================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended October 29, 2005 Commission File Number
0-19517
THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA 17402
(717) 757-7660
INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229
----------
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 a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
----- -----
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
----- -----
As of December 1, 2005 there were 14,179,564 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.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data) October 29, January 29,
(Unaudited) 2005 2005
----------- -----------
Assets
Current assets:
Cash and cash equivalents $ 14,445 $ 22,908
Retained interest in trade receivables, net of allowance for doubtful accounts and
sales returns of $6,172 at January 29, 2005 -- 82,576
Other receivables, net of allowance for doubtful accounts of $1,577 and $244 at
October 29, 2005 and January 29, 2005, respectively 10,908 11,967
Merchandise inventories 418,355 296,382
Prepaid expenses and other current assets 19,488 12,253
Deferred income taxes 7,977 4,819
-------- --------
Total current assets 471,173 430,905
-------- --------
Property, fixtures and equipment at cost, net of accumulated depreciation and amortization
of $212,813 and $198,797 at October 29, 2005 and January 29, 2005, respectively 166,217 168,304
Deferred income taxes 32,892 24,908
Goodwill 2,965 2,965
Intangible assets, net of accumulated amortization of $6,117 and $5,364 at October 29, 2005
and January 29, 2005, respectively 8,510 9,400
Other assets 7,013 9,674
-------- --------
TOTAL ASSETS $688,770 $646,156
======== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $174,032 $101,151
Accrued payroll and benefits 18,156 25,361
Accrued expenses 46,327 46,646
Current maturities of long-term debt 937 869
Current maturities of obligations under capital leases 246 939
Income taxes payable 2,452 4,817
-------- --------
Total current liabilities 242,150 179,783
-------- --------
Long-term debt, less current maturities 154,191 178,257
Obligations under capital leases, less current maturities 46 98
Other long-term liabilities 39,787 25,461
-------- --------
TOTAL LIABILITIES 436,174 383,599
-------- --------
Shareholders' equity:
Preferred Stock - authorized 5,000,000 shares at $0.01 par value; no shares issued -- --
Common Stock - authorized 40,000,000 shares at $0.01 par value; issued 14,065,289
and 13,568,977 shares at October 29, 2005 and January 29, 2005, respectively 141 136
Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued
and outstanding 2,951,490 shares at October 29, 2005 and January 29, 2005 30 30
Treasury stock, at cost - 337,800 shares at October 29, 2005 and January 29, 2005 (1,387) (1,387)
Additional paid-in-capital 127,688 119,284
Deferred compensation (6,422) (1,096)
Accumulated other comprehensive loss (65) (427)
Retained earnings 132,611 146,017
-------- --------
TOTAL SHAREHOLDERS' EQUITY 252,596 262,557
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $688,770 $646,156
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
2
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- -------------------------
(In thousands except share and per share data) October 29, October 30, October 29, October 30,
(Unaudited) 2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales $ 285,676 $ 297,798 $ 822,555 $ 847,079
Other income 2,126 2,012 6,098 6,211
----------- ----------- ----------- -----------
287,802 299,810 828,653 853,290
----------- ----------- ----------- -----------
Costs and expenses:
Costs of merchandise sold 189,229 186,180 530,692 533,849
Selling, general and administrative 97,759 105,232 285,848 299,391
Depreciation and amortization 7,508 6,101 21,525 20,687
----------- ----------- ----------- -----------
(Loss) income from operations (6,694) 2,297 (9,412) (637)
Interest expense, net 2,804 3,489 9,710 10,057
----------- ----------- ----------- -----------
Loss before income taxes (9,498) (1,192) (19,122) (10,694)
Income tax benefit (3,198) (447) (6,965) (4,010)
----------- ----------- ----------- -----------
NET LOSS $ (6,300) $ (745) $ (12,157) $ (6,684)
=========== =========== =========== ===========
PER SHARE AMOUNTS -
BASIC:
Net loss $ (0.39) $ (0.05) $ (0.75) $ (0.42)
=========== =========== =========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 16,218,717 15,999,908 16,175,790 15,887,321
DILUTED:
Net loss $ (0.39) $ (0.05) $ (0.75) $ (0.42)
=========== =========== =========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 16,218,717 15,999,908 16,175,790 15,887,321
The accompanying notes are an integral part of these consolidated financial
statements.
3
THE BON-TON STORES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTY-NINE
WEEKS ENDED
-------------------------
(In thousands) October 29, October 30,
(Unaudited) 2005 2004
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (12,157) $ (6,684)
Adjustments to reconcile net loss to net cash provided by (used in)
operating activities:
Depreciation and amortization 21,525 20,687
Bad debt provision 1,510 2,369
Stock compensation expense 1,728 267
Amortization of deferred financing costs 1,164 3,027
(Increase) decrease in deferred income tax assets (11,362) 3,774
Other (1,101) (1,245)
Net transfers of receivables to accounts receivable facility (244,000) (7,500)
Proceeds from sale of proprietary credit card portfolio 315,445 --
Loss on sale of proprietary credit card portfolio 596 --
Changes in operating assets and liabilities, net (41,754) (88,929)
--------- ---------
Net cash provided by (used in) operating activities 31,594 (74,234)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (19,094) (24,065)
Proceeds from sale of property, fixtures and equipment 102 12
--------- ---------
Net cash used in investing activities (18,992) (24,053)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (280,742) (196,539)
Proceeds from issuance of long-term debt 256,000 286,100
Cash dividends paid (1,249) (1,197)
Proceeds from stock options exercised 825 2,101
Deferred financing costs paid (123) (462)
Increase in bank overdraft balances 4,224 6,698
--------- ---------
Net cash (used in) provided by financing activities (21,065) 96,701
Net decrease in cash and cash equivalents (8,463) (1,586)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 22,908 17,835
--------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,445 $ 16,249
========= =========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 8,420 $ 7,627
Net income taxes paid $ 9,876 $ 14,214
The accompanying notes are an integral part of these consolidated financial
statements.
4
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on
January 31, 1996 as the successor of a company incorporated on January 31, 1929,
and currently operates, through its subsidiaries, 139 department stores and two
furniture stores in sixteen states from the Northeast to the Midwest under the
names "Bon-Ton" and "Elder-Beerman." The Bon-Ton Stores, Inc. conducts its
operations through one business segment.
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
include the accounts of The Bon-Ton Stores, Inc. and all of its wholly owned
subsidiaries (the "Company"). All intercompany transactions and balances have
been eliminated in consolidation.
The unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions for Form 10-Q and do not include
all information and footnotes required by generally accepted accounting
principles. In the opinion of management, all adjustments (primarily consisting
of normal recurring accruals) considered necessary for a fair presentation of
interim periods have been included. The Company's business is seasonal in nature
and results of operations for interim periods presented are not necessarily
indicative of results for the full fiscal year. These unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in the Company's
Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
Certain prior year balances have been reclassified to conform with the
current year presentation.
