10-Q 1 w63977e10vq.txt FORM 10-Q THE BON-TON STORES, INC. 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 August 3, 2002 Commission File Number 0-19517 THE BON-TON STORES, INC. 2801 EAST MARKET STREET YORK, PENNSYLVANIA 17402 (717) 757-7660 INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 10, 2002 there were 12,400,911 shares of Common Stock, $0.01 par value, and 2,989,853 shares of Class A Common Stock, $0.01 par value, outstanding. PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
August 3, February 2, (In thousands except share and per share data) 2002 2002 ------------------------------------------------------------------------------------------------------------------------------------ ASSETS (Unaudited) CURRENT ASSETS: Cash and cash equivalents $ 11,596 $ 9,752 Trade and other accounts receivable, net of allowance for doubtful accounts and sales returns of $3,586 and $3,408 at August 3, 2002 and February 2, 2002, respectively 22,285 31,161 Merchandise inventories 156,594 166,042 Prepaid expenses and other current assets 15,419 10,542 Deferred income taxes 6,377 7,371 --------- --------- Total current assets 212,271 224,868 --------- ---------- PROPERTY, FIXTURES AND EQUIPMENT AT COST, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 138,094 143,884 DEFERRED INCOME TAXES 3,935 2,741 GOODWILL AND INTANGIBLE ASSETS 9,755 9,999 OTHER ASSETS 3,776 4,091 --------- --------- Total assets $ 367,831 $ 385,583 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 60,150 $ 57,007 Accrued payroll and benefits 9,749 9,743 Accrued expenses 24,047 28,191 Current portion of long-term debt 680 646 Current portion of obligations under capital leases 241 232 Income taxes payable 660 11,891 --------- --------- Total current liabilities 95,527 107,710 --------- --------- LONG-TERM DEBT, LESS CURRENT MATURITIES 68,160 67,209 OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT MATURITIES 597 720 OTHER LONG-TERM LIABILITIES 6,955 6,683 --------- --------- Total liabilities 171,239 182,322 --------- --------- SHAREHOLDERS' EQUITY Preferred Stock - authorized 5,000,000 shares at $0.01 par value; no shares issued -- -- Common Stock - authorized 40,000,000 shares at $0.01 par value; issued and outstanding shares of 12,415,211 and 12,483,941 at August 3, 2002 and February 2, 2002, respectively 125 125 Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued and outstanding shares of 2,989,853 at August 3, 2002 and February 2, 2002 30 30 Treasury stock, at cost - shares of 65,500 at August 3, 2002 (279) -- Additional paid-in-capital 107,436 107,467 Deferred compensation (298) (408) Accumulated other comprehensive income (2,879) (2,354) Retained earnings 92,457 98,401 --------- --------- Total shareholders' equity 196,592 203,261 --------- --------- Total liabilities and shareholders' equity $ 367,831 $ 385,583 ========= =========
The accompanying notes are an integral part of these consolidated statements. 2 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED ------------------------------------------------------------------- (In thousands except share and per share data) August 3, August 4, August 3, August 4, (Unaudited) 2002 2001 2002 2001 ------------------------------------------------------------------------------------------------------------------------- NET SALES $ 153,890 $ 150,867 $ 304,407 $ 300,586 OTHER INCOME, NET 553 518 1,087 1,042 ------------------------------------------------------------------- 154,443 151,385 305,494 301,628 ------------------------------------------------------------------- COSTS AND EXPENSES: Costs of merchandise sold 95,959 95,637 196,356 194,377 Selling, general and administrative 53,733 54,112 104,369 107,218 Depreciation and amortization 4,847 4,484 9,904 8,934 -------------------------------------------------------------------- LOSS FROM OPERATIONS (96) (2,848) (5,135) (8,901) INTEREST EXPENSE, NET 2,399 2,175 4,376 4,092 -------------------------------------------------------------------- LOSS BEFORE INCOME TAXES (2,495) (5,023) (9,511) (12,993) INCOME TAX BENEFIT (936) (1,884) (3,567) (4,873) -------------------------------------------------------------------- NET LOSS $ (1,559) $ (3,139) $ (5,944) $ (8,120) ==================================================================== Per share amounts -- BASIC: Net loss $ (0.10) $ (0.21) $ (0.39) $ (0.54) ==================================================================== BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,238,000 15,161,000 15,260,000 15,155,000 DILUTED: Net loss $ (0.10) $ (0.21) $ (0.39) $ (0.54) ===================================================================== DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,238,000 15,161,000 15,260,000 15,155,000
The accompanying notes are an integral part of these consolidated statements. 3 THE BON-TON STORES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
TWENTY-SIX WEEKS ENDED -------------------------- (In thousands) August 3, August 4, (Unaudited) 2002 2001 ----------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (5,944) $ (8,120) Adjustments to reconcile net loss to net cash provided by (used in) operating activities: Depreciation and amortization 9,904 8,934 Changes in operating assets and liabilities, net 6,792 (11,414) -------------------------- Net cash provided by (used in) operating activities 10,752 (10,600) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (3,878) (5,939) Proceeds from sale of property, fixtures and equipment 2 12 -------------------------- Net cash used in investing activities (3,876) (5,927) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt and capital lease obligations (75,079) (76,269) Proceeds from issuance of long-term debt 75,950 93,500 Common shares repurchased (279) -- Increase (decrease) in bank overdraft balances (5,624) 313 -------------------------- Net cash provided by (used in) financing activities (5,032) 17,544 Net increase in cash and cash equivalents 1,844 1,017 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,752 14,067 -------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 11,596 $ 15,084 ========================== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 3,891 $ 3,454 Income taxes paid $ 10,785 $ 7,820
