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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 October 30, 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 December 10, 2004 there were 13,145,544 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) October 30, January 31,
(Unaudited) 2004 2004
- ---------------------------------------------- ----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 18,636 $ 19,890
Retained interest in trade receivables and other, net of allowance for doubtful accounts and
sales returns of $6,733 and $6,299 at October 30, 2004 and January 31, 2004, respectively 82,753 104,679
Merchandise inventories 419,199 257,372
Prepaid expenses and other current assets 30,991 14,683
Deferred income taxes 4,568 8,825
--------- ---------
Total current assets 556,147 405,449
--------- ---------
Property, fixtures and equipment at cost, net of accumulated depreciation and amortization
of $182,154 and $165,438 at October 30, 2004 and January 31, 2004, respectively 155,967 160,923
Deferred income taxes 25,969 24,252
Goodwill and intangible assets, net of accumulated amortization of $5,101 and $4,672
at October 30, 2004 and January 31, 2004, respectively 12,983 9,316
Other assets 8,447 11,905
--------- ---------
TOTAL ASSETS $ 759,513 $ 611,845
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 185,174 $ 88,118
Accrued payroll and benefits 22,635 36,344
Accrued expenses 42,063 42,519
Current maturities of long-term debt 854 1,113
Current maturities of obligations under capital leases 913 1,797
Income taxes payable - 13,531
--------- ---------
Total current liabilities 251,639 183,422
--------- ---------
Long-term debt, less current maturities 262,054 170,703
Obligations under capital leases, less current maturities 365 1,013
Other long-term liabilities 10,040 17,223
--------- ---------
TOTAL LIABILITIES 524,098 372,361
--------- ---------
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 13,476,344 and 13,055,740 at October 30, 2004 and January 31, 2004, respectively 135 131
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 October 30, 2004 and January 31,
2004, respectively 30 30
Treasury stock, at cost - shares of 337,800 at October 30, 2004 and January 31, 2004 (1,387) (1,387)
Additional paid-in-capital 118,283 114,687
Deferred compensation (544) (136)
Accumulated other comprehensive loss (676) (1,298)
Retained earnings 119,574 127,457
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 235,415 239,484
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 759,513 $ 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 THIRTY-NINE
WEEKS ENDED WEEKS ENDED
---------------------------- ----------------------------
(In thousands except share and per share data) October 30, November 1, October 30, November 1,
(Unaudited) 2004 2003 2004 2003
- --------------------------------------------- ------------ ------------ ------------ ------------
Net sales $ 297,798 $ 180,417 $ 847,079 $ 474,656
Other income, net 906 619 2,942 1,709
------------ ------------ ------------ ------------
298,704 181,036 850,021 476,365
------------ ------------ ------------ ------------
Costs and expenses:
Costs of merchandise sold 185,055 113,313 530,723 298,551
Selling, general and administrative 105,645 61,690 300,430 162,664
Depreciation and amortization 5,707 7,330 19,505 17,217
------------ ------------ ------------ ------------
Income (loss) from operations 2,297 (1,297) (637) (2,067)
Interest expense, net 3,489 1,437 10,057 3,983
------------ ------------ ------------ ------------
Loss before income taxes (1,192) (2,734) (10,694) (6,050)
Income tax provision (benefit) (447) (1,032) (4,010) (2,258)
------------ ------------ ------------ ------------
NET LOSS $ (745) $ (1,702) $ (6,684) $ (3,792)
============ ============ ============ ============
PER SHARE AMOUNTS -
BASIC:
Net loss $ (0.05) $ (0.11) $ (0.42) $ (0.25)
============ ============ ============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,999,908 15,062,566 15,887,321 15,031,138
DILUTED:
Net loss $ (0.05) $ (0.11) $ (0.42) $ (0.25)
============ ============ ============ ============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,999,908 15,062,566 15,887,321 15,031,138
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) October 30, November 1,
(Unaudited) 2004 2003
- -------------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (6,684) $ (3,792)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 19,505 17,217
Bad debt provision 2,369 1,413
Net transfers of receivables to accounts receivable facility (7,500) (17,600)
Other 3,990 7,003
Changes in operating assets and liabilities, net (85,596) (12,217)
--------- ---------
Net cash used in operating activities (73,916) (7,976)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (24,065) (9,444)
Acquisition, net of cash acquired - (97,485)
Proceeds from sale of property, fixtures and equipment 12 1,310
--------- ---------
Net cash used in investing activities (24,053) (105,619)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (372,992) (188,947)
Proceeds from issuance of long-term debt 462,553 301,192
Issuance of common stock - 6,500
Common stock repurchased - (254)
Cash dividends paid (1,197) (757)
Stock options exercised 2,101 387
Deferred financing costs paid (448) (7,839)
Increase in bank overdraft balances 6,698 8,758
