10-Q 1 w89922e10vq.txt FORM 10-Q FOR 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 2, 2003 Commission File Number 0-19517 THE BON-TON STORES, INC. 2801 EAST MARKET STREET YORK, PENNSYLVANIA 17402 (717) 757-7660 INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229 ---------------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] As of September 10, 2003 there were 12,157,546 shares of Common Stock, $0.01 par value per share, and 2,989,853 shares of Class A Common Stock, $0.01 par value per share, outstanding. =============================================================================== PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEEET
August 2, February 1, (In thousands except share and per share data) 2003 2003 ---------------------------------------------------------------------------------------------------------------------------------- Assets (Unaudited) Current assets: Cash and cash equivalents $ 14,798 $ 16,796 Trade and other accounts receivable, net of allowance for doubtful accounts and sales returns of $3,598 and $3,540 at August 2, 2003 and February 1, 2003, respectively 39,070 46,735 Merchandise inventories 156,841 148,618 Prepaid expenses and other current assets 13,606 12,958 Deferred income taxes 2,465 3,205 ---------------------------------------------------------------------------------------------------------------------------------- Total current assets 226,780 228,312 ---------------------------------------------------------------------------------------------------------------------------------- Property, fixtures and equipment at cost, less accumulated depreciation and amortization 130,235 136,201 Deferred income taxes - 3,980 Goodwill and intangible assets 9,316 9,511 Other assets 4,296 4,019 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 370,627 $ 382,023 ================================================================================================================================== Liabilities and Shareholders' Equity Current liabilities: Accounts payable $ 57,944 $ 53,367 Accrued payroll and benefits 9,513 14,037 Accrued expenses 18,268 25,546 Current portion of long-term debt 752 715 Current portion of obligations under capital leases 262 250 Income taxes payable - 5,249 ---------------------------------------------------------------------------------------------------------------------------------- Total current liabilities 86,739 99,164 ---------------------------------------------------------------------------------------------------------------------------------- Long-term debt, less current maturities 63,608 64,194 Obligations under capital leases, less current maturities 333 468 Deferred income taxes 4,789 - Other long-term liabilities 4,921 5,851 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 160,390 169,677 ---------------------------------------------------------------------------------------------------------------------------------- Shareholder's 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 12,157,546 and 12,200,285 at August 2, 2003 and February 1, 2003, 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 2, 2003 and February 1, 2003 30 30 Treasury stock, at cost - shares of 337,800 and 277,000 at August 2, 2003 and February 1, 2003, respectively (1,387) (1,132) Additional paid-in-capital 107,484 107,415 Deferred compensation (232) (222) Accumulated other comprehensive income (1,319) (1,876) Retained earnings 105,536 108,006 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 210,237 212,346 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 370,627 $ 382,023 ==================================================================================================================================
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 2, August 3, August 2, August 3, (Unaudited) 2003 2002 2003 2002 ------------------------------------------------------------------------------------------------------------ Net sales $ 153,128 $ 153,890 $ 294,239 $ 304,407 Other income, net 564 553 1,090 1,087 ------------------------------------------------------------------------------------------------------------ 153,692 154,443 295,329 305,494 ------------------------------------------------------------------------------------------------------------ Costs and expenses: Costs of merchandise sold 96,311 95,959 185,238 196,356 Selling, general and administrative 49,594 53,733 100,974 104,369 Depreciation and amortization 5,123 4,847 9,887 9,904 ------------------------------------------------------------------------------------------------------------ Income (loss) from operations 2,664 (96) (770) (5,135) Interest expense, net 1,302 2,399 2,546 4,376 ------------------------------------------------------------------------------------------------------------ Income (loss) before income taxes 1,362 (2,495) (3,316) (9,511) Income tax provision (benefit) 504 (936) (1,226) (3,567) ------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $ 858 $ (1,559) $ (2,090) $ (5,944) ============================================================================================================ PER SHARE AMOUNTS -- BASIC: Net income (loss) $ 0.06 $ (0.10) $ (0.14) $ (0.39) ============================================================================================================ BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 14,997,502 15,237,911 15,015,424 15,260,464 DILUTED: Net income (loss) $ 0.06 $ (0.10) $ (0.14) $ (0.39) ============================================================================================================ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,222,031 15,237,911 15,015,424 15,260,464
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 2, August 3, (Unaudited) 2003 2002 -------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss $ (2,090) $ (5,944) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization 9,887 9,904 Changes in operating assets and liabilities, net (2,209) 6,792 -------------------------------------------------------------------------------------------------- Net cash provided by operating activities 5,588 10,752 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (4,134) (3,878) Proceeds from sale of property, fixtures and equipment 1,310 2 -------------------------------------------------------------------------------------------------- Net cash used in investing activities (2,824) (3,876) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt and capital lease obligations (73,072) (75,079) Proceeds from issuance of long-term debt 72,400 75,950 Common shares repurchased (254) (279) Cash dividends paid (379) - Decrease in bank overdraft balances, net (3,457) (5,624) -------------------------------------------------------------------------------------------------- Net cash used in financing activities (4,762) (5,032) Net (decrease) increase in cash and cash equivalents (1,998) 1,844 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 16,796 9,752 -------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,798 $ 11,596 ================================================================================================== SUPPLEMENTAL CASH FLOW INFORMATION: Interest paid $ 4,114 $ 3,891 Net income taxes (refunded) paid $ (2,563) $ 10,785
