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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 July 31, 2004 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, 2004 there were 13,132,044 shares of Common Stock, $0.01 par
value per share, and 2,951,490 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
(In thousands except share and per share data) July 31, January 31,
(Unaudited) 2004 2004
- ----------------------------------------------------------------------------------------------- --------- -----------
Assets
Current assets:
Cash and cash equivalents $ 15,481 $ 19,890
Retained interest in trade receivables and other, net of allowance for doubtful accounts and
sales returns of $7,131 and $6,299 at July 31, 2004 and January 31, 2004, respectively 75,102 104,679
Merchandise inventories 283,447 257,372
Prepaid expenses and other current assets 32,399 14,683
Deferred income taxes, net 5,249 8,825
--------- -----------
Total current assets 411,678 405,449
--------- -----------
Property, fixtures and equipment at cost,
less accumulated depreciation and amortization 160,686 160,923
Deferred income taxes, net 20,592 24,252
Goodwill and intangible assets, net 8,927 9,121
Other assets 10,587 12,100
--------- -----------
TOTAL ASSETS $ 612,470 $ 611,845
========= ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 114,052 $ 88,118
Accrued payroll and benefits 23,304 36,344
Accrued expenses 42,394 42,519
Current maturities of long-term debt 833 1,113
Current maturities of obligations under capital leases 983 1,797
Income taxes payable - 13,531
--------- -----------
Total current liabilities 181,566 183,422
--------- -----------
Long-term debt, less current maturities 177,727 170,703
Obligations under capital leases, less current maturities 557 1,013
Other long-term liabilities 16,686 17,223
--------- -----------
TOTAL LIABILITIES 376,536 372,361
--------- -----------
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 13,414,844 and 13,055,740 at July 31, 2004 and January 31, 2004, respectively 134 131
Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued
and outstanding shares of 2,951,490 and 2,989,853 at July 31, 2004 and January 31,
2004, respectively 30 30
Treasury stock, at cost - shares of 337,800 at July 31, 2004 and January 31, 2004 (1,387) (1,387)
Additional paid-in-capital 117,238 114,687
Deferred compensation (29) (136)
Accumulated other comprehensive loss (776) (1,298)
Retained earnings 120,724 127,457
--------- -----------
TOTAL SHAREHOLDERS' EQUITY 235,934 239,484
--------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 612,470 $ 611,845
========= ===========
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) July 31, August 2, July 31, August 2,
(Unaudited) 2004 2003 2004 2003
- ------------------------------------------------ ------------ ----------- ------------ ------------
Net sales $ 284,198 $ 153,128 $ 549,281 $ 294,239
Other income, net 1,053 564 2,036 1,090
------------ ----------- ------------ ------------
285,251 153,692 551,317 295,329
------------ ----------- ------------ ------------
Costs and expenses:
Costs of merchandise sold 177,005 96,311 345,668 185,238
Selling, general and administrative 98,278 49,594 194,785 100,974
Depreciation and amortization 7,223 5,123 13,798 9,887
------------ ----------- ------------ ------------
Income (loss) from operations 2,745 2,664 (2,934) (770)
Interest expense, net 3,364 1,302 6,568 2,546
------------ ----------- ------------ ------------
Income (loss) before income taxes (619) 1,362 (9,502) (3,316)
Income tax provision (benefit) (231) 504 (3,563) (1,226)
------------ ----------- ------------ ------------
NET INCOME (LOSS) $ (388) $ 858 $ (5,939) $ (2,090)
============ =========== ============ ============
PER SHARE AMOUNTS -
BASIC:
Net income (loss) $ (0.02) $ 0.06 $ (0.38) $ (0.14)
============ =========== ============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,975,641 14,997,502 15,831,028 15,015,424
DILUTED:
Net income (loss) $ (0.02) $ 0.06 $ (0.38) $ (0.14)
============ =========== ============ ============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,975,641 15,222,031 15,831,028 15,015,424
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) July 31, August 2,
(Unaudited) 2004 2003
- -------------------------------------------------------------------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,939) $ (2,090)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization 13,798 9,887
Net transfers of receivables to accounts receivable facility (17,000) (9,967)
Changes in operating assets and liabilities, net 11,265 8,590
--------- ---------
Net cash provided by operating activities 2,124 6,420
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,195) (4,134)
Proceeds from sale of property, fixtures and equipment 7 1,310
--------- ---------
Net cash used in investing activities (13,188) (2,824)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (239,299) (73,072)
Proceeds from issuance of long-term debt 244,773 72,400
Common stock repurchased - (254)
Cash dividends paid (794) (379)
Stock options exercised 1,921 -
Deferred financing costs paid (146) (832)
Increase (decrease) in bank overdraft balances, net 200 (3,457)
--------- ---------
Net cash provided by (used in) financing activities 6,655 (5,594)
Net decrease in cash and cash equivalents (4,409) (1,998)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,890 16,796
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,481 $ 14,798
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 3,421 $ 4,114
Net income taxes paid (refunded) $ 12,686 $ (2,563)
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, through its subsidiaries, 139 department stores and two
furniture stores in sixteen states from the Northeast to the Midwest under the
names "Bon-Ton" and "Elder-Beerman." The Company conducts its operations through
one business segment.