The accompanying notes are an integral part of these consolidated statements. 4 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on January 31, 1996 as successor of a company established on January 31, 1929 and currently operates as one business segment, through its subsidiaries, 73 retail department stores located in Pennsylvania, New York, New Jersey, Maryland, Connecticut, Massachusetts, New Hampshire, Vermont and West Virginia. 1. BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements include accounts of The Bon-Ton Stores, Inc. and all of its wholly-owned subsidiaries (the "Company"). All intercompany transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation of interim periods have been included. The Company's business is seasonal in nature and results of operations for interim periods presented are not necessarily indicative of results for the full fiscal year. It is suggested that these consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002 (the "2001 Annual Report"). Certain prior year balances have been reclassified to conform with the current year presentation. 2. STOCK REPURCHASES On February 7, 2002, the Company announced a stock repurchase program authorizing the purchase of up to $2.5 million of Company stock from time to time. The Company purchased 41,500 shares, at a cost of $0.2 million, during the first quarter of 2002 and 24,000 shares, at a cost of $0.1 million, during the second quarter of 2002. Treasury stock is accounted for by the cost method. 3. PER SHARE AMOUNTS The presentation of earnings per share (EPS) requires a reconciliation of numerators and denominators used in basic and diluted EPS calculations. The numerator, net loss, is identical in both calculations. The following table presents a reconciliation of average shares outstanding for the respective calculations for each period presented on the accompanying consolidated statements of operations:
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED ---------------------------------------------------------------- August 3, August 4, August 3, August 4, 2002 2001 2002 2001 ------------- -------------- --------------- ------------ Basic Calculation 15,238,000 15,161,000 15,260,000 15,155,000 Effect of dilutive shares --- Restricted Shares -- -- -- -- Options -- -- -- -- ----------------------------- ----------------------------- Diluted Calculation 15,238,000 15,161,000 15,260,000 15,155,000 ----------------------------- -----------------------------
5 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) The following securities were antidilutive and, therefore, were not included in the computation of diluted income per share amounts for the periods indicated:
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED --------------------------- ---------------------------- August 3, August 4, August 3, August 4, 2002 2001 2002 2001 ------------ ------------- ------------ ------------ Antidilutive shares --- Restricted Shares 175,000 321,000 179,000 219,000 Options 960,000 929,000 964,000 928,000
Certain securities were excluded from the computation of dilutive shares due to the Company's net loss position. The following table shows the approximate effect of dilutive securities had the Company reported profit for the periods indicated:
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED ---------------------------------- -------------------------------- August 3, August 4, August 3, August 4, 2002 2001 2002 2001 ---------------- --------------- --------------- -------------- Approximate effect of dilutive securities --- Restricted Shares 105,000 20,000 98,000 10,000 Options 121,000 - 104,000 -
4. GOODWILL AND INTANGIBLE ASSETS Effective at the beginning of 2002, the Company adopted the Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets." Upon adoption of SFAS No. 142, goodwill amortization ceased. Goodwill is now subject to fair-value based impairment tests performed, at a minimum, on an annual basis. In addition, a transitional goodwill impairment test was required as of the adoption date. The Company had $3.0 million in net goodwill recorded in its consolidated balance sheet at the beginning of 2002. The Company completed the required transitional goodwill impairment test in the first quarter of 2002, and determined that its goodwill was not impaired. During the twenty-six weeks ended August 3, 2002, no goodwill amortization was recorded, no additional goodwill was acquired, no impairment losses were recognized and no goodwill was disposed of through sale of a business unit. 6 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) SFAS No. 142 requires the presentation of net income and related earnings per share data adjusted for the effect of goodwill amortization. To illustrate the impact of goodwill amortization on results of the prior year periods, the following table provides adjusted net income and earnings per share:
THIRTEEN TWENTY-SIX (In thousands except per share data) WEEKS ENDED WEEKS ENDED ----------------------------------------------------------------- August 3, August 4, August 3, August 4, 2002 2001 2002 2001 ------------ ---------------- --------------- -------------- Reported net loss ($ 1,559) ($ 3,139) ($ 5,944) ($ 8,120) Add back: Goodwill amortization, net of tax benefit of $22 and $44 for the thirteen and twenty-six weeks, respectively -- 36 -- 73 -------------------------------- ------------------------------ Adjusted net loss ($ 1,559) ($ 3,103) ($ 5,944) ($ 8,047) ================================ ============================== Per share amounts --- BASIC: Reported net loss ($ 0.10) ($ 0.21) ($ 0.39) ($ 0.54) Add back: Goodwill amortization, net of tax benefit -- 0.01 -- 0.01 -------------------------------- ------------------------------ Adjusted net loss ($ 0.10) ($ 0.20) ($ 0.39) ($ 0.53) ================================ ============================== DILUTED: Reported net loss ($ 0.10) ($ 0.21) ($ 0.39) ($ 0.54) Add back: Goodwill amortization, net of tax benefit -- 0.01 -- 0.01 -------------------------------- ------------------------------ Adjusted net loss ($ 0.10) ($ 0.20) ($ 0.39) ($ 0.53) ================================ ==============================
SFAS No. 142 also requires disclosure of intangible assets which are subject to amortization. As of August 3, 2002 and February 2, 2002, the Company reported the following lease-related interests classified as intangible assets:
(In thousands) August 3, February 2, 2002 2002 ------------- --------------- Intangible assets - leases $ 10,828 $ 10,828 Less: Accumulated amortization 4,038 3,794 ------------------------------ Net $ 6,790 $ 7,034 ==============================
These lease interests relate to below-market-rate leases purchased in store acquisitions completed in fiscal years 1992 through 1999, which were adjusted to reflect fair market value. These leases had average lives of twenty-five years. Amortization of $0.1 million and $0.2 million was recorded on these intangible assets during the thirteen and twenty-six weeks ended August 3, 2002, respectively. The Company anticipates amortization on these intangible assets of approximately $0.5 million, $0.4 million, $0.4 million, $0.5 million and $0.5 million for fiscal years 2002, 2003, 2004, 2005 and 2006, respectively. 7 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. INTEREST RATE DERIVATIVES In 2002, the Company discontinued cash flow hedge accounting for $40 million of outstanding interest rate swaps that are converting variable rates under the Company's credit facilities to fixed rates. As these swaps were no longer considered highly effective under SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," they are now being marked-to-market through earnings each reporting period. The amount recorded in interest expense related to the mark-to-market adjustment for these swaps was $0.2 million of income in the thirteen weeks ended May 4, 2002 and $0.3 million of expense for the thirteen weeks ended August 3, 2002. The amount in accumulated other comprehensive income related to these swaps is being recognized as an adjustment to the yield of credit facilities borrowings over the remaining term for these discontinued swaps. The amount released from accumulated other comprehensive income was $0.2 million in each of the thirteen weeks ended May 4, 2002 and August 3, 2002. 6. SALE OF RECEIVABLES The Company securitizes its proprietary credit card portfolio through an accounts receivable facility (the "Facility"). Under the Facility, which is contingent upon receivables meeting certain performance criteria, the Company has the option to sell through The Bon-Ton Receivables Partnership, LP ("BTRLP"), a wholly-owned subsidiary of the Company, up to $150.0 million of an undivided percentage interest in the receivables on a limited recourse basis. In connection with the Facility, the Company retains servicing responsibilities, subordinated interests and an interest-only strip, all of which are retained interests in the securitized receivables. The Company receives annual servicing fees of 2.0% of the outstanding balance and rights to future cash flows arising after investors in the securitization have received the return for which they contracted. The investors have no recourse to the Company's other assets for failure of debtors to pay when due. The Company's retained interests are subordinate to the investors' interests. The value of the retained interest is subject to credit, prepayment and interest rate risks. The Company does not recognize a servicing asset or liability, as the amount received for servicing the receivables is a reasonable approximation of market rates and servicing costs. As of August 3, 2002 and February 2, 2002, credit card receivables were sold under the securitization agreement in the amount of $144.5 million and $150.0 million, respectively, and the Company had subordinated interests of $22.9 million and $31.5 million, respectively, related to the amounts sold that were included in the accompanying consolidated balance sheets as trade and other accounts receivable. During the thirteen weeks and twenty-six weeks ended August 3, 2002, the Company recognized securitization income of $2.3 million and $5.2 million, respectively, on securitization of credit card loans. This income is reported as a component of selling, general and administrative expenses. 8 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 7. EFFECT OF NEW ACCOUNTING STANDARDS NOT YET ADOPTED In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for fiscal years beginning after June 15, 2002 with earlier adoption encouraged. The Company intends to adopt SFAS 143 for the 2003 fiscal year and does not expect the provisions of SFAS No. 143 to have a material impact on operating results of the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets," which supercedes SFAS No. 121. SFAS No. 144, effective for fiscal 2002, retains provisions of SFAS No. 121 regarding recognition and measurement of long-lived asset impairment. SFAS No. 144 supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments of a business to be disposed of. The Company anticipates that adoption of SFAS No. 144 provisions will not have a material impact on its operating results. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement changes the timing of recognition for certain exit costs associated with restructuring activities, so that certain exit costs would be recognized over the period in which the restructuring activities occur. Currently, exit costs are recognized when the Company commits to a restructuring plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, with early adoption encouraged. 9 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table summarizes changes in selected operating indicators of the Company, illustrating the relationship of various income and expense items to net sales for the respective periods presented:
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED ----------------------- ------------------------ August 3, August 4, August 3, August 4, 2002 2001 2002 2001 -------------------------------------------------------------------- ----------------------- NET SALES 100.0% 100.0% 100.0% 100.0% OTHER INCOME, NET 0.4 0.3 0.4 0.4 ----------------------- ----------------------- 100.4 100.3 100.4 100.4 ----------------------- ----------------------- COSTS AND EXPENSES: Costs of merchandise sold 62.4 63.4 64.5 64.7 Selling, general and administrative 34.9 35.9 34.3 35.7 Depreciation and amortization 3.1 3.0 3.3 3.0 ----------------------- ----------------------- LOSS FROM OPERATIONS (0.1) (1.9) (1.7) (3.0) INTEREST EXPENSE, NET 1.6 1.4 1.4 1.4 ----------------------- ----------------------- LOSS BEFORE INCOME TAXES (1.6) (3.3) (3.1) (4.3) INCOME TAX BENEFIT (0.6) (1.2) (1.2) (1.6) ----------------------- ----------------------- NET LOSS (1.0)% (2.1)% (2.0)% (2.7)% ----------------------- -----------------------
THIRTEEN WEEKS ENDED AUGUST 3, 2002 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 4, 2001 For purposes of the following discussions, all references to "second quarter of 2002" and "second quarter of 2001" are to the Company's thirteen-week period ended August 3, 2002 and August 4, 2001, respectively. NET SALES. Net sales for the second quarter of 2002 were $153.9 million, reflecting a total and comparable store sales increase of 2.0% from the same period last year. Business families recording sales increases for the second quarter of 2002 were Coats, Accessories, Misses Sportswear, Petites, Womens and Juniors. Business families reflecting the sharpest sales percentage decreases for the second quarter of 2002 were Dresses, Childrens and Shoes. OTHER INCOME, NET. Net other income, principally income from leased departments, was 0.4% of net sales in the second quarter of 2002 compared to 0.3% of net sales in the second quarter of 2001. COSTS AND EXPENSES. Gross margin as a percentage of net sales increased 1.0 percentage point to 37.6% for the second quarter of 2002 from 36.6% for the comparable period last year. The gross margin percentage increase was primarily due to a higher cumulative markup and reduced markdowns. Gross margin dollars for the second quarter of 2002 increased $2.7 million compared to the second quarter of 2001, resulting from increases in sales volume and gross margin rate. 10 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Selling, general and administrative expenses for the second quarter of 2002 were $53.7 million, $0.4 million less than the second quarter of 2001. The expense dollar improvement was principally a reflection of increased securitization income on the Company's proprietary credit card program of $1.0 million, partially offset by increased insurance expenses and reduced vendor violations income. The current year expense rate decreased 1.0 percentage point to 34.9% of net sales, primarily due to increased sales volume. Depreciation and amortization in the second quarter of 2002 increased $0.4 million over the second quarter of 2001, principally reflecting 2002 depreciation on fiscal 2001 capital expenditures. LOSS FROM OPERATIONS. Loss from operations in the second quarter of 2002 was $0.1 million, or 0.1% of net sales, compared to loss from operations of $2.8 million, or 1.9% of net sales, in the second quarter of 2001. INTEREST EXPENSE, NET. Net interest expense was $2.4 million, or 1.6% of net sales, in the second quarter of 2002 compared to $2.2 million, or 1.4% of net sales, in the second quarter of 2001. The increase in net interest expense is a reflection of the Company's position in interest rate swaps, partially offset by reductions in debt balances and interest rates. INCOME TAX BENEFIT. The effective tax rate remained constant at 37.5% in the second quarters of 2002 and 2001. NET LOSS. Net loss in the second quarter of 2002 was $1.6 million, or 1.0% of net sales, compared to net loss of $3.1 million, or 2.1% of net sales, in the second quarter of 2001. TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST 4, 2001 For purposes of the following discussions, all references to "2002" and "2001" are to the Company's twenty-six week period ended August 3, 2002 and August 4, 2001, respectively. NET SALES. Net sales for the twenty-six weeks ended August 3, 2002 were $304.4 million, reflecting a total and comparable store sales increase of 1.3% from the same period last year. Business families recording sales increases for 2002 were Coats, Petites, Accessories, Misses Sportswear and Juniors. Business families reflecting the sharpest sales percentage decreases for 2002 were Dresses, Childrens, Intimate, Shoes and Mens Clothing. OTHER INCOME, NET. Net other income, principally income from leased departments, was 0.4% of net sales in 2002 and 2001. COSTS AND EXPENSES. Gross margin as a percentage of net sales increased 0.2 percentage point to 35.5% for the twenty-six weeks ended August 3, 2002 from 