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UNITED STATES 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
THE BON-TON STORES, INC. 2801 East Market Street York, Pennsylvania 17402 (717) 757-7660
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 twelve months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of August 24, 2012, there were 17,094,108 shares of Common Stock, $.01 par value, and 2,951,490 shares of Class A Common Stock, $.01 par value, outstanding.
PART I: FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
THE BON-TON STORES, INC. CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these consolidated financial statements.
THE BON-TON STORES, INC. CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying notes are an integral part of these consolidated financial statements.
THE BON-TON STORES, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
The accompanying notes are an integral part of these consolidated financial statements.
THE BON-TON STORES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS
The accompanying notes are an integral part of these consolidated financial statements.
THE BON-TON STORES, INC. CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
The accompanying notes are an integral part of these consolidated financial statements.
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
1. BASIS OF PRESENTATION
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. The Bon-Ton Stores, Inc. operates, through its subsidiaries, 272 stores in 23 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates and, in the Detroit, Michigan area, under the Parisian nameplate. The Bon-Ton Stores, Inc. conducts its operations through one business segment.
The accompanying unaudited consolidated financial statements include the accounts of The Bon-Ton Stores, Inc. (the “Parent”) and its wholly owned subsidiaries (collectively, “the Company”). Variable interest entities are consolidated where it has been determined the Company is the primary beneficiary of those entities’ operations. All intercompany transactions and balances have been eliminated in consolidation.
The unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, all adjustments considered necessary for a fair presentation of interim periods have been included. The Company’s business is seasonal in nature and results of operations for the interim periods presented are not necessarily indicative of results for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2012.
For purposes of the following discussion, references to the “first quarter of 2012” are to the 13 weeks ended April 28, 2012. References to the “second quarter of 2012” and the “second quarter of 2011” are to the 13 weeks ended July 28, 2012 and July 30, 2011, respectively. References to “fiscal 2012” are to the 53 weeks ending February 2, 2013; references to “fiscal 2011” are to the 52 weeks ended January 28, 2012.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions about future events. These estimates and assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and the reported amounts of revenues and expenses. Such estimates include those related to merchandise returns, inventories, long-lived assets, intangible assets, insurance reserves, contingencies, litigation and assumptions used in the calculation of income taxes and retirement and other post-employment benefits, among others. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from further changes in the economic environment will be reflected in the financial statements in future periods.
Previously Issued Accounting Standards
In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which amends FASB Codification Topic 220 on comprehensive income disclosures. The new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements, while eliminating the option to report other comprehensive income and its components in the statement of changes in shareholders’ equity. The provisions of ASU 2011-05 were adopted in the first quarter of 2012. The adoption
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
of ASU 2011-05 did not impact the Company’s consolidated financial position, results of operations or cash flows as it required only a change in the format of presentation.
In May 2011, ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (“ASU 2011-04”), was issued, amending FASB Codification Topic 820 on fair value measurements and disclosures. The amendments (1) clarify the FASB’s intent regarding application of existing fair value measurement guidance, (2) revise certain measurement and disclosure requirements that change or modify a principle to achieve convergence with international accounting standards and (3) expand the information required to be disclosed with respect to fair value measurements categorized in Level 3 fair value measurements. The provisions of ASU 2011-04 were adopted in the first quarter of 2012. The adoption of ASU 2011-04 did not have a material impact on the Company’s consolidated financial statements.
2. PER-SHARE AMOUNTS
The following table presents a reconciliation of net loss and weighted average shares outstanding used in basic and diluted earnings (loss) per share (“EPS”) calculations for each period presented:
Due to the Company’s net loss position, weighted average unvested restricted shares (participating securities) of 1,311,856 and 1,423,355 for the second quarter in each of 2012 and 2011, respectively, and 1,393,696 and 1,384,540 for the 26 weeks ended July 28, 2012 and July 30, 2011, respectively, were not considered in the calculation of net loss available to common shareholders used for both basic and diluted EPS.
