net 0.9 1.6 0.9 1.4
- -----------------------------------------------------------------------------------------------
Income (loss) before income taxes 0.9 (1.6) (1.1) (3.1)
Income tax provision (benefit) 0.3 (0.6) (0.4) (1.2)
- -----------------------------------------------------------------------------------------------
Net income (loss) 0.6% (1.0)% (0.7)% (2.0)%
- -----------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED AUGUST 2, 2003 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 3,
2002
For purposes of the following discussions, all references to "second
quarter of 2003" and "second quarter of 2002" are to the Company's thirteen-week
periods ended August 2, 2003 and August 3, 2002, respectively.
NET SALES. Net sales for the second quarter of 2003 were $153.1
million, reflecting a decrease of 0.5% from the same period last year.
Comparable store sales, which exclude the Red Bank, New Jersey store closed in
January 2003, increased 0.2% in the second quarter of 2003. Business families
recording the largest comparable store sales increases for the second quarter of
2003 were Home, Petites, Juniors, Coats and Cosmetics. Business families
reflecting the largest comparable store sales decreases were Mens Collections,
Misses Sportswear, Childrens and Dresses.
OTHER INCOME, NET. Net other income, principally income from leased
departments, was 0.4% of net sales in the second quarter of 2003 and in the
second quarter of 2002.
COSTS AND EXPENSES. Gross margin as a percentage of net sales decreased
0.5 percentage point to 37.1% for the second quarter of 2003 from 37.6% for the
comparable period last year. The decrease resulted primarily from increased
markdowns, partially offset by a reduction in inventory
11
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
shrinkage accrual rates. Gross margin dollars for the second quarter of 2003
decreased $1.1 million compared to the second quarter of 2002 due to lower net
sales and the decreased gross margin rate.
Selling, general and administrative expenses for the second quarter of
2003 were $49.6 million, $4.1 million below the second quarter of 2002. The
reduction in selling, general and administrative dollars was principally
attributable to decreased expense in payroll, net advertising and utilities --
combined with a gain on sale of the Harrisburg, Pennsylvania distribution center
of $0.9 million. The current year expense rate decreased 2.5 percentage points
to 32.4% of net sales, relative to 34.9% of net sales in the second quarter of
2002. The rate decrease reflects lower costs and the gain on sale of
distribution center, partially offset by lower net sales.
Depreciation and amortization in the second quarter of 2003 was $5.1
million, an increase of $0.3 million compared to $4.8 million in the second
quarter of 2002. The increase was primarily due to depreciation on recent
capital expenditures, partially offset by prior year depreciation on assets at
the Red Bank, New Jersey store closed in January 2003.
INCOME (LOSS) FROM OPERATIONS. Income from operations in the second
quarter of 2003 was $2.7 million, or 1.7% of net sales, compared to a loss from
operations of $0.1 million, or 0.1% of net sales, in the second quarter of 2002.
INTEREST EXPENSE, NET. Net interest expense was $1.3 million, or 0.9%
of net sales, in the second quarter of 2003 compared to $2.4 million, or 1.6% of
net sales, in the second quarter of 2002. The decrease in net interest expense
was primarily due to favorable fair market value adjustments on interest rate
swap agreements. Interest expense for the second quarter of 2003 and second
quarter of 2002 included a reduction of interest expense of $0.6 million and an
increase in interest expense of $0.4 million, respectively, related to fair
market value adjustments on interest rate swaps.
INCOME TAX PROVISION (BENEFIT). The effective tax rate decreased 0.5
percentage point to 37.0% in the second quarter of 2003 from to 37.5% in the
second quarter of 2002.
NET INCOME (LOSS). Net income in the second quarter of 2003 was $0.9
million, or 0.6% of net sales, compared to a net loss of $1.6 million, or 1.0%
of net sales, in the second quarter of 2002.
TWENTY-SIX WEEKS ENDED AUGUST 2, 2003 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
3, 2002
For purposes of the following discussions, all references to "2003" and
"2002" are to the Company's twenty-six week periods ended August 2, 2003 and
August 3, 2002, respectively.
NET SALES. Net sales in 2003 were $294.2 million, reflecting a decrease
of 3.3% from the same period last year. Comparable store sales, which exclude
the Red Bank, New Jersey store closed in January 2003, decreased 2.7% in 2003.
