================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarter ended April 29, 2006 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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer" and "large accelerated filer" in Rule 12b-2 of the Exchange Act. (check
one):
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of June 1, 2006, there were 14,084,859 shares of Common Stock, $.01 par
value, and 2,951,490 shares of Class A Common Stock, $.01 par value,
outstanding.
================================================================================
PART I: FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE BON-TON STORES, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands except share and per share data) April 29, January 28,
(Unaudited) 2006 2006
---------- -----------
Assets
Current assets:
Cash and cash equivalents $ 22,973 $ 9,771
Merchandise inventories 772,773 284,584
Prepaid expenses and other current assets 63,299 28,412
Deferred income taxes 8,956 7,126
---------- --------
Total current assets 868,001 329,893
---------- --------
Property, fixtures and equipment at cost, net of accumulated
depreciation and amortization of $235,221 and $216,740 at April 29,
2006 and January 28, 2006, respectively 784,711 167,679
Deferred income taxes 50,410 38,715
Goodwill 246,108 2,965
Intangible assets, net of accumulated amortization of $6,606 and
$5,776 at April 29, 2006 and January 28, 2006, respectively 86,949 5,013
Other long-term assets 31,174 9,340
---------- --------
TOTAL ASSETS $2,067,353 $553,605
========== ========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 222,224 $ 87,318
Accrued payroll and benefits 58,420 18,986
Accrued expenses 159,784 52,692
Current maturities of long-term debt 5,449 961
Current maturities of obligations under capital leases 1,866 74
Income taxes payable 3,634 19,005
---------- --------
Total current liabilities 451,377 179,036
---------- --------
Long-term debt, less current maturities 1,191,333 42,491
Obligations under capital leases, less current maturities 71,066 24
Other long-term liabilities 70,608 39,960
---------- --------
TOTAL LIABILITIES 1,784,384 261,511
---------- --------
Contingencies (Note 10)
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 14,316,140 and 14,195,664 shares at April 29, 2006 and
January 28, 2006, respectively 138 142
Class A Common Stock - authorized 20,000,000 shares at $0.01 par
value; issued and outstanding 2,951,490 shares at April 29, 2006
and January 28, 2006 30 30
Treasury stock, at cost - 337,800 shares at April 29, 2006 and
January 28, 2006 (1,387) (1,387)
Additional paid-in-capital 125,082 129,614
Deferred compensation -- (6,663)
Accumulated other comprehensive loss -- (5)
Retained earnings 159,106 170,363
---------- --------
TOTAL SHAREHOLDERS' EQUITY 282,969 292,094
---------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,067,353 $553,605
========== ========
The accompanying notes are an integral part of these financial statements.
2
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTEEN WEEKS ENDED
-------------------------
(In thousands except share and per share data) April 29, April 30,
(Unaudited) 2006 2005
----------- -----------
Net sales $ 561,774 $ 262,533
Other income 14,813 2,158
----------- -----------
576,587 264,691
----------- -----------
Costs and expenses:
Costs of merchandise sold 351,580 167,415
Selling, general and administrative 199,780 94,664
Depreciation and amortization 19,216 6,433
----------- -----------
Income (loss) from operations 6,011 (3,821)
Interest expense, net 23,868 3,306
----------- -----------
Loss before income taxes (17,857) (7,127)
Income tax benefit (7,022) (2,715)
----------- -----------
NET LOSS $ (10,835) $ (4,412)
=========== ===========
PER SHARE AMOUNTS -
BASIC:
Net loss $ (0.66) $ (0.27)
=========== ===========
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 16,389,962 16,122,555
DILUTED:
Net loss $ (0.66) $ (0.27)
=========== ===========
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 16,389,962 16,122,555
The accompanying notes are an integral part of these financial statements.
3
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THIRTEEN WEEKS ENDED
-----------------------
(In thousands) April 29, April 30,
(Unaudited) 2006 2005
----------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (10,835) $ (4,412)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 19,216 6,433
Bad debt provision -- 778
Stock-based compensation expense 749 494
Tax benefit of stock option exercises -- 363
Excess tax benefit from exercise of stock options (832) --
Gain on sale of property, fixtures and equipment (558) (8)
Amortization of deferred financing costs 3,199 388
Amortization of deferred gain on sale of proprietary credit card portfolio (603) --
Deferred income tax benefit -- (560)
Net transfers of receivables to accounts receivable facility -- (17,200)
Changes in operating assets and liabilities, net of effect of acquisition:
Decrease in retained interest in trade receivables -- 23,235
Increase in merchandise inventories (29,280) (36,924)
(Increase) decrease in prepaid expenses and other current assets (19,269) 284
Decrease (increase) in other long-term assets 564 (55)
(Decrease) increase in accounts payable (19,733) 2,267
Increase (decrease) in accrued expenses 30,419 (13,433)
Decrease in income taxes payable (15,371) (4,454)
Decrease in other long-term liabilities (1,398) (26)
----------- --------
Net cash used in operating activities (43,732) (42,830)
----------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (15,220) (2,695)
Acquisition, net of cash acquired (1,055,527) --
Proceeds from sale of property, fixtures and equipment 535 98
----------- --------
Net cash used in investing activities (1,070,212) (2,597)
----------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (205,947) (58,813)
Proceeds from issuance of long-term debt 1,359,110 98,400
Cash dividends paid (422) (415)
Proceeds from stock options exercised 546 558
Excess tax benefit from exercise of stock options 832 --
Deferred financing costs paid (27,549) (67)
Increase (decrease) in bank overdraft balances 576 (2,408)
----------- --------
Net cash provided by financing activities 1,127,146 37,255
----------- --------
Net increase (decrease) in cash and cash equivalents 13,202 (8,172)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,771 22,908
----------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,973 $ 14,736
=========== ========
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 9,488 $ 2,296
Net income taxes paid $ 15,640 $ 5,074
The accompanying notes are an integral part of these financial statements.
4
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Accumulated
Other
Class A Additional Deferred Compre-
(In thousands except per share data) Common Common Treasury Paid-in Compen- hensive Retained
(Unaudited) Stock Stock Stock Capital sation Loss Earnings Total
------ ------- -------- ---------- -------- ----------- -------- --------
BALANCE AT JANUARY 28, 2006 $142 $30 $(1,387) $129,614 $(6,663) $(5) $170,363 $292,094
Comprehensive loss:
Net loss -- -- -- -- -- -- (10,835) (10,835)
Change in fair value of cash flow hedges,
net of $3 tax effect -- -- -- -- -- 5 -- 5
---- --- ------- -------- ------- --- -------- --------
Total comprehensive loss (10,830)
Adoption of SFAS No. 123R (Note 3) (5) -- -- (6,658) 6,663 -- -- --
Dividends to shareholders, $0.025 per share -- -- -- -- -- -- (422) (422)
Stock options exercised 1 -- -- 545 -- -- -- 546
Stock-based compensation expense -- -- -- 749 -- -- -- 749
Tax benefit of stock options and restricted
shares -- -- -- 832 -- -- -- 832
---- --- ------- -------- ------- --- -------- --------
BALANCE AT APRIL 29, 2006 $138 $30 $(1,387) $125,082 $ -- $-- $159,106 $282,969
==== === ======= ======== ======= === ======== ========
The accompanying notes are an integral part of these financial statements.
5
THE BON-TON STORES, INC.
NOTES TO 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, 271 department stores and
seven furniture galleries in 23 states in the Northeast, Midwest and Great
Plains under the Bon-Ton, Bergner's, Boston Store, Carson Pirie Scott,
Elder-Beerman, Herberger's and Younkers nameplates. The Bon-Ton Stores, Inc.
conducts its operations through one business segment.
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements include the
accounts of The Bon-Ton Stores, Inc. and all of its wholly owned subsidiaries
(collectively, the "Company," unless the context otherwise indicates the term
refers to The Bon-Ton Stores, Inc.). All intercompany transactions and balances
have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in
accordance with the instructions for Form 10-Q and do not include all
information and footnotes required 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 the interim periods presented are not necessarily
indicative of results for the full fiscal year. These unaudited consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended January 28, 2006.
All references to the "first quarter of 2006" and the "first quarter of
2005" are to the 13 weeks ended April 29, 2006 and April 30, 2005, respectively.
All references to "fiscal 2006" and "fiscal 2005" are to the 53 weeks ending
February 3, 2007 and the 52 weeks ended January 28, 2006, respectively.
Certain prior year balances have been reclassified to conform with the
current year presentation.
2. CARSON'S ACQUISITION
Effective March 5, 2006, pursuant to the October 29, 2005 purchase
agreement with Saks Incorporated ("Saks"), as amended, the Company acquired of
all of the outstanding securities of two subsidiaries of Saks that were solely
related to the business of owning and operating the 142 retail department stores
that operated under the names Carson Pirie Scott, Younkers, Herberger's, Boston
Store and Bergner's (collectively, "Carson's"). The stores are located in 12
states in the Midwest and upper Great Plains regions.
Under the terms of the purchase agreement, the Company paid $1,047,280 in
cash, subject to potential purchase price adjustments, which are expected to be
settled during the thirteen weeks ending July 29, 2006.
