Attached files
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EX-31.2 - EXHIBIT 31.2 - BON TON STORES INC | c93510exv31w2.htm |
EX-32.1 - EXHIBIT 32.1 - BON TON STORES INC | c93510exv32w1.htm |
EX-31.1 - EXHIBIT 31.1 - BON TON STORES INC | c93510exv31w1.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
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
of the Securities Exchange Act of 1934
For the Quarter ended October 31, 2009 | 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 twelve
months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files).
Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer þ | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of November 27, 2009, there were 15,607,066 shares of Common Stock, $.01 par value, and
2,951,490 shares of Class A Common Stock, $.01 par value, outstanding.
PART I: FINANCIAL INFORMATION
ITEM 1. | FINANCIAL STATEMENTS |
THE BON-TON STORES, INC.
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data) | October 31, | January 31, | ||||||
(Unaudited) | 2009 | 2009 | ||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 15,661 | $ | 19,719 | ||||
Merchandise inventories |
900,669 | 666,081 | ||||||
Prepaid expenses and other current assets |
71,716 | 113,441 | ||||||
Total current assets |
988,046 | 799,241 | ||||||
Property, fixtures and equipment at cost, net of accumulated depreciation and amortization
of $578,211 and $498,556 at October 31, 2009 and January 31, 2009, respectively |
778,132 | 832,763 | ||||||
Deferred income taxes |
9,340 | 9,994 | ||||||
Intangible assets, net of accumulated amortization of $37,282 and $30,611 at October 31, 2009
and January 31, 2009, respectively |
141,249 | 148,171 | ||||||
Other long-term assets |
26,633 | 31,152 | ||||||
Total assets |
$ | 1,943,400 | $ | 1,821,321 | ||||
Liabilities and Shareholders Equity |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 297,717 | $ | 143,423 | ||||
Accrued payroll and benefits |
34,833 | 36,116 | ||||||
Accrued expenses |
151,741 | 179,073 | ||||||
Current maturities of long-term debt |
6,396 | 6,072 | ||||||
Current maturities of obligations under capital leases |
4,949 | 2,730 | ||||||
Deferred income taxes |
10,132 | 7,328 | ||||||
Income taxes payable |
184 | 62 | ||||||
Total current liabilities |
505,952 | 374,804 | ||||||
Long-term debt, less current maturities |
1,149,456 | 1,083,449 | ||||||
Obligations under capital leases, less current maturities |
66,703 | 65,319 | ||||||
Other long-term liabilities |
165,539 | 163,572 | ||||||
Total liabilities |
1,887,650 | 1,687,144 | ||||||
Contingencies (Note 11) |
||||||||
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
15,944,866 and 14,880,173 at October 31, 2009 and January 31, 2009, respectively |
159 | 149 | ||||||
Class A Common Stock authorized 20,000,000 shares at $0.01 par value; issued
and outstanding shares of 2,951,490 at October 31, 2009 and January 31, 2009 |
30 | 30 | ||||||
Treasury stock, at cost 337,800 shares at October 31, 2009 and January 31, 2009 |
(1,387 | ) | (1,387 | ) | ||||
Additional paid-in-capital |
148,052 | 144,577 | ||||||
Accumulated other comprehensive loss |
(57,020 | ) | (59,464 | ) | ||||
(Accumulated deficit) retained earnings |
(34,084 | ) | 50,272 | |||||
Total shareholders equity |
55,750 | 134,177 | ||||||
Total liabilities and shareholders equity |
$ | 1,943,400 | $ | 1,821,321 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
2
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTEEN | THIRTY-NINE | |||||||||||||||
WEEKS ENDED | WEEKS ENDED | |||||||||||||||
(In thousands except share and per share data) | October 31, | November 1, | October 31, | November 1, | ||||||||||||
(Unaudited) | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Net sales |
$ | 703,946 | $ | 724,927 | $ | 1,957,705 | $ | 2,098,559 | ||||||||
Other income |
18,667 | 22,742 | 53,135 | 67,030 | ||||||||||||
722,613 | 747,669 | 2,010,840 | 2,165,589 | |||||||||||||
Costs and expenses: |
||||||||||||||||
Costs of merchandise sold |
439,029 | 466,791 | 1,242,492 | 1,361,253 | ||||||||||||
Selling, general and administrative |
234,798 | 261,916 | 694,548 | 764,084 | ||||||||||||
Depreciation and amortization |
28,016 | 29,770 | 84,810 | 88,680 | ||||||||||||
Amortization of lease-related interests |
1,216 | 1,220 | 3,660 | 3,634 | ||||||||||||
Goodwill impairment |
| | | 17,767 | ||||||||||||
Income (loss) from operations |
19,554 | (12,028 | ) | (14,670 | ) | (69,829 | ) | |||||||||
Interest expense, net |
23,201 | 24,681 | 69,321 | 73,419 | ||||||||||||
Loss before income taxes |
(3,647 | ) | (36,709 | ) | (83,991 | ) | (143,248 | ) | ||||||||
Income tax provision (benefit) |
506 | (22,375 | ) | 365 | (61,025 | ) | ||||||||||
Net loss |
$ | (4,153 | ) | $ | (14,334 | ) | $ | (84,356 | ) | $ | (82,223 | ) | ||||
Per share amounts |
||||||||||||||||
Basic: |
||||||||||||||||
Net loss |
$ | (0.24 | ) | $ | (0.85 | ) | $ | (4.96 | ) | $ | (4.90 | ) | ||||
Basic weighted average shares outstanding |
17,008,132 | 16,805,600 | 17,000,824 | 16,793,125 | ||||||||||||
Diluted: |
||||||||||||||||
Net loss |
$ | (0.24 | ) | $ | (0.85 | ) | $ | (4.96 | ) | $ | (4.90 | ) | ||||
Diluted weighted average shares outstanding |
17,008,132 | 16,805,600 | 17,000,824 | 16,793,125 |
The accompanying notes are an integral part of these consolidated financial statements.
3
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-NINE | ||||||||
WEEKS ENDED | ||||||||
(In thousands) | October 31, | November 1, | ||||||
(Unaudited) | 2009 | 2008 | ||||||
Cash flows from operating activities: |
||||||||
Net loss |
$ | (84,356 | ) | $ | (82,223 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: |
||||||||
Depreciation and amortization |
84,810 | 88,680 | ||||||
Amortization of lease-related interests |
3,660 | 3,634 | ||||||
Goodwill impairment |
| 17,767 | ||||||
Share-based compensation expense |
3,485 | 4,021 | ||||||
Loss on sale of property, fixtures and equipment |
103 | 644 | ||||||
Amortization of deferred financing costs |
3,054 | 3,124 | ||||||
Amortization of deferred gain on sale of proprietary credit card portfolio |
(1,810 | ) | (1,810 | ) | ||||
Deferred income taxes |
3,458 | (3,522 | ) | |||||
Changes in operating assets and liabilities: |
||||||||
Increase in merchandise inventories |
(234,588 | ) | (223,887 | ) | ||||
Decrease (increase) in prepaid expenses and other current assets |
41,726 | (52,074 | ) | |||||
Decrease in other long-term assets |
1,786 | 1,263 | ||||||
Increase in accounts payable |
152,945 | 149,440 | ||||||
Decrease in accrued payroll and benefits and accrued expenses |
(24,101 | ) | (14,668 | ) | ||||
Increase (decrease) in income taxes payable |
122 | (899 | ) | |||||
Increase in other long-term liabilities |
7,678 | 12,367 | ||||||
Net cash used in operating activities |
(42,028 | ) | (98,143 | ) | ||||
Cash flows from investing activities: |
||||||||
Capital expenditures |
(22,210 | ) | (76,639 | ) | ||||
Proceeds from sale of property, fixtures and equipment |
86 | 322 | ||||||
Net cash used in investing activities |
(22,124 | ) | (76,317 | ) | ||||
Cash flows from financing activities: |
||||||||
Payments on long-term debt and capital lease obligations |
(476,142 | ) | (458,345 | ) | ||||
Proceeds from issuance of long-term debt |
539,531 | 626,364 | ||||||
Cash dividends paid |
(866 | ) | (1,882 | ) | ||||
Deferred financing costs paid |
(322 | ) | (268 | ) | ||||
(Decrease) increase in bank overdraft balances |
(2,107 | ) | 4,148 | |||||
Net cash provided by financing activities |
60,094 | 170,017 | ||||||
Net decrease in cash and cash equivalents |
(4,058 | ) | (4,443 | ) | ||||
Cash and cash equivalents at beginning of period |
19,719 | 21,238 | ||||||
Cash and cash equivalents at end of period |
$ | 15,661 | $ | 16,795 | ||||
The accompanying notes are an integral part of these consolidated financial statements.
4
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
Accumulated | ||||||||||||||||||||||||||||
Other | (Accumulated | |||||||||||||||||||||||||||
Class A | Additional | Compre- | Deficit) | |||||||||||||||||||||||||
(In thousands) | Common | Common | Treasury | Paid-in | hensive | Retained | ||||||||||||||||||||||
(Unaudited) | Stock | Stock | Stock | Capital | Loss | Earnings | Total | |||||||||||||||||||||
BALANCE AT JANUARY 31, 2009 |
$ | 149 | $ | 30 | $ | (1,387 | ) | $ | 144,577 | $ | (59,464 | ) | $ | 50,272 | $ | 134,177 | ||||||||||||
Comprehensive loss (Note 12): |
||||||||||||||||||||||||||||
Net loss |
| | | | | (84,356 | ) | (84,356 | ) | |||||||||||||||||||
Pension and postretirement benefit plans |
| | | | 3,589 | | 3,589 | |||||||||||||||||||||
Change in fair value of cash flow hedges |
| | | | (1,145 | ) | | (1,145 | ) | |||||||||||||||||||
Total comprehensive loss |
(81,912 | ) | ||||||||||||||||||||||||||
Share-based compensation expense |
10 | | | 3,475 | | | 3,485 | |||||||||||||||||||||
BALANCE AT OCTOBER 31, 2009 |
$ | 159 | $ | 30 | $ | (1,387 | ) | $ | 148,052 | $ | (57,020 | ) | $ | (34,084 | ) | $ | 55,750 | |||||||||||
The accompanying notes are an integral part of these consolidated financial statements.
5
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
1. BASIS OF PRESENTATION
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. As of October 31, 2009, The Bon-Ton
Stores, Inc. operated, through its subsidiaries, 279 department stores in 23 states in the
Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergners, Boston Store, Carson Pirie
Scott, Elder-Beerman, Herbergers and Younkers nameplates and, in the Detroit, Michigan area, the
Parisian nameplate. The Bon-Ton Stores, Inc. conducts its operations through one business segment.
The accompanying unaudited consolidated financial statements include the accounts of The
Bon-Ton Stores, Inc. and all of its wholly owned subsidiaries (collectively, the Company). All
intercompany transactions and balances have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with the
instructions for Form 10-Q and do not include all information and footnotes required in annual
consolidated financial statements prepared in accordance with accounting principles generally
accepted in the United States. In accordance with Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) Topic 855, Subsequent Events, the Company performed an
evaluation of subsequent events for the accompanying consolidated financial statements and notes
through December 10, 2009, the date this report was issued; required subsequent event disclosures
have been made in Note 15. In the opinion of management, all adjustments and disclosures
considered necessary for a fair presentation of interim periods have been included. The Companys
business is seasonal in nature and results of operations for the interim periods presented are not
necessarily indicative of results for the full fiscal year. These unaudited consolidated financial
statements should be read in conjunction with the consolidated financial statements and notes
thereto included in the Companys Annual Report on Form 10-K for the fiscal year ended January 31,
2009.
