<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
January 30, 1999 0-19517
THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA, 17402
(717) 757-7660
INCORPORATED IN PENNSYLVANIA IRS NO. 23-2835229
____________________
Securities registered pursuant to Section 12(b)
of the Act: None
Securities registered pursuant to Section 12(g)
of the Act: Common Stock, $.01 par
value
The Registrant has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and
has been subject to such filing requirements for the past 90 days.
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
contained in Registrant's proxy statement incorporated by reference in Part III
of this Form 10-K.
As of March 29, 1999, the aggregate market value of the voting stock held
by non-affiliates of the Registrant was approximately $71,208,700, based upon
the closing price of $7.50 per share on March 29, 1999.*
As of March 29, 1999, there were 12,278,120 shares of Common Stock, $.01
par value, and 2,989,853 shares of Class A Common Stock, $.01 par value,
outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Part II - Portions of the Registrant's Annual Report to security holders
for the Fiscal Year Ended January 30, 1999 ("Annual Report").
Part III - Portions of the Registrant's Proxy Statement with respect to
its 1999 Annual Meeting of Shareholders ("Proxy Statement").
____________________________
* Calculated by excluding all shares that may be deemed to be beneficially
owned by executive officers and directors of the Registrant, without conceding
that all such persons are "affiliates" of the Registrant for purposes of the
federal securities laws.
- --------------------------------------------------------------------------------
<PAGE>
Certain information included in this Form 10-K contains statements that are
forward looking. Such forward-looking information involves certain risks and
uncertainties that could significantly affect anticipated results in the future,
including, but not limited to, uncertainties affecting retail generally (such as
consumer confidence and demand for soft goods); uncertainties associated with
opening new stores or expanding and remodeling existing stores; and competition
within the markets in which the Company's stores are located.
References to a year in this Form 10-K refer to the Company's fiscal year,
which is the 52 or 53 week period ending on the Saturday nearer January 31 of
the following calendar year (e.g. a reference to 1998 is a reference to the
fiscal year ended January 30, 1999).
PART I
ITEM 1. BUSINESS
GENERAL
The Bon-Ton Stores, Inc., together with its subsidiaries (collectively, the
"Company" or "The Bon-Ton"), is the successor to S. Grumbacher & Son, a family
business founded in 1898. The Company is a leading operator of quality fashion
department stores offering moderate and better apparel, home furnishings,
cosmetics, accessories and shoes in secondary markets. In many of its markets,
The Bon-Ton is the primary destination for branded fashion merchandise such as
Calvin Klein, Liz Claiborne, Nautica, Ralph Lauren and Tommy Hilfiger. The
Company presently operates 65 quality fashion department stores in secondary
markets with 35 stores in Pennsylvania, 24 in New York, three stores in Maryland
and one store in each of Massachusetts, West Virginia and New Jersey. The
Company's strategy focuses on being the premier fashion retailer in smaller
secondary markets that demand, but often have limited access to, better branded
merchandise.
The Bon-Ton provides an in-depth selection of high-quality, well-known
branded merchandise at competitive prices in upscale shopping environments.
None of The Bon-Ton's stores are located in major metropolitan markets, and most
are located in smaller secondary markets. The Company's executive offices are
located at 2801 East Market Street, York, Pennsylvania.
MERCHANDISING
The Bon-Ton stores offer moderate and better fashion apparel, home
furnishings, cosmetics, accessories, shoes and other items. The Company's sales
of apparel constituted 62.9% of sales in 1998. The chart below illustrates the
sales by product category for 1998, 1997 and 1996.
2
<PAGE>
<TABLE>
<CAPTION>
MERCHANDISE CATEGORY 1998 1997 1996
- ----------------------- ------ ------ ------
<S> <C> <C> <C>
Women's clothing.................... 27.0% 28.0% 27.4%
Men's clothing...................... 18.6 17.8 17.7
Home................................ 12.6 12.2 12.0
Cosmetics........................... 9.7 9.7 9.8
Children's clothing................. 7.0 7.0 7.4
Accessories......................... 7.3 7.3 7.9
Junior's clothing................... 5.3 5.5 5.5
Intimate apparel.................... 5.0 5.0 5.3
Shoes............................... 5.0 5.0 4.7
Fine Jewelry........................ 2.1 2.0 1.7
Beauty Salon........................ 0.4 0.5 0.6
----- ----- -----
Total............................ 100.0% 100.0% 100.0%
===== ===== =====
</TABLE>
The Company carries a number of highly recognized brand names, including
Calvin Klein, Cole/./Haan, Estee Lauder, Jones New York, Kenneth Cole, Liz
Claiborne, Nautica, Nine West, Ralph Lauren, Steve Madden, Tommy Hilfiger and
Via Spiga, and within these brands chooses collections which balance fashion,
price and selection. The Company also is placing greater emphasis on vendor
shops within its stores from key vendors such as Calvin Klein, Nautica, Ralph
Lauren and Tommy Hilfiger. In such vendor shops merchandise is grouped and
positioned in preferred floor locations to provide enhanced visibility with
distinctive, vendor-specific fixturing, signage and displays.
Complementing its branded merchandise, the Company's exclusive private
brand merchandise provides fashion at competitive pricing under names such as
Andrea Viccaro, Jenny Buchanan, Susquehanna Trail Outfitters and Susquehanna
Blues. The Bon-Ton views its private brand merchandise as a strategic addition
to its strong array of highly recognized, quality national brands and as an
opportunity to increase brand exclusiveness, customer loyalty and competitive
differentiation. Private brand merchandise represented approximately 17.8% of
apparel sales in 1998.
The Company's business, like that of most retailers, is subject to seasonal
fluctuations, with the major portion of sales and income realized during the
latter half of each fiscal year, which includes the back-to-school and holiday
seasons.
MARKETING
The Company attracts customers by offering services such as free gift wrap,
special order capability and in-store alterations. In addition, through its
"Certified Value" program, the Company maintains everyday value prices on staple
items such as turtlenecks, T-shirts, shorts and denim within major product
groups.
The Company conducts its advertising and promotional programs through
newspaper advertisements, direct mail and, to a lesser extent, local television
and radio. The Company maintains an in-house advertising group that produces
substantially all of its print advertising. The effectiveness of the Company's
direct mail efforts has been greatly enhanced through database management
systems. By accurately identifying the predictors of response to its direct
mail pieces, the Company now has the ability to rank, score and select customers
with event-specific information.
3
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CUSTOMER CREDIT
Bon-Ton customers may pay for their purchases with The Bon-Ton proprietary
credit card, Visa, Mastercard, cash or check.
The Bon-Ton credit card holders generally constitute the Company's most
loyal and active customers; during 1998, the average dollar amount for
proprietary credit card purchases substantially exceeded the average dollar
amount for cash purchases. The Company believes that its credit card is a
particularly productive tool for customer segmentation and target marketing.
The following table summarizes the percentage of total sales generated by
payment type:
<TABLE>
<CAPTION>
TYPE OF PAYMENT
----------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Bon-Ton credit card 48% 50% 51%
Visa, Mastercard, American Express* 23 22 20
Cash or check 29 28 29
---- ---- ----
Total 100% 100% 100%
==== ==== ====
</TABLE>
*The Company ceased accepting American Express in 1998.
During 1998, the Company issued 244,700 Bon-Ton credit cards for newly
opened accounts.
COMPETITION
The Company faces competition for customers from traditional department
stores such as those operated by J. C. Penney Company, Inc. ("JC Penney"),
Federated Department Stores Inc. ("Federated"), The May Department Stores
Company ("May") and Sears, Roebuck and Co. ("Sears"), from regional department
stores such as Boscov's Department Store, Inc., and from specialty stores and
catalogue and other retailers. In addition, the Company faces competition for
store locations from other department stores and other large retailers. In a
number of its markets, the Company competes for customers with national
department store chains which are better established in such markets than the
Company and which offer a similar mix of better branded merchandise as the
Company. In other markets, the Company faces potential competition from
national chains that to date have not entered such markets. In all markets, the
Company generally competes for customers with department stores offering
moderately priced goods. Many of the Company's competitors are units of large
national or regional chains that may have substantially greater financial and
other resources than the Company. Some of the Company's competitors have
greater leverage with vendors than the Company, which may allow such competitors
to obtain merchandise more easily or on better terms than the Company. In
several of the Company's markets, the Company's stores compete with other
department stores in the immediate vicinity which are larger and/or have a
superior location in the relevant mall or local shopping area.
The Company believes it compares favorably with its competitors with
respect to quality, depth and breadth of merchandise, prices for comparable
quality merchandise, customer service and store environment. The Company also
believes its knowledge of smaller secondary markets, developed over its many
years of operation, and its focus on secondary markets as its primary area of
operation, give it an advantage that cannot be readily duplicated.
4
<PAGE>
ASSOCIATES
As of January 30, 1999, the Company had approximately 3,600 full-time and
5,400 part-time associates. The Company also employs additional part-time
clerks and cashiers during peak periods. None of the Company's associates are
represented by a labor union. The Company believes that its relationship with
its associates is good.
ITEM 2. PROPERTIES.
The Company's stores, which all operate under the name "The Bon-Ton", vary
in size from approximately 45,000 to 160,000 square feet. All but three of
The Bon-Ton stores are anchor tenants in shopping malls or are in, or adjacent
to, strip shopping centers.
The Company configures its stores to provide a logical flow from department
to department and continually monitors its product layouts in an attempt to
make shopping easier and to maximize sales per square foot.
The Company maintains a corporate visual merchandising staff and at least
one associate in each store responsible for visual presentation. The Company
continually evaluates all aspects of its visual merchandising program to provide
an aesthetically pleasing atmosphere for its customers.
The following table sets forth the number of stores at the beginning and
end of each of the last five years:
<TABLE>
<CAPTION>
Fiscal Year 1998 1997 1996 1995 1994
- ----------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Number of stores:
Beginning of year 64 64 68 69 35
Additions 2 0 1 4 35
Closings (1) 0 (5) (5) (1)
---- ---- ---- ---- ----
End of year 65 64 64 68 69
</TABLE>
The Company plans to maintain its growth by expanding and upgrading its
existing stores and by opening new stores and will consider acquisitions of
department store companies or their real estate assets if and when such
opportunities arise. The Company's market positioning strategy has been to
locate its new stores or acquire existing companies or their stores in secondary
markets generally within or contiguous to its existing areas of operations.
In March 1998, the Company opened a 60,100 square foot store in the
Jamestown, New York market, and in November 1998, the Company opened a 50,600
square foot store in Westfield, Massachusetts. The Company closed its Rome,
Georgia store in April 1998. The Company anticipates opening new stores in
Glens Falls, New York and Pottstown, Pennsylvania, and expanding its existing
stores in Butler, Pennsylvania and Hagerstown, Maryland, during 1999. In
addition, the Company has acquired the leases for department stores in Hamden,
Connecticut, Brick, New Jersey and Red Bank, New Jersey from Steinbach Stores,
Inc. The Company plans to renovate these three stores and open them for
business in the fall of 1999.
The following table provides certain information regarding the Company's
properties:
5
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STORE PROPERTIES
----------------
<TABLE>
<CAPTION>
APPROXIMATE
GROSS SQUARE YEAR OPENED
MARKET LOCATION FEET OR ACQUIRED
- ------ -------- ------------- -------------
PENNSYLVANIA
<S> <C> <C> <C>
Allentown South Mall 111,000 1994
Bethlehem Westgate Mall 107,100 1994
Bloomsburg Columbia Mall 46,100 1988
Butler Clearview Mall 100,500/(1)/ 1982
Carlisle Carlisle Plaza Mall 59,900 1977
Chambersburg Chambersburg Mall 55,600 1985
Doylestown Doylestown Shopping Center 55,500 1994
Easton Palmer Park Mall 120,200 1994
Greensburg Westmoreland Mall 99,900 1987
Hanover North Hanover Mall 67,600 1971
Harrisburg Camp Hill (Free Standing) 145,200 1987
Colonial Park Shopping Center 136,500 1987
Indiana Indiana Mall 60,400 1979
Johnstown The Galleria 80,900 1992
Lancaster Park City Center 144,800 1992
Lebanon Lebanon Plaza Mall 53,700 1994
Lewistown Central Business District 46,700 1972
Oil City Cranberry Mall 45,200 1982
Pottstown Coventry Mall 88,300 1999/(2)/
Pottsville Schuylkill Mall 61,100 1987
Quakertown Richland Mall 88,100 1994
Reading Berkshire Mall 159,400 1987
Scranton Keyser Oak Plaza 57,600 1980
State College Nittany Mall 70,200 1994
Stroudsburg Stroud Mall 87,000 1994
Sunbury Susquehanna Valley Mall 90,000 1978
Trexlertown Trexler Mall 54,000 1994
Uniontown Uniontown Mall 71,000 1976
Warren Warren Mall 50,000 1980
Washington Crown Washington Center 78,100 1987
Williamsport Lycoming Mall 60,100 1986
Wilkes-Barre Midway Shopping Center 66,000 1987
Wyoming Valley Mall 159,500 1987
York York Galleria 128,200 1989
Queensgate Shopping Center 85,100 1962
West Manchester Mall 80,200 1981
NEW YORK
Binghamton Oakdale Mall 80,000 1981
Buffalo Northtown Plaza 100,800 1994
Walden Galleria 150,000 1994
Eastern Hills Mall 151,200 1994
McKinley Mall 97,200 1994
Sheridan/Delaware Plaza 124,100 1994
Southgate Plaza 100,500 1994
Elmira Arnot Mall 74,800 1995
Glens Falls Aviation Mall 80,300 1999/(3)/
Ithaca Pyramid Mall 52,400 1991
Jamestown Chautauqua Mall 60,100 1998
Lockport Lockport Mall 82,000 1994
Massena St. Lawrence Centre 51,000 1994
Niagara Falls Summit Park Mall 88,100 1994
Olean Olean Mall 73,000 1994
Rochester The Mall at Greece Ridge Center 144,600 1996
The Marketplace Mall 100,000 1995
Irondequoit Mall 102,600 1995
Eastview Mall 118,900 1995
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
GROSS SQUARE YEAR OPENED
MARKET LOCATION FEET OR ACQUIRED
- ------ -------- -------------- -------------
<S> <C> <C> <C>
Saratoga Springs Wilton Mall 71,700 1993
Syracuse Carousel Center 80,000 1994
Camillus Mall 64,700 1994
Great Northern Mall 98,400 1994
Shoppingtown Mall 70,100 1994
Watertown Salmon Run Mall 50,200 1992
MARYLAND
Cumberland Country Club Mall 60,900 1979
Frederick Frederick Towne Mall 77,900 1972
Hagerstown Valley Mall 123,000/(4)/ 1974
WEST VIRGINIA
Martinsburg Martinsburg Mall 65,800 1994
CONNECTICUT
Hamden Hamden Mart 58,900 1999/(2)/
NEW JERSEY
Brick Brick Plaza 53,500 1999/(2)/
Phillipsburg Phillipsburg Mall 65,000 1994
Red Bank Freestanding 33,300 1999/(2)/
MASSACHUSETTS
Westfield Westfield Shops 50,600 1998
</TABLE>
Footnotes:
- ---------
/(1)/ Includes 40,000 square foot expansion expected to be completed in May
1999.
/(2)/ Anticipated opening date is in August 1999.
/(3)/ Anticipated opening date is in April 1999.
