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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 November 1, 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
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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 December 10, 2003 there were 12,711,640 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.
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
November 1, February 1,
(In thousands except share and per share data) 2003 2003
- --------------------------------------------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 22,241 $ 16,796
Trade and other accounts receivable, net of allowance for doubtful accounts and sales
returns of $8,429 and $3,540 at November 1, 2003 and February 1, 2003, respectively 169,532 46,735
Merchandise inventories 385,935 148,618
Prepaid expenses and other current assets 20,775 12,958
Deferred income taxes 18,930 3,205
--------- ---------
Total current assets 617,413 228,312
--------- ---------
Property, fixtures and equipment at cost,
less accumulated depreciation and amortization 150,646 136,201
Deferred income taxes 21,212 3,980
Goodwill and intangible assets 9,219 9,511
Other assets 14,321 4,019
--------- ---------
TOTAL ASSETS $ 812,811 $ 382,023
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 174,884 $ 53,367
Accrued payroll and benefits 32,812 14,037
Accrued expenses 50,156 25,546
Current portion of long-term debt 85,257 715
Current portion of obligations under capital leases 1,990 250
Income taxes payable 2,934 5,249
--------- ---------
Total current liabilities 348,033 99,164
--------- ---------
Long-term debt, less current maturities 235,708 64,194
Obligations under capital leases, less current maturities 1,333 468
Other long-term liabilities 12,657 5,851
--------- ---------
TOTAL LIABILITIES 597,731 169,677
--------- ---------
Shareholders' 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 shares
of 13,036,440 and 12,477,285 at November 1, 2003 and February 1, 2003, respectively 130 125
Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued
shares of 2,989,853 at November 1, 2003 and February 1, 2003 30 30
Treasury stock, at cost - shares of 337,800 and 277,000 at November 1, 2003 and
February 1, 2003, respectively (1,387) (1,132)
Additional paid-in-capital 114,475 107,415
Deferred compensation (184) (222)
Accumulated other comprehensive income (1,439) (1,876)
Retained earnings 103,455 108,006
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 215,080 212,346
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 812,811 $ 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 THIRTY-NINE
WEEKS ENDED WEEKS ENDED
---------------------------------------------------------------
(In thousands except share and per share data) November 1, November 2, November 1, November 2,
(Unaudited) 2003 2002 2003 2002
- -----------------------------------------------------------------------------------------------------------------
Net sales $ 180,417 $ 167,542 $ 474,656 $ 471,949
Other income, net 619 520 1,709 1,607
------------ ------------ ------------ ------------
181,036 168,062 476,365 473,556
------------ ------------ ------------ ------------
Costs and expenses:
Costs of merchandise sold 113,313 104,878 298,551 301,234
Selling, general and administrative 61,690 55,301 162,664 159,670
Depreciation and amortization 7,330 4,945 17,217 14,849
------------ ------------ ------------ ------------
Income (loss) from operations (1,297) 2,938 (2,067) (2,197)
Interest expense, net 1,437 2,413 3,983 6,789
------------ ------------ ------------ ------------
Income (loss) before income taxes (2,734) 525 (6,050) (8,986)
Income tax provision (benefit) (1,032) 197 (2,258) (3,370)
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (1,702) $ 328 $ (3,792) $ (5,616)
============ ============ ============ ============
PER SHARE AMOUNTS --
BASIC:
Net income (loss) $ (0.11) $ 0.02 $ (0.25) $ (0.37)
============ ============ ============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,062,566 15,180,685 15,031,138 15,233,871
DILUTED:
Net income (loss) $ (0.11) $ 0.02 $ (0.25) $ (0.37)
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,062,566 15,392,437 15,031,138 15,233,871
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
THIRTY-NINE
WEEKS ENDED
-------------------------
(In thousands) November 1, November 2,
(Unaudited) 2003 2002
- -------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (3,792) $ (5,616)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 17,217 14,849
Changes in operating assets and liabilities, net (21,401) (33,773)
--------- ---------
Net cash used in operating activities (7,976) (24,540)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (9,444) (8,244)
Acquisition, net of cash acquired (97,485) -
Proceeds from sale of property, fixtures and equipment 1,310 2
--------- ---------
Net cash used in investing activities (105,619) (8,242)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (188,947) (113,903)
Proceeds from issuance of long-term debt 301,192 151,750
Issuance of common stock 6,500 -
Common stock repurchased (254) (882)
Cash dividends paid (757) -
Stock options exercised 387 -
Deferred financing costs paid (7,839) -
Increase in bank overdraft balances, net 8,758 978
--------- ---------
Net cash provided by financing activities 119,040 37,943
Net increase in cash and cash equivalents 5,445 5,161
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,796 9,752
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,241 $ 14,913
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 5,649 $ 5,597
Net income taxes (refunded) paid $ (5,870) $ 12,096
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,
142 retail department stores located in Connecticut, Illinois, Indiana, Iowa,
Kentucky, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New
York, Ohio, Pennsylvania, Vermont, West Virginia and Wisconsin.