The accompanying notes are an integral part of these consolidated statements. 4 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on January 31, 1996 as the successor of a company incorporated on January 31, 1929 and currently operates as one business segment, through its subsidiaries, 72 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 condensed consolidated financial statements include accounts of The Bon-Ton Stores, Inc. and all of its wholly owned subsidiaries (the "Company"). All intercompany transactions and balances have been eliminated in consolidation. The unaudited condensed consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation of interim periods have been included. The Company's business is seasonal in nature and results of operations for interim periods presented are not necessarily indicative of results for the full fiscal year. It is suggested that these condensed consolidated financial statements be read in conjunction with the financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended February 1, 2003 (the "2002 Annual Report"). 2. STOCK-BASED COMPENSATION The Company applies the intrinsic-value-based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations including FASB Interpretation No. 44, "Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB Opinion No. 25," issued in March 2000, to account for its fixed-plan stock options. Under this method, compensation expense is recorded on the date of the grant only if the current market price of the underlying stock exceeded the exercise price. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), established accounting and disclosure requirements using a fair-value-based method of accounting for stock-based employee compensation plans. As allowed by SFAS No. 123, the Company has elected to continue to apply the intrinsic-value-based method of accounting described above, and has adopted only the disclosure requirements of SFAS No. 123, as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure." No stock-based employee compensation is reflected in net income for stock options, as all options granted had an exercise price equal to the market value of the underlying common stock on the date of grant. The following table illustrates the effect on net income if the fair-value-based method had been applied to all outstanding and unvested awards in each period: 5 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED ---------------------- ----------------------- August 2, August 3, August 2, August 3, 2003 2002 2003 2002 ----------------------------------------------------------------------------------------------------------------------- Net income (loss), as reported $ 858 $ (1,559) $ (2,090) $ (5,944) Deduct: Total stock-option-based employee compensation expense determined under fair-value-based methods for all awards, net of related tax effects (83) (104) (166) (208) ----------------------------------------------------------------------------------------------------------------------- Pro forma net income (loss) $ 775 $ (1,663) $ (2,256) $ (6,152) ======================================================================================================================= Earnings (loss) per share Basic As reported $ 0.06 $ (0.10) $ (0.14) $ (0.39) Pro forma 0.05 (0.11) (0.15) (0.40) Diluted As reported $ 0.06 $ (0.10) $ (0.14) $ (0.39) Pro forma 0.05 (0.11) (0.15) (0.40)
The Company used the Black-Scholes option pricing model to calculate the fair value of the stock options at the grant date. 3. PER SHARE AMOUNTS The presentation of earnings per share (EPS) requires a reconciliation of numerators and denominators used in basic and diluted EPS calculations. The numerator, net income or loss, is identical in both calculations. The following table presents a reconciliation of weighted average shares outstanding for the respective calculations for each period presented on the accompanying consolidated statements of operations:
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED ----------------------- ----------------------- August 2, August 3, August 2, August 3, 2003 2002 2003 2002 --------------------------------------------------------------------------------------------------- Basic calculation 14,997,502 15,237,911 15,015,424 15,260,464 Effect of dilutive shares --- Restricted Shares 94,722 - - - Options 129,807 - - - --------------------------------------------------------------------------------------------------- Diluted calculation 15,222,031 15,237,911 15,015,424 15,260,464 ===================================================================================================
6 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) The following securities were antidilutive and, therefore, were not included in the computation of diluted earnings per share amounts for the periods indicated:
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED ----------------------- ----------------------- August 2, August 3, August 2, August 3, 2003 2002 2003 2002 -------------------------------------------------------------------------------------------------- Antidilutive shares --- Restricted Shares - 174,988 69,868 178,520 Options 603,839 960,163 775,839 963,773
Certain securities were excluded from the computation of dilutive shares due to the Company's net loss position in the thirteen weeks ended August 3, 2002 and twenty-six weeks ended August 2, 2003 and August 3, 2002. The following table shows the approximate effect of dilutive securities had the Company reported profit for these periods:
THIRTEEN TWENTY-SIX WEEKS ENDED WEEKS ENDED ----------------------- ----------------------- August 2, August 3, August 2, August 3, 2003 2002 2003 2002 -------------------------------------------------------------------------------------------------- Effect of dilutive securities --- Restricted Shares 94,722 104,855 95,437 97,724 Options 129,807 120,667 111,779 103,566