2. STOCK-BASED COMPENSATION
The Company applies the intrinsic-value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees" ("APB No. 25"), and related interpretations including
Financial Accounting Standards Board ("FASB") Interpretation No. 44, "Accounting
for Certain Transactions involving Stock Compensation," issued in March 2000, to
account for its fixed-plan stock options. Under this method, compensation
expense is recorded only if the current market price of the underlying stock on
the date of grant exceeded the exercise price. Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), established accounting and disclosure requirements using a
fair-value-based method of accounting for stock-based employee compensation
plans. As permitted by SFAS No. 123, the Company has elected to continue to
apply the intrinsic-value-based method of accounting described above, and has
adopted only the disclosure requirements of SFAS No. 123 as amended by SFAS No.
148, "Accounting for Stock-Based Compensation--Transition and Disclosure." The
following table illustrates the effect on net loss if the fair-value-based
method had been applied to all unvested awards in each period:
5
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- -------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss, as reported $(6,300) $ (745) $(12,157) $(6,684)
Add: Total stock-based employee compensation included in
net loss, net of related tax effects 378 182 1,098 167
Deduct: Total stock-based employee compensation expense
determined under fair-value-based method for all awards,
net of related tax effects (607) (279) (1,626) (352)
------- ------ -------- -------
Pro forma net loss $(6,529) $ (842) $(12,685) $(6,869)
======= ====== ======== =======
Loss per share
Basic As reported $ (0.39) $(0.05) $ (0.75) $ (0.42)
Pro forma (0.40) (0.05) (0.78) (0.43)
Diluted As reported $ (0.39) $(0.05) $ (0.75) $ (0.42)
Pro forma (0.40) (0.05) (0.78) (0.43)
The Company used the Black-Scholes option pricing model to calculate the
fair value of the stock options at the grant date.
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 weighted average shares outstanding for the
respective calculations for each period presented in the accompanying
consolidated statements of operations:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- -------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Basic calculation 16,218,717 15,999,908 16,175,790 15,887,321
Effect of dilutive shares ---
Restricted Shares and Restricted
Stock Units -- -- -- --
Options -- -- -- --
---------- ---------- ---------- ----------
Diluted calculation 16,218,717 15,999,908 16,175,790 15,887,321
========== ========== ========== ==========
6
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The following securities were antidilutive and, therefore, were not
included in the computation of diluted EPS for the periods indicated:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- -------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Antidilutive shares ---
Restricted Shares and Restricted
Stock Units 506,432 90,348 454,255 76,949
Options 618,778 559,812 571,533 609,459
Certain securities were excluded from the computation of dilutive shares
due to the Company's net loss position in the thirteen and thirty-nine weeks
ended October 29, 2005 and October 30, 2004. The following table shows the
approximate effect of dilutive securities had the Company reported a profit for
these periods:
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- -------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Effect of dilutive securities ---
Restricted Shares and Restricted
Stock Units 140,082 65,229 117,070 63,492
Options 174,411 219,724 191,418 282,944
4. SALE OF THE PROPRIETARY CREDIT CARD PORTFOLIO
On July 8, 2005, pursuant to the terms of the June 20, 2005 Purchase and
Sale Agreement between the Company and HSBC Bank Nevada, N.A., a national
banking association ("HSBC"), the Company sold substantially all of its private
label credit card accounts and the related accounts receivable to HSBC for cash
consideration of $313,635. The Company received total cash of $315,445 at
closing, with $296,664 allocated to the sale of credit card accounts and related
accounts receivable, $16,971 allocated as deferred program revenue and $1,810
representing proceeds from the sale of related assets. The allocation between
the sale of accounts receivable and the deferred program revenue was based on
the relative fair values as determined by an independent valuation. A portion of
the proceeds from the sale ($230,238) were used to pay in-full principal and
accrued interest due note-holders under the Company's accounts receivable
securitization program plus any other payments in respect of the termination of
that program. The remaining proceeds of $85,207 from the sale were used to
reduce outstanding borrowings under the Company's revolving credit facility.
Concurrently, the Company's obligation to sell its accounts receivable to the
securitization trust was terminated.
Selling, general and administrative expense for the thirty-nine weeks ended
October 29, 2005 includes a net loss of $596 associated with the sale of the
proprietary credit card portfolio. Proceeds allocated to deferred program
revenue, net of certain related costs, of $16,895 were recorded as deferred
revenue and will be amortized over a seven-year term. For the thirteen and
thirty-nine weeks ended October 29, 2005,
7
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
deferred revenue amortization income of $603 and $742, respectively, was
recognized within selling, general and administrative expense. At October 29,
2005 deferred program revenue of $2,414 and $13,739 were reported within accrued
expenses and other long-term liabilities, respectively.
In connection with the sale, the Company entered into two additional
agreements with HSBC: an Interim Servicing Agreement (the "ISA") and a Credit
Card Program Agreement (the "CCPA").
Under the terms of the ISA, the Company continued to service the credit
card receivables from July 8, 2005 through October 31, 2005. HSBC compensated
the Company for providing these services during the interim servicing period.
The CCPA sets forth the terms and conditions under which HSBC will issue
credit cards to the Company's customers. The Company will be paid a percentage
of Net Credit Sales, as defined in the CCPA, for future credit card sales. Under
the terms of the CCPA, the Company is required to perform certain duties,
including receiving and remitting in-store customer payments on behalf of HSBC
for which the Company will receive a fee. The CCPA has a term of seven years and
is cancelable earlier by either party under certain circumstances.
For the thirteen and thirty-nine weeks ended October 29, 2005, proceeds of
$11,142 and $13,678, respectively, was recognized within selling, general and
administrative expense pursuant to the ISA and CCPA.
5. EXIT OR DISPOSAL ACTIVITIES
In connection with the sale of its credit card accounts, the Company
developed plans resulting in involuntary associate terminations and contract
termination, with total expected costs of $540 and $200, respectively. The
liability for involuntary associate terminations covers approximately eighty
associates in credit operations. The Company expects to pay the balance of the
associate termination payments by March 1, 2006, while the liability for the
contract termination costs will be paid over the remaining contract periods
ending May 2007. Activities to-date related to these costs are as follows:
Involuntary
Termination Contract
Benefits Termination Total
----------- ----------- -----
Provisions:
Thirteen weeks ended July 30, 2005 $155 $200 $355
Thirteen weeks ended October 29, 2005 290 -- 290
Payments:
Thirteen weeks ended July 30, 2005 -- -- --
Thirteen weeks ended October 29, 2005 -- -- --
---- ---- ----
Balance at October 29, 2005 $445 $200 $645
==== ==== ====
The above charges were included within selling, general and administrative
expense. The Company expects additional charges in connection with involuntary
associate terminations of $75 during the thirteen weeks ending January 28, 2006
and $20 during the thirteen weeks ending April 29, 2006.
On September 20, 2005, the Company announced the closing of its Great
Northern and Shoppingtown stores in the Syracuse, New York area and its Lebanon,
Pennsylvania store effective January 28, 2006. In connection with the closing of
these three stores, the Company developed plans resulting in involuntary
8
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
associate terminations and other closing costs, with expected total costs of
$276 and $245, respectively. The liability for involuntary associate
terminations covers approximately 100 associates. The Company expects to pay the
balance of the involuntary associate termination payments and other closing
costs during the thirteen weeks ending April 29, 2006. Activities to-date
related to these costs are as follows:
Involuntary Other
Termination Closing
Benefits Costs Total
----------- ------- -----
Provisions:
Thirteen weeks ended October 29, 2005 $84 -- $84
Payments:
Thirteen weeks ended October 29, 2005 -- -- --
--- --- ---
Balance at October 29, 2005 $84 -- $84
=== === ===
The above charges were included within selling, general and administrative
expense. The Company expects additional charges for involuntary associate
terminations and other closing costs of $192 and $245, respectively, during the
thirteen weeks ending January 28, 2006.
