EX-13.3 5 w48423ex13-3.txt PAGES 28 THROUGH 45 OF THE ANNUAL REPORT 1 Exhibit 13.3 Consolidated Balance Sheets
February 3, January 29, (In thousands except share and per share data) 2001 2000 ------------------------------------------------------------------------------------------------------------------------ ASSETS CURRENT ASSETS: Cash and cash equivalents $ 14,067 $ 10,807 Trade and other accounts receivable, net of allowance for doubtful accounts of $3,445 and $3,167 in 2000 and 1999, respectively 24,052 27,782 Merchandise inventories 192,547 203,489 Prepaid expenses and other current assets 8,503 12,371 Deferred income taxes 2,318 1,926 ----------- ----------- Total current assets 241,487 256,375 ----------- ----------- PROPERTY, FIXTURES AND EQUIPMENT AT COST, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 147,415 144,715 DEFERRED INCOME TAXES 1,163 -- OTHER ASSETS 14,973 16,402 ----------- ----------- Total assets $ 405,038 $ 417,492 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 57,184 $ 67,353 Accrued payroll and benefits 8,588 10,016 Accrued expenses 21,919 26,262 Current portion of long-term debt 584 682 Current portion of obligations under capital leases 479 442 Income taxes payable 10,422 9,832 ----------- ----------- Total current liabilities 99,176 114,587 ----------- ----------- LONG-TERM DEBT, LESS CURRENT MATURITIES 97,805 106,247 OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT MATURITIES 953 1,431 DEFERRED INCOME TAXES -- 1,362 OTHER LONG-TERM LIABILITIES 8,242 3,174 ----------- ----------- Total liabilities 206,176 226,801 ----------- ----------- COMMITMENTS AND CONTINGENCIES (NOTE 6) SHAREHOLDERS' EQUITY Common Stock -- authorized 40,000,000 shares at $0.01 par value; issued and outstanding shares of 12,225,501 and 12,276,860 in 2000 and 1999, respectively 122 123 Class A Common Stock -- authorized 20,000,000 shares at $0.01 par value; issued and outstanding shares of 2,989,853 in 2000 and 1999 30 30 Additional paid-in capital 106,882 108,083 Deferred compensation (347) (2,172) Retained earnings 92,175 84,627 ----------- ----------- Total shareholders' equity 198,862 190,691 ----------- ----------- Total liabilities and shareholders' equity $ 405,038 $ 417,492 =========== ===========
The accompanying notes are an integral part of these consolidated statements. THE BON-TON STORES, INC. AND SUBSIDIARIES 28 2 Consolidated Statements of Income
Fiscal Year Ended ---------------------------------------------- February 3, January 29, January 30, (In thousands except share and per share data) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------- NET SALES $ 749,816 $ 710,963 $ 674,871 OTHER INCOME, NET 2,715 2,651 2,350 --------------------------------------------- 752,531 713,614 677,221 --------------------------------------------- COSTS AND EXPENSES: Costs of merchandise sold 474,026 449,596 426,730 Selling, general and administrative 231,859 224,150 209,407 Depreciation and amortization 17,085 14,846 13,281 Unusual expense 6,485 2,683 -- Restructuring income -- (2,492) -- --------------------------------------------- INCOME FROM OPERATIONS 23,076 24,831 27,803 INTEREST EXPENSE, NET 10,906 8,552 9,396 --------------------------------------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 12,170 16,279 18,407 INCOME TAX PROVISION 4,622 6,186 7,196 --------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 7,548 10,093 11,211 EXTRAORDINARY ITEM -- loss on early extinguishment of debt, net of income tax benefit -- (378) -- --------------------------------------------- NET INCOME $ 7,548 $ 9,715 $ 11,211 ============================================= Per share amounts -- BASIC: Net income before extraordinary item $ 0.50 $ 0.68 $ 0.81 Effect of extraordinary item -- (0.02) -- --------------------------------------------- Net income $ 0.50 $ 0.66 $ 0.81 ============================================= BASIC SHARES OUTSTANDING 14,953,000 14,750,000 13,866,000 DILUTED: Net income before extraordinary item $ 0.50 $ 0.68 $ 0.81 Effect of extraordinary item -- (0.02) -- --------------------------------------------- Net income $ 0.50 $ 0.66 $ 0.81 ============================================= DILUTED SHARES OUTSTANDING 14,953,000 14,753,000 13,917,000
The accompanying notes are an integral part of these consolidated statements. THE BON-TON STORES, INC. AND SUBSIDIARIES 29 3 Consolidated Statements of Shareholders' Equity
Class A Additional Common Common Paid-in Deferred Retained (In thousands) Stock Stock Capital Compensation Earnings Total ----------------------------------------------------------------------------------------------------------------------------- Balance at January 31, 1998 $ 88 $ 30 $ 62,585 $ (2,010) $ 63,701 $ 124,394 Net income -- -- -- -- 11,211 11,211 Secondary stock offering 31 -- 43,386 -- -- 43,417 Issuance of stock under Stock Award Plans 3 -- 1,949 (2,262) -- (310) Deferred compensation amortization -- -- -- 943 -- 943 Exercised stock options 1 -- 732 -- -- 733 Cancellation of Restricted Shares -- -- (392) 215 -- (177) --------------------------------------------------------------------------- Balance at January 30, 1999 123 30 108,260 (3,114) 74,912 180,211 Net income -- -- -- -- 9,715 9,715 Issuance of stock under Stock Award Plans -- -- 36 (22) -- 14 Deferred compensation amortization -- -- (183) 933 -- 750 Exercised stock options -- -- 16 -- -- 16 Cancellation of Restricted Shares -- -- (46) 31 -- (15) --------------------------------------------------------------------------- Balance at January 29, 2000 123 30 108,083 (2,172) 84,627 190,691 Net income -- -- -- -- 7,548 7,548 Deferred compensation amortization -- -- -- 1,490 -- 1,490 Tax impact on Restricted Shares -- -- (655) 18 -- (637) Cancellation of Restricted Shares (1) -- (546) 317 -- (230) --------------------------------------------------------------------------- Balance at February 3, 2001 $ 122 $ 30 $ 106,882 $ (347) $ 92,175 $ 198,862 ===========================================================================
The accompanying notes are an integral part of these consolidated statements. THE BON-TON STORES, INC. AND SUBSIDIARIES 30 4 Consolidated Statements of Cash Flows