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
consolidated 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") and the consolidated financial statements and notes thereto
included in Exhibit 99.8 of the Company's Current Report on Form 8-K filed on
November 7, 2003.
2. ACQUISITION
Effective October 24, 2003, pursuant to the Agreement and Plan of
Merger dated as of September 15, 2003, among the Company, The Elder-Beerman
Stores Corp. ("Elder-Beerman") and Elder Acquisition Corp., an indirect wholly
owned subsidiary of the Company ("Merger Sub"), Merger Sub was merged with and
into Elder-Beerman with Elder-Beerman continuing as the surviving corporation
and as an indirect wholly owned subsidiary of the Company (the "Merger").
Elder-Beerman is headquartered in Dayton, Ohio and operates sixty-nine
department and home furniture stores in Illinois, Indiana, Iowa, Kentucky,
Michigan, Ohio, Pennsylvania, West Virginia and Wisconsin.
Prior to the Merger, Merger Sub had acquired 10,892,494 shares of
Elder-Beerman common stock, representing approximately 94% of the outstanding
Elder-Beerman common stock, pursuant to a tender offer for all of the
outstanding shares of Elder-Beerman common stock. The consideration paid
pursuant to the tender offer was $8.00 in cash per share of Elder-Beerman common
stock. As a result of the Merger, each share of Elder-Beerman common stock
outstanding at the effective time of the Merger was converted into the right to
receive $8.00 in cash. On October 23, 2003, there were 11,585,457 shares of
Elder-Beerman common stock outstanding. Following consummation of the Merger,
the Elder-Beerman common stock was delisted from Nasdaq. As of November 1, 2003,
the consolidated balance sheet of the Company includes a liability of $5,544 for
Elder-Beerman common stock not yet tendered.
5
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Effective October 24, 2003, the Company amended and restated its
revolving credit facility agreement. The amendment increases the line of credit
from $150,000 to $300,000; modifies certain borrowing availability, interest and
fee calculation elements; and alters the agreement expiration date from April
2008 to October 2007. In addition, the Company entered into a $25,000 term loan
agreement.
In conjunction with the Merger, Elder-Beerman's accounts receivable
facility was amended, effective October 24, 2003. The amendment decreases the
line of credit from $135,000 to $100,000, changes some of the financial
institutions involved, modifies certain terms and alters the agreement
expiration date from July 2005 to July 2004.
The Company amended its accounts receivable facility agreement,
effective October 24, 2003. The amendment modifies certain terms, interest and
fee calculation elements; and extends the agreement expiration date from January
2004 to October 2004. The facility amount remained unchanged at $150,000.
The Company obtained equity financing in an aggregate amount of $6,500
from the Chairman and Chief Executive Officer of the Company, pursuant to a
Stock Purchase Agreement dated as of October 23, 2003 under which the Company
issued 476,890 shares, at fair market value, of the Company's common stock.
The primary reason for the acquisition was the addition of sixty-nine
stores and the corresponding increase in geographic presence as well as the
Company's belief in the opportunity for enhanced growth, purchasing leverage and
profitability.
The Company's consolidated balance sheet and consolidated statements of
operations for the thirteen and thirty-nine weeks ended November 1, 2003 include
Elder-Beerman operations for the period from October 24, 2003 through November
1, 2003. Elder-Beerman operations reflect preliminary purchase accounting, which
is subject to future refinement based upon updated fair value valuations of net
assets acquired.
The acquisition purchase price was $109,311, consisting of the purchase
of common stock, settlement of stock options, and various professional fees
incurred relative to the acquisition process.