6. SECURITIZATION OF RECEIVABLES
Prior to termination of the receivables securitization program on July 8,
2005 (see Note 4), the Company securitized its proprietary credit card portfolio
through an accounts receivable facility (the "Facility"). Under the Facility
agreement, which was contingent upon receivables meeting certain performance
criteria, the Company sold through The Bon-Ton Receivables Partnership, LP, a
wholly owned subsidiary of the Company and qualifying special purpose entity
under SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities," up to $250,000 of an undivided percentage
interest in the receivables on a limited recourse basis. In connection with the
Facility agreement, the Company retained servicing responsibilities,
subordinated interests and an interest-only strip, all of which were retained
interests in the securitized receivables. The Company retained annual servicing
fees of 2.0% of the outstanding accounts receivable balance and rights to future
cash flows arising after investors in the securitization had received the return
for which they contracted. The Company did not recognize a servicing asset or
liability, as the amount received for servicing the receivables was a reasonable
approximation of market rates and servicing costs. The investors had no recourse
to the Company's other assets for failure of debtors to pay when due. The
Company's retained interests were subordinate to the investors' interests. The
value of the retained interest was subject to credit, prepayment and interest
rate risks.
As of January 29, 2005, credit card receivables sold under the Facility
agreement totaled $244,000 and the Company had subordinated interests of $82,576
related to the amounts sold that were included in the accompanying Consolidated
Balance Sheet as retained interest in trade receivables. The Company accounted
for its subordinated interest in the receivables in accordance with SFAS No.
115, "Accounting for Certain Investments in Debt and Equity Securities." The
Company did not recognize any unrealized gains or losses on its subordinated
interest, as the current carrying value of customer revolving charge accounts
receivable was a reasonable estimate of fair value and average interest rates
approximated current market origination rates. Subordinated interests as of
January 29, 2005 included restricted cash of $1,998 required pursuant to terms
of the Company's Facility agreement.
New receivables were sold on a continual basis to replenish each investor's
respective level of participation in receivables that had been repaid by credit
card holders.
9
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Company recognized securitization income of $2,070 on securitization of
credit card receivables during the thirteen weeks ended October 30, 2004. The
Company recognized securitization income of $2,680 and $7,248 during the
thirty-nine weeks ended October 29, 2005 and October 30, 2004, respectively.
This income is reported as a component of selling, general and administrative
expenses.
The Company recognized servicing fees, which it reported as a component of
selling, general and administrative expenses, of $1,078 for the thirteen weeks
ended October 30, 2004. The Company recognized servicing fees of $1,989 and
$3,212 for the thirty-nine weeks ended October 29, 2005 and October 30, 2004,
respectively. Net credit losses on the total managed credit card receivables
were $3,474 for the thirteen weeks ended October 30, 2004, and $6,253 and
$10,372 for the thirty-nine weeks ended October 29, 2005 and October 30, 2004,
respectively.
7. INTEGRATION ACTIVITIES
In connection with the acquisition of The Elder-Beerman Stores Corp. in
October 2003, the Company developed integration plans resulting in involuntary
terminations, employee relocations and lease terminations. Payments and
adjustments since January 29, 2005 associated with liabilities recognized in
connection with these integration plans are as follows:
Involuntary
Termination Employee Lease
Benefits Relocation Termination Total
----------- ---------- ----------- ------
Balance at January 29, 2005 $1,521 $ 388 $1,158 $3,067
Payments (420) (256) (85) (761)
Other adjustments -- (124) -- (124)
------ ----- ------ ------
Balance at October 29, 2005 $1,101 $ 8 $1,073 $2,182
====== ===== ====== ======
Other adjustments represent refinements to anticipated liabilities
established under provisions of Emerging Issues Task Force No. 95-3,
"Recognition of Liabilities in Connection With a Purchase Business Combination,"
and resulted in reductions in certain opening balance sheet assets of The
Elder-Beerman Stores Corp. that were recorded as part of purchase accounting.
The Company expects to pay the balance of involuntary termination benefits
when certain contractual criteria are met. The liability for terminated leases
will be paid over the remaining contract periods ending 2030.
10
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
8. COMPREHENSIVE LOSS
Comprehensive loss was determined as follows:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------- -------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net loss $(6,300) $(745) $(12,157) $(6,684)
Other comprehensive income:
Cash flow hedge derivative
income, net of tax 87 100 362 622
------- ----- -------- -------
Comprehensive loss $(6,213) $(645) $(11,795) $(6,062)
======= ===== ======== =======
9. EMPLOYEE BENEFIT PLANS
The Company provides eligible employees with retirement benefits under a
401(k) salary reduction and retirement contribution plan (the "Plan"). The
Company recorded Plan expense of $935 and $1,053 during the thirteen weeks ended
October 29, 2005 and October 30, 2004, respectively, and expense of $2,610 and
$2,928 for the thirty-nine weeks ended October 29, 2005 and October 30, 2004,
respectively.
The Company provides a supplementary pension plan to certain key executives
and former employees. Net periodic benefit expense (income) includes the
following components:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
------------------------- -------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Experience gain $-- $(454) $(20) $(454)
Service cost 18 48 54 151
Interest cost 55 60 164 183
--- ----- ---- -----
Net periodic benefit
expense (income) $73 $(346) $198 $(120)
=== ===== ==== =====
During the thirty-nine weeks ended October 29, 2005, contributions of $164
have been made. The Company anticipates contributing an additional $52 to fund
its supplementary pension plan during the thirteen weeks ending January 28, 2006
for an annual total of $216.
11
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
10. FUTURE ACCOUNTING CHANGES
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment"
("SFAS No. 123R"). SFAS No. 123R revises SFAS No. 123 and supersedes APB No. 25
and its related implementation guidance. SFAS No. 123R will require compensation
costs related to share-based payment transactions to be recognized in the
financial statements (with limited exceptions). The amount of compensation cost
will be measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. The full impact of SFAS No.
123R adoption cannot be predicted at this time as it will depend on levels of
share-based payments granted in the future. However, had the Company adopted
SFAS No. 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net loss and loss per share within Note 2, "Stock-Based Compensation,"
above. SFAS No. 123R also requires that tax benefits from compensation
deductions in excess of recognized compensation cost be reported as a financing
cash flow, rather than as an operating cash flow as currently required. This
requirement will reduce net operating cash flows and increase net financing cash
flows in periods after adoption. The Company is unable to estimate what those
amounts will be in the future as they depend on, among other things, when
employees exercise stock options. On April 14, 2005, the Securities and Exchange
Commission announced a delay of the required implementation timing of SFAS No.
123R to the beginning of the Company's fiscal year commencing January 29, 2006.
