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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended May 4, 2002 Commission File Number
0-19517
THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA 17402
(717) 757-7660
INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
As of June 10, 2002 there were 12,415,211 shares of Common Stock, $0.01
par value, and 2,989,853 shares of Class A Common Stock, $0.01 par value,
outstanding.
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PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
May 4, February 2,
(In thousands except share and per share data) 2002 2002
- -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents ............................................................. $ 11,747 $ 9,752
Restricted cash ....................................................................... 2,712 2,355
Trade and other accounts receivable, net of allowance for doubtful accounts and sales
returns of $3,127 and $3,408 at May 4, 2002 and February 2, 2002, respectively ..... 23,485 28,806
Merchandise inventories ............................................................... 171,814 170,003
Prepaid expenses and other current assets ............................................. 12,115 10,542
Deferred income taxes ................................................................. 6,548 7,371
--------- ---------
Total current assets ................................................................. 228,421 228,829
--------- ---------
PROPERTY, FIXTURES AND EQUIPMENT AT COST,
LESS ACCUMULATED DEPRECIATION AND AMORTIZATION ........................................ 140,133 143,884
DEFERRED INCOME TAXES ................................................................... 3,197 2,741
GOODWILL AND INTANGIBLE ASSETS (NOTE 4) ................................................. 9,877 9,999
OTHER ASSETS ............................................................................ 4,058 4,091
--------- ---------
Total assets ......................................................................... $ 385,686 $ 389,544
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................................................... $ 58,353 $ 57,007
Accrued payroll and benefits .......................................................... 8,533 9,743
Accrued expenses ...................................................................... 27,629 32,152
Current portion of long-term debt ..................................................... 663 646
Current portion of obligations under capital leases ................................... 237 232
Income taxes payable .................................................................. 703 11,891
--------- ---------
Total current liabilities ............................................................ 96,118 111,671
--------- ---------
LONG-TERM DEBT, LESS CURRENT MATURITIES ................................................. 83,537 67,209
OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT MATURITIES ............................... 659 720
OTHER LONG-TERM LIABILITIES ............................................................. 6,396 6,683
--------- ---------
Total liabilities .................................................................... 186,710 186,283
--------- ---------
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 and outstanding
shares of 12,442,156 and 12,483,941 at May 4, 2002 and February 2, 2002, respectively 125 125
Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued and
outstanding shares of 2,989,853 at May 4, 2002 and February 2, 2002 ................. 30 30
Treasury stock, at cost - shares of 41,500 at May 4, 2002 ............................. (178) --
Additional paid-in-capital ............................................................ 107,456 107,467
Deferred compensation ................................................................. (335) (408)
Accumulated other comprehensive income ................................................ (2,138) (2,354)
Retained earnings ..................................................................... 94,016 98,401
--------- ---------
Total shareholders' equity ........................................................... 198,976 203,261
--------- ---------
Total liabilities and shareholders' equity ........................................... $ 385,686 $ 389,544
========= =========
The accompanying notes are an integral part of these consolidated statements.
2
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTEEN
WEEKS ENDED
---------------------------------
(In thousands except share and per share data) May 4, May 5,
(Unaudited) 2002 2001
- ------------------------------------------------------------------------------------
NET SALES $ 150,517 $ 149,719
OTHER INCOME, NET 534 524
------------ ------------
151,051 150,243
------------ ------------
COSTS AND EXPENSES:
Costs of merchandise sold 100,397 98,740
Selling, general and administrative 50,636 53,106
Depreciation and amortization 5,057 4,450
------------ ------------
LOSS FROM OPERATIONS (5,039) (6,053)
INTEREST EXPENSE, NET 1,977 1,917
------------ ------------
LOSS BEFORE INCOME TAXES (7,016) (7,970)
INCOME TAX BENEFIT (2,631) (2,989)
------------ ------------
NET LOSS $ (4,385) $ (4,981)
============ ============
Per share amounts --
BASIC:
Net loss $ (0.29) $ (0.33)
============ ============
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,283,000 15,150,000
DILUTED:
Net loss $ (0.29) $ (0.33)
============ ============
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,283,000 15,150,000
The accompanying notes are an integral part of these consolidated statements.