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. These condensed consolidated
financial statements should 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 January 31, 2004 (the "2003 Annual
Report").
Certain prior year balances have been reclassified to conform with the
current year presentation.
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" ("APB 25"), and related interpretations including
Financial Accounting Standards Board ("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 only if the current
market price of the underlying stock on the date of the grant 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, an Amendment of FASB
Statement No. 123."
5
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The following table illustrates the effect on net income or loss if the
fair-value-based method had been applied to all unvested awards in each period:
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
-------------------- -----------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
-------- --------- ------- -------
Net income (loss), as reported $ (388) $ 858 $(5,939) $ (2,090)
Deduct: Total stock-option-based
employee compensation expense
determined under fair-value-based methods
for all awards, net of related tax effects (44) (83) (88) (166)
-------- --------- ------- --------
Pro forma net income (loss) $ (432) $ 775 $(6,027) $ (2,256)
======== ========= ======= ========
Earnings (loss) per share
Basic As reported $ (0.02) $ 0.06 $ (0.38) $ (0.14)
Pro forma (0.03) 0.05 (0.38) (0.15)
Diluted As reported $ (0.02) $ 0.06 $ (0.38) $ (0.14)
Pro forma (0.03) 0.05 (0.38) (0.15)
All stock options impacting the periods in the above table were issued
with an option exercise price equal to the per-share market price at the date of
grant. The Company used the Black-Scholes option pricing model to calculate the
fair value of the stock options at the grant date.
The FASB is currently reviewing the accounting for stock options, and may
require use of the fair value method prescribed by SFAS No. 123. In addition, on
February 19, 2004, the International Accounting Standards Board issued
accounting rules that require the expensing of stock options, and the FASB is
working to align U.S. accounting with international standards. As required by
SFAS No. 123 for companies retaining APB 25 accounting, the Company discloses
the estimated impact of fair value accounting for stock options issued.
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 in the accompanying
consolidated statements of operations:
6
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
---------------------- ----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Basic calculation 15,975,641 14,997,502 15,831,028 15,015,424
Effect of dilutive shares
Restricted Shares - 94,722 - -
Options - 129,807 - -
---------- ---------- ---------- ----------
Diluted calculation 15,975,641 15,222,031 15,831,028 15,015,424
========== ========== ========== ==========
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
-------------------- --------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
--------- --------- --------- ---------
Antidilutive shares
Restricted Shares 44,835 - 70,249 137,883
Options 496,003 603,839 634,283 945,395
Certain securities were excluded from the computation of dilutive shares
due to the Company's net loss position in the thirteen weeks ended July 31, 2004
and twenty-six weeks ended July 31, 2004 and August 2, 2003. 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
-------------------- --------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
--------- --------- --------- ---------
Effect of dilutive securities
Restricted Shares 37,229 - 61,555 95,437
Options 236,881 - 314,555 111,779
7
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
4. EXIT OR DISPOSAL ACTIVITIES
Effective July 31, 2004, the Company closed its Pottstown, Pennsylvania
store. A pre-tax charge related to this store closure of $1,721, reflected
within selling, general and administrative expenses, was recorded during the
thirteen weeks ended July 31, 2004.
An agreement was entered into amending the lease termination date to July
31, 2004 from January 28, 2012, requiring the Company to pay a fee of $1,600.
The remaining estimated costs relate to severance and logistics. Following is a
reconciliation of accruals related to this store closure:
Fiscal 2004 Fiscal 2004 Balance at
Charges Payments July 31, 2004
----------- ----------- -------------
Lease termination fee $ 1,600 $ 1,600 $ -
Associate termination benefits 33 29 4
Other closing costs 88 37 51
----------- ----------- -------------
Total $ 1,721 $ 1,666 $ 55
=========== =========== =============
5. INTEGRATION ACTIVITIES
In connection with the acquisition of The Elder-Beerman Stores Corp.
("Elder-Beerman") effective October 24, 2003, the Company developed integration
plans resulting in involuntary terminations, employee relocations, and lease and
other contract terminations. The liability for involuntary termination benefits
covers approximately three hundred employees, primarily in general and
administrative and merchandising functions. The Company expects to pay the
balance of involuntary termination benefits and employee relocations by the end
of the first fiscal quarter of 2005, while the liability for lease and other
contractual terminations will be paid over the remaining contract periods
through 2030. The Company will finalize its integration plans during fiscal
2004, which may result in additional liabilities. Liabilities recognized in
connection with the acquisition and activity to date are as follows:
Involuntary Lease and
Termination Employee Other Contract
Benefits Relocation Termination Total
----------- ----------- -------------- --------
Liability established in purchase
accounting $ 5,571 $ 1,637 $ 3,053 $ 10,261
Payments during fiscal 2003 -- (26) -- (26)
----------- ----------- -------------- --------
Balance at January 31, 2004 5,571 1,611 3,053 10,235
Payments during fiscal 2004 (2,542) (1,290) (1,856) (5,688)
----------- ----------- -------------- --------
Balance at July 31, 2004 $ 3,029 $ 321 $ 1,197 $ 4,547
=========== =========== ============== ========
8
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
6. 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 sells 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 $250,000 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 accounts receivable 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 July 31, 2004 and January 31, 2004, credit card receivables were
sold under the securitization agreement in the amount of $211,488 and $228,488,
respectively, and the Company had subordinated interests of $69,917 and $96,755,
respectively, related to the amounts sold that were included in the accompanying
Consolidated Balance Sheets as retained interest in trade receivables. 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 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 July 31, 2004 and January 31, 2004 included restricted cash of
$6 and $5,998, respectively, required pursuant to terms of the Company's
accounts receivable 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 $2,201 and $1,867 on
securitization of credit card receivables during the thirteen weeks ended July
31, 2004 and August 2, 2003, respectively and $5,178 and $4,417 during the
twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively. This
income is reported as a component of selling, general and administrative
expenses.