In July 2005, the FASB issued Proposed Interpretation, "Accounting for
Uncertain Tax Positions," an interpretation of SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). This proposed interpretation clarifies the
accounting for uncertain tax positions in accordance with SFAS No. 109 by
requiring companies to recognize, in their financial statements, the best
estimate of the impact of a tax position only if that position is probable of
being sustained under audit based solely on the technical merits of the
position. In evaluating whether the probable recognition threshold has been met,
the proposed interpretation would require the presumption that the tax position
will be evaluated during an audit by taxing authorities. The proposed standard
further defines probable as the definition in SFAS No. 5, "Accounting for
Contingencies." The proposed interpretation is currently expected to be issued
in early 2006. The impact of this interpretation to the Company's consolidated
financial statements is not presently known.
12
THE BON-TON STORES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
11. SUBSEQUENT EVENTS AND OTHER MATTERS
On October 29, 2005, the Company entered into a purchase agreement with
Saks Incorporated ("Saks") pursuant to which the Company will purchase all of
the outstanding securities of two subsidiaries of Saks that are solely related
to the business of owning and operating the 142 retail department stores that
comprise Saks' Northern Department Store Group and operate under the names
"Carson Pirie Scott," "Younkers," "Herberger's," "Boston Store" and "Bergner's."
The stores are located in twelve states in the Midwest and upper Great Plains
regions. The purchase price the Company will pay to Saks is approximately
$1,100,000 in cash. The purchase price is subject to adjustment based on, among
other things, the working capital at closing and the amount of certain unfunded
employee benefit plan liabilities. Closing of the transaction is expected to
occur in February 2006. The transaction is subject to certain closing
conditions, including regulatory approvals and the Company obtaining financing
sufficient to pay the purchase price and related expenses.
On November 16, 2005, the Company announced the closing of its Walden
Galleria store located in Buffalo, New York effective January 28, 2006. The
Company anticipates it will incur charges and future cash expenditures totaling
approximately $1,800 in connection with the closing, comprised of approximately
$1,500 for lease termination, $100 for one-time termination benefits and $200
for other associated costs.
13
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of the following discussions, all references to "third quarter
of 2005" and "third quarter of 2004" are to the thirteen-week periods ended
October 29, 2005 and October 30, 2004, respectively, of The Bon-Ton Stores, Inc.
(the "Company"). All references to "2005" and "2004" are to the thirty-nine
weeks ended October 29, 2005 and October 30, 2004, respectively.
OVERVIEW
The Company is a traditional department store retailer with a 107-year
history of providing quality merchandise to its customers in secondary markets.
In October 2003, the Company acquired The Elder-Beerman Stores Corp.
("Elder-Beerman"), nearly doubling its number of stores and adding 5.7 million
square feet of retail space. The Company currently operates 139 department
stores and two furniture stores in sixteen states, from the Northeast to the
Midwest, under the "Bon-Ton" and "Elder-Beerman" names. The stores carry a broad
assortment of quality brand-name and private label fashion apparel and
accessories for women, men and children, as well as distinctive cosmetics and
home furnishings. The Company's strategy is to profitably sell merchandise by
providing its customers with differentiated fashion merchandise at compelling
value in the markets the Company serves.
Net sales for 2005 were $822.6 million as compared to $847.1 million in
2004, a decrease of 2.9%. Comparable store net sales for 2005 decreased 2.6%.
The comparable store net sales decline was the result of several factors
including, among others:
- Sales of discontinued merchandise in 2004, which reflected the
realignment of non-common assortments during the integration of
Elder-Beerman and Bon-Ton. These goods generated clearance sales of
approximately $31.0 million in 2004.
- Unseasonably cold weather in the spring season and warm weather in
September and October within the Company's operating regions, which
negatively affected apparel sales in 2005.
- The general retail environment in 2005 reflecting lack of consumer
confidence and concerns related to higher gas and heating costs.
The retail industry is highly competitive, and the Company anticipates that
competitive pressures and challenges will continue in the foreseeable future. To
address these pressures and challenges, the Company is continuing its highly
promotional posture and emphasis on offering a wide range of merchandise value.
Additionally, expansion of the Company's private labels and growth of exclusive
brands support its strategy of product differentiation and provide an
opportunity for additional sales at a higher gross margin.
The Company is focused on managing assets, store expenses and corporate
expenses to improve its financial position. The Company continues to explore
meaningful ways to improve its ratio of expenses to sales. Execution of these
initiatives is necessary to achieve earnings growth in an anticipated
environment of flat-to-minimal comparable store sales growth.
14
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company sold its proprietary credit card portfolio to HSBC Bank Nevada,
N.A. ("HSBC") on July 8, 2005, recording pre-tax charges of $2.2 million in 2005
representing a loss on the sale, costs associated with involuntary termination
benefits and contract terminations, and accelerated depreciation. A portion of
the proceeds from the sale ($230.2 million) were used to terminate the Company's
accounts receivable securitization program; the remaining proceeds of $85.2
million were used to reduce outstanding borrowings under the Company's revolving
credit facility. In connection with the sale, the Company entered into two
agreements with HSBC: an Interim Servicing Agreement (the "ISA") and a Credit
Card Program Agreement (the "CCPA"). Under the terms of the ISA, the Company
continued to service the credit card receivables from July 8, 2005 through
October 31, 2005, for which the Company was compensated. The CCPA sets forth the
terms and conditions under which HSBC will issue credit cards to the Company's
customers. Under the CCPA, the Company is paid a percentage of net credit sales
for credit card sales generated after July 7, 2005. The CCPA has a term of seven
years and is cancelable earlier by either party under certain circumstances.
On September 20, 2005 the Company announced several real estate
initiatives, which included the expansion of three stores; the relocation of two
stores; and the closing of two stores in the Syracuse, New York market and one
store in Lebanon, Pennsylvania. In addition, on November 16, 2005 the Company
announced the closing of its Walden Galleria store in Buffalo, New York. All
four store closings will be effective January 28, 2006.
On October 29, 2005, the Company entered into a purchase agreement with
Saks Incorporated ("Saks") pursuant to which the Company will purchase all of
the outstanding securities of two subsidiaries of Saks that are solely related
to the business of owning and operating the 142 retail department stores that
comprise Saks' Northern Department Store Group ("NDSG") and operate under the
names "Carson Pirie Scott," "Younkers," "Herberger's," "Boston Store" and
"Bergner's." The stores are located in twelve states in the Midwest and upper
Great Plains regions. The purchase price the Company will pay to Saks is
approximately $1.1 billion in cash. The purchase price is subject to adjustment
based on, among other things, the working capital at closing and the amount of
certain unfunded employee benefit plan liabilities. Closing of the transaction
is expected to occur in February 2006 and is subject to certain closing
conditions, including regulatory approvals and the Company obtaining financing
sufficient to pay the purchase price and related expenses. The Company believes
that the acquisition of NDSG will, among other things, complement and strengthen
its network of stores, augment its product offerings and expand its customer
base.
