================================================================================
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 1, 2004 Commission File Number
0-19517
THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA 17402
(717) 757-7660
INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229
------------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 10, 2004 there were 13,055,378 shares of Common Stock, $0.01
par value per share, and 2,951,490 shares of Class A Common Stock, $0.01 par
value per share, outstanding.
================================================================================
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data) May 1, January 31,
(Unaudited) 2004 2004
- -----------------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 19,565 $ 19,890
Retained interest in trade receivables and other, net of allowance for doubtful accounts
and sales returns of $6,001 and $6,299 at May 1, 2004 and January 31, 2004, respectively 79,321 104,679
Merchandise inventories 288,588 257,372
Prepaid expenses and other current assets 21,267 14,683
Deferred income taxes 6,474 8,825
- -----------------------------------------------------------------------------------------------------------------------------
Total current assets 415,215 405,449
- -----------------------------------------------------------------------------------------------------------------------------
Property, fixtures and equipment at cost,
less accumulated depreciation and amortization 158,773 160,923
Deferred income taxes 22,225 24,252
Goodwill and intangible assets 9,025 9,121
Other assets 11,236 12,100
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 616,474 $ 611,845
=============================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 106,531 $ 88,118
Accrued payroll and benefits 24,587 36,344
Accrued expenses 41,409 42,519
Current maturities of long-term debt 811 1,113
Current maturities of obligations under capital leases 1,282 1,797
Income taxes payable - 13,531
- -----------------------------------------------------------------------------------------------------------------------------
Total current liabilities 174,620 183,422
- -----------------------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 188,492 170,703
Obligations under capital leases, less current maturities 787 1,013
Other long-term liabilities 16,895 17,223
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 380,794 372,361
- -----------------------------------------------------------------------------------------------------------------------------
Shareholders' equity
Preferred Stock - authorized 5,000,000 shares at $0.01 par value; no shares issued - -
Common Stock - authorized 40,000,000 shares at $0.01 par value; issued shares
of 13,393,178 and 13,055,740 at May 1, 2004 and January 31, 2004, respectively 134 131
Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued
and outstanding shares of 2,951,490 and 2,989,853 at May 1, 2004 and January 31,
2004, respectively 30 30
Treasury stock, at cost - shares of 337,800 at May 1, 2004 and January 31, 2004 (1,387) (1,387)
Additional paid-in-capital 116,423 114,687
Deferred compensation (36) (136)
Accumulated other comprehensive loss (996) (1,298)
Retained earnings 121,512 127,457
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 235,680 239,484
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 616,474 $ 611,845
=============================================================================================================================
The accompanying notes are an integral part of these consolidated statements.
2
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTEEN
WEEKS ENDED
------------------------------
(In thousands except share and per share data) May 1, May 3,
(Unaudited) 2004 2003
- -------------------------------------------------------------------------------------
Net sales $ 265,083 $ 141,111
Other income, net 983 526
- -------------------------------------------------------------------------------------
266,066 141,637
- -------------------------------------------------------------------------------------
Costs and expenses:
Costs of merchandise sold 168,663 88,927
Selling, general and administrative 96,507 51,380
Depreciation and amortization 6,575 4,764
- -------------------------------------------------------------------------------------
Loss from operations (5,679) (3,434)
Interest expense, net 3,204 1,244
- -------------------------------------------------------------------------------------
Loss before income taxes (8,883) (4,678)
Income tax benefit (3,332) (1,730)
- -------------------------------------------------------------------------------------
NET LOSS $ (5,551) $ (2,948)
=====================================================================================
PER SHARE AMOUNTS -
BASIC:
Net loss $ (0.35) $ (0.20)
=====================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,686,415 15,033,345
DILUTED:
Net loss $ (0.35) $ (0.20)
=====================================================================================
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,686,415 15,033,345
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 1, May 3,
(Unaudited) 2004 2003
- ------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (5,551) $ (2,948)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 6,575 4,764
Net transfers of receivables to accounts receivable facility (17,000) (9,400)
Changes in operating assets and liabilities, net 6,281 (8,745)
- ------------------------------------------------------------------------------------------------
Net cash used in operating activities (9,695) (16,329)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (4,219) (1,031)
Proceeds from sale of property, fixtures and equipment 7 -
- ------------------------------------------------------------------------------------------------
Net cash used in investing activities (4,212) (1,031)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (142,935) (27,133)
Proceeds from issuance of long-term debt 159,680 39,000
Common stock repurchased - (243)
Cash dividends paid (394) -
Stock options exercised 1,782 -
Deferred financing costs paid (146) -
(Decrease) increase in bank overdraft balances, net (4,405) 565
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 13,582 12,189
Net decrease in cash and cash equivalents (325) (5,171)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 19,890 16,796
- ------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,565 $ 11,625
================================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 1,896 $ 2,069
Net income taxes paid $ 12,537 $ 3,049
The accompanying notes are an integral part of these consolidated statements.
4
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on
January 31, 1996 as the successor of a company incorporated on January 31, 1929,
and currently operates, through its subsidiaries, 140 department stores and two
furniture stores in sixteen states from the Northeast to the Midwest under the
names "Bon-Ton" and "Elder-Beerman." The Company conducts its operations through
one business segment.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include accounts of The Bon-Ton Stores, Inc. and all of its wholly owned
subsidiaries (the "Company"). All intercompany transactions and balances have
been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and do not include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (primarily consisting
of normal recurring accruals) considered necessary for a fair presentation of
interim periods have been included. The Company's business is seasonal in nature
and results of operations for interim periods presented are not necessarily
indicative of results for the full fiscal year. It is suggested that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 31, 2004 (the "2003
Annual Report").
Certain prior year balances have been reclassified to conform with the
current year presentation.
2. STOCK-BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board ("APB") Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"), and related interpretations including
Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25," issued in March 2000, to account for its fixed-plan stock
options. Under this method, compensation expense is recorded on the date of the
grant only if the current market price of the underlying stock exceeded the
exercise price. Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), established
accounting and disclosure requirements using a fair-value-based method of
accounting for stock-based employee compensation plans. As allowed by SFAS No.