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 pro forma information presents the results of operations
of the Company as if the Elder-Beerman acquisition had taken place at the
beginning of the respective periods presented:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
--------------------------------------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
(Pro Forma) (Pro Forma) (Pro Forma) (Pro Forma)
- ------------------------------------------------------------------------------------------------------
Net sales $ 309,233 $ 318,434 $ 867,082 $ 897,585
Other income, net 1,222 1,224 3,635 3,696
--------- --------- --------- ---------
310,455 319,658 870,717 901,281
--------- --------- --------- ---------
Costs and expenses:
Costs of merchandise sold 197,057 203,408 553,691 577,068
Selling, general and administrative 108,897 103,780 296,171 299,624
Depreciation and amortization 8,457 6,160 20,724 18,487
--------- --------- --------- ---------
Income (loss) from operations (3,956) 6,310 131 6,102
Interest expense, net 4,335 6,464 13,876 18,783
--------- --------- --------- ---------
Loss before income taxes and
cumulative effect of changes in
accounting principles (8,291) (154) (13,745) (12,681)
Income tax benefit (3,033) (65) (5,028) (4,752)
--------- --------- --------- ---------
Loss before cumulative effect of
changes in accounting principles (5,258) (89) (8,717) (7,929)
Cumulative effect of changes in accounting
principles, net of tax - - - (14,060)
--------- --------- --------- ---------
NET LOSS $ (5,258) $ (89) $ (8,717) $ (21,989)
========= ========= ========= =========
LOSS PER SHARE--
Basic $ (0.34) $ (0.01) $ (0.56) $ (1.40)
Diluted $ (0.34) $ (0.01) $ (0.56) $ (1.40)
Pro forma adjustments have been made to reflect depreciation and
amortization on the accounting base recognized in recording the acquisition,
interest expense on borrowings used to finance the acquisition and issuance of
476,890 shares of the Company's common stock to the Chairman and Chief
Executive Officer of the Company.
The pro forma thirteen weeks and thirty-nine weeks ended November 1,
2003 include nonrecurring charges directly attributable to the acquisition
transaction of $6,201 and $6,887, respectively, principally representing
professional service fees, legal expenses and the write-off of deferred
financing fees paid prior to the acquisition. In addition, the pro forma
thirteen weeks and thirty-nine weeks ended November 1, 2003 include nonrecurring
charges of $2,318 reflecting an asset impairment charge for the write-off of
duplicate information systems software due to the acquisition.
7
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The pro forma thirty-nine weeks ended November 2, 2002 includes the
cumulative effect of changes in accounting principles associated with an
Elder-Beerman goodwill impairment charge of $14,060 taken pursuant to adoption
of Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets."
The above pro forma results of operations is presented for
informational purposes only, is not necessarily indicative of actual results of
operations had the acquisition been effected at the beginning of the respective
periods presented, does not reflect potential synergies, integration costs and
other such costs or savings and is not indicative of future results.
3. 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 ("SFAS") 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 SFAS 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:
8
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- -------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
- --------------------------------------------------------------------------------------------------
Net income (loss), as reported $(1,702) $ 328 $(3,792) $(5,616)
Deduct: Total stock-option-based
employee compensation expense
determined under fair-value-based methods
for all awards, net of related tax effects (83) (104) (249) (312)
------- ------- ------- -------
Pro forma net income (loss) $(1,785) $ 224 $(4,041) $(5,928)
======= ======= ======= =======
Earnings (loss) per share
Basic As reported $ (0.11) $ 0.02 $ (0.25) $ (0.37)
Pro forma (0.12) 0.01 (0.27) (0.39)
Diluted As reported $ (0.11) $ 0.02 $ (0.25) $ (0.37)
Pro forma (0.12) 0.01 (0.27) (0.39)
The Company used the Black-Scholes option pricing model to calculate the fair
value of the stock options at the grant date.
4. 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 THIRTY-NINE
WEEKS ENDED WEEKS ENDED
-------------------------- --------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------
Basic calculation 15,062,566 15,180,685 15,031,138 15,233,871
Effect of dilutive shares ---
Restricted Shares - 106,294 - -
Options - 105,458 - -
---------- ---------- ---------- ----------
Diluted calculation 15,062,566 15,392,437 15,031,138 15,233,871
========== ========== ========== ==========
9
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 THIRTY-NINE
WEEKS ENDED WEEKS ENDED
-------------------------- --------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
- -----------------------------------------------------------------------------------------
Antidilutive shares ---
Restricted Shares 150,529 - 142,098 176,232
Options 920,382 619,764 937,057 961,664
Certain securities were excluded from the computation of dilutive
shares due to the Company's net loss position in the thirteen weeks ended
November 1, 2003 and thirty-nine weeks ended November 1, 2003 and November 2,
2002. The following table shows the approximate effect of dilutive securities
had the Company reported profit for these periods:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
-------------------------- --------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
- ---------------------------------------------------------------------------------------------
Effect of dilutive securities ---
Restricted Shares 121,629 106,294 104,167 100,581
Options 329,366 105,458 184,309 104,196
5. 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.