For purposes of the following discussion, references to the second quarter of 2008 are to
the 13 weeks ended August 2, 2008. References to the fourth quarter of 2008 are to the 13 weeks
ended January 31, 2009. References to the third quarter of 2009 and the third quarter of 2008
are to the 13 weeks ended October 31, 2009 and November 1, 2008, respectively. References to
fiscal 2009 are to the 52 weeks ending January 30, 2010.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States requires that management make estimates and assumptions about future
events. These estimates and assumptions affect the reported amounts of assets and liabilities,
disclosures about contingent assets and liabilities, and the reported amounts of revenues and
expenses. Such estimates include the valuation of inventories, long-lived assets, intangible
assets, insurance reserves, legal contingencies and assumptions used in the calculation of income
taxes and retirement and other post-employment benefits, among others. These estimates and
assumptions are based on managements best estimates and judgments. Management evaluates its
estimates and assumptions on an ongoing basis using historical experience and other factors,
including the current economic environment, which management believes to be reasonable under the
circumstances. Management adjusts such estimates and assumptions when facts and circumstances
dictate. As future events and their effects cannot be determined with precision, actual results
could differ significantly from these estimates. Changes in estimates resulting from further
changes in the economic environment will be reflected in the financial statements in future
periods.
Recently Issued Accounting Standards
In August 2009, the FASB issued Accounting Standards Update No. 2009-05, Fair Value
Measurements and Disclosures (Topic 820) Measuring Liabilities at Fair Value (ASU 2009-05),
which provides amendments to ASC Subtopic 820-10, Fair Value Measurements and Disclosures
Overall, for the fair value measurement of liabilities. ASU 2009-05 provides clarification on
measuring liabilities at fair value when a quoted price in an active market is not available. The
amendments are intended to reduce potential
ambiguity in financial reporting when measuring the fair value of liabilities. The Company
adopted the provisions of this update, as required, for the period ended October 31, 2009. The
adoption of ASU 2009-05 did not have a material impact on the Companys consolidated financial
statements.
6
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
In June 2009, the FASB issued guidance now codified as ASC Topic 105, Generally Accepted
Accounting Principles (ASC 105), which established the FASB Accounting Standards Codification
(the Codification) as the single source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in preparation of financial statements in conformity
with generally accepted accounting principles in the United States. The Codification superseded
all existing accounting standard documents; all other accounting literature not included in the
Codification is considered non-authoritative. The Company adopted this standard, as required, for
the period ended October 31, 2009. The adoption of ASC 105 did not have an impact on the Companys
financial condition or results of operations, but has impacted certain disclosures by requiring all
accounting literature references to be updated with ASC references and by eliminating all
references to pre-Codification standards.
ASC Subtopic 715-20, Compensation Retirement Benefits Defined Benefit Plans (ASC
715-20), requires entities to provide enhanced disclosures about investment allocation decisions,
the major categories of plan assets, the inputs and valuation techniques used to measure fair value
of plan assets, the effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period and significant concentrations of risk within plan assets.
The enhanced disclosures required by ASC 715-20 must be provided in the Companys Annual Report on
Form 10-K for fiscal 2009. The Company does not expect the adoption of the enhanced disclosures
required by ASC 715-20 to have a material impact on its consolidated financial statements.
2. PER-SHARE AMOUNTS
Effective February 1, 2009, the Company adopted certain new provisions now codified within ASC
Topic 260, Earnings Per Share (ASC 260), pursuant to which unvested share-based payment awards
that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid,
are participating securities and shall be included in the computation of earnings per share (EPS)
according to the two-class method. The Companys unvested restricted shares and restricted stock
units are considered participating securities. All prior-period EPS data presented is required to
be adjusted retrospectively to conform to these provisions of ASC 260. However, in the event of a
net loss, participating securities are to be excluded from the calculation of both basic and
diluted EPS.
Due to the Companys net loss position, unvested restricted shares (participating securities)
totaling 1,261,004 and 688,903 for the third quarter of 2009 and 2008, respectively,
and 1,093,837 and 626,650 for the 39 weeks ended October 31, 2009 and November 1, 2008,
respectively, were excluded from the calculation of both basic and diluted EPS.
In
addition, stock option shares (non-participating securities) totaling 1,084,306 and 1,150,142 for the third quarter of 2009 and 2008, respectively, and
1,100,943 and 1,074,348 for the 39 weeks ended October 31, 2009 and November 1, 2008, respectively,
were excluded from the calculation of diluted EPS as they would have been antidilutive. Certain of
these stock option shares were excluded solely due to the Companys net loss position. Had the
Company reported a profit for the third quarter of 2009 and 2008, these shares would have had an effect of 73,614 and 1,195 dilutive shares, respectively, for purposes of calculating
diluted EPS. Had the Company reported a profit for the 39 weeks ended October 31, 2009 and
November 1, 2008, these shares would have had an effect of 25,054 and 3,541 dilutive
shares, respectively, for purposes of calculating diluted EPS.
7
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
3. FAIR VALUE OF FINANCIAL INSTRUMENTS
ASC Topic 820, Fair Value Measurements and Disclosures (ASC 820), defines fair value and
establishes a framework for measuring fair value. Effective February 3, 2008, the Company adopted
the provisions codified within ASC 820 for financial assets and liabilities that are measured at
fair value on a recurring basis. Effective February 1, 2009, the Company adopted the provisions of
ASC 820 for non-financial assets and liabilities that are not required or permitted to be measured
at fair value on a recurring basis. There were no material fair value measurements required for
the Companys non-financial assets and liabilities during the third quarter of 2009 and the 39
weeks ended October 31, 2009.
ASC 820 establishes fair value hierarchy levels that prioritize the inputs used in valuations
that determine fair value. Level 1 inputs are unadjusted quoted prices in active markets for
identical assets or liabilities. Level 2 inputs are primarily quoted prices for similar assets or
liabilities in active markets or inputs that are observable for the asset or liability, either
directly or indirectly. Level 3 inputs are unobservable inputs based on the Companys own
assumptions.
As of October 31, 2009 and January 31, 2009, the Company held two interest rate swap contracts
required to be measured at fair value on a recurring basis. The fair values of these interest rate
swap contracts are derived from discounted cash flow analysis utilizing an interest rate yield
curve that is readily available to the public or can be derived from information available in
publicly quoted markets. Therefore, the Company has categorized these interest rate swap contracts
as a Level 2 fair value measurement.
The interest rate swap liability comprises the entirety of the Companys financial assets and
liabilities carried at fair value and measured on a recurring basis. The carrying value of the
interest rate swap liability as of October 31, 2009 and January 31, 2009 is as follows:
Significant | ||||||||||||||||
Quoted Prices | Other | Significant | ||||||||||||||
in Active | Observable | Unobservable | ||||||||||||||
Total Carrying | Markets | Inputs | Inputs | |||||||||||||
Value | (Level 1) | (Level 2) | (Level 3) | |||||||||||||
October 31, 2009 |
$ | 6,853 | $ | | $ | 6,853 | $ | | ||||||||
January 31, 2009 |
$ | 5,708 | $ | | $ | 5,708 | $ | | ||||||||
Effective May 3, 2009, the Company adopted the provisions codified within ASC Topic 825,
Financial Instruments, which require disclosures about the fair value of the Companys financial
instruments on an interim basis.
The carrying values of the Companys cash and cash equivalents, accounts payable and financial
instruments reported within prepaid expenses and other current assets and other long-term assets
approximate fair value. The carrying value of the Companys long-term debt, including current
maturities but excluding capital leases, was $1,155,852 and $1,089,521 at October 31, 2009 and
January 31, 2009, respectively, and the estimated fair value was $999,785 and $605,813 at October
31, 2009 and January 31, 2009, respectively. The fair value estimate of the Companys long-term
debt was based on quoted market prices or, where applicable, derived from discounted cash flow
analysis.
8
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
4. INTEREST RATE DERIVATIVES
As of February 1, 2009, the Company adopted certain provisions codified within ASC Topic 815,
Derivatives and Hedging (ASC 815), which enhance disclosures for derivative instruments and
hedging activities, including: (1) how and why a company uses derivative instruments; (2) the
manner in which derivative instruments and related hedged items are accounted for; and (3) the
effect of derivative instruments and related hedged items on a companys financial position,
financial performance and cash flows. The adoption of the enhanced disclosures required by ASC 815
had no impact on the Companys financial condition, results of operations or cash flows.
The Company enters into interest rate swap agreements to manage the fixed/variable interest
rate mix of its debt portfolio. These derivatives are accounted for in accordance with ASC Topic
815.
It is the policy of the Company to identify on a continuing basis the need for debt capital
and evaluate financial risks inherent in funding the Company with debt capital. In conjunction
with this ongoing review, the debt portfolio and hedging program of the Company is managed to: (1)
reduce funding risk with respect to borrowings made or to be made by the Company to preserve the
Companys access to debt capital and provide debt capital as required for funding and liquidity
purposes, and (2) control the aggregate interest rate risk of the debt portfolio. The Company
enters into interest rate swap agreements to change the fixed/variable interest rate mix of the
debt portfolio in order to maintain an appropriate balance of fixed-rate and variable-rate debt.
On the date the derivative instrument is entered into, the Company designates the derivative
as a hedge of the variability of cash flows to be received or paid related to a recognized asset or
liability (cash flow hedge). Changes in the fair value of a derivative that is designated as,
and meets all required criteria for, a cash flow hedge are recorded in other comprehensive income
or loss (OCI) and reclassified into the statement of operations as the underlying hedged item
affects earnings, such as when quarterly settlements are made on the hedged forecasted transaction.
The portion of the change in fair value of a derivative associated with hedge ineffectiveness or
the component of a derivative instrument excluded from the assessment of hedge effectiveness, if
any, is recorded in the current statement of operations. Also, changes in the fair value of a
derivative that is not designated as a hedge, if any, are entirely recorded in the statement of
operations. The Company formally documents all relationships between hedging instruments and hedged
items, as well as its risk-management objective and strategy for undertaking various hedge
transactions; this process includes relating all derivatives that are designated as cash flow
hedges to specific balance sheet assets or liabilities. The Company also formally assesses, both
at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective
in offsetting changes in cash flows of the hedged item. If it is determined that a derivative is
not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, the
Company will discontinue hedge accounting prospectively for the respective derivative. In
addition, if the forecasted transaction is no longer likely to occur, any amounts in accumulated
other comprehensive income or loss (AOCI) related to the derivative are recorded in the statement
of operations for the current period.
At October 31, 2009, the Company had two interest rate swap contracts to effectively convert a
portion of its variable-rate debt to fixed-rate debt, both of which were entered into on July 14,
2006 and expire on July 14, 2011. These contracts entail the exchange of fixed-rate and
floating-rate interest payments periodically over the life of the agreement. The floating-rate
interest payments are based on three-month LIBOR rates. The following indicates the notional
amounts of these interest rate swap contracts as of October 31, 2009 and the range of fixed-rates
associated with these contracts:
Interest rate swaps (notional amount) |
$ | 100,000 | ||
Range of fixed pay rates |
5.48% - 5.49 | % |
9
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The following table summarizes the fair value and presentation in the consolidated balance
sheet of the interest rate swaps designated as cash flow hedging instruments under ASC 815 as of
October 31, 2009:
Balance Sheet Location | Derivative Assets | Derivative Liabilities | ||||||
Other Long-Term Liabilities |
$ | | $ | 6,853 |
The following table summarizes the effect of the interest rate swaps on the consolidated
statement of operations and AOCI:
Location of | Amount of | Location of | Amount of | |||||||||||||
Loss | Loss | Loss | Loss | |||||||||||||
Amount of | Reclassified | Reclassified | Recognized | Recognized | ||||||||||||
Loss | from AOCI to | from AOCI to | in the | in the | ||||||||||||
Recognized | the Statement of | the Statement of | Statement of | Statement of | ||||||||||||
in OCI | Operations | Operations | Operations | Operations | ||||||||||||
(effective | (effective | (effective | (ineffective | (ineffective | ||||||||||||
portion) | portion) | portion) | portion) | portion) | ||||||||||||
Third Quarter of 2009 |
$ | 1,515 | Interest Expense, Net |
$ | 1,270 | Interest Expense, Net |
$ | | ||||||||
39 Weeks Ended October 31, 2009 |
$ | 4,641 | Interest Expense, Net |
$ | 3,496 | Interest Expense, Net |
$ | |
At October 31, 2009, it is expected that approximately $4,190 of losses in AOCI related to
interest rate swaps will be reclassified into the statement of operations within the next 12
months. As of October 31, 2009, the maximum time over which the Company is hedging its exposure to
the variability in future cash flows related to forecasted transactions is 20 months.