6
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Company financed the Carson's acquisition, payment of related fees and
expenses and the payoff of its existing indebtedness through the issuance of
10-1/4% Senior Notes due 2014 in the aggregate principal amount of $510,000,
entry into a $1,000,000 senior secured revolving credit facility led by Bank of
America, N.A. ("Bank of America") as agent, and entry into a $260,000 mortgage
loan facility with Bank of America as lender (see Note 5).
Company management believes the acquisition of Carson's will enable the
Company to enhance its product offerings, strengthen its vendor and customer
relationships and increase its profitability.
The Company's consolidated financial statements for the first quarter of
2006 include Carson's operations for the period from March 5, 2006 through April
29, 2006. Carson's operations for the first quarter of 2006 reflect preliminary
purchase accounting in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 141, "Business Combinations," whereby the purchase price
was preliminarily allocated to the assets acquired and liabilities assumed based
upon their estimated fair values on the acquisition date. The preliminary
purchase price and purchase price allocation, as reflected in the following
table, are subject to the final fair value determination of certain assets and
liabilities:
Preliminary Purchase Price
Cash purchase $1,047,280
Carson's severance and relocation 2,210
Professional fees incurred 11,202
----------
Total $1,060,692
==========
Preliminary Purchase Price Allocation
Cash and cash equivalents $ 3,110
Merchandise inventories 458,908
Prepaid expenses 14,787
Property, fixtures and equipment 620,635
Deferred income taxes 13,529
Goodwill 243,143
Intangible assets 82,767
Other assets 10
----------
Total assets acquired 1,436,889
----------
Accounts payable (158,310)
Accrued payroll and benefits (33,339)
Other accrued expenses (78,609)
Obligations under capital leases (73,000)
Other liabilities (32,939)
----------
Total liabilities assumed (376,197)
----------
Net assets acquired $1,060,692
==========
7
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Company has filed a section 338(h)(10) election under the Internal
Revenue Code ("Section 338"). The Section 338 election essentially enables a
buyer to account for a stock purchase as an asset purchase for income tax
purposes.
Goodwill in the amount of $243,143 has been recorded in conjunction with
the acquisition. The Company expects that substantially all goodwill will be
deductible for income tax purposes.
Intangible assets are comprised of lease-related interests of $40,000 that
relate to below-market-rate leases; trademarks totaling $37,767, of which only
$1,767 will be subject to amortization; and customer lists totaling $5,000. The
lease-related interests, amortizable trademarks and customer lists were assigned
weighted-average amortization lives of twelve years, eight years and seven
years, respectively.
Deferred tax assets of $13,529 have been recorded as part of the
preliminary purchase accounting. This balance represents a reduction in the
Company's pre-acquisition valuation allowances against certain net operating
losses acquired as part of the October 2003 acquisition of The Elder-Beerman
Stores Corp. This valuation allowance reduction was a result of the projected
additional net operating loss utilization based on the projected accretive
impact from Carson's on the Company's long-term pre-tax income.
The Company has not completed its assessment of the fair values of the
acquired assets and assumed liabilities and has not finalized its plans
regarding the integration of the acquired Carson's operations. The Company is
currently in the process of obtaining third-party valuations for certain
acquired assets and assumed liabilities. Additionally, the purchase price is
subject to adjustment based upon provisions of the purchase agreement.
Consequently, the purchase price allocation may be subsequently adjusted to
reflect the final valuation of acquired assets and assumed liabilities. Such
revisions could have a material impact on the Company's results of operations
for fiscal 2006.
No amounts were paid for Carson's-related severance and relocation in the
first quarter of 2006.
The Company's corporate office will remain in York, Pennsylvania and be
comprised of corporate administrative and back-office functions. Merchandising
and marketing functions for the combined operations will operate from Carson's
former headquarters in Milwaukee, Wisconsin.
In conjunction with this acquisition, the Company entered into a transition
services agreement with Saks pursuant to which Saks provides the Company with
various services related to Carson's, including, among other things, credit
operations, procurement, accounting, bank card processing, store planning,
construction, facilities maintenance and energy, information technology and
human resources activities. These services will be provided by Saks for periods
ranging from three months to 12 months from the date of the acquisition of
Carson's (subject to extension at the Company's discretion).
8
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The following unaudited pro forma consolidated financial data give effect
to the Carson's acquisition as if it had occurred as of the beginning of the
periods presented:
THIRTEEN
WEEKS ENDED
---------------------
April 29, April 30,
2006 2005
--------- ---------
Net sales $743,381 $752,442
Other income 15,840 4,523
Costs and expenses:
Costs of merchandise sold 484,234 470,641
Selling, general and administrative 258,621 249,647
Depreciation and amortization 26,836 26,152
-------- --------
(Loss) income from operations (10,470) 10,525
Interest expense, net 34,254 27,430
-------- --------
Loss before income taxes (44,724) (16,905)
Income tax benefit (17,581) (6,595)
-------- --------
NET LOSS $(27,143) $(10,310)
======== ========
Per share amounts -
Basic $ (1.66) $ (0.64)
Diluted $ (1.66) $ (0.64)
The pro forma information for the first quarter of 2006 includes the
following non-recurring charges: $4,405 of integration costs recorded in
selling, general and administrative expense, which includes severance and
relocation expense related to the transition of the Company's merchandising and
marketing staff to Milwaukee, Wisconsin in the amount of $3,376; $2,319 of
charges in interest expense related to the write-off of deferred financing fees
associated with the previous credit agreement; and $4,500 included in interest
expense related to the write-off of commitment fees associated with a bridge
loan in connection with the Carson's acquisition. There were no non-recurring
charges included in the pro forma information for the first quarter of 2005.
The pro forma information does not purport to be indicative of the results
that actually would have been achieved if the operations were combined during
the periods presented and is not intended to be a projection of future results
or trends.
9
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
3. STOCK-BASED COMPENSATION
The Company's Amended and Restated 2000 Stock Incentive Plan ("2000 Stock
Plan"), as amended through August 24, 2004, provides for the granting of common
stock options, restricted shares and restricted stock units to certain
employees, officers, directors, consultants and advisors. A maximum of 1,900,000
shares may be granted under the 2000 Stock Plan, of which 785,948 shares remain
available as of April 29, 2006. Grant vesting periods are at the discretion of
the Company's board of directors.
The Company's Amended and Restated 1991 Stock Option and Restricted Stock
Plan ("1991 Stock Plan"), as amended through June 17, 1997, provided for the
granting of common stock options, performance-based common stock options as part
of a long-term incentive plan for selected officers and common stock restricted
shares. A maximum of 1,900,000 shares were available under the 1991 Stock Plan;
no shares remain available as of April 29, 2006.
Stock options granted in the first quarter of 2006 were granted with an
exercise price equal to the market value of the underlying stock on the grant
date, vest on an annual basis over three years and have a contractual term of
seven years. Stock options granted before fiscal 2006 generally vested over two
to four years and had a contractual term of seven or ten years.
Restricted shares granted in the first quarter of 2006 vest after three
years. Employees granted restricted shares are not required to pay for the
shares; however, they must remain employed with the Company until the
restrictions on the shares lapse. Restricted shares granted before fiscal 2006
generally vested over two to four years.
Employees and directors who are granted restricted stock units are not
required to pay for the shares but must remain employed by the Company, or
continue to serve as a member of its board of directors, until the restrictions
on the shares lapse.
Refer to Note 15 in the Company's Annual Report on Form 10-K for the
year-ended January 28, 2006 for additional information regarding these plans.
Plan descriptions for the Phantom Equity Replacement Plan and Management
Incentive Plan were excluded herefrom due to immateriality.
The Company generally issues new stock to satisfy share-based award
exercises.
10
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
ADOPTION OF SFAS NO. 123R
Effective January 29, 2006, the Company adopted SFAS No. 123R, "Share-Based
Payment" ("SFAS No. 123R"), which revised SFAS No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123R requires a public entity to measure the
cost of employee services received in exchange for an award of equity
instruments based on the grant-date fair value of the award and to recognize
that cost over the period that an employee is required to provide service in
exchange for the award. Any awards of liability instruments to employees would
be measured at fair value at each reporting date through settlement.
Prior to adopting SFAS No. 123R, the Company followed the intrinsic value
method of accounting for stock-based employee compensation in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees," and related interpretations. The Company adopted SFAS No. 123R
using the modified prospective application method, which requires that
provisions of SFAS No. 123R are generally applied only to share-based awards
granted, modified, repurchased, or cancelled on January 29, 2006 and thereafter.
For those grants made prior to January 29, 2006 that are nonvested and
outstanding as of January 29, 2006, the Company started recognizing the
remaining unrecognized compensation cost of these awards over the remaining
service period as required by SFAS No. 123R. Accordingly, the results of prior
periods have not been restated. The adoption of SFAS No. 123R did not have a
material effect on the Company's results of operations, cash flows, or financial
position.
The following table illustrates the effect on net loss and loss per share
for grants issued prior to April 30, 2005 had the Company applied the fair value
recognition provisions of SFAS No. 123 to those grants in fiscal 2005:
THIRTEEN
WEEKS ENDED
April 30,
2005
-----------
Net loss, as reported $(4,412)
Add: Stock-based compensation expense included
in net loss, net of income tax of $188 306
Deduct: Total stock-based compensation expense
determined under fair-value-based method for all
awards, net of income tax of $270 (439)
-------
Pro forma net loss $(4,545)
=======
Loss per share:
Basic As reported $ (0.27)
Pro forma (0.28)
Diluted As reported $ (0.27)
Pro forma (0.28)
11
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The compensation cost that has been charged against income for the
Company's share-based award plans was $749 and $494 for the first quarter of
2006 and 2005, respectively. The total income tax benefit recognized in the
statements of operations for stock-based award compensation was $295 and $188
for the first quarter of 2006 and 2005, respectively.