10
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 roll-forward of the accrual as of February 1, 2003
through November 1, 2003 related to the distribution center and store closures:
February 1, November 1,
2003 Fiscal 2003 Fiscal 2003 2003
Balance Provision Payments Balance
- ----------------------------------------------------------------------------
Termination benefits $ 220 $ 58 $ 278 $ -
Other closing costs 255 (16) 94 145
----- ----- ----- -----
Total $ 475 $ 42 $ 372 $ 145
===== ===== ===== =====
As of November 1, 2003, the remaining York, Pennsylvania distribution
center rental obligation through lease expiration in December 2020 is $9,461.
The Company continues 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.
6. SALE OF RECEIVABLES
The Company securitizes its Bon-Ton proprietary credit card portfolio
through a Bon-Ton 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, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
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 November 1, 2003 and February 1, 2003, credit card receivables
were sold under the securitization agreement in the amount of $127,400 and
$145,000, respectively, and the Company had subordinated interests of $51,783
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
11
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company has 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 November 1, 2003 and February 1, 2003 included restricted cash
of $6,103 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 $1,897 and $1,772 on
securitization of credit card receivables during the thirteen weeks ended
November 1, 2003 and November 2, 2002, respectively, and $6,315 and $7,018
during the thirty-nine weeks ended November 1, 2003 and November 2, 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 $666
and $691 for the thirteen weeks ended November 1, 2003 and November 2, 2002,
respectively, and $2,043 and $2,156 for the thirty-nine weeks ended November 1,
2003 and November 2, 2002, respectively. As of November 1, 2003, $6,462 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 $1,995 and
$1,845 for the thirteen weeks ended November 1, 2003 and November 2, 2002,
respectively, and $5,713 and $5,297 for the thirty-nine weeks ended November 1,
2003 and November 2, 2002, respectively.
7. 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.
During the thirteen weeks ended November 1, 2003, the Company purchased no
stock. During the thirty-nine weeks ended November 1, 2003, the Company
purchased 60,800 shares at a cost of $254. On a cumulative basis, since February
7, 2002, the Company 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.
8. 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 future purchases, (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.
12
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 reached a consensus on
Issue 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 thirty-nine weeks ended November 1, 2003.
9. SUBSEQUENT EVENTS
On December 9, 2003, the Company announced a quarterly cash dividend of
$0.025 per share on Class A Common Stock and Common Stock, payable January 15,
2004 to shareholders of record as of January 1, 2004.
13
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 THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- -------------------------
November 1, November 2, November 1, November 2,
2003 2002 2003 2002
- -------------------------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income, net 0.3 0.3 0.4 0.3
----- ----- ----- -----
100.3 100.3 100.4 100.3
----- ----- ----- -----
Costs and expenses:
Costs of merchandise sold 62.8 62.6 62.9 63.8
Selling, general and administrative 34.2 33.0 34.3 33.8
Depreciation and amortization 4.1 3.0 3.6 3.1
----- ----- ----- -----
Income (loss) from operations (0.7) 1.8 (0.4) (0.5)
Interest expense, net 0.8 1.4 0.8 1.4
----- ----- ----- -----
Income (loss) before income taxes (1.5) 0.3 (1.3) (1.9)
Income tax provision (benefit) (0.6) 0.1 (0.5) (0.7)
----- ----- ----- -----
Net income (loss) (0.9)% 0.2% (0.8)% (1.2)%
----- ----- ----- -----
Effective October 24, 2003, the Company acquired The Elder-Beerman
Stores Corp. ("Elder-Beerman"). Elder-Beerman is headquartered in Dayton, Ohio
and operates sixty-nine department and home furniture stores in Illinois,
Indiana, Iowa, Kentucky, Michigan, Ohio, Pennsylvania, West Virginia and
Wisconsin. Results of operations for the thirteen and thirty-nine weeks ended
November 1, 2003 include Elder-Beerman operations for the period from October
24, 2003 through November 1, 2003. Elder-Beerman operations reflect preliminary
purchase accounting, which is subject to future refinement based upon updated
fair value valuations of net assets acquired.
THIRTEEN WEEKS ENDED NOVEMBER 1, 2003 COMPARED TO THIRTEEN WEEKS ENDED NOVEMBER
2, 2002
For purposes of the following discussions, all references to "third
quarter of 2003" and "third quarter of 2002" are to the Company's thirteen-week
periods ended November 1, 2003 and November 2, 2002, respectively.
NET SALES. Net sales for the third quarter of 2003 were $180.4 million,
reflecting an increase of $12.9 million, or 7.7%, from the same period last
year. Net sales include $15.3 million from Elder-Beerman operations for the
period from October 24, 2003 through November 1, 2003. Comparable store sales,
which exclude the impact of Elder-Beerman and the Red Bank, New Jersey store
closed in January 2003, decreased 0.8% in the third quarter of 2003. Business
families recording comparable
14
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
store sales increases for the third quarter of 2003 were Cosmetics, Shoes,
Intimate, Coats and Home. Business families reflecting the largest comparable
store sales decreases were Dresses, Juniors, Children's, Men's Collections,
Misses' Sportswear, and Petites.