--------- ---------
Net cash provided by financing activities 96,715 119,040
Net (decrease) increase in cash and cash equivalents (1,254) 5,445
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,890 16,796
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 18,636 $ 22,241
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 7,014 $ 5,649
Net income taxes paid (refunded) $ 14,214 $ (5,870)
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 loss if the
fair-value-based method had been applied to all unvested awards in each period:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
----------------------- -------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ---------- ----------- ----------
Net loss, as reported $ (745) $ (1,702) $ (6,684) $ (3,792)
Deduct: Total stock-option-based
employee compensation expense
determined under fair-value-based methods
for all awards, net of related tax effects (97) (83) (185) (249)
--------- --------- --------- ---------
Pro forma net loss $ (842) $ (1,785) $ (6,869) $ (4,041)
========= ========= ========= =========
Loss per share
Basic As reported $ (0.05) $ (0.11) $ (0.42) $ (0.25)
Pro forma (0.05) (0.12) (0.43) (0.27)
Diluted As reported $ (0.05) $ (0.11) $ (0.42) $ (0.25)
Pro forma (0.05) (0.12) (0.43) (0.27)
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.
On March 31, 2004, the FASB issued its exposure draft, "Share-Based
Payment," which is a proposed amendment to SFAS No. 123. Generally, the approach
in the exposure draft is similar to the approach described in SFAS No. 123;
however, the exposure draft would require all share-based payments to employees,
including grants of employee stock options, to be recognized in the Company's
income statement based on their fair values. There are a number of issues that
are not resolved in the exposure draft, including the final methodology for
calculating fair value. The FASB expects to issue a final standard late in 2004
that would be effective for interim and annual periods beginning after June 15,
2005. The pro forma impact of the adoption of SFAS No. 123 on the Company's
historical financial statements is included in these notes to consolidated
financial statements. The Company expects to continue to grant stock-based
compensation to employees. The impact of the new standard, when and if issued,
may have a material adverse impact on our future results 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)
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:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
-------------------------- -------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Basic calculation
Effect of dilutive shares --- 15,999,908 15,062,566 15,887,321 15,031,138
Restricted Shares - - - -
Options - - - -
---------- ---------- ---------- ----------
Diluted calculation 15,999,908 15,062,566 15,887,321 15,031,138
========== ========== ========== ==========
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
----------------------- ------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Antidilutive shares ---
Restricted Shares 90,348 150,529 76,949 142,098
Options 559,812 920,382 609,459 937,057
Certain securities were excluded from the computation of dilutive shares
due to the Company's net loss position in the thirteen weeks and thirty-nine
weeks ended October 30, 2004 and November 1, 2003. The following table shows the
approximate effect of dilutive securities had the Company reported a profit for
these periods:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- ------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
---------- ----------- ----------- -----------
Effect of dilutive securities ---
Restricted Shares 65,229 121,629 63,492 104,167
Options 219,724 329,366 282,944 184,309
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. Pre-tax charges related to this store closure of $1,721 and $4, reflected
within selling, general and administrative expenses, were recorded during the
thirteen weeks ended July 31, 2004 and October 30, 2004, respectively.
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 costs relate to severance and logistics. Following is a
reconciliation of accruals related to this store closure:
Balance at
Fiscal 2004 Fiscal 2004 October 30,
Charges Payments 2004
----------- ----------- -----------
Lease termination fee $ 1,600 $(1,600) $ -
Associate termination benefits 29 (29) -
Other closing costs 96 (96) -
------- ------- ---------
Total $ 1,725 $(1,725) $ -
======= ======= =========
5. ACQUISITION PURCHASE ACCOUNTING
Effective October 24, 2003, the Company acquired The Elder-Beerman Stores
Corp. ("Elder-Beerman"). During the thirteen weeks ended October 30, 2004, the
Company made its final purchase accounting allocations in accordance with SFAS
No. 141, "Business Combinations." The Company obtained third party appraisals in
order to determine the valuation of lease interests, trademarks and customer
lists, which resulted in an increase in intangible assets of $4,096. There was a
reduction in other assets of $1,699 related primarily to the write-off of
capitalized costs relative to certain Elder-Beerman leases. Accrued expenses and
other long-term liabilities decreased by $6,924, primarily due to the
elimination of deferred rent associated with certain Elder-Beerman leases.
