EX-13.3 8 w60067ex13-3.txt PAGES 28 THROUGH 46 OF THE ANNUAL REPORT EXHIBIT 13.3 CONSOLIDATED BALANCE SHEETS
February 2, February 3, (In thousands except share and per share data) 2002 2001 ------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 9,752 $ 14,067 Restricted cash 2,355 -- Trade and other accounts receivable, net of allowances for doubtful accounts and sales returns of $3,408 and $4,045 in 2001 and 2000, respectively 28,806 24,052 Merchandise inventories 170,003 192,547 Prepaid expenses and other current assets 10,542 8,503 Deferred income taxes 7,371 2,318 --------------------------- Total current assets 228,829 241,487 --------------------------- PROPERTY, FIXTURES AND EQUIPMENT AT COST, LESS ACCUMULATED DEPRECIATION AND AMORTIZATION 143,884 147,415 DEFERRED INCOME TAXES 2,741 1,163 OTHER ASSETS 14,090 14,973 --------------------------- Total assets $ 389,544 $ 405,038 =========================== LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 57,007 $ 56,088 Accrued payroll and benefits 9,743 9,684 Accrued expenses 32,152 21,919 Current portion of long-term debt 646 584 Current portion of obligations under capital leases 232 479 Income taxes payable 11,891 10,422 --------------------------- Total current liabilities 111,671 99,176 --------------------------- LONG-TERM DEBT, LESS CURRENT MATURITIES 67,209 97,805 OBLIGATIONS UNDER CAPITAL LEASES, LESS CURRENT MATURITIES 720 953 OTHER LONG-TERM LIABILITIES 6,683 8,242 --------------------------- Total liabilities 186,283 206,176 --------------------------- COMMITMENTS AND CONTINGENCIES (NOTE 7) SHAREHOLDERS' EQUITY Preferred Stock - authorized 5,000,000 shares at $0.01 par value; no shares issued -- -- Common Stock - authorized 40,000,000 shares at $0.01 par value; issued and outstanding shares of 12,483,941 and 12,225,501 in 2001 and 2000, respectively 125 122 Class A Common Stock - authorized 20,000,000 shares at $0.01 par value; issued and outstanding shares of 2,989,853 in 2001 and 2000 30 30 Additional paid-in capital 107,467 106,882 Deferred compensation (408) (347) Accumulated other comprehensive income (2,354) -- Retained earnings 98,401 92,175 --------------------------- Total shareholders' equity 203,261 198,862 --------------------------- Total liabilities and shareholders' equity $ 389,544 $ 405,038 ===========================
The accompanying notes are an integral part of these consolidated statements. THE BON-TON STORES, INC. AND SUBSIDIARIES 28 CONSOLIDATED STATEMENTS OF INCOME
Fiscal Year Ended ------------------------------------------------- February 2, February 3, January 29, (In thousands except share and per share data) 2002 2001 2000 ------------------------------------------------------------------------------------------------------------------- NET SALES $ 721,777 $ 749,816 $ 710,963 OTHER INCOME, NET 2,548 2,715 2,651 ------------------------------------------------- 724,325 752,531 713,614 ------------------------------------------------- COSTS AND EXPENSES: Costs of merchandise sold 459,720 474,026 449,596 Selling, general and administrative 224,306 231,859 224,150 Depreciation and amortization 19,783 17,085 14,846 Unusual expense 916 6,485 2,683 Restructuring income -- -- (2,492) ------------------------------------------------- INCOME FROM OPERATIONS 19,600 23,076 24,831 INTEREST EXPENSE, NET 9,558 10,906 8,552 ------------------------------------------------- INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 10,042 12,170 16,279 INCOME TAX PROVISION 3,816 4,622 6,186 ------------------------------------------------- INCOME BEFORE EXTRAORDINARY ITEM 6,226 7,548 10,093 EXTRAORDINARY ITEM - loss on early extinguishment of debt, net of $232 income tax benefit -- -- (378) ------------------------------------------------- NET INCOME $ 6,226 $ 7,548 $ 9,715 ================================================= Per share amounts - BASIC: Net income before extraordinary item $ 0.41 $ 0.50 $ 0.68 Effect of extraordinary item -- -- (0.02) ------------------------------------------------- Net income $ 0.41 $ 0.50 $ 0.66 ================================================= BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,200,000 14,953,000 14,750,000 DILUTED: Net income before extraordinary item $ 0.41 $ 0.50 $ 0.68 Effect of extraordinary item -- -- (0.02) ------------------------------------------------- Net income $ 0.41 $ 0.50 $ 0.66 ================================================= DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,214,000 14,953,000 14,753,000
The accompanying notes are an integral part of these consolidated statements. THE BON-TON STORES, INC. AND SUBSIDIARIES 29 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Class A Additional Other Common Common Paid-in Deferred Comprehensive Retained (In thousands) Stock Stock Capital Compensation Income Earnings Total ----------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------- Comprehensive income: Net income -- -- -- -- -- 6,226 6,226 Cumulative effect of change in accounting for derivative instruments, net of $256 tax benefit -- -- -- -- (426) -- (426) Unrealized loss on derivative financial instruments, net of $1,158 tax benefit -- -- -- -- (1,928) -- (1,928) --------------------------------------------------------------------------------- Total comprehensive income -- -- -- -- (2,354) 6,226 3,872 Issuance of stock under Stock Award Plans 3 -- 686 (689) -- -- -- Deferred compensation amortization -- -- -- 589 -- -- 589 Tax impact on Restricted Shares -- -- (45) -- -- -- (45) Cancellation of Restricted Shares -- -- (56) 39 -- -- (17) --------------------------------------------------------------------------------- Balance at February 2, 2002 $ 125 $ 30 $107,467 $ (408) $ (2,354) $ 98,401 $203,261 =================================================================================