4. EXIT OR DISPOSAL ACTIVITIES In October 2002, the Company announced it would close its York, Pennsylvania distribution operations in April 2003 and that all merchandise processing functions would be consolidated into the Company's existing Allentown, Pennsylvania distribution center. In addition, the Company announced it would close its Red Bank, New Jersey store in January 2003. The closings were completed as scheduled. The Company elected early adoption of SFAS No. 146, "Accounting for Exit or Disposal Activities," for these exit activities and, accordingly, recorded charges of $696 in fiscal 2002 relating to the closures. In addition, the Company recorded charges of $42 in the thirteen weeks ended May 3, 2003. All charges were included within selling, general and administrative expense and related primarily to termination benefits for affected associates and other costs to consolidate the distribution centers. Total costs relating to the closures are estimated at $738, with $404 for termination benefits and $334 for other costs. 7 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Following is a reconciliation of accruals as of February 1, 2003 and August 2, 2003 related to the distribution center and store closures:
February 1, August 2, 2003 Fiscal 2003 Fiscal 2003 2003 Balance Provision Payments Balance --------------------------------------------------------------------------------------------------- Termination benefits $ 220 $ 58 $ 278 $ - Other closing costs 255 (16) 93 146 --------------------------------------------------------------------------------------------------- Total $ 475 $ 42 $ 371 $ 146 ===================================================================================================
As of August 2, 2003, the remaining York, Pennsylvania distribution center rental obligation through lease expiration in December 2020 is $9,599. The Company will continue to utilize a portion of this facility for its data processing operations center and intends to sublet the remaining space. The Company anticipates that the fair market value of any sublet income will equal or exceed its remaining rent obligation. During the thirteen weeks ended August 2, 2003, the Company sold its Harrisburg, Pennsylvania distribution center, resulting in a gain on sale of $933 classified within selling, general and administrative expenses. 5. SALE OF RECEIVABLES The Company securitizes its proprietary credit card portfolio through an accounts receivable facility (the "facility"). Under the securitization agreement, which is contingent upon receivables meeting certain performance criteria, the Company has the option to sell through The Bon-Ton Receivables Partnership, LP ("BTRLP"), a wholly owned subsidiary of the Company and qualifying special purpose entity under SFAS No. 140, up to $150,000 of an undivided percentage interest in the receivables on a limited recourse basis. In connection with the securitization agreement, the Company retains servicing responsibilities, subordinated interests and an interest-only strip, all of which are retained interests in the securitized receivables. The Company retains annual servicing fees of 2.0% of the outstanding 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 2, 2003 and February 1, 2003, credit card receivables were sold under the securitization agreement in the amount of $135,033 and $145,000, respectively, and the Company had subordinated interests of $36,985 and $44,520, respectively, related to the amounts sold that were included in the accompanying Consolidated Balance Sheets as trade and other accounts receivable. The Company accounts for its subordinated interest in the receivables in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company has 8 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) not recognized any unrealized gains or losses on its subordinated interest, as the current carrying value of customer revolving charge accounts receivable is a reasonable estimate of fair value and average interest rates approximate current market origination rates. Subordinated interests as of August 2, 2003 and February 1, 2003 included restricted cash of $6,322 and $6,222, respectively, required based upon terms of the facility agreement. New receivables are sold on a continual basis to replenish each investor's respective level of participation in receivables that have been repaid by credit card holders. The Company recognized securitization income of $1,867 and $2,360 on securitization of credit card loans during the thirteen weeks ended August 2, 2003 and August 3, 2002, respectively, and $4,417 and $5,246 during the twenty-six weeks ended August 2, 2003 and August 3, 2002, respectively. This income is reported as a component of selling, general and administrative expenses. The Company retained net proceeds from servicing fees, which it reported as a component of selling, general and administrative expenses, of $690 and $724 for the thirteen weeks ended August 2, 2003 and August 3, 2002, respectively and $1,376 and $1,465 for the twenty-six weeks ended August 2, 2003 and August 3, 2002, respectively. As of August 2, 2003, $4,368 of the total managed credit card receivables were sixty-one days or more past due. Net credit losses on the total managed credit card receivables were $1,793 and $1,672 for the thirteen weeks ended August 2, 2003 and August 3, 2002, respectively, and $3,718 and $3,452 for the twenty-six weeks ended August 2, 2003 and August 3, 2002, respectively. 6. STOCK REPURCHASES On February 7, 2002, the Company announced a stock repurchase program authorizing the purchase of up to $2,500 of Company stock from time to time. For the thirteen weeks ended August 2, 2003, the Company purchased 2,600 shares at a cost of $12. For the twenty-six weeks ended August 2, 2003, the Company purchased 60,800 shares at a cost of $254. On a cumulative basis, since February 7, 2002 the Company has purchased 337,800 shares at a cost of $1,387 pursuant to this stock purchase program. Treasury stock is accounted for by the cost method. 7. IMPLEMENTATION OF NEW ACCOUNTING STANDARD As is standard industry practice, the Company receives allowances from merchandise vendors as reimbursement for charges incurred on marked-down merchandise. Vendor allowances are credited to costs of goods sold, provided the allowance is: (1) collectable, (2) for merchandise either permanently marked down or sold, (3) not predicated on a future purchase, (4) not predicated on a future increase in the purchase price from the vendor, and (5) authorized by internal management. If the aforementioned criteria are not met, the Company reflects the allowances as an adjustment to the cost of merchandise capitalized in inventory. 