OTHER INCOME, NET. Net other income, principally income from leased
departments, was $0.6 million, or 0.3% of net sales, in the third quarter of
2003 compared to $0.5 million, or 0.3% of net sales, in the third quarter of
2002.
COSTS AND EXPENSES. Gross margin was $67.1 million for the third
quarter of 2003 compared to $62.7 million for the same period last year, an
increase of $4.4 million. Gross margin as a percentage of net sales decreased
0.2 percentage point to 37.2% for the third quarter of 2003 from 37.4% for the
same period last year. The decrease in gross margin rate resulted primarily from
increased markdowns. The increase in gross margin dollars for the third quarter
of 2003 was due to Elder-Beerman operations for the period from October 24, 2003
through November 1, 2003, partially offset by lower comparable store sales and a
decreased gross margin rate.
Selling, general and administrative expenses for the third quarter of
2003 were $61.7 million compared to $55.3 million for the third quarter of 2002,
reflecting an increase of $6.4 million. The increase in selling, general and
administrative dollars was largely due to the addition of Elder-Beerman
operations for the period from October 24, 2003 through November 1, 2003. In
addition, selling, general and administrative expenses increased due to reduced
vendor credits, increased corporate expenses and store pre-opening expenses. The
current year expense rate increased 1.2 percentage points to 34.2% of net sales,
relative to 33.0% of net sales in the same period last year. The expense rate
increase principally reflects a decline in comparable store sales and the
expense increases discussed above.
Depreciation and amortization in the third quarter of 2003 was $7.3
million, an increase of $2.4 million compared to $4.9 million in the third
quarter of 2002. The increase reflects an asset impairment charge of $2.3
million for the write-off of duplicate information systems software due to the
acquisition of Elder-Beerman.
INCOME (LOSS) FROM OPERATIONS. Loss from operations in the third
quarter of 2003 was $1.3 million, or 0.7% of net sales, compared to income from
operations of $2.9 million, or 1.8% of net sales, in the third quarter of 2002.
INTEREST EXPENSE, NET. Net interest expense was $1.4 million, or 0.8%
of net sales, in the third quarter of 2003 compared to $2.4 million, or 1.4% of
net sales, in the third quarter of 2002. The decrease in net interest expense
was largely due to fair market value adjustments on interest rate swap
agreements. Interest expense for the third quarter of 2003 and third quarter of
2002 included a reduction of interest expense of $0.3 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 increased 0.2
percentage point to 37.7% in the third quarter of 2003 from 37.5% in the third
quarter of 2002.
15
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NET INCOME (LOSS). Net loss in the third quarter of 2003 was $1.7
million, or 0.9% of net sales, compared to net income of $0.3 million, or 0.2%
of net sales, in the third quarter of 2002.
THIRTY-NINE WEEKS ENDED NOVEMBER 1, 2003 COMPARED TO THIRTY-NINE WEEKS ENDED
NOVEMBER 2, 2002
For purposes of the following discussions, all references to "2003" and
"2002" are to the Company's thirty-nine week periods ended November 1, 2003 and
November 2, 2002, respectively.
NET SALES. Net sales in 2003 were $474.7 million, reflecting a 0.6%
increase over net sales in 2002 of $471.9 million. Net sales include $15.3
million from Elder-Beerman operations for the period from October 24, 2003
through November 1, 2003. Comparable store sales, which exclude the impact of
Elder-Beerman and the Red Bank, New Jersey store closed in January 2003,
decreased 2.0% in 2003. Business families recording comparable store sales
increases were Coats, Home, Shoes, Accessories, Cosmetics and Intimate. Business
families reflecting the largest comparable store sales decreases were Dresses,
Men's Collections, Misses' Sportswear, Children's and Juniors.
OTHER INCOME, NET. Net other income, principally income from leased
departments, was 0.4% of net sales in 2003 and 0.3% of net sales in 2002.
COSTS AND EXPENSES. Gross margin was $176.1 million in 2003 compared to
$170.7 million in 2002, an increase of $5.4 million. Gross margin as a
percentage of net sales increased 0.9 percentage point to 37.1% for 2003 from
36.2% for the same period last year. Gross margin includes the impact of
Elder-Beerman operations for the period from October 24, 2003 through November
1, 2003.