15
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes changes in selected operating indicators of
the Company, illustrating the relationship of various income and expense items
to net sales for the respective periods presented (components may not add or
subtract to totals due to rounding):
THIRTEEN THIRTY-NINE
WEEKS ENDED WEEKS ENDED
------------------------- -------------------------
October 29, October 30, October 29, October 30,
2005 2004 2005 2004
----------- ----------- ----------- -----------
Net sales 100.0% 100.0% 100.0% 100.0%
Other income 0.7 0.7 0.7 0.7
----- ----- ----- -----
100.7 100.7 100.7 100.7
----- ----- ----- -----
Costs and expenses:
Costs of merchandise sold 66.2 62.5 64.5 63.0
Selling, general and administrative 34.2 35.3 34.8 35.3
Depreciation and amortization 2.6 2.0 2.6 2.4
----- ----- ----- -----
(Loss) income from operations (2.3) 0.8 (1.1) (0.1)
Interest expense, net 1.0 1.2 1.2 1.2
----- ----- ----- -----
Loss before income taxes (3.3) (0.4) (2.3) (1.3)
Income tax benefit (1.1) (0.2) (0.8) (0.5)
----- ----- ----- -----
Net loss (2.2)% (0.3)% (1.5)% (0.8)%
===== ===== ===== =====
THIRTEEN WEEKS ENDED OCTOBER 29, 2005 COMPARED TO THIRTEEN WEEKS ENDED OCTOBER
30, 2004
NET SALES. Net sales and comparable stores sales for the third quarter of
2005 were $285.7 million, reflecting a decrease of $12.1 million, or 4.1%, from
the third quarter of 2004.
The best performing merchandise categories in the third quarter of 2005
were Ladies' Special Sizes (included in Women's Clothing), Shoes and Intimate
Apparel. The performance in Ladies' Special Sizes reflects the Company's
increased emphasis and corresponding inventory investment. Shoe sales increased
as customers responded favorably to the Company's changes in moderately-priced
branded casual footwear and the introduction of new products at Elder-Beerman
that were previously sold only at Bon-Ton stores. Intimate apparel sales
benefited from stronger promotions and a better balanced inventory mix. The
poorest performing merchandise categories in the third quarter of 2005 were
Dresses and Coats (both included in Women's Clothing), Men's and Cosmetics.
Dresses were negatively impacted by lack of customer demand due to changing
fashion patterns. Coats sales were hampered by unseasonably warm weather in
September and October 2005. Sales in Men's clothing were impacted by the
introduction of higher priced/margin goods in the third quarter of 2005. Sales
results for Cosmetics reflected the introduction of new products in the prior
year.
OTHER INCOME. Other income, which includes income from leased departments
and other customer revenues, was $2.1 million, or 0.7% of net sales, in the
third quarter of 2005 compared to $2.0 million, or 0.7% of net sales, in the
third quarter of 2004.
16
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
COSTS AND EXPENSES. Gross margin was $96.4 million for the third quarter of
2005 compared to $111.6 million for the third quarter of 2004, a decrease of
$15.2 million. The decrease in gross margin dollars for the third quarter of
2005 as compared to the third quarter of 2004 reflects lower sales volume and a
reduced gross margin rate. Gross margin as a percentage of net sales decreased
3.7 percentage points to 33.8% for the third quarter of 2005 from 37.5% for the
same period last year. The decrease in gross margin rate primarily reflects an
increased net markdown rate and higher merchandise distribution costs.
Selling, general and administrative expenses for the third quarter of 2005
were $97.8 million compared to $105.2 million for the third quarter of 2004,
reflecting a decrease of $7.5 million. Selling, general and administrative
expenses decreased due to reduced payroll, personal property taxes, integration
costs and credit expenses, partially offset by higher utility expenses. The
current year expense rate decreased 1.1 percentage points to 34.2% of net sales,
compared to 35.3% for the same period last year.
Depreciation and amortization in the third quarter of 2005 was $7.5
million, an increase of $1.4 million compared to the $6.1 million expense in
third quarter of 2004, reflecting current year accelerated depreciation on
software associated with the proprietary credit card portfolio sale and on
certain assets related to announced store closings and relocations.
(LOSS) INCOME FROM OPERATIONS. Loss from operations in the third quarter of
2005 was $6.7 million, or 2.3% of net sales, compared to income of $2.3 million,
or 0.8% of net sales, in the third quarter of 2004. The reduction in income
reflects the decreased net sales and gross margin, partially offset by lower
selling, general and administrative expenses.
INTEREST EXPENSE, NET. Net interest expense was $2.8 million, or 1.0% of
net sales, in the third quarter of 2005 compared to $3.5 million, or 1.2% of net
sales, in the third quarter of 2004. The $0.7 million net decrease is
principally due to the reduction of debt resulting from the sale of the
proprietary credit card portfolio, partially offset by higher interest rates for
the period.
INCOME TAX BENEFIT. The tax rate of 33.7% in the third quarter of 2005 was
3.8 percentage points lower than the rate of 37.5% in the third quarter of 2004.
The rate reduction resulted from recording deferred tax expense in the third
quarter of 2005, which reduced the income tax benefit. The deferred tax expense
was recorded as a result of adjustments to the state tax rate used in computing
deferred tax assets and liabilities, based upon the most recent state income tax
return filings.
NET LOSS. Net loss in the third quarter of 2005 was $6.3 million, or 2.2%
of net sales, compared to a net loss of $0.7 million, or 0.3% of net sales, in
the third quarter of 2004.
17
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
THIRTY-NINE WEEKS ENDED OCTOBER 29, 2005 COMPARED TO THIRTY-NINE WEEKS ENDED
OCTOBER 30, 2004
NET SALES. Net sales for 2005 were $822.6 million, reflecting a decrease of
$24.5 million, or 2.9%, from the same period last year. Comparable store sales,
which exclude the impact of the Pottstown, Pennsylvania store closed in the
second quarter of fiscal 2004, decreased 2.6% in 2005.
The best performing merchandise categories in 2005 were Ladies' Special
Sizes (included in Women's Clothing) and Shoes. Sales for Ladies' Special Sizes
reflect the Company's increased emphasis and corresponding inventory investment.
Shoe sales increased as customers responded favorably to the Company's changes
in moderately-priced branded casual footwear and the introduction of new
products at Elder-Beerman that were previously sold only at Bon-Ton stores. The
poorest performing merchandise categories in 2005 were Dresses (included in
Women's Clothing), Cosmetics, Children's, Juniors' and Home. Sales results for
Cosmetics reflected the introduction of new products in the prior year. Apparel
sales were hampered by unseasonably cold weather during the spring of 2005 and
unseasonably warm weather in September and October of 2005. Home sales were
negatively impacted by a decrease in sales of clearance goods as compared to the
prior year.
OTHER INCOME. Other income, which includes income from leased departments
and other customer revenues, was $6.1 million, or 0.7% of net sales, in 2005
compared to $6.2 million, or 0.7% of net sales, in 2004.
COSTS AND EXPENSES. Gross margin was $291.9 million for 2005 compared to
$313.2 million for the same period last year, a decrease of $21.4 million. The
decrease in gross margin dollars for 2005 reflects lower sales volume and a
reduced gross margin rate. Gross margin as a percentage of net sales decreased
1.5 percentage points to 35.5% for 2005 from 37.0% last year. The decrease in
gross margin rate resulted from an increased net markdown rate and higher
merchandise distribution costs.