9 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) Additionally, the Company receives allowances from vendors in connection with cooperative advertising programs. These amounts are recognized by the Company as a reduction of the related advertising costs that have been incurred and reflected in selling, general and administrative expenses. In November 2002, the Emerging Issues Task Force issued Consensus No. 02-16, "Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor" ("EITF 02-16"), which is effective prospectively for all vendor arrangements entered into after December 31, 2002. EITF 02-16 requires that consideration received from vendors be considered a reduction of the prices of vendors' products and shown as a reduction of cost of sales when recognized in the income statement of the customer. If the consideration represents a reimbursement of specific incremental identifiable costs incurred, these amounts should be offset against the related costs with any excess consideration recorded in cost of sales. The Company's current accounting policies are consistent with the provisions of EITF 02-16 and, therefore, adoption of EITF 02-16 did not have a material impact on the Company's financial position or results of operations in fiscal 2002 or the thirteen and twenty-six weeks ended August 2, 2003. 8. SUBSEQUENT EVENTS On September 9, 2003, the Company announced a quarterly cash dividend of $0.025 per share on Class A Common Stock and Common Stock, payable October 15, 2003 to shareholders of record as of October 1, 2003. On September 15, 2003, the Company announced that it has proposed to acquire all of the outstanding shares of common stock of The Elder-Beerman Stores Corp. ("EBSC") for $8.00 per share in cash. As of the current date, EBSC and the Company have not entered into any definitive acquisition agreement and there can be no assurance that any transaction between EBSC and the Company will be consummated. The proposed acquisition would involve a cash tender offer by the Company for all of the outstanding shares of EBSC and the subsequent merger of EBSC with a subsidiary of the Company. EBSC operates sixty-eight department stores in Ohio, West Virginia, Indiana, Michigan, Illinois, Kentucky, Wisconsin, Pennsylvania and Iowa. In connection with the proposed acquisition of EBSC, the Company has obtained commitments from financial institutions to refinance the debt facilities and the receivable securitization facilities of both the Company and EBSC. The new financings are conditioned upon, among other things, consummation of the tender offer. 10 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 2, August 3, August 2, August 3, 2003 2002 2003 2002 ----------------------------------------------------------------------------------------------- Net sales 100.0% 100.0% 100.0% 100.0% Other income, net 0.4 0.4 0.4 0.4 ----------------------------------------------------------------------------------------------- 100.4 100.4 100.4 100.4 ----------------------------------------------------------------------------------------------- Costs and expenses: Costs of merchandise sold 62.9 62.4 63.0 64.5 Selling, general and administrative 32.4 34.9 34.3 34.3 Depreciation and amortization 3.3 3.1 3.4 3.3 ----------------------------------------------------------------------------------------------- Income (loss) from operations 1.7 (0.1) (0.3) (1.7) Interest expense, net 0.9 1.6 0.9 1.4 ----------------------------------------------------------------------------------------------- Income (loss) before income taxes 0.9 (1.6) (1.1) (3.1) Income tax provision (benefit) 0.3 (0.6) (0.4) (1.2) ----------------------------------------------------------------------------------------------- Net income (loss) 0.6% (1.0)% (0.7)% (2.0)% -----------------------------------------------------------------------------------------------
THIRTEEN WEEKS ENDED AUGUST 2, 2003 COMPARED TO THIRTEEN WEEKS ENDED AUGUST 3, 2002 For purposes of the following discussions, all references to "second quarter of 2003" and "second quarter of 2002" are to the Company's thirteen-week periods ended August 2, 2003 and August 3, 2002, respectively. NET SALES. Net sales for the second quarter of 2003 were $153.1 million, reflecting a decrease of 0.5% from the same period last year. Comparable store sales, which exclude the Red Bank, New Jersey store closed in January 2003, increased 0.2% in the second quarter of 2003. Business families recording the largest comparable store sales increases for the second quarter of 2003 were Home, Petites, Juniors, Coats and Cosmetics. Business families reflecting the largest comparable store sales decreases were Mens Collections, Misses Sportswear, Childrens and Dresses. OTHER INCOME, NET. Net other income, principally income from leased departments, was 0.4% of net sales in the second quarter of 2003 and in the second quarter of 2002. COSTS AND EXPENSES. Gross margin as a percentage of net sales decreased 0.5 percentage point to 37.1% for the second quarter of 2003 from 37.6% for the comparable period last year. The decrease resulted primarily from increased markdowns, partially offset by a reduction in inventory 11 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS shrinkage accrual rates. Gross margin dollars for the second quarter of 2003 decreased $1.1 million compared to the second quarter of 2002 due to lower net sales and the decreased gross margin rate. Selling, general and administrative expenses for the second quarter of 2003 were $49.6 million, $4.1 million below the second quarter of 2002. The reduction in selling, general and administrative dollars was principally attributable to decreased expense in payroll, net advertising and utilities -- combined with a gain on sale of the Harrisburg, Pennsylvania distribution center of $0.9 million. The current year expense rate decreased 2.5 percentage points to 32.4% of net sales, relative to 34.9% of net sales in the second quarter of 2002. The rate decrease reflects lower costs and the gain on sale of distribution center, partially offset by lower net sales. Depreciation and amortization in the second quarter of 2003 was $5.1 million, an increase of $0.3 million compared to $4.8 million in the second quarter of 2002. The increase was primarily due to depreciation on recent capital expenditures, partially offset by prior year depreciation on assets at the Red Bank, New Jersey store closed in January 2003. INCOME (LOSS) FROM OPERATIONS. Income from operations in the second quarter of 2003 was $2.7 million, or 1.7% of net sales, compared to a loss from operations of $0.1 million, or 0.1% of net sales, in the second quarter of 2002. INTEREST EXPENSE, NET. Net interest expense was $1.3 million, or 0.9% of net sales, in the second quarter of 2003 compared to $2.4 million, or 1.6% of net sales, in the second quarter of 2002. The decrease in net interest expense was primarily due to favorable fair market value adjustments on interest rate swap agreements. Interest expense for the second quarter of 2003 and second quarter of 2002 included a reduction of interest expense of $0.6 million and an increase in interest expense of $0.4 million, respectively, related to fair market value adjustments on interest rate swaps. INCOME TAX PROVISION (BENEFIT). The effective tax rate decreased 0.5 percentage point to 37.0% in the second quarter of 2003 from to 37.5% in the second quarter of 2002. NET INCOME (LOSS). Net income in the second quarter of 2003 was $0.9 million, or 0.6% of net sales, compared to a net loss of $1.6 million, or 1.0% of net sales, in the second quarter of 2002. TWENTY-SIX WEEKS ENDED AUGUST 2, 2003 COMPARED TO TWENTY-SIX WEEKS ENDED AUGUST 3, 2002 For purposes of the following discussions, all references to "2003" and "2002" are to the Company's twenty-six week periods ended August 2, 2003 and August 3, 2002, respectively. NET SALES. Net sales in 2003 were $294.2 million, reflecting a decrease of 3.3% from the same period last year. Comparable store sales, which exclude the Red Bank, New Jersey store closed in January 2003, decreased 2.7% in 2003. Business families recording the largest comparable store sales increases were Coats, Home, Accessories and Shoes. Business families reflecting the largest comparable store sales decreases were Mens Collections, Dresses, Misses Sportswear, Childrens and Womens. 12 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OTHER INCOME, NET. Net other income, principally income from leased departments, was 0.4% of net sales in 2003 and 2002. COSTS AND EXPENSES. Gross margin as a percentage of net sales increased 1.5 percentage points to 37.0% in 2003 from 35.5% in 2002, primarily as a result of decreased markdowns on seasonal merchandise and a reduction in inventory shrinkage accrual rates. During the first quarter of 2002, as an aggressive response to a difficult retail environment and increased price competition, the Company accelerated the timing of markdowns on seasonal merchandise; this accelerated cadence for seasonal merchandise markdowns has been continued through the second quarter of 2003. To implement this accelerated cadence, the Company recognized increased markdowns in the first quarter of 2002. The impact of the two factors discussed above were partially offset by increased markdowns in the second quarter of 2003 relative to the second quarter of 2002. Gross margin dollars in 2003 increased $1.0 million over 2002 as a result of the increased gross margin rate, partially offset by lower net sales. Selling, general and administrative expenses decreased $3.4 million, to $101.0 million in 2003 from $104.4 million in 2002. The decrease in expense dollars was principally attributable to decreased payroll expense and increased vendor purchase order violations income, combined with a gain on sale of the Harrisburg, Pennsylvania distribution center of $0.9 million. The expense rate remained flat at 34.3% of net sales, as the 2003 impact of lower costs and the gain on sale of the distribution center was offset by lower 2003 net sales. Depreciation and amortization expense remained flat at $9.9 million, but as a percent of net sales increased to 3.4% in 2003 from 3.3% in 2002 due to lower net sales. LOSS FROM OPERATIONS. Loss from operations in 2003 was $0.8 million, or 0.3% of net sales, compared to a loss from operations of $5.1 million, or 1.7% of net sales, in 2002. INTEREST EXPENSE, NET. Net interest expense was $2.5 million, or 0.9% of net sales, in 2003 compared to $4.4 million, or 1.4% of net sales, in 2002. The decrease in net interest expense was primarily due to favorable fair market value adjustments on interest rate swap agreements. Interest expense in 2003 and 2002 included a reduction of interest expense of $1.3 million and an increase in interest expense of $0.5 million, respectively, related to fair market value adjustments on interest rate swaps. INCOME TAX BENEFIT. The effective tax rate decreased 0.5 percentage point to 37.0% in 2003 from 37.5% in 2002. NET LOSS. Net loss in 2003 was $2.1 million compared to a net loss of $5.9 million in 2002. 13 THE BON-TON STORES, INC. AND SUBSIDIARIES 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 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 2, 2003 and August 3, 2002. 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 material measures of the Company's liquidity and capital resources:
August 2, August 3, (Dollars in millions) 2003 2002 ----------------------------------------------------------------------------------------- Working capital $ 140.0 $ 116.7 Current ratio 2.61:1 2.22:1 Debt to total capitalization (debt plus equity) 0.23:1 0.26:1 Unused availability under revolving credit facility $ 58.4 $ 54.1
For the twenty-six weeks ended August 2, 2003, net cash provided by operating activities was $5.6 million compared to $10.8 million for the comparable period last year. The decrease in net cash provided was primarily attributable to the impact of inventory reduction initiatives during 2002 and decreased accrued expenses in 2003--partially offset by a lower net loss, decreased deferred tax assets and a reduction in income taxes paid. The decreases in deferred tax assets and income taxes paid were largely due to the filing of tax refund requests pursuant to a fixed asset "cost segregation" study that resulted in accelerated tax depreciation. 14 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net cash used in investing activities was $2.8 million for the twenty-six weeks ended August 2, 2003 compared to $3.9 million for the comparable period last year. The decrease was primarily due to $1.3 million in proceeds from the sale of the Harrisburg, Pennsylvania distribution center in the second quarter of 2003. Net cash used in financing activities was $4.8 million for the twenty-six weeks ended August 2, 2003 compared to $5.0 million for the comparable period of 2002. 