-----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, ORAt4XKktG5ypeoMpCTk6kRATzrYFlb5h4V7gzlf67nr9/y03GoOjGKlihMkXE0P wQlUlD++duNMRPY5MSKI1g== 0001036050-97-000210.txt : 19970502 0001036050-97-000210.hdr.sgml : 19970502 ACCESSION NUMBER: 0001036050-97-000210 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19970201 FILED AS OF DATE: 19970501 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: 231269309 STATE OF INCORPORATION: PA FISCAL YEAR END: 0202 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-19517 FILM NUMBER: 97593606 BUSINESS ADDRESS: STREET 1: 2801 E MARKET ST CITY: YORK STATE: PA ZIP: 17402 BUSINESS PHONE: 7177577660 MAIL ADDRESS: STREET 1: 2801 EAST MARKET STREET CITY: YORK STATE: PA ZIP: 17402 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 February 1, 1997 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, $0.01 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. [ ] As of April 4, 1997, the aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $35,856,835, based upon the closing price of $7.00 per share on April 4, 1997, as reported by the Nasdaq National Market.* As of April 4, 1997, there were 8,348,219 shares of Common Stock, $0.01 par value, and 2,989,853 shares of Class A Common Stock, $0.01 par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Part II - Portions of the registrant's Annual Report to security holders for Fiscal Year Ended February 1, 1997. Part III - Portions of the registrant's Proxy Statement with respect to its 1997 Annual Meeting of Shareholders. - ----------------------------- * 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. - -------------------------------------------------------------------------------- "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 substantial 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 As of April 4, 1997, The Bon-Ton Stores, Inc., together with its subsidiaries (collectively, the "Company"), operated 64 Bon-Ton department stores which are located primarily in middle and secondary markets in Pennsylvania, New York and Maryland, with one store in each of West Virginia, New Jersey and Georgia. The Company's stores, which are typically anchor tenants of shopping malls, carry moderate to better brand name fashions and accessories for women, men and children, as well as cosmetics, jewelry, shoes, china, linens, housewares, gifts and other products. The Company strives to be the leading fashion retailer in each of its markets by providing a timely, deep and broad selection of prominent brands. In addition, the Company maintains a strong focus on serving its target customers: women and men between the ages of 25 and 55 with family incomes between $30,000 and $75,000. The Company's executive offices are located at 2801 East Market Street, York, Pennsylvania. Merchandising and Marketing All of the Company's stores carry apparel for the whole family, cosmetics and accessories; 55 stores carry home furnishings, such as china, linens, housewares and gifts, and 17 stores offer furniture and bedding. In addition, 39 stores have leased fine jewelry departments and 34 stores contain leased beauty salons. During the fiscal years ended February 1, 1997 ("fiscal 1996"), February 3, 1996 ("fiscal 1995") and January 28, 1995 ("fiscal 1994"), the percentage of net sales accounted for by each of the Company's major merchandise categories was as follows: 2
Fiscal Year ------------------------------------------------- Merchandise Category 1996 1995 1994 - -------------------- ------ ------ ------ Women's clothing........................... 27.4% 27.5% 27.6% Men's clothing............................. 17.7 17.5 18.0 Home....................................... 12.0 11.8 11.2 Cosmetics.................................. 9.8 9.9 10.0 Children's clothing........................ 7.4 8.0 8.1 Accessories................................ 7.9 8.0 8.4 Junior's clothing.......................... 5.5 5.6 6.0 Lingerie................................... 5.3 5.0 4.7 Shoes...................................... 4.7 4.4 4.0 Fine Jewelry............................... 1.7 1.6 1.4 Beauty Salon............................... .6 .7 .6 ----- ----- ----- Total.................................. 100.0% 100.0% 100.0% ======== ======== =======
The Company's merchandising and marketing strategy is based on an approach which balances fashion leadership, customer service, everyday value prices on a limited number of key items and the selective use of promotions. The Company emphasizes high-margin, high-turnover product lines, such as apparel and accessories, in a balanced mix of moderate and better. The Company strives to be among the first in its markets to identify fashion trends, to advertise and stock new merchandise and to carry a full complement of sizes and colors of the items it sells. The Company carries a line of highly recognized quality vendors such as Liz Claiborne, Calvin Klein, Tommy Hilfiger, Ralph Lauren, Alfred Dunner, Levi's, Bandolino and Nine West. Complementing that product is a commitment to private brand merchandise that provides fashion and quality at value prices. The Company has developed private brands including Andrea Viccaro, Susquehanna Trail Outfitters, Jenny Buchanan and Susquehanna Blues. The combination of merchandise further differentiates the Company from its competitors. The Company provides a variety of customer services including free gift wrapping and special order capability. The Company also provides bridal registries at selected stores. Through its "Certified Value" program, the Company maintains everyday value prices on a limited number of key items such as turtlenecks, fleece, t-shirts, shorts and denims within certain major product groups. This provides the customer with the confidence that these items are already value priced and will not be placed on sale during their normal selling cycles. The Company conducts its general advertising and promotion programs through newspaper advertisements and circulars and, to a lesser extent, through local television and radio. The Company maintains an in-house advertising group that produces substantially all of its print advertising. In addition, the Company advertises through direct mail, primarily to 3 holders of its Bon-Ton credit card. By using a database management system to obtain information regarding past purchases of Bon-Ton credit card holders, the Company is able to target previous purchasers of specific types of merchandise. Store Facilities The Company's stores vary in size from approximately 35,000 to 160,000 total square feet. Most Bon-Ton stores are one of several anchor tenants in shopping malls, with the balance of the Company's stores generally located in or adjacent to strip shopping centers. The Company emphasizes strong visual presentations in key traffic areas in its stores. Displays are changed on a frequent basis and are designed for the market served. Each store has at least one associate responsible for visual presentations in addition to the Company's central visual planning staff. The Company utilizes prototype store layouts based primarily on the Company's estimate of the size of the potential market for a particular store. Store layouts are customized based on the actual size and configuration of the individual stores. Although Bon-Ton stores typically utilize a "race track" configuration (an oval aisle encircling a central core), the Company plans the aisle layouts to provide a more pleasing visual experience. The Company generally maintains relatively shallow racking of merchandise from the main aisle to the store walls to facilitate customer access. The Company attempts to arrange its products to provide a logical flow from department to department and continually monitors its product layouts in an attempt to make shopping easier and to maximize sales per square foot. Expansion The Company plans to maintain its growth by increasing sales in its existing stores, by opening new stores and, in future years, by acquiring suitable department store companies or their real estate assets. The Company's market positioning strategy has been to locate its new stores or acquire existing companies or their stores in middle and secondary markets generally within or contiguous to its existing areas of operations. In August 1996, the Company opened its fourth store in the greater Rochester, New York market, completing its positioning strategy in entering that market. In January 1997, the Company closed stores in Frackville, PA, Washington, PA, Johnstown, PA (Richland Mall) and Fairmont, WV. These four stores were part of the 19 stores acquired from Hess's Department Stores, Inc. in 1994, and were not acquired for long-term operation. In January 1997, the Company also closed an unprofitable store in Cortland, NY which had been acquired from C.E. Chappell & Sons, Inc. in 1994. 4 Purchasing and Distribution The Company purchased merchandise from over 1,300 domestic and foreign manufacturers and suppliers during fiscal 1996. During that period, the top 25 vendors by dollar volume accounted for approximately 40% of net purchases. No vendor accounted for more than 7% of the Company's purchases. The Company believes that alternative sources of supply are available for each category of merchandise it purchases. In addition, the Company's buying staff purchases private label and other merchandise through Frederick Atkins, Inc. ("Atkins"), a national association of major retailers that provides its members with group purchasing opportunities. In fiscal 1996, the Company purchased approximately 7% of its merchandise from Atkins. The Company has two primary distribution facilities: a 173,000 square foot automated facility in York, Pennsylvania and a 396,000 square foot automated facility in Allentown, Pennsylvania. In fiscal 1996, approximately 49% of the Company's merchandise was processed in the York facility and 51% in Allentown. Merchandise is generally shipped directly from vendors to the Company's distribution centers, except that deliveries from vendors in the New York and Los Angeles areas are generally routed through a consolidator. Deliveries are made from the distribution center to each store typically twice a week in the spring season and three times weekly during the fall. Merchandise is usually shipped ready for immediate placement on the selling floor. Management Information and Control Systems The Company has placed substantial emphasis on upgrading its management information and control systems. Control of the Company's merchandising activities is maintained by a set of on-line systems, including a point-of-sale and sales reporting system, a purchase order management system, a receiving system and a merchandise planning system. These closely linked systems track merchandise from order through sale, comparing actual to planned results and highlighting areas requiring management attention. The Company's enhancement of its management information and control systems is an ongoing process. During fiscal 1996, the Company expanded the use of vendor bar codes to eliminate ticketing and to facilitate cross docking of merchandise, implemented a new on-line system to handle furniture and expanded the bridal registry system to all 55 stores which carry home furnishings. It also introduced radio frequency scanning at the Company's distribution centers and bar code scanning at its control vendor return site. These technologies greatly enhance the movement of merchandise through the distribution process. During fiscal 1997, the Company plans to expand the utilization of scanning at its stores. 5 Customer Credit Bon-Ton customers may pay for their purchases with The Bon-Ton proprietary credit card, Visa, Mastercard, American Express, cash or check. During fiscal 1996, the Company issued 256,000 Bon-Ton credit cards for newly opened accounts. 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 1996, 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. The following table summarizes the percentage of total sales generated by type of payment for fiscal 1996, 1995 and 1994:
Type of Payment Fiscal Year --------------- ---------------------------------------- 1996 1995 1994 ------ ------ ------ Bon-Ton credit card............................... 51% 55% 54% Visa, Mastercard, American Express ............... 20% 16% 13% Cash or check..................................... 29% 29% 33% ----- ----- ----- Total......................................... 100% 100% 100% ===== ===== =====
All phases of the credit card operation are handled by the Company except statement mailing and the processing of customer mail payments, which 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. The Company believes that its bad debt expense (as a percentage of total proprietary credit card sales) is consistent with the department store industry average. Competition The retail department store business is highly competitive. The Company competes for customers and suitable store locations with national department store chains such as JCPenney, The May Department Stores Company and Sears, as well as with regional department stores such as Boscov's. The Company also competes with catalogue retailers and specialty stores. Many of the stores that compete with the Company's stores are owned by corporations that are considerably larger than the Company and have substantially greater financial and other resources. In addition to its current competitors, the Company faces potential competition from other national chains that to date generally have not entered the markets served by the Company. The Company's stores compete on the basis of quality, depth and breadth of merchandise, prices for comparable quality merchandise, customer service and store environment. 6 Associates As of April 4, 1997, the Company had approximately 3,500 full-time and 4,100 part-time associates. The Company also employs additional part-time clerks and cashiers during peak periods. None of the Company's associates is represented by a labor union. The Company believes that its relationship with its associates is good. Item 2. Properties. The following table provides certain information regarding the Company's properties as of April 10, 1997. The Company believes that the rents at its leased locations are generally at or below market rates.