Selling, general and administrative expenses for 2005 were $285.8 million
compared to $299.4 million for 2004, reflecting a decrease of $13.5 million.
Selling, general and administrative expenses in 2004 included a $1.7 million
charge associated with the closing of the Company's Pottstown, Pennsylvania
store. In addition, selling, general and administrative expenses decreased due
to reduced payroll, insurance, integration costs and credit expenses, partially
offset by higher advertising and a $1.2 million charge associated with the sale
of the Company's proprietary credit card portfolio. The current year expense
rate decreased 0.6 percentage point to 34.8% of net sales, compared to 35.3% for
the same period last year.
Depreciation and amortization in 2005 was $21.5 million, an increase of
$0.8 million compared to the $20.7 million expense in 2004, largely reflecting
the impact of accelerated depreciation on software related to the sale of the
Company's proprietary credit card portfolio.
LOSS FROM OPERATIONS. Loss from operations in 2005 was $9.4 million, or
1.1% of net sales, compared to $0.6 million, or 0.1% of net sales, in 2004. The
increased loss reflects the lower sales and decrease in gross margin, partially
offset by decreased selling, general and administrative expenses.
INTEREST EXPENSE, NET. Net interest expense was $9.7 million, or 1.2% of
net sales, in 2005 compared to $10.1 million, or 1.2% of net sales, in 2004. The
$0.3 million decrease is due to the reduction of debt resulting from the
proprietary credit card portfolio sale in July 2005, partially offset by higher
interest rates for the period.
18
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INCOME TAX BENEFIT. The effective tax rate decreased 1.1 percentage points
to 36.4% in 2005 from 37.5% in 2004. The rate reduction resulted from recording
deferred tax expense in the third quarter of 2005, which reduced the income tax
benefit for 2005. The deferred tax expense was recorded as a result of
adjustments to the state tax rate used in computing deferred tax assets and
liabilities, based upon the most recent state income tax return filings.
NET LOSS. Net loss in 2005 was $12.2 million, or 1.5% of net sales,
compared to $6.7 million, or 0.8% of net sales, in 2004.
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 2005 or 2004. However, there can be no assurance that the
Company's business will not be affected by inflationary adjustments in the
future.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes material measures of the Company's liquidity
and capital resources:
October 29, October 30,
(Dollars in millions) 2005 2004
----------- -----------
Working capital $ 229.0 $ 304.0
Current ratio 1.95:1 2.21:1
Debt to total capitalization (debt plus equity) 0.38:1 0.53:1
Unused availability under lines of credit (subject to
the minimum borrowing availability covenant of $10) $ 148.3 $ 58.6
The Company's primary sources of working capital are cash flows from
operations and borrowings under its revolving credit facility. Through July 8,
2005, the Company's primary sources of working capital also included proceeds
from the accounts receivable facility. The Company's business follows a seasonal
pattern, whereby working capital fluctuates with seasonal variations reaching
its highest level in October or November.
19
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Decreases in working capital, current ratio and debt to total
capitalization and the increase in unused availability under lines of credit at
October 29, 2005 as compared to October 30, 2004 are principally due to the
proprietary credit card portfolio sale and associated debt reduction.
Net cash provided by operating activities totaled $31.6 million as compared
to $74.2 million of cash used for 2005 and 2004, respectively. The increase in
net cash provided by operating activities primarily reflects net proceeds from
the proprietary credit card portfolio sale.
Net cash used in investing activities was $19.0 million and $24.1 million
for 2005 and 2004, respectively. Capital expenditures in the current year were
$5.0 million lower than the comparable prior year period, largely due to prior
year system integration initiatives.
Net cash used in financing activities was $21.1 million in 2005, as
compared to net cash provided of $96.7 million in 2004. The increase in net cash
used primarily reflects payments made to reduce long-term debt as a result of
the proprietary credit card portfolio sale.
The Company's amended and restated revolving credit facility agreement (the
"Credit Agreement") provides a revolving line of credit of $300.0 million and a
term loan in the amount of $19.0 million. The current Credit Agreement expires
in October 2007. The revolving credit line interest rate, based on LIBOR or an
index rate plus an applicable margin, and fee charges are determined by a
formula based upon the Company's borrowing availability. Under the Credit
Agreement, the Company incurs fees at a rate of 0.375 percentage point on the
unused line of credit. The term loan interest rate is based on LIBOR plus an
applicable margin. Financial covenants contained in the Credit Agreement include
the following: a limitation on fiscal 2005 capital expenditures of $53.5
million, minimum borrowing availability of $10.0 million and a fixed charge
coverage ratio of 1.0-to-1. The fixed charge coverage ratio is defined as
earnings before interest, taxes, depreciation and amortization divided by
interest expense, capital expenditures, tax payments and scheduled debt
payments, and is measured at each fiscal quarter-end based on the immediately
preceding four fiscal quarters. Total borrowings under the Credit Agreement were
$137.0 million and $160.4 million at October 29, 2005 and January 29, 2005,
respectively.
Prior to termination of the receivables securitization program on July 8,
2005, the Company's off-balance-sheet accounts receivable facility agreement
included a funding limit of $250.0 million. Availability under the accounts
receivable facility was calculated based on the dollar balance and performance
of the Company's proprietary credit card portfolio. At January 29, 2005,
accounts receivable totaling $244.0 million 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. This interest rate
swap, used to hedge a portion of the underlying variable-rate facilities,
matures in February 2006.
The Credit Agreement expires in October 2007. The Company anticipates that
it will be able to renew or replace this agreement with an agreement on
substantially comparable terms. Failure to renew or replace this agreement on
substantially comparable terms could have a material adverse effect on the
Company's financial condition.
20
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company paid a quarterly cash dividend of $0.025 per share on shares of
Class A common stock and common stock on April 15, 2005, July 15, 2005 and
October 15, 2005 to shareholders of record as of April 1, 2005, July 1, 2005 and
October 1, 2005, respectively. Additionally, the Company declared a quarterly
cash dividend of $0.025 per share, payable January 15, 2006 to shareholders of
record as of January 1, 2006. The Company's Board of Directors will consider
dividends in subsequent periods as it deems appropriate.
Capital expenditures for fiscal 2005 are expected to be in the range of
$28.0 million to $30.0 million.
The Company anticipates that its cash flows from operations, supplemented
by borrowings under the current Credit Agreement, will be sufficient to satisfy
its operating cash requirements for at least the next twelve months. The Company
intends to finance its acquisition of NDSG with borrowings from a replacement
revolving credit facility and proceeds from the issuance of one or more series
of senior unsecured notes. The Company expects that it will have sufficient cash
available from operations and availability under such replacement revolving
credit facility to finance its operations and planned capital expenditures for
the portion of the next twelve months that occurs after the completion of the
pending acquisition.
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
Prior to termination of the receivables securitization program on July 8,
2005, the Company engaged in securitization activities involving the Company's
proprietary credit card portfolio as a source of funding. Off-balance sheet
proprietary credit card securitizations provided a significant portion of the
Company's funding and was one of its primary sources of liquidity. At January
29, 2005, off-balance sheet securitized receivables represented 57.7% of the
Company's funding (sum of securitized receivables and balance sheet debt). Gains
and losses from securitizations were recognized in the Consolidated Statements
of Operations when the Company relinquished 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," and other related pronouncements. The gain or
loss on the sale of financial assets depended 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 comprised the retained
interests were short-term in nature, the Company classified its retained
interests as a current asset.