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. The accounts receivable facility agreement expires in January 2004. The Company anticipates that it will be able to renew or replace this agreement with an agreement of substantially comparable terms. On May 21, 2003, the Company amended and restated its revolving credit facility agreement. The new revolving credit facility agreement reduces the line of credit from $175.0 million to $150.0 million; modifies certain borrowing availability, interest and fee calculation elements; and extends the agreement expiration date from April 2004 to April 2008. The Company negotiated the $25.0 million reduction in the line of credit, which the Company anticipates will yield lower fee charges without materially impacting the Company's total availability. 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 sector. 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 Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities--a Replacement of FASB Statement No. 125" 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. 15 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company sells undivided percentage ownership interests in certain of its credit card accounts receivable to unrelated third-parties under a $150.0 million accounts receivable securitization facility (the "facility"). The unrelated third-parties, referred to as the conduit, have purchased a $135.0 million interest in the accounts receivable under the facility at August 2, 2003. The Company is responsible for servicing these accounts, retains a servicing fee and bears the risk of non-collection (limited to its retained interests in the accounts receivable). Associated off-balance-sheet assets and related debt were $135.0 million at August 2, 2003 and $145.0 million at February 1, 2003. Upon the facility's termination, the conduit would be entitled to all cash collections on the accounts receivable until its investment ($135.0 million at August 2, 2003) and accrued discounts are repaid. Accordingly, upon termination of the facility, the assets of the facility (and the Company's retained interest) would not be available to the Company until all amounts due to the conduit have been paid in full. Based upon the terms of the facility, the accounts receivable transactions qualify for "sale treatment" under generally accepted accounting principles. This treatment requires the Company to account for transactions with the conduit as a sale of accounts receivable instead of reflecting the conduit's net investment as long-term debt with a pledge of accounts receivable as collateral. Absent this "sale treatment," the Company's balance sheet would reflect additional accounts receivable and long-term debt, which could be a factor in the Company's ability to raise capital; however, results of operations would not be significantly impacted. CRITICAL ACCOUNTING POLICIES The Company's discussion and analysis of financial condition and results of operations are based upon the condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles. Preparation of these financial statements requires the Company to make estimates and judgments that affect reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of its financial statements. On an ongoing basis, the Company evaluates its estimates, including those related to merchandise returns, bad debts, inventories, intangible assets, income taxes, financings, and contingencies and litigation. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially lead to materially different results under different assumptions and conditions. The Company believes its critical accounting policies are described below. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company performs ongoing credit evaluations of its customers and adjusts credit limits based upon payment history and the customer's current credit-worthiness. The Company continually monitors collections and payments from customers and maintains an allowance for estimated credit losses based upon its historical experience, how delinquent accounts ultimately charge-off, aging of 16 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS accounts and any specific customer collection issues identified (e.g., bankruptcy). While such credit losses have historically been within expectations and provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates as in the past. If circumstances change (e.g., higher than expected defaults or bankruptcies), the Company's estimates of the recoverability of amounts due the Company could be materially reduced. The allowance for doubtful accounts and sales returns was $3.6 million and $3.5 million as of August 2, 2003 and February 1, 2003, respectively. INVENTORY VALUATION Inventories are stated at the lower of cost or market with cost determined using the retail last-in, first-out ("LIFO") method. Under the retail inventory method, the valuation of inventories at cost and resulting gross margin is derived by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail inventory method is an averaging method that has been widely used in the retail industry. Use of the retail inventory method will result in valuing inventories at the lower of cost or market if markdowns are taken timely as a reduction of the retail value of inventories. Inherent in the retail inventory method calculation are certain significant management judgments and estimates including, among others, merchandise markups, markdowns and shrinkage, which significantly impact both the ending inventory valuation at cost and resulting gross margin. These significant estimates, coupled with the fact that the retail inventory method is an averaging process, can, under certain circumstances, result in individual inventory components with cost above related net realizable value. Factors that can lead to this result include applying the retail inventory method to a group of products that is not fairly uniform in terms of its cost, selling price relationship and turnover; or applying the retail inventory method to transactions over a period of time that includes different rates of gross profit, such as those relating to seasonal merchandise. In addition, failure to take timely markdowns can result in an overstatement of cost under the lower of cost or market principle. Management believes that the Company's retail inventory method provides an inventory valuation that approximates cost and results in carrying inventory in the aggregate at the lower of cost or market. The Company regularly reviews inventory on hand and records a provision 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 on-hand. Additionally, estimates of future merchandise demand may prove to be inaccurate, in which case the Company may have understated or overstated the provision required for excess or old inventory. If the Company's inventory is determined to be overvalued in the future, the Company would be required to recognize such costs in the costs of goods sold and reduce operating income at the time of such determination. Likewise, if inventory is later determined to be undervalued, the Company may have overstated the costs of goods sold in previous periods and would be required to recognize additional operating income at the time of such determination. Therefore, although every effort is made to ensure the accuracy of forecasts of future merchandise demand, any significant unanticipated changes in demand or the economy in the Company's markets could have a significant impact on the value of the Company's inventory and reported operating results. 