The Company recognized servicing fees, which it reported as a component
of selling, general and administrative expenses, of $1,057 and $690 for the
thirteen weeks ended July 31, 2004 and August 2, 2003, respectively and $2,134
and $1,377 for the twenty-six weeks ended July 31, 2004 and August 2, 2003,
respectively. As of July 31, 2004, $9,384 of the total managed credit card
9
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
receivables were sixty-one days or more past due. Net credit losses on the total
managed credit card receivables were $3,236 and $1,793 for the thirteen weeks
ended July 31, 2004 and August 2, 2003, respectively and $6,647 and $3,718 for
the twenty-six weeks ended July 31, 2004 and August 2, 2003, respectively.
7. COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) is determined as follows:
THIRTEEN TWENTY-SIX
WEEKS ENDED WEEKS ENDED
----------------------- -----------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---- ---- ---- ----
Net income (loss) $ (388) $ 858 $ (5,939) $ (2,090)
Other comprehensive income:
Cash flow hedge derivative income, net
of tax 220 574 522 557
------ ------ -------- --------
Comprehensive income (loss) $ (168) $1,432 $ (5,417) $ (1,533)
====== ====== ======== ========
8. STOCK REPURCHASES
On February 7, 2002, the Company announced a stock repurchase program
authorizing the purchase of up to $2,500 of the Company's Common Stock from time
to time. No shares were purchased during the twenty-six weeks ended July 31,
2004. 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.
9. SUBSEQUENT EVENTS
On August 24, 2004, the Company appointed Byron L. Bergren, 57, as the
Company's President and Chief Executive Officer, and the Company's Board of
Directors elected Mr. Bergren a Director. Mr. Bergren's employment agreement is
included as Exhibit 10.1 to the Company's Form 10-Q for the quarter ended July
31, 2004.
On August 27, 2004, the Company announced a quarterly cash dividend of
$0.025 per share on Class A Common Stock and Common Stock, payable October 15,
2004 to shareholders of record as of October 1, 2004.
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
For purposes of the following discussions, all references to "second
quarter of 2004" and "second quarter of 2003" are to the Company's thirteen-week
periods ended July 31, 2004 and August 2, 2003, respectively.
RESULTS OF OPERATIONS
The Company is a traditional department store retailer with a 106-year
history of providing high quality merchandise to its customers in secondary
markets. On October 24, 2003, the Company acquired The Elder-Beerman Stores
Corp. ("Elder-Beerman"), nearly doubling its number of stores and adding 5.7
million square feet of retail space. As a result of the acquisition, the Company
operates 139 department stores and two furniture stores in sixteen states, from
the Northeast to the Midwest, under the Bon-Ton and Elder-Beerman names. The
stores carry a broad assortment of quality brand-name and private label fashion
apparel and accessories for women, men and children, as well as distinctive
cosmetics and home furnishings. The Company's strategy is to profitably sell
merchandise by providing its customers with differentiated fashion merchandise
at compelling value in the secondary markets the Company serves.
The Company's revenues are generated through sales in existing stores and
through sales from new stores opened through expansion and acquisition. During
the twenty-six weeks ended July 31, 2004, the Company's total sales increased
86.7% to $549.3 million, including $255.9 million from the acquired
Elder-Beerman stores, compared to $294.2 million for the same period last year.
Comparable store sales during the twenty-six weeks ended July 31, 2004, which do
not include Elder-Beerman stores, decreased 1.2% from the comparable period in
fiscal 2003.
The retail industry is highly competitive and the first half of fiscal
2004 was no exception as evidenced by the Company's comparable store sales
decreases. The Company anticipates these competitive pressures and challenges
will continue in the future. As a result, the Company will continue its highly
promotional posture and emphasis on offering a wide range of value merchandise.
Additionally, expansion of the Company's private labels and growth of exclusive
brands support its strategy of product differentiation and provide opportunity
for increased sales and higher gross margin.