Property, fixtures and equipment decreased by $12,101, largely as a result of
the impact of the other final purchase price allocation adjustments based on the
negative goodwill associated with the Elder-Beerman acquisition. In addition,
deferred income tax assets increased by $2,429 based on the tax effect of the
final allocation adjustments noted above.
Intangible assets of $4,096 are comprised of the following items: Lease
interests that relate to below-market-rate leases of $3,494 and trademarks and
customer lists totaling $602. The lease interests, trademarks and customer lists
were assigned amortization lives of five to twenty years, three years and three
years, respectively.
8
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
6. INTEGRATION ACTIVITIES
In connection with the acquisition of Elder-Beerman, 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 the
terminated leases will be paid over the remaining contract periods (through
2030). Other contract terminations have been fully paid as of October 30, 2004.
Liabilities recognized in connection with the acquisition and integration
activity to date are as follows:
Involuntary Lease and
Termination Employee Other Contract
Benefits Relocation Termination Total
----------- ---------- -------------- --------
Liability established in preliminary
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
Final purchase accounting
adjustments (411) 290 - (121)
Payments during fiscal 2004 (3,277) (1,435) (1,876) (6,588)
-------- -------- -------- --------
Balance at October 30, 2004 $ 1,883 $ 466 $ 1,177 $ 3,526
======== ======== ======== ========
7. 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.
9
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
As of October 30, 2004 and January 31, 2004, credit card receivables were
sold under the securitization agreement in the amount of $220,988 and $228,488,
respectively, and the Company had subordinated interests of $79,594 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 October 30, 2004 and January 31, 2004 included restricted cash
of $5,303 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 $2,070 and $1,897 on
securitization of credit card receivables during the thirteen weeks ended
October 30, 2004 and November 1, 2003, respectively and $7,248 and $6,315 during
the thirty-nine weeks ended October 30, 2004 and November 1, 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 $1,078 and $666 for the
thirteen weeks ended October 30, 2004 and November 1, 2003, respectively and
$3,212 and $2,043 for the thirty-nine weeks ended October 30, 2004 and November
1, 2003, respectively. As of October 30, 2004, $8,772 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 $3,474 and $1,995 for the
thirteen weeks ended October 30, 2004 and November 1, 2003, respectively and
$10,372 and $5,713 for the thirty-nine weeks ended October 30, 2004 and November
1, 2003, respectively.
10
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
8. COMPREHENSIVE LOSS
Comprehensive loss was determined as follows:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
-------------------------- --------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net loss $ (745) $(1,702) $(6,684) $(3,792)
Other comprehensive income (loss):
Cash flow hedge derivative income
(loss), net of tax 100 (120) 622 437
------- ------- ------- -------
Comprehensive loss $ (645) $(1,822) $(6,062) $(3,355)
======= ======= ======= =======
9. 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 thirty-nine weeks ended October 30,
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
using the cost method.
10. SUBSEQUENT EVENTS
On December 1, 2004, the Company announced a quarterly cash dividend of
$0.025 per share on Class A Common Stock and Common Stock, payable January 15,
2005 to shareholders of record as of January 1, 2005.
11
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 "third
quarter of 2004" and "third quarter of 2003" are to the thirteen-week fiscal
periods ended October 30, 2004 and November 1, 2003, respectively, of The
Bon-Ton Stores, Inc. (the "Company"). All references to "fiscal 2004" and
"fiscal 2003" are to the twelve months ending January 29, 2005 and January 31,
2004, respectively.
OVERVIEW
The Company is a traditional department store retailer with a 106-year
history of providing 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 thirty-nine weeks ended October 30, 2004, the Company's total sales
increased 78.5% to $847.1 million, including $393.5 million from the acquired
Elder-Beerman stores, compared to $474.7 million for the same period last year.