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
Prepaid expenses and other current assets were comprised of the following:
October 31, | January 31, | |||||||
2009 | 2009 | |||||||
Prepaid expenses |
$ | 40,353 | $ | 32,822 | ||||
Other receivables |
30,101 | 49,473 | ||||||
Income tax receivables |
1,262 | 31,146 | ||||||
Total |
$ | 71,716 | $ | 113,441 | ||||
10
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental cash flow information is provided for the periods reported:
THIRTY-NINE | ||||||||
WEEKS ENDED | ||||||||
October 31, | November 1, | |||||||
2009 | 2008 | |||||||
Cash paid for: |
||||||||
Interest, net of amounts capitalized |
$ | 79,452 | $ | 82,134 | ||||
Income taxes, net of refunds received |
(32,088 | ) | 5,516 | |||||
Non-cash investing activities: |
||||||||
Decrease in accrued property, fixtures and equipment
included in accounts payable and accrued expenses |
$ | (194 | ) | $ | (4,087 | ) | ||
Assets acquired under capital leases |
6,546 | |
7. EXIT OR DISPOSAL ACTIVITIES
The following table summarizes exit or disposal activities during the 39 weeks ended October
31, 2009 related to involuntary associate termination costs associated with the Companys cost
reductions implemented in January 2009 and the 39 weeks ended October 31, 2009, the closing of its
Elder-Beerman store in Hamilton, Ohio in March 2009 and the closing of its Elder-Beerman store in
Northwood, Ohio in September 2009:
Termination | Other | |||||||||||
Benefits | Costs | Total | ||||||||||
Balance as of January 31, 2009 |
$ | 2,324 | $ | 70 | $ | 2,394 | ||||||
Provisions: |
||||||||||||
Thirteen weeks ended May 2, 2009 |
1,641 | | 1,641 | |||||||||
Thirteen weeks ended August 1, 2009 |
294 | | 294 | |||||||||
Thirteen weeks ended October 31, 2009 |
874 | 104 | 978 | |||||||||
Payments: |
||||||||||||
Thirteen weeks ended May 2, 2009 |
(3,845 | ) | | (3,845 | ) | |||||||
Thirteen weeks ended August 1, 2009 |
(283 | ) | (70 | ) | (353 | ) | ||||||
Thirteen weeks ended October 31, 2009 |
(928 | ) | (35 | ) | (963 | ) | ||||||
Balance as of October 31, 2009 |
$ | 77 | $ | 69 | $ | 146 | ||||||
The above provisions were included within selling, general and administrative expense.
In connection with the acquisition of The Elder-Beerman Stores Corp. in October 2003, the
Company incurred expenses related to the termination of a lease. The Company made payments of $20
in the third quarter of 2009 and payments of $70 during the 39 weeks ended October 31, 2009 related
to this termination. The liability for the lease termination was $737 as of October 31, 2009 and
will be paid over the remaining contract period ending in 2030.
11
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
8. EMPLOYEE DEFINED AND POSTRETIREMENT BENEFIT PLANS
The Company provides benefits to certain current and former associates who are eligible under
a defined benefit pension plan and various supplemental pension plans (collectively, the Pension
Plans). Net periodic benefit expense for the Pension Plans includes the following (income) and
expense components:
THIRTEEN | THIRTY-NINE | |||||||||||||||
WEEKS ENDED | WEEKS ENDED | |||||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Service cost |
$ | | $ | 38 | $ | | $ | 116 | ||||||||
Interest cost |
2,822 | 2,935 | 8,464 | 8,805 | ||||||||||||
Expected return on plan assets |
(1,764 | ) | (3,076 | ) | (5,294 | ) | (9,227 | ) | ||||||||
Recognition of prior service cost |
| 1 | | 3 | ||||||||||||
Recognition of net actuarial loss |
1,219 | 127 | 3,657 | 379 | ||||||||||||
Net periodic benefit expense |
$ | 2,277 | $ | 25 | $ | 6,827 | $ | 76 | ||||||||
During the 39 weeks ended October 31, 2009, contributions of $6,249 were made to the Pension
Plans. Included in those contributions was a payment of $5,658 for the settlement of a previously
terminated supplemental pension plan. No gain or loss was recognized in connection with that
settlement. The Company anticipates contributing an additional $148 to fund the Pension Plans in
fiscal 2009, for an annual total of $6,397.
The Company also provides medical and life insurance benefits to certain former associates
under a postretirement benefit plan (Postretirement Benefit Plan). Net periodic benefit expense
of $64, comprised of interest expense of $87 and recognition of net actuarial gain of $23, was
recorded in the third quarter of 2009. Net periodic benefit expense of $95, comprised solely of
interest expense, was recorded in the third quarter of 2008. During the 39 weeks ended October 31,
2009, net periodic benefit expense of $194, comprised of interest expense of $262 and recognition
of net actuarial gain of $68, was recorded. During the 39 weeks ended November 1, 2008, the
Company recorded net periodic benefit expense of $285, comprised solely of interest expense.
During the 39 weeks ended October 31, 2009, payments under the Postretirement Benefit Plan exceeded
participant premiums received by $188. The Company anticipates contributing an additional $641 to
fund the Postretirement Benefit Plan in fiscal 2009, for a net annual total of $829.
9. INCOME TAXES
The provisions codified within ASC Topic 740, Income Taxes (ASC 740), require companies to
assess whether valuation allowances should be established against their deferred tax assets based
on consideration of all available evidence using a more likely than not standard. In accordance
with ASC 740, a full valuation allowance was established during the fourth quarter of 2008, and
maintained throughout the 39 weeks ending October 31, 2009, on nearly all the Companys net
deferred tax assets. The Companys deferred tax asset valuation allowance totaled $172,656 and
$145,468 at October 31, 2009 and January 31, 2009, respectively.
Given the Companys valuation allowance position, no tax benefit was recognized on the
Companys loss before income taxes for the 39 weeks ending October 31, 2009. The tax expense of
$365 recorded for the 39 weeks ending October 31, 2009 reflects a $1,633 tax benefit recorded in
the first quarter of 2009 related to the statute-of-limitations expiration of certain tax position
exposures, offset by certain state income tax expense and tax position exposure related expense
accruals.
12
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The income tax benefit in the third quarter of 2008 and the 39 weeks ended November 1, 2008
includes a tax benefit adjustment of $7,038 resulting from a statute-of-limitations expiration of
certain tax position exposures.
Within the Companys Annual Report on Form 10-K for the fiscal year ended January 31, 2009,
the Company disclosed that it was reasonably possible that gross unrecognized tax benefits could
decrease by $3,030 within the next twelve months. Of this, $1,223 was recognized in the first
quarter of 2009, $22 was recognized in the third quarter of 2009, and the remaining $1,785 could be
recognized in the fourth quarter of 2009. As of October 31, 2009, it is reasonably possible that
gross unrecognized tax benefits could decrease by $2,955 within the next twelve months due to the
expiration of certain statute-of-limitations.
10. GOODWILL IMPAIRMENT
The Company recorded a goodwill impairment charge of $17,767 in the second quarter of 2008 in
accordance with ASC Subtopic 350-20, Intangibles Goodwill and Other Goodwill. The economic
environment at the end of the second quarter of 2008 had depressed stock values for many companies,
including that of the Company. This factor, coupled with the expectation that the economic
challenges at that time would impede recovery in the retail sector, led the Company to determine
that its goodwill should be reviewed for impairment. The fair value of the Companys single
reporting unit was estimated using a combination of its common stock trading value at the end of
the second quarter of 2008, a discounted cash flow analysis and other generally accepted valuation
methodologies. As a result of the impairment review, the Company determined its goodwill was fully
impaired.
11. CONTINGENCIES
In April 2009, in connection with the 2006 sale of a store lease, the Company instituted legal
proceedings against the purchaser, and its guarantor, to collect $1,654 due. As of October 31,
2009, the Company is owed $6,730 from this sale, of which $1,654 is past due. The Company believes
it will collect all amounts owed.
The Company is party to other legal proceedings and claims that arise during the ordinary
course of business. In the opinion of management, the ultimate outcome of any such litigation and
claims will not have a material adverse effect on the Companys financial position, results of
operations or liquidity.
12. COMPREHENSIVE LOSS
Comprehensive loss was determined as follows:
THIRTEEN | THIRTY-NINE | |||||||||||||||
WEEKS ENDED | WEEKS ENDED | |||||||||||||||
October 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net loss |
$ | (4,153 | ) | $ | (14,334 | ) | $ | (84,356 | ) | $ | (82,223 | ) | ||||
Other comprehensive income (loss): |
||||||||||||||||
Amortization of pension and
postretirement benefit plans |
1,196 | 79 | 3,589 | 238 | ||||||||||||
Cash flow hedge derivative (loss) income |
(245 | ) | 679 | (1,145 | ) | 2,220 | ||||||||||
Comprehensive loss |
$ | (3,202 | ) | $ | (13,576 | ) | $ | (81,912 | ) | $ | (79,765 | ) | ||||
13
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
As a result of the additional deferred tax asset valuation allowance established in the fourth
quarter of 2008 and maintained throughout the 39 weeks ended October 31, 2009, the changes
recognized within other comprehensive income (loss) in the third quarter of 2009 and the 39-week
period ended October 31, 2009 were recorded on a gross basis. In the third quarter of 2008 and the
39 weeks ended November 1, 2008, these changes were recorded net of tax.
13. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
On March 6, 2006, The Bon-Ton Department Stores, Inc. (the Issuer), a wholly owned
subsidiary of the Company, entered into an Indenture with The Bank of New York, as trustee, under
which the Issuer issued $510,000 aggregate principal amount of its 10-1/4% Senior Notes due 2014.
The Notes are guaranteed on a senior unsecured basis by the Company and by each of the Companys
subsidiaries, other than the Issuer, that is an obligor under the Companys senior secured credit
facility. The guarantees are full and unconditional and joint and several.
The condensed consolidating financial information for the Company, the Issuer and the
Companys guarantor and non-guarantor subsidiaries as of October 31, 2009 and January 31, 2009 and
for the third quarter of 2009 and 2008 and the 39 weeks ended October 31, 2009 and November 1, 2008
as presented below has been prepared from the books and records maintained by the Company, the
Issuer and the guarantor and non-guarantor subsidiaries. The condensed financial information may
not necessarily be indicative of the results of operations or financial position had the guarantor
and non-guarantor subsidiaries operated as independent entities. Certain intercompany revenues and
expenses included in the subsidiary records are eliminated in consolidation. As a result of this
activity, an amount due to/due from affiliates will exist at any time.