Fiscal Year Ended -------------------------------------------- February 3, January 29, January 30, (In thousands) 2001 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 7,548 $ 9,715 $ 11,211 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 17,085 14,846 13,281 Bad debt 1,863 520 1,770 Stock compensation expense 833 750 441 Gain on sale of property, fixtures and equipment (12) (158) (1,291) Cancellation of Restricted Shares (230) (15) (177) Decrease (increase) in other long-term assets 634 (408) 143 Deferred income tax (2,917) (1,414) (743) Increase (decrease) in other long-term liabilities 4,650 (185) (50) Proceeds from sale of accounts receivable, net 12,000 11,000 (5,000) Extraordinary loss on debt extinguishment -- 610 -- Asset write-down charge -- 2,683 -- Restructuring income -- (2,492) -- Restructuring payments -- -- (449) Changes in operating assets and liabilities: Increase in accounts receivable (10,133) (4,625) (2,961) Decrease (increase) in merchandise inventories 10,942 (10,616) (15,090) Decrease (increase) in prepaid expenses and other current assets 3,868 (3,195) 543 (Decrease) increase in accounts payable (10,169) (4,093) 15,970 (Decrease) increase in accrued expenses (5,754) 3,865 1,851 Increase in income taxes payable 590 91 1,352 -------------------------------------------- Total adjustments 23,250 7,164 9,590 -------------------------------------------- Net cash provided by operating activities 30,798 16,879 20,801 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (29,577) (46,451) (19,418) Proceeds from sale of property, fixtures and equipment 12 426 3,004 Proceeds from sale and leaseback arrangement 11,046 -- -- Payment for the acquisition of businesses, net of cash received -- (2,192) -- -------------------------------------------- Net cash used in investing activities (18,519) (48,217) (16,414) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt and capital lease obligations (302,720) (278,778) (309,339) Proceeds from issuance of long-term debt 293,700 310,300 262,300 Proceeds from equity offering -- -- 43,417 Exercised stock options 1 16 733 -------------------------------------------- Net cash (used in) provided by financing activities (9,019) 31,538 (2,889) Net increase in cash and cash equivalents 3,260 200 1,498 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 10,807 10,607 9,109 -------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 14,067 $ 10,807 $ 10,607 ============================================
The accompanying notes are an integral part of these consolidated statements. THE BON-TON STORES, INC. AND SUBSIDIARIES 31 5 Notes to Consolidated Financial Statements (In thousands except share and per share data) The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on January 31, 1996 as the successor of a company established on January 31, 1929, and currently operates as one business segment, through its subsidiaries, 73 retail department stores located in Pennsylvania, New York, New Jersey, Maryland, Connecticut, Massachusetts, New Hampshire, Vermont and West Virginia. 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of The Bon-Ton Stores, Inc. and its wholly-owned subsidiaries (the "Company"). All intercompany transactions have been eliminated in consolidation. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform with the current year presentation. FISCAL YEAR The Company's fiscal year ends on the Saturday nearer to January 31 of the following calendar year, and consisted of fifty-three weeks for fiscal year 2000 and fifty-two weeks for fiscal years 1999 and 1998. Fiscal years 2000, 1999 and 1998 ended on February 3, 2001, January 29, 2000 and January 30, 1999, respectively. CASH AND CASH EQUIVALENTS The Company considers all highly liquid short-term investments with an original maturity of three months or less when purchased to be cash equivalents. Cash equivalents are generally overnight money market investments. MERCHANDISE INVENTORIES For 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 $193,876 and $203,756 as of February 3, 2001 and January 29, 2000, 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 3 to 10 years No depreciation is recorded until property, fixtures and equipment are placed into service. Property, fixtures and equipment not placed into service are classified as construction in progress. The Company capitalizes interest and lease costs incurred during the construction of any new facilities or major improvements. The amount of interest and lease costs capitalized is limited to that incurred during the construction period. Repair and maintenance costs are charged to operations as incurred. Property retired or sold is removed from the asset and accumulated depreciation accounts and the resulting gain or loss is reflected in income. The costs of major remodeling and improvements on leased stores are capitalized as leasehold improvements. Leasehold improvements are generally amortized over the shorter of the lease term or the useful life of the asset. Capital leases are recorded at the lower of fair market value or the present value of future minimum lease payments. Capital leases are amortized over the primary term of the lease. THE BON-TON STORES, INC. AND SUBSIDIARIES 32 6 STORE OPENING AND CLOSING COSTS The Company follows the practice of accounting for store opening costs incurred prior to opening a new retail unit as a current period expense. When the decision to close a retail unit is made, the Company provides for the 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 and certain assumptions about future events. Changes in the assumptions for store closing costs for such items as the estimated period of future lease obligations and the amounts actually realized relating to the carrying value of property, fixtures and equipment could cause these estimates to change. ADVERTISING Advertising production costs are expensed the first time the advertisement is run. Media placement costs are expensed in the period the advertising appears. Total advertising expenses included in selling, general and administrative expenses for fiscal years 2000, 1999 and 1998 were $28,784, $28,795 and $27,569, respectively. Prepaid expenses and other current assets include prepaid advertising costs of $847 and $1,000 at February 3, 2001 and January 29, 2000, respectively. REVENUE RECOGNITION The Company recognizes revenue at either the point of sale or at the time merchandise is shipped to the customer. Sales are net of returns and exclude sales tax. A reserve is provided for estimated merchandise returns based on experience. LEASED DEPARTMENT SALES The Company leases space to third parties in several of its stores and receives compensation based on a percentage of sales made in these departments. Other income, net, includes leased department rental income of approximately $3,001, $2,872 and $2,590 in fiscal 2000, 1999 and 1998, respectively. REVOLVING CHARGE ACCOUNTS Finance charge income on customers' revolving charge accounts is reflected as a reduction of selling, general and administrative expenses. The finance charge income earned by the Company, before considering the costs of administering and servicing the revolving charge accounts, for fiscal years 2000, 1999 and 1998 was $30,619, $28,406 and $29,776, respectively, and is a component of securitization income (see Note 4). RECEIVABLE SALES When the Company sells receivables in securitizations of credit card loans, it retains interest-only strips, subordinated interests and servicing rights, all of which are retained interests in the securitized receivables. Gain or loss on sale of the receivables depends in part on the previous carrying amount of the financial assets involved in the transfer, allocated between the assets sold and the retained interests, based on