35.3% for the comparable period last year. The gross margin percentage increase in 2002 was primarily due to a higher cumulative markup. Gross margin dollars in 2002 increased $1.8 million compared to 2001, resulting from increases in sales volume and gross margin rate. Selling, general and administrative expenses decreased $2.8 million, to $104.4 million in 2002 from $107.2 million in 2001. The expense dollar improvement was principally a reflection of increased securitization income on the Company's proprietary credit card program of $2.5 million and decreased advertising and utilities expense, partially offset by 11 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) reduced vendor violation income. The expense rate as a percentage of net sales decreased 1.4 percentage points, to 34.3% from 35.7% for the prior year period, resulting from reductions in expense combined with increased sales volume. Depreciation and amortization increased to 3.3% of net sales in 2002 from 3.0% of net sales in 2001, principally reflecting 2002 depreciation on fiscal 2001 capital expenditures. LOSS FROM OPERATIONS. Loss from operations in 2002 was $5.1 million, or 1.7% of net sales, compared to loss from operations of $8.9 million, or 3.0% of net sales, in 2001. INTEREST EXPENSE, NET. Net interest expense was $4.4 million, or 1.4% of net sales, for the twenty-six weeks ended August 3, 2002 compared to $4.1 million, or 1.4% of net sales, for the prior year period. The increase in net interest expense is a reflection of the Company's position in interest rate swaps, partially offset by reductions in debt balances and interest rates. INCOME TAX BENEFIT. The effective tax rate remained constant at 37.5% in 2002 and 2001. NET LOSS. Net loss in 2002 was $5.9 million compared to a net loss of $8.1 million in 2001. FUTURE ACCOUNTING CHANGES In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses financial accounting and reporting for obligations associated with retirement of tangible long-lived assets and the associated asset retirement costs. SFAS 143 is effective for fiscal years beginning after June 15, 2002 with earlier adoption encouraged. The Company intends to adopt SFAS 143 for the 2003 fiscal year and does not expect the provisions of SFAS No. 143 to have a material impact on operating results of the Company. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets," which supercedes SFAS No. 121. SFAS No. 144, effective for fiscal 2002, retains provisions of SFAS No. 121 regarding recognition and measurement of long-lived asset impairment. SFAS No. 144 supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations -- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments of a business to be disposed of. The Company anticipates that adoption of SFAS No. 144 provisions will not have a material impact on its operating results. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This statement changes the timing of recognition for certain exit costs associated with restructuring activities, so that certain exit costs would be recognized over the period in which the restructuring activities occur. Currently, exit costs are recognized when the Company commits to a restructuring plan. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, with early adoption encouraged. 12 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) SEASONALITY AND INFLATION The Company's business, like that of most retailers, is subject to seasonal fluctuations, with the major portion of sales and income realized during the second half of each fiscal year, which includes back-to-school and holiday seasons. Due to the fixed nature of certain costs, selling, general and administrative expenses are typically higher as a percentage of net sales during the first half of each fiscal year. Because of the seasonality of the Company's business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year. In addition, quarterly operating results are impacted by the timing and amount of revenues and costs associated with the opening of new stores and closing and remodeling of existing stores. The Company does not believe inflation had a material effect on operating results during the twenty-six weeks ended August 3, 2002 and August 4, 2001. However, there can be no assurance that the Company's business will not be affected by inflationary adjustments in the future. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital requirements are currently met through a combination of cash, borrowings under its revolving credit facility and proceeds from its accounts receivable facility. The following table summarizes the Company's liquidity and capital resources:
August 3, August 4, (Dollars in millions) 2002 2001 Working capital $116.7 $153.2 Current ratio 2.22:1 2.63:1 Funded debt to total capitalization 0.26:1 0.38:1 Unused availability under lines of credit $ 54.1 $ 37.3
For the twenty-six weeks ended August 3, 2002, net cash provided by operating activities was $10.8 million as compared to net cash used in operating activities of $10.6 million for the comparable prior year period. The increase in net cash from operating activities in 2002 as compared to 2001 was primarily attributable to a decrease in merchandise inventories, a reduction in accounts receivable and an increase in net proceeds from sale of accounts receivable. Net cash used in investing activities was $3.9 million in 2002, compared to $5.9 million for the comparable period last year. This reduction reflects differences in the timing of capital projects. 