/(4)/ Includes 30,000 square foot expansion expected to be completed in
August 1999.
The Company leases 62 of its stores and owns eight stores, three of which
are subject to ground leases. The Company leases a total of 154,600 square feet
for its executive and administrative offices located in York, Pennsylvania,
leases the land (but owns the building) for its 143,700 square foot distribution
center in York, Pennsylvania, and leases its 326,000 square foot distribution
center in Allentown, Pennsylvania.
The distribution centers currently operate on one shift; however, by
adding second shifts, the capacity of the distribution centers can be at least
doubled. There is substantial space for additional expansion at the York and
Allentown sites and additional truck docks in place not currently used in
Allentown.
7
<PAGE>
ITEM 3. LEGAL PROCEEDINGS.
The Company has been named, together with other department stores and
Nine West Group, Inc., a defendant in a number of antitrust class action
lawsuits filed in February 1999, which have been consolidated in the United
States District Court for the Southern District of New York. These lawsuits
allege that the defendants engaged in conduct in violation of the antitrust
laws relating to the sale of shoes manufactured by Nine West, and seek
unspecified damages against all defendants. The Company and its counsel
believe these claims are without merit and intends to vigorously defend
these lawsuits.
The Company is party to other legal proceedings and claims which arise
during the ordinary course of business. The Company does not expect the
ultimate outcome of all such litigation and claims to have a material
adverse effect on the Company's financial position or results of
operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM A. EXECUTIVE OFFICERS OF THE COMPANY.
Certain information with respect to the executive officers of the
Company is provided below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------- --- -------------------------------
<S> <C> <C>
Heywood Wilansky 51 President - Chief Executive Officer and Director
M. Thomas ("Tim") Grumbacher 59 Chairman of the Board and Director
Michael L. Gleim 56 Vice Chairman - Chief Operating Officer and Director
Douglas Lamm 52 Executive Vice President - Softlines Merchandise
James H. Baireuther 52 Senior Vice President - Chief Financial Officer
Jack Boonshaft 56 Senior Vice President - Stores
J. Rick Cusick 41 Senior Vice President - General Merchandise Manager
H. Stephen Evans 49 Senior Vice President - Real Estate, Legal and Governmental
Affairs
Elizabeth R. Feher 38 Senior Vice President - General Merchandise Manager
Steven D. Goldsmith 32 Senior Vice President - General Merchandise Manager
William T. Harmon 44 Senior Vice President - Sales Promotion, Marketing and
Strategic Planning
</TABLE>
8
<PAGE>
<TABLE>
<S> <C> <C>
Cheryl Jan Ladnier 50 Senior Vice President - Product Development, Fashion
Merchandising and Special Events
Patrick J. McIntyre 54 Senior Vice President - Chief Information Officer
Ryan J. Sattler 54 Senior Vice President - Operations
Stephen M. Sloane 52 Senior Vice President - General Merchandise Manager
Stephanie Stough 47 Senior Vice President - Merchandise Planning and Control
Thomas R. Tortoriello 57 Senior Vice President - Human Resources
</TABLE>
Mr. Wilansky joined the Company in August 1995 as President, Chief
Executive Officer and a Director. Prior to joining the Company, Mr. Wilansky
was employed by May for more than 19 years. From 1992 to August 1995, he was
President and Chief Executive Officer of the Foley's division of May, and from
1991 to 1992, he was President and Chief Executive Officer of the Filene's
division of May. Prior to that, he was with the Hecht's and Lord & Taylor
divisions of May.
Mr. Grumbacher joined the Company in 1961 and has been Chairman of the
Board since August 1991. From 1977 to 1989, he was President and from 1985 to
1995, he was Chief Executive Officer of the Company.
Mr. Gleim joined the Company in 1989 as Executive Vice President and Chief
Administrative Officer. He became Senior Executive Vice President and a
Director in 1991, and Vice Chairman and Chief Operating Officer in December
1995. Prior to joining the Company, Mr. Gleim was employed by Federated for
more than 25 years.
Mr. Lamm joined the Company as Senior Vice President - General Merchandise
Manager in October 1995 and was appointed Executive Vice President - Softlines
Merchandise in February 1998. Prior to joining the Company, Mr. Lamm owned a
chain of women's large size apparel boutiques from 1988 to 1995, and from 1984
to 1988 was Senior Vice President and General Merchandise Manager of Venture
Stores, Inc. in St. Louis.
Mr. Baireuther joined the Company as Senior Vice President - Chief
Financial Officer in June 1996. From September 1994 until he joined the
Company, Mr. Baireuther was Senior Vice President - Chief Financial Officer at
DAC Vision, a manufacturer and distributor of optical supplies. Prior to that,
he was Executive Vice President - Chief Financial Officer for Eye Care Centers
of America, a retail optical superstore chain and wholly-owned subsidiary of
Sears, from 1989 to 1994. From 1969 to 1989, Mr. Baireuther held a variety of
positions with Sears including Director of Mergers and Acquisitions, Manager of
Corporate Financial Analysis and Controller.
Mr. Boonshaft joined the Company in January 1996 as Vice President -
Stores' Merchandising and was named Senior Vice President - Stores in February
1998. Prior to joining the Company, Mr. Boonshaft was with the Hecht's division
of May, where his last position was Regional Vice President - Stores from 1986
to 1995.
Mr. Cusick joined the Company in October 1996 as Divisional Vice President
- - Divisional Merchandise Manager and was named Senior Vice President - General
Merchandise Manager in July 1997. Prior to joining the Company, Mr. Cusick was
with Marshall's from September 1995 to February 1996. From 1980 to 1995, Mr.
Cusick held a variety of merchandising positions with Filene's, Foley's and The
Broadway.
9
<PAGE>
Mr. Evans joined the Company as Senior Vice President - Real Estate in 1991
and was named Senior Vice President - Real Estate, Legal and Governmental
Affairs in 1993.
Ms. Feher joined the Company as Divisional Vice President - Divisional
Merchandise Manager in October 1994 and was named Senior Vice President -
General Merchandise Manager in February 1998. Ms. Feher was previously
associated with Hess's Department Stores, Inc., where she served as Vice
President - Merchandise Manager for over six years.
Mr. Goldsmith joined the Company in February 1997 as Divisional Vice
President - Divisional Merchandise Manager and was named Senior Vice President -
General Merchandise Manager in March 1999. From November 1992 to February 1997,
Mr. Goldsmith was with Foley's, where he held various positions including buyer
and Director of Merchandising Analysis. From 1988 to November 1992, Mr.
Goldsmith was with Filene's and Lord & Taylor.
Mr. Harmon joined the Company as Senior Vice President - Sales Promotion,
Marketing and Strategic Planning in June 1997. From December 1992 to October
1994, Mr. Harmon was Vice President, and from November 1994 to June 1997, Senior
Vice President - Merchandise Planning, and during that entire period, Assistant
to the President, of Foley's, and from June 1989 to December 1992 he was Vice
President - Assistant to the President of Filene's. Prior to that, he was
employed by McKinsey & Company for seven years.
Ms. Ladnier joined the Company as Senior Vice President - Sales Promotion
and Marketing in December 1993 and was subsequently named Senior Vice President
- - Marketing and Corporate Communications. In May 1997 she was named Senior Vice
President - Product Development, Fashion Merchandising and Special Events.
Mr. McIntyre joined the Company as Senior Vice President - Chief
Information Officer in June 1997. From 1988 to June 1997, Mr. McIntyre was
Senior Vice President - Chief Information Officer for the Cato Corporation, a
women's specialty retailer. Prior to that, he held similar positions with the
Higbee Company and Burdine's Department Store.
Mr. Sattler joined the Company as Vice President - Distribution and
Operations in 1986 and was promoted to Senior Vice President - Operations in
1990.
Mr. Sloane joined the Company as Senior Vice President - General
Merchandise Manager in February 1997. From December 1995 until February 1997,
Mr. Sloane was Vice President - General Merchandise Manager at Dick's Clothing &
Sporting Goods, and from July 1995 until December 1995 he was Vice President -
General Merchandise Manager at McRae's Department Stores. Prior to that, Mr.
Sloane was associated with May for over 17 years, having most recently served as
Vice President-Merchandising at Foley's.
Ms. Stough joined the Company in March 1987 as Director of Merchandise
Planning and Control. In February 1991 she was promoted to Vice President -
Merchandise Planning and Control and in May 1997 she was promoted to Senior Vice
President - Merchandise Planning and Control.
Mr. Tortoriello joined the Company in June 1998 as Senior Vice President -
Human Resources. From April 1995 until he joined the Company, Mr. Tortoriello
was Senior Vice President of Organization Development at the Handleman Company,
a distributor to retailers, and from January 1993 to June 1994 he was Senior
Vice President, Human Resources at Office Max.
10
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market (symbol:
BONT). There is no established public trading market for the Company's Class A
Common Stock. The Class A Common Stock is convertible on a share for share
basis into Common Stock. The following table sets forth the range of the sales
price of the Common Stock as furnished by Nasdaq:
<TABLE>
<CAPTION>
1998
------------------
HIGH LOW
-------- --------
<S> <C> <C>
1/st/ Quarter $18.000 $13.750
2/nd/ Quarter 17.625 11.250
3/rd/ Quarter 14.000 6.000
4/th/ Quarter 9.250 6.000
1997
------------------
HIGH LOW
-------- --------
1/st/ Quarter $ 7.375 $ 5.625
2/nd/ Quarter 9.125 6.250
3/rd/ Quarter 15.000 7.875
4/th/ Quarter 17.500 11.750
</TABLE>
On March 29, 1999, there were approximately 318 shareholders of record of
the Company's Common Stock and five shareholders of record of the Company's
Class A Common Stock.
The Company has not paid cash dividends since its initial public offering
in September 1991 and does not anticipate paying any cash dividends in the
foreseeable future. The Company intends to retain its earnings, if any, for the
operation and expansion of its business. The payment and rate of future
dividends, if any, are subject to the discretion of the Board of Directors and
will depend upon the Company's earnings, financial condition, capital
requirements, contractual restrictions under its current indebtedness and other
factors. The Company's revolving credit agreement contains restrictions on the
Company's ability to pay dividends and make other distributions.
ITEM 6. SELECTED FINANCIAL DATA.
Item 6 is hereby incorporated by reference to the material under "Selected
Consolidated Financial and Operating Data" on page 20 of the Company's Annual
Report attached hereto as Exhibit 13.1.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
Item 7 is hereby incorporated by reference to the material under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 21 through 26 of the Company's Annual Report, attached
hereto as Exhibit 13.2.
11
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Item 7A is hereby incorporated by reference to the material under
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 21 through 26 of the Company's Annual Report, attached
hereto as Exhibit 13.2.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Item 8 is hereby incorporated by reference to the Report of Independent
Public Accountants, Consolidated Financial Statements and Notes thereto on pages
27 through 44 of the Company's Annual Report, attached hereto as Exhibit 13.3.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding executive officers called for by Item 401 of
Regulation S-K is included in Part I as Item A, in accordance with General
Instruction G(3) to Form 10-K. The remainder of the information called for by
this Item will be contained in the Company's Proxy Statement and is hereby
incorporated by reference thereto.
ITEM 11. EXECUTIVE COMPENSATION.
The information called for by this Item will be contained in the Company's
Proxy Statement and is hereby incorporated by reference thereto (other than the
information called for by Item 402(i), (k) and (l) of Regulation S-K, which is
not incorporated herein by reference).
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The information called for by this Item will be contained in the Company's
Proxy Statement and is hereby incorporated by reference thereto.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item will be contained in the Company's
Proxy Statement and is hereby incorporated by reference thereto.
12
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
1. Consolidated Financial Statements -- See Item 8 above.
2. Consolidated Financial Statement Schedules -- See the Index to
Consolidated Financial Statement Schedules on page F-1.
3. Exhibits:
The following exhibits are filed herewith or incorporated by reference as
indicated below:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
NO.
<S> <C> <C>
3.1 Articles of Incorporation Exhibit 3.1 to the Company's Report on Form 8-B,
File No. 0-19517 ("Form 8-B")
3.2 Bylaws Exhibit 3.2 to Form 8-B
10.1 Shareholder's Agreement by and among the Exhibit 10.3 to Amendment No. 2 to the Company's
Company and the shareholders named therein Registration Statement on Form S-1, File No.
33-42142 ("1991 Form S-1")
* 10.2 (a) Employment Agreement between the Company Exhibit 99 to the Company's Report on Form 8-K
and Heywood Wilansky dated March 26, 1998
* (b) The Bon-Ton Stores, Inc. Supplemental Exhibit 10.2(b) to the Company's Registration
Executive Retirement Plan for Heywood Wilansky Statement on Form S-1, File No. 333-48811 ("1998
Form S-1")
* (c) The Bon-Ton Stores, Inc. Five Year Cash Bonus Exhibit 10.2(c) to 1998 Form S-1
Plan for Heywood Wilansky
* (d) The Bon-Ton Stores, Inc. Performance Based Stock Exhibit 4 to the Company's Registration Statement
Incentive Plan for Heywood Wilansky on Form S-8, File No. 333-58591
* 10.3 (a) Employment Agreement between the Company and Exhibit 10.4 to Form 8-B
Michael L. Gleim
* (b) First Amendment to Employment Agreement Exhibit 10.1 to the Company's Quarterly Report on
between the Company and Michael L. Gleim Form 10-Q for the quarter ended October 31, 1998
("Form 10-Q")
</TABLE>
13
<PAGE>
<TABLE>
<S> <C> <C> <C>
* 10.4 Form of severance agreement between the Exhibit 10.14 to Form 8-B
Company and certain of its executive officers
* 10.5 (a) Amended and Restated 1991 Stock Option and Exhibit 4.1 to the Company's Registration
Restricted Stock Plan Statement on Form S-8, File No. 333-36633
* (b) Phantom Equity Replacement Stock Option Plan Exhibit 10.18 to 1991 Form S-1
10.6 Ground Leases for distribution center located in Exhibit 10.12 to 1991 Form S-1
York, Pennsylvania between the Company and M.
