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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 April 30, 2005 Commission File Number
0-19517
THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA 17402
(717) 757-7660
INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of June 1, 2005 there were 13,698,351 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.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data) April 30, January 29,
(Unaudited) 2005 2005
- ---------------------------------------------- --------- -----------
Assets
Current assets:
Cash and cash equivalents $ 17,173 $ 25,222
Retained interest in trade receivables and other, net of allowance for doubtful accounts and
sales returns of $6,801 and $6,416 at April 30, 2005 and January 29, 2005, respectively 81,315 92,229
Merchandise inventories 331,841 294,152
Prepaid expenses and other current assets 17,043 14,483
Deferred income taxes 5,110 4,819
--------- -----------
Total current assets 452,482 430,905
--------- -----------
Property, fixtures and equipment at cost, net of accumulated depreciation and amortization
of $204,717 and $198,797 at April 30, 2005 and January 29, 2005, respectively 164,636 168,304
Deferred income taxes 25,081 24,908
Goodwill 2,965 2,965
Intangible assets, net of accumulated amortization of $5,620 and $5,364 at April 30, 2005
and January 29, 2005, respectively 9,144 9,400
Other assets 9,405 9,674
--------- -----------
TOTAL ASSETS $ 663,713 $ 646,156
========= ===========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 99,491 $ 101,151
Accrued payroll and benefits 17,070 25,361
Accrued expenses 42,671 46,646
Current maturities of long-term debt 891 869
Current maturities of obligations under capital leases 706 939
Income taxes payable - 4,817
--------- -----------
Total current liabilities 160,829 179,783
--------- -----------
Long-term debt, less current maturities 218,076 178,257
Obligations under capital leases, less current maturities 77 98
Other long-term liabilities 25,432 25,461
--------- -----------
TOTAL LIABILITIES 404,414 383,599
--------- -----------
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 14,023,151 and 13,568,977 at April 30, 2005 and January 29, 2005, respectively 140 136
Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued
and outstanding shares of 2,951,490 at April 30, 2005 and January 29, 2005 30 30
Treasury stock, at cost - shares of 337,800 at April 30, 2005 and January 29, 2005 (1,387) (1,387)
Additional paid-in-capital 126,901 119,284
Deferred compensation (7,304) (1,096)
Accumulated other comprehensive loss (270) (427)
Retained earnings 141,189 146,017
--------- -----------
TOTAL SHAREHOLDERS' EQUITY 259,299 262,557
--------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 663,713 $ 646,156
========= ===========
The accompanying notes are an integral part of these consolidated financial
statements.
2
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTEEN
WEEKS ENDED
-------------------------
(In thousands except share and per share data) April 30, May 1,
(Unaudited) 2005 2004
- ---------------------------------------------- ----------- -----------
Net sales $ 262,533 $ 265,083
Other income 2,158 1,978
----------- -----------
264,691 267,061
----------- -----------
Costs and expenses:
Costs of merchandise sold 167,415 169,660
Selling, general and administrative 94,664 96,111
Depreciation and amortization 6,433 6,969
----------- -----------
Loss from operations (3,821) (5,679)
Interest expense, net 3,306 3,204
----------- -----------
Loss before income taxes (7,127) (8,883)
Income tax benefit (2,715) (3,332)
----------- -----------
NET LOSS $ (4,412) $ (5,551)
=========== ===========
PER SHARE AMOUNTS -
BASIC:
Net loss $ (0.27) $ (0.35)
=========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 16,122,555 15,686,415
DILUTED:
Net loss $ (0.27) $ (0.35)
=========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 16,122,555 15,686,415
The accompanying notes are an integral part of these consolidated financial
statements.