123, the Company has elected to continue to apply the intrinsic-value-based
method of accounting described above, and has adopted only the disclosure
requirements of SFAS No. 123 as amended by SFAS No. 148, "Accounting for
Stock-Based Compensation -- Transition and Disclosure, an Amendment of FASB
Statement No. 123." The following table illustrates the effect on net loss if
the fair-value-based method had been applied to all unvested awards in each
period:
5
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN
WEEKS ENDED
-----------------------
May 1, May 3,
2004 2003
- -------------------------------------------------------------------------------
Net loss, as reported $(5,551) $(2,948)
Deduct: Total stock-option-based
employee compensation expense
determined under fair-value-based methods
for all awards, net of related tax effects (44) (83)
- ------------------------------------------------------------------------------
Pro forma net loss $(5,595) $(3,031)
==============================================================================
Loss per share -
Basic As reported $ (0.35) $ (0.20)
Pro forma (0.36) (0.20)
Diluted As reported $ (0.35) $ (0.20)
Pro forma (0.36) (0.20)
All stock options impacting the periods in the above table were issued
with an option exercise price equal to the per-share market price at date of
grant. The Company used the Black-Scholes option pricing model to calculate the
fair value of the stock options at the grant date.
The FASB is currently reviewing the accounting for stock options, and may
require use of the fair value method prescribed by SFAS No. 123. In addition, on
February 19, 2004, the International Accounting Standards Board issued
accounting rules that require the expensing of stock options, and the FASB is
working to align U.S. accounting with international standards. As required by
SFAS No. 123 for companies retaining APB 25 accounting, the Company discloses
the estimated impact of fair value accounting for stock options issued.
3. PER SHARE AMOUNTS
The presentation of earnings per share ("EPS") requires a reconciliation
of numerators and denominators used in basic and diluted EPS calculations. The
numerator, net income or loss, is identical in both calculations. The following
table presents a reconciliation of weighted average shares outstanding for the
respective calculations for each period presented on the accompanying
consolidated statements of operations:
6
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN
WEEKS ENDED
-------------------------
May 1, May 3,
2004 2003
- ---------------------------------------------------------------
Basic calculation 15,686,415 15,033,345
Effect of dilutive securities ---
Restricted shares - -
Options - -
- ---------------------------------------------------------------
Diluted calculation 15,686,415 15,033,345
===============================================================
The following securities were antidilutive and, therefore, were not
included in the computation of diluted earnings per share amounts for the
periods indicated:
THIRTEEN
WEEKS ENDED
-----------------------
May 1, May 3,
2004 2003
- --------------------------------------------------------------
Antidilutive shares ---
Restricted shares 96,000 140,000
Options 773,000 948,000
Certain securities were excluded from the computation of dilutive shares
due to the Company's net loss position in the thirteen weeks ended May 1, 2004
and May 3, 2003. The following table shows the approximate effect of dilutive
securities had the Company reported profit for these periods:
THIRTEEN
WEEKS ENDED
----------------------
May 1, May 3,
2004 2003
- -------------------------------------------------------------
Effect of dilutive securities ---
Restricted shares 86,000 96,000
Options 392,000 94,000
7
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
4. INTEGRATION ACTIVITIES
In connection with the acquisition of The Elder-Beerman Stores Corp.
("Elder-Beerman") effective October 24, 2003, the Company developed integration
plans resulting in involuntary terminations, employee relocations, and lease and
other contract terminations. The liability for involuntary termination benefits
covers approximately three hundred employees, primarily in general and
administrative and merchandising functions. The Company expects to pay the
balance of involuntary termination benefits and employee relocations by the end
of fiscal 2004. The liability for lease and other contractual terminations
benefits will be paid over the remaining contract periods through 2030. The
Company will finalize its integration plans during fiscal 2004, which may result
in additional liabilities. Liabilities recognized in connection with the
acquisition and activity to date are as follows:
Involuntary Lease and
Termination Employee Other Contract
Benefits Relocation Termination Total
- -----------------------------------------------------------------------------------------
Liability established in purchase
accounting $ 5,571 $ 1,637 $ 3,053 $ 10,261
Payments during fiscal 2003 --- (26) --- (26)
- -----------------------------------------------------------------------------------------
Balance at January 31, 2004 $ 5,571 $ 1,611 $ 3,053 $ 10,235
Payments during fiscal 2004 (1,944) (784) (1,800) (4,528)
- -----------------------------------------------------------------------------------------
Balance at May 1, 2004 $ 3,627 $ 827 $ 1,253 $ 5,707
=========================================================================================
5. SALE OF RECEIVABLES
The Company securitizes its proprietary credit card portfolio through an
accounts receivable facility (the "Facility"). Under the securitization
agreement, which is contingent upon receivables meeting certain performance
criteria, the Company sells through The Bon-Ton Receivables Partnership, LP
("BTRLP"), a wholly owned subsidiary of the Company and qualifying special
purpose entity under SFAS No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities," up to $250,000 of an
undivided percentage interest in the receivables on a limited recourse basis. In
connection with the securitization agreement, the Company retains servicing
responsibilities, subordinated interests and an interest-only strip, all of
which are retained interests in the securitized receivables. The Company retains
annual servicing fees of 2.0% of the outstanding accounts receivable balance and
rights to future cash flows arising after investors in the securitization have
received the return for which they contracted. The investors have no recourse to
the Company's other assets for failure of debtors to pay when due. The Company's
retained interests are subordinate to the investors' interests. The value of the
retained interest is subject to credit, prepayment and interest rate risks. The
Company does not recognize a servicing asset or liability, as the amount
received for servicing the receivables is a reasonable approximation of market
rates and servicing costs.
8
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
As of May 1, 2004 and January 31, 2004, credit card receivables were sold
under the securitization agreement in the amount of $211,488 and $228,488,
respectively, and the Company had subordinated interests of $76,068 and $96,755,
respectively, related to the amounts sold that were included in the accompanying
Consolidated Balance Sheets as retained interest in trade receivables. The
Company accounts for its subordinated interest in the receivables in accordance
with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company has not recognized any unrealized gains or losses on
its subordinated interest, as the current carrying value of customer revolving
charge accounts receivable is a reasonable estimate of fair value and average
interest rates approximate current market origination rates. Subordinated
interests as of May 1, 2004 and January 31, 2004 included restricted cash of
$2,057 and $5,998, respectively, required pursuant to terms of the Company's
accounts receivable facility agreement.