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
In addition, weighted average stock option shares (non-participating securities) of 914,997 and 983,955 for the second quarter in each of 2012 and 2011, respectively, and 941,970 and 1,003,384 for the 26 weeks ended July 28, 2012 and July 30, 2011, respectively, were excluded from the calculation of diluted EPS as they would have been antidilutive. Certain of these stock option shares were excluded solely due to the Company’s net loss position. Had the Company reported net income for the second quarter in each of 2012 and 2011, these shares would have had an effect of 61,422 and 209,003 dilutive shares, respectively, for purposes of calculating diluted EPS. Had the Company reported net income for the 26 weeks ended July 28, 2012 and July 30, 2011, these shares would have had an effect of 77,596 and 263,371 dilutive shares, respectively, for purposes of calculating diluted EPS.
3. FAIR VALUE MEASUREMENTS
Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value and establishes a framework for measuring fair value. ASC 820 establishes fair value hierarchy levels that prioritize the inputs used in valuations determining fair value. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are primarily quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs based on the Company’s own assumptions.
The carrying values of the Company’s cash and cash equivalents, accounts payable and financial instruments reported within prepaid expenses and other current assets and other long-term assets approximate fair value.
The carrying value and estimated fair value of the Company’s long-term debt, including current maturities but excluding capital leases, as of July 28, 2012 are as follows:
The carrying value and estimated fair value of the Company’s long-term debt, including current maturities but excluding capital leases, as of January 28, 2012 are as follows:
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
The Level 2 fair value estimates are determined by a market approach using prices generated by market transactions. The Level 3 fair value estimates are determined by a discounted cash flow analysis utilizing a discount rate the Company believes is appropriate and would be used by market participants. There was no change in the valuation technique used to determine the Level 2 or Level 3 fair value estimates.
4. INTEREST RATE DERIVATIVES
It is the policy of the Company to identify on a continuing basis the need for debt capital and evaluate financial risks inherent in funding the Company with debt capital. In conjunction with this ongoing review, the debt portfolio and hedging program of the Company is managed to: (1) reduce funding risk with respect to borrowings made or to be made by the Company to preserve the Company’s access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) control the aggregate interest rate risk of the debt portfolio. The Company has previously entered and may in the future enter into interest rate swap agreements to change the fixed/variable interest rate mix of the debt portfolio in order to maintain an appropriate balance of fixed-rate and variable-rate debt and to mitigate the impact of volatile interest rates. These derivatives are accounted for in accordance with ASC 815, Derivatives and Hedging (“ASC 815”).
On the date the derivative instrument is entered into, the Company designates the derivative as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). Changes in the fair value of a derivative that is designated as, and meets all required criteria for, a cash flow hedge are recorded in other comprehensive income or loss and reclassified into the statement of operations as the underlying hedged item affects earnings, such as when quarterly settlements are made on the hedged forecasted transaction. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness, if any, is recorded in the current statement of operations. Also, changes in the fair value of a derivative that is not designated as a hedge, if any, are entirely recorded in the statement of operations. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions; this process includes relating all derivatives that are designated as cash flow hedges to specific balance sheet assets or liabilities. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the respective derivative. In addition, if the forecasted transaction is no longer probable of occurring, any amounts in accumulated other comprehensive income or loss (“AOCI”) related to the derivative are recorded in the statement of operations for the current period.
The Company had two interest rate swap contracts to effectively convert a portion of its variable-rate debt to fixed-rate debt, both of which were entered into on July 14, 2006 and expired on July 14, 2011.
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
On December 4, 2009, the Company amended and restated its prior senior secured credit facility, at which time the Company de-designated and re-measured its two interest rate swaps and discontinued hedge accounting prospectively in accordance with ASC 815.
