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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended Commission File Number
February 1, 2003 0-19517
THE BON-TON STORES, INC.
2801 EAST MARKET STREET
YORK, PENNSYLVANIA 17402
(717) 757-7660
www.bonton.com
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 Act during the preceding 12 months and has been subject to such
filing requirements for the past 90 days.
The Registrant is not an accelerated filer (as defined in Rule 12b-2 of
the Act).
Disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
is contained in the Registrant's proxy statement incorporated by reference in
Part III of this Form 10-K.
As of August 2, 2002, the aggregate market value of the voting stock
held by non-affiliates of the Registrant was approximately $42,081,863 based
upon the closing price of $4.82 per share.*
As of April 4, 2003, there were 12,179,485 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 III - Portions of the Proxy Statement for the 2003 Annual Meeting
of Shareholders ("Proxy Statement").
- -------------------------------------
* Calculated by excluding all shares held in the treasury of the Registrant or
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.
- --------------------------------------------------------------------------------
References to a fiscal year in this Form 10-K refer to The Bon-Ton'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 fiscal 2002 is a
reference to the fiscal year ended February 1, 2003).
PART I
ITEM 1. BUSINESS.
GENERAL
The Bon-Ton Stores, Inc., together with its subsidiaries, is the
successor to S. Grumbacher & Son, a family business founded in 1898, and
operates stores offering apparel, home furnishings, cosmetics, accessories and
shoes. We presently operate 72 stores in secondary markets - 36 stores in
Pennsylvania, 26 stores in New York, three stores in Maryland, two stores in New
Jersey, and one store in each of Connecticut, New Hampshire, Massachusetts,
Vermont and West Virginia. Our strategy focuses on being the fashion value
retailer in secondary markets.
The Bon-Ton's executive offices are located at 2801 East Market Street,
York, Pennsylvania.
MERCHANDISING
The Bon-Ton stores offer value, moderate and better merchandise in
apparel, home furnishings, cosmetics, accessories, shoes and other categories.
Sales of apparel constituted 59.7%, 60.7% and 62.4% of owned sales for fiscal
2002, 2001 and 2000, respectively (owned sales exclude leased department sales).
The following chart illustrates owned sales by product category for fiscal 2002,
2001 and 2000:
MERCHANDISE CATEGORY 2002 2001 2000
- ---------------------------------------------------------------------------------
Women's clothing 27.4% 27.5% 27.6%
Men's clothing 16.0 16.5 18.0
Home 14.7 14.5 13.5
Cosmetics 11.0 11.1 10.9
Accessories 8.8 7.9 7.9
Children's clothing 6.5 6.8 6.9
Shoes 5.8 5.8 5.3
Intimate apparel 4.9 5.0 5.2
Junior's clothing 4.9 4.9 4.7
- ---------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0%
=================================================================================
We carry a number of highly recognized brand names, including Clarks,
Estee Lauder, Liz Claiborne, Nautica, Nine West, Ralph Lauren, Van Heusen, Sag
Harbor, OshKosh, Easy Spirit, Royal Velvet and Tommy Hilfiger, and within these
brands we choose assortments which balance fashion, price and quality.
We depend on our relationships with our key vendors to secure branded
merchandise. If we lose the support of these vendors, it could have a material
adverse effect on The Bon-Ton.
Complementing branded merchandise, our private brand merchandise
provides fashion at competitive pricing under names such as Andrea Viccaro,
Jenny Buchanan, Madison & Max and Susquehanna Trail Outfitters. We view this
private brand merchandise as a strategic addition to our 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 11.1%, 9.8% and 9.8% of owned sales in
fiscal 2002, 2001 and 2000, respectively.
1
Our 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 year, which includes the back-to-school and holiday seasons.
MARKETING
Our advertising and promotional programs are conducted through
newspapers, direct mail and, to a lesser extent, television and radio. We
maintain an in-house advertising organization that supplies substantially all
our creative advertising. We also offer our customers special services such as
free gift wrap and bridal registry.
TRADEMARKS
The name "Bon-Ton," in its distinctive diamond design style, is a
registered trademark of a wholly-owned subsidiary of the Company, and the
Company considers this tradename valuable to its business. This subsidiary has
approximately fifteen additional trademarks, most of which are used in the
Company's private brand merchandise program.
CUSTOMER CREDIT
Our 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 our most loyal and
active customers; during fiscal 2002, the average dollar amount for proprietary
credit card purchases substantially exceeded the average dollar amount for cash
purchases. We believe our credit card is a particularly productive tool for
customer segmentation and target marketing.
The following table summarizes the percentage of total fiscal year
sales generated by payment type:
TYPE OF PAYMENT 2002 2001 2000
- --------------------------------------------------------------------------------
Bon-Ton credit card 56% 52% 48%
Visa, Mastercard 22 24 26
Cash or check 22 24 26
- --------------------------------------------------------------------------------
Total 100% 100% 100%
================================================================================
COMPETITION
We face competition for customers from traditional department stores,
mass merchandisers, specialty stores, off-price retailers, and, to a lesser
extent, catalogue and internet retailers. Many of our competitors have
substantially greater financial and other resources than The Bon-Ton, and some
of our competitors have greater leverage with vendors, which may allow such
competitors to obtain merchandise more easily or on better terms. However, we
believe our knowledge of secondary markets, developed over many years of
operation, gives us a competitive advantage as we focus on secondary markets as
our primary area of operation.
ASSOCIATES
As of February 1, 2003, we had approximately 3,600 full-time and 5,000
part-time associates. We employ additional part-time associates during peak
periods. None of our associates are represented by a labor union. We believe
that our relationship with our associates is good.
2
EXECUTIVE OFFICERS
The Executive Officers of the Company are:
NAME AGE POSITION
---- --- --------
Tim Grumbacher 63 Chairman of the Board and Chief Executive Officer
Frank Tworecke 56 President and Chief Operating Officer
James H. Baireuther 56 Vice Chairman, Chief Administrative Officer and Chief Financial Officer
Lynn C. Derry 47 Senior Vice President - General Merchandise Manager
John S. Farrell 57 Senior Vice President - Stores
Robert A. Geisenberger 42 Senior Vice President - General Merchandise Manager
William T. Harmon 48 Senior Vice President - Marketing, Planning and Allocation
Patrick J. McIntyre 58 Senior Vice President - Chief Information Officer
Keith E. Plowman 45 Senior Vice President - Finance
Ryan J. Sattler 58 Senior Vice President - Human Resources
Mr. Grumbacher has been Chairman of the Board for more than five years,
and has served as Chief Executive Officer since June 2000.
Mr. Tworecke was named President and Chief Operating Officer in March
2003. He joined the Company in November 1999 as Vice Chairman and Chief
Merchandising Officer. From January 1996 until November 1999, he was with Jos.
A. Bank Clothiers, serving as President from February 1997 until November 1999.
Mr. Baireuther has been Vice Chairman, Chief Administrative Officer and
Chief Financial Officer since September 2001. From February 2000 to September
2001, he was Executive Vice President - Chief Financial Officer, and for more
than two years prior to that time he was Senior Vice President - Chief Financial
Officer.
Ms. Derry was appointed Senior Vice President - General Merchandise
Manager in February 2001. For more than three years prior to that time, Ms.
Derry was a Divisional Merchandise Manager for The Bon-Ton.
Mr. Farrell was appointed Senior Vice President - Stores in June 2000.
For more than three years prior to that time, Mr. Farrell was Vice President -
Stores for The Bon-Ton.
Mr. Geisenberger was appointed Senior Vice President - General
Merchandise Manager in July 2000. For more than three years prior to that time,
Mr. Geisenberger was a Divisional Merchandise Manager for The Bon-Ton.
Mr. Harmon joined the Company as Senior Vice President - Sales
Promotion, Marketing and Strategic Planning in June 1997 and was named Senior
Vice President - Marketing, Planning and Allocation in September 2001.
3
Mr. McIntyre joined The Bon-Ton as Senior Vice President - Chief
Information Officer in June 1997.
Mr. Plowman was appointed Senior Vice President - Finance in September
2001. From May 1999 to September 2001, he was Vice President - Controller, and
from August 1997 to May 1999 he was Divisional Vice President - Controller of
the Company.
Mr. Sattler was appointed Senior Vice President - Human Resources in
September 2001. From June 2000 to September 2001, he was Senior Vice President -
Human Resources and Operations. For more than three years prior to that time,
Mr. Sattler was Senior Vice President - Operations.
CAUTIONARY STATEMENTS RELATING TO FORWARD-LOOKING INFORMATION
The Company and its representatives may, from time to time, make
written or verbal forward-looking statements. Those statements relate to
developments, results, conditions or other events the Company expects or
anticipates will occur in the future. Without limiting the foregoing, those
statements may relate to future revenues, earnings, store openings, market
conditions and the competitive environment. Forward-looking statements are based
on management's then-current views and assumptions and, as a result, are subject
to risks and uncertainties that could cause actual results to differ materially
from those projected.