New receivables are sold on a continual basis to replenish each investor's
respective level of participation in receivables that have been repaid by credit
card holders.
The Company recognized securitization income of $2,977 and $2,550 on
securitization of credit card receivables during the thirteen weeks ended May 1,
2004 and May 3, 2003, respectively. This income is reported as a component of
selling, general and administrative expenses.
The Company recognized servicing fees, which it reported as a component of
selling, general and administrative expenses, of $1,077 and $687 for the
thirteen weeks ended May 1, 2004 and May 3, 2003, respectively. As of May 1,
2004, $10,723 of the total managed credit card receivables were sixty-one days
or more past due. Net credit losses on the total managed credit card receivables
were $3,411 and $1,925 for the thirteen weeks ended May 1, 2004 and May 3, 2003,
respectively.
6. STOCK REPURCHASES
On February 7, 2002, the Company announced a stock repurchase program
authorizing the purchase of up to $2,500 of the Company's Common Stock from time
to time. No shares were purchased during the thirteen weeks ended May 1, 2004.
Since February 7, 2002, the Company purchased 337,800 shares at a cost of $1,387
pursuant to this stock purchase program. Treasury stock is accounted for by the
cost method.
7. SUBSEQUENT EVENTS
On May 27, 2004, the Company announced a quarterly cash dividend of $0.025
per share on Class A Common Stock and Common Stock, payable July 15, 2004 to
shareholders of record as of July 1, 2004.
On June 3, 2004, the Company announced plans to close its Pottstown,
Pennsylvania store effective July 31, 2004. The estimated pre-tax cost of
closing this location is $1,700 to $2,000. An agreement was entered into
amending the lease termination date to July 31, 2004 from January 28, 2012,
requiring the Company to pay a fee of $1,600. The remaining estimated costs
relate to severance, product liquidation and logistics.
9
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of the following discussions, all references to "first
quarter of 2004" and "first quarter of 2003" are to the Company's thirteen-week
periods ended May 1, 2004 and May 3, 2003, respectively.
RESULTS OF OPERATIONS
The Company is a traditional department store retailer with a 106-year
history of providing high quality merchandise to its customers in secondary
markets. On October 24, 2003, the Company acquired The Elder-Beerman Stores
Corp. ("Elder-Beerman"), nearly doubling its number of stores and adding 5.7
million square feet of retail space. As a result of the acquisition, the Company
operates 140 department stores and two furniture stores in sixteen states, from
the Northeast to the Midwest, under the Bon-Ton and Elder-Beerman names. The
stores carry a broad assortment of quality brand-name and private label fashion
apparel and accessories for women, men and children, as well as distinctive
cosmetics and home furnishings. The Company's strategy is to profitably sell
merchandise by providing its customers with differentiated fashion merchandise
at compelling value in the secondary markets the Company serves.
The Company's revenues are generated through sales in existing stores and
through sales from new stores opened through expansion and acquisition. During
the first quarter of fiscal 2004, the Company's total sales increased 87.9% to
$265.1 million, including $125.7 million from the acquired Elder-Beerman stores,
compared to $141.1 million for the same period last year. Comparable store
sales, which do not include Elder-Beerman stores, decreased 2.0% in the first
quarter of fiscal 2004 as compared to the comparable period in fiscal 2003.
The retail industry is highly competitive and the first quarter of 2004
was no exception as evidenced by the Company's comparable store sales decreases.
The Company anticipates these competitive pressures and challenges will continue
in the future. As a result, the Company will continue its highly promotional
posture and emphasis on offering a wide range of value merchandise.
Additionally, expansion of the Company's private labels and growth of exclusive
brands support its strategy of product differentiation and provide opportunity
for increased sales and higher gross margin.
The Company's ongoing challenge in 2004 is the successful integration of
the two companies into one business unit and ensuring that the new company
remains a stable financial performer. Decreases in sales volume and a highly
promotional retail environment are being addressed with the finalization of the
Company's vendor matrix, product assortment and inventory levels, supported by
strong Company-wide marketing efforts. First quarter results were positively
impacted by synergies realized which offset the integration expenses incurred
during the period; achieving these synergies on an ongoing basis will be
critical to the Company's success. Of equal importance is expediting the
Company's systems integration efforts; the majority of the Company's capital
expenditures in 2004 will be directed towards strategic systems improvements. As
a result of the acquisition, the Company has increased its debt levels and,
accordingly, its exposure to interest rate fluctuations.
10
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On June 3, 2004, the Company announced that it would close its Pottstown,
Pennsylvania store effective July 31, 2004. The estimated pre-tax cost of
closing this location is $1.7 million to $2.0 million. An agreement was entered
into amending the lease termination date to July 31, 2004 from January 28, 2012,
requiring the Company to pay a fee of $1.6 million. The remaining estimated
costs relate to severance, product liquidation and logistics. The Company
previously identified this store as under-performing and, in fiscal year 2002,
recorded an impairment charge related to long-lived assets at this location. The
Company believes this closure will have a favorable impact on its results of
operations going forward.
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 THIRTEEN
WEEKS ENDED WEEKS ENDED
----------- -----------
May 1, May 3,
2004 2003
- -------------------------------------------------------------------------------------
Net sales 100.0% 100.0%
Other income, net 0.4 0.4
- ---------------------------------------------------------------------------------
100.4 100.4
- ---------------------------------------------------------------------------------
Costs and expenses:
Costs of merchandise sold 63.6 63.0
Selling, general and administrative 36.4 36.4
Depreciation and amortization 2.5 3.4
- ---------------------------------------------------------------------------------
Loss from operations (2.1) (2.4)
Interest expense, net 1.2 0.9
- ---------------------------------------------------------------------------------
Loss before income taxes (3.4) (3.3)
Income tax benefit (1.3) (1.2)
- ---------------------------------------------------------------------------------
Net loss (2.1)% (2.1)%
=================================================================================
THIRTEEN WEEKS ENDED MAY 1, 2004 COMPARED TO THIRTEEN WEEKS ENDED MAY 3, 2003
NET SALES. Net sales for the first quarter of 2004 were $265.1 million,
reflecting an increase of $124.0 million, or 87.9%, from the same period last
year. The first quarter of 2004 includes sales of $125.7 million generated by
the acquired Elder-Beerman stores. Comparable store sales, which exclude the
impact of Elder-Beerman stores and the Latham, New York store, decreased 2.0% in
the first quarter of 2004. Business families recording comparable store sales
increases for the first quarter of 2004 were Cosmetics, Accessories and Home.