The following table summarizes the effect of the expired interest rate swaps on the consolidated statement of operations and AOCI, after being de-designated on December 4, 2009:
5. SUPPLEMENTAL BALANCE SHEET INFORMATION
Prepaid expenses and other current assets were comprised of the following:
Other long-term liabilities were comprised of the following:
6. SUPPLEMENTAL CASH FLOW INFORMATION
The following supplemental cash flow information is provided for the periods reported:
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
7. EXIT OR DISPOSAL ACTIVITIES
The following table summarizes exit or disposal activities during the 26 weeks ended July 28, 2012 related to targeted reductions in administrative and support functions and store closings in fiscal 2012 and fiscal 2011:
The above provisions were included within selling, general and administrative expense.
8. EMPLOYEE DEFINED AND POSTRETIREMENT BENEFIT PLANS
The Company provides benefits to certain current and former associates who are eligible under a qualified defined benefit pension plan and various non-qualified supplemental pension plans (collectively, the “Pension Plans”). Net periodic benefit expense for the Pension Plans includes the following (income) and expense components:
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
During the 26 weeks ended July 28, 2012, contributions of $17,237 were made to the Pension Plans. The Company anticipates contributing an additional $550 to fund the Pension Plans in 2012 for an annual total of $17,787.
The Company also provides medical and life insurance benefits to certain former associates under a postretirement benefit plan (“Postretirement Benefit Plan”). Net periodic benefit income for the Postretirement Benefit Plan includes the following (income) and expense components:
During the 26 weeks ended July 28, 2012, the Company contributed $131 to fund the Postretirement Benefit Plan, and anticipates contributing an additional $480 in 2012 for a net annual total of $611.
9. LONG-TERM DEBT
On April 2, 2012, in connection with the sale of two of its stores located in Rochester, New York, the Company prepaid its outstanding indebtedness of $5,374 under related mortgage loan agreements. The Company was required to pay an additional $1,026 due to the early termination. In addition, $143 of unamortized deferred financing fees related to the mortgage agreements was accelerated on the date of termination. The required additional payment and accelerated deferred financing fees were recognized in loss on exchange/extinguishment of debt.
On June 4, 2012, The Bon-Ton Department Stores, Inc. (the “Issuer”), a wholly owned subsidiary of the Parent, commenced an offer to certain eligible note holders to exchange its outstanding 10¼% Senior Notes due 2014 (the “Old Notes”) for newly issued 105/8% Second Lien Senior Secured Notes due 2017 (the “New Notes”) upon the terms and conditions set forth in the Confidential Offering Memorandum and Consent Solicitation Statement dated June 4, 2012 (the “Exchange Offer”). The Exchange Offer expired on July 3, 2012, with the Issuer receiving tenders with consents from holders of $330,017 principal amount of Old Notes, representing approximately 71% of the outstanding Old Notes. Upon the July 9, 2012 settlement, $329,998 principal amount of New Notes was issued. The New Notes are guaranteed by the Parent and by each of its subsidiaries, other than the Issuer, that is an obligor under the Company’s Second Amended and
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
Restated Loan and Security Agreement (the “Second Amended Revolving Credit Facility”). The New Notes are secured by a second-priority lien on collateral owned by the Issuer and each of the guarantors consisting of substantially all of the Issuer’s and guarantors’ tangible and intangible assets securing the Second Amended Revolving Credit Facility, except for capital stock of the Issuer and certain of the Issuer’s subsidiaries and certain other exceptions. The New Notes will mature on July 15, 2017. Interest on the New Notes is payable March 15 and September 15 of each year, beginning September 15, 2012. In addition, the Issuer entered into a supplemental indenture adopting amendments to the indenture under which the Old Notes were issued to permit the liens securing the New Notes. Fees associated with the exchange of debt totaled $6,301 and were recognized in loss on exchange/extinguishment of debt.
