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2006 FORM 10-K
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended
February 3, 2007
Commission File Number
0-19517
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:
Common Stock, $.01 par value
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes 
No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the
Act. Yes 
No 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes 
No 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated
filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer  Accelerated filer  Non-accelerated filer 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes 
No 
As of the last business day of the registrant’s most recently completed second fiscal quarter, the aggregate market
value of the voting and non-voting stock held by non-affiliates of the registrant was approximately $245.7 million,
based upon the closing price of $24.78 per share.*
As of April 2, 2007, there were 14,475,196 shares of Common Stock, $.01 par value, and 2,951,490 shares of
Class A Common Stock, $.01 par value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement for the 2007 Annual Meeting of Shareholders (the “Proxy Statement”)
are incorporated by reference in Part III to the extent described in Part III.
* 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.
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The Bon-Ton Stores, Inc. operates on a fiscal year, which is the 52 or 53 week period ending on the
Saturday nearer January 31 of the following calendar year. References to “2006,” “2005” and “2004”
represent the fiscal 2006 year ended February 3, 2007, fiscal 2005 year ended January 28, 2006 and
fiscal 2004 year ended January 29, 2005, respectively. References to “2007” represent the fiscal
2007 year ending February 2, 2008.
References to the “Company,” “we,” “us,” and “our” refer to The Bon-Ton Stores, Inc. and its subsidiaries.
References to “Carson’s” are to the Northern Department Store Group acquired by the Company from Saks
Incorporated (“Saks”) effective March 5, 2006. References to “Elder-Beerman” denote The Elder-Beerman Stores
Corp. and its subsidiaries, which were acquired by the Company in October 2003. References to “Bon-Ton” refer
to the Company’s stores operating under the Bon-Ton and Elder-Beerman nameplates. References to “Parisian”
refer to the stores acquired from Belk, Inc. effective October 29, 2006.
PART I
Item 1.
Business
Overview
The Company was founded in 1898 and is one of the largest regional department store operators in
terms of sales in the United States, offering a broad assortment of brand-name fashion apparel and accessories
for women, men and children as well as cosmetics, home furnishings and other goods. We currently operate 279
stores in mid-size and metropolitan markets in 23 Northeastern, Midwestern and upper Great Plains states under
the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers
nameplates and, under the Parisian nameplate, stores in the Detroit, Michigan area, encompassing a total of
approximately 26 million square feet. Our management believes that we enjoy the #1 or #2 market position
among traditional department stores in most of the markets in which we operate.
Industry Overview
We compete in the department store segment of the U.S. retail industry. Department stores have
historically dominated apparel and accessories retailing, occupying a cornerstone in the U.S. retail landscape for
more than 100 years. Over time, department stores have evolved from single unit, family owned, urban locations
to regional and national chains serving communities of all sizes. The department store industry continues to
evolve in response to ongoing consolidation among merchandise vendors as well as the evolution of competitive
retail formats — mass merchandisers, national chain retailers, specialty retailers and online retailers.
Merchandise
Merchandise Mix
Our stores offer a broad assortment of quality, brand-name fashion apparel and accessories for women,
men and children, as well as footwear, cosmetics, home furnishings and other goods at opening, moderate and
better price points. We offer a distinct core merchandise assortment, including nationally distributed brands at
competitive prices and unique product at compelling values through our private brands. We further differentiate
our merchandise assortment with exclusive product from nationally distributed brands. The following table
illustrates our net sales
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by product category for the last three years (2006 includes sales of Carson’s, which the Company acquired from
Saks effective March 5, 2006):
Merchandise Category
2006
Women’s Apparel
Home
Men’s Apparel
Cosmetics
Accessories
Children’s Apparel
Footwear
Intimate Apparel
Juniors’ Apparel
Total
2005
2004
26.4 %
18.3
13.2
12.4
8.2
6.0
7.6
4.2
3.7
25.4 %
19.5
14.0
11.7
8.8
5.8
6.6
4.8
3.4
25.8 %
19.1
14.2
11.9
8.7
6.0
5.8
4.7
3.8
100.0 %
100.0 %
100.0 %
Nationally Distributed Brands
Our nationally distributed brand assortment includes many of the most well-known and popular labels in
the apparel, accessories, footwear, cosmetics and home furnishings industries such as Calvin Klein, Chanel,
Coach, Easy Spirit, Bandolino, Børn, Clarks, Estée Lauder, Jones New York, Liz Claiborne, Anne Klein II,
Nautica, Columbia, Nine West, OshKosh, Ralph Lauren and Waterford. We believe these brands enable us to
position our stores as headquarters for fashion, offering both newness and wardrobe staples at competitive
prices. We believe that we maintain excellent relationships with our merchandise vendors, working collaboratively
to select the most compelling assortments for our customers.
Private Brands
Our exclusive private brands complement our offering of nationally distributed brands and are a key
component of our overall merchandising strategy. Our private brand portfolio includes popular brands such as
Laura Ashley; Consensus; Cuddle Bear; Pursuits, Ltd.; Living Quarters; Relativity; Ruff Hewn; Statements; Studio
Works; Breckenridge; and Karen Neuberger Home. By providing exclusive fashion products at price points that
are more attractive than nationally distributed brand alternatives, our private brand program creates value for our
customers and increases our brand exclusiveness, competitive differentiation and customer loyalty.
Since the acquisition of Carson’s, we have built a significant private brand organization to serve the entire
Company. Our private brand program presents the opportunity to increase our overall gross margin by virtue of
the more efficient cost structure inherent in the design and sourcing of in-house brands.
Vendor Relationships and Sourcing
Our highly experienced team of buyers has developed long-standing and strong relationships with many
of the leading vendors in the marketplace. Our scale, geographic footprint and market leadership make us an
important distribution channel for leading merchandise vendors to reach their target consumers. We believe that
our status as a key account to many of our vendors serves to strengthen our ability to negotiate for exclusive
merchandise as well as better pricing terms. We monitor and evaluate the sales and profitability performance of
each vendor and adjust our purchasing decisions based upon the results of this analysis.
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Consistent with industry practice, we receive reimbursement allowances from certain of our vendors in
support of the merchandise sold to us that was marked down or that did not allow us to achieve certain margins
upon sale to our customers. Additionally, we receive advertising allowances and reimbursement of certain payroll
expenses from some of our vendors, which primarily represent reimbursements of specific, incremental and
identifiable costs incurred to promote and sell the vendors’ merchandise.
Marketing and Customer Service
We are committed to providing our customers with a satisfying shopping experience by offering
trend-right fashions, differentiated product, value and convenience. Critical elements of our customer service
approach are:
•
marketing programs designed to promote customer awareness of our fashion, quality and value;
•
proprietary credit card programs that facilitate ongoing communication with our customers;
•
loyalty programs that foster and strengthen mutually beneficial long-term relationships; and
•
knowledgeable, friendly and well-trained sales associates.
Marketing
Our strategic marketing initiatives develop and enhance our brand equity and support our position as a
leading shopping destination among our target customers. We conduct a multi-faceted marketing program,
including newspaper advertisements and inserts, broadcast advertisements, direct mail and in-store events. We
use a combination of (i) advertising and sales promotion activities to reach and build brand image and traffic and
(ii) customer-specific communications and purchase incentives to drive customer spending and loyalty. Both
types of marketing efforts focus primarily on our target customer of women between the ages of 35 and 60 with
annual household incomes of $55,000 to $125,000, with the intention of increasing visit frequency and purchases
per visit. Additionally, our marketing activities attract a broader audience, including juniors, seniors and men. We
seek to attract new customers and to maintain customer loyalty by actively communicating with our customers
through the execution of targeted marketing facilitated by sophisticated customer relationship management
capabilities.
Effective communication includes showcasing our “hometown store” tradition. We are focused on
important, cause-related efforts and events to enhance our connection with the communities in which we operate
and with the customers we serve. These strategic initiatives garner favorable publicity, drive traffic and generate
incremental sales. Additionally, these efforts serve to differentiate us from our competitors.
We maintain an active calendar of in-store events to promote our sales efforts. These events include
appearances by well-known designers and personalities, trunk shows, fashion shows, cooking demonstrations
and cosmetic makeovers from leading makeup artists.
Proprietary Credit Card
Evidencing our customer satisfaction and loyalty is the high penetration rate of our proprietary credit card
programs that are administered by HSBC Bank Nevada, N.A. (“HSBC”). We have over 4.9 million active
proprietary credit card holders.
Our proprietary credit card loyalty programs are designed to cultivate long-term relationships with our
customers. Loyalty programs offer rewards and privileges to all members meeting annual purchase requirements.
Our targeted loyalty programs focus on our most active customers,
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which we refer to as our “loyalty club customers,” and include marketing features such as coupon pricing without
coupons, advanced sales notices and extra savings events.
On July 8, 2005, HSBC purchased the Bon-Ton proprietary credit card accounts and the related
outstanding balances associated with those accounts (we refer to this transaction as the “Credit Card Sale”). As
part of the Credit Card Sale, Bon-Ton entered into a seven-year marketing and servicing agreement with HSBC.
Under the terms of the agreement, Bon-Ton entered into an Interim Servicing Agreement (the “ISA”) and a Credit
Card Program Agreement (the “CCPA”). Under the terms of the ISA, Bon-Ton continued to service the credit card
receivables from July 8, 2005 through October 31, 2005, for which Bon-Ton was compensated. The CCPA sets
forth the terms and conditions under which HSBC will issue credit cards to Bon-Ton’s customers. Under the
CCPA, Bon-Ton is paid a percentage of net credit sales for credit card sales generated after July 7, 2005. Prior to
our acquisition of Carson’s, HSBC had acquired Carson’s proprietary credit card program, and the servicing and
marketing agreement we have with HSBC was amended to include the Carson’s proprietary credit card program
within the Bon-Ton program.
Customer Service
We maintain a sales force of knowledgeable and well-trained sales associates who deliver excellent
service to our customers. Sales associates are trained in the areas of customer service, selling skills and product
knowledge. We employ a two-tiered strategy to achieve effective customer service. In selected areas, we offer
one-on-one selling with dedicated associates to assist customers with merchandise selections. Our customers
also appreciate the convenience of self-service formats in many departments and efficient service centers to
expedite their purchases. Our new associates receive computer-based training for effective, efficient and uniform
training. We actively monitor and analyze, through our scheduling program, the service levels in our stores in
order to maximize sales associate productivity and store profitability.
Integration of Carson’s
Effective March 5, 2006, the Company purchased Carson’s, adding approximately 15 million square feet
of retail space.
We began the process of integrating Carson’s into Bon-Ton, which we anticipate will span two years. The
Company’s senior management team, which includes a number of former Carson’s executives, adopted best
business practices and defined opportunities for profitable growth. One of our goals was and is to implement
strategic initiatives to drive sales growth. We targeted several business categories for incremental sales
opportunities, building on the merchandising strengths of Bon-Ton and Carson’s. Moreover, by increasing our
importance to vendors as a high-volume purchaser, we are better able to differentiate ourselves from competitors
via improved access to exclusive merchandise from nationally distributed brands.
We achieved a common merchandise assortment of both nationally distributed and private brands and a
common marketing and sales promotion calendar for all of our stores. A significant portion of the Carson’s
merchandising staff remained with us, which allowed us to enhance the merchandise offerings at Bon-Ton
stores. Additionally, the acquisition of Carson’s included a significant private brand program upon which we built
a private brand organization to serve the Company as a whole.
Of equal importance is enhancing our systems while maintaining a steady flow of merchandise and
appropriate levels of inventory to minimize business disruption and ensure customer satisfaction. During 2006,
we successfully integrated the Carson’s and Bon-Ton systems. We will continue to evaluate our technology
infrastructure to ensure it is positioned to serve our needs efficiently.
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Competition
The retail industry is highly competitive and fragmented. We face competition for customers from
traditional department store operators such as Belk, Inc., Dillard’s, Inc. and Federated Department Stores, Inc.;
national chain retailers such as J. C. Penney Company, Inc., Kohl’s Corporation and Sears Holdings Corporation;
mass merchandisers such as Target Corporation and Wal-Mart Stores, Inc.; specialty stores and, to a lesser
extent, catalogue and online retailers. In addition, we face competition for suitable store locations from other
department stores, national chain retailers, mass merchandisers and other large-format retailers. In a number of
our markets, we compete for customers with national department store chains which offer a similar mix of
branded merchandise as we do. In other markets, we face potential competition from national chains that, to
date, have not entered such markets and from national chains that have stores in our markets but currently do
not carry similar branded goods. In all markets, we generally compete for customers with stores offering
moderately priced goods. Many of our competitors have substantially greater financial and other resources than
we do, and many of those competitors have significantly less debt than we do and may thus have greater
flexibility to respond to changes in our industry.
We believe that we compare favorably with our competitors with respect to quality, depth and breadth of
merchandise, prices for comparable quality merchandise, customer service and store environment. We also
believe our knowledge of and focus on mid-size markets, developed over our many years of operation, give us
an advantage in these markets that cannot be readily duplicated. In markets in which we face traditional
department store competition, we believe that we compete effectively.
Trademarks
We own or license various trademarks, including our store nameplates and private brands. We believe
our trademarks and service marks are important and that the loss of certain of our trademarks or trade names,
particularly the store nameplates, could have a material adverse effect on us. Many of our trademarks are
registered in the United States Patent and Trademark Office. The terms of these registrations are generally ten
years, and they are renewable for additional ten-year periods indefinitely so long as the marks are in use at the
time of renewal. We are not aware of any claims of infringement or other challenges to our right to register or use
our marks in the United States that would have a material adverse effect on our consolidated financial position,
results of operations, or liquidity.
Information Technology and Systems
Systems
During 2006, we substantially completed the integration of Carson’s systems to allow the Company to
operate in the fourth quarter as one company. Substantially all mainframe, midrange, server computing systems,
and central storage systems were replaced with new advanced technologies to support the expanded business
and provide the foundation for future growth. Data processing facilities in York, Pennsylvania and Dayton, Ohio
were upgraded and equipped with standby diesel generators to provide back-up electrical service. The Company
is increasing its technology staff to support and enhance the new systems infrastructure. Work to optimize both
business and systems processes will continue into 2007 with continued focus on achieving synergy goals, and
we will begin a three-year program to install Bon-Ton’s advanced point-of-sale system in all Carson’s stores.
Inventory Management
Our merchandising function is centralized, with a staff of buyers and a planning and allocation team that
have responsibility for determining the merchandise assortment, quantities to be purchased and allocation of
merchandise to each store.
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The majority of the merchandise we purchase is initially received at one of our four distribution facilities.
We primarily operate on a pre-distribution model through which we allocate merchandise on our initial
purchase orders to each store. This merchandise is shipped from our vendors to our distribution facilities for
delivery to designated stores. We then have the ability to direct replenishment merchandise to the stores that
demonstrate the highest customer demand. This reactive distribution technique helps minimize excess inventory
and affords us timely and accurate replenishment.
Our distribution facilities are electronically monitored by our merchandising staff to facilitate the
distribution of goods to our stores. We utilize electronic data interchange (EDI) technology with most vendors,
which is designed to move merchandise onto the selling floor quickly and cost-effectively by allowing vendors to
deliver floor-ready merchandise to the distribution facilities. In addition, we utilize high-speed automated
conveyor systems to scan bar coded labels on incoming cartons of merchandise and direct cartons to the proper
processing areas. Many types of merchandise are processed in the receiving area and immediately
“cross-docked” to the shipping dock for delivery to the stores. Certain processing areas are staffed with
personnel equipped with hand-held radio frequency terminals that can scan a vendor’s bar code and transmit the
necessary information to a computer to record merchandise on hand. We utilize third-party carriers to distribute
our merchandise to individual stores.
The majority of our merchandise is held in our stores. We closely monitor the inventory levels and
assortments in our stores to facilitate reorder and replenishment decisions, satisfy customer demand and
maximize sales.
Seasonality
Our 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 year, which includes the back-to-school and holiday seasons.
Due to the fixed nature of certain costs, our selling, general and administrative (“SG&A”) expenses are typically
higher as a percentage of net sales during the first half of each year. Because of the seasonality of our business,
results for any quarter are not necessarily indicative of the results that may be achieved for a full year. In
addition, quarterly results of operations depend upon the timing and amount of revenues and costs associated
with the opening, closing and remodeling of existing stores.
Capital Investments
We make capital investments to support our long-term business goals and objectives. We invest capital
in new and existing stores, distribution and support facilities and information technology.
In 2007, we anticipate total capital expenditures, net of landlord contributions, of approximately
$106.0 million. As part of our focus on continually improving our store base, significant capital will be employed
for major remodels and expansions, as well as on-going upgrades in other stores. We are focused on
maintaining the quality of our stores and, consequently, our brand equity. With respect to our major remodels, we
expand only after extensive analysis of our projected returns on capital. We generally experience an increase in
both total sales and profitability at stores that undergo a remodel or expansion.
In 2007, we plan to open two new stores, expand three stores and renovate and reconfigure several
existing stores.
We believe capital investments for information technology in our stores, distribution facilities and support
functions are necessary to support our business strategies. We are continually
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upgrading our information systems to improve efficiency and productivity. Included in the 2007 capital budget are
significant expenditures for information technology projects.
Associates
As of April 2, 2007, we had approximately 33,000 full-time and part-time associates. We employ
additional part-time associates during peak selling periods. We believe that our relationship with our associates is
good.
Available Information
Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and
amendments to those reports, are available without charge on our website, www.bonton.com, as soon as
reasonably practicable after they are filed electronically with the Securities and Exchange Commission (“SEC”).
We also make available on our website, free of charge, the following documents:
•
Audit Committee Charter
•
Compensation and Human Resources Committee Charter
•
Governance and Nominating Committee Charter
•
Code of Ethical Standards and Business Practices
Executive Officers
The following table sets forth certain information regarding our executive officers as of April 2, 2007:
NAME
AGE
Tim Grumbacher
Byron L. Bergren
Anthony J. Buccina
Stephen R. Byers
67
60
56
53
David B. Zant
50
Edward P. Carroll, Jr.
60
Dennis R. Clouser
Keith E. Plowman
54
49
James M. Zamberlan
60
POSITION
Executive Chairman of the Board of Directors
President and Chief Executive Officer and Director
Vice Chairman, President — Merchandising
Vice Chairman — Stores, Operations, Private Brand,
Planning & Allocation
Vice Chairman — Private Brand and Planning &
Allocation
Executive Vice President — Sales Promotion and
Marketing
Executive Vice President — Human Resources
Executive Vice President — Chief Financial Officer and
Principal Accounting Officer
Executive Vice President — Stores and Visual
Mr. Grumbacher has been Executive Chairman of the Board of Directors since February 2005. He served
as Chairman of the Board of Directors from August 1991 to February 2005. He was Chief Executive Officer from
1985 to 1995 and from June 2000 to August 2004. From 1977 to 1989 he was President.
Mr. Bergren has been President and Chief Executive Officer since August 2004. Mr. Bergren, who joined
us in November 2003 as Vice Chairman and served as President and Chief Executive Officer of Elder-Beerman
from February 2002 through August 2004, served as Chairman of the Southern Division of Belk, Inc. from 1999
to February 2002, as Partner of the Florida Division of Belk, Inc. from 1992 to 1999, and in senior executive
positions at Belk, Inc. from 1985 to 1992.