14
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
October 31, 2009
Condensed Consolidating Balance Sheet
October 31, 2009
Bon-Ton | ||||||||||||||||||||||||
(Parent | Guarantor | Non-Guarantor | Consolidating | Company | ||||||||||||||||||||
Company) | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1 | $ | 8,076 | $ | 7,584 | $ | | $ | | $ | 15,661 | ||||||||||||
Merchandise inventories |
| 470,532 | 430,137 | | | 900,669 | ||||||||||||||||||
Prepaid expenses and other current assets |
| 58,088 | 11,799 | 2,435 | (606 | ) | 71,716 | |||||||||||||||||
Total current assets |
1 | 536,696 | 449,520 | 2,435 | (606 | ) | 988,046 | |||||||||||||||||
Property, fixtures and equipment at cost, net |
| 236,884 | 248,554 | 292,694 | | 778,132 | ||||||||||||||||||
Deferred income taxes |
| 1,531 | 7,809 | | | 9,340 | ||||||||||||||||||
Intangible assets, net |
| 60,490 | 80,759 | | | 141,249 | ||||||||||||||||||
Investment in and advances to (from) affiliates |
55,749 | 614,992 | (23,415 | ) | 316 | (647,642 | ) | | ||||||||||||||||
Other long-term assets |
| 17,878 | 4,223 | 4,532 | | 26,633 | ||||||||||||||||||
Total assets |
$ | 55,750 | $ | 1,468,471 | $ | 767,450 | $ | 299,977 | $ | (648,248 | ) | $ | 1,943,400 | |||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | 297,717 | $ | | $ | | $ | | $ | 297,717 | ||||||||||||
Accrued payroll and benefits |
| 24,429 | 10,404 | | | 34,833 | ||||||||||||||||||
Accrued expenses |
| 71,698 | 79,259 | 1,390 | (606 | ) | 151,741 | |||||||||||||||||
Current maturities of long-term debt and obligations
under capital leases |
| 2,585 | 2,364 | 6,396 | | 11,345 | ||||||||||||||||||
Deferred income taxes |
| 2,174 | 7,958 | | | 10,132 | ||||||||||||||||||
Income taxes payable |
| 110 | 74 | | | 184 | ||||||||||||||||||
Total current liabilities |
| 398,713 | 100,059 | 7,786 | (606 | ) | 505,952 | |||||||||||||||||
Long-term debt and obligations under capital leases,
less current maturities |
| 913,071 | 55,569 | 247,519 | | 1,216,159 | ||||||||||||||||||
Other long-term liabilities |
| 123,435 | 40,848 | 1,256 | | 165,539 | ||||||||||||||||||
Total liabilities |
| 1,435,219 | 196,476 | 256,561 | (606 | ) | 1,887,650 | |||||||||||||||||
Shareholders equity |
55,750 | 33,252 | 570,974 | 43,416 | (647,642 | ) | 55,750 | |||||||||||||||||
Total liabilities and shareholders equity |
$ | 55,750 | $ | 1,468,471 | $ | 767,450 | $ | 299,977 | $ | (648,248 | ) | $ | 1,943,400 | |||||||||||
15
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
January 31, 2009
Condensed Consolidating Balance Sheet
January 31, 2009
Bon-Ton | ||||||||||||||||||||||||
(Parent | Guarantor | Non-Guarantor | Consolidating | Company | ||||||||||||||||||||
Company) | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Assets |
||||||||||||||||||||||||
Current assets: |
||||||||||||||||||||||||
Cash and cash equivalents |
$ | 1 | $ | 10,769 | $ | 8,949 | $ | | $ | | $ | 19,719 | ||||||||||||
Merchandise inventories |
| 329,808 | 336,273 | | | 666,081 | ||||||||||||||||||
Prepaid expenses and other current assets |
| 91,644 | 21,797 | 606 | (606 | ) | 113,441 | |||||||||||||||||
Total current assets |
1 | 432,221 | 367,019 | 606 | (606 | ) | 799,241 | |||||||||||||||||
Property, fixtures and equipment at cost, net |
| 261,922 | 269,357 | 301,484 | | 832,763 | ||||||||||||||||||
Deferred income taxes |
| 5,214 | 4,780 | | | 9,994 | ||||||||||||||||||
Intangible assets, net |
| 63,981 | 84,190 | | | 148,171 | ||||||||||||||||||
Investment in and advances to (from) affiliates |
135,042 | 558,968 | 58,476 | 317 | (752,803 | ) | | |||||||||||||||||
Other long-term assets |
| 19,729 | 6,714 | 4,709 | | 31,152 | ||||||||||||||||||
Total assets |
$ | 135,043 | $ | 1,342,035 | $ | 790,536 | $ | 307,116 | $ | (753,409 | ) | $ | 1,821,321 | |||||||||||
Liabilities and Shareholders Equity |
||||||||||||||||||||||||
Current liabilities: |
||||||||||||||||||||||||
Accounts payable |
$ | | $ | 143,423 | $ | | $ | | $ | | $ | 143,423 | ||||||||||||
Accrued payroll and benefits |
| 24,676 | 11,440 | | | 36,116 | ||||||||||||||||||
Accrued expenses |
866 | 93,342 | 84,921 | 1,416 | (1,472 | ) | 179,073 | |||||||||||||||||
Current maturities of long-term debt and obligations
under capital leases |
| 495 | 2,236 | 6,071 | | 8,802 | ||||||||||||||||||
Deferred income taxes |
| 2,548 | 4,780 | | | 7,328 | ||||||||||||||||||
Income taxes payable |
| 16 | 46 | | | 62 | ||||||||||||||||||
Total current liabilities |
866 | 264,500 | 103,423 | 7,487 | (1,472 | ) | 374,804 | |||||||||||||||||
Long-term debt and obligations under capital leases,
less current maturities |
| 839,020 | 57,358 | 252,390 | | 1,148,768 | ||||||||||||||||||
Other long-term liabilities |
| 123,351 | 39,032 | 1,189 | | 163,572 | ||||||||||||||||||
Total liabilities |
866 | 1,226,871 | 199,813 | 261,066 | (1,472 | ) | 1,687,144 | |||||||||||||||||
Shareholders equity |
134,177 | 115,164 | 590,723 | 46,050 | (751,937 | ) | 134,177 | |||||||||||||||||
Total liabilities and shareholders equity |
$ | 135,043 | $ | 1,342,035 | $ | 790,536 | $ | 307,116 | $ | (753,409 | ) | $ | 1,821,321 | |||||||||||
16
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended October 31, 2009
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended October 31, 2009
Bon-Ton | ||||||||||||||||||||||||
(Parent | Guarantor | Non-Guarantor | Consolidating | Company | ||||||||||||||||||||
Company) | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | 307,443 | $ | 396,503 | $ | | $ | | $ | 703,946 | ||||||||||||
Other income |
| 7,780 | 10,887 | | | 18,667 | ||||||||||||||||||
| 315,223 | 407,390 | | | 722,613 | |||||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Costs of merchandise sold |
| 192,046 | 246,983 | | | 439,029 | ||||||||||||||||||
Selling, general and administrative |
| 106,786 | 136,826 | 22 | (8,836 | ) | 234,798 | |||||||||||||||||
Depreciation and amortization |
| 11,222 | 13,924 | 2,870 | | 28,016 | ||||||||||||||||||
Amortization of lease-related interests |
| 698 | 518 | | | 1,216 | ||||||||||||||||||
Income (loss) from operations |
| 4,471 | 9,139 | (2,892 | ) | 8,836 | 19,554 | |||||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Intercompany rental and royalty income |
| | 1,793 | 7,043 | (8,836 | ) | | |||||||||||||||||
Equity in (losses) earnings of subsidiaries |
(3,647 | ) | 9,725 | | | (6,078 | ) | | ||||||||||||||||
Interest expense, net |
| (17,843 | ) | (1,187 | ) | (4,171 | ) | | (23,201 | ) | ||||||||||||||
(Loss) income before income taxes |
(3,647 | ) | (3,647 | ) | 9,745 | (20 | ) | (6,078 | ) | (3,647 | ) | |||||||||||||
Income tax provision |
506 | 506 | 153 | | (659 | ) | 506 | |||||||||||||||||
Net (loss) income |
$ | (4,153 | ) | $ | (4,153 | ) | $ | 9,592 | $ | (20 | ) | $ | (5,419 | ) | $ | (4,153 | ) | |||||||
17
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended November 1, 2008
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended November 1, 2008
Bon-Ton | ||||||||||||||||||||||||
(Parent | Guarantor | Non-Guarantor | Consolidating | Company | ||||||||||||||||||||
Company) | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | 312,593 | $ | 412,334 | $ | | $ | | $ | 724,927 | ||||||||||||
Other income |
| 9,399 | 13,343 | | | 22,742 | ||||||||||||||||||
| 321,992 | 425,677 | | | 747,669 | |||||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Costs of merchandise sold |
| 203,747 | 263,044 | | | 466,791 | ||||||||||||||||||
Selling, general and administrative |
| 120,760 | 149,975 | 21 | (8,840 | ) | 261,916 | |||||||||||||||||
Depreciation and amortization |
| 14,270 | 12,563 | 2,937 | | 29,770 | ||||||||||||||||||
Amortization of lease-related interests |
| 750 | 470 | | | 1,220 | ||||||||||||||||||
Loss from operations |
| (17,535 | ) | (375 | ) | (2,958 | ) | 8,840 | (12,028 | ) | ||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Intercompany rental and royalty income |
| | 1,797 | 7,043 | (8,840 | ) | | |||||||||||||||||
Equity in losses of subsidiaries |
(36,709 | ) | (627 | ) | | | 37,336 | | ||||||||||||||||
Interest expense, net |
| (18,547 | ) | (1,863 | ) | (4,271 | ) | | (24,681 | ) | ||||||||||||||
Loss before income taxes |
(36,709 | ) | (36,709 | ) | (441 | ) | (186 | ) | 37,336 | (36,709 | ) | |||||||||||||
Income tax benefit |
(22,375 | ) | (22,375 | ) | (5,799 | ) | | 28,174 | (22,375 | ) | ||||||||||||||
Net (loss) income |
$ | (14,334 | ) | $ | (14,334 | ) | $ | 5,358 | $ | (186 | ) | $ | 9,162 | $ | (14,334 | ) | ||||||||
18
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirty-Nine Weeks Ended October 31, 2009
Condensed Consolidating Statement of Operations
Thirty-Nine Weeks Ended October 31, 2009
Bon-Ton | ||||||||||||||||||||||||
(Parent | Guarantor | Non-Guarantor | Consolidating | Company | ||||||||||||||||||||
Company) | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | 848,178 | $ | 1,109,527 | $ | | $ | | $ | 1,957,705 | ||||||||||||
Other income |
| 25,257 | 27,878 | | | 53,135 | ||||||||||||||||||
| 873,435 | 1,137,405 | | | 2,010,840 | |||||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Costs of merchandise sold |
| 539,241 | 703,251 | | | 1,242,492 | ||||||||||||||||||
Selling, general and administrative |
| 315,885 | 404,886 | 67 | (26,290 | ) | 694,548 | |||||||||||||||||
Depreciation and amortization |
| 34,011 | 42,009 | 8,790 | | 84,810 | ||||||||||||||||||
Amortization of lease-related interests |
| 2,106 | 1,554 | | | 3,660 | ||||||||||||||||||
Loss from operations |
| (17,808 | ) | (14,295 | ) | (8,857 | ) | 26,290 | (14,670 | ) | ||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Intercompany rental and royalty income |
| | 4,944 | 21,346 | (26,290 | ) | | |||||||||||||||||
Equity in losses of subsidiaries |
(83,991 | ) | (12,874 | ) | | | 96,865 | | ||||||||||||||||
Interest expense, net |
| (53,309 | ) | (3,422 | ) | (12,590 | ) | | (69,321 | ) | ||||||||||||||
Loss before income taxes |
(83,991 | ) | (83,991 | ) | (12,773 | ) | (101 | ) | 96,865 | (83,991 | ) | |||||||||||||
Income tax provision |
365 | 365 | 965 | | (1,330 | ) | 365 | |||||||||||||||||
Net loss |
$ | (84,356 | ) | $ | (84,356 | ) | $ | (13,738 | ) | $ | (101 | ) | $ | 98,195 | $ | (84,356 | ) | |||||||
19
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirty-Nine Weeks Ended November 1, 2008
Condensed Consolidating Statement of Operations
Thirty-Nine Weeks Ended November 1, 2008
Bon-Ton | ||||||||||||||||||||||||
(Parent | Guarantor | Non-Guarantor | Consolidating | Company | ||||||||||||||||||||
Company) | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Net sales |
$ | | $ | 897,209 | $ | 1,201,350 | $ | | $ | | $ | 2,098,559 | ||||||||||||
Other income |
| 28,478 | 38,552 | | | 67,030 | ||||||||||||||||||
| 925,687 | 1,239,902 | | | 2,165,589 | |||||||||||||||||||
Costs and expenses: |
||||||||||||||||||||||||
Costs of merchandise sold |
| 584,596 | 776,657 | | | 1,361,253 | ||||||||||||||||||
Selling, general and administrative |
| 350,888 | 439,690 | 62 | (26,556 | ) | 764,084 | |||||||||||||||||
Depreciation and amortization |
| 41,518 | 38,351 | 8,811 | | 88,680 | ||||||||||||||||||
Amortization of lease-related interests |
| 2,255 | 1,379 | | | 3,634 | ||||||||||||||||||
Goodwill impairment |
| 8,488 | 9,279 | | | 17,767 | ||||||||||||||||||
Loss from operations |