3
THE BON-TON STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTEEN
WEEKS ENDED
---------------------
(In thousands) April 30, May 1,
(Unaudited) 2005 2004
- ------------- --------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,412) $ (5,551)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,433 6,969
Bad debt provision 778 750
Amortization of deferred financing costs 388 910
(Increase) decrease in deferred income tax assets (560) 4,197
Other 412 (400)
Net transfers of receivables to accounts receivable facility (17,200) (17,000)
Changes in operating assets and liabilities, net (28,546) 464
--------- --------
Net cash used in operating activities (42,707) (9,661)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (2,695) (4,219)
Proceeds from sale of property, fixtures and equipment 98 7
--------- --------
Net cash used in investing activities (2,597) (4,212)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (58,813) (76,854)
Proceeds from issuance of long-term debt 98,400 93,600
Cash dividends paid (415) (394)
Stock options exercised 558 1,782
Deferred financing costs paid (67) (181)
Decrease in bank overdraft balances (2,408) (4,405)
--------- --------
Net cash provided by financing activities 37,255 13,548
Net decrease in cash and cash equivalents (8,049) (325)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 25,222 19,890
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 17,173 $ 19,565
========= ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,296 $ 2,449
Net income taxes paid $ 5,074 $ 12,537
The accompanying notes are an integral part of these consolidated financial
statements.
4
THE BON-TON STORES, INC.
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 Bon-Ton Stores, Inc. conducts its
operations through one business segment.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the 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 unaudited 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 29, 2005.
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 Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), and related interpretations including
Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation," 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 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." 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:
5
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN
WEEKS ENDED
--------------------
April 30, May 1,
2005 2004
--------- --------
Net loss, as reported $ (4,412) $ (5,551)
Add: Total stock-based employee compensation included
in net loss, net of related tax effects 306 (19)
Deduct: Total stock-based employee compensation
expense determined under fair-value-based method
for all awards, net of related tax effects (439) (25)
--------- --------
Pro forma net loss $ (4,545) $ (5,595)
========= ========
Loss per share:
Basic As reported $ (0.27) $ (0.35)
Pro forma (0.28) (0.36)
Diluted As reported $ (0.27) $ (0.35)
Pro forma (0.28) (0.36)
The Company used the Black-Scholes option pricing model to calculate the
fair value of the stock options at the grant date.
6
THE BON-TON STORES, INC.
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
WEEKS ENDED
----------------------
April 30, May 1,
2005 2004
---------- ----------
Basic calculation 16,122,555 15,686,415
Effect of dilutive shares ---
Restricted Shares and Restricted Stock Units - -
Options - -
---------- ----------
Diluted calculation 16,122,555 15,686,415
========== ==========
The following securities were antidilutive and, therefore, were not
included in the computation of diluted earnings per share amounts for the
periods indicated:
THIRTEEN
WEEKS ENDED
--------------------
April 30, May 1,
2005 2004
--------- -------
Antidilutive shares ---
Restricted Shares and Restricted Stock Units 345,093 95,663
Options 554,509 772,563
Certain securities were excluded from the computation of dilutive shares
due to the Company's net loss position in the thirteen weeks ended April 30,
2005 and May 1, 2004. The following table shows the approximate effect of
dilutive securities had the Company reported a profit for these periods:
THIRTEEN
WEEKS ENDED
--------------------
April 30, May 1,
2005 2004
--------- -------
Effect of dilutive securities ---
Restricted Shares and Restricted Stock Units 98,318 85,880
Options 218,017 392,227
7
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
4. INTEGRATION ACTIVITIES
In connection with the acquisition of The Elder-Beerman Stores Corp. in
October 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 in fiscal 2005, while the liability for
terminated leases will be paid over the remaining contract periods (through
2030). Other contract terminations have been fully paid as of January 29, 2005.