All forward-looking statements are qualified by the following important
factors that could cause actual results to differ materially from those
predicted by the forward-looking statements:
Customer Trends
It is difficult to predict what merchandise consumers will want. A
substantial part of our business is dependent on our ability to make correct
trend decisions for a wide variety of goods and services. Failure to accurately
predict constantly changing consumer tastes, preferences, spending patterns and
other lifestyle decisions could adversely affect short-term results and
long-term relationships with our customers.
Credit Operations
Sales of merchandise and services are facilitated by the Company's
credit card operations. These credit card operations also generate additional
revenue from fees related to extending credit. Our ability to extend credit to
our customers depends on many factors, including compliance with federal and
state laws which may change from time to time. In addition, changes in credit
card use, payment patterns and default rates may result from a variety of
economic, legal, social and other factors that we cannot control or predict with
certainty. Changes that adversely affect our ability to extend credit and
collect payments could negatively affect our results and financial condition.
General Economic Conditions
General economic factors that are beyond our control influence the
Company's forecasts and directly affect performance. These factors include
interest rates, recession, inflation, deflation, consumer credit availability,
consumer debt levels, tax rates and policy, unemployment trends and other
matters that influence consumer confidence and spending. Increasing volatility
in financial markets may cause these factors to change with a greater degree of
frequency and magnitude.
Product Sourcing
The products we sell are sourced from a wide variety of domestic and
international vendors. Our ability to find qualified vendors and access products
in a timely and efficient manner is a significant challenge which is typically
even more difficult with respect to goods sourced outside of the United
4
States. Trade restrictions, tariffs, currency exchange rates, transport capacity
and costs, and other factors significant to this trade are beyond our control
and could adversely affect our business.
Advertising and Marketing Programs
The Company spends extensively on advertising and marketing. Our
business depends on effective marketing to generate high customer traffic in our
stores. If our advertising and marketing efforts are not effective, this could
negatively affect our results.
Inventory Control
The Company's merchants focus on inventory levels and balance these
levels with plans and trends. Excess inventories could result in significant
markdowns, which could adversely affect our results.
Cost Containment
The Company's performance depends on appropriate management of its
expense structure, including its selling, general and administrative costs. The
Company is continuously focused on controlling expenses. The Company's failure
to meet its expense budget or to appropriately reduce expenses during a weak
sales season could adversely affect our results.
Other Factors
Other factors that could cause actual results to differ materially from
those predicted include: competition, weather, changes in the availability or
cost of capital, the availability of suitable new store locations on acceptable
terms, shifts in seasonality of shopping patterns, work interruptions, the
effect of excess retail capacity in our markets, material acquisitions or
dispositions, regulatory changes, or adverse results in material litigation.
The foregoing list of important factors is not exclusive, and the
Company does not undertake to revise any forward-looking statement to reflect
events or circumstances that occur after the date the statement is made.
ITEM 2. PROPERTIES.
Our stores, which all operate under "The Bon-Ton" name, vary in size
from approximately 45,000 to 160,000 square feet.
The following table sets forth the number of stores at the beginning
and end of each of the last five fiscal years:
Fiscal Year 2002 2001 2000 1999 1998
- --------------------------------------------------------------------------------
Number of stores:
Beginning of year 73 73 72 65 64
Additions 0 0 1 7 2
Closings (1) 0 0 0 (1)
- --------------------------------------------------------------------------------
End of year 72 73 73 72 65
================================================================================
We plan to grow by expanding and upgrading existing stores and by
opening new stores. In addition, we will consider acquisitions of retail
companies or their real estate assets if and when such opportunities arise. Our
market positioning strategy has been to locate new stores, or acquire existing
companies or their stores, in secondary markets generally within or contiguous
to existing areas of operation.
5
The following table provides certain information regarding our store
properties:
APPROXIMATE
SQUARE YEAR OPENED
MARKET LOCATION FOOTAGE OR ACQUIRED
- ------------------------------------------------------------------------------------------------------------
PENNSYLVANIA
Allentown South Mall 101,800 1994
Bethlehem Westgate Mall 109,000 1994
Bloomsburg Columbia Mall 46,100 1988
Butler Clearview Mall 100,800 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 115,100 1994
Frackville Schuylkill Mall 61,100 1987
Greensburg Westmoreland Mall 100,000 1987
Hanover North Hanover Mall 67,600 1971
Harrisburg Capital City Commons 145,200 1987
Colonial Park Shopping Center 136,500 1987
Indiana Indiana Mall 60,500 1979
Johnstown The Galleria 81,200 1992
Lancaster Park City Center 142,300 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
Quakertown Richland Plaza 88,100 1994
Reading Berkshire Mall 156,100 1987
Scranton The Mall at Steamtown 113,200 2000
State College Nittany Mall 61,200 1994
Stroudsburg Stroud Mall 87,000 1994
Sunbury Susquehanna Valley Mall 90,000 1978
Trexlertown Trexler Mall 54,000 1994
Uniontown Uniontown Mall 80,500 1976
Warren Warren Mall 50,000 1980
Washington Washington Crown Center 78,100 1987
Wilkes-Barre Midway Shopping Center 66,000 1987
Wyoming Valley Mall 159,500 1987
Williamsport Lycoming Mall 60,900 1986
York York Galleria 128,200 1989
Queensgate Shopping Center 113,000 1962
West Manchester Mall 80,200 1981
NEW YORK
Binghamton Oakdale Mall 81,100 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 124,300 1994
Southgate Plaza 100,500 1994
Elmira Arnot Mall 74,800 1995
Glens Falls Aviation Mall 67,800 1999
6
APPROXIMATE
SQUARE YEAR OPENED
MARKET LOCATION FOOTAGE OR ACQUIRED
- ------------------------------------------------------------------------------------------------------------
Ithaca Pyramid Mall 62,200 1991
Jamestown Chautauqua Mall 59,900 1998
Lockport Lockport Mall 82,000 1994
Massena St. Lawrence Centre 51,000 1994
Newburgh Newburgh Mall 61,800 2000
Niagara Falls Summit Park Mall 88,100 1994
Olean Olean Mall 73,000 1994
Rochester Greece Ridge Center 144,600 1996
The Marketplace Mall 100,000 1995
Irondequoit Mall 102,600 1995
Eastview Mall 118,900 1995
Saratoga Springs Wilton Mall 71,200 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 1981
Frederick Frederick Towne Mall 97,700 1972
Hagerstown Valley Mall 126,000 1974
NEW JERSEY
Brick Brick Plaza 53,500 1999
Phillipsburg Phillipsburg Mall 65,000 1994
WEST VIRGINIA
Martinsburg Martinsburg Mall 65,800 1994
CONNECTICUT
Hamden Hamden Mart 58,900 1999
MASSACHUSETTS
Westfield Westfield Shops 50,600 1998
NEW HAMPSHIRE
Concord Steeplegate Mall 87,700 1999
VERMONT
S. Burlington University Mall 60,000 1999
We lease 64 of our stores and own eight stores, two of which are
subject to ground leases. We lease a total of 178,600 square feet for our
executive and administrative offices in York, Pennsylvania, lease our 143,700
square foot distribution center in York, Pennsylvania, and lease our 326,000
square foot distribution center in Allentown, Pennsylvania.
7
ITEM 3. LEGAL PROCEEDINGS.
We are a party to legal proceedings and claims which arise during the
ordinary course of business. We do not expect the ultimate outcome of all such
litigation and claims to have a material adverse effect on our financial
position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
The Common Stock is traded on the Nasdaq Stock Market (symbol: BONT).
There is no established public trading market for the 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 high and low sales price of the Common
Stock as furnished by Nasdaq:
Fiscal 2002 Fiscal 2001
- ----------------------------------------------
High Low High Low
- ----------------------------------------------
1st Quarter $ 4.93 $ 2.35 $ 3.50 $ 2.12
2nd Quarter 5.28 3.45 3.16 2.45
3rd Quarter 4.94 3.41 3.00 1.77
4th Quarter 4.31 3.37 3.39 2.25
On April 4, 2003, there were approximately 324 shareholders of record
of Common Stock and five shareholders of record of Class A Common Stock.
We have not paid cash dividends since our initial public offering in
September 1991 and do not anticipate paying cash dividends in fiscal 2003. The
payment and rate of future dividends, if any, are subject to the discretion of
the Board of Directors and will depend upon earnings, financial condition,
capital requirements, contractual restrictions under current indebtedness and
other factors. Our revolving credit agreement contains restrictions on our
ability to pay dividends and make other distributions.