Thomas Grumbacher, as amended
10.7 Ground Lease for York Galleria store, York, Exhibit 10.14 to 1991 Form S-1
Pennsylvania between the Company and MBM Land
Associates Limited Partnership
10.8 (a) Sublease of Butler, Pennsylvania store between Exhibit 10.15 to 1991 Form S-1
the Company and M. Thomas Grumbacher
(b) First Amendment to Butler, Pennsylvania sublease Exhibit 10.21 to Amendment No. 1 to 1991 Form S-1
(c) Corporate Guarantee with respect to Butler, Exhibit 10.24 to Amendment No. 1 to 1991 Form S-1
Pennsylvania lease
10.9 (a) Sublease of Oil City, Pennsylvania store between Exhibit 10.16 to 1991 Form S-1
the Company and M. Thomas Grumbacher
(b) First Amendment to Oil City, Pennsylvania sublease Exhibit 10.22 to Amendment No. 1 to 1991 Form S-1
(c) Corporate Guarantee with respect to Oil City, Exhibit 10.26 to Amendment No. 1 to 1991 Form S-1
Pennsylvania lease
* 10.10 The Company's Profit Sharing/Retirement Savings Exhibit 10.24 to the Company's Annual Report on
Plan, amended and restated as of July 1, 1994 Form 10-K for the fiscal year ended January 28,
1995 ("1994 Form 10-K")
10.11 (a) Amended and Restated Receivables Purchase Exhibit 10.16(a) to Amendment No. 2 to 1998 Form
Agreement dated as of January 12, 1995 among The S-1
Bon-Ton Receivables Corp., The Bon-Ton
Receivables Partnership, L.P., Falcon Asset
Securitization Corporation, The First National
Bank of Chicago, and the other financial
institutions party thereto
(b) Amendment dated as of June 30, 1995 to Amended Exhibit 10.16(b) to Amendment No. 1 to 1998 Form
and Restated Receivables Purchase Agreement S-1
* 10.12 Management Incentive Plan and Addendum to Exhibit 10.13 to the Company's Annual Report on
Management Incentive Plan Form 10-K for the fiscal year ended February 1,
1997 ("1996 Form 10-K")
* 10.13 The Bon-Ton Stores, Inc. Long-Term Incentive Plan Exhibit 10.14 to 1996 Form 10-K
For Principals
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
10.14 (a) Credit Agreement dated as of April 15, 1997 among Exhibit 10.1 to the Company's Quarterly Report on
the Company, Adam, Meldrum & Anderson Co., Inc., Form 10-Q for the quarter ended May 3, 1997
and The Bon-Ton Stores of Lancaster, Inc., the Other
Credit Parties Signatory thereto, the Lenders Signatory
thereto from time to time, the First National Bank of
Boston and General Electric Capital Corporation
(b) First Amendment to Credit Agreement Exhibit 10.3(b) to 1998 Form S-1
(c) Second Amendment to Credit Agreement Exhibit 10.3(c) to 1998 Form S-1
(d) Third Amendment to Credit Agreement Exhibit 10.3(d) to 1998 Form S-1
(e) Fourth Amendment to Credit Agreement Exhibit 10.2 to Form 10-Q
(f) Fifth Amendment to Credit Agreement
</TABLE>
13.1 Page 20 of the Company's Annual Report.
13.2 Pages 21 through 26 of the Company's Annual Report.
13.3 Pages 27 through 44 of the Company's Annual Report.
21. Subsidiaries of the Registrant.
23. Consent of Arthur Andersen LLP.
27. Financial Data Schedule - Year ended January 30, 1999.
(b) Reports on Form 8-K filed during the fourth quarter.
None
_____________________
* Constitutes a management contract or compensatory plan or arrangement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE BON-TON STORES, INC.
Dated: April 23, 1999 By: /s/ Heywood Wilansky
-----------------------
Heywood Wilansky
President and
Chief Executive Officer
15
<PAGE>
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Capacity Date
- --------- -------- ----
/s/ Heywood Wilansky President, Chief Executive April 23, 1999
- --------------------------
Heywood Wilansky Officer and Director
(principal executive officer)
/s/ M. Thomas Grumbacher Chairman of the Board April 23, 1999
- --------------------------
M. Thomas Grumbacher and Director
/s/ Samuel J. Gerson Director April 23, 1999
- --------------------
Samuel J. Gerson
/s/ Michael L. Gleim Vice Chairman, Chief April 23, 1999
- --------------------
Michael L. Gleim Operating Officer
and Director
/s/ Lawrence J. Ring Director April 23, 1999
- --------------------
Lawrence J. Ring
/s/ Robert C. Siegel Director April 23, 1999
- --------------------
Robert C. Siegel
/s/ Leon D. Starr Director April 23, 1999
- -----------------
Leon D. Starr
/s/ Leon F. Winbigler Director April 23, 1999
- ---------------------
Leon F. Winbigler
/s/ Thomas W. Wolf Director April 23, 1999
- ------------------
Thomas W. Wolf
/s/ James H. Baireuther Senior Vice President April 23, 1999
- -----------------------
James H. Baireuther and Chief Financial Officer
(principal financial and
accounting officer)
16
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENT SCHEDULE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS................................... F-2
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............................ F-3
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To the Shareholders of
The Bon-Ton Stores, Inc.:
We have audited in accordance with generally accepted auditing standards, the
consolidated financial statements of The Bon-Ton Stores, Inc.'s included in this
annual report on Form 10-K, and have issued our report thereon dated March 2,
1999 (except with respect to the matter discussed in Note 16 to the consolidated
financial statements, as to which the date is April 7, 1999). Our audit was made
for the purpose of forming an opinion on the basic financial statements taken as
a whole. The schedule listed in the accompanying index is the responsibility of
the Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 2, 1999
F-2
<PAGE>
SCHEDULE II: VALUATION AND QUALIFYING ACCOUNTS
THE BON-TON STORES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
- -------- ---------- ---------- -------- ---------- --------
BALANCE AT CHARGED TO BALANCE AT
BEGINNING COSTS OTHER END OF
CLASSIFICATION OF PERIOD & EXPENSES INCREASE DEDUCTIONS PERIOD
- -------------- ---------- ---------- -------- ---------- --------
<S> <C> <C> <C> <C> <C>
Year ended February 1, 1997:
Allowance for doubtful
accounts.................. $3,113,000 $5,018,000/(1)/ $ --- $(5,362,000) /(2)/ $2,769,000
Reserve for store closing... $9,570,000 $ --- $ --- $(2,586,000) /(3)/ $6,984,000
Year ended January 31, 1998:
Allowance for doubtful
accounts.................. $2,769,000 $3,549,000/(1)/ $ --- $(4,341,000) /(2)/ $1,977,000
Reserve for store closing... $6,984,000 $ --- $ --- $(1,513,000) /(3)/ $5,471,000
Year ended January 30, 1999:
Allowance for doubtful
accounts.................. $1,977,000 $8,851,000/(1)/ $ --- $(7,136,000) /(2)/ $3,692,000
Reserve for store closing... $5,471,000 $ --- $ --- $(2,663,000) /(3)/ $2,808,000
</TABLE>
___________________
NOTES:
/(1)/ Provision for loss on credit sales.
/(2)/ Uncollectible accounts, written off, net of recoveries.
/(3)/ Store closing expenses, net of monies received from asset liquidation.
F-3
<PAGE>
EXHIBIT INDEX
Exhibit Description
- ------- -----------
10.14(f) Fifth Amendment to Credit Agreement
13.1 Page 20 of the Company's Annual Report.
13.2 Pages 21 through 26 of the Company's Annual Report.
13.3 Pages 27 through 44 of the Company's Annual Report.
21. Subsidiaries of the Registrant
23. Consent of Arthur Andersen LLP
27. Financial Data Schedule - Year Ended January 30, 1999
<PAGE>
EXHIBIT 10.14(f)
FIFTH AMENDMENT TO THE CREDIT AGREEMENT
FIFTH AMENDMENT, dated as of April 7, 1999, among THE BON-TON
DEPARTMENT STORES, INC. and THE BON-TON STORES OF LANCASTER, INC. (collectively,
the "Borrowers"), the other Credit Parties party to the Credit Agreement
referred to below, the Lenders party to such Credit Agreement and GENERAL
ELECTRIC CAPITAL CORPORATION as Administrative Agent and Lender.
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, Adam, Meldrum & Anderson Co., Inc. have merged with and into
The Bon-Ton Department Stores, Inc.; and
WHEREAS, the parties hereto have entered into that certain Credit
Agreement, dated as of April 15, 1997 (such Agreement, as amended, supplemented
or otherwise modified from time to time, being hereinafter referred to as the
"Credit Agreement," and capitalized terms defined therein and not otherwise
defined herein are used herein as therein defined); and
WHEREAS, the Borrowers desire to have the Lenders amend certain
provisions of the Credit Agreement; and
WHEREAS, the Lenders have agreed to such amendment upon the terms and
subject to the conditions provided herein; and
WHEREAS, certain Lenders have assigned all or a portion of their
interest in the Loans to certain other Lenders, which assignment shall have
become effective immediately prior to the effectiveness of this amendment, and
the Commitment of each Lender is set forth next to its signature herein.
NOW, THEREFORE, in consideration of the premises, covenants and
agreements contained herein, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the parties hereto
hereby agree as follows:
SECTION 1. Amendment. The Lenders, the Agents, the Borrowers and the
---------
other Credit Parties hereby agree to the following amendments to the Credit
Agreement:
(a) Section 1.3(b)(ii) is hereby amended by deleting the reference to
"Section 6.8" on the third line thereof and inserting in lieu thereof "Section
- ------------ -------
6.8(a)-(g)),".
- ----------
<PAGE>
(b) Section 1.5(a) is hereby amended by deleting the existing grid in
its entirety and amending it as follows:
"If Interest Level of
Coverage Ratio is: Applicable Margins:
----------------- ------------------
Greater than 4.5:1.0 I
Greater than 4.0:1.0 but less than or equal to 4.49 II
Greater than 3.5:1.0 but less than or equal to 3.99 III
Greater than 2.75:1.0 but less than or equal to 3.49 IV
Less than 2.74 V
<TABLE>
<CAPTION>
Level I Level II Level III Level IV Level V
------- -------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
Applicable Revolver
Index Margin 0.00% 0.00% 0.25% 0.50% 0.75%
Applicable Revolver
LIBOR Margin 1.25% 1.50% 1.75% 2.00% 2.25%
Applicable L/C
Margin 1.25% 1.50% 1.50% 1.50% 1.50%
Applicable Unused
Facility Fee 0.25% 0.25% 0.375% 0.375% 0.375%"
</TABLE>
(c) Section 6.3(a)(vii), relating to interest rate swaps, is hereby
amended by deleting the words "$50 million" and inserting in lieu thereof "$100
million".
(d) Section 6.4(b) is hereby amended by deleting ", other than to
Heywood Wilansky as to whom such maximum shall be $1,000,000" and inserting in
lieu thereof ", other than to Heywood Wilansky as to whom such maximum shall be
$2,000,000".
(e) (i) Section 6.8 is hereby amended by deleting the word "and"
immediately prior to "(g)" and inserting a comma in lieu thereof, and adding the
following clause (h) at the end of the first sentence:
"and (h) the sale, transfer, conveyance or other disposition of
Equipment, Fixtures or Real Estate by Borrowers in connection with the
sale of a store location up to an aggregate amount equal to
$30,000,000".
2
<PAGE>
(ii) The last sentence of section 6.8 is amended by deleting the word
"and" between "clause (f)" and "clause (g)" and inserting a comma in lieu
---------- ----------
thereof, and inserting the words "and clause (h)" after "clause (g)".
---------- ----------
(f) Section 9.2 is hereby amended as follows: (i) the first sentence
is amended by deleting "GE Capital and FNBB are" and inserting in lieu thereof
"GE Capital is", and by deleting ", respectively" and (ii) the third sentence is
deleted in its entirety.
(g) Section 9.4 is hereby deleted in its entirety and the following
is inserted in lieu thereof:
"GE Capital and its Affiliates. With respect to its Commitments
-----------------------------
hereunder, GE Capital shall have the same rights and powers under this
Agreement and the other Loan Documents as any other Lender and may
exercise the same as though it were not Agent hereunder; and the term
"Lender" or "Lenders" shall, unless otherwise expressly indicated,
include GE Capital in its individual capacity. GE Capital and its
Affiliates may lend money to, invest in, and generally engage in any
kind of business with, any Credit Party, any of its Affiliates and any
Person who may do business with or own securities of any Credit Party
or any such Affiliate, all as if GE Capital was not Agent and without
any duty to account therefor to Lenders. GE Capital and its
Affiliates may accept fees and other consideration from any Credit
Party for services in connection with this Agreement or otherwise
without having to account for the same to Lenders. Each Lender
acknowledges the potential conflict of interest between GE Capital as
a Lender and GE Capital as Agent."
(h) Section 11.14 is hereby amended by deleting it in its entirety
and inserting in lieu thereof the following:
"11.14 Press Releases Each Credit Party executing this
--------------
Agreement agrees that neither it nor its Affiliates will in the future
issue any press releases or other public disclosure using the name of
GE Capital or its Affiliates or referring to this Agreement, the other
Loan Documents or the transactions contemplated hereby or thereby
without at least two (2) Business Days' prior notice to GE Capital and
without the prior written consent of GE Capital unless (and only to
the extent that) such Credit Party or Affiliate is required to do so
under law and then, in any event, such Credit Party or Affiliate will
consult with GE Capital before issuing such press release or other
public disclosure. Each Credit Party consents to the publication by
Agents or any Lender of a tombstone or similar advertising material
relating to the financing transactions contemplated by this
Agreement."
3
<PAGE>
(i) The definition of "Collateral Agent" in Annex A is hereby amended
by deleting it in its entirety and inserting the following in lieu thereof:
"Collateral Agent shall mean GE Capital or its successor
----------------
appointed puruant to Section 9."
(j) Clause (a) of the definition of "Commitment Termination Date" in
Annex A is hereby amended by changing the date to "April 15, 2004".
(k) The first clause (iii) and clause (iv) of the definition of
"Fixed Asset Availability" in Annex A are hereby amended by deleting them in
their entirety and inserting in lieu thereof the following:
"and (iii) on March 1, 1999 and thereafter, up to 33 1/3% of Maximum
Fixed Asset Availability."
(l) Paragraph (a) of Annex B is hereby amended by changing the
definition of "L/C Sublimit" to "Twenty-Five Million Dollars ($25,000,000)".
(m) Paragraph (d) of Annex B is hereby amended by deleting subsection
(y) in its entirety and inserting the following in lieu thereof:
"(y) for each month during which any Letter of Credit Obligation shall
remain outstanding, a fee (the "Letter of Credit Fee") in an amount
--------------------
equal to the Applicable L/C Margin set forth in Section 1.5(a)
multiplied by the maximum amount available from time to time to be
drawn under the applicable Letter of Credit."
(n) Paragraph (e) of Annex B is hereby amended by inserting the
following at the end of the first sentence:
"; provided, however, that Borrower Representative need not obtain
-------- -------
approval and need not provide notice to Administrative Agent for the
incurrence of a Letter of Credit Obligation if (i) the issuance of
such Letter of Credit Obligation would not violate any provision of
this Annex B, (ii) the amount of such Letter of Credit Obligation is
-------
less than $300,000 and (iii) the aggregate amount of all Letter of
Credit Obligations issued in such week is less than $300,000. For
administrative purposes, by Monday of the following week, the L/C
Issuer shall distribute a summary sheet to Administrative Agent
stating the amount requested during such week and the date of all
Letter of Credit Obligations issued during such week."
(o) Paragraph 1(b) of Annex F is hereby amended by deleting the
existing language in its entirety and inserting the following in lieu thereof:
4
<PAGE>
"(b) To the Agents, no later than ten (10) Business Days after the
end of each Fiscal Month, a Borrowing Base Certificate with respect to
each Borrower as of the close of business on the last day of the
immediately preceding Fiscal Month, accompanied by such supporting
detail and documentation as shall be requested by Agents in their
reasonable discretion; provided, however, that if Net Borrowing
-------- -------
Availability shall equal an amount less than $25,000,000 for fourteen
(14) consecutive days or more, Borrowers shall deliver or cause to be
delivered, no later than Tuesday of each week or less frequently as
may otherwise be requested by Agents, a Borrowing Base Certificate
with respect to each Borrower as of the close of business on the
immediately preceding Saturday, in each case accompanied by such
supporting detail and documentation as shall be requested by Agents in
their reasonable discretion, until the earlier of such time as (i) Net
Borrowing Availability shall equal an amount greater than $25,000,000
for at least twenty-eight (28) consecutive days or (ii) Agents shall
determine otherwise, at which time Borrowers shall deliver a Borrowing
Base Certificate solely on a monthly basis as provided in the first
clause of this sentence;"
(p) Paragraph 2 of Annex F is hereby amended by deleting the existing
language in its entirety and inserting the following in lieu thereof:
"2. During any Fiscal Year Borrowers shall pay for all costs and
expenses of up to two commercial finance field audits conducted by
Agents and at least one limited-scope Inventory appraisal and, if at
any time Net Borrowing Availability is less than $35,000,000 for more
than ten (10) consecutive days in a Fiscal Month, for the remainder of
such Fiscal Year Borrowers shall pay for all costs and expenses of up
to one full-scope Inventory appraisal for such Fiscal Year, conducted
by an appraiser selected by Agents, each of the foregoing in form and
substance satisfactory to Agents."