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Mr. Buccina was appointed Vice Chairman, President — Merchandising on June 1, 2006. He had been
President and Chief Merchandising Officer of Carson’s from April 2006 to June 2006. Prior to that time, he had
served as President — Head Merchant of the Northern Department Store Group of Saks (“NDSG”) for more than
five years.
Mr. Byers was appointed Vice Chairman — Stores, Operations, Private Brand, Planning & Allocation on
October 9, 2006. He had been Executive Vice President — Stores and Visual Merchandising from April 2006 to
October 2006. Prior to that time, he had served as Executive Vice President of Stores and Visual Merchandising
of NDSG since August 2004. He held the post of Senior Vice President / Territory Director of Stores for Kohl’s
Corporation between 2000 and August 2004.
Mr. Zant was named Vice Chairman — Private Brand and Planning & Allocation on August 1, 2006. He
had been Vice Chairman and Chief Merchandising Officer from January 2005 to July 2006. From July 2002 to
December 2004, he was Executive Vice President — General Merchandise Manager for Belk, Inc. and from June
2001 to July 2002, he was President of the Central Division of Belk, Inc. Prior to that, Mr. Zant was with the
Parisian Division of Saks, serving as Executive Vice President of Merchandising.
Mr. Carroll became Executive Vice President — Sales Promotion and Marketing effective April 3, 2006.
Prior to that time, he had served as Executive Vice President of Sales Promotion and Marketing of NDSG for
more than five years.
Mr. Clouser has been Executive Vice President — Human Resources since April 3, 2006. He served as
Senior Vice President — Human Resources from February 2005 to April 2006 and Vice President —
Employment and Training from April 2004 to February 2005. For more than four years prior to that time, he was
Senior Vice President — Human Resources at Elder-Beerman.
Mr. Plowman has been Executive Vice President — Finance since April 3, 2006, Chief Financial Officer
since May 2005 and Principal Accounting Officer since June 2003. He served as Senior Vice President —
Finance from September 2001 to April 2006. Mr. Plowman joined us in 1997 as Divisional Vice
President — Controller and from May 1999 to September 2001 he was our Vice President — Controller.
Mr. Zamberlan has been Executive Vice President — Stores and Visual since November 2004. Prior to
that time, he served as Executive Vice President — Stores for Elder-Beerman for more than five years.
Item 1A.
Risk Factors
Cautionary Statements Relating to Forward-Looking Information
We have made, in this Annual Report on Form 10-K, forward-looking statements relating to
developments, results, conditions or other events we expect or anticipate will occur. These statements may relate
to revenues, earnings, store openings, business strategy, market conditions and the competitive environment.
The words “believe,” “may,” “will,” “estimate,” “intend,” “expect,” “anticipate,” “plan” and similar expressions as
they relate to the Company, or future or conditional verbs, such as “will,” “should,” “would,” “may” and “could,” are
intended to identify forward-looking statements. Forward-looking statements are based on management’s
then-current views and assumptions and we undertake no obligation to update them. Forward-looking statements
are subject to risks and uncertainties and actual results may differ materially from those projected.
An investment in our securities carries certain risks. Investors should carefully consider the risks
described below and other risks which may be disclosed in our filings with the SEC before investing in our
securities.
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Our substantial debt could adversely affect our financial condition and prevent us from fulfilling our debt
obligations.
We have a substantial amount of debt. As of April 2, 2007, we had total debt of approximately
$1.2 billion. This could have important consequences to our investors. For example, it could:
•
make it more difficult for us to satisfy our debt obligations;
•
cause our failure to comply with the financial and restrictive covenants contained in the indenture
governing our senior unsecured notes and the agreements governing our senior secured credit
facility and mortgage loan facility, which could cause a default under those instruments and which, if
not cured or waived, could have a material adverse effect on us;
•
increase our vulnerability to general adverse economic and industry conditions;
•
limit our ability to borrow money or sell equity to fund future working capital requirements, capital
expenditures, debt service requirements and other general corporate requirements;
•
require us to dedicate a substantial portion of our cash flow from operations to payments on our
debt, thereby reducing our ability to use our cash flow for other purposes, including capital
expenditures;
•
limit our flexibility in planning for, or reacting to, changes in our business and the retail industry;
•
make it more difficult for us to meet our debt service obligations in the event that there is a
substantial increase in interest rates because the debt under our senior secured credit facility bears
interest at fluctuating rates; and
•
place us at a competitive disadvantage compared to our competitors that have less debt.
Our ability to service our debt depends upon, among other things, our ability to replenish inventory,
generate sales and maintain our stores. If we do not generate sufficient cash from our operations to service our
debt obligations, we will need to take one or more actions, including refinancing our debt, obtaining additional
financing, selling assets, obtaining additional equity capital, or reducing or delaying capital expenditures. We
cannot be certain that our earnings will be sufficient to allow us to pay the principal and interest on our debt and
meet our other obligations. Debt under our senior secured credit facility bears interest at a floating rate, a portion
of which is offset by fixed-rate swap derivatives. Accordingly, changes in prevailing interest rates may affect our
ability to meet our debt service obligations. A higher interest rate on our debt would adversely affect our
operating results. If we are unable to meet our debt service obligations or if we default in some other manner
under our credit facilities, our lenders could elect to declare all borrowings outstanding, together with
accumulated and unpaid interest and other fees, immediately due and payable, which would have a material
adverse effect on our business, financial condition and results of operations.
Our discretion in some matters is limited by the restrictions contained in our senior secured credit facility and
mortgage loan facility agreements and in the indenture that governs our senior unsecured notes, and any
default on our senior secured credit facility, mortgage loan facility or the indenture that governs the senior
unsecured notes could harm our business, profitability and growth prospects.
The agreements that govern our senior secured credit facility and mortgage loan facility, and the
indenture that governs our senior unsecured notes, contain a number of covenants that limit the discretion of our
management with respect to certain business matters and may impair our ability to
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respond to changing business and economic conditions. The senior secured credit facility, the mortgage loan
facility and the indenture, among other things, restrict our ability to:
•
incur additional debt or issue guarantees of debt;
•
sell preferred stock;
•
create liens;
•
make restricted payments (including the payment of dividends or the repurchase of our capital
stock);
•
make certain types of investments;
•
sell stock in our restricted subsidiaries;
•
pay dividends or make payments from subsidiaries;
•
enter into transactions with affiliates; and
•
sell all or substantially all of our assets or merge or consolidate with another company.
Our senior secured credit facility contains financial covenants that require us to comply with a minimum
excess availability requirement. Our ability to borrow funds for any purpose depends on our satisfying this
requirement.
If we fail to comply with any of the financial covenants or the other restrictions contained in our senior
secured credit facility or any future financing agreements, an event of default could occur. An event of default
could result in the acceleration of some or all of our debt. If the debt is accelerated, we would not have, and may
not be able to obtain, sufficient funds to repay our debt, which could have a material adverse effect on our
business, financial condition and results of operations.
We may not be able to attract or retain a sufficient number of customers in a highly competitive retail
environment, which would have an adverse effect on our business, financial condition and results of
operations.
We compete with other department stores and many other retailers, including store-based, mail-order
and internet retailers. Many of our competitors have significant financial and marketing resources. The principal
competitive factors in our business are price, quality and selection of merchandise, reputation, store location,
advertising and customer service. We cannot assure you that we will be able to compete successfully against
existing or future competitors. Our expansion into new markets served by our competitors and the entry of new
competitors into, or expansion of existing competitors in, our markets could have a material adverse effect on our
business, financial condition and results of operations.
We may not be able to accurately predict customer-based trends and effectively manage our inventory levels,
which could reduce our revenues and adversely affect our business, financial condition and results of
operations.
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, particularly given the long lead times for ordering much of our merchandise, could adversely affect our
long-term relationships with our customers. Our managers focus on inventory levels and balance these levels
with inventory plans and reviews of trends; however, if our inventories become too large, we may have to “mark
down” or decrease our sales price, and we may be required to sell a significant amount of unsold inventory at
discounted prices or even below cost, which could have a material adverse effect on our business, financial
condition and results of operations.
10
Table of Contents
We may not be able to obtain adequate capital to support our operations and growth strategies.
Our operations and growth strategies require adequate capital, the availability of which depends on our
ability to generate cash flow from operations, borrow funds on satisfactory terms and raise funds in the capital
markets. We may need seasonal borrowing capacity in addition to the funds available under our senior secured
credit facility to fund our working capital requirements. The inability to obtain adequate capital could have a
material adverse effect on our business, financial condition and results of operations.
Our operating results fluctuate from season to season.
Our stores experience seasonal fluctuations in net sales and consequently in operating income, with
peak sales occurring during the back-to-school and holiday seasons. Any decrease in net sales or margins
during our peak selling periods, decrease in the availability of working capital needed in the months before these
periods or reduction in vendor allowances could have a material adverse effect on our business. We usually
order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed
by customer purchases. We must carry a significant amount of inventory, especially before the peak selling
periods. If we are not successful in selling our inventory, especially during our peak selling periods, we may be
forced to rely on markdowns or promotional sales to dispose of the inventory or we may not be able to sell the
inventory at all, which could have a material adverse effect on our business, financial condition and results of
operations.
Weather conditions could adversely affect our results of operations.
Because a significant portion of our business is apparel sales and subject to weather conditions in our
markets, our operating results may be unexpectedly and adversely affected by inclement weather. Frequent or
unusually heavy snow, ice or rain storms might make it difficult for our customers to travel to our stores and
thereby reduce our sales and profitability. Extended periods of unseasonable temperatures in our markets,
potentially during our peak seasons, could render a portion of our inventory incompatible with those
unseasonable conditions. Reduced sales from extreme or prolonged unseasonable weather conditions could
adversely affect our business, financial condition and results of operations.
We may pursue strategic acquisitions of businesses which may not be completed or, if completed, may not be
successfully integrated into our existing business.
We may pursue increased market penetration through strategic acquisitions. If we are unable to
successfully complete acquisitions or to effectively integrate acquired businesses, our ability to grow our
business or to operate our business effectively could be reduced, and our business, financial condition and
operating results could suffer. We also cannot assure you that we will be able to integrate the operations of any
future completed strategic acquisitions without encountering difficulty regarding different business strategies with
respect to marketing, integration of personnel with disparate business backgrounds and corporate cultures,
integration of different point-of-sale systems and other technology and managing relationships with other
business partners.
The consummation and integration of any future acquisition involve many risks, including the risks of:
•
diverting management’s attention from our ongoing business concerns;
•
being unable to obtain financing on terms favorable to us;
•
entering markets in which we have no direct prior experience;
•
improperly evaluating new services, products and markets;
•
being unable to maintain uniform standards, controls, procedures and policies;
11
Table of Contents
•
being unable to integrate new technologies or personnel;
•
incurring the expenses of any undisclosed or potential liabilities; and
•
the departure of key management and employees.
Failure to maintain our current key vendor relationships may adversely affect our business, financial condition
and results of operations.
Our business is dependent to a significant degree upon close relationships with our vendors and our
ability to purchase brand name merchandise at competitive prices. The loss of key vendor support could have a
material adverse effect on our business, financial condition and results of operations. There can be no assurance
that we will be able to acquire brand name merchandise at competitive prices or on competitive terms in the
future. For example, certain merchandise that is high profile and in high demand may be allocated by vendors
based upon the vendors’ internal criteria, which are beyond our control.
An inability to find qualified domestic and international vendors and fluctuations in the exchange rate with
countries in which our international vendors are located could adversely affect our business.
The products we sell are sourced from a wide variety of domestic and international vendors. Our ability to
find qualified vendors and source products in a timely and cost-effective manner, including obtaining vendor
allowances in support of our advertising and promotional programs, represents a significant challenge. The
availability of products and the ultimate costs of buying and selling these products, including advertising and
promotional costs, are not completely within our control and could increase our merchandise and operating costs
and adversely affect our business. Additionally, costs and other factors specific to imported merchandise, such
as trade restrictions, tariffs, currency exchange rates and transport capacity and costs, are beyond our control
and could restrict the availability of imported merchandise or significantly increase the costs of our merchandise
sales and adversely affect our business, financial condition and results of operations.
The loss of the outside vendor that operates our proprietary credit card programs could have an adverse effect
on our operations and financial results.
Our proprietary credit card programs are operated, under agreements, by HSBC. Under these
agreements, HSBC issues our proprietary credit cards to our customers and we receive a percentage of the net
credit sales thereunder. If for any reason HSBC is unable to provide the services comprising our proprietary
credit card programs, or our agreements with HSBC are terminated, in either case under circumstances in which
we are unable to quickly and adequately contract with a comparable replacement vendor of such services, our
customers who have accounts under our proprietary credit card programs will be unable to use their cards, which
would likely result in a certain decrease in sales to such customers, a loss of the revenues attributable to the
payments from HSBC, and an adverse effect on customer goodwill, any or all of which could have a material
adverse effect on our business, financial condition and results of operations.
Conditions in, and the United States’ relationship with, the foreign countries where we source our merchandise
could adversely affect our business.
A majority of our merchandise is manufactured outside of the United States, primarily in India and the Far
East. Political instability or other events resulting in the disruption of trade from the countries where our
merchandise is manufactured or the imposition of additional regulations relating to, or duties upon, the
merchandise we import could cause significant delays or interruptions in the supply of our merchandise or
increase our costs, either of which could have a material adverse effect on our business. If we are forced to
source merchandise from other countries, those goods may be more expensive or of a different or inferior quality
from the merchandise we now sell. If we are
12
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unable to adequately replace the merchandise we currently source with merchandise produced elsewhere, our
business, financial condition and results of operations could be adversely affected.
Our business could be significantly disrupted if we cannot retain or replace members of our management team.
Our success depends to a significant degree upon the continued contributions of our executive officers
and other key personnel, both individually and as a group. Our future performance will be substantially
dependent on our ability to retain or replace our key personnel and the inability to retain or replace our key
personnel could prevent us from executing our business strategy.
Labor conditions could adversely affect our results of operations.
Our performance is dependent on attracting and retaining a large number of quality sales associates.
Many of those sales associates are in entry level or part-time positions with historically high rates of turnover. Our
ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels,
prevailing wage rates, minimum wage legislation and changing demographics. Changes that adversely impact
our ability to attract and retain quality sales associates could adversely affect our performance.
Inflation may adversely affect our business operations in the future.
In recent years, we have experienced certain inflationary conditions in our cost base due primarily to
(1) changes in foreign currency exchange rates that have reduced the purchasing power of the U.S. dollar and
(2) increases in SG&A expenses, particularly with regard to employee benefits. Inflation can harm our margins
and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost
base. If inflation in these or other costs worsens, we cannot assure you that our attempts to offset the effects of
inflation through control of expenses, passing cost increases to our customers or any other method will be
successful. Any future inflation could adversely affect our business, financial condition and results of operations.
If we are unable to effectively market our business or if our advertising campaigns are ineffective, our revenues
may decline and our results of operations could be adversely affected.
We spend extensively on advertising and marketing. Our business depends on effective marketing to
generate customer traffic in our stores. If our advertising and marketing efforts are not effective, our business,
financial condition and results of operations could be negatively affected.
Failure to successfully maintain and update information technology systems and enhance existing systems
may adversely affect our business.
To keep pace with changing technology, we must continuously provide for the design and implementation
of new information technology systems as well as enhancements of our existing systems. Any failure to
adequately maintain and update the information technology systems supporting our sales operations or inventory
control could prevent us from processing and delivering merchandise, which could adversely affect our business,
financial condition and results of operations.
Our stock price has been and may continue to be volatile.
The market price of our common stock has been and may continue to be volatile and may be significantly
affected by:
•
actual or anticipated fluctuations in our operating results;
•
announcements of new services by us or our competitors;
13
Table of Contents
•
developments with respect to conditions and trends in our industry;
•
governmental regulation;
•
general market conditions; and
•
other factors, many of which are beyond our control.
In addition, the stock market has recently, and from time to time, experienced significant price and
volume fluctuations that have adversely affected the market prices of securities of companies without regard to
their operating performances.
Tim Grumbacher beneficially owns shares of our capital stock giving him voting control over matters submitted
to a vote of the shareholders, and he may take actions that conflict with the interests of our other shareholders
and holders of our debt securities.
Collectively, as of April 2, 2007, Tim Grumbacher, trusts for the benefit of members of Mr. Grumbacher’s
family and The Grumbacher Family Foundation beneficially own shares of our outstanding common stock (which
is entitled to one vote per share) and shares of our Class A common stock (which is entitled to ten votes per
share) representing, in the aggregate, approximately 63% of the votes eligible to be cast by shareholders in the
election of directors and generally. Accordingly, Mr. Grumbacher has the power to control all matters requiring
the approval of our shareholders, including the election of directors and the approval of mergers and other
significant corporate transactions. The interests of Mr. Grumbacher and certain other stockholders may conflict
with the interests of our other shareholders and holders of our debt securities.
In addition to Mr. Grumbacher’s voting control, certain provisions of our charter documents and Pennsylvania
law could discourage potential acquisition proposals and could deter, delay or prevent a change in control of
the Company that our other shareholders consider favorable and could depress the market value of our
common stock.
Certain provisions of our articles of incorporation and by-laws, as well as provisions of the Pennsylvania
Business Corporation Law, could have the effect of deterring takeovers or delaying or preventing changes in
control or management of the Company that our shareholders consider favorable and could depress the market
value of our common stock.
Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, which is applicable
to us, may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a
shareholder might consider in his or her best interest, including those attempts that might result in a premium
over the market price for the Company’s shares. In general, Subchapter F of Chapter 25 of the Pennsylvania
Business Corporation Law could delay for five years and impose conditions upon “business combinations”
between an “interested shareholder” and us, unless prior approval by our Board of Directors is given. The term
“business combination” is defined broadly to include various merger, consolidation, division, exchange or sale
transactions, including transactions using our assets for purchase price amortization or refinancing purposes. An
“interested shareholder,” in general, would be a beneficial owner of shares entitling that person to cast at least
20% of the votes that all shareholders would be entitled to cast in an election of directors.
Item 1B. Unresolved Staff Comments
None.
Item 2.
Properties
We currently operate 279 stores in 23 states, encompassing approximately 26 million square feet. We
have, however, announced we will be closing two underperforming stores in May 2007. We own 33 stores, have
ground leases on seven stores, and lease 239 stores.
14
Table of Contents
We operate under eight nameplates, as follows:
Nameplate
Stores
Bon-Ton
71
Elder-Beerman
66
Younkers
Herberger’s
46
40
Carson Pirie Scott
Bergner’s
Boston Store
Parisian
31
13
10
2
States
Connecticut, Maryland, Massachusetts, New Hampshire, New Jersey,
New York, Pennsylvania, Vermont, West Virginia
Illinois, Indiana, Iowa, Kentucky, Michigan, Ohio, West Virginia,
Wisconsin
Illinois, Iowa, Michigan, Minnesota, Nebraska, South Dakota, Wisconsin
Colorado, Iowa, Minnesota, Montana, Nebraska, North Dakota, South
Dakota, Wisconsin, Wyoming
Illinois, Indiana
Illinois
Wisconsin
Michigan
Our corporate headquarters is located in York, Pennsylvania where our administrative and sales support
functions reside. Merchandising and marketing functions are located in Milwaukee, Wisconsin. We own two
distribution centers which are located in Rockford, Illinois and Green Bay, Wisconsin, and we lease our other two
distribution centers which are located in Allentown, Pennsylvania and Fairborn, Ohio.
