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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
February 1, 2003 0-19517
THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA 17402
(717) 757-7660
www.bonton.com
INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229
---------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common
Stock, $.01 par value
The Registrant has filed all reports required to be filed by Section 13
or 15(d) of the Act during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.
The Registrant is not an accelerated filer (as defined in Rule 12b-2 of
the Act).
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is contained in the Registrant's proxy statement incorporated by reference in
Part III of this Form 10-K.
As of August 2, 2002, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $42,081,863 based
upon the closing price of $4.82 per share.*
As of April 4, 2003, there were 12,179,485 shares of Common Stock, $.01
par value, and 2,989,853 shares of Class A Common Stock, $.01 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part III - Portions of the Proxy Statement for the 2003 Annual Meeting
of Shareholders ("Proxy Statement").
- -------------------------------------
* Calculated by excluding all shares held in the treasury of the Registrant or
that may be deemed to be beneficially owned by executive officers and directors
of the Registrant, without conceding that all such persons are "affiliates" of
the Registrant for purposes of the federal securities laws.
- --------------------------------------------------------------------------------
References to a fiscal year in this Form 10-K refer to The Bon-Ton's
fiscal year, which is the 52 or 53 week period ending on the Saturday nearer
January 31 of the following calendar year (e.g., a reference to fiscal 2002 is a
reference to the fiscal year ended February 1, 2003).
PART I
ITEM 1. BUSINESS.
GENERAL
The Bon-Ton Stores, Inc., together with its subsidiaries, is the
successor to S. Grumbacher & Son, a family business founded in 1898, and
operates stores offering apparel, home furnishings, cosmetics, accessories and
shoes. We presently operate 72 stores in secondary markets - 36 stores in
Pennsylvania, 26 stores in New York, three stores in Maryland, two stores in New
Jersey, and one store in each of Connecticut, New Hampshire, Massachusetts,
Vermont and West Virginia. Our strategy focuses on being the fashion value
retailer in secondary markets.
The Bon-Ton's executive offices are located at 2801 East Market Street,
York, Pennsylvania.
MERCHANDISING
The Bon-Ton stores offer value, moderate and better merchandise in
apparel, home furnishings, cosmetics, accessories, shoes and other categories.
Sales of apparel constituted 59.7%, 60.7% and 62.4% of owned sales for fiscal
2002, 2001 and 2000, respectively (owned sales exclude leased department sales).
The following chart illustrates owned sales by product category for fiscal 2002,
2001 and 2000:
MERCHANDISE CATEGORY 2002 2001 2000
- ---------------------------------------------------------------------------------
Women's clothing 27.4% 27.5% 27.6%
Men's clothing 16.0 16.5 18.0
Home 14.7 14.5 13.5
Cosmetics 11.0 11.1 10.9
Accessories 8.8 7.9 7.9
Children's clothing 6.5 6.8 6.9
Shoes 5.8 5.8 5.3
Intimate apparel 4.9 5.0 5.2
Junior's clothing 4.9 4.9 4.7
- ---------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
=================================================================================
We carry a number of highly recognized brand names, including Clarks,
Estee Lauder, Liz Claiborne, Nautica, Nine West, Ralph Lauren, Van Heusen, Sag
Harbor, OshKosh, Easy Spirit, Royal Velvet and Tommy Hilfiger, and within these
brands we choose assortments which balance fashion, price and quality.
We depend on our relationships with our key vendors to secure branded
merchandise. If we lose the support of these vendors, it could have a material
adverse effect on The Bon-Ton.
Complementing branded merchandise, our private brand merchandise
provides fashion at competitive pricing under names such as Andrea Viccaro,
Jenny Buchanan, Madison & Max and Susquehanna Trail Outfitters. We view this
private brand merchandise as a strategic addition to our strong array of highly
recognized, quality national brands and as an opportunity to increase brand
exclusiveness, customer loyalty and competitive differentiation. Private brand
merchandise represented approximately 11.1%, 9.8% and 9.8% of owned sales in
fiscal 2002, 2001 and 2000, respectively.
1
Our business, like that of most retailers, is subject to seasonal
fluctuations, with the major portion of sales and income realized during the
latter half of each year, which includes the back-to-school and holiday seasons.
MARKETING
Our advertising and promotional programs are conducted through
newspapers, direct mail and, to a lesser extent, television and radio. We
maintain an in-house advertising organization that supplies substantially all
our creative advertising. We also offer our customers special services such as
free gift wrap and bridal registry.
TRADEMARKS
The name "Bon-Ton," in its distinctive diamond design style, is a
registered trademark of a wholly-owned subsidiary of the Company, and the
Company considers this tradename valuable to its business. This subsidiary has
approximately fifteen additional trademarks, most of which are used in the
Company's private brand merchandise program.
CUSTOMER CREDIT
Our customers may pay for their purchases with The Bon-Ton proprietary
credit card, Visa, Mastercard, cash or check.
The Bon-Ton credit card holders generally constitute our most loyal and
active customers; during fiscal 2002, the average dollar amount for proprietary
credit card purchases substantially exceeded the average dollar amount for cash
purchases. We believe our credit card is a particularly productive tool for
customer segmentation and target marketing.
The following table summarizes the percentage of total fiscal year
sales generated by payment type:
TYPE OF PAYMENT 2002 2001 2000
- --------------------------------------------------------------------------------
Bon-Ton credit card 56% 52% 48%
Visa, Mastercard 22 24 26
Cash or check 22 24 26
- --------------------------------------------------------------------------------
Total 100% 100% 100%
================================================================================
COMPETITION
We face competition for customers from traditional department stores,
mass merchandisers, specialty stores, off-price retailers, and, to a lesser
extent, catalogue and internet retailers. Many of our competitors have
substantially greater financial and other resources than The Bon-Ton, and some
of our competitors have greater leverage with vendors, which may allow such
competitors to obtain merchandise more easily or on better terms. However, we
believe our knowledge of secondary markets, developed over many years of
operation, gives us a competitive advantage as we focus on secondary markets as
our primary area of operation.
ASSOCIATES
As of February 1, 2003, we had approximately 3,600 full-time and 5,000
part-time associates. We employ additional part-time associates during peak
periods. None of our associates are represented by a labor union. We believe
that our relationship with our associates is good.
2
EXECUTIVE OFFICERS
The Executive Officers of the Company are:
NAME AGE POSITION
---- --- --------
Tim Grumbacher 63 Chairman of the Board and Chief Executive Officer
Frank Tworecke 56 President and Chief Operating Officer
James H. Baireuther 56 Vice Chairman, Chief Administrative Officer and Chief Financial Officer
Lynn C. Derry 47 Senior Vice President - General Merchandise Manager
John S. Farrell 57 Senior Vice President - Stores
Robert A. Geisenberger 42 Senior Vice President - General Merchandise Manager
William T. Harmon 48 Senior Vice President - Marketing, Planning and Allocation
Patrick J. McIntyre 58 Senior Vice President - Chief Information Officer
Keith E. Plowman 45 Senior Vice President - Finance
Ryan J. Sattler 58 Senior Vice President - Human Resources
Mr. Grumbacher has been Chairman of the Board for more than five years,
and has served as Chief Executive Officer since June 2000.
Mr. Tworecke was named President and Chief Operating Officer in March
2003. He joined the Company in November 1999 as Vice Chairman and Chief
Merchandising Officer. From January 1996 until November 1999, he was with Jos.
A. Bank Clothiers, serving as President from February 1997 until November 1999.
Mr. Baireuther has been Vice Chairman, Chief Administrative Officer and
Chief Financial Officer since September 2001. From February 2000 to September
2001, he was Executive Vice President - Chief Financial Officer, and for more
than two years prior to that time he was Senior Vice President - Chief Financial
Officer.
Ms. Derry was appointed Senior Vice President - General Merchandise
Manager in February 2001. For more than three years prior to that time, Ms.
Derry was a Divisional Merchandise Manager for The Bon-Ton.
Mr. Farrell was appointed Senior Vice President - Stores in June 2000.
For more than three years prior to that time, Mr. Farrell was Vice President -
Stores for The Bon-Ton.
Mr. Geisenberger was appointed Senior Vice President - General
Merchandise Manager in July 2000. For more than three years prior to that time,
Mr. Geisenberger was a Divisional Merchandise Manager for The Bon-Ton.
Mr. Harmon joined the Company as Senior Vice President - Sales
Promotion, Marketing and Strategic Planning in June 1997 and was named Senior
Vice President - Marketing, Planning and Allocation in September 2001.
3
Mr. McIntyre joined The Bon-Ton as Senior Vice President - Chief
Information Officer in June 1997.
Mr. Plowman was appointed Senior Vice President - Finance in September
2001. From May 1999 to September 2001, he was Vice President - Controller, and
from August 1997 to May 1999 he was Divisional Vice President - Controller of
the Company.
Mr. Sattler was appointed Senior Vice President - Human Resources in
September 2001. From June 2000 to September 2001, he was Senior Vice President -
Human Resources and Operations. For more than three years prior to that time,
Mr. Sattler was Senior Vice President - Operations.
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION
The Company and its representatives may, from time to time, make
written or verbal forward-looking statements. Those statements relate to
developments, results, conditions or other events the Company expects or
anticipates will occur in the future. Without limiting the foregoing, those
statements may relate to future revenues, earnings, store openings, market
conditions and the competitive environment. Forward-looking statements are based
on management's then-current views and assumptions and, as a result, are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected.
All forward-looking statements are qualified by the following important
factors that could cause actual results to differ materially from those
predicted by the forward-looking statements:
Customer Trends
It is difficult to predict what merchandise consumers will want. A
substantial part of our business is dependent on our ability to make correct
trend decisions for a wide variety of goods and services. Failure to accurately
predict constantly changing consumer tastes, preferences, spending patterns and
other lifestyle decisions could adversely affect short-term results and
long-term relationships with our customers.
Credit Operations
Sales of merchandise and services are facilitated by the Company's
credit card operations. These credit card operations also generate additional
revenue from fees related to extending credit. Our ability to extend credit to
our customers depends on many factors, including compliance with federal and
state laws which may change from time to time. In addition, changes in credit
card use, payment patterns and default rates may result from a variety of
economic, legal, social and other factors that we cannot control or predict with
certainty. Changes that adversely affect our ability to extend credit and
collect payments could negatively affect our results and financial condition.
General Economic Conditions
General economic factors that are beyond our control influence the
Company's forecasts and directly affect performance. These factors include
interest rates, recession, inflation, deflation, consumer credit availability,
consumer debt levels, tax rates and policy, unemployment trends and other
matters that influence consumer confidence and spending. Increasing volatility
in financial markets may cause these factors to change with a greater degree of
frequency and magnitude.
Product Sourcing
The products we sell are sourced from a wide variety of domestic and
international vendors. Our ability to find qualified vendors and access products
in a timely and efficient manner is a significant challenge which is typically
even more difficult with respect to goods sourced outside of the United
4
States. Trade restrictions, tariffs, currency exchange rates, transport capacity
and costs, and other factors significant to this trade are beyond our control
and could adversely affect our business.
Advertising and Marketing Programs
The Company spends extensively on advertising and marketing. Our
business depends on effective marketing to generate high customer traffic in our
stores. If our advertising and marketing efforts are not effective, this could
negatively affect our results.
Inventory Control
The Company's merchants focus on inventory levels and balance these
levels with plans and trends. Excess inventories could result in significant
markdowns, which could adversely affect our results.
Cost Containment
The Company's performance depends on appropriate management of its
expense structure, including its selling, general and administrative costs. The
Company is continuously focused on controlling expenses. The Company's failure
to meet its expense budget or to appropriately reduce expenses during a weak
sales season could adversely affect our results.
Other Factors
Other factors that could cause actual results to differ materially from
those predicted include: competition, weather, changes in the availability or
cost of capital, the availability of suitable new store locations on acceptable
terms, shifts in seasonality of shopping patterns, work interruptions, the
effect of excess retail capacity in our markets, material acquisitions or
dispositions, regulatory changes, or adverse results in material litigation.
The foregoing list of important factors is not exclusive, and the
Company does not undertake to revise any forward-looking statement to reflect
events or circumstances that occur after the date the statement is made.
ITEM 2. PROPERTIES.
Our stores, which all operate under "The Bon-Ton" name, vary in size
from approximately 45,000 to 160,000 square feet.
The following table sets forth the number of stores at the beginning
and end of each of the last five fiscal years:
Fiscal Year 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------
Number of stores:
Beginning of year 73 73 72 65 64
Additions 0 0 1 7 2
Closings (1) 0 0 0 (1)
- --------------------------------------------------------------------------------
End of year 72 73 73 72 65
================================================================================
We plan to grow by expanding and upgrading existing stores and by
opening new stores. In addition, we will consider acquisitions of retail
companies or their real estate assets if and when such opportunities arise. Our
market positioning strategy has been to locate new stores, or acquire existing
companies or their stores, in secondary markets generally within or contiguous
to existing areas of operation.