Store Properties ---------------- Approximate Year Opened Gross Square or Acquired/ Market Location Feet Owned or Leased - ------ -------- ------------ --------------- PENNSYLVANIA Allentown South Mall 111,000 1994/Leased Bethlehem Westgate Mall 107,100 1994/Leased Bloomsburg Columbia Mall 46,100 1988/Leased Butler Clearview Mall 63,600 1982/Leased Carlisle Carlisle Plaza Mall 59,900 1977/Leased Chambersburg Chambersburg Mall 55,600 1985/Leased Doylestown Doylestown Shopping Center 35,100 1994/Leased Easton Palmer Park Mall 120,200 1994/Leased Greensburg Westmoreland Mall 99,900 1987/Owned/(1)/ Hanover North Hanover Mall 60,100 1971/Leased Harrisburg Camp Hill (Free Standing) 145,200 1987/Owned Colonial Park Shopping Center 136,500 1987/Leased Indiana Indiana Mall 60,400 1979/Leased Johnstown The Galleria 80,900 1992/Leased Lancaster Park City Center 144,800 1992/Leased Lebanon Lebanon Plaza Mall 53,700 1994/Leased Lewistown Central Business District 46,700 1972/Owned Oil City/Franklin Cranberry Mall 45,200 1982/Leased Pottsville Schuylkill Mall 61,100 1987/Leased Quakertown Richland Mall 88,100 1994/Leased Reading Berkshire Mall 159,400 1987/Leased Scranton Keyser Oak Plaza 57,600 1980/Leased State College Nittany Mall 70,200 1994/Leased Stroudsburg Stroud Mall 87,000 1994/Leased Sunbury Susquehanna Valley Mall 60,200 1978/Leased Trexlertown Trexler Mall 54,000 1994/Leased Uniontown Uniontown Mall 61,500 1976/Leased Warren Warren Mall 50,000 1980/Leased Washington Franklin Mall 78,100 1987/Leased Williamsport Lycoming Mall 60,100 1986/Leased Wilkes-Barre Midway Shopping Center 66,000 1987/Leased Wyoming Valley Mall 159,500 1987/Leased York York Galleria 128,200 1989/Owned/(1)/ Queensgate Shopping Center 85,100 1962/Leased West Manchester Mall 80,200 1981/Leased
7
Approximate Year Opened Gross Square or Acquired/ Market Location Feet Owned or Leased - ------ -------- ------------ --------------- NEW YORK Binghamton Oakdale Mall 80,000 1981/Leased Buffalo Northtown Plaza 100,800 1994/Leased Walden Galleria 150,000 1994/Leased Eastern Hills Mall 151,200 1994/Leased McKinley Mall 97,200 1994/Leased Sheridan/Delaware Plaza 124,100 1994/Leased Southgate Plaza 100,500 1994/Leased Elmira Arnot Mall 74,800 1995/Leased Ithaca Pyramid Mall 52,400 1991/Leased Lockport Lockport Mall 82,000 1994/Leased Massena St. Lawrence Centre 51,000 1994/Leased Niagara Falls Summit Park Mall 88,100 1994/Leased Olean Olean Mall 73,000 1994/Leased Rochester The Mall at Greece Ridge Center 144,600 1996/Owned The Marketplace Mall 100,000 1995/Owned/(1)/ Irondequoit Mall 102,600 1995/Owned Eastview Mall 118,900 1995/Owned Saratoga Springs Wilton Mall 71,700 1993/Leased Syracuse Carousel Center 80,000 1994/Leased Camillus Mall 64,700 1994/Leased Great Northern Mall 98,400 1994/Leased Shoppingtown Mall 70,100 1994/Leased Watertown Salmon Run Mall 50,200 1992/Leased MARYLAND Cumberland Country Club Mall 60,900 1979/Leased Frederick Frederick Towne Mall 77,900/(2)/ 1972/Leased Hagerstown Valley Mall 100,000 1974/Leased WEST VIRGINIA Martinsburg Martinsburg Mall 65,800 1994/Leased NEW JERSEY Phillipsburg Phillipsburg Mall 65,000 1994/Leased GEORGIA Rome River Bend Mall 42,700 1994/Leased
8
Other Properties Approximate Year Opened Gross Square or Acquired/ Market Location Feet Owned or Leased - ------ -------- ------------ --------------- PENNSYLVANIA Allentown Central Business District/(3)/ 850,700 1994/Owned Distribution Center 326,000 1994/Leased Lancaster Central Business District/(4)/ 246,200 1992/Owned Harrisburg Warehouse 124,200 1987/Owned York Corporate Offices 83,000 1983/Leased Corporate Office Annex/Credit Service Center 58,600 1988/Leased Corporate Services Facility 48,000 1993/Leased Distribution Center/ Data Center 143,700 1988/Owned/(1)/ Johnstown Richland Mall/(5)/ 81,100 1994/Leased NEW YORK Buffalo Distribution Center/(6)/ 177,000 1994/Leased MARYLAND Hunt Valley Credit Service Center 2,603 1996/Leased
Footnotes: - --------- /(1)/ Ownership of building is subject to an underlying long-term ground lease. /(2)/ Includes leases for two separate premises in the same mall: a 71,900 sq. ft. main store and a 6,000 sq. ft. home store annex. /(3)/ Store closed in January 1996. The Company is attempting to dispose of this property. /(4)/ Store closed in March 1995. The Company is attempting to dispose of this property. /(5)/ Store closed in January 1997. The Company is trying to negotiate an early termination of the lease or assign or sublet the premises. /(6)/ This facility's distribution operation has been consolidated into other Bon-Ton facilities. The Company has sublet a substantial part of these premises and is attempting to sublet the balance. Item 3. Legal Proceedings. The Company is not party to any material pending litigation. Item 4. Submission of Matters to a Vote of Security Holders. None. 9 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 L. Wilansky ................... 49 President, Chief Executive Officer and Director M. Thomas ("Tim") Grumbacher .......... 57 Chairman of the Board and Director Michael L. Gleim ...................... 54 Vice Chairman, Chief Operating Officer and Director James H. Baireuther ................... 50 Senior Vice President and Chief Financial Officer Bernard H. Breuers .................... 55 Senior Vice President, General Merchandise Manager Thomas B. Daniels ..................... 53 Senior Vice President, Stores H. Stephen Evans ...................... 47 Senior Vice President, Real Estate, Legal and Governmental Affairs Theodore C. Johnson, Jr. .............. 63 Senior Vice President, Human Resources Leroy J. Karlin ....................... 65 Senior Vice President, Information Systems Cheryl Jan Ladnier .................... 48 Senior Vice President, Marketing and Corporate Communication Douglas Lamm .......................... 50 Senior Vice President, General Merchandise Manager Paul Lindblom ......................... 42 Senior Vice President, General Merchandise Manager Ryan J. Sattler ....................... 52 Senior Vice President, Operations Stephen M. Sloane ..................... 50 Senior Vice President, General Merchandise Manager
10 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 Department Stores Company for more than 19 years. From 1992 to August 1995, he was President and Chief Executive Officer of the Foley's division of May, and from 1991 to 1992, he was President and Chief Executive Officer of the Filene's division. Prior to that, he was with the Hecht's and Lord & Taylor divisions of May. Mr. Grumbacher joined the Company in 1961 and has been Chairman of the Board since August 1991. From 1989 to 1991, Mr. Grumbacher served as Vice Chairman, 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 Department Stores, Inc. for more than 25 years. He was Senior Vice President of Administration and Chief Financial Officer of the Lazarus division of Federated from 1988 to 1989, President of the Block's division of Federated from 1987 to 1988 and Senior Vice President of Administration of the Lazarus division from 1986 to 1988. Mr. Baireuther joined the Company as Senior Vice President and Chief Financial Officer in June 1996. Prior to joining the Company, Mr. Baireuther was Senior Vice President and Chief Financial Officer at DAC Vision, a manufacturer of optical supplies, from 1994 to 1996. Prior to joining DAC, he was Executive Vice President and Chief Financial Officer for Eye Care Centers of America, a subsidiary of Sears, Roebuck and Co. 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. Mr. Breuers joined the Company as Senior Vice President, General Merchandise Manager in April 1996. Mr. Breuers was previously at Marshall's from 1991 to 1996, where he held the position of Senior Vice President-General Merchandise Manager. Prior to that, he was associated with Women's Specialty Retailing, a subsidiary of U.S. Shoe Company, from 1987 to 1991, and with the Hecht's division of The May Department Stores Company from 1972 to 1987. Mr. Daniels joined the Company in June 1994 as Senior Vice President, Stores. Mr. Daniels was previously employed by the Kaufmann's division of The May Department Stores Company from 1993 until June 1994 as Regional Vice President of Stores supervising all Cleveland-based stores. Prior to the merger of May Company's Kaufmann's and Cleveland Divisions, he served as Senior Vice President and Director of Stores for May Company-Cleveland from 1988 to 1993. Mr. Daniels' association with The May Department Stores Company began in 1974. 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 Company, Inc. from 1978 to 1991 where he served most recently as a Senior Regional Real Estate Representative from 1986 to 1991. Mr. Johnson has been Senior Vice President, Human Resources of the Company since 1988. Mr. Johnson was previously associated with the Higbee Company, a department store company based in Cleveland, Ohio, where he served most recently as Senior Vice President-Human Resources for more than five years. 11 Mr. Karlin joined the Company as Senior Vice President, Information Services in 1989. Mr. Karlin was previously associated with Federated Department Stores, Inc., where he served as Divisional Vice President at the Southeast Region Data Center in Atlanta, Georgia from 1987 to 1989 and as Director of Data Processing at Foley's Department Store in Houston, Texas from 1979 to 1987. Ms. Ladnier joined the Company as Senior Vice President, Sales Promotion and Marketing in December 1993, and was named Senior Vice President, Marketing and Corporate Communications in 1996. From January 1993 until October 1993, Ms. Ladnier served as Corporate Vice President, Public Relations at Neiman-Marcus in Dallas, Texas. Prior to that she was associated with The May Department Stores Company for 14 years where she served as Senior Vice President, Sales Promotion and Marketing for three divisions, most recently the May D and F division in Denver, Colorado. Mr. Lamm joined the Company as Senior Vice President, General Merchandise Manager in October 1995. Prior to joining the Company, Mr. Lamm owned a chain of women's large size apparel specialty stores 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. Lindblom joined the Company as Senior Vice President, General Merchandise Manager in 1992. Mr. Lindblom was previously employed by The May Department Stores Company from 1988 to 1992 where he served as Senior Vice President, General Merchandise Manager in its G. Fox division in Hartford, Connecticut. Prior to that, Mr. Lindblom was associated with Macy's Department Stores from 1980 to 1988 where he most recently served as Divisional Merchandise Manager in Atlanta, Georgia. Mr. Sattler joined the Company as Vice President, Distribution and Operations in 1986 and was promoted to Senior Vice President, Operations in 1990. Mr. Sattler previously served as Vice President-Director of Gimbels Midwest Department Stores in Milwaukee, Wisconsin from 1983 to 1986. 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, Pittsburgh, Pennsylvania, and from July 1995 until December 1995 he was Vice President-General Merchandise Manager at McRae's Department Stores, Jackson, Mississippi. Prior to that, Mr. Sloane was associated with The May Department Stores Company for over 17 years, having most recently served as Vice President- Merchandising at Foley's in Houston, Texas. PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters. The Company's 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. 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 high and low sales prices per share of the Common Stock as furnished by Nasdaq: 12
Fiscal 1996 ------------------------------- High Low -------- -------- 1st Quarter $8.250 $4.688 2nd Quarter 6.875 5.000 3rd Quarter 6.750 5.125 4th Quarter 7.375 4.875 Fiscal 1995 ------------------------------- High Low -------- -------- 1st Quarter $12.250 $9.750 2nd Quarter 11.250 6.750 3rd Quarter 8.688 6.000 4th Quarter 6.750 4.500
On April 4, 1997, there were 289 shareholders of record of the Company's Common Stock and 5 shareholders of record of the Company's Class A Common Stock. No dividends have been paid on the Common Stock since the beginning of fiscal 1992. The Company's Board of Directors intends to reinvest earnings in the Company's business to support its operations and expansion. The Board of Directors has no present intention to pay cash dividends in the foreseeable future, and will determine whether to declare cash dividends in the future in light of the Company's earnings, financial condition and capital requirements. In addition, the Company has certain credit agreements that limit the payment of dividends. Item 6. Selected Financial Data. The following selected financial data, except pro forma amounts, have been derived from the Company's consolidated financial statements which have been audited by Arthur Andersen LLP, independent auditors. The information set forth below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements of the Company and notes thereto. See Items 7 and 8. 13
(Dollars in thousands except per share data) FISCAL YEAR ----------------------------------------------------------------------- 1996 1995 1994 1993 1992 -------- -------- -------- -------- -------- Statement of Operations Data: Net sales ..................................... $626,482 $607,357 $494,908 $336,733 $333,764 Other income, net ............................. 2,430 2,266 2,581 2,597 2,266 ------- ------- ------- ------- ------- 628,912 609,623 497,489 339,330 336,030 ------- ------- ------- ------- ------- Costs and expenses: Costs of merchandise sold ................. 395,563 387,947 299,914 206,542 206,915 Selling, general and administrative ....... 197,315 204,867 162,442 108,647 107,448 Depreciation and amortization ............. 12,758 11,895 8,465 6,593 5,478 Unusual (income) expense .................. (3,171) 5,471 -- -- -- Restructuring charges ..................... -- 5,690 -- -- -- ------- ------- ------- ------- ------- Income (loss) from operations .......... 26,447 (6,247) 26,668 17,548 16,189 Interest expense, net ..................... 14,687 8,722 5,475 4,042 5,506 ------- ------- ------- ------- ------- Income (loss) before income taxes ......... 11,760 (14,969) 21,193 13,506 10,683 Income tax provision (benefit) ............ 4,949 (5,766) 7,563 4,727 3,632 ------- ------- ------- ------- ------- Income (loss) before cumulative effect of a change in accounting principle .................. 6,811 (9,203) 13,630 8,779 7,051 Cumulative effect of changing to the liability method of accounting for income taxes (1). -- -- -- 1,500 -- ------- ------- ------- ------- ------- Net income (loss) ......................... $ 6,811 $(9,203) $ 13,630 $ 10,279 $ 7,051 ======= ======= ======= ======= ======= Per Share Amounts: Earnings per Common Share Income (loss) before cumulative effect of a change in accounting principle ................. $ 0.61 $ (0.83) $ 1.23 $ 0.80 $ 0.64 Cumulative effect of changing to the liability method of accounting for income taxes (1) -- -- -- 0.14 -- ------- ------- ------- ------- ------- Net income (loss) per share ............... $ 0.61 $ (0.83) $ 1.23 $ 0.94 $ 0.64 ======= ======= ======= ======= ======= Weighted average shares outstanding (2) ....... 11,134,000 11,044,000 11,051,000 10,983,000 11,015,000 Year ended ---------------------------------------------------------------------- February 1, February 3, January 28, January 29, January 30, 1997 1996 1995 1994 1993 ----------- ----------- ----------- ----------- ----------- Balance Sheet Data: Working capital................................ $102,853 $ 90,758 $ 62,539 $ 70,688 $ 81,605 Total assets................................... 341,252 331,173 270,228 190,431 196,354 Long-term debt and capital leases.............. 128,098 127,893 60,521 34,741 53,099 Shareholders' equity........................... $111,485 $104,174 $112,447 $ 98,551 $ 88,011
(1) The Company adopted SFAS No. 109, "Accounting for Income Taxes", at the beginning of fiscal 1993. (2) When the effect is dilutive, weighted average shares outstanding include common stock equivalents, which represent stock options and restricted stock grants, and is computed using the treasury stock method. 14 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 18 through 22 of the Company's Annual Report to Shareholders for the fiscal year ended February 1, 1997, attached hereto as exhibit 13.1. 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 23 through 39 of the Company's Annual Report to Shareholders for the fiscal year ended February 1, 1997, attached hereto as exhibit 13.2. 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 definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held in 1997, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference thereto. Item 11. Executive Compensation. The information called for by this Item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held in 1997, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, 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). 15 Item 12. Security Ownership of Certain Beneficial Owners and Management. The information called for by this Item will be contained in the Company's definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held in 1997, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, 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 definitive Proxy Statement with respect to the Company's Annual Meeting of Shareholders to be held in 1997, to be filed with the Securities and Exchange Commission within 120 days following the end of the Company's fiscal year, and is hereby incorporated by reference thereto. PART IV Item 14. Exhibits, Consolidated Financial Statement Schedules, and Reports on Form 8-K. (a) 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: 3.1 The Company's Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company's Report on Form 8-B, File 0-19517). 3.2 The Company's Bylaws (incorporated by reference to Exhibit 3.2 to the Company's Report on Form 8-B, File 0-19517). 10.1 Shareholder's Agreement by and among the Company and the shareholders named therein (incorporated by reference to Exhibit 10.3 to Amendment No. 2 to the Company's Registration Statement on Form S-1, File 33-42142). *10.2 (a) Employment Agreement between the Company and Heywood L. Wilansky (incorporated by reference to Exhibit 10.3 to the Company's Report on Form 8-B, File 0-19517). *10.2 (b) Amending Agreement between the Company and Heywood L. Wilansky. *10.3 Employment Agreement between the Company and Michael L. Gleim (incorporated by reference to Exhibit 10.4 to the Company's Report on Form 8-B, File 0-19517). 16 *10.4 Form of severance agreement between the Company and its executive officers (incorporated by reference to Exhibit 10.14 to the Company's Report on Form 8-B, File 0-19517). *10.5 Amended and Restated 1991 Stock Option and Restricted Stock Plan (incorporated by reference to Exhibit 10.5 to the Company's Report on Form 8-B, File 0-19517). 10.6 Ground Leases for distribution center located in York, Pennsylvania, by and between The Bon-Ton Department Stores, Inc. and M. Thomas Grumbacher, as amended (incorporated by reference to Exhibit 10.12 to the Company's Registration Statement on Form S-1, File 33-42142). 10.7 Ground Lease for York Galleria, York, Pennsylvania by and between The Bon-Ton Department Stores, Inc. and MBM Land Associates (incorporated by reference to Exhibit 10.14 to the Company's Registration Statement on Form S-1, File 33-42142). 10.8 (a) Sublease of Butler, Pennsylvania store by and between The Bon-Ton Department Stores, Inc. and M. Thomas Grumbacher (incorporated by reference to Exhibit 10.15 to the Company's Registration Statement on Form S-1, File 33-42142). (b) First Amendment to Butler, Pennsylvania sublease (incorporated by reference to Exhibit 10.21 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File 33-42142). (c) Corporate Guarantee with respect to Butler, Pennsylvania lease (incorporated by reference to Exhibit 10.24 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File 33-42142). 10.9 (a) Sublease of Oil City, Pennsylvania store by and between The Bon-Ton Department Stores, Inc. and M. Thomas Grumbacher (incorporated by reference to Exhibit 10.16 to the Company's Registration Statement on Form S-1, File 33-42142). (b) First Amendment to Oil City, Pennsylvania sublease (incorporated by reference to Exhibit 10.22 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File 33-42142). (c) Corporate Guarantee with respect to Oil City, Pennsylvania lease (incorporated by reference to Exhibit 10.26 to Amendment No. 1 to the Company's Registration Statement on Form S-1, File 33-42142). *10.10 The Company's Profit Sharing/Retirement Savings Plan, amended and restated as of July 1, 1994 (incorporated by reference to Exhibit 10.24 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995). 17 10.11 Receivables Purchase Agreement dated as of January 27, 1995 among The Bon-Ton Receivables Corp., Falcon Asset Securitization Corporation, The First National Bank of Chicago, and the other financial institutions party hereto (incorporated by reference to Exhibit 10.26 to the Company's Annual Report on Form 10-K for the fiscal year ended January 28, 1995). 10.12 Tax Indemnification Agreement (incorporated by reference to Exhibit 10.17 to Amendment No. 2 to the Company's Registration Statement on Form S-1, File 33-42142). *10.13 Management Incentive Plan and Addendum to Management Incentive Plan. *10.14 The Bon-Ton Stores, Inc. Long-Term Incentive Plan For Principals. 13.1 Pages 18 through 22 of the Company's Annual Report to Shareholders for the fiscal year ended February 1, 1997. 13.2 Pages 23 through 39 of the Company's Annual Report to Shareholders for the fiscal year ended February 1, 1997. 21. Subsidiaries of the Registrant. 23. Consent of Arthur Andersen LLP. 27. Financial Data Schedules. (b) Reports on Form 8-K filed during the fourth quarter. None. ______________________________________________ * Constitutes a management contract or compensatory plan or arrangement. 18 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE BON-TON STORES, INC. Dated: April 28, 1997 By: /s/ Heywood L. Wilansky ---------------------------- Heywood L. 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 in the capacities and on the dates indicated.