Business families recording the largest comparable store sales increases were
Coats, Home, Accessories and Shoes. Business families reflecting the largest
comparable store sales decreases were Mens Collections, Dresses, Misses
Sportswear, Childrens and Womens.
12
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OTHER INCOME, NET. Net other income, principally income from leased
departments, was 0.4% of net sales in 2003 and 2002.
COSTS AND EXPENSES. Gross margin as a percentage of net sales increased
1.5 percentage points to 37.0% in 2003 from 35.5% in 2002, primarily as a result
of decreased markdowns on seasonal merchandise and a reduction in inventory
shrinkage accrual rates. During the first quarter of 2002, as an aggressive
response to a difficult retail environment and increased price competition, the
Company accelerated the timing of markdowns on seasonal merchandise; this
accelerated cadence for seasonal merchandise markdowns has been continued
through the second quarter of 2003. To implement this accelerated cadence, the
Company recognized increased markdowns in the first quarter of 2002. The impact
of the two factors discussed above were partially offset by increased markdowns
in the second quarter of 2003 relative to the second quarter of 2002. Gross
margin dollars in 2003 increased $1.0 million over 2002 as a result of the
increased gross margin rate, partially offset by lower net sales.
Selling, general and administrative expenses decreased $3.4 million, to
$101.0 million in 2003 from $104.4 million in 2002. The decrease in expense
dollars was principally attributable to decreased payroll expense and increased
vendor purchase order violations income, combined with a gain on sale of the
Harrisburg, Pennsylvania distribution center of $0.9 million. The expense rate
remained flat at 34.3% of net sales, as the 2003 impact of lower costs and the
gain on sale of the distribution center was offset by lower 2003 net sales.
Depreciation and amortization expense remained flat at $9.9 million,
but as a percent of net sales increased to 3.4% in 2003 from 3.3% in 2002 due to
lower net sales.
LOSS FROM OPERATIONS. Loss from operations in 2003 was $0.8 million, or
0.3% of net sales, compared to a loss from operations of $5.1 million, or 1.7%
of net sales, in 2002.
INTEREST EXPENSE, NET. Net interest expense was $2.5 million, or 0.9%
of net sales, in 2003 compared to $4.4 million, or 1.4% of net sales, in 2002.
The decrease in net interest expense was primarily due to favorable fair market
value adjustments on interest rate swap agreements. Interest expense in 2003 and
2002 included a reduction of interest expense of $1.3 million and an increase in
interest expense of $0.5 million, respectively, related to fair market value
adjustments on interest rate swaps.
INCOME TAX BENEFIT. The effective tax rate decreased 0.5 percentage
point to 37.0% in 2003 from 37.5% in 2002.
NET LOSS. Net loss in 2003 was $2.1 million compared to a net loss of
$5.9 million in 2002.
13
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
SEASONALITY AND INFLATION
The Company's business, like that of most retailers, is subject to
seasonal fluctuations, with the major portion of sales and income realized
during the second half of each fiscal year, which includes back-to-school and
holiday seasons. Due to the fixed nature of certain costs, selling, general and
administrative expenses are typically higher as a percentage of net sales during
the first half of each fiscal year.
Because of the seasonality of the Company's business, results for any
quarter are not necessarily indicative of results that may be achieved for a
full fiscal year. In addition, quarterly operating results are impacted by the
timing and amount of revenues and costs associated with the opening of new
stores and closing and remodeling of existing stores.
The Company does not believe inflation had a material effect on
operating results during the twenty-six weeks ended August 2, 2003 and August 3,
2002. However, there can be no assurance that the Company's business will not be
affected by inflationary adjustments in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements are currently met through a
combination of cash, borrowings under its revolving credit facility and proceeds
from its accounts receivable facility.