SECTION 2. Conditions to Effectiveness. This Amendment shall become
---------------------------
effective as of the date hereof when the Agents shall have received (a)
counterparts of this Amendment executed by each Borrower, Credit Party, Agent
and each Lender or, as to the Lenders, advice satisfactory to the Agents that
each Lender has executed this Amendment, (b) an amendment fee equal to 0.15% of
the Commitments (i.e., $300,000), to be paid to the Lenders based on their Pro
Rata Shares and (c) receipt by the Agents of the amendments to the GE Capital
Fee Letter and the FNBB Fee Letter, in form and substance acceptable to GE
Capital, and of all fees payable on the effective date hereof as set forth in
the amendment to the GE Capital Fee Letter.
SECTION 3. Representations and Warranties. The Borrowers and other
------------------------------
Credit Parties hereby jointly and severally represent and warrant to the Lenders
and the Agents as follows:
5
<PAGE>
(a) After giving effect to this Amendment, each of the
representations and warranties in Section 3 of the Credit Agreement and in the
other Loan Documents are true and correct in all material respects on and as of
the date hereof as though made on and as of such date, except to the extent that
any such representation or warranty expressly relates to an earlier date and
except for changes therein not prohibited by the Credit Agreement.
(b) After giving effect to this Amendment, no Default or Event of
Default has occurred and is continuing as of the date hereof.
(c) The execution, delivery and performance by the Credit Parties of
this Amendment have been duly authorized by all necessary or proper corporate
action and do not require the consent or approval of any Person which has not
been obtained.
(d) This Amendment has been duly executed and delivered by each
Credit Party and each of this Amendment and the Credit Agreement as amended
hereby constitutes the legal, valid and binding obligation of the Credit
Parties, enforceable against them in accordance with its terms.
SECTION 4. Reference to and Effect on the Loan Documents. (a) Upon
---------------------------------------------
the effectiveness of this Amendment, on and after the date hereof, each
reference in the Credit Agreement and the other Loan Documents to "this
Agreement," "hereunder," "hereof," "herein," or words of like import, shall mean
and be a reference to the Credit Agreement as amended hereby.
(b) Except to the extent amended hereby, the provisions of the Credit
Agreement and all of the other Loan Documents shall remain in full force and
effect and are hereby ratified and confirmed.
(c) The execution, delivery and effectiveness of this Amendment shall
not, except as expressly provided herein, operate as a waiver of any right,
power or remedy of the Lenders or the Agents under any of the Loan Documents,
nor constitute a waiver of any provision of any of the Loan Documents.
SECTION 5. Costs and Expenses. The Borrowers agree to pay on demand
------------------
all costs, fees and expenses of the Agents in connection with the preparation,
execution and delivery of this Amendment and the other instruments and documents
to be delivered pursuant hereto, including the reasonable fees and out-of-pocket
expenses of counsel for the Agents with respect thereto.
SECTION 6. Execution in Counterparts. This Amendment may be executed
-------------------------
in any number of counterparts and by different parties hereto in separate
counterparts, each of which when so executed shall be deemed to be an original
and all of which taken together shall constitute one and the same instrument.
6
<PAGE>
SECTION 7. Governing Law. This Amendment shall be governed by and
-------------
construed and enforced in accordance with the laws of the State of New York
applicable to contracts made and performed in such state, without regard to the
principles thereof regarding conflict of laws.
7
<PAGE>
IN WITNESS WHEREOF, the parties hereto have duly executed this
Amendment as of the date first above written.
BORROWERS:
---------
THE BON-TON DEPARTMENT STORES, INC.
By: /s/ H. Todd Dissinger
---------------------------------
Name H. Todd Dissinger
Title: Treasurer
THE BON-TON STORES OF LANCASTER, INC.
By: /s/ James H. Baireuther
---------------------------------
Name: James H. Baireuther
Title: Sr. Vice President
OTHER CREDIT PARTIES:
--------------------
THE BON-TON STORES, INC.
By: /s/ H. Todd Dissinger
---------------------------------
Name: H. Todd Dissinger
Title Treasurer
THE BON-TON CORP.
By: /s/ James H. Baireuther
---------------------------------
Name: James H. Baireuther
Title: Treasurer
THE BON-TON NATIONAL CORP.
By: /s/ James H. Baireuther
---------------------------------
Name: James H. Baireuther
Title: Treasurer
8
<PAGE>
THE BON-TON TRADE CORP.
By: /s/ James H. Baireuther
---------------------------------
Name: James H. Baireuther
Title: Treasurer
AGENTS AND LENDERS:
------------------
GENERAL ELECTRIC CAPITAL CORPORATION
Revolving Loan Commitment (including a Swing Line Commitment of $20,000,000):
$48,000,000
By: /s/ Charles D. Chiodo
---------------------------------
Name: Charles D. Chiodo
Title: Duly Authorized Signatory
BANKBOSTON, N.A.
Revolving Loan Commitment $25,000,000
By: /s/ Kali A. Ramachandran
---------------------------------
Name: Kali A. Ramachandran, CPA
Title: Vice President
THE CIT GROUP/BUSINESS CREDIT, INC.
Revolving Loan Commitment $25,000,000
By: /s/ Kevin O'Hara
---------------------------------
Name: Kevin O'Hara
Title: AVP
FIRST UNION NATIONAL BANK, as successor
to CORESTATES BANK, N.A.
Revolving Loan Commitment $25,000,000
By: /s/ Richard J. Preskenis
---------------------------------
Name: Richard J. Preskenis
Title: Vice President
9
<PAGE>
MANUFACTURERS AND TRADERS TRUST COMPANY
Revolving Loan Commitment $20,000,000
By: /s/ Christopher Kania
---------------------------------
Name: Christopher Kania
Title: Vice President
FOOTHILL CAPITAL CORPORATION
Revolving Loan Commitment $30,000,000
By: /s/ Todd W. Colpitts
---------------------------------
Name: Todd W. Colpitts
Title: V.P.
FLEET BUSINESS CREDIT CORPORATION
Revolving Loan Commitment $11,000,000
By: /s/ Victor Alarcon
--------------------------------
Name:
Title: Vice President
UNION BANK OF CALIFORNIA, N.A.
Revolving Loan Commitment $16,000,000
By: /s/ Albert R. Joseph
--------------------------------
Name: Albert R. Joseph
Title: Vice President
10
<PAGE>
EXHIBIT 13.1
THE BON-TON STORES, INC. AND SUBSIDIARIES
SELECTED CONSOLIDATED FINANCIAL AND OPERATING DATA
(In thousands except share, per share and store data)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1998 1997 1996
Ended Jan. 30, 1999 Jan. 31, 1998 Feb. 1, 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: % %
Net sales (1) $ 674,871 100.0 $ 656,399 100.0 $ 626,482
Other income, net 2,350 0.3 2,349 0.4 2,430
Gross profit (2) 248,141 36.8 242,553 37.0 230,919
Selling, general and administrative expenses 209,407 31.0 202,850 30.9 197,315
Depreciation and amortization 13,281 2.0 12,882 2.0 12,758
Unusual (income) expense (3) - - - - (3,171)
Restructuring charges (4) - - - - -
Income (loss) from operations 27,803 4.1 29,170 4.4 26,447
Interest expense, net 9,396 1.4 13,202 2.0 14,687
Income (loss) before taxes 18,407 2.7 15,968 2.4 11,760
Income tax provision (benefit) 7,196 1.1 6,270 1.0 4,949
Income (loss) before extraordinary item 11,211 1.7 9,698 1.5 6,811
Extraordinary item, net of tax (5) - - (446) (0.1) -
Net income (loss) $ 11,211 1.7 $ 9,252 1.4 $ 6,811
Per Share Amounts --
Basic:
Net income (loss) before extraordinary item $ 0.81 $ 0.87 $ 0.62
Effect of extraordinary item - (0.04) -
Net income (loss) $ 0.81 $ 0.83 $ 0.62
Basic Shares Outstanding 13,866,000 11,122,000 11,064,000
Diluted:
Net income (loss) before extraordinary item $ 0.81 $ 0.85 $ 0.61
Effect of extraordinary item - (0.04) -
Net income (loss) $ 0.81 $ 0.81 $ 0.61
Diluted Shares Outstanding 13,917,000 11,377,000 11,106,000
BALANCE SHEET DATA (AT END OF PERIOD):
- --------------------------------------------------------------------------------------------------------------------------------
Working capital $ 128,977 $ 123,078 $ 102,853
Total assets 378,119 352,686 341,252
Long-term debt, including capital leases 76,255 123,384 128,098
Shareholders' equity 180,211 124,394 111,485
SELECTED OPERATING DATA:
- --------------------------------------------------------------------------------------------------------------------------------
EBITDA (6) $ 41,084 6.1 $ 42,052 6.4 $ 39,205
Total Sales Growth (7) 2.8% 4.8% 4.1%
Comparable stores growth (7) (8) 1.4% 6.5% 4.2%
Comparable stores data: (8)
Sales per selling square foot $ 143 $ 143 $ 138
Selling square footage 4,620,000 4,511,000 4,153,000
Capital expenditures $ 19,418 $ 10,978 $ 9,730
Number of stores:
Beginning of year 64 64 68
Additions 2 - 1
Closings (1) - (5)
End of year 65 64 64
- --------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Fiscal Year 1995 1994
Ended Feb. 3, 1996 Jan. 28, 1995
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA: % % %
Net sales (1) 100.0 $ 607,357 100.0 $ 494,908 100.0
Other income, net 0.4 2,266 0.4 2,581 0.5
Gross profit (2) 36.9 219,410 36.1 194,994 39.4
Selling, general and administrative expenses 31.5 207,058 34.1 162,442 32.8
Depreciation and amortization 2.1 11,895 2.0 8,465 1.7
Unusual (income) expense (3) (0.5) 3,280 0.5 - -
Restructuring charges (4) - 5,690 0.9 - -
Income (loss) from operations 4.2 (6,247) (1.0) 26,668 5.4
Interest expense, net 2.3 8,722 1.4 5,475 1.1
Income (loss) before taxes 1.9 (14,969) (2.4) 21,193 4.3
Income tax provision (benefit) 0.8 (5,766) (0.9) 7,563 1.5
Income (loss) before extraordinary item 1.1 (9,203) (1.5) 13,630 2.8
Extraordinary item, net of tax (5) - - - - -
Net income (loss) 1.1 $ (9,203) (1.5) $ 13,630 2.8
Per Share Amounts --
Basic:
Net income (loss) before extraordinary item $ (0.83) $ 1.24
Effect of extraordinary item - -
Net income (loss) $ (0.83) $ 1.24
Basic Shares Outstanding 11,044,000 10,955,000
Diluted:
Net income (loss) before extraordinary item $ (0.83) $ 1.23
Effect of extraordinary item - -
Net income (loss) $ (0.83) $ 1.23
Diluted Shares Outstanding 11,044,000 11,041,000
BALANCE SHEET DATA (AT END OF PERIOD):
- --------------------------------------------------------------------------------------------------------------------------------
Working capital $ 90,758 $ 62,539
Total assets 331,173 270,228
Long-term debt, including capital leases 127,893 60,521
Shareholders' equity 104,174 112,447
SELECTED OPERATING DATA:
- --------------------------------------------------------------------------------------------------------------------------------
EBITDA (6) 6.3 $ 5,648 0.9 $ 35,133 7.1
Total Sales Growth (7) 22.7% 47.0%
Comparable stores growth (7) (8) 0.2% 6.1%
Comparable stores data: (8)
Sales per selling square foot $ 160 $ 163
Selling square footage 2,278,000 2,185,000
Capital expenditures $ 43,587 $ 18,532
Number of stores:
Beginning of year 69 35
Additions 4 35
Closings (5) (1)
End of year 68 69
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Fiscal 1995 reflects the 53 weeks ended February 3, 1996.
(2) Fiscal 1995 includes a $3.5 million charge related to inventory liquidation
associated with the elimination of certain vendors and other merchandise
changes.
(3) Reflects the gain recognized on the pension termination and expenses related
to hiring the Chief Executive Officer in fiscal years 1996 and 1995,
respectively.
(4) Includes $5.0 million charge for store closing reserve with the balance
related to a work force reduction.
(5) Expense resulting from the early extinguishment of the Company's term loan
and revolving credit facility.
(6) Income (loss) from operations plus depreciation and amortization.
(7) Fiscal 1996 sales compared to the 52 weeks ended January 27, 1996.
(8) Comparable stores data (sales and selling square footage) reflects stores
open for the entire current and prior fiscal years.
20
<PAGE>
EXHIBIT 13.2
THE BON-TON STORES, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
RESULTS OF OPERATIONS
---------------------
The following table summarizes the changes in selected operating indicators of
The Bon-Ton Stores, Inc. (the "Company"), illustrating the relationship of
various income and expense items to net sales for each fiscal year presented:
<TABLE>
<CAPTION>
PERCENT OF NET SALES
--------------------------------------
FISCAL YEAR
--------------------------------------
1998 1997 1996
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net sales 100.0% 100.0% 100.0%
Other income, net 0.3 0.4 0.4
--------------------------------------
100.3 100.4 100.4
--------------------------------------
Costs and expenses:
Costs of merchandise sold 63.2 63.0 63.1
Selling, general and administrative 31.0 30.9 31.5
Depreciation and amortization 2.0 2.0 2.1
Unusual income --- --- (0.5)
--------------------------------------
Income from operations 4.1 4.4 4.2
Interest expense, net 1.4 2.0 2.3
--------------------------------------
Income before income taxes 2.7 2.4 1.9
Income tax provision 1.1 1.0 0.8
--------------------------------------
Income before extraordinary item 1.7 1.5 1.1
Extraordinary loss, net of tax --- 0.1 ---
--------------------------------------
Net income 1.7% 1.4% 1.1%
======================================
</TABLE>
FISCAL 1998 COMPARED TO FISCAL 1997
-----------------------------------
NET SALES: Net sales were $674.9 million for the fifty-two weeks ended January
30, 1999, an increase of $18.5 million, or 2.8%, over the fifty-two week period
ended January 31, 1998. A majority of this increase was attributable to the
addition of stores in Jamestown, New York and Westfield, Massachusetts.
Comparable store sales for the same period increased 1.4%. Strong sales
performances were achieved in men's sportswear/young men's, home, intimate,
children and shoes. The sales increase in these categories was reflective of
the Company's initiative to expand its merchandise offerings by introducing
additional better branded goods to its current assortment.