their relative fair value at the date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for retained interests and the Company estimates fair value based on the present value of future expected cash flows using management's best estimates of the key assumptions -- credit losses, prepayment impact and an appropriate discount rate commensurate with the risks involved. As all estimates used are influenced by factors outside our control, uncertainty is inherent in these estimates, making it reasonably possible they could change in the near term. STOCK-BASED COMPENSATION The Company follows Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123"), which provides for a fair value based method of accounting for grants of equity instruments to employees or suppliers in return for goods or services. As permitted under SFAS No. 123, the Company has elected to continue to account for compensation costs under the provisions prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." The Company has included pro forma disclosures of net income and basic and diluted earnings per share in Note 10 as if the fair value based method had been applied in measuring compensation cost. EARNINGS PER SHARE The presentation of earnings per share (EPS) requires a reconciliation of the numerators and denominators used in the basic and diluted EPS calculations. The numerator, net income, is identical in both calculations. The following table presents a reconciliation of the shares outstanding for the respective calculations, as well as the calculated EPS, for each period presented on the accompanying Consolidated Statements of Income. The EPS shown in the reconciliation represents EPS before the impact of extraordinary items. THE BON-TON STORES, INC. AND SUBSIDIARIES 33 7
2000 1999 1998 ------------------- ------------------- ------------------- Shares EPS Shares EPS Shares EPS --------------------------------------------------------------------------------------------------------------- Basic Calculation 14,953,000 $0.50 14,750,000 $0.68 13,866,000 $0.81 Dilutive Securities -- Restricted Shares -- -- 25,000 Options -- 3,000 26,000 -------------------------------------------------------------------- Diluted Calculation 14,953,000 $0.50 14,753,000 $0.68 13,917,000 $0.81 -------------------------------------------------------------------- Antidilutive Shares and Options -- Restricted Shares 280,000 402,000 388,000 Options 1,206,000 1,316,000 1,068,000
Antidilutive shares and options, consisting of restricted shares and options to purchase shares outstanding, were excluded from the computation of dilutive securities due to the Company's net loss position in the first three quarters of 1999 and 1998, and the first two quarters of fiscal 2000. In addition, antidilutive options to purchase shares during the remaining quarters were excluded from the computation of dilutive securities due to exercise prices greater than the average market price. The following table reflects the approximate dilutive securities calculated under the treasury stock method had the Company reported a net profit in each consecutive quarter of the corresponding fiscal years:
2000 1999 1998 -------------------------------------------------------------------------------- Approximate Dilutive Securities -- Restricted Shares -- 43,000 90,000 Options -- 27,000 291,000
In addition, options to purchase shares with exercise prices greater than the average market price were excluded from the above table for 2000, 1999 and 1998 in the approximate amounts of 1,206,000, 1,139,000 and 244,000, respectively, as they would have been antidilutive. FUTURE ACCOUNTING CHANGES In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and for Hedging Activities" ("SFAS No. 133"). This statement requires every derivative instrument be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS No. 133 requires changes in the derivative's fair value be recognized currently in earnings unless specific hedge criteria are met. SFAS No. 133 also requires the Company to formally document, designate and assess the effectiveness of transactions that receive hedge accounting. By requiring greater use of fair value accounting, SFAS No. 133 has the potential to increase the volatility of earnings and other comprehensive income. The Company adopted SFAS No. 133 in fiscal 2001 and its effect was not material to the operating results of the Company as primarily cash flow hedges are utilized by the Company and their change is reported through comprehensive income. In September 2000, the FASB issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 140"). The guidance in SFAS No. 140 supersedes SFAS No. 125. Under SFAS No. 125, the Company's securitization transactions are accounted for as sales of receivables. SFAS No. 140 requires additional disclosures relating to securitized financial assets, retained interests in securitized financial assets and collateral for fiscal years ending after December 15, 2000. These disclosures are included in Note 4. In addition, SFAS No. 140 establishes new requirements for an entity to be a qualified special purpose entity and modifies under what conditions a transferor has retained effective control over transferred assets. The updated rules to determine the accounting for transfers of financial assets are effective for transfers occurring after March 31, 2001. Early adoption of the new rules is not permitted. We anticipate the adoption of the accounting provisions of SFAS No. 140 will not have a material impact on the operating results of the Company. THE BON-TON STORES, INC. AND SUBSIDIARIES 34 8 2. DEBT Debt consisted of the following:
February 3, January 29, 2001 2000 ----------------------------------------------------------------------------------------------------------------------- Revolving credit agreement - principal payable April 15, 2004; interest payable periodically at varying rates (7.82% for fiscal year 2000) $72,450 $ 75,300 Mortgage notes payable - principal payable in varying monthly installments through June 2016; interest 9.62%; secured by land and buildings 20,439 21,012 Mortgage notes payable - principal payable February 1, 2012; interest payable monthly at various rates; secured by a building 4,500 4,500 Mortgage notes payable - principal payable January 1, 2011; interest payable monthly at 5% beginning February 1, 2006; secured by a building and fixtures 1,000 -- Mortgage notes payable - principal and interest in monthly installments of $68 through January 2001, with a balloon payment in February 2001; interest 11.00%; secured by buildings -- 6,117 ------------------------- Total debt 98,389 106,929 Less: current maturities 584 682 ------------------------- Long-term debt $97,805 $106,247 =========================