Signature Capacity Date - --------- -------- ---- /s/ Heywood L. Wilansky Chief Executive April 28, 1997 - ------------------------------- Officer and Director Heywood L. Wilansky (principal executive officer) /s/ M. Thomas Grumbacher Director April 28, 1997 - ------------------------------- M. Thomas Grumbacher /s/ Samuel J. Gerson Director April 28, 1997 - ------------------------------- Samuel J. Gerson /s/ Michael L. Gleim Vice Chairman, Chief April 28, 1997 - ------------------------------- Operating Officer Michael L. Gleim and Director /s/ Roger S. Hillas Director April 28, 1997 - ------------------------------- Roger S. Hillas /s/ Lawrence J. Ring Director April 28, 1997 - ------------------------------- Lawrence J. Ring
19 /s/ Leon D. Starr Director April 28, 1997 - ------------------------------- Leon D. Starr /s/ Leon F. Winbigler Director April 28, 1997 - ------------------------------- Leon F. Winbigler /s/ James H. Baireuther Senior Vice President and April 28, 1997 - ------------------------------- Chief Financial Officer James H. Baireuther (principal financial and accounting officer)
20 INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS.........................F-2 F-1 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 January 28, 1995: Allowance for doubtful accounts..................... $ 1,134,000 $ 1,916,000 /(1)/ $ 2,361,000 /(5)/ $(3,117,000) /(2)/ $ 2,294,000 Reserve for store closing....... $ 263,000 $ 2,132,000 /(3)/ $ 5,025,000 /(6)/ $ (287,000) /(4)/ $ 7,133,000 Year ended February 3, 1996: Allowance for doubtful accounts..................... $ 2,294,000 $ 4,043,000 /(1)/ $ 604,000 /(7)/ $(3,828,000) /(2)/ $ 3,113,000 Reserve for store closing....... $ 7,133,000 $ 5,000,000 /(8)/ $ --- $(2,563,000) /(4)/ $ 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) /(4)/ $ 6,984,000
- ------------------- NOTES: (1) Provision for loss on credit sales. (2) Uncollectible accounts, written off, net of recoveries. (3) Provision for expenses and the write off of assets associated with the store closings. (4) Cash payments for store closing expenses, net of monies received from asset liquidation. (5) Represents the allowance for losses on accounts receivable recorded in purchase accounting. (6) Represents reserves recorded in purchase accounting for the costs associated with closing certain acquired stores. (7) Represents reserves associated with the purchase of the Hess's Department Store's Inc. accounts receivable. (8) Represents reserves relating to stores that the Company has committed to close due to poor performance. REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE To the Shareholders of The Bon-Ton Stores, Inc.: We have audited in accordance with generally accepted auditing standards, the consolidated financial statements included in The Bon-Ton Stores, Inc.'s annual report to shareholders, incorporated by reference in this Form 10-K, and have issued our report thereon dated March 5, 1997 (except with respect to the matter discussed in Note 17 to the consolidated financial statements, as to which the date is April 10, 1997). Our audits were made for the purpose of forming an opinion on these statements taken as a whole. The schedule listed in Item 14(a)(2) 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 audits 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 5, 1997 F-2 EXHIBIT INDEX Exhibit Description - ------- ----------- 10.2(b) Amending Agreement between the Company and Heywood L. Wilansky 10.13 Management Incentive Plan and Addendum to Management Incentive Plan 10.14 The Bon-Ton Stores, Inc. Long-Term Incentive Plan For Principals 13.1 Pages 18 through 22 of the Company's Annual Report to Shareholders for the year ended February 1, 1997 13.2 Pages 23 through 39 of the Company's Annual Report to Shareholders for the fiscal year ended February 1, 1997 21. Subsidiaries of the Registrant 23. Consent of Arthur Andersen LLP 27. Financial Data Schedules EX-10.2B 2 AMENDING AGREEMENT EXHIBIT 10.2(b) AMENDING AGREEMENT This agreement made March 10, 1997 between The Bon-Ton Stores, Inc. ("Company") and Heywood Wilansky ("Executive"). WHEREAS, Company and Executive entered an employment agreement dated August 18, 1995 (the "Employment Agreement"); and WHEREAS, pursuant to the provisions of the Employment Agreement, Company made a $750,000 loan to Executive and Executive issued a note to Company to evidence such loan (the "Note"); and WHEREAS, Company and Executive have agreed to modify the Note as hereinafter provided. NOW THEREFORE, in consideration of $10 each paid to the other, Company and Executive agree as follows: The Note is hereby amended to provide that the $375,000 payment due thereunder on April 30, 1997 shall be due and payable on December 30, 1997 provided, however, that if Executive remains employed by Company pursuant to the terms of the Employment Agreement through December 30, 1997, or if Executive is terminated by Company without Cause (as defined in the Employment Agreement) or does not voluntarily terminate his employment other than due to a Change in Control (as defined in the Employment Agreement) prior to December 30, 1997, then the $375,000 principal of the Note due on December 30, 1997 will be deemed forgiven. In Witness whereof, the parties hereto have duly executed this Amending Agreement as of the date first above written. THE BON-TON STORES, INC. By /s/ M. Thomas Grumbacher ------------------------------- M. Thomas Grumbacher Chairman /s/ Heywood Wilansky ------------------------------- Heywood Wilansky EX-10.13 3 MANAGEMENT INCENTIVE PLAN EXHIBIT 10.13 - -------------------------------------------------------------------------------- MANAGEMENT INCENTIVE PROGRAM THE BON.TON FOR FISCAL YEAR 1995 - --------------------------------------------------------------------------------
CONTENTS: PAGE - --------- ---- I. Plan Description (with Examples) 1 II. Goal Setting 6 III. Incentive Payouts 6 IV. Individual Worksheet 7 V. General Rules 9 Appendix A: Goal Weights Appendix B: Plan Participants (limited distribution) Appendix C: Weighting Criteria (limited distribution)
EFFECTIVE: January 29, 1995 Page 1 I. PLAN DESCRIPTION A. Objectives of the Plan ---------------------- 1. To attract, reward and retain key executives for their individual and combined contribution to the achievement of specific goals and objectives. 2. To emphasize the importance of high standards of individual performance. 3. To reinforce teamwork to achieve the overall corporate financial goals. 4. To reward the "flexibility factor" which is required in an environment of continuing change and growth. B. Eligibility ----------- 1. As determined by the Executive Committee. 2. See Appendix A Page 2 C. Basic Principles ---------------- 1. The "target" bonus for each participant is expressed as a percent of base salary. Any additional compensation for benefits, perks, bonuses, travel, etc. is excluded. Example: 10% of $50,000 = $5,000. 2. The actual "earned" bonus may range from 0 to 1.5 (150%) of the target bonus. Example: 1.5 x $5,000 = $7,500. 3. Earned bonuses are based on: (a) Company performance, defined by "earnings before interest and taxes", or EBIT. (b) Individual performance, based on the written goals and objectives for the current fiscal year. (c) The executive's bonus opportunities are weighted by position. Example: 60% based on company performance (EBIT) 40% based on individual performance (goals and objectives). 4. Company performance and individual performance are evaluated separately and earned payouts (bonuses) are made accordingly. Bonus payments may be rounded to a $50 increment. 5. The participant must be rated "GOOD" or better to receive any bonus, individual or company. 6. This incentive plan does not replace, reduce or change the basic compensation plans now in place. Salaries and merit increases based on a position and individual performance remain in effect and are unchanged from the compensation programs that apply to all other managers. 7. Bonus payments remain at the discretion of the Chief Executive Officer. No bonuses (company or individual) may be paid if the company fails to achieve "minimum results" established by the Executive Committee or in the event of unusual circumstances that would make it impractical to make bonus payments. Page 3 D. Measurement of Performance -------------------------- 1. The levels of performance required to earn various percentages of the target bonus (i.e. 40%, 50%, 75%, 100%, 125% or 150%) are established at the beginning of each fiscal year during the goal setting process. Performance below the 40% level earns no ($0) bonus. 2. Company Performance a) Based on financial plan for EBIT, as "booked" by March 1 of each fiscal year. b) The performance level will be evaluated each fiscal year and may be changed from year to year. c) Payouts to be 40%, 50%, 75%, 100%, 125% or 150%, depending on the company's EBIT performance. Example:
Performance Level Company Percent (% to EBIT Plan) Perf. Rating Payout ----------------- ------------ ------ 90 LOW GOOD 40% 100 GOOD (Plan) 50% 105 High,GOOD/Low VERY GOOD 75% 110 VERY GOOD 100% 115 High VERY GOOD 125% 120 EXCELLENT 150%
Page 4 3. Individual Performance a) Based on the approved financial goals and personal objectives for the participant, as "booked" or provided as the financial plan by March 1 for the Spring season and by September 1 for the Fall season of each fiscal year. b) Payouts to be 40%, 50%, 75%, 100%, 125%, or 150%, depending on the overall (combined) performance evaluation of the participant's goals and objectives (excludes "Skills and Responsibilities" appraisal). Example:
Performance Level Individual Percent (Goals and Objectives) Perf. Rating Payout ---------------------- ------------ ------- 3.1 to 3.5 LOW GOOD 40% 3.5 to 3.8 Solid or High GOOD (Plan; 3.5) 50% 3.8 to 4.1 Low VERY GOOD 75% 4.1 to 4.4 VERY GOOD 100% 4.4 to 4.7 High VERY GOOD 125% 4.7 to 5.0 EXCELLENT 150%
c) The Performance rating scale is as follows:
UNSAT FAIR GOOD V.GOOD EXCELLENT ----- ---- ---- ------ --------- 0-39 40-55 56-75 76-90 91-100
d) Evaluation of goals and objectives - Example:
1) Goal Goal X Performance = Total Weighted Number Weight Rating Points ------ ------ --------- ------------- 1 10% 4.5 0.45 2 15% 4.0 0.60 3 15% 3.0 0.45 4 15% 4.0 0.60 5 5% 3.0 0.15 --- ---- TOTAL 60% 2.25
2) Overall Performance Level a) Total weighted individual performance = 2.25 b) Divided by goal weight (60%) = 3.75 c) 3.75 = Overall performance level of Solid/High GOOD, eligible for a payout of 50%. Page 5 E. Bonus Calculation - Example: ----------------- 1. Individual Data Salary $50,000 Target = 10% of Salary $ 5,000 Weightings: 60% on Company Performance $ 3,000 40% on Individual Performance $ 2,000 ------- TOTAL $ 5,000 2. Assumptions a) Company EBIT performance level exceeds Plan by 5% (105%); 75% bonus payout. b) Individual goals and objectives rated 3.75 (Solid High GOOD); 50% bonus payout. 3. Bonus Calculations a) Company Performance: 75% x $3,000 = $2,250 Individual Performance: 50% x $2,000 = $1,000 ------ TOTAL Bonus: $3,250 or 6.5% of salary 4. Merit Increase a) Assume overall rating points = 75, High GOOD b) Using "normal" merit increase guidelines, assume an increase to the base salary of $2,000 (4.0%). Increase guidelines vary each year. c) New base salary: $50,000 + $2,000 = $52,000. Page 6 II. GOAL SETTING A. Company Goal ------------ The company goal is based on "earnings before interest and taxes" or EBIT. The Executive Committee approves the EBIT plan for each fiscal year. B. Individual Goals and Objectives ------------------------------- 1. Individual goals and objectives are those established through the MBO (management by objectives) process. These goals are written on the company's goal-setting form and are kept on file in Human Resources. 2. Generally, all the goals and objectives and their individual weightings used for the performance appraisal process are used for the management incentive plan. 3. The performance rating for each goal and objective is the same for the performance appraisal and the management incentive plan. III. INCENTIVE PAYOUTS A. Payouts will be in cash. All applicable taxes will be withheld. NOTE: For the current year and future payouts, the company reserves the option to provide payouts through the use of alternative arrangements to cash, e.g. stock options (restricted and/or incentive), stock grants (restricted and/or incentive), deferred compensation, etc. B. Payouts will usually be distributed in April or May following the end of the fiscal year. C. All payouts are reviewed and approved by the Executive Committee. D. Eligible managers may defer a portion or all of their bonus into the Deferred Compensation plan, as elected the prior year in accordance to the Deferred Compensation Plan. Page 7 EXAMPLE INDIVIDUAL WORKSHEET FOR MANAGEMENT INCENTIVE PLAN FISCAL YEAR: 1995 Participant's Name: ________________________ Location: _______________ Title: ________________________ Employee #: _______________ SS #: ________________________ Salary: $50,000 Target Bonus as a % of Salary: 15% ------- --- Target Bonus (Salary x Target Bonus %): $7,500 ------ INCENTIVE CRITERIA ------------------ Company Performance: 25% $1,875 --- ------ Individual Performance: 75% $5,625 --- ------ BONUS OPPORTUNITY -----------------
========================================================================================================== LEVEL OF PAYOUT (LESS THAN) GOOD LOW GOOD HIGH EXCELLENT 0% GOOD (PLAN) LOW V.GOOD V.GOOD V.GOOD 40% 50% 75% 100% 125% 150% - ---------------------------------------------------------------------------------------------------------- Company Performance: $0 $750 $938 $1,406 $1,875 $2,344 $2,813 % to EBIT Plan: 90% 100% 105% 110% 115% 120% - ---------------------------------------------------------------------------------------------------------- Individual Performance: $0 $2,250 $2,813 $4,219 $5,625 $7,031 $8,438 Rating: 3.1-3.5 3.5-3.8 3.8-4.1 4.1-4.4 4.4-4.7 4.7-5.0 ==========================================================================================================
Page 8 INCENTIVE AWARDS EARNED A. OVERALL PERFORMANCE RATING:__________________ B. SUMMARY OF INDIVIDUAL'S PERFORMANCE GOAL PERFORMANCE GOAL TOTAL WEIGHTED NUMBER RATING X WEIGHT(%) = POINTS ------ ------ --------- ------ 1 ______ X _______ = ______ 2 ______ X _______ = ______ 3 ______ X _______ = ______ 4 ______ X _______ = ______ 5 ______ X _______ = ______ 6 ______ X _______ = ______ 7 ______ X _______ = ______ 8 ______ X _______ = ______ TOTALS _______ % ______ PERFORMANCE LEVEL C. INCENTIVE AWARDS - Refer to the attached guidelines for the current year. 1. Company Performance % to EBIT Plan: _____ PERCENT OF PAYOUT: ____% BONUS: $____ 2. Individual Performance Overall Performance Level: _____ PERCENT OF PAYOUT: ____% BONUS: $____ 3. TOTAL BONUS $___________ D. APPROVALS Supervisor: _____________________________ DATE: _______ CEO, COO, CAO: _____________________________ DATE: _______ Sr. VP, Human Resourses: _____________________________ DATE: _______ E. EXECUTIVE SIGNATURE: _____________________________ DATE: _______ Page 9 V. GENERAL RULES A. New Hires and Promotions ------------------------ 1. New hires and participants promoted into eligible positions during the first quarter of the current fiscal year will participate for the full year. 2. Participants who are newly eligible during the second quarter of the current fiscal year are eligible to participate on a pro-rated basis. The pro-ration is based on the number of fiscal months the participant is eligible; the month the participant is first eligible counts as a full month as long as the participant worked the last two (2) full weeks of the month. 3. Participants who are newly eligible during the third or fourth quarters of the fiscal year must wait until the following year to participate. B. Transfers --------- 1. a) Participants who change positions (thus, the goals and objectives change) during the fiscal year are eligible for an award equal to the sum of the prorated portions of the bonuses they would have earned in each position. b) The portion of the bonus is based on the number of months and performance relative to the goals and the salary in each position, and the target bonus percentage applicable to each position. 2. If the transferee is in either position for less than one full quarter, the award is based solely on the job performed for the majority of the year, subject to the approval of the participant's former supervisor (and other required approvals). 3. The portion of the bonus for the new position is based on the number of full months in the new position. The portion of the bonus for the previous position is based on the number of months in the previous position, including the month in which the transfer is effective. 4. When a participant transfers, the participant's supervisor must prepare a written evaluation (form provided by Human Resources) of the former goals and objectives within 30 days of the transfer. This evaluation is then sent to the Sr. Vice President, Human Resources and filed until the year-end performance appraisals are written. Page 10 C. Resignations/ Terminations/ Demotions ------------------------------------- A participant must be actively employed in an eligible position on the last day of the fiscal year and must be actively employed with the company at the time of the bonus payment to be eligible for a payout. D. Retirement ---------- 1. Participants who retire in the first or second fiscal quarters will not share in the program for the year in which they retire. 