Item 3.
Legal Proceedings
In connection with the acquisition of Carson’s, the Company assumed liability for the following matter but
only to the extent it applies to the entities acquired from Saks: On October 25, 2005 the Chapter 7 trustee for the
bankruptcy estate of Kleinert’s Inc. filed a complaint against Saks and several of its subsidiaries in the United
States Bankruptcy Court for the Southern District of New York. In its initial complaint the plaintiff, as assignee,
alleged breach of contract, fraud, and unjust enrichment, among other causes of action, and seeks compensatory
and punitive damages due to Saks assessment of alleged improper chargebacks against Kleinert’s Inc. totaling
approximately $4.0 million which wrongful acts the plaintiff alleges caused the insolvency and bankruptcy of
Kleinert’s Inc. On August 15, 2006 the plaintiff, as assignee, filed an amended complaint in which it asserts the
following claims, among others: (1) defendants applied improper chargebacks to the accounts payable of
Kleinert’s, which led to the extreme financial distress and Kleinert’s eventual bankruptcy and Kleinert’s incurred
liabilities and lost profits of at least $100.0 million and plaintiff requests punitive damages of no less than
$50.0 million (conversion claim); (2) from 1998- 2003 defendants charged back an amount not less than
$4.0 million to Kleinert’s and these chargebacks improperly benefited the defendants, and plaintiff requests
$4.0 million on this claim (unjust enrichment claim); (3) defendants falsely represented that its $4.0 million in
chargebacks were proper and Kleinert’s reliance on defendants’ misrepresentations caused Kleinert’s to lose not
less than $4.0 million and caused it to file for bankruptcy resulting in liabilities and lost profits of $100.0 million,
and plaintiff requests punitive damages of no less than $50.0 million (fraud claim); (4) defendants wrongfully
charged back at least $4.0 million and these unwarranted chargebacks assisted Kleinert’s officers and directors
in booking fictitious sales revenue and accounts receivable and perpetrating a fraud on Kleinert’s lenders in
excess of $25.0 million, and plaintiff requests punitive damages of no less than $50.0 million (fraud claim);
(5) defendants used dishonest, improper and unfair means in conducting business with Kleinert’s and interfered
with Kleinert’s relationship with its lenders (tortious interference with prospective economic advantage claim);
(6) defendants assisted officers of Kleinert’s in breaching their fiduciary duties to Kleinert’s and to its creditors by
falsifying borrowing base certificates given to the lenders, and defendants knew that their improper chargeback
scheme was assisting these breaches of fiduciary duty by Kleinert’s officers, with respect to which plaintiff
requests $100.0 million plus $50.0 million in punitive
15
Table of Contents
damages (aiding and abetting breach of fiduciary duty claim); (7) defendants knew that their improper
chargeback scheme was assisting the perpetration of fraud by Kleinert’s officers, and plaintiff requests
$100.0 million plus $50.0 million in punitive damages (aiding and abetting fraud claim); and (8) various fraudulent
conveyance claims with respect to which plaintiff requests damages of $4.0 million.
On December 8, 2005 Adamson Apparel, Inc. filed a purported class action lawsuit against Saks in the
United States District Court for the Northern District of Alabama. In its complaint the plaintiff asserts breach of
contract claims and alleges that Saks improperly assessed chargebacks, timely payment discounts, and
deductions for merchandise returns against members of the plaintiff class. The lawsuit seeks compensatory and
incidental damages and restitution. Under the terms of the purchase agreement relating to the acquisition of
Carson’s from Saks, the Company may have an obligation to indemnify Saks for any damages incurred by Saks
under this lawsuit by Adamson Apparel solely to the extent that such damages relate to the business acquired
from Saks.
In addition, the Company is party to legal proceedings and claims that arise during the ordinary course of
business.
In the opinion of management, the ultimate outcome of any such litigation and claims, including the two
matters detailed above, will not have a material adverse effect on the Company’s financial position, results of
operations or liquidity.
Item 4.
Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
Our common stock is traded on The Nasdaq Global Select Stock Market (symbol: BONT). There is no
established public trading market for our Class A common stock. The Class A common stock is convertible on a
share-for-share basis into common stock at the option of the holder. The following table sets forth the high and
low sales price of our common stock for the periods indicated as furnished by Nasdaq:
2006
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2005
High
Low
High
Low
$ 34.14
29.36
38.60
39.36
$ 18.88
20.22
24.02
31.84
$ 19.78
21.90
23.22
22.73
$ 15.41
16.75
15.55
17.71
On April 2, 2007, we had approximately 198 shareholders of record of common stock and four
shareholders of record of Class A common stock.
We have paid quarterly cash dividends, each at $0.025 per share, on Class A common stock and
common stock beginning April 15, 2004. Pursuant to our senior secured credit facility agreement, entered into on
March 6, 2006, any dividends paid may not exceed $4.0 million in any year or $15.0 million during the term of the
agreement, which expires March 2011. In addition, pursuant to the indenture that governs our senior unsecured
notes, any dividends paid may not exceed $0.24 per share in any year. We declared a quarterly cash dividend of
$0.05 per share, payable May 1, 2007 to shareholders of record as of April 16, 2007. Our Board of Directors will
consider dividends in subsequent periods as it deems appropriate.
16
Table of Contents
STOCK PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the cumulative total shareholder return
on common stock from February 2, 2002 through February 3, 2007, the cumulative total return on the CRSP
Total Return Index for The Nasdaq Stock Market (U.S. Companies) and the Nasdaq Retail Trade Stocks Index
during such period. The comparison assumes $100 was invested on February 2, 2002 in the Company’s
common stock and in each of the foregoing indices and assumes the reinvestment of any dividends.
DATE
2/2/02
2/1/03
1/31/04
1/29/05
1/28/06
2/3/07
NASDAQ
100.00
69.85
108.59
107.43
122.38
131.92
NASDAQ RETAIL
100.00
81.48
119.47
143.10
155.17
170.49
17
BON-TON
100.00
165.60
497.60
627.60
864.80
1,528.40
Table of Contents
Item 6.
Selected Financial Data
2006
2005
2004
2003
2002
(In thousands except share, per share, comparable stores data and number of stores)
Statement of Operations
Data (1) (2) (3):
Net sales
%
$
3,362,279
100.0
93,531
Gross profit
Selling, general and
administrative
expenses
%
1,310,372
100.0
713,230
100.0
1.6
9,251
0.7
5,917
0.6
3,805
0.5
464,999
36.1
479,958
36.6
335,153
36.2
261,158
36.6
31.4
407,145
31.6
415,921
31.7
273,426
29.5
217,375
30.5
103,189
3.1
27,245
2.1
27,278
2.1
25,634
2.8
22,783
3.2
3,720
0.1
839
0.1
531
0.0
—
—
—
—
Income from operations
173,667
5.2
50,195
3.9
45,479
3.5
42,010
4.5
24,805
3.5
Interest expense, net
107,143
3.2
12,052
0.9
13,437
1.0
9,049
1.0
9,436
1.3
Income before taxes
66,524
2.0
38,143
3.0
32,042
2.4
32,961
3.6
15,369
2.2
Income tax provision
19,641
0.6
12,129
0.9
11,880
0.9
12,360
1.3
5,764
0.8
Net income
46,883
1.4
26,014
2.0
20,162
1.5
20,601
2.2
9,605
1.3
Amortization of
lease-related interests
100.0
2.8
20,425
1,243,517
37.0
1,056,472
$
$
%
100.0
Depreciation and
amortization
1,287,170
%
926,409
Other income
$
%
$
Per share amounts Basic:
Net income
$
Weighted average
shares outstanding
2.85
$
16,430,554
1.61
$
16,204,414
1.27
$
15,918,650
1.36
$
15,161,406
0.63
15,192,471
Diluted:
Net income
$
Weighted average
shares outstanding
Cash dividends declared
per share
2.78
$
16,841,183
1.57
$
16,518,268
1.24
$
16,253,254
1.33
$
15,508,560
0.62
15,394,231
$
0.100
$
0.100
$
0.100
$
0.075
$
—
$
402,414
$
143,119
$
251,122
$
221,497
$
127,618
Balance Sheet Data (at
end of period)(3):
Working capital
Total assets
2,134,799
561,343
646,156
629,900
400,817
Long-term debt, including
capital leases
1,189,625
42,515
178,355
171,716
64,662
346,396
292,094
262,557
239,484
212,346
Shareholders’ equity
Selected Operating Data:
Total sales change
161.0 %
Comparable stores sales
change(4)
(2.7 )%
(1.8 )%
41.4 %
29.9 %
(1.2 )%
(1.6 )%
0.9 %
(2.0 )%
(1.2 )%
Comparable stores
data(4):
Sales per selling
square foot
$
Selling square
footage
Capital expenditures
125
$
9,819,000
$
100,977
128
$
10,069,000
$
29,179
135
$
5,155,000
$
31,523
132
$
5,278,000
$
20,257
133
5,382,000
$
14,806
Number of stores:
Beginning of year
137
141
142
72
73
Additions(5)
Closings
End of year
147
(1 )
283
—
—
(4 )
(1 )
137
141
70
—
—
(1 )
142
72
(1)
2006 includes operations of Carson’s for the period from March 5, 2006 through February 3, 2007. 2003 includes operations of Elder-Beerman for the period from October 24,
2003 through January 31, 2004.
(2)
2006 reflects the 53 weeks ended February 3, 2007. All other periods presented include 52 weeks.
(3)
Certain prior year balances have been reclassified to conform to the current year presentation. These reclassifications did not impact the Company’s net income for any of the
years presented.
(4)
Comparable stores data (sales change, sales per selling square foot and selling square footage) reflects stores open for the entire current and prior fiscal year. 2006 comparable
stores data does not include Carson’s stores. 2005 comparable stores data includes stores of Elder-Beerman.
(5)
Includes the addition of 142 stores pursuant to the acquisition of Carson’s and four stores from Belk, Inc. during 2006. Includes the addition of 69 stores pursuant to the acquisition
of Elder-Beerman during 2003.
18
Table of Contents
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Company Overview
The Company was founded in 1898 and is one of the largest regional department store operators in
terms of sales in the United States, offering a broad assortment of brand-name fashion apparel and accessories
for women, men and children as well as cosmetics, home furnishings and other goods. At February 3, 2007, we
operated 283 stores in 23 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton,
Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates and, under
the Parisian nameplate, stores in the Detroit, Michigan area, encompassing a total of approximately 26 million
square feet. Our management believes we hold the #1 or #2 market position among traditional department stores
in most of the markets in which we operate. The Company had net sales of $3.4 billion in 2006.
Effective March 5, 2006, we purchased all of the outstanding securities of two subsidiaries of Saks that
were solely related to the business of owning and operating 142 retail department stores. The stores are located
in 12 states in the Midwest and upper Great Plains regions and operate under the names Carson Pirie Scott,
Younkers, Herberger’s, Boston Store and Bergner’s. Under the terms of the purchase agreement, we paid
approximately $1.0 billion in cash for Carson’s. Carson’s stores encompass a total of approximately 15 million
square feet in mid-size and metropolitan markets.
To finance the acquisition and the payoff of our previous revolving credit facility, we entered into a new
revolving credit facility which provides for up to $1.0 billion in borrowings, issued $510.0 million in senior
unsecured notes, and entered into a new mortgage loan facility in the aggregate principal amount of
$260.0 million.
On October 25, 2006, we entered into an asset purchase agreement with Belk, Inc. (“Belk”), pursuant to
which we agreed to purchase assets in connection with four department stores, all operated under the Parisian
nameplate and the rights to construct a new Parisian store. The purchase price was $22.0 million in cash, subject
to certain closing revisions. In addition, we agreed to assume specific liabilities and obligations of Belk and its
affiliates with respect to the acquired Parisian stores. The acquisition of Parisian was effective as of October 29,
2006.
We achieved significant progress with the integration of Bon-Ton and Carson’s operations in 2006,
completing scheduled phases of the systems integration and permitting a single management view of the
consolidated operations. In so doing, we substantially reduced our dependency on Saks for transition services
support. Our merchant and marketing staff successfully introduced a common merchandise assortment across all
locations, including new private brand offerings, and implemented a common marketing/advertising calendar in
the second half of 2006. The private brand organization, established in Milwaukee in 2006, became an integral
part of our merchandise organization. We established and expanded the Planning and Allocation division to
advance inventory productivity.
Operational areas integrated in the first quarter of 2007 principally include the remaining aspects of
internationally-sourced merchandise purchasing and information systems technical support, effectively
eliminating our dependency on Saks for transition services support.
We compete in the department store segment of the U.S. retail industry. The department store industry
continues to evolve in response to ongoing consolidation among merchandise vendors as well as the evolution of
competitive retail formats — mass merchandisers, national chain retailers, specialty retailers and online retailers.
Our segment of the retail industry is highly competitive, and we foresee competitive pressures and challenges
continuing in the future. As such, we anticipate minimal comparable store sales growth in 2007, with a gross
margin rate consistent with 2006 results.
19
Table of Contents
Results of Operations
The following table summarizes changes in our selected operating indicators, illustrating the relationship
of various income and expense items to net sales for each year presented (components may not add or subtract
to totals because of rounding):
2006
Net sales
Other income
Costs and expenses:
Costs of merchandise sold
Selling, general and administrative
Depreciation and amortization
Amortization of lease-related interests
Income from operations
Interest expense, net
Income before income taxes
Income tax provision
Net income
Percent of Net Sales
2005
2004
100.0 %
2.8
102.8
100.0 %
1.6
101.6
100.0 %
0.7
100.7
63.0
31.4
3.1
0.1
5.2
3.2
2.0
0.6
1.4 %
63.9
31.6
2.1
0.1
3.9
0.9
3.0
0.9
2.0 %
63.4
31.7
2.1
—
3.5
1.0
2.4
0.9
1.5 %
2006 Compared to 2005
Net sales: Net sales for 2006 increased 161% to $3,362.3 million compared to $1,287.2 million in the
prior year. Net sales include $2,119.1 million from Carson’s stores for the period March 5, 2006 through
February 3, 2007 and Parisian stores for the period October 29, 2006 through February 3, 2007. Bon-Ton
comparable store net sales for the fifty-two week period ended January 27, 2007 decreased 2.7% compared to
the prior year fifty-two week period. We believe that the comparable store net sales decline was the result of
several factors including, among others:
•
The introduction of a common merchandise assortment across all locations, which resulted in
significant changes to the merchandise mix at the Bon-Ton stores.
•
The implementation of a common marketing/advertising calendar in the second half of 2006, which
resulted in less aggressive discounting in promotional activity at the Bon-Ton stores. This strategy
negatively impacted sales while improving the gross margin rate.
•
Events in the automobile industry, which affected sales trends in our markets in Ohio, Michigan and
Indiana.
•
Unseasonably warm weather in December, which negatively affected apparel sales.
Carson’s sales are not included in the Company’s reported comparable store sales; therefore, the
following is provided for informational purposes only: For the period March 5, 2006 through January 27, 2007,
Carson’s comparable store sales increased 4.3%.
The best performing merchandise categories in 2006 were Women’s Special Size and Misses Outerwear
(both included in Women’s Apparel), Footwear, Home and Children’s Apparel. Sales for Women’s Special Size
reflect increased inventory investment. Misses Outerwear sales increased as a
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result of expanded offerings of updated branded product and aggressive marketing efforts. Footwear sales
increased as customers responded favorably to our new and expanded offerings in branded casual footwear.
The performance in the Home area in 2006 reflects approximately $17.5 million of incremental sales due
primarily to the liquidation of merchandise we no longer intend to carry. Children’s apparel benefited from
narrowed merchandise assortments, increased emphasis on stronger national brands and improved penetration
of unique brands. The poorest performing merchandise categories in 2006 were Dresses (included in Women’s
Apparel) and Accessories. Sales in Dresses continue to trend downward, and we have reduced our inventory
investment in this area. Sales decreases in Accessories reflected a lack of clearance merchandise as compared
to the prior year and warm weather in our markets during December 2006.
Other income: Other income, which includes income from revenues received under the CCPA, leased
departments and other customer revenues, was $93.5 million, or 2.8% of net sales, in 2006 as compared $20.4,
or 1.6% of net sales, in 2005. The increase was due to the addition of the Carson’s operations and, commencing
in November 2005, revenues received under the CCPA recorded in other income rather than SG&A.
Costs and expenses: Gross margin dollars in 2006 were $1,243.5 million as compared to
$465.0 million in 2005, an increase of $778.5 million. The increase in gross margin dollars reflects the addition of
the Carson’s stores and an increased gross margin rate, partially offset by reduced sales volume attributable to
the comparable store sales decrease and to the four Bon-Ton stores closed in January 2006. Gross margin as a
percentage of sales increased 0.9 percentage point to 37.0% in the current year from 36.1% in the prior year.
The increase in the gross margin rate reflects a 1.6 percentage point decrease, at cost, in the net markdown rate,
the result of improved sales of regular priced goods and less aggressive discounting in our promotional activity,
partially offset by increased distribution costs.
SG&A expense in 2006 was $1,056.5 million as compared to $407.1 million in 2005, an increase of
$649.3 million. The principle factors in the increase in SG&A expenses were the addition of the Carson’s stores
and support costs, including the costs associated with the transition services agreement with Saks, and
integration expenses. Integration expenses approximated $15.6 million in 2006. The current year expense rate
decreased 0.2 percentage point to 31.4% due to the increased sales volume.
Depreciation and amortization expense and amortization of lease-related interests increased
$78.8 million, to $106.9 million, in 2006 from $28.1 million in 2005, primarily reflecting the addition of depreciation
and amortization associated with the acquired Carson’s operations. In addition, in 2006 we recorded $2.9 million
of asset impairment charges related to the reduction in the estimated net realizable value of a store property and
a reduction in the value of duplicate information systems software, as compared to $0.9 million of accelerated
charges on software associated with our credit operation in 2005.
Income from operations: Income from operations in 2006 was $173.7 million, or 5.2% of net sales, as
compared to $50.2 million, or 3.9% of net sales, in 2005.
Interest expense, net: Net interest expense in 2006 was $107.1 million, or 3.2% of net sales, as
compared to $12.1 million, or 0.9% of net sales, in 2005. The $95.1 million net increase is principally due to the
increased debt required to fund the acquisition of Carson’s. Included in the 2006 expense are charges of
$2.3 million for the write-off of fees associated with the Company’s previous credit agreement and $4.5 million for
fees associated with a bridge facility required in connection with the financing for the acquisition of Carson’s.
Income tax provision: The income tax provision reflects an effective tax rate of 29.5% in 2006 as
compared to 31.8% in 2005. Included in the provision is an income tax benefit adjustment of $4.1 million and
approximately $2.2 million in 2006 and 2005, respectively, principally associated with a net reduction in income
tax valuation allowances.
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Net income: Net income in 2006 was $46.9 million, or 1.4% of net sales, as compared to $26.0 million,
or 2.0% of net sales, in 2005.
2005 Compared to 2004
Net sales: Net sales were $1,287.2 million in 2005, a decrease of $23.2 million, or 1.8%, as compared
to 2004. Comparable store sales decreased 1.6% in 2005. The best performing merchandise categories in 2005
were Women’s Special Size (included in Women’s Apparel), Footwear, Home and Intimate Apparel. Sales for
Women’s Special Size reflect increased inventory, additional space in stores and increased advertising exposure.