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
----------- ---------- --------------- ----------
Balance at January 29, 2005 $ 1,521 $ 388 $ 1,158 $ 3,067
Less: Payments during fiscal 2005 (361) (178) (41) (580)
----------- ---------- --------------- ----------
Balance at April 30, 2005 $ 1,160 $ 210 $ 1,117 $ 2,487
=========== ========== =============== ==========
5. SALE OF RECEIVABLES
The Company securitizes its proprietary credit card portfolio through an
accounts receivable facility (the "Facility"). Under the Facility agreement,
which is contingent upon receivables meeting certain performance criteria, the
Company sells through The Bon-Ton Receivables Partnership, LP, 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
Facility 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 April 30, 2005 and January 29, 2005, credit card receivables sold
under the Facility agreement were in the amount of $226,800 and $244,000,
respectively, and the Company had subordinated interests of $75,762 and $82,576,
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 April 30, 2005 and January 29, 2005 included restricted cash of
$240 and $1,998, respectively, required pursuant to terms of the Company's
Facility agreement.
8
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
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 $2,233 and $2,977 on
securitization of credit card receivables during the thirteen weeks ended April
30, 2005 and May 1, 2004, 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 $1,140 and $1,077 for the
thirteen weeks ended April 30, 2005 and May 1, 2004, respectively. As of April
30, 2005, $7,719 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 $3,211 and $3,411 for the thirteen weeks ended April 30, 2005
and May 1, 2004, respectively.
6. COMPREHENSIVE LOSS
Comprehensive loss was determined as follows:
THIRTEEN
WEEKS ENDED
----------------------
April 30, May 1,
2005 2004
--------- ----------
Net loss $ (4,412) $ (5,551)
Other comprehensive income:
Cash flow hedge derivative income, net of tax 157 302
--------- ----------
Comprehensive loss $ (4,255) $ (5,249)
========= ==========
9
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
7. EMPLOYEE BENEFIT PLANS
The Company provides eligible employees with retirement benefits under a
401(k) salary reduction and retirement contribution plan (the "Plan"). The
Company made an annual contribution of $4,420 to the Plan during the thirteen
weeks ended April 30, 2005. The Company recorded expense of $760 and $608
related to the Plan during the thirteen weeks ended April 30, 2005 and May 1,
2004, respectively.
The Company provides a supplementary pension plan to certain key
executives and former employees. Net periodic benefit cost includes the
following components:
THIRTEEN
WEEKS ENDED
---------------------
April 30, May 1,
2005 2004
--------- ---------
Service cost $ 19 $ 53
Interest cost 54 62
--------- ---------
Net periodic benefit expense $ 73 $ 115
========= =========
As of April 30, 2005, contributions of $54 have been made. The Company
anticipates contributing an additional $182 to fund its supplementary pension
plan in fiscal 2005 for a total of $236.
8. FUTURE ACCOUNTING CHANGES
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment" ("SFAS
No. 123R"). SFAS No. 123R revises SFAS No. 123 and supersedes APB No. 25 and its
related implementation guidance. SFAS No. 123R will require compensation costs
related to share-based payment transactions to be recognized in the financial
statements (with limited exceptions). The amount of compensation cost will be
measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. The full impact of SFAS No.
123R adoption cannot be predicted at this time as it will depend on levels of
share-based payments granted in the future. However, had the Company adopted
SFAS No. 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net loss and loss per share within Note 2, "Stock-Based Compensation,"
above. SFAS No. 123R also requires that benefits of tax deductions in excess of
recognized compensation cost be reported as a financing cash flow, rather than
as an operating cash flow as currently required. This requirement will reduce
net operating cash flows and increase net financing cash flows in periods after
adoption. The Company is unable to estimate what those amounts will be in the
future as they depend on, among other things, when employees exercise stock
options. On April 14, 2005, the SEC announced a delay of the required
implementation timing of SFAS No. 123R to the beginning of the Company's fiscal
year commencing January 29, 2006.
10
THE BON-TON STORES, INC.