The following table summarizes material measures of the Company's
liquidity and capital resources:
August 2, August 3,
(Dollars in millions) 2003 2002
- -----------------------------------------------------------------------------------------
Working capital $ 140.0 $ 116.7
Current ratio 2.61:1 2.22:1
Debt to total capitalization (debt plus equity) 0.23:1 0.26:1
Unused availability under revolving credit facility $ 58.4 $ 54.1
For the twenty-six weeks ended August 2, 2003, net cash provided by
operating activities was $5.6 million compared to $10.8 million for the
comparable period last year. The decrease in net cash provided was primarily
attributable to the impact of inventory reduction initiatives during 2002 and
decreased accrued expenses in 2003--partially offset by a lower net loss,
decreased deferred tax assets and a reduction in income taxes paid. The
decreases in deferred tax assets and income taxes paid were largely due to the
filing of tax refund requests pursuant to a fixed asset "cost segregation" study
that resulted in accelerated tax depreciation.
14
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net cash used in investing activities was $2.8 million for the
twenty-six weeks ended August 2, 2003 compared to $3.9 million for the
comparable period last year. The decrease was primarily due to $1.3 million in
proceeds from the sale of the Harrisburg, Pennsylvania distribution center in
the second quarter of 2003.
Net cash used in financing activities was $4.8 million for the
twenty-six weeks ended August 2, 2003 compared to $5.0 million for the
comparable period of 2002.
The Company anticipates its cash flows from operations, supplemented by
borrowings under its revolving credit facility and proceeds from its accounts
receivable facility, will be sufficient to satisfy its operating cash
requirements.
The accounts receivable facility agreement expires in January 2004. The
Company anticipates that it will be able to renew or replace this agreement with
an agreement of substantially comparable terms.
On May 21, 2003, the Company amended and restated its revolving credit
facility agreement. The new revolving credit facility agreement reduces the line
of credit from $175.0 million to $150.0 million; modifies certain borrowing
availability, interest and fee calculation elements; and extends the agreement
expiration date from April 2004 to April 2008. The Company negotiated the $25.0
million reduction in the line of credit, which the Company anticipates will
yield lower fee charges without materially impacting the Company's total
availability.
Cash flows from operations are impacted by consumer confidence, weather
in the geographic markets served by the Company, and economic and competitive
conditions existing in the retail sector. A downturn in any single factor or a
combination of factors could have a material adverse impact upon the Company's
ability to generate sufficient cash flows to operate its business.
The Company has not identified any probable circumstances that would
likely impair its ability to meet its cash requirements or trigger a default or
acceleration of payment of the Company's debt.
TRANSFERS OF FINANCIAL ASSETS
The Company engages in securitization activities involving the
Company's proprietary credit card portfolio as a source of funding. Gains and
losses from securitizations are recognized in the Consolidated Statements of
Income when the Company relinquishes control of the transferred financial assets
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities--a Replacement of FASB Statement No. 125" and other related
pronouncements. The gain or loss on the sale of financial assets depends in part
on the previous carrying amount of the assets involved in the transfer,
allocated between the assets sold and the retained interests based upon their
respective fair values at the date of sale.
15
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company sells undivided percentage ownership interests in certain
of its credit card accounts receivable to unrelated third-parties under a $150.0
million accounts receivable securitization facility (the "facility"). The
unrelated third-parties, referred to as the conduit, have purchased a $135.0
million interest in the accounts receivable under the facility at August 2,
2003. The Company is responsible for servicing these accounts, retains a
servicing fee and bears the risk of non-collection (limited to its retained
interests in the accounts receivable). Associated off-balance-sheet assets and
related debt were $135.0 million at August 2, 2003 and $145.0 million at
February 1, 2003. Upon the facility's termination, the conduit would be entitled
to all cash collections on the accounts receivable until its investment ($135.0
million at August 2, 2003) and accrued discounts are repaid. Accordingly, upon
termination of the facility, the assets of the facility (and the Company's
retained interest) would not be available to the Company until all amounts due
to the conduit have been paid in full.