OTHER INCOME, NET: Net other income, which is comprised mainly of income from
leased departments, decreased to 0.3% of net sales for fiscal 1998 compared to
0.4% in fiscal 1997, as a result of the increased net sales in fiscal 1998.
COSTS AND EXPENSES: Gross margin dollars for fiscal 1998 increased $5.6
million, or 2.3%, over fiscal 1997 as a result of the sales volume increase.
Gross profit as a percentage of net sales decreased slightly from 37.0% in
fiscal 1997 to 36.8% for fiscal 1998. The decrease in the margin rate was
primarily attributable to a reduction in the cumulative markup percentage, an
increase in the ratio of markdowns to sales and the lower margin typically
associated with better branded goods which accounted for a greater percentage of
total inventory.
Selling, general and administrative expenses for fiscal 1998 were $209.4
million, or 31.0% of net sales, as compared to $202.9 million, or 30.9% of net
sales, in the prior year. The percentage increase in fiscal 1998 was primarily
attributable to the cost of improving customer service, including personnel
costs, expenses associated with the opening of two new stores and deterioration
of credit operations as a result of increased levels of personal bankruptcies,
which were partially offset by the gain recognized on the sale of the Downtown
Lancaster property (see Note 5) and increased sales volume in fiscal 1998.
Depreciation and amortization remained constant at 2.0% of net sales in fiscal
1998 and fiscal 1997.
21
<PAGE>
INCOME FROM OPERATIONS: Income from operations in fiscal 1998 amounted to $27.8
million, or 4.1% of net sales, as compared to $29.2 million, or 4.4% of net
sales, in fiscal 1997.
INTEREST EXPENSE, NET: Net interest expense decreased $3.8 million to $9.4
million, or 1.4% of net sales, in fiscal 1998 from $13.2 million, or 2.0% of net
sales, in the prior fiscal year. The decrease was primarily attributable to
lower average borrowing levels, which were reduced with the proceeds received
from the sale of additional shares (see Note 7), lower borrowing rates due to a
change in the debt mix and a reduction in the cost of funds borrowed under the
Credit Facility (see Note 2).
EXTRAORDINARY ITEM: The Company recorded an expense of $446,000, net of tax,
related to the early extinguishment of the Company's term loan and revolving
credit facility in fiscal 1997 (see Note 2).
NET INCOME: Net income in fiscal 1998 amounted to $11.2 million, or 1.7% of net
sales, compared to $9.3 million, or 1.4% of net sales, in fiscal 1997.
The decrease in the effective tax rate to 39.1% in fiscal 1998 from 39.3% in
fiscal 1997 primarily reflects a reduction in expenses in excess of the
limitations established in Section 162 of the Internal Revenue Code of 1986,
partially offset by taxes paid in the closure of the Internal Revenue Service
audit for the fiscal years of 1992 through 1995.
FISCAL 1997 COMPARED TO FISCAL 1996
-----------------------------------
NET SALES: Net sales were $656.4 million for the fifty-two weeks ended January
31, 1998, an increase of $29.9 million, or 4.8%, over the fifty-two week period
ended February 1, 1997. Comparable store sales for the same period increased
6.5%. Strong sales performances were achieved in fiscal 1997 in better ladies'
sportswear, men's collections, men's designer denim, Club X (junior department),
children's better collections and men's and ladies' special sizes. The sales
increase in these categories reflects the results of the Company's merchandise
realignment from a predominately moderate mix to an improved balance of moderate
and better merchandise and a larger selection of sizes, colors and styles.
OTHER INCOME, NET: Net other income, which is comprised mainly of income from
leased departments, remained constant at 0.4% of net sales for fiscal 1997.
COSTS AND EXPENSES: Gross margin dollars for fiscal 1997 increased $11.6
million over fiscal 1996 as a result of the sales volume increase and an
improvement in the gross margin rate. Gross profit as a percentage of net sales
increased slightly from 36.9% in fiscal 1996 to 37.0% for fiscal 1997. The
increase in the margin rate was primarily attributable to the continued
improvement in the Company's shrinkage rate as a result of concerted inventory
loss prevention efforts and a decrease in the markdown rate, partially offset by
a strategic reduction in the cumulative markup percentage and reduced margins on
the better merchandise mix.
Selling, general and administrative expenses for fiscal 1997 were $202.9
million, or 30.9% of net sales, as compared to $197.3 million, or 31.5% of net
sales, in the prior year. The percentage decrease in fiscal 1997 was primarily
attributable to the increased sales volume, a $4.0 million improvement in the
profitability of the Company's credit operations and reduced advertising costs,
which were partially offset by the expense of sales growth programs, including
additional personnel expense, and general inflation costs.
Depreciation and amortization decreased slightly to 2.0% of net sales in
fiscal 1997 from 2.1% of net sales in fiscal 1996. The decrease primarily
reflects the increased sales volume in fiscal 1997.
Fiscal 1996 results were affected by the recognition of $3.2 million in pre-
tax unusual income as the result of terminating the pension plan associated with
one of the Company's 1994 acquisitions.
INCOME FROM OPERATIONS: Income from operations in fiscal 1997 amounted to $29.2
million, or 4.4% of net sales, as compared to $26.4 million, or 4.2% of net
sales, in fiscal 1996. The improvement was primarily attributable to the
increase in current year sales and gross margin combined with selling, general
and administrative expenses increasing at a rate less than sales.
22
<PAGE>
INTEREST EXPENSE, NET: Net interest expense decreased $1.5 million to $13.2
million, or 2.0% of net sales, in fiscal 1997 from $14.7 million, or 2.3% of net
sales, in the prior fiscal period. The decrease was primarily attributable to
lower average borrowing levels, partially offset by slightly higher borrowing
costs.
EXTRAORDINARY ITEM: The Company recorded an expense of $446,000, net of tax,
related to the early extinguishment of the Company's term loan and revolving
credit facility in fiscal 1997.
NET INCOME: Net income in fiscal 1997 amounted to $9.3 million, or 1.4% of net
sales, as compared to $6.8 million, or 1.1% of net sales, in fiscal 1996.
The decrease in the effective tax rate to 39.3% in fiscal 1997 from 42.1% in
fiscal 1996 was primarily a result of the nondeductibility of the Federal excise
tax of $1.1 million relating to the pension plan termination in fiscal 1996.
CHANGES IN ACCOUNTING POLICIES
In the fourth quarter of fiscal 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"). The
statement establishes standards for computing and presenting earnings per share
("EPS") and applies to entities with publicly held common stock. SFAS No. 128
simplifies the standards for computing EPS previously found in Accounting
Principles Board Opinion No. 15, "Earnings Per Share," and makes them comparable
to international EPS standards. It replaces the presentation of primary and
fully diluted EPS with a presentation of basic and diluted EPS, respectively.
SFAS No. 128 also requires the dual presentation of basic and diluted EPS on the
face of the income statement and requires a reconciliation of the numerator and
the denominator of the basic EPS computation to the numerator and the
denominator of the diluted EPS calculation. In accordance with this statement,
the Company has restated all EPS calculations presented in these financial
statements and the notes thereto to reflect the requirements of SFAS No. 128.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board 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 also 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 volatility in earnings and other comprehensive
income. The Company will adopt SFAS No. 133 in fiscal 2000 and its effect is
not anticipated to impact the operating results of the Company, as only cash
flow hedges are utilized by the Company and their change will be reported
through comprehensive income.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue refers to the inability of some computer programs and
microprocessors to correctly interpret the century from a date in which the year
is represented by only two digits (e.g., 98). As a result, on January 1, 2000,
computer systems throughout the world may experience operating difficulties
unless they are modified or upgraded to properly process date-related
information. The Year 2000 issue can arise at any point in a company's supply,
operational, distribution or financial processes.
Breakdowns or malfunctions in any number of the Company's computer systems or
applications could prevent the Company from being able to receive and sell its
merchandise. Examples are failures in the Company's receiving, inventory,
payment or point-of-sale applications software, computer chips embedded in
equipment, lack of supply of products from its vendors or lack of power, heat or
water from utilities servicing its facilities.
STATE OF READINESS: The Company implemented a comprehensive risk-based plan
designed to make its operations Year 2000 compliant. The Company established a
corporate project team, which reports to the Vice Chairman and Chief Operating
Officer, to oversee, monitor and coordinate the Company-wide Year 2000 effort.
The Company's plan focuses on four areas - applications and mainframe software,
service providers, miscellaneous equipment providers and merchandise vendors -
and generally covers three stages, including (i) assessment, (ii) remediation
and (iii) testing and certification. The remediation and testing and
certification stages do not apply to the merchandise vendor area. The Company is
primarily utilizing internal resources to complete its Year 2000 initiatives.
23
<PAGE>
The applications and mainframe software area includes the Company's
proprietary and third party computer systems and related hardware, software and
data and telephone networks. The Company's merchandise system, which supports
procurement and distribution, inventory control and point-of-sale reporting
systems, is primarily proprietary. With respect to the Company's credit
business, the Company utilizes a third party software support vendor and has
obtained assurances from such vendor that it expects its system to be Year 2000
compliant. A majority of the Company's information systems are presently Year
2000 compliant. Remediation and testing of remaining systems is in process,
with substantial completion anticipated by July 1999.
The service provider area includes systems and processes provided by outside
agencies, such as freight carriers, inventory and direct mail service providers.
Based on assurances from third parties, these systems present little Year 2000
risk.
The miscellaneous equipment area includes equipment and systems that contain
embedded computer technology such as elevators, phone systems and security
systems. The majority of these systems are presently Year 2000 compliant and the
remaining systems present little Year 2000 exposure or risk.
Merchandise vendors are currently being monitored by an outside agency, co-
sponsored by a group of retailers, which is surveying the vendors for Year 2000
readiness. The survey results are monitored by the retailers via an internet
webpage. The Company is reviewing its vendors' responses on the webpage and
expects to conduct follow-up assessments of certain of its critical vendors to
further monitor such vendors' progress.
COSTS: The aggregate costs for the Company to achieve Year 2000 readiness are
not expected to exceed $1.3 million. These costs will be incurred over the two
year period from 1998 through the year 1999, with the majority to be expended in
1999. All costs associated with Year 2000 readiness will be expensed as
incurred and funded from operating cash flows. The Company's costs associated
with Year 2000 readiness through January 30, 1999 are approximately $235,000.
RISKS AND CONTINGENCY PLANS: Despite the Company's significant efforts to make
its systems and facilities Year 2000 compliant, the ability of third party
service providers, merchandise vendors and other third parties, including
governmental entities and utility companies, to be Year 2000 compliant, is
beyond the Company's control. Accordingly, the Company can give no assurances
that the systems of others on which the Company's systems rely will be timely
converted or compatible with the Company's systems. Additionally, there can be
no assurance that the Company's systems will be rendered Year 2000 compliant in
a timely manner. Failure of a third party or the Company to comply on a timely
basis could have a material adverse effect on the Company. At present, the
Company does not expect Year 2000 issues to materially affect its supply of
merchandise, services, competitive position or financial performance.
The Company believes it is very difficult to accurately predict the most
reasonably likely worst case Year 2000 scenario. However, a reasonably likely
worst case Year 2000 scenario would include the failure of a third party
(including, without limitation, merchandise vendors and service and utility
providers) to timely complete remediation of its Year 2000 deficiencies for any
substantial period of time. This could have a material adverse effect upon the
Company's ability to provide and sell merchandise to its customers.
Additionally, a failure by the Company to timely remediate its Year 2000
deficiencies could impair the Company's ability to conduct its business of
providing and selling merchandise in a timely or profitable manner. The Company
is developing contingency plans, such as identifying alternative sourcing,
increasing inventory on basic stock items and identifying what actions need to
be taken if a critical system or third party provider is not Year 2000
compliant. The Company expects these plans to be finalized by May 1999.
The foregoing statements as to costs and dates relating to the Year 2000
effort are forward-looking and are made in reliance on the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. They are
based on the Company's best estimates which may be updated as additional
information becomes available. The Company's forward-looking statements are
also based on assumptions about many important factors, including the technical
skills of employees and independent contractors, the representations and
preparedness of third parties, the failure of vendors to deliver merchandise or
perform services required by the Company and the collateral effects of the Year
2000 issues on the Company's business partners and customers. While the Company
believes its assumptions are reasonable, it cautions that it is impossible to
predict the impact of certain factors that could cause actual costs or
timetables to differ materially from the expected results.
24
<PAGE>
MARKET RISK AND FINANCIAL INSTRUMENTS
The Company is exposed to market risk associated with changes in interest rates.
To provide the Company with some protection against potential increases in the
variable rate associated with its long-term debt, the Company has entered into
various derivative financial transactions in the form of interest rate swaps.
The interest rate swaps are used to hedge underlying debt obligations. The
swaps are qualifying hedges and the interest rate differential is reflected as
an adjustment to interest expense over the life of the swaps. The Company
currently holds "variable to fixed" rate swaps with a notional amount of $80.0
million with several different financial institutions for various terms. The
notional amount does not represent amounts exchanged by the parties, rather it
is used as the basis to calculate the amounts due and to be received under the
rate swaps. The Company believes the derivative financial instruments entered
into provide protection to the Company from volatile upward swings in the
variable interest rates associated with its debt. The Company does not enter
into or hold derivative financial instruments for trading purposes.
The following tabular disclosure provides information about the Company's
derivative financial instruments and other financial instruments that are
sensitive to changes in interest rates, including debt obligations and interest
rate swaps. For debt obligations, the table presents principal cash flows and
related weighted average interest rates by expected maturity dates, based upon
the amended debt financing (see Note 16), as of January 30, 1999. For interest
rate swaps, the table presents notional amounts and weighted average pay and
receive interest rates by expected maturity date.
<TABLE>
<CAPTION>
Expected Maturity Date
----------------------------------------------------------
There- Fair
1999 2000 2001 2002 2003 after Total Value
-------- -------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities:
Long-term debt
Fixed rate debt $ 615 $ 670 $ 6,542 $ 642 $ 709 $ 18,554 $ 27,732 $ 30,882
Average fixed rate 9.93% 9.92% 10.88% 9.62% 9.62% 9.62% 9.93%
Variable rate debt --- --- --- --- --- $ 47,270 $ 47,270 $ 45,597
Average variable rate --- --- --- --- --- 7.12% 7.12%
Interest Rate Derivatives
Interest Rate Swaps
Variable to Fixed --- $ 30,000 --- --- $ 50,000 --- $ 80,000 $ (2,308)
Average pay rate --- 6.02% --- --- 5.81% --- 5.89%
Average variable rate --- 5.55% --- --- 5.45% --- 5.49%
</TABLE>
SEASONALITY AND INFLATION
The Company's business, like that of most retailers, is subject to seasonal
fluctuations, with the major portion of sales and income realized during the
last half of each fiscal year, which includes the back-to-school and holiday
seasons. See Note 11 of Notes to Consolidated Financial Statements for the
Company's quarterly results for fiscal 1998 and 1997. Selling, general and
administrative expenses are typically higher as a percentage of net sales during
the first half of each fiscal year.
Because of the seasonality of the Company's business, results for any quarter
are not necessarily indicative of the results that may be achieved for a full
fiscal year. In addition, quarterly results of operations depend upon the timing
and amount of revenues and costs associated with the opening, closing and
remodeling of existing stores.
The Company does not believe inflation had a material effect on operating
results during the past three years. However, there can be no assurance that
the Company's business will not be affected by inflationary adjustments in the
future.