At February 1, 2003, the Amended and Restated 1991 Stock Option and
Restricted Stock Plan, The Bon-Ton Stores, Inc. 2000 Stock Incentive Plan and
the Company's Phantom Equity Replacement Plan were in effect. Each of these
plans has been approved by the shareholders. There were no other equity
compensation plans in effect. The following information concerning these plans
is as of February 1, 2003:
Number of securities
remaining available for
Number of securities future issuance
to be issued upon Weighted-average (excluding securities
exercise of exercise price of reflected in the first
Plan category outstanding options outstanding options column)
- ----------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved 941,446 $5.82 300,000
by security holders
Equity compensation plans not Not applicable Not applicable Not applicable
approved by security holders
8
ITEM 6. SELECTED FINANCIAL DATA.
(In thousands except share, per share and store data)
Fiscal Year 2002 2001 2000
Ended Feb. 1, 2003 Feb. 2, 2002 Feb. 3, 2001
- -------------------------------------------------------------------------------------------------------------
Statement of Operations Data: % % %
- -------------------------------------------------------------------------------------------------------------
Net sales (1) $ 713,230 100.0 $ 721,777 100.0 $ 749,816 100.0
Other income, net 2,705 0.4 2,548 0.4 2,715 0.4
Gross profit 262,412 36.8 262,057 36.3 275,790 36.8
Selling, general and
administrative expenses (2) 219,716 30.8 224,306 31.1 231,859 30.9
Depreciation and amortization 21,301 3.0 19,783 2.7 17,085 2.3
Unusual expense (3) - - 916 0.1 6,485 0.9
Restructuring income (4) - - - - - -
Income from operations 24,100 3.4 19,600 2.7 23,076 3.1
Interest expense, net 8,731 1.2 9,558 1.3 10,906 1.5
Income before taxes 15,369 2.2 10,042 1.4 12,170 1.6
Income tax provision 5,764 0.8 3,816 0.5 4,622 0.6
Net income $ 9,605 1.3 $ 6,226 0.9 $ 7,548 1.0
Per Share Amounts
Basic:
Net income $ 0.63 $ 0.41 $ 0.50
Weighted average shares
outstanding 15,192,471 15,200,154 14,952,985
Diluted:
Net income $ 0.62 $ 0.41 $ 0.50
Weighted average shares
outstanding 15,394,231 15,214,145 14,952,985
Balance Sheet Data (at end
of period):
- -------------------------------------------------------------------------------------------------------------
Working capital $ 129,148 $ 117,158 $ 142,311
Total assets 382,023 385,583 402,680
Long-term debt, including
capital leases 64,662 67,929 98,758
Shareholders' equity 212,346 203,261 198,862
Selected Operating Data:
- -------------------------------------------------------------------------------------------------------------
Total sales change (1.2)% (3.7)% 5.5%
Comparable store
sales change(5)(6) (1.2)% (3.3)% 0.7%
Comparable stores data(5)(6):
Sales per selling
square foot $ 133 $ 134 $ 143
Selling square footage 5,382,000 5,339,000 4,792,000
Capital expenditures $ 14,806 $ 15,550 $ 29,577
Number of stores:
Beginning of year 73 73 72
Additions - - 1
Closings (1) - -
End of year 72 73 73
Fiscal Year 1999 1998
Ended Jan. 29, 2000 Jan. 30, 1999
- -------------------------------------------------------------------------------------
Statement of Operations Data: % %
- -------------------------------------------------------------------------------------
Net sales (1) $ 710,963 100.0 $ 674,871 100.0
Other income, net 2,651 0.4 2,350 0.3
Gross profit 261,367 36.8 248,141 36.8
Selling, general and
administrative expenses (2) 224,760 31.6 209,407 31.0
Depreciation and amortization 14,846 2.1 13,281 2.0
Unusual expense (3) 2,683 0.4 - -
Restructuring income (4) (2,492) (0.4) - -
Income from operations 24,221 3.4 27,803 4.1
Interest expense, net 8,552 1.2 9,396 1.4
Income before taxes 15,669 2.2 18,407 2.7
Income tax provision 5,954 0.8 7,196 1.1
Net income $ 9,715 1.4 $ 11,211 1.7
Per Share Amounts
Basic:
Net income $ 0.66 $ 0.81
Weighted average shares
outstanding 14,749,746 13,866,163
Diluted:
Net income $ 0.66 $ 0.81
Weighted average shares
outstanding 14,752,919 13,917,452
Balance Sheet Data (at end
of period):
- -------------------------------------------------------------------------------------
Working capital $ 141,788 $ 128,977
Total assets 416,123 376,547
Long-term debt, including
capital leases 107,678 76,255
Shareholders' equity 190,691 180,211
Selected Operating Data:
- -------------------------------------------------------------------------------------
Total sales change 5.3% 2.8%
Comparable store
sales change(5)(6) 0.0% 1.4%
Comparable stores data(5)(6):
Sales per selling
square foot $ 141 $ 143
Selling square footage 4,705,000 4,620,000
Capital expenditures $ 46,451 $ 19,418
Number of stores:
Beginning of year 65 64
Additions 7 2
Closings - (1)
End of year 72 65
(1) Fiscal 2000 reflects the 53 weeks ended February 3, 2001. All other periods
presented include 52 weeks.
(2) Fiscal 1999 includes expense resulting from renegotiation of the Company's
revolving credit facility.
(3) Reflects expense recognized for workforce reductions and realignment and
elimination of certain senior management positions in fiscal 2001; expense
recognized for workforce reductions, early retirement of Heywood Wilansky
and realignment and elimination of certain senior management positions in
fiscal 2000; and an asset write-down in fiscal 1999.
(4) Income recognized in fiscal 1999 as a result of a lease termination for a
closed store.
(5) Fiscal 2000 reflects the 52 weeks ended January 27, 2001.
(6) Comparable stores data (sales and selling square footage) reflects stores
open for the entire current and prior fiscal year.
9
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
RESULTS OF OPERATIONS
Fiscal 2002 total and comparable store sales of The Bon-Ton Stores,
Inc. and all subsidiaries (the "Company") decreased 1.2% compared to fiscal
2001. Fiscal 2002 was a difficult year for retail stores, as merchandise price
became an increasingly significant component of consumer buying decisions. The
continued economic downturn and general declining consumer confidence were also
major factors adversely impacting retail businesses.
While sales in most stores were below their fiscal 2001 level, sales in
certain stores performed at a level below the Company average. During fiscal
2002, the Company recognized impairment charges against long-lived assets at
certain of these store sites. The Company will continue to monitor the
performance of its stores and initiate operational improvements where possible.
The following table summarizes changes in selected operating indicators
of the Company, illustrating the relationship of various income and expense
items to net sales for each fiscal year presented:
PERCENT OF NET SALES
---------------------------
FISCAL YEAR
- ---------------------------------------------------------------------------------
2002 2001 2000
- ---------------------------------------------------------------------------------
Net sales 100.0% 100.0% 100.0%
Other income, net 0.4 0.4 0.4
- ---------------------------------------------------------------------------------
100.4 100.4 100.4
- ---------------------------------------------------------------------------------
Costs and expenses:
Costs of merchandise sold 63.2 63.7 63.2
Selling, general and administrative 30.8 31.1 30.9
Depreciation and amortization 3.0 2.7 2.3
Unusual expense -- 0.1 0.9
- ---------------------------------------------------------------------------------
Income from operations 3.4 2.7 3.1
Interest expense, net 1.2 1.3 1.5
- ---------------------------------------------------------------------------------
Income before income taxes 2.2 1.4 1.6
Income tax provision 0.8 0.5 0.6
- ---------------------------------------------------------------------------------
Net income 1.3% 0.9% 1.0%
=================================================================================
FISCAL 2002 COMPARED TO FISCAL 2001
NET SALES: Net sales were $713.2 million for fiscal 2002, a decrease of
$8.5 million relative to fiscal 2001. Total and comparable store sales for
fiscal 2002 decreased 1.2% from fiscal 2001. Merchandise departments recording
sales increases were Accessories, Coats and Petites. Merchandise departments
reflecting the sharpest sales declines were Dresses, Children's, Men's Clothing
and Intimate.
OTHER INCOME, NET: Net other income, principally income from leased
departments, remained constant at 0.4% of net sales for fiscal 2002 and fiscal
2001.
COSTS AND EXPENSES: Gross margin dollars for fiscal 2002 increased $0.4
million, or 0.1% over fiscal 2001, due to an increased margin percentage
partially offset by declining sales volume. Gross margin as a percentage of net
sales was 36.8% in fiscal 2002, an increase of 0.5 percentage point from 36.3%
in fiscal 2001. Gross margin percentage improvement over fiscal 2001 reflects
increased markup on purchases in fiscal 2002 and reserves established for
seasonal carryover merchandise in fiscal 2001.
