FORM 10-Q
SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
(MARK ONE)
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[X] |
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 1, 2003
or
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[ ] |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
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OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____ to ____
Commission File No. 1-8739
Burlington Coat Factory Warehouse Corporation
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(Exact name of registrant as specified in its charter)
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Delaware |
22-1970303 |
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(State or other jurisdiction of |
(I.R.S. Employer |
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incorporation or organization) |
Identification Number) |
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1830 Route 130 North |
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Burlington, New Jersey |
08016 |
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------------------------------ |
---------------------------- |
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(Address of principal |
(Zip Code) |
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executive offices) |
Registrant's telephone number, including area code: (609) 387-7800
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Indicate by check mark whether the Registrant (1) has filed all reports required by |
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Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding |
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12 months (or for such shorter period that the registrant was required to file such |
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Reports) and (2) has been subject to such filing requirements for the past 90 days. |
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Yes X No |
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Indicate the number of shares outstanding of each of the issuer's classes of |
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common stock, as of the latest practicable date. |
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Class |
Outstanding at March 31, 2003 |
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-------------------------- |
--------------------------------- |
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Common stock, par value $1 |
44,541,866 |
Page 1 of 23
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION
AND SUBSIDIARIES
I N D E X
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Part I - Financial Information: |
Page |
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Item 1. Financial Statements: |
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Condensed Consolidated Balance Sheets - March 1, 2003 and June 1, 2002 (unaudited) |
3 |
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Condensed Consolidated Statements of Operations - Nine and Three Months Ended March 1, 2003 and March 2, 2002 (unaudited) |
4 |
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Condensed Consolidated Statements of Cash Flows - Nine Months Ended March 1, 2003 and March 2, 2002 (unaudited) |
5 |
| Notes to Condensed Consolidated Financial Statements |
6 - 11 |
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Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition |
12 - 18 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
19 |
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19 |
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Part II - Other Information: |
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| Item 6. Exhibits and Reports on Form 8-K |
20 |
| SIGNATURES |
21 |
| CERTIFICATIONS |
22 |
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***************** |
Page 2 of 23
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(All amounts in thousands)
(unaudited)
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March 1, |
June 1, |
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2003 |
2002 |
|
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ASSETS |
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Current Assets: |
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Cash and Cash Equivalents |
$ 78,887 |
$ 122,774 |
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Restricted Cash |
6,200 |
6,200 |
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Accounts Receivable |
18,445 |
16,273 |
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Merchandise Inventories |
583,386 |
564,652 |
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Deferred Tax Asset |
11,212 |
10,534 |
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Prepaid and Other Current Assets |
23,770 |
30,282 |
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|
||
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Total Current Assets |
721,900 |
750,715 |
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Property and Equipment (Net of Accumulated |
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Intangible and Other Assets (Net of Accumulated |
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Other Assets |
1,267 |
7,848 |
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Total Assets |
$1,319,763 |
$1,273,791 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current Liabilities: |
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Accounts Payable |
$ 329,615 |
$ 372,726 |
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Income Taxes Payable |
16,309 |
5,424 |
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Other Current Liabilities |
139,084 |
135,424 |
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Current Maturities of Long Term Debt and |
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|
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Total Current Liabilities |
485,928 |
514,402 |
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Long Term Debt and Obligations Under |
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Other Liabilities |
13,634 |
13,795 |
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Deferred Tax Liability |
562 |
851 |
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Stockholders' Equity: |
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Preferred Stock |
- |
- |
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Common Stock |
49,766 |
49,749 |
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Capital in Excess of Par Value |
21,695 |
21,259 |
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Retained Earnings |
773,447 |
712,089 |
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Note Receivable from Stock Options Exercised |
(82) |
(100) |
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Accumulated Other Comprehensive Income (Loss) |
(2) |
(2) |
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Treasury Stock at Cost |
(59,847) |
(60,497) |
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Total Stockholders' Equity |
784,977 |
722,498 |
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Total Liabilities and Stockholders' Equity |
$1,319,763 |
$1,273,791 |
Page 3 of 23
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(unaudited)
(All amounts in thousands, except share data)
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Nine Months Ended |
Three Months Ended |
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March 1, |
March 2, |
March 1, |
March 2, |
|
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2003 |
2002 |
2003 |
2002 |
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REVENUES: |
||||
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Net Sales |
$2,088,797 |
$1,975,607 |
$ 799,916 |
$ 779,820 |
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Other Income |
21,050 |
18,740 |
7,463 |
7,729 |
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2,109,847 |
1,994,347 |
807,379 |
787,549 |
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COSTS AND EXPENSES: |
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Cost of Sales (Exclusive of |
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|