The favorable results in Cosmetics were driven by a new product launch and a
highly successful promotion in one of the Company's existing lines; trendy,
colorful goods fueled sales in Accessories; and the Home area benefited from
opportunistic buys, a new product launch and increased emphasis of certain
existing merchandise categories. Business families reflecting the largest
comparable store sales decreases were Women's Clothing (Dresses, Special Sizes),
Children's, Junior's and Men's. These results are a continuation of an
unfavorable sales trend in apparel. The Company is focusing its efforts on
product differentiation
11
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
and improved merchandise assortments, particularly appropriate levels of more
fashionable merchandise.
Elder-Beerman sales were not included in the Company's reported comparable
store sales; therefore, the following is provided for informational purposes
only: Elder-Beerman comparable store sales for the thirteen weeks ended May 1,
2004 decreased 2.9% and, for Elder-Beerman and Bon-Ton combined, comparable
store sales for the thirteen weeks ended May 1, 2004 decreased 2.4%.
OTHER INCOME, NET. Net other income, principally income from leased
departments, was $1.0 million, or 0.4% of net sales, in the first quarter of
2004 compared to $0.5 million, or 0.4% of net sales, in the first quarter of
2003. The increase of $0.5 million primarily reflects income from the leased
departments in the Elder-Beerman stores.
COSTS AND EXPENSES. Gross margin was $96.4 million for the first quarter
of 2004 compared to $52.2 million for the same period last year, an increase of
$44.2 million. Gross margin as a percentage of net sales decreased 0.6
percentage point to 36.4% for the first quarter of 2004 from 37.0% for the same
period last year. The decrease in gross margin rate resulted primarily from the
inclusion of Elder-Beerman sales at a comparably lower gross margin rate and an
increase in the markdown rate. The increase in gross margin dollars for the
first quarter of 2004 was due to the inclusion of Elder-Beerman operations.
Selling, general and administrative expenses for the first quarter of 2004
were $96.5 million compared to $51.4 million for the first quarter of 2003,
reflecting an increase of $45.1 million. The first quarter of 2004 includes
$41.4 million of Elder-Beerman selling, general and administrative expenses. In
addition, selling, general and administrative expenses increased due to
integration costs; increases in advertising, real estate taxes and rent; and
increased interest expense related to the accounts receivable securitization
facility. The current year expense rate remained consistent with the prior year
at 36.4% of net sales.
Depreciation and amortization in the first quarter of 2004 was $6.6
million, an increase of $1.8 million compared to $4.8 million in the first
quarter of 2003. The increase reflects the inclusion of Elder-Beerman expense.
LOSS FROM OPERATIONS. Loss from operations in the first quarter of 2004
was $5.7 million, or 2.1% of net sales, compared to a loss from operations of
$3.4 million, or 2.4% of net sales, in the first quarter of 2003.
INTEREST EXPENSE, NET. Net interest expense was $3.2 million, or 1.2% of
net sales, in the first quarter of 2004 compared to $1.2 million, or 0.9% of net
sales, in the first quarter of 2003. The $2.0 million increase reflects
additional interest expense of $1.1 million on borrowings required to fund the
acquisition and operations of Elder-Beerman and increased deferred financing
fees amortization of $0.8 million associated with the acquisition.
INCOME TAX BENEFIT. The effective tax rate increased 0.5 percentage point
to 37.5% in the first quarter of 2004 from 37.0% in the first quarter of 2003.
12
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NET LOSS. Net loss in the first quarter of 2004 was $5.6 million, or 2.1%
of net sales, compared to a net loss of $2.9 million, or 2.1% of net sales, in
the first quarter of 2003.
SEASONALITY AND INFLATION
The Company's business, like that of most retailers, is subject to
seasonal fluctuations, with the major portion of sales and income realized
during the second half of each fiscal year, which includes back-to-school and
holiday seasons. Due to the fixed nature of certain costs, selling, general and
administrative expenses are typically higher as a percentage of net sales during
the first half of each fiscal year.
Because of the seasonality of the Company's business, results for any
quarter are not necessarily indicative of results that may be achieved for a
full fiscal year. In addition, quarterly operating results are impacted by the
timing and amount of revenues and costs associated with the opening of new
stores and closing and remodeling of existing stores.
The Company does not believe inflation had a material effect on operating
results during the thirteen weeks ended May 1, 2004 and May 3, 2003. However,
there can be no assurance that the Company's business will not be affected by
inflationary adjustments in the future.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes material measures of the Company's
liquidity and capital resources:
May 1, May 3,
(Dollars in millions) 2004 2003
- ---------------------------------------------------------------------------
Working capital $ 240.6 $ 141.1
Current ratio 2.38:1 2.35:1
Debt to total capitalization (debt plus equity) 0.45:1 0.27:1
Unused availability under revolving credit facility $ 60.3 $ 67.3
The Company's primary sources of working capital are cash flows from
operations, borrowings under its revolving credit facility and proceeds from its
accounts receivable securitization facility. The Company had working capital of
$240.6 and $141.1 million at May 1, 2004 and May 3, 2003, respectively. The
increase in working capital for the first quarter of fiscal 2004 as compared to
the prior year principally reflects Elder-Beerman working capital.
The debt to total capitalization ratio increased in fiscal 2004 over
fiscal 2003, reflecting long-term debt for the acquisition and operation of
Elder-Beerman.