The accompanying notes are an integral part of these consolidated statements. THE BON-TON STORES, INC. AND SUBSIDIARIES 30 CONSOLIDATED STATEMENTS OF CASH FLOWS
Fiscal Year Ended ------------------------------------------ February 2, February 3, January 29, (In thousands) 2002 2001 2000 ----------------------------------------------------------------------------------------------------------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 6,226 $ 7,548 $ 9,715 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 19,783 17,085 14,846 Bad debt provision 1,305 1,863 520 Stock compensation expense 589 833 750 Loss (gain) on sale of property, fixtures and equipment 3 (12) (158) Cancellation of Restricted Shares (17) (230) (15) Decrease (increase) in other long-term assets 162 634 (408) Increase in deferred income tax assets (5,217) (2,917) (1,414) (Decrease) increase in other long-term liabilities (4,383) 4,650 (185) Proceeds from sale of accounts receivable, net -- 12,000 11,000 Extraordinary loss on debt extinguishment -- -- 610 Asset write-down charge -- -- 2,683 Restructuring income -- -- (2,492) Changes in operating assets and liabilities: Increase in accounts receivable (6,059) (10,133) (4,625) Decrease (increase) in merchandise inventories 22,544 10,942 (10,616) (Increase) decrease in prepaid expenses and other current assets (2,039) 3,868 (3,195) Decrease in accounts payable (1,973) (1,582) (4,919) Increase (decrease) in accrued expenses 9,428 (5,754) 3,865 Increase in income taxes payable 1,424 590 91 ----------------------------------------- Total adjustments 35,550 31,837 6,338 ----------------------------------------- Net cash provided by operating activities 41,776 39,385 16,053 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net (15,550) (29,577) (46,451) Proceeds from sale of property, fixtures and equipment 16 12 426 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 (15,534) (18,519) (48,217) CASH FLOWS FROM FINANCING ACTIVITIES: Payments on long-term debt and capital lease obligations (207,064) (302,720) (278,778) Proceeds from issuance of long-term debt 176,050 293,700 310,300 Increase (decrease) in bank overdraft balances 2,812 (8,587) 826 Increase in restricted cash (2,355) -- -- Exercised stock options -- 1 16 ----------------------------------------- Net cash (used in) provided by financing activities (30,557) (17,606) 32,364 Net (decrease) increase in cash and cash equivalents (4,315) 3,260 200 CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 14,067 10,807 10,607 ----------------------------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 9,752 $ 14,067 $ 10,807 =========================================
The accompanying notes are an integral part of these consolidated statements. THE BON-TON STORES, INC. AND SUBSIDIARIES 31 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 all of its wholly-owned subsidiaries (the "Company"). All intercompany transactions have been eliminated in consolidation. ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires that management make estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain prior year balances have been reclassified to conform with the current year presentation. FISCAL YEAR The Company's fiscal year ended on the Saturday nearest to January 31, and consisted of fifty-two weeks for fiscal year 2001, fifty-three weeks for fiscal year 2000 and fifty-two weeks for fiscal year 1999. Fiscal years 2001, 2000 and 1999 ended on February 2, 2002, February 3, 2001 and January 29, 2000, 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. The Company reclassified outstanding accounts payable and payroll checks from cash to accounts payable or accrued payroll and benefits totaling $11,179 and $8,367 as of February 2, 2002 and February 3, 2001, respectively. RESTRICTED CASH As of February 2, 2002, restricted cash was required per the terms of the Company's accounts receivable facility agreement. ALLOWANCE FOR DOUBTFUL ACCOUNTS The Company owns and administers a proprietary credit card program. The Company performs ongoing credit evaluations of its customers who hold the Company's proprietary credit card, and adjusts credit limits based upon payment history and the customer current credit-worthiness. The Company continually monitors collections and payments from customers and maintains an allowance for estimated credit losses based upon its historical experience and any specific customer collection issues identified (e.g. bankruptcy). While such credit losses have historically been within expectations and provisions established, the Company cannot guarantee that it will continue to experience the same credit loss rates as in the past. If circumstances change (e.g. higher than expected defaults or bankruptcies), the Company's estimates of the recoverability of amounts due the Company could be reduced by a material amount. The allowance for doubtful accounts amounted to $2,808 and $3,445 as of February 2, 2002 and February 3, 2001, respectively. 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 $170,721 and $193,876 as of February 2, 2002 and February 3, 2001, respectively. PROPERTY, FIXTURES AND EQUIPMENT: DEPRECIATION AND AMORTIZATION Depreciation and amortization of property, fixtures and equipment is computed using the straight-line method based upon remaining lease terms or the following average estimated service lives: -------------------------------------------------------------------------------- Buildings 20 to 40 years Leasehold improvements 2 to 15 years Fixtures and equipment 3 to 10 years