As of April 29, 2006, there was $9,982 of total unrecognized compensation
cost related to the Company's share-based award plans that is expected to be
recognized over a weighted average period of 2.76 years. Cash received from
exercise under all share-based payment arrangements was $546 and $558 for the
first quarter of 2006 and 2005, respectively. The actual tax benefit realized
for the tax deductions from exercise of the share-based payment arrangements was
$832 and $363 for the first quarter of 2006 and 2005, respectively.
Awards with graded vesting are recognized using the straight-line method.
Based upon an examination of forfeiture rates for the various classes of
stock options, restricted stock units and restricted shares, Company management
does not believe that the total number of options or shares that are vested and
expected to vest as of April 29, 2006 are materially different from the
respective number of options or shares outstanding as of April 29, 2006.
STOCK OPTIONS
The fair value of each option award was estimated on the grant date using
the Black-Scholes option valuation model and the weighted average assumptions
noted in the following table:
THIRTEEN
WEEKS ENDED
---------------------
April 29, April 30,
2006 2005
--------- ---------
Weighted average grant date fair value $14.23 $10.01
Weighted average risk-free interest rate 4.9% 4.0%
Weighted average expected volatility 48.1% 50.3%
Weighted average expected dividend yield 0.3% 0.6%
Weighted average expected term (years) 4.5 7.7
The risk-free rates used in the first quarters of 2006 and 2005 were based
on the zero-coupon U.S. Treasury bond, with a term equal to the expected term of
the stock options. The volatility used in the first quarters of 2006 and 2005
represent the historical volatility of the Company's common shares over a period
that approximates the expected term of the stock options. The expected dividend
yields used in the first quarters of 2006 and 2005 were estimated based on
historical dividend yields. The expected term of options granted in the first
quarters of 2006 and 2005 were estimated using the average of the vesting date
and the contractual term, in accordance with methods provided within Securities
and Exchange Commission Staff Accounting Bulletin No. 107.
12
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Company's stock options include stock options granted under the 2000
Stock Plan, 1991 Stock Plan and the Phantom Equity Replacement Plan.
A summary of the status of the stock options under the Company's stock
option plans as of April 29, 2006 and changes during the first quarter of 2006
are presented below:
Weighted Weighted
Average Average Remaining Aggregate
Shares Under Per-Share Contractual Term Intrinsic
Option Exercise Price (Years) Value
------------ -------------- ----------------- ---------
Outstanding as of January 28, 2006 546,030 $13.15
Granted 60,000 31.84
Exercised (91,976) 5.95
------- ------
Outstanding as of April 29, 2006 514,054 16.63 6.55 $6,086
======= ====== ==== ======
Exercisable as of April 29, 2006 151,720 $ 9.13 5.10 $2,935
The total intrinsic value of options exercised was $2,107 and $1,016 during
the first quarter of 2006 and 2005, respectively. As of April 29, 2006, there
was $2,940 of total unrecognized compensation cost related to unvested stock
options; that cost is expected to be recognized over a weighted average period
of 1.43 years.
RESTRICTED STOCK UNITS
Restricted stock units consist of those units granted under the 2000 Stock
Plan, as discussed above. The fair value of each restricted stock unit award is
calculated using the stock price at the date of grant. A summary of the status
of the restricted stock units as of April 29, 2006 and January 28, 2006 is
presented below:
Weighted Average
Restricted Stock Grant-Date Fair
Units Value
---------------- ----------------
Outstanding as of January 28, 2006 and April 29, 2006 46,375 $15.09
====== ======
As of April 29, 2006, all compensation cost related to restricted stock
units has been recognized. No restricted stock units vested during the first
quarters of 2006 and 2005.
13
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Company pays cash dividend equivalents on all outstanding restricted
stock units.
RESTRICTED SHARES
The Company's restricted shares consist of restricted shares granted under
the 2000 Stock Plan, as discussed above. The fair value of each restricted share
award is calculated using the stock price at the date of grant. A summary of the
status of restricted share awards as of April 29, 2006 and changes during the
first quarter of 2006 are presented below:
Weighted Average
Grant-Date Fair
Restricted Shares Value
----------------- ----------------
Outstanding as of January 28, 2006 471,647 $17.58
Granted 28,500 31.84
------- ------
Outstanding as of April 29, 2006 500,147 18.40
======= ======
As of April 29, 2006, there was $7,042 of total unrecognized compensation
cost related to restricted shares that is expected to be recognized over a
weighted average period of 3.32 years. No restricted shares vested during the
first quarter of 2006. The total fair value of shares vested during the first
quarter of 2005 was $10.
The Company pays cash dividends on all outstanding restricted shares.
4. 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 WEEKS ENDED
-----------------------
April 29, April 30,
2006 2005
---------- ----------
Basic calculation 16,389,962 16,122,555
Effect of dilutive shares ---
Restricted Shares and Restricted Stock Units -- --
Options -- --
---------- ----------
Diluted calculation 16,389,962 16,122,555
========== ==========
14
THE BON-TON STORES, INC.
NOTES TO 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 WEEKS ENDED
---------------------
April 29, April 30,
2006 2005
--------- ---------
Antidilutive shares ---
Restricted Shares and Restricted Stock Units 526,165 345,093
Options 510,919 554,509
Certain securities were excluded from the computation of dilutive shares
due to the Company's net loss position in the first quarters of 2006 and 2005.
The following table shows the approximate effect of dilutive securities had the
Company reported a profit for these periods:
THIRTEEN WEEKS ENDED
---------------------
April 29, April 30,
2006 2005
--------- ---------
Effect of dilutive securities ---
Restricted Shares and Restricted Stock Units 201,366 98,318
Options 64,770 218,017
5. DEBT
On March 6, 2006, the Company and certain of its subsidiaries, Bank of
America and certain other lenders entered into a Loan and Security Agreement
("New Senior Secured Credit Facility") which provides for up to $1,000,000 of
revolver borrowings. The New Senior Secured Credit Facility includes a last-in,
first-out revolving credit facility of up to $900,000 and a first-in, last-out
revolving credit facility of up to $100,000 and has a sub-limit of $150,000 for
the issuance of standby and documentary letters of credit. All borrowings under
the New Senior Secured Credit Facility are limited by amounts available pursuant
to a borrowing base calculation, which is based on percentages of eligible
inventory, real estate and fixed assets, with a reduction for applicable
reserves. The New Senior Secured Credit Facility is guaranteed by The Bon-Ton
Stores, Inc. and certain of its subsidiaries. As part of the New Senior Secured
Credit Facility, Bank of America and the other lenders will make available
certain swing line loans in an aggregate amount not to exceed $75,000 at any one
time outstanding. Borrowings under the New Senior Secured Credit Facility will
bear interest at either (i) the prime rate established by Bank of America, from
time to time, plus the applicable margin (the "Prime Rate") or (ii) the LIBOR
rate from time to time plus the
15
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
applicable margin. The applicable margin will be determined by the excess
availability under the New Senior Secured Credit Facility. The swing line loans
will bear interest at the same rate applicable to last in, first out Prime Rate
loans. The Company will be required to pay a commitment fee to the lenders for
unused commitments at a rate of 0.25% to 0.30% per annum, based on excess
availability under the New Senior Secured Credit Facility. The New Senior
Secured Credit Facility expires March 6, 2011. Financial covenants contained in
the New Senior Secured Credit Facility require that the minimum excess
availability be greater than $75,000 at all times. In addition, there are
certain restrictions against the incurrence of additional indebtedness, pledge
or sale of assets, payment of dividends and distributions, and other similar
restrictions. Dividends paid by the Company may not exceed $15,000 over the life
of the agreement, or $4,000 in any single year. Capital expenditures are limited
to $125,000 per year, with a one-year carryover of any prior year unused amount.
The available borrowing capacity under the New Senior Secured Credit Facility
will be used in the future for other general corporate purposes.
On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned
subsidiary of The Bon-Ton Stores, Inc., entered into an indenture (the
"Indenture") with The Bank of New York, as trustee, under which The Bon-Ton
Department Stores, Inc. issued $510,000 aggregate principal amount of its
10-1/4% Senior Notes due 2014 (the "Notes"). The Notes are guaranteed on a
senior unsecured basis by the Company and by each of the Company's subsidiaries
that is an obligor under the New Senior Secured Credit Facility. The Notes
mature on March 15, 2014. The interest rate of the Notes is fixed at 10-1/4% per
year. Interest on the Notes is payable on March 15 and September 15 of each
year, beginning on September 15, 2006. The Indenture includes covenants that
limit the ability of the Company and its restricted subsidiaries to, among other
things: incur additional debt; pay dividends and make distributions; make
certain investments; enter into certain types of transactions with affiliates;
use assets as security in other transactions; and sell certain assets or merge
with or into other companies.