25
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The following table summarizes material measures of the Company's liquidity and
capital resources:
<TABLE>
<CAPTION>
January 30, January 31, February 1,
(Dollars in millions) 1999 1998 1997
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Working capital $ 129.0 $ 123.1 $ 102.9
Current ratio 2.10:1 2.22:1 2.03:1
Funded debt to total capitalization 0.29:1 0.49:1 0.55:1
Unused availability under lines of credit $ 69.7 $ 17.5 $ 22.0
</TABLE>
The Company's primary sources of working capital are typically cash flow from
operations, borrowings under its revolving credit facility and proceeds from its
accounts receivable facility. The Company had working capital of $129.0
million, $123.1 million and $102.9 million at the end of fiscal 1998, 1997 and
1996, respectively. The increase in working capital in fiscal 1998 was
principally attributable to an increase in merchandise inventories required to
support the increased sales volume at existing and new locations. The increase
in working capital was partially offset by increased payable levels consistent
with increased inventory and an increase in income taxes payable reflecting
increased income in fiscal 1998. The Company's business follows a seasonal
pattern and working capital fluctuates with seasonal variations. Historically,
the Company's working capital is at its lowest levels from February through
August and then increases very sharply through November when it reaches its
highest level.
Net cash provided by operating activities amounted to $25.8 million in fiscal
1998, while net cash used in operating activities amounted to $7.7 million and
$1.2 million in fiscal 1997 and 1996, respectively. Net operating cash inflows
in fiscal 1998 primarily resulted from improved net income and increased
depreciation.
Net cash used in investing activities amounted to $21.4 million and $8.9
million in fiscal 1998 and 1996, respectively, while net cash provided by
investing activities amounted to $21.9 million in fiscal 1997. The net cash
outflow in fiscal 1998 is the result of capital expenditures in the amount of
$19.4 million which were primarily related to the construction of new stores in
Jamestown, New York and Westfield, Massachusetts, expansion and remodeling of
existing stores and expenditures for fixtures and displays. The Company also
received net proceeds in the amount of $3.0 million primarily from the sale of
the Company's vacant facilities in Downtown Lancaster, Pennsylvania and Downtown
Allentown, Pennsylvania.
Net cash used in financing activities amounted to $2.9 million and $11.6
million in fiscal 1998 and 1997, respectively, while net cash provided by
financing activities was $9.7 million in fiscal 1996. The net cash outflow in
fiscal 1998 was primarily attributable to the net repayment on the Company's
long-term debt, offset by proceeds from the Company's sale of additional stock
(see Note 7).
The Company currently anticipates its capital expenditures for fiscal 1999
will approximate $46.5 million. The expenditures will be directed toward
expansion and remodeling in the Company's existing stores, completion of five to
seven new stores including one in Glen Falls, New York, one in Pottstown,
Pennsylvania and three newly acquired locations (see Note 16) along with
information system enhancements.
In addition to the capital expenditures planned for fiscal 1999, the Company
is planning an increased investment in inventory, advertising and staffing in
certain areas of the New York market. The investment was determined as part of
the continuous process of monitoring store performance. The Company intends to
improve its performance in the New York markets to be more in line with the
Company's strategic goals.
Aside from planned capital expenditures, the Company's primary cash
requirements will be to service debt and finance working capital increases
during peak selling seasons. The Company anticipates that its cash balances and
cash flows from operations, supplemented by borrowings under the Credit
Facility, as amended (see Note 16), and proceeds from the accounts receivable
facility, will be sufficient to satisfy its operating cash requirements.
26
<PAGE>
EXHIBIT 13.3
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA) 1999 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 10,607 $ 9,109
Trade and other accounts receivable, net of allowance for doubtful
accounts of $3,692 and $1,977 in 1998 and 1997, respectively 34,677 28,485
Merchandise inventories 192,872 177,783
Prepaid expenses and other current assets 8,292 8,835
- ----------------------------------------------------------------------------------------------------------------
Total current assets 246,448 224,212
- ----------------------------------------------------------------------------------------------------------------
PROPERTY, FIXTURES AND EQUIPMENT at cost, less accumulated
depreciation and amortization 112,521 108,568
OTHER ASSETS 19,150 19,906
- ----------------------------------------------------------------------------------------------------------------
Total assets $378,119 $352,686
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 71,448 $ 55,478
Accrued payroll and benefits 9,639 9,457
Accrued expenses 25,594 25,649
Current portion of long-term debt 615 556
Current portion of obligations under capital leases 409 379
Deferred income taxes 26 1,227
Income taxes payable 9,740 8,388
- ----------------------------------------------------------------------------------------------------------------
Total current liabilities 117,471 101,134
- ----------------------------------------------------------------------------------------------------------------
LONG-TERM DEBT, less current maturities 74,387 121,121
OBLIGATIONS UNDER CAPITAL LEASES, less current maturities 1,868 2,263
DEFERRED INCOME TAXES 823 365
OTHER LONG-TERM LIABILITIES 3,359 3,409
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 197,908 228,292
- ----------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Note 6)
SHAREHOLDERS' EQUITY:
Common Stock -- authorized 40,000,000 shares at $0.01 par value; issued and
outstanding shares of 12,278,120 and 8,847,333 in 1998 and 1997, respectively 123 88
Class A Common Stock -- authorized 20,000,000 shares at $0.01 par value; issued
and outstanding shares of 2,989,853 in 1998 and 1997 30 30
Additional paid-in capital 108,260 62,585
Deferred compensation (3,114) (2,010)
Retained earnings 74,912 63,701
- ----------------------------------------------------------------------------------------------------------------
Total shareholders' equity 180,211 124,394
- ----------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $378,119 $352,686
================================================================================================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
27
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
(In thousands except share and per share data) 1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $ 674,871 $ 656,399 $ 626,482
OTHER INCOME, NET 2,350 2,349 2,430
- ------------------------------------------------------------------------------------------------------
677,221 658,748 628,912
- ------------------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Costs of merchandise sold 426,730 413,846 395,563
Selling, general and administrative 209,407 202,850 197,315
Depreciation and amortization 13,281 12,882 12,758
Unusual income (Note 13) --- --- (3,171)
- ------------------------------------------------------------------------------------------------------
INCOME FROM OPERATIONS 27,803 29,170 26,447
INTEREST EXPENSE, NET 9,396 13,202 14,687
- ------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 18,407 15,968 11,760
INCOME TAX PROVISION 7,196 6,270 4,949
- ------------------------------------------------------------------------------------------------------
INCOME BEFORE EXTRAORDINARY ITEM 11,211 9,698 6,811
EXTRAORDINARY ITEM - loss on early extinguishment of debt,
net of income tax benefit of $251 --- (446) ---
- ------------------------------------------------------------------------------------------------------
NET INCOME $ 11,211 $ 9,252 $ 6,811
======================================================================================================
PER SHARE AMOUNTS --
BASIC:
Net income before extraordinary item $ 0.81 $ 0.87 $ 0.62
Effect of extraordinary item --- (0.04) ---
- -----------------------------------------------------------------------------------------------------
Net income $ 0.81 $ 0.83 $ 0.62
======================================================================================================
BASIC SHARES OUTSTANDING 13,866,000 11,122,000 11,064,000
DILUTED:
Net income before extraordinary item $ 0.81 $ 0.85 $ 0.61
Effect of extraordinary item --- (0.04) ---
- -----------------------------------------------------------------------------------------------------
Net income $ 0.81 $ 0.81 $ 0.61
======================================================================================================
DILUTED SHARES OUTSTANDING 13,917,000 11,377,000 11,106,000
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
28
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Class A Additional
Common Common Paid-in Deferred Retained
(In thousands) Stock Stock Capital Compensation Earnings Total
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 3, 1996 $ 83 $30 $ 58,197 $(1,774) $47,638 $104,174
Net income --- --- --- --- 6,811 6,811
Deferred compensation
amortization --- --- --- 505 --- 505
Cancellation of Restricted Shares --- --- (15) 10 --- (5)
- -------------------------------------------------------------------------------------------------------
Balance at February 1, 1997 83 30 58,182 (1,259) 54,449 111,485
Net income --- --- --- --- 9,252 9,252
Issuance of stock under
Stock Award Plans 2 --- 2,094 (1,256) --- 840
Deferred compensation
amortization --- --- --- 505 --- 505
Exercised stock options 3 --- 2,314 --- --- 2,317
Cancellation of Restricted Shares --- --- (5) --- --- (5)
- -------------------------------------------------------------------------------------------------------
Balance at January 31, 1998 88 30 62,585 (2,010) 63,701 124,394
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
- -------------------------------------------------------------------------------------------------------
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
29
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
(In thousands) 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,211 $ 9,252 $ 6,811
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation and amortization 13,281 12,882 12,758
Bad debt and other noncash charges 1,770 700 924
Stock compensation expense 441 1,345 505
Gain on sale of property, fixtures and equipment (1,291) (17) (407)
Cancellation of Restricted Shares (177) (5) (5)
Decrease (increase) in other long-term assets 143 (80) 320
Deferred income tax (743) (1,210) 4,116
Decrease in other long-term liabilities (50) (523) (476)
Extraordinary loss on debt extinguishment --- 697 ---
Restructuring payments (449) (580) (1,252)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable (2,961) (34,879) 216
Increase in merchandise inventories (15,090) (16,592) (19,450)
Decrease (increase) in prepaid expenses and other current assets 543 9,554 (4,827)
Decrease in income taxes receivable --- --- 8,549
Increase (decrease) in accounts payable 15,970 3,852 (3,542)
Increase (decrease) in accrued expenses 1,851 3,343 (6,823)
Increase in income taxes payable 1,352 4,551 1,334
----------------------------------------
Total adjustments 14,590 (16,962) (8,060)
----------------------------------------
Net cash provided by (used in) operating activities 25,801 (7,710) (1,249)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures, net (19,418) (10,978) (9,730)
Proceeds from sale of property, fixtures and equipment 3,004 17 855
Proceeds from sale of accounts receivable, net (5,000) 22,000 ---
Proceeds from Sale and Leaseback arrangement --- 10,841 ---
----------------------------------------
Net cash (used in) provided by investing activities (21,414) 21,880 (8,875)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt and capital lease obligations (309,339) (320,996) (233,826)
Proceeds from issuance of long-term debt 262,300 307,102 220,125
Proceeds from issuance of mortgages --- --- 23,400
Proceeds from equity offering 43,417 --- ---
Exercised stock options 733 2,317 ---
----------------------------------------
Net cash (used in) provided by financing activities (2,889) (11,577) 9,699
Net increase (decrease) in cash and cash equivalents 1,498 2,593 (425)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 9,109 6,516 6,941
----------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,607 $ 9,109 $ 6,516
========================================
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
30
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)
The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on
January 31, 1996 as the successor of a company established on January 31, 1929
and currently operates as one business segment, through its subsidiaries, 65
retail department stores located in Pennsylvania, New York, Maryland,
Massachusetts, West Virginia and New Jersey.
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
----------------------------------------------
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of The Bon-Ton
Stores, Inc. and its wholly-owned subsidiaries (the "Company"). All
intercompany transactions have been eliminated in consolidation.
ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires that management make estimates and assumptions
which affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
FISCAL YEAR
The Company's fiscal year ends on the Saturday nearer to January 31 of the
following calendar year, and consisted of fifty-two weeks for fiscal years 1998,
1997 and 1996. Fiscal years 1998, 1997 and 1996 ended on January 30, 1999,
January 31, 1998 and February 1, 1997, respectively.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid short-term investments with an original
maturity of three months or less when purchased to be cash equivalents. Cash
equivalents are generally overnight money market investments.
MERCHANDISE INVENTORIES
For both financial reporting and tax purposes, merchandise inventories are
determined by the retail method, using a LIFO (last-in, first-out) cost basis.
The estimated cost to replace inventories was $193,823 and $180,083 as of
January 30, 1999 and January 31, 1998, respectively.
PROPERTY, FIXTURES AND EQUIPMENT: DEPRECIATION AND AMORTIZATION
Depreciation and amortization of property, fixtures and equipment are computed
using the straight-line method based upon the following average estimated
service lives (or remaining lease terms):
Buildings................ 20 to 40 years
Leasehold improvements... 15 years
Fixtures and equipment... 5 to 10 years
No depreciation is recorded until property, fixtures and equipment are placed
into service. Property, fixtures and equipment not placed into service are
classified as construction in progress.
The Company capitalizes interest 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.
31
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
STORE OPENING AND CLOSING COSTS
The Company follows the practice of accounting for store opening costs incurred
prior to opening a new retail unit as a current period expense. When the
decision to close a retail unit is made, the Company provides for estimated
future net lease obligations after store operations cease; nonrecoverable
investments in property, fixtures and equipment; and other expenses directly
related to discontinuance of operations. The estimates are based upon
historical information along with certain assumptions about future events.
Changes in the assumptions for store closing costs for such items as the
estimated period of future lease obligations and the amounts actually realized
relating to the 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
expense for fiscal years 1998, 1997 and 1996 were $27,569, $27,095 and $28,747,
respectively. Prepaid expenses and other current assets include prepaid
advertising costs of $972 and $687 at January 30, 1999 and January 31, 1998,
respectively.
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 $2,590,
$2,502 and $2,719 in fiscal 1998, 1997 and 1996, 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 1998, 1997 and 1996
was $29,776, $25,019 and $19,502, respectively, and is a component of
securitization income (see Note 4).
STOCK-BASED COMPENSATION
The Company follows Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), which provides for a
fair value based method of accounting for grants of equity instruments to
employees or suppliers in return for goods or services. As permitted under SFAS
No. 123, the Company has elected to continue to account for compensation costs
under the provisions prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees." The Company has included pro forma
disclosures of net income 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
In the fourth quarter of fiscal 1997, the Company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share" ("SFAS No. 128"). SFAS No.
128, which supersedes Accounting Principles Board Opinion No. 15, "Earnings per
Share," requires dual presentation of Basic and Diluted earnings per share
("EPS") on the face of the statement of operations. Basic EPS is computed by
dividing reported earnings available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted EPS is
computed assuming the conversion of all dilutive securities, such as options and
restricted stock. The effect of the adoption of SFAS No. 128 was immaterial to
the financial statements of the Company. In accordance with SFAS No. 128, all
prior period per share amounts have been restated to reflect the new calculation
and presentation. The statement requires a reconciliation of the numerators and
denominators used in the Basic and Diluted EPS calculations. The numerator, net
income, 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.
32
<PAGE>
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- -----------------
Shares EPS Shares EPS Shares EPS
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Calculation 13,866,000 $0.81 11,122,000 $0.87 11,064,000 $0.62
Dilutive Securities---
Restricted Shares 25,000 72,000 10,000
Options 26,000 183,000 32,000
-------------------------------------------------------
Diluted Calculation 13,917,000 $0.81 11,377,000 $0.85 11,106,000 $0.61
-------------------------------------------------------
Antidilutive shares and options ---
Restricted Shares 388,000 132,000 208,000
Options 1,068,000 654,000 1,049,000
</TABLE>
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
1998 and 1996 and the first two quarters of 1997. In addition, antidilutive
options to purchase shares during the remaining four quarters were excluded from
the computation of dilutive securities due to exercise prices greater than the
average market price during the quarters of fiscal 1998, 1997 and 1996.