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Selling and Administrative Expenses |
636,368 |
606,515 |
212,904 |
207,621 |
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Depreciation |
51,516 |
42,773 |
17,791 |
15,102 |
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Amortization |
2,915 |
2,973 |
971 |
1,280 |
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Interest Expense |
2,103 |
651 |
1,040 |
109 |
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2,009,759 |
1,901,329 |
748,325 |
727,817 |
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Income Before Provision for Income Taxes |
100,088 |
93,018 |
59,054 |
59,732 |
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Provision for Income Taxes |
37,844 |
35,024 |
22,328 |
22,426 |
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Net Income |
$ 62,244 |
$ 57,994 |
$ 36,726 |
$ 37,306 |
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Basic Net Income Per Share |
$ 1.40 |
$ 1.31 |
$ .83 |
$ .84 |
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Weighted Average Shares Outstanding |
44,488,524 |
44,404,551 |
44,495,421 |
44,405,824 |
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Dividends Per Share |
$ 0.02 |
$ 0.02 |
$ - |
$ - |
Page 4 of 23
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(unaudited)
(All amounts in thousands)
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Nine Months Ended |
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March 1, |
March 2, |
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2003 |
2002 |
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OPERATING ACTIVITIES |
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Net Income |
$ 62,244 |
$ 57,994 |
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Adjustments to Reconcile Net Income to Net Cash |
||
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Depreciation and Amortization |
54,431 |
45,746 |
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Provision for Losses on Accounts Receivable |
7,650 |
8,129 |
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Provision for Deferred Income Taxes |
(967) |
352 |
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(Gain) Loss on Disposition of Fixed Assets |
(1,100) |
846 |
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Non-Cash Rent Expense and Other |
(261) |
771 |
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Changes in Operating Assets and Liabilities: |
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Restricted Cash and Cash Equivalents |
- |
(6,200) |
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Accounts Receivable |
(9,650) |
(12,240) |
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Merchandise Inventories |
(18,734) |
(38,503) |
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Prepaids and Other Current Assets |
6,512 |
10,323 |
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Accounts Payable |
(43,111) |
107,197 |
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Other Current Liabilities |
14,546 |
17,658 |
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Net Cash Provided by Operating Activities |
71,560 |
192,073 |
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INVESTING ACTIVITIES |
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Acquisition of Property and Equipment |
(100,387) |
(123,664) |
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Proceeds From Sale of Fixed Assets |
2,385 |
16 |
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Proceeds From Sale of Long Term Investments |
- |
6,200 |
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Acquisition of Leaseholds |
(20,775) |
(25,269) |
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Issuance of Notes Receivable |
(181) |
(7,591) |
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Receipts Against Long Term Notes Receivable |
4,053 |
44 |
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Minority Interest and Other |
97 |
74 |
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Net Cash Used in Investing Activities |
(114,808) |
(150,190) |
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FINANCING ACTIVITIES |
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Proceeds from Long Term Debt |
- |
2,000 |
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Principal Payments on Long Term Debt |
(856) |
(521) |
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Payment of Dividends |
(886) |
(888) |
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Issuance of Common Stock Upon Exercise of |
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|
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Reissuance of Treasury Stock |
918 |
802 |
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Net Cash Provided by (Used in) Financing Activities |
(639) |
1,453 |
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Increase (Decrease) in Cash and Cash Equivalents |
(43,887) |
43,336 |
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Cash and Cash Equivalents at Beginning of Period |
122,774 |
77,407 |
|
|
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Cash and Cash Equivalents at End of Period |
$ 78,887 |
$ 120,743 |
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Interest Paid: |
$ 2,007 |
$ 771 |
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Income Taxes Paid: |
$ 27,926 |
$ 20,210 |
Page 5 of 23
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NINE AND THREE MONTHS ENDED MARCH 1, 2003 AND MARCH 2, 2002
1. The condensed consolidated financial statements include the accounts of Burlington Coat Factory Warehouse Corporation and its subsidiaries ("the Company"). All significant intercompany accounts and transactions have been eliminated. The accompanying financial statements are unaudited, but in the opinion of management reflect all adjustments (which are of a normal and recurring nature) necessary for a fair presentation of the results of operations for the interim periods. Because the Company's business is seasonal in nature, the operating results for the nine and three months ended March 1, 2003 and the corresponding periods ended March 2, 2002 are not necessarily indicative of results for the fiscal year.
2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. 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 filed with the Securities and Exchange Commission on August 27, 2002.
3. Merchandise inventories as of March 1, 2003 and June 1, 2002 are valued at the lower of cost, on a First In First Out (FIFO) basis, or market, as determined by the retail inventory method.
4. The Company classifies its investments in debt securities into held-to-maturity, available-for-sale or trading categories in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 115, Accounting For Certain Investments in Debt and Equity Securities. Debt securities are classified as held-to-maturity when the Company has the positive intent and ability to hold the securities to maturity. Held-to-maturity securities are stated at amortized cost. The Company's debt securities not classified as held-to-maturity are classified as available-for-sale and are carried at fair market value, with unrealized gains and losses, net of tax, reported as a separate component in stockholders' equity. During the nine and three months ended March 2, 2002, $6.2 million and $2.0 million of the Company's held-to-maturity investments were called by the issuing authority, respectively. Proceeds from the sale of these investments were used to purchase money market investments and are classified as restricted cash and cash equivalents on the Company's balance sheet at March 2, 2002. The $6.2 million of money market investments are pledged as collateral for certain insurance contracts.
5. The Company records revenue at the time of sale and delivery of merchandise. The Company records revenue net of allowances for estimated future returns. The Company accounts for layaway sales and leased department revenue in compliance with Staff Accounting Bulletin ("SAB") No. 101, Revenue Recognition in Financial Statements. Layaway sales are recognized upon delivery of merchandise to the customer. The amount of cash received upon initiation of the layaway is recorded as a deposit liability within other current liabilities.