17 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 by $7.1 million as of August 2, 2003 and February 1, 2003 to a net realizable value (NRV). Inherent in these NRV assessments and related reserves are significant management judgments and estimates regarding future merchandise selling costs and pricing. Should these estimates prove to be inaccurate, the Company may have overstated or understated its inventory carrying value. In such cases, the Company would be required to recognize cost increases or decreases in costs of goods sold, and impact operating income accordingly, at the time of such determination. VENDOR ALLOWANCES As is standard industry practice, the Company receives allowances from merchandise vendors as reimbursement for charges incurred on marked-down merchandise. Vendor allowances are credited to costs of goods sold, provided the allowance is: (1) collectable, (2) for merchandise either permanently marked down or sold, (3) not predicated on a future purchase, (4) not predicated on a future increase in the purchase price from the vendor, and (5) authorized by internal management. If the aforementioned criteria are not met, the Company reflects the allowances as an adjustment to the cost of merchandise capitalized in inventory. Additionally, the Company receives allowances from vendors in connection with cooperative advertising programs. These amounts are recognized by the Company as a reduction of the related advertising costs that have been incurred and reflected in selling, general and administrative expenses. INCOME TAXES Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The process involves the Company summarizing temporary differences resulting from differing treatment of items (e.g., inventory valuation reserves) for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. The Company must then assess the likelihood that deferred tax assets will be recovered from future taxable income or tax carry-back availability 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 taxes were a liability of $2.3 million and an asset of $7.2 million as of August 2, 2003 and February 1, 2003, respectively. No valuation allowance has been established against the 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. If actual results 18 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS differ from these estimates or these estimates are adjusted in future periods, the Company may need to establish a valuation allowance, which could materially impact its financial position and results of operations. Legislation changes currently proposed by certain states in which the Company operates could have a materially adverse impact on future operating results of the Company. These changes principally involve state income tax laws. LONG-LIVED ASSETS Property, fixtures and equipment are recorded at cost and are depreciated on a straight-line basis over the estimated useful lives of such assets. Changes in the Company's business model or capital strategy can result in the actual useful lives differing from the Company's estimates. In cases where the Company determines that the useful life of property, fixtures and equipment should be shortened, the Company depreciates the net book value in excess of the salvage value over its revised remaining useful life, thereby increasing depreciation expense. Factors such as changes in the planned use of fixtures or leasehold improvements could also result in shortened useful lives. Net property, fixtures and equipment amounted to $130.2 million and $136.2 million as of August 2, 2003 and February 1, 2003, 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 operating results, - Significant changes in the manner of the Company's use of assets or overall business strategy, and - Significant negative industry or economic trends for a sustained period. The Company records impairment losses on long-lived assets used in operations when events and circumstances indicate that the assets might be impaired and the undiscounted cash flows estimated to be generated by those assets are less than the carrying amount of those 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. 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. Newly opened stores may require time to generate positive operating and cash flow results. Factors such as store type, store location, current marketplace awareness of the Company's private label brands, local customer demographic data and current fashion trends are all considered in determining the time-frame required for a store to achieve positive financial results. If economic conditions prove to be substantially different from the Company's expectations, the carrying value of new stores may ultimately become impaired. 