The Company's ongoing challenge in 2004 is the successful integration of
the two companies into one business unit and ensuring that the combined
organization remains a stable financial performer. Decreases in sales volume and
a highly promotional retail environment are being addressed with the
finalization of the Company's vendor matrix, product assortment and inventory
levels, supported by strong Company-wide marketing efforts. Results for the
first half of fiscal 2004 were positively impacted by synergies realized which
offset the integration expenses incurred during the period; achieving these
synergies on an ongoing basis will be critical to the Company's success. Of
equal importance is expediting the Company's systems integration efforts; the
majority of the Company's capital expenditures in 2004 are being directed
towards strategic systems improvements. As a result of the acquisition, the
Company has increased its debt levels and, accordingly, its exposure to interest
rate fluctuations.
11
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Effective July 31, 2004, the Company closed its Pottstown, Pennsylvania
store. The pre-tax cost of closing this location was $1.7 million. The Company
previously identified this store as under-performing and, in fiscal 2002,
recorded an impairment charge related to long-lived assets at this location. The
Company believes this store closure will have a favorable impact on its results
of operations in the future.
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
-------------------------- --------------------------
July 31, August 2, July 31, August 2,
2004 2003 2004 2003
---- ---- ---- ----
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 62.3 62.9 62.9 63.0
Selling, general and administrative 34.6 32.4 35.5 34.3
Depreciation and amortization 2.5 3.3 2.5 3.4
----- ----- ----- -----
Income (loss) from operations 1.0 1.7 (0.5) (0.3)
Interest expense, net 1.2 0.9 1.2 0.9
----- ----- ----- -----
Income (loss) before income taxes (0.2) 0.9 (1.7) (1.1)
Income tax provision (benefit) (0.1) 0.3 (0.6) (0.4)
----- ----- ----- -----
Net income (loss) (0.1)% 0.6% (1.1)% (0.7)%
----- ----- ----- -----
THIRTEEN WEEKS ENDED JULY 31, 2004 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 2,
2003
NET SALES. Net sales for the second quarter of 2004 were $284.2
million, reflecting an increase of $131.1 million, or 85.6%, from the same
period last year. The second quarter of 2004 includes sales of $130.2 million
generated by the acquired Elder-Beerman stores. Comparable store sales, which
exclude the impact of Elder-Beerman stores, the Latham, New York store (opened
in 2003) and the recently closed Pottstown, Pennsylvania store, decreased 0.5%
in the second quarter of 2004.
Business families recording comparable store sales increases in the
second quarter of 2004 were Home, Accessories, Cosmetics and Women's Clothing
(Misses Sportswear). The favorable results in Home resulted from adopting
various merchandising initiatives from Elder-Beerman. One of these initiatives
is based on the success of Elder-Beerman's furniture department in driving
top-line growth; new furniture galleries were opened in five Bon-Ton stores in
late June 2004. In addition, Home continued to benefit from products added to
the assortment in the first quarter of 2004. Colorful, trend-right merchandise
in Accessories remains the driver of positive sales increases and a new product
launch in Cosmetics that occurred in the first quarter of this year continues to
generate sales increases in that category. Customers responded favorably to the
Company's early fall deliveries in Women's Clothing (Misses Sportswear). The
weakest categories were in apparel:
12
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Women's Clothing (Dresses and Petites), Junior's, Children's and Men's. The
Company anticipates an improved sales performance upon completion of the
merchandise integration, at which time Bon-Ton and Elder-Beerman stores will
each have a full-line of comparable merchandise assortments. The Company remains
focused on product differentiation and improved merchandise assortments,
particularly appropriate levels of more fashionable merchandise.
Elder-Beerman sales are not included in the Company's reported
comparable store sales. Therefore, the following is provided for informational
purposes only: Elder-Beerman comparable store sales for the thirteen weeks ended
July 31, 2004 decreased 2.4% and, for Elder-Beerman and Bon-Ton combined,
comparable store sales for the thirteen weeks ended July 31, 2004 decreased
1.4%.
OTHER INCOME, NET. Net other income, principally income from leased
departments, was $1.1 million, or 0.4% of net sales, in the second quarter of
2004 compared to $0.6 million, or 0.4% of net sales, in the second quarter of
2003. The increase of $0.5 million primarily reflects income from the leased
departments in the Elder-Beerman stores.
COSTS AND EXPENSES. Gross margin was $107.2 million for the second
quarter of 2004 compared to $56.8 million for the same period last year, an
increase of $50.4 million. Gross margin as a percentage of net sales increased
0.6 percentage point to 37.7% for the second quarter of 2004 from 37.1% for the
same period last year. The increase in gross margin rate resulted primarily from
a decreased net markdown rate in comparable stores partially offset by the
inclusion of Elder-Beerman sales at a lower gross margin rate. The increase in
gross margin dollars for the second quarter of 2004 was largely due to the
inclusion of Elder-Beerman operations.