No depreciation is recorded until property, fixtures and equipment are placed into service. Property, fixtures and equipment not placed into service are classified as construction in progress. The Company capitalizes interest and lease costs incurred during the construction of new facilities or major improvements. The amount of interest and lease costs capitalized is limited to that incurred during the construction period. Interest of $25, $123 and $333 was capitalized in fiscal years 2001, 2000 and 1999, respectively. Repair and maintenance costs are charged to operations as incurred. Property retired or sold is removed from asset and accumulated depreciation accounts and the resulting gain or loss is reflected in income. Costs of major remodeling and improvements on leased stores are capitalized as leasehold improvements. Leasehold improvements THE BON-TON STORES, INC. AND SUBSIDIARIES 32 are generally amortized over the shorter of the lease term or the useful life of the asset. Capital leases are recorded at the lower of fair market value or the present value of future minimum lease payments. Capital leases are amortized over the primary term of the lease. The Company assesses the impairment of property, fixtures and equipment whenever events or changes in circumstances indicate that the carrying value may not be recoverable. In fiscal 2001, the Company evaluated a store lease renewal option exercisable in January 2003. The Company decided against exercising this lease option under existing terms and, therefore, accelerated depreciation of $1,389 on associated assets with lives exceeding the expected lease term. OTHER ASSETS Other assets consist primarily of goodwill and lease-related interests classified as intangible assets:
February 2, February 3, 2002 2001 ------------------------------------------------------------------------------- Goodwill $ 4,208 $ 4,208 Less: Accumulated amortization 1,243 1,009 -------------------------- Net $ 2,965 $ 3,199 ========================== Intangible assets - leases $ 10,828 $ 10,828 Less: Accumulated amortization 3,794 3,305 -------------------------- Net $ 7,034 $ 7,523 ==========================
These lease interests relate to below-market-rate leases purchased in store acquisitions completed in fiscal years 1992 through 1999, which were adjusted to reflect fair market value. These leases had lives of four to forty-eight years. ACCRUED EXPENSES Accrued expenses consist of liabilities associated with store and corporate facility operations, such as accrued lease expense, advertising, employee severance, real estate taxes, legal expense and expense recorded pursuant to Statement of Financial Accounting Standards No. 133 (see Note 3). 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. Net deferred tax assets were $10,112 and $3,481 as of February 2, 2002 and February 3, 2001, respectively. As of February 2, 2002 and February 3, 2001, no valuation allowance has been established against this net deferred tax asset, as the Company believes these tax benefits will be realizable through reversal of existing deferred tax liabilities and future taxable income. 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 store closing cost assumptions for items such 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 2001, 2000 and 1999 were $26,717, $28,784 and $28,795, respectively. Prepaid expenses and other current assets include prepaid advertising costs of $352 and $847 at February 2, 2002 and February 3, 2001, 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 $2,738, $3,001 and $2,872 in fiscal 2001, 2000 and 1999, respectively. REVOLVING CHARGE ACCOUNTS Finance charge income on customer revolving charge accounts is reflected as a reduction of selling, general and administrative expenses. Finance charge income earned by the Company, before considering costs of administering and servicing revolving charge accounts, for fiscal years 2001, 2000 and 1999 was $33,706, $30,619 and $28,406, respectively, and is a component of securitization income (see Note 5). THE BON-TON STORES, INC. AND SUBSIDIARIES 33 RECEIVABLE SALES When the Company sells receivables in securitizations of credit card loans, it retains interest-only strips, subordinated interests and servicing rights, all of which are retained interests in the securitized receivables. Gain or loss on sale of the receivables depends in part on the previous carrying amount of financial assets involved in the transfer, allocated between the assets sold and retained interests, based on their relative fair value at date of transfer. To obtain fair values, quoted market prices are used if available. However, quotes are generally not available for retained interests and the Company estimates fair value based on the present value of future expected cash flows using management's best estimates of key assumptions -- credit losses, prepayment impact and an appropriate discount rate commensurate with risks involved. As all estimates used are influenced by factors outside the Company's control, uncertainty is inherent in these estimates, making it reasonably possible that they could change in the near term. 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 accounting 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 11 as if the fair value based method had been applied in measuring compensation cost as required by SFAS No. 123. EARNINGS PER SHARE The presentation of earnings per share ("EPS") requires a reconciliation of the numerators and denominators used in basic and diluted EPS calculations. The numerator, net income, is identical in both calculations. The following table presents a reconciliation of the weighted average shares outstanding used in EPS calculations for each of fiscal 2001, 2000 and 1999. EPS shown in this reconciliation excludes the impact of extraordinary items.
