-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Cq9eqx8MVPQ+Do9JX4DuDX6YuHzLE3EZb5C+SFqnGre92ICkeCgnhRDxSpOPCOyu J2S1N7dSiI+X/phF4u8uVA== 0001036050-98-000719.txt : 19980430 0001036050-98-000719.hdr.sgml : 19980430 ACCESSION NUMBER: 0001036050-98-000719 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19980131 FILED AS OF DATE: 19980429 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BON TON STORES INC CENTRAL INDEX KEY: 0000878079 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-DEPARTMENT STORES [5311] IRS NUMBER: 232835229 STATE OF INCORPORATION: PA FISCAL YEAR END: 0131 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-19517 FILM NUMBER: 98603738 BUSINESS ADDRESS: STREET 1: 2801 E MARKET ST CITY: YORK STATE: PA ZIP: 17402-2406 BUSINESS PHONE: 7177577660 MAIL ADDRESS: STREET 1: P O BOX 2821 CITY: YORK STATE: PA ZIP: 17405-2821 10-K 1 FORM 10-K 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 January 31, 1998 0-19517 THE BON-TON STORES, INC. 2801 EAST MARKET STREET YORK, PENNSYLVANIA, 17402 (717) 757-7660 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
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] As of March 30, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant was approximately $79,281,626.00, based upon the closing price of $15.75 per share on March 30, 1998, as reported by the Nasdaq National Market.* As of March 30, 1998, there were 8,924,697 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 II - Portions of the Registrant's Annual Report to security holders for Fiscal Year Ended January 31, 1998 ("Annual Report"). Part III - Portions of the Registrant's Proxy Statement with respect to its 1998 Annual Meeting of Shareholders ("Proxy Statement"). _____________________________ * Calculated by excluding all shares 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. - -------------------------------------------------------------------------------- As used in this Annual Report on Form 10-K, references to a "fiscal year" refer to the 52 or 53 week period ending on the Saturday nearer January 31 of the following calendar year (e.g. a reference to fiscal 1996 is a reference to the fiscal year ended February 1, 1997). "SAFE HARBOR" STATEMENT - ----------------------- Certain information included in this Annual Report on Form 10-K contains statements that are forward looking. Such forward-looking information involves certain risks and uncertainties that could significantly affect anticipated results in the future, including, but not limited to, uncertainties affecting retail generally (such as consumer confidence and demand for soft goods); risks relating to the leverage and debt service of the Company; and competition within the markets in which the Company's stores are located. PART I ITEM 1. BUSINESS GENERAL The Bon-Ton Stores, Inc., together with its subsidiaries (collectively, the "Company" or "The Bon-Ton"), operates 64 quality fashion department stores in secondary markets with 35 stores in Pennsylvania, 24 in New York, three stores in Maryland and one store in each of West Virginia and New Jersey. The Company's strategy focuses on being the premier fashion retailer in smaller markets that demand, but often have limited access to, better branded merchandise. In many of its markets, The Bon-Ton is the primary destination for branded fashion merchandise from top designers such as Calvin Klein, Liz Claiborne, Nautica, Ralph Lauren and Tommy Hilfiger. The Bon-Ton provides an in-depth selection of high-quality, well-known branded merchandise at competitive prices in upscale shopping environments. None of The Bon-Ton's stores are located in major metropolitan markets, and most are located in smaller secondary markets. The Bon-Ton's strategic focus is on smaller secondary markets that are served primarily by moderate-price competitors offering a more limited selection of better branded fashion merchandise. The Company's executive offices are located at 2801 East Market Street, York, Pennsylvania. MERCHANDISING The Bon-Ton stores offer moderate and better fashion apparel, home furnishings, cosmetics, accessories, shoes and other items. The Company's sales of apparel constituted 63% of sales in fiscal year 1997. The chart below illustrates the sales by product category for fiscal 1997, fiscal 1996 and fiscal 1995: 2
FISCAL YEAR ---------------------- MERCHANDISE CATEGORY 1997 1996 1995 - -------------------- ------ ------ ------ Women's clothing..... 28.0% 27.4% 27.0% Men's clothing....... 17.8 17.7 17.6 Home................. 12.2 12.0 11.8 Cosmetics............ 9.7 9.8 10.0 Children's clothing.. 7.0 7.4 8.1 Accessories.......... 7.3 7.9 8.1 Junior's clothing.... 5.5 5.5 5.6 Intimate apparel..... 5.0 5.3 5.1 Shoes................ 5.0 4.7 4.4 Fine Jewelry......... 2.0 1.7 1.6 Beauty Salon......... 0.5 0.6 0.7 ----- ----- ----- Total............. 100.0% 100.0% 100.0% ===== ===== =====
The Company carries a number of highly recognized brand names, including Calvin Klein, Cole Haan, Estee Lauder, Jones New York, Kenneth Cole, Liz Claiborne, Nautica, Nine West, Ralph Lauren, Steve Madden, Tommy Hilfiger, Tommy Hilfiger Jeans and Via Spiga, and within these brands chooses collections which balance fashion, price and selection. The Company continues to implement its strategy of shifting the merchandise mix from predominantly moderate to a higher proportion of better brands and assessing each store to determine the appropriate product mix for the market it serves. As part of this process, the Company has revised its inventory strategy to carry a deeper selection from fewer, select vendors. Complementing its branded merchandise, the Company's exclusive private brand merchandise provides fashion at competitive pricing under names such as Andrea Viccaro, Jenny Buchanan, Susquehanna Trail Outfitters and Susquehanna Blues. The Bon-Ton views its private brand merchandise as a strategic addition to its strong array of highly recognized, quality national brands and as an opportunity to increase brand exclusiveness, customer loyalty and competitive differentiation. 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 latter half of each fiscal year, which includes the back-to-school and holiday seasons. 3 MARKETING The Bon-Ton seeks to attract new customers and to maintain customer loyalty with frequent-shopper clubs such as "Club X", which was created for the Company's junior customers. Through its "retail-tainment" programs, the Company promotes in-store events such as fashion shows, wardrobe seminars and cooking demonstrations in selected markets, and tie-ins with local charitable and cultural organizations. The Company attracts customers by offering services such as free gift wrap, special order capability and in-store alterations. In addition, through its "Certified Value" program, the Company maintains everyday value prices on staple items such as turtlenecks, T-shirts, shorts and denim within major product groups. To increase merchandise turnover, the Company systematically marks down slow-selling merchandise that is no longer current. The Company conducts its advertising and promotional programs through newspaper advertisements, direct mail and, to a lesser extent, local television and radio. The Company maintains an in-house advertising group that produces substantially all of its print advertising. The effectiveness of the Company's direct mail efforts has been greatly enhanced through database management systems. By accurately identifying the predictors of response to its direct mail pieces, the Company now has the ability to rank, score and select customers with event-specific information. STORE FACILITIES The Company's stores vary in size from approximately 45,000 to 160,000 gross square feet with 42 of such stores at less than 90,000 gross square feet. All but two of the Company's stores are anchor tenants in shopping malls or in, or adjacent to, strip shopping centers. All of the Company's stores are operated as "The Bon-Ton". The following table sets forth the total of The Bon-Ton stores at the beginning and end of each of the last five fiscal years, including the number of additional stores from acquisitions and the opening of new stores and the number of store closures:
Fiscal Year 1997 1996 1995 1994 1993 - ----------- ---- ---- ---- ---- ---- Number of stores: Beginning of year 64 68 69 35 36 Additions 0 1 4 35 1 Closings 0 (5) (5) (1) (2) ---- ---- ---- ---- ---- End of year 64 64 68 69 35
4 EXPANSION The Company was incorporated in Pennsylvania in 1996 and is the successor to S. Grumbacher & Son, a family business which was founded in 1898. In 1994, the Company doubled its number of stores with three acquisitions involving 35 stores, including 19 stores from Hess's Department Stores, Inc., the ten stores of Adam, Meldrum & Anderson Co., Inc., based in Buffalo, New York and the six stores of C.E. Chappell & Sons, Inc., based in Syracuse, New York. In 1995 and 1996, the Company entered the Rochester and Elmira, New York markets with four acquired stores and the opening of one additional store, and opened a new store in Jamestown, New York in March 1998. In addition, the Company closed ten stores between March 1995 and January 1997 to eliminate mall or market duplication resulting from such acquisitions or to close underperforming stores, and closed its Rome, Georgia store in April 1998. The Company plans to maintain its growth by expanding and upgrading its existing stores and by opening new stores and will consider opportunities for growth through acquisitions of department store companies or their real estate assets if and when such opportunities arise. The Company's market positioning strategy has been to locate its new stores or acquire existing companies or their stores in secondary markets generally within or contiguous to its existing areas of operations. PURCHASING The Bon-Ton's strategy is to build relationships with its top vendors, creating working alliances that will be mutually beneficial to the vendor and the Company. The Company has reduced its total number of vendors by 44% since 1994 and, as of January 1998, the Company purchases merchandise from approximately 1,350 domestic and foreign manufacturers and suppliers, with relatively little concentration in any one supplier. The Company purchases certain of its private brand merchandise through Frederick Atkins, Inc. ("Atkins"), an association of major retailers that provides its members with group purchasing opportunities. The Company's membership in Atkins also entitles it to receive current information about marketing and operating trends. MANAGEMENT INFORMATION AND CONTROL SYSTEM The Company operates a proprietary management information and control system with the capability to track inventory from the distribution centers to the point-of-sale and to generate financial reports by multiple categories. The Company currently operates seven primary system 5 modules: Merchandising; Financial; Point-of-Sale; Purchase Order Management; Financial Transfer; Receiving; and Planning & Allocation. The Company utilizes the information generated from these modules to execute timely decisions in relation to the management of its business on a daily, weekly and monthly basis. The Company is in the process of enhancing its management information and control system to utilize advance shipping information through an electronic data interchange in order to expedite the flow of merchandise through the distribution centers. The Company believes that this system will provide improved productivity and better in-stock availability. The Company also plans to modernize its in-store systems over the next several years to improve operating efficiencies. The use of radio frequency for barcode scanning will streamline price change processing, re-ticketing, price audits and signage for promotional events, and an upgrade to the point-of-sale system, including an updated gift registry system, is planned to further enhance customer service and inventory management. YEAR 2000 DATE CONVERSION Many existing computer programs use only two digits to identify a year in the date field. These programs were designed and developed without considering the impact of the upcoming century change in the year 2000. If not corrected, many computer applications could fail or create erroneous results when processing year 2000 data. The Company has completed an assessment of the potential effects of the year 2000 century change and has established a central office to coordinate the identification, evaluation and implementation of changes to the Company's systems and applications necessary to achieve a year 2000 date conversion. All internally developed systems, which represent 69% of installed applications, have been modified to process year 2000 dates. The remaining systems are commercially supplied software packages maintained by third party vendors and are scheduled to be upgraded to a year 2000 version or replaced over the next 18 months. All installed systems require testing, which is planned over the next two years. The cost to complete the conversion, including internal personnel costs, is estimated to be $1,100,000. The Company is communicating with major suppliers, financial institutions and service providers to coordinate the conversion effort. CUSTOMER CREDIT Bon-Ton customers may pay for their purchases with The Bon-Ton proprietary credit card, Visa, Mastercard, American Express, cash or check. 6 The Company has made a significant investment in its credit card program since it believes that The Bon-Ton credit card holders generally constitute its most loyal and active customers; during fiscal 1997, the average dollar amount for proprietary credit card purchases substantially exceeded the average dollar amount for cash purchases. The Company believes that its credit card is a particularly productive tool for customer segmentation and target marketing. During fiscal 1997 and 1996, the Company issued 273,000 and 255,000 Bon-Ton credit cards, respectively, for newly opened accounts. The following table summarizes the percentage of total sales generated by payment type:
TYPE OF PAYMENT FISCAL YEAR - ---------------- --------------------------- 1997 1996 1995 ------ ------ ------ Bon-Ton credit card............................ 50% 51% 55% Visa, Mastercard, American Express............. 22 20 16 Cash or check.................................. 28 29 29 ---- ---- ---- Total..................................... 100% 100% 100% ==== ==== ====