6. As of March 1, 2003 the Company had a deferred tax liability of $0.6 million and a current deferred tax asset of $11.2 million. As of June 1, 2002, the Company had a deferred tax liability of $0.9 million and a current deferred tax asset of $10.5 million. Valuation allowances were not required. Deferred tax assets consisted primarily of certain operating costs, provisions for uncollectible receivables, and certain inventory related costs, not currently deductible for tax purposes. Deferred tax liabilities primarily reflected the excess of tax depreciation over book depreciation.
Page 6 of 18
7. Intangible assets consists primarily of leasehold purchases, which are amortized over the minimum life of the related lease term (See footnote 23a). Intangible assets as of March 1, 2003 and June 1, 2002 are as follows (all amounts in thousands) (unaudited):
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March 1, 2003 |
June 1, 2002 |
|||||
|
Gross Carrying |
Accumulated |
|
Gross Carrying |
Accumulated |
|
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Leasehold Purchases |
$66,878 |
$16,091 |
$50,787 |
$46,102 |
$13,199 |
$32,903 |
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Other |
463 |
234 |
229 |
463 |
210 |
253 |
|
$67,341 |
$16,325 |
$51,016 |
$46,565 |
$13,409 |
$33,156 |
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Amortization expense amounted to $2.9 million and $1.0 million for the nine and three months ended March 1, 2003 and $3.0 million and $1.3 million for the nine and three months ended March 2, 2002. Amortization expense for each of the next five fiscal years is estimated to be as follows: fiscal 2004 - $5.5 million; fiscal 2005 - $4.8 million; fiscal 2006 - $3.6 million; fiscal 2007 - $3.4 million; fiscal 2008 - $3.1 million. Leasehold purchases made during the nine months ended March 1, 2003 amounted to $20.8 million. Leaseholds acquired during the nine months ended March 1, 2003 have a weighted average amortization period of approximately eight years.
8. Other assets consists primarily of notes receivable.
9. Other current liabilities primarily consisted of sales tax payable, unredeemed store credits and gift certificates, accrued insurance costs, accrued operating expenses, payroll taxes payable and other miscellaneous items.
10. During the fourth quarter of fiscal 2001, management approved a plan to relocate several stores during fiscal 2002. At that time, the Company established a reserve of $2.4 million for lease commitments and other expenses to be incurred subsequent to the closing of these stores. During the first six months of fiscal 2003, $0.4 million of payments for rent and other rent related expenses were applied against this reserve, respectively. As of March 1, 2003, all costs related to the store closings had been paid.
11. Long-term debt consists of (unaudited) (in thousands):
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March 1, |
June 1, |
|
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Industrial Revenue Bonds, 6.0%, |
|
|
|
Promissory note, non-interest |
|
|
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Capital Lease Obligations |
26,794 |
13,580 |
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Subtotal |
35,582 |
23,073 |
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Less Current Portion |
(920) |
(828) |
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Long-Term Debt |
$34,662 |
$22,245 |
On December 5, 2001, the Company borrowed $2.0 million from the Burlington County Board of Chosen Freeholders, the proceeds of which were used to partially finance the acquisition and construction of a new warehouse facility in Edgewater Park, New Jersey. The loan is non-interest bearing and is payable in monthly installments of $16,667 per month through January 1, 2012.
12. On October 24, 2002, the Board of Directors of the Company declared a cash dividend in the amount of two cents ($.02) per share. The cash dividend was paid on November 30, 2002 to stockholders of record on November 6, 2002 and amounted to $0.9 million.
Page 7 of 23
13. The Company presents comprehensive income as a component of stockholders' equity in accordance with SFAS No. 130, Reporting Comprehensive Income. For the nine and three months ended March 1, 2003, comprehensive income consisted solely of net income.
14. The Company has one reportable segment, operating within the United States. Sales by major product categories are as follows (in thousands)(unaudited):
|
Nine Months Ended |
Three Months Ended |
|||
|
March 1, |
March 2, |
March 1, |
March 2, |
|
|
2003 |
2002 |
2003 |
2002 |
|
|
Apparel |
$1,633,183 |
$1,539,554 |
$639,151 |
$618,844 |
|
Home Products |
455,614 |
436,053 |
160,765 |
160,976 |
|
$2,088,797 |
$1,975,607 |
$779,916 |
$779,820 |
|
Apparel includes all clothing items for men, women and children and apparel accessories, such as jewelry, perfumes and watches. Home Products includes linens, home furnishings, gifts, baby furniture and baby furnishings.
15. The Company records the net of leased department revenues and related costs to other income. Leased department income, included in other income, amounted to $6.5 million and $2.6 million for the nine and three month periods ended March 1, 2003, compared with $7.1 million and $2.8 million for the similar periods of a year ago.
16. Rebates and allowances received from vendors that are dependent on purchases or inventories are recognized as a reduction of costs of goods sold when the related inventory is sold or marked down. Rebates and allowances not tied directly to purchases are recognized as a reduction of selling, general and administrative expense when earned (See footnote 23j).
17. In March 1998, the AICPA issued Statement of Position ("SOP") 98-1, Accounting For the Costs of Computer Software Developed For or Obtained for Internal-Use. The SOP requires the capitalization of certain costs incurred in connection with developing or obtaining software for internal use. The Company capitalized $3.1 million and $1.0 million relating to these costs during the nine and three months ended March 1, 2003, respectively. For the similar comparative nine and three month periods of a year ago, the Company capitalized $1.9 million and $0.6 million, respectively.