19 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has identified assets in the New York market with a net book value of approximately $4.0 million that have under-performed relative to the Company average. The Company has taken steps to address these issues and currently forecasts no impairment charge. Should the Company's efforts prove unsuccessful or economic conditions change, the carrying value of these assets may ultimately become impaired. GOODWILL AND INTANGIBLE ASSETS Net goodwill was $3.0 million as of August 2, 2003 and February 1, 2003. Intangible assets are comprised of lease interests that relate to below-market-rate leases purchased in store acquisitions completed in fiscal years 1992 through 1999, which were adjusted to reflect fair market value. These leases had average lives of twenty-five years. Net intangible assets amounted to $6.4 million and $6.5 million as of August 2, 2003 and February 1, 2003, respectively. As a result of the Company's adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," the Company annually reviews goodwill and other intangible assets that have indefinite lives for impairment and when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. The Company determines fair value using discounted cash flow analysis, which requires certain assumptions and estimates regarding industry economic factors and future profitability of acquired businesses. It is the Company's policy to conduct impairment testing based on its most current business plans, which reflect anticipated changes in the economy and the industry. If actual results prove inconsistent with Company assumptions and judgments, the Company could be exposed to a material impairment charge. SECURITIZATIONS A significant portion of the Company's funding is through off-balance-sheet credit card securitizations. This funding is via sales of certain accounts receivable through an accounts receivable facility (the "facility"). The sale of receivables is to The Bon-Ton Receivables Partnership, LP ("BTRLP"), a special purpose entity as defined by SFAS No. 140, "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 may sell accounts receivable with a purchase price up to $150.0 million through the facility to a conduit on a revolving basis. The Company sells accounts receivable through securitizations with servicing retained. When the Company securitizes, it surrenders control over the transferred assets and accounts for the transaction as a sale to the extent that consideration other than beneficial interests in the transferred assets is received in exchange. The Company allocates the previous carrying amount of the securitized receivables between the assets sold and retained interests, based on their relative estimated fair values at the date of sale. Securitization income is recognized at the time of the sale, and is equal to the excess of the fair value of the assets obtained (principally cash) over the allocated cost of the assets sold and transaction costs. During the revolving period of each accounts receivable securitization, securitization income is recorded representing estimated gains on the sale of new 20 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. The Company recognized securitization income of $1.9 million and $2.4 million for the thirteen weeks ended August 2, 2003 and August 3, 2002, respectively, and $4.4 million and $5.2 million for the twenty-six weeks ended August 2, 2003 and August 3, 2002, respectively. 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 1, 2003. 21 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 2002 Annual Report, have changed materially since the Company's disclosure in its 2002 Annual Report. ITEM 4. CONTROLS AND PROCEDURES The Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report and, based on this evaluation, concluded that the Company's disclosure controls and procedures, which have been designed to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission, are effective. No change in the Company's internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) or 15d-15(f)) has occurred during the Company's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 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 2002 Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 17, 2003, the Company held its Annual Meeting of Shareholders. The following matters were 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: 40,833,936 Withhold Authority: 209,089 Robert B. Bank For: 40,856,463 Withhold Authority: 186,502 Philip M. Browne For: 40,856,463 Withhold Authority: 186,502 Shirley A. Dawe For: 40,892,163 Withhold Authority: 150,802
22 THE BON-TON STORES, INC. AND SUBSIDIARIES Marsha M. Everton For: 40,892,090 Withhold Authority: 150,875 Samuel J. Gerson* For: 39,538,988 Withhold Authority: 1,503,977 Michael L. Gleim For: 39,556,782 Withhold Authority: 1,486,183 Robert E. Salerno For: 40,882,127 Withhold Authority: 160,838 Robert C. Siegel For: 40,907,263 Withhold Authority: 135,702 Leon D. Starr For: 40,902,616 Withhold Authority: 140,349 Thomas W. Wolf For: 40,907,263 Withhold Authority: 135,702
* Mr. Gerson passed away in July 2003. On July 21, 2003, the Board of Directors of the Company elected to reduce the size of the Board from eleven members to ten members. Consequently, the Company will not fill Mr. Gerson's position. 2. The holders of 37,019,325 shares voted in favor of, the holders of 770,808 shares voted against and the holders of 30,693 shares abstained with respect to the amendment of The Bon-Ton Stores, Inc. 2000 Stock Incentive Plan. 3. The holders of 39,492,991 shares voted in favor of, the holders of 1,536,560 shares voted against and the holders of 13,414 shares abstained with respect to ratification of the appointment of KPMG LLP as independent auditor of The Bon-Ton Stores, Inc. 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: 10.1 Amended and Restated Employment Agreement for Frank Tworecke 31.1 Certification of Tim Grumbacher 31.2 Certification of James H. Baireuther 32.1 Certifications Pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934. 23 THE BON-TON STORES, INC. AND SUBSIDIARIES (b) Reports on Form 8-K filed during the quarter: 1. A Current Report on Form 8-K dated July 25, 2003 was filed with the Securities and Exchange Commission on July 29, 2003 to report, under Item 5, that the Registrant issued a press release with respect to its submission of a proposal to the Board of Directors of The Elder-Beerman Stores Corp. to provide for a combination of Elder-Beerman and The Bon-Ton Stores, Inc. The following Reports on Form 8-K were filed subsequent to August 2, 2003 but prior to the filing of this Quarterly Report on Form 10-Q: 2. A Current Report on Form 8-K dated August 21, 2003 was filed with the Securities and Exchange Commission on August 21, 2003 to report, under Item 12, that the Registrant issued a press release with respect to its results of operations for the thirteen weeks ended August 2, 2003. 3. A Current Report on Form 8-K dated September 9, 2003 was filed with the Securities and Exchange Commission on September 9, 2003 to report, under Item 5, that the Registrant issued a press release with respect to a dividend declaration. 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 15, 2003 BY: /s/ Tim Grumbacher --------------------------- Tim Grumbacher Chairman of the Board and Chief Executive Officer DATE: September 15, 2003 BY: /s/ James H. Baireuther --------------------------- James H. Baireuther Vice Chairman, Chief Administrative Officer and Chief Financial Officer 24