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 "first
quarter of 2005" and "first quarter of 2004" are to the thirteen-week fiscal
periods ended April 30, 2005 and May 1, 2004, respectively, of The Bon-Ton
Stores, Inc. (the "Company"). All references to "fiscal 2005" and "fiscal 2004"
are to the fifty-two weeks ending January 28, 2006 and ended January 29, 2005,
respectively.
OVERVIEW
The Company is a traditional department store retailer with a 107-year
history of providing quality merchandise to its customers in secondary markets.
In October 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. The Company currently 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 markets the Company serves.
The Company recorded a net loss of $4.4 million in the first quarter of
2005, an improvement of $1.1 million over a net loss of $5.6 million in the
first quarter of 2004.
The Company's net sales for the first quarter of 2005 were $262.5 million
as compared to $265.1 million in the first quarter of 2004, a decrease of 1.0%.
Comparable store sales for the first quarter of 2005 decreased 0.6%. The
Company's gross margin for the first quarter of 2005 decreased $0.3 million as
compared to the prior year period due to lower sales volume. The impact of lower
sales volume was partially offset by an improvement in gross margin rate of 0.2
percentage point, primarily reflecting a slight reduction in net markdowns.
Selling, general and administrative expenses for the first quarter of 2005 were
reduced by $1.4 million from the prior year period -- the result of an ongoing
review of store and corporate expenses associated with the combined
Elder-Beerman and Bon-Ton operations. Depreciation and amortization expense in
the first quarter of 2005 decreased by $0.5 million from the first quarter of
2004 due to the impact of final purchase price allocation adjustments recorded
in fiscal 2004.
The retail industry is highly competitive, as reflected in the Company's
comparable store sales in recent years. The Company anticipates that these
competitive pressures and challenges will continue. To address this difficult
sales environment, the Company is continuing its highly-promotional posture and
emphasis on offering a wide range of merchandise value. Additionally, expansion
of the Company's private labels and growth of exclusive brands support its
strategy of product differentiation and provide an opportunity for additional
sales at a higher gross margin.
The Company is focusing its efforts on maintaining a flat to
slightly-improved gross margin rate and managing assets, store expenses and
corporate expenses to improve its financial position. The Company continues to
explore meaningful ways to improve its ratio of expenses to sales. Execution of
these initiatives is necessary to achieve earnings growth in an anticipated
environment of flat-to-minimal comparable store sales growth.
11
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes changes in selected operating indicators of
the Company, illustrating the relationship of various income and expense items
to net sales for the respective periods presented (components may not add or
subtract to totals due to rounding):
THIRTEEN
WEEKS ENDED
------------------------
April 30, May 1,
2005 2004
--------- ---------
Net sales 100.0 % 100.0 %
Other income 0.8 0.7
----- -----
100.8 100.7
----- -----
Costs and expenses:
Costs of merchandise sold 63.8 64.0
Selling, general and administrative 36.1 36.3
Depreciation and amortization 2.5 2.6
----- -----
Loss from operations (1.5) (2.1)
Interest expense, net 1.3 1.2
----- -----
Loss before income taxes (2.7) (3.4)
Income tax benefit (1.0) (1.3)
----- -----
Net loss (1.7) % (2.1) %
===== =====
THIRTEEN WEEKS ENDED APRIL 30, 2005 COMPARED TO THIRTEEN WEEKS ENDED MAY 1, 2004
NET SALES. Net sales for the first quarter of 2005 were $262.5 million,
reflecting a decrease of $2.6 million, or 1.0%, from the same period last year.
Comparable store sales, which exclude the impact of the Pottstown, Pennsylvania
store closed in the second quarter of fiscal 2004, decreased 0.6% in the first
quarter of 2005.