18. The Company's net advertising costs consist primarily of newspaper and television costs. The production costs of net advertising are charged to expenses as incurred. Net advertising expenses for the nine and three month periods ended March 1, 2003 were $44.9 million and $11.4 million, respectively. For the nine and three month periods ended March 2, 2002, net advertising costs amounted to $47.3 million and $15.1 million, respectively.
19. Basic and diluted net income per share is based on the weighted average number of shares outstanding during each period. The amounts used in the calculation of dilutive net income per share are as follows (unaudited):
Page 8 of 23
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Nine |
Nine |
Three |
Three |
|
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(all amounts in thousands, except per share data) |
||||
|
Net Income |
$62,244 |
$57,994 |
$36,726 |
$37,306 |
|
Weighted Average |
|
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|
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Effect of Dilutive |
|
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Weighted Average |
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Diluted Net Income Per |
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20. The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk.
21. Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash, cash equivalents and investments. The Company manages the credit risk associated with cash equivalents and investments by investing with high-quality institutions and, by policy, limiting investments only to those which meet prescribed investment guidelines. The Company has a policy of making investments in debt securities with short-term ratings of A-1 (or equivalent) or long-term ratings of A and A-2 (or equivalent). The Company maintains cash accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses from maintaining cash accounts in excess of such limits. Management believes that it is not exposed to any significant risks on its cash and cash equivalent accounts.
22. Certain reclassifications have been made to the prior year's financial statements to conform to the classifications used in the current year.
Page 9 of 23
23. a. In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 requires that all business combinations initiated after June 30, 2001 be accounted for under the purchase method and addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination. SFAS No. 142 addresses the initial recognition and measurement of intangible assets acquired outside of a business combination and the accounting for goodwill and other intangible assets subsequent to their acquisition. SFAS No. 142 provides that intangible assets with finite useful lives be amortized and that goodwill and intangible assets with indefinite lives will not be amortized, but will rather be tested at least annually for impairment. Under the provisions of SFAS No. 142, any impairment loss identified upon adoption of this standard is recognized as a cumulative effect of a change in accounting principle. Any impairment loss incurred subsequent to initial adoption of SFAS No. 142 is recorded as a charge to current period earnings. SFAS 142 is effective for fiscal years beginning after December 15, 2001 for all goodwill and other intangible assets recognized in an entity's balance sheet at that date regardless of when those assets were initially recognized. The Company adopted SFAS No. 141 on July 1, 2001 and determined that the adoption had no effect on the Company's earnings or financial position. The Company adopted SFAS No. 142 on June 2, 2002. The adoption did not have a material effect on the Company's earnings or financial position.
b. In June 2001, the FASB issued SFAS No. 143, Accounting for Asset Retirement Obligations. SFAS No. 143 addresses accounting standards for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs and is effective for fiscal years beginning after June 15, 2002. The Company has assessed the impact of the adoption of this statement on its consolidated financial statements and determined that it will not have a material effect on the Company's earnings or financial position.
c. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144 supersedes SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of, and the reporting provisions of APB Opinion No. 30, Reporting the Results of Operation - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the Disposal of a Segment of a Business. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 on June 2, 2002. The Company's adoption of this statement had no effect on its consolidated financial statements.
d. The FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, in April 2002. SFAS No. 145 rescinds, amends or makes various technical corrections to certain existing authoritative pronouncements. Among other things, SFAS No. 145 will change the accounting for certain gains and losses resulting from extinguishments of debt by requiring that a gain or loss from extinguishments of debt be classified as an extraordinary item only if it meets the specific criteria of APB Opinion No. 30. SFAS No. 145 also requires that cash flows from all trading securities be classified as cash flows from operating activities in its statement of cash flows. The provisions of this statement related to the rescission of SFAS No. 4 are effective for fiscal years beginning after May 15, 2002. Certain provisions of the statement relating to SFAS No. 13 are effective for transactions occurring after May 15, 2002. All other provisions of the statement are effective for financial statements issued on or after May 15, 2002. These provisions had no impact on the Company's financial statements.
e. The FASB issued SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities, in June 2002. SFAS No. 146 changes the standards for recognition of a liability for a cost associated with an exit or disposal activity. SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. SFAS No. 146 establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 nullifies the guidance of Emerging Issues Task Force ("EITF") 94-3 under which an entity recognized a liability for an exit cost on the date that the entity committed itself to an exit plan. SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002. The Company has not entered into any exit or disposal activities subsequent to December 31, 2002.