The increased gross margin rate was primarily the result of decreased
markdowns on seasonal merchandise and a reduction, reflecting historical
performance, in inventory shrinkage accrual rates. During the first quarter of
2002, in 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 third 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 and third quarters of 2003 relative to the
respective prior year periods due to increased competitive pressure. The
increase in gross margin dollars for 2003 was due to the impact of Elder-Beerman
operations for the period from October 24, 2003 through November 1, 2003 and the
increased gross margin rate, partially offset by a decline in comparable store
sales.
Selling, general and administrative expenses for 2003 were $162.7
million compared to $159.7 million for 2002, reflecting an increase of $3.0
million. The increase in selling, general and administrative dollars was largely
due to the addition of Elder-Beerman operations for the period from October 24,
2003 through November 1, 2003, partially offset by decreased payroll expense and
a gain on the sale of the Harrisburg, Pennsylvania distribution center of $0.9
million. The expense rate increased 0.5 percentage point, to 34.3% in 2003 from
33.8% in 2002, due to decreased comparable store sales.
16
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Depreciation and amortization in 2003 increased $2.4 million, to $17.2
million in 2003 from $14.8 million in 2002. The increase reflects an asset
impairment charge of $2.3 million for the write-off of duplicate information
systems software due to the acquisition of Elder-Beerman.
LOSS FROM OPERATIONS. Loss from operations in 2003 was $2.1 million, or
0.4% of net sales, compared to a loss from operations of $2.2 million, or 0.5%
of net sales, in 2002.
INTEREST EXPENSE, NET. Net interest expense was $4.0 million, or 0.8%
of net sales, in 2003 compared to $6.8 million, or 1.4% of net sales, in 2002.
The $2.8 million decrease in net interest expense was primarily due to fair
market value adjustments on interest rate swap agreements. Interest expense in
2003 and 2002 included a reduction of interest expense of $1.6 million and an
increase in interest expense of $0.8 million, respectively, related to fair
market value adjustments on interest rate swaps.
INCOME TAX BENEFIT. The effective tax rate decreased 0.2 percentage
point to 37.3% in 2003 from 37.5% in 2002.
NET LOSS. Net loss in 2003 was $3.8 million compared to a net loss of
$5.6 million in 2002.
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 thirty-nine weeks ended November 1, 2003 and
November 2, 2002. However, there can be no assurance that the Company's business
will not be affected by inflationary adjustments in the future.
17
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements are currently met through a
combination of cash, borrowings under its revolving credit facility, borrowings
under its Elder-Beerman accounts receivable facility and proceeds from its
Bon-Ton accounts receivable facility.
The following table summarizes material measures of the Company's
liquidity and capital resources:
November 1, November 2,
(Dollars in millions) 2003 2002
- --------------------------------------------------------------------------------
Working capital $ 269.4 $ 157.2
Current ratio 1.77:1 2.22:1
Debt to total capitalization (debt plus equity) 0.60:1 0.35:1
Unused availability under revolving credit facility $ 104.6 $ 64.4
For the thirty-nine weeks ended November 1, 2003, net cash used in
operating activities was $8.0 million compared to $24.5 million for the
comparable period last year. The reduction in net cash used in operating
activities reflects cash provided by Elder-Beerman operating activities,
increased accounts payable, increased accrued expenses, lower income taxes paid
and deferred tax changes--offset by increased accounts receivable, long-term
assets and merchandise inventories relative to beginning year balances.
Net cash used in investing activities was $105.6 million for the
thirty-nine weeks ended November 1, 2003 compared to $8.2 million for the
comparable period last year. The increase in net cash used in investing
activities largely reflects funds used for the acquisition of Elder-Beerman.
Net cash provided by financing activities was $119.0 million for the
thirty-nine weeks ended November 1, 2003 compared to $37.9 million for the
comparable period of 2002. The increase in net cash provided by financing
activities principally reflects the borrowings to fund the Elder-Beerman
acquisition.
The Company's consolidated balance sheet at November 1, 2003 reflects
significant changes from balances at February 1, 2003 due to seasonality and the
impact of the Elder-Beerman acquisition, particularly trade and other accounts
receivable, merchandise inventories, accounts payable and long-term debt. The
impact of Elder-Beerman includes preliminary purchase accounting, which is
subject to future refinement based upon updated fair value valuations of net
assets acquired.
Effective October 24, 2003, the Company amended and restated its
revolving credit facility agreement. The amendment increases the line of credit
from $150.0 million to $300.0 million; modifies certain borrowing availability,
interest and fee calculation elements; and alters the agreement expiration date
from April 2008 to October 2007. In addition, the Company entered into a $25.0
million term loan agreement.
18
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
In conjunction with the Merger, Elder-Beerman's accounts receivable
facility was amended, effective October 24, 2003. The amendment decreases the
line of credit from $135.0 million to $100.0 million, changes some of the
financial institutions involved, modifies certain terms and alters the agreement
expiration date from July 2005 to July 2004.