5
The following table provides certain information regarding our store
properties:
APPROXIMATE
SQUARE YEAR OPENED
MARKET LOCATION FOOTAGE OR ACQUIRED
- ------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Allentown South Mall 101,800 1994
Bethlehem Westgate Mall 109,000 1994
Bloomsburg Columbia Mall 46,100 1988
Butler Clearview Mall 100,800 1982
Carlisle Carlisle Plaza Mall 59,900 1977
Chambersburg Chambersburg Mall 55,600 1985
Doylestown Doylestown Shopping Center 55,500 1994
Easton Palmer Park Mall 115,100 1994
Frackville Schuylkill Mall 61,100 1987
Greensburg Westmoreland Mall 100,000 1987
Hanover North Hanover Mall 67,600 1971
Harrisburg Capital City Commons 145,200 1987
Colonial Park Shopping Center 136,500 1987
Indiana Indiana Mall 60,500 1979
Johnstown The Galleria 81,200 1992
Lancaster Park City Center 142,300 1992
Lebanon Lebanon Plaza Mall 53,700 1994
Lewistown Central Business District 46,700 1972
Oil City Cranberry Mall 45,200 1982
Pottstown Coventry Mall 88,300 1999
Quakertown Richland Plaza 88,100 1994
Reading Berkshire Mall 156,100 1987
Scranton The Mall at Steamtown 113,200 2000
State College Nittany Mall 61,200 1994
Stroudsburg Stroud Mall 87,000 1994
Sunbury Susquehanna Valley Mall 90,000 1978
Trexlertown Trexler Mall 54,000 1994
Uniontown Uniontown Mall 80,500 1976
Warren Warren Mall 50,000 1980
Washington Washington Crown Center 78,100 1987
Wilkes-Barre Midway Shopping Center 66,000 1987
Wyoming Valley Mall 159,500 1987
Williamsport Lycoming Mall 60,900 1986
York York Galleria 128,200 1989
Queensgate Shopping Center 113,000 1962
West Manchester Mall 80,200 1981
NEW YORK
Binghamton Oakdale Mall 81,100 1981
Buffalo Northtown Plaza 100,800 1994
Walden Galleria 150,000 1994
Eastern Hills Mall 151,200 1994
McKinley Mall 97,200 1994
Sheridan/Delaware Plaza 124,300 1994
Southgate Plaza 100,500 1994
Elmira Arnot Mall 74,800 1995
Glens Falls Aviation Mall 67,800 1999
6
APPROXIMATE
SQUARE YEAR OPENED
MARKET LOCATION FOOTAGE OR ACQUIRED
- ------------------------------------------------------------------------------------------------------------
Ithaca Pyramid Mall 62,200 1991
Jamestown Chautauqua Mall 59,900 1998
Lockport Lockport Mall 82,000 1994
Massena St. Lawrence Centre 51,000 1994
Newburgh Newburgh Mall 61,800 2000
Niagara Falls Summit Park Mall 88,100 1994
Olean Olean Mall 73,000 1994
Rochester Greece Ridge Center 144,600 1996
The Marketplace Mall 100,000 1995
Irondequoit Mall 102,600 1995
Eastview Mall 118,900 1995
Saratoga Springs Wilton Mall 71,200 1993
Syracuse Carousel Center 80,000 1994
Camillus Mall 64,700 1994
Great Northern Mall 98,400 1994
Shoppingtown Mall 70,100 1994
Watertown Salmon Run Mall 50,200 1992
MARYLAND
Cumberland Country Club Mall 60,900 1981
Frederick Frederick Towne Mall 97,700 1972
Hagerstown Valley Mall 126,000 1974
NEW JERSEY
Brick Brick Plaza 53,500 1999
Phillipsburg Phillipsburg Mall 65,000 1994
WEST VIRGINIA
Martinsburg Martinsburg Mall 65,800 1994
CONNECTICUT
Hamden Hamden Mart 58,900 1999
MASSACHUSETTS
Westfield Westfield Shops 50,600 1998
NEW HAMPSHIRE
Concord Steeplegate Mall 87,700 1999
VERMONT
S. Burlington University Mall 60,000 1999
We lease 64 of our stores and own eight stores, two of which are
subject to ground leases. We lease a total of 178,600 square feet for our
executive and administrative offices in York, Pennsylvania, lease our 143,700
square foot distribution center in York, Pennsylvania, and lease our 326,000
square foot distribution center in Allentown, Pennsylvania.
7
ITEM 3. LEGAL PROCEEDINGS.
We are a party to legal proceedings and claims which arise during the
ordinary course of business. We do not expect the ultimate outcome of all such
litigation and claims to have a material adverse effect on our financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the Nasdaq Stock Market (symbol: BONT).
There is no established public trading market for the Class A Common Stock. The
Class A Common Stock is convertible on a share for share basis into Common
Stock. The following table sets forth the high and low sales price of the Common
Stock as furnished by Nasdaq:
Fiscal 2002 Fiscal 2001
- ----------------------------------------------
High Low High Low
- ----------------------------------------------
1st Quarter $ 4.93 $ 2.35 $ 3.50 $ 2.12
2nd Quarter 5.28 3.45 3.16 2.45
3rd Quarter 4.94 3.41 3.00 1.77
4th Quarter 4.31 3.37 3.39 2.25
On April 4, 2003, there were approximately 324 shareholders of record
of Common Stock and five shareholders of record of Class A Common Stock.
We have not paid cash dividends since our initial public offering in
September 1991 and do not anticipate paying cash dividends in fiscal 2003. The
payment and rate of future dividends, if any, are subject to the discretion of
the Board of Directors and will depend upon earnings, financial condition,
capital requirements, contractual restrictions under current indebtedness and
other factors. Our revolving credit agreement contains restrictions on our
ability to pay dividends and make other distributions.
At February 1, 2003, the Amended and Restated 1991 Stock Option and
Restricted Stock Plan, The Bon-Ton Stores, Inc. 2000 Stock Incentive Plan and
the Company's Phantom Equity Replacement Plan were in effect. Each of these
plans has been approved by the shareholders. There were no other equity
compensation plans in effect. The following information concerning these plans
is as of February 1, 2003:
Number of securities
remaining available for
Number of securities future issuance
to be issued upon Weighted-average (excluding securities
exercise of exercise price of reflected in the first
Plan category outstanding options outstanding options column)
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved 941,446 $5.82 300,000
by security holders
Equity compensation plans not Not applicable Not applicable Not applicable
approved by security holders
8
ITEM 6. SELECTED FINANCIAL DATA.
(In thousands except share, per share and store data)
Fiscal Year 2002 2001 2000
Ended Feb. 1, 2003 Feb. 2, 2002 Feb. 3, 2001
- -------------------------------------------------------------------------------------------------------------
Statement of Operations Data: % % %
- -------------------------------------------------------------------------------------------------------------
Net sales (1) $ 713,230 100.0 $ 721,777 100.0 $ 749,816 100.0
Other income, net 2,705 0.4 2,548 0.4 2,715 0.4
Gross profit 262,412 36.8 262,057 36.3 275,790 36.8
Selling, general and
administrative expenses (2) 219,716 30.8 224,306 31.1 231,859 30.9
Depreciation and amortization 21,301 3.0 19,783 2.7 17,085 2.3
Unusual expense (3) - - 916 0.1 6,485 0.9
Restructuring income (4) - - - - - -
Income from operations 24,100 3.4 19,600 2.7 23,076 3.1
Interest expense, net 8,731 1.2 9,558 1.3 10,906 1.5
Income before taxes 15,369 2.2 10,042 1.4 12,170 1.6
Income tax provision 5,764 0.8 3,816 0.5 4,622 0.6
Net income $ 9,605 1.3 $ 6,226 0.9 $ 7,548 1.0
Per Share Amounts
Basic:
Net income $ 0.63 $ 0.41 $ 0.50
Weighted average shares
outstanding 15,192,471 15,200,154 14,952,985
Diluted:
Net income $ 0.62 $ 0.41 $ 0.50
Weighted average shares
outstanding 15,394,231 15,214,145 14,952,985
Balance Sheet Data (at end
of period):
- -------------------------------------------------------------------------------------------------------------
Working capital $ 129,148 $ 117,158 $ 142,311
Total assets 382,023 385,583 402,680
Long-term debt, including
capital leases 64,662 67,929 98,758
Shareholders' equity 212,346 203,261 198,862
Selected Operating Data:
- -------------------------------------------------------------------------------------------------------------
Total sales change (1.2)% (3.7)% 5.5%
Comparable store
sales change(5)(6) (1.2)% (3.3)% 0.7%
Comparable stores data(5)(6):
Sales per selling
square foot $ 133 $ 134 $ 143
Selling square footage 5,382,000 5,339,000 4,792,000
Capital expenditures $ 14,806 $ 15,550 $ 29,577
Number of stores:
Beginning of year 73 73 72
Additions - - 1
Closings (1) - -
End of year 72 73 73
Fiscal Year 1999 1998
Ended Jan. 29, 2000 Jan. 30, 1999
- -------------------------------------------------------------------------------------
Statement of Operations Data: % %
- -------------------------------------------------------------------------------------
Net sales (1) $ 710,963 100.0 $ 674,871 100.0
Other income, net 2,651 0.4 2,350 0.3
Gross profit 261,367 36.8 248,141 36.8
Selling, general and
administrative expenses (2) 224,760 31.6 209,407 31.0
Depreciation and amortization 14,846 2.1 13,281 2.0
Unusual expense (3) 2,683 0.4 - -
Restructuring income (4) (2,492) (0.4) - -
Income from operations 24,221 3.4 27,803 4.1
Interest expense, net 8,552 1.2 9,396 1.4
Income before taxes 15,669 2.2 18,407 2.7
Income tax provision 5,954 0.8 7,196 1.1
Net income $ 9,715 1.4 $ 11,211 1.7
Per Share Amounts
Basic:
Net income $ 0.66 $ 0.81
Weighted average shares
outstanding 14,749,746 13,866,163
Diluted:
Net income $ 0.66 $ 0.81
Weighted average shares
outstanding 14,752,919 13,917,452
Balance Sheet Data (at end
of period):
- -------------------------------------------------------------------------------------
Working capital $ 141,788 $ 128,977
Total assets 416,123 376,547
Long-term debt, including
capital leases 107,678 76,255
Shareholders' equity 190,691 180,211
Selected Operating Data:
- -------------------------------------------------------------------------------------
Total sales change 5.3% 2.8%
Comparable store
sales change(5)(6) 0.0% 1.4%
Comparable stores data(5)(6):
Sales per selling
square foot $ 141 $ 143
Selling square footage 4,705,000 4,620,000
Capital expenditures $ 46,451 $ 19,418
Number of stores:
Beginning of year 65 64
Additions 7 2
Closings - (1)
End of year 72 65
(1) Fiscal 2000 reflects the 53 weeks ended February 3, 2001. All other periods
presented include 52 weeks.
(2) Fiscal 1999 includes expense resulting from renegotiation of the Company's
revolving credit facility.
(3) Reflects expense recognized for workforce reductions and realignment and
elimination of certain senior management positions in fiscal 2001; expense
recognized for workforce reductions, early retirement of Heywood Wilansky
and realignment and elimination of certain senior management positions in
fiscal 2000; and an asset write-down in fiscal 1999.
(4) Income recognized in fiscal 1999 as a result of a lease termination for a
closed store.
(5) Fiscal 2000 reflects the 52 weeks ended January 27, 2001.
(6) Comparable stores data (sales and selling square footage) reflects stores
open for the entire current and prior fiscal year.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Fiscal 2002 total and comparable store sales of The Bon-Ton Stores,
Inc. and all subsidiaries (the "Company") decreased 1.2% compared to fiscal
2001. Fiscal 2002 was a difficult year for retail stores, as merchandise price
became an increasingly significant component of consumer buying decisions. The
continued economic downturn and general declining consumer confidence were also
major factors adversely impacting retail businesses.
While sales in most stores were below their fiscal 2001 level, sales in
certain stores performed at a level below the Company average. During fiscal
2002, the Company recognized impairment charges against long-lived assets at
certain of these store sites. The Company will continue to monitor the
performance of its stores and initiate operational improvements where possible.
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 each fiscal year presented:
PERCENT OF NET SALES
---------------------------
FISCAL YEAR
- ---------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Other income, net 0.4 0.4 0.4
- ---------------------------------------------------------------------------------
100.4 100.4 100.4
- ---------------------------------------------------------------------------------
Costs and expenses:
Costs of merchandise sold 63.2 63.7 63.2
Selling, general and administrative 30.8 31.1 30.9
Depreciation and amortization 3.0 2.7 2.3
Unusual expense -- 0.1 0.9
- ---------------------------------------------------------------------------------
Income from operations 3.4 2.7 3.1
Interest expense, net 1.2 1.3 1.5
- ---------------------------------------------------------------------------------
Income before income taxes 2.2 1.4 1.6
Income tax provision 0.8 0.5 0.6
- ---------------------------------------------------------------------------------
Net income 1.3% 0.9% 1.0%
=================================================================================
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES: Net sales were $713.2 million for fiscal 2002, a decrease of
$8.5 million relative to fiscal 2001. Total and comparable store sales for
fiscal 2002 decreased 1.2% from fiscal 2001. Merchandise departments recording
sales increases were Accessories, Coats and Petites. Merchandise departments
reflecting the sharpest sales declines were Dresses, Children's, Men's Clothing
and Intimate.
OTHER INCOME, NET: Net other income, principally income from leased
departments, remained constant at 0.4% of net sales for fiscal 2002 and fiscal
2001.
COSTS AND EXPENSES: Gross margin dollars for fiscal 2002 increased $0.4
million, or 0.1% over fiscal 2001, due to an increased margin percentage
partially offset by declining sales volume. Gross margin as a percentage of net
sales was 36.8% in fiscal 2002, an increase of 0.5 percentage point from 36.3%
in fiscal 2001. Gross margin percentage improvement over fiscal 2001 reflects
increased markup on purchases in fiscal 2002 and reserves established for
seasonal carryover merchandise in fiscal 2001.
10
Selling, general and administrative expenses for fiscal 2002 were
$219.7 million, or 30.8% of net sales, compared to $224.3 million, or 31.1% of
net sales, in fiscal 2001. Fiscal 2002 store expense decreased $1.0 million
versus fiscal 2001, primarily due to reduced advertising expense, but reflected
an expense rate increase of 0.1 percentage point due to reduced 2002 net sales.
Fiscal 2002 corporate expense decreased $3.6 million versus fiscal 2001--driving
an overall selling, general and administrative expense rate decrease of 0.3
percentage point. The decrease in corporate expense principally reflects an
increase in securitization income of $3.2 million from the Company's proprietary
credit card program and reduced equipment rental costs. The increased
securitization income in fiscal 2002 relative to fiscal 2001 was principally a
reflection of increased sales on the Company's proprietary credit card and lower
securitization facility costs.
Depreciation and amortization increased to 3.0% of net sales in fiscal
2002 from 2.7% in fiscal 2001 partially as a result of a lower sales base and
capital expenditures in the amount of $14.8 million and $15.6 million in fiscal
2002 and 2001, respectively. Additionally, in fiscal 2002 the Company recognized
approximately $2.0 million of impairment losses on the long-lived assets of
certain stores. In fiscal 2001, the Company recorded accelerated depreciation of
$1.4 million for a store that was closed in January 2003.
Unusual expense in fiscal 2001 of $0.9 million, or 0.1% of net sales,
was incurred in the third quarter relating to a workforce reduction and the
realignment and elimination of certain senior management positions. See Note 16
to the Consolidated Financial Statements.
INCOME FROM OPERATIONS: Income from operations in fiscal 2002 was $24.1
million, or 3.4% of net sales, compared to $19.6 million, or 2.7% of net sales,
in fiscal 2001.
INTEREST EXPENSE, NET: Net interest expense in fiscal 2002 decreased
$0.8 million to $8.7 million, or 1.2% of net sales, from $9.6 million, or 1.3%
of net sales, in fiscal 2001. The decrease in interest expense was attributable
to decreased average borrowing levels and lower interest rates, partially offset
by increased interest expense pursuant to cash flow hedge ineffectiveness.