10
Selling, general and administrative expenses for fiscal 2002 were
$219.7 million, or 30.8% of net sales, compared to $224.3 million, or 31.1% of
net sales, in fiscal 2001. Fiscal 2002 store expense decreased $1.0 million
versus fiscal 2001, primarily due to reduced advertising expense, but reflected
an expense rate increase of 0.1 percentage point due to reduced 2002 net sales.
Fiscal 2002 corporate expense decreased $3.6 million versus fiscal 2001--driving
an overall selling, general and administrative expense rate decrease of 0.3
percentage point. The decrease in corporate expense principally reflects an
increase in securitization income of $3.2 million from the Company's proprietary
credit card program and reduced equipment rental costs. The increased
securitization income in fiscal 2002 relative to fiscal 2001 was principally a
reflection of increased sales on the Company's proprietary credit card and lower
securitization facility costs.
Depreciation and amortization increased to 3.0% of net sales in fiscal
2002 from 2.7% in fiscal 2001 partially as a result of a lower sales base and
capital expenditures in the amount of $14.8 million and $15.6 million in fiscal
2002 and 2001, respectively. Additionally, in fiscal 2002 the Company recognized
approximately $2.0 million of impairment losses on the long-lived assets of
certain stores. In fiscal 2001, the Company recorded accelerated depreciation of
$1.4 million for a store that was closed in January 2003.
Unusual expense in fiscal 2001 of $0.9 million, or 0.1% of net sales,
was incurred in the third quarter relating to a workforce reduction and the
realignment and elimination of certain senior management positions. See Note 16
to the Consolidated Financial Statements.
INCOME FROM OPERATIONS: Income from operations in fiscal 2002 was $24.1
million, or 3.4% of net sales, compared to $19.6 million, or 2.7% of net sales,
in fiscal 2001.
INTEREST EXPENSE, NET: Net interest expense in fiscal 2002 decreased
$0.8 million to $8.7 million, or 1.2% of net sales, from $9.6 million, or 1.3%
of net sales, in fiscal 2001. The decrease in interest expense was attributable
to decreased average borrowing levels and lower interest rates, partially offset
by increased interest expense pursuant to cash flow hedge ineffectiveness.
Interest expense includes cash flow hedge ineffectiveness, relating to interest
rate swaps, of $1.4 million and $0.5 million in fiscal 2002 and 2001,
respectively, representing non-cash mark-to-market charges pursuant to Statement
of Financial Accounting Standards No. 133. See Note 6 to the Consolidated
Financial Statements.
INCOME TAXES: The effective tax rate decreased 0.5 percentage point to
37.5% in fiscal 2002 from 38.0% in fiscal 2001.
NET INCOME: Net income in fiscal 2002 was $9.6 million, or 1.3% of net
sales, compared to $6.2 million, or 0.9% of net sales, in fiscal 2001. As
discussed above, the increased gross profit rate, decreased selling, general and
administrative expenses and decreased interest expense more than offset the
impact of decreased sales--thus driving the $3.4 million net income increase
over fiscal 2001.
FISCAL 2001 COMPARED TO FISCAL 2000
NET SALES: Net sales were $721.8 million for the fifty-two weeks ended
February 2, 2002, a decrease of $28.0 million, or 3.7%, relative to the
fifty-three week period ended February 3, 2001. Comparable store sales for the
fifty-two week period ended February 2, 2002 decreased 3.3% from the fifty-two
week period ended January 27, 2001. Merchandise departments recording comparable
store sales increases were Coats, Home and Juniors. Merchandise departments
reflecting the sharpest comparable store sales declines were Women's, Men's
Clothing and Dresses.
OTHER INCOME, NET: Net other income, principally income from leased
departments, remained constant at 0.4% of net sales for fiscal 2001 and fiscal
2000.
11
COSTS AND EXPENSES: Gross margin dollars for fiscal 2001 decreased
$13.7 million, or 5.0% from fiscal 2000, primarily reflecting the decline in
sales volume. Gross margin as a percentage of net sales was 36.3% in fiscal
2001, down 0.5 percentage point from 36.8% in fiscal 2000. The gross margin
percentage decline was principally due to the increased markdown rate and
reserves established for seasonal merchandise in fiscal 2001.
Selling, general and administrative expenses for fiscal 2001 were
$224.3 million, or 31.1% of net sales, compared to $231.9 million, or 30.9% of
net sales, in fiscal 2000. Fiscal 2001 store expense decreased $1.5 million
versus fiscal 2000, but reflected an expense rate increase of 0.7 percentage
point due to reduced fiscal 2001 sales. Fiscal 2001 corporate expense decreased
$6.0 million versus fiscal 2000, driving an expense rate decrease of 0.5
percentage point. The decrease in corporate expense principally reflects
increased securitization income of $2.9 million from the Company's proprietary
credit card program and reduced payroll costs. The increased securitization
income in fiscal 2001 relative to fiscal 2000 was principally a reflection of
increased sales on the Company's proprietary credit card, lower securitization
facility costs and higher fee income.
Depreciation and amortization increased to 2.7% of net sales in fiscal
2001 from 2.3% in fiscal 2000 partially as a result of a lower sales base and
capital expenditures in the amount of $15.6 million and $29.6 million in fiscal
2001 and 2000, respectively. Additionally, in fiscal 2001 the Company evaluated
a store lease renewal option exercisable in January 2003. The Company decided
against exercising this lease option under existing terms and, therefore,
accelerated depreciation of $1.4 million for associated assets with lives
exceeding the expected lease term.
Unusual expense in fiscal 2001 of $0.9 million, or 0.1% of net sales,
was incurred in the third quarter relating to a workforce reduction and the
realignment and elimination of certain senior management positions. See Note 16
to the Consolidated Financial Statements.
Unusual expense in fiscal 2000 of $6.5 million, or 0.9% of net sales,
was incurred due to the early retirement of Heywood Wilansky as President and
Chief Executive Officer, the realignment and elimination of certain senior
management positions and a workforce reduction. See Note 16 to the Consolidated
Financial Statements.
INCOME FROM OPERATIONS: Income from operations in fiscal 2001 amounted
to $19.6 million, or 2.7% of net sales, compared to $23.1 million, or 3.1% of
net sales, in fiscal 2000.
INTEREST EXPENSE, NET: Net interest expense in fiscal 2001 decreased
$1.3 million to $9.6 million, or 1.3% of net sales, from $10.9 million, or 1.5%
of net sales, in fiscal 2000. The decrease in interest expense was attributable
to decreased average borrowing levels and lower interest rates.
INCOME TAXES: The effective tax rate remained constant at 38.0% in
fiscal 2001 and fiscal 2000.
NET INCOME: Net income in fiscal 2001 was $6.2 million, or 0.9% of net
sales, compared to $7.5 million, or 1.0% of net sales, in fiscal 2000.
12
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes material measures of the Company's
liquidity and capital resources:
February 1, February 2, February 3,
(Dollars in millions) 2003 2002 2001
- ------------------------------------------------------------------------------------------------------------
Working capital $ 129.1 $ 117.2 $ 142.3
Current ratio 2.30:1 2.09:1 2.47:1
Debt to total capitalization (debt plus equity) 0.23:1 0.25:1 0.33:1
Unused availability under lines of credit $ 43.1 $ 52.9 $ 37.4
The Company's primary sources of working capital are cash flows from
operations, borrowings under its revolving credit facility and proceeds from its
accounts receivable facility. The Company had working capital of $129.1 million,
$117.2 million and $142.3 million at the end of fiscal 2002, 2001 and 2000,
respectively. The Company's business follows a seasonal pattern and working
capital fluctuates with seasonal variations, reaching its highest level in
October or November. The increase in working capital at the end of fiscal 2002
compared to the end of fiscal 2001 was principally due to increased accounts
receivable and decreased income taxes payable, partially offset by a reduction
in merchandise inventory.
Net cash provided by operating activities amounted to $28.1 million in
2002 and $39.4 million in fiscal 2001 and 2000. The $11.3 million decrease in
cash provided by operating activities in fiscal 2002 relative to fiscal 2001 was
primarily due to increased working capital requirements, partially offset by
increased net income and higher depreciation and amortization costs.
Net cash used in investing activities amounted to $14.8 million, $15.5
million and $18.5 million in fiscal 2002, 2001 and 2000, respectively. The net
cash outflow in fiscal 2002 was the result of capital expenditures in the amount
of $14.8 million, primarily related to store remodeling, information services
projects and general operations.
Net cash used in financing activities amounted to $6.3 million, $28.2
million and $17.6 million in fiscal 2002, 2001 and 2000, respectively. The net
cash outflow in fiscal 2002 was principally attributable to payments on
long-term debt, a decrease in bank overdrafts and repurchase of the Company's
common stock.