3
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTEEN
WEEKS ENDED
-------------------------
(In thousands) May 4, May 5,
(Unaudited) 2002 2001
- -----------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,385) $ (4,981)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 5,057 4,450
Proceeds from sale of accounts receivable, net (5,300) (10,200)
Changes in operating assets and liabilities, net (4,535) (8,176)
-------- --------
Net cash used in operating activities (9,163) (18,907)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (1,191) (2,029)
Proceeds from sale of property, fixtures and equipment -- 8
-------- --------
Net cash used in investing activities (1,191) (2,021)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (32,512) (28,607)
Proceeds from issuance of long-term debt 48,800 50,600
Common shares repurchased (178) --
Decrease in bank overdraft balances (3,404) (688)
Increase in restricted cash (357) --
-------- --------
Net cash provided by financing activities 12,349 21,305
Net increase in cash and cash equivalents 1,995 377
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,752 14,067
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,747 $ 14,444
======== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 2,144 $ 1,588
Income taxes paid $ 10,618 $ 7,813
The accompanying notes are an integral part of these consolidated statements.
4
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on
January 31, 1996 as successor of a company established on January 31, 1929 and
currently operates as one business segment, through its subsidiaries, 73 retail
department stores located in Pennsylvania, New York, New Jersey, Maryland,
Connecticut, Massachusetts, New Hampshire, Vermont and West Virginia.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include accounts of
The Bon-Ton Stores, Inc. and all of its wholly-owned subsidiaries (the
"Company"). All intercompany transactions and balances have been eliminated in
consolidation.
The unaudited condensed consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and do not include all
information and footnotes required by generally accepted accounting principles.
In the opinion of management, all adjustments (primarily consisting of normal
recurring accruals) considered necessary for a fair presentation of interim
periods have been included. The Company's business is seasonal in nature and
results of operations for interim periods presented are not necessarily
indicative of results for the full fiscal year. It is suggested that these
consolidated financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Annual Report on Form
10-K for the fiscal year ended February 2, 2002 (the "2001 Annual Report").
Certain prior year balances have been reclassified to conform with the current
year presentation.
2. STOCK REPURCHASES
On February 7, 2002, the Company announced a stock repurchase program
authorizing the purchase of up to $2.5 million of Company stock from time to
time. During the first quarter of 2002, the Company purchased 41,500 shares at a
cost of $0.2 million. Treasury stock is accounted for by the cost method.
3. PER SHARE AMOUNTS
The presentation of earnings per share (EPS) requires a reconciliation of
numerators and denominators used in basic and diluted EPS calculations. The
numerator, net loss, is identical in both calculations. The following table
presents a reconciliation of average shares outstanding for the respective
calculations for each period presented on the accompanying consolidated
statements of operations:
THIRTEEN
WEEKS ENDED
----------------------------
May 4, May 5,
2002 2001
---------- ----------
Basic Calculation 15,283,000 15,150,000
Effect of dilutive shares ---
Restricted Shares -- --
Options -- --
---------- ----------
Diluted Calculation 15,283,000 15,150,000
---------- ----------
5
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
The following securities were antidilutive and, therefore, were not included in
the computation of diluted income per share amounts:
THIRTEEN
WEEKS ENDED
----------------------
May 4, May 5,
2002 2001
------- -------
Antidilutive shares ---
Restricted Shares 182,000 117,000
Options 967,000 928,000
Certain securities were excluded from the computation of dilutive shares due to
the Company's net loss position in the quarters ended May 4, 2002 and May 5,
2001. The following table shows the approximate effect of dilutive securities
had the Company reported profit for the quarters ended May 4, 2002 and May 5,
2001:
THIRTEEN
WEEKS ENDED
-------------------
May 4, May 5,
2002 2001
------ ----
Approximate effect of dilutive securities ---
Restricted Shares 91,000 --
Options 86,000 --
4. GOODWILL AND INTANGIBLE ASSETS
Effective at the beginning of 2002, the Company adopted the Financial Accounting
Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS")
No. 142, "Goodwill and Other Intangible Assets." Upon adoption of SFAS No. 142,
goodwill amortization ceased. Goodwill is now subject to fair-value based
impairment tests performed, at a minimum, on an annual basis. In addition, a
transitional goodwill impairment test was required as of the adoption date.