Interest expense includes cash flow hedge ineffectiveness, relating to interest
rate swaps, of $1.4 million and $0.5 million in fiscal 2002 and 2001,
respectively, representing non-cash mark-to-market charges pursuant to Statement
of Financial Accounting Standards No. 133. See Note 6 to the Consolidated
Financial Statements.
INCOME TAXES: The effective tax rate decreased 0.5 percentage point to
37.5% in fiscal 2002 from 38.0% in fiscal 2001.
NET INCOME: Net income in fiscal 2002 was $9.6 million, or 1.3% of net
sales, compared to $6.2 million, or 0.9% of net sales, in fiscal 2001. As
discussed above, the increased gross profit rate, decreased selling, general and
administrative expenses and decreased interest expense more than offset the
impact of decreased sales--thus driving the $3.4 million net income increase
over fiscal 2001.
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES: Net sales were $721.8 million for the fifty-two weeks ended
February 2, 2002, a decrease of $28.0 million, or 3.7%, relative to the
fifty-three week period ended February 3, 2001. Comparable store sales for the
fifty-two week period ended February 2, 2002 decreased 3.3% from the fifty-two
week period ended January 27, 2001. Merchandise departments recording comparable
store sales increases were Coats, Home and Juniors. Merchandise departments
reflecting the sharpest comparable store sales declines were Women's, Men's
Clothing and Dresses.
OTHER INCOME, NET: Net other income, principally income from leased
departments, remained constant at 0.4% of net sales for fiscal 2001 and fiscal
2000.
11
COSTS AND EXPENSES: Gross margin dollars for fiscal 2001 decreased
$13.7 million, or 5.0% from fiscal 2000, primarily reflecting the decline in
sales volume. Gross margin as a percentage of net sales was 36.3% in fiscal
2001, down 0.5 percentage point from 36.8% in fiscal 2000. The gross margin
percentage decline was principally due to the increased markdown rate and
reserves established for seasonal merchandise in fiscal 2001.
Selling, general and administrative expenses for fiscal 2001 were
$224.3 million, or 31.1% of net sales, compared to $231.9 million, or 30.9% of
net sales, in fiscal 2000. Fiscal 2001 store expense decreased $1.5 million
versus fiscal 2000, but reflected an expense rate increase of 0.7 percentage
point due to reduced fiscal 2001 sales. Fiscal 2001 corporate expense decreased
$6.0 million versus fiscal 2000, driving an expense rate decrease of 0.5
percentage point. The decrease in corporate expense principally reflects
increased securitization income of $2.9 million from the Company's proprietary
credit card program and reduced payroll costs. The increased securitization
income in fiscal 2001 relative to fiscal 2000 was principally a reflection of
increased sales on the Company's proprietary credit card, lower securitization
facility costs and higher fee income.
Depreciation and amortization increased to 2.7% of net sales in fiscal
2001 from 2.3% in fiscal 2000 partially as a result of a lower sales base and
capital expenditures in the amount of $15.6 million and $29.6 million in fiscal
2001 and 2000, respectively. Additionally, in fiscal 2001 the Company evaluated
a store lease renewal option exercisable in January 2003. The Company decided
against exercising this lease option under existing terms and, therefore,
accelerated depreciation of $1.4 million for associated assets with lives
exceeding the expected lease term.
Unusual expense in fiscal 2001 of $0.9 million, or 0.1% of net sales,
was incurred in the third quarter relating to a workforce reduction and the
realignment and elimination of certain senior management positions. See Note 16
to the Consolidated Financial Statements.
Unusual expense in fiscal 2000 of $6.5 million, or 0.9% of net sales,
was incurred due to the early retirement of Heywood Wilansky as President and
Chief Executive Officer, the realignment and elimination of certain senior
management positions and a workforce reduction. See Note 16 to the Consolidated
Financial Statements.
INCOME FROM OPERATIONS: Income from operations in fiscal 2001 amounted
to $19.6 million, or 2.7% of net sales, compared to $23.1 million, or 3.1% of
net sales, in fiscal 2000.
INTEREST EXPENSE, NET: Net interest expense in fiscal 2001 decreased
$1.3 million to $9.6 million, or 1.3% of net sales, from $10.9 million, or 1.5%
of net sales, in fiscal 2000. The decrease in interest expense was attributable
to decreased average borrowing levels and lower interest rates.
INCOME TAXES: The effective tax rate remained constant at 38.0% in
fiscal 2001 and fiscal 2000.
NET INCOME: Net income in fiscal 2001 was $6.2 million, or 0.9% of net
sales, compared to $7.5 million, or 1.0% of net sales, in fiscal 2000.
12
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes material measures of the Company's
liquidity and capital resources:
February 1, February 2, February 3,
(Dollars in millions) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Working capital $ 129.1 $ 117.2 $ 142.3
Current ratio 2.30:1 2.09:1 2.47:1
Debt to total capitalization (debt plus equity) 0.23:1 0.25:1 0.33:1
Unused availability under lines of credit $ 43.1 $ 52.9 $ 37.4
The Company's primary sources of working capital are cash flows from
operations, borrowings under its revolving credit facility and proceeds from its
accounts receivable facility. The Company had working capital of $129.1 million,
$117.2 million and $142.3 million at the end of fiscal 2002, 2001 and 2000,
respectively. The Company's business follows a seasonal pattern and working
capital fluctuates with seasonal variations, reaching its highest level in
October or November. The increase in working capital at the end of fiscal 2002
compared to the end of fiscal 2001 was principally due to increased accounts
receivable and decreased income taxes payable, partially offset by a reduction
in merchandise inventory.
Net cash provided by operating activities amounted to $28.1 million in
2002 and $39.4 million in fiscal 2001 and 2000. The $11.3 million decrease in
cash provided by operating activities in fiscal 2002 relative to fiscal 2001 was
primarily due to increased working capital requirements, partially offset by
increased net income and higher depreciation and amortization costs.
Net cash used in investing activities amounted to $14.8 million, $15.5
million and $18.5 million in fiscal 2002, 2001 and 2000, respectively. The net
cash outflow in fiscal 2002 was the result of capital expenditures in the amount
of $14.8 million, primarily related to store remodeling, information services
projects and general operations.
Net cash used in financing activities amounted to $6.3 million, $28.2
million and $17.6 million in fiscal 2002, 2001 and 2000, respectively. The net
cash outflow in fiscal 2002 was principally attributable to payments on
long-term debt, a decrease in bank overdrafts and repurchase of the Company's
common stock.
The Company currently anticipates its capital expenditures for fiscal
2003 will approximate $20.0 million. The expenditures will be directed toward
remodeling some of the Company's existing stores, information systems
enhancements and general operations.
Aside from planned capital expenditures, the Company's primary cash
requirements will be to service debt and finance working capital increases
during peak selling seasons. The Company anticipates that its cash balances and
cash flows from operations, supplemented by borrowings under the revolving
credit facility and proceeds from the accounts receivable facility, will be
sufficient to satisfy its operating cash requirements.
The accounts receivable facility and revolving credit facility
agreements expire in January 2004 and April 2004, respectively. The Company
anticipates that it will be able to renew or replace these agreements with
agreements of substantially comparable terms.
Cash flows from operations are impacted by consumer confidence, weather
conditions in the geographic markets served by the Company, the economic climate
and competitive conditions existing in the retail industry. A downturn in any
single factor or a combination of factors could have a material adverse impact
upon the Company's ability to generate sufficient cash flows to operate its
business.
13
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.
The following table reflects the Company's major debt and lease
commitments:
Payments Required By Fiscal Year
--------------------------------------------------------------------------
There-
(Dollars in thousands) 2003 2004 2005 2006 2007 after Total
- ------------------------------------------------------------------------------------------------------------
Long-term debt $ -- $ 40,991 $ 876 $ 970 $ 1,073 $ 20,284 $ 64,194
Short-term debt 715 -- -- -- -- -- 715
Capital leases 300 300 200 -- -- -- 800
Operating leases 20,996 20,664 19,138 15,331 12,689 68,491 157,309
- ------------------------------------------------------------------------------------------------------------
Totals $ 22,011 $ 61,955 $ 20,214 $ 16,301 $ 13,762 $ 88,775 $223,018
============================================================================================================
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.
The Company sells undivided percentage ownership interests in certain
of its credit card accounts receivable to unrelated third-parties under a $150
million accounts receivable securitization facility, which is described in
further detail below and in Note 8 to the Consolidated Financial Statements. The
unrelated third-parties, referred to as the conduit, have purchased a $145
million interest in the accounts receivable under this facility at February 1,
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 $145 million at February 1, 2003 and $150 million at February
2, 2002. Upon the facility's termination, the conduit would be entitled to all
cash collections on the accounts receivable until its investment ($145 million
at February 1, 2003) and accrued discounts are repaid. Accordingly, upon
termination of the facility, the assets of the facility 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 accounts receivable 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. See Note 8 to the
Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and
results of operations are based upon the Consolidated Financial Statements,
which have been prepared in accordance with generally
14
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. For a
discussion of the application of these and other accounting policies, see Notes
to Consolidated Financial Statements.
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 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 $3.5 million and $3.8
million as of February 1, 2003 and February 2, 2002, respectively.
INVENTORY VALUATION
As discussed in Note 1 to the Consolidated Financial Statements,
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.
15
The Company regularly reviews inventory quantities 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 quantities on-hand. Additionally, estimates of future
merchandise demand may prove to be inaccurate, in which case the Company may
have understated or overstated the 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.
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 and $5.6 million as
of February 1, 2003 and February 2, 2002, respectively, 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 generally credited to costs of goods sold,
provided the allowance is: (1) collectable, (2) for merchandise either
permanently marked down or sold, (3) not predicated on a future purchase, (4)
not predicated on a future increase in the purchase price from the vendor, and
(5) authorized by internal management. If the aforementioned criteria are not
met, the 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.
16
Net deferred tax assets were $7.2 million and $10.1 million as of
February 1, 2003 and February 2, 2002, respectively. No valuation allowance has
been established against net deferred tax assets, as the Company believes these
tax benefits will be realizable through reversal of existing deferred tax
liabilities, tax carry-back availability and future taxable income. If actual
results 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 legislation 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 $136.2 million and $143.9
million as of February 1, 2003 and February 2, 2002, respectively.
The Company assesses, on a store-by-store basis, the impairment of
identifiable long-lived assets--primarily property, fixtures and
equipment--whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that could trigger an impairment
review include the following:
- - Significant under-performance of stores relative to historical or projected
future operating results,
- - Significant changes in the manner of the Company's use of assets or overall
business strategy, and
- - Significant negative industry or economic trends for a sustained period.
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 take time to generate positive operating and
cash flow results. Factors such as store type, store location, current
marketplace awareness of the Company's private label brands, local customer
demographic data and current fashion trends are all considered in determining
the time-frame required for a store to achieve positive financial results. If
economic conditions prove to be substantially different from the Company's
expectations, the carrying value of new stores may ultimately become impaired.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived
Assets" ("SFAS No. 144"), which supersedes SFAS No. 121. SFAS No. 144, effective
for fiscal 2002, retains provisions of SFAS No. 121 regarding recognition and
measurement of long-lived asset impairment. SFAS No. 144 supersedes the
accounting
17
and reporting provisions of Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for segments of a business to be disposed of.
In fiscal 2002, the Company evaluated the recoverability of its
long-lived assets. As a result of the evaluation, an impairment loss of
approximately $2.0 million was recorded in depreciation and amortization
expense.
Additionally, 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
improvement 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 February 1, 2003 and February 2,
2002.
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
$6.5 million and $7.0 million as of February 1, 2003 and February 2, 2002,
respectively.
As a result of the Company's adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"), the Company now 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 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 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 receivables to the conduit on a continuous
basis to replenish the investors' interest in securitized receivables that have
been repaid by
18
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 $8.9 million, $5.6
million and $2.7 million for fiscal years 2002, 2001, and 2000, respectively.
The increased income in fiscal 2002 relative to fiscal 2001 was principally a
reflection of increased sales on the Company's proprietary credit card and lower
securitization facility costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK AND FINANCIAL INSTRUMENTS
The Company is exposed to market risk associated with changes in
interest rates. To provide some protection against potential rate increases
associated with its variable-rate facilities, the Company has entered into
various derivative financial transactions in the form of interest rate swaps.
The interest rate swaps are used to hedge the underlying variable-rate
facilities. The swaps are qualifying hedges and the interest rate differential
is reflected as an adjustment to interest expense over the life of the swaps.
The Company currently holds "variable-to-fixed" rate swaps with a notional
amount of $110.0 million with several financial institutions for various terms.
The notional amount does not represent amounts exchanged by the parties, but it
is used as the basis to calculate amounts due and to be received under the rate
swaps. The Company believes the derivative financial instruments entered into
provide protection from volatile upward swings in interest rates associated with
the Company's variable-rate facilities. During fiscal 2002 and 2001, the Company
did not enter into or hold derivative financial instruments for trading
purposes.
The following table provides information about the Company's derivative
financial instruments and other financial instruments that are sensitive to
changes in interest rates, including debt obligations and interest rate swaps.
For debt obligations, the table presents principal cash flows and related
weighted average interest rates by expected maturity dates as of February 1,
2003. For interest rate swaps, the table presents notional amounts and weighted
average pay and receive interest rates by expected maturity date. For additional
discussion of the Company's interest rate swaps, see Note 6 to the Consolidated
Financial Statements.
19
Expected Maturity Date By Fiscal Year
-------------------------------------------------------------------
(Dollars in There-
thousands) 2003 2004 2005 2006 2007 after Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Debt:
Fixed-rate debt $ 715 $ 791 $ 876 $ 970 $ 1,073 $ 15,784 $ 20,209 $ 22,976
Average fixed rate 9.62% 9.62% 9.62% 9.62% 9.62% 9.33% 9.39%
Variable-rate debt -- $ 40,200 -- -- -- $ 4,500 $ 44,700 $ 44,700
Average variable
rate -- 3.05% -- -- -- 1.15% 2.86%
Interest Rate Derivatives:
Interest rate swaps
Variable-to-fixed $ 50,000 $ 30,000 -- $ 30,000 -- -- $ 110,000 $ (4,940)
Average pay rate 5.81% 5.58% -- 5.43% -- -- 5.64%
Average receive rate 1.91% 1.88% -- 1.97% -- -- 1.92%
- ----------------------------------------------------------------------------------------------------------------------------
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 the back-to-school
and holiday seasons. See Note 15 of Notes to Consolidated Financial Statements
for the Company's quarterly results for fiscal 2002 and 2001. 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 past three years. However, there can be no
assurance that the Company's business will not be affected by inflationary
adjustments in the future.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information called for by this item is set forth in the Company's
Consolidated Financial Statements and supplementary data contained in this
report and is incorporated herein by this reference. See index at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Information regarding the change in the Company's independent auditor
was provided in the Company's Current Report on Form 8-K filed June 14, 2002
(amended on June 27, 2002). The letter from Arthur Andersen LLP stating the
firm's agreement with the information provided in the report was filed as an
exhibit to the Form 8-K report.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding executive officers is included in Part I
under the heading "Executive Officers." The remainder of the information called
for by this Item will be contained in the Company's Proxy Statement and is
hereby incorporated by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this Item will be contained in the
Company's Proxy Statement and is hereby incorporated by reference thereto (other
than the information called for by Items 402(k) and (l) of Regulation S-K, which
is not incorporated herein by reference).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The information called for by this Item will be contained in the
Company's Proxy Statement and is hereby incorporated by reference thereto.