The Company currently anticipates its capital expenditures for fiscal
2003 will approximate $20.0 million. The expenditures will be directed toward
remodeling some of the Company's existing stores, information systems
enhancements and general operations.
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 revolving
credit facility and proceeds from the accounts receivable facility, will be
sufficient to satisfy its operating cash requirements.
The accounts receivable facility and revolving credit facility
agreements expire in January 2004 and April 2004, respectively. The Company
anticipates that it will be able to renew or replace these agreements with
agreements of substantially comparable terms.
Cash flows from operations are impacted by consumer confidence, weather
conditions in the geographic markets served by the Company, the economic climate
and competitive conditions existing in the retail industry. A downturn in any
single factor or a combination of factors could have a material adverse impact
upon the Company's ability to generate sufficient cash flows to operate its
business.
13
The Company has not identified any probable circumstances that would
likely impair its ability to meet its cash requirements or trigger a default or
acceleration of payment of the Company's debt.
The following table reflects the Company's major debt and lease
commitments:
Payments Required By Fiscal Year
--------------------------------------------------------------------------
There-
(Dollars in thousands) 2003 2004 2005 2006 2007 after Total
- ------------------------------------------------------------------------------------------------------------
Long-term debt $ -- $ 40,991 $ 876 $ 970 $ 1,073 $ 20,284 $ 64,194
Short-term debt 715 -- -- -- -- -- 715
Capital leases 300 300 200 -- -- -- 800
Operating leases 20,996 20,664 19,138 15,331 12,689 68,491 157,309
- ------------------------------------------------------------------------------------------------------------
Totals $ 22,011 $ 61,955 $ 20,214 $ 16,301 $ 13,762 $ 88,775 $223,018
============================================================================================================
TRANSFERS OF FINANCIAL ASSETS
The Company engages in securitization activities involving the
Company's proprietary credit card portfolio as a source of funding. Gains and
losses from securitizations are recognized in the Consolidated Statements of
Income when the Company relinquishes control of the transferred financial assets
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities--a Replacement of FASB Statement No. 125" and other related
pronouncements. The gain or loss on the sale of financial assets depends in part
on the previous carrying amount of the assets involved in the transfer,
allocated between the assets sold and the retained interests based upon their
respective fair values at the date of sale.
The Company sells undivided percentage ownership interests in certain
of its credit card accounts receivable to unrelated third-parties under a $150
million accounts receivable securitization facility, which is described in
further detail below and in Note 8 to the Consolidated Financial Statements. The
unrelated third-parties, referred to as the conduit, have purchased a $145
million interest in the accounts receivable under this facility at February 1,
2003. The Company is responsible for servicing these accounts, retains a
servicing fee and bears the risk of non-collection (limited to its retained
interests in the accounts receivable). Associated off-balance-sheet assets and
related debt were $145 million at February 1, 2003 and $150 million at February
2, 2002. Upon the facility's termination, the conduit would be entitled to all
cash collections on the accounts receivable until its investment ($145 million
at February 1, 2003) and accrued discounts are repaid. Accordingly, upon
termination of the facility, the assets of the facility would not be available
to the Company until all amounts due to the conduit have been paid in full.
Based upon the terms of the accounts receivable facility, the accounts
receivable transactions qualify for "sale treatment" under generally accepted
accounting principles. This treatment requires the Company to account for
transactions with the conduit as a sale of accounts receivable instead of
reflecting the conduit's net investment as long-term debt with a pledge of
accounts receivable as collateral. Absent this "sale treatment," the Company's
balance sheet would reflect additional accounts receivable and long-term debt,
which could be a factor in the Company's ability to raise capital; however,
results of operations would not be significantly impacted. See Note 8 to the
Consolidated Financial Statements.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of financial condition and
results of operations are based upon the Consolidated Financial Statements,
which have been prepared in accordance with generally
14
accepted accounting principles. Preparation of these financial statements
requires the Company to make estimates and judgments that affect reported
amounts of assets and liabilities, revenues and expenses, and related disclosure
of contingent assets and liabilities at the date of its financial statements. On
an ongoing basis, the Company evaluates its estimates, including those related
to merchandise returns, bad debts, inventories, intangible assets, income taxes,
financings, and contingencies and litigation. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
Critical accounting policies are defined as those that are reflective
of significant judgments and uncertainties, and could potentially lead to
materially different results under different assumptions and conditions. The
Company believes its critical accounting policies are described below. For a
discussion of the application of these and other accounting policies, see Notes
to Consolidated Financial Statements.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The Company performs ongoing credit evaluations of its customers and
adjusts credit limits based upon payment history and the customer's current
credit-worthiness. The Company continually monitors collections and payments
from customers and maintains an allowance for estimated credit losses based upon
its historical experience, how delinquent accounts ultimately charge-off, aging
of accounts and any specific customer collection issues identified (e.g.,
bankruptcy). While such credit losses have historically been within expectations
and provisions established, the Company cannot guarantee that it will continue
to experience the same credit loss rates as in the past. If circumstances change
(e.g., higher than expected defaults or bankruptcies), the Company's estimates
of the recoverability of amounts due the Company could be materially reduced.
The allowance for doubtful accounts and sales returns was $3.5 million and $3.8
million as of February 1, 2003 and February 2, 2002, respectively.
INVENTORY VALUATION
As discussed in Note 1 to the Consolidated Financial Statements,
inventories are stated at the lower of cost or market with cost determined using
the retail last-in, first-out ("LIFO") method. Under the retail inventory
method, the valuation of inventories at cost and resulting gross margin is
derived by applying a calculated cost-to-retail ratio to the retail value of
inventories. The retail inventory method is an averaging method that has been
widely used in the retail industry. Use of the retail inventory method will
result in valuing inventories at the lower of cost or market if markdowns are
taken timely as a reduction of the retail value of inventories.
Inherent in the retail inventory method calculation are certain
significant management judgments and estimates including, among others,
merchandise markups, markdowns and shrinkage, which significantly impact both
the ending inventory valuation at cost and resulting gross margin. These
significant estimates, coupled with the fact that the retail inventory method is
an averaging process, can, under certain circumstances, result in individual
inventory components with cost above related net realizable value. Factors that
can lead to this result include applying the retail inventory method to a group
of products that is not fairly uniform in terms of its cost, selling price
relationship and turnover; or applying the retail inventory method to
transactions over a period of time that includes different rates of gross
profit, such as those relating to seasonal merchandise. In addition, failure to
take timely markdowns can result in an overstatement of cost under the lower of
cost or market principle. Management believes that the Company's retail
inventory method provides an inventory valuation that approximates cost and
results in carrying inventory in the aggregate at the lower of cost or market.
15
The Company regularly reviews inventory quantities on hand and records
a provision for excess or old inventory based primarily on an estimated forecast
of merchandise demand for the selling season. Demand for merchandise can
fluctuate greatly; a significant increase in the demand for merchandise could
result in a short-term increase in the cost of inventory purchases while a
significant decrease in demand could result in an increase in the amount of
excess inventory quantities on-hand. Additionally, estimates of future
merchandise demand may prove to be inaccurate, in which case the Company may
have understated or overstated the provision required for excess or old
inventory. If the Company's inventory is determined to be overvalued in the
future, the Company would be required to recognize such costs in the costs of
goods sold and reduce operating income at the time of such determination.
Likewise, if inventory is later determined to be undervalued, the Company may
have overstated the costs of goods sold in previous periods and would be
required to recognize additional operating income at the time of such
determination. Therefore, although every effort is made to ensure the accuracy
of forecasts of future merchandise demand, any significant unanticipated changes
in demand or the economy in the Company's markets could have a significant
impact on the value of the Company's inventory and reported operating results.
As is currently the case with many companies in the retail industry,
the Company's LIFO calculations have yielded inventory increases in recent years
due to deflation reflected in price indices used. This is the result of the LIFO
method whereby merchandise sold is valued at the cost of more recent inventory
purchases (which the deflationary indices indicate to be lower), resulting in
the general inventory on-hand being carried at the older, higher costs. Given
these higher values and the promotional retail environment, the Company reduced
the carrying value of its LIFO inventories by $7.1 million and $5.6 million as
of February 1, 2003 and February 2, 2002, respectively, to a net realizable
value (NRV). Inherent in these NRV assessments and related reserves are
significant management judgments and estimates regarding future merchandise
selling costs and pricing. Should these estimates prove to be inaccurate, the
Company may have overstated or understated its inventory carrying value. In such
cases, the Company would be required to recognize cost increases or decreases in
costs of goods sold, and impact operating income accordingly, at the time of
such determination.