| (62,058 | ) | (25,454 | ) | (8,873 | ) | 26,556 | (69,829 | ) | ||||||||||||||
Other income (expense): |
||||||||||||||||||||||||
Intercompany rental and royalty income |
| | 5,283 | 21,273 | (26,556 | ) | | |||||||||||||||||
Equity in losses of subsidiaries |
(143,248 | ) | (26,762 | ) | | | 170,010 | | ||||||||||||||||
Interest expense, net |
| (54,428 | ) | (6,104 | ) | (12,887 | ) | | (73,419 | ) | ||||||||||||||
Loss before income taxes |
(143,248 | ) | (143,248 | ) | (26,275 | ) | (487 | ) | 170,010 | (143,248 | ) | |||||||||||||
Income tax benefit |
(61,025 | ) | (61,025 | ) | (16,773 | ) | | 77,798 | (61,025 | ) | ||||||||||||||
Net loss |
$ | (82,223 | ) | $ | (82,223 | ) | $ | (9,502 | ) | $ | (487 | ) | $ | 92,212 | $ | (82,223 | ) | |||||||
20
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
Thirty-Nine Weeks Ended October 31, 2009
Condensed Consolidating Statement of Cash Flows
Thirty-Nine Weeks Ended October 31, 2009
Bon-Ton | ||||||||||||||||||||||||
(Parent | Guarantor | Non-Guarantor | Consolidating | Company | ||||||||||||||||||||
Company) | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
$ | 866 | $ | (51,174 | ) | $ | 12,323 | $ | 7,079 | $ | (11,122 | ) | $ | (42,028 | ) | |||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Capital expenditures |
| (16,131 | ) | (6,079 | ) | | | (22,210 | ) | |||||||||||||||
Intercompany Investing activity |
| (1,713 | ) | | | 1,713 | | |||||||||||||||||
Proceeds from sale of property, fixtures
and equipment |
| 24 | 62 | | | 86 | ||||||||||||||||||
Net cash used in investing activities |
| (17,820 | ) | (6,017 | ) | | 1,713 | (22,124 | ) | |||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Payments on long-term debt and capital
lease obligations |
| (469,935 | ) | (1,661 | ) | (4,546 | ) | | (476,142 | ) | ||||||||||||||
Proceeds from issuance of long-term debt |
| 539,531 | | | | 539,531 | ||||||||||||||||||
Intercompany financing activity |
| (866 | ) | (6,010 | ) | (2,533 | ) | 9,409 | | |||||||||||||||
Cash dividends paid |
(866 | ) | | | | | (866 | ) | ||||||||||||||||
Deferred financing costs paid |
| (322 | ) | | | | (322 | ) | ||||||||||||||||
Decrease in bank overdraft balances |
| (2,107 | ) | | | | (2,107 | ) | ||||||||||||||||
Net cash (used in) provided by financing activities |
(866 | ) | 66,301 | (7,671 | ) | (7,079 | ) | 9,409 | 60,094 | |||||||||||||||
Net decrease in cash and cash
equivalents |
| (2,693 | ) | (1,365 | ) | | | (4,058 | ) | |||||||||||||||
Cash and cash equivalents at beginning
of period |
1 | 10,769 | 8,949 | | | 19,719 | ||||||||||||||||||
Cash and cash equivalents at end of period |
$ | 1 | $ | 8,076 | $ | 7,584 | $ | | $ | | $ | 15,661 | ||||||||||||
21
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
Thirty-Nine Weeks Ended November 1, 2008
Condensed Consolidating Statement of Cash Flows
Thirty-Nine Weeks Ended November 1, 2008
Bon-Ton | ||||||||||||||||||||||||
(Parent | Guarantor | Non-Guarantor | Consolidating | Company | ||||||||||||||||||||
Company) | Issuer | Subsidiaries | Subsidiaries | Eliminations | Consolidated | |||||||||||||||||||
Cash flows from operating activities: |
$ | 1,882 | $ | (131,173 | ) | $ | 36,104 | $ | 7,693 | $ | (12,649 | ) | $ | (98,143 | ) | |||||||||
Cash flows from investing activities: |
||||||||||||||||||||||||
Capital expenditures |
| (44,982 | ) | (31,657 | ) | | | (76,639 | ) | |||||||||||||||
Proceeds from sale of property, fixtures
and equipment |
| 251 | 71 | | | 322 | ||||||||||||||||||
Net cash used in investing activities |
| (44,731 | ) | (31,586 | ) | | | (76,317 | ) | |||||||||||||||
Cash flows from financing activities: |
||||||||||||||||||||||||
Payments on long-term debt and capital
lease obligations |
| (453,310 | ) | (1,265 | ) | (3,770 | ) | | (458,345 | ) | ||||||||||||||
Proceeds from issuance of long-term debt |
| 626,364 | | | | 626,364 | ||||||||||||||||||
Intercompany financing activity |
| (1,882 | ) | (6,850 | ) | (3,917 | ) | 12,649 | | |||||||||||||||
Cash dividends paid |
(1,882 | ) | | | | | (1,882 | ) | ||||||||||||||||
Deferred financing costs paid |
| (262 | ) | | (6 | ) | | (268 | ) | |||||||||||||||
Increase in bank overdraft balances |
| 4,148 | | | | 4,148 | ||||||||||||||||||
Net cash (used in) provided by financing activities |
(1,882 | ) | 175,058 | (8,115 | ) | (7,693 | ) | 12,649 | 170,017 | |||||||||||||||
Net decrease in cash and cash
equivalents |
| (846 | ) | (3,597 | ) | | | (4,443 | ) | |||||||||||||||
Cash and cash equivalents at beginning
of period |
1 | 9,604 | 11,633 | | | 21,238 | ||||||||||||||||||
Cash and cash equivalents at end of period |
$ | 1 | $ | 8,758 | $ | 8,036 | $ | | $ | | $ | 16,795 | ||||||||||||
14. THIRD AMENDMENT TO THE CREDIT CARD PROGRAM AGREEMENT
On August 4, 2009, the Company entered into a Third Amendment to the Credit Card Program
Agreement (the Third Amendment) with HSBC Bank Nevada, N.A. (HSBC), effective as of January 1,
2009. Under the agreement, which is in effect through June 20, 2012, the Company continues to
participate in the revenue generated by credit sales. The Third Amendment defines additional
protection for the credit lines of certain of the Companys credit card customers, revises the
compensation the Company will receive for certain types of sales made on the credit cards and
provides that the Company and HSBC will share certain losses associated with the credit card
program. Either party may terminate the Third Amendment between April 1, 2010 and July 31, 2010 and
revert back to the terms and conditions of the agreement prior to the Third Amendment upon
providing notice and making a prescribed cash payment to the other party. Pursuant to the terms of
the Third Amendment, other income was reduced by $1,424 and $7,586 in the third quarter of 2009 and
the 39 weeks ended October 31, 2009, respectively. The impact of the Third Amendment on the
Companys financial results is estimated to be a reduction of other income of $9,000 in fiscal
2009.
15. SUBSEQUENT EVENTS
The Worker, Homeownership, and Business Assistance Act of 2009 (the 2009 Act) was enacted on
November 6, 2009. Among other provisions, the 2009 Act increases the carry-back period for net
operating losses arising in either 2008 or 2009 to five years for most companies, with certain
limitations. While the full impact of the 2009 Act on the Company is not yet known, the Company
anticipates a favorable tax expense adjustment during the 13 weeks ending January 30, 2010. The
Company anticipates a related income tax carry-back refund approximating the amount of the
favorable tax adjustment, to be received during fiscal 2010.
22
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)
On December 4, 2009, the Company entered into a $675,000 3.5-year senior secured asset-based
revolving credit facility (the New Credit Facility), which will expire on June 4, 2013. The New
Credit Facility replaces the Companys existing $800,000 asset-based revolving credit facility (the
Existing Credit Facility) scheduled to mature on March 6, 2011. The proceeds of the New Credit
Facility were used to pay the outstanding balance under the Existing Credit Facility and will be
used for other general corporate purposes.
The financial covenant contained in the New Credit Facility requires that the minimum excess
availability be at least $75,000 at all times. Other covenants continue the requirements of the
Existing Credit Facility and require that the Company provide the lenders with certain financial
statements, forecasts and
other reports, borrowing base certificates and notices and comply with various federal, state
and local rules and regulations.
Borrowings under the New Credit Facility will be at either (A) Adjusted LIBOR (based on the
highest of (i) the British Bankers Association LIBOR Rate based on an interest period selected by
the Borrowers, (ii) the British Bankers Association LIBOR Rate based on an interest period of three
months and (iii) 1.25%) plus the applicable margin or (B) a base rate (based on the highest of (i)
the Federal Funds Rate plus 0.5%, (ii) the Bank of America prime rate, and (iii) Adjusted LIBOR
based on an interest period of one month plus 1.0%) plus the applicable margin. The applicable
margin is determined based upon the excess availability under the New Credit Facility.
The New Credit Facility is secured by a first priority security position on substantially all
of the current and future assets of the Company, including, but not limited to, inventory, general
intangibles, trademarks, equipment, certain real estate and proceeds from any of the foregoing,
subject to certain exceptions and liens.
On November 18, 2009, the Company entered into a $75,000 Second Lien Term Loan Credit Facility
(the Term Loan Facility), which will mature on November 18, 2013. Proceeds from the transaction
were used to pay a portion of the outstanding borrowings under the Companys Existing Credit
Facility and to pay related fees and expenses. The Existing Credit Facility was amended to
permit the Term Loan Facility.
The financial covenant contained in the Term Loan Facility requires that the minimum excess
availability under the New Credit Facility be at least $75,000 at all times. Other covenants
substantially mirror the requirements of the New Credit Facility and require that the Company
provide the lenders with certain financial statements, forecasts and other reports, borrowing base
certificates and notices and comply with various federal, state and local rules and regulations.
Borrowings under the Term Loan Facility will be at either (A) Adjusted LIBOR (based on the
highest of (i) the British Bankers Association LIBOR Rate for the two business days prior to the
borrowing, (ii) the British Bankers Association LIBOR Rate based on an interest period of three
months and (iii) 3.00%) plus the applicable margin or (B) a base rate (based on the highest of (i)
the Federal Funds Rate plus 0.5%, (ii) the Bank of America prime rate, (iii) Adjusted LIBOR based
on an interest period of one month and (iv) 3.0%) plus the applicable margin. The applicable
margin is 12.75%.
The Term Loan Facility is secured by a second priority security position on substantially
all of the current and future assets of the Company, including, but not limited to, inventory,
general intangibles, trademarks, equipment, certain real estate and proceeds from any of the
foregoing, subject to certain exceptions and liens.
23
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
For purposes of the following discussion, references to the second quarter of 2008 and
the fourth quarter of 2008 are to the 13 weeks ended August 2, 2008 and January 31, 2009,
respectively. References to the first quarter of 2009 are to the 13 weeks ended May 2, 2009.
References to the third quarter of 2009 and the third quarter of 2008 are to the 13-week
periods ended October 31, 2009 and November 1, 2008, respectively. References to 2009 and 2008
are to the 39 weeks ended October 31, 2009 and November 1, 2008, respectively. References to the
fourth quarter of 2009 are to the 13 weeks ending January 30, 2010. References to fiscal 2009
and fiscal 2008 are to the 52 weeks ending January 30, 2010 and the 52 weeks ended January 31,
2009, respectively. References to the Company, we, us, and our refer to The Bon-Ton
Stores, Inc. and its subsidiaries.