2. Participants who retire in the third or fourth fiscal quarters will be eligible to share proportionately based on the number of months in position. The month in which the participant retires counts as a full month. E. Death/ Disability ----------------- 1. In the case of death or disability, with the consent of the Executive Committee, an award may be granted based on performance to date and pro-rated for the portion of the fiscal year that elapsed prior to the death or commencement of the disability. 2. Disability is defined in accordance to the provisions of the company's Long-Term Disability Plan. F. Approvals --------- 1. All individual goals and objectives, to be established between the participant and his or her supervisor, must be approved at the beginning of the year by the next level of management. 2. All payouts of incentive awards must be approved by the Executive Committee and all decisions are final. 3. The Executive Committee administers this management incentive plan. G. Changes and Exceptions ---------------------- 1. Changes and exceptions to these general rules, the plan description and any other administrative guidelines related to this plan must be approved by the Chief Executive Officer. 2. The Chief Executive Officer has the right to terminate or modify the plan, any awards made under the plan or any performance criteria at any time. ADDENDUM TO THE MANAGEMENT INCENTIVE PLAN - RESTRICTED STOCK PAYOUTS DEFINITIONS: Award - The issuance by The Bon-Ton of a bonus payout to a Manager (i) who has met certain performance criteria, or (ii) which may be discretionary. Committee - The Compensation Committee of the Board of Directors of The Bon-Ton or any other committee which the Board may designate, provided that the Committee shall be composed of two or more "non-employee directors" (as such term is defined in Rule 16b-3 under the Securities Act). Compensation Committee - The Compensation and Stock Option Committee of the Board of Directors of The Bon-Ton. Executive Committee - The Executive Committee of the Board of Directors of The Bon-Ton. MIP - The Management Incentive Plan of The Bon-Ton as amended by this Addendum. Manager - an employee of The Bon-Ton entitled to participate in the MIP pursuant to the terms and provisions of the MIP. Manager's Election - The election by a Manager which indicates the portion of an Award to be made in the form of Restricted Stock. Restricted Stock - Shares of Common Stock of The Bon-Ton available to Managers through the MIP. Securities Act - the Securities Exchange Act of 1934, as amended. The Bon-Ton - The Bon-Ton Stores, Inc. and its subsidiaries. RESTRICTED STOCK PAYOUT ELECTIONS 1. ADMINISTRATION: -------------- The MIP shall be administered by the Committee. The Committee may designate an Administrator, who may be an employee of The Bon-Ton or a non-employee, to perform the day-to-day administration of the MIP. The interpretation and construction by the Committee of any provision of the MIP or of any Award hereunder shall be final, binding and conclusive. 2. ELIGIBILITY: ----------- All managers may elect Awards in Restricted Stock subject to the approval of the Committee in its sole discretion. 3. RESTRICTED STOCK POOLS: ---------------------- A pool of Restricted Stock shall be established by the Committee for each Manager based on the shares elected by each Manager's Election. The Committee has established for all Awards of Restricted Stock to the original participants described in Section 4 a Base Price of $6.375 per share. 4. MANAGER'S ELECTION: ------------------ a. Each Manager shall determine what portion of such Manager's annual bonus for services performed during 1996 and thereafter shall be paid in cash or in Restricted Stock, provided that such Restricted Stock portion shall not exceed 50% of such Manager's target bonus for 1996 calculated on the basis of the Manager's base salary as of 8/4/96 multiplied by three (3). The election shall be made by the execution of such forms as may be determined by the Administrator. The election establishes the maximum pool of Restricted Stock which may be Awarded to the Manager, contingent on the Manager's continuing eligibility in the MIP. b. The Manager's Election may be for 100% Restricted Stock, 100% cash, or any whole number combination of the two which equals 100%. The number of shares of Restricted Stock in the Manager's pool must be a whole number of shares, determined as follows: the percentage elected shall be multiplied by the target bonus, the result shall be divided by the price per share, then rounded down to the next whole number, and then multiplied by three. Example: Salary: $100,000 Target Bonus: 20% ($20,000) Payout Basis: 50% of target Restricted Stock Election: 75% Restricted Stock in the pool, assuming a share price of $6.25: $20,000 x 50% payout = $10,000 x 75% stock election = $7,500 $ 7,500 / $6.25 per share = 1,200 shares 1,200 shares x 3 years = 3,600 shares in the manager's pool c. The election shall apply to at least the three Awards (even if not awarded under the MIP) made subsequent to the election unless the pool of Restricted Stock elected by the Manager is exhausted prior to full payment of all Awards. d. The election made by the Manager is irrevocable. The original election must be completed by October 31, 1996. e. New participants 1. In the event a Manager becomes eligible to participate in the MIP after October 31, 1996 (a "New Participant"), the New Participant shall be entitled to make a Manager's Election to be effective through the 1998 plan year provided such election is made within thirty (30) days after the Manager first becomes eligible to participate. 2. The number of shares included in the New Participant's Restricted Stock pool shall be based on the Manager's annualized target bonus for the then current fiscal year and the Base Price for such shares shall be the average closing market price of the Common Stock during the 90 calendar days immediately preceding the date the Manager became a New Participant. 2 3. Any Awards of Restricted Stock shall be otherwise made in accordance with the terms of the MIP. f. In the events Manager's Elections are authorized to be effective following the expiration of the 1998 plan year, the Manager must exhaust all Restricted Stock in the original pool before the new election may be utilized 5. BONUS AWARDS: ------------ a. The decision to make any Awards, the amount of the Awards and the timing of Awards are at the sole discretion of the Compensation Committee and the Executive Committee of The Bon-Ton. All Awards to Officers who are considered insiders under Section 16b of the Securities Act must be approved by the Committee or the Board of Directors or the shareholders of The Bon-Ton. b. Each year in which an Award is granted, the Manager shall receive the proportion of Restricted Stock or cash elected, provided that the maximum number of Restricted Shares granted in any year shall be one- third (1/3) of the Manager's original Restricted Stock pool. All other earned bonus for that year shall be paid in cash (minimum cash payout = $50). Example: Award: $12,000 Restricted Stock Election: 75% Restricted Stock Value: $12,000 x 75% = $9,000 $9,000 / $6.25 Base Price = 1,440 Shares Shares in Pool = 3,600 One-third shares = 1,200 Since the shares payable (1,440) exceed the maximum payable (1,200), only the maximum shares (1,200) are Awarded. Stock Award = 1,200 shares of Restricted Stock; value = $7,500 Cash payout equals the remainder: $12,000 - $7,500 = $4,500. c. Awards which fall short of the target bonus shall be paid by reducing both the number of shares of stock granted and the cash component, each on a pro-rata basis. d. If at the conclusion of the third bonus payout to the Manager there are shares of Restricted Stock remaining in the Manager's pool, these shares shall be distributed in lieu of cash in any subsequent Award to the Manager. The maximum of one-third of the initial Restricted Stock pool awarded in any year shall be waived for any such subsequent distribution to the Manager. e. The Manager will receive all remaining Restricted Stock in the Manager's Restricted Stock pool after the end of ten (10) plan years, regardless of whether or not the Restricted Stock was Awarded to the Manager. 3 6. VESTING: ------- a. All Restricted Stock Awards are immediately fully vested in the Manager. b. Restricted Stock not Awarded shall fully vest in the Manager upon the lapse of ten (10) plan years from the date the initial pool for each Manager is established, provided the committee may accelerate the vesting of this Restricted Stock. c. All Restricted Stock shall be valued at the Base Price [as provided in Section 3 or 4(e) (2)]to determine the number of shares of Restricted Stock in an Award. d. Acceleration of Vesting in the Event of the Manager's Death, Disability or Retirement - in the event of the death, disability (within the meaning of The Bon-Ton's Long-Term Disability Plan) or retirement of a Manager, the provisions of the MIP will prevail. The Committee may, after considering any recommendation of the Executive Committee with respect to the performance of such Manager and of The Bon-Ton for the portion of the then current fiscal year prior to such death, disability or retirement, accelerate vesting with respect to a pro rata portion of the Restricted Stock which would have become vested had the Manager worked the entire year. Any balance thereafter remaining in the Manager's pool shall be forfeited. e. Acceleration of Vesting of Restricted Stock Shares in the Event of a Change of Control - After February 1, 1997, in the event of, or upon the date set by the Committee to be an accelerated vesting date in anticipation of a Change of Control (as defined in the Company's Stock Option and Restricted Stock Plan), the Committee may, after considering any recommendation of the Executive Committee with respect to the performance of such Manager and of The Bon-Ton for the portion of the then current fiscal year prior to such actual or anticipated Change of Control, accelerate vesting with respect to a pro rata portion of the Restricted Stock which would have become vested had the Manager worked the entire year. Any balance thereafter remaining in the Manager's pool shall be forfeited. 7. FORFEITURES: ----------- All nonvested Restricted Stock shall be forfeited by the Manager upon the last day of the Manager's employment with The Bon-Ton except as provided under Sections 6(d) and 6(e). All nonvested Restricted Stock shall be forfeited by the Manager upon the date the Manager is no longer eligible to participate in the MIP. Restricted Stock which is forfeited may be cancelled by The Bon-Ton. 8. TRANSFER OF RESTRICTED SHARES: ----------------------------- No Restricted Stock under the MIP may be transferred, pledged or encumbered until such time as such shares become vested. 4 9. AMENDMENT OF THE MIP: -------------------- The Committee or the non-employee members of the Board of Directors of the Company may amend the MIP from time to time in such manner as deemed advisable. No amendment shall adversely affect any Restricted Stock in a Manager's pool without the consent of the Manager. The shareholders of The Bon-Ton Common Stock must approve the adoption of this addendum prior to the making of any Restricted Stock Awards. 10. NO CONTINUED EMPLOYMENT: ----------------------- Any Restricted Stock Award pursuant to the MIP shall not be constructed to imply or to constitute evidence of any agreement, express or implied, on the part of The Bon-Ton to retain the Manager in the employ of The Bon-Ton, and such Manager shall remain subject to discharge to the same extent as if this Plan has not been adopted. 11. WITHHOLDING OF TAXES: -------------------- a. As required by law, The Bon-Ton will include the value of Restricted Stock Awards as income and withhold appropriate taxes. The fair market value of the Restricted Stock at the date of the Award will be used unless an otherwise applicable value is stated by law. b. Whenever shares of Restricted Stock vest or, if sooner, whenever an Award recipient must include the Restricted Stock in income for federal income purposes, The Bon-Ton shall have the right to (a) require the recipient to remit or otherwise make available to The Bon- Ton an amount sufficient to satisfy all federal, state and/or local witholding tax requirements prior to the delivery or transfer of any certificate or certificates for such Restricted Stock, or (b) take whatever action it deems necessary to protect interests with respect to tax liabilities, including, without limitation, redeeming a portion of any Restricted Stock otherwise deliverable pursuant to this plan with a then fair market value equal to such tax liabilities. The Bon-Ton's obligation to make any delivery or transfer of Restricted Stock shall be conditioned on the Award recipient's compliance with any witholding requirement to the Company's satisfaction. c. The Committee shall have the authority to establish rules with respect to The Bon-Ton's obligations in connection with the witholding requirements described above so as to insure compliance with Rule 16b- 3(e) of the Securities Act. The Committee must approve the utilization of Restricted Stock for tax witholding for all Officers covered by Section 16b of the Securities Act. 12. PLAN DOCUMENTS: -------------- Any interpretation of the MIP, including this Addendum, are at the discretion of the Committee and are final and binding on all parties. This addendum is in effect and governs the Award of Restricted Stock pursuant to the MIP until the later of the end of The Bon-Ton's 1998 fiscal year or until a Manager's individual pool of Restricted Stock is Awarded. 5 13. OTHER RIGHTS: ------------ During the period from the date Restricted Stock is segregated into a Manager's pool until the date Restricted Stock is vested in the Manager, the Manager will be entitled with respect to the Restricted Stock in the Manager's pool to all voting rights of a holder of Common Stock of The Bon- Ton. 14. STOCK CERTIFICATES: ------------------ The stock certificate(s) evidencing Restricted Stock in each Manager's pool shall be restricted in the name of the Manager and shall bear a legend referring to the terms, conditions and restrictions applicable to such shares. The Committee shall direct The Bon-Ton to either retain physical possession or custody of or place into escrow the certificate(s) evidencing the Restricted Stock until such time as such shares are vested. 6 EX-10.14 4 BONTON LONG-TERM PLAN EXHIBIT 10.14 ================================================================================ THE BON-TON STORES, INC. Long-Term Incentive Plan For Principals ADMINISTRATIVE GUIDE MARCH 1, 1996 ================================================================================ THE BON-TON STORES, INC. LONG-TERM INCENTIVE PROGRAM - --------------------------------------------------------------------------------
SECTION PAGE - --------------------------------------------- ---------- 1. Introduction 1 2. Objectives 2 3. Overview 3 4. Stock Options 4 5. Performance Awards 5 6. Grant Size Determination and Potential Award Value 7 7. Termination Provisions 9 8. Change-in-Control Provisions 10 9. Administration 11 10. Illustrations 12