All phases of The Bon-Ton proprietary credit card operation are handled by the Company except statement mailing and the processing of customer mail payments, which processing is performed pursuant to a retail lockbox agreement with a bank. Decisions whether to issue a credit card to an applicant are made on the basis of a credit scoring system. According to the National Retail Federation, net write-offs as a percentage of credit sales for the retail industry ranged from 1.06% to 5.09% in 1996. The Company's bad debt expense is in the lower end of this range. COMPETITION The Company faces competition for customers from traditional department stores such as J. C. Penney and Company, Inc. ("J.C. Penney"), Federated Department Stores Inc. ("Federated"), The May Department Stores Company ("The May Company") and Sears, Roebuck and Co. ("Sears"), from regional department stores such as Boscov's and from specialty stores and catalogue and other retailers. In addition, the Company faces competition for store locations from other department stores and other large retailers. In a number of its markets, the Company competes for customers with national department store chains which are better established in such markets than the Company and which offer a similar mix of better branded merchandise as the Company. In other markets, the Company faces potential competition from national chains that to date have not entered such markets and from national chains which have stores in the Company's markets but currently do not carry similar better branded goods as the Company. In all markets, the Company generally competes for customers with department stores offering moderately priced goods. Many of the Company's competitors are units of large national or regional chains that may have substantially greater financial and 7 other resources than the Company. Some of the Company's competitors have greater leverage with vendors of better merchandise than the Company, which may allow such competitors to obtain such merchandise more easily or on better terms than the Company. Competition with The May Company, in particular, increased during fiscal 1994 and 1995 as a result of The Bon-Ton's entry into certain markets in which The May Company stores are located and The May Company's entry into certain markets in which The Bon-Ton's stores are located. Currently, The Bon- Ton competes directly with The May Company in a significant number of The Bon- Ton's geographic markets. In several of the Company's markets, the Company's stores compete with other department stores in the immediate vicinity which are larger and/or have a superior location in the relevant mall or local shopping area. The Company believes it compares favorably with its competitors with respect to quality, depth and breadth of merchandise, prices for comparable quality merchandise, customer service and store environment. The Company also believes its knowledge of smaller secondary markets in particular, developed over its many years of operation, and its focus on secondary markets as its primary area of operation, give it an advantage that cannot be readily duplicated. ASSOCIATES As of January 31, 1998, the Company had approximately 2,600 full-time and 6,000 part-time associates. The Company also employs additional part-time clerks and cashiers during peak periods. None of the Company's associates are represented by a labor union. The Company believes that its relationship with its associates is good. ITEM 2. PROPERTIES. The Company leases 56 of its stores and owns eight stores, three of which are subject to ground leases. The Company leases a total of 154,600 square feet for its executive and administrative offices which are located at or near the York Mall in York, Pennsylvania. The Company also leases the land (but owns the building) for its 143,700 square foot distribution center in York, Pennsylvania and leases its 326,000 square foot distribution center in Allentown, Pennsylvania. 8 The following table provides certain information regarding the Company's store properties:
STORE PROPERTIES ---------------- APPROXIMATE GROSS SQUARE MARKET LOCATION FEET ------ -------- ------------ PENNSYLVANIA Allentown South Mall 111,000 Bethlehem Westgate Mall 107,100 Bloomsburg Columbia Mall 46,100 Butler Clearview Mall 63,600 Carlisle Carlisle Plaza Mall 59,900 Chambersburg Chambersburg Mall 55,600 Doylestown Doylestown Shopping Center 55,500 Easton Palmer Park Mall 120,200 Greensburg Westmoreland Mall 99,900 Hanover North Hanover Mall 67,600 Harrisburg Camp Hill (Free Standing) 145,200 Colonial Park Shopping Center 136,500 Indiana Indiana Mall 60,400 Johnstown The Galleria 80,900 Lancaster Park City Center 144,800 Lebanon Lebanon Plaza Mall 53,700 Lewistown Central Business District 46,700 Oil City/Franklin Cranberry Mall 45,200 Pottsville Schuylkill Mall 61,100 Quakertown Richland Mall 88,100 Reading Berkshire Mall 159,400 Scranton Keyser Oak Plaza 57,600 State College Nittany Mall 70,200 Stroudsburg Stroud Mall 87,000 Sunbury Susquehanna Valley Mall 60,200 Trexlertown Trexler Mall 54,000 Uniontown Uniontown Mall 71,000 Warren Warren Mall 50,000 Washington Franklin Mall 78,100 Williamsport Lycoming Mall 60,100 Wilkes-Barre Midway Shopping Center 66,000 Wyoming Valley Mall 159,500 York York Galleria 128,200 Queensgate Shopping Center 85,100 West Manchester Mall 80,200
9
APPROXIMATE GROSS SQUARE MARKET LOCATION FEET ------ -------- ------------ NEW YORK Binghamton Oakdale Mall 80,000 Buffalo Northtown Plaza 100,800 Walden Galleria 150,000 Eastern Hills Mall 151,200 McKinley Mall 97,200 Sheridan/Delaware Plaza 124,100 Southgate Plaza 100,500 Elmira Arnot Mall 74,800 Ithaca Pyramid Mall 52,400 Jamestown Chautauqua Mall 60,000 Lockport Lockport Mall 82,000 Massena St. Lawrence Centre 51,000 Niagara Falls Summit Park Mall 88,100 Olean Olean Mall 73,000 Rochester The Mall at Greece Ridge Center 144,600 The Marketplace Mall 100,000 Irondequoit Mall 102,600 Eastview Mall 118,900 Saratoga Springs Wilton Mall 71,700 Syracuse Carousel Center 80,000 Camillus Mall 64,700 Great Northern Mall 98,400 Shoppingtown Mall 70,100 Watertown Salmon Run Mall 50,200 MARYLAND Cumberland Country Club Mall 60,900 Frederick Frederick Towne Mall 77,900 Hagerstown Valley Mall 100,000 WEST VIRGINIA Martinsburg Martinsburg Mall 65,800 NEW JERSEY Phillipsburg Phillipsburg Mall 65,000
ITEM 3. LEGAL PROCEEDINGS. The Company is involved in various proceedings that are incidental to its normal course of business. The Company does not expect that any of such proceedings will have a material adverse effect on the Company's financial position or results of operations. 10 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. ITEM A. EXECUTIVE OFFICERS OF THE COMPANY. Certain information with respect to the executive officers of the Company is provided below:
NAME AGE POSITION - -------------------------------- --- ----------------------------------- Heywood Wilansky................ 50 President, Chief Executive Officer and Director M. Thomas ("Tim") Grumbacher.... 58 Chairman of the Board and Director Michael L. Gleim................ 55 Vice Chairman - Chief Operating Officer and Director Douglas Lamm.................... 51 Executive Vice President - Softlines Merchandise James H. Baireuther............. 51 Senior Vice President-Chief Financial Officer Robert W. Bennet................ 41 Senior Vice President-General Merchandise Manager Jack Boonshaft.................. 55 Senior Vice President-Stores J. Rick Cusick ................. 40 Senior Vice President-General Merchandise Manager H. Stephen Evans................ 48 Senior Vice President-Real Estate, Legal and Governmental Affairs Elizabeth R. Feher.............. 37 Senior Vice President-General Merchandise Manager William T. Harmon............... 43 Senior Vice President-Sales Promotion, Marketing and Strategic Planning Theodore C. Johnson, Jr......... 64 Senior Vice President-Human Resources
11 Cheryl Jan Ladnier.............. 49 Senior Vice President-Product Development, Fashion Merchandising and Special Events Patrick J. McIntyre............. 53 Senior Vice President-Chief Information Officer Ryan J. Sattler................. 53 Senior Vice President-Operations Stephen M. Sloane............... 51 Senior Vice President-General Merchandise Manager Stephanie Stough................ 46 Senior Vice President-Merchandise Planning & Control
Mr. Wilansky joined the Company in August 1995 as President, Chief Executive Officer and a director. Prior to joining the Company, Mr. Wilansky was employed by The May Company for more than 19 years. From 1992 to August 1995, he was President and Chief Executive Officer of the Foley's division of The May Company, and from 1991 to 1992, he was President and Chief Executive Officer of the Filene's division of The May Company. Prior to that, he was with the Hecht's and Lord & Taylor divisions of The May Company. Mr. Grumbacher joined the Company in 1961 and has been Chairman of the Board since August 1991. From 1977 to 1989, he was President and from 1985 to 1995, he was Chief Executive Officer of the Company. Mr. Gleim joined the Company in 1989 as Executive Vice President and Chief Administrative Officer. He became Senior Executive Vice President and a director in 1991, and Vice Chairman and Chief Operating Officer in December 1995. Prior to joining the Company, Mr. Gleim was employed by Federated for more than 25 years. Mr. Lamm joined the Company as Senior Vice President - General Merchandise Manager in October 1995 and was appointed Executive Vice President - Softlines Merchandise in February 1998. Prior to joining the Company, Mr. Lamm owned a chain of women's large size apparel boutiques from 1988 to 1995, and from 1984 to 1988 was Senior Vice President and General Merchandise Manager at Venture Stores, Inc. in St. Louis. Mr. Baireuther joined the Company as Senior Vice President - Chief Financial Officer in June 1996. From September 1994 until he joined the Company, Mr. Baireuther was Senior Vice President - Chief Financial Officer at DAC Vision ("DAC"), a manufacturer and distributor of optical supplies. Prior to joining DAC, he was Executive Vice President - Chief Financial Officer for Eye Care Centers of America, a retail optical superstore chain and wholly-owned subsidiary of Sears, from 1989 to 1994. From 1969 to 1989, Mr. Baireuther held a variety of positions with Sears including Director of Mergers and Acquisitions, Manager of Corporate Financial Analysis and Controller. 12 Mr. Bennet joined the Company in March 1993 as Divisional Vice President - Divisional Merchandise Manager. In February 1998, Mr. Bennet was named Senior Vice President - General Merchandise Manager. Prior to joining the Company, Mr. Bennet was with the Famous-Barr division of The May Company for more than fourteen years, last serving as Divisional Merchandise Manager - Accessories. Mr. Boonshaft joined the Company in January 1996 as Vice President - Stores' Merchandising and was named Senior Vice President - Stores in February 1998. Prior to joining the Company, Mr. Boonshaft was with the Hecht's division of The May Company, where his last position was Regional Vice President - Stores from 1986 to 1995. Mr. Cusick joined the Company in October 1996 as Divisional Vice President - - Divisional Merchandise Manager and was named Senior Vice President - General Merchandise Manager in July 1997. Prior to joining the Company, Mr. Cusick was at Marshall's from September 1995 to February 1996, where he held the position of Divisional Vice President - Divisional Merchandise Manager. From 1980 to 1995, Mr. Cusick held a variety of merchandising positions with Filene's, Foley's and The Broadway. Mr. Evans joined the Company as Senior Vice President - Real Estate in 1991 and was named Senior Vice President - Real Estate, Legal and Governmental Affairs in 1993. Mr. Evans was previously employed by J.C. Penney for more than twelve years. Ms. Feher joined the Company as Divisional Vice President - Divisional Merchandise Manager in October 1994 and was named Senior Vice President - General Merchandise Manager in February 1998. Ms. Feher was previously associated with Hess's Department Stores, Inc., where she served as Vice President - Merchandise Manager for over six years. Mr. Harmon joined the Company as Senior Vice President - Sales Promotion, Marketing and Strategic Planning in June 1997. From December 1992 to June 1997, Mr. Harmon was Senior Vice President - Merchandise Planning and Assistant to the President of Foley's, and from June 1989 to December 1992 he was Vice President - - Assistant to the President of Filene's. Prior to that, he was employed by McKinsey & Company for seven years. Mr. Johnson has been Senior Vice President - Human Resources of the Company since 1988. Ms. Ladnier joined the Company as Senior Vice President - Sales Promotion and Marketing in December 1993, was subsequently named Senior Vice President- Marketing and Corporate Communications. In May 1997 she was named Senior Vice President - Product Development, Fashion Merchandising and Special Events. Prior to joining the Company, Ms. Ladnier had been with Neiman-Marcus as Corporate Vice President - Public Relations from January 1993 until October 1993, and prior to that she was with The May Company for fourteen years. Mr. McIntyre joined the Company as Senior Vice President - Chief Information Officer in June 1997. From 1988 to June 1997, Mr. McIntyre was Senior Vice President - Chief Information Officer for the Cato Corporation, a women's specialty retailer. Prior to that, he held similar positions with the Higbee Company and Burdine's Department Store. 13 Mr. Sattler joined the Company as Vice President - Distribution and Operations in 1986 and was promoted to Senior Vice President - Operations in 1990. Mr. Sloane joined the Company as Senior Vice President - General Merchandise Manager in February 1997. From December 1995 until February 1997, Mr. Sloane was Vice President - General Merchandise Manager at Dick's Clothing & Sporting Goods, and from July 1995 until December 1995 he was Vice President - General Merchandise Manager at McRae's Department Stores. Prior to that, Mr. Sloane was associated with The May Company for over 17 years, having most recently served as Vice President-Merchandising at Foley's. Ms. Stough joined the Company in March 1987 as Director of Merchandise Planning and Control. In February 1991 she was promoted to Vice President - Merchandise Planning and Control and in May 1997 she was promoted to Senior Vice President - Merchandise Planning and Control. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Common Stock, $.01 par value ("Common Stock"), is traded on the Nasdaq National Market (symbol: BONT). There is no established public trading market for the Company's Class A Common Stock, $.01 par value ("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 for the periods indicated the range of the sales price of the Common Stock as furnished by Nasdaq:
FISCAL 1997 -------------------- HIGH LOW ------- ----------- 1st Quarter $ 7.375 $ 5.625 2nd Quarter 9.125 6.250 3rd Quarter 15.000 7.875 4th Quarter 17.500 11.750 FISCAL 1996 -------------------- HIGH LOW ------- ----------- 1st Quarter $8.250 $4.875 2nd Quarter 6.875 5.000 3rd Quarter 6.750 5.125 4th Quarter 7.375 4.875
On March 30, 1998, there were approximately 300 shareholders of record of the Company's Common Stock and five shareholders of record of the Company's Class A Common Stock. 14 The Company has not paid cash dividends since its initial public offering in September 1991 and does not anticipate paying any cash dividends in the foreseeable future. The Company intends to retain its earnings, if any, for the operation and expansion of its business. The payment and rate of future dividends, if any, are subject to the discretion of the Board of Directors of the Company and will depend upon the Company's earnings, financial condition, capital requirements, contractual restrictions under its current indebtedness and other factors. The Company's revolving credit facility contains restrictions on the Company's ability to pay dividends and make other distributions. ITEM 6. SELECTED FINANCIAL DATA. Item 6 is hereby incorporated by reference to the material under "Selected Consolidated Financial and Operating Data" on page 25 of the Company's Annual Report attached hereto as Exhibit 13.1. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Item 7 is hereby incorporated by reference to the material under "Management's Discussion and Analysis of Financial Condition and Results of Operations" on pages 26 through 29 of the Company's Annual Report, attached hereto as exhibit 13.2. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Not applicable. ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. Item 8 is hereby incorporated by reference to the Report of Independent Public Accountants, Consolidated Financial Statements and Notes thereto on pages 30 through 47 of the Company's Annual Report, attached hereto as exhibit 13.3. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information regarding executive officers called for by Item 401 of Regulation S-K is included in Part I as Item A, in accordance with General Instruction G(3) to Form 10-K. 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. 15 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 Item 402(i), (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. 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. 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 Item 8 above. 2. Consolidated Financial Statement Schedules -- See the Index to Consolidated Financial Statement Schedules on page F-1. 3. Exhibits: The following exhibits are filed herewith or incorporated by reference as indicated below:
EXHIBIT DOCUMENT IF INCORPORATED NO. DESCRIPTION BY REFERENCE - ------- ----------- ------------ 3.1 Articles of Incorporation Exhibit 3.1 to the Company's Report on Form 8-B, File No. 0-19517 ("Form 8-B") 3.2 Bylaws Exhibit 3.2 to Form 8-B 10.1 Shareholder's Agreement by and among Exhibit 10.3 to Amendment No. 2 to the Company's Registration Statement on the Company and the shareholders Form S-1, File No. 33-42142 ("1991 Form S-1") named therein
16 *10.2(a) Employment Agreement between the Exhibit 99 to the Company's Report on Form 8-K dated March 26, 1998, File No. Company and Heywood Wilansky 0-19517. * (b) The Bon-Ton Stores, Inc. Supplemental Exhibit 10.2(b) to the Company's Registration Statement on Form S-1 dated Executive Retirement Plan for March 27, 1998, File No. 333-48811 ("1998 Form S-1") Heywood Wilansky * (c) The Bon-Ton Stores, Inc. Five Year Cash Exhibit 10.2(c) to 1998 Form S-1 Bonus Plan for Heywood Wilansky *10.3 Employment Agreement between the Exhibit 10.4 to Form 8-B Company and Michael L. Gleim *10.4 Form of severance agreement between Exhibit 10.14 to Form 8-B the Company and certain of its executive officers *10.5(a) Amended and Restated 1991 Stock Option Exhibit 4.1 to the Company's Registration Statement on Form S-8, File No. and Restricted Stock Plan 333-36633 * (b) Phantom Equity Replacement Stock Option Exhibit 10.18 to 1991 Form S-1 Plan 10.6 Ground Leases for distribution center Exhibit 10.12 to 1991 Form S-1 located in York, Pennsylvania between the Company and M. Thomas Grumbacher, as amended 10.7 Ground Lease for York Galleria store, Exhibit 10.14 to 1991 Form S-1 York, Pennsylvania between the Company and MBM Land Associates Limited Partnership 10.8 (a) Sublease of Butler, Pennsylvania store Exhibit 10.15 to 1991 Form S-1 between the Company and M. Thomas Grumbacher (b) First Amendment to Butler, Pennsylvania Exhibit 10.21 to Amendment No. 1 to 1991 Form S-1 sublease (c) Corporate Guarantee with respect to Exhibit 10.24 to Amendment No. 1 to 1991 Form S-1 Butler, Pennsylvania lease 10.9 (a) Sublease of Oil City, Pennsylvania store Exhibit 10.16 to 1991 Form S-1 between the Company and M. Thomas Grumbacher (b) First Amendment to Oil City, Pennsylvania Exhibit 10.22 to Amendment No. 1 to 1991 Form S-1 sublease (c) Corporate Guarantee with respect to Oil Exhibit 10.26 to Amendment No. 1 to 1991 Form S-1 City, Pennsylvania lease *10.10 The Company's Profit Sharing/Retirement Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year Savings Plan, amended and restated as of ended January 28, 1995 ("1994 Form 10-K") July 1, 1994
17 10.11 (a) Amended and Restated Exhibit 10.16(a) to Amendment No. Receivables Purchase 2 to 1998 Form S-1 Agreement dated as of January 12, 1995 among The Bon-Ton Receivables Corp., The Bon-Ton Receivables Partnership, L.P., Falcon Asset Securitization Corporation, The First National Bank of Chicago, and the other financial institutions party thereto (b) Amendment dated as of June 30, Exhibit 10.16(b) to Amendment No. 1995 to Amended and Restated 1 to 1998 Form S-1 Receivables Purchase Agreement *10.12 Management Incentive Plan Exhibit 10.13 to the Company's and Addendum to Management Annual Report on Form 10-K Incentive Plan for the fiscal year ended February 1, 1997 ("1996 Form 10-K") *10.13 The Bon-Ton Stores, Inc. Exhibit 10.14 to 1996 Form 10-K Long-Term Incentive Plan For Principals 10.14 (a) Credit Agreement dated as of Exhibit 10.1 to the Company's April 15, 1997 among the Quarterly Report on Form 10-Q Company, Adam, Meldrum for the quarter ended May 3, 1997 & Anderson Co, Inc., and The ("Form 10-Q") 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 Exhibit 10.3(b) to 1998 Form S-1 Agreement (c) Second Amendment to Credit Exhibit 10.3(c) to 1998 Form S-1 Agreement (d) Third Amendment to Credit Exhibit 10.3(d) to 1998 Form S-1 Agreement 13.1 Page 25 of the Company's Annual Report. 13.2 Pages 26 through 29 of the Company's Annual Report. 13.3 Pages 30 through 47 of the Company's Annual Report. 21. Subsidiaries of the Registrant. 23. Consent of Arthur Andersen LLP. 27.1 Financial Data Schedule - Year ended January 31, 1998. 27.2 Restated Financial Data Schedule - Periods ended May 3, 1997, August 2, 1997 and November 1, 1997. 27.3 Restated Financial Data Schedule - Year ended February 1, 1997 and Periods ended May 4, 1996, August 3, 1996 and November 2, 1996. 18 (b) Reports on Form 8-K filed during the fourth quarter. None ________________________________________________ * Constitutes a management contract or compensatory plan or arrangement. 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 24, 1998 By: /s/ Heywood Wilansky ----------------------- Heywood Wilansky President 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/ Heywood Wilansky President, Chief Executive April 24, 1998 ---------------------------- Officer and Director Heywood Wilansky (principal executive officer) /s/ M. Thomas Grumbacher Director April 24, 1998 ---------------------------- M. Thomas Grumbacher /s/ Samuel J. Gerson Director April 24, 1998 ---------------------------- Samuel J. Gerson /s/ Michael L. Gleim Vice Chairman, Chief April 24, 1998 ---------------------------- Operating Officer Michael L. Gleim and Director 19 /s/ Roger S. Hillas Director April 24, 1998 ---------------------------- Roger S. Hillas /s/ Lawrence J. Ring Director April 24, 1998 ---------------------------- Lawrence J. Ring /s/ Leon D. Starr Director April 24, 1998 ---------------------------- Leon D. Starr /s/ Leon F. Winbigler Director April 24, 1998 ---------------------------- Leon F. Winbigler /s/ James H. Baireuther Senior Vice President April 24, 1998 ---------------------------- and Chief Financial Officer James H. Baireuther (principal financial and accounting officer) 20 INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS...................................F-2 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............................F-3 F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Bon-Ton Stores, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements of The Bon-Ton Stores, Inc. included in this annual report on form 10-K and have issued our report thereon dated March 4, 1998. Our audit was made for the purpose of forming an opinion on the basic financial 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 4, 1998 F-2 SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS THE BON-TON STORES, INC. AND SUBSIDIARIES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F - -------- ---------- -------------- ------------ ---------------- ---------- Balance at Charged to Balance at BEGINNING COSTS OTHER END OF Classification OF PERIOD & EXPENSES INCREASE DEDUCTIONS PERIOD - ------------------------------ ---------- ------------- ----------- --------------- ---------- Year ended February 3, 1996: Allowance for doubtful accounts.................... $2,294,000 $4,043,000 (1) $604,000 (4) $(3,828,000) (2) $3,113,000 Reserve for store closing..... $7,133,000 $5,000,000 (5) $ --- $(2,563,000) (3) $9,570,000 Year ended February 1, 1997: Allowance for doubtful accounts.................... $3,113,000 $5,018,000 (1) $ --- $(5,362,000) (2) $2,769,000 Reserve for store closing..... $9,570,000 $ --- $ --- $(2,586,000) (3) $6,984,000 Year ended January 31, 1998: Allowance for doubtful accounts.................... $2,769,000 $3,549,000 (1) $ --- $(4,341,000) (2) $1,977,000 Reserve for store closing..... $6,984,000 $ --- $ --- $(1,513,000) (3) $5,471,000
___________________ NOTES: (1) Provision for loss on credit sales. (2) Uncollectible accounts, written off, net of recoveries. (3) Cash payments for store closing expenses, net of monies received from asset liquidation. (4) Represents reserves associated with the purchase of the Hess's Department Store's Inc. accounts receivable. (5) Represents reserves relating to stores that the Company committed to close due to poor performance. F-3 EXHIBIT INDEX Exhibit Description - ------- ----------- 13.1 Page 25 of the Company's Annual Report. 13.2 Pages 26 through 29 of the Company's Annual Report. 13.3 Pages 30 through 47 of the Company's Annual Report. 21. Subsidiaries of the Registrant 23. Consent of Arthur Andersen LLP 27.1 Financial Data Schedule - Year Ended January 31, 1998 27.2 Restated Financial Data Schedule - Periods ended May 3, 1997, August 2, 1997 and November 1, 1997. 27.3 Restated Financial Data Schedule - Year ended February 1, 1997, and Periods ended May 4, 1996, August 3, 1996 and November 2, 1996. EX-13.1 2 ANNUAL REPORT Exhibit 13.1
The Bon-Ton Stores, Inc. and Subsidiaries SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA (In thousands except share, per share and store data) Fiscal Year 1997 1996 1995 Ended Jan. 31, 1998 Feb. 1, 1997 Feb. 3, 1996 - ----------------------------------------------------------------------------------------------------------------------------------- Statement of Operations Data: % % % - ----------------------------------------------------------------------------------------------------------------------------------- Net sales (1) $ 656,399 100.0 $ 626,482 100.0 $ 607,357 100.0 Other income, net 2,349 0.4 2,430 0.4 2,266 0.4 Gross profit (2) 242,553 37.0 230,919 36.9 219,410 36.1 Selling, general and administrative expenses 202,850 30.9 197,315 31.5 207,058 34.1 Depreciation and amortization 12,882 2.0 12,758 2.1 11,895 2.0 Unusual (income) expense (3) - - (3,171) (0.5) 3,280 0.5 Restructuring charges (4) - - - - 5,690 0.9 Income (loss) from operations 29,170 4.4 26,447 4.2 (6,247) (1.0) Interest expense, net 13,202 2.0 14,687 2.3 8,722 1.4 Income (loss) before taxes 15,968 2.4 11,760 1.9 (14,969) (2.4) Income tax provision (benefit) 6,270 1.0 4,949 0.8 (5,766) (0.9) Income (loss) before extraordinary item/accounting change 9,698 1.5 6,811 1.1 (9,203) (1.5) Extraordinary item, net of tax (5) (446) (0.1) - - - - Cumulative accounting change, net of tax (6) - - - - - Net income (loss) $ 9,252 1.4 $ 6,811 1.1 $ (9,203) (1.5) PER SHARE AMOUNTS- - -------------------------------------------------------------------------------------------------------------------------------- Basic: Net income (loss) before extraordinary item/accounting change $ 0.87 $ 0.62 ($0.83) Effect of extraordinary item/accounting change (0.04) - - Net income (loss) $ 0.83 $ 0.62 ($0.83) Basic shares outstanding 11,122,000 11,064,000 11,044,000 Diluted: Net income (loss) before extraordinary item/accounting change $ 0.85 $ 0.61 ($0.83) Effect of extraordinary item/accounting change (0.04) - - Net income (loss) $ 0.81 $ 0.61 ($0.83) Diluted shares outstanding 11,377,000 11,106,000 11,044,000 BALANCE SHEET DATA (AT END OF PERIOD): - ---------------------------------------------------------------------------------------------------------------------------------- Working capital $123,078 $102,853 $ 90,758 Total assets 352,686 341,252 331,173 Long-term debt, including capital leases 123,384 128,098 127,893 Shareholders' equity 124,394 111,485 104,174 SELECTED OPERATING DATA: - ---------------------------------------------------------------------------------------------------------------------------------- EBITDA (7) $ 42,052 6.4 $ 39,205 6.3 $ 5,648 0.9 Total sales growth (8) 4.8% 4.1% 22.7% Comparable stores growth (8) (9) 6.5% 4.2% 0.2% Comparable stores data (9): Sales per selling square foot $ 143 $ 138 $ 160 Selling square footage 4,511,000 4,153,000 2,278,000 Capital expenditures $ 10,978 $ 9,730 $ 43,587 Number of stores: Beginning of year 64 68 69 Additions - 1 4 Closings - (5) (5) End of year 64 64 68 - ---------------------------------------------------------------------------------------------------------------------------------- - ---------------------------------------------------------------------------------------------------------------------------------- Fiscal Year 1994 1993 Ended Jan. 28, 1995 Jan. 29, 1994 - --------------------------------------------------------------------------------------------------------------------------------- Statement of Operations Data: % % - --------------------------------------------------------------------------------------------------------------------------------- Net sales (1) $494,908 100.0 $336,733 100.0 Other income, net 2,581 0.5 2,597 0.8 Gross profit (2) 194,994 39.4 130,191 38.7 Selling, general and administrative expenses 162,442 32.8 108,647 32.3 Depreciation and amortization 8,465 1.7 6,593 2.0 Unusual (income) expense (3) - - - - Restructuring charges (4) - - - - Income (loss) from operations 26,668 5.4 17,548 5.2 Interest expense, net 5,475 1.1 4,042 1.2 Income (loss) before taxes 21,193 4.3 13,506 4.0 Income tax provision (benefit) 7,563 1.5 4,727 1.4 Income (loss) before extraordinary item/accounting change 13,630 2.8 8,779 2.6 Extraordinary item, net of tax (5) - - - - Cumulative accounting change, net of tax (6) - - 1,500 0.4 Net income (loss) $ 13,630 2.8 $ 10,279 3.1 PER SHARE AMOUNTS- - --------------------------------------------------------------------------------------------------------------------------------- Basic: Net income (loss) before extraordinary item/accounting change $1.24 $0.80 Effect of extraordinary item/accounting change - 0.14 Net income (loss) $1.24 $0.94 Basic shares outstanding 10,955,000 10,935,000 Diluted: Net income (loss) before extraordinary item/accounting change $1.23 $0.79 Effect of extraordinary item/accounting change - 0.14 Net income (loss) $1.23 $0.93 Diluted shares outstanding 11,041,000 11,051,000 BALANCE SHEET DATA (AT END OF PERIOD): - --------------------------------------------------------------------------------------------------------------------------------- Working capital $ 62,539 $ 70,688 Total assets 270,228 190,431 Long-term debt, including capital leases 60,521 34,741 Shareholders' equity 112,447 98,551 SELECTED OPERATING DATA: - --------------------------------------------------------------------------------------------------------------------------------- EBITDA (7) $ 35,133 7.1 $ 24,141 7.2 Total sales growth (8) 47.0% 0.9% Comparable stores growth (8) (9) 6.1% (0.6)% Comparable stores data (9): Sales per selling square foot $ 163 $ 157 Selling square footage 2,185,000 1,850,000 Capital expenditures $ 18,532 $ 8,935 Number of stores: Beginning of year 35 36 Additions 35 1 Closings (1) (2) End of year 69 35 - --------------------------------------------------------------------------------------------------------------------------------- (1) Fiscal 1995 reflects the 53 weeks ended February 3, 1996. (2) Fiscal 1995 includes a $3.5 million charge related to inventory liquidation associated with the elimination of certain vendors and other merchandise changes . (3) Reflects expenses related to the gain recognized on the pension termination and the hiring of the Chief Executive Officer in fiscal years 1996 and 1995, respectively. (4) Includes $5.0 million charge for a store closing reserve with the balance related to a work force reduction. (5) Expense resulting from the early extinguishment of the Company's term loan and revolving credit facility. (6) Change in accounting for income taxes. (7) Income (loss) from operations plus depreciation and amortization. (8) Fiscal 1996 sales compared to the 52 weeks ended January 27, 1996. (9) Comparable stores data (sales and selling square footage) reflects stores open for the entire current and prior fiscal years.