2001 2000 1999 -------------------- -------------------- -------------------- Shares EPS Shares EPS Shares EPS ----------------------------------------------------------------------------------------------------------- Basic Calculation 15,200,000 $ 0.41 14,953,000 $ 0.50 14,750,000 $ 0.68 Dilutive Securities - Restricted Shares 14,000 -- -- Options -- -- 3,000 -------------------------------------------------------------------- Diluted Calculation 15,214,000 $ 0.41 14,953,000 $ 0.50 14,753,000 $ 0.68 ==================================================================== Antidilutive shares and options - Restricted Shares 175,000 280,000 402,000 Options 908,000 1,206,000 1,316,000
Antidilutive shares and options, consisting of restricted shares and options to purchase shares, were excluded from the computation of dilutive securities due to the Company's net loss position in the first three quarters of fiscal 2001 and 1999, 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 average market price. The following table reflects the approximate dilutive securities had the Company reported a net profit in each consecutive quarter of the corresponding fiscal years:
2001 2000 1999 -------------------------------------------------------------------------------- Approximate Dilutive Securities - Restricted Shares 23,000 -- 43,000 Options -- -- 27,000
In addition, options to purchase shares with exercise prices greater than average market price were excluded from the above table for fiscal 2001, 2000, and 1999 in the approximate amounts of 908,000, 1,206,000 and 1,139,000, respectively, as they would have been antidilutive. FUTURE ACCOUNTING CHANGES The Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" became effective in 2002. As a result, the Company will cease to amortize approximately $2,965 of net goodwill. The Company recorded approximately $234 of goodwill amortization during each of fiscal 2001, 2000 and 1999, and would have recorded approximately $234 of goodwill amortization during fiscal 2002. In lieu of amortization, the Company is required to perform an initial impairment review of its goodwill in 2002 and an annual impairment review thereafter. The Company completed the initial review during the first quarter of 2002 and will not record an impairment charge. In August 2001, the FASB issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived Assets" ("SFAS No. 144"), which supercedes SFAS No. 121. SFAS No. 144, effective for fiscal 2002, retains provisions of SFAS No. 121 regarding recognition and measurement of long-lived asset impairment. SFAS No. 144 supercedes the accounting and reporting provisions of Accounting Principles Board Opinion No. 30 "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions" for segments of a business to be disposed of. The Company anticipates that adoption of SFAS No. 144 provisions will not have a material impact on its operating results. THE BON-TON STORES, INC. AND SUBSIDIARIES 34 2. DEBT Debt consisted of the following:
February 2, February 3, 2002 2001 ------------------------------------------------------------------------------------------------------------------ Revolving credit agreement - principal payable April 15, 2004; interest payable periodically at varying rates (5.08% for fiscal year 2001) $ 42,500 $ 72,450 Mortgage notes payable - principal payable in varying monthly installments through June 2016; interest 9.62%; secured by land and buildings 19,855 20,439 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 5.00% beginning February 1, 2006; secured by a building and fixtures 1,000 1,000 ------------------------ Total debt 67,855 98,389 Less: current maturities 646 584 ------------------------ Long-term debt $ 67,209 $ 97,805 ========================
In December 2001, the Company amended its revolving credit facility ("Credit Facility") agreement to reduce the line of credit from $200,000 to $175,000. In April 1999, the Company amended its Credit Facility agreement 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 2, 2002, the Company had borrowings of $42,500, with $52,894 of additional borrowing availability (net of $6,095 letter-of-credit commitments) remaining under the Credit Facility. The interest charged under this agreement, based on LIBOR or an index rate plus an applicable margin, is determined by a formula based on the Company's interest coverage ratio (defined as the ratio of earnings before interest, taxes, depreciation and amortization to interest expense). The Company entered into a loan agreement with the City of Scranton, Pennsylvania on July 5, 2000. The loan provided $1,000 to be used in certain store renovations. The agreement provides for interest payments beginning February 1, 2006 at a rate of 5.0% per annum. The principal balance is to be paid in full by January 1, 2011. Several of the Company's loan agreements contain restrictive covenants, including a minimum trade support ratio; a minimum fixed charge ratio; and limitations on dividends, additional incurrence of debt and capital expenditures. The Company was in compliance with each of these covenants during fiscal 2001. The fair value of the Company's debt, excluding interest rate swaps, was estimated at $70,087 and $98,947 on February 2, 2002 and February 3, 2001, respectively, and is based on an estimate of rates available to the Company for debt with similar features. Debt maturities by fiscal year as of February 2, 2002, are as follows:
-------------------------------------------------------------------------------- 2002 $ 646 2003 715 2004 43,291 2005 876 2006 970 2007 and thereafter 21,357 -------- $ 67,855 ========
THE BON-TON STORES, INC. AND SUBSIDIARIES 35 3. INTEREST RATE DERIVATIVES The Company maintains an interest rate swap portfolio that allows the Company to convert a portion of the variable rates under the Company's credit facilities to fixed rates. The following table indicates the notional amounts as of February 2, 2002 and February 3, 2001 and the range of interest rates paid and received by the Company during the respective fiscal years:
February 2, February 3, 2002 2001 -------------------------------------------------------------------------------- Fixed swaps (notional amount) $110,000 $ 80,000 Range of receive rate 2.21%-6.74% 6.03%-6.86% Range of pay rate 5.43%-5.88% 5.58%-5.88%