The thirty-nine weeks of 2003 included sales of $15.3 million for the
Elder-Beerman stores during the nine-day period from October 24, 2003 through
November 1, 2003. Comparable store sales during the thirty-nine weeks ended
October 30, 2004, which do not include Elder-Beerman stores, decreased 1.9% from
the comparable period in fiscal 2003.
The retail industry is highly competitive, as evidenced by the Company's
comparable store sales decreases during the first three quarters of fiscal 2004.
The Company anticipates these competitive pressures and challenges will continue
in the future. As a result, the Company plans to continue its highly promotional
posture and emphasis on offering a wide range of value. 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 three quarters of fiscal 2004 were positively impacted by synergies
realized which exceed 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
12
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
improvements. As a result of the acquisition, the Company has increased its debt
levels and, accordingly, its exposure to interest rate fluctuations.
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.
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 (components may not add or
subtract to totals due to rounding):
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
---------------------------- ---------------------------
October 30, November 1, October 30, November 1,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income, net 0.3 0.3 0.3 0.4
----- ----- ----- -----
100.3 100.3 100.3 100.4
----- ----- ----- -----
Costs and expenses:
Costs of merchandise sold 62.1 62.8 62.7 62.9
Selling, general and administrative 35.5 34.2 35.5 34.3
Depreciation and amortization 1.9 4.1 2.3 3.6
----- ----- ----- -----
Income (loss) from operations 0.8 (0.7) (0.1) (0.4)
Interest expense, net 1.2 0.8 1.2 0.8
----- ----- ----- -----
Loss before income taxes (0.4) (1.5) (1.3) (1.3)
Income tax provision (benefit) (0.2) (0.6) (0.5) (0.5)
----- ----- ----- -----
Net loss (0.3)% (0.9)% (0.8)% (0.8)%
===== ===== ===== =====
THIRTEEN WEEKS ENDED OCTOBER 30, 2004 COMPARED TO THIRTEEN WEEKS ENDED NOVEMBER
1, 2003
NET SALES. Net sales for the third quarter of 2004 were $297.8 million,
reflecting an increase of $117.4 million, or 65.1%, from the same period last
year. The third quarter of 2004 includes net sales of $137.7 million generated
by the acquired Elder-Beerman stores. The third quarter of 2003 included net
sales of $15.3 million for the Elder-Beerman stores during the nine-day period
from October 24, 2003 through November 1, 2003. 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 3.1%
in the third quarter of 2004.
Business families recording comparable store sales increases in the third
quarter of 2004 were Home, 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 sales growth; furniture
galleries
13
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
were opened in five Bon-Ton stores in the second quarter of 2004. In addition,
Home continued to benefit from products added to the assortment in the first
quarter of 2004. Cosmetics continued to benefit from a new product launch that
occurred in the first quarter of 2004. Customers responded favorably to the
Company's fall offerings in Women's Clothing (Misses Sportswear). The weakest
categories were in apparel: Women's Clothing (Coats and Dresses), Men's, Juniors
and Children's. The Company remains focused on product differentiation,
appropriate levels of key items and an aggressive marketing campaign for the
holiday selling season.
Elder-Beerman sales are not included in the Company's reported comparable
store sales. The following is provided for informational purposes only:
Elder-Beerman comparable store sales for the thirteen weeks ended October 30,
2004 decreased 4.8% and, for Elder-Beerman and Bon-Ton combined, comparable
store sales for the thirteen weeks ended October 30, 2004 decreased 3.9%.
OTHER INCOME, NET. Net other income, principally income from leased
departments, was $0.9 million, or 0.3% of net sales, in the third quarter of
2004 compared to $0.6 million, or 0.3% of net sales, in the third quarter of
2003. The increase of $0.3 million primarily reflects income from the leased
departments in the Elder-Beerman stores.
COSTS AND EXPENSES. Gross margin was $112.7 million for the third quarter
of 2004 compared to $67.1 million for the same period last year, an increase of
$45.6 million. Gross margin as a percentage of net sales increased 0.7
percentage point to 37.9% for the third quarter of 2004 from 37.2% for the same
period last year. The increase in gross margin rate resulted primarily from an
increase in the cumulative markup percentage. The increase in gross margin
dollars for the third quarter of 2004 was due to the inclusion of Elder-Beerman
operations.