13
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
For the thirteen weeks ended May 1, 2004, net cash used in operating
activities was $9.7 million compared to $16.3 million for the comparable period
last year. The reduction in net cash used in operating activities reflects a
decrease in accounts receivable, partially offset by an increase in inventory,
increased income tax payments and increased net loss.
Net cash used in investing activities was $4.2 million for the thirteen
weeks ended May 1, 2004 compared to $1.0 million for the comparable period last
year. The increase in net cash used in investing activities reflects an increase
in capital expenditures of $3.2 million over last year.
Net cash provided by financing activities was $13.6 million for the
thirteen weeks ended May 1, 2004 compared to $12.2 million for the comparable
period of 2003. The increase in net cash provided by financing activities
principally reflects increased funds drawn on the revolving credit facility and
funds received from the exercise of stock options, partially offset by decreased
bank overdraft balances.
In October 2003, the Company amended and restated its revolving credit
facility agreement. The current agreement provides a line of credit of $300.0
million and a term loan in the amount of $25.0 million. The current agreement
expires in October 2007. The interest rate, based on LIBOR or an index rate plus
an applicable margin, and fee charges are determined by a formula based upon the
Company's borrowing availability. Total borrowings under the revolving credit
facility agreement were $170.0 million and $152.0 million at May 1, 2004 and
January 31, 2004, respectively.
In January 2004, the Company entered into a new off-balance sheet accounts
receivable facility. This agreement has a funding limit of $250.0 million and
expires in October 2004. Availability under the accounts receivable facility is
calculated based on the balance and performance of the Company's proprietary
credit card portfolio. At May 1, 2004 and January 31, 2004, accounts receivable
totaling $211.5 million and $228.5 million, respectively, were sold under the
accounts receivable facility.
Aside from planned capital expenditures, the Company's primary cash
requirements will be to service debt and finance working capital increases
during peak selling seasons.
The Company is exposed to market risk associated with changes in interest
rates. To provide some protection against potential rate increases associated
with its variable-rate facilities, the Company has entered into a derivative
financial transaction in the form of an interest rate swap. The interest rate
swap is used to hedge the underlying variable-rate facilities.
The accounts receivable facility and revolving credit facility agreements
expire in October 2004 and October 2007, respectively. The Company anticipates
that it will be able to renew or replace these agreements with agreements of
substantially comparable terms. Failure to renew or replace these agreements on
substantially comparable terms would have a material adverse effect on the
Company's financial condition.
14
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
On April 15, 2004, the Company paid a quarterly cash dividend of $0.025
per share on Class A Common Stock and Common Stock to shareholders of record as
of April 1, 2004. Additionally, the Company declared a quarterly cash dividend
of $0.025 per share, payable July 15, 2004 to shareholders of record as of July
1, 2004. The Company's board of directors will consider dividends in subsequent
periods as it deems appropriate.
The Company currently anticipates its capital expenditures for fiscal 2004
will total approximately $32.0 million. Of this amount, approximately $18.2
million is budgeted for the integration of the point-of-sale system in Bon-Ton
stores and information system enhancements. The remainder will be directed
towards remodeling some of the Company's existing stores and general operations.
No new stores are currently planned for fiscal 2004.
The Company anticipates its cash flows from operations, supplemented by
borrowings under its revolving credit facility and proceeds from its accounts
receivable securitization facility, will be sufficient to satisfy its operating
cash requirements for at least the next twelve months.
Cash flows from operations are impacted by consumer confidence, weather in
the geographic markets served by the Company, and economic and competitive
conditions existing in the retail industry. A downturn in any single factor or a
combination of factors could have a material adverse impact upon the Company's
ability to generate sufficient cash flows to operate its business.
The Company has not identified any probable circumstances that would
likely impair its ability to meet its cash requirements or trigger a default or
acceleration of payment of the Company's debt.
OFF-BALANCE SHEET ARRANGEMENTS
The Company engages in securitization activities involving the Company's
proprietary credit card portfolio as a source of funding. Off-balance sheet
proprietary credit card securitizations provide a significant portion of the
Company's funding and are one of its primary sources of liquidity. At May 1,
2004, off-balance sheet securitized receivables represented 53% of the Company's
funding. Gains and losses from securitizations are recognized in the
Consolidated Statements of Operations when the Company relinquishes control of
the transferred financial assets in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities -- a Replacement of FASB
Statement No. 125" ("SFAS No. 140"), and other related pronouncements. The gain
or loss on the sale of financial assets depends in part on the previous carrying
amount of the assets involved in the transfer, allocated between the assets sold
and the retained interests based upon their respective fair values at the date
of sale. Based on the term of the securitization agreement (less than one year)
and the fact that the credit card receivables that comprise the retained
interests are short-term in nature, the Company has classified its retained
interests as a current asset.
The Company sells undivided percentage ownership interests in certain of
its credit card accounts receivable to unrelated third-parties under a $250.0
million accounts receivable securitization facility. The unrelated
third-parties, referred to as the conduit, have purchased a $211.5 million
interest in the accounts receivable under this facility at May 1, 2004. The
Company is
15
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
responsible for servicing these accounts, retains a servicing fee and bears the
risk of non-collection (limited to its retained interests in the accounts
receivable). Associated off-balance-sheet assets and related debt were $211.5
million at May 1, 2004 and $228.5 million at January 31, 2004. Upon the
facility's termination, the conduit would be entitled to all cash collections on
the accounts receivable until its investment ($211.5 million at May 1, 2004) and
accrued discounts are repaid. Accordingly, upon termination of the facility, the
assets of the facility would not be available to the Company until all amounts
due to the conduit have been paid in full.
Based upon the terms of the accounts receivable facility, the accounts
receivable transactions qualify for "sale treatment" under generally accepted
accounting principles. This treatment requires the Company to account for
transactions with the conduit as a sale of accounts receivable instead of
reflecting the conduit's net investment as long-term debt with a pledge of
accounts receivable as collateral. Absent this "sale treatment," the Company's
balance sheet would reflect additional accounts receivable and debt, which could
be a factor in the Company's ability to raise capital; however, results of
operations would not be significantly impacted.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and results
of operations are based upon the Consolidated Financial Statements, which have
been prepared in accordance with generally accepted accounting principles.