The interest rate swap agreements will expire on various dates from June 2, 2003 to February 6, 2006. The net income or expense from the exchange of interest rate payments is included in interest expense. The estimated fair value of the interest rate swap agreements, based on dealer quotes, at February 2, 2002 and February 3, 2001, was an unrealized loss of $4,311 and $682, respectively, and represents the amount the Company would pay if the agreements were terminated as of such dates. The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133"), and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities -- an amendment of FASB Statement No. 133," on February 5, 2001. SFAS No. 133 requires the transition adjustment, net of tax effect, resulting from adopting these Statements to be reported in net income or other comprehensive income, as appropriate, as the cumulative effect of a change in accounting principle. In the first quarter of 2001, a $426 net-of-tax loss transition adjustment was recorded in accumulated other comprehensive income as a result of recognizing at fair value all derivatives designated as cash flow hedging instruments. As of February 2, 2002, the Company recorded accrued expenses of $1,486 and other long-term liabilities of $2,825 to recognize at fair value all derivatives designated as cash flow hedging instruments. Of this amount, $543 was recognized as a current period charge (corresponding to the portion of the hedges deemed ineffective), $2,354 was reported within other comprehensive income and $1,414 was reported as deferred tax assets. All charges recorded in fiscal 2001 pursuant to SFAS No. 133 are considered non-cash items for Consolidated Statement of Cash Flows purposes. ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company recognizes all derivatives on the balance sheet at fair value. On the date the derivative instrument is entered into, the Company generally designates the derivative as a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow hedge"). Changes in the fair value of a derivative that is designated as, and meets all required criteria for, a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness is recorded in current earnings. Also, changes in the entire fair value of a derivative that is not designated as a hedge are recorded in earnings. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes relating all derivatives that are designated as cash flow hedges to specific balance sheet assets and liabilities. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the respective derivative. DEBT PORTFOLIO MANAGEMENT It is the policy of the Company to identify on a continuing basis the need for debt capital and evaluate financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, the debt portfolio and hedging program of the Company is managed to (1) reduce funding risk with respect to borrowings made or to be made by the Company to preserve the Company's access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) reduce the aggregate interest rate risk of the debt portfolio in accordance with certain debt management parameters. The Company enters into interest rate swap agreements to change the fixed/variable interest rate mix of the debt portfolio in order to maintain the percentage of fixed-rate and variable-rate debt within parameters set by management. In accordance with these parameters, swap agreements are used to reduce interest rate risks and costs inherent in the Company's debt portfolio. Accordingly, the Company currently has interest rate swap contracts outstanding to effectively convert variable-rate debt to fixed-rate debt. These contracts entail the exchange of fixed-rate and floating-rate interest payments periodically over the agreement life. CASH FLOW HEDGES Interest expense for fiscal 2001 includes $543 of net losses related to hedge ineffectiveness. Changes in the fair value of derivatives qualifying as cash flow hedges are reported in accumulated other comprehensive income. Gains and losses are reclassified into earnings as the underlying hedged item affects earnings, such as when quarterly settlements are made on the hedged forecasted transaction. As of February 2, 2002, it is expected that approximately $1,000 of net-of-tax losses in accumulated other comprehensive income will be reclassified into earnings within the next twelve months. There was no gain or loss reclassified from accumulated other comprehensive income into earnings during fiscal 2001 as a result of the discontinuance of a cash flow hedge due to the probability of the original forecasted transaction not occurring. As of February 2, 2002, the maximum time over which the Company is hedging its exposure to the variability in future cash flows for forecasted transactions is forty-eight months. THE BON-TON STORES, INC. AND SUBSIDIARIES 36 4. INTEREST COSTS Interest and debt costs were:
Fiscal Year Ended ---------------------------------------- February 2, February 3, January 29, 2002 2001 2000 ------------------------------------------------------------------------------- Interest costs incurred $ 9,732 $ 11,284 $ 8,988 Interest income (149) (255) (103) Capitalized interest, net (25) (123) (333) --------------------------------------- Interest expense, net $ 9,558 $ 10,906 $ 8,552 ======================================= Interest paid $ 8,244 $ 11,698 $ 8,303 =======================================
5. SALE OF RECEIVABLES The Company securitizes its proprietary 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 modified pricing and a trade support covenant. The amended agreement also permits 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 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 2.0% of the outstanding balance and rights to future cash flows arising after investors in the securitization have received the return for which they contracted. The investors have no recourse to the Company's other assets for failure of debtors to pay when due. The Company's retained interests are subordinate to the investors' interests. The value of the retained interest is subject to credit, prepayment and interest rate risks. The Company does not recognize a servicing asset or liability, as the amount received for servicing the receivables is a reasonable approximation of market rates and servicing costs. As of February 2, 2002 and February 3, 2001, credit card receivables were sold under the securitization agreement in the amount of $150,000, and the Company had subordinated interests of $29,099 and $22,585, respectively, related to the amounts sold that were included in the accompanying Consolidated Balance Sheets as trade and other accounts receivable. The Company accounts for its subordinated interest in the receivables in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The Company has not recognized any unrealized gains or losses on its subordinated interest, as the current carrying value of customer revolving charge accounts receivable is a reasonable estimate of fair value and average interest rates approximate current market origination rates. New receivables are sold on a continual basis to replenish each investor's respective level of participation in receivables that have been repaid by credit card holders. During fiscal 2001, 2000 and 1999, the Company recognized securitization income of $9,054, $4,230 and $4,591, respectively, on securitization of credit card loans. This income is reported as a component of selling, general and administrative expenses. Key economic assumptions used in measuring retained interests at the date of securitization for securitizations completed during the year were as follows:
Fiscal 2001 Fiscal 2000 ------------------------------------------------------------------------------- Yield on credit cards 16.8%-17.3% 17.0%-18.2% Payment rate 18.8%-19.3% 19.1%-19.7% Interest rate on variable funding 4.4%-6.4% 6.4%-7.6% Net charge-off rate 7.4% 7.0% Residual cash flows discount rate 12.0% 12.0%
THE BON-TON STORES, INC. AND SUBSIDIARIES 37 The interest-only strip was recorded at its fair value of $1,109 and $973 at February 2, 2002 and February 3, 2001, respectively, and is included in trade and other accounts receivable on the Consolidated Balance Sheets. The following table shows key economic assumptions used in measuring the interest-only strip for fiscal 2001. The table also displays the sensitivity of the current fair value of residual cash flows in fiscal 2001 to immediate 10% and 20% adverse changes in assumptions:
Effect of Adverse Changes($) ---------------------------- Assumptions 10% 20% ---------------------------------------------------------------------------- Yield (annual rate) 16.8% 652 1,305 Payment rate 18.8% 102 204 Interest rate on variable 4.4% 172 344 and adjusted contracts Net charge-off rate 7.4% 291 582 Residual cash flows discount 12.0% 2 4 rate (annual rate)
These sensitivities are hypothetical and should be used with caution. Changes in fair value based on a 10% variation in an assumption generally cannot be extrapolated because the relationship of the change in an assumption to the change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of retained interest is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. During fiscal 2001, the Company received net proceeds of $3,428 from servicing fees, which is reported as a component of selling, general and administrative expenses. As of February 2, 2002, $5,434 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 2, 2002 were $7,813. 6. PROPERTY, FIXTURES AND EQUIPMENT As of February 2, 2002 and February 3, 2001, property, fixtures and equipment and related accumulated depreciation and amortization consisted of:
February 2, February 3, 2002 2001 ------------------------------------------------------------------------------- Land and improvements $ 2,801 $ 2,801 Buildings and leasehold improvements 144,715 135,164 Furniture and equipment 125,020 119,609 Buildings under capital leases 5,052 5,052 ------------------------ 277,588 262,626 Less: Accumulated depreciation and amortization 133,704 115,211 ------------------------ $ 143,884 $ 147,415 ========================
Property, fixtures and equipment with a net depreciated cost of approximately $29,143 and $30,420 are pledged as collateral for secured loans at February 2, 2002 and February 3, 2001, 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 2, 2002, 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 ------------------------------------------------------------------------------- 2002 $ 300 $ 20,904 2003 300 20,422 2004 300 19,538 2005 200 18,070 2006 -- 14,517 2007 and thereafter -- 81,155 ----------------------------- Total net minimum rentals 1,100 $ 174,606 ========= Less: Amount representing interest 148 --------- Present value of net minimum lease payments, $ 952 of which $232 is due within one year =========
THE BON-TON STORES, INC. AND SUBSIDIARIES 38 Minimum rental commitments under operating leases are reflected without reduction for rental income due in future years under noncancellable subleases since amounts are immaterial. Some of the store leases contain renewal options ranging from five to thirty-five years. Included in the minimum lease payments under operating leases are leased vehicles, copiers, fax machines and computer equipment, and a related-party commitment with the Company's majority shareholder and related entities of $224 for fiscal 2002 through 2005 and $112 for fiscal 2006. Rental expense consisted of the following:
Fiscal Year Ended ---------------------------------------- February 2, February 3, January 29, 2002 2001 2000 -------------------------------------------------------------------------------------- Operating leases: Buildings: Minimum rentals $ 19,960 $ 18,667 $ 16,367 Contingent rentals 2,067 2,358 2,614 Fixtures and equipment 1,403 2,094 2,015 Contingent rentals on capital leases 320 397 414 ---------------------------------------- Totals $ 23,750 $ 23,516 $ 21,410 =========================================
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. 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. 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. 9. INCOME TAXES The Company accounts for income taxes according to 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 2, February 3, January 29, 2002 2001 2000 ------------------------------------------------------------------------------- Current: Federal $ 8,975 $ 7,296 $ 7,287 State 644 243 313 -------------------------------------------- Total current 9,619 7,539 7,600 Deferred: Federal (5,416) (2,759) (1,338) State (387) (158) (76) -------------------------------------------- Total deferred (5,803) (2,917) (1,414) -------------------------------------------- Income tax expense $ 3,816 $ 4,622 $ 6,186 ============================================
THE BON-TON STORES, INC. AND SUBSIDIARIES 39 Components of gross deferred tax assets and liabilities were comprised of the following:
February 2, February 3, 2002 2001 ------------------------------------------------------------------------------- Deferred tax assets: Accrued expenses $ 4,919 $ 3,251 Restricted shares and options 238 159 Bad debt reserve 1,053 1,275 Sale and leaseback 992 1,045 CEO retirement 403 862 Asset write-down 724 833 Inventory 1,673 -- Other 1,617 215 ---------------------------- Total gross deferred tax assets $ 11,619 $ 7,640 ============================ Deferred tax liabilities: Fixed assets $ 823 $ 2,369 Inventory -- 711 Other 684 1,079 ---------------------------- Total gross deferred tax liabilities $ 1,507 $ 4,159 ============================
No deferred tax assets have associated valuation allowances since the Company believes these tax benefits are realizable through reversal of existing deferred tax liabilities and future taxable income. A reconciliation of the statutory federal income tax rate to the effective tax rate is presented below:
Fiscal Year Ended ---------------------------------------- February 2, February 3, January 29, 2002 2001 2000 -------------------------------------------------------------------------------- Tax at statutory rate 35.0% 35.0% 35.0% State income taxes, net of federal benefit 2.6 2.0 2.0 Book expense in excess of IRC 162 limitation -- -- 0.9 Other, net 0.4 1.0 0.1 ---------------------------------------- Total 38.0% 38.0% 38.0% ========================================