Footwear sales increased as customers responded favorably to our focus on maximizing key casual vendors,
store intensifications and increased advertising exposure. The Home sales increase resulted from key item
maximization in soft home and new product offerings in hard home. Intimate Apparel sales benefited from a
narrowed assortment that ensured size availability. The poorest performing merchandise categories in 2005 were
Dresses and Coats (included in Women’s Apparel) and Juniors’ Apparel. Apparel sales in 2005 were hampered
by unseasonably cold weather during the spring season and unseasonably warm weather in the third quarter.
Other income: Other income, which includes income from program revenue received under the CCPA,
leased departments and other customer revenues, increased $11.2 million in 2005 over 2004 primarily because
of the revenue received under the CCPA in the fourth quarter of 2005. After the July 8, 2005 Credit Card Sale,
we continued to service the credit card receivables through October 31, 2005; proceeds earned pursuant to the
CCPA during this period were recorded within SG&A expense.
Costs and expenses: Gross margin dollars for 2005 decreased $15.0 million, or 3.1%, as compared to
2004, reflecting lower sales volume and a reduced gross margin rate. Gross margin as a percentage of net sales
was 36.1% in 2005, a decrease of 0.5 percentage point from 36.6% in 2004. The decrease in gross margin rate
reflects a decreased markup rate and higher shrinkage partially offset by a lower markdown rate.
SG&A expense for 2005 was $407.1 million, or 31.6% of net sales, compared to $415.9 million, or 31.7%
of net sales, in 2004. The decrease reflects reduced integration expenses and store payroll, partially offset by
increased advertising expenses.
Depreciation and amortization expense and amortization of lease-related interests increased $0.3 million,
to $28.1 million, in 2005 from $27.8 million in 2004. In 2005, we recognized approximately $0.9 million of
accelerated charges on software associated with our credit operation. In 2004, we recorded asset impairment
charges on the long-lived assets of certain stores of $0.9 million and a $0.5 million cumulative charge pursuant to
a review of our historical lease accounting.
Income from operations: Income from operations in 2005 was $50.2 million, or 3.9% of net sales,
compared to $45.5 million, or 3.5% of net sales, in 2004.
Interest expense, net: Net interest expense in 2005 decreased $1.4 million to $12.1 million, or 0.9% of
net sales, from $13.4 million, or 1.0% of net sales, in 2004. Interest expense was positively impacted by a
reduction in long-term debt as a result of applying the proceeds from the Credit Card Sale, partially offset by an
increase in interest rates.
Income tax provision: The effective income tax rate for 2005 was 31.8% compared to 37.1% for 2004.
Included in the provision for 2005 was an income tax benefit adjustment of approximately $2.2 million principally
associated with a net reduction of the income tax valuation allowances that were established in connection with
the October 2003 purchase of Elder-Beerman.
Net income: Net income in 2005 was $26.0 million, or 2.0% of net sales, compared to $20.2 million, or
1.5% of net sales, in 2004.
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Liquidity and Capital Resources
The following table summarizes material measures of our liquidity and capital resources:
February 3,
2007
(Dollars in millions)
Working capital
Current ratio
Debt to total capitalization(1)
Unused availability under lines of credit(2)
$
$
402.4
1.79:1
0.78:1
341.3
January 28,
2006
$
$
143.1
1.77.1
0.13:1
173.8
January 29,
2005
$
$
251.1
2.40:1
0.41:1
64.3
(1) Debt includes obligations under capital leases. Total capitalization includes shareholders’ equity, debt and
obligations under capital leases.
(2) Before taking into account the minimum borrowing availability covenant of $75, $10 and $10 as of
February 3, 2007, January 28, 2006 and January 29, 2005, respectively.
Prior to March 6, 2006, our primary sources of working capital were cash flows from operations and
borrowings under our revolving credit facility. On March 6, 2006, to finance the acquisition of Carson’s and the
related payoff of our previous revolving credit facility, we entered into a new revolving credit facility which
provides for up to $1.0 billion in borrowings, issued $510.0 million in senior unsecured notes and entered into a
new mortgage loan facility in the aggregate principal amount of $260.0 million. Our business follows a seasonal
pattern; working capital fluctuates with seasonal variations, reaching its highest level in October or November to
fund the purchase of merchandise inventories prior to the holiday season.
Increases in working capital, current ratio, debt to total capitalization and unused availability under lines
of credit in 2006, as compared to 2005, principally reflect the addition of Carson’s operations and the increase in
debt to fund the acquisition. Decreases in working capital, current ratio and debt to total capitalization and the
increase in unused lines of credit in 2005, as compared to 2004, are largely due to the sale of the credit card
operation in July 2005 and associated debt reduction.
Net cash provided by operating activities amounted to $117.7 million in 2006, $153.8 million in 2005 and
$28.7 million in 2004. The decrease in net cash provided in 2006 is principally due to the 2005 proceeds from the
sale of the credit card operation. The increase in net cash provided by operating activities in 2005 as compared
to 2004 primarily reflects net proceeds from the Credit Card Sale and decreases in merchandise inventories and
retained interest in trade receivables.
Net cash used in investing activities amounted to $1,171.8 million in 2006, $28.7 million in 2005 and
$31.4 million in 2004. The increase in cash outflow in 2006 reflects the acquisition costs of Carson’s and the
Parisian stores as well as increased capital expenditures for the larger combined company. Capital expenditures
in 2005 were $2.3 million lower than in 2004 largely because of reduced spending for systems integration,
partially offset by increased spending for store remodels. Additionally, proceeds from the sale of property, fixtures
and equipment in 2005 were $2.2 million higher than in 2004.
Net cash provided by financing activities amounted to $1,069.1 million in 2006 and $7.8 million in 2004.
Net cash used in financing activities amounted to $138.2 million in 2005. 2006 cash inflow reflects the increased
borrowings to fund the acquisitions of Carson’s and Parisian stores. The increase in net cash used in 2005
primarily reflects payments made to reduce long-term debt as a result of the Credit Card Sale.
Prior to March 6, 2006, our amended and restated revolving credit facility agreement (the “Credit
Agreement”) provided a revolving line of credit of $300.0 million. In connection with the acquisition of Carson’s
and the related financing arrangements, discussed below, the Credit Agreement was terminated and
simultaneously replaced by a new senior secured credit facility
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on March 6, 2006. There were no prepayment or early termination premiums or penalties in connection with the
termination of the Credit Agreement. All deferred financing costs as of March 6, 2006 associated with the Credit
Agreement, which totaled $2.3 million, were expensed immediately upon termination of the Credit Agreement.
On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned subsidiary of The Bon-Ton
Stores, Inc., and certain of its subsidiaries, Bank of America, N.A. (“Bank of America”) and certain other lenders
entered into a Loan and Security Agreement (“New Senior Secured Credit Facility”) which provides for up to
$1.0 billion of revolver borrowings. The New Senior Secured Credit Facility includes a last-in, first-out revolving
credit facility of up to $900.0 million and a first-in, last-out revolving credit facility of up to $100.0 million, and has
a sub-limit of $150.0 million for the issuance of standby and documentary letters of credit. All borrowings under
the New Senior Secured Credit Facility are limited by amounts available pursuant to a borrowing base
calculation, which is based on percentages of eligible inventory, real estate and fixed assets, with a reduction for
applicable reserves. The New Senior Secured Credit Facility is guaranteed by The Bon-Ton Stores, Inc. and
certain of its subsidiaries. The New Senior Secured Credit Facility is secured by substantially all the assets of the
Company, except for certain mortgaged real property. As part of the New Senior Secured Credit Facility, Bank of
America and the other lenders will make available certain swing line loans in an aggregate amount not to exceed
$75.0 million outstanding at any one time. Borrowings under the New Senior Secured Credit Facility bear interest
at either (i) the prime rate established by Bank of America, from time to time, plus the applicable margin (the
“Prime Rate”) or (ii) the LIBOR rate from time to time plus the applicable margin. The applicable margin is
determined based upon the excess availability under the New Senior Secured Credit Facility. The swing line
loans bear interest at the same rate applicable to last-in, first-out Prime Rate loans. We are required to pay a
commitment fee to the lenders for unused commitments at a rate of 0.25% to 0.30% per annum, based upon the
unused portion of the total commitment under the New Senior Secured Credit Facility. The New Senior Secured
Credit Facility expires March 6, 2011. Financial covenants contained in the New Senior Secured Credit Facility
require that the minimum excess availability be greater than $75.0 million at all times. In addition, there are
certain restrictions against the incurrence of additional indebtedness, pledge or sale of assets, payment of
dividends and distributions, and other similar restrictions. Dividends paid may not exceed $15.0 million over the
life of the agreement, or $4.0 million in any single year. Capital expenditures are limited to $125.0 million per
year, with a one-year carryover of any prior year unused amount. As of February 3, 2007, the Company had
borrowings of $342.3 million, with $341.3 million of borrowing availability (before taking into account the minimum
borrowing availability covenant of $75.0 million) and letter-of-credit commitments of $47.9 million.
On March 6, 2006, The Bon-Ton Department Stores, Inc. entered into an Indenture (the “Indenture”) with
The Bank of New York, as trustee, under which The Bon-Ton Department Stores, Inc. issued $510.0 million
aggregate principal amount of its 10 1 / 4 % Senior Notes due 2014 (the “Notes”). The Notes are guaranteed on a
senior unsecured basis by The Bon-Ton Stores, Inc. and certain of its subsidiaries. The Notes mature on
March 15, 2014. The Notes may not be redeemed prior to March 15, 2010, except that we may redeem up to
35% of the Notes prior to March 15, 2009 through the proceeds of an equity offering. The interest rate of the
Notes is fixed at 10 1 / 4 % per year. Interest on the Notes is payable on March 15 and September 15 of each
year, beginning on September 15, 2006. The Indenture includes covenants that limit the ability of the Company
and its restricted subsidiaries to, among other things, incur additional debt, pay dividends and make distributions,
make certain investments, enter into certain types of transactions with affiliates, use assets as security in other
transactions, and sell certain assets or merge with or into other companies.
On March 6, 2006, certain bankruptcy-remote special purpose entities (each an “SPE” and, collectively,
the “SPEs”) that are indirect wholly owned subsidiaries of The Bon-Ton Stores, Inc. entered into loan agreements
with Bank of America, pursuant to which Bank of America provided a new mortgage loan facility in the aggregate
principal amount of $260.0 million (the “New Mortgage
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Loan Facility”). The New Mortgage Loan Facility has a term of ten years and is secured by mortgages on
twenty-three retail stores and one distribution center owned by the SPEs. Each SPE entered into a lease with
each of The Bon-Ton Stores, Inc. subsidiaries operating on such SPE’s properties. A portion of the rental income
received under these leases will be used to pay the debt service under the New Mortgage Loan Facility. The New
Mortgage Loan Facility requires level monthly payments of principal and interest based on an amortization period
of twenty-five years and the balance outstanding at the end of ten years will then become due and payable. The
interest rate for the New Mortgage Loan Facility is fixed at 6.2125%. Financial covenants contained in the New
Mortgage Loan Facility require that the SPEs maintain certain financial thresholds, as defined in the agreements.
We used the net proceeds of the Notes offering and New Mortgage Loan Facility, along with borrowings
under the New Senior Secured Credit Facility, to finance the acquisition of Carson’s, refinance our previous
revolving credit agreement, and pay related fees and expenses in connection with the acquisition and related
financing transactions.
Aside from planned capital expenditures, our primary cash requirements will be to service debt and
finance working capital increases during peak selling seasons.
We paid a quarterly cash dividend of $0.025 per share on shares of Class A common stock and common
stock to shareholders on May 1, 2006, August 1, 2006, October 16, 2006 and January 16, 2007 to shareholders
of record as of April 15, 2006, July 14, 2006, October 2, 2006, and January 2, 2007, respectively. Additionally, we
declared a quarterly cash dividend of $0.05 per share, payable May 1, 2007 to shareholders of record as of
April 16, 2007. Our Board of Directors will consider dividends in subsequent periods as it deems appropriate.
Capital expenditures for 2006, which do not reflect landlord contributions, totaled $101.0 million. Capital
expenditures for 2007, net of landlord contributions, are planned at approximately $106.0 million. Included in
these planned amounts are expenditures relating to the opening of two new stores, expansions of three stores
and the renovation and reconfiguration of several existing stores.
We anticipate that cash flows from operations, supplemented by borrowings under the New Senior
Secured Credit Facility, will be sufficient to satisfy operating cash requirements for at least the next twelve
months.
Cash flows from operations are impacted by consumer confidence, weather in the geographic markets
served by the Company, and economic 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 our ability to generate
sufficient cash flows to operate our business.
We have not identified any probable circumstances that would likely impair our ability to meet our cash
requirements or trigger a default or acceleration of payment of our debt.
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Table of Contents
Contractual Obligations and Commitments
The following tables reflect our contractual obligations and commitments as of February 3, 2007:
Contractual Obligations
Payment due by period
(Dollars in
thousands)
Long-term debt(1)
Capital leases
Service agreements
Operating leases
Private Brand
agreements
Totals
Total
Within 1 Year
1-3 Years
3-5 Years
After 5 Years
$ 1,659,997
126,474
9,135
636,367
$
75,475
7,224
5,042
89,472
$ 150,950
14,875
3,647
168,074
$ 494,200
15,000
446
131,454
$
939,372
89,375
—
247,367
15,875
$ 2,447,848
7,762
$ 184,975
5,455
$ 343,001
2,658
$ 643,758
—
$ 1,276,114
(1) Excludes interest under long-term debt obligations where such interest is calculated on a variable basis.
Debt within the “3-5 Years” category includes $342.3 million in variable rate debt under the New Senior
Secured Credit Facility, which is scheduled to expire in March 2011.
In addition, we expect to make cash contributions to our supplementary pension plans and the Carson
Retiree Health plan in the amount of $1.9 million, $2.4 million, $3.0 million, $1.9 million and $1.6 million in 2007,
2008, 2009, 2010 and 2011, respectively, and $11.5 million in the aggregate for the five years thereafter.
We currently do not anticipate making payments to the Carson defined benefit pension plan within the
next ten years; however, the impact of The Pension Protection Act of 2006 on this plan’s future funding
requirements have not been finalized because certain required assumptions have not yet been made available
by the Internal Revenue Service.
Note 9 in the Notes to Consolidated Financial Statements provides a more complete description of our
benefit plans.
Commitments
Amount of expiration per period
(Dollars in thousands)
Documentary letters of
credit
Standby letters of credit
Surety bonds
Totals
Total
$
4,870
42,985
2,552
$ 50,407
Within 1 Year
$
4,870
42,985
2,552
$ 50,407
1-3 Years
$
$
—
—
—
—
3-5 Years
$
$
—
—
—
—
After 5 Years
$ —
—
—
$ —
Documentary letters of credit are primarily issued to support the importing of merchandise, which
includes our private brand goods. Standby letters of credit are primarily issued to support the importing of
merchandise and as collateral for obligations related to general liability and workers’ compensation insurance.
Surety bonds are primarily for previously incurred and expensed obligations related to workers’ compensation.
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In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise up
to twelve months in advance of expected delivery. These purchase orders do not contain any significant
termination payments or other penalties if cancelled.
Critical Accounting Policies
Our discussion and analysis of financial condition and results of operations are based upon the
Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted
accounting principles. Preparation of these financial statements required us to make estimates and judgments
that affected reported amounts of assets and liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we evaluate our
estimates, including those related to merchandise returns, bad debts, inventories, goodwill, intangible assets,
income taxes, financings, contingencies, insurance reserves, and litigation. We base our estimates on historical
experience and on various other assumptions that we believe 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.
We believe our critical accounting policies are as described below. For a discussion of the application of these
and other accounting policies, see the Notes to Consolidated Financial Statements.
Inventory Valuation
Inventories are stated at the lower of cost or market with cost determined by the retail inventory method.
Under the retail inventory method, the valuation of inventories at cost and the 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 the 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 include 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 inventory under the lower of cost or market
principle. We believe that the retail inventory method we use provides an inventory valuation that approximates
cost and results in carrying inventory in the aggregate at the lower of cost or market.
We regularly review inventory quantities on-hand and record an adjustment 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 we may have understated or overstated the adjustment
required for excess or old inventory. If our inventory is
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determined to be overvalued in the future, we would be required to recognize such costs in costs of goods sold
and reduce operating income at the time of such determination. Likewise, if inventory is later determined to be
undervalued, we may have overstated the costs of goods sold in previous periods and would recognize additional
operating income when such inventory is sold. Therefore, although every effort is made to ensure the accuracy of
forecasts of future merchandise demand, any significant unanticipated changes in demand or in economic
conditions within our markets could have a significant impact on the value of our inventory and reported operating
results.
Prior to the Carson’s acquisition, we utilized the last-in, first-out (“LIFO”) cost basis for all of our
inventories. In connection with the Carson’s acquisition, we evaluated the inventory costing for the acquired
inventories and elected the first-in, first-out (“FIFO”) cost basis for the majority of the acquired Carson’s locations.
As of February 3, 2007, approximately 30% of our inventories were valued using a FIFO cost basis and
approximately 70% of our inventories were valued using a LIFO cost basis. As is currently the case with many
companies in the retail industry, our LIFO calculations have yielded inventory increases in recent years due to
deflation reflected in price indices used. The LIFO method values merchandise sold 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, we have reduced the carrying value of our LIFO inventories to a net realizable value. These
reductions totaled $38.9 million and $23.7 million as of February 3, 2007 and January 28, 2006. Inherent in the
valuation of inventories are significant management judgments and estimates regarding future merchandise
selling costs and pricing. Should these estimates prove to be inaccurate, we may have overstated or understated
our inventory carrying value. In such cases, operating results would ultimately be impacted.
Vendor Allowances
As is standard industry practice, allowances from merchandise vendors are received 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 allowances
are reflected as an adjustment to the cost of merchandise capitalized in inventory.
Additionally, allowances are received from vendors in connection with cooperative advertising programs
and for reimbursement of certain payroll expenses. These allowances received from each vendor are reviewed to
ensure reimbursements are for specific, incremental and identifiable advertising or payroll costs incurred to sell
the vendor’s products. If a vendor reimbursement exceeds the costs incurred, the excess reimbursement is
recorded as a reduction of cost purchases from the vendor and reflected as a reduction of costs of merchandise
sold when the related merchandise is sold. All other amounts are recognized as a reduction of the related
advertising or payroll costs that have been incurred and reflected in SG&A expense.
Income Taxes
Significant management judgment is required in determining the provision for income taxes, deferred tax
assets and liabilities, and the valuation allowance recorded against net deferred tax assets. The process involves
summarizing temporary differences resulting from differing treatment of items for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are included within the consolidated balance
sheet. We 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 we do not believe recovery of the deferred tax asset is
more-likely-than-not, a valuation allowance must be established. To the extent a valuation allowance is
established in a period, an expense must be recorded within the income tax provision in the statement of income.