Preparation of these financial statements requires the Company to make estimates
and judgments that affect reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of its financial statements. On an ongoing basis, the Company evaluates its
estimates, including those related to merchandise returns, bad debts,
inventories, intangible assets, income taxes, financings, and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially lead to
materially different results under different assumptions and conditions. The
Company believes its critical accounting policies are described below.
ALLOWANCE FOR DOUBTFUL ACCOUNTS AND SALES RETURNS
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit-worthiness. The Company continually monitors collections and payments
from customers and maintains an allowance for estimated credit losses based upon
its historical experience, how delinquent accounts ultimately charge-off, aging
of accounts and any specific customer collection issues identified (e.g.,
bankruptcy). While such credit losses have historically been within expectations
and provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates as in the past. If circumstances change
(e.g., higher than expected defaults or bankruptcies), the Company's estimates
of the recoverability of amounts due the Company could be materially reduced.
16
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company recognizes revenue at either the point-of-sale or at the time
merchandise is shipped to the customer. Sales are net of returns and exclude
sales tax. A reserve is provided for estimated merchandise returns based on
experience and is reflected as an adjustment to sales and costs of merchandise
sold.
The allowance for doubtful accounts and sales returns was $6.0 million and
$6.3 million as of May 1, 2004 and January 31, 2004, respectively.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market with cost determined
using the retail last-in, first-out ("LIFO") method. Under the retail inventory
method, the valuation of inventories at cost and resulting gross margin is
derived by applying a calculated cost-to-retail ratio to the retail value of
inventories. The retail inventory method is an averaging method that has been
widely used in the retail industry. Use of the retail inventory method will
result in valuing inventories at the lower of cost or market if markdowns are
taken timely as a reduction of the retail value of inventories.
Inherent in the retail inventory method calculation are certain
significant management judgments and estimates including, among others,
merchandise markups, markdowns and shrinkage, which significantly impact both
the ending inventory valuation at cost and resulting gross margin. These
significant estimates, coupled with the fact that the retail inventory method is
an averaging process, can, under certain circumstances, result in individual
inventory components with cost above related net realizable value. Factors that
can lead to this result include applying the retail inventory method to a group
of products that is not fairly uniform in terms of its cost, selling price
relationship and turnover; or applying the retail inventory method to
transactions over a period of time that includes different rates of gross
profit, such as those relating to seasonal merchandise. In addition, failure to
take timely markdowns can result in an overstatement of cost under the lower of
cost or market principle. Management believes that the Company's retail
inventory method provides an inventory valuation that approximates cost and
results in carrying inventory in the aggregate at the lower of cost or market.
The Company regularly reviews inventory quantities on hand and records an
adjustment for excess or old inventory based primarily on an estimated forecast
of merchandise demand for the selling season. Demand for merchandise can
fluctuate greatly. A significant increase in the demand for merchandise could
result in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on-hand. Additionally, estimates of future
merchandise demand may prove to be inaccurate, in which case the Company may
have understated or overstated the adjustment required for excess or old
inventory. If the Company's inventory is determined to be overvalued in the
future, the Company would be required to recognize such costs in the costs of
goods sold and reduce operating income at the time of such determination.
Likewise, if inventory is later determined to be undervalued, the Company may
have overstated the costs of goods sold in previous periods and would recognize
additional operating income when such inventory is sold. Therefore, although
every effort is made to ensure the accuracy of forecasts of future merchandise
demand, any significant
17
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
unanticipated changes in demand or the economy in the Company's markets could
have a significant impact on the value of the Company's inventory and reported
operating results.
As is currently the case with many companies in the retail industry, the
Company's LIFO calculations have yielded inventory increases in recent years due
to deflation reflected in price indices used. This is the result of the LIFO
method whereby merchandise sold is valued at the cost of more recent inventory
purchases (which the deflationary indices indicate to be lower), resulting in
the general inventory on-hand being carried at the older, higher costs. Given
these higher values and the promotional retail environment, the Company reduced
the carrying value of its LIFO inventories to a net realizable value (NRV).
These reductions totaled $16.1 million at May 1, 2004. Inherent in these NRV
assessments are significant management judgments and estimates regarding future
merchandise selling costs and pricing. Should these estimates prove to be
inaccurate, the Company may have overstated or understated its inventory
carrying value. In such cases, operating income would ultimately be impacted.
VENDOR ALLOWANCES
As is standard industry practice, the Company receives allowances from
merchandise vendors as reimbursement for charges incurred on marked-down
merchandise. Vendor allowances are generally credited to costs of goods sold,
provided the allowance is: (1) collectable, (2) for merchandise either
permanently marked down or sold, (3) not predicated on a future purchase, (4)
not predicated on a future increase in the purchase price from the vendor, and
(5) authorized by internal management. If the aforementioned criteria are not
met, the Company reflects the allowances as an adjustment to the cost of
merchandise capitalized in inventory.
Additionally, the Company receives allowances from vendors in connection
with cooperative advertising programs. The Company reviews advertising
allowances received from each vendor to ensure reimbursements are for specific,
incremental and identifiable advertising costs incurred by the Company to sell
the vendor's products. If a vendor reimbursement exceeds the costs incurred by
the Company, the excess reimbursement is recorded as a reduction of cost
purchases from the vendor and reflected as a reduction of costs of merchandise
sold when the related merchandise is sold. All other amounts are recognized by
the Company as a reduction of the related advertising costs that have been
incurred and reflected in selling, general and administrative expenses.
INCOME TAXES
Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities, and the valuation
allowance recorded against net deferred tax assets. The process involves the
Company summarizing temporary differences resulting from differing treatment of
items (e.g., allowance for doubtful accounts) for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the consolidated balance sheet. The Company must then assess the
likelihood that deferred tax assets will be recovered from future taxable income
or tax carry-back availability and, to the extent the Company believes recovery
is not more-likely-than-not, a valuation allowance must be established. To the
extent the Company establishes a valuation allowance in a period, an expense
must be recorded within the tax provision in the statement of operations.