13 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net cash used in financing activities was $5.0 million for 2002, compared to net cash provided by financing activities of $17.5 million for the comparable period of 2001. The decrease in cash from financing activities in 2002 was primarily attributable to decreased advances on the Company's revolving credit facility. The Company anticipates its cash flows from operations, supplemented by borrowings under its revolving credit facility and proceeds from its accounts receivable facility, will be sufficient to satisfy its operating cash requirements. Cash flows from operations are impacted by consumer confidence, weather conditions in the geographic markets served by the Company, economic climate and competitive conditions existing in the retail industry. A downturn in any single factor or a combination of factors could have a material adverse impact upon the Company's ability to generate sufficient cash flows to operate its business. The Company has not identified any probable circumstances that would likely impair its ability to meet its cash requirements or trigger a default or acceleration of payment of the Company's debt. TRANSFERS OF FINANCIAL ASSETS The Company engages in securitization activities involving the Company's proprietary credit card portfolio as a source of funding. Gains and losses from securitizations are recognized in the Consolidated Statements of Income when the Company relinquishes control of the transferred financial assets in accordance with SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- a Replacement of FASB Statement No. 125" and other related pronouncements. The gain or loss on the sale of financial assets depends in part on the previous carrying amount of the assets involved in the transfer, allocated between the assets sold and the retained interests based upon their respective fair values at the date of sale. The Company has sold an undivided percentage ownership interest in certain of its credit card accounts receivable to an unrelated third-party under a $150 million accounts receivable securitization facility. The unrelated third-party, referred to as the conduit, has purchased a $144.5 million interest in the accounts receivable under this facility at August 3, 2002. The Company has an agreement to sell, on a revolving basis, pools of accounts receivable to a special purpose entity, The Bon-Ton Receivables Partnership, LP ("BTRLP"), a wholly-owned subsidiary of the Company. BTRLP is designed to facilitate the securitization of certain accounts receivable. BTRLP then sells an undivided percentage ownership interest in each individual receivable to the conduit at a discount and uses cash collected on these receivables to purchase additional receivables from the Company. The Company is responsible for servicing these accounts and receives a servicing fee, while BTRLP bears the risk of non-collection. Associated off-balance-sheet assets and related debt were $144.5 and $150.0 million at August 3, 2002 and February 2, 2002, respectively. Upon the facility's termination, the conduit would be entitled to all cash collections on BTRLP's accounts receivable until its net investment ($144.5 million at August 3, 2002) is repaid. Accordingly, upon termination of the facility, the assets of BTRLP would not be available to the Company until all amounts due and owing by BTRLP to the conduit have been paid in full. The Company believes the terms of the accounts receivable facility qualify the accounts receivable transactions for "sale treatment" under generally accepted accounting principles. This treatment requires it to account for BTRLP's transactions with the conduit as a sale of accounts receivable instead of reflecting the conduit's net investment as long-term debt with a pledge of accounts receivable as collateral. Absent this "sale treatment," the Company's balance sheet would reflect additional accounts receivable and long-term debt, 14 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) which could be a factor in the Company's ability to raise capital; however, results of operations would not be materially impacted. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of financial condition and results of operations are based upon the consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. Preparation of these financial statements requires the Company to make estimates and judgments that affect reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of its financial statements. On an ongoing basis, the Company evaluates its estimates, including those related to merchandise returns, bad debts, inventories, intangible assets, income taxes, financings and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company defines "critical accounting policies" as those accounting policies that are reflective of significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. The Company believes its critical accounting policies are those described below. Allowance for Doubtful Accounts The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit-worthiness. The Company continually monitors collections and payments from customers and maintains an allowance for estimated credit losses based upon its historical experience and any specific customer collection issues identified (e.g. bankruptcy). While such credit losses have historically been within expectations and provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates as in the past. If circumstances change (e.g. higher than expected defaults or bankruptcies), the Company's estimates of the recoverability of amounts due to the Company could be materially reduced. Inventory Valuation Inventories are stated at the lower of cost or market with cost determined using the retail last-in, first-out ("LIFO") method. Under the retail inventory method, the valuation of inventories at cost and resulting gross margin are calculated by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail inventory method is an averaging method that has been widely