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Our net deferred tax assets were $94.4 million and $53.6 million at February 3, 2007 and January 28,
2006, respectively. In assessing the realizability of the deferred tax assets, we considered whether it was
more-likely-than-not that the deferred tax assets, or a portion thereof, will not be realized. We considered the
scheduled reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and
limitations pursuant to Section 382 of the Internal Revenue Code. As a result, we concluded that a valuation
allowance against a portion of the net deferred tax assets was appropriate. A total valuation allowance of
$25.4 million and $43.9 million was recorded at February 3, 2007 and January 28, 2006, respectively. If actual
results differ from these estimates or these estimates are adjusted in future periods, the valuation allowance may
need to be adjusted, which could materially impact our financial position and results of operations.
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 our business model or capital strategy can result in the
actual useful lives differing from estimates. In cases where we determined that the useful life of property, fixtures
and equipment should be shortened, we depreciated the net book value in excess of the salvage value over the
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. Our net property, fixtures
and equipment amounted to $897.9 million and $167.7 million at February 3, 2007 and January 28, 2006,
respectively.
Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or
Disposal of Long-Lived Assets” (“SFAS No. 144”), requires the Company to test a long-lived asset for
recoverability whenever events or changes in circumstances indicate that its 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 our use of assets or overall business strategy, and
•
Significant negative industry or economic trends for a sustained period.
If the undiscounted cash flows associated with the asset are insufficient to support the recorded asset, an
impairment loss is recognized for the amount (if any) by which the carrying amount of the asset exceeds the fair
value of the asset. Cash flow estimates are based on historical results, adjusted to reflect our best estimate of
future market and operating conditions. Estimates of fair value represent our best estimate based on industry
trends and reference to market rates and transactions, if available. Should cash flow estimates differ significantly
from actual results, an impairment could arise and materially impact our financial position and results of
operations. Given the seasonality of operations, impairment is not conclusive, in many cases, until after the
holiday period in the fourth quarter is concluded.
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 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 conditions prove to be substantially different from expectations, the carrying value of
new stores’ long-lived assets may ultimately become impaired.
We evaluated the recoverability of our long-lived assets in accordance with SFAS No. 144. As a result, in
2006 we recorded $2.9 million of asset impairment charges related to the reduction in the estimated net
realizable value of a store property and a reduction in the value of duplicate information systems software
resulting from the acquisition of Carson’s. No impairment loss was recorded in 2005 and an impairment loss of
$0.9 million was recorded in depreciation and
29
Table of Contents
amortization expense in 2004. Included in the impairment loss in 2004 is $0.3 million related to the write-down of
an intangible asset at one store location.
Goodwill and Intangible Assets
Our goodwill was $27.4 million and $3.0 million at February 3, 2007 and January 28, 2006, respectively.
The increase in goodwill reflects the purchase accounting for the acquisition of Carson’s.
Net intangible assets totaled $176.7 million and $5.0 million at February 3, 2007 and January 28, 2006,
respectively. Our intangible assets are principally comprised of $91.1 million of lease interests that relate to
below-market-rate leases and $85.6 million associated with trademarks and customer lists. The lease-related
interests and the portion of trademarks subject to amortization are being amortized using a straight-line method.
The customer lists are being amortized using a declining-balance method. At February 3, 2007, lease-related
interests, customer lists and trademarks had average remaining lives of sixteen years, twelve years and two
years, respectively, for amortization purposes. Trademarks of $63.5 million have been deemed as having
indefinite lives as part of the purchase accounting for Carson’s.
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”), goodwill
and other intangible assets that have indefinite lives are reviewed for impairment at least annually or when
events or changes in circumstances indicate the carrying value of these assets might exceed their current fair
values. Fair value is determined using a discounted cash flow analysis methodology, which requires certain
assumptions and estimates regarding industry economic factors and future profitability of acquired businesses.
Our policy is to conduct impairment testing based on our most current business plans, which reflect anticipated
changes in the economy and the industry. If actual results prove inconsistent with our assumptions and
judgments, we could be exposed to a material impairment charge. For 2006, we completed a review of the
carrying value of goodwill, in accordance with SFAS No. 142, and determined that goodwill was not impaired.
Insurance Reserve Estimates
We use a combination of insurance and self-insurance for a number of risks, including workers’
compensation, general liability and employee-related health care benefits, a portion of which is paid by our
associates. We determine the estimates for the liabilities associated with these risks by considering historical
claims experience, demographic factors, severity factors and other actuarial assumptions. A change in claims
frequency and severity of claims from historical experience as well as changes in state statutes and the mix of
states in which we operate could result in a change to the required reserve levels.
Purchase Accounting
We have accounted for the acquisition of Carson’s in accordance with the provisions of SFAS No. 141,
“Business Combinations,” whereby the purchase price paid to effect the acquisition was allocated to the acquired
assets and assumed liabilities at their estimated fair value as of the acquisition date. The acquisition of Carson’s
was effective as of March 5, 2006. In connection with purchase price allocations, we made estimates of the fair
values of our long-lived and intangible assets based upon assumptions related to the future cash flows, discount
rates and asset lives utilizing currently available information. We have recorded preliminary purchase accounting
adjustments to record the property and equipment and inventory at their estimated fair values, to establish
intangible assets for trade names, customer lists and favorable lease interests and to revalue long-term benefit
plan obligations, among other things.
30
Table of Contents
Future Accounting Changes
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN No. 48”). FIN No. 48 requires applying a more-likely-than-not
threshold to the recognition and de-recognition of tax positions. The new guidance will become effective for the
Company beginning in the first quarter of 2007. We have not yet determined the impact of FIN No. 48 on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements, but does not require any new fair
value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. We are in
the process of evaluating what effect, if any, adoption of SFAS No. 157 may have on our consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to measure many financial instruments
and certain other assets and liabilities at fair value on an instrument by instrument basis. SFAS No. 159 also
establishes presentation and disclosure requirements to facilitate comparisons between companies that select
different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for fiscal
years beginning after November 15, 2007. We are in the process of evaluating what effect, if any, adoption of
SFAS No. 159 may have on our financial statements.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk
Market Risk and Financial Instruments
We are exposed to market risk associated with changes in interest rates. To provide some protection
against potential rate increases associated with our variable-rate facilities, we enter into derivative financial
transactions in the form of interest rate swaps. The interest rate swaps are used to hedge a portion of 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.
At February 3, 2007, we held two “variable-to-fixed” rate swaps with a notional amount of $50.0 million
each. The notional amount does not represent amounts exchanged by the parties; rather, it is used as the basis
to calculate amounts due and to be received under the rate swap. During 2006 and 2005, we did not enter into or
hold derivative financial instruments for trading purposes.
The following table provides information about our derivative financial instruments and other financial
instruments that are sensitive to changes in interest rates, including debt obligations and the interest rate swaps.
For debt obligations, the table presents principal cash flows and related weighted average interest rates by
expected maturity dates at February 3, 2007. For the interest rate swaps, the table presents the notional amount
and weighted average pay and receive interest rates by
31
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expected maturity date. For additional discussion of our interest rate swaps, see Note 11 in the Notes to
Consolidated Financial Statements.
Expected Maturity Date By Year
(Dollars in
thousands)
2007
Debt:
Fixed-rate debt
Average fixed rate
Variable-rate debt
Average variable rate
Interest Rate Derivatives:
Interest rate swap
Variable-to-fixed
Average pay rate
Average receive rate
2008
2009
2010
2011
ThereAfter
Total
Fair Value
$ 5,555
$ 5,915
$ 6,394
$ 7,864
$
7,370
$ 750,326
$ 783,424
$ 807,657
6.87 %
6.90 %
6.91 %
6.69 %
6.96 %
9.00 %
8.91 %
—
—
—
—
$ 342,300
—
$ 342,300
$ 342,300
—
—
—
—
7.16 %
—
7.16 %
—
—
—
—
—
—
—
—
—
—
—
—
$ 100,000
5.49 %
5.43 %
—
—
—
$ 100,000
$
5.49 %
5.43 %
(1,444 )
Seasonality and Inflation
Our 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 19 in the Notes to Consolidated Financial Statements for the Company’s quarterly results for
2006 and 2005. Due to the fixed nature of certain costs, SG&A expense is typically higher as a percentage of net
sales during the first half of each year.
Because of the seasonality of our business, results for any quarter are not necessarily indicative of
results that may be achieved for a full 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 the closing and remodeling of
existing stores.
We do not believe inflation had a material effect on operating results during the past three years.
However, there can be no assurance that our 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 Consolidated Financial Statements and Financial
Statement Schedule 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
None.
Item 9A.
Controls and Procedures
Attached as exhibits to this Form 10-K are certifications of the Company’s Chief Executive Officer and
Chief Financial Officer, which are required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended
(the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and
controls evaluation referred to in the certifications. This section should be read in conjunction with the
certifications for a more complete understanding of the topics presented.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to
be disclosed in reports filed pursuant to the Exchange Act is recorded, processed,
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Table of Contents
summarized and reported within the time periods specified in the SEC’s rules and forms, and that such
information is accumulated and communicated to management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management,
including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the
period covered by this report and, based on this evaluation, concluded that our disclosure controls and
procedures are effective.
Management Report on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control
over financial reporting to provide reasonable assurance regarding the reliability of its financial reporting and the
preparation of financial statements for external purposes in accordance with generally accepted accounting
principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the
maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of
the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that the
Company’s receipts and expenditures are being made only in accordance with authorizations of management
and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of its assets that could have a material effect on the financial
statements.
Management assessed the Company’s internal control over financial reporting as of February 3, 2007,
the end of the 2006 year. Management based its assessment on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management’s assessment included evaluation of such elements as the design and operating effectiveness of
key financial reporting controls, process documentation, accounting policies and the Company’s overall control
environment.
Based on its assessment, management has concluded that the Company’s internal control over financial
reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external reporting purposes in accordance with
generally accepted accounting principles. The results of management’s assessment were reviewed with the Audit
Committee of the Company’s Board of Directors.
KPMG LLP audited management’s assessment and independently assessed the effectiveness of the
Company’s internal control over financial reporting. KPMG LLP has issued an attestation report concurring with
management’s assessment, which is included below.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders
The Bon-Ton Stores, Inc.:
We have audited management’s assessment, included in the accompanying Management Report on
Internal Control over Financial Reporting presented above, that The Bon-Ton Stores, Inc. maintained effective
internal control over financial reporting as of February 3, 2007, based on criteria established in Internal Control —
Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO). The Bon-Ton Stores, Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of the
Company’s internal control over financial reporting based on our audit.
33
Table of Contents
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinion.
A Company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of
the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
In our opinion, management’s assessment that The Bon-Ton Stores, Inc. maintained effective internal
control over financial reporting as of February 3, 2007, is fairly stated, in all material respects, based on criteria
established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Also, in our opinion, The Bon-Ton Stores, Inc. maintained, in all material
respects, effective internal control over financial reporting as of February 3, 2007, based on criteria established in
Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of The Bon-Ton Stores, Inc. and subsidiaries as of
February 3, 2007 and January 28, 2006, and the related consolidated statements of income, shareholders’
equity, and cash flows for each of the fiscal years in the three-year period ended February 3, 2007, and the
related financial statement schedule, and our report dated April 17, 2007 expressed an unqualified opinion on
those consolidated financial statements and the related financial statement schedule.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 17, 2007
Inherent Limitations on Effectiveness of Controls
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that
our disclosure controls or internal control over financial reporting will prevent or detect all errors and all fraud. A
control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. The design of a
34
Table of Contents
control system must reflect the fact that there are resource constraints, and the benefits of controls must be
considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation
of controls can provide absolute assurance that misstatements because of error or fraud will not occur or that all
control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations
include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a
simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion
of two or more people, or by management override of the controls. The design of any system of controls is
based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that
any design will succeed in achieving its stated goals under all potential future conditions. Projections of any
evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become
inadequate because of changes in conditions or deterioration in the degree of compliance with policies or
procedures.
Changes in Internal Control Over Financial Reporting
There were no changes to the Company’s internal control over financial reporting that occurred during
the fourteen weeks ended February 3, 2007 that have materially affected, or are reasonably likely to materially
affect, the Company’s internal control over financial reporting.
Item 9B.
Other Information
None.
35
Table of Contents
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
As part of our system of corporate governance, our Board of Directors has adopted a Code of Ethical
Standards and Business Practices applicable to all directors, officers and associates. This Code is available on
our website at www.bonton.com.
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 is incorporated by reference to the sections entitled
“Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance
and Board of Directors Information” in the Proxy Statement.
Item 11.
Executive Compensation
The information called for by this Item is incorporated by reference to the section entitled “Executive
Compensation” of the Proxy Statement.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The information called for by this Item is incorporated by reference to the sections entitled “Security
Ownership of Directors and Executive Officers” and “Equity Compensation Plan Information” of the Proxy
Statement.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information called for by this Item is incorporated by reference to the sections entitled “Related Party
Transactions” and “Director Independence” of the Proxy Statement.
Item 14.
Principal Accountant Fees and Services
The information called for by this Item is incorporated by reference to the section entitled “Fees Paid to
KPMG” of the Proxy Statement.
36
Table of Contents
PART IV
Item 15.
Exhibits and Financial Statement Schedules
(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. Financial Statement Schedule — See the Index to Consolidated Financial Statements and
Financial Statement Schedule on page F-1.
(b) The following are exhibits to this Form 10-K and, if incorporated by reference, we have indicated the
document previously filed with the SEC in which the exhibit was included.
Exhibit No
2 .1
(a)
(b)
3 .1
3 .2
4 .1
10 .1
10 .2*
(a)
(b)
10 .3*
10 .4*
10 .5*
(a)
(b)
(c)
10 .6*
10 .7*
10 .8*
Description
Document Location
Purchase Agreement between The
Bon-Ton Stores, Inc. and Saks
Incorporated
Amendment No. 1 to Purchase Agreement
Exhibit 2.1 to the Current Report on
Form 8-K filed on October 31, 2005
Exhibit 2.1 to the Current Report on
Form 8-K filed on February 17, 2006
Articles of Incorporation
Exhibit 3.1 to the Report on Form 8-B, File
No. 0-19517 (‘‘Form 8-B”)
Bylaws
Exhibit 3.2 to Form 8-B
Indenture with The Bank of New York
Exhibit 4.1 to the Current Report on
Form 8-K filed on March 10, 2006 (‘‘3/10/06
Form 8-K”)
Shareholders’ Agreement among The
Exhibit 10.3 to Amendment No. 2 to the
Bon-Ton Stores, Inc. and the shareholders Registration Statement on Form S-1, File
named therein
No. 33-42142 (‘‘1991 Form S-1”)
Employment Agreement with David B. Zant Exhibit 10.2 to the Annual Report on
Form 10-K for the fiscal year ended
January 29, 2005 (“2004 Form 10-K”)
First Amendment to Employment
Filed Herewith
Agreement with David B. Zant
Employment Agreement with James M.
Exhibit 10.1 to the Current Report on
Zamberlan
Form 8-K filed on September 19, 2006
Employment Agreement with Anthony
Exhibit 10.1 to the Current Report on
Buccina
Form 8-K filed on June 6, 2006
Employment Agreement with Byron L.
Exhibit 10.1 to the Quarterly Report on
Bergren
Form 10-Q for the quarter ended July 31,
2004 (“7/31/04 Form 10-Q”)
Amendment No. 1 to Employment
Exhibit 10.5(b) to the 2004 Form 10-K
Agreement with Byron L. Bergren
Amendment No. 2 to Employment
Exhibit 99.1 to the Current Report on
Agreement with Byron L. Bergren
Form 8-K filed on May 26, 2006
Restricted Stock Unit Agreement with
Exhibit 10.2 to the Current Report on
Byron L. Bergren
Form 8-K filed on June 26, 2006
Executive Transition Agreement with M.
Exhibit 10.1 to the Current Report on
Thomas Grumbacher
Form 8-K filed on March 11, 2005
Form of severance agreement with certain Exhibit 10.14 to Form 8-B
executive officers
37
Table of Contents
Exhibit No
Description
10 .9*
Supplemental Executive Retirement Plan
10 .10*
10 .11*
(a)
(b)
(c)
(d)
10 .12*
10 .13*
10 .14*
10 .15*
10 .16*
10 .17
10 .18
10 .19
(a)
(b)
(c)
10 .20
10 .21
10 .22
Document Location
(a)
(b)
Exhibit 10.2 to the Quarterly Report on
Form 10-Q for the quarter ended
August 4, 2001
Amended and Restated 1991 Stock Option Exhibit 4.1 to the Registration Statement
and Restricted Stock Plan
on Form S-8, File No. 333-36633
Amended and Restated 2000 Stock
Exhibit 10.1 to the Current Report on
Incentive and Performance-Based Award
Form 8-K filed on June 26, 2006
Plan
Form of Stock Option Agreement
Exhibit 10.2 to the Current Report on
Form 8-K filed on November 25, 2005
(“11/25/05 Form 8-K”)
Form of Restricted Stock Agreement
Exhibit 10.3 to the 11/25/05 Form 8-K
Form of Restricted Stock Unit Agreement
Exhibit 10.4 to the 11/25/05 Form 8-K
Phantom Equity Replacement Stock
Exhibit 10.18 to the 1991 Form S-1
Option Plan
The Bon-Ton Stores, Inc. Cash Bonus
Exhibit 10.1 to the Current Report on
Plan
Form 8-K filed on November 25, 2005
The Bon-Ton Stores, Inc. Deferred
Filed Herewith
Compensation Plan
The Bon-Ton Stores, Inc. Severance Pay
Exhibit 10.1 to the Current Report on
Plan
Form 8-K filed on August 8, 2006
The Bon-Ton Stores, Inc. Change of
Filed Herewith
Control and Material Transaction
Severance Plan for Certain Employees of
Acquired Employers
Registration Rights Agreement between
Exhibit 99.3 to the 11/7/03 Form 8-K
The Bon-Ton Stores, Inc. and Tim
Grumbacher
Summary of Consulting Arrangement with Exhibit 10.1 to the Current Report on
Michael L. Gleim
Form 8-K filed on December 1, 2005
Sublease of Oil City, Pennsylvania store
Exhibit 10.16 to the 1991 Form S-1
between The Bon-Ton Stores, Inc. and
Nancy T. Grumbacher, Trustee
First Amendment to Oil City, Pennsylvania Exhibit 10.22 to Amendment No. 1 to the
sublease
1991 Form S-1
Corporate Guarantee with respect to Oil
Exhibit 10.26 to Amendment No. 1 to the
City, Pennsylvania lease
1991 Form S-1
Purchase and Sale Agreement between
Exhibit 10.1 to the Current Report on
The Bon-Ton Stores, Inc. and HSBC Bank Form 8-K filed on June 23, 2005 (“6/23/05
Nevada, N.A.
Form 8-K”)
Interim Servicing Agreement between The Exhibit 10.2 to the 6/23/05 Form 8-K
Bon-Ton Stores, Inc. and HSBC Bank
Nevada, N.A.
Credit Card Program Agreement between Exhibit 10.3 to the 6/23/05 Form 8-K
The Bon-Ton Stores, Inc. and HSBC Bank
Nevada, N.A.