Selling, general and administrative expenses for the third quarter of 2004
were $105.6 million compared to $61.7 million for the third quarter of 2003,
reflecting an increase of $44.0 million. The third quarter of 2004 included
$39.4 million of incremental Elder-Beerman selling, general and administrative
expenses. Selling, general and administrative expenses increased due to
integration costs, professional services related to new corporate governance
requirements, and increases in advertising and expenses related to the accounts
receivable securitization facility. The current year expense rate increased 1.3
percentage points to 35.5% of net sales, compared to 34.2% for the same period
last year.
Depreciation and amortization in the third quarter of 2004 was $5.7
million, a decrease of $1.6 million compared to $7.3 million in the third
quarter of 2003. This decrease reflects an asset impairment charge of $2.3
million recorded in the third quarter of 2003 for duplicate information systems,
partially offset by the depreciation on the acquired Elder-Beerman assets and
recent capital expenditures.
INCOME (LOSS) FROM OPERATIONS. Income from operations in the third quarter
of 2004 was $2.3 million, or 0.8% of net sales, compared to a loss of $1.3
million, or 0.7% of net sales, in the third quarter of 2003.
14
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 $3.5 million, or 1.2% of
net sales, in the third quarter of 2004 compared to $1.4 million, or 0.8% of net
sales, in the third quarter of 2003. The $2.1 million increase primarily
reflects additional interest expense of $1.6 million on borrowings required to
fund the acquisition and operations of Elder-Beerman and increased financing
fees expense of $0.4 million associated with the acquisition financing.
INCOME TAX PROVISION (BENEFIT). The effective tax rate decreased 0.2
percentage point to 37.5% in the third quarter of 2004 from 37.7% in the third
quarter of 2003.
NET LOSS. Net loss in the third quarter of 2004 was $0.7 million, or 0.3%
of net sales, compared to $1.7 million, or 0.9% of net sales, in the third
quarter of 2003.
THIRTY-NINE WEEKS ENDED OCTOBER 30, 2004 COMPARED TO THIRTY-NINE WEEKS ENDED
NOVEMBER 1, 2003
For purposes of the following discussions, all references to "2004" and
"2003" are to the Company's thirty-nine week periods ended October 30, 2004 and
November 1, 2003, respectively.
NET SALES. Net sales for 2004 were $847.1 million, reflecting an increase
of $372.4 million, or 78.5%, from the same period last year. 2004 included net
sales of $393.5 million generated by the acquired Elder-Beerman stores. 2003 net
sales included $15.3 million for the Elder-Beerman stores during the nine-day
period from October 24, 2003 through November 1, 2003. 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 1.9% in 2004.
Business families recording comparable store sales increases in 2004 were
Home, Cosmetics, Shoes, Women's Clothing (Misses Sportswear) and Accessories.
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 sales growth; furniture
galleries were opened in five Bon-Ton stores in 2004. In addition, Home
continued to benefit from products added to the assortment in the first quarter
of 2004. A new product launch in Cosmetics that occurred in the first quarter of
2004 continues to generate sales increases in that category. A change in
merchandise presentation in Shoes to an open sell, or self-serve, layout aided
that category in delivering sales increases. Customers responded favorably to
the Company's fall offerings in Women's Clothing (Misses Sportswear). Colorful,
trend-right merchandise in Accessories drove sales increases. The weakest
categories were in apparel: Women's Clothing (Dresses and Coats), Men's,
Junior's and Children's. The Company remains focused on product differentiation,
appropriate levels of key items and an aggressive marketing campaign for the
holiday selling season.
Elder-Beerman sales were not included in the Company's reported comparable
store sales. The following is provided for informational purposes only:
Elder-Beerman comparable store sales for 2004 decreased 3.4% and, for
Elder-Beerman and Bon-Ton combined, comparable store sales for 2004 decreased
2.6%.
15
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 $2.9 million, or 0.3% of net sales, in 2004 compared to $1.7
million, or 0.4% of net sales, in 2003. The increase of $1.2 million primarily
reflects income from the leased departments in the Elder-Beerman stores.
COSTS AND EXPENSES. Gross margin was $316.4 million for 2004 compared to
$176.1 million for the same period last year, an increase of $140.3 million.
Gross margin as a percentage of net sales increased 0.2 percentage point to
37.3% for 2004 from 37.1% for the same period last year. The increase in gross
margin rate resulted primarily from an increase in the cumulative markup
percentage, partially offset by the inclusion of Elder-Beerman sales at a lower
gross margin rate. The increase in gross margin dollars for 2004 was primarily
due to the inclusion of Elder-Beerman operations.