Based upon the terms of the facility, the accounts receivable
transactions qualify for "sale treatment" under generally accepted accounting
principles. This treatment requires the Company to account for transactions with
the conduit as a sale of accounts receivable instead of reflecting the conduit's
net investment as long-term debt with a pledge of accounts receivable as
collateral. Absent this "sale treatment," the Company's balance sheet would
reflect additional accounts receivable and long-term debt, which could be a
factor in the Company's ability to raise capital; however, results of operations
would not be significantly impacted.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and
results of operations are based upon the condensed consolidated financial
statements, which have been prepared in accordance with generally accepted
accounting principles. Preparation of these financial statements requires the
Company to make estimates and judgments that affect reported amounts of assets
and liabilities, revenues and expenses, and related disclosure of contingent
assets and liabilities at the date of its financial statements. On an ongoing
basis, the Company evaluates its estimates, including those related to
merchandise returns, bad debts, inventories, intangible assets, income taxes,
financings, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and could potentially lead to
materially different results under different assumptions and conditions. The
Company believes its critical accounting policies are described below.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit-worthiness. The Company continually monitors collections and payments
from customers and maintains an allowance for estimated credit losses based upon
its historical experience, how delinquent accounts ultimately charge-off, aging
of
16
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
accounts and any specific customer collection issues identified (e.g.,
bankruptcy). While such credit losses have historically been within expectations
and provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates as in the past. If circumstances change
(e.g., higher than expected defaults or bankruptcies), the Company's estimates
of the recoverability of amounts due the Company could be materially reduced.
The allowance for doubtful accounts and sales returns was $3.6 million and $3.5
million as of August 2, 2003 and February 1, 2003, respectively.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market with cost
determined using the retail last-in, first-out ("LIFO") method. Under the retail
inventory method, the valuation of inventories at cost and resulting gross
margin is derived by applying a calculated cost-to-retail ratio to the retail
value of inventories. The retail inventory method is an averaging method that
has been widely used in the retail industry. Use of the retail inventory method
will result in valuing inventories at the lower of cost or market if markdowns
are taken timely as a reduction of the retail value of inventories.
Inherent in the retail inventory method calculation are certain
significant management judgments and estimates including, among others,
merchandise markups, markdowns and shrinkage, which significantly impact both
the ending inventory valuation at cost and resulting gross margin. These
significant estimates, coupled with the fact that the retail inventory method is
an averaging process, can, under certain circumstances, result in individual
inventory components with cost above related net realizable value. Factors that
can lead to this result include applying the retail inventory method to a group
of products that is not fairly uniform in terms of its cost, selling price
relationship and turnover; or applying the retail inventory method to
transactions over a period of time that includes different rates of gross
profit, such as those relating to seasonal merchandise. In addition, failure to
take timely markdowns can result in an overstatement of cost under the lower of
cost or market principle. Management believes that the Company's retail
inventory method provides an inventory valuation that approximates cost and
results in carrying inventory in the aggregate at the lower of cost or market.
The Company regularly reviews inventory on hand and records a provision
for excess or old inventory based primarily on an estimated forecast of
merchandise demand for the selling season. Demand for merchandise can fluctuate
greatly; a significant increase in the demand for merchandise could result in a
short-term increase in the cost of inventory purchases while a significant
decrease in demand could result in an increase in the amount of excess inventory
on-hand. Additionally, estimates of future merchandise demand may prove to be
inaccurate, in which case the Company may have understated or overstated the
provision required for excess or old inventory. If the Company's inventory is
determined to be overvalued in the future, the Company would be required to
recognize such costs in the costs of goods sold and reduce operating income at
the time of such determination. Likewise, if inventory is later determined to be
undervalued, the Company may have overstated the costs of goods sold in previous
periods and would be required to recognize additional operating income at the
time of such determination. Therefore, although every effort is made to ensure
the accuracy of forecasts of future merchandise demand, any significant
unanticipated changes in demand or the economy in the Company's markets could
have a significant impact on the value of the Company's inventory and reported
operating results.
17
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As is currently the case with many companies in the retail industry,
the Company's LIFO calculations have yielded inventory increases in recent years
due to deflation reflected in price indices used. This is the result of the LIFO
method whereby merchandise sold is valued at the cost of more recent inventory
purchases (which the deflationary indices indicate to be lower), resulting in
the general inventory on-hand being carried at the older, higher costs. Given
these higher values and the promotional retail environment, the Company reduced
the carrying value of its LIFO inventories by $7.1 million as of August 2, 2003
and February 1, 2003 to a net realizable value (NRV). Inherent in these NRV
assessments and related reserves are significant management judgments and
estimates regarding future merchandise selling costs and pricing. Should these
estimates prove to be inaccurate, the Company may have overstated or understated
its inventory carrying value. In such cases, the Company would be required to
recognize cost increases or decreases in costs of goods sold, and impact
operating income accordingly, at the time of such determination.