First Amendment to the Credit Card
Exhibit 10.5 to the 3/10/06 Form 8-K
Program Agreement
38
Table of Contents
Exhibit No
(c)
10 .23
10 .24
10 .25
10 .26
10 .27
10 .28
(a)
(b)
(c)
10 .29*
(a)
(b)
10 .30
10 .31
(a)
(b)
Description
Document Location
Second Amendment to the Credit Card
Program Agreement
Registration Rights Agreement between
The Bon-Ton Department Stores, Inc., The
Bon-Ton Stores, Inc., other guarantors
listed on Schedule I of the Agreement,
Banc of America Securities LLC and
Citigroup Global Markets Inc.
Loan and Security Agreement among
Bank of America, N.A., The Bon-Ton
Department Stores, Inc., The
Elder-Beerman Stores Corp., Carson Pirie
Scott, Inc. (f/k/a Parisian, Inc.),
Herberger’s Department Stores, LLC and
the other credit parties and lenders parties
thereto.
Loan Agreement between Bonstores
Realty One, LLP and Bank of America,
N.A.
Loan Agreement between Bonstores
Realty Two, LLP and Bank of America,
N.A.
Private Brands Agreement among Saks
Incorporated, The Bon-Ton Stores, Inc.,
Herberger’s Department Stores, LLC and
Carson Pirie Scott, Inc. (f/k/a Parisian,
Inc.)
Amended and Restated Transition
Services Agreement between Saks
Incorporated and The Bon-Ton Stores, Inc.
Amendment No. 1 to Amended and
Restated Transition Services Agreement
between Saks Incorporated and The
Bon-Ton Stores, Inc.
Amendment No. 2 to Amended and
Restated Transition Services Agreement
between Saks Incorporated and The
Bon-Ton Stores, Inc.
Carson Pirie Scott & Co. Supplemental
Executive Retirement Plan
First Amendment to the Carson Pirie
Scott & Co. Supplemental Executive
Retirement Plan
Asset Purchase Agreement between The
Bon-Ton Stores, Inc. and Belk, Inc.
Private Brands Agreement between The
Bon-Ton Stores, Inc. and Belk, Inc.
Amendment No. 1 to the Private Brands
Agreement between The Bon-Ton Stores,
Inc. and Belk, Inc.
Filed Herewith
39
Exhibit 10.1 to the 3/10/06 Form 8-K
Exhibit 10.2 to the 3/10/06 Form 8-K
Exhibit 10.3 to the 3/10/06 Form 8-K
Exhibit 10.4 to the 3/10/06 Form 8-K
Exhibit 10.6 to the 3/10/06 Form 8-K
Exhibit 10.7 to the 3/10/06 Form 8-K
Exhibit 10.1 to the Quarterly Report on
Form 10-Q for the quarter ended July 29,
2006
Filed Herewith
Filed Herewith
Filed Herewith
Exhibit 10.1 to the Current Report on
Form 8-K filed on October 31, 2006
Filed Herewith
Filed Herewith
Table of Contents
Exhibit No
21
23
31 .1
31 .2
32
Description
Document Location
Subsidiaries of the Registrant
Consent of KPMG LLP
Certification of Byron L. Bergren
Certification of Keith E. Plowman
Certifications Pursuant to Rules 13a-14(b)
and 15d-14(b) of the Securities Exchange
Act of 1934
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
Filed Herewith
* Constitutes a management contract or compensatory plan or arrangement.
40
Table of Contents
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.
By:
/s/
KEITH E. PLOWMAN
Keith E. Plowman
Executive Vice President, Chief
Financial Officer and Principal
Accounting Officer
Dated: April 17, 2007
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
Tim Grumbacher
Executive Chairman of the Board
April 17, 2007
/s/ BYRON L. BERGREN
Byron L. Bergren
President and Chief Executive Officer
and Director
April 17, 2007
/s/ KEITH E. PLOWMAN
Keith E. Plowman
Executive Vice President, Chief Financial
Officer and Principal Accounting Officer
April 17, 2007
/s/ ROBERT B. BANK
Robert B. Bank
Director
April 17, 2007
/s/ PHILIP M. BROWNE
Philip M. Browne
Director
April 17, 2007
/s/ SHIRLEY A. DAWE
Shirley A. Dawe
Director
April 17, 2007
/s/ MARSHA M. EVERTON
Marsha M. Everton
Director
April 17, 2007
/s/ MICHAEL L. GLEIM
Michael L. Gleim
Director
April 17, 2007
/s/ ROBERT E. SALERNO
Robert E. Salerno
Director
April 17, 2007
41
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULE
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Schedule II — Valuation and Qualifying Accounts
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT W/DAVID B.ZANT
THE BON-TON STORES,INC.DEFERRED COMPENSATION PLAN
CHANGE OF CONTROL AND MATERIAL TRANSACTION SEVERANCE PLAN
SECOND AMENDMENT TO THE CREDIT CARD PROGRAM AGREEMENT
AMENDMENT NO.2 TO AMENDED AND RESTATED TRANSITION AGREEMENT
CARSON PIRIE SCOTT & CO.SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
FIRST AMENDMENT TO CARSON PIRIE SCOTT & CO.RETIREMENT PLAN
PRIVATE BRANDS AGREEMENT
AMENDMENT N0.1 TO PRIVATE BRANDS AGREEMENT
SUBSIDIARIES OF THE REGISTRANT
CONSENT OF KPMG
CERTIFICATION OF BYRON L.BERGREN
CERTIFICATION OF KEITH E.PLOWMAN
CERTIFICATION PURSANT TO RULES 13a-14(b) and 15d-14(b)
F-1
F-2
F-3
F-4
F-5
F-6
F-7
F-56
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
The Bon-Ton Stores, Inc.:
We have audited the accompanying consolidated balance sheets of The Bon-Ton Stores, Inc. and
subsidiaries as of February 3, 2007 and January 28, 2006, and the related consolidated statements of income,
shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended February 3, 2007.
In connection with our audits of the consolidated financial statements, we also have audited the financial
statement schedule, Valuation and Qualifying Accounts. 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 audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (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 consolidated 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 3, 2007 and
January 28, 2006, and the results of their operations and their cash flows for each of the fiscal years in the
three-year period ended February 3, 2007, in conformity with U.S. generally accepted accounting principles. Also
in our opinion, the related 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 in notes 1, 9 and 17 to the consolidated financial statements, the Company adopted the
provisions of Statement of Financial Accounting Standards No. 123R, “Share-Based Payment,” effective
January 29, 2006, using the modified prospective method, and Statement of Financial Accounting Standards
No. 158 “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans,” effective
February 3, 2007.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the effectiveness of The Bon-Ton Stores, Inc.’s internal control over financial reporting as
of February 3, 2007, based on criteria established in Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated April 17,
2007 expressed an unqualified opinion on management’s assessment of, and the effective operation of, internal
control over financial reporting.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 17, 2007
F-2
Table of Contents
THE BON-TON STORES, INC.
CONSOLIDATED BALANCE SHEETS
February 3,
2007
(In thousands except share and per share data)
Assets
Current assets:
Cash and cash equivalents
Merchandise inventories
Prepaid expenses and other current assets
Deferred income taxes
Total current assets
Property, fixtures and equipment at cost, net of accumulated depreciation and
amortization of $311,160 and $216,740 at February 3, 2007 and January 28, 2006,
respectively
Deferred income taxes
Goodwill
Intangible assets, net of accumulated amortization of $12,087 and $5,776 at
February 3, 2007 and January 28, 2006, respectively
Other long-term assets
Total assets
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable
Accrued payroll and benefits
Accrued expenses
Current maturities of long-term debt
Current maturities of obligations under capital leases
Income taxes payable
Total current liabilities
Long-term debt, less current maturities
Obligations under capital leases, less current maturities
Other long-term liabilities
Total liabilities
Commitments and contingencies (Note 14)
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 shares of
14,469,196 and 14,195,664 at February 3, 2007 and January 28, 2006,
respectively
Class A Common Stock — authorized 20,000,000 shares at $0.01 par value; issued
and outstanding shares of 2,951,490 at February 3, 2007 and January 28, 2006
Treasury stock, at cost — shares of 337,800 at February 3, 2007 and January 28,
2006
Additional paid-in capital
Deferred compensation
Accumulated other comprehensive income (loss)
Retained earnings
Total shareholders’ equity
Total liabilities and shareholders’ equity
$
24,733
787,487
84,731
17,858
914,809
January 28,
2006
$
9,771
284,584
28,412
7,126
329,893
897,886
76,586
27,377
167,679
46,453
2,965
176,700
41,441
$ 2,134,799
5,013
9,340
$ 561,343
$
$
209,742
68,434
178,642
5,555
1,936
48,086
512,395
1,120,169
69,456
86,383
1,788,403
87,318
18,986
52,692
961
74
26,743
186,774
42,491
24
39,960
269,249
—
—
145
142
30
30
(1,387 )
130,875
—
1,189
215,544
346,396
$ 2,134,799
(1,387 )
129,614
(6,663 )
(5 )
170,363
292,094
$ 561,343
The accompanying notes are an integral part of these consolidated financial statements.
F-3
Table of Contents
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
February 3,
(In thousands except share and per
share data)
Net sales
Other income
Costs and expenses:
Costs of merchandise sold
Selling, general and administrative
Depreciation and amortization
Amortization of lease-related interests
Income from operations
Interest expense, net
Income before income taxes
Income tax provision
Net income
Per share amounts —
Basic:
Net income
Basic weighted average shares
outstanding
Diluted:
Net income
Diluted weighted average shares
outstanding
Fiscal Year Ended
January 28,
2007
$
3,362,279
93,531
3,455,810
$
2,118,762
1,056,472
103,189
3,720
173,667
107,143
66,524
19,641
46,883
$
2.85
2006
$
2.78
16,841,183
1,287,170
20,425
1,307,595
2005
$
1,310,372
9,251
1,319,623
$
822,171
407,145
27,245
839
50,195
12,052
38,143
12,129
26,014
$
830,414
415,921
27,278
531
45,479
13,437
32,042
11,880
20,162
$
1.61
$
1.27
16,430,554
$
January 29,
16,204,414
$
1.57
16,518,268
15,918,650
$
1.24
16,253,254
The accompanying notes are an integral part of these consolidated financial statements.
F-4
Table of Contents
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Additional
Deferred
Accumulated
Other
Compre-
Treasury
Paid-in
Compen-
hensive
Retained
Stock
Stock
Capital
sation
Income (Loss)
Earnings
Total
$ 131
$ 30
$ (1,387 )
$ 114,687
$ 127,457
$ 239,484
—
—
—
—
—
—
20,162
20,162
—
—
—
—
—
53
—
53
—
—
—
—
—
818
—
818
Class A
(In thousands except per
share data)
BALANCE AT
JANUARY 31, 2004
Comprehensive income
(Note 16):
Net income
Amounts amortized into
interest expense from
accumulated other
comprehensive loss,
net of tax
Change in fair value of
cash flow hedges, net
of tax
Total comprehensive
income
Dividends to
shareholders, $0.10 per
share
Stock options exercised
Issuance of stock under
stock award plans
Stock-based
compensation expense
Tax benefit of stock
options and restricted
shares
Cancellation of restricted
shares
BALANCE AT
JANUARY 29, 2005
Comprehensive income
(Note 16):
Net income
Change in fair value of
cash flow hedges, net
of tax
Total comprehensive
income
Dividends to
shareholders, $0.10 per
share
Stock options exercised
Issuance of stock under
stock award plans
Stock-based
compensation expense
Tax benefit of stock
options and restricted
shares
Cancellation of restricted
shares
BALANCE AT
JANUARY 28, 2006
Comprehensive income
(Note 16):
Net income
Pension and
Commo
n
Common
Stock
$
(136 )
$
(1,298 )
21,033
—
4
—
—
—
—
—
2,308
1
—
—
1,540
—
—
—
—
—
—
—
889
—
—
—
(140 )
136
30
—
—
—
—
—
—
—
—
(1,387 )
119,284
—
—
—
—
(1,602 )
—
(1,602 )
2,312
—
—
—
450
—
—
450
—
—
—
889
131
—
—
(1,541 )
(1,096 )
(9 )
(427 )
146,017
262,557
—
—
26,014
26,014
—
422
—
422
26,436
—
2
—
—
—
—
—
1,440
4
—
—
7,756
—
—
—
—
—
—
—
—
—
142
30
—
—
—
—
(1,387 )
—
—
—
—
—
—
(1,668 )
—
(1,668 )
1,442
(7,760 )
—
—
—
114
2,193
—
—
2,307
1,022
—
—
—
1,022
—
—
—
(2 )
129,614
—
—
(6,663 )
—
—
(5 )
170,363
—
(313 )
46,883
—
(2 )
292,094
46,883
(313 )
postretirement benefit
plans, net of tax
Change in fair value of
cash flow hedges, net
of tax
Total comprehensive
income
Cumulative adjustment to
adopt SFAS No. 158
(Note 9), net of $1,386
tax effect
Adoption of
SFAS No. 123R
(Note 17)
Dividends to
shareholders, $0.10 per
share
Stock options exercised
Stock-based
compensation expense
Tax benefit of stock
options and restricted
shares
BALANCE AT
FEBRUARY 3, 2007
—
—
—
—
—
(839 )
—
(839 )
45,731
—
—
—
—
2,346
—
2,346
(5 )
—
—
(6,658 )
6,663
—
—
—
—
1
—
—
—
—
—
1,085
—
—
—
—
7
—
—
5,772
—
—
—
5,779
—
—
—
1,062
—
—
—
1,062
$ 145
$ 30
1,189
$ 215,544
$ 346,396
$ (1,387 )
—
$ 130,875
$
—
$
(1,702 )
—
The accompanying notes are an integral part of these consolidated financial statements.
F-5
(1,702 )
1,086
Table of Contents
THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization
Amortization of lease-related interests
Bad debt provision
Stock compensation expense
Excess tax benefit from share-based compensation
(Gain) loss on sale of property, fixtures and equipment
Amortization of deferred financing costs
Amortization of deferred gain on sale of proprietary credit
card portfolio
Deferred income tax (benefit) provision
Net transfers of receivables to accounts receivable facility
Proceeds from sale of proprietary credit card portfolio
Loss on sale of proprietary credit card portfolio
Changes in operating assets and liabilities, net of effect of
acquisitions:
(Increase) decrease in merchandise inventories
(Increase) decrease in prepaid expenses and other current
assets
(Increase) decrease in other long-term assets
(Decrease) increase in accounts payable
Increase (decrease) in accrued expenses
Increase (decrease) in income taxes payable
Increase (decrease) in other long-term liabilities
Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures
Acquisitions, net of cash acquired
Proceeds from sale of property, fixtures and equipment
Net cash used in investing activities
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations
Proceeds from issuance of long-term debt
Cash dividends paid
Proceeds from stock options exercised
Excess tax benefit from share-based compensation
Deferred financing costs paid
Increase (decrease) in bank overdraft balances
Net cash provided by (used in) financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents at beginning of period
Cash and cash equivalents at end of period
February 3,
2007
$
46,883
Fiscal Year Ended
January 28,
2006
$
26,014
January 29,
2005
$
20,162
103,189
3,720
—
5,779
(1,062 )
(1,373 )
5,984
27,245
839
1,510
2,307
—
237
1,523
27,278
531
3,339
450
—
(148 )
3,446
(2,460 )
(16,004 )
—
—
—
(1,346 )
(20,986 )
(244,000 )
315,445
596
—
7,315
15,512
—
—
(28,902 )
11,798
(38,474 )
(22,632 )
(3,077 )
(47,180 )
54,234
18,889
1,675
117,663
23,751
134
(12,882 )
(2,714 )
22,990
1,363
153,824
(3,911 )
(1,348 )
10,197
(5,237 )
(9,877 )
(582 )
28,653
(100,977 )
(1,073,295 )
2,516
(1,171,756 )
(29,179 )
(2,054 )
2,514
(28,719 )
(31,523 )
(185 )
290
(31,418 )
(967,788 )
2,048,355
(1,702 )
1,086
1,062
(27,839 )
15,881
1,069,055
14,962
9,771
24,733
(449,313 )
312,700
(1,668 )
1,442
—
(336 )
(1,067 )
(138,242 )
(13,137 )
22,908
$
9,771
(383,364 )
388,900
(1,602 )
2,312
—
(526 )
2,118
7,838
5,073
17,835
$
22,908
$
The accompanying notes are an integral part of these consolidated financial statements.
F-6
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc. is a Pennsylvania corporation incorporated on January 31, 1996 as the
successor of a company incorporated on January 31, 1929. As of February 3, 2007, The Bon-Ton Stores, Inc.
operated, through its subsidiaries, 283 stores, which includes eight furniture galleries, in 23 states from the
Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott,
Elder-Beerman, Herberger’s and Younkers nameplates and, under the Parisian nameplate, stores in the Detroit,
Michigan area.
The Company’s fiscal year ends on the Saturday nearer January 31, and consisted of fifty-three weeks
for 2006 and fifty-two weeks for 2005 and 2004. References to “2006,” “2005” and “2004” represent the
Company’s fiscal 2006 year ended February 3, 2007, fiscal 2005 year ended January 28, 2006 and fiscal
2004 year ended January 29, 2005, respectively. References to “2007” represent the Company’s fiscal 2007 year
ending February 2, 2008.
1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The consolidated financial statements include the accounts of The Bon-Ton Stores, Inc. and its wholly
owned subsidiaries (the “Company”). All intercompany transactions have been eliminated in consolidation.
Results of operations for the year ended February 3, 2007 include the Northern Department Store Group
of Saks Incorporated (“Carson’s”) from the March 5, 2006 acquisition date through February 3, 2007 (see
Note 2) and four Parisian stores (“Parisian”) from the October 29, 2006 acquisition date through February 3,
2007. The Company conducts its operations through one business segment.
Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires that management make estimates and assumptions which affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Reclassifications
Certain prior year balances presented in the consolidated financial statements and notes thereto have
been reclassified to conform to the current year presentation. These reclassifications did not impact the
Company’s net income for 2006, 2005 or 2004.
Cash and Cash Equivalents
The Company considers all highly liquid short-term investments with maturities of three months or less at
the time of purchase to be cash equivalents. Cash equivalents are generally overnight money market
investments.
Merchandise Inventories
For financial reporting and tax purposes, merchandise inventories are determined by the retail method.
Prior to the Carson’s acquisition, the last-in, first-out (“LIFO”) cost basis was utilized for all inventories. In
connection with the Carson’s acquisition, the Company adopted the first-in, first-out (“FIFO”) cost basis for the
majority of the acquired Carson’s locations. As of February 3, 2007,
F-7
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
approximately 30% of the Company’s merchandise inventories were valued using a FIFO cost basis and
approximately 70% of merchandise inventories were valued using a LIFO cost basis. There were no adjustments
to costs of merchandise sold for LIFO valuations in 2006 and 2005. 2004 reflects income of $200 for LIFO
valuations, after net realizable value assessments. If the FIFO method of inventory valuation had been used for
all inventories, the Company’s merchandise inventories would have been lower by $6,837 at February 3, 2007
and January 28, 2006.
Costs for merchandise purchases, product development and distribution are included in costs of
merchandise sold. Inventories are pledged as collateral under certain debt agreements (see Note 10).
Property, Fixtures and Equipment: Depreciation and Amortization
Depreciation and amortization of property, fixtures and equipment is computed using the straight-line
method based upon the shorter of the remaining accounting lease term, if applicable, or the economic life
reflected in the following ranges:
Buildings
Leasehold improvements
Fixtures and equipment
20 to 40 years
2 to 15 years
3 to 10 years
No depreciation is recorded until property, fixtures and equipment are placed into service. The Company
capitalizes interest incurred during the construction of new facilities or major improvements to existing facilities.