The Company sold 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, purchased a $244.0 million interest
in the accounts receivable under this facility at January 29, 2005. The Company
was responsible for servicing these accounts,
21
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
retained a servicing fee and bore the risk of non-collection (limited to its
retained interests in the accounts receivable). Associated off-balance-sheet
assets and related debt were $244.0 million at January 29, 2005.
Based upon the terms of the accounts receivable facility, the accounts
receivable transactions qualified for "sale treatment" under generally accepted
accounting principles. This treatment required 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 have reflected additional accounts receivable and debt.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and results of
operations are based upon the Consolidated Financial Statements, which have been
prepared in accordance with generally accepted accounting principles.
Preparation of these financial statements requires the Company to make estimates
and judgments that affect reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of its financial statements. On an ongoing basis, the Company evaluates its
estimates, including those related to merchandise returns, bad debts,
inventories, intangible assets, income taxes, financings, and contingencies and
litigation. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
Critical accounting policies are defined as those that are reflective of
significant judgments and uncertainties, and could potentially lead to
materially different results under different assumptions and conditions. The
Company's critical accounting policies are as described below.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market with cost determined
by the retail inventory method using a last-in, first-out ("LIFO") cost basis.
Under the retail inventory method, the valuation of inventories at cost and
resulting gross margin is derived by applying a calculated cost-to-retail ratio
to the retail value of inventories. The retail inventory method is an averaging
method that has been widely used in the retail industry. Use of the retail
inventory method will result in valuing inventories at the lower of cost or
market if markdowns are taken timely as a reduction of the retail value of
inventories.
Inherent in the retail inventory method calculation are certain significant
management judgments and estimates including, among others, merchandise markups,
markdowns and shrinkage, which significantly impact both the ending inventory
valuation at cost and resulting gross margin. These significant estimates,
coupled with the fact that the retail inventory method is an averaging process,
can, under certain circumstances, result in individual inventory components with
a cost above their 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
22
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
provides an inventory valuation that approximates cost and results in carrying
inventory in the aggregate at the lower of cost or market.
The Company regularly reviews inventory quantities on-hand and records an
adjustment for excess or old inventory based primarily on an estimated forecast
of merchandise demand for the selling season. Demand for merchandise can
fluctuate greatly. A significant increase in the demand for merchandise could
result in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on-hand. Additionally, estimates of future
merchandise demand may prove to be inaccurate, in which case the Company may
have understated or overstated the adjustment required for excess or old
inventory. If the Company's inventory is determined to be overvalued in the
future, the Company would be required to recognize such costs in costs of goods
sold and reduce operating income at the time of such determination. Likewise, if
inventory is later determined to be undervalued, the Company may have overstated
the costs of goods sold in previous periods and would recognize additional
operating income when such inventory is sold. Therefore, although every effort
is made to ensure the accuracy of forecasts of future merchandise demand, any
significant unanticipated changes in demand or in economic conditions within the
Company's markets could have a significant impact on the value of the Company's
inventory and reported operating results.
As is currently the case with many companies in the retail industry, the
Company's LIFO calculations have yielded inventory increases in recent years due
to deflation reflected in price indices used. This is the result of the LIFO
method whereby merchandise sold is valued at the cost of more recent inventory
purchases (which consumer price indices indicate to be lower), resulting in the
general inventory on-hand being carried at the older, higher costs. Given these
higher values and the promotional retail environment, the Company reduced the
carrying value of its LIFO inventories to a net realizable value ("NRV"). These
reductions totaled $20.2 million at October 29, 2005 and January 29, 2005.
Inherent in these NRV assessments are significant management judgments and
estimates regarding future merchandise selling costs and pricing. Should these
estimates prove to be inaccurate, the Company may have overstated or understated
its inventory carrying value. In such cases, the Company's operating results
would ultimately be impacted.
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.
23
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INCOME TAXES
Significant management judgment is required in determining the provision
for income taxes, deferred tax assets and liabilities, and the valuation
allowance recorded against net deferred tax assets. The process involves the
Company summarizing temporary differences resulting from differing treatment of
items (e.g., allowance for doubtful accounts) for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included within the Consolidated Balance Sheet. The Company must then assess the
likelihood that deferred tax assets will be recovered from future taxable income
or tax carry-back availability and, to the extent the Company does not believe
recovery of the deferred tax asset is more-likely-than-not, a valuation
allowance must be established. To the extent the Company establishes a valuation
allowance in a period, an expense must be recorded within the income tax
provision in the Consolidated Statement of Operations.
Net deferred tax assets were $40.9 million and $29.7 million at October 29,
2005 and January 29, 2005, respectively. In assessing the realizability of the
deferred tax assets, the Company considered whether it was more-likely-than-not
that the deferred tax assets, or a portion thereof, will not be realized. The
Company considered the scheduled reversal of deferred tax liabilities, projected
future taxable income, tax planning strategies, and limitations pursuant to
Section 382 of the Internal Revenue Code. As a result, the Company concluded
that a valuation allowance against a portion of the net deferred tax assets was
appropriate. A total valuation allowance of $58.2 million and $58.1 million was
recorded at October 29, 2005 and January 29, 2005, respectively. If actual
results differ from these estimates or if these estimates are adjusted in future
periods, the Company may need to adjust its valuation allowance, which could
materially impact its financial position and results of operations.
The Company recorded $86.6 million of deferred tax assets in connection
with the October 24, 2003 acquisition of Elder-Beerman; a valuation allowance of
$47.7 million was established against these deferred tax assets. Any future
reduction to the valuation allowance established against deferred tax assets
acquired in connection with the acquisition of Elder-Beerman would first reduce
intangible assets purchased in the acquisition and then, to the extent the
valuation allowance reduction exceeds the current book value of intangible
assets purchased in the acquisition (approximately $3.3 million at October 29,
2005), would reduce the current income tax provision.
Legislative changes 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 $166.2 million and $168.3 million at October 29, 2005
and January 29, 2005, respectively.
24
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company assesses, on a store-by-store basis, the impairment of
identifiable long-lived assets--primarily property, fixtures and
equipment--whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that could trigger an impairment
review include the following:
- - Significant under-performance of stores relative to historical or projected
future operating results,
- - Significant changes in the manner of the Company's use of assets or overall
business strategy, and
- - Significant negative industry or economic trends for a sustained period.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," requires the Company to recognize an impairment loss if the carrying
amount of the long-lived asset is not recoverable from its undiscounted cash
flows. The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Cash flow estimates are
based on historical results adjusted to reflect the Company's best estimate of
future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Estimates of fair value represent the
Company's best estimate based on industry trends and reference to market rates
and transactions, if available. Should cash flow estimates differ significantly
from actual results, an impairment could arise and materially impact the
Company's financial position and results of operations. Given the seasonality of
operations, impairment is not conclusive, in many cases, until after the holiday
period in the fourth quarter is concluded.