The following table reflects the approximate dilutive securities calculated
under the treasury stock method had the Company reported consecutive quarterly
net profits for the corresponding fiscal years:
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Approximate Dilutive Securities ---
Restricted Shares 90,000 108,000 24,000
Options 291,000 248,000 138,000
</TABLE>
Options to purchase shares with exercise prices greater than the average market
price were excluded from the above table for 1998, 1997 and 1996 in the
approximate amounts of 244,000, 311,000 and 806,000, respectively, as they would
have been antidilutive.
TRANSFERS AND SERVICING OF FINANCIAL ASSETS
In June 1996, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities" ("SFAS No. 125"). Under
SFAS No. 125, a transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent consideration
other than beneficial interests in the transferred assets is received in
exchange. It also requires that servicing assets and other retained interests
in the transferred assets be measured by allocating the previous carrying amount
between assets sold, if any, and retained interests, if any, based on their
relative fair value at the date of transfer. The adoption of this statement on
January 1, 1997 did not have a material effect on the consolidated financial
results of the Company.
FUTURE ACCOUNTING CHANGES
In June 1998, the Financial Accounting Standards Board 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 also 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 volatility in earnings and other comprehensive
income. The Company will adopt SFAS No. 133 in fiscal 2000 and its effect is not
anticipated to impact the operating results of the Company, as only cash flow
hedges are utilized by the Company and their change will be reported through
comprehensive income.
33
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. DEBT
--------
Debt consisted of the following:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Revolving credit agreement -- principal payable April 15, 2000;
interest payable periodically at varying rates (7.40% for fiscal year 1998) $42,770 $ 88,900
Mortgage notes payable -- principal payable in varying monthly installments
through June 2015; interest 9.62%; secured by
land and buildings 21,484 21,918
Mortgage note payable -- principal and interest in monthly installments of
$68 through January 2001, with a balloon payment in February 2001; interest
11.00%; secured by buildings 6,248 6,359
Mortgage notes payable -- principal payable February 1, 2012; interest payable
monthly at various rates; secured by a building 4,500 4,500
--------------------
Total debt 75,002 121,677
Less: current maturities 615 556
--------------------
Long-term debt $74,387 $121,121
====================
</TABLE>
In April 1997, the Company entered into a three-year revolving credit agreement
("Credit Facility") with several financial institutions, replacing the Company's
previous $86,250 term loan and $85,000 revolving credit agreement. The new
agreement provides for a borrowing base, with subjective elements, determined
upon eligible inventory and selected fixed assets and real estate, up to an
aggregate principal amount of $200,000. As of January 30, 1999, the Company
borrowed $42,770 with $69,670 of borrowings remaining available under this
agreement. The interest charged under this agreement, based on LIBOR or an
index rate plus an applicable margin, is determined by a formula based on the
Company's interest coverage ratio (defined as the ratio of earnings before
interest, taxes, depreciation and amortization (EBITDA) to interest expense).
In connection with the repayment of the previous term loan and revolving credit
agreement, the Company recognized a one-time extraordinary after-tax charge of
$446, or $0.04 per share, in fiscal 1997.
The Company maintains an interest rate swap portfolio which allows the
Company to convert variable rate borrowings to fixed rates. The following table
indicates the notional amounts, and the range of interest rates paid and
received by the Company as of January 30, 1999 and January 31, 1998:
<TABLE>
<CAPTION>
January 30, January 31,
1999 1998
------------ ------------
<S> <C> <C>
Fixed swaps (notional amount) $80,000 $60,000
Range of receive rate 5.06%-5.70% 5.56%-6.24%
Range of pay rate 5.66%-6.06% 5.97%-8.06%
</TABLE>
The interest rate swap agreements will expire on various dates from November 27,
2000 to September 2, 2003. The net income or expense from the exchange of
interest rate payments is included in interest expense. The estimated fair
value, based on dealer quotes, of the interest rate swap agreements at January
30, 1999 and January 31, 1998 was a loss of $2,308 and $1,261, respectively, and
represents the amount the Company would pay if the agreements were terminated as
of such dates.
Several of the Company's loan agreements contain restrictive covenants,
including a minimum trade support ratio, a minimum fixed charge ratio and
limitations on dividends, additional incurrence of debt and capital
expenditures.
The fair value of the Company's debt, excluding interest rate swaps, is
estimated at $76,480 and $122,310 on January 30, 1999 and January 31, 1998,
respectively, and is based on an estimate of the rates available to the Company
for debt with similar features.
34
<PAGE>
Debt maturities, based upon the amended debt financing (see Note 16), as of
January 30, 1999, are as follows:
<TABLE>
<CAPTION>
---------------------------------------------
<S> <C>
1999 $ 615
2000 670
2001 6,542
2002 642
2003 709
2004 and thereafter 65,824
-------
$75,002
=======
</TABLE>
3. INTEREST COSTS
------------------
Interest and debt costs were:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
---------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest cost incurred $9,681 $13,441 $14,955
Interest income (110) (234) (153)
Capitalized interest, net (175) (5) (115)
------------------------------------------
Interest expense, net $9,396 $13,202 $14,687
==========================================
Interest paid $9,128 $12,887 $14,898
==========================================
</TABLE>
4. SALE OF RECEIVABLES
-----------------------
The Company securitizes its private credit card portfolio through an accounts
receivable facility (the "Facility"). Under the securitization agreement, which
expires in January 2000 and is contingent upon the receivables meeting certain
performance criteria, the Company has the option to sell through The Bon-Ton
Receivables Partnership, LP ("BTRLP"), a wholly-owned subsidiary of the Company,
up to $150,000 of an undivided percentage interest in the receivables, on a
limited recourse basis. BTRLP assets of $35,157 and $27,979 as of January 30,
1999 and January 31, 1998, respectively, were included in the accompanying
Consolidated Balance Sheets and consist primarily of its retained interest in
receivables initially purchased from the Company and sold under the Facility.
The Company accounts for its retained 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 retained interest as the
current carrying value of customers' revolving charge accounts receivable is a
reasonable estimate of fair value since the average interest rates approximate
current market origination rates. Creditors of BTRLP have a claim on BTRLP's
assets prior to any equity in BTRLP becoming available to creditors of the
Company.
As of January 30, 1999 and January 31, 1998, credit card receivables were
sold under the above referenced agreement in the amount of $127,000 and
$132,000, respectively. BTRLP holds a participating interest in an undivided
ownership interest in the receivables sold. This interest is required to be
held under terms of the agreement to provide credit support against future
losses and is subject to lien. The amount subject to credit support amounted to
$29,360 and $21,071 at January 30, 1999 and January 31, 1998, respectively. New
receivables are sold on a continual basis to replenish the investors' respective
level of participation in receivables which have been repaid by the credit card
holders. The Company does not recognize a servicing asset or liability, as the
amount received for servicing the receivables is a reasonable approximation of
market rates and servicing costs.
The net impact on earnings in connection with the sale of receivables
under this agreement was not significant. However, under the terms of the sale
agreement, the Company receives securitization income equal to the excess of the
finance charges collected on the receivables over the rate paid, which is based
on variable or fixed rate pricing alternatives, less the credit losses which are
payable under the recourse provisions of these agreements. The Company also
continues to service the accounts. Securitization income, before consideration
of servicing expenses other than the rate paid in these securitization
transactions and credit losses, was approximately $7,587, $8,410 and $6,211 in
fiscal 1998, 1997 and 1996, respectively. Securitization income and servicing
expenses are reported as components of selling, general and administrative
expenses. Although the Company receives positive securitization cash flow, an
interest-only strip has not been recorded due to the short life of the
receivables and to provide for credit losses under the recourse provision of the
Facility.
35
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. PROPERTY, FIXTURES AND EQUIPMENT
------------------------------------
As of January 30, 1999 and January 31, 1998, property, fixtures and equipment
and the related accumulated depreciation and amortization consisted of:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
----------- -----------
<S> <C> <C>
Land $ 660 $ 1,171
Buildings and leasehold improvements 105,305 94,635
Furniture and equipment 94,675 89,128
Buildings under capital leases 5,052 5,052
-------- --------
205,692 189,986
Less: Accumulated depreciation and amortization 93,171 81,418
-------- --------
$112,521 $108,568
======== ========
</TABLE>
Property, fixtures and equipment with a net depreciated cost of approximately
$40,056 and $41,336 are pledged as collateral for secured loans at January 30,
1999, and January 31, 1998, respectively.
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.
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 gain or 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.
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 January 30, 1999, future minimum lease payments under operating leases
and the present value of net minimum lease payments under capital leases are as
follows:
<TABLE>
<CAPTION>
Fiscal Year CAPITAL LEASES OPERATING LEASES
- ------------------------------------------------------------------------------------
<S> <C> <C>
1999 $ 579 $ 16,277
2000 579 15,506
2001 579 13,428
2002 300 11,775
2003 300 11,446
2004 and thereafter 500 64,243
------------------------
Total net minimum rentals 2,837 $132,675
========
Less: Amount representing interest 560
------
Present value of net minimum lease payments, of
which $409 is due within one year $2,277
======
</TABLE>
Minimum rental commitments under operating leases detailed earlier are reflected
without reduction for rental income due in future years under noncancellable
subleases since the amounts are immaterial. Some of the store leases contain
renewal options ranging from two to thirty-five years. Included in the minimum
lease payments under operating leases are leased vehicles, copiers and computer
equipment, as well as related-party commitments with the Company's majority
shareholder and related entities of $625, $451, $481, $481, $481 and $4,328 for
fiscal 1999, 2000, 2001, 2002, 2003 and 2004 and thereafter, respectively.
36
<PAGE>
Rental expense consists of the following:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
-------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
----------- ----------------- -----------
<S> <C> <C> <C>
Operating leases:
Buildings:
Minimum rentals $14,597 $13,898 $13,660
Contingent rentals 2,710 2,636 2,374
Fixtures and equipment 1,230 1,332 750
Contingent rentals on capital leases 399 410 357
------- ------- -------
Totals $18,936 $18,276 $17,141
======= ======= =======
</TABLE>
CONTINGENCIES
The Company has been named, together with other department stores and Nine West
Group, Inc., as a defendant in a number of antitrust class action lawsuits which
have been consolidated in the United States District Court of the Southern
District of New York. These lawsuits allege that the defendants engaged in
conduct in violation of the antitrust laws relating to the sale of shoes
manufactured by Nine West, and seek unspecified damages against all defendants.
The Company and its counsel believes these claims are without merit and intends
to vigorously defend these lawsuits.
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; 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 will
be used to expand and upgrade existing stores, open new stores, provide working
capital and for general corporate purposes. Pending such uses, the Company used
the proceeds to reduce indebtedness under the Credit Facility.
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:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Federal and State:
Current $7,939 $ 7,480 $ 833
Deferred (743) (1,210) 4,116
------------------------------------------
Total $7,196 $ 6,270 $4,949
==========================================
</TABLE>
37
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Components of gross deferred tax assets and liabilities were comprised of the
following:
<TABLE>
<CAPTION>
JANUARY 30, JANUARY 31,
1999 1998
-----------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Accrued expenses $1,635 $1,560
Restricted Shares 1,432 1,096
Bad debt reserve 1,329 712
Store closings 1,011 1,969
Sale and leaseback 976 1,030
Loss carryforward 270 324
Capital leases 116 140
Other --- 168
Valuation allowance (204) (288)
--------------------
Total gross deferred tax assets $6,565 $6,711
====================
Deferred tax liabilities:
Fixed assets $4,400 $4,740
Inventory 1,692 2,155
Other 1,322 1,408
--------------------
Total gross deferred tax liabilities $7,414 $8,303
====================
</TABLE>
The loss carryforward at January 30, 1999 relates to the acquisition of Adam,
Meldrum & Anderson Co., Inc. and will expire in January 2009.
The valuation allowance relates to the deferred tax assets that result
from accrued expenses that are not deductible for tax purposes due to the
limitations arising from Section 162 of the Internal Revenue Code of 1986, as
amended ("IRC 162"), relating to deductions for executive compensation.
No other deferred tax assets have associated valuation allowances since
these tax benefits are realizable through the reversal of existing deferred tax
liabilities and future taxable income.
A reconciliation of the statutory federal income tax rate to the effective
tax rate for fiscal 1998, 1997 and 1996 is presented below:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
----------------------------------------------
JANUARY 30, JANUARY 31, FEBRUARY 1,
1999 1998 1997
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax at statutory rate 35.0% 35.0% 35.0%
Book expense in excess of
IRC 162 limitation 0.7 2.3 3.6
State income taxes, net of federal benefit 1.0 1.0 1.0
Excise tax on pension termination --- --- 3.4
Internal Revenue Service audit closure 1.9 --- ---
Other, net 0.5 1.0 (0.9)
----------------------------------------------
Total 39.1% 39.3% 42.1%
==============================================
</TABLE>
In fiscal 1998 and 1997, the Company made income tax payments of $6,397 and
$2,194, respectively. The Company received income tax refunds, net of payments,
of $8,641 in fiscal 1996.
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
38
<PAGE>
the discretion of the Company's Board of Directors. These profit sharing
contributions become fully vested after five years of service. The Company
contributed $1,422, $1,350 and $1,200 in fiscal 1998, 1997 and 1996,
respectively, under the profit sharing provisions of the Plan.
In addition to the above plans, the Company maintains a non-qualified
compensation plan for a select group of management employees.
The Company's fiscal 1998, 1997 and 1996 expense under the aforementioned
benefit plans was $1,798, $1,951 and $1,932, respectively.
In December 1995, the Company merged the Adam, Meldrum and Anderson Co.,
Inc. Pension Plan into the Hess's Department Stores, Inc. Employees' Pension
Plan. These defined benefit pension plans (the "Merged Plan") covered
substantially all the former employees of Adam, Meldrum and Anderson Co., Inc.
and Hess's Department Stores, Inc., respectively. The Adam, Meldrum and
Anderson Co., Inc. Pension Plan was curtailed in fiscal 1992 by the former
owners. The Hess's Department Stores, Inc. Employees' Pension Plan was
overfunded at the time of the purchase of certain assets of Hess's Department
Stores, Inc. Due to the overfunded status of the Merged Plan, an asset was
recorded in the purchase price allocation for the estimated net realizable value
of the overfunded plan at the expected termination date.
In April 1996, the Company began the termination process of the Merged
Plan. The participants' obligations were settled through an election by the
participants of either a lump sum payout or an annuity purchase. The settlement
of participants' obligations was completed in November 1996. As a result of
this settlement, the Company recorded a gain in fiscal 1996 of $3,171, net of
$1,132 Federal excise tax expense, to recognize the value of assets to be
reverted to the Company in excess of the asset established in purchase
accounting.
Completion of the funds reversion occurred in November 1997. Total funds
reverted to the Company amounted to $6,005, net of $1,132 Federal excise taxes
paid. Additionally, the Company also transferred $2,007 to the Company's profit
sharing plan of which $1,200 was used to fund the Company's 1996 contribution.
The remaining balance in the Plan partially funded the Company's 1997
contribution of $1,350.
10. STOCK AWARD PLANS
----------------------
The Company's Amended and Restated 1991 Stock Option and Restricted Stock Plan
(the "Stock Plan"), as amended through June 17, 1997, provides for the granting
of the following options and awards to certain associates, officers, directors,
consultants and advisors: Common Stock options; performance-based Common Stock
options as part of a long-term incentive plan for selected officers; and Common
Stock awards subject to substantial risk of forfeiture ("Restricted Shares").