The amount of interest costs capitalized is limited to the costs incurred during the construction period. Interest of
$71, $88 and $7 was capitalized in 2006, 2005 and 2004, respectively.
Repair and maintenance costs are charged to operations as incurred. Property retired or sold is removed
from asset and accumulated depreciation accounts and the resulting gain or loss is reflected in selling, general
and administrative expense.
Costs of major remodeling and improvements on leased stores are capitalized as leasehold
improvements. Leasehold improvements are amortized over the shorter of the accounting lease term or the
useful life of the asset. Capital leases are recorded at the lower of fair market value or the present value of future
minimum lease payments. Capital leases are amortized in accordance with Statement of Financial Accounting
Standards (“SFAS”) No. 13, “Accounting for Leases.”
SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”),
requires the Company to test a long-lived asset for recoverability whenever events or changes in circumstances
indicate that its carrying value may not be recoverable. If the undiscounted cash flows associated with the asset
are insufficient to support the recorded asset, an impairment loss is recognized for the amount (if any) by which
the carrying amount of the asset exceeds the fair value of the asset. Cash flow estimates are based on historical
results, adjusted to reflect the Company’s best estimate of future market and operating conditions. Estimates of
fair value represent the Company’s best estimate based on industry trends and reference to market rates and
transactions, if available. As a result of this evaluation, $2,923 of asset impairment charges related to the
reduction in the estimated net realizable value of a store property and a reduction in the value of duplicate
information systems software, resulting from the acquisition of Carson’s, were recorded in 2006. No impairment
loss was recorded in 2005; impairment losses of approximately $900 were recorded in 2004. Included in the
impairment loss in 2004 was $295 related to the write-down of an intangible asset at one store location. The
charges are included in depreciation and amortization expense.
F-8
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Goodwill and Intangible Assets
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company periodically
reviews goodwill and intangible assets not subject to amortization for impairment. Intangible assets subject to
amortization are reviewed for impairment in accordance with SFAS No. 144. These reviews are performed at
least annually and may be performed more frequently if events or changes in circumstances indicate the carrying
value of goodwill or intangible assets might exceed their fair value. The Company completed its reviews of the
carrying values of goodwill and intangible assets for 2006 and determined they were not impaired.
Deferred Financing Fees
Amounts paid by the Company to secure financing agreements are reflected in other long-term assets
and are amortized over the term of the related facility. Amortization of credit facility costs and accounts receivable
securitization facility costs are classified as interest expense and selling, general and administrative expense,
respectively. Unamortized amounts at February 3, 2007 and January 28, 2006 were $25,561 and $3,317,
respectively. Deferred financing fees amortized to expense for 2006, 2005 and 2004 were $5,984, $1,523 and
$3,446, respectively.
Income Taxes
The Company accounts for income taxes according to SFAS No. 109, “Accounting for Income Taxes”
(“SFAS No. 109”). Under SFAS No. 109, deferred tax assets and liabilities are recognized for the expected future
tax consequences of the difference between the financial statement and income tax basis of assets and liabilities
and from net operating losses and credit carryforwards (see Note 18). The effect on deferred tax assets and
liabilities of a change in tax rates is recognized within income in the period that includes the enactment date.
Revenue Recognition
The Company recognizes revenue, which excludes sales tax, at either the point-of-sale or at the time
merchandise is delivered to the customer and all significant obligations have been satisfied. The Company has a
customer return policy allowing customers to return merchandise with proper documentation. A reserve is
provided for estimated merchandise returns, based on historical returns experience, and is reflected as an
adjustment to sales and costs of merchandise sold.
Other Income
The Company licenses space to third parties in its stores and receives compensation based on a
percentage of sales made in these departments, receives revenues from customers for delivery of certain items
and services (primarily associated with its furniture operations) and, commencing November 2005, receives
revenues under a Credit Card Program Agreement (see Note 3), all of which are recorded within other income. In
addition, the Company recovers a portion of its cost from the disposal of damaged or otherwise distressed
merchandise; this recovery is recorded within other income.
Advertising
Advertising production costs are expensed the first time the advertisement is run. Media placement costs
are expensed in the period the advertising appears. Total advertising expenses, net of vendor allowances,
included in selling, general and administrative expense for 2006, 2005 and 2004 were $139,842, $76,015 and
$63,496, respectively. Prepaid expenses and other current
F-9
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
assets include prepaid advertising costs of $5,346 and $1,634 at February 3, 2007 and January 28, 2006,
respectively.
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 credited to cost of
merchandise 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 allowance dollars as an adjustment to the cost of merchandise capitalized in inventory.
Additionally, the Company receives allowances from vendors in connection with cooperative advertising
programs and for reimbursement of certain payroll expenses. These amounts are recognized by the Company as
a reduction of the related advertising or payroll costs that have been incurred and reflected in selling, general and
administrative expense. The Company reviews these allowances received from each vendor to ensure
reimbursements are for specific, incremental and identifiable advertising or payroll costs incurred by the
Company to sell the vendor’s products. If a vendor reimbursement exceeds the costs incurred by the Company,
the excess reimbursement is recorded as a reduction of cost purchases from the vendor and reflected as a
reduction of costs of merchandise sold when the related merchandise is sold.
Purchase Order Violations
The Company, consistent with industry practice, mandates that vendor merchandise shipments conform
to certain standards. These standards are usually defined in the purchase order and include items such as
proper ticketing, security tagging, quantity, packaging, on-time delivery, etc. Failure by vendors to conform to
these standards increases the Company’s merchandise handling costs. Accordingly, various purchase order
violation charges are billed to vendors; these charges are reflected by the Company as a reduction of cost of
merchandise sold in the period in which the respective violations occur. The Company establishes reserves for
purchase order violations that may become uncollectable.
Self-Insurance Liabilities
The Company is self-insured for certain losses related to workers’ compensation and health insurance,
although it maintains stop-loss coverage with third party insurers to limit exposures. The estimate of its
self-insurance liability contains uncertainty since the Company must use judgment to estimate the ultimate cost
that will be incurred to settle reported claims and claims for incidents incurred but not reported as of the balance
sheet date. When estimating its self-insurance liability, the Company considers a number of factors which
include, but are not limited to, historical claim experience, demographic factors, severity factors and information
provided by independent third-party advisors.
Revolving Charge Accounts
Prior to the July 8, 2005 sale of the Company’s proprietary credit card accounts and related accounts
receivable to HSBC Bank Nevada, N.A. (“HSBC”) (see Note 3), the Company reflected finance charge income
and late fees on customer revolving charge accounts as a reduction of selling, general and administrative
expense. Finance charge income and late fees earned by the Company for
F-10
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THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
2005 and 2004, before considering costs of administering and servicing revolving charge accounts, were $27,504
and $59,491, respectively.
Fair Value of Financial Instruments
The carrying values of the Company’s cash and cash equivalents, accounts payable and obligations
under capital leases approximate fair value. The Company discloses the fair value of its long-term debt and
derivative financial instruments in Notes 10 and 11, respectively. Fair value estimates of the Company’s
long-term debt and derivative financial instruments are based on market prices, when available, or are derived
from discounted cash flow analyses.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents. The Company manages the credit risk associated with cash and cash
equivalents by maintaining cash accounts and investing with high-quality institutions. The Company maintains
cash accounts, primarily on an overnight basis, which may exceed federally insured limits. The Company has not
experienced any losses from maintaining cash accounts in excess of such limits. The Company believes that it is
not exposed to any significant risks related to its cash accounts.
Operating Leases
The Company leases a majority of its retail stores under operating leases. Many of the lease agreements
contain rent holidays, rent escalation clauses and contingent rent provisions — or some combination of these
items. The Company recognizes rent expense on a straight-line basis over the accounting lease term, which
includes cancelable option periods where failure to exercise such options would result in an economic penalty. In
calculating straight-line rent expense, the Company utilizes an accounting lease term that equals or exceeds the
time period used for depreciation. Additionally, the commencement date of the accounting lease term reflects the
earlier of the date the Company becomes legally obligated for the rent payments or the date the Company takes
possession of the building for initial construction and setup. The excess of rent expense over the actual cash paid
is recorded as deferred rent.
In a February 2005 letter to the American Institute of Certified Public Accountants, the Securities and
Exchange Commission (the “SEC”) clarified its position regarding certain lease accounting practices. The SEC’s
letter specifically addressed the depreciable life of leasehold improvements, rent holidays and landlord-tenant
incentives. Similar to other retailers, the Company reviewed its historical treatment of these lease issues. After
assessing its findings using the guidelines in SEC Staff Accounting Bulletin No. 99, the Company recorded a
cumulative pre-tax expense of $465 in the fourth quarter of 2004.
Stock-Based Compensation
Prior to 2006, the Company applied the intrinsic value method as prescribed in Accounting Principles
Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related interpretations, in
accounting for stock options granted under the Company’s stock option plans. Under the intrinsic value method,
no compensation cost is recognized if the exercise price of the Company’s stock options was equal to or greater
than the market price of the underlying stock on the date of grant. Accordingly, no compensation cost was
recognized in the accompanying consolidated statements of income prior to 2006 on stock options granted, since
all options granted under
F-11
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THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
the Company’s stock option plans had an exercise price equal to the market value of the underlying common
stock on the date of grant.
Effective January 29, 2006, the Company adopted SFAS No. 123(R), “Share-Based Payment”
(“SFAS No. 123R”). This statement replaces SFAS No. 123, “Accounting for Stock-Based Compensation”
(“SFAS No. 123”), and supersedes APB No. 25. SFAS No. 123R requires that all stock-based compensation be
recognized as an expense in the financial statements and that such cost be measured at the fair value of the
award. SFAS No. 123R was adopted using the modified prospective method of application, which requires the
Company to recognize compensation cost on a prospective basis. Therefore, prior years’ financial statements
have not been restated. Under this method, the Company recorded stock-based compensation expense for
awards granted prior to, but not yet vested as of, January 28, 2006 using the fair value amounts determined for
pro forma disclosures under SFAS No. 123. For stock-based awards granted after January 28, 2006, the
Company recognizes compensation expense based on estimated grant date fair value using the Black-Scholes
option-pricing model.
The Company has elected to adopt the shortcut method provided in Staff Position No. FAS 123(R)-3,
“Transition Election Related to Accounting for the Tax Effects of Share-Based Payment Awards,” for determining
the initial pool of excess tax benefits available to absorb tax deficiencies related to stock-based compensation
subsequent to the adoption of SFAS No. 123R. The shortcut method includes simplified procedures for
establishing the beginning balance of the pool of excess tax benefits (the “APIC Tax Pool”) and for determining
the subsequent effect on the APIC Tax Pool and the Company’s Consolidated Statements of Cash Flows of the
tax effects of share-based compensation awards.
Excess tax benefits related to share-based compensation in 2005 and 2004 are reflected in operating
activities. In a change from previous standards, SFAS No. 123R requires that excess tax benefits related to
share-based compensation be reflected as financing cash inflows.
Earnings Per Share
The presentation of earnings per share (“EPS”) requires a reconciliation of the numerators and
denominators used in basic and diluted EPS calculations. The numerator, net income, is identical in both
calculations. The following table presents a reconciliation of the weighted average shares outstanding used in
EPS calculations for each of 2006, 2005 and 2004:
Basic Calculation
Effect of dilutive
shares — Restricted
shares
Stock options
Diluted Calculation
2006
Shares
EPS
2005
Shares
EPS
2004
Shares
EPS
16,430,554
$ 2.85
16,204,414
$ 1.61
15,918,650
$ 1.27
$ 2.78
132,430
181,424
16,518,268
$ 1.57
63,170
271,434
16,253,254
$ 1.24
279,401
131,228
16,841,183
F-12
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The following average potential shares of Common Stock were excluded from diluted EPS because their
effect would have been antidilutive:
Restricted shares
Stock options
2006
2005
2004
9,591
144,642
—
64,787
—
72,790
Future Accounting Changes
In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48,
“Accounting for Uncertainty in Income Taxes” (“FIN No. 48”). FIN No. 48 requires applying a “more likely than
not” threshold to the recognition and de-recognition of tax positions. The new guidance will become effective for
the Company for the first quarter of 2007. The Company has not yet determined the impact of FIN No. 48 on the
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”).
SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements, but does not require any new fair
value measurements. SFAS No. 157 is effective for years beginning after November 15, 2007. The Company is
in the process of evaluating what effect, if any, adoption of SFAS No. 157 may have on the consolidated financial
statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to measure many financial instruments
and certain other assets and liabilities at fair value on an instrument by instrument basis. SFAS No. 159 also
establishes presentation and disclosure requirements to facilitate comparisons between companies that select
different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for years
beginning after November 15, 2007. The Company is in the process of evaluating what effect, if any, adoption of
SFAS No. 159 may have on the consolidated financial statements.
2.
CARSON’S ACQUISITION
Effective March 5, 2006, pursuant to the October 29, 2005 purchase agreement with Saks Incorporated
(“Saks”), as amended, the Company acquired all of the outstanding securities of two subsidiaries of Saks that
were solely related to the business of owning and operating the 142 retail department stores that operated under
the names Carson Pirie Scott, Younkers, Herberger’s, Boston Store and Bergner’s. The stores are located in
12 states in the Midwest and upper Great Plains regions.
Under the terms of the purchase agreement, the Company paid $1,040,188 in cash. The Company
financed the Carson’s acquisition, payment of related fees and expenses and the payoff of its existing
indebtedness through the issuance of 10 1 / 4 % Senior Notes due 2014 in the aggregate principal amount of
$510,000, entry into a $1,000,000 senior secured revolving credit facility led by Bank of America, N.A. (“Bank of
America”) as agent, and entry into a $260,000 mortgage loan facility with Bank of America as lender (see
Note 10).
Company management believes the acquisition of Carson’s will continue to enable the Company to
enhance its product offerings, strengthen its vendor and customer relationships and increase its profitability.
F-13
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THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Company’s consolidated financial statements for 2006 include Carson’s operations for the period
from March 5, 2006 through February 3, 2007. Carson’s operations reflect purchase accounting in accordance
with SFAS No. 141, “Business Combinations,” whereby the purchase price was allocated to the assets acquired
and liabilities assumed based upon their estimated fair values on the acquisition date. The purchase price and
purchase price allocation are reflected in the following table:
Purchase
Price
Cash purchase
Carson’s severance
Professional fees incurred
Total
Purchase Price Allocation
Cash and cash equivalents
Merchandise inventories
Prepaid expenses and other current assets
Property, fixtures and equipment
Deferred income taxes
Goodwill
Intangible assets
Other long-term assets
Total assets acquired
Accounts payable
Accrued payroll and benefits
Other accrued expenses
Obligations under capital leases
Other long-term liabilities
Total liabilities assumed
Net assets acquired
$ 1,040,188
514
11,812
$ 1,052,514
$
3,110
455,207
33,687
724,844
21,951
24,412
178,180
9,040
1,450,431
(158,860 )
(34,560 )
(79,088 )
(73,000 )
(52,409 )
(397,917 )
$ 1,052,514
The purchase price allocation is subject to refinement as Company management continues to receive
additional information; however, Company management does not believe that the changes, if any, will have a
material impact on the Company’s financial position or results of operations.
The Company has filed a section 338(h)(10) election under the Internal Revenue Code (“Section 338”).
The Section 338 election essentially enables a buyer to account for a stock purchase as an asset purchase for
income tax purposes.
Goodwill in the amount of $24,412 has been recorded in conjunction with the acquisition. The Company
expects that substantially all goodwill will be deductible for income tax purposes.
F-14
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Intangible assets are comprised of lease-related interests of $91,580 that relate to below-market-rate
leases; trade names and private label brand names totaling $64,000, of which $500 will be subject to a two-year
amortization; and customer lists and relationships totaling $22,600. The lease-related interests and customer lists
and relationships were assigned weighted-average amortization lives of seventeen years and thirteen years,
respectively.
Deferred tax assets of $21,951 have been recorded as part of purchase accounting. This balance
primarily represents a reduction in the Company’s pre-acquisition valuation allowances against certain net
operating losses acquired as part of the October 2003 acquisition of The Elder-Beerman Stores Corp
(“Elder-Beerman”) and the effect of certain tax temporary differences on the purchase price allocation. The
valuation allowance reduction was a result of the projected additional net operating loss utilization based on the
projected accretive impact from Carson’s on the Company’s long-term pre-tax income.
The Company obtained third-party valuations for certain acquired assets and assumed liabilities.
During 2006, $514 was paid for Carson’s-related severance.
The Company’s corporate headquarters is located in York, Pennsylvania and is comprised of corporate
administrative and back-office functions. Merchandising and marketing functions for the combined operations are
operated from Carson’s former headquarters in Milwaukee, Wisconsin.
In conjunction with this acquisition, the Company entered into a transition services agreement with Saks
pursuant to which Saks provided the Company with various services related to Carson’s, including, among other
things, credit operations, procurement, accounting, bank card processing, store planning, construction, facilities
maintenance and energy, information technology and human resources activities. These services were provided
by Saks for periods ranging from six months to 12 months from the date of the acquisition of Carson’s (subject to
extension at the Company’s discretion).
F-15
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The following unaudited pro forma consolidated financial data give effect to the Carson’s acquisition as if
it had occurred as of the beginning of the periods presented:
Net sales
Other income
Costs and expenses:
Costs of merchandise sold
Selling, general and administrative
Depreciation and amortization
Amortization of lease-related interests
Income from operations
Interest expense, net
Income before income taxes
Income tax provision
Net income
Income per share:
Basic
Diluted
2006
2005
$ 3,543,886
94,558
$ 3,444,719
31,113
2,251,416
1,115,313
110,062
3,546
158,107
116,960
41,147
12,155
$
28,992
2,149,471
1,075,791
104,925
3,546
142,099
106,639
35,460
13,548
$
21,912
$
$
$
$
1.76
1.72
1.35
1.33
The pro forma information for 2006 includes the following non-recurring charges: $15,569 of integration
costs recorded in selling, general and administrative expense, which includes severance and relocation expense
related to the transition of the Company’s merchandising and marketing staff to Milwaukee, Wisconsin in the
amount of $5,943; $2,319 of charges in interest expense related to the write-off of deferred financing fees
associated with the Company’s previous revolving credit agreement; and $4,500 included in interest expense
related to the write-off of commitment fees associated with a bridge loan in connection with the Carson’s
acquisition.
The pro forma information does not purport to be indicative of the results that actually would have been
achieved if the operations were combined during the periods presented and is not intended to be a projection of
future results or trends.
3.
SALE OF THE PROPRIETARY CREDIT CARD PORTFOLIO
On July 8, 2005, pursuant to the terms of the June 20, 2005 Purchase and Sale Agreement between the
Company and HSBC, the Company sold substantially all of its private label credit card accounts and the related
accounts receivable to HSBC for cash consideration of $313,635. The Company received total cash of $315,445
at closing, with $296,664 allocated to the sale of credit card accounts and related accounts receivable, $16,971
allocated as deferred program revenue and $1,810 representing proceeds from the sale of related assets. The
allocation between the sale of accounts receivable and the deferred program revenue was based on the relative
fair values as determined by an independent valuation. A portion of the proceeds from the sale ($230,238) were
used to pay all principal and accrued interest due note-holders under the Company’s accounts receivable
securitization program plus any other payments in respect of the termination of that
F-16
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
program. The remaining proceeds of $85,207 from the sale were used to reduce outstanding borrowings under
the Company’s revolving credit facility. Concurrently, the Company’s obligation to sell its accounts receivable to
the securitization trust was terminated.