VENDOR ALLOWANCES
As is standard industry practice, the Company receives allowances from
merchandise vendors as reimbursement for charges incurred on marked-down
merchandise. Vendor allowances are generally credited to costs of goods sold,
provided the allowance is: (1) collectable, (2) for merchandise either
permanently marked down or sold, (3) not predicated on a future purchase, (4)
not predicated on a future increase in the purchase price from the vendor, and
(5) authorized by internal management. If the aforementioned criteria are not
met, the Company reflects the allowances as an adjustment to the cost of
merchandise capitalized in inventory.
Additionally, the Company receives allowances from vendors in
connection with cooperative advertising programs. These amounts are recognized
by the Company as a reduction of the related advertising costs that have been
incurred and reflected in selling, general and administrative expenses.
INCOME TAXES
Significant management judgment is required in determining the
provision for income taxes, deferred tax assets and liabilities and any
valuation allowance recorded against net deferred tax assets. The process
involves the Company summarizing temporary differences resulting from differing
treatment of items (e.g., inventory valuation reserves) for tax and accounting
purposes. These differences result in deferred tax assets and liabilities, which
are included within the consolidated balance sheet. The Company must then assess
the likelihood that deferred tax assets will be recovered from future taxable
income or tax carry-back availability and, to the extent the Company believes
recovery is not likely, a valuation allowance must be established. To the extent
the Company establishes a valuation allowance in a period, an expense must be
recorded within the tax provision in the statement of operations.
16
Net deferred tax assets were $7.2 million and $10.1 million as of
February 1, 2003 and February 2, 2002, respectively. No valuation allowance has
been established against net deferred tax assets, as the Company believes these
tax benefits will be realizable through reversal of existing deferred tax
liabilities, tax carry-back availability and future taxable income. If actual
results differ from these estimates or these estimates are adjusted in future
periods, the Company may need to establish a valuation allowance, which could
materially impact its financial position and results of operations.
Legislation changes currently proposed by certain states in which the
Company operates could have a materially adverse impact on future operating
results of the Company. These legislation changes principally involve state
income tax laws.
LONG-LIVED ASSETS
Property, fixtures and equipment are recorded at cost and are
depreciated on a straight-line basis over the estimated useful lives of such
assets. Changes in the Company's business model or capital strategy can result
in the actual useful lives differing from the Company's estimates. In cases
where the Company determines that the useful life of property, fixtures and
equipment should be shortened, the Company depreciates the net book value in
excess of the salvage value over its revised remaining useful life, thereby
increasing depreciation expense. Factors such as changes in the planned use of
fixtures or leasehold improvements could also result in shortened useful lives.
Net property, fixtures and equipment amounted to $136.2 million and $143.9
million as of February 1, 2003 and February 2, 2002, respectively.
The Company assesses, on a store-by-store basis, the impairment of
identifiable long-lived assets--primarily property, fixtures and
equipment--whenever events or changes in circumstances indicate that the
carrying value may not be recoverable. Factors that could trigger an impairment
review include the following:
- - Significant under-performance of stores relative to historical or projected
future operating results,
- - Significant changes in the manner of the Company's use of assets or overall
business strategy, and
- - Significant negative industry or economic trends for a sustained period.
The Company records impairment losses on long-lived assets used in
operations when events and circumstances indicate that the assets might be
impaired and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amount of those items. Cash flow estimates are
based on historical results adjusted to reflect the Company's best estimate of
future market and operating conditions. The net carrying value of assets not
recoverable is reduced to fair value. Estimates of fair value represent the
Company's best estimate based on industry trends and reference to market rates
and transactions. Should cash flow estimates differ significantly from actual
results, an impairment could arise and materially impact the Company's financial
position and results of operations.
Newly opened stores may take time to generate positive operating and
cash flow results. Factors such as store type, store location, current
marketplace awareness of the Company's private label brands, local customer
demographic data and current fashion trends are all considered in determining
the time-frame required for a store to achieve positive financial results. If
economic conditions prove to be substantially different from the Company's
expectations, the carrying value of new stores may ultimately become impaired.
In August 2001, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 144, "Accounting for Impairment or Disposal of Long-lived
Assets" ("SFAS No. 144"), which supersedes SFAS No. 121. SFAS No. 144, effective
for fiscal 2002, retains provisions of SFAS No. 121 regarding recognition and
measurement of long-lived asset impairment. SFAS No. 144 supersedes the
accounting
17
and reporting provisions of Accounting Principles Board Opinion No. 30
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions" for segments of a business to be disposed of.
In fiscal 2002, the Company evaluated the recoverability of its
long-lived assets. As a result of the evaluation, an impairment loss of
approximately $2.0 million was recorded in depreciation and amortization
expense.
Additionally, the Company has identified assets in the New York market
with a net book value of approximately $4.0 million that have under-performed
relative to the Company average. The Company has taken steps to address these
issues and currently forecasts no impairment charge. Should the Company's
improvement efforts prove unsuccessful or economic conditions change, the
carrying value of these assets may ultimately become impaired.
GOODWILL AND INTANGIBLE ASSETS
Net goodwill was $3.0 million as of February 1, 2003 and February 2,
2002.
Intangible assets are comprised of lease interests that relate to
below-market-rate leases purchased in store acquisitions completed in fiscal
years 1992 through 1999, which were adjusted to reflect fair market value. These
leases had average lives of twenty-five years. Net intangible assets amounted to
$6.5 million and $7.0 million as of February 1, 2003 and February 2, 2002,
respectively.
As a result of the Company's adoption of Statement of Financial
Accounting Standards No. 142 "Goodwill and Other Intangible Assets" ("SFAS No.
142"), the Company now annually reviews goodwill and other intangible assets
that have indefinite lives for impairment and when events or changes in
circumstances indicate the carrying value of these assets might exceed their
current fair values. The Company determines fair value using discounted cash
flow analysis, which requires certain assumptions and estimates regarding
industry economic factors and future profitability of acquired businesses. It is
the Company's policy to conduct impairment testing based on its most current
business plans, which reflect anticipated changes in the economy and the
industry. If actual results prove inconsistent with Company assumptions and
judgments, the Company could be exposed to a material impairment charge.
SECURITIZATIONS
A significant portion of the Company's funding is through
off-balance-sheet credit card securitizations via sales of certain accounts
receivable through an accounts receivable facility ("the facility"). The sale of
receivables is to The Bon-Ton Receivables Partnership, LP ("BTRLP"), a special
purpose entity, as defined by SFAS No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities--A Replacement
of FASB Statement No. 125." BTRLP is a wholly owned subsidiary of the Company.
BTRLP may sell accounts receivable with a purchase price up to $150 million
through the facility to a conduit on a revolving basis.
The Company sells accounts receivable through securitizations with
servicing retained. When the Company securitizes, it surrenders control over the
transferred assets and accounts for the transaction as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The Company allocates the previous carrying amount of the
securitized receivables between the assets sold and retained interests, based on
their relative estimated fair values at the date of sale. Securitization income
is recognized at the time of the sale, and is equal to the excess of the fair
value of the assets obtained (principally cash) over the allocated cost of the
assets sold and transaction costs. During the revolving period of each accounts
receivable securitization, securitization income is recorded representing
estimated gains on the sale of new receivables to the conduit on a continuous
basis to replenish the investors' interest in securitized receivables that have
been repaid by
18
the credit card account holders. Fair value estimates used in the recognition of
securitization income require certain assumptions of payment, default, servicing
costs and interest rates. To the extent actual results differ from those
estimates, the impact is recognized as securitization income.
The Company estimates the fair value of retained interests in
securitizations based on a discounted cash flow analysis. The cash flows of the
retained interest-only strip are estimated as the excess of the weighted average
finance charge yield on each pool of receivables sold over the sum of the
interest rate paid to the note holder, the servicing fee and an estimate of
future credit losses over the life of the receivables. Cash flows are discounted
from the date the cash is expected to become available to the Company. These
cash flows are projected over the life of the receivables using payment,
default, and interest rate assumptions that the Company believes would be used
by market participants for similar financial instruments subject to prepayment,
credit and interest rate risk. The cash flows are discounted using an interest
rate that the Company believes a purchaser unrelated to the seller of the
financial instrument would demand. As all estimates used are influenced by
factors outside the Company's control, there is uncertainty inherent in these
estimates, making it reasonably possible that they could change in the near
term. Any adverse change in the Company's assumptions could materially impact
securitization income.
The Company recognized securitization income of $8.9 million, $5.6
million and $2.7 million for fiscal years 2002, 2001, and 2000, respectively.
The increased income in fiscal 2002 relative to fiscal 2001 was principally a
reflection of increased sales on the Company's proprietary credit card and lower
securitization facility costs.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
MARKET RISK AND FINANCIAL INSTRUMENTS
The Company is exposed to market risk associated with changes in
interest rates. To provide some protection against potential rate increases
associated with its variable-rate facilities, the Company has entered into
various derivative financial transactions in the form of interest rate swaps.