Business families recording comparable store sales increases in the first
quarter of 2005 were Home, Shoes, Accessories, and Special Sizes and Misses
Sportswear (both included in Women's Clothing). The favorable results in Home
resulted from the addition of furniture galleries at five Bon-Ton stores in the
second quarter of 2004 and the introduction of new products to Bon-Ton stores
that were previously sold only at Elder-Beerman stores. Shoe sales increased as
customers responded favorably to the Company's changes in moderately-priced
branded casual footwear and the introduction of new products at Elder-Beerman
that were previously sold only at Bon-Ton stores. Increased emphasis on fashion
accessories, particularly in sunglasses and handbags, drove sales increases in
Accessories. Customers responded favorably to the Company's offerings in Special
Sizes and Misses Sportswear. Categories reflecting the sharpest sales decreases
as compared to the prior period were Dresses and Coats (both included in Women's
Clothing), Children's and Juniors'. Apparel sales were hampered by unseasonably
cold weather in the Northeast and Midwest during the first quarter of 2005. The
Company remains focused on product differentiation, appropriate levels of key
items and an aggressive marketing campaign.
12
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OTHER INCOME. Other income, which includes income from leased departments
and other customer revenues, was $2.2 million, or 0.8% of net sales, in the
first quarter of 2005 compared to $2.0 million, or 0.7% of net sales, in the
first quarter of 2004. The increase of $0.2 million primarily reflects increases
in other customer revenues.
COSTS AND EXPENSES. Gross margin was $95.1 million for the first quarter
of 2005 compared to $95.4 million for the same period last year, a decrease of
$0.3 million. Gross margin as a percentage of net sales increased 0.2 percentage
point to 36.2% for the first quarter of 2005 from 36.0% for the same period last
year. The increase in gross margin rate resulted primarily from a decrease in
the net markdown rate. The decrease in gross margin dollars for the first
quarter of 2005 reflected the lower sales volume.
Selling, general and administrative expenses for the first quarter of 2005
were $94.7 million compared to $96.1 million for the first quarter of 2004,
reflecting a decrease of $1.4 million. Selling, general and administrative
expenses decreased due to reduced payroll, insurance and integration costs --
partially offset by higher advertising, rental and fuel related expenses. The
current year expense rate decreased 0.2 percentage point to 36.1% of net sales,
compared to 36.3% for the same period last year.
Depreciation and amortization in the first quarter of 2005 was $6.4
million, a decrease of $0.5 million compared to $7.0 million in the first
quarter of 2004. This decrease reflects the impact of final purchase price
allocation adjustments recorded in fiscal 2004.
LOSS FROM OPERATIONS. Loss from operations in the first quarter of 2005
was $3.8 million, or 1.5% of net sales, compared to a loss of $5.7 million, or
2.1% of net sales, in the first quarter of 2004.
INTEREST EXPENSE, NET. Net interest expense was $3.3 million, or 1.3% of
net sales, in the first quarter of 2005 compared to $3.2 million, or 1.2% of net
sales, in the first quarter of 2004. The $0.1 million net increase principally
reflects additional revolver borrowings required to fund working capital
requirements and higher average interest rates for the period. This increase was
partially offset by decreases in deferred financing fees, interest rate swap
settlements and the unfavorable impact of mark-to-market adjustments during the
first quarter of 2004.
INCOME TAX BENEFIT. The effective tax rate of 38.1% in the first quarter
of 2005 is 0.6 percentage point higher than the rate of 37.5% in the first
quarter of 2004.
NET LOSS. Net loss in the first quarter of 2005 was $4.4 million, or 1.7%
of net sales, compared to a net loss of $5.6 million, or 2.1% of net sales, in
the first quarter of 2004.
13
THE BON-TON STORES, INC.
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 thirteen weeks ended April 30, 2005 and May 1, 2004. 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:
April 30, May 1,
(Dollars in millions) 2005 2004
- ----------------------------------------------------- --------- --------
Working capital $ 291.7 $ 240.1
Current ratio 2.81:1 2.37:1
Debt to total capitalization (debt plus equity) 0.46:1 0.45:1
Unused availability under lines of credit (subject to $ 50.0 $ 60.3
the minimum borrowing availability covenant of $10)
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 facility. The Company's business follows a seasonal pattern
and working capital fluctuates with seasonal variations, reaching its highest
level in October or November.