25 EX-13.2 3 ANNUAL REPORT EXHIBIT 13.2 THE BON-TON STORES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table summarizes the changes in selected operating indicators of The Bon-Ton Stores, Inc. (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 1997 1996 1995 ----- ----- ----- Net sales 100.0% 100.0% 100.0% Other income, net 0.4 0.4 0.4 Costs and expenses (percent of net sales): Costs of merchandise sold 63.0 63.1 63.9 Selling, general and administrative 30.9 31.5 34.1 Depreciation and amortization 2.0 2.1 2.0 Unusual (income) expense - (0.5) 0.5 Restructuring charges - - 0.9 ----- ----- ----- Income (loss) from operations 4.4 4.2 (1.0) Interest expense, net 2.0 2.3 1.4 ----- ----- ----- Income (loss) before income taxes 2.4 1.9 (2.4) Income tax provision (benefit) 1.0 0.8 (0.9) ----- ----- ----- Income (loss) before extraordinary item 1.5 1.1 (1.5) Extraordinary loss, net of tax 0.1 -- -- ----- ----- ----- Net income (loss) 1.4% 1.1% (1.5)% ===== ===== =====
FISCAL 1997 COMPARED TO FISCAL 1996 NET SALES. Net sales were $656.4 million for the fifty-two weeks ended January 31, 1998, an increase of $29.9 million, or 4.8%, over the fifty-two week period ended February 1, 1997. Comparable store sales for the same period increased 6.5%. Strong sales performances were achieved in fiscal 1997 in better ladies' sportswear, men's collections, men's designer denim, Club X (junior department), children's better collections and men's and ladies' special sizes. The sales increases in these categories reflect the result of the Company's merchandise realignment from a predominately moderate mix to an improved balance of moderate and better merchandise and a larger selection of sizes, colors and styles. Other income, net. Net other income, which is comprised mainly of income from leased departments, remained constant at 0.4% of net sales for fiscal 1997. COSTS AND EXPENSES. Gross margin dollars for fiscal 1997 increased $11.6 million over fiscal 1996 as a result of the sales volume increase and an improvement in the gross margin rate. Gross profit as a percentage of net sales increased slightly from 36.9% in fiscal 1996 to 37.0% for fiscal 1997. The increase in the margin rate was primarily attributable to the continued improvement in the Company's shrinkage rate as a result of concerted inventory loss prevention efforts and a decrease in the markdown rate, partially offset by a strategic reduction in the cumulative markup percentage and reduced margins on the better merchandise mix. Selling, general and administrative expenses for fiscal 1997 were $202.9 million, or 30.9% of net sales, as compared to $197.3 million, or 31.5% of net sales, in the prior year. The percentage decrease in fiscal 1997 was primarily attributable to the increased sales volume, a $4.0 million improvement in the profitability of the Company's credit operations in fiscal 1997 and reduced advertising costs, partially offset by the expense of sales growth programs, including additional personnel costs, and general inflation costs. Depreciation and amortization decreased slightly to 2.0% of net sales in fiscal 1997 from 2.1% of net sales in fiscal 1996. The decrease primarily reflects the increased sales volume in fiscal 1997. Fiscal 1996 results were affected by the recognition of $3.2 million in pre-tax unusual income as the result of terminating the pension plan associated with one of the Company's 1994 acquisitions. INCOME (LOSS) FROM OPERATIONS. Income from operations in fiscal 1997 amounted to $29.2 million, or 4.4% of net sales, as compared to $26.4 million, or 4.2% of net sales, in fiscal 1996. The improvement was primarily attributable to the increase in current year sales and gross margin combined with selling, general and administrative expenses increasing at a rate less than sales. 26 INTEREST EXPENSE, NET. Net interest expense decreased $1.5 million to $13.2 million, or 2.0% of net sales, in fiscal 1997 from $14.7 million, or 2.3% of net sales, in the prior fiscal period. The decrease was primarily attributable to lower average borrowing levels, partially offset by slightly higher borrowing costs. EXTRAORDINARY ITEM. The Company recorded an expense of $446,000, net of tax, related to the early extinguishment of the Company's term loan and revolving credit facility in fiscal 1997. NET INCOME (LOSS). Net income in fiscal 1997 amounted to $9.3 million, or 1.4% of net sales, as compared to $6.8 million, or 1.1% of net sales, in fiscal 1996. The decrease in the effective tax rate to 39.3% in fiscal 1997 from 42.1% in fiscal 1996 was primarily a result of the nondeductibility of the Federal excise tax of $1.1 million relating to the pension plan termination in fiscal 1996. FISCAL 1996 COMPARED TO FISCAL 1995 NET SALES. Net sales were $626.5 million for the fifty-two weeks ended February 1, 1997, an increase of 4.1% over the fifty-two week period ended January 27, 1996. Comparable store sales for the fifty-two week period increased 4.2%. Net sales for the fifty-two weeks ended February 1, 1997 increased 3.1% versus the fifty-three weeks ended February 3, 1996. Solid performances were posted in the ladies' apparel, shoes, home and intimate apparel merchandise categories, all of which showed sales gains above the Company average. The strong showing in these categories reflects the results of the Company's merchandise realignment from a predominately moderate mix to an improved balance of moderate and better merchandise and a larger selection of sizes, colors and styles. OTHER INCOME, NET. Net other income, which consisted mainly of income from leased departments, remained constant at 0.4% of net sales for fiscal 1996. COSTS AND EXPENSES. Gross margin dollars increased $11.5 million over fiscal 1995 as a result of the sales volume increase and the improvement in the gross margin rate. Gross profit as a percentage of net sales increased from 36.1% for fiscal 1995 to 36.9% for fiscal 1996. The increase in margin rate was primarily attributable to a significant improvement in the Company's shrinkage rate as a result of concerted inventory loss prevention efforts, partially offset by a strategic reduction in the cumulative markup percentage. Additionally, fiscal 1995 results were adversely impacted by a $3.5 million one-time charge relating to inventory liquidation associated with the Company's elimination of certain vendors and other merchandising strategies. Selling, general and administrative expenses for fiscal 1996 decreased $9.7 million to 31.5% of net sales from 34.1% of net sales in the prior year. The rate decrease was primarily attributable to expense control efforts initiated at the end of fiscal 1995 and applied throughout fiscal 1996 at corporate and store levels and the absence of $2.2 million in store pre-opening costs incurred in fiscal 1995. The cost containment initiatives, established in fiscal 1996, were partially offset by an increase in the Company's advertising expense. Technological advances in the Company's merchandise handling and distribution processes resulted in payroll savings at the corporate level. The store expense rate improved over the prior year, most notably due to the continued productivity improvements in 1996. Depreciation and amortization increased slightly to 2.1% of net sales in fiscal 1996 from 2.0% of net sales in fiscal 1995. The increase was primarily a result of recognizing a full year of depreciation on the three Rochester stores and the one store in Elmira, New York opened in late 1995 and asset additions relating to the August 1996 opening of the Company's fourth store in the Rochester market. Fiscal 1996 results were affected by the one-time pre-tax income recognition of $3.2 million as the result of terminating the pension plan associated with one of the Company's 1994 acquisitions. Fiscal 1995 results were adversely impacted by one-time expenses and restructuring charges. Unusual expenses amounting to $3.3 million were recorded in October 1995 related to the hiring of the Company's Chief Executive Officer. Restructuring charges amounting to $5.7 million were recorded in January 1996; $5.0 million was attributable to costs related to the expected closure of unprofitable locations with the remainder related to a workforce reduction. Five store locations were closed in fiscal 1996; costs expended and charged against this reserve through year-end for these closings were $1.5 million. It is anticipated that the remaining portion of the restructuring charges, for items such as noncancellable lease costs, will be expended through the end of 2005. INCOME (LOSS) FROM OPERATIONS. Income from operations in fiscal 1996 amounted to $26.4 million, or 4.2% of net sales, as compared to a loss from operations in fiscal 1995 of $6.2 million, or 1.0% of net sales. The significant improvement was primarily attributable to an increase in the fiscal 1996 gross margin combined with a decrease in selling, general and administrative expenses, the $3.2 million gain recognized on the pension termination and non-reoccurrence of the unusual expense and restructuring charges incurred in fiscal 1995. 27 The Bon-Ton Stores, Inc. and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations (Continued) INTEREST EXPENSE, NET. Net interest expense increased $6.0 million to $14.7 million, or 2.3% of net sales, in fiscal 1996 from $8.7 million, or 1.4% of net sales, in the prior fiscal period. The increase was attributable to higher average borrowing levels over the prior year, primarily to fund inventory increases and $9.7 million of capital improvements. NET INCOME (LOSS). Net income in fiscal 1996 amounted to $6.8 million, or 1.1% of net sales, as compared to a net loss of $9.2 million, or 1.5% of net sales, in fiscal 1995. The increase in the effective tax rate to 42.1% in fiscal 1996 from 38.5% in fiscal 1995 was primarily attributable to certain expenses relating to executive compensation and a Federal excise tax of $1.1 million relating to the pension plan termination in fiscal 1996, both of which were not deductible for tax reporting purposes. CHANGES IN ACCOUNTING POLICIES In the fourth quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). The statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock. SFAS No. 128 simplifies the standards for computing EPS previously found in Accounting Principles Board Opinion No. 15, "Earnings Per Share," and makes them comparable to international EPS standards. It replaces the presentation of primary and fully diluted EPS with a presentation of basic and diluted EPS, respectively. SFAS No. 128 also requires the dual presentation of basic and diluted EPS on the face of the income statement and requires a reconciliation of the numerator and the denominator of the basic EPS computation to the numerator and the denominator of the diluted EPS calculation. In accordance with this statement, the Company has restated all EPS calculations presented in these financial statements and the notes thereto to reflect the requirements of SFAS No. 128. YEAR 2000 COMPLIANCE Many existing computer programs use only two digits to identify a year in the date field. These programs were designed without consideration for the impact of the upcoming century change in the year 2000. If not corrected, applications which are not year 2000 compliant may fail or create erroneous results when processing year 2000 information. The Company has completed an assessment of the potential effects of the year 2000 century change and has established procedures to coordinate the identification, evaluation and implementation of changes to the established systems and applications necessary to achieve a year 2000 date conversion. All internally developed systems, which represent approximately 69% of installed applications, have been modified to process year 2000 dates. The remaining systems are commercially supplied software packages maintained by third party vendors and are scheduled to be upgraded to a year 2000 version or replaced over the next 18 months. All installed systems require testing, which is planned over the next two years. The cost to complete the conversion, including existing internal personnel costs, is estimated to be $1.1 million. The Company is communicating with major suppliers, financial institutions and service providers with which it does business to coordinate the conversion effort. The Company's operations may be adversely affected if the Company or other organizations with which the Company does business are unsuccessful in completing the conversion in a timely manner. 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 last half of each fiscal year, which includes the back-to-school and holiday seasons. See Note 13 of Notes to Consolidated Financial Statements for the Company's quarterly results for fiscal 1997 and 1996. 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 the results that may be achieved for a full fiscal year. In addition, quarterly results of operations depend upon the timing and amount of revenues and costs associated with the opening, 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. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes material measures of the Company's liquidity and capital resources (dollars in millions): January 31, February 1, February 3, 1998 1997 1996 ------- ------- ------- Working capital $ 123.1 $ 102.9 $ 90.8 Current ratio 2.22:1 2.03:1 1.93:1 Funded debt to total capitalization 0.49:1 0.55:1 0.55:1 Unused availability under lines of credit $ 17.5 $ 22.0 $ 36.0 28 The Company's primary sources of working capital are cash flow from operations, borrowings under its revolving credit facility and proceeds from its accounts receivable facility. The Company had working capital of $123.1 million, $102.9 million and $90.8 million at the end of fiscal 1997, 1996 and 1995, respectively. The increase in working capital in fiscal 1997 was principally attributable to an increase in merchandise inventories due to the change in merchandise mix and a greater selection of sizes, colors and styles. It also reflected the inventory required to support the increased sales volume and the increase in accounts receivable as a result of the Company's increased sales. The increase in working capital was partially offset by a decrease in other current assets due to the pension asset termination in fiscal 1996, increased payable levels consistent with increased inventory and an increase in income taxes payable reflecting the Company's profit in fiscal 1997. The Company's business follows a seasonal pattern and working capital fluctuates with seasonal variations. Historically, the Company's working capital is at its lowest levels from February through July and then increases very sharply through November when it reaches its highest level. To support the anticipated working capital requirements of the Company during the next three years, the Company entered into a new asset based borrowing agreement in April 1997. The terms of the new financing provide for a secured revolving credit facility of up to $200.0 million (the "Credit Facility"). The amount available for borrowing under the Credit Facility is based on eligible inventory and selected fixed assets and real estate. The Credit Facility provides the Company with additional borrowing capacity during peak inventory periods and contains restrictive covenants, including a minimum trade support ratio, a minimum fixed charge coverage ratio and limitations on dividends, additional incurrence of debt and capital expenditures. As a result of this transaction, the Company incurred an extraordinary charge of $446,000, net of tax, relating to the early extinguishment of its existing term loan and revolving credit facility. In addition, the Company completed a sale and leaseback transaction on two of its owned properties in April 1997 which generated net proceeds of $10.8 million. These proceeds were utilized to repay certain indebtedness and to fund ongoing working capital requirements. The leaseback terms under this agreement provide that the Company lease the properties over a primary term of 20 years. Net cash used in operating activities amounted to $7.7 million, $1.2 million and $14.2 million in fiscal 1997, 1996 and 1995, respectively. Net operating outflows in fiscal 1997 primarily resulted from increases in working capital over prior year levels, partially offset by depreciation and amortization and net income in the current year. The major components of the working capital increase were a higher level of merchandise inventories and customer accounts receivable principally attributable to the increased sales volume, partially offset by a decrease in other assets primarily relating to the pension asset terminated in fiscal 1996 and increases in accounts payable, accrued expenses and income taxes payable. Net cash provided by investing activities amounted to $21.9 million in fiscal 1997, while net cash used in investing activities amounted to $8.9 million and $48.4 million in fiscal 1996 and 1995, respectively. The net cash inflow in fiscal 1997 primarily reflects proceeds received from the additional sale of $22.0 million of proprietary credit card receivables under the Company's accounts receivable facility and proceeds from a sale and leaseback arrangement of $10.8 million, partially offset by capital expenditures of $11.0 million that are primarily related to the construction of a new store in Jamestown, New York, expansion and remodeling of existing stores and expenditures for fixtures and displays. On February 17, 1998, the Company sold its vacant facility in Lancaster, Pennsylvania. The net proceeds of $1.2 million were used to fund additional working capital requirements. Net cash used in financing activities amounted to $11.6 million in fiscal 1997, while net cash provided by financing activities was $9.7 million and $67.9 million in fiscal 1996 and 1995, respectively. The net cash outflow in fiscal 1997 was primarily attributable to the net repayment on the Company's long-term debt, partially offset by proceeds from stock options that were exercised by employees. The Company currently anticipates its capital expenditures for fiscal 1998 will approximate $16.0 million. The expenditures will be directed toward fixturing and leasehold improvements in the Company's stores, including the new store in Jamestown, New York that opened in March 1998, and information system enhancements. 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 Credit Facility and proceeds from its accounts receivable facility, will be sufficient to satisfy its operating cash requirements. 29 EX-13.3 4 ANNUAL REPORT EXHIBIT 13.3 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
JANUARY 31, FEBRUARY 1, 1998 1997 ASSETS Current assets: Cash and cash equivalents............................ $ 9,109 $ 6,516 Trade and other accounts receivable, net of allowance for doubtful accounts of $1,977 and $2,769 in 1997 and 1996, respectively.............................. 28,485 16,306 Merchandise inventories.............................. 177,783 161,191 Prepaid expenses and other current assets............ 8,835 18,389 -------- -------- Total current assets............................... 224,212 202,402 -------- -------- Property, fixtures and equipment at cost, less accumulated depreciation and amortization............. 108,568 117,716 Other assets........................................... 19,906 21,134 -------- -------- Total assets....................................... $352,686 $341,252 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable..................................... $ 55,478 $ 51,626 Accrued payroll and benefits......................... 9,457 7,135 Accrued expenses..................................... 25,649 25,209 Current portion of long-term debt.................... 556 9,763 Current portion of obligations under capital leases.. 379 351 Deferred income taxes................................ 1,227 1,628 Income taxes payable................................. 8,388 3,837 -------- -------- Total current liabilities.......................... 101,134 99,549 -------- -------- Long-term debt, less current maturities................ 121,121 125,620 Obligations under capital leases, less current maturities............................................ 2,263 2,478 Deferred income taxes.................................. 365 1,174 Other long-term liabilities............................ 3,409 946 -------- -------- Total liabilities.................................. 228,292 229,767 -------- -------- Commitments and contingencies (Note 7) Shareholders' equity: Common Stock--authorized 40,000,000 shares at $0.01 par value; issued and outstanding shares of 8,847,333 and 8,349,699 in 1997 and 1996, respectively........................................ 88 83 Class A Common Stock--authorized 20,000,000 shares at $0.01 par value; issued and outstanding shares of 2,989,853 in 1997 and 1996.......................... 30 30 Additional paid-in capital........................... 62,585 58,182 Deferred compensation................................ (2,010) (1,259) Retained earnings.................................... 63,701 54,449 -------- -------- Total shareholders' equity......................... 124,394 111,485 -------- -------- Total liabilities and shareholders' equity......... $352,686 $341,252 ======== ========
The accompanying notes are an integral part of these consolidated statements. 30 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
FISCAL YEAR ENDED ------------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 Net sales.................................. $ 656,399 $ 626,482 $ 607,357 Other income, net.......................... 2,349 2,430 2,266 ---------- ---------- ---------- 658,748 628,912 609,623 ---------- ---------- ---------- Costs and expenses: Costs of merchandise sold................ 413,846 395,563 387,947 Selling, general and administrative...... 202,850 197,315 207,058 Depreciation and amortization............ 12,882 12,758 11,895 Unusual (income) expense (Note 15)....... -- (3,171) 3,280 Restructuring charges (Note 16).......... -- -- 5,690 ---------- ---------- ---------- Income (loss) from operations.............. 29,170 26,447 (6,247) Interest expense, net...................... 13,202 14,687 8,722 ---------- ---------- ---------- Income (loss) before income taxes.......... 15,968 11,760 (14,969) Income tax provision (benefit)............. 6,270 4,949 (5,766) ---------- ---------- ---------- Income (loss) before extraordinary item.... 9,698 6,811 (9,203) Extraordinary item --loss on early extinguishment of debt, net of income tax benefit of $251....... (446) -- -- ---------- ---------- ---------- Net income (loss).......................... $ 9,252 $ 6,811 $ (9,203) ========== ========== ========== Per share amounts-- Basic: Net income (loss) before extraordinary item.................................... $ 0.87 $ 0.62 $ (0.83) Effect of extraordinary item............. (0.04) -- -- ---------- ---------- ---------- Net income (loss)........................ $ 0.83 $ 0.62 $ (0.83) ========== ========== ========== Basic shares outstanding.................. 11,122,000 11,064,000 11,044,000 Diluted: Net income (loss) before extraordinary item.................................... $ 0.85 $ 0.61 $ (0.83) Effect of extraordinary item............. (0.04) -- -- ---------- ---------- ---------- Net income (loss)........................ $ 0.81 $ 0.61 $ (0.83) ========== ========== ========== Diluted shares outstanding................ 11,377,000 11,106,000 11,044,000
The accompanying notes are an integral part of these consolidated statements. 31 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
CLASS A ADDITIONAL COMMON COMMON PAID-IN DEFERRED RETAINED STOCK STOCK CAPITAL COMPENSATION EARNINGS TOTAL Balance at January 28, 1995................... $ 51 $ 59 $55,827 $ (331) $56,841 $112,447 Net loss................ -- -- -- -- (9,203) (9,203) Issuance of stock under Stock Award Plans...... 3 -- 1,771 (1,774) -- -- Deferred compensation amortization........... -- -- -- 293 -- 293 Exercised stock options................ -- -- 643 -- -- 643 Cancellation of Restricted Shares...... -- -- (44) 38 -- (6) Conversion of Class A Common Stock to Common Stock.................. 29 (29) -- -- -- -- ---- ---- ------- ------- ------- -------- Balance at February 3, 1996................... 83 30 58,197 (1,774) 47,638 104,174 Net income.............. -- -- -- -- 6,811 6,811 Deferred compensation amortization........... -- -- -- 505 -- 505 Cancellation of Restricted Shares...... -- -- (15) 10 -- (5) ---- ---- ------- ------- ------- -------- Balance at February 1, 1997................... 83 30 58,182 (1,259) 54,449 111,485 Net income.............. -- -- -- -- 9,252 9,252 Issuance of stock under Stock Award Plans...... 2 -- 2,094 (1,256) -- 840 Deferred compensation amortization........... -- -- -- 505 -- 505 Exercised stock options................ 3 -- 2,314 -- -- 2,317 Cancellation of Restricted Shares...... -- -- (5) -- -- (5) ---- ---- ------- ------- ------- -------- Balance at January 31, 1998................... $ 88 $ 30 $62,585 $(2,010) $63,701 $124,394 ==== ==== ======= ======= ======= ========
The accompanying notes are an integral part of these consolidated statements. 32 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS)
FISCAL YEAR ENDED ----------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 Cash flows from operating activities: Net income (loss)......................... $ 9,252 $ 6,811 $ (9,203) Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization........... 12,882 12,758 11,895 Bad debt and other noncash charges...... 700 924 229 Stock compensation expense.............. 1,345 505 293 Gain on sale of property, fixtures and equipment.............................. (17) (407) (144) Cancellation of Restricted Shares....... (5) (5) (6) (Increase) decrease in other long-term assets................................. (80) 320 825 Deferred income taxes................... (1,210) 4,116 6,709 Decrease in other long-term liabilities............................ (523) (476) (2,686) Extraordinary loss on debt extinguishment......................... 697 -- -- Loss from restructuring activities...... -- -- 5,690 Restructuring payments.................. (580) (1,252) (413) Changes in operating assets and liabilities: (Increase) decrease in accounts receivable.............................. (34,879) 216 7,728 Increase in merchandise inventories...... (16,592) (19,450) (21,087) Decrease (increase) in prepaid expenses and other current assets................ 9,554 (4,827) (4,118) Decrease (increase) in income taxes receivable.............................. -- 8,549 (8,549) Increase (decrease) in accounts payable.. 3,852 (3,542) 13,138 Increase (decrease) in accrued expenses.. 3,343 (6,823) (9,365) Increase (decrease) in income taxes payable................................. 4,551 1,334 (5,185) --------- --------- --------- Total adjustments...................... (16,962) (8,060) (5,046) --------- --------- --------- Net cash used in operating activities.. (7,710) (1,249) (14,249) Cash flows from investing activities: Capital expenditures, net................. (10,978) (9,730) (43,587) Proceeds from sale of property, fixtures and equipment............................ 17 855 278 Purchase of accounts receivable........... -- -- (30,138) Proceeds from sale of accounts receivable, net...................................... 22,000 -- 25,000 Proceeds from sale and leaseback arrangement.............................. 10,841 -- -- --------- --------- --------- Net cash provided by (used in) investing activities.................. 21,880 (8,875) (48,447) Cash flows from financing activities: Payments on long-term debt and capital lease obligations........................ (320,996) (233,826) (301,738) Proceeds from issuance of long-term debt.. 307,102 220,125 369,000 Proceeds from issuance of mortgages....... -- 23,400 -- Exercised stock options................... 2,317 -- 643 --------- --------- --------- Net cash (used in) provided by financing activities.................. (11,577) 9,699 67,905 Net increase (decrease) in cash and cash equivalents...................... 2,593 (425) 5,209 Cash and cash equivalents at beginning of period.................................... 6,516 6,941 1,732 --------- --------- --------- Cash and cash equivalents at end of period.................................... $ 9,109 $ 6,516 $ 6,941 ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. 33 THE BON-TON STORES, INC. AND SUBSIDIARIES 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 established on January 31, 1929 and currently operates, through its subsidiaries, 64 retail department stores located in Pennsylvania, New York, Maryland, West Virginia and New Jersey. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: BASIS OF PRESENTATION The consolidated financial statements include the accounts of The Bon-Ton Stores, Inc. and 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. FISCAL YEAR The Company's fiscal year ends on the Saturday nearer to January 31 of the following calendar year, and consisted of fifty-two weeks for fiscal years 1997 and 1996, and fifty-three weeks for fiscal year 1995. Fiscal years 1997, 1996 and 1995 ended on January 31, 1998, February 1, 1997 and February 3, 1996, respectively. CASH AND CASH EQUIVALENTS The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are generally overnight money market investments. MERCHANDISE INVENTORIES For both 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 $180,083 and $161,945 as of January 31, 1998 and February 1, 1997, respectively. PROPERTY, FIXTURES AND EQUIPMENT: DEPRECIATION AND AMORTIZATION Depreciation and amortization of property, fixtures and equipment are computed using the straight-line method based upon the following average estimated service lives (or remaining lease terms): Buildings................................................. 20 to 40 years Leasehold improvements.................................... 