Appendix Plan and Agreements ================================================================================ 1. INTRODUCTION ================================================================================ The Bon-Ton's compensation program for the principals of the Company has four components: 1. BASE SALARY, which provides a competitive rate of fixed pay reflecting the market value of the executive's expertise, function, and contribution to the Company. 2. ANNUAL BONUS, which provides a reward for achieving key one-year operating and financial objectives related to the growth and profitability of the Company. 3. DEFERRED COMPENSATION, which allows principals to elect to defer part of base salary and bonus to accumulate capital to supplement the Company's retirement program and/or to support intermediate financial needs. This program provides flexibility to accommodate personal financial considerations, which can vary by individual and for the same individual over time, based on age and other factors. 4. LONG-TERM INCENTIVE, which provides a reward for achieving key long-term financial objectives related to increases in shareholder value. Like the deferred compensation plan, this plan is intended to allow principals to accumulate capital to supplement the Company's retirement program and/or to support intermediate financial needs, with flexibility to accommodate various personal financial considerations. The purpose of this guide is to describe the fourth component of the pay package: Long-Term Incentive Plan for Principals. The guide outlines the plan's objectives, incentive vehicles, links to Company performance, mechanics, and illustrations of how it works. Any questions may be directed to the Chief Financial Officer. -1- ================================================================================ 2. OBJECTIVES ================================================================================ The long-term incentive component of the principals' pay program is intended to work in tandem with the other three components of the pay program to achieve the following objectives: . To provide a competitive component of executive income linked to the increase in the Company's shareholder value. . To focus and reward executives for stock price appreciation. . To focus and reward executives for achieving long-term performance objectives. . To provide executives with a capital accumulation opportunity that is consistent with their individual attitudes toward risk and the stock market and their personal considerations regarding their investment portfolios. -2- ================================================================================ 3. OVERVIEW ================================================================================ The Long-Term Incentive Plan comprises two vehicles: stock options and performance awards. Both stock options and performance awards are granted annually. The stock option grants are similar to those that have been made historically. They are explained in Section 4 of this guide. The performance award component offers three incentive vehicles from which participants chose one each year: performance units, performance shares, and performance stock options (in addition to the stock option component). The performance awards vest at the end of a three-year performance cycle to the extent a specified performance goal is achieved. Performance awards are described in detail in Section 5. As explained in detail in Section 6, the size of the grants is determined as follows: . Target present value of the long-term opportunity is established for each principal based on target compensation mix and competitive practice. . Target present value is divided in two portions, one for stock options and one for performance awards. . For stock options: target present value for the stock option component is divided by the present value of one option to determine the number of stock options. For performance awards: target present value for the performance award component is divided by the present value of the award vehicle selected. -3- =============================================================================== 4. STOCK OPTIONS =============================================================================== Stock options granted under the Long-Term Incentive Plan will operate according to the terms and conditions set forth in the Amended and Restated 1991 Stock Option and Restricted Stock Plan (contained in the Appendix of this guide). Each grant of stock options will be evidenced by an Option Document, which sets forth the terms and conditions of each grant. Incentive Stock Options (ISOs) will be granted to the extent possible under prevailing tax laws, unless otherwise decided by the Compensation Committee. The remainder of the stock option grants will be nonqualified stock options. The term of the stock options, which will be specified in the Option Document, will generally be ten years. The options will have a vesting schedule in the Option Document which prescribes when and under what conditions the options become exercisable. Generally, the options will become exercisable in four equal annual installments beginning one year after the date of grant, though this vesting schedule may vary from grant to grant. The options remain exercisable until the end of their term, or earlier in the case of termination of employment (as explained in Section 8). They may become exercisable earlier in the event of a change of control (as explained in Section 9). The exercise price of the options is the Fair Market Value of the shares at the time the option is granted, which is deemed to be the last reported sale price on the grant date. -4- =============================================================================== 5. PERFORMANCE AWARDS =============================================================================== Each year performance awards are granted with a new three-year performance cycle. At the outset of each performance cycle, the participant selects one of three awards which will be granted for that three-year cycle. The award selected may be the same as or different than the award selected for other performance cycles. The three award vehicles are as follows: 1. Performance Units A performance unit is a unit whose value equals the price of a share of The Bon-Ton Stock on the date of grant that is granted to the participant at the beginning of the performance cycle and earned at the end of the performance cycle if the performance goals set for the cycle are met. The value of the Unit remains fixed throughout the performance cycle. At the end of the cycle, the value of the Units that are earned is paid to the participant in cash. If the Units are not earned, there is no payout. 2. Performance Shares A performance share is a share of The Bon-Ton Stock that is granted to the participant at the beginning of the performance cycle and earned at the end of the cycle if the performance goals set for the cycle are met. The value of the Share fluctuates throughout the performance cycle with the price of The Bon-Ton Stock. The Shares have a forfeiture restriction until the end of the cycle. If the Shares are earned, the restriction lapses; if the Shares are not earned, the shares are forfeited. 3. Performance Stock Options A performance stock option is a nonqualified stock option to buy a share of The Bon-Ton stock at the price on the date of grant that is granted to the participant at the beginning of the performance cycle and earned at the end of the performance cycle if the performance goals set for the cycle are met. The value of the options is zero when granted and fluctuates throughout the performance cycle with the appreciation in the share price. The options have a forfeiture restriction until the end of the performance cycle. If they are earned, the restriction lapses; if they are not earned, they are forfeited. -5- All awards are earned at the end of the three-year performance cycle if the performance goal(s) set for the cycle are achieved. If the goal(s) are met or exceeded, 100% of the awards are earned. If the goal(s) are not achieved, all awards are forfeited. However, if the goal(s) are not achieved, the Compensation Committee has the authority to extend the performance cycle by one or two years, at the end of which time actual performance over the extended cycle will be measured against the original goals set for the cycle. If the goals are met or exceeded over the extended performance cycle, 50% of the awards are earned and 50% are forfeited. If the goals are not achieved, all awards are forfeited. A new three-year performance cycle begins each year. Performance measures and goals are established at the beginning of each cycle. One or more performance measures may be used for a cycle. The performance goals may be expressed as an absolute dollar or percentage amount or as a percentile ranking against as defined peer group. For a particular performance cycle, both the performance measures and goals set for each measure may be the same or different than the measures and goals set for other performance cycles. The performance measures will be indicators of long-term shareholder value, such as Return on Shareholder Equity (ROE), Economic Value Added (EVA), or Total Shareholder Return (stock price appreciation plus dividends). -6- ================================================================================ 6. GRANT SIZE DETERMINATION AND POTENTIAL AWARD VALUE ================================================================================ A specified percent is applied to the participant's base salary to determine the target present value of the long-term incentive opportunity. The percentage to be applied may or may not be the same for each participant and may or may not be the same each year. Generally, though, the percent will be the same for all participants and will be the same year to year (around 25%). The target present value of long-term incentive opportunity for each participant is divided between stock options and performance awards. The balance between the two may or may not be the same for each participant and may or may not be the same each year. Generally, the split will be half stock options, half performance awards for all participants each year. To determine the number of options in the stock option grant, the portion of the present value of the long-term incentive opportunity assigned to stock options is divided by the present value of one stock option. The present value of one stock option is calculated as follows: Share price on the grant date (i.e., exercise price) projected three years based on the assumed compound annual growth rate for the cycle minus the share price on the grant date equals the gain in one stock option at the end of three years. The gain is discounted back three years based on the assumed interest rate for the cycle to determine the present value of the stock option. To determine the size of the performance award grant, the portion of the present value of the long-term incentive opportunity assigned to performance awards is divided by the present value of the performance award selected by the participant. The present value of one performance unit is determined as follows: Share price on grant date, which is the amount that will be paid out at the end of the three-year performance cycle, is discounted back three years based on the assumed interest rate for the cycle to determine the present value of one Unit. -7- The present value of one performance share is determined as follows: Share price on grant date projected three years based on the assumed compound annual growth rate for the cycle is the value of one Share at the end of the three-year cycle. The value is discounted back three years based on the assumed interest rate for the cycle to determine the present value of one Share. The present value of one performance stock option is determined as described above for stock options. The grants determined for the three award vehicles will all have the same present value on the grant date. Performance shares have the highest present value per share, so there will be fewer of them in the grant than either units or options. Performance stock options have the lowest present value per option, so there will be more of them in the grant than either shares or units. The actual value at the end of the performance cycle is fixed for the Units but is variable (dependent on share price) for the Shares and Options. The least leveraged/lowest risk award vehicle is the performance unit, since the value is fixed on the date of grant. The most leveraged/highest risk award vehicle is the performance stock options since the Option could be underwater, i.e., with no value, when it is earned (though the participant could hold it seven years until the end of the option term). The middle award vehicle is the performance share whose value when earned could be higher or lower than its initial value when granted (and the participant could hold it indefinitely). -8- ================================================================================ 7. TERMINATION PROVISIONS ================================================================================ A participant who leaves the Company for any reason other than death, disability, or normal retirement as agreed between the participant and the Company forfeits all unvested stock options and unearned performance awards. The participant has ninety days from the termination date to exercise vested stock options. If a participant dies or becomes disabled, all unvested options vest and unearned performance awards are paid out. The participant or beneficiary may exercise the options within one year of the date of death/disability. In the event of a normal retirement as agreed between the participant and the Company, the participant may hold unvested stock options until they vest and then has one year from the date of vesting to exercise them. The retiree may exercise options that are vested on the retirement date within one year of retirement. Performance awards are partially earned and paid out on the retirement date to the extent the Compensation Committee deems the performance goals have been met and the portion of the performance cycle that has elapsed. Notwithstanding these general guidelines, the Committee designated by the Board of Directors to administer the plan may extend the period following termination during which an option may be exercised but not beyond the end of the option term. -9- ================================================================================ 8. CHANGE-IN-CONTROL PROVISIONS ================================================================================ In the event of Change of Control as defined in the Amended and Restated 1991 Stock Option and Restricted Stock Plan, all unvested stock options vest immediately. Unearned performance awards are earned based on the price of the stock in the sale of the Company and as if the performance cycle had ended and all performance goals had been met. -10- ================================================================================ 9. ADMINISTRATION ================================================================================ The Plan will be administered by the Committee of the Board of Directors designated to administer the Amended and Restated 1991 Stock Option and Restricted Stock Plan. The Committee will have the authority to approve the participants, grants, vesting, performance measures and goals, and other administrative matters. The Chief Executive Officer will recommend to the Committee who should participate, the size of incentive opportunities, and the balance between stock options and performance awards. The Chief Financial Officer will provide input regarding the performance measures and goals as well as assumptions required to calculate the present value of stock options and performance awards, to ensure that the Plan is consistent with the Company's long-term financial plans and budgets. The Committee will approve the earn-out of all performance awards based on their assessment of the Company's performance against the performance goal(s). -11- ================================================================================ 10. ILLUSTRATIONS ================================================================================ ASSUMPTIONS - ----------- Long-term incentive opportunity as a percent of base salary is 25%. Split between stock options and performance awards is 50%/50%. Salaries of the three participants are: Participant A: $400,000 Participant B: $360,000 Participant C: $300,000 Performance award selections are: Participant A: performance units Participant B: performance shares Participant C: performance stock options Share price on grant date is $6. Expected annual stock price growth rate is 8%. Discount factor is 6%. Performance goal is 3-year ROE of 14.0%. PARTICIPANTS' GRANTS - -------------------- Based on the above assumptions, the present value of each award vehicle and the grant sizes for each participant are calculated as follows:
($000) =================================================================================================================== LTI OPPORTUNITY PV GRANT ------------------------------------------------------------------------------------- STOCK PERFORMANCE STOCK PERFORMANCE STOCK PERFORMANCE PARTICIPANT SALARY TOTAL OPTIONS AWARDS OPTION AWARD OPTIONS AWARDS - ------------------------------------------------------------------------------------------------------------------- A $400 $100 $50.0 $50.0 $ 1.31 $5.04 38,200 9,900 - ------------------------------------------------------------------------------------------------------------------- B 360 90 45.0 45.0 1.31 6.35 34,350 7,100 - ------------------------------------------------------------------------------------------------------------------- C 300 75 37.5 37.5 1.31 1.31 28,625 28,625 ===================================================================================================================
-12- AWARD VALUE - ----------- Assume that actual share price doubles and at the end of performance cycle is $12 and that 3-year average ROE is 14.5%, resulting in an earn-out of the performance awards. The Value of each participant's awards is as follows:
================================================================================ VALUE OF ------------------------------------------------------------- PARTICIPANT STOCK OPTIONS PERFORMANCE AWARDS TOTAL - -------------------------------------------------------------------------------- A $229,200 $ 59,400 $288,600 - -------------------------------------------------------------------------------- B $206,100 $ 85,200 $291,300 - -------------------------------------------------------------------------------- C $171,750 $171,750 $343,500 ================================================================================
Participant C, whose target long-term income is the lowest, ends up with the largest value, because the options are the largest beneficiary of the doubling in stock price. Conversely, Participant A, whose target incentive is the highest, realizes the lowest income because the performance units do not benefit at all from the doubled stock price. Now assume that actual share price at the end of the cycle is $7 and 3-year average ROE is 14.5%.