In fiscal 2001, 2000 and 1999, the Company made income tax payments of $6,963, $7,232 and $7,335, 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 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 2001, 2000 and 1999 expense under the Plan was $2,200, $2,200 and $1,981, respectively. THE BON-TON STORES, INC. AND SUBSIDIARIES 40 11. STOCK AWARD PLANS The Company's Amended and Restated 1991 Stock Option and Restricted Stock Plan ("1991 Stock Plan"), as amended through June 17, 1997, provided for the granting of the following options and awards to certain associates, officers, directors, consultants and advisors: Common Stock options, performance-based Common Stock options as part of a long-term incentive plan for selected officers, and Common Stock awards subject to substantial risk of forfeiture ("Restricted Shares"). The maximum number of shares which could have been granted under the 1991 Stock Plan, less forfeitures, was 1,900,000 shares. In addition to the 1991 Stock Plan, during 1991 the Board of Directors approved a Phantom Equity Replacement Plan ("Replacement Plan") to replace the Company's previous deferred compensation arrangement that was structured as a phantom stock program. Options granted under the 1991 Stock Plan, excluding Restricted Share awards, were generally issued at the market price of the Company's stock on the date of grant, vested over three to five years and had a ten-year term. No additional options or awards may be granted from the 1991 Stock Plan after September 30, 2001. 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 ("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 was 300,000, with no additional shares to be issued after July 1998. In 1998, the Company implemented The Bon-Ton Stores, Inc. Performance Based Stock Incentive Plan ("Stock Incentive Plan") for Heywood Wilansky, former president and chief executive officer. The Stock Incentive Plan provided performance-based compensation to Mr. Wilansky in the form of stock bonuses granted in connection with services provided. Pursuant to the early retirement of Mr. Wilansky (see Note 14), outstanding options in the plan have been cancelled and the plan has been terminated. The Company implemented the 2000 Stock Incentive Plan ("2000 Stock Plan") during fiscal 2000. The 2000 Stock Plan provides for the granting of Common Stock options and Restricted Shares to certain associates, officers, directors, consultants and advisors. 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 2, 2002, options for 100,000 shares were granted under the 2000 Stock Plan at an exercise price of $2.39 with a ten-year contractual life. No Restricted Shares were granted under the 2000 Stock Plan as of February 2, 2002. Compensation costs 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 $589, $1,270 and $750 in fiscal 2001, 2000 and 1999, 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 and earnings per share would have been reduced to the pro forma amounts indicated below:
Fiscal Year Ended ---------------------------------------- February 2, February 3, January 29, 2002 2001 2000 ------------------------------------------------------------------------------- Net income As reported $ 6,226 $ 7,548 $ 9,715 Pro forma 5,636 6,812 8,121 Earnings per share Basic As reported $ 0.41 $ 0.50 $ 0.66 Pro forma 0.37 0.46 0.55 Diluted As reported $ 0.41 $ 0.50 $ 0.66 Pro forma 0.37 0.46 0.55
The Company used the Black-Scholes option pricing model to calculate the fair value of the stock options at the grant date. The following assumptions were used:
Fiscal Year Ended ---------------------------------------- February 2, February 3, January 29, 2002 2001 2000 ------------------------------------------------------------------------------- Expected option term in years 7.8 6.0 6.7 Stock price volatility factor 70.4% 88.0% 65.4% Dividend yield 0.0% 0.0% 0.0% Risk-free interest rate 4.7% 6.6% 6.1%
THE BON-TON STORES, INC. AND SUBSIDIARIES 41 A summary of the options and restricted shares under the 1991 Stock Plan follows:
Restricted Common Stock Options Performance-Based Options Shares -------------------------------------------------------------------- Weighted Weighted Number of Average Number of Average Number Options Price Options Price of Shares ---------------------------------------------------------------------------------------------------------------------- FISCAL 1999 January 30, 1999 692,363 $ 9.58 343,900 $ 6.67 201,666 Granted 243,000 $ 5.81 -- -- 5,000 Transferred 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 -- -- -- Transferred 83,550 $ 7.25 (83,550) $ 7.25 -- Exercised -- -- -- -- (83,333) Forfeited (319,533) $ 8.64 (83,550) $ 7.25 (30,000) -------------------------------------------------------------------- February 3, 2001 756,547 $ 7.93 -- -- 10,000 -------------------------------------------------------------------- Options exercisable at February 3, 2001 562,588 $ 8.39 -- -- -- Weighted average fair value of options granted during fiscal 2000 $ 2.55 -- ---------------------------------------------------------------------------------------------------------------------- FISCAL 2001 Granted 212,084 $ 2.94 -- -- 275,652 Transferred -- -- -- -- -- Exercised -- -- -- -- (128,617) Forfeited (131,033) $ 10.49 -- -- (7,000) -------------------------------------------------------------------- February 2, 2002 837,598 $ 6.27 -- -- 150,035 -------------------------------------------------------------------- Options exercisable at February 2, 2002 578,848 $ 7.42 -- -- -- Weighted average fair value of options granted during fiscal 2001 $ 2.15 --
The exercised shares in the above summary for Restricted Shares represent shares for which the restrictions have lapsed. The range of exercise prices for Common Stock options outstanding as of February 2, 2002 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 ------------------------------------------------------------------------------------------------------------------------------------ $ 2.94 203,584 $ 2.94 9.1 years 16,500 $ 2.94 $ 3.19 - $ 7.13 418,348 $ 5.93 6.2 years 346,682 $ 5.99 $ 7.25 - $11.25 145,266 $ 8.02 4.2 years 145,266 $ 8.02 $13.25 - $17.00 70,400 $ 14.28 6.1 years 70,400 $ 14.28
THE BON-TON STORES, INC. AND SUBSIDIARIES 42 A summary of the status of the Replacement Plan follows:
Discount Non-Discount Options Options ------------------------------------------------------------------------------- Exercise Price $ 3.25 $ 13.00 --------------------------- 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 Exercised -- -- Forfeited (6,591) (28,902) --------------------------- February 2, 2002 42,598 -- ===========================