Overview
We are one of the largest regional department store operators in the United States, offering a
broad assortment of brand-name fashion apparel and accessories for women, men and children. Our
merchandise offerings also include cosmetics, home furnishings and other goods. We currently
operate 278 stores in mid-size and metropolitan markets in 23 Northeastern, Midwestern and upper
Great Plains states under the Bon-Ton, Bergners, Boston Store, Carson Pirie Scott, Elder-Beerman,
Herbergers and Younkers nameplates and, in the Detroit, Michigan area, the Parisian nameplate,
encompassing a total of approximately 26 million square feet.
We operate in the department store segment of the U.S. retail industry, which is a highly
competitive and fragmented environment. The department store industry continues to evolve in
response to consolidation among merchandise vendors as well as the evolution of competitive retail
formats mass merchandisers, national chain retailers, specialty retailers and online retailers.
Our operating performance, and that of our competitors, depends significantly on economic
conditions and the resulting impact on consumer spending. Many of the economic indicators
associated with consumer discretionary spending presented challenges to the retail industry in
fiscal 2008 and remain weak in 2009. While the Companys financial results improved in the third
quarter of 2009, there remains much uncertainty as to future economic conditions and consumer
confidence. As such, on November 19, 2009 we provided expectations of the following in fiscal
2009:
| a comparable store sales decrease in the range of 5.0% to 6.5%; |
| a gross margin rate of 36.5%; |
| a reduction of approximately $70.0 million to $75.0 million in our selling, general and
administrative (SG&A) expenses; and |
| an effective tax rate of 0% (exclusive of the potential favorable impact in
the fourth quarter of 2009 of recently enacted income tax legislation as discussed in Note
15 in the Notes to Consolidated Financial Statements). |
On December 4, 2009, we entered into a $675.0 million 3.5-year senior secured asset-based
revolving credit facility (the New Credit Facility), which will expire on June 4, 2013. The New
Credit Facility replaces our existing $800.0 million asset-based revolving credit facility (the
Existing Credit Facility) scheduled to mature on March 6, 2011. The proceeds of the New Credit
Facility were used to pay the outstanding balance under the Existing Credit Facility and will be
used for other general corporate purposes. See Note 15 in the Notes to Consolidated Financial
Statements.
24
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
On November 18, 2009, we entered into a $75.0 million Second Lien Term Loan Credit Facility
(the Term Loan Facility), which will mature on November 18, 2013. Proceeds from the transaction
were used to increase liquidity by paying a portion of the outstanding borrowings under the
Existing Credit Facility and to pay related fees and expenses. The Existing Credit Facility was
amended to permit the Term Loan Facility. See Note 15 in the Notes to Consolidated Financial
Statements.
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 31, | November 1, | October 31, | November 1, | |||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net sales |
100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | ||||||||
Other income |
2.7 | 3.1 | 2.7 | 3.2 | ||||||||||||
102.7 | 103.1 | 102.7 | 103.2 | |||||||||||||
Costs and expenses: |
||||||||||||||||
Costs of merchandise sold |
62.4 | 64.4 | 63.5 | 64.9 | ||||||||||||
Selling, general and administrative |
33.4 | 36.1 | 35.5 | 36.4 | ||||||||||||
Depreciation and amortization |
4.0 | 4.1 | 4.3 | 4.2 | ||||||||||||
Amortization of lease-related interests |
0.2 | 0.2 | 0.2 | 0.2 | ||||||||||||
Goodwill impairment |
| | | 0.8 | ||||||||||||
Income (loss) from operations |
2.8 | (1.7 | ) | (0.7 | ) | (3.3 | ) | |||||||||
Interest expense, net |
3.3 | 3.4 | 3.5 | 3.5 | ||||||||||||
Loss before income taxes |
(0.5 | ) | (5.1 | ) | (4.3 | ) | (6.8 | ) | ||||||||
Income tax provision (benefit) |
0.1 | (3.1 | ) | | (2.9 | ) | ||||||||||
Net loss |
(0.6 | )% | (2.0 | )% | (4.3 | )% | (3.9 | )% | ||||||||
Third Quarter of 2009 Compared with Third Quarter of 2008
Net sales: Net sales in the third quarter of 2009 were $703.9 million, compared with $724.9
million in the third quarter of 2008, reflecting a decrease of $21.0 million, or 2.9%. Comparable
store sales decreased 2.6% in the third quarter of 2009. We believe the comparable store sales
decline was due to the continued challenging economic environment, with consumer spending
negatively impacted. Additionally, due to inventory management efforts, there was significantly
less clearance inventory throughout the third quarter of 2009 compared with the prior year, further
challenging sales.
While our sales experienced continued weakness in the third quarter of 2009, we realized
monthly improvement in our sales trend throughout the period and some merchandise categories
exhibited relative strength. The best performing merchandise categories were Coats and Moderate
Sportswear (both included in Womens Apparel) and Accessories. Coats benefited from the arrival of
colder weather in our markets as well as the expansion of value-priced offerings and popular
brands. Sales in Moderate Sportswear continue to be favorably impacted by a customer shift toward a
value-orientation; we believe this shift is in response to the current economic situation and that
our moderate offerings provide the value and price-points our customers are seeking. Accessories
benefited from increased inventory investment in the period and favorable customer response to new
and expanded offerings in cold-weather items and trend jewelry.
25
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Furniture and Hard Home (both included in Home) performed poorly in the third quarter of 2009.
We believe discretionary spending for more expensive items is under significant pressure, as
evidenced by the poor performance of higher-priced merchandise throughout our families of business;
sales of mattresses (included in Furniture) remain particularly difficult. Hard Home sales
comparisons to the prior year were unfavorably impacted by the shifting of a major promotional
event from the third quarter of 2008 into the fourth quarter of 2009 and continued difficult sales
in novelty electronic gift items.
Other income: Other income, which includes income from revenues received under a credit card
program agreement with HSBC Bank Nevada, N.A. (HSBC), leased departments and other customer
revenues, was $18.7 million, or 2.7% of net sales, in the third quarter of 2009 as compared
with $22.7 million, or 3.1% of net sales, in the third quarter of 2008. The decrease was primarily
due to reduced sales volume and reduced income associated with our proprietary credit card program.
Proprietary credit card income decreased as a result of lower sales volume as well as an amendment
to the credit card program agreement with HSBC. Other income was reduced by $1.4 million in the
third quarter of 2009 pursuant to the amended agreement with HSBC which revises the compensation
the Company will receive for certain types of credit sales and provides that the Company and HSBC
will share certain losses associated with the credit card program. See Note 14 in the Notes to
Consolidated Financial Statements.
Costs and expenses: Gross margin in the third quarter of 2009 increased $6.8 million to $264.9
million as compared with $258.1 million in the comparable prior year period. The increase is
attributable to an increased margin rate; gross margin as a percentage of net sales increased
approximately 200 basis points to 37.6% in the third quarter of 2009 from 35.6% in the same period
last year, primarily due to disciplined inventory management efforts that resulted in decreased net
markdowns as well as an increased net markup percentage and reduced distribution costs.
SG&A expense in the third quarter of 2009 was $234.8 million as compared with $261.9 million
in the third quarter of 2008, a decrease of $27.1 million. The expense reduction, largely the
result of our cost savings initiatives in response to the difficult economic environment, allowed
us to reduce our current year expense rate approximately 280 basis points to 33.4% of net sales
despite the sales decline in the period.
Depreciation and amortization expense and amortization of lease-related interests decreased
$1.8 million, to $29.2 million in the third quarter of 2009 from $31.0 million in the third quarter
of 2008, primarily due to the reduced asset base resulting from significant asset impairments
recorded in the fourth quarter of 2008 and reduced capital expenditures.
Income (loss) from operations: Income from operations in the third quarter of 2009 was $19.6
million, or 2.8% of net sales, compared with a loss from operations of $(12.0) million, or (1.7)%
of net sales, in the comparable prior year period.
Interest expense, net: Net interest expense was $23.2 million, or 3.3% of net sales, in the
third quarter of 2009 as compared with $24.7 million, or 3.4% of net sales, in the third quarter of
2008. The $1.5 million decrease primarily reflects decreased borrowing levels and reduced interest
rates.
Income tax provision (benefit): The income tax provision of $0.5 million in the third
quarter of 2009 reflects an effective tax rate of (13.9)%, compared with an income tax benefit of
$22.4 million in the third quarter of 2008, reflecting an effective tax rate of 61.0%. The current
year results principally reflect the fact that the Company maintained a nearly full valuation
allowance position against all net deferred tax assets throughout 2009. The prior year results
primarily reflect a favorable adjustment of $7.0 million resulting from a statute-of-limitations
expiration.
Net loss: Net loss in the third quarter of 2009 was $4.2 million, or 0.6% of net sales,
compared with a net loss of $14.3 million, or 2.0% of net sales, in the third quarter of 2008.
26
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
2009 Compared with 2008
Net sales: Net sales in 2009 were $1,957.7 million, compared with $2,098.6 million in 2008,
reflecting a decrease of $140.9 million, or 6.7%. Comparable store sales decreased 6.9% in 2009.
We believe the comparable store sales decline reflects the continuation of the difficult economic
environment, which has pressured consumer spending. Additionally, due to inventory management
efforts, there was significantly less clearance inventory throughout 2009 compared with the prior
year, further challenging sales.
The best performing merchandise categories in 2009 were Coats and Moderate Sportswear (both
included in Womens Apparel). Coats benefited from the arrival of colder weather in our markets as
well as the expansion of value-priced offerings and popular brands. Sales in Moderate Sportswear
have benefited from what we believe is a shift in our customers spending patterns in response to
the economic situation in 2009 as our moderate offerings provide the value our customers are
seeking. We are seeing similar success in sales of moderate goods throughout all families of
business.
Conversely, the poor performances of Better Sportswear (included in Womens Apparel) and
Furniture (included in Home) suggest our customers are spending their limited discretionary dollars
on more moderately-priced merchandise. Better Sportswear is the most difficult business in Womens
Apparel at this time. Furniture sales continue to be adversely impacted by the difficult housing
market and continued deterioration in consumer spending for bigger ticket items.
Other income: Other income was $53.1 million, or 2.7% of net sales, in 2009 as compared with
$67.0 million, or 3.2% of net sales, in 2008. The decrease primarily reflects reduced sales volume
and reduced income associated with our proprietary credit card program. Proprietary credit card
income decreased as a result of lower sales volume as well as an amendment to the credit card
program agreement with HSBC. Other income was reduced by $7.6 million in 2009 pursuant to the
amended agreement with HSBC, which revises the compensation the Company will receive for certain
types of credit sales and provides that the Company and HSBC will share certain losses associated
with the credit card program. See Note 14 in the Notes to Consolidated Financial Statements.
Costs and expenses: Gross margin in 2009 was $715.2 million as compared with $737.3 million in
2008, reflecting a decrease of $22.1 million. The decrease in gross margin dollars was due to the
decreased sales volume in the period. Gross margin as a percentage of net sales increased
approximately 140 basis points to 36.5% in the current year from 35.1% last year, primarily due to
decreased net markdowns and reduced distribution costs.
SG&A expense in 2009 was $694.5 million as compared with $764.1 million in 2008, a decrease of
$69.5 million, reflecting the continued successful execution of our cost savings initiatives. The
expense rate in 2009 decreased approximately 90 basis points to 35.5% of net sales, compared with
36.4% in 2008.
Depreciation and amortization expense and amortization of lease-related interests decreased
$3.8 million, to $88.5 million in 2009 from $92.3 million in 2008, primarily due to the reduced
asset base resulting from significant asset impairments recorded in the fourth quarter of 2008 and
reduced capital expenditures.
The Company recorded a non-cash goodwill impairment charge of $17.8 million in 2008 as, upon
review in the second quarter of 2008, the fair value of the Companys single reporting unit,
estimated using a combination of our common stock trading value as of the end of the second quarter
of 2008, a discounted cash flow analysis and other generally accepted valuation methodologies, was
less than the carrying amount. See Note 10 in the Notes to Consolidated Financial Statements.