used in the retail industry due to its practicality. Use of the retail inventory method will result in valuing inventories at the lower of cost or market if markdowns are taken timely as a reduction of the retail value of inventories. Income Taxes Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The process involves the Company summarizing temporary differences resulting from differing treatment of items (e.g. inventory valuation reserves) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must then assess the 15 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) likelihood that deferred tax assets will be recovered from future taxable income and, to the extent the Company believes recovery is not likely, a valuation allowance must be established. To the extent the Company establishes a valuation allowance in a period, an expense must be recorded within the tax provision in the statement of operations. Net deferred tax assets were $10.3 million and $10.1 million as of August 3, 2002 and February 2, 2002, respectively. As of said dates, no valuation allowance has been established against net deferred tax assets, as the Company believes these tax benefits will be realizable through reversal of existing deferred tax liabilities, tax carry-back availability and future taxable income. Long-lived Assets The Company assesses, on a store-by-store basis, the impairment of identifiable long-lived assets -- primarily property, fixtures and equipment -- whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those items. Cash flow estimates are based on historical results adjusted to reflect the Company's best estimate of future market and operating conditions. The net carrying value of assets not recoverable is reduced to fair value. Estimates of fair value represent the Company's best estimate based on industry trends and reference to market rates and transactions. Newly-opened stores may take time to generate positive operating and cash flow results. Factors such as store type, store location, current marketplace awareness of the Company's private label brands, local customer demographic data and current fashion trends are all considered in determining the time-frame required for a store to achieve positive financial results. If economic conditions are substantially different from our expectations, the carrying value of certain long-lived assets may become impaired. Property, fixtures and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in the Company's business model or changes in the Company's capital strategy can result in the actual useful lives differing from the Company's estimates. In cases where the Company determines that the useful life of property, fixtures and equipment should be shortened, the Company would depreciate the net book value in excess of the salvage value over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or leasehold improvements could result in shortened useful lives. Securitizations A significant portion of the Company's funding is through off-balance-sheet credit card securitizations via sales of certain accounts receivable through an accounts receivable facility. The sale of receivables is to BTRLP, a special purpose entity, as defined by SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -- A Replacement of FASB Statement No. 125." BTRLP is a wholly-owned subsidiary of the Company. BTRLP sells the receivables through the accounts receivable facility to a conduit. BTRLP may sell up to $150.0 million through the facility. The Company sells accounts receivable through securitizations with servicing retained. When the Company securitizes, it surrenders control over the transferred assets and accounts for the transaction as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The Company allocates the previous carrying amount of the securitized receivables between the assets sold and retained interests, based on their relative estimated fair values at the date of sale. Securitization income is recognized at the time of the sale, and is equal to the excess of the fair value of the assets obtained (principally cash) over the allocated cost of the assets sold and transaction costs. During the revolving period 16 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) of each accounts receivable securitization, securitization income is recorded representing estimated gains on the sale of new receivables to the conduit on a continuous basis to replenish the investors' interest in securitized receivables that have been repaid by the credit card account holders. Fair value estimates used in the recognition of securitization income require certain assumptions of payment, default, servicing costs and interest rates. To the extent actual results differ from those estimates, the impact is recognized as securitization income. The Company estimates the fair value of retained interests in securitizations based on a discounted cash flow analysis. The cash flows of the retained interest-only strip are estimated as the excess of the weighted average finance charge yield on each pool of receivables sold over the sum of the interest rate paid to the note holder, the servicing fee and an estimate of future credit losses over the life of the receivables. Cash flows are discounted from the date the cash is expected to become available to the Company. These cash flows are projected over the life of the receivables using payment, default, and interest rate assumptions that the Company believes would be used by market participants for similar financial instruments subject to prepayment, credit and interest rate risk. The cash flows are discounted using an interest rate that the Company believes a purchaser unrelated to the seller of the financial instrument would demand. As all estimates used are influenced by