The maximum number of shares to be granted under the Stock Plan, less
forfeitures, is 1,900,000 shares. In addition to the Stock Plan, during 1991
the Board of Directors approved a Phantom Equity Replacement Plan (the
"Replacement Plan") to replace the Company's previous deferred compensation
arrangement that was structured as a phantom stock program.
Options granted under the Stock Plan, excluding Restricted Share awards,
are generally issued at the market price of the Company's stock on the date of
grant, vest over three to five years and have a ten-year term. Grants under the
Replacement Plan vest over approximately one to six years and have a thirty-year
term.
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.
Pursuant to Mr. Wilansky's Employment Agreement (see Note 12), the Company
implemented The Bon-Ton Stores, Inc. Performance Based Stock Incentive Plan for
Heywood Wilansky (the "Stock Incentive Plan"). The Stock Incentive Plan
provides performance-based compensation to Mr. Wilansky in the form of stock
bonuses granted in connection with services provided. The maximum number of
shares available under the Stock Incentive Plan is 500,000.
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 $441, $1,345 and $505 in fiscal
1998, 1997 and 1996, respectively. Had the Company recorded compensation
expense using the fair value based
39
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------
<S> <C> <C> <C> <C>
Net income As reported $11,211 $9,252 $6,811
Pro forma 10,154 8,416 5,987
Earnings per share
Basic As reported $ 0.81 $ 0.83 $ 0.62
Pro forma 0.73 0.76 0.54
Diluted As reported $ 0.81 $ 0.81 $ 0.61
Pro forma 0.73 0.74 0.54
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Expected option term in years 7.7 7.2 7.0
Stock price volatility factor 66.6% 61.5% 65.0%
Dividend yield 0.0% 0.0% 0.0%
Risk free interest rate 5.5% 6.3% 6.4%
</TABLE>
A summary of the options under the Stock Plan follows:
<TABLE>
<CAPTION>
RESTRICTED
COMMON STOCK OPTIONS PERFORMANCE-BASED OPTIONS SHARES
-------------------------------------------------------------------
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF
OPTIONS PRICE OPTIONS PRICE SHARES
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FISCAL 1996
February 3, 1996 637,750 $ 8.57 94,000 $ 8.67 281,440
Granted 131,286 $ 6.58 176,800 $ 6.13 ---
Exercised --- --- --- --- (11,659)
Forfeited (17,216) $ 8.69 (60,700) $ 7.25 (1,456)
-------------------------------------------------------------------
February 1, 1997 751,820 $ 8.22 210,100 $ 6.94 268,325
===================================================================
Options exercisable at February 1, 1997 328,653 $ 9.54 --- --- ---
Weighted average fair value of options
granted during fiscal 1996 $ 4.40 $ 4.20
FISCAL 1997
Granted 134,300 $ 6.86 167,100 $ 7.25 ---
Exercised (243,759) $ 6.04 --- --- (10,955)
Forfeited (25,866) $10.32 --- --- (704)
-------------------------------------------------------------------
January 31, 1998 616,495 $ 8.35 377,200 $ 7.08 256,666
===================================================================
Options exercisable at January 31, 1998 274,309 $10.03 --- --- ---
Weighted average fair value of options
granted during fiscal 1997 $ 4.84 $ 4.95
FISCAL 1998
Granted 151,400 $13.71 --- --- 35,000
Exercised (64,132) $ 8.72 --- --- (90,000)
Forfeited (21,400) $ 8.13 (33,300) $11.25 ---
-------------------------------------------------------------------
January 30, 1999 682,363 $ 9.50 343,900 $ 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 ---
</TABLE>
The exercised shares in the above summary for Restricted Shares represent shares
for which the restrictions have lapsed.
40
<PAGE>
The range of exercise prices for the Common Stock options outstanding as of
January 30, 1999 follows:
<TABLE>
<CAPTION>
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
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$5.88 - $ 8.25 381,230 $ 6.71 4.0 years 234,270 $ 6.62
$9.00 - $13.00 164,733 $11.96 1.0 year 160,983 $12.02
$13.75 - $16.13 136,400 $14.34 1.8 years 4,500 $14.25
</TABLE>
The range of exercise prices for the performance-based options was $6.13 to
$7.25, with a weighted average contractual life of 7.6 years.
A summary of the status of the Replacement Plan follows:
<TABLE>
<CAPTION>
Discount Non-Discount
Options Options
- --------------------------------------------------------------------------
<S> <C> <C>
Exercise Price $3.25 $ 13.00
-----------------------
February 3, 1996 142,578 42,606
Exercised --- ---
Forfeited --- ---
-----------------------
February 1, 1997 142,578 42,606
Exercised (57,309) ---
Forfeited --- (5,054)
-----------------------
January 31, 1998 85,269 37,552
Exercised (36,080) ---
Forfeited --- ---
-----------------------
January 30, 1999 49,189 37,552
</TABLE>
As of January 30, 1999, January 31, 1998 and February 1, 1997, the exercisable
discounted options amounted to 49,189, 83,411 and 138,861, respectively, and
exercisable non-discounted options amounted to 37,552, 36,122 and 39,746,
respectively.
The Company granted 202,300 Restricted Shares under the MIP Plan in fiscal
1997. No Restricted Shares vested or were forfeited during fiscal 1997. In
fiscal 1998, the Company granted an additional 1,326 shares, the restriction
lapsed on 39,466 shares pursuant to the MIP Plan and 47,022 shares were
forfeited. No additional shares will be granted under the MIP Plan. The total
shares outstanding under the MIP Plan as of January 30, 1999 were 117,138.
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.
Cancellation of options and shares in the above plans resulted primarily
from the termination of the employment of certain executives and voluntary
forfeitures.
41
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. QUARTERLY RESULTS (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED
-----------------------------------------------------
MAY 2, AUGUST 1, OCTOBER 31, JANUARY 30,
FISCAL 1998: 1998 1998 1998 1999
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net sales $ 143,267 $ 145,731 $ 154,748 $ 231,125
Other income, net 499 475 424 952
-----------------------------------------------------
143,766 146,206 155,172 232,077
-----------------------------------------------------
Costs of merchandise sold 91,435 91,460 97,047 146,788
Selling, general and administrative expenses 47,029 50,713 52,352 59,313
Depreciation and amortization 3,090 3,090 3,566 3,535
-----------------------------------------------------
Income from operations 2,212 943 2,207 22,441
Interest expense, net 2,633 2,089 2,483 2,191
-----------------------------------------------------
Income (loss) before income taxes (421) (1,146) (276) 20,250
Income tax provision (benefit) (175) (435) (109) 7,915
-----------------------------------------------------
Net income (loss) $ (246) $ (711) $ (167) $ 12,335
=====================================================
PER SHARE AMOUNTS ---
BASIC:
Net income (loss) $ (0.02) $ (0.05) $ (0.01) $ 0.84
=====================================================
BASIC SHARES OUTSTANDING 11,506,000 14,592,000 14,672,000 14,695,000
DILUTED:
Net income (loss) $ (0.02) $ (0.05) $ (0.01) $ 0.83
=====================================================
DILUTED SHARES OUTSTANDING 11,506,000 14,592,000 14,672,000 14,900,000
FISCAL QUARTER ENDED
-----------------------------------------------------
MAY 3, AUGUST 2, NOVEMBER 1, JANUARY 31,
FISCAL 1997: 1997 1997 1997 1998
- ----------------------------------------------------------------------------------------------------------
Net sales $ 134,251 $ 137,994 $ 155,513 $ 228,641
Other income, net 491 472 457 929
-----------------------------------------------------
134,742 138,466 155,970 229,570
-----------------------------------------------------
Costs of merchandise sold 84,936 86,152 97,212 145,546
Selling, general and administrative expenses 46,002 47,457 51,064 58,327
Depreciation and amortization 3,166 3,196 3,500 3,020
-----------------------------------------------------
Income from operations 638 1,661 4,194 22,677
Interest expense, net 3,549 3,223 3,254 3,176
-----------------------------------------------------
Income (loss) before income taxes (2,911) (1,562) 940 19,501
Income tax provision (benefit) (1,108) (594) 367 7,605
-----------------------------------------------------
Income (loss) before extraordinary item (1,803) (968) 573 11,896
Extraordinary item - loss on early extinguishment
of debt, net of income tax benefit of $251 (446) --- --- ---
-----------------------------------------------------
Net income (loss) $ (2,249) $ (968) $ 573 $ 11,896
=====================================================
PER SHARE AMOUNTS --
BASIC:
Net income (loss) before extraordinary item $ (0.16) $ (0.09) $ 0.05 $ 1.06
Effect of extraordinary item (0.04) --- --- ---
-----------------------------------------------------
Net income (loss) $ (0.20) $ (0.09) $ 0.05 $ 1.06
=====================================================
BASIC SHARES OUTSTANDING 11,073,000 11,075,000 11,082,000 11,261,000
DILUTED:
Net income (loss) before extraordinary item $ (0.16) $ (0.09) $ 0.05 $ 1.00
Effect of extraordinary item (0.04) --- --- ---
-----------------------------------------------------
Net income (loss) $ (0.20) $ (0.09) $ 0.05 $ 1.00
=====================================================
DILUTED SHARES OUTSTANDING 11,073,000 11,075,000 11,493,000 11,867,000
</TABLE>
42
<PAGE>
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 provides for increased cash and
stock-based compensation. Pursuant to the new agreement, the Company
implemented the Stock Incentive Plan which provides 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.
13. UNUSUAL INCOME
-------------------
In January 1997, the Company recorded unusual income of $3,171 before taxes,
which is presented separately as a component of income from operations in the
Consolidated Statements of Income. The income relates to a $4,303 gain that was
recognized on the termination of the Merged Plan. The gain was partially offset
by $1,132 for Federal excise tax that was paid when the pension assets were
reverted to the Company. The asset reversion occurred during 1997 (see Note 9).
14. SALE AND LEASEBACK ARRANGEMENT
----------------------------------
In April 1997, the Company sold the land, building and leasehold improvements
comprising its department store in Johnstown, Pennsylvania and distribution
center in Allentown, Pennsylvania and subsequently leased the facilities back
under a twenty-year lease. The lease has been accounted for as an operating
lease for financial reporting purposes. Annual payments under the operating
lease agreement are $1,270. The $10,841 of net proceeds received from the sale
were used to pay down 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.
15. 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 1998, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------------------------------------------------
<S> <C> <C> <C>
Beginning of year balance $2,895 $3,475 $ 5,277
Severance paid --- --- (277)
Store closing costs (449) (580) (1,525)
---------------------------------
End of year balance $2,446 $2,895 $ 3,475
====== ====== =======
</TABLE>
It is anticipated that the remaining accrual which relates to a leased property
located in Johnstown, Pennsylvania will be utilized through the end of 2005.
16. SUBSEQUENT EVENTS
---------------------
On March 23, 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 cash purchase price of $2,185. 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 included in the purchase.
The Company anticipates, subject to finalization of legal proceedings and
closing of the transactions, to take possession of these store premises by April
30, 1999. After completion of the remodeling, the Company plans to open these
stores in the fall of fiscal 1999. This business combination will be accounted
for under the purchase method.
On April 7, 1999, the Company amended the Credit Facility (see Note 2) to
extend the term of the facility to April 15, 2004. The amended agreement will
extend the available fixed assets and real estate borrowing base and provide a
more favorable interest pricing structure, with substantially all other terms
and conditions remaining unchanged. As a result of this transaction, the
Company will incur a one-time pre-tax charge of $610 in the first quarter of
fiscal 1999 relating to the early extinguishment of debt.
43
<PAGE>
THE BON-TON STORES, INC. AND SUBSIDIARIES
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
-----------------------------------------
To the Shareholders of The Bon-Ton Stores, Inc.:
We have audited the accompanying consolidated balance sheets of The Bon-Ton
Stores, Inc. (a Pennsylvania corporation) and subsidiaries as of January 30,
1999 and January 31, 1998 and the related consolidated statements of income,
shareholders' equity and cash flows for each of the three fiscal years in the
period ended January 30, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Bon-Ton
Stores, Inc. and subsidiaries as of January 30, 1999 and January 31, 1998, and
the consolidated results of their operations and their cash flows for each of
the three fiscal years in the period ended January 30, 1999 in conformity with
generally accepted accounting principles.
Philadelphia, PA /s/ Arthur Andersen LLP
March 2, 1999
(Except with respect to the matter discussed in Note 16, as to which the date is
April 7, 1999.)
44
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
The Bon-Ton Department Stores, Inc., a Pennsylvania corporation
The Bon-Ton Corp., a Delaware corporation
The Bon-Ton Stores of Lancaster, Inc., a Pennsylvania corporation
The Bon-Ton National Corp., a Delaware corporation
The Bon-Ton Trade Corp., a Delaware corporation
BTRGP, Inc., a Pennsylvania corporation
The Bon-Ton Receivables Partnership, L. P., a Pennsylvania limited partnership
The Bon-Ton Properties - Greece Ridge G. P., Inc., a New York corporation
The Bon-Ton Properties - Greece Ridge L. P., a Delaware limited partnership
The Bon-Ton Properties - Irondequoit G. P., Inc., a New York corporation
The Bon-Ton Properties - Irondequoit L. P., a Delaware limited partnership
The Bon-Ton Properties - Marketplace G. P., Inc., a New York corporation
The Bon-Ton Properties - Marketplace L. P., a Delaware limited partnership
The Bon-Ton Properties - Eastview G. P., Inc., a New York corporation
The Bon-Ton Properties - Eastview L. P., a Delaware limited partnership
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
reports dated March 2, 1999 (except with respect to the matter discussed in Note
16 to the consolidated financial statements, as to which the date is April 7,
1999) included in this Form 10-K, into the Company's previously filed Form S-8
Registration Statements, Registration Nos. 33-43105, 33-51954, 333-36633, 333-
36661, 333-36725, and 333-58591.
/s/ Arthur Andersen LLP
Philadelphia, PA
April 23, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS FINANCIAL INFORMATION EXTRACTED FROM THE COMPANY'S ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED JANUARY 30, 1999 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JAN-30-1999
<PERIOD-START> FEB-01-1998
<PERIOD-END> JAN-30-1999
<CASH> 10,607
<SECURITIES> 0
<RECEIVABLES> 38,369
<ALLOWANCES> 3,692
<INVENTORY> 192,872
<CURRENT-ASSETS> 246,448
<PP&E> 205,692
<DEPRECIATION> 93,171
<TOTAL-ASSETS> 378,119
<CURRENT-LIABILITIES> 117,471
<BONDS> 76,255
0
0
<COMMON> 153
<OTHER-SE> 180,058
<TOTAL-LIABILITY-AND-EQUITY> 378,119
<SALES> 674,871
<TOTAL-REVENUES> 677,221
<CGS> 426,730
<TOTAL-COSTS> 649,418
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 9,396
<INCOME-PRETAX> 18,407
<INCOME-TAX> 7,196
<INCOME-CONTINUING> 11,211
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,211
<EPS-PRIMARY> 0.81<F1>
<EPS-DILUTED> 0.81<F1>
<FN>
<F1>EPS has been prepared in accordance with SFAS No. 128, and that basic and
diluted EPS have been entered in place of primary and fully diluted,
respectively.
</FN>
</TABLE>