The Company entered into a loan agreement with the City of Scranton on July 5, 2000. The loan provided $1,000 to be used in certain store renovations. The agreement provides for interest payments beginning February 1, 2006 at a rate of 5% per annum. The principal balance is to be paid in full by January 1, 2011. In April 1999, the Company amended its revolving credit agreement ("Credit Facility") to extend the term of the facility to April 15, 2004. The amended agreement extends the term of the available fixed assets and real estate borrowing base and provides a more favorable interest rate pricing structure, with substantially all other terms and conditions remaining unchanged. As a result of this transaction, the Company incurred a one-time extraordinary after-tax charge of $378, or $0.02 per share, in fiscal 1999. As of February 3, 2001, the Company borrowed $72,450, with $37,405 of additional borrowing availability remaining under the Credit Facility. The interest charged under this agreement, based on LIBOR or an index rate plus an applicable margin, is determined by a formula based on the Company's interest coverage ratio (defined as the ratio of earnings before interest, taxes, depreciation and amortization to interest expense). The Company maintains an interest rate swap portfolio that allows the Company to convert a portion of the variable rates under the Company's facilities to fixed rates. The following table indicates the notional amounts as of February 3, 2001 and January 29, 2000 and the range of interest rates paid and received by the Company during the respective fiscal years:
February 3, January 29, 2001 2000 -------------------------------------------------------------------------------- Fixed swaps (notional amount) $80,000 $110,000 Range of receive rate 6.03%-6.86% 5.00%-6.16% Range of pay rate 5.58%-5.88% 5.58%-6.06%
The interest rate swap agreements will expire on various dates from June 2, 2003 to April 8, 2004. 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 3, 2001 and January 29, 2000, was a loss of $682 and income of $3,842, respectively, and represents the amount the Company would pay or receive if the agreements were terminated as of such dates. Several of the Company's loan agreements contain restrictive covenants, including a minimum trade support ratio, a minimum fixed charge ratio and limitations on dividends, additional incurrence of debt and capital expenditures. The Company was in compliance with each of these covenants during fiscal 2001. The fair value of the Company's debt, excluding interest rate swaps, is estimated at $98,947 and $105,203 on February 3, 2001 and January 29, 2000, respectively, and is based on an estimate of the rates available to the Company for debt with similar features. THE BON-TON STORES, INC. AND SUBSIDIARIES 35 9 Debt maturities, as of February 3, 2001, are as follows: -------------------------------------------------------------------------------- 2001 $ 584 2002 646 2003 715 2004 73,242 2005 876 2006 and thereafter 22,326 ------- $98,389 =======
3. INTEREST COSTS Interest and debt costs were:
Fiscal Year Ended --------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------------------------------------------------------------------------------------------ Interest costs incurred $11,284 $8,988 $9,681 Interest income (255) (103) (110) Capitalized interest, net (123) (333) (175) ----------------------------------------- Interest expense, net $10,906 $8,552 $9,396 ========================================= Interest paid $11,698 $8,303 $9,128 =========================================
4. SALE OF RECEIVABLES The Company securitizes its private credit card portfolio through an accounts receivable facility (the "Facility"). The securitization agreement was amended in October 1999 to extend the term of the facility through January 2003 and contains increased pricing of 0.1 percentage point and a trade support covenant. The amended agreement also provides for the Company to request seasonal increases in the amount sold under the facility and annual extensions of the term. Substantially all other terms and conditions of the original agreement remain unchanged. Under the securitization agreement, which is contingent upon the receivables meeting certain performance criteria, the Company has the option to sell through The Bon-Ton Receivables Partnership, LP ("BTRLP"), a wholly-owned subsidiary of the Company, up to $150,000 of an undivided percentage interest in the receivables, on a limited recourse basis. In connection with the securitization agreement, the Company retains servicing responsibilities, subordinated interests and an interest-only strip, all of which are retained interests in the securitized receivables. The Company receives annual servicing fees of two percent of the outstanding balance and rights to future cash flows arising after the investors in the securitization have received the return for which they contracted. The investors have no recourse to the Company's other assets for failure of debtors to pay when due. The Company's retained interests are subordinate to the investors' interests. The value of the retained interest is subject to credit, prepayment and interest rate risks. The Company does not recognize a servicing asset or liability, as the amount received for servicing the receivables is a reasonable approximation of market rates and servicing costs. As of February 3, 2001 and January 29, 2000, credit card receivables were sold under the above referenced agreement in the amount of $150,000 and $138,000, respectively, and the Company had subordinated interests of $22,585 and $25,873, respectively, related to the amounts sold that were included in the accompanying Consolidated Balance Sheets. The Company accounts for its subordinated interest in the receivables in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company has not recognized any unrealized gains or losses on its subordinated interest, as the current carrying value of customers' revolving charge accounts receivable is a reasonable estimate of fair value and the average interest rates approximate current market origination rates. 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. During the fiscal year ended February 3, 2001, January 29, 2000 and January 30, 1999, the Company recognized securitization income of $4.2 million, $4.6 million and $5.0 million, respectively, on the securitization of credit card loans. This income is reported as a component of selling, general and administrative expenses. THE BON-TON STORES, INC. AND SUBSIDIARIES 36 10 Key economic assumptions used in measuring the retained interests at the date of securitization for securitizations completed during the year were as follows:
Fiscal 2000 -------------------------------------------------------------------------------- Yield on credit cards 18.2%-19.5% Convenience rate 2.9% Payment rate 19.1%-19.7% Interest rate on variable funding 6.4%-7.6% Net charge-off rate 7.0% Residual cash flows discount rate 12.0%
As of February 3, 2001, the interest-only strip was recorded at its fair value of $973. The following table shows the key economic assumptions used in measuring the interest-only strip. The table also displays the sensitivity of the current fair value of residual cash flows to immediate 10 percent and 20 percent adverse changes in the assumptions:
Effect of Adverse Changes ($) ----------------------------- Assumptions 10% 20% ----------------------------------------------------------------------------------------------------------------- Yield (annual rate) 18.2% 659 1,318 Convenience rate 2.9% 6 12 Payment rate 19.1% 92 184 Interest rate on variable and adjusted contracts 6.4% 234 467 Net charge-off rate 7.0% 255 510 Residual cash flows discount rate (annual rate) 12.0% 2 5
These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10 percent variation in an assumption generally cannot be extrapolated because the relationship of the change in an assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. During fiscal 2000, the Company received net proceeds of $3.2 million from servicing fees, which is reported as a component of selling, general and administrative expenses. At February 3, 2001, the Company had total managed credit card receivables of $172.6 million, of which $150.0 million are securitized and $22.6 million are subordinated interests held by the Company and included on the Consolidated Balance Sheets. As of February 3, 2001, $5.5 million of the total managed credit card receivables were 60 days or more past due. Net credit losses on the total managed credit card receivables for the fiscal year ending February 3, 2001 were $6.8 million. 5. PROPERTY, FIXTURES AND EQUIPMENT As of February 3, 2001 and January 29, 2000, property, fixtures and equipment and the related accumulated depreciation and amortization consisted of:
February 3, January 29, 2001 2000 ------------------------------------------------------------------------------------------- Land and improvements $ 2,801 $ 1,952 Buildings and leasehold improvements 135,164 131,290 Furniture and equipment 119,609 113,772 Buildings under capital leases 5,052 5,052 ----------------------------- 262,626 252,066 Less: Accumulated depreciation and amortization 115,211 107,351 ----------------------------- $147,415 $144,715 =============================
Property, fixtures and equipment with a net depreciated cost of approximately $30,420 and $38,754 are pledged as collateral for secured loans at February 3, 2001 and January 29, 2000, respectively. On November 20, 1998, the Company sold its vacant property in Downtown Allentown, Pennsylvania. The property was acquired during the 1994 acquisition of certain assets from Hess's Department Stores, Inc. The property was closed in January 1996. No loss was recognized on this transaction as the Company utilized $1.0 million of the store closing reserve established for this property. The net proceeds of $1.5 million received from the sale were used to fund additional working capital requirements. On February 17, 1998, the Company sold its vacant property in Downtown Lancaster, Pennsylvania. The property, which was acquired during the 1992 acquisition of Watt and Shand, Inc., was closed in March 1995. The Company recognized a gain during the first quarter of 1998 of $1.4 million on the disposal of this property, which included the remaining store closing reserve established in 1994. The gain was reflected as a reduction of selling, general and administrative expense. The net proceeds of $1.2 million received from the sale were used to fund additional working capital requirements. THE BON-TON STORES, INC. AND SUBSIDIARIES 37 11 6. 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 3, 2001, 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 ------------------------------------------------------------------------------------------- 2001 $ 579 $ 21,014 2002 300 19,224 2003 300 18,486 2004 300 17,705 2005 200 16,231 2006 and thereafter -- 88,192 --------------------------- Total net minimum rentals 1,679 $180,852 ======== Less: Amount representing interest 247 ----- Present value of net minimum lease payments, of which $479 is due within one year $1,432 ======
Minimum rental commitments under operating leases 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, fax machines and computer equipment, as well as related-party commitments with the Company's majority shareholder and related entities of $224 for fiscal 2001 through 2005 and $112 for fiscal 2006 and thereafter. Rental expense consisted of the following:
Fiscal Year Ended --------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------------------------------------------------------------------------------------------------- Operating leases: Buildings: Minimum rentals $18,667 $16,367 $14,597 Contingent rentals 2,358 2,614 2,710 Fixtures and equipment 2,094 2,015 1,230 Contingent rentals on capital leases 397 414 399 --------------------------------------------- Totals $23,516 $21,410 $18,936 =============================================
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 all such litigation and claims will not have a material adverse effect on the Company's financial position or results of its operations. 7. 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 5.0 million shares of preferred stock authorized at $0.01 par value; 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. On May 1, 1998, the Company sold 3.1 million shares of its Common Stock pursuant to a public offering. The net proceeds received of $43.4 million were used to expand and upgrade existing stores, open new stores, provide working capital and for general corporate purposes. THE BON-TON STORES, INC. AND SUBSIDIARIES 38 12 8. INCOME TAXES The Company accounts for income taxes according to Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No. 109"). Under SFAS No. 109, deferred tax assets and liabilities are computed based on the difference between the financial statement and income tax basis of assets and liabilities using applicable current marginal tax rates. Components of the income tax provision are as follows:
Fiscal Year Ended --------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------------------------------------------------------------------------------------------ Federal and State: Current $ 7,539 $ 7,600 $7,939 Deferred (2,917) (1,414) (743) ----------------------------------------- Total $ 4,622 $ 6,186 $7,196 =========================================
Components of gross deferred tax assets and liabilities were comprised of the following:
February 3, January 29, 2001 2000 -------------------------------------------------------------------------------- Deferred tax assets: Accrued expenses $1,444 $2,261 Restricted Shares 1,966 1,614 Bad debt reserve 1,275 1,172 Sale and leaseback 1,045 948 CEO retirement 862 -- Asset write-down 833 830 Loss carryforward 167 222 Capital leases 48 88 Valuation allowance -- (125) ---------------------- Total gross deferred tax assets $7,640 $7,010 ====================== Deferred tax liabilities: Fixed assets $2,369 $4,205 Inventory 711 1,029 Other 1,079 1,212 ---------------------- Total gross deferred tax liabilities $4,159 $6,446 ======================