================================================================================ VALUE OF ------------------------------------------------------------- PARTICIPANT STOCK OPTIONS PERFORMANCE AWARDS TOTAL - -------------------------------------------------------------------------------- A $38,200 $59,400 $97,600 - -------------------------------------------------------------------------------- B $34,350 $49,700 $84,050 - -------------------------------------------------------------------------------- C $28,625 $28,625 $57,250 ================================================================================
In this scenario, the participants earn much less than in the first example, because the stock price hardly moved even though ROE was achieved. Note that the participant who experiences the largest decline is C. A's decline is only in the value of the stock option component; the value of the performance award is the same in both scenarios because the value of performance units (A's choice) is independent of stock price. -13- EX-13.1 5 MANAGEMENT DISCUSSION AND ANALYSIS EXHIBIT 13.1 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, illustrating the relationship of various income and expense items to net sales for each fiscal year presented:
Percent of Net Sales ---------------------------------------------- Fiscal Year ---------------------------------------------- 1996 1995 1994 ---------------- ------------- ----------- Net sales..................................... 100.0% 100.0% 100.0% Other income, net............................. 0.4 0.4 0.5 -------- -------- ------- 100.4 100.4 100.5 Costs and expenses: Costs of merchandise sold............... 63.1 63.9 60.6 Selling, general and administrative...... 31.5 33.7 32.8 Depreciation and amortization............ 2.1 2.0 1.7 Unusual items............................ (0.5) 0.9 0.0 Restructuring charges.................... 0.0 0.9 0.0 -------- -------- ------- Income (loss) from operations................. 4.2 (1.0) 5.4 Interest expense, net......................... 2.3 1.4 1.1 -------- -------- ------- Income (loss) before income taxes............. 1.9 (2.4) 4.3 Income tax provision (benefit) .............. 0.8 (0.9) 1.5 -------- ---------- ------- Net income (loss)............................. 1.1% (1.5)% 2.8% ======== ========= ========
FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 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 families of business, 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 moderate to better vendors and inventory intensification efforts. 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 both the sales volume increase and the improvement in the gross margin rate. Gross profit as a percentage of net sales increased by 0.8 percentage points 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 streamlining the Company's vendor base and other merchandising strategies. Selling, general and administrative expenses for fiscal 1996 decreased $7.6 million to 31.5% of net sales from 33.7% 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 both corporate and store levels. These cost containment initiatives 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 continued productivity improvements in payroll 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 the effect of 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. 18 Fiscal 1996 results were affected by a 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 $5.5 million were recorded in October 1995, with approximately $3.3 million related to the hiring of the Company's Chief Executive Officer and the balance being pre-opening costs for three new stores. Restructuring charges amounting to $5.7 million were recorded in January 1996; $5.0 million was attributable to cost 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 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 1999. The Company continues to review underperforming stores in order to maximize its return on investment. 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 attributable to the increase in current year gross margin combined with the decrease in selling, general and administrative expenses, as well as the $3.2 million gain recognized on the pension termination and the non-reoccurrence of the unusual and restructuring charges that were incurred in fiscal 1995. 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 the nondeductibility of certain amounts paid for executive compensation and the Federal excise tax of $1.1 million relating to the pension plan termination. FISCAL YEAR 1995 COMPARED TO FISCAL YEAR 1994 Net sales. Sales for the fifty-three weeks ended February 3, 1996 increased 22.7% to $607.4 million from $494.9 million reported in the fifty-two week period in fiscal 1994. Comparable store sales for the fifty-two weeks ended January 27, 1996 increased 0.2%. The Company's shoes and home areas, with increases of 14.2% and 7.0%, respectively, constituted the majority of the comparable store increase. Weak ladies ready-to-wear sales, which was symptomatic of the retail industry, resulted in total performance that was not up to the Company's expectations. Poor sales results were also attributable to a difficult retail environment, new competition, poor performance of some acquired stores and severe weather conditions. Other income, net. Net other income, which consisted primarily of income from leased departments, decreased slightly to 0.4% of net sales in fiscal 1995 from 0.5% of net sales in fiscal 1994. This decrease was primarily attributable to the conversion of shoes from a leased operation to an owned business in July of fiscal 1994. Costs and expenses. Gross profit as a percentage of net sales decreased 3.3% to 36.1% in fiscal 1995 from 39.4% in the prior fiscal year. The decrease was largely due to $3.5 million of one-time charges relating to inventory liquidation associated with streamlining the Company's vendor base and other merchandising strategies. Margin rate was also negatively impacted by increased markdowns due to an aggressive promotional calendar as a response to increased competition and inclement weather, as well as an increase in the shrinkage rate to 3.2% in the current year from 2.5% in the prior year. The increased shrinkage rate was largely due to the acquired stores, as the core Bon-Ton stores were in line with prior year results. The gross margin decline was partially offset by increased cumulative markups on inventory purchases as a result of better terms secured by the Company's buying staff. 19 Selling, general and administrative expenses were higher in fiscal 1995 both in dollars and as a percentage of sales, increasing to 33.7% of net sales in fiscal 1995 from 32.8% in the prior fiscal year. The net rate increase was primarily attributable to poor productivity of certain of the acquired stores. The store expense rate at the core Bon-Ton stores improved over the prior year, most notably due to continued productivity improvements in payroll in fiscal 1995. The increase in the store expense rate was partially offset by a reduction in the corporate expense rate as the Company completed its integration process, further streamlining overhead. Depreciation and amortization increased to 2.0% of net sales in fiscal 1995 from 1.7% in fiscal 1994. The increase was primarily a result of fiscal 1995 asset additions relating to the four new Rochester and Elmira, New York stores and the effect of a full year of depreciation on the fiscal 1994 additions relating to the acquisitions. Fiscal 1995 results were also adversely affected by one-time unusual expenses and restructuring charges. Unusual expenses amounting to $5.5 million were recorded in October 1995; approximately $3.3 million related to the hiring of the Company's Chief Executive Officer and the cost of litigation associated with the hiring of this individual, with the balance attributable to pre-opening costs for the three new stores opened in Rochester, New York and one store in Elmira, New York. Restructuring charges amounting to $5.7 million were recorded by the Company in January 1996. Store closing costs of approximately $5.0 million were attributable to unprofitable locations identified by the Company for future closing. These charges provided for noncancellable lease costs after store operations cease, lease cancellation costs and nonrecoverable investments in property, fixtures and equipment. Additional restructuring expenses of $0.7 million related to the Company's strategic workforce reduction, as severance was paid in connection with the elimination of 700 positions or approximately 250 employees on a full-time equivalent basis. These initiatives allowed the Company to reduce operating expenses and eliminate unprofitable locations and were the final steps in the integration of the acquisitions the Company had made over the prior eighteen months. Income (loss) from operations. The loss from operations in fiscal 1995 amounted to $6.2 million or 1.0% of net sales as compared to income from operations of $26.7 million or 5.4% of net sales in fiscal 1994. The loss was largely the result of the unusual expenses of $5.5 million and restructuring charges of $9.2 million, inclusive of the $3.5 million charge to costs of merchandise sold, as previously discussed. Excluding these one-time charges, net income from operations in fiscal 1995 was $8.4 million or 1.4% of net sales. Interest expense, net. Net interest expense increased $3.2 million to $8.7 million or 1.4% of net sales in fiscal 1995 from $5.5 million or 1.1% of net sales in the prior fiscal period. The increase was attributable to increased borrowing levels over the prior year to finance the purchase of the new stores and related renovation efforts, as well as funding inventory increases. Net income (loss). The net loss in fiscal 1995 amounted to $9.2 million or 1.5% of net sales as compared to net income of $13.6 million or 2.8% of net sales in fiscal 1994. Excluding the aforementioned unusual and one-time charges, net income for the current year was $0.2 million or 0.03% of net sales. The increase in the effective tax rate to 38.5% in fiscal 1995 from 35.7% in fiscal 1994 was the result of the utilization of tax credits and tax refunds. These benefits were partially offset by the nondeductibility of certain amounts paid for executive compensation. Changes in Accounting Policies On February 4, 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 cash flows associated with such assets. The measurement of the impairment losses to be recognized is to be based on the difference between the fair values and the carrying amounts of the assets. SFAS No. 121 also requires that the long-lived assets held for sale be reported at the lower of carrying amount or the fair value less selling costs. The adoption of this policy had no effect on the consolidated financial results of the Company. 20 Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), was effective for 1996. This statement provides for a fair value based method of accounting for grants of equity instruments to employees or suppliers in return for goods or services. With respect to stock-based compensation to employees, SFAS No. 123 permits entities to continue to apply the provisions prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"); however, pro forma disclosures of net income and earnings per share must be presented as if the fair value based method has been applied in measuring compensation cost. The Company elected to continue with the accounting method prescribed by APB Opinion No. 25 and presented the pro forma disclosures in Note 11 of Notes to Consolidated Financial Statements. 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 Extinguishment 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 that 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 the transfer. The adoption of this policy on January 1, 1997 did not have material effect on the consolidated financial results of the Company. The Company expects that the impact of SFAS No. 125 will have a moderately positive impact on the Company's future results of operations. Seasonality and Inflation The Company's business, like that of most retailers, is subject to seasonal influences, 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 1996 and 1995. 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 significantly upon the timing and amount of revenues and costs associated with the opening or closing and the remodeling of existing stores. The Company does not believe that inflation has had a material effect on the results during the past three years. However, there can be no assurance that the Company's business will not be affected in the future. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes material measures of the Company's liquidity and capital resources (dollars in millions):
February 1, February 3, January 28, 1997 1996 1995 - ------------------------------------------------------------------------------------------------- Working capital $102.9 $90.8 $62.5 Current ratio 2.03:1 1.93:1 1.67:1 Funded debt to total capitalization 0.55:1 0.55:1 0.34:1 Available lines of credit $22.0 $36.0 $74.0
The Company's primary sources of working capital are typically cash flow from operations, borrowings under its revolving credit facility and proceeds from its accounts receivable purchase facility. The Company had working capital of $102.9 million, $90.8 million and $62.5 million at the end of fiscal 1996, 1995 and 1994, respectively. The increase in working capital in fiscal 1996 was principally attributable to the following factors: an increase in merchandise inventories due to the Company's inventory intensification strategy, an increase in other current assets as a result of the pension termination and the decrease of accrued expenses relating to store closings. The increase in working capital was partially offset by an increase in the current portion of long-term debt. The Company's business follows a seasonal pattern and working capital fluctuates in keeping with seasonal variations. Historically, the Company's working capital is at its lowest level in February, increases through May, declines through July and then increases very sharply through December when it reaches its highest level. 21 In March 1996, the Company completed a financing agreement with its existing eight-member bank group of an $86.3 million term loan and an $85.0 million revolving credit facility. As further disclosed in Note 2 of Notes to Consolidated Financial Statements, the Company is limited in its ability to incur additional indebtedness under certain provisions of the existing term and revolving credit agreement. The agreement allowed for a supplemental $15 million short-term facility for the period of September 15 through December 15 to help fund additional working capital during peak inventory periods. During 1996, the Company negotiated such a supplemental facility with two banks in the existing term and revolver facility and used a maximum $7 million of this facility to help fund peak inventory levels. The Company was also required to repay $10 million of the term debt during January 1997. In order to support the strategic initiatives of the Company during the next three years, the Company entered into a new asset based borrowing agreement on April 10, 1997. The new debt financing is fully underwritten by GE Capital Corporation and Bank of Boston. The terms of the new financing provide for a secured revolving credit facility of up to $200.0 million. The amount allowed to be borrowed is based on eligible inventory and selected fixed assets and real estate. The new financing will provide the Company with additional borrowing capacity during peak inventory periods. The agreement contains restrictive covenants, including but not limited to, the maintenance of certain financial ratios, limitations on dividends, additional incurrence of debt, capital expenditures and acquisitions. As a result of this transaction, the Company will incur a one-time pre-tax charge of $0.8 million relating to the early extinguishment of its existing debt. In addition, the Company completed a sale and leaseback transaction on two of its owned properties. This transaction was completed April 10, 1997 and generated net proceeds of $11.0 million. Proceeds of $8.0 million were used to pay down debt with the remainder providing additional working capital. The leaseback terms under this agreement provides that the Company lease the properties over a primary term of twenty years with six five-year renewal options. Although the Company believes that these new funding sources will be adequate for fiscal 1997, the Company continues to investigate other financing alternatives that would supplement the new agreement. Net cash used in operating activities amounted to $1.2 million, $14.2 million and $45.3 million in fiscal 1996, 1995 and 1994, respectively. Net operating outflows in fiscal 1996 primarily resulted from increases in working capital over prior year levels, partially offset by depreciation and amortization and net income for the year. The major components of the working capital increase were a higher level of merchandise inventories to support the Company's inventory intensification strategy, a decrease of accrued expenses relating to store closings and the asset created as a result of the pension termination. Net cash used in investing activities amounted to $8.9 million and $48.4 million in fiscal 1996 and 1995, respectively, while net cash provided by investing activities amounted to $45.3 million in fiscal 1994. The net cash outflow in fiscal 1996 resulted from capital expenditures of $9.7 million that primarily related to remodeling in preparation for the opening of the fourth store in the Rochester market and the remodels of four stores in Syracuse. Net cash provided by financing activities amounted to $9.7 million and $67.9 million in fiscal 1996 and 1995, respectively, while net cash used in financing activities amounted to $3.1 million in fiscal 1994. The net cash inflow in fiscal 1996 was primarily attributable to net borrowings under the Company's revolving credit facility and proceeds from mortgage financing on the Rochester properties. These borrowings were principally used for capital expenditures for remodels and increased working capital requirements. The cash inflow was partially offset by $233.8 million of payments on long-term debt. The Company currently anticipates its capital expenditures for fiscal 1997 will be approximately $11.0 million. The monies will be directed toward information system enhancements, fixturing and leasehold improvements in the Company's existing stores and construction of a new store in the Jamestown, NY market scheduled to open in March 1998. Aside from planned capital expenditures, the Company's primary ongoing cash requirements will be to service debt and finance working capital increases during peak selling seasons. The Company anticipates that its cash flow from operations, supplemented by borrowings under the revolving credit facility and proceeds from its accounts receivable purchase facility, will be sufficient to satisfy its operating cash requirements. 22 EX-13.2 6 ANNUAL REPORT TO SHAREHOLDERS Exhibit 13.2 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (Dollars in thousands except per share amounts)
February 1, February 3, 1997 1996 ----------- ------------ ASSETS Current Assets: Cash and cash equivalents....................................................... $ 6,516 $ 6,941 Trade and other accounts receivable, net of allowance for doubtful accounts of $2,769 and $3,113 in 1996 and 1995, respectively.................. 16,306 17,445 Merchandise inventories......................................................... 161,191 141,741 Prepaid expenses and other current assets....................................... 18,389 13,562 Income taxes receivable......................................................... --- 8,549 --------- --------- Total current assets...................................................... 202,402 188,238 Property, Fixtures and Equipment at cost, less accumulated depreciation and amortization................................................... 117,716 120,874 Other Assets.......................................................................... 21,134 22,061 --------- --------- Total assets.............................................................. $ 341,252 $ 331,173 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current Liabilities: Accounts payable................................................................ $ 51,626 $ 55,168 Accrued payroll and benefits.................................................... 7,135 7,954 Accrued expenses................................................................ 25,209 32,969 Current portion of long-term debt............................................... 9,763 295 Current portion of obligations under capital leases............................. 351 325 Deferred income taxes........................................................... 1,628 769 Income taxes payable............................................................ 3,837 --- --------- --------- Total current liabilities................................................. 99,549 97,480 Long-Term Debt, less current maturities............................................... 125,620 125,069 Obligations Under Capital Leases, less current maturities............................. 2,478 2,824 Deferred Income Taxes................................................................. 1,174 420 Other Long-Term Liabilities........................................................... 946 1,206 Commitments and Contingencies (Note 7)................................................ --- --- --------- --------- Total liabilities......................................................... 229,767 226,999 --------- --------- Shareholders' Equity: Common Stock -- authorized 40,000,000 shares at $0.01 par value; issued and outstanding shares of 8,349,699 and 8,351,083 in 1996 and 1995, respectively.. 83 83 Class A Common Stock -- authorized 20,000,000 shares at $0.01 par value; issued and outstanding shares of 2,989,853 in 1996 and 1995. ........................ 30 30 Additional paid-in capital...................................................... 58,182 58,197 Deferred compensation........................................................... (1,259) (1,774) Retained earnings............................................................... 54,449 47,638 --------- --------- Total shareholders' equity................................................ 111,485 104,174 --------- --------- Total liabilities and shareholders' equity................................ $ 341,252 $ 331,173 ========= =========