Page 10 of 23
f. In December 2002, the FASB issued SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an Amendment of FASB Statement No. 123. SFAS No. 148 amends FASB No. 123, Accounting for Stock-Based Compensation and Accounting Principles Board ("APB") Opinion No. 28, Interim Financial Reporting. It provides for alternative methods of transition for an entity which voluntarily changes to the fair value based method of accounting for stock-based employee compensation and amends the disclosure requirements of an entity's accounting for stock-based compensation on both an annual and interim financial reporting basis. Certain provisions of FASB No. 148 related to FASB No. 123 and APB No. 28 are effective for reports containing condensed financial statements for interim periods beginning after December 15, 2002. All other provisions of the statement are effective for financial statements for fiscal years ending after December 15, 2002. This disclosure is not required for the current interim period.
g. In May 2000, the Emerging Issues Task Force ("EITF") issued EITF Issue No. 00-14, Accounting for Certain Sales Incentives. This Issue addresses the recognition, measurement and income statement classification of certain sales incentives. EITF No. 00-14 is effective for annual or interim financial statements for periods beginning after December 15, 2001. The Company has assessed the impact of EITF No. 00-14 and determined that the Issue did not have a material effect on the Company's earnings or financial position.
h. In May 2000, the EITF issued EITF Issue No. 00-25, Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor's Products. This Issue addresses the financial statement classification of consideration received by a reseller from a vendor. EITF No. 00-25 is effective for annual or interim financial statements for periods beginning after December 15, 2001. The Company has assessed the impact of EITF No. 00-25 and determined that the Issue did not have a material effect on the Company's earnings or financial position.
i. In November 2001, the EITF issued EITF Issue No. 01-9, Accounting for Consideration Given to a Customer (Including a Reseller of the Vendor's Products). This Issue requires, among other things, that consideration paid to customers should be classified as a reduction of revenue unless certain criteria are met. EITF No. 01-9 is effective for annual or interim financial statements for periods beginning after December 15, 2001. The Company has assessed the impact of EITF No. 01-9 and determined that the Issue did not have an impact on the Company's earnings or financial position.
j. In November 2002, the EITF issued sections of EITF Issue No. 02-16, Accounting by a Customer (including a Reseller) for Certain Consideration Received from a Vendor. The released sections of Issue No. 02-16 specifically address when a reseller should account for cash consideration received from a vendor as an adjustment of cost of sales, revenue, or as a reduction to a cost incurred by the reseller. The Company has assessed the impact of EITF No. 02-16 and determined that the Issue did not have a material effect on the Company's earnings or financial position.
Page 11 of 23
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Results of Operations.
Critical Accounting Policies and Estimates
The Company's condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue returns, bad debts, inventories, income taxes, financing operations, asset impairment, retirement benefits, risk participation agreements, reserves for closed stores and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
The Company believes that the following represent its more critical estimates and assumptions used in the preparation of the consolidated financial statements, although the list is not exhaustive:
The Company's inventory is valued at the lower of cost or market using the retail first-in, first-out ("FIFO") inventory method. Under the retail inventory method, the valuation of inventory at cost and resulting gross margin are calculated by applying a calculated cost to retail ratio to the retail value of inventory. The retail inventory method is an averaging method that has been widely used in the retail industry due to its practicality. Additionally, it is recognized that the use of the retail inventory method will result in valuing inventory at the lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventory. Inherent in the retail inventory method calculation are certain significant management judgments and estimates including, merchandise markon, markups, markdowns and shrinkage which significantly impact the ending inventory valuation at cost as well as the resulting gross margin. Management believes that the Company's retail inventory method and application of FIFO provides an inventory valuation which approximates cost using a first-in, first-out assumption and results in carrying value at the lower of cost or market. Estimates are used to charge inventory shrinkage for the first three fiscal quarters of the fiscal year. An actual physical inventory is conducted at the end of the fiscal year to calculate actual shrinkage. The Company also estimates its required markdown reserves. If actual market conditions are less favorable than those projected by management, additional markdowns may be required. While the Company makes estimates on the basis of the best information available to it at the time estimates are made, over accruals or under accruals may be uncovered as a result of the physical inventory requiring fourth quarter adjustments.
The Company has risk participation agreements with insurance carriers with respect to workers' compensation and liability insurance. Pursuant to these arrangements, the Company is responsible for paying claims up to designated dollar limits. The amounts included in the Company's costs related to these claims are estimated and can vary based on changes in assumptions or claims experience included in the associated insurance programs.
The Company records reserves for future revenue returns. The reserves are based on current revenue volume and historical claim experience. If claims experience differs from historical levels, revisions in the Company's estimates may be required.
The Company tests for recoverability of long-lived assets whenever events or changes in circumstances indicate that its carrying amount may not be recoverable. This includes performing an analysis of anticipated undiscounted future net cash flows of long-lived assets. If the carrying value of the related assets exceeds the undiscounted cash flow, the Company reduces the carrying value to its fair value, which is generally calculated using discounted cash flows. Various factors including future sales growth and profit margins are included in this analysis. To the extent these future projections change, the conclusion regarding impairment may differ from the estimates. Future adverse changes in market conditions or poor operating results of underlying assets could result in losses or an inability to recover the carrying value of the assets that may not be reflected in an asset's current carrying value, thereby possibly requiring an impairment charge in the future.