The Company had $3.0 million in net goodwill recorded in its consolidated
balance sheet at the beginning of 2002. The Company completed the required
transitional goodwill impairment test in the first quarter of 2002, and
determined that its goodwill was not impaired. During the first quarter of 2002,
no goodwill amortization was recorded, no additional goodwill was acquired, no
impairment losses were recognized and no goodwill was disposed of through sale
of a business unit.
6
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
SFAS No. 142 requires the presentation of net income and related earnings per
share data adjusted for the effect of goodwill amortization. To illustrate the
impact of goodwill amortization on results of the prior year period, the
following table provides adjusted net income and earnings per share data for the
first quarter of 2001 as compared to 2002:
THIRTEEN
(In thousands, except per share data) WEEKS ENDED
---------------------------
May 4, May 5,
2002 2001
--------- ---------
Reported net loss ($ 4,385) ($ 4,981)
Add back: Goodwill amortization, net of $22 tax benefit -- 36
--------- ---------
Adjusted net loss ($ 4,385) ($ 4,945)
========= =========
Per share amounts ---
BASIC:
Reported net loss ($ 0.29) ($ 0.33)
Add back: Goodwill amortization, net of tax benefit -- --
--------- ---------
Adjusted net loss ($ 0.29) ($ 0.33)
========= ========
DILUTED:
Reported net loss ($ 0.29) ($ 0.33)
Add back: Goodwill amortization, net of tax benefit -- --
--------- ---------
Adjusted net loss ($ 0.29) ($ 0.33)
========= ========
SFAS No. 142 also requires disclosure of intangible assets which are subject to
amortization. As of May 4, 2002 and February 2, 2002, the Company reported the
following lease-related interests classified as intangible assets:
(In thousands) May 4, February 2,
2002 2002
------- -------
Intangible assets - leases $10,828 $10,828
Less: Accumulated amortization 3,916 3,794
------- -------
Net $ 6,912 $ 7,034
======= =======
These lease interests relate to below-market-rate leases purchased in store
acquisitions completed in fiscal years 1992 through 1999, which were adjusted to
reflect fair market value. These leases had lives of four to forty-eight years.
During the quarter ended May 4, 2002, $0.1 million in amortization was recorded
on these intangible assets. The Company anticipates amortization on these
intangible assets of approximately $0.5 million, $0.4 million, $0.4 million,
$0.5 million and $0.5 million for fiscal years 2002, 2003, 2004, 2005 and 2006,
respectively.
7
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(CONTINUED)
5. EFFECT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses financial accounting and reporting for
obligations associated with retirement of tangible long-lived assets and the
associated asset retirement costs. SFAS 143 is effective for fiscal years
beginning after June 15, 2002 with earlier adoption encouraged. The Company
intends to adopt SFAS 143 for the 2003 fiscal year and does not expect the
provisions of SFAS No. 143 to have a material impact on operating results of the
Company.
8
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes changes in selected operating indicators of the
Company, illustrating the relationship of various income and expense items to
net sales for the respective periods presented:
THIRTEEN
WEEKS ENDED
----------------------
May 4, May 5,
2002 2001
------ ------
NET SALES 100.0% 100.0%
OTHER INCOME, NET 0.4 0.4
------ ------
100.4 100.4
------ ------
COSTS AND EXPENSES:
Costs of merchandise sold 66.7 65.9
Selling, general and administrative 33.6 35.5
Depreciation and amortization 3.4 3.0
------ ------
LOSS FROM OPERATIONS (3.3) (4.0)
INTEREST EXPENSE, NET 1.3 1.3
------ ------
LOSS BEFORE INCOME TAXES (4.7) (5.3)
INCOME TAX BENEFIT (1.7) (2.0)
------ ------
NET LOSS (2.9)% (3.3)%
====== ======
THIRTEEN WEEKS ENDED MAY 4, 2002 COMPARED TO THIRTEEN WEEKS ENDED MAY 5, 2001
For purposes of the following discussions, all references to "first quarter of
2002" and "first quarter of 2001" are to the Company's thirteen-week period
ended May 4, 2002 and May 5, 2001, respectively.