Newly opened stores may take time to generate positive operating and cash
flow results. Factors such as store type, store location, current marketplace
awareness of the Company's private label brands, local customer demographic data
and current fashion trends are all considered in determining the time-frame
required for a store to achieve positive financial results. If conditions prove
to be substantially different from the Company's expectations, the carrying
value of new stores' long-lived assets may ultimately become impaired.
GOODWILL AND INTANGIBLE ASSETS
Goodwill was $3.0 million at October 29, 2005 and January 29, 2005.
Intangible assets are principally comprised of lease interests that relate to
below-market-rate leases acquired in store acquisitions completed in fiscal
years 1992 through 2003, which were adjusted to reflect fair market value. These
lease-related interests are being amortized on a straight-line method. Net
intangible assets totaled $8.5 million and $9.4 million at October 29, 2005 and
January 29, 2005, respectively.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
the Company reviews goodwill and other intangible assets that have indefinite
lives for impairment at least annually or when events or changes in
circumstances indicate the carrying value of these assets might exceed their
current fair values. The Company determines fair value using a discounted cash
flow analysis methodology, which requires certain assumptions and estimates
regarding industry economic factors and future profitability of acquired
businesses. It is the Company's policy to conduct impairment testing based on
its most current business plans, which reflect anticipated changes in the
economy and the industry. If actual results prove inconsistent with the
Company's assumptions and judgments, the Company could be exposed to a material
impairment charge.
25
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FUTURE ACCOUNTING CHANGES
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued SFAS No. 123R, "Share-Based Payment" ("SFAS No. 123R"). SFAS No. 123R
revises SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123"), and it supercedes APB No. 25, "Accounting for Stock Issued to Employees,"
and its related implementation guidance. SFAS No. 123R will require compensation
costs related to share-based payment transactions to be recognized in the
financial statements (with limited exceptions). The amount of compensation cost
will be measured based on the grant-date fair value of the equity or liability
instruments issued. Compensation cost will be recognized over the period that an
employee provides service in exchange for the award. The full impact of SFAS No.
123R adoption cannot be predicted at this time as it will depend on levels of
share-based payments granted in the future. However, had the Company adopted
SFAS No. 123R in prior periods, the impact of that standard would have
approximated the impact of SFAS No. 123 as described in the disclosure of pro
forma net loss and loss per share within Note 2 of the Notes to Condensed
Consolidated Financial Statements. SFAS No. 123R also requires that tax benefits
from compensation deductions in excess of recognized compensation cost be
reported as a financing cash flow, rather than as an operating cash flow as
required under current literature. This requirement will reduce net operating
cash flows and increase net financing cash flows in periods after adoption. The
Company is unable to estimate what those amounts will be in the future as they
depend on, among other things, when employees exercise stock options. On April
14, 2005, the Securities and Exchange Commission announced a deferral of the
effective date of SFAS No. 123R to the beginning of the Company's fiscal year
commencing January 29, 2006.
In July 2005, the FASB issued Proposed Interpretation, "Accounting for
Uncertain Tax Positions," an interpretation of SFAS No. 109, "Accounting for
Income Taxes" ("SFAS No. 109"). This proposed interpretation clarifies the
accounting for uncertain tax positions in accordance with SFAS No. 109 by
requiring companies to recognize, in their financial statements, the best
estimate of the impact of a tax position only if that position is probable of
being sustained under audit based solely on the technical merits of the
position. In evaluating whether the probable recognition threshold has been met,
the proposed interpretation would require the presumption that the tax position
will be evaluated during an audit by taxing authorities. The proposed standard
further defines probable as the definition in SFAS No. 5, "Accounting for
Contingencies." The proposed interpretation is currently expected to be issued
in early 2006. The impact of this interpretation to the Company's consolidated
financial statements is not presently known.
26
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
FORWARD-LOOKING STATEMENTS
Certain information included in this report and other materials filed or to
be filed by the Company with the Securities and Exchange Commission contain
statements that are forward-looking within the meaning of the Private Securities
Litigation Reform Act of 1995. Such forward-looking statements, which may be
identified by words such as "may," "could," "will," "plan," "expect,"
"anticipate," "estimate," "project," "intend" or other similar expressions,
involve important risks and uncertainties that could significantly affect
results in the future and, accordingly, such results may differ from those
expressed in any forward-looking statements made by or on behalf of the Company.
These risks and uncertainties include, but are not limited to, uncertainties
affecting the retail industry in general, such as consumer confidence and demand
for soft goods; risks relating to leverage and debt service; competition within
markets in which the Company's stores are located; the need for, and costs
associated with, store renovations and other capital expenditures; and risks
related to the Company's pending acquisition of NDSG, including difficulties in
the assimilation of the operations, services and corporate culture of the
acquired business, diversion of management attention from other business
concerns and overvaluation of the acquired business. These risks, as applicable,
and other risks are discussed in the Company's Annual Report on Form 10-K for
the fiscal year ended January 29, 2005.
27
THE BON-TON STORES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Other than as described below, the Company does not believe its interest
rate risks, as described in the Company's Annual Report on Form 10-K for the
fiscal year ended January 29, 2005 ("2004 Annual Report"), have changed
materially since the Company's disclosure in its 2004 Annual Report.
The Company sold its proprietary credit card portfolio on July 8, 2005, as
further described in the Overview section of Part 1, Item 2. The Company
utilized a portion of the sale proceeds to reduce outstanding borrowings under
its variable-rate revolving credit facility. As a result, the Company's exposure
to market risk associated with changes in interest rates has been
correspondingly reduced, subject to normal operating fluctuations in the balance
of the revolving credit facility.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in reports filed pursuant to
the Securities Exchange Act of 1934, as amended (the "Exchange Act") is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms, and that such
information is accumulated and communicated to management, including the
Company's Chief Executive Officer and Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosure. The Company's
management, including the Company's Chief Executive Officer and Chief Financial
Officer, evaluated the effectiveness of the Company's disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as
of the end of the period covered by this report and, based on this evaluation,
concluded that the Company's disclosure controls and procedures are effective.
Changes in Internal Control over Financial Reporting
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.
28
THE BON-TON STORES, INC.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There have been no material developments in any legal proceedings since the
Company's disclosure in its 2004 Annual Report.
ITEM 6. EXHIBITS
(a) The following exhibits are filed pursuant to the requirements of Item 601 of
Regulation S-K:
Exhibit Description Document Location
- ------- ----------- -----------------
10.1 Purchase Agreement, dated October 29, 2005, Exhibit 2.1 to Form 8-K
between Saks Incorporated and The Bon-Ton filed on October 31,
Stores, Inc. 2005
31.1 Certification of Byron L. Bergren Filed herein.
31.2 Certification of Keith E. Plowman Filed herein.
32.1 Certifications Pursuant to Rules 13a-14(b) and Furnished herein.
15d-14(b) of the Securities Exchange Act of
1934.
29
THE BON-TON STORES, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE BON-TON STORES, INC.
DATE: December 7, 2005 BY: /s/ Byron L. Bergren
------------------------------------
Byron L. Bergren
President and
Chief Executive Officer
DATE: December 7, 2005 BY: /s/ Keith E. Plowman
------------------------------------
Keith E. Plowman
Senior Vice President,
Chief Financial Officer and
Principal Accounting Officer
30