VENDOR ALLOWANCES
As is standard industry practice, the Company receives allowances from
merchandise vendors as reimbursement for charges incurred on marked-down
merchandise. Vendor allowances are credited to costs of goods sold, provided the
allowance is: (1) collectable, (2) for merchandise either permanently marked
down or sold, (3) not predicated on a future purchase, (4) not predicated on a
future increase in the purchase price from the vendor, and (5) authorized by
internal management. If the aforementioned criteria are not met, the Company
reflects the allowances as an adjustment to the cost of merchandise capitalized
in inventory.
Additionally, the Company receives allowances from vendors in
connection with cooperative advertising programs. These amounts are recognized
by the Company as a reduction of the related advertising costs that have been
incurred and reflected in selling, general and administrative expenses.
INCOME TAXES
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against net deferred tax assets. The process
involves the Company summarizing temporary differences resulting from differing
treatment of items (e.g., inventory valuation reserves) for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within the consolidated balance sheet. The Company must then assess
the likelihood that deferred tax assets will be recovered from future taxable
income or tax carry-back availability and, to the extent the Company believes
recovery is not likely, a valuation allowance must be established. To the extent
the Company establishes a valuation allowance in a period, an expense must be
recorded within the tax provision in the statement of operations.
Net deferred taxes were a liability of $2.3 million and an asset of
$7.2 million as of August 2, 2003 and February 1, 2003, respectively. No
valuation allowance has been established against the deferred tax assets, as the
Company believes these tax benefits will be realizable through reversal of
existing deferred tax liabilities, tax carry-back availability and future
taxable income. If actual results
18
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
differ from these estimates or these estimates are adjusted in future periods,
the Company may need to establish a valuation allowance, which could materially
impact its financial position and results of operations.
Legislation changes currently proposed by certain states in which the
Company operates could have a materially adverse impact on future operating
results of the Company. These changes principally involve state income tax laws.
LONG-LIVED ASSETS
Property, fixtures and equipment are recorded at cost and are
depreciated on a straight-line basis over the estimated useful lives of such
assets. Changes in the Company's business model or capital strategy can result
in the actual useful lives differing from the Company's estimates. In cases
where the Company determines that the useful life of property, fixtures and
equipment should be shortened, the Company depreciates the net book value in
excess of the salvage value over its revised remaining useful life, thereby
increasing depreciation expense. Factors such as changes in the planned use of
fixtures or leasehold improvements could also result in shortened useful lives.
Net property, fixtures and equipment amounted to $130.2 million and $136.2
million as of August 2, 2003 and February 1, 2003, respectively.
The Company assesses, on a store-by-store basis, the impairment of
identifiable long-lived assets--primarily property, fixtures and equipment--
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. Factors that could trigger an impairment review include the
following:
- Significant under-performance of stores relative to historical or
projected operating results,
- Significant changes in the manner of the Company's use of assets or
overall business strategy, and
- Significant negative industry or economic trends for a sustained
period.
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Cash flow estimates are
based on historical results adjusted to reflect the Company's best estimate of
future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Estimates of fair value represent the
Company's best estimate based on industry trends and reference to market rates
and transactions. Should cash flow estimates differ significantly from actual
results, an impairment could arise and materially impact the Company's financial
position and results of operations.
Newly opened stores may require time to generate positive operating and
cash flow results. Factors such as store type, store location, current
marketplace awareness of the Company's private label brands, local customer
demographic data and current fashion trends are all considered in determining
the time-frame required for a store to achieve positive financial results. If
economic conditions prove to be substantially different from the Company's
expectations, the carrying value of new stores may ultimately become impaired.
19
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company has identified assets in the New York market with a net
book value of approximately $4.0 million that have under-performed relative to
the Company average. The Company has taken steps to address these issues and
currently forecasts no impairment charge. Should the Company's efforts prove
unsuccessful or economic conditions change, the carrying value of these assets
may ultimately become impaired.
GOODWILL AND INTANGIBLE ASSETS
Net goodwill was $3.0 million as of August 2, 2003 and February 1,
2003.