10. INCOME TAXES
The provisions codified within ASC Topic 740, Income Taxes (“ASC 740”), require companies to assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. In accordance with ASC 740, the Company maintained a full valuation allowance throughout fiscal 2011 and the 26 weeks ended July 28, 2012 on all of the Company’s net deferred tax assets. The Company’s deferred tax asset valuation allowance totaled $182,160 and $147,148 at July 28, 2012 and January 28, 2012, respectively.
Given the Company’s valuation allowance position, no tax benefit was recognized on the Company’s loss before income taxes in the 13 and 26 weeks ended July 28, 2012 and July 30, 2011. The income tax provision recorded in the 26 weeks ended July 28, 2012 reflects certain state income tax expense and recognition of deferred tax liabilities associated with indefinite-lived assets. The income tax benefit recorded in the 26 weeks ended July 30, 2011 reflects a $3,224 benefit resulting from reclassifying from accumulated other comprehensive loss the residual tax effect associated with certain interest rate swap contracts which expired on July 14, 2011, partially offset by certain state income tax expense and recognition of deferred tax liabilities associated with indefinite-lived assets.
As a result of the deferred tax asset valuation allowance maintained throughout fiscal 2011 and the 26 weeks ended July 28, 2012, no tax effect was recorded on the changes recognized within other comprehensive income (loss) for all periods presented with regard to the pension and postretirement benefit plans. The changes recognized within other comprehensive loss for the 13 and 26 weeks ended July 30, 2011 with regard to the cash flow derivatives are net of the $3,224 tax benefit discussed above.
As of July 28, 2012, it is reasonably possible that gross unrecognized tax benefits could decrease by $214 within the next 12 months due to the expiration of certain statutes of limitations.
11. CONTINGENCIES
The Company is party to legal proceedings and claims that arise during the ordinary course of business. In the opinion of management, the ultimate outcome of any such litigation and claims will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
Certain debt obligations of the Company, which constitute debt obligations of the Issuer, are guaranteed by the Parent and by each of its subsidiaries, other than the Issuer, that is an obligor under the Company’s Second Amended Revolving Credit Facility. Separate financial statements of the Parent, the Issuer and such subsidiary guarantors are not presented because the guarantees by the Parent and each wholly owned subsidiary guarantor are joint and several, full and unconditional, except for certain customary limitations. These customary limitations include releases of a guarantee (i) if the guarantor no longer
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
guarantees other indebtedness of the Issuer; (ii) if there is a sale or other disposition of the capital stock of a guarantor and if such sale complies with the covenant regarding asset sales; and (iii) if the subsidiary guarantor is properly designated as an “unrestricted subsidiary.”
The condensed consolidating financial information for the Parent, the Issuer and the guarantor and non-guarantor subsidiaries as of July 28, 2012 and January 28, 2012 and for the second quarter in each of 2012 and 2011 and the 26 weeks ended July 28, 2012 and July 30, 2011 as presented below has been prepared from the books and records maintained by the Parent, the Issuer and the guarantor and non-guarantor subsidiaries. The condensed financial information may not necessarily be indicative of the results of operations or financial position had the guarantor and non-guarantor subsidiaries operated as independent entities. Certain intercompany revenues and expenses included in the subsidiary records are eliminated in consolidation. As a result of this activity, an amount due to/due from affiliates will exist at any time.
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
The Bon-Ton Stores, Inc. Condensed Consolidating Balance Sheet July 28, 2012
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
The Bon-Ton Stores, Inc. Condensed Consolidating Balance Sheet January 28, 2012
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
The Bon-Ton Stores, Inc. Condensed Consolidating Statement of Operations Thirteen Weeks Ended July 28, 2012
The Bon-Ton Stores, Inc. Condensed Consolidating Statement of Comprehensive (Loss) Income Thirteen Weeks Ended July 28, 2012
THE BON-TON STORES, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (In thousands except share data)
The Bon-Ton Stores, Inc. Condensed Consolidating Statement of Operations Thirteen Weeks Ended July 30, 2011
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