See also Part II, Item 5 for a discussion of securities authorized for
issuance under equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item will be contained in the
Company's Proxy Statement and is hereby incorporated by reference thereto.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and the
Chief Financial Officer, have evaluated the effectiveness of the Company's
"disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14
and 15d-14), within 90 days of the filing date of this Form 10-K, and based upon
their evaluation, have concluded that the Company's disclosure controls and
procedures are effective.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls since the date
the internal controls were evaluated.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements--See the Index to
Consolidated Financial Statements and Financial Statement
Schedule on page F-1.
2. Consolidated Financial Statement Schedule--See the Index to
Consolidated Financial Statements and Financial Statement
Schedule on page F-1.
3. The following are exhibits to this Form 10-K and, if
incorporated by reference, the Company has indicated the
document previously filed with the Commission in which the
exhibit was included.
21
EXHIBIT
NO. DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
3.1 Articles of Incorporation Exhibit 3.1 to the Report on Form 8-B, File
No.0-19517 ("Form 8-B")
3.2 Bylaws Exhibit 3.2 to Form 8-B
10.1 Shareholders' Agreement among the Company and the Exhibit 10.3 to Amendment No. 2 to the
shareholders named therein Registration Statement on Form S-1, File No.
33-42142 ("1991 Form S-1")
* 10.2 (a) Employment Agreement with Frank Tworecke Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended October 30, 1999
* (b) First Amendment to Employment Agreement with Exhibit 10.3(b) to the Annual Report on Form 10-K for the
Frank Tworecke fiscal year ended February 2, 2002 ("2001 Form 10-K")
* 10.3 Employment Agreement with James H. Baireuther Exhibit 10.4 to the 2001 Form 10-K
* 10.4 Form of severance agreement with certain Exhibit 10.14 to Form 8-B
executive officers
* 10.5 Supplemental Executive Retirement Plan Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended August 4, 2001
10.6 Consulting and Noncompetition Agreement Exhibit 10.1 to the Quarterly Report on Form 10-Q
Between the Company and Leon D. Starr for the quarter ended November 3, 2001
* 10.7 Amended and Restated 1991 Stock Option and Exhibit 4.1 to the Registration Statement on Form
Restricted Stock Plan S-8, File No. 333-36633
* 10.8 2000 Stock Incentive Plan Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended July 29, 2000 ("7/29/00
10-Q")
* 10.9 Phantom Equity Replacement Stock Option Plan Exhibit 10.18 to the 1991 Form S-1
* 10.10 Management Incentive Plan and Addendum to Exhibit 10.13 to the Annual Report on Form 10-K
Management Incentive Plan for the fiscal year ended February 1, 1997
22
EXHIBIT DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
NO.
10.11 (a) Sublease of Oil City, Pennsylvania store between Exhibit 10.16 to the 1991 Form S-1
the Company and M. Thomas Grumbacher
(b) First Amendment to Oil City, Pennsylvania sublease Exhibit 10.22 to Amendment No. 1 to the 1991 Form S-1
(c) Corporate Guarantee with respect to Oil City, Exhibit 10.26 to Amendment No. 1 to the 1991 Form S-1
Pennsylvania lease
10.12 Second Amended and Restated Receivables Purchase
Agreement dated as of January 17, 2003 among The
Bon-Ton Receivables Partnership, L.P., Falcon
Asset Securitization Corporation, EagleFunding
Capital Corporation, Bank One, N.A. and Fleet
Securities, Inc.
10.13 (a) Credit Agreement dated as of April 15, 1997 among Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
the Company, Adam, Meldrum & Anderson Co., Inc., quarter ended May 3, 1997
and The Bon-Ton Stores of Lancaster, Inc., the
Other Credit Parties Signatory thereto, the
Lenders Signatory thereto from time to time, the
First National Bank of Boston and General
Electric Capital Corporation
(b) First Amendment to Credit Agreement Exhibit 10.3(b) to the Registration Statement on Form
S-1, File No. 333-48811 ("1998 Form S-1")
(c) Second Amendment to Credit Agreement Exhibit 10.3(c) to the 1998 Form S-1
(d) Third Amendment to Credit Agreement Exhibit 10.3(d) to the 1998 Form S-1
(e) Fourth Amendment to Credit Agreement Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended October 31, 1998
(f) Fifth Amendment to Credit Agreement Exhibit 10.14(f) to the Annual Report on Form 10-K
for the fiscal year ended January 30, 1999
(g) Sixth Amendment to Credit Agreement Exhibit 10.5(g) to the Annual Report on Form 10-K
for the fiscal year ended January 29, 2000
(h) Seventh Amendment to Credit Agreement Exhibit 10.1 to the 7/29/00 10-Q
(i) Eighth Amendment to Credit Agreement Exhibit 10.13(a) to the 2001 Form 10-K
23
21. Subsidiaries of The Bon-Ton.
23.1 Consent of KPMG LLP.
23.2 Explanation Concerning Absence of Current Written Consent of Arthur
Andersen LLP.
99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Constitutes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter
ended February 1, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
Dated: April 28, 2003 By: /s/ Tim Grumbacher
------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Tim Grumbacher Chairman of the Board April 28, 2003
- -------------------------------- and Chief Executive Officer
Tim Grumbacher
/s/ James H. Baireuther Vice Chairman, Chief April 28, 2003
- -------------------------------- Administrative Officer and Chief
James H. Baireuther Financial Officer and Director
(principal financial and accounting officer)
/s/ Robert B. Bank Director April 28, 2003
- --------------------------------
Robert B. Bank
/s/ Philip M. Browne Director April 28, 2003
- --------------------------------
Philip M. Browne
/s/ Shirley A. Dawe Director April 28, 2003
- --------------------------------
Shirley A. Dawe
24
/s/ Marsha M. Everton Director April 28, 2003
- --------------------------------
Marsha M. Everton
/s/ Samuel J. Gerson Director April 28, 2003
- --------------------------------
Samuel J. Gerson
/s/ Michael L. Gleim Director April 28, 2003
- --------------------------------
Michael L. Gleim
/s/ Robert E. Salerno Director April 28, 2003
- --------------------------------
Robert E. Salerno
/s/ Robert C. Siegel Director April 28, 2003
- --------------------------------
Robert C. Siegel
/s/ Leon D. Starr Director April 28, 2003
- --------------------------------
Leon D. Starr
/s/ Frank Tworecke President, Chief Operating April 28, 2003
- -------------------------------- Officer and Director
Frank Tworecke
/s/ Thomas W. Wolf Director April 28, 2003
- --------------------------------
Thomas W. Wolf
25
CERTIFICATION
I, Tim Grumbacher, Chairman of the Board and Chief Executive
Officer of The Bon-Ton Stores, Inc., certify that:
1) I have reviewed this Annual Report on Form 10-K of The Bon-Ton Stores, Inc.;
2) Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 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 in which this Annual Report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of
the 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 registrant's board of directors (or persons performing the equivalent
function):
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 weaknesses 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 Annual
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 28, 2003 By: /s/ Tim Grumbacher
-------------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
26
CERTIFICATION
I, James H. Baireuther, Vice Chairman, Chief Administrative
Officer and Chief Financial Officer of The Bon-Ton Stores, Inc., certify that:
1) I have reviewed this Annual Report on Form 10-K of The Bon-Ton Stores, Inc.;
2) Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this Annual 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 Annual 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 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 in which this Annual Report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of
the 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 registrant's board of directors (or persons performing the equivalent
function):
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 weaknesses 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 Annual
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 28, 2003 By: /s/ James H. Baireuther
----------------------------
James H. Baireuther
Vice Chairman, Chief Administrative
Officer and Chief Financial Officer
27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Independent Accountants' Reports.......................................... F-2
Consolidated Balance Sheets............................................... F-5
Consolidated Statements of Income......................................... F-6
Consolidated Statements of Shareholders' Equity........................... F-7
Consolidated Statements of Cash Flows..................................... F-8
Notes to Consolidated Financial Statements................................ F-9
Schedule II - Valuation and Qualifying Accounts........................... F-33
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
The Bon-Ton Stores, Inc.:
We have audited the accompanying consolidated balance sheet of The
Bon-Ton Stores, Inc. and subsidiaries as of February 1, 2003 and the related
consolidated statements of income, shareholders' equity and cash flows for the
fiscal year then ended. In connection with our audit of the fiscal 2002
consolidated financial statements, we also have audited the fiscal 2002
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit. The fiscal 2001
and fiscal 2000 consolidated financial statements and financial statement
schedule of The Bon-Ton Stores, Inc. were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements and financial statement schedule, before the
revisions described in Note 2 to the consolidated financial statements, in their
report dated March 6, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the fiscal 2002 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of The Bon-Ton Stores, Inc. and subsidiaries as of February
1, 2003, and the results of their operations and their cash flows for the fiscal
year then ended in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the related fiscal 2002
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed above, the fiscal 2001 and fiscal 2000 consolidated
financial statements and financial statement schedule of The Bon-Ton Stores,
Inc. and subsidiaries were audited by other auditors who have ceased operations.
As described in Note 2, these consolidated financial statements have been
revised to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
which was adopted by the Company as of February 3, 2002. In our opinion, the
disclosures for fiscal 2001 and fiscal 2000 in Note 2 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the fiscal 2001
and fiscal 2000 consolidated financial statements and financial statement
schedule of The Bon-Ton Stores, Inc. and subsidiaries other than with respect to
such disclosures and, accordingly, we do not express an opinion or any other
form of assurance on the fiscal 2001 and fiscal 2000 consolidated financial
statements and financial statement schedule taken as a whole.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 5, 2003
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To The Bon-Ton Stores, Inc.:
We have audited the accompanying consolidated balance sheets of The
Bon-Ton Stores, Inc. (a Pennsylvania corporation) and subsidiaries as of
February 2, 2002 and February 3, 2001, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three fiscal
years in the period ended February 2, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Bon-Ton Stores,
Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended February 2, 2002 in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 6, 2002
NOTE: THE REPORT ABOVE IS A COPY OF A PREVIOUSLY ISSUED REPORT AND HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP. THE INFORMATION FOR EACH OF THE TWO YEARS IN
THE PERIOD ENDED FEBRUARY 2, 2002 IN THE TRANSITIONAL DISCLOSURES REQUIRED BY
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS," WHICH WAS ADOPTED BY THE COMPANY AS OF FEBRUARY 3, 2002, AS
DESCRIBED IN NOTE 2, WAS NOT REVIEWED BY ARTHUR ANDERSEN LLP.
F-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To The Bon-Ton Stores, Inc.:
We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements included in
The Bon-Ton Stores, Inc.'s annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated March 6,
2002. Our audit was made for the purpose of forming an opinion on those
statements taken as a whole. The schedule listed in the accompanying index is
the responsibility of the company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 6, 2002
NOTE: THE REPORT ABOVE IS A COPY OF A PREVIOUSLY ISSUED REPORT AND HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP. SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS,
IS LOCATED AT PAGE F-33.
F-4
THE BON-TON STORES, INC.
CONSOLIDATED BALANCE SHEETS
February 1, February 2,
(In thousands except share and per share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 16,796 $ 9,752
Trade and other accounts receivable, net of allowance for doubtful accounts
and sales returns of $3,540 and $3,758 in fiscal 2002 and 2001, respectively 46,735 31,161
Merchandise inventories 148,618 166,042
Prepaid expenses and other current assets 12,958 10,542
Deferred income taxes 3,205 7,371
- ---------------------------------------------------------------------------------------------------------------
Total current assets 228,312 224,868
- ---------------------------------------------------------------------------------------------------------------
Property, fixtures and equipment at cost,
less accumulated depreciation and amortization 136,201 143,884
Deferred income taxes 3,980 2,741
Goodwill and intangible assets 9,511 9,999
Other assets 4,019 4,091
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 382,023 $ 385,583
===============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 53,367 $ 57,007
Accrued payroll and benefits 14,037 9,743
Accrued expenses 25,546 28,191
Current portion of long-term debt 715 646
Current portion of obligations under capital leases 250 232
Income taxes payable 5,249 11,891
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 99,164 107,710
- ---------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 64,194 67,209
Obligations under capital leases, less current maturities 468 720
Other long-term liabilities 5,851 6,683
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 169,677 182,322
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
Shareholders' equity
Preferred Stock - authorized 5,000,000 shares at $0.01 par value; no shares issued -- --
Common Stock - authorized 40,000,000 shares at $0.01 par value; issued and
outstanding shares of 12,200,285 and 12,483,941 in fiscal 2002 and 2001,
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 in fiscal 2002 and 2001 30 30
Treasury stock, at cost - shares of 277,000 in fiscal 2002 (1,132) --
Additional paid-in capital 107,415 107,467
Deferred compensation (222) (408)
Accumulated other comprehensive income (1,876) (2,354)
Retained earnings 108,006 98,401
- ---------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 212,346 203,261
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 382,023 $ 385,583
===============================================================================================================
The accompanying notes are an integral part of these consolidated statements.