Selling, general and administrative expenses for the second quarter of
2004 were $98.3 million compared to $49.6 million for the second quarter of
2003, reflecting an increase of $48.7 million. The second quarter of 2004
includes $40.8 million of Elder-Beerman selling, general and administrative
expenses. Selling, general and administrative expenses for the second quarter of
2004 include a $1.7 million charge associated with the closing of the Company's
Pottstown, Pennsylvania store, while the second quarter of 2003 reflects a $0.9
million gain on the sale of the Company's Harrisburg, Pennsylvania distribution
center. In addition, selling, general and administrative expenses increased due
to integration costs, increases in professional services related to new
corporate governance requirements, and increased financing fee expense related
to the accounts receivable securitization facility. The current year expense
rate increased 2.2 percentage points to 34.6% of net sales, compared to 32.4%
for the same period last year.
Depreciation and amortization in the second quarter of 2004 was $7.2
million, an increase of $2.1 million compared to $5.1 million in the second
quarter of 2003. This increase primarily reflects the inclusion of Elder-Beerman
expense.
INCOME FROM OPERATIONS. Income from operations in the second quarter of
2004 was $2.7 million, or 1.0% of net sales, compared to $2.7 million, or 1.7%
of net sales, in the second quarter of 2003.
13
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTEREST EXPENSE, NET. Net interest expense was $3.4 million, or 1.2%
of net sales, in the second quarter of 2004 compared to $1.3 million, or 0.9% of
net sales, in the second quarter of 2003. The $2.1 million increase reflects
additional interest expense of $1.1 million on borrowings required to fund the
acquisition and operations of Elder-Beerman and increased deferred financing
fees expense of $1.0 million associated with the acquisition financing.
INCOME TAX PROVISION (BENEFIT). The effective tax rate increased 0.3
percentage point to 37.3% in the second quarter of 2004 from 37.0% in the second
quarter of 2003.
NET INCOME (LOSS). Net loss in the second quarter of 2004 was $0.4
million, or 0.1% of net sales, compared to net income of $0.9 million, or 0.6%
of net sales, in the second quarter of 2003.
TWENTY-SIX WEEKS ENDED JULY 31, 2004 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST
2, 2003
For purposes of the following discussions, all references to "2004" and
"2003" are to the Company's twenty-six week periods ended July 31, 2004 and
August 2, 2003, respectively.
NET SALES. Net sales for 2004 were $549.3 million, reflecting an
increase of $255.0 million, or 86.7%, from the same period last year. 2004
includes sales of $255.9 million generated by the acquired Elder-Beerman stores.
Comparable store sales, which exclude the impact of Elder-Beerman stores, the
Latham, New York store (opened in 2003) and the recently closed Pottstown,
Pennsylvania store, decreased 1.2% in 2004.
Business families recording comparable store sales increases in 2004
were Home, Accessories, and Cosmetics. The favorable results in Home resulted
from adopting various merchandising initiatives from Elder-Beerman. One of these
initiatives is based on the success of Elder-Beerman's furniture department in
driving top-line growth; new furniture galleries were opened in five Bon-Ton
stores in late June 2004. In addition, Home continued to benefit from products
added to the assortment in the first quarter of 2004. Colorful, trend-right
merchandise in Accessories remains the driver of positive sales increases. A new
product launch in Cosmetics that occurred in the first quarter continues to
generate sales increases in that category. The weakest categories were in
apparel: Women's Clothing (Dresses and Petites), Junior's, Children's and Men's.
The Company anticipates an improved sales performance upon completion of the
merchandise integration, at which time Bon-Ton and Elder-Beerman stores will
each have a full-line of comparable merchandise assortments. The Company remains
focused on product differentiation and improved merchandise assortments,
particularly appropriate levels of more fashionable merchandise.
Elder-Beerman sales were not included in the Company's reported
comparable store sales. Therefore, the following is provided for informational
purposes only: Elder-Beerman comparable store sales for the twenty-six weeks
ended July 31, 2004 decreased 2.7% and, for Elder-Beerman and Bon-Ton combined,
comparable store sales for the twenty-six weeks ended July 31, 2004 decreased
1.9%.
14
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 $2.0 million, or 0.4% of net sales, in 2004 compared to $1.1
million, or 0.4% of net sales, in 2003. The increase of $0.9 million primarily
reflects income from the leased departments in the Elder-Beerman stores.
COSTS AND EXPENSES. Gross margin was $203.6 million for 2004 compared
to $109.0 million for the same period last year, an increase of $94.6 million.
Gross margin as a percentage of net sales increased 0.1 percentage point to
37.1% for 2004 from 37.0% for the same period last year. The slight increase in
gross margin rate resulted primarily from increased markup and decreased
markdown rates in comparable stores, which were offset by the inclusion of
Elder-Beerman sales at a lower gross margin rate. The increase in gross margin
dollars for 2004 was largely due to the inclusion of Elder-Beerman operations.
Selling, general and administrative expenses for 2004 were $194.8
million compared to $101.0 million for 2003, reflecting an increase of $93.8
million. 2004 includes $82.2 million of Elder-Beerman selling, general and
administrative expenses. Selling, general and administrative expenses for 2004
include a $1.7 million charge associated with the closing of the Company's
Pottstown, Pennsylvania store, while 2003 selling, general and administrative
expenses reflect a $0.9 million gain on the sale of the Company's Harrisburg,
Pennsylvania distribution center. In addition, selling, general and
administrative expenses increased due to integration costs and increases in
advertising, professional services related to new corporate governance
requirements, real estate taxes and rent, and financing fee expense related to
the accounts receivable securitization facility. The current year expense rate
increased 1.2 percentage points to 35.5% of net sales, compared to 34.3% for the
same period last year.