NET SALES. Net sales for the first quarter of 2002 were $150.5 million,
reflecting a total and comparable store sales increase of 0.5% from the same
period last year. Business families recording sales increases for the first
quarter of 2002 were Coats, Petites, Juniors, Misses Sportswear and Accessories.
Business families reflecting the sharpest sales percentage decreases were Mens
Clothing, Shoes, Womens, Intimate and Dresses.
OTHER INCOME, NET. Net other income, principally income from leased departments,
remained constant at 0.4% of net sales in the first quarter of 2002 and 2001.
COSTS AND EXPENSES. Gross margin as a percentage of net sales decreased 0.8
percentage point to 33.3% for the quarter ended May 4, 2002 from 34.1% for the
comparable period last year, primarily reflecting an increased markdown rate on
seasonal merchandise. Gross margin dollars decreased $0.9 million compared to
the first quarter of 2001 as a result of the reduction in gross margin rate.
9
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Selling, general and administrative expenses for the first quarter of
2002 were $2.5 million below the first quarter of 2001. The current year
expense rate decreased 1.9 percentage points to 33.6% of net sales, relative to
35.5% of net sales in the first quarter of 2001. The expense dollar and rate
decreases are principally a reflection of increased income on the Company's
proprietary credit card program, and lower expenses for utilities, rent,
advertising and employee benefits.
Depreciation and amortization in the first quarter of 2002 increased $0.6
million over the first quarter of 2001, principally reflecting full 2002
depreciation on fiscal 2001 fixed asset additions.
LOSS FROM OPERATIONS. Loss from operations in the first quarter of 2002 was $5.0
million, or 3.3% of net sales, compared to loss from operations of $6.1 million,
or 4.0% of net sales, in the first quarter of 2001.
The Company sells receivables through its accounts receivable facility to
provide additional working capital. On a pro-forma basis, if the Company had
on-balance sheet financing, it would have reduced selling, general and
administrative expenses by $1.4 million in the first quarter of 2002 and $2.1
million in the first quarter of 2001. The lower selling, general and
administrative expenses would have been offset by a corresponding increase in
interest expense for both periods. The net result of the pro-forma
reclassification would reflect loss from operations of $3.6 million in the first
quarter of 2002 and loss from operations of $4.0 million for the first quarter
of 2001.
INTEREST EXPENSE, NET. Net interest expense remained relatively constant at $2.0
million, or 1.3% of net sales, in the first quarter of 2002 compared to $1.9
million, or 1.3% of net sales, in the first quarter of 2001. The consistency in
net interest expense is primarily a reflection of long-term interest rate swap
agreements.
INCOME TAX BENEFIT. The effective tax rate remained constant at 37.5% in the
first quarters of 2002 and 2001.
NET LOSS. Net loss in the first quarter of 2002 was $4.4 million, or 2.9% of net
sales, compared to net loss of $5.0 million, or 3.3% of net sales, in the first
quarter of 2001.
FUTURE ACCOUNTING CHANGES
In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses financial accounting and
reporting for obligations associated with retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS 143 is effective for
fiscal years beginning after June 15, 2002 with earlier adoption encouraged. The
Company intends to adopt SFAS 143 for the 2003 fiscal year and does not expect
the provisions of SFAS No. 143 to have a material impact on operating results of
the Company.