18
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Pursuant to the acquisition of Elder-Beerman, the Company acquired federal
and state net operating loss carry-forwards of approximately $77.8 million and
$153.2 million, respectively, which are available to offset future federal and
state taxable income -- subject to certain limitations imposed by Section 382 of
the Internal Revenue Code ("Section 382"). These net operating losses will
expire at various dates beginning in fiscal 2009 through fiscal 2022. In
addition, pursuant to the acquisition of Elder-Beerman, the Company acquired
alternative minimum tax credits and general business credits in the amount of
$2.1 million and $0.6 million, respectively. Both credits are also subject to
the limitations imposed by Section 382. The alternative minimum tax credits are
available indefinitely, and the general business credits expire beginning in
fiscal 2007 through fiscal 2008.
Net deferred tax assets were $28.7 million and $33.1 million as of May 1,
2004 and January 31, 2004, respectively. Pursuant to the acquisition of
Elder-Beerman, the Company recorded $83.2 million of net deferred tax assets.
The Company's ability to utilize these assets will be limited by Section 382. As
part of preliminary purchase accounting, a valuation allowance of $46.7 million
was established against these deferred tax assets. As of May 1, 2004, $10.5
million and $36.2 million of this valuation allowance has been classified as
current and long-term, respectively, pursuant to requirements of SFAS No. 109,
"Accounting for Income Taxes." In assessing the realizability of the deferred
tax assets, the Company considered whether it is more-likely-than-not that the
deferred taxes assets, or a portion thereof, will not be realized. The Company
considered the scheduled reversal of deferred tax liabilities, projected future
taxable income, tax planning strategies, and the limitations of Section 382 in
making this assessment. As a result, the Company concluded during fiscal 2003
that a valuation allowance against a portion of the net deferred tax assets was
appropriate. If actual results differ from these estimates or these estimates
are adjusted in future periods, the Company may need to adjust its valuation
allowance, which could materially impact its financial position and results of
operations.
Legislative changes currently proposed by certain states in which the
Company operates could have a materially adverse impact on future operating
results of the Company. These legislative changes principally involve state
income tax laws.
LONG-LIVED ASSETS
Property, fixtures and equipment are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of such assets. Changes
in the Company's business model or capital strategy can result in the actual
useful lives differing from the Company's estimates. In cases where the Company
determines that the useful life of property, fixtures and equipment should be
shortened, the Company depreciates the net book value in excess of the salvage
value over its revised remaining useful life, thereby increasing depreciation
expense. Factors such as changes in the planned use of fixtures or leasehold
improvements could also result in shortened useful lives. Net property, fixtures
and equipment amounted to $158.8 million and $160.9 million as of May 1, 2004
and January 31, 2004, respectively.
The Company assesses, on a store-by-store basis, the impairment of
identifiable long-lived assets -- primarily property, fixtures and equipment --
whenever events or changes in circumstances
19
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
indicate that the carrying value may not be recoverable. Factors that could
trigger an impairment review include the following:
- - Significant under-performance of stores relative to historical or
projected future operating results,
- - Significant changes in the manner of the Company's use of assets or
overall business strategy, and
- - Significant negative industry or economic trends for a sustained period.
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those assets. Cash flow estimates
are based on historical results adjusted to reflect the Company's best estimate
of future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Estimates of fair value represent the
Company's best estimate based on industry trends and reference to market rates
and transactions. Should cash flow estimates differ significantly from actual
results, an impairment could arise and materially impact the Company's financial
position and results of operations. Given the seasonality of operations,
impairment is not conclusive, in many cases, until after the holiday period in
the fourth quarter is concluded.
Newly opened stores may take time to generate positive operating and cash
flow results. Factors such as store type, store location, current marketplace
awareness of the Company's private label brands, local customer demographic data
and current fashion trends are all considered in determining the time-frame
required for a store to achieve positive financial results. If economic
conditions prove to be substantially different from the Company's expectations,
the carrying value of new stores may ultimately become impaired.
Additionally, the Company has identified assets in various markets that
have under-performed relative to the Company average. The Company has taken
steps to address these issues and currently forecasts no impairment charge.
Should the Company's improvement efforts prove unsuccessful or economic
conditions change, the carrying value of these assets may ultimately become
impaired.
The Company is in the process of refining its preliminary purchase
accounting for long-lived assets acquired in the acquisition of Elder-Beerman.
The Company is in the process of obtaining updated fair value valuations for
certain assets acquired.
GOODWILL AND INTANGIBLE ASSETS
Goodwill was $3.0 million as of May 1, 2004 and January 31, 2004.
Intangible assets are comprised of lease interests that relate to
below-market-rate leases purchased in store acquisitions completed in fiscal
years 1992 through 1999, which were adjusted to reflect fair market value. These
leases had average lives of twenty-five years. Net intangible assets amounted to
$6.1 million and $6.2 million as of May 1, 2004 and January 31, 2004,
respectively.
As a result of the Company's adoption of Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"), the
Company now reviews goodwill and other intangible assets that have indefinite
lives for impairment at least annually or when events or
20
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
changes in circumstances indicate the carrying value of these assets might
exceed their current fair values. The Company determines fair value using
discounted cash flow analysis, which requires certain assumptions and estimates
regarding industry economic factors and future profitability of the business. It
is the Company's policy to conduct impairment testing based on its most current
business plans, which reflect anticipated changes in the economy and the
industry. If actual results prove inconsistent with Company assumptions and
judgments, the Company could be exposed to a material impairment charge.
SECURITIZATIONS
A significant portion of the Company's funding is through
off-balance-sheet credit card securitizations via sales of certain accounts
receivable through an accounts receivable facility (the "Facility"). The sale of
receivables is to The Bon-Ton Receivables Partnership, LP ("BTRLP"), a special
purpose entity as defined by SFAS No. 140. BTRLP is a wholly owned subsidiary of
the Company. BTRLP may sell accounts receivable with a purchase price up to
$250.0 million through the Facility to a conduit on a revolving basis.