The Company amended its accounts receivable facility agreement,
effective October 24, 2003. The amendment modifies certain terms, interest and
fee calculation elements; and extends the agreement expiration date from January
2004 to October 2004. The facility amount remained unchanged at $150.0 million.
The Company obtained equity financing in an aggregate amount of $6.5
million from the Chairman and Chief Executive Officer of the Company, pursuant
to a Stock Purchase Agreement dated as of October 23, 2003 under which the
Company issued 476,890 shares of the Company's common stock.
The Company anticipates its cash flows from operations--supplemented by
borrowings under its revolving credit facility, borrowings under its
Elder-Berman accounts receivable facility and proceeds from its Bon-Ton accounts
receivable facility--will be sufficient to satisfy its operating cash
requirements for the foreseeable future.
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 Bon-Ton proprietary credit card portfolio as a source of funding.
Gains and losses from securitizations are recognized in the consolidated
statements of operations 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.
The Company sells undivided percentage ownership interests in certain
of its Bon-Ton 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 $127.4
million interest in the accounts receivable under the facility at November 1,
19
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 $127.4 million at November 1, 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 ($127.4
million at November 1, 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 condensed consolidated 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 as follows:
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
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 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.
20
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company recognizes revenue at either the point-of-sale or at the
time merchandise is shipped to the customer. Sales are net of returns and
exclude sales tax. A reserve is provided for estimated merchandise returns based
on experience.
If circumstances change (e.g., higher than expected defaults,
bankruptcies or returns), 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 $8.4 million and $3.5 million as of November 1,
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
21
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
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 November 1,
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 future purchases, (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 financial
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, more
likely than not, be recovered from future taxable income or tax carry-back
availability. To the extent the Company believes recovery cannot be established
to a standard of more-likely-than-not, 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.
22
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net deferred tax assets were $40.1 million and $7.2 million as of
November 1, 2003 and February 1, 2003, respectively. As part of preliminary
purchase accounting, a valuation allowance of $37.9 million was established
against deferred tax assets and remains at November 1, 2003. No valuation
allowance was established at February 1, 2003. The valuation allowance was
established against a portion of the net deferred tax assets that resulted from
the acquisition of Elder-Beerman. As part of the acquisition, the Company
recorded $79.9 million of net deferred tax assets. Due to limitations per
Internal Revenue Code Section 382, the utilization of these deferred tax assets
cannot be established under a more-likely-than-not standard. If actual results
differ from these estimates or these estimates are adjusted in future periods,
the Company may need to adjust its valuation allowance, which could materially
impact its financial position and results of operations.
Legislative 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 $150.6 million and $136.2
million as of November 1, 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.
23
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION 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.
The Company has identified assets in the New York market with a net
book value of approximately $3.7 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
Goodwill was $3.0 million as of November 1, 2003 and February 1, 2003.
Intangible assets are comprised of lease interests that relate to
below-market-rate leases acquired 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
$6.3 million and $6.5 million as of November 1, 2003 and February 1, 2003,
respectively.
As a result of the Company's adoption of SFAS 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 Bon-Ton 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 the accounts receivable, 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
24
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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 $1.8
million for the thirteen weeks ended November 1, 2003 and November 2, 2002,
respectively, and $6.3 million and $7.0 million for the thirty-nine weeks ended
November 1, 2003 and November 2, 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
contain 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; our ability to integrate the recently acquired Elder-Beerman stores into
our overall operations; 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.
25
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.
The Company assumed Elder-Beerman's internal controls over financial
reporting upon the closing of the acquisition of Elder-Beerman. The Company
evaluated Elder-Beerman's internal controls over financial reporting and
concluded that Elder-Beerman's existing internal controls over financial
reporting are sufficient and that no material changes were required to be made
to Elder-Beerman's internal controls as a result of the acquisition.
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 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:
EXHIBIT DESCRIPTION DOCUMENT LOCATION
2.1 * Agreement and Plan of Merger dated as of Incorporated herein by reference
September 15, 2003 by and among The Bon-Ton to Exhibit (d) (1) to the
Stores, Inc., The Elder-Beerman Stores Corp. Schedule TO filed by The Bon-Ton
and Elder Acquisition Corp. Stores, Inc. with the SEC on
September 23, 2003.
26
THE BON-TON STORES, INC. AND SUBSIDIARIES
EXHIBIT DESCRIPTION DOCUMENT LOCATION
10.1 Employment Agreement for Byron L. Bergren. Filed herein.
10.2 Second Amended and Restated Credit Agreement Incorporated herein by reference
dated as of October 24, 2003 among General to Exhibit 99.1 of the Form 8-K
Electric Capital Corporation, The Bon-Ton filed by The Bon-Ton Stores, Inc.