On March 6, 2006, certain bankruptcy remote special purpose entities (each,
an "SPE," and, collectively, the "SPEs") that are indirect wholly owned
subsidiaries of The Bon-Ton Stores, Inc. entered into Loan Agreements with Bank
of America, pursuant to which Bank of America provided a new mortgage loan
facility in the aggregate principal amount of $260,000 (the "New Mortgage Loan
Facility"). The New Mortgage Loan Facility has a term of ten years and is
secured by mortgages on twenty-three retail stores and one distribution center
owned by the SPEs. Each SPE entered into a lease with each of The Bon-Ton
Stores, Inc. subsidiaries operating on such SPE's properties. A portion of the
rental income received under these leases will be used to pay the debt service
under the New Mortgage Loan Facility. The New Mortgage Loan Facility requires
level monthly payments of principal and interest based on an amortization period
of 25 years and the balance outstanding at the end of ten years will then become
due and payable. The interest rate for the New Mortgage Loan Facility is a fixed
rate of 6.2125%. Financial covenants contained in the New Mortgage Loan Facility
require that the SPEs maintain certain financial thresholds, as defined.
The Company used the net proceeds of the Notes offering along with
additional borrowings under its New Senior Secured Credit Facility and New
Mortgage Loan Facility to finance the acquisition of Carson's, pay related fees
and expenses in connection with the acquisition and related financing
transactions, and pay the outstanding balance under the Company's previous
credit agreement.
16
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
6. EXIT OR DISPOSAL ACTIVITIES
On January 28, 2006, the Company closed its Great Northern and Shoppingtown
stores in the Syracuse, New York area, its Walden Galleria store in Buffalo, New
York and its Lebanon, Pennsylvania store. In connection with the closing of
these four stores, the Company developed plans resulting in involuntary
associate terminations and a lease termination fee. Payments during the first
quarter of 2006 associated with liabilities recognized in connection with these
store closings were as follows:
Involuntary
Termination Lease
Benefits Termination Total
----------- ----------- -----
Balance as of January 28, 2006 $ 122 $ 782 $ 904
Payments (117) (168) (285)
----- ----- -----
Balance as of April 29, 2006 $ 5 $ 614 $ 619
===== ===== =====
The Company expects to pay the balance of the involuntary associate
termination payments during the thirteen weeks ending July 29, 2006, and the
balance of the lease termination fee through February 1, 2008.
In connection with the sale of its credit card accounts in July 2005, the
Company developed plans resulting in involuntary associate terminations and
contract terminations, with total costs of $534 and $200, respectively. The
Company expects to pay the balance of the associate termination payments by
February 3, 2007, while the liability for the contract termination costs will be
paid over the remaining contract periods ending in May 2007. Activities during
the first quarter of 2006 related to these costs are as follows:
Involuntary
Termination Contract
Benefits Termination Total
----------- ----------- -----
Balance as of January 28, 2006 $ 168 $168 $ 336
Provision 15 -- 15
Payments (107) (31) (138)
----- ---- -----
Balance as of April 29, 2006 $ 76 $137 $ 213
===== ==== =====
The above provision was included within selling, general and administrative
expense.
17
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
7. INTEGRATION ACTIVITIES
In connection with the acquisition of Carson's, the Company developed
certain integration plans. These plans include transferring Bon-Ton's existing
merchandising and marketing functions to Carson's former headquarters in
Milwaukee, Wisconsin, resulting in involuntary terminations and employee
relocation costs, with total expected costs of $5,000 and $5,650, respectively.
As of April 29, 2006, the Company has recorded within selling, general and
administrative expense charges of $3,066 for involuntary terminations and $310
for employee relocations. No payments have been made as of April 29, 2006. The
Company expects to pay the involuntary termination and employee relocation costs
by February 3, 2007.
In connection with the acquisition of The Elder-Beerman Stores Corp. in
October 2003, the Company developed integration plans resulting in certain lease
terminations. The liability balance as of January 28, 2006 for the lease
terminations was $1,075. As of April 29, 2006, additional payments of $24 had
been made. As of April 29, 2006, the liability balance for lease terminations
was $1,051, which will be paid over the remaining contract periods ending in
2030.
8. COMPREHENSIVE LOSS
Comprehensive loss was determined as follows:
THIRTEEN
WEEKS ENDED
---------------------
April 29, April 30,
2006 2005
--------- ---------
Net loss $(10,835) $(4,412)
Other comprehensive income:
Cash flow hedge derivative income, net of tax 5 157
-------- -------
Comprehensive loss $(10,830) $(4,255)
======== =======
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 made an annual contribution of $4,054 to the Plan during the first
quarter of 2006. The Company recorded Plan expense of $1,943 and $760 during the
first quarters of 2006 and 2005, respectively.
18
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Company provides the Bon-Ton supplementary pension plan to certain key
executives and former employees. Net periodic benefit expense includes the
following components:
THIRTEEN
WEEKS ENDED
---------------------
April 29, April 30,
2006 2005
--------- ---------
Service cost $19 $19
Interest cost 53 54
--- ---
Net periodic benefit expense $72 $73
=== ===
During the first quarter of 2006, contributions of $61 have been made to
the Bon-Ton supplementary pension plan. The Company anticipates contributing an
additional $165 to fund the Bon-Ton supplementary pension plan in fiscal 2006
for an annual total of $226.
As part of the Carson's acquisition (see Note 2), the Company acquired a
defined benefit plan, supplemental pension plans and a retiree health care plan.
A valuation of each of the plans is currently being performed by a third-party
actuarial firm. The Company expects that these valuations will be completed
during the thirteen week period ending July 29, 2006. Therefore, the Company is
unable at this time to estimate required fiscal 2006 cash contributions to these
plans. Based on preliminary expense projections, the Company believes that the
expenses related to the plans for the period of March 5, 2006 through April 29,
2006 are not material.
10. CONTINGENCIES
The Company is involved in various legal matters arising in the ordinary
course of business. In the opinion of Company management, the outcome of such
proceedings and litigation will not have a material adverse impact on the
Company's financial position, results of operations or liquidity.
11. SUBSEQUENT EVENT
On May 24, 2006, the Company announced a quarterly cash dividend of $0.025
per share on Class A Common Stock and Common Stock, payable August 1, 2006 to
shareholders of record as of July 14, 2006.
19
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned
subsidiary of the Company, entered into an Indenture with The Bank of New York,
as trustee, under which The Bon-Ton Department Stores, Inc. issued $510,000
aggregate principal amount of its 10-1/4% Senior Notes due 2014 (see Note 5).
The Notes are guaranteed on a senior unsecured basis by the Company and by each
of the Company's subsidiaries, other than The Bon-Ton Department Stores, Inc.,
that is an obligor under the New Senior Secured Credit Facility.
The condensed consolidating financial information for the Company, the
Company's guarantor subsidiaries (including The Bon-Ton Department Stores, Inc.)
and the Company's non-guarantor subsidiaries as of April 29, 2006 and for the
first quarters of 2006 and 2005, as presented below, have been prepared from the
books and records maintained by the Company and the guarantor and non-guarantor
subsidiaries. The condensed financial information may not necessarily be
indicative of the results of operations or financial position had the guarantor
and non-guarantor subsidiaries operated as independent entities. Certain
intercompany revenues and expenses included in the subsidiary records are
eliminated in consolidation. As a result of this activity, an amount due to/due
from affiliates will exist at any time.
20
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THE BON-TON STORES, INC.