Increases in working capital and the current ratio at April 30, 2005 over
May 1, 2004 principally reflect an increase in merchandise inventories.
Net cash used in operating activities totaled $42.7 million and $9.7
million for the thirteen weeks ended April 30, 2005 and May 1, 2004,
respectively. The increase in net cash used in operating activities primarily
reflects increased merchandise inventories, and the timing of merchandise
inventory receipts and associated accounts payable payments.
14
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Net cash used in investing activities amounted to $2.6 million and $4.2
million for the thirteen weeks ended April 30, 2005 and May 1, 2004,
respectively. Capital expenditures in the current year were $1.5 million lower
than the comparable prior year period largely due to prior year system
integration efforts.
Net cash provided by financing activities amounted to $37.3 million and
$13.5 million for the thirteen weeks ended April 30, 2005 and May 1, 2004,
respectively. The current year increase in net cash provided by financing
activities principally reflects additional net borrowings needed to fund working
capital increases and a smaller decrease in bank overdraft balances.
The Company's amended and restated revolving credit facility agreement
(the "credit agreement") provides a revolving line of credit of $300.0 million
and a term loan in the amount of $19.0 million. The current credit agreement
expires in October 2007. The revolving credit line 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. Under the credit
agreement, the Company incurs fees at a rate of 0.375 percentage point on unused
lines of credit. The term loan interest rate is based on LIBOR plus an
applicable margin. Financial covenants contained in the credit agreement include
the following: a limitation on fiscal 2005 capital expenditures of $53.5
million, minimum borrowing availability of $10.0 million and a fixed charge
coverage ratio of 1.0-to-1. The fixed charge coverage ratio is defined as
earnings before interest, taxes, depreciation and amortization divided by
interest expense, capital expenditures, tax payments and scheduled debt payments
- -- measured at each fiscal quarter-end based on the immediately preceding four
fiscal quarters. Total borrowings under the credit agreement were $200.4 million
and $160.4 million at April 30, 2005 and January 29, 2005, respectively.
The Company's off-balance-sheet accounts receivable facility agreement
includes a funding limit of $250.0 million and is scheduled to expire in 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 April 30, 2005 and January 29, 2005, accounts receivable totaling
$226.8 million and $244.0 million, respectively, were sold under the accounts
receivable facility. Financial covenants contained in the accounts receivable
facility agreement include the following: a limitation on fiscal 2005 capital
expenditures of $53.5 million and a fixed charge coverage ratio of 1.0-to-1. The
fixed charge coverage ratio is defined as earnings before interest, taxes,
depreciation and amortization divided by interest expense, capital expenditures,
tax payments and scheduled debt payments -- measured at each fiscal quarter-end
based on the immediately preceding four fiscal quarters.
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 a portion of the underlying variable-rate facilities,
matures in February 2006.
The credit agreement and accounts receivable facility agreement expire in
October 2007 and October 2005, respectively. The Company anticipates that it
will be able to renew or replace these agreements with agreements on
substantially comparable terms. Failure to renew or replace these agreements on
substantially comparable terms could have a material adverse effect on the
Company's financial condition.
15
THE BON-TON STORES, INC.
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 shares
of Class A common stock and common stock on April 15, 2005 to shareholders of
record as of April 1, 2005. Additionally, the Company declared a quarterly cash
dividend of $0.025 per share, payable July 15, 2005 to shareholders of record as
of July 1, 2005. The Company's Board of Directors will consider dividends in
subsequent periods as it deems appropriate.
Capital expenditures for fiscal 2005 are expected to be in the range of
$28.0 million to $32.0 million. The Company anticipates increasing store selling
space in fiscal 2005 by expanding existing store locations.