The loss carryforward at February 3, 2001 relates to the acquisition of Adam, Meldrum & Anderson Co., Inc. and will expire in January 2009. The valuation allowance relates to the deferred tax assets that result from accrued expenses that are not deductible for tax purposes due to the limitations arising from Section 162 of the Internal Revenue Code of 1986, as amended ("IRC 162"), relating to deductions for executive compensation. No other deferred tax assets have associated valuation allowances since these tax benefits are realizable through carryback availability, the reversal of existing deferred tax liabilities and future taxable income. THE BON-TON STORES, INC. AND SUBSIDIARIES 39 13 A reconciliation of the statutory federal income tax rate to the effective tax rate for fiscal 2000, 1999 and 1998 is presented below:
Fiscal Year Ended --------------------------------------------- February 3, January 29, January 30, 2001 2000 1999 ------------------------------------------------------------------------------------------------------------- Tax at statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.0 2.0 1.0 Book expense in excess of IRC 162 limitation -- 0.9 0.7 Internal Revenue Service audit closure -- -- 1.9 Other, net 1.0 0.1 0.5 -------------------------------------- Total 38.0% 38.0% 39.1% ======================================
In fiscal 2000, 1999 and 1998, the Company made income tax payments of $7,232, $7,335 and $6,397, respectively. 9. EMPLOYEE BENEFIT PLANS The Company provides eligible employees with retirement benefits under a 401(k) salary reduction and profit sharing plan (the "Plan"). Employees are eligible to participate in the Plan after they reach the age of 21, complete one year of service and work at least 1,000 hours in any calendar year. Under the 401(k) provisions of the Plan, the majority of eligible employees may contribute up to 15% of their compensation to the Plan. Company matching contributions, not to exceed 5% of eligible employees' compensation, are at the discretion of the Company's Board of Directors. Company matching contributions under the 401(k) provisions of the Plan become fully vested for eligible employees after three years of service. Contributions to the Plan under the profit sharing provisions are at the discretion of the Company's Board of Directors. These profit sharing contributions become fully vested after five years of service. The Company's fiscal 2000, 1999 and 1998 expense under the aforementioned benefit plans was $2,200, $1,981 and $1,798, respectively. 10. STOCK AWARD PLANS The Company's Amended and Restated 1991 Stock Option and Restricted Stock Plan (the "1991 Stock Plan"), as amended through June 17, 1997, provides for the granting of the following options and awards to certain associates, officers, directors, consultants and advisors: Common Stock options; performance-based Common Stock options as part of a long-term incentive plan for selected officers; and Common Stock awards subject to substantial risk of forfeiture ("Restricted Shares"). The maximum number of shares to be granted under the 1991 Stock Plan, less forfeitures, is 1,900,000 shares. In addition to the 1991 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 1991 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. The Company amended its Management Incentive Plan (the "MIP Plan") in 1997 to provide, at the election of each participant, for bonus awards to be received in vested Restricted Shares in lieu of cash on the satisfaction of applicable performance goals. The maximum number of shares to be granted under the MIP Plan is 300,000, with no additional shares to be issued after July 1998. The Company implemented The Bon-Ton Stores, Inc. Performance Based Stock Incentive Plan for Heywood Wilansky (the "Stock Incentive Plan") in 1998. The Stock Incentive Plan provided performance-based compensation to Mr. Wilansky in the form of stock bonuses granted in connection with services provided. Pursuant to the early retirement of Mr. Wilansky (see Note 12), outstanding options in the plan have been cancelled and the plan has been terminated. The Company implemented the 2000 Stock Incentive Plan (the "2000 Stock Plan") during fiscal 2000. The 2000 Stock Plan provides for the granting of Common Stock options and Restricted Shares to associates, directors, consultants and advisors. The maximum number of shares to be granted under the 2000 Stock Plan is 400,000. No options or awards may be granted under the 2000 Stock Plan after March 2, 2010. As of February 3, 2001, no options or Restricted Shares were granted under this plan. Compensation cost charged to operations, calculated using the intrinsic value method as required by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," was $1,270, $750 and $441 in fiscal 2000, 1999 and 1998, respectively. Had the Company recorded compensation expense using the fair value based method as THE BON-TON STORES, INC. AND SUBSIDIARIES 40 14 discussed in SFAS No. 123, "Accounting for Stock-Based Compensation," net income and earnings per share would have been reduced to the pro forma amounts indicated below:
2000 1999 1998 ----------------------------------------------------------------------------------------- Net income As reported $7,548 $9,715 $11,211 Pro forma 6,812 8,121 10,154 Earnings per share Basic As reported $ 0.50 $ 0.66 $ 0.81 Pro forma 0.46 0.55 0.73 Diluted As reported $ 0.50 $ 0.66 $ 0.81 Pro forma 0.46 0.55 0.73
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:
2000 1999 1998 ------------------------------------------------------------------------------------- Expected option term in years 6.0 6.7 7.7 Stock price volatility factor 88.0% 65.4% 66.6% Dividend yield 0.0% 0.0% 0.0% Risk free interest rate 6.6% 6.1% 5.5%
A summary of the options and restricted shares 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 1998 January 31, 1998 616,495 $ 8.35 377,200 $ 7.08 256,666 Granted 161,400 $ 13.80 -- -- 35,000 Exercised (64,132) $ 8.72 -- -- (90,000) Forfeited (21,400) $ 8.13 (33,300) $ 11.25 -- --------------------------------------------------------------- January 30, 1999 692,363 $ 9.58 343,900 $ 6.67 201,666 --------------------------------------------------------------- Options exercisable at January 30, 1999 399,753 $ 8.88 -- -- -- Weighted average fair value of options granted during fiscal 1998 $ 9.86 -- FISCAL 1999 Granted 243,000 $ 5.81 -- -- 5,000 Transfer 88,400 $ 6.13 (88,400) $ 6.13 -- Exercised (1,000) $ 6.38 -- -- (83,333) Forfeited (40,733) $ 11.31 (88,400) $ 6.13 -- --------------------------------------------------------------- January 29, 2000 982,030 $ 8.20 167,100 $ 7.25 123,333 --------------------------------------------------------------- Options exercisable at January 29, 2000 595,342 $ 8.58 -- -- -- Weighted average fair value of options granted during fiscal 1999 $ 3.95 -- FISCAL 2000 Granted 10,500 $ 3.29 -- -- -- Transfer 83,550 $ 7.25 (83,550) $ 7.25 -- Exercised -- -- -- -- (83,333) Forfeited (319,533) $ 8.64 (83,550) $ 7.25 (30,000) --------------------------------------------------------------- February 3, 2001 756,547 $ 7.93 -- -- 10,000 --------------------------------------------------------------- Options exercisable at February 3, 2001 562,588 $ 8.39 -- -- -- Weighted average fair value of options granted during fiscal 2000 $ 2.55 --