The Company sells accounts receivable through securitizations with
servicing retained. When the Company securitizes, it surrenders control over the
transferred assets and accounts for the transaction as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The Company allocates the previous carrying amount of the
securitized receivables between the assets sold and retained interests, based on
their relative estimated fair values at the date of sale. Securitization income
is recognized at the time of the sale, and is equal to the excess of the fair
value of the assets obtained (principally cash) over the allocated cost of the
assets sold and transaction costs. During the revolving period of each accounts
receivable securitization, securitization income is recorded representing
estimated gains on the sale of new receivables to the conduit on a continuous
basis to replenish the investors' interest in securitized receivables that have
been repaid by the credit card account holders. Fair value estimates used in the
recognition of securitization income require certain assumptions of payment,
default, servicing costs (direct and indirect) and interest rates. To the extent
actual results differ from those estimates, the impact is recognized as a
component of securitization income.
The Company estimates the fair value of retained interests in
securitizations based on a discounted cash flow analysis. The cash flows of the
retained interest-only strip are estimated as the excess of the weighted average
finance charge yield on each pool of receivables sold over the sum of the
interest rate paid to the note holder, the servicing fee and an estimate of
future credit losses over the life of the receivables. Cash flows are discounted
from the date the cash is expected to become available to the Company. These
cash flows are projected over the life of the receivables using payment,
default, and interest rate assumptions that the Company believes would be used
by market participants for similar financial instruments subject to prepayment,
credit and interest rate risk. The cash flows are discounted using an interest
rate that the Company believes a purchaser unrelated to the seller of the
financial instrument would demand. As all estimates used are influenced by
factors outside the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. Any adverse change in the Company's assumptions could materially impact
securitization income.
21
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company recognized securitization income of $3.0 million and $2.6
million for the thirteen weeks ended May 1, 2004 and May 3, 2003, respectively.
The increased income in the first quarter of 2004 relative to the prior year
period was principally due to increased sales of receivables through the
Facility, which now includes Elder-Beerman receivables, partially offset by a
decline in the finance charge rate and an increase in the net credit loss rate.
FORWARD-LOOKING STATEMENTS
Certain information included in this report and other materials filed or
to be filed by the Company with the Securities and Exchange Commission contain
statements that are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, which may be
identified by words such as "may," "could," "will," "plan," "expect,"
"anticipate," "estimate," "project," "intend" or other similar expressions,
involve important risks and uncertainties that could significantly affect
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, uncertainties
affecting the retail industry in general, such as consumer confidence and demand
for soft goods; our ability to integrate the recently acquired Elder-Beerman
stores into our overall operations; risks relating to leverage and debt service;
competition within markets in which the Company's stores are located; and the
need for, and costs associated with, store renovations and other capital
expenditures. These risks and other risks are discussed in the Company's Annual
Report on Form 10-K for the fiscal year ended January 31, 2004.
22
THE BON-TON STORES, INC. AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not believe its interest rate risks, as described in the
2003 Annual Report, have changed materially since the Company's disclosure in
its 2003 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company's management, including the Company's Chief Executive Officer
and Chief Financial Officer, evaluated the effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934) as of the end of the period covered by
this report and, based on this evaluation, concluded that the Company's
disclosure controls and procedures, which have been designed to ensure that
information required to be disclosed by the Company in the reports it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the rules and forms of the Securities and
Exchange Commission, are effective.
Changes in Internal Controls over Financial Reporting
Other than as described below, there has been no change in the Company's
internal control over financial reporting during the Company's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the Company's internal control over financial reporting.
The Company is currently in the process of integrating the operations of
Elder-Beerman. As part of the integration, the Company is changing the
functional areas or locations responsible for certain transaction processing and
certain processes over financial data collection, consolidation and reporting.
As a result, the Company is changing the design and operation of certain
elements of its internal control over financial reporting. The Company believes
it is taking the necessary steps to monitor and maintain appropriate internal
control over financial reporting during this period of change.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any legal proceedings since
the Company's disclosure in its 2003 Annual Report.
23
THE BON-TON STORES, INC. AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed pursuant to the requirements of Item 601 of
Regulation S-K:
EXHIBIT DESCRIPTION DOCUMENT LOCATION
31.1 Certification of Tim Grumbacher Filed herein.
31.2 Certification of James H. Baireuther Filed herein.
32.1 Certifications Pursuant to Rules 13a-14(b) and 15d-14(b) Filed herein.
of the Securities Exchange Act of 1934.
(b) Reports on Form 8-K filed during the quarter:
1. A Current Report on Form 8-K dated March 11, 2004 was furnished to
the Securities and Exchange Commission on March 11, 2004 to report,
under Item 12, that the Registrant issued a press release with
respect to its results of operations for the year ended January 31,
2004.
2. A Current Report on Form 8-K dated March 18, 2004 was filed with the
Securities and Exchange Commission on March 18, 2004 to report,
under Item 5, that the Registrant issued a press release with
respect to a dividend declaration.
3. A Current Report on Form 8-K dated April 21, 2004 was filed with the
Securities and Exchange Commission on April 22, 2004 to report,
under Item 5, that the Registrant issued a press release with
respect to the resignation of the Company's president and chief
operating officer.
The following Reports on Form 8-K were filed subsequent to May 1, 2004 but
prior to the filing of this Quarterly Report on Form 10-Q:
1. A Current Report on Form 8-K dated May 20, 2004 was furnished to the
Securities and Exchange Commission on May 20, 2004 to report, under
Item 12, that the Registrant issued a press release with respect to
its results of operations for the thirteen weeks ended May 1, 2004.
2. A Current Report on Form 8-K dated May 27, 2004 was filed with the
Securities and Exchange Commission on May 27, 2004 to report, under
Item 5, that the Registrant issued a press release with respect to a
dividend declaration.
3. A Current Report on Form 8-K dated June 3, 2004 was filed with the
Securities and Exchange Commission on June 3, 2004 to report, under
Item 5, that the Registrant issued a press release with respect to
closure of its Pottstown, Pennsylvania store.
24
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 10, 2004 BY: /s/ Tim Grumbacher
--------------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
DATE: June 10, 2004 BY: /s/ James H. Baireuther
--------------------------
James H. Baireuther
Vice Chairman, Chief
Administrative Officer and
Chief Financial Officer
25