15 years Fixtures and equipment.................................... 5 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 costs incurred as a result of the construction of any new facilities or major improvements. The amount of interest capitalized is limited to that incurred during the construction period. Repair and maintenance costs are charged to operations as incurred. Property retired or sold is removed from the asset and accumulated depreciation accounts and the resulting gain or loss is reflected in income. The 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. 34 STORE OPENING AND CLOSING COSTS The Company follows the practice of accounting for store opening costs incurred prior to opening a new retail unit as a current period expense. When the decision to close a retail unit is made, the Company provides for estimated future net lease obligations after store operations cease; nonrecoverable investments in property, fixtures and equipment; and other expenses directly related to discontinuance of operations. The estimates are based upon historical information along with certain assumptions about future events. Changes in the assumptions for store closing costs for such items as the estimated period of future lease obligations and the amounts actually realized relating to the recorded value of property, fixtures and equipment could cause these estimates to change in the near term. 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 included in selling, general and administrative expense for fiscal years 1997, 1996 and 1995 were $27,095, $28,747 and $25,377, respectively. Prepaid expenses and other current assets include prepaid advertising costs of $687 and $756 at January 31, 1998 and February 1, 1997, respectively. LEASED DEPARTMENT SALES The Company leases space 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 approximately $2,502, $2,719 and $2,607 in fiscal 1997, 1996 and 1995, respectively. REVOLVING CHARGE ACCOUNTS Finance charge income on customers' revolving charge accounts is reflected as a reduction of selling, general and administrative expenses. The finance charge income earned by the Company, before considering the costs of administering and servicing the revolving charge accounts, for fiscal years 1997, 1996 and 1995 was $25,019, $19,502 and $21,869, respectively (see Note 4). STOCK-BASED COMPENSATION The Company follows Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which provides for a fair value based method of accounting for grants of equity instruments to employees or suppliers in return for goods or services. As permitted under SFAS No. 123, the Company has elected to continue to account for compensation costs under the provisions prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has included pro forma disclosures of net income (loss) and basic and diluted earnings (loss) per share in Note 11 as if the fair value based method had been applied in measuring compensation cost. NET INCOME (LOSS) PER SHARE In the fourth quarter of fiscal 1997, the Company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No. 128, which supersedes Accounting Principles Board Opinion No. 15, "Earnings per Share," requires dual presentation of Basic and Diluted earnings per share ("EPS") on the face of the statement of operations. Basic EPS is computed by dividing reported earnings available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS is computed assuming the conversion of all dilutive securities, such as options and restricted stock. The effect of the adoption of SFAS No. 128 was immaterial to the financial statements of the Company. In accordance with SFAS No. 128, all prior period per share amounts have been restated to reflect the new calculation and presentation. The statement requires a reconciliation of the numerators and denominators used in the Basic and Diluted EPS calculations. The numerator, net income (loss), is identical in both calculations. The following table presents a reconciliation of the shares outstanding for the respective calculations, as well as the calculated EPS for each period presented on the accompanying Consolidated Statements of Operations. The EPS shown in the reconciliation represents EPS before the impact of extraordinary items. 35 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1997 1996 1995 ---------------- ---------------- ----------------- SHARES EPS SHARES EPS SHARES EPS Basic Calculation.......... 11,122,000 $0.87 11,064,000 $0.62 11,044,000 $(0.83) Dilutive Securities-- Restricted Shares........ 72,000 10,000 -- Options.................. 183,000 32,000 -- ---------- ----- ---------- ----- ---------- ------ Diluted Calculation........ 11,377,000 $0.85 11,106,000 $0.61 11,044,000 $(0.83) ========== ===== ========== ===== ========== ======
RECLASSIFICATIONS To conform to the 1997 presentation, store pre-opening expenses incurred in 1995 of $2,191 were reclassified from unusual (income) expense to selling, general and administrative expenses on the Consolidated Statements of Operations. ACCOUNTING FOR LONG-LIVED ASSETS In fiscal 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS No. 121"). This statement requires recognition of impairment losses for long-lived assets whenever events or changes in circumstances result in the carrying amount of the assets exceeding the sum of the expected future undiscounted cash flows associated with such assets. The measurement of the impairment losses to be recognized is based on the difference between the fair values and the carrying amounts of the assets. SFAS No. 121 also requires any long-lived assets held for sale be reported at the lower of carrying amount or the fair value less selling cost. The adoption of this statement had no effect on the consolidated financial results of the Company. TRANSFERS AND SERVICING OF FINANCIAL ASSETS In June 1996, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). Under SFAS No. 125, a transfer of financial assets in which the transferor surrenders control over those assets is accounted for as a sale to the extent consideration other than beneficial interests in the transferred assets is received in exchange. It also requires that servicing assets and other retained interests in the transferred assets be measured by allocating the previous carrying amount between assets sold, if any, and retained interests, if any, based on their relative fair value at the date of transfer. The adoption of this statement on January 1, 1997 did not have a material effect on the consolidated financial results of the Company for fiscal 1997 or fiscal 1996. 2. DEBT: Debt consisted of the following:
JANUARY 31, FEBRUARY 1, 1998 1997 Revolving credit agreement--principal payable April 15, 2000; interest payable periodically at varying rates (8.11% for fiscal year 1997)................. $ 88,900 $ 37,000 Term loan........................................... -- 65,000 Mortgage notes payable--principal payable in varying monthly installments through June 2016 plus interest at a fixed rate of 9.62%; secured by land and buildings...................................... 21,918 22,306 Mortgage note payable--principal and interest in monthly installments of $68 through January 2001, with a balloon payment in February 2001; interest 11.00%; secured by buildings....................... 6,359 6,465 Mortgage notes payable--principal payable February 1, 2012; interest payable monthly at various rates; secured by a building.............................. 4,500 4,500 Other notes payable................................. -- 112 -------- -------- Total debt.......................................... 121,677 135,383 Less: current maturities............................ 556 9,763 -------- -------- Long-term debt...................................... $121,121 $125,620 ======== ========
36 In April 1997, the Company entered into a three-year revolving credit agreement with several financial institutions, replacing the Company's previous $86,250 term loan and $85,000 revolving credit agreement. The new agreement provides for a borrowing base, with subjective elements, determined upon eligible inventory and selected fixed assets and real estate, up to an aggregate principal amount of $200,000. As of January 31, 1998, the Company borrowed $88,900 with $17,500 of borrowings remaining available under this agreement. 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 ratios (defined as the ratio of earnings before interest, taxes, depreciation and amortization (EBITDA) to interest expense). In connection with the repayment of the previous term loan and revolving credit agreement, the Company recognized a one-time extraordinary after-tax charge of $446, or $0.04 per share in fiscal 1997. In May 1996, the Company entered into a $23,400, twenty-year mortgage agreement, secured by its four stores in Rochester, New York. The net proceeds were used to repay debt and to fund ongoing working capital requirements. The Company maintains an interest rate swap portfolio which allows the Company to convert floating rate borrowings to fixed rates. The following table indicates the notional amounts and the range of interest rates paid and received by the Company as of January 31, 1998 and February 1, 1997:
JANUARY 31, FEBRUARY 1, 1998 1997 Fixed swaps (notional amount)........................ $60,000 $60,000 Range of receive rate.............................. 5.56%-6.24% 5.50%-6.24% Range of pay rate.................................. 5.97%-8.06% 7.02%-8.06%
The interest rate swap agreements will expire on various dates from January 29, 1999 to December 22, 2000. The net income or expense from the exchange of interest rate payments is included in interest expense. The estimated fair value, based on dealer quotes, of the interest rate swap agreements at January 31, 1998 and February 1, 1997 was a loss of $1,261 and $1,963, respectively, and represents the amount the Company would pay if the agreements were terminated as of such dates. 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 fair value of the Company's debt, excluding interest rate swaps, is estimated at $122,310 and $133,844 on January 31, 1998 and February 1, 1997, respectively, and is based on an estimate of the rates available to the Company for debt with similar features. Debt maturities, as of January 31, 1998, are as follows: 1998............................................................. $ 556 1999............................................................. 604 2000............................................................. 89,570 2001............................................................. 6,542 2002............................................................. 639 2003 and thereafter.............................................. 23,766 -------- $121,677 ========
3. INTEREST COSTS: Interest and debt costs were:
FISCAL YEAR ENDED ----------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 Interest cost incurred................... $13,441 $14,955 $ 9,820 Interest income.......................... (234) (153) (437) Capitalized interest, net................ (5) (115) (661) ------- ------- ------- Interest expense, net.................... $13,202 $14,687 $ 8,722 ======= ======= ======= Interest paid............................ $12,887 $14,898 $10,441 ======= ======= =======
37 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. SALE OF RECEIVABLES: The Company securitizes its private credit card portfolio through an accounts receivable facility (the "Facility"). Under the securitization agreement, which expires in January 2000 and is contingent upon the 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, an undivided percentage interest in the receivables, on a limited recourse basis. BTRLP assets of $27,979 and $15,413 as of January 31, 1998 and February 1, 1997, respectively, were included in the accompanying Consolidated Balance Sheets and consist primarily of its retained interest in receivables initially purchased from the Company and sold under the Facility. The Company accounts for its undivided interest in the receivables in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company has not recognized any unrealized gains or losses on its participation interest as the current carrying value of customers' revolving charge accounts receivable is a reasonable estimate of fair value since the average interest rates approximate current market origination rates. Creditors of BTRLP have a claim on BTRLP's assets prior to any equity in BTRLP becoming available to creditors of the Company. In January 1998, the Company increased its accounts receivable facility to $150,000 to increase the level of receivables it may sell to fund working capital. In September 1996, the Company reduced the Facility to $120,000 based on the Company's analysis of credit sales as a percentage of total sales and the required level of working capital. As of January 31, 1998 and February 1, 1997, credit card receivables were sold under the above referenced agreement in the amount of $132,000 and $110,000, respectively. BTRLP holds a participating interest in an undivided ownership interest in the receivables sold. This interest is required to be held under terms of the agreement to provide credit support against future losses and is subject to lien. The amount subject to credit support amounted to $21,071 and $19,764 at January 31, 1998 and February 1, 1997, respectively. New receivables are sold on a continual basis to replenish the investors' respective level of participation in receivables which have been repaid by the credit card holders. 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. The net impact on earnings in connection with the sale of receivables under this agreement was not significant. However, under the terms of the sale agreement, the Company receives securitization income equal to the excess of the finance charges collected on the receivables over the rate paid in these securitization transactions and credit losses which are payable under the recourse provisions of these agreements. The Company also continues to service the accounts. The rate paid may be based on variable or fixed rate pricing alternatives at the option of the Company. Securitization income, before consideration of servicing expenses, was approximately $8,410, $6,211 and $5,205 in fiscal 1997, 1996 and 1995, respectively, and has been reported as part of finance charge income. Although the Company receives positive securitization cash flow, an interest-only strip has not been recorded due to the short life of the receivables and to provide for credit losses under the recourse provision of the Facility. 5. PURCHASE OF RECEIVABLES: The Company purchased certain customer accounts receivable of Hess's Department Stores, Inc. on February 24, 1995. The net investment in this purchase was $30,138. The receivables were purchased from a finance company which had an agreement with Hess's Department Stores, Inc. to acquire and service their receivables. 38 6. PROPERTY, FIXTURES AND EQUIPMENT: As of January 31, 1998 and February 1, 1997, property, fixtures and equipment and the related accumulated depreciation and amortization consisted of:
JANUARY 31, FEBRUARY 1, 1998 1997 Land................................................ $ 1,171 $ 1,409 Buildings and leasehold improvements................ 94,635 99,743 Furniture and equipment............................. 89,128 82,186 Buildings under capital leases...................... 5,052 5,052 -------- -------- 189,986 188,390 Less: Accumulated depreciation and amortization..... 81,418 70,674 -------- -------- $108,568 $117,716 ======== ========
Property, fixtures and equipment with a net depreciated cost of approximately $41,336 and $43,255 are pledged as collateral for secured loans at January 31, 1998, and February 1, 1997, respectively. Included in Land, Buildings and leasehold improvements is $2.6 million for a vacant store owned by the Company located in Allentown, Pennsylvania. The Company is currently negotiating for the sale of this property, however, at this time, there is no binding contract for the sale. The Company will continue to pursue opportunities to dispose of this property. The Company believes the established reserves are adequate. 7. 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 licensed to other retailers in many of the Company's leased facilities. At January 31, 1998, 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 1998.......................................... $ 579 $ 15,445 1999.......................................... 579 14,780 2000.......................................... 579 12,863 2001.......................................... 579 11,427 2002.......................................... 300 10,405 2003 and thereafter........................... 800 62,841 ------ -------- Total net minimum rentals..................... 3,416 $127,761 ======== Less: Amount representing interest............ 774 ------ Present value of net minimum lease payments, of which $379 is due within one year......... $2,642 ======
Minimum rental commitments under operating leases detailed earlier are reflected without reduction for rental income due in future years under noncancellable subleases since the amounts are immaterial. Some of the store leases contain renewal options ranging from two to thirty-five years. Included in the minimum lease payments under operating leases are leased vehicles, copiers and computer equipment, as well as related-party commitments with the Company's majority shareholder and related entities of $713, $713, $715, $745, $745 and $5,568 for fiscal 1998, 1999, 2000, 2001, 2002 and 2003 and thereafter, respectively. 39 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Rental expense consists of the following:
FISCAL YEAR ENDED ----------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 Operating leases: Buildings: Minimum rentals........................... $13,898 $13,660 $13,580 Contingent rentals........................ 2,636 2,374 2,402 Fixtures and equipment..................... 1,332 750 2,265 Contingent rentals on capital leases....... 410 357 321 ------- ------- ------- Totals.................................. $18,276 $17,141 $18,568 ======= ======= =======
CONTINGENCIES The Company is party to legal proceedings and claims which arise during the ordinary course of business. In the opinion of management, the ultimate outcome of such litigation and claims will not have a material adverse effect on the Company's financial position or results of its operations. 8. 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. In addition, the Company has 5,000,000 shares of preferred stock authorized; however, none of these shares have been issued. Transfers of the Company's Class A Common Stock are restricted. Upon sale or transfer of ownership or voting rights to other than permitted transferees, as defined, such shares will convert to an equal number of shares of Common Stock. During fiscal 1995, 2,935,317 shares of Class A Common Stock were converted to an equal number of shares of Common Stock. 9. 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. Components of income tax provision (benefit) are as follows:
FISCAL YEAR ENDED ----------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 Federal and State: Current................................ $ 7,480 $ 833 $(12,475) Deferred............................... (1,210) 4,116 6,709 ------- ------ -------- Total.................................. $ 6,270 $4,949 $ (5,766) ======= ====== ========
40 Components of gross deferred tax assets and liabilities were comprised of the following:
JANUARY 31, FEBRUARY 1, 1998 1997 Deferred tax assets: Store closings..................................... $1,969 $ 1,535 Accrued expenses................................... 1,560 2,366 Restricted Shares.................................. 1,096 1,014 Sale and leaseback................................. 1,030 -- Bad debt reserve................................... 712 997 Loss carryforward.................................. 324 796 Capital leases..................................... 140 157 AMT credit carryforward............................ -- 833 Other.............................................. 168 166 Valuation allowance................................ (288) (169) ------ ------- Total gross deferred tax assets.................... $6,711 $ 7,695 ====== ======= Deferred tax liabilities: Fixed assets....................................... $4,740 $ 3,949 Inventory.......................................... 2,155 2,783 Pension asset...................................... -- 2,718 Other.............................................. 1,408 1,047 ------ ------- Total gross deferred tax liabilities............... $8,303 $10,497 ====== =======
The loss carryforward at January 31, 1998 relates to the acquisition of Adam, Meldrum & Anderson Co., Inc. and will expire in January 2009. The valuation allowance relates to the deferred tax assets that result from accrued expenses that are not deductible for tax purposes due to the limitations arising from Section 162 of the Internal Revenue Code of 1986, as amended ("IRC 162"), relating to deductions for executive compensation. No other deferred tax assets have associated valuation allowances since these tax benefits are realizable through the reversal of existing deferred tax liabilities and future taxable income, exclusive of reversals of temporary differences and carryforwards. A reconciliation of the statutory federal income tax rate to the effective tax rate for fiscal 1997, 1996 and 1995 is presented below:
FISCAL YEAR ENDED ----------------------------------- JANUARY 31, FEBRUARY 1, FEBRUARY 3, 1998 1997 1996 Tax at statutory rate.................. 35.0% 35.0% (35.0)% Tax credits............................ -- -- (4.0) Refund of prior year income taxes...... -- -- (4.8) Book expense in excess of IRC 162 limitation............................ 2.3 3.6 5.0 State income taxes, net of federal benefit............................... 1.0 1.0 -- Excise tax on pension termination...... -- 3.4 -- Other, net............................. 1.0 (0.9) 0.3 ---- ---- ----- Total................................ 39.3% 42.1% (38.5)% ==== ==== =====
In fiscal 1997 and 1995, the Company made income tax payments of $2,194 and $5,071, respectively. The Company received income tax refunds, net of payments, of $8,641 in fiscal 1996. 41 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) 10. 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 20% 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 contributed $1,350 in fiscal 1997 and $1,200 in fiscal 1996 under the profit sharing provisions of the Plan. No contributions were made under the profit sharing provisions for fiscal 1995. In addition to the above plans, the Company maintains a non-qualified compensation plan for a select group of management employees. The Company's fiscal 1997, 1996 and 1995 expense under the aforementioned benefit plans was $1,951, $1,932 and $395, respectively. In December 1995, the Company merged the Adam, Meldrum and Anderson Co., Inc. Pension Plan into the Hess's Department Stores, Inc. Employees' Pension Plan. These defined benefit pension plans (the "Merged Plan") covered substantially all the former employees of Adam, Meldrum and Anderson Co., Inc. and Hess's Department Stores, Inc., respectively. The Adam, Meldrum and Anderson Co., Inc. Pension Plan was curtailed in fiscal 1992 by the former owners. The Hess's Department Stores, Inc. Employees' Pension Plan was overfunded at the time of the purchase of certain assets of Hess's Department Stores, Inc. Due to the overfunded status of the Merged Plan an asset was recorded in the purchase price allocation for the estimated net realizable value of the overfunded plan at the expected termination date. In April 1996, the Company began the termination process of the Merged Plan. The participants' obligations were settled through an election by the participants of either a lump sum payout or an annuity purchase. The settlement of participants' obligations was completed in November 1996. As a result of this settlement, the Company recorded a gain in fiscal 1996 of $3,171, net of $1,132 Federal excise tax expense, to recognize the value of assets to be reverted to the Company in excess of the asset established in purchase accounting. Completion of the funds reversion was completed in November 1997. Total funds reverted to the Company amounted to $6,005, net of $1,132 Federal excise taxes paid. Additionally, the Company also transferred $2,007 to the Company's profit sharing plan of which $1,200 was used to fund the Company's 1996 contribution. The remaining balance in the Plan will partially fund the Company's 1997 contribution of $1,350. 11. STOCK AWARD PLANS: The Company's Amended and Restated 1991 Stock Option and Restricted Stock Plan (the "Stock Plan"), as amended through June 17, 1997, provides 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"). The maximum number of shares to be granted under the Stock Plan, less forfeitures, is 1,900,000 shares. In addition to the Stock Plan, during 1991 the Board of Directors approved a Phantom Equity Replacement Plan (the "Replacement Plan") to replace the Company's previous deferred compensation arrangement that was structured as a phantom stock program. The Company amended its Management Incentive Plan (the "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 on the satisfaction of applicable performance goals. The maximum number of shares to be granted under the MIP Plan is 300,000. Options granted under the Stock Plan, excluding Restricted Share awards, are generally issued at the market price of the Company's stock on the date of grant, vest over three to five years and have a ten-year term. Grants under the Replacement Plan vest over approximately one to six years and have a thirty-year term. Compensation cost charged to operations, calculated using the intrinsic value method as required by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," was $1,345, $505 and $293 in fiscal 1997, 1996 and 1995, respectively. Had the Company recorded compensation expense using 42 the fair value based method as discussed in SFAS No. 123, "Accounting for Stock- Based Compensation," net income (loss) and earnings (loss) per share would have been reduced to the pro forma amounts indicated below:
1997 1996 1995 ---- ---- ---- Net income (loss)......................... As reported $9,252 $6,811 $(9,203) Pro forma 8,416 5,987 (9,496) Earnings (loss) per share Basic................................... As reported $ 0.83 $ 0.62 $ (0.83) Pro forma 0.76 0.54 (0.86) Diluted................................. As reported $ 0.81 $ 0.61 $ (0.83) Pro forma 0.74 0.54 (0.86)
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 for 1997 calculations: risk-free interest rate--6.3%; expected volatility--61.5%; expected life--7.2 years; expected dividend yield--0.0% and for both 1996 and 1995 calculations: risk-free interest rate--6.4%; expected volatility--65.0%; expected life--7 years; expected dividend yield--0.0%. A summary of the options under the Stock Plan follows:
PERFORMANCE- RESTRICTED COMMON STOCK OPTIONS BASED OPTIONS SHARES ---------------------- ----------------- ---------- NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OPTIONS PRICE OPTIONS PRICE OF SHARES FISCAL 1995 January 28, 1995.......... 401,976 $10.07 86,300 $ 7.25 21,528 Granted.................. 371,600 $ 7.26 33,300 $11.25 270,000 Exercised................ (68,868) $ 8.90 -- -- (7,176) Forfeited................ (66,958) $ 9.91 (25,600) $ 7.25 (2,912) ----------- ------ ------- ------ ------- February 3, 1996.......... 637,750 $ 8.57 94,000 $ 8.67 281,440 =========== ====== ======= ====== ======= Options exercisable at February 3, 1996......... 142,885 $11.26 -- -- -- Weighted average fair value of options granted during fiscal 1995....... $ 5.84 $ 7.89 FISCAL 1996 Granted.................. 131,286 $ 6.58 176,800 $ 6.13 -- Exercised................ -- -- -- -- (11,659) Forfeited................ (17,216) $ 8.69 (60,700) $ 7.25 (1,456) ----------- ------ ------- ------ ------- February 1, 1997.......... 751,820 $ 8.22 210,100 $ 6.94 268,325 =========== ====== ======= ====== ======= Options exercisable at February 1, 1997......... 328,653 $ 9.54 -- -- -- Weighted average fair value of options granted during fiscal 1996....... $ 4.40 $ 4.20 FISCAL 1997 Granted.................. 134,300 $ 6.86 167,100 $ 7.25 -- Exercised................ (243,759) $ 6.04 -- -- (10,955) Forfeited................ (25,866) $10.32 -- -- (704) ----------- ------ ------- ------ ------- January 31, 1998.......... 616,495 $ 8.35 377,200 $ 7.08 256,666 =========== ====== ======= ====== ======= Options exercisable at January 31, 1998......... 274,309 $10.03 -- -- -- Weighted average fair value of options granted during fiscal 1997....... $ 4.84 $ 4.95
The exercised shares in the above summary for Restricted Shares represent shares for which the restrictions have lapsed. 43 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The range of exercise prices for the Common Stock options outstanding as of January 31, 1998 was $5.88 to $13.00 with a weighted average contractual life of 7.2 years. The range of exercise prices for the performance-based options was $6.13 to $11.25, with a weighted average contractual life of 8.4 years. A summary of the status of the Replacement Plan follows:
NON- DISCOUNT DISCOUNT OPTIONS OPTIONS Exercise Price.............................................. $ 3.25 $ 13.00 -------- ------- January 28, 1995............................................ 155,888 48,894 Exercised................................................. (10,239) -- Forfeited................................................. (3,071) (6,288) -------- ------- February 3, 1996............................................ 142,578 42,606 Exercised................................................. -- -- Forfeited................................................. -- -- -------- ------- February 1, 1997............................................ 142,578 42,606 Exercised................................................. (57,309) -- Forfeited................................................. -- (5,054) -------- ------- January 31, 1998............................................ 85,269 37,552 -------- -------