The exercised shares in the above summary for Restricted Shares represent shares for which the restrictions have lapsed. THE BON-TON STORES, INC. AND SUBSIDIARIES 41 15 The range of exercise prices for the Common Stock options outstanding as of February 3, 2001 follows:
Range of Number of Options Weighted Average Weighted Average Number of Options Weighted Average Exercise Prices Outstanding Exercise Price Contractual Life Currently Exercisable Exercise Price --------------------------------------------------------------------------------------------------------------------------------- $ 3.19 -- $ 7.13 442,681 $ 5.90 4.2 years 275,181 $ 6.03 $ 7.25 -- $11.25 151,966 $ 8.04 1.0 year 143,466 $ 8.04 $ 12.50 -- $17.00 161,900 $13.37 0.8 years 143,941 $13.24
A summary of the status of the Replacement Plan follows:
Discount Non-Discount Options Options -------------------------------------------------------------------------------- Exercise Price $3.25 $13.00 ------------------------ January 31, 1998 85,269 37,552 Exercised (36,080) -- Forfeited -- -- ------------------------ January 30, 1999 49,189 37,552 Exercised -- -- Forfeited -- -- ------------------------ January 29, 2000 49,189 37,552 Exercised -- -- Forfeited -- (8,650) ------------------------ February 3, 2001 49,189 28,902 ========================
The exercisable discounted options amounted to 49,189 as of February 3, 2001, January 29, 2000 and January 30, 1999. The exercisable non-discounted options amounted to 28,902 as of February 3, 2001 and 37,552 as of January 29, 2000 and January 30, 1999. A summary of the Management Incentive Plan follows:
Shares -------------------------------------------------------------------------------- January 31, 1998 202,300 Granted 1,326 Restriction lapse (39,466) Forfeited (47,022) ------- January 30, 1999 117,138 Granted -- Restriction lapse (15,317) Forfeited (7,260) ------- January 29, 2000 94,561 Granted -- Restriction lapse (13,907) Forfeited (21,359) ------- February 3, 2001 59,295 =======
Shares issued under the Stock Incentive Plan in fiscal 1998 were 250,000 Restricted Shares and options to purchase 250,000 shares with an exercise price of $8.00 per share. No shares or options were vested or forfeited during fiscal 1998 and 83,334 options vested in fiscal 1999. During fiscal 2000, 250,000 Restricted Shares vested and 250,000 options were forfeited due to the early retirement of Heywood Wilansky (see Note 12). No shares remain in the plan. Cancellation of options and shares in the above plans resulted primarily from the termination of the employment of certain executives and voluntary forfeitures. THE BON-TON STORES, INC. AND SUBSIDIARIES 42 16 11. QUARTERLY RESULTS (UNAUDITED)
Fiscal Quarter Ended ---------------------------------------------------------- April 29, July 29, October 28, February 3, 2000 2000 2000 2001 ------------------------------------------------------------------------------------------------------------------- FISCAL 2000 Net sales $ 152,135 $ 156,346 $ 174,924 $ 266,411 Other income, net 572 539 468 1,136 ----------------------------------------------------------- 152,707 156,885 175,392 267,547 ----------------------------------------------------------- Costs of merchandise sold 100,449 98,150 110,178 165,249 Selling, general and administrative expenses 54,025 54,175 56,010 67,649 Depreciation and amortization 4,121 4,121 4,677 4,166 Unusual expense -- 6,485 -- -- ----------------------------------------------------------- Income (loss) from operations (5,888) (6,046) 4,527 30,483 Interest expense, net 2,339 2,821 2,906 2,840 ----------------------------------------------------------- Income (loss) before income taxes (8,227) (8,867) 1,621 27,643 Income tax provision (benefit) (3,127) (3,370) 615 10,504 ----------------------------------------------------------- Net income (loss) $ (5,100) $ (5,497) $ 1,006 $ 17,139 =========================================================== PER SHARE AMOUNTS - BASIC: Net income (loss) $ (0.34) $ (0.37) $ 0.07 $ 1.13 =========================================================== BASIC SHARES OUTSTANDING 14,802,000 14,813,000 15,051,000 5,146,000 DILUTED: Net income (loss) $ (0.34) $ (0.37) $ 0.07 $ 1.13 =========================================================== DILUTED SHARES OUTSTANDING 14,802,000 14,813,000 15,051,000 15,146,000
Fiscal Quarter Ended -------------------------------------------------------------- May 1, July 31, October 30, January 29, 1999 1999 1999 2000 FISCAL 1999 ---------------------------------------------------------------------------------------------------------------------- Net sales $ 142,399 $ 149,449 $ 168,474 $ 250,641 Other income, net 517 521 477 1,136 -------------------------------------------------------------- 142,916 149,970 168,951 251,777 -------------------------------------------------------------- Costs of merchandise sold 93,190 92,719 106,469 157,218 Selling, general and administrative expenses 48,560 53,311 59,950 62,329 Depreciation and amortization 3,256 3,145 4,194 4,251 Unusual expense -- -- -- 2,683 Restructuring income -- -- -- (2,492) -------------------------------------------------------------- Income (loss) from operations (2,090) 795 (1,662) 27,788 Interest expense, net 1,920 2,048 2,211 2,373 -------------------------------------------------------------- Income (loss) before income taxes (4,010) (1,253) (3,873) 25,415 Income tax provision (benefit) (1,524) (476) (1,472) 9,658 -------------------------------------------------------------- Income (loss) before extraordinary item (2,486) (777) (2,401) 15,757 Extraordinary item - loss on early extinguishment of debt, net of income tax benefit of $232 (378) -- -- -- -------------------------------------------------------------- Net income (loss) $ (2,864) $ (777) $ (2,401) $ 15,757 ============================================================== PER SHARE AMOUNTS - BASIC: Net income (loss) before extraordinary item $ (0.17) $ (0.05) $ (0.16) $ 1.06 Effect of extraordinary item (0.02) -- -- -- -------------------------------------------------------------- Net income (loss) $ (0.19) $ (0.05) $ (0.16) $ 1.06 ============================================================== BASIC SHARES OUTSTANDING 14,703,000 14,715,000 14,781,000 14,799,000 DILUTED: Net income (loss) before extraordinary item $ (0.17) $ (0.05) $ (0.16) $ 1.06 Effect of extraordinary item (0.02) -- -- -- -------------------------------------------------------------- Net income (loss) $ (0.19) $ (0.05) $ (0.16) $ 1.06 ============================================================== DILUTED SHARES OUTSTANDING 14,703,000 14,715,000 14,781,000 14,812,000