SEASONALITY AND INFLATION
The Company's business, like that of most retailers, is subject to seasonal
fluctuations, with the major portion of sales and income realized during the
second half of each fiscal year, which includes back-to-school and holiday
seasons. Due to the fixed nature of certain costs, selling, general and
administrative expenses are typically higher as a percentage of net sales during
the first half of each fiscal year.
10
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Because of the seasonality of the Company's business, results for any quarter
are not necessarily indicative of results that may be achieved for a full fiscal
year. In addition, quarterly operating results are impacted by the timing and
amount of revenues and costs associated with the opening of new stores and
closing and remodeling of existing stores.
The Company does not believe inflation had a material effect on operating
results during the quarters ended May 4, 2002 and May 5, 2001. However, there
can be no assurance that the Company's business will not be affected by
inflationary adjustments in the future.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital requirements are currently met through a
combination of cash, borrowings under its revolving credit facility and proceeds
from its accounts receivable facility.
The following table summarizes the Company's liquidity and capital resources:
May 4, May 5,
(Dollars in millions) 2002 2001
- ------------------------------------------------------------------------
Working capital $ 132.3 $ 159.4
Current ratio 2.38:1 2.73:1
Funded debt to total capitalization 0.30:1 0.39:1
Unused availability under lines of credit $ 67.5 $ 52.0
For the quarter ended May 4, 2002, net cash used in operating activities was
$9.2 million as compared to net cash used of $18.9 million for the comparable
period last year. The decrease in net cash used in 2002 as compared to 2001 was
primarily attributable to a decrease in the Company's working capital
requirements, particularly reflected in reduced merchandise inventories, reduced
accounts receivable and an increase in net proceeds from sale of accounts
receivable.
Net cash used in investing activities was $1.2 million in 2002 compared to $2.0
million for the comparable period last year. This reduction reflects differences
in the timing of capital projects.
Net cash provided by financing activities amounted to $12.3 million for 2002
compared to $21.3 million for the comparable period of 2001. The decrease in
cash provided by financing activities in 2002 was primarily attributable to
decreased advances from the Company's revolving credit facility and increased
debt payments.
The Company anticipates its cash flows from operations, supplemented by
borrowings under its revolving credit facility and proceeds from its accounts
receivable facility, will be sufficient to satisfy its operating cash
requirements.
Cash flows from operations are impacted by consumer confidence, weather
conditions in the geographic markets served by the Company, economic climate and
competitive conditions existing in the retail industry. A downturn in any single
factor or a combination of factors could have a material adverse impact upon the
Company's ability to generate sufficient cash flows to operate its business.
11
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company has not identified any probable circumstances that would likely
impair its ability to meet its cash requirements or trigger a default or
acceleration of payment of the Company's debt.
TRANSFERS OF FINANCIAL ASSETS
The Company engages in securitization activities involving the Company's
proprietary credit card portfolio as a source of funding. Gains and losses from
securitizations are recognized in the Consolidated Statements of Income when the
Company relinquishes control of the transferred financial assets in accordance
with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125"
and other related pronouncements. The gain or loss on the sale of financial
assets depends in part on the previous carrying amount of the assets involved in
the transfer, allocated between the assets sold and the retained interests based
upon their respective fair values at the date of sale.
The Company has sold an undivided percentage ownership interest in certain of
its credit card accounts receivable to an unrelated third-party under a $150
million accounts receivable securitization facility. The unrelated third-party,
referred to as the conduit, has purchased a $144.7 million interest in the
accounts receivable under this facility at May 4, 2002. The Company has an
agreement to sell, on a revolving basis, pools of accounts receivable to a
special purpose entity, The Bon-Ton Receivables Partnership, LP ("BTRLP"), a
wholly-owned subsidiary of the Company. BTRLP is designed to facilitate the
securitization of certain accounts receivable. BTRLP then sells an undivided
percentage ownership interest in each individual receivable to the conduit at a
discount and uses cash collected on these receivables to purchase additional
receivables from the Company. The Company is responsible for servicing these
accounts and receives a servicing fee, while BTRLP bears the risk of
non-collection. Associated off-balance-sheet assets and related debt were $144.7
and $150.0 million at May 4, 2002 and February 2, 2002, respectively. Since the
conduit purchases accounts receivable from BTRLP on a revolving basis, the
Company currently has access to all of the cash collections on the accounts
receivable. Upon the facility's termination, the conduit would be entitled to
all cash collections on BTRLP's accounts receivable until its net investment
($144.7 million at May 4, 2002) is repaid. Accordingly, upon termination of the
facility, the assets of BTRLP would not be available to the Company until all
amounts due and owing by BTRLP to the conduit have been paid in full.