Intangible assets are comprised of lease interests that relate to
below-market-rate leases purchased in store acquisitions completed in fiscal
years 1992 through 1999, which were adjusted to reflect fair market value. These
leases had average lives of twenty-five years. Net intangible assets amounted to
$6.4 million and $6.5 million as of August 2, 2003 and February 1, 2003,
respectively.
As a result of the Company's adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets," the
Company annually reviews goodwill and other intangible assets that have
indefinite lives for impairment and when events or changes in circumstances
indicate the carrying value of these assets might exceed their current fair
values. The Company determines fair value using discounted cash flow analysis,
which requires certain assumptions and estimates regarding industry economic
factors and future profitability of acquired businesses. It is the Company's
policy to conduct impairment testing based on its most current business plans,
which reflect anticipated changes in the economy and the industry. If actual
results prove inconsistent with Company assumptions and judgments, the Company
could be exposed to a material impairment charge.
SECURITIZATIONS
A significant portion of the Company's funding is through
off-balance-sheet credit card securitizations. This funding is via sales of
certain accounts receivable through an accounts receivable facility (the
"facility"). The sale of receivables is to The Bon-Ton Receivables Partnership,
LP ("BTRLP"), a special purpose entity as defined by SFAS No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities--A Replacement of FASB Statement No. 125." BTRLP is a wholly owned
subsidiary of the Company. BTRLP may sell accounts receivable with a purchase
price up to $150.0 million through the facility to a conduit on a revolving
basis.
The Company sells accounts receivable through securitizations with
servicing retained. When the Company securitizes, it surrenders control over the
transferred assets and accounts for the transaction as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The Company allocates the previous carrying amount of the
securitized receivables between the assets sold and retained interests, based on
their relative estimated fair values at the date of sale. Securitization income
is recognized at the time of the sale, and is equal to the excess of the fair
value of the assets obtained (principally cash) over the allocated cost of the
assets sold and transaction costs. During the revolving period of each accounts
receivable securitization, securitization income is recorded representing
estimated gains on the sale of new
20
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
receivables to the conduit on a continuous basis to replenish the investors'
interest in securitized receivables that have been repaid by the credit card
account holders. Fair value estimates used in the recognition of securitization
income require certain assumptions of payment, default, servicing costs and
interest rates. To the extent actual results differ from those estimates, the
impact is recognized as securitization income.
The Company estimates the fair value of retained interests in
securitizations based on a discounted cash flow analysis. The cash flows of the
retained interest-only strip are estimated as the excess of the weighted average
finance charge yield on each pool of receivables sold over the sum of the
interest rate paid to the note holder, the servicing fee and an estimate of
future credit losses over the life of the receivables. Cash flows are discounted
from the date the cash is expected to become available to the Company. These
cash flows are projected over the life of the receivables using payment,
default, and interest rate assumptions that the Company believes would be used
by market participants for similar financial instruments subject to prepayment,
credit and interest rate risk. The cash flows are discounted using an interest
rate that the Company believes a purchaser unrelated to the seller of the
financial instrument would demand. As all estimates used are influenced by
factors outside the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. Any adverse change in the Company's assumptions could materially impact
securitization income.
The Company recognized securitization income of $1.9 million and $2.4
million for the thirteen weeks ended August 2, 2003 and August 3, 2002,
respectively, and $4.4 million and $5.2 million for the twenty-six weeks ended
August 2, 2003 and August 3, 2002, respectively.
FORWARD-LOOKING STATEMENTS
Certain information included in this report and other materials filed
or to be filed by the Company with the Securities and Exchange Commission
contains statements that are forward-looking within the meaning of the Private
Securities Litigation Reform Act of 1995. Such forward-looking statements, which
may be identified by words such as "may," "could," "will," "plan," "expect,"
"anticipate," "estimate," "project," "intend" or other similar expressions,
involve important risks and uncertainties that could significantly affect
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, uncertainties
affecting retail in general, such as consumer confidence and demand for soft
goods; risks relating to leverage and debt service; competition within markets
in which the Company's stores are located; and the need for, and costs
associated with, store renovations and other capital expenditures. These risks
and other risks are discussed in the Company's Annual Report on Form 10-K for
the fiscal year ended February 1, 2003.