F-5
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended
-----------------------------------------
February 1, February 2, February 3,
(In thousands except share and per share data) 2003 2002 2001
- ------------------------------------------------------------------------------------------
Net sales $ 713,230 $ 721,777 $ 749,816
Other income, net 2,705 2,548 2,715
- ------------------------------------------------------------------------------------------
715,935 724,325 752,531
- ------------------------------------------------------------------------------------------
Costs and expenses:
Costs of merchandise sold 450,818 459,720 474,026
Selling, general and administrative 219,716 224,306 231,859
Depreciation and amortization 21,301 19,783 17,085
Unusual expense - 916 6,485
- ------------------------------------------------------------------------------------------
Income from operations 24,100 19,600 23,076
Interest expense, net 8,731 9,558 10,906
- ------------------------------------------------------------------------------------------
Income before income taxes 15,369 10,042 12,170
Income tax provision 5,764 3,816 4,622
- ------------------------------------------------------------------------------------------
NET INCOME $ 9,605 $ 6,226 $ 7,548
==========================================================================================
PER SHARE AMOUNTS -
BASIC:
Net income $ 0.63 $ 0.41 $ 0.50
==========================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,192,471 15,200,154 14,952,985
DILUTED:
Net income $ 0.62 $ 0.41 $ 0.50
==========================================================================================
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,394,231 15,214,145 14,952,985
The accompanying notes are an integral part of these consolidated statements.
F-6
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Class A Additional
Common Common Treasury Paid-in
(In thousands) Stock Stock Stock Capital
- ---------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 29, 2000 $ 123 $ 30 $ - $ 108,083
- ---------------------------------------------------------------------------------------------------
Net income - - - -
Deferred compensation amortization - - - -
Tax impact on Restricted Shares - - - (655)
Cancellation of Restricted Shares (1) - - (546)
- ---------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 3, 2001 122 30 - 106,882
- ---------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - -
Cumulative effect of change in accounting
for derivative instruments, net of $256
tax benefit - - - -
Unrealized loss on derivative financial
instruments, net of $1,158 tax benefit - - - -
- ---------------------------------------------------------------------------------------------------
Total comprehensive income - - - -
Issuance of stock under Stock
Award Plans 3 - - 686
Deferred compensation amortization - - - -
Tax impact on Restricted Shares - - - (45)
Cancellation of Restricted Shares - - - (56)
- ---------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 2, 2002 125 30 - 107,467
- ---------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - - -
Amounts amortized into interest expense
from OCI, net of $627 tax benefit - - - -
Change in fair value of cash flow hedges,
net of $340 tax benefit - - - -
- ---------------------------------------------------------------------------------------------------
Total comprehensive income - - - -
Common shares repurchased - - (1,132) -
Deferred compensation amortization - - - -
Tax impact on Restricted Shares - - - (8)
Cancellation of Restricted Shares - - - (44)
- ---------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 1, 2003 $ 125 $ 30 $ (1,132) $ 107,415
===================================================================================================
Other
Deferred Compre-
Compen- hensive Retained
(In thousands) sation Income Earnings Total
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
BALANCE AT JANUARY 29, 2000 $ (2,172) $ - $ 84,627 $ 190,691
- --------------------------------------------------------------------------------------------------------
Net income - - 7,548 7,548
Deferred compensation amortization 1,490 - - 1,490
Tax impact on Restricted Shares 18 - - (637)
Cancellation of Restricted Shares 317 - - (230)
- --------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 3, 2001 (347) - 92,175 198,862
- --------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - 6,226 6,226
Cumulative effect of change in accounting
for derivative instruments, net of $256
tax benefit - (426) - (426)
Unrealized loss on derivative financial
instruments, net of $1,158 tax benefit - (1,928) - (1,928)
- --------------------------------------------------------------------------------------------------------
Total comprehensive income - (2,354) 6,226 3,872
Issuance of stock under Stock
Award Plans (689) - - -
Deferred compensation amortization 589 - - 589
Tax impact on Restricted Shares - - - (45)
Cancellation of Restricted Shares 39 - - (17)
- --------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 2, 2002 (408) (2,354) 98,401 203,261
- --------------------------------------------------------------------------------------------------------
Comprehensive income:
Net income - - 9,605 9,605
Amounts amortized into interest expense
from OCI, net of $627 tax benefit - 1,045 - 1,045
Change in fair value of cash flow hedges,
net of $340 tax benefit - (567) - (567)
- --------------------------------------------------------------------------------------------------------
Total comprehensive income - 478 9,605 10,083
Common shares repurchased - - - (1,132)
Deferred compensation amortization 160 - - 160
Tax impact on Restricted Shares - - - (8)
Cancellation of Restricted Shares 26 - - (18)
- --------------------------------------------------------------------------------------------------------
BALANCE AT FEBRUARY 1, 2003 $ (222) $ (1,876) $ 108,006 $ 212,346
========================================================================================================
The accompanying notes are an integral part of these consolidated statements.
F-7
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended
---------------------------------------
February 1, February 2, February 3,
(In thousands) 2003 2002 2001
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 9,605 $ 6,226 $ 7,548
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 21,301 19,783 17,085
Bad debt provision 1,357 1,305 1,863
Stock compensation expense 160 589 833
(Gain) loss on sale of property, fixtures and equipment (2) 3 (12)
Cancellation of Restricted Shares (18) (17) (230)
Decrease in other long-term assets 71 162 634
Decrease (increase) in deferred income tax assets 2,640 (5,217) (2,917)
Increase (decrease) in other long-term liabilities 93 (4,383) 4,650
Proceeds from sale of accounts receivable, net - - 12,000
Changes in operating assets and liabilities:
Increase in accounts receivable (16,185) (8,414) (10,133)
Decrease in merchandise inventories 17,425 24,147 11,931
(Increase) decrease in prepaid expenses and other current assets (2,416) (2,039) 3,868
Decrease in accounts payable (1,718) (1,973) (1,582)
Increase (decrease) in accrued expenses 2,426 7,825 (6,743)
(Decrease) increase in income taxes payable (6,647) 1,424 590
- -------------------------------------------------------------------------------------------------------------
Total adjustments 18,487 33,195 31,837
- -------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 28,092 39,421 39,385
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (14,806) (15,550) (29,577)
Proceeds from sale of property, fixtures and equipment 31 16 12
Proceeds from sale and leaseback arrangement - - 11,046
- -------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (14,775) (15,534) (18,519)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (174,030) (207,064) (302,720)
Proceeds from issuance of long-term debt 170,850 176,050 293,700
Common shares repurchased (1,132) - -
(Decrease) increase in bank overdraft balances (1,961) 2,812 (8,587)
Exercised stock options - - 1
- -------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (6,273) (28,202) (17,606)
Net increase (decrease) in cash and cash equivalents 7,044 (4,315) 3,260
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,752 14,067 10,807
- -------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,796 $ 9,752 $ 14,067
=============================================================================================================
The accompanying notes are an integral part of these consolidated statements.
F-8
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The
Bon-Ton Stores, Inc. and all of its wholly owned subsidiaries (the "Company").
All intercompany transactions have been eliminated in consolidation.
ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions which affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain prior year balances have been reclassified to conform to the
current year presentation.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearer January 31, and
consisted of fifty-two weeks for fiscal years 2002 and 2001, and fifty-three
weeks for fiscal year 2000. Fiscal years 2002, 2001 and 2000 ended on February
1, 2003, February 2, 2002 and February 3, 2001, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with a
remaining term of three months or less to be cash equivalents. Cash equivalents
are generally overnight money market investments.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company owns and administers a proprietary credit card program. The
Company performs ongoing credit evaluations of its customers who hold the
Company's proprietary credit card, and adjusts credit limits based upon payment
history and customer current credit-worthiness. The Company continually monitors
collections and payments from customers and maintains an allowance for estimated
credit losses based upon its historical experience and any specific customer
collection issues identified (e.g. bankruptcy). While such credit losses have
historically been within expectations and provisions established, the Company
cannot guarantee that it will continue to experience the same credit loss rates
as in the past. If circumstances change (e.g., higher than expected defaults or
bankruptcies), the Company's estimates of the recoverability of amounts due the
Company could be reduced by a material amount. The allowance for doubtful
accounts and sales returns amounted to $3,540 and $3,758 as of February 1, 2003
and February 2, 2002, respectively.
F-9
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
MERCHANDISE INVENTORIES
For financial reporting and tax purposes, merchandise inventories are
determined by the retail method, using a LIFO (last-in, first-out) cost basis.
The estimated cost to replace inventories was $148,643 and $174,841 as of
February 1, 2003 and February 2, 2002, respectively.
PROPERTY, FIXTURES AND EQUIPMENT: DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property, fixtures and equipment is
computed using the straight-line method based upon remaining lease terms or the
following average estimated service lives:
Buildings 20 to 40 years
Leasehold improvements 2 to 15 years
Fixtures and equipment 3 to 10 years
No depreciation is recorded until property, fixtures and equipment are
placed into service. Property, fixtures and equipment not placed into service
are classified as construction in progress. The Company capitalizes interest and
lease costs incurred during the construction of new facilities or major
improvements to existing facilities. The amount of interest and lease costs
capitalized is limited to that incurred during the construction period. Interest
of $3, $25 and $123 was capitalized in fiscal years 2002, 2001 and 2000,
respectively.
Repair and maintenance costs are charged to operations as incurred.
Property retired or sold is removed from asset and accumulated depreciation
accounts and the resulting gain or loss is reflected in income.
Costs of major remodeling and improvements on leased stores are
capitalized as leasehold improvements. Leasehold improvements are generally
amortized over the shorter of the lease term or the useful life of the asset.
Capital leases are recorded at the lower of fair market value or the present
value of future minimum lease payments. Capital leases are amortized over the
primary term of the lease.
The Company assesses the impairment of property, fixtures and equipment
whenever events or changes in circumstances indicate that the carrying value may
not be recoverable. In fiscal 2002, the Company evaluated the recoverability of
its long-lived assets. As a result, an impairment loss of approximately $2,000
for certain store assets was recorded and is included as part of depreciation
and amortization expense (see Note 3).
GOODWILL AND INTANGIBLE ASSETS
Goodwill and intangible assets consist of goodwill and lease-related
interests classified as intangible assets:
February 1, February 2,
2003 2002
- ----------------------------------------------------------------------------------
Goodwill $ 4,208 $ 4,208
Less: Accumulated amortization 1,243 1,243
- ----------------------------------------------------------------------------------
Net $ 2,965 $ 2,965
==================================================================================
Intangible assets - leases $ 10,828 $ 10,828
Less: Accumulated amortization 4,282 3,794
- ----------------------------------------------------------------------------------
Net $ 6,546 $ 7,034
==================================================================================
F-10
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
These lease interests relate to below-market-rate leases purchased in
store acquisitions completed in fiscal years 1992 through 1999, which were
adjusted to reflect fair market value. These leases have average lives of
twenty-five years.
In fiscal 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No. 142"). In
accordance with SFAS No. 142, the Company reviews goodwill and other intangible
assets that have indefinite lives for impairment. This review is performed
annually and when events or changes in circumstances indicate the carrying value
of goodwill and other intangible 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 and
forecasts, which reflect anticipated changes in the economy and the industry.
ACCRUED EXPENSES
Accrued expenses consist of liabilities associated with store and
corporate facility operations, such as lease expense, advertising, employee
severance, real estate taxes, legal expense and expense recorded pursuant to
Statement of Financial Accounting Standards No. 133 (see Note 6).
INCOME TAXES
The Company accounts for income taxes according to Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"). Under SFAS No. 109, deferred tax assets and liabilities are computed
based on the difference between the financial statement and income tax basis of
assets and liabilities using applicable current marginal tax rates.
REVENUE RECOGNITION
The Company recognizes revenue at either the point-of-sale or at the
time merchandise is shipped to the customer. Sales are net of returns and
exclude sales tax. A reserve is provided for estimated merchandise returns based
on experience.
LEASED DEPARTMENT SALES
The Company leases space to third parties in several of its stores and
receives compensation based on a percentage of sales made in these departments.
Other income, net, includes leased department rental income of $2,903, $2,738
and $3,001 in fiscal 2002, 2001 and 2000, respectively.
ADVERTISING
Advertising production costs are expensed the first time the
advertisement is run. Media placement costs are expensed in the period the
advertising appears. Total advertising expenses, net of vendor allowances,
included in selling, general and administrative expenses for fiscal 2002, 2001
and 2000 were $25,694, $26,717 and $28,784, respectively. Prepaid expenses and
other current assets include prepaid advertising costs of $589 and $352 at
February 1, 2003 and February 2, 2002, respectively.
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
F-11
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
the purchase price from the vendor, and (5) authorized by internal management.
If the aforementioned criteria are not met, the Company reflects the allowance
dollars 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.
PURCHASE ORDER VIOLATIONS
The Company, consistent with industry practice, mandates that vendor
merchandise shipments conform to certain standards. These standards are usually
defined in the purchase order and include items such as proper ticketing,
security tagging, quantity, packaging, on-time delivery, etc. Failure by vendors
to conform to these standards increases Company merchandise handling costs.
Accordingly, various purchase order violation charges are billed to vendors;
these charges are reflected by the Company as a reduction of cost of sales in
the period in which the respective violations occur. The Company establishes
reserves for disputed purchase order violations.
SELF-INSURANCE LIABILITIES
The Company is self-insured for certain losses related to workers'
compensation and certain health insurance, although it maintains stop-loss
coverage with third party insurers to limit certain exposures. The estimate of
its self-insurance liability contains uncertainty since the Company must use
judgment to estimate the ultimate cost that will be incurred to settle reported
claims and unreported claims for incidents incurred but not reported as of the
balance sheet date. When estimating its self-insurance liability, the Company
considers a number of factors which include, but are not limited to, historical
claim experience, demographic factors, severity factors and valuations provided
by independent third-party advisors. The Company has not made any material
changes in the accounting methodology used to establish its self-insurance
liabilities during the past three fiscal years.
REVOLVING CHARGE ACCOUNTS
Finance charge income and late fees on customer revolving charge
accounts are reflected as a reduction of selling, general and administrative
expenses. Finance charge income and late fees earned by the Company, before
considering costs of administering and servicing revolving charge accounts, for
fiscal 2002, 2001 and 2000 were $34,732, $33,706 and $30,619, respectively.
Finance charge income is a component of securitization income (see Note 8).
RECEIVABLE SALES
When the Company sells receivables in securitizations of credit card
loans, it retains interest-only strips, subordinated interests and servicing
rights, all of which are retained interests in the securitized receivables. Gain
or loss on sale of the receivables depends in part on the previous carrying
amount of financial assets involved in the transfer, allocated between the
assets sold and retained interests, based on their relative fair value at date
of transfer. To obtain fair values, quoted market prices are used if available.
However, quotes are generally not available for retained interests and the
Company estimates fair value based on the present value of future expected cash
flows using management's best estimates of key assumptions--credit losses,
prepayment impact and an appropriate discount rate commensurate with the risks
involved. As all estimates used are influenced by factors outside the Company's
control, uncertainty is inherent in these estimates, making it reasonably
possible that they could change in the near term.