The Company believes the terms of the accounts receivable facility qualify the
accounts receivable transactions for "sale treatment" under generally accepted
accounting principles. This treatment requires it to account for BTRLP's
transactions with the conduit as a sale of accounts receivable instead of
reflecting the conduit's net investment as long-term debt with a pledge of
accounts receivable as collateral. Absent this "sale treatment," the Company's
balance sheet would reflect additional accounts receivable and long-term debt,
which could be a factor in the Company's ability to raise capital; however,
results of operations would not be impacted.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and results of
operations are based upon the consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles.
Preparation of these financial statements requires the Company to make estimates
and judgments that affect reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of its financial statements. On an ongoing basis, the Company evaluates its
estimates, including those related to merchandise returns, bad debts,
inventories,
12
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
intangible assets, income taxes, financings and contingencies and litigation.
The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially result in
materially different results under different assumptions and conditions. The
Company believes its critical accounting policies are those described below.
Allowance for Doubtful Accounts
The Company performs ongoing credit evaluations of its customers and adjusts
credit limits based upon payment history and the customer's current
credit-worthiness. The Company continually monitors collections and payments
from customers and maintains an allowance for estimated credit losses based upon
its historical experience and any specific customer collection issues identified
(e.g. bankruptcy). While such credit losses have historically been within
expectations and provisions established, the Company cannot guarantee that it
will continue to experience the same credit loss rates as in the past. If
circumstances change (e.g. higher than expected defaults or bankruptcies), the
Company's estimates of the recoverability of amounts due to the Company could be
materially reduced.
Inventory Valuation
Inventories are stated at the lower of cost or market with cost determined using
the retail last-in, first-out ("LIFO") method. Under the retail inventory
method, the valuation of inventories at cost and resulting gross margin are
calculated 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 due to its practicality. 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.
Income Taxes
Significant management judgment is required in determining the provision for
income taxes, deferred tax assets and liabilities and any valuation allowance
recorded against net deferred tax assets. The process involves the Company
summarizing temporary differences resulting from differing treatment of items
(e.g. inventory valuation reserves) for tax and accounting purposes. These
differences result in deferred tax assets and liabilities, which are included
within the consolidated balance sheet. The Company must then assess the
likelihood that deferred tax assets will be recovered from future taxable income
and, to the extent the Company believes recovery is not likely, a valuation
allowance must be established. To the extent the Company establishes a valuation
allowance in a period, an expense must be recorded within the tax provision in
the statement of operations. Net deferred tax assets were $9.7 million and $10.1
million as of May 4, 2002 and February 2, 2002, respectively. As of said dates,
no valuation allowance has been established against net deferred tax assets, as
the Company believes these tax benefits will be realizable through reversal of
existing deferred tax liabilities and future taxable income.
13
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Long-lived Assets
The Company assesses, on a store-by-store basis, the impairment of identifiable
long-lived assets -- primarily property, fixtures and equipment -- whenever
events or changes in circumstances indicate that the carrying value may not be
recoverable. The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Cash flow estimates are
based on historical results adjusted to reflect the Company's best estimate of
future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Estimates of fair value represent the
Company's best estimate based on industry trends and reference to market rates
and transactions. Newly-opened stores may take time to generate positive
operating and cash flow results. Factors such as store type, store location,
current marketplace awareness of the Company's private label brands, local
customer demographic data and current fashion trends are all considered in
determining the time-frame required for a store to achieve positive financial
results. If economic conditions are substantially different from our
expectations, the carrying value of certain long-lived assets may become
impaired.