Loss from operations: The loss from operations in 2009 was $14.7 million, or 0.7% of net
sales, compared with $69.8 million, or 3.3% of net sales, in 2008.
27
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Interest expense, net: Net interest expense was $69.3 million, or 3.5% of net sales, in 2009
as compared with $73.4 million, or 3.5% of net sales, in 2008. The $4.1 million decrease
principally reflects decreased borrowing levels and reduced interest rates in 2009.
Income tax provision (benefit): The income tax provision of $0.4 million in 2009 reflects an
effective tax rate of (0.4)%, compared with an income tax benefit of $61.0 million in 2008,
reflecting an effective tax rate of 42.6%. The current year results principally reflect the fact
that the Company maintained a nearly full valuation allowance position against all net deferred tax
assets throughout 2009.
Net loss: Net loss in 2009 was $84.4 million, or 4.3% of net sales, compared with a net loss
of $82.2 million, or 3.9% of net sales, in 2008.
Seasonality
Our 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 the
holiday season. Due to the fixed nature of certain costs, SG&A expense is typically higher as a
percentage of net sales during the first half of each fiscal year. We typically finance working
capital increases in the second half of each fiscal year through additional borrowings under our
revolving credit facility.
Because of the seasonality of our business, results for any quarter are not necessarily
indicative of results that may be achieved for a full fiscal year.
Liquidity and Capital Resources
At October 31, 2009, we had $15.7 million in cash and cash equivalents and $245.6 million
available under our Existing Credit Facility (before taking into account the minimum borrowing
availability covenant under such facility of $75.0 million). In anticipation of continued
recessionary pressures in fiscal 2009, we heightened our focus on maximizing cash flow by reducing
operating expenses and significantly curtailing our planned capital expenditures. Additionally, we
are continuing to control inventory levels in order to benefit working capital. We anticipate that
these actions, together with projected cash benefits from our cost savings initiatives, will
positively impact our fiscal 2009 cash flow.
Typically, cash flows from operations are impacted by the effect on sales of (1) consumer
confidence, (2) weather in the geographic markets served by the Company, (3) general economic
conditions and (4) 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 our ability to
generate sufficient cash flows to operate our business. In 2009, our business model has been
adversely impacted by additional economic drivers reflective of the global recession. While
difficult economic conditions affect our assessment of short-term liquidity, and while there can be
no assurances, we consider our resources, including cash flows from operations supplemented by
borrowings under our revolving credit facility and term loan, adequate to satisfy our cash needs
for at least the next 12 months.
28
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table summarizes material measures of the Companys liquidity and capital
resources:
October 31, | November 1, | |||||||
(Dollars in millions) | 2009 | 2008 | ||||||
Working capital |
$ | 482.1 | $ | 555.0 | ||||
Current ratio |
1.95:1 | 1.96:1 | ||||||
Debt to total capitalization (1) |
0.96:1 | 0.82:1 | ||||||
Unused availability under lines of credit (2) |
$ | 245.6 | $ | 213.7 |
(1) | Debt includes obligations under capital leases. Total capitalization includes
shareholders equity, debt and obligations under capital leases. |
|||
(2) | Subject to a minimum borrowing availability covenant of $75. |
Our primary sources of working capital are cash flows from operations and borrowings
under our New Credit Facility, which provides for up to $675.0 million in borrowings and replaces
our $800.0 million Existing Credit Facility. In the first quarter of 2009, we elected to reduce
the previous $1.0 billion commitment under our Existing Credit Facility by $200.0 million in order
to reduce interest expense associated with the unused commitment fee.
On December 4, 2009, we entered into a $675.0 million 3.5-year senior secured asset-based
revolving credit facility, which will expire on June 4, 2013. This New Credit Facility replaces
our Existing Credit Facility scheduled to mature on March 6, 2011. The proceeds of the New Credit
Facility were used to pay the outstanding balance under the Existing Credit Facility and will be
used for other general corporate purposes.
The financial covenant contained in the New Credit Facility requires that the minimum excess
availability be at least $75.0 million at all times. Other covenants continue the requirements of
the Existing Credit Facility and require that we provide the lenders with certain financial
statements, forecasts and other
reports, borrowing base certificates and notices and comply with various federal, state and
local rules and regulations.
Borrowings under the New Credit Facility will be at either (A) Adjusted LIBOR (based on the
highest of (i) the British Bankers Association LIBOR Rate based on an interest period selected by
the Borrowers, (ii) the British Bankers Association LIBOR Rate based on an interest period of three
months and (iii) 1.25%) plus the applicable margin or (B) a base rate (based on the highest of (i)
the Federal Funds Rate plus 0.5%, (ii) the Bank of America prime rate, and (iii) Adjusted LIBOR
based on an interest period of one month plus 1.0%) plus the applicable margin. The applicable
margin is determined based upon the excess availability under the New Credit Facility.
The New Credit Facility is secured by a first priority security position on substantially all
of our current and future assets, including, but not limited to, inventory, general intangibles,
trademarks, equipment, certain real estate and proceeds from any of the foregoing, subject to
certain exceptions and liens. See Note 15 in the Notes to Consolidated Financial Statements.
On November 18, 2009, we entered into a $75.0 million Term Loan Facility, which will mature on November 18, 2013. Proceeds from the transaction
were used to increase liquidity by paying a portion of the outstanding borrowings under the
Existing Credit Facility and to pay related fees and expenses. The Existing Credit Facility was
amended to permit the Term Loan Facility.
The financial covenant contained in the Term Loan Facility requires that the minimum excess
availability under the New Credit Facility be at least $75.0 million at all times. Other covenants
substantially mirror the requirements of the New Credit Facility and require that we provide
the lenders with certain financial statements, forecasts and other reports, borrowing base
certificates and notices and comply with various federal, state and local rules and regulations.
29
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Borrowings under the Term Loan Facility will be at either (A) Adjusted LIBOR (based on the
highest of (i) the British Bankers Association LIBOR Rate for the two business days prior to the
borrowing, (ii) the British Bankers Association LIBOR Rate based on an interest period of three
months and (iii) 3.00%) plus the applicable margin or (B) a base rate (based on the highest of (i)
the Federal Funds Rate plus 0.5%, (ii) the Bank of America prime rate, (iii) Adjusted LIBOR based
on an interest period of one month and (iv) 3.0%) plus the applicable margin. The applicable
margin is 12.75%.
The Term Loan Facility is secured by a second priority security position on substantially
all of our current and future assets, including, but not limited to, inventory, general
intangibles, trademarks, equipment, certain real estate and proceeds from any of the foregoing,
subject to certain exceptions and liens. See Note 15 in the Notes to Consolidated Financial
Statements.
Decreases in working capital and the current ratio are primarily the result of decreased
levels of merchandise inventories due to our inventory management efforts in response to sales
trends, the current year receipt of an income tax refund, and decreased prepaid and deferred income
taxes as a result of the Companys recent net losses and valuation allowance position. The
increase in debt to total capitalization is largely due to the significant decrease in
shareholders equity in fiscal 2008 and 2009, the result of the net loss in the respective periods,
which in fiscal 2008 includes the charges for asset impairments and deferred tax valuation
allowances, as well as the decline in the funded status of the Companys defined benefit pension
plans. These unfavorable factors are partially mitigated by reduced debt levels in 2009. The
increase in unused availability under lines of credit as compared with the prior year reflects
reduced direct borrowings, partially offset by reduced availability due to decreased inventory
levels and increases in trade and standby letters of credit. In addition, unused availability at
October 31, 2009 was favorably impacted by a change in the reporting process under our Existing
Credit Facility. At the Companys request, the borrowing base certificate reporting frequency was
changed to weekly during the period of October through December to better align borrowing
availability with the fluctuations in the Companys inventory, as seasonal inventory builds in
October and November and is subsequently converted to cash to reduce borrowings in late November
and December.
Cash provided by (used in) our operating, investing and financing activities is summarized as
follows:
THIRTY-NINE | ||||||||
WEEKS ENDED | ||||||||
October 31, | November 1, | |||||||
(Dollars in millions) | 2009 | 2008 | ||||||
Operating activities |
$ | (42.0 | ) | $ | (98.1 | ) | ||
Investing activities |
(22.1 | ) | (76.3 | ) | ||||
Financing activities |
60.1 | 170.0 |
Net cash used in operating activities was $42.0 million and $98.1 million in 2009 and 2008,
respectively. The decrease in net cash used in the current year primarily reflects reduced working
capital requirements, principally due to the current year receipt of an income tax refund. Prior
year working capital changes were negatively impacted by a significant income tax receivable due to
the tax benefit recorded; by comparison, there is no income tax receivable in the current year as a
result of the reduced effective tax rate due to the valuation allowance recorded in the fourth
quarter of 2008 and maintained throughout 2009.
Net cash used in investing activities was $22.1 million in 2009, compared with $76.3 million
in 2008, as capital expenditures were significantly reduced in the current year in response to
economic conditions.
30
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Net cash provided by financing activities was $60.1 million and $170.0 million in 2009 and
2008, respectively. The change primarily reflects reduced net borrowings due to decreased cash
requirements for current year operating activities and reduced capital expenditures.
Our capital expenditures in 2009, which do not reflect reductions for landlord contributions
of $5.5 million, totaled $22.2 million. Capital expenditures for fiscal 2009, net of approximately
$7 million of landlord contributions, are not expected to exceed $35 million, a significant
reduction from the prior years capital expenditures of $84.8 million (which do not reflect
reductions for landlord contributions of $18.9 million), as we are limiting store expansion and
major remodel activities in the near term. Included in fiscal 2009 planned capital expenditures is
continued investment in information technology.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are based upon
our consolidated financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States. Preparation of these financial statements
required us to make estimates and judgments that affected reported amounts of assets and
liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at
the date of our financial statements. On an ongoing basis, we evaluate our estimates, including
those related to merchandise returns, inventories, intangible assets, income taxes, financings,
contingencies, insurance reserves, litigation, and pension and supplementary retirement plans. We
base our estimates on historical experience and on various other assumptions that we believe 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. We believe our critical accounting policies are as described below:
Inventory Valuation
Inventories are stated at the lower of cost or market with cost determined by the retail
inventory method. Under the retail inventory method, the valuation of inventories at cost and the
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 the 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 inventory under the lower of cost or market principle. We believe the retail inventory method
we use provides an inventory valuation that approximates cost and results in carrying inventory in
the aggregate at the lower of cost or market.
31
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We regularly review inventory quantities on-hand and record 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 merchandise demand may prove to be inaccurate, in which case
we may have understated or overstated the adjustment required for excess or old inventory. If our
inventory is determined to be overvalued in the future, we 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, we 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
merchandise demand, any significant unanticipated changes in demand or in economic conditions
within our markets could have a significant impact on the value of our inventory and reported
operating results.
As of January 31, 2009, approximately 32% of our inventories were valued using a first-in,
first-out cost basis and approximately 68% of our inventories were valued using a last-in,
first-out (LIFO) cost basis. As is currently the case with many companies in the retail
industry, our LIFO calculations yielded inventory increases in recent prior years due to deflation
reflected in price indices used. The LIFO method values merchandise sold at the cost of more
recent inventory purchases (which the deflationary indices indicated 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, we have reduced the carrying value of our LIFO inventories to
an estimated realizable value. These reductions totaled $41.6 million as of October 31, 2009 and
January 31, 2009. Inherent in the valuation of inventories are significant management judgments
and estimates regarding future merchandise selling costs and pricing. Should these estimates prove
to be inaccurate, we may have overstated or understated our inventory carrying value. In such
cases, operating results would ultimately be impacted.
Vendor Allowances
As is standard industry practice, allowances from merchandise vendors are received 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 allowances are reflected as an
adjustment to the cost of merchandise capitalized in inventory.