Depreciation and amortization in 2004 was $13.8 million, an increase of
$3.9 million compared to $9.9 million in 2003. The increase primarily reflects
the inclusion of Elder-Beerman expense.
LOSS FROM OPERATIONS. Loss from operations in 2004 was $2.9 million, or
0.5% of net sales, compared to $0.8 million, or 0.3% of net sales, in 2003.
INTEREST EXPENSE, NET. Net interest expense was $6.6 million, or 1.2%
of net sales, in 2004 compared to $2.5 million, or 0.9% of net sales, in 2003.
The $4.0 million increase reflects additional interest expense of $2.4 million
on borrowings required to fund the acquisition and operations of Elder-Beerman
and increased deferred financing fees expense of $1.7 million associated with
the acquisition financing.
INCOME TAX BENEFIT. The effective tax rate increased 0.5 percentage
point to 37.5% in 2004 from 37.0% in 2003.
NET LOSS. Net loss in 2004 was $5.9 million, or 1.1% of net sales,
compared to $2.1 million, or 0.7% of net sales, in 2003.
15
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 July 31, 2004 and August 2,
2003. 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 following table summarizes material measures of the Company's
liquidity and capital resources:
July 31, August 2,
(Dollars in millions) 2004 2003
- --------------------- ---- ----
Working capital $ 230.1 $ 140.0
Current ratio 2.27:1 2.61:1
Debt to total capitalization (debt plus equity) 0.43:1 0.23:1
Unused availability under revolving credit facility $ 51.0 $ 58.4
The Company's primary sources of working capital are cash flows from
operations, borrowings under its revolving credit facility and proceeds from its
accounts receivable securitization facility. The Company had working capital of
$230.1 million and $140.0 million at July 31, 2004 and August 2, 2003,
respectively. The increase in working capital for fiscal 2004 as compared to the
prior year principally reflects working capital associated with Elder-Beerman
operations.
The debt to total capitalization ratio increased in fiscal 2004 over
fiscal 2003, reflecting long-term debt required to fund the acquisition and
operation of Elder-Beerman.
16
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the twenty-six weeks ended July 31, 2004, net cash provided by
operating activities was $2.1 million compared to $6.4 million for the
comparable period last year. The reduction in net cash provided by operating
activities reflects a larger net loss and increases in inventory and income tax
payments -- partially offset by a decrease in accounts receivable (net of
transfers to the accounts receivable facility).
Net cash used in investing activities was $13.2 million for the
twenty-six weeks ended July 31, 2004 compared to $2.8 million for the comparable
period last year. The increase in net cash used in investing activities reflects
an increase in capital expenditures of $9.1 million over last year. Prior year
cash flows include $1.3 million from the sale of the Harrisburg distribution
center.
Net cash provided by financing activities was $6.7 million for the
twenty-six weeks ended July 31, 2004 compared to a net cash outflow of $5.6
million for the comparable period of 2003. The increase in net cash provided by
financing activities principally reflects an increase in borrowings on the
revolving credit facility, funds received from the exercise of stock options and
increased bank overdraft balances.
In October 2003, the Company amended and restated its revolving credit
facility agreement. In June 2004 the Company reduced, by $6.0 million, the
related term loan. The current agreement provides a line of credit of $300.0
million and a term loan in the amount of $19.0 million. The current agreement
expires in October 2007. The interest rate, based on LIBOR or an index rate plus
an applicable margin, and fee charges are determined by a formula based upon the
Company's borrowing availability. Total borrowings under the revolving credit
facility agreement were $159.5 million and $152.0 million at July 31, 2004 and
January 31, 2004, respectively.
In January 2004, the Company entered into a new off-balance sheet
accounts receivable facility. This agreement has a funding limit of $250.0
million and expires in October 2004. Availability under the accounts receivable
facility is calculated based on the balance and performance of the Company's
proprietary credit card portfolio. At July 31, 2004 and January 31, 2004,
accounts receivable totaling $211.5 million and $228.5 million, respectively,
were sold under the accounts receivable facility.
Aside from planned capital expenditures, the Company's primary cash
requirements will be to service debt and finance working capital increases
during peak selling seasons.
The Company is exposed to market risk associated with changes in
interest rates. To provide some protection against potential rate increases
associated with its variable-rate facilities, the Company has entered into a
derivative financial transaction in the form of an interest rate swap. This
interest rate swap, used to hedge the underlying variable-rate facilities,
matures in February 2006.
The accounts receivable facility and revolving credit facility
agreements expire in October 2004 and October 2007, respectively. The Company
anticipates that it will be able to renew or replace these agreements with
agreements of substantially comparable terms. Failure to renew or replace these
agreements on substantially comparable terms would have a material adverse
effect on the Company's financial condition.