CONDENSED CONSOLIDATING BALANCE SHEET
APRIL 29, 2006
Bon-Ton
(Parent Guarantor Non-Guarantor Consolidating Company
Company) Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------- ------------
Assets
Current assets:
Cash and cash equivalents $ 1 $ 20,772 $ 2,200 $ -- $ 22,973
Merchandise inventories -- 772,773 -- -- 772,773
Prepaid expenses and other current assets -- 61,824 1,475 -- 63,299
Deferred income taxes -- 8,956 -- -- 8,956
-------- ---------- -------- --------- ----------
Total current assets 1 864,325 3,675 -- 868,001
-------- ---------- -------- --------- ----------
Property, fixtures and equipment at cost, net -- 461,548 323,163 -- 784,711
Deferred income taxes -- 50,410 -- -- 50,410
Goodwill -- 246,108 -- -- 246,108
Intangible assets, net -- 86,949 -- -- 86,949
Investment in and advances to (from) affiliates 282,968 (135,140) 899 (148,727) --
Other long-term assets -- 27,803 3,371 -- 31,174
-------- ---------- -------- --------- ----------
TOTAL ASSETS $282,969 $1,602,003 $331,108 $(148,727) $2,067,353
======== ========== ======== ========= ==========
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ -- $ 222,224 $ -- $ -- $ 222,224
Accrued payroll and benefits -- 58,420 -- -- 58,420
Accrued expenses -- 158,477 1,307 -- 159,784
Current maturities of long-term debt and obligations
under capital leases -- 1,866 5,449 7,315
Income taxes payable -- 3,634 -- -- 3,634
-------- ---------- -------- --------- ----------
Total current liabilities -- 444,621 6,756 -- 451,377
Long-term debt and obligations under capital leases,
less current maturities -- 998,717 263,682 -- 1,262,399
Other long-term liabilities -- 70,608 -- -- 70,608
-------- ---------- -------- --------- ----------
TOTAL LIABILITIES -- 1,513,946 270,438 -- 1,784,384
-------- ---------- -------- --------- ----------
SHAREHOLDERS' EQUITY 282,969 88,057 60,670 (148,727) 282,969
-------- ---------- -------- --------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $282,969 $1,602,003 $331,108 $(148,727) $2,067,353
======== ========== ======== ========= ==========
21
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THE BON-TON STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 29, 2006
Bon-Ton
(Parent Guarantor Non-Guarantor Consolidating Company
Company) Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------- ------------
Net sales $ -- $561,774 $ -- $ -- $561,774
Other income -- 14,813 -- -- 14,813
-------- -------- ------- ------- --------
-- 576,587 -- -- 576,587
Costs and expenses:
Costs of merchandise sold -- 351,580 -- -- 351,580
Selling, general and administrative 2 204,109 5 (4,336) 199,780
Depreciation and amortization -- 16,556 2,660 -- 19,216
-------- -------- ------- ------- --------
Income (loss) from operations (2) 4,342 (2,665) 4,336 6,011
Other income (expense):
Intercompany interest income 1,700 -- -- (1,700) --
Intercompany rental income -- -- 4,336 (4,336) --
Equity in earnings of subsidiaries (19,555) (1,257) -- 20,812 --
Interest expense, net -- (22,640) (2,928) 1,700 (23,868)
-------- -------- ------- ------- --------
Income (loss) before income taxes (17,857) (19,555) (1,257) 20,812 (17,857)
Income tax provision (benefit) (7,022) (7,690) (494) 8,184 (7,022)
-------- -------- ------- ------- --------
NET INCOME (LOSS) $(10,835) $(11,865) $ (763) $12,628 $(10,835)
======== ======== ======= ======= ========
22
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THE BON-TON STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS
THIRTEEN WEEKS ENDED APRIL 30, 2005
Bon-Ton
(Parent Guarantor Non-Guarantor Consolidating Company
Company) Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------- ------------
Net sales $ -- $262,533 $ -- $ -- $262,533
Other income -- 2,158 -- -- 2,158
------- -------- ----- ------- --------
-- 264,691 -- -- 264,691
Costs and expenses:
Costs of merchandise sold -- 167,415 -- -- 167,415
Selling, general and administrative 1 95,324 1 (662) 94,664
Depreciation and amortization -- 6,106 327 6,433
------- -------- ----- ------- --------
Income (loss) from operations (1) (4,154) (328) 662 (3,821)
Other income (expense):
Intercompany interest income 2,549 -- -- (2,549) --
Intercompany rental income -- -- 662 (662) --
Equity in earnings of subsidiaries (9,675) (130) -- 9,805 --
Interest expense, net -- (5,391) (464) 2,549 (3,306)
------- -------- ----- ------- --------
Income (loss) before income taxes (7,127) (9,675) (130) 9,805 (7,127)
Income tax provision (benefit) (2,715) (3,686) (50) 3,736 (2,715)
------- -------- ----- ------- --------
NET INCOME (LOSS) $(4,412) $ (5,989) $ (80) $ 6,069 $ (4,412)
======= ======== ===== ======= ========
23
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THE BON-TON STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTEEN WEEKS ENDED APRIL 29, 2006
Bon-Ton
(Parent Guarantor Non-Guarantor Consolidating Company
Company) Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES: $(965) $ (45,207) $2,440 $-- $ (43,732)
----- ----------- ------ --- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (15,220) -- -- (15,220)
Acquisition, net of cash acquired -- (1,055,527) -- -- (1,055,527)
Proceeds from sale of property, fixtures and equipment -- 535 -- -- 535
----- ----------- ------ --- -----------
Net cash used in investing activities -- (1,070,212) -- -- (1,070,212)
----- ----------- ------ --- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations -- (205,707) (240) -- (205,947)
Proceeds from issuance of long-term debt -- 1,359,110 -- -- 1,359,110
Cash dividends paid (422) -- -- (422)
Proceeds from stock options exercised 546 -- -- -- 546
Excess tax benefit from exercise of stock options 832 -- -- -- 832
Deferred financing costs paid -- (27,549) -- -- (27,549)
Increase in bank overdraft balances -- 576 -- -- 576
----- ----------- ------ --- -----------
Net cash provided by (used in) financing activities 956 1,126,430 (240) -- 1,127,146
----- ----------- ------ --- -----------
Net increase (decrease) in cash and cash equivalents (9) 11,011 2,200 -- 13,202
----- ----------- ------ --- -----------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10 9,761 -- -- 9,771
----- ----------- ------ --- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1 $ 20,772 $2,200 $-- $ 22,973
===== =========== ====== === ===========
24
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THE BON-TON STORES, INC.
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
THIRTEEN WEEKS ENDED APRIL 30, 2005
Bon-Ton
(Parent Guarantor Non-Guarantor Consolidating Company
Company) Subsidiaries Subsidiaries Eliminations Consolidated
-------- ------------ ------------- ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES: $(130) $(42,923) $ 223 $-- $(42,830)
----- -------- ----- --- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures -- (2,695) -- -- (2,695)
Proceeds from sale of property, fixtures and equipment -- 98 -- -- 98
----- -------- ----- --- --------
Net cash used in investing activities -- (2,597) -- -- (2,597)
----- -------- ----- --- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations -- (58,590) (223) -- (58,813)
Proceeds from issuance of long-term debt -- 98,400 -- -- 98,400
Cash dividends paid (415) -- -- -- (415)
Proceeds from stock options exercised 558 -- -- -- 558
Deferred financing costs paid -- (67) -- -- (67)
Decrease in bank overdraft balances -- (2,408) -- -- (2,408)
----- -------- ----- --- --------
Net cash provided by (used in) financing activities 143 37,335 (223) -- 37,255
----- -------- ----- --- --------
Net increase (decrease) in cash and cash equivalents 13 (8,185) -- -- (8,172)
----- -------- ----- --- --------
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 2 22,906 -- -- 22,908
----- -------- ----- --- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15 $ 14,721 $ -- $-- $ 14,736
===== ======== ===== === ========
25
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
For purposes of the following discussions, all references to "first quarter
of 2006" and "first quarter of 2005" are to the thirteen-week periods ended
April 29, 2006 and April 30, 2005, respectively, of The Bon-Ton Stores, Inc. and
all of its wholly owned subsidiaries (collectively, the "Company," unless the
context otherwise indicates the term refers to The Bon-Ton Stores, Inc.).
OVERVIEW
Effective March 5, 2006, pursuant to the October 29, 2005 purchase
agreement with Saks Incorporated ("Saks"), as amended, the Company acquired all
of the outstanding securities of two subsidiaries of Saks that were solely
related to the business of owning and operating the 142 retail department stores
operated under the names Carson Pirie Scott, Younkers, Herberger's, Boston Store
and Bergner's (collectively, "Carson's"). The stores are located in twelve
states in the Midwest and Great Plains regions. Under the terms of the purchase
agreement, the Company paid approximately $1.05 billion in cash for Carson's.
The purchase price remains subject to certain post-closing adjustments. Carson's
stores encompass a total of approximately 15 million gross square feet in
mid-sized and metropolitan markets.
To finance the acquisition and the payoff of the Company's previous
revolving credit facility, the Company entered into a new revolving credit
facility which provides for up to $1.0 billion in borrowings, issued $510.0
million in senior unsecured notes, and entered into a new mortgage loan facility
in the aggregate principal amount of $260.0 million.
As a result of the acquisition of Carson's, the Company is now the second
largest regional department store operator in the United States, in terms of
sales, with 278 stores that encompass a total of approximately 27 million gross
square feet across the Northeastern, Midwestern and Great Plains states. The
Company's management believes that the acquisition will enhance the Company's
product offerings, strengthen its vendor and customer relationships and increase
its profitability. The Company's scale will make it an important distribution
channel for leading merchandise vendors and will enhance its ability to offer
its customers nationally distributed brands and exclusive merchandise.
Furthermore, the Company's management believes that the Company will continue to
enjoy the #1 or #2 market position among department stores in most of the
markets in which it operates.
The Company competes in the department store segment of the U.S. retail
industry. Department stores have historically dominated apparel and accessories
retailing, occupying a cornerstone in the U.S. retail landscape for more than
100 years. Over time, department stores have evolved from single unit, family
owned, urban locations to regional and national chains serving communities of
all sizes. The department store industry continues to evolve in response to
ongoing consolidation among apparel and accessory vendors as well as the
evolution of competitive retail formats -- mass merchandisers, national chain
retailers, specialty retailers and online retailers. The Company's segment of
the retail industry is highly competitive, and the Company anticipates that
competitive pressures and challenges will continue in the foreseeable future.
26
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table summarizes changes in selected operating indicators of
the Company, illustrating the relationship of various income and expense items
to net sales for the respective periods presented (components may not add or
subtract to totals due to rounding):
THIRTEEN
WEEKS ENDED
---------------------
April 29, April 30,
2006 2005
--------- ---------
Net sales 100.0% 100.0%
Other income 2.6 0.8
----- -----
102.6 100.8
----- -----
Costs and expenses:
Costs of merchandise sold 62.6 63.8
Selling, general and administrative 35.6 36.1
Depreciation and amortization 3.4 2.5
----- -----
Income (loss) from operations 1.1 (1.5)
Interest expense, net 4.2 1.3
----- -----
Loss before income taxes (3.2) (2.7)
Income tax benefit (1.2) (1.0)
----- -----
Net loss (1.9)% (1.7)%
===== =====
THIRTEEN WEEKS ENDED APRIL 29, 2006 COMPARED TO THIRTEEN WEEKS ENDED APRIL 30,
2005
NET SALES: Net sales for the first quarter of 2006 were $561.8 million as
compared to $262.5 million for the first quarter of 2005. Sales in the first
quarter of 2006 include $311.3 million from Carson's for the period March 5,
2006 through April 29, 2006. Comparable store sales decreased 2.9%. Sales for
Carson's stores are not included in the Company's reported comparable store
sales, therefore, the following comparable store sales are provided for
informational purposes only: For the period from March 5, 2006 through April 29,
2006, Carson's comparable store sales increased 1.7% over the prior year period.