Page 12 of 23
The Company maintains allowances for doubtful accounts for estimated losses resulting from the inability of its customers to make required payments. If the financial condition of the Company's customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Results of Operations
The following table sets forth certain items in the condensed consolidated statements of operations as a percentage of net sales for the nine and three month periods ended March 1, 2003 and March 2, 2002.
|
|
Percentage of Net Sales |
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Nine Months Ended |
Three Months Ended |
|||
|
March 1, |
March 2, |
March 1, |
March 2, |
|
|
2003 |
2002 |
2003 |
2002 |
|
|
Net sales |
100.0% |
100.0% |
100.0% |
100.0% |
|
Costs and expenses: |
|
|
|
|
|
Selling & adminis- |
|
|
|
|
|
Depreciation |
2.5 |
2.2 |
2.2 |
1.9 |
|
Amortization |
0.1 |
0.1 |
0.1 |
0.2 |
|
Interest expense |
0.1 |
- |
0.1 |
- |
|
96.2 |
96.2 |
93.5 |
93.3 |
|
|
Other income |
1.0 |
0.9 |
0.9 |
1.0 |
|
Income before income |
|
|
|
|
|
Provision for income |
|
|
|
|
|
Net Income |
3.0% |
2.9% |
4.6% |
4.8% |
Net sales increased $113.2 million (5.7%) to $2.1 billion for the nine month period ended March 1, 2003 compared with the nine month period ended March 2, 2002. Comparative stores sales (i.e. same store sales for comparative weeks) decreased 1.1%. Twelve new Burlington Coat Factory stores, five new MJM Designer Shoes stores and three
Page 13 of 23
relocated stores opened during the current fiscal year contributed $81.6 million to this year's net sales. Sales from stores operating in the current fiscal year but not operating during the comparative period last year contributed $94.7 million to net sales. Eleven stores which were in operation a year ago, but which were closed prior to this year, contributed $31.4 million to last year's sales. The three stores closed due to relocation and five additional stores closed during the current fiscal year contributed $16.8 million to last year's sales.
Net sales increased $20.1 million (2.6%) for the three month period ended March 1, 2003, compared with the similar period a year ago. Comparative store sales decreased 2.5% for the three month period. December comparative store sales decreased 4.2%. January comparative store sales increased 2.4%. February comparative store sales were down 2.8%. During the third fiscal quarter, twenty new and relocated stores contributed $37.6 million to this year's third quarter sales. Sales from stores operating during the current year's third quarter, but not open in the comparative period a year ago, amounted to $14.1 million. Stores closed prior to this year contributed $6.4 million to last year's sales. Stores closed during this fiscal year contributed $6.2 million to last year's sales during their non-comparative period of a year ago.
The Company plans to open an additional stand-alone shoe store by the end of fiscal 2003 along with six additional Burlington Coat Factory stores.
Other income (consisting of investment income, rental income from leased departments, and miscellaneous items) was $21.1 million for the nine months ended March 1, 2003 and $18.7 million for the nine months ended March 2, 2002. For the three month period ended March 1, 2003, other income amounted to $7.5 million compared with $7.7 million for the similar period of a year ago. For both the nine and three month periods, increases in miscellaneous income were offset by decreases in rental income and investment income. Included in other income is a $1.5 million gain realized on the sale of two non-store properties during fiscal 2003 and $1.2 million in miscellaneous non-recurring items. Lower investment income resulted primarily from decreases in interest rates and decreases in investable funds during the comparative periods.
Cost of sales increased by $68.4 million (5.5%) for the nine month period ended March 1, 2003 compared with the similar period of a year ago. For the three months ended March 1, 2003, compared with the three months ended March 2, 2002, cost of sales increased from $503.7 million to $515.6 million. As a percentage of sales, cost of sales was 63.0% and 64.4% for the nine and three months ended March 1, 2003, respectively. For the comparable nine and three months ended March 2, 2002, cost of sales as a percentage of sales was 63.2% and 64.6%, respectively.
Page 14 of 23
Selling and administrative expenses were $636.4 million and $212.9 million for the nine and three months ended March 1, 2003, respectively, compared with $606.5 million and $207.6 million for the comparative periods of a year ago. As a percentage of sales, selling and administrative expenses were 30.5% and 26.7% for the nine and three months ended March 2, 2002, respectively. For the comparative nine and three month periods ended March 1, 2003, selling and administrative expenses were 30.7% and 26.6% of sales, respectively. The dollar increase in selling and administrative expenses was primarily the result of the increased number of stores operating during the nine and three month periods of this fiscal year compared with the similar periods of a year ago.
Depreciation expense was $51.5 million and $17.8 million, respectively, for the nine and three months ended March 1, 2003 compared with $42.8 million and $15.1 million for the similar periods of a year ago. The increase is due to capital additions made by the Company for new store purchases, improvements, expansions and store remodels over the past two years. Amortization of leasehold purchases and other intangible assets amounted to $2.9 million and $1.0 million, respectively, for the nine and three months ended March 1, 2003. This compares with $3.0 million and $1.3 million, respectively, for the nine and three month periods ended March 2, 2002.
Interest expense increased $1.5 million for the nine months ended March 1, 2003 compared with the similar period of a year ago. For the three months ended March 1, 2003, interest expense increased $0.9 million compared with the three months ended March 2, 2002. The nine and three month increase in interest expense is primarily related to capital lease transactions entered into during the fourth quarter of fiscal 2002 and the third quarter of fiscal 2003. Interest expense related to the Company's capital lease obligations amounted to $1.5 million and $0.9 million for the nine and three month periods ended March 1, 2003, respectively. Interest expense relating to borrowings under the Company's lines of credit amounted to $0.2 million for the nine months ended March 1, 2003 compared with $0.3 million for the comparative period a year ago.