Selling, general and administrative expenses for 2004 were $300.4 million
compared to $162.7 million for 2003, reflecting an increase of $137.8 million.
2004 selling, general and administrative expenses included $121.6 million of
incremental Elder-Beerman expenses. Selling, general and administrative expenses
for 2004 included 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, 2004 selling, general
and administrative expenses increased over 2003 due to integration costs,
professional services related to new corporate governance requirements, and
increases in advertising and expenses 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 $19.5 million, an increase of
$2.3 million compared to $17.2 million in 2003. The increase primarily reflects
depreciation on the acquired Elder-Beerman assets and recent capital
expenditures, partially offset by an asset impairment charge of $2.3 million
recorded in the third quarter of 2003 for duplicate information systems.
LOSS FROM OPERATIONS. Loss from operations in 2004 was $0.6 million, or
0.1% of net sales, compared to $2.1 million, or 0.4% of net sales, in 2003.
INTEREST EXPENSE, NET. Net interest expense was $10.1 million, or 1.2% of
net sales, in 2004 compared to $4.0 million, or 0.8% of net sales, in 2003. The
$6.1 million increase primarily reflects additional interest expense of $3.9
million on borrowings required to fund the acquisition and operations of
Elder-Beerman and increased financing fees expense of $2.1 million associated
with the acquisition financing.
INCOME TAX PROVISION (BENEFIT). The effective tax rate increased 0.2
percentage point to 37.5% in 2004 from 37.3% in 2003.
NET LOSS. Net loss in 2004 was $6.7 million, or 0.8% of net sales,
compared to $3.8 million, or 0.8% of net sales, in 2003.
16
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 thirty-nine weeks ended October 30, 2004 and November 1,
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:
October 30, November 1,
(Dollars in millions) 2004 2003
- --------------------- ---- ----
Working capital $ 304.5 $ 269.4
Current ratio 2.21:1 1.77:1
Debt to total capitalization (debt plus equity) 0.53:1 0.60:1
Unused availability under revolving credit facility $ 58.6 $ 104.6
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
$304.5 million and $269.4 million at October 30, 2004 and November 1, 2003,
respectively. The increase in working capital for fiscal 2004 as compared to the
prior year principally reflects an increase in inventory and payment of accrued
benefit liabilities assumed in connection with the acquisition of Elder-Beerman.
The debt to total capitalization ratio decreased in fiscal 2004 from
fiscal 2003, reflecting the January 2004 conversion of Elder-Beerman's
on-balance-sheet accounts receivable facility to the consolidated,
off-balance-sheet accounts receivable securitization facility. For informational
purposes only, the fiscal 2003 debt to total capitalization ratio, restated to
reflect conversion of the Elder-Beerman accounts receivable facility to the
consolidated off-balance-sheet accounts receivable securitization facility, was
0.52:1.
17
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the thirty-nine weeks ended October 30, 2004, net cash used in
operating activities was $73.9 million compared to $8.0 million for the
comparable period last year. The increase in net cash used in operating
activities primarily reflects a larger net loss, increases in inventory and
income tax payments, and payment of accrued benefit liabilities assumed in
connection with the acquisition of Elder-Beerman. Prior year cash flows reflect
the net cash used in operating activities for only nine days of the acquired
Elder-Beerman operations.
Net cash used in investing activities was $24.1 million for the
thirty-nine weeks ended October 30, 2004 compared to $105.6 million for the
comparable period last year. Current year capital expenditures were $14.6
million higher than last year; 2003 capital expenditures reflect only nine days
of the acquired Elder-Beerman operations. Prior year expenditures include $97.5
million used for the acquisition of Elder-Beerman, partially offset by $1.3
million from the sale of the Harrisburg distribution center.
Net cash provided by financing activities was $96.7 million for the
thirty-nine weeks ended October 30, 2004 compared to $119.0 million for the
comparable period of 2003. The decrease in net cash provided by financing
activities principally reflects the 2004 conversion of Elder-Beerman's
on-balance-sheet accounts receivable facility to the consolidated,
off-balance-sheet accounts receivable securitization facility, partially offset
by an increase in borrowings on the revolving credit facility. Prior year cash
flows reflect only nine days of the acquired Elder-Beerman operations.