The accompanying notes are an integral part of these consolidated statements. 23 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (Dollars in thousands except per share amounts)
FISCAL YEAR ENDED ----------------------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ----------- NET SALES............................................. $ 626,482 $ 607,357 $ 494,908 OTHER INCOME, NET..................................... 2,430 2,266 2,581 ---------- ----------- ---------- 628,912 609,623 497,489 ---------- ----------- ---------- COSTS AND EXPENSES: Costs of merchandise sold......................... 395,563 387,947 299,914 Selling, general and administrative............... 197,315 204,867 162,442 Depreciation and amortization..................... 12,758 11,895 8,465 Unusual (income) expense (Note 15)................ (3,171) 5,471 --- Restructuring charges (Note 16)................... --- 5,690 --- ========== =========== ========== INCOME (LOSS) FROM OPERATIONS......................... 26,447 (6,247) 26,668 INTEREST EXPENSE, NET................................. 14,687 8,722 5,475 ========== =========== ========== INCOME (LOSS) BEFORE INCOME TAXES..................... 11,760 (14,969) 21,193 INCOME TAX PROVISION (BENEFIT)........................ 4,949 (5,766) 7,563 ---------- ----------- ---------- NET INCOME (LOSS)..................................... $ 6,811 $ (9,203) $ 13,630 ========== =========== ========== PER SHARE AMOUNTS Net income (loss) per common share......... $ 0.61 $ (0.83) $ 1.23 ========== =========== ========== WEIGHTED AVERAGE SHARES OUTSTANDING................... 11,134,000 11,044,000 11,051,000 ========== =========== ==========
The accompanying notes are an integral part of these consolidated statements. 24 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Dollars in thousands)
Class A Additional Common Common Paid-in Deferred Retained Stock Stock Capital Compensation Earnings Total ------ ------- ---------- ------------ -------- ----- Balance at January 29, 1994............ $ 50 $ 60 $ 55,775 $ (545) $ 43,211 $ 98,551 Net income............................ --- --- --- --- 13,630 13,630 Deferred compensation amortization........................ --- --- --- 180 --- 180 Cancellation of Restricted Shares --- --- (42) 34 --- (8) Exercised stock options............... --- --- 94 --- --- 94 Conversion of Class A Common Stock to Common Stock............... 1 (1) --- --- --- --- - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 28, 1995............ 51 59 55,827 (331) 56,841 112,447 Net loss.............................. --- --- --- --- (9,203) (9,203) Deferred compensation amortization........................ --- --- --- 293 --- 293 Cancellation of Restricted Shares..... --- --- (44) 38 --- (6) Exercised stock options............... --- --- 643 --- --- 643 Conversion of Class A Common Stock to Common Stock............... 29 (29) --- --- --- --- Issuance of stock to executives....... 3 --- 1,771 (1,774) --- --- - ------------------------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------------------------
The accompanying notes are an integral part of these consolidated statements. 25 THE BON-TON STORES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in thousands)
FISCAL YEAR ENDED ---------------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss)........................................................... $ 6,811 $ (9,203) $ 13,630 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization.......................................... 12,758 11,895 8,465 Bad debt and other noncash charges..................................... 4,622 4,043 1,916 Deferred compensation.................................................. 505 293 180 Gain on sale of property, fixtures and equipment....................... (407) (144) (7) Cancellation of Restricted Shares...................................... (5) (6) (8) Decrease (increase) in other long-term assets.......................... 320 825 (757) Deferred income tax expense............................................ 4,116 6,709 2,917 (Decrease) increase in other long-term liabilities..................... (476) (2,686) 210 Loss from restructuring activities..................................... --- 5,690 --- Restructuring payments................................................. (1,252) (413) --- Changes in operating assets and liabilities, net of effect of acquisitions: (Increase) decrease in accounts receivable............................. (3,482) 3,914 (64,657) Increase in merchandise inventories.................................... (19,450) (21,087) (18,170) Increase in prepaid expenses and other current assets.................. (4,827) (4,118) (2,200) Decrease (increase) in income taxes receivable......................... 8,549 (8,549) --- (Decrease) increase in accounts payable................................ (3,542) 13,138 8,670 (Decrease) increase in accrued expenses................................ (6,823) (9,365) 2,250 Increase (decrease) in income taxes payable............................ 1,334 (5,185) 2,256 --------- -------- --------- Total adjustments (8,060) (5,046) (58,935) --------- -------- --------- Net cash used in operating activities (1,249) (14,249) (45,305) CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net.............................................. (9,730) (43,587) (18,532) Proceeds from sale of property, fixtures and equipment................. 855 278 20 Purchase of accounts receivable........................................ --- (30,138) --- Proceeds from sale of accounts receivable, net......................... --- 25,000 127,000 Payment for the acquisition of businesses, net of cash acquired........ --- --- (63,206) --------- -------- --------- Net cash (used in) provided by investing activities (8,875) (48,447) 45,282 CASH FLOWS FROM FINANCING ACTIVITIES: Extinguishment of long-term debt....................................... --- --- (25,800) Payments on long-term debt and capital lease obligations............... (233,826) (301,738) (133,419) Proceeds from issuance of long-term debt............................... 220,125 369,000 156,000 Proceeds from issuance of mortgages.................................... 23,400 --- --- Exercised stock options................................................ --- 643 94 --------- -------- --------- Net cash provided by (used in) financing activities.................... 9,699 67,905 (3,125) Net (decrease) increase in cash and cash equivalents................... (425) 5,209 (3,148) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD............................ 6,941 1,732 4,880 --------- -------- --------- CASH AND CASH EQUIVALENTS AT END OF PERIOD.................................. $ 6,516 $ 6,941 $ 1,732 ========= ======== =========
The accompanying notes are an integral part of these consolidated statements. 26 THE BON-TON STORES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollars in thousands except 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, New Jersey and Georgia. 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 management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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 January 31, and consisted of fifty-two weeks for fiscal years 1996 and 1994, and fifty-three weeks for fiscal year 1995. 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 $161,945 and $145,910 as of February 1, 1997 and February 3, 1996, 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 only that which is 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. 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 current period expenses. 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 things 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. 27 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. Net other income includes leased department rental income of approximately $2,719, $2,607 and $2,473 in fiscal 1996, 1995 and 1994, 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 is impacted by the securitization of the Company's revolving charge accounts (see Note 4). 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. Net Income (Loss) Per Share - --------------------------- Net income (loss) per share amounts were computed by dividing the corresponding net income or loss by the weighted average number of common shares and common share equivalents outstanding. Common share equivalents represent stock options and restricted stock grants computed using the treasury stock method and are included in the weighted average shares reported on the Consolidated Statements of Operations when the effect is dilutive. Changes in Accounting Policies - ------------------------------ 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 to be based on the difference between the fair values and the carrying amounts of the assets. SFAS No. 121 also requires that 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 policy had no effect on the consolidated financial results of the Company. Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") became effective in fiscal 1996. This statement provides for a fair value based method of accounting for grants of equity instruments to employees or suppliers in return for goods or services. With respect to stock-based compensation to employees, SFAS No. 123 permits entities to continue to apply the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB Opinion No. 25"); however, pro forma disclosures of net income (loss) and net income (loss) per share must be presented as if the fair value based method has been applied in measuring compensation cost. The Company elected to continue with the accounting method prescribed by APB Opinion No. 25 and presented the pro forma disclosures in Note 11. 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 Extinguishment 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 that 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 the transfer. The adoption of this policy on January 1, 1997 did not have a material effect on the consolidated financial results of the Company for fiscal 1996. The Company expects that the impact of SFAS No. 125 will have a moderately positive impact on the Company's future results of operations. 28 2. DEBT: Debt consisted of the following:
February 1, February 3, 1997 1996 -------------- -------------- Revolving credit agreement -- principal payable September 23, 1999; interest payable periodically at varying rates (7.00% for fiscal year 1996)............... $ 37,000 $ 114,000 Term Loan -- payments of $3,100, $6,000 and $10,000 due on May 1, 1997, January 31, 1998 and January 31, 1999 - -balance due September 23, 1999; interest payable periodically at varying rates (8.40% for fiscal 1996).................... 65,000 --- Mortgage notes payable -- principal payable in varying monthly installments through June 2016 plus interest at a fixed rates of 9.62%; secured by land and buildings........................................................................ 22,306 --- Mortgage note payable -- principal and interest in monthly installments of $68 through January 2001, with balloon payment in February 2001; interest 11.00%; secured by buildings.............................................................. 6,465 6,560 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 -- principal payable in varying installments through fiscal 1997; interest payable at various rates from 6.50% to 8.70%..................................... 112 304 ---------- ------------ Total debt.................................................................................. 135,383 125,364 Less: current maturities.................................................................... 9,763 295 ---------- ------------ Long-term debt.............................................................................. $ 125,620 $ 125,069 ========== ============
On March 20, 1996, the Company completed a financing agreement with its existing bank group. The new structure, which is secured by the Company's inventory and other unencumbered assets, replaced the Company's existing $150,000 revolving credit agreement with an $86,250 term loan and an $85,000 revolving credit agreement. The revolving credit agreement is subject to a borrowing base calculation that is based on inventory and has a maximum borrowing level of $85,000. The term loan refinances the Company's recent acquisitions and the associated capital improvements. The facility is syndicated with eight banks and provides for borrowings at various interest rate options (i.e., LIBOR, prime rate, etc.) offered by the banks; plus a spread of 2.0%, inclusive of the facility fee. This pricing is determined by a pricing formula based on the Company's debt to capitalization and fixed charge coverage ratios. Under the term loan, payments of $3,100, $6,000 and $10,000 must be made by the Company on May 1, 1997 and January 31, 1998 and 1999, respectively. The remaining outstanding balance due under the term loan and the revolving credit agreement matures on September 23, 1999. The agreement also provided a supplemental $15,000 short-term facility for the period of September 15 through December 15, 1996, which provided additional working capital during peak inventory season. The Company's maximum utilization of this supplemental facility was $7,000 in December 1996. On May 17, 1996, the Company entered into a $23,400, twenty year mortgage agreement, secured by its four stores in Rochester, New York. The proceeds were used to repay $21,250 of the Company's bank term loan and to fund ongoing working capital requirements. The payment on the term loan permanently reduced the total availability under this loan to $65,000. The Company maintains an interest rate swap portfolio which allows the Company to convert long-term floating rate borrowings into fixed rates that are lower than those available to the Company if fixed-rate borrowings were made directly. The following table indicates the types of swaps used, the notional amounts, and the range of interest rates paid and received as of February 1, 1997 and February 3, 1996:
February 1, February 3, 1997 1996 ----------- ----------- Pay-fixed swaps-notional amount...... $60,000 $60,000 Range of receive rate.............. 5.50%-6.24% 5.31%-6.24% Range of pay rate.................. 7.02%-8.06% 7.02%-8.06%
The interest rate swap agreements will expire on various dates from November 14, 1997 to January 29, 1999. 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 February 1, 1997 and February 3, 1996 was a loss of $1,963 and $2,954, respectively, and 29 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 but not limited to, the maintenance of certain financial ratios, limitations on dividends, additional incurrence of debt, capital expenditures and acquisitions. The fair value of the Company's debt, excluding interest rate swaps, is estimated at $133,844 and $124,468 at February 1, 1997 and February 3, 1996, respectively, and is based on an estimate of the rates available to the Company for debt with similar features. Debt maturities, based upon the new debt financing (see Note 17), as of February 1, 1997, are as follows: 1997.................................. $ 692 1998.................................. 4,245 1999.................................. 3,004 2000.................................. 96,570 2001.................................. 6,542 2002 and thereafter................... 24,330 ---------- $ 135,383 ==========
3. INTEREST COSTS: Interest and debt costs were:
FISCAL YEAR ENDED -------------------------------------------------- February 1, February 3, January 28, 1997 1996 1995 -------------- ------------ ----------- Interest cost incurred................ $ 14,955 $ 9,820 $ 5,857 Interest income....................... (153) (437) (277) Capitalized interest, net............. (115) (661) (105) -------- -------- ------- Interest expense, net................. $ 14,687 $ 8,722 $ 5,475 ======== ======== ======= Interest paid......................... $ 14,898 $ 10,441 $ 4,959 ======== ======== =======
4. SALE OF RECEIVABLES: In June 1995, the Company increased its accounts receivable facility (the "Facility") from $100,000 to $130,000 and syndicated it among four members of the Company's bank group. In September 1996, the Company reduced its Facility to $120,000 based on the Company's analysis of credit sales as a percentage of total sales and the required level of borrowings to fund working capital. By reducing the Facility's ceiling, fees were decreased on the unsecuritized portion of the Facility. Under the agreement, which expires in January 2000, the Company has the option to sell through The Bon-Ton Receivables Partnership, LP ("BTRLP"), a wholly-owned subsidiary of the Company, up to $120,000 of undivided percentage interests in the receivables, on a limited recourse basis. BTRLP assets of $15,413 and $17,083 as of February 1, 1997 and February 3, 1996, respectively, are included in the accompanying consolidated statements and consist primarily of its retained interest in receivables initially purchased from the Company and sold under the facility. Creditors of BTRLP have a claim on BTRLP's assets prior to any equity in BTRLP becoming available to creditors of the Company. As of February 1, 1997 and February 3, 1996, credit card receivables were sold under the above referenced agreement in the amount of $110,000 for both years. BTRLP holds participation interest representing an undivided ownership interest in the receivables sold. These interests are required to be held under terms of the agreement to provide credit support against future losses and are subject to lien. The amount subject to credit support amounted to $19,764 and $15,822 at February 1, 1997 and February 3, 1996, 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 net impact on earnings in connection with the sale of receivables under these agreements was not significant. However, under the terms of these sale agreements, the Company receives 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 (i.e., securitization income). 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 of approximately $6,211, $5,205 and $3,010 was recognized in fiscal 1996, 1995 and 1994, respectively, and has been reported as part of finance charge income. 5. PURCHASE OF RECEIVABLES: The Company purchased accounts receivable attributable to Hess's Department Stores, Inc.'s customers 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. 30 6. PROPERTY, FIXTURES AND EQUIPMENT: As of February 1, 1997 and February 3, 1996, property, fixtures and equipment and the related accumulated depreciation and amortization consisted of:
February 1, February 3, 1997 1996 ------------ ----------- Land.............................................. $ 1,409 $ 1,563 Buildings and leasehold improvements.............. 99,743 93,518 Furniture and equipment........................... 82,186 79,817 Buildings under capital leases.................... 5,052 5,052 ----------- ----------- $ 188,390 $ 179,950 Less: Accumulated depreciation and amortization........................... 70,674 59,076 ----------- ----------- $ 117,716 $ 120,874 =========== ===========