The provision for income taxes increased to $37.8 million for the nine months ended March 1, 2003 from $35.0 million for the similar period of a year ago. For the three months ended March 1, 2003, the provision for income taxes decreased to $22.3 million from $22.4 million for the comparative quarter of last fiscal year. The effective tax rate for the nine and three months ended March 1, 2003 was 37.8% compared with 37.7% and 37.5% for the nine and three months ended March 2, 2002, respectively.
Net income was $62.2 million and $36.7 million, respectively, for the nine and three months ended March 1, 2003 compared with $58.0 million and $37.3 million, respectively, for the similar periods of a year ago. Income per share for the current fiscal year's nine and three month periods ended March 1, 2003, respectively, was $1.40 and $0.83 per share, compared with $1.31 and $0.84 per share for the comparative nine and three month periods of a year ago.
The Company's business is seasonal, with its highest sales occurring in the months of September, October, November, December and January of each year. The Company's net income generally reflects the same seasonal pattern as its net sales. In the past, substantially all of the Company's profits have been derived from operations during the months of September, October, November, December and January.
Page 15 of 23
Liquidity and Capital Resources
Through the first nine months of fiscal 2003, the Company had capital expenditures amounting to $121.2 million including $20.8 million for leaseholds, $68.7 million for store expenditures, $26.1 million for upgrades and expansion of warehouse facilities and $5.6 million for computer and other equipment expenditures. The Company estimates that capital expenditures will reach approximately $162.0 million by the end of fiscal 2003.* The Company believes that its current capital expenditures and operating requirements can be satisfied from internally generated funds, short term borrowings under its revolving credit and term loan agreement and uncommitted lines of credit.
Working capital was $236.0 million at March 1, 2003 compared with $236.3 million at June 1, 2002.
Net cash provided by operating activities decreased to $71.6 million for the nine months ended March 1, 2003 from $192.1 million for the similar period a year ago.
On October 24, 2002, the Board of Directors of the Company declared a cash dividend in the amount of two cents ($.02) per share. The cash dividend was paid on November 30, 2002, to stockholders of record on November 6, 2002 and amounted to $0.9 million.
As of March 1, 2003, the Company had authorization to purchase an additional $3.6 million of its stock.
The Company's long term borrowings at March 1, 2003 consists of an industrial development bond of $7.0 million issued by the New Jersey Economic Development Authority (the "Refunding Bonds"), a $1.8 million loan from the Burlington County Board of Chosen Freeholders and capital lease obligations of $26.8 million. The Refunding Bonds consist of serial and term bonds. The serial bonds aggregate $0.6 million and mature on September 1, 2003. The term bonds consist of two portions, $1.4 million maturing on September 1, 2005 and $5.0 million maturing on September 1, 2010.
The serial bonds bear interest at 5.4% per annum, and the term bonds bear interest at the rates of 5.60% for the portion maturing on September 1, 2005 and 6.125% per annum for the portion maturing on September 1, 2010. The average interest rate and average maturity of the Refunding Bonds are 6.0% and 4.5 years, respectively.
On December 5, 2001, the Company borrowed $2.0 million from the Burlington County Board of Chosen Freeholders. The proceeds were used for part of the acquisition and development costs of a new warehouse facility in Edgewater Park, New Jersey. The loan is interest-free and matures on January 1, 2012. The loan is to be repaid in monthly installments of $16,667 which began on February 1, 2002.
The Company has capital lease obligations relating to two of its stores. The lease term for these locations extend over twenty-five years and twenty-two years, respectively. The capital lease obligations equaled the present value of the minimum lease payments under the leases and amounted to $27.1 million. At March 1, 2003, the Company's capital lease obligations were $26.8 million.
* Forward looking statement. See Safe Harbor Statement on page 18.
Page 16 of 23
The Company has in place a committed four year revolving line of credit agreement in the amount of $100.0 million. The term of the committed revolving line of credit automatically renews for an additional year on its anniversary unless the lender gives notice of its intention to not renew in which case the revolving line of credit will continue until the remaining three year term expires. The Company also has in place an additional $10.0 million in uncommitted lines of credit. The uncommitted lines of credit are cancelable by the lenders at any time. Short term borrowings against the Company's lines of credit bear interest at or below the lending bank's prime rate (4.25% at March 1, 2003).
At March 1, 2003, the Company had no borrowings under these lines of credit. Maximum borrowings amounted to $43.5 million during the first quarter and $74.8 million during the second quarter. For the comparative periods of a year ago, the maximum borrowings were $54.8 million and $50.2 million, respectively. The average borrowings under these credit lines during the first quarter period of borrowing was $19.3 million, at an average interest rate of 2.3%. During the second quarter, the average borrowings under the lines of credit was $47.3 million at an average interest rate of 2.3%. Average borrowings during last year's first quarter were $38.1 million at an average interest rate of 4.2%. During the second quarter of last year, average borrowings were $22.5 million at an average interest rate of 3.5%. During the third quarters of fiscal 2003 and fiscal 2002, there were no borrowings under these lines of credit. Borrowings under the Company's lines of credit were necessary during the current year's first nine months primarily because of the purchase of inventory during the period and capital expenditure requirements. The Company had letter of credit commitments outstanding against these lines of credit of $21.6 million as of the end of the third quarter of fiscal 2003 and $26.2 million at June 1, 2002.