21
THE BON-TON STORES, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe its interest rate risks, as described in
the 2002 Annual Report, have changed materially since the Company's disclosure
in its 2002 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
The Company's management, including the Company's Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of the
Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period
covered by this report and, based on this evaluation, concluded that the
Company's disclosure controls and procedures, which have been designed to ensure
that information required to be disclosed by the Company in the reports it files
or submits under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, are effective.
No change in the Company's internal control over financial reporting
(as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)) has occurred during
the Company's most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any legal proceedings since
the Company's disclosure in its 2002 Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 17, 2003, the Company held its Annual Meeting of Shareholders.
The following matters were submitted for vote:
1. The following individuals were nominated and elected by the votes set forth
to serve as the directors of the Company:
M. Thomas Grumbacher For: 40,833,936
Withhold Authority: 209,089
Robert B. Bank For: 40,856,463
Withhold Authority: 186,502
Philip M. Browne For: 40,856,463
Withhold Authority: 186,502
Shirley A. Dawe For: 40,892,163
Withhold Authority: 150,802
22
THE BON-TON STORES, INC. AND SUBSIDIARIES
Marsha M. Everton For: 40,892,090
Withhold Authority: 150,875
Samuel J. Gerson* For: 39,538,988
Withhold Authority: 1,503,977
Michael L. Gleim For: 39,556,782
Withhold Authority: 1,486,183
Robert E. Salerno For: 40,882,127
Withhold Authority: 160,838
Robert C. Siegel For: 40,907,263
Withhold Authority: 135,702
Leon D. Starr For: 40,902,616
Withhold Authority: 140,349
Thomas W. Wolf For: 40,907,263
Withhold Authority: 135,702
* Mr. Gerson passed away in July 2003. On July 21, 2003, the Board of Directors
of the Company elected to reduce the size of the Board from eleven members to
ten members. Consequently, the Company will not fill Mr. Gerson's position.
2. The holders of 37,019,325 shares voted in favor of, the holders of 770,808
shares voted against and the holders of 30,693 shares abstained with respect
to the amendment of The Bon-Ton Stores, Inc. 2000 Stock Incentive Plan.
3. The holders of 39,492,991 shares voted in favor of, the holders of 1,536,560
shares voted against and the holders of 13,414 shares abstained with respect
to ratification of the appointment of KPMG LLP as independent auditor of The
Bon-Ton Stores, Inc.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant to the requirements of Item 601 of
Regulation S-K:
10.1 Amended and Restated Employment Agreement for Frank Tworecke
31.1 Certification of Tim Grumbacher
31.2 Certification of James H. Baireuther
32.1 Certifications Pursuant to Rules 13a-14(b) and 15d-14(b) of the
Securities Exchange Act of 1934.
23
THE BON-TON STORES, INC. AND SUBSIDIARIES
(b) Reports on Form 8-K filed during the quarter:
1. A Current Report on Form 8-K dated July 25, 2003 was filed with the
Securities and Exchange Commission on July 29, 2003 to report, under
Item 5, that the Registrant issued a press release with respect to its
submission of a proposal to the Board of Directors of The Elder-Beerman
Stores Corp. to provide for a combination of Elder-Beerman and The
Bon-Ton Stores, Inc.
The following Reports on Form 8-K were filed subsequent to August 2, 2003
but prior to the filing of this Quarterly Report on Form 10-Q:
2. A Current Report on Form 8-K dated August 21, 2003 was filed with the
Securities and Exchange Commission on August 21, 2003 to report, under
Item 12, that the Registrant issued a press release with respect to its
results of operations for the thirteen weeks ended August 2, 2003.
3. A Current Report on Form 8-K dated September 9, 2003 was filed with the
Securities and Exchange Commission on September 9, 2003 to report, under
Item 5, that the Registrant issued a press release with respect to a
dividend declaration.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BON-TON STORES, INC.
DATE: September 15, 2003 BY: /s/ Tim Grumbacher
---------------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
DATE: September 15, 2003 BY: /s/ James H. Baireuther
---------------------------
James H. Baireuther
Vice Chairman, Chief
Administrative Officer and
Chief Financial Officer
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