The Company anticipates its cash flows from operations, supplemented by
borrowings under its credit agreement and proceeds from its accounts receivable
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 April 30,
2005, off-balance sheet securitized receivables represented 50.9% of the
Company's funding (sum of securitized receivables and balance sheet debt). 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" ("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 $226.8 million
interest in the accounts receivable under this facility at April 30, 2005. 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
$226.8 million at April 30, 2005 and $244.0 million at January 29, 2005. Upon
the facility's termination, the conduit would be entitled to all cash
collections on the accounts receivable until its investment ($226.8 million at
April 30, 2005) and accrued
16
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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's critical accounting policies are as described below.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit-worthiness. The Company continually monitors collections and payments
from customers and maintains an allowance for estimated credit losses based upon
its historical experience, how delinquent accounts ultimately charge-off, aging
of accounts and any specific customer collection issues identified (e.g.,
bankruptcy). While such credit losses have historically been within expectations
and provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates as in the past. If circumstances change
(e.g., higher than expected defaults or bankruptcies), the Company's estimates
of the recoverability of amounts due the Company could be materially reduced.
The allowance for doubtful accounts and sales returns was $6.8 million and $6.4
million at April 30, 2005 and January 29, 2005, respectively.
17
THE BON-TON STORES, INC.
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
by the retail inventory method using a last-in, first-out ("LIFO") cost basis.
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 include 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 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 in economic conditions within 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 a net realizable value ("NRV").
These reductions totaled $20.2 million at April 30, 2005 and January 29, 2005.
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, the Company's operating results
would ultimately be impacted.
18
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 does not believe
recovery of the deferred tax asset is 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 income tax
provision in the Consolidated Statement of Operations.
Net deferred tax assets were $30.2 million and $29.7 million at April 30,
2005 and January 29, 2005, respectively. In assessing the realizability of the
deferred tax assets, the Company considered whether it was 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 limitations pursuant to
Section 382 of the Internal Revenue Code ("Section 382"). As a result, the
Company concluded that a valuation allowance against a portion of the net
deferred tax assets was appropriate. A total valuation allowance of $58.1
million was recorded at April 30, 2005 and January 29, 2005. 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.
The Company recorded $86.6 million of net deferred tax assets in
connection with the October 24, 2003 acquisition of Elder-Beerman; a valuation
allowance of $47.7 million was established against these deferred tax assets.
Any future reduction to the valuation allowance established against deferred tax
assets acquired in connection with the acquisition of Elder-Beerman would first
reduce intangible assets purchased in the acquisition and then, to the extent
the valuation allowance reduction exceeds the current book value of
19
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
intangible assets purchased in the acquisition (approximately $3.6 million at
April 30, 2005), would reduce the current income tax provision.
At April 30, 2005, the Company had federal and state net operating loss
carry-forwards of $75.6 million and $358.3 million, respectively, which are
available to offset future federal and state taxable income -- subject to
certain limitations imposed by Section 382. These net operating losses will
expire at various dates beginning in fiscal 2009 through fiscal 2023.
At April 30, 2005, the Company had 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 in fiscal 2007 and fiscal 2008.
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 $164.6 million and $168.3 million at April 30, 2005
and January 29, 2005, 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.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," requires the Company to recognize an impairment loss if the carrying
amount of the long-lived asset is not recoverable from its undiscounted cash
flows. The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Cash flow estimates are
based on historical results adjusted to reflect the Company's best estimate of
future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Estimates of fair value represent the
Company's best estimate based on industry trends and reference to market rates
and transactions, if available. 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.
20
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 conditions prove
to be substantially different from the Company's expectations, the carrying
value of new stores' long-lived assets may ultimately become impaired.
GOODWILL AND INTANGIBLE ASSETS
Goodwill was $3.0 million at April 30, 2005 and January 29, 2005.