Recently several retail chain stores have filed for protection from creditors under Chapter 11 of the U.S. Bankruptcy Code and subsequently have made many of their retail locations available for auction. The Company monitors such activity for desirable locations for its stores. In fiscal 2002, the Company acquired sixteen former Montgomery Ward locations. In fiscal 2003, the Company has acquired twelve former Kmart locations, the costs for which are reflected in the above noted capital budgets. Should additional locations become available from these or other retailers, the Company may seek to acquire a number of such locations in one or more transactions. If the Company undertakes such transactions, the Company may seek additional financing to fund acquisition and carry charges (i.e., the cost of rental, maintenance, tax and other obligations associated with such properties from the time of commitment to acquire to the time that such locations can be readied for opening as Company stores) related to these stores.* There can be no assurances, however, that any additional locations will become available from other retailers or that, if available, the Company will undertake to bid or be successful in bidding for such locations. Furthermore, to the extent that the Company decides to purchase additional store locations, it may be necessary to finance such acquisitions with additional long term borrowings.*
* Forward looking statement. See Safe Harbor Statement on page 18.
Page 17 of 23
Statements made in this report that are forward-looking (within the meaning of the Private Securities Litigation Reform Act of 1995) are not historical facts and involve a number of risks and uncertainties. Such statements include but are not limited to, proposed store openings and closings, proposed capital expenditures, projected financing requirements, proposed developmental projects, projected sales and earnings, and the Company's ability to maintain selling margins. Among the factors that could cause actual results to differ materially are the following: general economic conditions; consumer demand; consumer preferences; weather patterns; competitive factors, including pricing and promotional activities of major competitors; the availability of desirable store locations on suitable terms; the availability, selection and purchasing of attractive merchandise on favorable terms; import risks; the Company's ability to control costs and expenses; unforeseen computer related problems; any unforeseen material loss or casualty; the effect of inflation; and other factors that may be described in the Company's filings with the Securities and Exchange Commission. The Company does not undertake to publicly update or revise its forward-looking statements even if experience or future changes make it clear that any projected results expressed or implied will not be realized.
Page 18 of 23
Item 3. Quantitative and Qualitative Market Risk Disclosures.
The Company does not utilize financial instruments for trading purposes and holds no derivative financial instruments which could expose the Company to significant market risk. The Company's primary market risk exposure with regard to financial instruments is to changes in interest rates. Pursuant to the terms of certain revolving credit arrangements, changes in the lenders' prime rate, LIBOR or other stated interest rates could affect the rates at which the Company could borrow funds thereunder. At March 1, 2003, the Company had no borrowings under the lines of credit. The table below summarizes the fair value and contract terms of the Company's fixed rate debt and capital lease obligations, at March 1, 2003 (in thousands):
Expected Maturity Date of Long-Term Debt and Capital Lease Obligations(Including Current Portion) at March 1, 2003 (unaudited):
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Fixed Rate |
Average |
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|
2003 |
$ 87 |
3.7% |
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Item 4. Controls and Procedures.
The Company's principal executive officer, Monroe G. Milstein, and the Company's principal financial officer, Robert LaPenta, have reviewed and evaluated the Company's disclosure controls and procedures as of a date within ninety days prior to the filing of this quarterly report on Form 10-Q. Based on their review, these officers have concluded that such disclosure controls and procedures are adequate for the effective recording, processing and summarizing of information for the preparation of this quarterly report on Form 10-Q. Since the date of their evaluation, there have been no significant changes in the Company's internal controls or in other factors that could significantly affect such controls.
Page 19 of 23
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION
AND SUBSIDIARIES
Item 6. Exhibits and Reports on Form 8-K.
Page 20 of 23
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.
BURLINGTON COAT FACTORY WAREHOUSE CORPORATION
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/s/ Monroe G. Milstein |
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Monroe G. Milstein |
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President & Chief Executive Officer |
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/s/ Robert L. LaPenta, Jr. |
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Robert L. LaPenta, Jr. |
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Vice President & Chief Accounting Officer |
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Date: April 14, 2003
Page 21 of 23
I, Monroe G. Milstein, President and Chief Executive Officer of Burlington Coat Factory Warehouse Corporation, certify that:
(1) I have read this quarterly report on Form 10-Q of Burlington Coat Factory Warehouse Corporation;
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period during which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within ninety days prior to the filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in the quarterly report our conclusions about the effectiveness of the Company's disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
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/s/ Monroe G. Milstein |
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Monroe G. Milstein |
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President & Chief Executive Officer |
Page 22 of 23
I, Robert L. LaPenta, Vice President - Chief Accounting Officer of Burlington Coat Factory Warehouse Corporation, certify that:
(1) I have read this quarterly report on Form 10-Q of Burlington Coat Factory Warehouse Corporation;
(2) Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods presented in this quarterly report;
(3) Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
(4) The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period during which this quarterly report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within ninety days prior to the filing date of this quarterly report (the "Evaluation Date"); and
(c) presented in the quarterly report our conclusions about the effectiveness of the Company's disclosure controls and procedures based on our evaluation as of the Evaluation Date;
(5) The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors:
(a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weakness in internal controls; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and
(6) The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
Date: April 14, 2003
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/s/ Robert L. LaPenta |
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Robert L. LaPenta |
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Vice President - Chief Accounting Officer |
Page 23 of 23