In October 2003, the Company amended and restated its revolving credit
facility agreement. The agreement provides a line of credit of $300.0 million
and provided a term loan in the amount of $25.0 million. In June 2004 the
Company reduced, to $19.0 million, the related term loan. The current agreement
expires in October 2007. The revolving credit facility 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. The term loan
interest rate is based on an index rate plus an applicable margin. Total
borrowings under the revolving credit facility agreement, inclusive of the term
loan, were $244.0 million and $152.0 million at October 30, 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
was scheduled to expire in October 2004. During October 2004, this agreement was
amended to extend the expiration date from October 2004 to October 2005.
Availability under the accounts receivable facility is calculated based on the
dollar balance and performance of the Company's proprietary credit card
portfolio. At October 30, 2004 and January 31, 2004, accounts receivable
totaling $221.0 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.
18
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 2005 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.
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, July
15, 2004 and October 15, 2004 for shareholders of record as of April 1, 2004,
July 1, 2004 and October 1, 2004, respectively. Additionally, the Company
declared a quarterly cash dividend of $0.025 per share, payable January 15, 2005
to shareholders of record as of January 1, 2005. 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 the remainder of 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.
19
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 October
30, 2004, off-balance sheet securitized receivables represented 45.7% 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.
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 $221.0 million
interest in the accounts receivable under this facility at October 30, 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
$221.0 million at October 30, 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 ($221.0 million at
October 30, 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.
20
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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 $6.7 million and
$6.3 million as of October 30, 2004 and January 31, 2004, respectively.
21
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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 October 30, 2004. Inherent in
22
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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.
In connection with the acquisition of Elder-Beerman, the Company acquired
federal and state net operating loss carry-forwards of approximately $75.9
million and $195.8 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.
23
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net deferred tax assets were $30.5 million and $33.1 million as of October
30, 2004 and January 31, 2004, respectively. Pursuant to the acquisition of
Elder-Beerman, the Company recorded $86.6 million of net deferred tax assets.
The Company's ability to utilize these assets will be limited by Section 382. As
part of purchase accounting, a valuation allowance of $47.7 million was
established against these deferred tax assets. As of October 30, 2004, $47.3 of
this valuation allowance remains; $7.6 million and $39.7 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 tax 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 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 $156.0 million and $160.9 million as of October 30,
2004 and January 31, 2004, 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 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.
24
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
GOODWILL AND INTANGIBLE ASSETS
Goodwill was $3.0 million as of October 30, 2004 and January 31, 2004.
Net intangible assets amounted to $10.0 million and $6.4 million as of
October 30, 2004 and January 31, 2004, respectively. Intangible assets include
lease interests that relate to below-market-rate leases assumed in store
acquisitions, which were adjusted to reflect fair market value. These leases
have average lives of twenty years. Intangible assets also include customer
lists and trademarks with amortization lives of three years.
As a result of the Company's adoption of SFAS 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. In addition, amortizable intangible assets are subject to
impairment testing and potential impairment losses to the extent that the
carrying values of these assets exceed their current fair values. If actual
results prove inconsistent with Company assumptions and judgments, the Company
could be exposed to a material impairment charge.
25
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 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 $2.1 million and $1.9
million for the thirteen weeks ended October 30, 2004 and November 1, 2003,
respectively and $7.2 million and $6.3 million for the thirty-nine weeks ended
October 30, 2004 and November 1, 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.
26
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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.
27
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.
28
THE BON-TON STORES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS
(a) The following exhibits are filed pursuant to the requirements of Item 601
of Regulation S-K:
Exhibit Description Document Location
- ------- ----------- -----------------
10.1 Credit Agreement Consent and Amendment No. 2 Filed herein.
10.2 Amendment No. 1 to Note Purchase Agreement Filed herein.
10.3 Credit Agreement Amendment No. 3 Filed herein.
10.4 Employment Agreement With Byron L. Bergren Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended July 31,
2004
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.
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 10, 2004 BY: /s/ Byron L. Bergren
---------------------------------
Byron L. Bergren
President and
Chief Executive Officer
DATE: December 10, 2004 BY: /s/ James H. Baireuther
----------------------------------
James H. Baireuther
Vice Chairman, Chief
Administrative Officer and
Chief Financial Officer
29