Property, fixtures and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of such assets. Changes in
the Company's business model or changes in the Company's capital strategy can
result in the actual useful lives differing from the Company's estimates. In
cases where the Company determines that the useful life of property, fixtures
and equipment should be shortened, the Company would depreciate the net book
value in excess of the salvage value over its revised remaining useful life,
thereby increasing depreciation expense. Factors such as changes in the planned
use of fixtures or leasehold improvements could result in shortened useful
lives.
Securitizations
A significant portion of the Company's funding is through off-balance-sheet
credit card securitizations via sales of certain accounts receivable through an
accounts receivable facility. The sale of receivables is to BTRLP, a special
purpose entity, as defined by SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities -- A
Replacement of FASB Statement No. 125." BTRLP is a wholly-owned subsidiary of
the Company. BTRLP sells the receivables through the accounts receivable
facility to a conduit. BTRLP may sell up to $150.0 million through the facility.
The Company sells accounts receivable through securitizations with servicing
retained. When the Company securitizes, it surrenders control over the
transferred assets and accounts for the transaction as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The Company allocates the previous carrying amount of the
securitized receivables between the assets sold and retained interests, based on
their relative estimated fair values at the date of sale. Securitization income
is recognized at the time of the sale, and is equal to the excess of the fair
value of the assets obtained (principally cash) over the allocated cost of the
assets sold and transaction costs. During the revolving period of each accounts
receivable securitization, securitization income is recorded representing
estimated gains on the sale of new receivables to the conduit on a continuous
basis to replenish the investors' interest in securitized receivables that have
been repaid by the credit card account holders. Fair value estimates used in the
recognition of securitization income require certain assumptions of payment,
default, servicing costs and interest rates. To the extent actual results differ
from those estimates, the impact is recognized as securitization income.
14
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company estimates the fair value of retained interests in securitizations
based on a discounted cash flow analysis. The cash flows of the retained
interest-only strip are estimated as the excess of the weighted average finance
charge yield on each pool of receivables sold over the sum of the interest rate
paid to the note holder, the servicing fee and an estimate of future credit
losses over the life of the receivables. Cash flows are discounted from the date
the cash is expected to become available to the Company. These cash flows are
projected over the life of the receivables using payment, default, and interest
rate assumptions that the Company believes would be used by market participants
for similar financial instruments subject to prepayment, credit and interest
rate risk. The cash flows are discounted using an interest rate that the Company
believes a purchaser unrelated to the seller of the financial instrument would
demand. As all estimates used are influenced by factors outside the Company's
control, there is uncertainty inherent in these estimates, making it reasonably
possible that they could change in the near term. Any adverse change in the
Company's assumptions could materially impact securitization income.
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 contains
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," "will," "plan," "expect," "anticipate,"
"estimate," "project," "intend" or other similar expressions, involve important
risks and uncertainties that could significantly affect anticipated results in
the future and, accordingly, such results may differ from those expressed in any
forward-looking statements made by or on behalf of the Company. These risks and
uncertainties include, but are not limited to, uncertainties affecting retail in
general, such as consumer confidence and demand for soft goods; risks relating
to leverage and debt service; competition within markets in which the Company's
stores are located; and the need for, and costs associated with, store
renovations and other capital expenditures.
15
THE BON-TON STORES, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe its interest rate risks, as described in the 2001
Annual Report, have changed materially since the Company's disclosure in its
2001 Annual Report.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any legal proceedings since the
Company's disclosure in its 2001 Annual Report.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant to the requirements of Item 601
of Regulation S-K:
None.
(b) Reports on Form 8-K filed during the quarter:
None.
16
THE BON-TON STORES, INC. AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BON-TON STORES, INC.
DATE: June 14, 2002 BY: /s/ Tim Grumbacher
--------------------- ------------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
DATE: June 14, 2002 BY: /s/ James H. Baireuther
--------------------- ----------------------------
James H. Baireuther
Vice Chairman, Chief
Administrative Officer and
Chief Financial Officer
17