The best performing merchandise categories in the comparable stores in the
first quarter of 2006 were Ladies' Special Sizes (included in Women's Clothing)
and Shoes. The performance in Ladies' Special Sizes reflects the Company's
increased emphasis and corresponding inventory investment. Shoe sales increased
as customers continued to respond favorably to the Company's offerings in
moderately priced branded casual footwear. The poorest performing merchandise
categories in the first quarter of 2006 were Dresses and Coats (both included in
Women's Clothing), Accessories and Men's. Dresses and Coats sales have been
trending down and, consequently, the Company reduced its inventory investment in
these areas. Accessories sales reflected the lack of clearance merchandise as
compared to the prior year. Sales in Men's clothing were impacted by the lack of
customer demand for traditional business attire.
27
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OTHER INCOME: Other income was $14.8 million, or 2.6% of net sales, in the
first quarter of 2006 compared to $2.2 million, or 0.8% of net sales, in the
first quarter of 2005. The increase was primarily due to the program revenue
received in the first quarter of 2006 under the credit card program agreement
with HSBC Bank Nevada, N.A.
COSTS AND EXPENSES: Gross margin was $210.2 million for the first quarter
of 2006 compared to $95.1 million for the first quarter of 2005, an increase of
$115.1 million. The increase in gross margin dollars for the first quarter of
2006 as compared to the first quarter of 2005 reflects the addition of the
Carson's stores, partially offset by lower sales volume and a reduced gross
margin rate for the comparable stores. Gross margin as a percentage of net sales
increased 1.2 percentage points to 37.4% for the first quarter of 2006 from
36.2% for the same period last year. The increase in gross margin rate primarily
reflects the addition of the Carson's stores at a rate higher than historical
Bon-Ton performance, partially offset by the increased net markdown rate for the
comparable stores.
Selling, general and administrative expense for the first quarter of 2006
were $199.8 million compared to $94.7 million for the first quarter of 2005,
reflecting an increase of $105.1 million. Selling, general and administrative
expense increased due to the addition of the Carson's stores and integration
expenses, partially offset by reductions for closed stores. Integration
expenses, net of cost savings, approximated $4.1 million and included a charge
of $3.4 million for severance and relocation. The current year expense rate
decreased 0.5 percentage point to 35.6% of net sales, compared to 36.1% for the
same period last year.
Depreciation and amortization expense in the first quarter of 2006 was
$19.2 million, an increase of $12.8 million compared to the $6.4 million expense
in the first quarter of 2005, primarily reflecting the addition of Carson's
depreciation and amortization from the preliminary purchase accounting for the
acquired Carson's operations.
INCOME (LOSS) FROM OPERATIONS: Income from operations in the first quarter
of 2006 was $6.0 million, or 1.1% of net sales, compared to a loss of $3.8
million, or 1.5% of net sales, in the first quarter of 2005.
INTEREST EXPENSE, NET: Net interest expense was $23.9 million, or 4.2% of
net sales, in the first quarter of 2006 compared to $3.3 million, or 1.3% of net
sales, in the first quarter of 2005. The $20.6 million net increase is
principally due to the increased debt required to fund the acquisition of
Carson's. In addition, in the first quarter of 2006, the Company recorded
charges of $2.3 million for the write-off of fees associated with the Company's
previous credit agreement and $4.5 million for fees associated with a bridge
facility required in connection with the financing for the acquisition of
Carson's.
INCOME TAX BENEFIT: The tax rate of 39.3% in the first quarter of 2006 was
1.2 percentage points higher than the rate of 38.1% in the first quarter of
2005. The increase principally reflects the impact of the Carson's operations on
the Company's state effective tax rate.
NET LOSS: Net loss in the first quarter of 2006 was $10.8 million, or 1.9%
of net sales, compared to a net loss of $4.4 million, or 1.7% of net sales, in
the first quarter of 2005.
28
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SEASONALITY AND INFLATION
The Company's business, like that of most retailers, is subject to seasonal
fluctuations, with the major portion of sales and income realized during the
second half of each fiscal year, which includes back-to-school and the holiday
season. 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. The Company finances increases in working
capital in the second half of each fiscal year through increased borrowings
under its revolving credit facility.
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 first quarters of 2006 and 2005. However, there can be no
assurance that the Company's business will not be affected by inflationary
adjustments in the future.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes material measures of the Company's liquidity
and capital resources:
April 29, April 30,
(Dollars in millions) 2006 2005
--------- ---------
Working capital $ 416.6 $ 291.7
Current ratio 1.92:1 2.81:1
Debt to total capitalization (1) 0.82:1 0.46:1
Unused availability under lines of credit (2) $ 257.6 $ 50.0
(1) Debt includes obligations under capital leases. Total capitalization
includes shareholders' equity, debt and obligations under capital leases.
(2) Subject to a minimum borrowing covenant of $75 and $10 as of April 29, 2006
and January 28, 2006, respectively.
Prior to March 6, 2006, the Company's primary sources of working capital
were cash flows from operations and borrowings under its revolving credit
facility. On March 6, 2006, to finance the acquisition of Carson's and the
related payoff of the Company's previous revolving credit facility, the Company
entered into a new revolving credit facility which provides for up to $1.0
billion in borrowings, issued $510.0 million in senior unsecured notes, and
entered into a new mortgage loan facility in the aggregate principal amount of
$260.0 million.
29
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Increases in working capital, debt to total capitalization and unused
availability under lines of credit, and a decrease in the current ratio, for the
first quarter of 2006, as compared to the first quarter of 2005, reflect the
addition of the Carson's operations and the increase in debt to fund the
acquisition.
Net cash used in operating activities amounted to $43.7 million in the
first quarter of 2006, as compared to $42.8 million in the first quarter of
2005.
Net cash used in investing activities amounted to $1,070.2 million in the
first quarter of 2006, as compared to $2.6 million in the first quarter of 2005.
The increase of $1,067.6 million reflects the acquisition of Carson's and an
increase in capital expenditures of $12.5 million in the first quarter of 2006
over the prior year period.
Net cash provided by financing activities amounted to $1,127.1 million in
the first quarter of 2006, as compared to $37.3 million in the first quarter of
2005. The increase of $1,089.9 million in net cash provided in the first quarter
of 2006 primarily reflects the issuance of debt used to finance the acquisition
of Carson's and refinancing of the Company's previous revolving credit facility.
Prior to March 6, 2006, the Company's amended and restated revolving credit
facility agreement (the "Credit Agreement") provided a revolving line of credit
of $300.0 million. In connection with the acquisition of Carson's and the
related financing arrangements, discussed below, the Credit Agreement was
terminated and simultaneously replaced by a new senior secured credit facility
on March 6, 2006. There were no prepayment or early termination premiums or
penalties in connection with the termination of the Credit Agreement. All
deferred financing costs as of March 6, 2006 associated with the Credit
Agreement, which totaled $2.3 million, were expensed immediately upon
termination of the Credit Agreement.
On March 6, 2006, the Company and certain of its subsidiaries, Bank of
America, N.A. ("Bank of America") and certain other lenders entered into a Loan
and Security Agreement ("New Senior Secured Credit Facility") which provides for
up to $1.0 billion of revolver borrowings. The New Senior Secured Credit
Facility includes a last-in, first-out revolving credit facility of up to $900.0
million and a first-in, last-out revolving credit facility of up to $100.0
million, and has a sub-limit of $150.0 million for the issuance of standby and
documentary letters of credit. All borrowings under the New Senior Secured
Credit Facility are limited by amounts available pursuant to a borrowing base
calculation, which is based on percentages of eligible inventory, real estate
and fixed assets, with a reduction for applicable reserves. The New Senior
Secured Credit Facility is guaranteed by The Bon-Ton Stores, Inc. and certain of
its subsidiaries. As part of the New Senior Secured Credit Facility, Bank of
America and the other lenders will make available certain swing line loans in an
aggregate amount not to exceed $75.0 million outstanding at any one time.
Borrowings under the New Senior Secured Credit Facility will bear interest at
either (i) the prime rate established by Bank of America, from time to time,
plus the applicable margin (the "Prime Rate") or (ii) the LIBOR rate from time
to time plus the applicable margin. The applicable margin will be determined by
the excess availability under the New Senior Secured Credit Facility. The swing
line loans will bear interest at the same rate applicable to last-in, first-out
Prime Rate loans. The Company will be required to pay a commitment fee to the
lenders for unused commitments at a rate of 0.25% to 0.30% per annum, based on
excess availability under the facility. The New Senior Secured Credit Facility
expires March 6, 2011. Financial covenants contained in the New Senior Secured
Credit Facility require that the minimum excess availability under the facility
be
30
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
greater than $75.0 million at all times. In addition, there are certain
restrictions against incurring additional indebtedness, pledge or sale of
assets, payment of dividends and distributions, and other similar restrictions.