factors outside the Company's control, there is uncertainty inherent in these estimates, making it reasonably possible that they could change in the near term. Any adverse change in the Company's assumptions could materially impact securitization income. FORWARD-LOOKING STATEMENTS Certain information included in this report and other materials filed or to be filed by the Company with the Securities and Exchange Commission contains statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which may be identified by words such as "may," "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 retail in general, such as consumer confidence and demand for soft goods; risks relating to leverage and debt service; competition within markets in which the Company's stores are located; and the need for, and costs associated with, store renovations and other capital expenditures. These risks and other risks are discussed in the Company's Annual Report on Form 10-K for the fiscal year ended February 2, 2002. 17 THE BON-TON STORES, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company does not believe its interest rate risks, as described in the 2001 Annual Report, have changed materially since the Company's disclosure in its 2001 Annual Report. PART II: OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There have been no material developments in any legal proceedings since the Company's disclosure in its 2001 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 18, 2002, the Company held its Annual Meeting of Shareholders. The following matter was submitted for vote: 1. The following individuals were nominated and elected by the votes set forth to serve as the directors of the Company:
M. Thomas Grumbacher For: 40,692,021 Withhold Authority: 243,102 James H. Baireuther For: 40,692,021 Withhold Authority: 243,102 Samuel J. Gerson For: 40,794,621 Withhold Authority: 140,502 Michael L. Gleim For: 40,378,876 Withhold Authority: 556,247 Robert C. Siegel For: 40,794,621 Withhold Authority: 140,502 Leon D. Starr For: 40,793,971 Withhold Authority: 141,152 Frank Tworecke For: 40,650,321 Withhold Authority: 284,802 Thomas W. Wolf For: 40,794,621 Withhold Authority: 140,502
18 THE BON-TON STORES, INC. AND SUBSIDIARIES ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following exhibits are filed pursuant to the requirements of Item 601 of Regulation S-K: None. (b) Reports on Form 8-K filed during the quarter: 1. On June 14, 2002, the Company filed a Current Report on Form 8-K reporting, under Item 4, a change in auditors from Arthur Andersen LLP to KPMG LLP. 2. On June 19, 2002, the Company filed a Current Report on Form 8-K reporting, under Item 4, a change in auditors relative to The Bon-Ton Stores, Inc. Profit Sharing / Retirement Savings Plan from Arthur Andersen LLP to KPMG LLP. 3. On June 27, 2002, the Company filed an amended Current Report on Form 8-K relative to events reported in the Current Report on Form 8-K filed June 14, 2002. 19 THE BON-TON STORES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE BON-TON STORES, INC. DATE: September 16, 2002 BY: /s/ Tim Grumbacher ------------------- -------------------------------- Tim Grumbacher Chairman of the Board and Chief Executive Officer DATE: September 16, 2002 BY: /s/ James H. Baireuther ------------------- -------------------------------- James H. Baireuther Vice Chairman, Chief Administrative Officer and Chief Financial Officer 20 THE BON-TON STORES, INC. AND SUBSIDIARIES CERTIFICATIONS I, Tim Grumbacher, Chairman of the Board and Chief Executive Officer of The Bon-Ton Stores, Inc., certify that: (1) I have reviewed this quarterly report on Form 10-Q of The Bon-Ton Stores, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. THE BON-TON STORES, INC. DATE: September 16, 2002 BY: /s/ Tim Grumbacher ------------------- ----------------------------- Tim Grumbacher Chairman of the Board and Chief Executive Officer I, James H. Baireuther, Vice Chairman, Chief Administrative Officer and Chief Financial Officer of The Bon-Ton Stores, Inc., certify that: (1) I have reviewed this quarterly report on Form 10-Q of The Bon-Ton Stores, Inc.; (2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; (3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report. THE BON-TON STORES, INC. DATE: September 16, 2002 BY: /s/ James H. Baireuther ------------------- --------------------------------- James H. Baireuther Vice Chairman, Chief Administrative Officer and Chief Financial Officer 21 THE BON-TON STORES, INC. AND SUBSIDIARIES CERTIFICATIONS PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with quarterly report of The Bon-Ton Stores, Inc. on Form 10-Q for the period ending August 3, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Tim Grumbacher, Chairman of the Board and Chief Executive Officer of The Bon-Ton Stores, Inc., certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of The Bon-Ton Stores, Inc. THE BON-TON STORES, INC. DATE: September 16, 2002 BY: /s/ Tim Grumbacher ------------------- --------------------------------- Tim Grumbacher Chairman of the Board and Chief Executive Officer In connection with quarterly report of The Bon-Ton Stores, Inc. on Form 10-Q for the period ending August 3, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James H. Baireuther, Vice Chairman, Chief Administrative Officer and Chief Financial Officer of The Bon-Ton Stores, Inc., certify, pursuant to section 906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13 (a) or 15 (d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of The Bon-Ton Stores, Inc. THE BON-TON STORES, INC. DATE: September 16, 2002 BY: /s/ James H. Baireuther ------------------- --------------------------------- James H. Baireuther Vice Chairman, Chief Administrative Officer and Chief Financial Officer 22