17
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company paid a quarterly cash dividend of $0.025 per share on Class
A Common Stock and Common Stock to shareholders on each of April 15, 2004 and
July 15, 2004 for shareholders of record as of April 1, 2004 and July 1, 2004,
respectively. Additionally, the Company declared a quarterly cash dividend of
$0.025 per share, payable October 15, 2004 to shareholders of record as of
October 1, 2004. The Company's Board of Directors will consider dividends in
subsequent periods as it deems appropriate.
The Company currently anticipates its capital expenditures for fiscal
2004 will total approximately $32.0 million. Of this amount, approximately $18.2
million is budgeted for the integration of the Elder-Beerman point-of-sale
system into Bon-Ton stores and information system enhancements. The remainder
will be directed towards remodeling some of the Company's existing stores and
general operations. No new stores are planned for fiscal 2004.
The Company anticipates its cash flows from operations, supplemented by
borrowings under its revolving credit facility and proceeds from its accounts
receivable securitization facility, will be sufficient to satisfy its operating
cash requirements for at least the next twelve months.
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 industry. 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.
OFF-BALANCE SHEET ARRANGEMENTS
The Company engages in securitization activities involving the
Company's proprietary credit card portfolio as a source of funding. Off-balance
sheet proprietary credit card securitizations provide a significant portion of
the Company's funding and are one of its primary sources of liquidity. At July
31, 2004, off-balance sheet securitized receivables represented 54% of the
Company's 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" ("SFAS No. 140"), 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. Based on the term of the securitization agreement (less than one year)
and the fact that the credit card receivables that comprise the retained
interests are short-term in nature, the Company has classified its retained
interests as a current asset.
18
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 $250.0
million accounts receivable securitization facility. The unrelated
third-parties, referred to as the conduit, have purchased a $211.5 million
interest in the accounts receivable under this facility at July 31, 2004. 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
$211.5 million at July 31, 2004 and $228.5 million at January 31, 2004. Upon the
facility's termination, the conduit would be entitled to all cash collections on
the accounts receivable until its investment ($211.5 million at July 31, 2004)
and accrued discounts are repaid. Accordingly, upon termination of the facility,
the assets of the facility 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 accounts receivable 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 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 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 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
19
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 Company recognizes revenue at either the point-of-sale or at the
time merchandise is shipped to the customer. Sales are recorded net of returns
and exclude sales tax. A reserve is provided for estimated merchandise returns
based on experience and is reflected as an adjustment to sales and costs of
merchandise sold.
The allowance for doubtful accounts and sales returns was $7.1 million
and $6.3 million as of July 31, 2004 and January 31, 2004, 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 quantities on hand and records
an adjustment 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 quantities on-hand. Additionally, estimates of future
merchandise demand may prove to be inaccurate, in which case the Company may
have understated or overstated the adjustment 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
20
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 recognize additional operating income
when such inventory is sold. 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.
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 to net realizable value (NRV). These
reductions totaled $16.1 million at July 31, 2004. Inherent in these NRV
assessments 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, operating income would ultimately be impacted.
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 generally 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. The Company reviews
advertising allowances received from each vendor to ensure reimbursements are
for specific, incremental and identifiable advertising costs incurred by the
Company to sell the vendor's products. If a vendor reimbursement exceeds the
costs incurred by the Company, the excess reimbursement is recorded as a
reduction of cost purchases from the vendor and reflected as a reduction of
costs of merchandise sold when the related merchandise is sold. All other
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 the
valuation allowance recorded against net deferred tax assets. The process
involves the Company summarizing temporary differences resulting from differing
treatment of items (e.g., allowance for doubtful accounts) 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
21
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
recovered from future taxable income or tax carry-back availability and, to the
extent the Company believes recovery is not 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.
Pursuant to the acquisition of Elder-Beerman, the Company acquired
federal and state net operating loss carry-forwards of approximately $77.8
million and $153.2 million, respectively, which are available to offset future
federal and state taxable income -- subject to certain limitations imposed by
Section 382 of the Internal Revenue Code ("Section 382"). These net operating
losses will expire at various dates beginning in fiscal 2009 through fiscal
2022. In addition, pursuant to the acquisition of Elder-Beerman, the Company
acquired alternative minimum tax credits and general business credits in the
amount of $2.1 million and $0.6 million, respectively. Both credits are also
subject to the limitations imposed by Section 382. The alternative minimum tax
credits are available indefinitely, and the general business credits expire
beginning in fiscal 2007 through fiscal 2008.
Net deferred tax assets were $25.8 million and $33.1 million as of July
31, 2004 and January 31, 2004, respectively. Pursuant to the acquisition of
Elder-Beerman, the Company recorded $83.2 million of net deferred tax assets.
The Company's ability to utilize these assets will be limited by Section 382. As
part of preliminary purchase accounting, a valuation allowance of $46.7 million
was established against these deferred tax assets. As of July 31, 2004, $9.5
million and $37.2 million of this valuation allowance has been classified as
current and long-term, respectively, pursuant to requirements of SFAS No. 109,
"Accounting for Income Taxes." In assessing the realizability of the deferred
tax assets, the Company considered whether it is more-likely-than-not that the
deferred taxes assets, or a portion thereof, will not be realized. The Company
considered the scheduled reversal of deferred tax liabilities, projected future
taxable income, tax planning strategies, and the limitations of Section 382 in
making this assessment. As a result, the Company concluded during fiscal 2003
that a valuation allowance against a portion of the net deferred tax assets was
appropriate. 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 legislative 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 $160.7 million and $160.9
million as of July 31, 2004 and January 31, 2004, respectively.