Intangible assets are principally comprised of lease interests that relate to
below-market-rate leases acquired in store acquisitions completed in fiscal
years 1992 through 2003, which were adjusted to reflect fair market value. These
lease-related interests are being amortized on a straight-line method. Net
intangible assets totaled $9.1 million and $9.4 million at April 30, 2005 and
January 29, 2005, respectively.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company 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 a discounted cash
flow analysis methodology, which requires certain assumptions and estimates
regarding industry economic factors and future profitability of acquired
businesses. It is the Company's policy to conduct impairment testing based on
its most current business plans, which reflect anticipated changes in the
economy and the industry. If actual results prove inconsistent with Company
assumptions and judgments, the Company could be exposed to a material impairment
charge.
SECURITIZATIONS
A significant portion of the Company's funding is through
off-balance-sheet credit card securitizations 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 the accounts receivable, it
surrenders control over the transferred assets and accounts for the transaction
as a sale to the extent that consideration other than beneficial interests in
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.
21
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company estimates the fair value of retained interests in
securitizations based on a discounted cash flow analysis. The cash flows of the
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 $2.2 million and $3.0
million for the thirteen weeks ended April 30, 2005 and May 1, 2004,
respectively. The decrease in securitization income was principally due to
higher interest costs.
FUTURE ACCOUNTING CHANGES
In December 2004, the FASB issued SFAS 123R, "Share-Based Payment" ("SFAS
No. 123R"). SFAS No. 123R revises SFAS No. 123 and it supercedes APB No. 25. and
its related implementation guidance. SFAS No. 123R will require compensation
costs related to share-based payment transactions to be recognized in the
financial statements (with limited exceptions). The amount of compensation cost
will be measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. The full impact of SFAS No.
123R adoption cannot be predicted at this time as it will depend on levels of
share-based payments granted in the future. However, had the Company adopted
SFAS No. 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net loss and loss per share within Note 2 of the Notes to Condensed
Consolidated Financial Statements. SFAS No. 123R also requires that benefits of
tax deductions in excess of recognized compensation cost be reported as a
financing cash flow, rather than as an operating cash flow as required under
current literature. This requirement will reduce net operating cash flows and
increase net financing cash flows in periods after adoption. The Company is
unable to estimate what those amounts will be in the future as they depend on,
among other things, when employees exercise stock options. On April 14, 2005,
the SEC announced a deferral of the effective date of SFAS No. 123R to the
beginning of the Company's fiscal year commencing January 29, 2006.
22
THE BON-TON STORES, INC.
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; 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 29, 2005.
23
THE BON-TON STORES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe its interest rate risks, as described in the
Company's Annual Report on Form 10-K for the fiscal year ended January 29, 2005
("2004 Annual Report"), have changed materially since the Company's disclosure
in its 2004 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in reports filed pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. 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 Exchange Act) 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 are effective.
Changes in Internal Control 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.
Throughout the first quarter of 2005, the Company continued the process of
integrating the operations of Elder-Beerman, including execution of certain
changes to the Company's merchandise inventory tracking and costing systems,
merchandise sales price management systems and general ledger interfaces. As
part of the integration process during the first quarter of 2005, the Company
modified 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 modified the design and operation of
certain elements of its internal control over financial reporting. The Company
believes it has taken 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 2004 Annual Report.
24
THE BON-TON STORES, INC.
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 Executive Transition Agreement with Tim Grumbacher Exhibit 10.1 to Form 8-K filed
on March 11, 2005
31.1 Certification of Byron L. Bergren Filed herein.
31.2 Certification of Keith E. Plowman Filed herein.
32 Certifications Pursuant to Rules 13a-14(b) and 15d-14(b)
of the Securities Exchange Act of 1934. Furnished 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: June 8, 2005 BY: /s/ Byron L. Bergren
----------------------------
Byron L. Bergren
President and
Chief Executive Officer
DATE: June 8, 2005 BY: /s/ Keith E. Plowman
----------------------------
Keith E. Plowman
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
25