F-12
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
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. SFAS 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. 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:
Fiscal Year Ended
- --------------------------------------------------------------------------------------------------------
February 1, February 2, February 3,
2003 2002 2001
- --------------------------------------------------------------------------------------------------------
Net income, as reported $ 9,605 $ 6,226 $ 7,548
Deduct: Total stock-option-based employee compensation
expense determined under fair-value-based methods
for all awards, net of related tax effects 416 590 736
- --------------------------------------------------------------------------------------------------------
Pro forma net income $ 9,189 $ 5,636 $ 6,812
========================================================================================================
Earnings per share
Basic As reported $ 0.63 $ 0.41 $ 0.50
Pro forma 0.60 0.37 0.46
Diluted As reported $ 0.62 $ 0.41 $ 0.50
Pro forma 0.60 0.37 0.46
The Company used the Black-Scholes option pricing model to calculate
the fair value of stock options at the grant date. See Note 14 for assumptions
used.
EARNINGS PER SHARE
The presentation of earnings per share ("EPS") requires a
reconciliation of the numerators and denominators used in basic and diluted EPS
calculations. The numerator, net income, is identical in both calculations. The
following table presents a reconciliation of the weighted average shares
outstanding used in EPS calculations for each of fiscal 2002, 2001 and 2000:
Fiscal 2002 Fiscal 2001 Fiscal 2000
------------------- ------------------- -------------------
Shares EPS Shares EPS Shares EPS
- ---------------------------------------------------------------------------------------------------
Basic Calculation 15,192,471 $ 0.63 15,200,154 $ 0.41 14,952,985 $ 0.50
Effect of dilutive shares -
Restricted Shares 103,274 13,991 --
Options 98,486 -- --
- ---------------------------------------------------------------------------------------------------
Diluted Calculation 15,394,231 $ 0.62 15,214,145 $ 0.41 14,952,985 $ 0.50
===================================================================================================
F-13
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Options to purchase shares with exercise prices greater than average
market price were excluded from the above table for fiscal 2002, 2001 and 2000
in the approximate amounts of 620,000, 908,000 and 1,206,000, respectively, as
they would have been antidilutive.
FUTURE ACCOUNTING CHANGES
In December, 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation--Transition and Disclosure" ("SFAS No. 148"). SFAS No.
148 presents additional alternatives for transitioning to the fair-value method
of accounting for stock-based compensation, prescribes the format to be used for
pro forma disclosures and requires the inclusion of similar pro forma
disclosures in interim financial statements. The provisions of SFAS No. 148 are
effective for the Company in fiscal 2003. The Company has not yet determined the
impact adoption of SFAS No. 148 will have on its financial position or results
of operations. In accordance with SFAS No. 148, the Company will include these
disclosures in its quarterly financial statements beginning May 3, 2003. The
planned implementation of SFAS No. 148 does not impact the Company's accounting
for stock-based employee compensation or its consolidated financial results at
this time as the Company has not changed to the fair-value-based method of
accounting for stock-based employee compensation.
In January, 2003, the FASB issued Interpretation No. 46, "Consolidation
of Variable Interest Entities" ("Interpretation 46"), to clarify the conditions
under which assets, liabilities and activities of another entity should be
consolidated into the financial statements of a company. Interpretation 46
requires the consolidation of a variable interest entity (including a special
purpose entity such as that utilized in an accounts receivable securitization
transaction) by a company that bears the majority of the risk of loss from the
variable interest entity's activities and/or is entitled to receive a majority
of the variable interest entity's residual returns. The provisions of
Interpretation 46 are required to be adopted by the Company in fiscal 2003. The
Company does not believe adoption of Interpretation 46 will have a material
impact on its overall financial position or results of operations as any special
purpose entities qualifying for accounting treatment under SFAS No. 140 (such as
the Company's special purpose entity used for sales of accounts receivable--see
Note 8) are not subject to Interpretation 46.
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 a vendor be considered a
reduction of the prices of vendor's products and shown as a reduction of cost of
sales 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 and the Company does not expect that EITF
02-16 will have a material impact on the Company's financial position or results
of operations in fiscal 2003.
2. GOODWILL AND INTANGIBLE ASSETS
Effective at the beginning of fiscal 2002, the Company adopted the FASB
SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). Upon
adoption of SFAS No. 142, goodwill amortization ceased. Goodwill is now subject
to fair-value based impairment tests performed, at a minimum, on an annual
basis. In addition, a transitional goodwill impairment test was required as of
the adoption date.
The Company had $2,965 in net goodwill recorded in its consolidated
balance sheet at the beginning of fiscal 2002. The Company completed the
required transitional goodwill impairment test in the first quarter of fiscal
2002, and determined that its goodwill was not impaired. During fiscal 2002,
F-14
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
no goodwill amortization was recorded, no additional goodwill was acquired, no
impairment losses were recognized and no goodwill was disposed of through sale
of a business unit.
SFAS No. 142 requires the presentation of net income and related
earnings per share data adjusted for the effect of goodwill amortization. To
illustrate the impact of goodwill amortization on results of the prior year
periods, the following table provides adjusted net income and earnings per
share:
Fiscal Year Ended
------------------------------------------------
February 1, February 2, February 3,
2003 2002 2001
------------------------------------------------
Reported net income $ 9,605 $ 6,226 $ 7,548
Add back: Goodwill amortization - 234 234
- --------------------------------------------------------------------------------------
Adjusted net income $ 9,605 $ 6,460 $ 7,782
======================================================================================
Per share amounts -
BASIC:
Reported net income $ 0.63 $ 0.41 $ 0.50
Add back: Goodwill amortization - 0.02 0.02
- --------------------------------------------------------------------------------------
Adjusted net income $ 0.63 $ 0.43 $ 0.52
======================================================================================
DILUTED:
Reported net income $ 0.62 $ 0.41 $ 0.50
Add back: Goodwill amortization - 0.01 0.02
- --------------------------------------------------------------------------------------
Adjusted net income $ 0.62 $ 0.42 $ 0.52
======================================================================================
SFAS No. 142 also requires disclosure of intangible assets that are
subject to amortization. As of February 1, 2003 and February 2, 2002, the
Company reported the following lease-related interests classified as intangible
assets:
February 1, February 2,
2003 2002
- -----------------------------------------------------------------------------------------
Intangible assets - leases $ 10,828 $ 10,828
Less: Accumulated amortization 4,282 3,794
- ----------------------------------------------------------------------------------------
Net $ 6,546 $ 7,034
========================================================================================
These lease interests relate to below-market-rate leases purchased in
store acquisitions completed in fiscal 1992 through 1999, which were adjusted to
reflect fair market value. These leases have average lives of twenty-five years.
Amortization of $488 and $489 was recorded on these intangible assets during
fiscal 2002 and 2001, respectively. The Company anticipates amortization on
these intangible assets of approximately $389, $423, $493, $491 and $470 for
fiscal 2003, 2004, 2005, 2006 and 2007, respectively.
3. LONG-LIVED ASSET IMPAIRMENT
In August 2001, the FASB issued SFAS No. 144, "Accounting for
Impairment or Disposal of Long-lived Assets" ("SFAS No. 144"), which supersedes
SFAS No. 121. SFAS No. 144, effective for fiscal 2002, retains provisions of
SFAS No. 121 regarding recognition and measurement of long-lived asset
F-15
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
impairment. SFAS No. 144 supersedes the accounting and reporting provisions of
Accounting Principles Board Opinion No. 30 "Reporting the Results of
Operations--Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for
segments of a business to be disposed of. SFAS No. 144 retains the SFAS No. 121
requirement to recognize an impairment loss only if the carrying amount of the
long-lived asset is not recoverable from its undiscounted cash flows and to
measure an impairment loss as the difference between the carrying amount and the
fair value of the asset.
In fiscal 2002, the Company evaluated the recoverability of its
long-lived assets. This evaluation measured the fair value of the assets by
comparing estimated future cash flows for individual store locations to their
carrying values. As a result of the evaluation, an impairment loss of
approximately $2,000 was recorded in depreciation and amortization expense.
4. EXIT OR DISPOSAL ACTIVITIES
In June 2002, the FASB issued SFAS No. 146, "Accounting for Exit or
Disposal Activities" ("SFAS No. 146"). SFAS No. 146 addresses significant issues
regarding the recognition, measurement, and reporting of costs associated with
exit and disposal activities, including restructuring activities that are
currently accounted for pursuant to the guidance that the Emerging Issues Task
Force ("EITF") set forth in EITF Issue No. 94-3. The scope of SFAS No. 146 also
includes: (1) costs related to terminating a contract that is not a capital
lease, and (2) termination benefits that employees who are involuntarily
terminated receive under the terms of a one-time benefit arrangement that is not
an ongoing benefit arrangement or an individual deferred compensation contract.
SFAS No. 146 was effective for exit or disposal activities that were initiated
after December 31, 2002.
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 Company
elected to adopt SFAS No. 146 early for these exit activities and, accordingly,
in fiscal 2002 recorded a charge of $696 relating to the closures, which is
included within selling, general and administrative expense. This expense
relates primarily to termination benefits for affected associates and other
costs to consolidate the distribution centers. Termination benefits for the
distribution center will be paid as operations are discontinued, but only if
employees render service through the scheduled closing date.
Following is a reconciliation of accruals related to fiscal 2002
distribution center and store closures:
February 1,
Fiscal 2002 Fiscal 2002 2003
Provision Payments Balance
- -----------------------------------------------------------------------------------------
Termination benefits $ 346 $ (126) $ 220
Other closing costs 350 (95) 255
- ---------------------------------------------------------------------------------------
Total $ 696 $ (221) $ 475
=======================================================================================
Total closing costs were estimated at $802, with $452 for termination
benefits and $350 for other costs. The termination benefits are being recognized
ratably over the future service period: $346 was expensed in fiscal 2002 and
$106 will be expensed in fiscal 2003.
The Company had operating lease agreements for these locations. The
operating lease agreement for the Red Bank location expired at the end of
January 2003, after which time the Company had no further obligation. When the
Company discontinues distribution center operations, the remaining distribution
center rental obligation through lease expiration in December 2020 will be
$9,782. The
F-16
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
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.
5. DEBT
Debt consisted of the following:
February 1, February 2,
2003 2002
- ------------------------------------------------------------------------------------------------------------------
Revolving credit agreement - principal payable April 15, 2004;
interest payable periodically at varying rates (3.05% for fiscal 2002) $ 40,200 $ 42,500
Mortgage notes payable - principal payable in varying monthly installments
through June 2016; interest 9.62%; secured by land and buildings 19,209 19,855
Mortgage notes payable - principal payable February 1, 2012; interest payable
monthly at various rates; secured by a building 4,500 4,500
Mortgage note payable - principal payable January 1, 2011; interest payable
monthly at 5.00% beginning February 1, 2006; secured by a building and fixtures 1,000 1,000
- -----------------------------------------------------------------------------------------------------------------
Total debt 64,909 67,855
Less: current maturities 715 646
- -----------------------------------------------------------------------------------------------------------------
Long-term debt $ 64,194 $ 67,209
=================================================================================================================
In December 2001, the Company amended its revolving credit facility
("Credit Facility") agreement to reduce the line of credit from $200,000 to
$175,000.
The Credit Facility provides a formula for borrowing availability, with
selective elements, determined upon eligible inventory and selected fixed assets
and real estate, up to an aggregate principal amount of $175,000. As of February
1, 2003, the Company had borrowings of $40,200 and letter-of-credit commitments
of $11,466, with $43,053 of additional borrowing availability remaining under
the Credit Facility. The interest charged under this agreement, based on LIBOR
or an index rate plus an applicable margin, is determined by a formula based on
the Company's interest coverage ratio (defined as the ratio of earnings before
interest, taxes, depreciation and amortization to interest expense).
The Company entered into a loan agreement with the City of Scranton,
Pennsylvania on July 5, 2000. The loan provided $1,000 to be used in certain
store renovations. The agreement provides for interest payments beginning
February 1, 2006 at a rate of 5.0% per annum. The principal balance is to be
paid in full by January 1, 2011.
Several of the Company's loan agreements contain restrictive covenants,
including a minimum trade support ratio; a minimum fixed charge ratio; and
limitations on dividends, additional incurrence of debt and capital
expenditures. The Company was in compliance with each of these covenants during
fiscal 2002.
The fair value of the Company's debt, excluding interest rate swaps,
was estimated at $67,676 and $70,087 on February 1, 2003 and February 2, 2002,
respectively, and is based on an estimate of rates available to the Company for
debt with similar features.
F-17
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Debt maturities by fiscal year as of February 1, 2003, are as follows:
2003 $ 715
2004 40,991
2005 876
2006 970
2007 1,073
2008 and thereafter 20,284
- ----------------------------------------------------------------------------
$ 64,909
============================================================================
6. INTEREST RATE DERIVATIVES
The Company maintains an interest rate swap portfolio that allows the
Company to convert variable rates under its credit facilities to fixed rates.
The following table indicates the notional amounts as of February 1, 2003 and
February 2, 2002 and the range of interest rates paid and received by the
Company during the respective fiscal years:
February 1, February 2,
2003 2002
- ------------------------------------------------------------------------
Fixed swaps (notional amount) $110,000 $110,000
Range of receive rate 1.76%-2.21% 2.21%-6.74%
Range of pay rate 5.43%-5.88% 5.43%-5.88%
The interest rate swap agreements will expire on various dates from
June 2, 2003 to February 6, 2006. The net income or expense from the exchange of
interest rate payments is included in interest expense. The estimated fair value
of the interest rate swap agreements, based on dealer quotes, at February 1,
2003 and February 2, 2002, was an unrealized loss of $4,940 and $4,311,
respectively, and represents the amount the Company would pay if the agreements
were terminated as of said dates.
On February 5, 2001, the Company adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"), and SFAS No.
138, "Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an amendment of FASB Statement No. 133." SFAS No. 133 requires the
transition adjustment, net of tax effect, resulting from adopting these
Statements to be reported in net income or other comprehensive income, as
appropriate, as the cumulative effect of a change in accounting principle. In
the first quarter of fiscal 2001, a $426 net-of-tax loss transition adjustment
was recorded in accumulated other comprehensive income as a result of
recognizing at fair value all derivatives designated as cash flow hedging
instruments.
ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company recognizes all derivatives on the balance sheet at fair
value. On the date the derivative instrument is entered into, the Company
generally designates the derivative as a hedge of a forecasted transaction or 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 accumulated other comprehensive income and
reclassified into earnings as the underlying hedged item affects earnings. 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 is recorded in current earnings. Also, changes
in the entire fair value of a derivative that is not designated as a hedge are
recorded in earnings. 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
F-18
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
transactions. This process includes relating all derivatives that are designated
as cash flow hedges to specific balance sheet 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 fair values or 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.
DEBT PORTFOLIO MANAGEMENT
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. Reflecting the result of 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) reduce the aggregate
interest rate risk of the debt portfolio in accordance with certain debt
management parameters. The Company enters into interest rate swap agreements to
change the fixed/variable interest rate mix of the debt portfolio in order to
maintain the percentage of fixed-rate and variable-rate debt within parameters
set by management. In accordance with these parameters, swap agreements are used
to reduce interest rate risks and costs inherent in the Company's debt
portfolio. The Company currently has interest rate swap contracts outstanding to
effectively convert variable-rate debt to fixed-rate debt. These contracts
entail the exchange of fixed-rate and floating-rate interest payments
periodically over the agreement life.
CASH FLOW HEDGES
Changes in the fair value of derivatives qualifying as cash flow hedges
are reported in accumulated other comprehensive income. Gains and losses are
reclassified into earnings as the underlying hedged item affects earnings, such
as when quarterly settlements are made on the hedged forecasted transaction.
In fiscal 2002, the Company discontinued cash flow hedge accounting for
$40,000 of the above-disclosed interest rate swaps. As these swaps were no
longer considered highly effective under SFAS 133, they are being
marked-to-market through earnings each reporting period. For fiscal 2002, a
reduction in interest expense of $225 was recorded related to the mark-to-market
adjustment for these swaps. In addition, $1,672 related to these swaps was
released from accumulated other comprehensive income to interest expense during
fiscal 2002.
Interest expense for fiscal 2002 and 2001 includes net losses related
to hedge ineffectiveness of $1,395 and $543, respectively. As of February 1,
2003, the Company reflected accrued expenses of $3,040 and other long-term
liabilities of $1,900 to recognize the fair value of its interest rate swaps.
All charges recorded in fiscal 2002 and 2001 pursuant to SFAS No. 133 are
considered non-cash items for Consolidated Statement of Cash Flows purposes.
As of February 1, 2003, it is expected that approximately $689 of
net-of-tax losses in accumulated other comprehensive income will be reclassified
into earnings within the next twelve months. As of February 1, 2003, the maximum
time over which the Company is hedging its exposure to the variability in future
cash flows for forecasted transactions is thirty-six months.
F-19
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
7. INTEREST COSTS
Interest and debt costs were:
Fiscal Year Ended
- -------------------------------------------------------------------------------------
February 1, February 2, February 3,
2003 2002 2001
- -------------------------------------------------------------------------------------
Interest costs incurred $ 8,821 $ 9,732 $ 11,284
Interest income (87) (149) (255)
Capitalized interest, net (3) (25) (123)
- ------------------------------------------------------------------------------------
Interest expense, net $ 8,731 $ 9,558 $ 10,906
====================================================================================
Interest paid $ 8,029 $ 8,244 $ 11,698
====================================================================================
8. SALE OF RECEIVABLES
The Company securitizes its proprietary credit card portfolio through
an accounts receivable facility (the "Facility"). The securitization agreement
was amended and restated in January 2003 to extend the term of the Facility
through January 2004, and contains modified pricing, a fixed charge covenant and
an increase in subordinated interest requirements. Substantially all other terms
and conditions of the original agreement remain unchanged.
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 February 1, 2003 and February 2, 2002, credit card receivables
were sold under the securitization agreement in the amount of $145,000 and
$150,000, respectively, and the Company had subordinated interests of $44,520
and $29,816, 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 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 February 1, 2003 and February 2, 2002 included
restricted cash of $6,222 and $2,355, respectively, required based upon the
terms of the Company's accounts receivable 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.
F-20
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
During fiscal 2002, 2001 and 2000, the Company recognized
securitization income of $8,860, $5,613 and $2,721, respectively, on
securitization of credit card loans. This income is reported as a component of
selling, general and administrative expenses.
Key economic assumptions used in measuring retained interests during
the year were as follows:
Fiscal Year Ended
- ----------------------------------------------------------------------------------------
February 1, 2003 February 2, 2002
- ----------------------------------------------------------------------------------------
Yield on credit cards 16.5% - 16.7% 16.8% - 17.3%
Payment rate 19.2% - 19.6% 18.8% - 19.3%
Interest rate on variable funding 4.0% 4.4% - 6.4%
Net charge-off rate 6.6% - 7.3% 7.4% - 8.5%
Residual cash flows discount rate 8.0% 8.0% - 12.0%
The interest-only strip was recorded at its fair value of $1,111 and
$1,109 at February 1, 2003 and February 2, 2002, respectively, and is included
in trade and other accounts receivable on the Consolidated Balance Sheets. The
following table shows key economic assumptions used in measuring the
interest-only strip for fiscal 2002. The table also displays the sensitivity of
the current fair value of residual cash flows in fiscal 2002 to immediate 10%
and 20% adverse changes in assumptions:
Decrease in Value
Due to Adverse
Changes
- ----------------------------------------------------------------------------------------
Assumptions 10% 20%
- ----------------------------------------------------------------------------------------
Yield (annual rate) 16.5% $ 596 $ 1,193
Payment rate 19.6% 110 221
Interest rate on variable and adjusted contracts 4.0% 146 291
Net charge-off rate 7.3% 267 534
Residual cash flows discount rate (annual rate) 8.0% 2 4
These sensitivities are hypothetical and should be used with caution.
Changes in fair value based on a 10% variation in an assumption generally cannot
be extrapolated because the relationship of the change in an assumption to the
change in fair value may not be linear. Also, in this table the effect of a
variation in a particular assumption on the fair value of retained interest is
calculated without changing any other assumption; in reality, changes in one
factor may result in changes in another, which might magnify or counteract the
sensitivities.
The Company retained net proceeds from servicing fees, which it
reported as a component of selling, general and administrative expenses, of
$2,890, $2,854 and $2,742 for fiscal 2002, 2001 and 2000, respectively. As of
February 1, 2003, $5,185 of the total managed credit card receivables were 61
days or more past due. Net credit losses on the total managed credit card
receivables were $7,364, $7,813 and $6,827 for fiscal 2002, 2001 and 2000,
respectively.
F-21
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
9. PROPERTY, FIXTURES AND EQUIPMENT
As of February 1, 2003 and February 2, 2002, property, fixtures and
equipment and related accumulated depreciation and amortization consisted of:
February 1, February 2,
2003 2002
- ----------------------------------------------------------------------------------------
Land and improvements $ 2,801 $ 2,801
Buildings and leasehold improvements 147,746 144,715
Furniture and equipment 130,627 125,020
Buildings under capital leases 2,910 5,052
- ---------------------------------------------------------------------------------------
284,084 277,588
Less: Accumulated depreciation and amortization 147,883 133,704
- ---------------------------------------------------------------------------------------
Net property, fixtures and equipment $ 136,201 $ 143,884
=======================================================================================
Property, fixtures and equipment with a net depreciated cost of
approximately $24,063 and $25,303 were pledged as collateral for secured loans
at February 1, 2003 and February 2, 2002, respectively.
10. COMMITMENTS AND CONTINGENCIES
LEASES
The Company is obligated under capital and operating leases for a major
portion of its store properties. Certain leases provide for additional rental
payments based on a percentage of sales in excess of a specified base
(contingent rentals) and for payment by the Company of operating costs (taxes,
maintenance and insurance). Also, selling space has been leased to other
retailers in many of the Company's facilities.
At February 1, 2003, future minimum lease payments under operating
leases and the present value of net minimum lease payments under capital leases
are as follows:
Fiscal Year Capital Leases Operating Leases
- --------------------------------------------------------------------------------------------------
2003 $ 300 $ 20,996
2004 300 20,664
2005 200 19,138
2006 -- 15,331
2007 -- 12,689
2008 and thereafter -- 68,491
- --------------------------------------------------------------------------------------------------
Total net minimum rentals $ 800 $ 157,309
- --------------------------------------------------------------------------------------------------
Less: Amount representing interest 82
- --------------------------------------------------------------------------------------------------
Present value of net minimum lease payments, of
which $250 is due within one year $ 718
- --------------------------------------------------------------------------------------------------
Minimum rental commitments under operating leases are reflected without
reduction for rental income due in future years under noncancellable subleases
since amounts are immaterial. Some of the store leases contain renewal options
ranging from five to thirty-five years. Included in the minimum
F-22
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
lease payments under operating leases are leased vehicles, copiers, fax
machines, computer equipment, and a related-party commitment with an entity
related to the Company's majority shareholder of $224 for each of fiscal 2003
through 2005 and $112 for fiscal 2006.
Rental expense consisted of the following:
Fiscal Year Ended
- ----------------------------------------------------------------------------------------------------
February 1, February 2, February 3,
2003 2002 2001
- ----------------------------------------------------------------------------------------------------
Operating leases:
Buildings:
Minimum rentals $ 20,377 $ 19,960 $ 18,667
Contingent rentals 2,383 2,067 2,358
Fixtures and equipment 669 1,403 2,094
Contingent rentals on capital leases 40 320 397
- --------------------------------------------------------------------------------------------------
Totals $ 23,469 $ 23,750 $ 23,516
==================================================================================================
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 all such litigation and claims will not have a material adverse
effect on the Company's financial position or results of operations.
11. SHAREHOLDERS' EQUITY
The Company's capital structure consists of Common Stock with one vote
per share and Class A Common Stock with ten votes per share. Transfers of the
Company's Class A Common Stock are restricted. Upon sale or transfer of
ownership or voting rights of Class A Common Stock to other than permitted
transferees, as defined, such shares will convert to an equal number of Common
Stock shares. Additionally, the Company authorized 5,000,000 shares of preferred
stock; however, no preferred shares were issued.
12. INCOME TAXES
The Company accounts for income taxes according to SFAS No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax
assets and liabilities are computed based on the difference between the
financial statement and income tax basis of assets and liabilities using
applicable current marginal tax rates.
F-23
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
Components of the income tax provision are as follows:
Fiscal Year Ended
- ------------------------------------------------------------------------------
February 1, February 2, February 3,
2003 2002 2001
- ------------------------------------------------------------------------------
Current:
Federal $ 3,128 $ 8,975 $ 7,296
State 350 644 243
- -----------------------------------------------------------------------------
Total current 3,478 9,619 7,539
Deferred:
Federal 2,133 (5,416) (2,759)
State 153 (387) (158)
- -----------------------------------------------------------------------------
Total deferred 2,286 (5,803) (2,917)
- -----------------------------------------------------------------------------
Income tax expense $ 5,764 $ 3,816 $ 4,622
=============================================================================
Components of gross deferred tax assets and liabilities were comprised
of the following:
February 1, February 2,
2003 2002
- ---------------------------------------------------------------------------------
Deferred tax assets:
Accrued expenses $ 3,912 $ 4,919
Restricted shares and options 153 238
Bad debt reserve 805 1,053
Sale and leaseback 929 992
CEO retirement -- 403
Asset write-down 1,112 724
Inventory -- 1,673
SFAS No. 133 - Interest rate swaps 1,852 1,617
Other 331 --
- -------------------------------------------------------------------------------
Total gross deferred tax assets $ 9,094 $ 11,619
===============================================================================
Deferred tax liabilities:
Fixed assets $ 748 $ 823
Inventory 143 --
Other 1,018 684
- -------------------------------------------------------------------------------
Total gross deferred tax liabilities $ 1,909 $ 1,507
===============================================================================
As of February 1, 2003 and February 2, 2002, no deferred tax assets had
associated valuation allowances, since the Company believes these tax benefits
are realizable through reversal of existing deferred tax liabilities, tax
carry-back availability and future taxable income.
F-24
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
A reconciliation of the statutory federal income tax rate to the
effective tax rate is presented below:
Fiscal Year Ended
- -------------------------------------------------------------------------------------------
February 1, February 2, February 3,
2003 2002 2001
- -------------------------------------------------------------------------------------------
Tax at statutory rate 35.0% 35.0% 35.0%
State income taxes, net of
federal benefit 2.5 2.6 2.0
Other, net -- 0.4 1.0
- --------------------------------------------------------------------------------------
Total 37.5% 38.0% 38.0%
======================================================================================
In fiscal 2002, 2001 and 2000, the Company made income tax payments
(net of refunds) of $9,430, $6,963 and $7,232, respectively.
13. EMPLOYEE BENEFIT PLANS
The Company provides eligible employees with retirement benefits under
a 401(k) salary reduction and profit sharing plan (the "Plan"). Employees are
eligible to participate in the Plan after they reach the age of 21, complete one
year of service and work at least 1,000 hours in any calendar year. Under the
401(k) provisions of the Plan, the majority of eligible employees may contribute
up to 15% of their compensation to the Plan. Company matching contributions, not
to exceed 5% of eligible employees' compensation, are at the discretion of the
Company's Board of Directors. Company matching contributions under the 401(k)
provisions of the Plan become fully vested for eligible employees after three
years of service. Contributions to the Plan under the profit sharing provisions
are at the discretion of the Company's Board of Directors. These profit sharing
contributions become fully vested after five years of service. The Company's
fiscal 2002, 2001 and 2000 expense under the Plan was $2,545, $2,200 and $2,200,
respectively.
14. STOCK AWARD PLANS
The Company's Amended and Restated 1991 Stock Option and Restricted
Stock Plan ("1991 Stock Plan"), as amended through June 17, 1997, provided for
the granting of the following options and awards to certain associates,
officers, directors, consultants and advisors: Common Stock options,
performance-based Common Stock options as part of a long-term incentive plan for
selected officers, and Common Stock awards subject to substantial risk of
forfeiture ("Restricted Shares"). A maximum of 1,900,000 shares could have been
granted under the 1991 Stock Plan. Options granted under the 1991 Stock Plan
were generally issued at the market price of the Company's stock on the date of
grant, vested over three to five years and had a ten-year term. No options or
awards may be granted under the 1991 Stock Plan after September 30, 2001.
In addition to the 1991 Stock Plan, during 1991 the Board of Directors
approved a Phantom Equity Replacement Plan ("Replacement Plan") to replace the
Company's previous deferred compensation arrangement that was structured as a
phantom stock program. Grants under the Replacement Plan vested over
approximately one to six years and have a thirty-year term. No options or awards
may be granted from the 1991 Replacement Plan after December 31, 1991. As of
February 1, 2003, options for 42,598 shares remain outstanding at an exercise
price of $3.25 with a remaining contractual life of six years (all such shares
are exercisable as of February 1, 2003).