The interest rate swaps are used to hedge the underlying variable-rate
facilities. 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 $110.0 million with several financial institutions for various terms.
The notional amount does not represent amounts exchanged by the parties, but it
is used as the basis to calculate amounts due and to be received under the rate
swaps. The Company believes the derivative financial instruments entered into
provide protection from volatile upward swings in interest rates associated with
the Company's variable-rate facilities. During fiscal 2002 and 2001, the Company
did not enter into or hold derivative financial instruments for trading
purposes.
The following table 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 as of February 1,
2003. For interest rate swaps, the table presents notional amounts and weighted
average pay and receive interest rates by expected maturity date. For additional
discussion of the Company's interest rate swaps, see Note 6 to the Consolidated
Financial Statements.
19
Expected Maturity Date By Fiscal Year
-------------------------------------------------------------------
(Dollars in There-
thousands) 2003 2004 2005 2006 2007 after Total Fair Value
- ----------------------------------------------------------------------------------------------------------------------------
Debt:
Fixed-rate debt $ 715 $ 791 $ 876 $ 970 $ 1,073 $ 15,784 $ 20,209 $ 22,976
Average fixed rate 9.62% 9.62% 9.62% 9.62% 9.62% 9.33% 9.39%
Variable-rate debt -- $ 40,200 -- -- -- $ 4,500 $ 44,700 $ 44,700
Average variable
rate -- 3.05% -- -- -- 1.15% 2.86%
Interest Rate Derivatives:
Interest rate swaps
Variable-to-fixed $ 50,000 $ 30,000 -- $ 30,000 -- -- $ 110,000 $ (4,940)
Average pay rate 5.81% 5.58% -- 5.43% -- -- 5.64%
Average receive rate 1.91% 1.88% -- 1.97% -- -- 1.92%
- ----------------------------------------------------------------------------------------------------------------------------
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 second half of each fiscal year, which includes the back-to-school
and holiday seasons. See Note 15 of Notes to Consolidated Financial Statements
for the Company's quarterly results for fiscal 2002 and 2001. Due to the fixed
nature of certain costs, 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 results that may be achieved for a
full fiscal year. In addition, quarterly operating results are impacted by the
timing and amount of revenues and costs associated with the opening of new
stores and 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.
ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Information called for by this item is set forth in the Company's
Consolidated Financial Statements and supplementary data contained in this
report and is incorporated herein by this reference. See index at page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Information regarding the change in the Company's independent auditor
was provided in the Company's Current Report on Form 8-K filed June 14, 2002
(amended on June 27, 2002). The letter from Arthur Andersen LLP stating the
firm's agreement with the information provided in the report was filed as an
exhibit to the Form 8-K report.
20
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information regarding executive officers is included in Part I
under the heading "Executive Officers." 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 Items 402(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.
See also Part II, Item 5 for a discussion of securities authorized for
issuance under equity compensation plans.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information called for by this Item will be contained in the
Company's Proxy Statement and is hereby incorporated by reference thereto.
PART IV
ITEM 14. CONTROLS AND PROCEDURES
The Company's management, including the Chief Executive Officer and the
Chief Financial Officer, have evaluated the effectiveness of the Company's
"disclosure controls and procedures" (as defined in Exchange Act Rules 13a-14
and 15d-14), within 90 days of the filing date of this Form 10-K, and based upon
their evaluation, have concluded that the Company's disclosure controls and
procedures are effective.
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect these controls since the date
the internal controls were evaluated.
ITEM 15. 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 the Index to
Consolidated Financial Statements and Financial Statement
Schedule on page F-1.
2. Consolidated Financial Statement Schedule--See the Index to
Consolidated Financial Statements and Financial Statement
Schedule on page F-1.
3. The following are exhibits to this Form 10-K and, if
incorporated by reference, the Company has indicated the
document previously filed with the Commission in which the
exhibit was included.
21
EXHIBIT
NO. DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
3.1 Articles of Incorporation Exhibit 3.1 to the Report on Form 8-B, File
No.0-19517 ("Form 8-B")
3.2 Bylaws Exhibit 3.2 to Form 8-B
10.1 Shareholders' Agreement among the Company and the Exhibit 10.3 to Amendment No. 2 to the
shareholders named therein Registration Statement on Form S-1, File No.
33-42142 ("1991 Form S-1")
* 10.2 (a) Employment Agreement with Frank Tworecke Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended October 30, 1999
* (b) First Amendment to Employment Agreement with Exhibit 10.3(b) to the Annual Report on Form 10-K for the
Frank Tworecke fiscal year ended February 2, 2002 ("2001 Form 10-K")
* 10.3 Employment Agreement with James H. Baireuther Exhibit 10.4 to the 2001 Form 10-K
* 10.4 Form of severance agreement with certain Exhibit 10.14 to Form 8-B
executive officers
* 10.5 Supplemental Executive Retirement Plan Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended August 4, 2001
10.6 Consulting and Noncompetition Agreement Exhibit 10.1 to the Quarterly Report on Form 10-Q
Between the Company and Leon D. Starr for the quarter ended November 3, 2001
* 10.7 Amended and Restated 1991 Stock Option and Exhibit 4.1 to the Registration Statement on Form
Restricted Stock Plan S-8, File No. 333-36633
* 10.8 2000 Stock Incentive Plan Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended July 29, 2000 ("7/29/00
10-Q")
* 10.9 Phantom Equity Replacement Stock Option Plan Exhibit 10.18 to the 1991 Form S-1
* 10.10 Management Incentive Plan and Addendum to Exhibit 10.13 to the Annual Report on Form 10-K
Management Incentive Plan for the fiscal year ended February 1, 1997
22
EXHIBIT DESCRIPTION DOCUMENT IF INCORPORATED BY REFERENCE
NO.
10.11 (a) Sublease of Oil City, Pennsylvania store between Exhibit 10.16 to the 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 the 1991 Form S-1
(c) Corporate Guarantee with respect to Oil City, Exhibit 10.26 to Amendment No. 1 to the 1991 Form S-1
Pennsylvania lease
10.12 Second Amended and Restated Receivables Purchase
Agreement dated as of January 17, 2003 among The
Bon-Ton Receivables Partnership, L.P., Falcon
Asset Securitization Corporation, EagleFunding
Capital Corporation, Bank One, N.A. and Fleet
Securities, Inc.
10.13 (a) Credit Agreement dated as of April 15, 1997 among Exhibit 10.1 to the Quarterly Report on Form 10-Q for the
the Company, Adam, Meldrum & Anderson Co., Inc., 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 the Registration Statement on Form
S-1, File No. 333-48811 ("1998 Form S-1")
(c) Second Amendment to Credit Agreement Exhibit 10.3(c) to the 1998 Form S-1
(d) Third Amendment to Credit Agreement Exhibit 10.3(d) to the 1998 Form S-1
(e) Fourth Amendment to Credit Agreement Exhibit 10.2 to the Quarterly Report on Form 10-Q
for the quarter ended October 31, 1998
(f) Fifth Amendment to Credit Agreement Exhibit 10.14(f) to the Annual Report on Form 10-K
for the fiscal year ended January 30, 1999
(g) Sixth Amendment to Credit Agreement Exhibit 10.5(g) to the Annual Report on Form 10-K
for the fiscal year ended January 29, 2000
(h) Seventh Amendment to Credit Agreement Exhibit 10.1 to the 7/29/00 10-Q
(i) Eighth Amendment to Credit Agreement Exhibit 10.13(a) to the 2001 Form 10-K
23
21. Subsidiaries of The Bon-Ton.
23.1 Consent of KPMG LLP.
23.2 Explanation Concerning Absence of Current Written Consent of Arthur
Andersen LLP.
99.1 Certifications Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
* Constitutes a management contract or compensatory plan or arrangement.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fiscal quarter
ended February 1, 2003.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE BON-TON STORES, INC.