Dividends paid by the Company may not exceed $15.0 million over the life of the
agreement, or $4.0 million in any single year. Capital expenditures are limited
to $125.0 million per year, with a one-year carryover of any prior year unused
amount. The proceeds of the March 6, 2006 borrowings under the New Senior
Secured Credit Facility were used to pay the outstanding balance under the
Credit Agreement and a portion of the purchase price for the acquisition of
Carson's. The available borrowing capacity under this facility will be used for
other general corporate purposes. As of April 29, 2006, the Company had $416.7
million of outstanding borrowings under the New Senior Secured Credit Facility
and, under the most restrictive covenant, the Company had the ability to borrow
an additional $182.6 million.
On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned
subsidiary of The Bon-Ton Stores, Inc., entered into an Indenture (the
"Indenture") with The Bank of New York, as trustee, under which The Bon-Ton
Department Stores, Inc. issued $510.0 million aggregate principal amount of its
10-1/4% Senior Notes due 2014 (the "Notes"). The Notes are guaranteed on a
senior unsecured basis by The Bon-Ton Stores, Inc. and certain of its
subsidiaries. The Notes mature on March 15, 2014. The interest rate of the Notes
is fixed at 10-1/4% per year. Interest on the Notes is payable on March 15 and
September 15 of each year, beginning on September 15, 2006. The Indenture
includes covenants that limit the ability of the Company and its restricted
subsidiaries to, among other things: incur additional debt; pay dividends and
make distributions; make certain investments; enter into certain types of
transactions with affiliates; use assets as security in other transactions; and
sell certain assets or merge with or into other companies.
On March 6, 2006, certain bankruptcy-remote special purpose entities (each
an "SPE" and collectively the "SPEs") that are indirect wholly owned
subsidiaries of The Bon-Ton Stores, Inc. entered into Loan Agreements with Bank
of America, pursuant to which Bank of America provided a new mortgage loan
facility in the aggregate principal amount of $260.0 million (the "New Mortgage
Loan Facility"). The New Mortgage Loan Facility has a term of ten years and is
secured by mortgages on twenty-three retail stores and one distribution center
owned by the SPEs. Each SPE entered into a lease with each of The Bon-Ton
Stores, Inc. subsidiaries operating on such SPE's properties. A portion of the
rental income received under these leases will be used to pay the debt service
under the New Mortgage Loan Facility. The New Mortgage Loan Facility requires
level monthly payments of principal and interest based on an amortization period
of 25 years and the balance outstanding at the end of ten years will then become
due and payable. The interest rate for the New Mortgage Loan Facility is fixed
at 6.2125%. Financial covenants contained in the New Mortgage Loan Facility
require that the SPEs maintain certain financial thresholds, as defined.
The Company used the net proceeds of the Notes offering along with
additional borrowings under its New Senior Secured Credit Facility and New
Mortgage Loan Facility to finance the acquisition of Carson's, refinance the
Credit Agreement, and pay related fees and expenses in connection with the
acquisition and related financing transactions.
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.
31
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 to shareholders on May 1, 2006 to
shareholders of record as of April 15, 2006. Additionally, the Company declared
a quarterly cash dividend of $0.025 per share, payable August 1, 2006 to
shareholders of record as of July 14, 2006. The Company's Board of Directors
will consider dividends in subsequent periods as it deems appropriate.
The Company's capital expenditures for the first quarter of 2006 totaled
$15.2 million. Capital expenditures for fiscal 2006 are planned at approximately
$91.0 million.
The Company anticipates that its cash flows from operations, supplemented
by borrowings under its New Senior Secured Credit 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 its debt.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following tables reflect the Company's contractual obligations and
commitments as of April 29, 2006:
CONTRACTUAL OBLIGATIONS
Payment due by period
------------------------------------------------------------------
Remainder of Fiscal 2007 Fiscal 2009
(Dollars in thousands) Total Fiscal 2006 and 2008 and 2010 Thereafter
---------- ------------ ----------- ----------- ----------
Long-term debt (1) $1,767,394 $ 44,398 $149,760 $150,760 $1,422,476
Capital leases 132,529 5,455 14,574 15,000 97,500
Building maintenance 15,409 7,664 7,745 -- --
Operating leases 638,405 65,078 159,488 134,940 278,899
---------- -------- -------- -------- ----------
Totals $2,553,737 $122,595 $331,567 $300,700 $1,798,875
========== ======== ======== ======== ==========
(1) Excludes interest under long-term debt obligations where such interest is
calculated on a variable basis. Debt within the "Thereafter" category
includes $416.7 million in variable rate debt under the New Senior Secured
Credit Facility, which is scheduled to expire in 2011.
In addition, the Company expects to make cash contributions to the Bon-Ton
supplementary pension plans in the amount of $0.2 million for the remainder of
fiscal 2006, $0.3 million for each year of fiscal 2007 through 2010 and $1.7
million in the aggregate for the five fiscal years thereafter. Note 9 to the
Notes to Consolidated Financial Statements (Unaudited) provides a more complete
description of the Company's supplementary pension plans.
32
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As part of the Carson's acquisition, the Company acquired a defined benefit
plan, supplemental pension plans and a retiree health care plan. A valuation of
each of the plans is currently being performed by a third-party actuarial firm.
The Company expects that these valuations will be completed during the thirteen
week period ending July 29, 2006. Therefore, the Company is unable at this time
to estimate required fiscal 2006 cash contributions to these plans. Note 2 to
the Notes to Consolidated Financial Statements (Unaudited) provides a
description of the Carson's acquisition and related preliminary purchase
accounting.
COMMITMENTS
Amount of expiration per period
---------------------------------------------------------------
Remainder of Fiscal 2007 Fiscal 2009
(Dollars in thousands) Total Fiscal 2006 and 2008 and 2010 Thereafter
------- ------------ ----------- ----------- ----------
Import merchandise
letters of credit $37,024 $37,024 $-- $-- $--
Standby letters of credit 1,617 1,617 -- -- --
Surety bonds 2,927 2,927 -- -- --
------- ------- --- --- ---
Totals $41,568 $41,568 $-- $-- $--
======= ======= === === ===
Import letters of credit are primarily issued to support the importing of
merchandise, which includes the Company's private brand goods. Standby letters
of credit are primarily issued as collateral for obligations related to general
liability and workers' compensation insurance. Surety bonds are primarily for
previously incurred and expensed obligations related to workers' compensation.
In the ordinary course of business, the Company enters into arrangements
with vendors to purchase merchandise up to twelve months in advance of expected
delivery. These purchase orders do not contain any significant termination
payments or other penalties if cancelled.
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 U.S. generally accepted accounting principles.
Preparation of these financial statements required the Company to make estimates
and judgments that affected reported amounts of assets and liabilities, revenues
and expenses, and related disclosure of contingent assets and liabilities at the
date of its financial statements. On an ongoing basis, the Company evaluates its
estimates, including those related to merchandise returns, bad debts,
inventories, goodwill, intangible assets, income taxes, financings,
contingencies, insurance reserves and litigation. The Company bases its
estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances, the results of which formed
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.
33
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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 as described below.
INVENTORY VALUATION
Inventories are stated at the lower of cost or market with cost determined
by the retail inventory method. Under the retail inventory method, the valuation
of inventories at cost and the resulting gross margin is derived by applying a
calculated cost-to-retail ratio to the retail value of inventories. The retail
inventory method is an averaging method that has been widely used in the retail
industry. Use of the retail inventory method will result in valuing inventories
at the lower of cost or market if markdowns are taken timely as a reduction of
the retail value of inventories.
Inherent in the retail inventory method calculation are certain significant
management judgments and estimates including, among others, merchandise markups,
markdowns and shrinkage, which significantly impact both the ending inventory
valuation at cost and the resulting gross margin. These significant estimates,
coupled with the fact that the retail inventory method is an averaging process,
can, under certain circumstances, result in individual inventory components with
cost above related net realizable value. Factors that can lead to this result
include applying the retail inventory method to a group of products that is not
fairly uniform in terms of its cost, selling price relationship and turnover; or
applying the retail inventory method to transactions over a period of time that
include different rates of gross profit, such as those relating to seasonal
merchandise. In addition, failure to take timely markdowns can result in an
overstatement of cost under the lower of cost or market principle. The Company
believes that the retail inventory method it uses 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 its inventory
and reported operating results.
34
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company uses a last-in, first-out ("LIFO") cost basis for valuation of
certain inventories. 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 $23.7 million as of April 29,
2006 and January 28, 2006. 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
results would ultimately be impacted.
VENDOR ALLOWANCES
As is standard industry practice, allowances from merchandise vendors are
received as reimbursement for charges incurred on marked-down merchandise.
Vendor allowances are generally credited to costs of goods sold, provided the
allowance is: (1) collectable, (2) for merchandise either permanently marked
down or sold, (3) not predicated on a future purchase, (4) not predicated on a
future increase in the purchase price from the vendor, and (5) authorized by
internal management. If the aforementioned criteria are not met, the allowances
are reflected as an adjustment to the cost of merchandise capitalized in
inventory.