22
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 future 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 assets. 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. Given the seasonality of operations,
impairment is not conclusive, in many cases, until after the holiday period in
the fourth quarter is concluded.
Newly opened stores may take 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.
Additionally, the Company has identified assets in various markets 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 improvement efforts prove unsuccessful or economic
conditions change, the carrying value of these assets may ultimately become
impaired.
The Company is in the process of refining its preliminary purchase
accounting for long-lived assets acquired in the acquisition of Elder-Beerman.
The Company is in the process of obtaining updated fair value valuations for
certain assets acquired.
GOODWILL AND INTANGIBLE ASSETS
Goodwill was $3.0 million as of July 31, 2004 and January 31, 2004.
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
$6.0 million and $6.2 million as of July 31, 2004 and January 31, 2004,
respectively.
23
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
As a result of the Company's adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"), the Company now reviews goodwill and other intangible assets that have
indefinite lives for impairment at least annually or 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 the business. 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 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. BTRLP is a wholly owned subsidiary of
the Company. BTRLP may sell accounts receivable with a purchase price up to
$250.0 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 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 (direct and indirect) and interest rates. To the extent
actual results differ from those estimates, the impact is recognized as a
component of 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
24
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 $2.2 million and $1.9
million for the thirteen weeks ended July 31, 2004 and August 2, 2003,
respectively and $5.2 million and $4.4 million for the twenty-six weeks ended
July 31, 2004 and August 2, 2003, respectively. The increased income in 2004
relative to the prior year period was principally due to increased sales of
receivables through the Facility, which now includes Elder-Beerman receivables,
partially offset by an increase in the net credit loss rate.
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 the retail industry 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 January 31, 2004.
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 2003 Annual Report, have changed materially since the Company's disclosure
in its 2003 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure 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.
Changes in Internal Controls over Financial Reporting
Other than as described below, there has been no change in the
Company's internal control over financial reporting 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 is currently in the process of integrating the operations
of Elder-Beerman. As part of the integration, the Company is changing the
functional areas or locations responsible for certain transaction processing and
certain processes over financial data collection, consolidation and reporting.
As a result, the Company is changing the design and operation of certain
elements of its internal control over financial reporting. The Company believes
it is taking the necessary steps to monitor and maintain appropriate internal
control over financial reporting during this period of change.
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 2003 Annual Report.
26
THE BON-TON STORES, INC. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On July 21, 2004, 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: 38,842,861
Withhold Authority: 1,688,268
Robert B. Bank For: 40,478,112
Withhold Authority: 53,017
Philip M. Browne For: 40,478,112
Withhold Authority: 53,017
Shirley A. Dawe For: 40,457,112
Withhold Authority: 74,017
Marsha M. Everton For: 38,740,692
Withhold Authority: 1,790,437
Michael L. Gleim For: 38,728,010
Withhold Authority: 1,803,119
Robert E. Salerno For: 40,478,112
Withhold Authority: 53,017
Thomas W. Wolf For: 38,864,098
Withhold Authority: 1,667,031
2. The holders of 40,230,713 shares voted in favor of, the holders of 295,631
shares voted against and the holders of 4,785 shares abstained with respect
to ratification of the appointment of KPMG LLP as independent auditor of
The Bon-Ton Stores, Inc.
3. The holders of 40,275,795 shares voted in favor of, the holders of 193,034
shares voted against and the holders of 62,298 shares abstained with
respect to approval of The Bon-Ton Stores, Inc. Cash Bonus Plan.
4. The holders of 37,038,671 shares voted in favor of, the holders of 635,676
shares voted against, the holders of 64,896 shares abstained and there
were 2,320,191 broker non-votes with respect to the amendment of
The Bon-Ton Stores, Inc. 2000 Stock Incentive Plan.
27
THE BON-TON STORES, INC. AND SUBSIDIARIES
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
- ------- ----------- -----------------
10.1 Employment Agreement With Byron L. Bergren Filed herein.
31.1 Certification of Byron L. Bergren Filed herein.
31.2 Certification of James H. Baireuther Filed herein.
32.1 Certifications Pursuant to Rules 13a-14(b) and 15d-14(b)
of the Securities Exchange Act of 1934. Filed herein.
99.1 The Bon-Ton Stores, Inc. Amended and Restated 2000 Stock
Incentive Plan Filed herein.
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 10, 2004 BY: /s/ Byron L. Bergren
--------------------------
Byron L. Bergren
President and
Chief Executive Officer
DATE: September 10, 2004 BY: /s/ James H. Baireuther
--------------------------
James H. Baireuther
Vice Chairman, Chief
Administrative Officer and
Chief Financial Officer
28