Additionally, allowances are received from vendors in connection with cooperative advertising
programs and for reimbursement of certain payroll expenses. These allowances are reviewed to ensure
reimbursements are for specific, incremental and identifiable advertising or payroll costs incurred
to sell the vendors products. If a vendor reimbursement exceeds the costs incurred, 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 as a reduction of the related advertising or payroll costs that have been incurred and
reflected in SG&A expense.
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 summarizing temporary differences resulting from differing treatment
of items for tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the consolidated balance sheet. In addition, we are
required to assess whether valuation allowances should be established against their deferred tax
assets based on consideration of all available evidence using a more likely than not standard.
To the extent a valuation allowance is established in a period, an expense must be recorded within
the income tax provision in the statement of operations.
32
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We reported net deferred tax liabilities of $0.8 million at October 31, 2009 and net deferred
tax assets of $2.7 million at January 31, 2009. In assessing the realizability of our deferred tax
assets, we considered whether it is more likely than not that our deferred tax assets will be
realized based upon all available evidence, including scheduled reversal of deferred tax
liabilities, historical operating results, projected future operating results, tax carry-back
availability and limitations pursuant to Section 382 of the Internal Revenue Code, among others.
Significant weight is to be given to evidence that can be objectively verified. As a result, a
companys current or previous losses are given more weight than any projected future taxable
income. In addition, a recent three-year historical cumulative loss is considered a significant
element of negative evidence that is difficult to overcome.
We evaluate our deferred tax assets each reporting period, including assessment of the
Companys cumulative income over the prior three-year period, to determine if valuation allowances
are required. With respect to our review for the fourth quarter of 2008, a significant element of
negative evidence considered was our three-year historical cumulative loss as of the fourth quarter
of 2008. This, combined with uncertain near-term economic conditions, reduced our ability to rely
on our projections of future taxable income in establishing the deferred tax assets valuation
allowance at January 31, 2009. Accordingly, a nearly full valuation allowance was established on
our net deferred tax assets during the fourth quarter of 2008. With respect to our reviews for the
first three quarters of 2009, we concluded that it was necessary to continue the position of a
nearly full valuation allowance on our net deferred tax assets.
Our deferred tax asset valuation allowance totaled $172.7 million and $145.5 million at
October 31, 2009 and January 31, 2009, respectively. If actual results differ from these estimates
or these estimates are adjusted in future periods, the valuation allowance may need to be adjusted,
which could materially impact our financial position and results of operations. If sufficient
positive evidence arises in the future indicating that all or a portion of the deferred tax assets
meet the more likely than not standard, the valuation allowance would be reversed accordingly in
the period that such a conclusion is reached.
We follow a prescribed recognition and derecognition threshold and measurement element for the
financial statement recognition and measurement of a tax position taken or expected to be taken in
a tax return. Accordingly, we establish reserves for certain tax positions that we believe are
supportable, but are potentially subject to challenge by applicable taxing authorities. However,
interpretations and guidance surrounding income tax laws and regulations change over time. Changes
in our assumptions and judgments could materially impact our financial position and results of
operations.
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 our business model or capital
strategy can result in the actual useful lives differing from estimates. In cases where we
determined the useful life of property, fixtures and equipment should be shortened, we depreciated
the net book value in excess of the salvage value over the 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.
Our net property, fixtures and equipment amounted to $778.1 million and $832.8 million at
October 31, 2009 and January 31, 2009, respectively.
33
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
We are required to test a long-lived asset for recoverability whenever events or changes in
circumstances indicate that its carrying value may not be recoverable. Factors that could trigger
an impairment review include the following:
| Significant underperformance of stores relative to historical or projected future
operating results, |
||
| Significant changes in the manner of our use of assets or overall business
strategy, and |
||
| Significant negative industry or economic trends for a sustained period. |
If the undiscounted cash flows associated with the asset are insufficient to support the
recorded asset, an impairment loss is recognized for the amount (if any) by which the carrying
amount of the asset exceeds the fair value of the asset. Should cash flow estimates differ
significantly from actual results, an impairment could arise and materially impact our 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 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 expectations, the carrying value of new stores long-lived assets may
ultimately become impaired.
Intangible Assets
Net intangible assets totaled $141.2 million and $148.2 million at October 31, 2009 and
January 31, 2009, respectively. Our intangible assets at October 31, 2009 are principally
comprised of $72.2 million of lease interests that relate to below-market-rate leases and $69.0
million associated with trade names, private label brand names and customer lists. The
lease-related interests are being amortized using a straight-line method. The customer lists are
being amortized using a declining-balance method. At October 31, 2009, trade names and private
label brand names of $54.1 million have been deemed as having indefinite lives.
Intangible assets that have indefinite lives are reviewed 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. Fair value is determined using quoted market prices and/or a discounted
cash flow analysis, which requires certain assumptions and estimates regarding industry economic
factors. Our policy is to conduct impairment testing based on our most current business plans,
which reflect anticipated changes in the economy and the industry.
Insurance Reserve Estimates
We use a combination of insurance and self-insurance for a number of risks including workers
compensation; general liability; and employee-related health care benefits, a portion of which is
paid by our associates. We determine the estimates for the liabilities associated with these risks
by considering historical claims experience, demographic factors, severity factors and other
actuarial assumptions. A change in claims frequency and severity of claims from historical
experience or changes in state statutes and the mix of states in which we operate could result in a
change to the required reserve levels.
Pension and Supplementary Retirement Plans
We provide an unfunded supplementary pension plan to certain key executives. Through
acquisitions, we acquired a defined benefit pension plan and assumed the liabilities of
supplementary pension plans and a postretirement benefit plan. Major assumptions used in
accounting for these plans include the discount rate and the expected long-term rate of return on
the defined benefit plans assets.
34
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discount rate assumption is evaluated annually. We utilize the Citibank Pension Discount
Curve (CPDC) to develop the discount rate assumption. The CPDC is developed from a U.S. Treasury
par curve that reflects the Treasury Coupon and Strips market. Option-adjusted spreads drawn from
the double-A corporate bond sector are layered-in to develop a double-A corporate par curve, from
which the CPDC spot rates are developed. The CPDC spot rates are applied to expected benefit
payments, from which a single constant discount rate can then be developed based on the expected
timing of these benefit payments.
We base our asset return assumption on current and expected allocations of assets, as well as
a long-term view of expected returns on the plan asset categories. We assess the appropriateness
of the expected rate of return on an annual basis and, when necessary, revise the assumption.
Changes in the assumptions regarding the discount rate and expected return on plan assets may
result in materially different expense and liability amounts. Actuarial estimations may differ
materially from actual results, reflecting many factors including changing market and economic
conditions, changes in investment strategies, higher or lower withdrawal rates and longer or
shorter life-spans of participants. In addition, while we are not required to make any mandatory
contributions to the defined benefit pension plan in fiscal 2009, the funded status of this plan
and the related cost reflected in our financial statements are affected by various factors that are
subject to an inherent degree of uncertainty, particularly in the current economic environment.
Under the Pension Protection Act of 2006, continued losses of asset values may necessitate
increased funding of the defined benefit pension plan in the future to meet minimum federal
government requirements. The continued downward pressure on the asset values of the defined
benefit pension plan may require us to fund obligations earlier than we forecasted, which would
have a negative impact on cash flows from operations.
Recently Issued Accounting Standards
In August 2009, the Financial Accounting Standards Board (FASB) issued Accounting Standards
Update No. 2009-05, Fair Value Measurements and Disclosures (Topic 820) Measuring Liabilities at
Fair Value (ASU 2009-05), which provides amendments to Accounting Standards Codification (ASC)
Subtopic 820-10, Fair Value Measurements and Disclosures Overall, for the fair value measurement
of liabilities. ASU 2009-05 provides clarification on measuring liabilities at fair value when a
quoted price in an active market is not available. The amendments are intended to reduce potential
ambiguity in financial reporting when measuring the fair value of liabilities. We adopted the
provisions of this update, as required, for the period ended October 31, 2009. The adoption of ASU
2009-05 did not have a material impact on our consolidated financial statements.
In June 2009, the FASB issued guidance now codified as ASC Topic 105, Generally Accepted
Accounting Principles (ASC 105), which established the FASB Accounting Standards Codification
(the Codification) as the single source of authoritative accounting principles recognized by the
FASB to be applied by nongovernmental entities in preparation of financial statements in conformity
with generally accepted accounting principles in the United States. The Codification superseded
all existing accounting standard documents; all other accounting literature not included in the
Codification is considered non-authoritative. We adopted this standard, as required, for the
period ended October 31, 2009. The adoption of ASC 105 did not have an impact on our financial
condition or results of operations, but has impacted certain disclosures by requiring all accounting literature references to be updated with ASC
references and by eliminating all references to pre-codification standards.
35
THE BON-TON STORES, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ASC Subtopic 715-20, Compensation Retirement Benefits Defined Benefit Plans (ASC
715-20), requires entities to provide enhanced disclosures about investment allocation decisions,
the major categories of plan assets, the inputs and valuation techniques used to measure fair value
of plan assets, the effect of fair value measurements using significant unobservable inputs on
changes in plan assets for the period and significant concentrations of risk within plan assets.
The enhanced disclosures required by ASC 715-20 must be provided in our Annual Report on Form 10-K
for fiscal 2009. We do not expect the adoption of the enhanced disclosures required by ASC 715-20
to have a material impact on our consolidated financial statements.
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. Factors that could cause such differences include, but are not limited to, risks
related to retail businesses generally; a significant and prolonged deterioration of general
economic conditions which could negatively impact the Company, including the potential write-down
of the current valuation of intangible assets and deferred taxes; changes in the terms of our
proprietary credit card program; potential increase in pension obligations; consumer spending
patterns, debt levels, and the availability and cost of consumer credit; additional competition
from existing and new competitors; inflation; changes in the costs of fuel and other energy and
transportation costs; weather conditions that could negatively impact sales; uncertainties
associated with expanding or remodeling existing stores; the ability to attract and retain
qualified management; the dependence upon relationships with vendors and their factors; a security
breach; the ability to reduce SG&A expenses; the incurrence of unplanned capital expenditures and
the ability to obtain financing for working capital, capital expenditures and general corporate
purposes. Additional factors that could cause the Companys actual results to differ from those
contained in these forward-looking statements are discussed in greater detail under Item 1A of the
Companys Form 10-K filed with the Securities and Exchange Commission.
36
THE BON-TON STORES, INC.
ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
Market Risk and Financial Instruments
Refer to disclosures contained on page 36 of our 2008 Annual Report on Form 10-K. There have
been no material changes in our exposures, risk management strategies, or hedging positions since
January 31, 2009.
ITEM 4. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
We maintain 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 Commissions rules and forms, and that such
information is accumulated and communicated to management, including our Chief Executive Officer
and Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness of our 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 our disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
There were no changes to our internal controls over financial reporting that occurred during
the 13 weeks ended October 31, 2009 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
37
THE BON-TON STORES, INC.
PART II: | OTHER INFORMATION |
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
|
Third Amendment to the Credit Card Program Agreement | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 10, 2009 | ||
10.2
|
Second Lien Loan and Security Agreement | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on November 24, 2009 (11/24/09 Form 8-K) | ||
10.3
|
Intercreditor Agreement | Incorporated by reference to Exhibit 10.2 to the 11/24/09 Form 8-K | ||
10.4
|
Amendment No. 2 to Loan and Security Agreement | Incorporated by reference to Exhibit 10.3 to the 11/24/09 Form 8-K | ||
10.5
|
Amended and Restated Loan and Security Agreement | Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on December 9, 2009 | ||
31.1
|
Certification of Byron L. Bergren | Filed herewith. | ||
31.2
|
Certification of Keith E. Plowman | Filed herewith. | ||
32.1
|
Certification Pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934 | Furnished herewith. |
38
THE BON-TON STORES, INC.
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, 2009 | BY: | /s/ Byron L. Bergren | ||
Byron L. Bergren | ||||
President and Chief Executive Officer | ||||
DATE: December 10, 2009 | BY: | /s/ Keith E. Plowman | ||
Keith E. Plowman | ||||
Executive Vice President,
Chief Financial Officer and Principal Accounting Officer |
39