THE BON-TON STORES, INC. AND SUBSIDIARIES 43 17 12. CHIEF EXECUTIVE OFFICER EMPLOYMENT The Company signed an agreement with Mr. Wilansky, effective February 1, 1998, to extend his employment as the Company's President and Chief Executive Officer through January 31, 2003. This new agreement provided for increased cash and stock-based compensation. Pursuant to the new agreement, the Company implemented the Stock Incentive Plan, which provided performance-based compensation to Mr. Wilansky in connection with services provided by him during the term of the plan. The Stock Incentive Plan provided for the award of 250,000 Restricted Shares and an option to purchase 250,000 shares of Common Stock at $8.00 per share. The restricted shares, which on the date the performance requirement was met had a market value of $1,969, will be transferable to Mr. Wilansky in three equal installments on the last day of the Company's fiscal year which occurs on the third, fourth and fifth anniversaries of the agreement. The options will become exercisable in three equal installments on the day before the first, second and third anniversaries of the agreement. Should Mr. Wilansky leave the Company before the shares are transferred or the options become exercisable, these benefits will be forfeited except in certain limited circumstances. On June 27, 2000, the Company announced the early retirement of Heywood Wilansky. Mr. Wilansky is entitled to receive his base salary (paid in monthly installments) for the remainder of the term. Mr. Wilansky also received a $170 cash bonus for fiscal 2000. Outstanding options to purchase 435,233 shares of Common Stock were exercisable for a period of 90 days. No options were exercised and all were cancelled. Restricted Shares in the amount of 333,333 shares vested immediately. 13. ACQUISITIONS In March 1999, the Company acquired the leasehold interests and certain other assets in three department stores located in Hamden, Connecticut; Red Bank, New Jersey and Brick Township, New Jersey, through a bankruptcy auction, for a total cost of $2.2 million. The leasehold interests were held by Steinbach Stores, Inc., a wholly-owned subsidiary of Crowley, Milner and Company. Certain fixed assets and customer lists were also included in the purchase. This business combination was accounted for under the purchase method, with the fair market value of the acquired leases amortized over the remaining lease term. 14. UNUSUAL EXPENSE During the second quarter of fiscal 2000, the Company announced a workforce reduction of 187 corporate and store personnel. The workforce reduction affected 137 employees and eliminated 50 unfilled positions. Additionally, the Company announced the early retirement of Heywood Wilansky (see Note 12), and the realignment and elimination of certain senior management positions. As of February 3, 2001, the amount paid during fiscal 2000 was $1.5 million and the remaining accrual was $5.0 million. During the fourth quarter of fiscal 1999, the Company recorded an expense to write down the value of certain assets relating to a cooperative buying group from which the Company purchases inventory. A $2.7 million charge was recorded to write down $2.3 million in deposits held by the cooperative buying group with the remainder relating to the write-down of the Company's minority equity interest. The cooperative buying group ceased its operations during fiscal 2000. 15. SALE AND LEASEBACK ARRANGEMENTS In December 2000, the Company purchased land from the Company's majority shareholder and related parties. The Company then sold the land along with building, leasehold improvements and certain equipment, comprising a department store and a distribution center both located in Pennsylvania, and subsequently leased the facilities back under a twenty-year lease. The lease has been accounted for as an operating lease for financial reporting purposes. Payments on the lease this year were $332, which includes the prepayment of February and March 2001. Net proceeds of $11,046 were received from the sale, of which $6,023 was used to payoff the related mortgages and the remainder to provide additional working capital. The gain associated with the sale, totaling $418, has been deferred in other long-term liabilities and is being amortized on a straight-line basis over the twenty-year lease term. In April 1997, the Company sold the land, building and leasehold improvements comprising a department store and a distribution center both located in Pennsylvania, and subsequently leased the facilities back under a twenty-year lease. The lease has been accounted for as an operating lease for financial reporting purposes. Annual payments under the operating lease agreement were $1,270. The $10,841 of net proceeds received from the sale were used to pay down indebtedness of $8,208 and to provide additional working capital. The gain associated with the sale, totaling $2,986, has been deferred in other long-term liabilities and is being amortized on a straight-line basis over the twenty-year lease term. THE BON-TON STORES, INC. AND SUBSIDIARIES 44 18 16. RESTRUCTURING In fiscal 1995, the Company recorded a restructuring charge of $5,690 for store closings and workforce reductions. The amounts charged against the restructuring reserve for fiscal 1999 and 1998 are as follows:
1999 1998 -------------------------------------------------------------------------------- Beginning of year balance $ 2,446 $2,895 Store closing costs, net of expense forgiveness 46 (449) Restructuring income (2,492) -- ------- ------ End of year balance $ -- $2,446 ======= ======
At the end of fiscal 1998, the balance remaining from this charge related to a leased property located in Johnstown, Pennsylvania. In 1999, the mall containing the leased location was sold to a new owner who wanted to redevelop the property and the Company negotiated the termination of this lease with the new owner. In the fourth quarter of fiscal 1999, the Company entered into an agreement to terminate the lease related to the closed store. To reflect the lease termination, during fiscal 1999, the Company recognized $2.5 million of restructuring income in the Company's Consolidated Statements of Income. Report of Independent Public Accountants We have audited the accompanying consolidated balance sheets of The Bon-Ton Stores, Inc. (a Pennsylvania corporation) and subsidiaries as of February 3, 2001 and January 29, 2000 and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 3, 2001. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Bon-Ton Stores, Inc. and subsidiaries as of February 3, 2001 and January 29, 2000, and the consolidated results of their operations and their cash flows for each of the three fiscal years in the period ended February 3, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Philadelphia, PA March 7, 2001 THE BON-TON STORES, INC. AND SUBSIDIARIES 45