Department Stores, Inc., Elder-Beerman and on November 7, 2003.
the other credit parties and lenders parties
thereto.
10.3 Stock Purchase Agreement dated as of October Incorporated herein by reference
23, 2003 between The Bon-Ton Stores, Inc. and to Exhibit 99.2 of the Form 8-K
Tim Grumbacher. filed by The Bon-Ton Stores, Inc.
on November 7, 2003.
10.4 Registration Rights Agreement dated as of Incorporated herein by reference
October 31, 2003 between The Bon-Ton Stores, to Exhibit 99.3 of the Form 8-K
Inc. and Tim Grumbacher. filed by The Bon-Ton Stores, Inc.
on November 7, 2003.
10.5 Master Amendment to Receivables Purchase Incorporated herein by reference
Agreement dated as of October 24, 2003 among to Exhibit 99.4 of the Form 8-K
The Bon-Ton Receivables Partnership, L.P., filed by The Bon-Ton Stores, Inc.
BTRGP, Inc., Falcon Asset Securitization on November 7, 2003.
Corporation, Charta, LLC and EagleFunding
Corporation, certain financial institutions
party thereto as investors, Bank One, NA,
Citicorp North America, Inc. and Fleet
Securities, Inc.
10.6 Amendment No. 1 to Transfer Agreement dated Incorporated herein by reference
as of October 24, 2003 by and between The to Exhibit 99.5 of the Form 8-K
Bon-Ton Department Stores, Inc. and The filed by The Bon-Ton Stores, Inc.
Bon-Ton Receivables Partnership, L.P. on November 7, 2003.
27
THE BON-TON STORES, INC. AND SUBSIDIARIES
EXHIBIT DESCRIPTION DOCUMENT LOCATION
10.7 Omnibus Amendment No. 1 dated as of October Incorporated herein by reference
24, 2003 among The El-Bee Receivables to Exhibit 99.6 of the Form 8-K
Corporation, The El-Bee Chargit Corp., filed by The Bon-Ton Stores, Inc.
Deutsche Bank Trust Company on November 7, 2003.
Americas, Citicorp North America, Inc.,
Citibank, N.A., CRC Funding, LLC, Fleet
Securities, Inc., Fleet National Bank,
EagleFunding Corporation, Bank One, NA and
Falcon Asset Securitization Corporation.
10.8 Waiver Letter dated as of October 24, 2003 Incorporated herein by reference
among The El-Bee Receivables Corporation, The to Exhibit 99.7 of the Form 8-K
El-Bee Chargit Corp., Citicorp North America, filed by The Bon-Ton Stores, Inc.
Inc., Fleet Securities, Inc., CRC Funding, on November 7, 2003.
LLC, EagleFunding Corporation, Citibank, NA,
Fleet National Bank and Deutsche Bank Trust
Company Americas.
31.1 Certification of Tim Grumbacher Filed herein.
31.2 Certification of James H. Baireuther Filed herein.
32.1 Certifications Pursuant to Rules 13a-14(b) Filed herein.
and 15d-14(b) of the Securities Exchange Act
of 1934.
* All schedules and exhibits to this Exhibit have been omitted in accordance
with 17 CFR ss.229.601(b)(2). The Registrant agrees to furnish supplementally
a copy of all omitted schedules and exhibits to the Securities and Exchange
Commission upon its request.
(b) Reports on Form 8-K filed during the quarter:
1. 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.
2. 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.
28
THE BON-TON STORES, INC. AND SUBSIDIARIES
The following Reports on Form 8-K were filed subsequent to November 1, 2003 but
prior to the filing of this Quarterly Report on Form 10-Q:
1. A Current Report on Form 8-K dated November 7, 2003 was filed
with the Securities and Exchange Commission on November 7,
2003 to report under Item 2 and Item 5 that the Registrant
acquired The Elder-Beerman Stores Corp. and executed related
documents, and to file under Item 7 certain required financial
information.
2. A Current Report on Form 8-K dated November 25, 2003 was filed
with the Securities and Exchange Commission on November 25,
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 November 1, 2003.
3. A Current Report on Form 8-K dated December 12, 2003 was filed
with the Securities and Exchange Commission on December 12,
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: December 12, 2003 BY: /s/ Tim Grumbacher
------------------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
DATE: December 12, 2003 BY: /s/ James H. Baireuther
------------------------------
James H. Baireuther
Vice Chairman, Chief
Administrative Officer and
Chief Financial Officer
29