As of January 31, 1998, February 1, 1997 and February 3, 1996, the exercisable discounted options amounted to 83,411, 138,861 and 130,259, respectively, and exercisable non-discounted options amounted to 36,122, 39,746 and 36,413, respectively. The Company granted 202,300 Restricted Shares under the MIP Plan. No Restricted Shares have vested or were forfeited during fiscal 1997. Cancellation of options and shares in the above plans resulted primarily from the termination of the employment of certain executives and voluntary forfeitures by key executives. 12. ACQUISITIONS: On March 6, 1995, the Company acquired three vacant department stores in Rochester, New York for $14,565. After completing renovations, the stores opened to the public on November 1, 1995. In addition, on November 13, 1995, the Company acquired one department store in Greece Ridge, New York for $3,670. This unit opened to the public on August 8, 1996 following major remodeling. 44 13. QUARTERLY RESULTS (UNAUDITED):
FISCAL QUARTER ENDED ----------------------------------------------- MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31, FISCAL 1997: 1997 1997 1997 1998 Net sales..................... $ 134,251 $ 137,994 $ 155,513 $ 228,641 Other income, net............. 491 472 457 929 ---------- ---------- ---------- ---------- 134,742 138,466 155,970 229,570 ---------- ---------- ---------- ---------- Costs of merchandise sold..... 84,936 86,152 97,212 145,546 Selling, general and adminis- trative expenses............. 46,002 47,457 51,064 58,327 Depreciation and amortiza- tion......................... 3,166 3,196 3,500 3,020 ---------- ---------- ---------- ---------- Income from operations........ 638 1,661 4,194 22,677 Interest expense, net......... 3,549 3,223 3,254 3,176 ---------- ---------- ---------- ---------- Income (loss) before income taxes........................ (2,911) (1,562) 940 19,501 Income tax provision (bene- fit)......................... (1,108) (594) 367 7,605 ---------- ---------- ---------- ---------- Income (loss) before extraor- dinary item.................. (1,803) (968) 573 11,896 Extraordinary item--loss on early extinguishment of debt, net of income tax benefit of $251......................... (446) -- -- -- ---------- ---------- ---------- ---------- Net income (loss)............. $ (2,249) $ (968) $ 573 $ 11,896 ========== ========== ========== ========== Per share amounts-- Basic: Net income (loss) before ex- traordinary item............. $ (0.16) $ (0.09) $ 0.05 $ 1.06 Effect of extraordinary item.. (0.04) -- -- -- ---------- ---------- ---------- ---------- Net income (loss)............. $ (0.20) $ (0.09) $ 0.05 $ 1.06 ========== ========== ========== ========== Basic shares outstanding...... 11,073,000 11,075,000 11,082,000 11,261,000 Diluted: Net income (loss) before ex- traordinary item............. $ (0.16) $ (0.09) $ 0.05 $ 1.00 Effect of extraordinary item.. (0.04) -- -- -- ---------- ---------- ---------- ---------- Net income (loss)............. $ (0.20) $ (0.09) $ 0.05 $ 1.00 ========== ========== ========== ========== Diluted shares outstanding.... 11,073,000 11,075,000 11,493,000 11,867,000
FISCAL QUARTER ENDED ------------------------------------------------ MAY 4, AUGUST 3, NOVEMBER 2, FEBRUARY 1, FISCAL 1996: 1996 1996 1996 1997 Net sales................. $ 129,320 $ 130,740 $ 148,374 $ 218,048 Other income, net......... 522 500 497 911 ---------- ---------- ---------- ---------- 129,842 131,240 148,871 218,959 ---------- ---------- ---------- ---------- Costs of merchandise sold..................... 80,518 81,276 93,514 140,255 Selling, general and ad- ministrative expenses.... 46,615 46,172 48,497 56,031 Depreciation and amortiza- tion..................... 3,048 3,025 3,256 3,429 Unusual income............ -- -- -- (3,171)(1) ---------- ---------- ---------- ---------- Income (loss) from opera- tions.................... (339) 767 3,604 22,415 Interest expense, net..... 3,097 3,801 3,979 3,810 ---------- ---------- ---------- ---------- Income (loss) before in- come taxes............... (3,436) (3,034) (375) 18,605 Income tax provision (ben- efit).................... (1,237) (1,088) (133) 7,407 ---------- ---------- ---------- ---------- Net income (loss)......... $ (2,199) $ (1,946) $ (242) $ 11,198 ========== ========== ========== ========== Per share amounts-- Basic: Net income (loss)......... $ (0.20) $ (0.18) $ (0.02) $ 1.01 ========== ========== ========== ========== Basic shares outstanding.. 11,062,000 11,064,000 11,064,000 11,067,000 Diluted: Net income (loss)......... $ (0.20) $ (0.18) $ (0.02) $ 1.00 ========== ========== ========== ========== Diluted shares outstand- ing...................... 11,062,000 11,064,000 11,064,000 11,235,000
- --------------------- (1) Gain recognized on the pension termination was $1.6 million or $0.14 per share on an after-tax basis (see Note 10). 45 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 14. CHIEF EXECUTIVE OFFICER EMPLOYMENT: In August 1995, the Company hired Mr. Heywood Wilansky as President and Chief Executive Officer pursuant to a three year employment agreement. In addition to a base salary, bonus eligibility, and other annual benefits and perquisites, he received 250,000 Restricted Shares and an option to purchase 250,000 shares of Common Stock at $6.625 per share (the market price on issuance date). The restricted shares, which as of the date of the grant had a market value of $1,656, will vest at the rate of 33 1/3% per annum over three years beginning at the third anniversary of the date of employment. The market value of $1,656 is being amortized over the five-year vesting period. The options will become exercisable at the rate of 33 1/3% per annum over three years beginning on the first anniversary of the date of employment and expiring upon the lapse of ten years from the date the options were granted. Both the stock options and restricted shares were issued under the Stock Plan (see Note 11). Should Mr. Wilansky leave the Company before vesting, these benefits will be forfeited upon departure except in certain limited circumstances. Mr. Wilansky also received a one-time signing bonus of $750 in fiscal 1995. The Company signed an agreement with Mr. Wilansky, effective February 1, 1998, to extend his employment as the Company's President and Chief Executive Officer through January 31, 2003. This new agreement provides for increased cash and stock-based compensation. 15. UNUSUAL (INCOME) EXPENSE: In January 1997, the Company recorded unusual income of $3,171 before taxes, which is presented separately as a component of income (loss) from operations in the Consolidated Statements of Operations. The income relates to a $4,303 gain that was recognized on the termination of the Merged Plan. The gain was partially offset by $1,132 for Federal excise tax that was paid when the pension assets were reverted to the Company. The asset reversion occurred during 1997 (see Note 10). In October 1995, the Company recorded unusual expenses of $3,280 before taxes. This is presented separately as a component of income (loss) from operations in the Consolidated Statements of Operations. The charge is comprised of relocation costs, employment agency fees, litigation costs and a signing bonus associated with the hiring of the Chief Executive Officer (see Note 14). The litigation cost related to actions brought by the Chief Executive Officer's former employer, alleging violation of a non-compete agreement between the Chief Executive Officer and the former employer. This suit was settled in fiscal 1995. 16. RESTRUCTURING CHARGES: In January 1996, the Company recorded a restructuring charge of $5,690 before taxes, which is presented separately as a component of income (loss) from operations in the Consolidated Statements of Operations. The amount is comprised of $5,000 relating to store closings and $690 for workforce reductions. The $5,000 for store closings relates to stores that the Company closed due to poor performance. The costs provided for these store closings represented noncancellable lease costs after store operations cease, lease cancellation costs and nonrecoverable investments in property, fixtures and equipment. During 1996, the Company closed five locations, with combined sales and net operating income of $12,600 and $293, respectively, for the 1996 fiscal year. The amounts incurred in fiscal 1997 and the remaining accrual for store closing as of January 31, 1998 were $580 and $2,895, respectively. As of February 1, 1997 the amounts incurred in fiscal 1996 and remaining accrual were $1,525 and $3,475, respectively. It is anticipated that the remaining costs will be expended through the end of 2005, and relate primarily to a leased property located in Johnstown, Pennsylvania. The Company continues to negotiate for the early termination of this lease. Currently, these negotiations have not been successful. The Company believes the established reserves are adequate. The $690 relating to workforce reductions consisted of severance paid in connection with the elimination of approximately 700 positions. These positions were eliminated across all areas of the Company and represented approximately 250 employees on a full-time equivalent basis. The amounts paid during fiscal 1996 and 1995 for these workforce reductions were $277 and $413, respectively. As of January 31, 1998 and February 1, 1997 there was no accrual remaining. 17. SALE AND LEASEBACK ARRANGEMENT: In April 1997, the Company sold the land, building and leasehold improvements comprising its department store in Johnstown, Pennsylvania and distribution center in Allentown, 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. Annual payments under the operating lease agreement are $1,270. The $10,841 of net proceeds received from the sale were used to pay down debt by $8,208 and to provide additional working capital. The gain associated with the sale, totaling $2,986, has been deferred in other long-term liabilities and is being amortized on a straight- line basis over the twenty-year lease term. 46 EX-21 5 SUBSIDIARIES OF THE REGISTRANT EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The Bon-Ton Department Stores, Inc., a Pennsylvania corporation The Bon-Ton Corp., a Delaware corporation The Bon-Ton Stores of Lancaster, Inc., a Pennsylvania corporation The Bon-Ton National Corp., a Delaware corporation The Bon-Ton Trade Corp., a Delaware corporation BTRGP, Inc., a Pennsylvania corporation Adam, Meldrum & Anderson Co., Inc., a New York corporation The Bon-Ton Receivables Partnership, L. P., a Pennsylvania limited partnership The Bon-Ton Properties - Greece Ridge G. P., Inc., a New York corporation The Bon-Ton Properties - Greece Ridge L. P., a Delaware limited partnership The Bon-Ton Properties - Irondequoit G. P., Inc., a New York corporation The Bon-Ton Properties - Irondequoit L. P., a Delaware limited partnership The Bon-Ton Properties - Marketplace G. P., Inc., a New York corporation The Bon-Ton Properties - Marketplace L. P., a Delaware limited partnership The Bon-Ton Properties - Eastview G. P., Inc., a New York corporation The Bon-Ton Properties - Eastview L. P., a Delaware limited partnership EX-23 6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS To The Bon-Ton Stores, Inc.: As independent public accountants, we hereby consent to the incorporation of our reports dated March 4, 1998 included in or incorporated by reference in this Form 10-K, into the Company's previously filed Form S-8 Registration Statements, Registration Nos. 33-43105, 33-51954, 333-36633, 333-36661 and 333-36725. /s/ Arthur Andersen LLP Philadelphia April 27, 1998 EX-27.1 7 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED BALANCE SHEETS AS OF JANUARY 31, 1998 AND THE CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE FISCAL YEAR ENDED JANUARY 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR JAN-31-1998 FEB-02-1997 JAN-31-1998 9,109 0 30,462 1,977 177,783 224,212 189,986 81,418 352,686 101,134 123,384 0 0 118 124,276 352,686 656,399 658,748 413,846 629,578 0 0 13,202 15,968 6,270 9,698 0 (446) 0 9,252 0.83 0.81 EPS has been prepared in accordance with SFAS No. 128, and that basic and diluted EPS have been entered in place of primary and fully diluted, repectively.
EX-27.2 8 FINANCIAL DATA SCHEDULE
5 THE FOLLOWING SCHEDULE IS BEING FILED TO RESTATE THE PREVIOUSLY REPORTED EARNINGS PER SHARE AMOUNTS IN CONNECTION WITH THE ADOPTION OF SFAS NO. 128 1,000 3-MOS 6-MOS 9-MOS JAN-31-1998 JAN-31-1998 JAN-31-1998 FEB-02-1997 FEB-02-1997 FEB-02-1997 MAY-03-1997 AUG-02-1997 NOV-01-1997 8,121 9,645 6,234 0 0 0 26,156 21,795 23,575 1,898 1,782 1,594 171,098 166,759 229,233 215,002 205,472 267,051 179,695 181,922 186,280 72,212 75,205 78,552 343,811 333,356 395,491 82,399 89,068 129,098 147,301 131,813 152,883 0 0 0 0 0 0 113 113 116 109,262 108,413 109,299 343,811 333,356 395,491 134,251 272,245 427,758 134,742 273,208 429,178 84,936 171,088 268,300 134,104 270,909 422,685 0 0 0 0 0 0 3,549 6,772 10,026 (2,911) (4,473) (3,533) (1,108) (1,702) (1,335) (1,803) (2,771) (2,198) 0 0 0 (446) (446) (446) 0 0 0 (2,249) (3,217) (2,644) (0.20) (0.29) (0.24) (0.20) (0.29) (0.24) EPS has been prepared in accordance with SFAS No. 128, and that basic and diluted EPS have been entered in place of primary and fully diluted, respectively.
EX-27.3 9 FINANCIAL DATA SCHEDULE
5 THE FOLLOWING SCHEDULE IS BEING FILED TO RESTATE THE PREVIOUSLY REPORTED EARNINGS PER SHARE AMOUNTS IN CONNECTION WITH THE ADOPTION OF SFAS NO. 128 1,000 YEAR 3-MOS 6-MOS 9-MOS FEB-01-1997 FEB-01-1997 FEB-01-1997 FEB-01-1997 FEB-04-1996 FEB-04-1996 FEB-04-1996 FEB-04-1996 FEB-01-1997 MAY-04-1996 AUG-03-1996 NOV-02-1996 6,516 10,653 10,237 8,797 0 0 0 0 2,769 25,557 20,444 22,499 2,769 2,953 3,000 2,735 161,191 168,692 176,553 216,816 202,402 226,618 221,946 263,417 188,390 179,187 182,519 185,680 70,674 61,300 64,150 67,164 341,252 366,995 361,643 404,174 99,549 94,122 96,606 110,627 128,098 168,744 163,497 192,202 0 0 0 0 0 0 0 0 113 113 113 113 111,372 101,983 100,156 100,049 341,252 366,995 361,43 404,174 626,482 129,320 260,060 408,434 628,912 129,842 261,082 409,953 395,563 80,518 161,794 255,308 602,465 130,181 260,654 405,921 0 0 0 0 0 0 0 0 14,687 3,097 6,898 10,877 11,760 (3,436) (6,470) (6,845) 4,949 (1,237) (2,325) (2,458) 6,811 (2,199) (4,145) (4,387) 0 0 0 0 0 0 0 0 0 0 0 0 6,811 (2,199) (4,145) (4,387) 0.62 (0.20) (0.37) (0.40) 0.61 (0.20) (0.37) (0.40) EPS has been prepared in accordance with SFAS No. 128, and that basic and diluted EPS have been entered in place of primary and fully diluted, respectively.
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