A summary of the Management Incentive Plan follows:
Shares -------------------------------------------------------------------------------- January 30, 1999 117,138 Granted -- Restriction lapsed (15,317) Forfeited (7,260) ------- January 29, 2000 94,561 Granted -- Restriction lapsed (13,907) Forfeited (21,359) ------- February 3, 2001 59,295 Granted -- Restriction lapsed (12,471) Forfeited (10,212) ------- February 2, 2002 36,612 =======
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 14). No shares remain in the plan. Cancellation of options and shares in the above plans resulted primarily from employment termination and voluntary forfeitures. THE BON-TON STORES, INC. AND SUBSIDIARIES 43 12. QUARTERLY RESULTS (UNAUDITED)
Fiscal Quarter Ended ----------------------------------------------------------------- May 5, August 4, November 3, February 2, 2001 2001 2001 2002 ------------------------------------------------------------------------------------------------------------------- FISCAL 2001: Net sales $ 149,719 $ 150,867 $ 175,621 $ 245,570 Other income, net 524 518 466 1,040 ----------------------------------------------------------------- 150,243 151,385 176,087 246,610 ----------------------------------------------------------------- Costs of merchandise sold 98,740 95,637 111,898 153,445 Selling, general and administrative expenses 53,106 54,112 56,656 60,432 Depreciation and amortization(1) 4,450 4,484 4,908 5,941 Unusual expense -- -- 916 -- ----------------------------------------------------------------- Income (loss) from operations (6,053) (2,848) 1,709 26,792 Interest expense, net 1,917 2,175 2,484 2,982 ----------------------------------------------------------------- Income (loss) before income taxes (7,970) (5,023) (775) 23,810 Income tax provision (benefit) (2,989) (1,884) (291) 8,980 ----------------------------------------------------------------- Net income (loss) $ (4,981) $ (3,139) $ (484) $ 14,830 ================================================================= PER SHARE AMOUNTS - BASIC: Net income (loss) $ (0.33) $ (0.21) $ (0.03) $ 0.97 ================================================================= BASIC WEIGHTED AVERAGE SHARES OUTSTANDING 15,150,000 15,161,000 15,214,000 15,276,000 DILUTED: Net income (loss) $ (0.33) $ (0.21) $ (0.03) $ 0.97 ================================================================= DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 15,150,000 15,161,000 15,214,000 15,332,000
(1) In the fiscal quarter ended February 2, 2002, the Company evaluated a store lease renewal option exercisable in January 2003. The Company decided against exercising this lease option under existing terms and, therefore, accelerated depreciation of $1,389 on associated assets with lives exceeding the expected lease term.
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 WEIGHTED AVERAGE SHARES OUTSTANDING 14,802,000 14,813,000 15,051,000 15,146,000 DILUTED: Net income (loss) $ (0.34) $ (0.37) $ 0.07 $ 1.13 ================================================================ DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING 14,802,000 14,813,000 15,051,000 15,146,000
THE BON-TON STORES, INC. AND SUBSIDIARIES 44 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 $2,200. 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 acquired leases amortized over the remaining lease term. 14. UNUSUAL EXPENSE During the third quarter of fiscal 2001, the Company reported $916 in unusual expense relating to a workforce reduction and realignment and elimination of certain senior management positions. As of February 2, 2002, the amount paid was $480 and the remaining accrual was $436. During the second quarter of fiscal 2000, the Company reported $6,485 in unusual expense relating to a workforce reduction of 187 corporate and store personnel. The workforce reduction affected 137 employees and eliminated 50 positions. Additionally, the Company announced the early retirement of Heywood Wilansky, former president and chief executive officer, and the realignment and elimination of certain senior management positions. As of February 2, 2002, the amount paid was $3,666 and the remaining accrual was $2,819. Mr. Wilansky is entitled to receive his base salary (paid in monthly installments) through January 31, 2003, the remainder of his employment term. Mr. Wilansky also received a $170 cash bonus for fiscal 2000. Outstanding options to purchase 435,233 shares of Common Stock were exercisable for a period of ninety days. No options were exercised and all were cancelled. Restricted Shares in the amount of 333,333 shares vested immediately. 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 purchased inventory. A $2,683 charge was recorded to write-down $2,300 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. Net proceeds of $11,046 were received from the sale, of which $6,023 was used to pay-off related mortgages and the remainder to provide additional working capital. The gain associated with the sale, totaling $418, has been deferred in other long-term liabilities and is being amortized on a straight-line basis over the twenty-year lease term. Payments on the lease during fiscal 2001 were $1,259, which includes the prepayment of February and March 2002. 16. RESTRUCTURING In fiscal 1995, the Company recorded a restructuring charge of $5,690 for store closings and workforce reductions. Amounts charged against the restructuring reserve for fiscal 1999 are as follows:
1999 ------------------------------------------------------------------------------- Beginning of year balance $ 2,446 Store closing costs, net of expense forgiveness 46 Restructuring income (2,492) ------- End of year balance $ -- =======
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 $2,492 of restructuring income in the Company's Consolidated Statements of Income. 17. SUBSEQUENT EVENT On February 7, 2002, the Company announced it would consider the repurchase of up to $2,500 of its stock from time to time. THE BON-TON STORES, INC. AND SUBSIDIARIES 45 REPORT OF INDEPENDENT ACCOUNTANTS TO THE BON-TON STORES, INC.: We have audited the accompanying consolidated balance sheets of The Bon-Ton Stores, Inc. (a Pennsylvania corporation) and subsidiaries as of February 2, 2002 and February 3, 2001, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three fiscal years in the period ended February 2, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Bon-Ton Stores, Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the results of their operations and their cash flows for each of the three fiscal years in the period ended February 2, 2002 in conformity with accounting principles generally accepted in the United States. /s/ ARTHUR ANDERSEN LLP Philadelphia, PA March 6, 2002 THE BON-TON STORES, INC. AND SUBSIDIARIES 46