Additionally, allowances are received from vendors in connection with
cooperative advertising programs. Advertising allowances received from each
vendor are reviewed to ensure reimbursements are for specific, incremental and
identifiable advertising costs incurred to sell the vendor's products. If a
vendor reimbursement exceeds the costs incurred, the excess reimbursement is
recorded as a reduction of cost purchases from the vendor and reflected as a
reduction of costs of merchandise sold when the related merchandise is sold. All
other amounts are recognized as a reduction of the related advertising 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
summarizing temporary differences resulting from differing treatment of items
(e.g., allowance for doubtful accounts) for tax and accounting purposes. These
differences and net operating loss carry-forwards 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 it does not believe recovery of the deferred tax asset is
more-likely-than-not, a valuation allowance must be established. To the extent a
valuation allowance is established in a period, an expense must be recorded
within the income tax provision in the statement of income.
35
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
LONG-LIVED ASSETS
Property, fixtures and equipment are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of such assets. Changes
in the Company's business model or capital strategy can result in the actual
useful lives differing from its estimates. In cases where the Company determines
that the useful life of property, fixtures and equipment should be shortened, it
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. The Company's net property, fixtures and
equipment amounted to $784.7 million and $167.7 million at April 29, 2006 and
January 28, 2006, respectively.
The Company assesses, on a store-by-store basis, the impairment of
identifiable long-lived assets--primarily property, fixtures and
equipment--whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that could trigger an impairment
review include the following:
- Significant under-performance of stores relative to historical or
projected future operating results,
- Significant changes in the manner of the Company's use of assets
or overall business strategy, and
- Significant negative industry or economic trends for a sustained
period.
Statement of Financial Accounting Standards ("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. Impairment losses on
long-lived assets used in operations are recorded 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 private label brands, local customer demographic data and current
fashion trends are all considered in determining the time-frame required for a
store to achieve positive financial results. If conditions prove to be
substantially different from expectations, the carrying value of new stores'
long-lived assets may ultimately become impaired.
36
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GOODWILL AND INTANGIBLE ASSETS
The Company's goodwill was $246.1 million and $3.0 million as of April 29,
2006 and January 28, 2006, respectively. The increase in the goodwill reflects
the preliminary purchase accounting for the acquisition of Carson's.
The Company's net intangible assets totaled $86.9 million and $5.0 million
as of April 29, 2006 and January 28, 2006, respectively. The Company's
intangible assets are principally comprised of $44.1 million of lease interests
that relate to below-market-rate leases and $42.6 million associated with
trademarks and customer lists. The lease-related interests, customer lists and
the portion of trademarks subject to amortization are being amortized on a
straight-line method. Trademarks of $36.0 million have been allocated with an
indefinite life as part of the preliminary purchase accounting for Carson's.
The Company has not completed its assessment of the fair values of the
acquired Carson's assets and assumed liabilities and has not finalized its plans
regarding the integration of the acquired Carson's operations. The Company is
currently in the process of obtaining third-party valuations for certain
acquired assets and assumed liabilities. Additionally, the purchase price is
subject to adjustment based upon provisions of the purchase agreement.
Consequently, the purchase price allocation may be subsequently adjusted to
reflect the final valuation of acquired assets and assumed liabilities.
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets,"
goodwill and other intangible assets that have indefinite lives are reviewed for
impairment at least annually or when events or changes in circumstances indicate
the carrying value of these assets might exceed their current fair values. Fair
value is determined using a discounted cash flow analysis, which requires
certain assumptions and estimates regarding industry economic factors and future
profitability of acquired businesses. The Company's policy is 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.
INSURANCE RESERVE ESTIMATES
The Company uses a combination of insurance and self-insurance for a number
of risks including workers' compensation, general liability and employee-related
health care benefits, a portion of which is paid by its associates. The Company
determines the estimates for the liabilities associated with these risks by
considering historical claims experience, demographic factors, severity factors
and other actuarial assumptions. A change in claims frequency and severity of
claims from historical experience as well as changes in state statutes and the
mix of states in which the Company operates could result in a change to the
required reserve levels.
37
THE BON-TON STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
PURCHASE ACCOUNTING
The Company has accounted for the acquisition of Carson's in accordance
with the provisions of SFAS No. 141, "Business Combinations," whereby the
purchase price paid to effect the Carson's acquisition was allocated to the
acquired assets and assumed liabilities at the estimated fair value as of the
acquisition date. The acquisition of Carson's was effective as of March 5, 2006.
In connection with the preliminary purchase price allocation, the Company made
estimates of the fair values of its long-lived and intangible assets based upon
assumptions related to the future cash flows, discount rates and asset lives
utilizing currently available information. As of April 29, 2006, the Company has
recorded preliminary purchase accounting adjustments to the carrying value of
property and equipment and inventory to estimated fair values, to establish
intangible assets for its tradenames, customer lists and favorable lease
interests and to revalue its long-term benefit plan obligations, among other
things.
The Company has not completed its assessment of the fair values of the
acquired Carson's assets and assumed liabilities and has not finalized its plans
regarding the integration of the acquired Carson's operations. The Company is
currently in the process of obtaining third-party valuations for certain
acquired assets and assumed liabilities. Additionally, the purchase price is
subject to adjustment based upon provisions of the purchase agreement.
Consequently, the purchase price allocation may be subsequently adjusted to
reflect the final valuation of acquired assets and assumed liabilities. Such
revisions could have a material impact on the Company's results of operations
for fiscal 2006.
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 acquisition of Carson's, 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 28, 2006.
38
THE BON-TON STORES, INC.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK AND FINANCIAL INSTRUMENTS
The following table provides information about the Company's financial
instruments that are sensitive to changes in interest rates, including debt
obligations. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates at April 29,
2006.
Expected Maturity Date By Fiscal Year
--------------------------------------------------------
Remainder There-
(Dollars in thousands) of 2006 2007 2008 2009 2010 after Total Fair Value
--------- ------ ------ ------ ------ -------- -------- ----------
Debt:
Fixed-rate debt $3,969 $5,625 $6,030 $6,465 $7,934 $750,109 $780,132 $781,299
Average fixed rate 6.84% 6.86% 6.88% 6.90% 6.68% 9.01% 8.92%
Variable-rate debt $ -- $ -- $ -- $ -- $ -- $416,650 $416,650 $416,650
Average variable rate -- -- -- -- -- -- 6.97%
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
Effective March 5, 2006, the Company completed the acquisition of Carson's.
In conjunction with this acquisition, the Company entered into a transition
services agreement with Saks pursuant to which Saks provides the Company with
various services related to Carson's, including, among other things, credit
operations, procurement, accounting, bank card processing, store planning,
construction, facilities maintenance and energy, information technology and
human resources activities. These services will be provided by Saks for periods
ranging from three months to 12 months from the date of the acquisition of
Carson's (subject to extension at the Company's discretion). As the transition
of these services to the Company continues over the next year, the Company will
carefully review internal control over financial reporting related to the
integration of Carson's operations. There were no changes to the Company's
internal control over financial reporting related to its previously existing
business that occurred during the thirteen weeks ended
39
THE BON-TON STORES, INC.
April 29, 2006 that have materially affected, or are reasonably likely to
materially affect, its internal control over financial reporting.
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 Annual Report on Form 10-K for the fiscal year ended
January 28, 2006.
ITEM 6. EXHIBITS
(a) The following exhibits are filed pursuant to the requirements of Item 601 of
Regulation S-K:
Exhibit Description Document Location
- ------- ----------- -----------------
2.1 Amendment No. 1 to Purchase Agreement Exhibit 2.1 to Current Report on Form 8-K filed on
February 17, 2006
4.1 Indenture with The Bank of New York, dated Exhibit 4.1 to Current Report on Form 8-K filed on
March 6, 2006 March 10, 2006
10.1 Registration Rights Agreement, dated March 6, 2006 Exhibit 10.1 to Current Report on Form 8-K filed on
March 10, 2006
10.2 Loan and Security Agreement, dated March 6, 2006 Exhibit 10.2 to Current Report on Form 8-K filed on
March 10, 2006
10.3 Loan Agreement, dated March 6, 2006 Exhibit 10.3 to Current Report on Form 8-K filed on
March 10, 2006
10.4 Loan Agreement, dated March 6, 2006 Exhibit 10.4 to Current Report on Form 8-K filed on
March 10, 2006
10.5 First Amendment to the Credit Card Program Agreement, Exhibit 10.5 to Current Report on Form 8-K filed on
dated March 6, 2006 March 10, 2006
10.6 Private Brands Agreement, dated March 6, 2006 Exhibit 10.6 to Current Report on Form 8-K filed on
March 10, 2006
10.7 Amended and Restated Transition Services Agreement, Exhibit 10.7 to Current Report on Form 8-K filed on
dated March 10, 2006 March 10, 2006
31.1 Certification of Byron L. Bergren Filed herewith.
31.2 Certification of Keith E. Plowman Filed herewith.
32.1 Certification Pursuant to Rules 13a-14(b) and Furnished herewith.
15d-14(b) of the Securities Exchange Act of 1934
40
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: June 8, 2006 BY: /s/ Byron L. Bergren
------------------------------------
Byron L. Bergren
President and
Chief Executive Officer
DATE: June 8, 2006 BY: /s/ Keith E. Plowman
------------------------------------
Keith E. Plowman
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
41