Dated: April 28, 2003 By: /s/ Tim Grumbacher
------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Capacity Date
--------- -------- ----
/s/ Tim Grumbacher Chairman of the Board April 28, 2003
- -------------------------------- and Chief Executive Officer
Tim Grumbacher
/s/ James H. Baireuther Vice Chairman, Chief April 28, 2003
- -------------------------------- Administrative Officer and Chief
James H. Baireuther Financial Officer and Director
(principal financial and accounting officer)
/s/ Robert B. Bank Director April 28, 2003
- --------------------------------
Robert B. Bank
/s/ Philip M. Browne Director April 28, 2003
- --------------------------------
Philip M. Browne
/s/ Shirley A. Dawe Director April 28, 2003
- --------------------------------
Shirley A. Dawe
24
/s/ Marsha M. Everton Director April 28, 2003
- --------------------------------
Marsha M. Everton
/s/ Samuel J. Gerson Director April 28, 2003
- --------------------------------
Samuel J. Gerson
/s/ Michael L. Gleim Director April 28, 2003
- --------------------------------
Michael L. Gleim
/s/ Robert E. Salerno Director April 28, 2003
- --------------------------------
Robert E. Salerno
/s/ Robert C. Siegel Director April 28, 2003
- --------------------------------
Robert C. Siegel
/s/ Leon D. Starr Director April 28, 2003
- --------------------------------
Leon D. Starr
/s/ Frank Tworecke President, Chief Operating April 28, 2003
- -------------------------------- Officer and Director
Frank Tworecke
/s/ Thomas W. Wolf Director April 28, 2003
- --------------------------------
Thomas W. Wolf
25
CERTIFICATION
I, Tim Grumbacher, Chairman of the Board and Chief Executive
Officer of The Bon-Ton Stores, Inc., certify that:
1) I have reviewed this Annual Report on Form 10-K of The Bon-Ton Stores, Inc.;
2) Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls, and;
6) The registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
DATE: April 28, 2003 By: /s/ Tim Grumbacher
-------------------------
Tim Grumbacher
Chairman of the Board and
Chief Executive Officer
26
CERTIFICATION
I, James H. Baireuther, Vice Chairman, Chief Administrative
Officer and Chief Financial Officer of The Bon-Ton Stores, Inc., certify that:
1) I have reviewed this Annual Report on Form 10-K of The Bon-Ton Stores, Inc.;
2) Based on my knowledge, this Annual Report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this Annual Report;
3) Based on my knowledge, the financial statements, and other financial
information included in this Annual Report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Annual Report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this Annual Report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
Annual Report (the "Evaluation Date"); and
c) presented in this Annual Report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee
of registrant's board of directors (or persons performing the equivalent
function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls, and;
6) The registrant's other certifying officer and I have indicated in this Annual
Report whether or not there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.
DATE: April 28, 2003 By: /s/ James H. Baireuther
----------------------------
James H. Baireuther
Vice Chairman, Chief Administrative
Officer and Chief Financial Officer
27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Independent Accountants' Reports.......................................... F-2
Consolidated Balance Sheets............................................... F-5
Consolidated Statements of Income......................................... F-6
Consolidated Statements of Shareholders' Equity........................... F-7
Consolidated Statements of Cash Flows..................................... F-8
Notes to Consolidated Financial Statements................................ F-9
Schedule II - Valuation and Qualifying Accounts........................... F-33
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
The Bon-Ton Stores, Inc.:
We have audited the accompanying consolidated balance sheet of The
Bon-Ton Stores, Inc. and subsidiaries as of February 1, 2003 and the related
consolidated statements of income, shareholders' equity and cash flows for the
fiscal year then ended. In connection with our audit of the fiscal 2002
consolidated financial statements, we also have audited the fiscal 2002
financial statement schedule. These consolidated financial statements and
financial statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements and financial statement schedule based on our audit. The fiscal 2001
and fiscal 2000 consolidated financial statements and financial statement
schedule of The Bon-Ton Stores, Inc. were audited by other auditors who have
ceased operations. Those auditors expressed an unqualified opinion on those
consolidated financial statements and financial statement schedule, before the
revisions described in Note 2 to the consolidated financial statements, in their
report dated March 6, 2002.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.
In our opinion, the fiscal 2002 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of The Bon-Ton Stores, Inc. and subsidiaries as of February
1, 2003, and the results of their operations and their cash flows for the fiscal
year then ended in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the related fiscal 2002
financial statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents fairly, in all
material respects, the information set forth therein.
As discussed above, the fiscal 2001 and fiscal 2000 consolidated
financial statements and financial statement schedule of The Bon-Ton Stores,
Inc. and subsidiaries were audited by other auditors who have ceased operations.
As described in Note 2, these consolidated financial statements have been
revised to include the transitional disclosures required by Statement of
Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets,
which was adopted by the Company as of February 3, 2002. In our opinion, the
disclosures for fiscal 2001 and fiscal 2000 in Note 2 are appropriate. However,
we were not engaged to audit, review, or apply any procedures to the fiscal 2001
and fiscal 2000 consolidated financial statements and financial statement
schedule of The Bon-Ton Stores, Inc. and subsidiaries other than with respect to
such disclosures and, accordingly, we do not express an opinion or any other
form of assurance on the fiscal 2001 and fiscal 2000 consolidated financial
statements and financial statement schedule taken as a whole.
/s/ KPMG LLP
Philadelphia, Pennsylvania
March 5, 2003
F-2
REPORT OF INDEPENDENT ACCOUNTANTS
To The Bon-Ton Stores, Inc.:
We have audited the accompanying consolidated balance sheets of The
Bon-Ton Stores, Inc. (a Pennsylvania corporation) and subsidiaries as of
February 2, 2002 and February 3, 2001, and the related consolidated statements
of income, shareholders' equity and cash flows for each of the three fiscal
years in the period ended February 2, 2002. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of The Bon-Ton Stores,
Inc. and subsidiaries as of February 2, 2002 and February 3, 2001, and the
results of their operations and their cash flows for each of the three fiscal
years in the period ended February 2, 2002 in conformity with accounting
principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Philadelphia, PA
March 6, 2002
NOTE: THE REPORT ABOVE IS A COPY OF A PREVIOUSLY ISSUED REPORT AND HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP. THE INFORMATION FOR EACH OF THE TWO YEARS IN
THE PERIOD ENDED FEBRUARY 2, 2002 IN THE TRANSITIONAL DISCLOSURES REQUIRED BY
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 142, "GOODWILL AND OTHER
INTANGIBLE ASSETS," WHICH WAS ADOPTED BY THE COMPANY AS OF FEBRUARY 3, 2002, AS
DESCRIBED IN NOTE 2, WAS NOT REVIEWED BY ARTHUR ANDERSEN LLP.
F-3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
To The Bon-Ton Stores, Inc.:
We have audited in accordance with auditing standards generally
accepted in the United States, the consolidated financial statements included in
The Bon-Ton Stores, Inc.'s annual report to shareholders incorporated by
reference in this Form 10-K, and have issued our report thereon dated March 6,
2002. Our audit was made for the purpose of forming an opinion on those
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 6, 2002
NOTE: THE REPORT ABOVE IS A COPY OF A PREVIOUSLY ISSUED REPORT AND HAS NOT BEEN
REISSUED BY ARTHUR ANDERSEN LLP. SCHEDULE II, VALUATION AND QUALIFYING ACCOUNTS,
IS LOCATED AT PAGE F-33.
F-4
THE BON-TON STORES, INC.
CONSOLIDATED BALANCE SHEETS
February 1, February 2,
(In thousands except share and per share data) 2003 2002
- ---------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents $ 16,796 $ 9,752
Trade and other accounts receivable, net of allowance for doubtful accounts
and sales returns of $3,540 and $3,758 in fiscal 2002 and 2001, respectively 46,735 31,161
Merchandise inventories 148,618 166,042
Prepaid expenses and other current assets 12,958 10,542
Deferred income taxes 3,205 7,371
- ---------------------------------------------------------------------------------------------------------------
Total current assets 228,312 224,868
- ---------------------------------------------------------------------------------------------------------------
Property, fixtures and equipment at cost,
less accumulated depreciation and amortization 136,201 143,884
Deferred income taxes 3,980 2,741
Goodwill and intangible assets 9,511 9,999
Other assets 4,019 4,091
- ---------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 382,023 $ 385,583
===============================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 53,367 $ 57,007
Accrued payroll and benefits 14,037 9,743
Accrued expenses 25,546 28,191
Current portion of long-term debt 715 646
Current portion of obligations under capital leases 250 232
Income taxes payable 5,249 11,891
- ---------------------------------------------------------------------------------------------------------------
Total current liabilities 99,164 107,710
- ---------------------------------------------------------------------------------------------------------------
Long-term debt, less current maturities 64,194 67,209
Obligations under capital leases, less current maturities 468 720
Other long-term liabilities 5,851 6,683
- ---------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 169,677 182,322
- ---------------------------------------------------------------------------------------------------------------
Commitments and contingencies (Note 10)
Shareholders' equity
Preferred Stock - authorized 5,000,000 shares at $0.01 par value; no shares issued -- --
Common Stock - authorized 40,000,000 shares at $0.01 par value; issued and
outstanding shares of 12,200,285 and 12,483,941 in fiscal 2002 and 2001,
respectively
125 125
Class A Common Stock - authorized 20,000,000 shares at $0.01 par value;
issued and outstanding shares of 2,989,853 in fiscal 2002 and 2001 30 30
Treasury stock, at cost - shares of 277,000 in fiscal 2002 (1,132) --