The Company amended its Management Incentive Plan ("MIP Plan") in 1997
to provide, at the election of each participant, for bonus awards to be received
in vested Restricted Shares in lieu of cash
F-25
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
on the satisfaction of applicable performance goals. The maximum number of
shares to be granted under the MIP Plan was 300,000, with no shares to be
granted after July 1998.
In 1998, the Company implemented The Bon-Ton Stores, Inc. Performance
Based Stock Incentive Plan ("Stock Incentive Plan") for Heywood Wilansky, former
president and chief executive officer. The Stock Incentive Plan provided
performance-based compensation to Mr. Wilansky in the form of stock bonuses
granted in connection with services provided. In fiscal 1998, 250,000 Restricted
Shares and options to purchase 250,000 shares with an exercise price of $8.00
per share were issued under the Stock Incentive Plan. During fiscal 2000,
250,000 Restricted Shares vested and 250,000 options were forfeited due to the
early retirement of Heywood Wilansky (see Note 16). No shares remain in the
plan.
The Company implemented the 2000 Stock Incentive Plan ("2000 Stock
Plan") during fiscal 2000. The 2000 Stock Plan provides for the granting of
Common Stock options and Restricted Shares to certain associates, officers,
directors, consultants and advisors. A maximum of 400,000 shares may be granted
under the 2000 Stock Plan. No options or awards may be granted under the 2000
Stock Plan after March 2, 2010. During fiscal 2001, options for 100,000 shares
were granted under the 2000 Stock Plan. As of February 1, 2003, options for
100,000 shares remain outstanding at an exercise price of $2.39 with a remaining
contractual life of nine years (33,334 of these shares are exercisable as of
February 1, 2003). No Restricted Shares were granted under the 2000 Stock Plan
as of February 1, 2003.
The Company used the Black-Scholes option pricing model to calculate
the fair value of the stock options at the grant date. The following assumptions
were used:
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------
February 1, February 2, February 3,
2003 2002 2001
- -----------------------------------------------------------------------------------------------
Expected option term in years 7.7 7.8 6.0
Stock price volatility factor 68.9% 70.4% 88.0%
Dividend yield 0.0% 0.0% 0.0%
Risk-free interest rate 3.7% 4.7% 6.6%
F-26
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
A summary of the options and restricted shares under the 1991 Stock
Plan follows:
Performance-Based Restricted
Common Stock Options Options Shares
------------------------ ----------------------- -----------
Weighted Weighted
Number Average Number of Average Number of
of Options Price Options Price Shares
-----------------------------------------------------------------
FISCAL 2000
January 29, 2000 982,030 $ 8.20 167,100 $ 7.25 123,333
Granted 10,500 $ 3.29 -- -- --
Transferred 83,550 $ 7.25 (83,550) $ 7.25 --
Exercised -- -- -- -- (83,333)
Forfeited (319,533) $ 8.64 (83,550) $ 7.25 (30,000)
- --------------------------------------------------------------------------------------------------
February 3, 2001 756,547 $ 7.93 -- -- 10,000
- --------------------------------------------------------------------------------------------------
Options exercisable at
February 3, 2001 562,588 $ 8.39 -- -- --
Weighted average fair value of
options granted during fiscal
2000 $ 2.55 --
- --------------------------------------------------------------------------------------------------
FISCAL 2001
Granted 212,084 $ 2.94 -- -- 275,652
Transferred -- -- -- -- ---
Exercised -- -- -- -- (128,617)
Forfeited (131,033) $ 10.49 -- -- (7,000)
- --------------------------------------------------------------------------------------------------
February 2, 2002 837,598 $ 6.27 -- -- 150,035
- --------------------------------------------------------------------------------------------------
Options exercisable at
February 2, 2002 578,848 $ 7.42 -- -- --
Weighted average fair value of
options granted during fiscal
2001 $ 2.15 --
- --------------------------------------------------------------------------------------------------
FISCAL 2002
Granted -- -- -- -- --
Transferred -- -- -- -- --
Exercised -- -- -- -- (27,685)
Forfeited (38,750) $ 3.77 -- -- (3,333)
- --------------------------------------------------------------------------------------------------
February 1, 2003 798,848 $ 3.77 -- -- 119,017
==================================================================================================
Options exercisable at
February 1, 2003 640,098 $ 7.24 -- -- --
Weighted average fair value of
options granted during fiscal
2002 -- --
The exercised Restricted Shares in the above summary represent shares
for which the restrictions have lapsed.
F-27
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The range of exercise prices for the 1991 Stock Plan options
outstanding as of February 1, 2003 follows:
Options Outstanding Options Exercisable
------------------------------------------- ---------------------------
Weighted Weighted Weighted
Number Average Average Number Average
Range of Outstanding Remaining Exercise Exercisable at Exercise
Exercise Prices at 2/1/03 Contractual Life Price 2/1/03 Price
- -------------------------------------------------------------------------------------------------
$ 2.94 173,584 8.1 years $ 2.94 16,500 $ 2.94
$ 3.19 - $ 7.13 409,598 5.2 years $ 5.91 407,932 $ 5.92
$ 7.25 - $11.25 145,266 3.2 years $ 8.02 145,266 $ 8.02
$13.25 - $17.00 70,400 5.1 years $14.28 70,400 $14.28
- -------------------------------------------------------------------------------------------------
Total 798,848 640,098
==================================================================================================
A summary of the Replacement Plan follows:
Discount Non-Discount
Options Options
- -------------------------------------------------------------------------------------------
Exercise Price $ 3.25 $ 13.00
- ---------------------------------------------------------------------------------------
FISCAL 2000
January 29, 2000 49,189 37,552
Exercised -- --
Forfeited -- (8,650)
- ---------------------------------------------------------------------------------------
February 3, 2001 49,189 28,902
- ---------------------------------------------------------------------------------------
FISCAL 2001
Exercised -- --
Forfeited (6,591) (28,902)
- ---------------------------------------------------------------------------------------
February 2, 2002 42,598 --
- ---------------------------------------------------------------------------------------
FISCAL 2002
Exercised -- --
Forfeited -- --
- ---------------------------------------------------------------------------------------
February 1, 2003 42,598 --
=======================================================================================
F-28
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
A summary of the Management Incentive Plan follows:
Shares
------
FISCAL 2000
January 29, 2000 94,561
Granted --
Restriction lapsed (13,907)
Forfeited (21,359)
- ----------------------------------------------------------------
February 3, 2001 59,295
- ----------------------------------------------------------------
FISCAL 2001
Granted --
Restriction lapsed (12,471)
Forfeited (10,212)
- ----------------------------------------------------------------
February 2, 2002 36,612
- ----------------------------------------------------------------
FISCAL 2002
Granted --
Restriction lapsed (6,762)
Forfeited (3,323)
- ----------------------------------------------------------------
February 1, 2003 26,527
================================================================
Forfeiture of options and shares in the above plans resulted primarily
from employment termination and voluntary forfeitures.
Amortization of restricted stock grants, charged to compensation
expense, was $160, $589 and $1,270 in fiscal 2002, 2001 and 2000, respectively.
F-29
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
15. QUARTERLY RESULTS (UNAUDITED)
Fiscal Quarter Ended
- --------------------------------------------------------------------------------------------------------------
May 4, August 3, November 2, February 1,
FISCAL 2002: 2002 2002 2002 2003
- --------------------------------------------------------------------------------------------------------------
Net sales $ 150,517 $ 153,890 $ 167,542 $ 241,281
Other income, net 534 553 520 1,098
- --------------------------------------------------------------------------------------------------------------
151,051 154,443 168,062 242,379
- --------------------------------------------------------------------------------------------------------------
Costs of merchandise sold 100,397 95,959 104,878 149,584
Selling, general and administrative expenses 50,636 53,733 55,301 60,046
Depreciation and amortization(1) 5,057 4,847 4,945 6,452
- --------------------------------------------------------------------------------------------------------------
Income (loss) from operations (5,039) (96) 2,938 26,297
Interest expense, net 1,977 2,399 2,413 1,942
- --------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7,016) (2,495) 525 24,355
Income tax provision (benefit) (2,631) (936) 197 9,134
- --------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (4,385) $ (1,559) $ 328 $ 15,221
==============================================================================================================
PER SHARE AMOUNTS -
BASIC:
Net income (loss) $ (0.29) $ (0.10) $ 0.02 $ 1.01
==============================================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,283,017 15,237,911 15,180,685 15,068,269
DILUTED:
Net income (loss) $ (0.29) $ (0.10) $ 0.02 $ 1.00
==============================================================================================================
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,283,017 15,237,911 15,392,437 15,260,979
(1) In the fiscal quarter ended February 1, 2003, the Company recorded an
impairment loss of approximately $2,000 on long-lived assets.
F-30
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
15. QUARTERLY RESULTS (UNAUDITED) - (CONTINUED)
Fiscal Quarter Ended
- ---------------------------------------------------------------------------------------------------------------
May 5, August 4, November 3, February 2,
FISCAL 2001: 2001 2001 2001 2002
- ---------------------------------------------------------------------------------------------------------------
Net sales $ 149,719 $ 150,867 $ 175,621 $ 245,570
Other income, net 524 518 466 1,040
- ---------------------------------------------------------------------------------------------------------------
150,243 151,385 176,087 246,610
- ---------------------------------------------------------------------------------------------------------------
Costs of merchandise sold 98,740 95,637 111,898 153,445
Selling, general and administrative expenses 53,106 54,112 56,656 60,432
Depreciation and amortization (1) 4,450 4,484 4,908 5,941
Unusual expense -- -- 916 --
- ---------------------------------------------------------------------------------------------------------------
Income (loss) from operations (6,053) (2,848) 1,709 26,792
Interest expense, net 1,917 2,175 2,484 2,982
- ---------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes (7,970) (5,023) (775) 23,810
Income tax provision (benefit) (2,989) (1,884) (291) 8,980
- ---------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (4,981) $ (3,139) $ (484) $ 14,830
===============================================================================================================
PER SHARE AMOUNTS -
BASIC:
Net income (loss) $ (0.33) $ (0.21) $ (0.03) $ 0.97
===============================================================================================================
BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,150,307 15,160,684 15,213,869 15,275,755
DILUTED:
Net income (loss) $ (0.33) $ (0.21) $ (0.03) $ 0.97
===============================================================================================================
DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,150,307 15,160,684 15,213,869 15,331,717
(1) In the fiscal quarter ended February 2, 2002, the Company evaluated a store
lease renewal option exercisable in January 2003. The Company decided against
exercising this lease option and accelerated depreciation of $1,389 on
associated assets with lives exceeding the expected lease term.
F-31
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
16. UNUSUAL EXPENSE
During the third quarter of fiscal 2001, the Company reported $916 in
unusual expense relating to a workforce reduction and realignment and
elimination of certain senior management positions. As of February 1, 2003, all
monies were paid and the remaining accrual was zero.
During the second quarter of fiscal 2000, the Company reported $6,485
in unusual expense relating to a workforce reduction of 187 corporate and store
personnel. The workforce reduction affected 137 employees and eliminated 50
positions. Additionally, the Company announced the early retirement of Heywood
Wilansky, former president and chief executive officer, and the realignment and
elimination of certain senior management positions. As of February 1, 2003, all
monies were paid and the remaining accrual was zero.
Mr. Wilansky received his base salary (paid in monthly installments)
through January 31, 2003, the remainder of his employment term. Mr. Wilansky
also received a $170 cash bonus for fiscal 2000. Outstanding options to purchase
435,233 shares of Common Stock were exercisable for a period of ninety days. No
options were exercised and all were cancelled. Restricted Shares in the amount
of 333,333 shares vested immediately.
17. SALE AND LEASEBACK ARRANGEMENTS
In December 2000, the Company purchased land from the Company's
majority shareholder and related parties. The Company then sold the land along
with building, leasehold improvements and certain equipment, comprising a
department store and a distribution center both located in Pennsylvania, and
subsequently leased the facilities back under a twenty-year lease. The lease has
been accounted for as an operating lease for financial reporting purposes. Net
proceeds of $11,046 were received from the sale, of which $6,023 was used to
pay-off related mortgages and the remainder to provide additional working
capital. The gain associated with the sale, totaling $418, has been deferred in
other long-term liabilities and is being amortized on a straight-line basis over
the twenty-year lease term. Payments on the lease during fiscal 2002 were
$1,265, which includes the prepayment of February and March 2003.
18. STOCK REPURCHASES
On February 7, 2002, the Company announced a stock repurchase program
authorizing the purchase of up to $2,500 of the Company's Common Stock from time
to time. During fiscal 2002, the Company purchased 277,000 Common Stock shares
at a cost of $1,132. Treasury stock is accounted for by the cost method.
F-32
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
THE BON-TON STORES, INC. AND SUBSIDIARIES
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS END
CLASSIFICATION OF PERIOD & EXPENSES DEDUCTIONS OF PERIOD
- ------------------------------------------------------------------------------------------------
YEAR ENDED FEBRUARY 3, 2001:
Allowances for doubtful
accounts and sales returns $ 3,167,000 $ 7,797,000(1) $(6,919,000)(2) $ 4,045,000
Reserve for facility closing $ 230,000 $ -- $ (140,000)(3) $ 90,000
YEAR ENDED FEBRUARY 2, 2002:
Allowances for doubtful
accounts and sales returns $ 4,045,000 $ 8,032,000(1) $(8,319,000)(2) $ 3,758,000
Reserve for facility closing $ 90,000 $ -- $ (4,000)(3) $ 86,000
YEAR ENDED FEBRUARY 1, 2003:
Allowances for doubtful
accounts and sales returns $ 3,758,000 $ 8,321,000(1) $(8,539,000)(2) $ 3,540,000
Reserve for facility closing $ 86,000 $ 696,000(4) $ (244,000)(3) $ 538,000
- -------------------
NOTES:
(1) Provision for merchandise returns and loss on credit sales.
(2) Uncollectible accounts written off, net of recoveries.
(3) Facility closing expenses, net of recoveries.
(4) Fiscal 2002 provision for store closing, as discussed in Note 4 to
Consolidated Financial Statements.
F-33
EXHIBIT INDEX
Exhibit Description
10.12 Second Amended and Restated Receivables Purchase Agreement.
21. Subsidiaries of the Registrant.
23.1 Consent of KPMG LLP.
23.2 Explanation Concerning Absence of Current Written Consent of
Arthur Andersen LLP.
99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.