Property, fixtures and equipment with a net depreciated cost of approximately $43,255 and $14,361 are pledged as collateral for secured loans at February 1, 1997, and February 3, 1996, respectively. 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 February 1, 1997, 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 ---------- -------------- ---------------- 1997...................................................... $ 579 $ 13,040 1998...................................................... 579 12,294 1999...................................................... 579 11,449 2000...................................................... 579 9,707 2001...................................................... 579 8,536 2002 and thereafter....................................... 1,100 45,442 -------- ----------- Total net minimum rentals................................. 3,995 $ 100,468 ========= Less: Amount representing interest........................ 1,166 -------- Present value of net minimum lease payments, of which $351 is due within one year...................... $ 2,829 ========
Minimum rental commitments under operating leases detailed above 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 $716, $722, $722, $724, $754 and $6,634 for fiscal 1997, 1998, 1999, 2000, 2001 and 2002 and thereafter, respectively. Rental expense consists of the following:
FISCAL YEAR ENDED ------------------------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ----------- Operating leases: Buildings: Minimum rentals.................................. $ 13,660 $ 13,580 $ 7,902 Contingent rentals............................... 2,374 2,402 2,051 Fixtures and equipment.............................. 750 2,265 930 Contingent rentals on capital leases................ 357 321 325 -------- -------- --------- Totals........................................... $ 17,141 $ 18,568 $ 11,208 ======== ======== =========
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. During fiscal 1994, 70,000 shares of Class A Common Stock were transferred to persons other than permitted transferees, causing such shares to be converted to an equal number of shares of Common Stock. 31 9. INCOME TAXES: The Company accounts for income taxes according to the 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 --------------------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ----------- ----------- ----------- Federal and State: Current......................................... $ 833 $ (12,475) $ 4,646 Deferred........................................ 4,116 6,709 2,917 -------- ---------- -------- Total .......................................... $ 4,949 $ (5,766) $ 7,563 ======== ========== ========
The components of the gross deferred tax assets and liabilities were comprised of the following:
February 1, February 3, 1997 1996 ----------- ----------- Deferred tax assets: Accrued expenses...................... $ 2,366 $ 2,903 Store closings........................ 1,535 3,848 Restricted Shares..................... 1,014 677 Bad debt reserve...................... 997 1,120 AMT credit carryforward............... 833 --- Loss carryforward..................... 796 432 Capital leases........................ 157 503 Other................................. 166 75 Valuation allowance................... (169) (586) ------- ------- Total gross deferred tax assets....... $ 7,695 $ 8,972 ======= ======= Deferred tax liabilities: Fixed assets.......................... $ 3,949 $ 3,380 Inventory............................. 2,783 4,375 Pension asset......................... 2,718 --- Other................................. 1,047 2,406 ------- ------- Total gross deferred tax liabilities.. $10,497 $10,161 ======= =======
The Company established a $418 loss carryforward deferred tax asset in 1996, which will expire in January 2011. The remaining loss carryforward relates to the acquisition of Adam, Meldrum & Anderson and will expire in January 2009. The Company also has an AMT credit carryforward of $833 which has an indefinite carryforward period. The valuation allowance was provided on the deferred tax assets that resulted from the hiring of the Chief Executive Officer in 1995. The valuation allowance relates to the deferred tax assets that resulted from accrued expenses that the Company does not expect to be deductible for tax purposes in the future due to the limitations arising from Section 162 of the Internal Revenue Code relating to deductions for executive compensation. The decrease in the valuation allowance was due to reductions in the accrued expenses that created the deferred tax assets. 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 1996, 1995 and 1994 is presented below:
FISCAL YEAR ENDED ---------------------------------------------- February 1, February 3, January 28, 1997 1996 1995 ------------ ------------ ----------- Tax at statutory rate................ 35.0% (35.0)% 35.0% Tax credits.......................... --- (4.0) --- Tax-exempt interest.................. (0.1) (0.1) (0.2) Refund of prior year income taxes........................ --- (4.8) --- Book expense in excess of IRC 162 limitation.................. 3.6 5.0 --- State income taxes, net of federal benefit..................... 1.0 --- 1.0 Excise tax on pension termination.... 3.4 --- --- Other, net........................... (0.8) 0.4 (0.1) ------- ------- ------- Total......................... 42.1% (38.5)% 35.7% ======= ======= =======
32 The Company received income tax refunds, net of payments, of $8,641 in fiscal 1996. In fiscal 1995 and 1994, the Company made income tax payments of $5,071 and $2,848, respectively. 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 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 $1,200 under the profit sharing provisions of the Plan for fiscal 1996. 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. In fiscal 1995, the Company terminated the Watt & Shand, Inc. Employees' Pension Plan. In connection with the purchase of Watt & Shand, Inc. and the curtailment of the Watt & Shand, Inc. Employees' Pension Plan in 1992, an accrual was established in anticipation of the termination at the entity's purchase date. Due to the establishment of this accrual, the termination of this plan did not have a material effect on 1995 results. 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 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. The final reversion of funds to the Company occurred in March 1997. Net periodic pension costs for the years ended December 31, 1996, 1995 and 1994 were not material to the financial statements. 33 The funded status of the Merged Plan at December 31, 1995, based upon an actuarial valuation was as follows:
1995 ------------- Assets Exceed Accumulated Benefits ------------- Plan assets at fair value $ 38,226 --------- Actuarial present value of benefit obligations: Vested benefits 32,286 Nonvested benefits 266 --------- Accumulated benefit obligation 32,552 --------- Projected benefit obligation 32,552 --------- Excess of assets over projected benefit obligations $ 5,674 ========= Key economic assumptions used in these determinations were as follows: Weighted-average discount rate................................ 7.50% Expected rate of return on assets............................. 8.00%
The Company's fiscal 1996, 1995 and 1994 expense under the aforementioned benefit plans was $1,932, $395 and $1,850, respectively. 11. STOCK AWARD PLANS: The Company's Amended and Restated 1991 Stock Option and Restricted Stock Plan (the "Stock Plan"), as amended through January 26, 1996, provides for the granting of the following options and awards to certain associates, officers, 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 1,350,000 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. 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 APB Opinion No. 25, "Accounting for Stock Issued to Employees", was $505, $293 and $180 in fiscal 1996, 1995 and 1994, respectively. Had the Company recorded compensation expense using 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:
1996 1995 -------- -------- Net income (loss) As reported $ 6,811 $ (9,203) Pro forma 5,987 (9,496) Earnings (loss) per share As reported $ 0.61 $ (0.83) Pro forma 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 both 1996 and 1995 calculations: risk-free interest rate -- 6.4%; expected volatility -- 65%; expected life -- 7 years; expected dividend yield -- 0.0%. 34 A summary of the options under the Stock Plan follows:
Restricted Common Stock Options Performance-Based Options Shares ------------------------ ------------------------- ---------- Number of Average Number of Average Number Options Price Options Price of Shares --------- --------- --------- --------- --------- Fiscal 1994 January 29, 1994................................. 361,500 $10.73 --- --- 33,696 Granted...................................... 121,100 $7.98 86,300 $7.25 --- Exercised.................................... --- --- --- --- (8,424) Forfeited.................................... (80,624) $9.89 --- --- (3,744) --------- --------- --------- January 28, 1995................................. 401,976 $10.07 86,300 $7.25 21,528 ========= ========= ========= Options exercisable at January 28, 1995.......... 173,782 $10.64 --- --- --- Weighted average fair value of options granted during fiscal 1994............... $5.15 $5.03 - --------------------------------------------------------------------------------------------------------------------------------- Fiscal 1995 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 - ---------------------------------------------------------------------------------------------------------------------------------
The exercised shares in the above summary for Restricted Shares represent shares for which the restrictions have lapsed. The range of exercise prices for the Common Stock options outstanding as of February 1, 1997 was $5.88 to $13.00 with a weighted average contractual life of 7.7 years. The range of exercise prices for the performance-based options was $6.13 to $11.25, with a weighted average contractual life of 8.9 years. A summary of the status of the Replacement Plan follows:
Discount Non-Discount Options Options ------------ ------------ Exercise Price $3.25 $13.00 -------------- January 29, 1994....................... 184,698 51,637 Exercised............................ (28,810) --- Forfeited............................ --- (2,743) ------------------------------------------------------------------------------------------- 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 -------------------------------------------------------------------------------------------
As of February 1, 1997, February 3, 1996 and January 28, 1995, the exercisable discounted options amounted to 138,861, 130,259 and 125,537, respectively, and exercisable non-discounted options amounted to 39,746, 36,413 and 34,850, respectively. 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. 35 12. ACQUISITIONS: On March 6, 1995, the Company acquired three vacant department stores in Rochester, New York for $14,565. 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 a major remodel. On October 18, 1994, the Company acquired certain assets of C.E. Chappell & Sons, Inc., a six-unit department store company headquartered in Syracuse, New York for approximately $7,900. The acquisition was accounted for using the purchase method of accounting. On September 30, 1994, the Company acquired nineteen stores and a 325,000- square-foot distribution center from Hess's Department Stores, Inc. The Company assumed leasehold obligations of eighteen stores, acquired ownership in an additional store and distribution center and bought all of the related inventories and certain other assets. The transaction was effected through the payment of $54,774 of cash and the assumption of certain liabilities and merchandise payables. The acquisition was accounted for using the purchase method of accounting and resulted in goodwill and other intangible assets of $8,096. Goodwill is being amortized over twenty years on a straight-line basis. Intangible assets, related to favorable operating leases, are being amortized over their associated lease periods ranging from six to forty-eight years on a straight-line basis. On July 2, 1994, the Company acquired Adam, Meldrum & Anderson Co., Inc., a ten-unit department store company located primarily in and around the greater Buffalo, New York area. The transaction was effected through the exchange of $3,132 in cash and the assumption of debt and other liabilities for all of the capital stock. The acquisition was accounted for using the purchase method of accounting. During fiscal 1995, the allocation of purchase prices relating to the 1994 acquisitions of Adam, Meldrum, & Anderson Co., Inc., Hess's Department Stores, Inc. and C.E. Chappell & Sons, Inc. was finalized. The impact of these adjustments was not material. The effect of these adjustments has properly been excluded from the Consolidated Statement of Cash Flows for fiscal 1995 as these were noncash items. The operating results of all acquisitions have been included in the Company's consolidated statements of operations since the date of acquisition. The following summary, prepared on a pro forma basis, combines the consolidated results of operations as if the acquisitions had occurred at the beginning of fiscal 1994. These results have been prepared for comparative purposes only and do not purport to be indicative of what would have occurred had the acquisitions been made at the beginning of 1994, or of the results which may occur in the future.
1994 ----------- (unaudited) Net sales $ 634,808 Net income $ 8,514 Net income per common share $ 0.77
36 13. QUARTERLY RESULTS (Unaudited):
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 administrative expenses..... 46,615 46,172 48,497 56,031 Depreciation and amortization.................... 3,048 3,025 3,256 3,429 Unusual income................................... --- --- --- (3,171)/(1)/ -------- -------- -------- -------- Income (loss) from operations.................... (339) 767 3,604 22,415 Interest expense, net............................ 3,097 3,801 3,979 3,810 -------- -------- -------- -------- Income (loss) before income taxes................ (3,436) (3,034) (375) 18,605 Income tax provision (benefit)................... (1,237) (1,088) (133) 7,407 -------- -------- -------- -------- Net income (loss)................................ $ (2,199) $ (1,946) $ (242) $ 11,198 ======== ======== ======== ======== Net income (loss) per share...................... $ (0.20) $ (0.18) $ (0.02) $ 1.00 ======== ======== ======== ======== Weighted average shares outstanding.............. 11,062,000 11,064,000 11,064,000 11,164,000
/(1)/ Gain recognized on the pension termination was $1.6 million or $0.14 per share on an after-tax basis (see Note 10).
FISCAL QUARTER ENDED --------------------------------------------------------- April 29, July 29, October 28, February 3, Fiscal 1995: 1995 1995 1995 1996 - ------------ --------- --------- ----------- ---------- Net sales........................................... $ 126,094 $ 128,422 $ 138,927 $ 213,915 Other income, net................................... 404 413 428 1,021 -------- -------- -------- -------- 126,498 128,835 139,355 214,936 -------- -------- -------- -------- Costs of merchandise sold........................... 76,358 79,258 86,172 146,159/(1)/ Selling, general and administrative expenses........ 48,907 48,057 48,499 59,404 Depreciation and amortization....................... 2,786 2,854 2,308 3,947 Unusual expense..................................... --- --- 5,471/(1)/ --- Restructuring charges............................... --- --- --- 5,690/(1)/ -------- -------- -------- -------- Loss from operations................................ (1,553) (1,334) (3,095) (264) Interest expense, net............................... 1,794 1,832 2,075 3,021 -------- -------- -------- -------- Loss before income taxes............................ (3,347) (3,166) (5,170) (3,285) Income tax benefit.................................. (1,204) (1,139) (1,861) (1,561) -------- -------- -------- -------- Net loss............................................ $ (2,143) $ (2,027) $ (3,309) $ (1,724) ======== ======== ======== ======== Net loss per share................................ $ (0.19) $ (0.18) $ (0.30) $ (0.16) ======== ======== ======== ======== Weighted average shares outstanding................. 11,001,000 11,057,000 11,059,000 11,059,000
/(1)/ Unusual items were $3.5 million or $0.32 per share on an after-tax basis. Restructuring charges, which included a $3.5 million pre-tax charge recorded as a component of costs of merchandise sold, amounted to $5.9 million or $0.53 per share on an after-tax basis. 37 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 of common stock 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. 15. UNUSUAL (INCOME) EXPENSE: In January 1997, the Company recorded unusual income of $3,171 before taxes. This 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 will be paid when the pension assets are reverted to the Company. The asset reversion occurred in March 1997 (see Note 10). In October 1995, the Company recorded unusual expenses of $5,471 before taxes. This is presented separately as a component of income (loss) from operations in the Consolidated Statements of Operations. The charge relates to $2,200 incurred in pre-opening costs for the three new stores opened in Rochester, New York and one store in Elmira, New York, and the remainder relates to costs incurred in the hiring of the Chief Executive Officer (see Note 14) and the cost of litigation associated with the hiring of this executive. 16. RESTRUCTURING CHARGES: In January 1996, the Company recorded a restructuring charge of $5,690 before taxes. This 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 has committed to close 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 and the remaining accrual as of February 1, 1997 for store closings were $1,525 and $3,475, respectively. As of February 3, 1996, no amounts were paid on these store closings. It is anticipated that the remaining costs will be expended through the end of 1999. 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 February 1, 1997 there was no accrual remaining. 38 17. SUBSEQUENT EVENT: On April 10, 1997, the Company entered into an asset based borrowing agreement with a three-year term, replacing its existing financing agreement (see Note 2). The new agreement is fully underwritten by GE Capital Corporation and Bank of Boston. The terms of the new financing provide for a secured revolving credit facility of up to $200,000. The amount allowed to be borrowed is based on eligible inventory and selected fixed assets and real estate. The new financing will provide the Company with additional borrowing capacity during peak inventory periods. The agreement contains restrictive convenants, including but not limited to, the maintenance of certain financial ratios, limitations on dividends, additional incurrence of debt, capital expenditures and acquisitions. As a result of this transaction, the Company will incur a one-time pre-tax charge of $753 in the first quarter of fiscal 1997 relating to the early extinguishment of debt. The Company completed a sale and leaseback transaction on two of its owned properties. The transaction was completed April 10, 1997 and generated net proceeds of $11,000. Proceeds of $8,000 were used to pay down debt with the remainder providing additional working capital. The leaseback terms under this agreement provide that the Company lease the properties over a primary term of twenty years with six five-year renewal options. The lease will be accounted for as an operating lease for financial reporting purposes. Report of Independent Public Accountants - ---------------------------------------- To the Shareholders of The Bon-Ton Stores, Inc.: We have audited the accompanying consolidated balance sheets of The Bon-Ton Stores, Inc. (a Pennsylvania corporation) and subsidiaries as of February 1, 1997 and February 3, 1996 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 1, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Bon-Ton Stores, Inc. and subsidiaries as of February 1, 1997 and February 3, 1996, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended February 1, 1997 in conformity with generally accepted accounting principles. Philadelphia, PA /s/ Arthur Andersen LLP March 5, 1997 (Except with respect to the matter discussed in Note 17, as to which the date is April 10, 1997.) 39 EX-21 7 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 8 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports dated March 5, 1997 (except with respect to the matter discussed in Note 17 to the consolidated financial statements, as to which the date is April 10, 1997) included or incorporated by reference in this Form 10-K, into the Company's previously filed Form S-8 Registration Statements, Registration Nos. 33-43105 and 33-51954. /s/ Arthur Andersen LLP Philadelphia, PA April 30, 1997 EX-27 9 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AS OF FEBRUARY 1, 1997 AND THE CONSOLIDATED STATEMENT OF OPERATIONS FOR THE FISCAL YEAR ENDED FEBRUARY 1, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR FEB-01-1997 FEB-04-1996 FEB-01-1997 6,516 0 19,075 2,769 161,191 202,402 188,390 70,674 341,252 99,549 128,098 0 0 113 111,372 341,252 626,482 628,912 395,563 602,465 0 0 14,687 11,760 4,949 6,811 0 0 0 6,811 0.61 0.61
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