Selling, general and administrative expense for 2005 includes a net loss of $596 associated with the sale
of the proprietary credit card portfolio. Proceeds allocated to deferred program revenue, net of certain related
costs, of $16,895 were recorded as deferred revenue and will be amortized over a seven-year term. Deferred
revenue amortization income of $2,460 and $1,346 was recognized within selling, general and administrative
expense in 2006 and 2005, respectively. At February 3, 2007 and January 28, 2006, deferred program revenue
of $2,414 was reported within accrued expenses. Deferred program revenue of $10,675 and $13,135 was
reported within other long-term liabilities at February 3, 2007 and January 28, 2006, respectively.
In connection with the sale, the Company entered into two additional agreements with HSBC: an Interim
Servicing Agreement (the “ISA”) and a Credit Card Program Agreement (the “CCPA”). Under the terms of the
ISA, the Company continued to service the credit card receivables from July 8, 2005 through October 31, 2005.
HSBC compensated the Company for providing these services during the interim servicing period. The CCPA
sets forth the terms and conditions under which HSBC will issue credit cards to the Company’s customers. The
Company will be paid a percentage of Net Credit Sales, as defined in the CCPA, for future credit card sales.
Under the terms of the CCPA, the Company is required to perform certain duties, including receiving and
remitting in-store customer payments on behalf of HSBC for which the Company will receive a fee. The CCPA
has a term of seven years and is cancelable earlier by either party under certain circumstances. Under these
agreements, the percentage of Net Credit Sales proceeds were recognized within other income in 2006 and the
fourth quarter of 2005 and within selling, general and administrative expense in the second and third quarters of
2005. Proceeds received under these agreements as reimbursement of expenses incurred to perform the certain
duties and servicing of the credit card receivables were recognized within selling, general and administrative
expense. Prior to the sale of credit to HSBC, all proceeds of the credit operations were reflected within selling,
general and administrative expense.
4.
PROPERTY, FIXTURES AND EQUIPMENT
Property, fixtures and equipment and related accumulated depreciation and amortization consisted of:
February 3,
2007
Land and improvements
Buildings and leasehold improvements
Furniture and equipment
Buildings and equipment under capital leases
$
120,521
580,579
440,383
67,563
1,209,046
(311,160 )
$
897,886
Less: Accumulated depreciation and amortization
Net property, fixtures and equipment
January 28,
2006
$
$
2,801
199,885
181,402
331
384,419
(216,740 )
167,679
Property, fixtures and equipment with a net book value of $393,361 and $25,592 were pledged as
collateral for secured loans (see Note 10) at February 3, 2007 and January 28, 2006, respectively.
F-17
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Accumulated depreciation and amortization includes $3,948 and $265 at February 3, 2007 and
January 28, 2006, respectively, related to buildings and equipment under capital leases. Amortization of buildings
and equipment under capital leases is included within depreciation and amortization expense.
Depreciation expense related to property, fixtures and equipment of $102,204, $26,940 and $27,117 was
included in depreciation and amortization expense for 2006, 2005 and 2004, respectively.
5.
GOODWILL AND INTANGIBLES
Goodwill and intangible assets consist of the following:
Goodwill
Intangible assets subject to amortization
Gross amount:
Lease-related interests
Customer lists and relationships
Private label brand names
Total gross amount
Accumulated amortization:
Lease-related interests
Customer lists and relationships
Private label brand names
Total accumulated amortization
Net intangible assets subject to amortization
Intangible assets not subject to amortization
Trade names
Private label brand names
Other intangibles
Total intangible assets not subject to amortization
Net intangible assets
February 3,
2007
January 28,
2006
$
27,377
$
2,965
$ 102,174
22,600
500
125,274
$
10,594
—
—
10,594
(11,102 )
(848 )
(137 )
(12,087 )
$ 113,187
$
$
$
50,700
12,800
13
$
63,513
$ 176,700
$
$
(5,776 )
—
—
(5,776 )
4,818
—
—
195
195
5,013
The increase in goodwill, the gross amount of intangible assets subject to amortization, and trade names
and private label brand names not subject to amortization are a result of the Carson’s acquisition (see Note 2).
An other intangible not subject to amortization of $182 was sold during 2006 at a loss of $112, which was
reflected within selling, general and administrative expense.
F-18
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Lease-related interests reflect below-market-rate leases purchased in store acquisitions completed in
1992 through 2006, which were adjusted to reflect fair market value. The lease-related interests, including the
unfavorable lease-related interests included in other long-term liabilities (see Note 6), are being amortized on a
straight-line method and reported as “amortization of lease-related interests” in the Consolidated Statements of
Income. At February 3, 2007, these lease-related interests have weighted-average remaining lives of fifteen
years for amortization purposes.
Customer lists and relationships are being amortized on a declining-balance method over the remaining
lives of twelve years, and the private label brand names are being amortized on a straight-line method over the
remaining lives of two years.
The amortization from the customer lists and relationships and private label brand names is included
within depreciation and amortization expense.
Amortization of $985, $305 and $161 was recorded on customer lists and relationships and private label
brand names during 2006, 2005 and 2004, respectively. Amortization of $3,720, $839 and $531 was recorded for
favorable and unfavorable lease-related interests during 2006, 2005 and 2004, respectively. The Company
anticipates amortization on customer lists and relationships and private label brand names of approximately
$2,946 in 2007, $2,725 in 2008, $2,362 in 2009, $2,165 in 2010 and $1,998 in 2011. The Company anticipates
amortization for favorable and unfavorable lease-related interests of approximately $4,917 in 2007, $4,949 in
2008, $4,949 in 2009, $4,750 in 2010 and $4,937 in 2011.
6.
SUPPLEMENTAL BALANCE SHEET INFORMATION
Prepaid expenses and other current assets were comprised of the following:
Landlord receivables
Prepaid expenses
Other
Total
February 3,
2007
January 28,
2006
$
$
$
15,000
29,527
40,204
84,731
$
—
11,955
16,457
28,412
Accrued expenses were comprised of the following:
Customer liabilities
Taxes
Other
Total
February 3,
2007
January 28,
2006
$
$
42,966
39,959
95,717
$ 178,642
F-19
$
14,457
8,522
29,713
52,692
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Other long-term liabilities were comprised of the following:
Real estate lease related
Unfavorable lease-related interests
Deferred revenue
Other
Total
7.
February 3,
2007
January 28,
2006
$
$
$
25,490
12,974
12,190
35,729
86,383
$
18,610
—
14,933
6,417
39,960
INTEGRATION ACTIVITIES
In connection with the acquisition of Carson’s, the Company developed integration plans which included
the transfer of Bon-Ton’s existing merchandising and marketing functions to Carson’s former headquarters in
Milwaukee, Wisconsin. This plan resulted in involuntary associate termination charges of $4,760. These charges
are reflected within selling, general and administrative expense. Payments in the amount of $4,427 were made
during 2006. The Company expects to pay the balance of the involuntary termination costs by the second quarter
of 2007.
In connection with the Elder-Beerman acquisition, the Company developed integration plans resulting in
involuntary terminations, employee relocations, and lease and other contract terminations. Involuntary
termination benefits and relocation expenses were fully paid as of January 28, 2006. The liability for terminated
leases will be paid over the remaining contract periods ending in 2030, while the other contract terminations were
fully paid as of January 29, 2005.
Liabilities recognized in connection with the acquisition and integration activities are as follows:
Balance at January 31, 2004
Purchase accounting
adjustments
Payments during 2004
Balance at January 29, 2005
Payments during 2005
Other adjustments
Balance at January 28, 2006
Charges during 2006
Payments during 2006
Balance at February 3, 2007
Termination
Benefits
Employee
Relocation
$
4,470
$
1,611
$
(698 )
(3,352 )
420
(420 )
—
—
4,760
(4,427 )
333
$
290
(1,513 )
388
(264 )
(124 )
—
—
—
—
Other Contract
Termination
$
3,053
$
—
(1,895 )
1,158
(83 )
—
1,075
—
(88 )
987
Total
$
9,134
(408 )
(6,760 )
1,966
(767 )
(124 )
1,075
4,760
(4,515 )
$ 1,320
Other adjustments represent refinements to anticipated liabilities established under provisions of
Emerging Issues Task Force Issue No. 95-3, “Recognition of Liabilities in Connection With a Purchase Business
Combination,” and resulted in reductions in certain opening balance sheet assets in the Elder-Beerman
acquisition that were recorded as part of purchase accounting.
F-20
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
8.
EXIT OR DISPOSAL ACTIVITIES
In conjunction with the Carson’s acquisition, the Company entered into a transition services agreement
(“TSA”) with Saks pursuant to which Saks provided the Company with various services related to Carson’s (see
Note 2). In the third quarter of 2006, the Company determined that, for the accounting and procurement services
portion of the TSA, a benefit would no longer be received and the payments related to those services for the
remaining term of the TSA should be accrued. Accordingly, the Company recorded a charge within selling,
general and administrative expense of $1,155 during 2006, of which $924 was paid in 2006. The Company
expects to pay the balance of $231 in the first quarter of 2007.
On January 9, 2007, the Company announced that it would close its distribution center located in
Ankeny, Iowa in April 2007. In connection with the closing of this distribution center, the Company developed
plans resulting in involuntary terminations with a total expected cost of $700. During 2006, the Company
recognized $233 of the total expected costs, which was included within selling, general and administrative
expense. The Company expects to record the remaining costs of $467 during the first quarter of 2007. The
Company expects to pay the associate termination payments during the first quarter of 2007. The Company
intends to assign the distribution center lease and anticipates that the income from such assignment will
approximate the remaining rent obligation.
On December 28, 2006, the Company announced that it would close its Younkers store located in the
Town Square Shopping Center in downtown Sioux City, Iowa in February 2007. In connection with the closing of
this store, the Company developed plans resulting in involuntary terminations and other closing costs of $92 and
$39, respectively. During 2006, the Company recognized $46 of the total expected costs, which was included
within selling, general and administrative expense. The Company expects to record the remaining involuntary
termination costs and other expected costs of $46 and $39, respectively, during the first quarter of 2007. The
Company expects to pay the associate termination payments during the first quarter of 2007.
On August 25, 2006, the Company announced that it would close its Carson Pirie Scott store at One
South State Street in Chicago, Illinois by March 2007. In connection with the closing of this store, the Company
developed plans resulting in involuntary associate terminations and other closing costs of $2,838 and $560,
respectively. During 2006, the Company recognized $2,436 of the total expected associate termination costs and
$273 of other costs, which was included within selling, general and administrative expense. The Company
expects to record the remaining associate termination costs and closing costs of $402 and $287, respectively,
during the first quarter of 2007. The Company expects to pay the majority of the associate termination payments
in the first quarter of 2007 with the balance to be paid by the third quarter of 2007.
On January 28, 2006, the Company closed its Great Northern and Shoppingtown stores in the Syracuse,
New York area, its Walden Galleria store in Buffalo, New York and its Lebanon, Pennsylvania store. In
connection with the closing of the four stores, the Company developed plans resulting in involuntary associate
terminations and other closing costs of $274 and $461, respectively. In addition, the Company incurred a lease
termination fee of $1,462, to be paid through February 1, 2008, related to the Walden Galleria store closing.
These charges are reflected within selling, general and administrative expense.
In 2005, in connection with the sale of its credit card accounts, the Company developed plans resulting in
involuntary associate terminations, contract termination and other costs, and incurred charges of $519, $200 and
$10, respectively. These charges are included within selling, general and administrative expense. The Company
recorded expense of $6 related to the associate terminations
F-21
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
in 2006. The liability for the contract termination will be paid over the remaining contract period through May
2007.
In July 2004, the Company closed its Pottstown, Pennsylvania store. Charges related to this store
closure of $1,756, reflected within selling, general and administrative expense, were recorded during 2004. The
Company incurred a fee of $1,600 related to the termination of the lease. The remaining costs related to
severance and logistics.
In October 2002, the Company announced it would discontinue its York, Pennsylvania distribution
operations in April 2003 and that all merchandise processing functions would be consolidated into the Company’s
existing Allentown, Pennsylvania distribution center. In addition, the Company announced it would close its Red
Bank, New Jersey store in January 2003. The activities were completed as scheduled. The Company recorded a
net expense reduction of $4 in 2004 relating to the closures. These expenses related primarily to termination
benefits for affected associates and other costs to consolidate the distribution centers. All reduction of expenses
and charges were included within selling, general and administrative expense. During 2006, the Company sold
its remaining lease interest in the distribution center. A gain of $275 was recorded as a result of this transaction.
Following is a reconciliation of accruals related to the Company’s closing activities:
2006
Beginning balance
Provisions:
Lease termination fee
Contract termination
Associate termination benefits
Other closing costs
Total
Payments:
Lease termination fee
Contract termination
Associate termination benefits
Other closing costs
Total
Balance at year-end
9.
$
1,240
—
—
2,721
1,428
4,149
(439 )
(136 )
(233 )
(1,197 )
(2,005 )
$ 3,384
2005
$
—
1,462
200
793
471
2,926
(680 )
(32 )
(503 )
(471 )
(1,686 )
$ 1,240
2004
$
—
1,600
—
29
127
1,756
(1,600 )
—
(29 )
(127 )
(1,756 )
$
—
EMPLOYEE BENEFIT PLANS
The Company provides eligible employees with retirement benefits under a 401(k) salary reduction and
retirement contribution plan (the “401(k) Plan”). Employees are eligible to receive a company contribution in the
401(k) Plan after they reach the age of 18, complete one year of service, are employed the last day of the plan
year and work at least 1,000 hours in any calendar year. Under the 401(k) Plan provisions, the majority of eligible
employees are permitted to contribute up to 50% of their compensation to the 401(k) Plan. Employees are
permitted to begin non-matching contributions to the 401(k) Plan after three months of service in a benefit status
position. Employees are
F-22
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
automatically enrolled to contribute 3% of pay unless the employee actively modifies or declines the election.
Company matching contributions, not to exceed 6% of eligible employees’ compensation, are at the discretion of
the Company’s Board of Directors. Company matching contributions under the 401(k) Plan become fully vested
for eligible employees after three years of service. Contributions to the 401(k) Plan under the retirement
contribution provisions are at the discretion of the Company’s Board of Directors. These retirement contributions
become fully vested after five years of service.
Effective with the Carson’s acquisition (see Note 2), employees of Carson’s who met the eligibility
requirements described above were immediately eligible to participate in the 401(k) Plan. Vesting credits under
Saks’ plan earned prior to the acquisition were carried over to the 401(k) Plan. Loans and rollovers were also
permitted. The Company’s matching contribution for Carson’s employees for 2006 was based on employee
contributions to the 401(k) Plan and salary earned commencing March 5, 2006.
Elder-Beerman provided eligible employees with a defined contribution employee benefit plan (the
“Elder-Beerman Plan”). Comparable plans in design, eligibility and company contribution were operated by the
Company and Elder-Beerman during 2004. On January 1, 2005, the assets of the Company’s 401(k) Plan and
the Elder-Beerman Plan were combined into a single plan. The Company’s 2006, 2005 and 2004 expense under
both the 401(k) Plan and the Elder-Beerman Plan was $10,382, $3,995 and $4,525, respectively.
The Company provides a supplementary pension plan to certain key executives. Employees become
100% vested in the plan benefits after achieving a specific age as defined in each employee’s agreement. The
benefits from this unfunded plan are paid upon retirement, providing the employee is age 60.
In addition, as a result of the acquisition of Elder-Beerman, the Company assumed a liability for a
supplementary pension plan that covers one current and eleven former employees. The benefits from this
unfunded plan are paid upon retirement, provided that the participant is age 65. All participants in this plan are
fully vested.
As part of the Carson’s acquisition, the Company acquired a defined benefit pension plan and unfunded
supplemental pension plans. In connection with the acquisition, all future benefit accruals in the defined benefit
plan were frozen, the effect of which was treated as a purchase accounting adjustment. The defined benefit
pension plan is also closed to new participants.
The Company also acquired a postretirement benefit plan as part of the Carson’s acquisition. The
unfunded postretirement plan provides medical and life insurance benefits. The medical portion of the plan is
contributory, and contains cost-sharing features such as deductibles and co-insurance. The life insurance
benefits of this plan are noncontributory.
Effective February 3, 2007, the Company adopted SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans — an amendment of FASB Statements No. 87, 88, 106, and
132(R)” (“SFAS No. 158”). SFAS No. 158 requires employers to recognize the funded status of defined benefit
pension and other postretirement benefit plans on the balance sheet and to recognize, in other comprehensive
income (loss), changes in the funded status that arise during the period but have not been recognized as a
component of net periodic cost. SFAS No. 158 revises the disclosures required about pension and other
postretirement plans. Additionally, SFAS No. 158 requires employers to measure the funded status of a plan as
of the date of its year-end balance sheet. The Company has historically measured plan assets and benefit
obligations as of its balance sheet date.
F-23
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Benefit obligations, fair value of plan assets and funded status of the plans are as follows:
Pension Benefits
2006
2005
Change in benefit obligation:
Benefit obligation at beginning of year
Carson’s acquisition
Service cost
Interest cost
Benefits paid
Plan amendments
Actuarial loss (gain)
Benefit obligation at end of year
Change in the fair value of plan assets:
Plan assets at beginning of year
Carson’s acquisition
Actual return on plan assets
Company contributions
Benefits paid
Plan assets at end of year
Funded status
$
4,065
223,289
125
11,329
(17,380 )
18
1,707
$ 223,153
$
—
200,679
18,272
2,582
(17,380 )
$ 204,153
$ (19,000 )
$
$
Medical and
Life Insurance
Benefits
2006
4,005
—
91
213
(227 )
—
(17 )
4,065
$
—
—
—
227
(227 )
$
—
$ (4,065 )
$
$
$
$
$
—
7,703
—
378
(719 )
—
237
7,599
—
—
—
719
(719 )
—
(7,599 )
Amounts recognized in the Consolidated Balance Sheets consist of:
Pension Benefits
2006
2005
Accrued expenses
Other long-term liabilities
Net amount recognized
$
(964 )
(18,036 )
$ (19,000 )
F-24
$
(273 )
(3,792 )
$ (4,065 )
Medical and
Life Insurance
Benefits
2006
$
$
(913 )
(6,686 )
(7,599 )
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Amounts recognized in accumulated other comprehensive (income) loss consist of:
Medical and
Life Insurance
Benefits
2006
Pension Benefits
2006
2005
Net prior service cost
Net actuarial (gain) loss
Gross amount recognized
Deferred tax expense (benefit)
Net amount recognized
$
18
(3,489 )
(3,471 )
1,289
$ (2,182 )
$ —
—
—
—
$ —
—
237
237
(88 )
149
$
$
The accumulated benefit obligation for all of the defined benefit and supplemental pension plans was
$221,394 and $4,065 at February 3, 2007 and January 28, 2006, respectively. The accumulated benefit
obligation for each of the pension plans exceeded its assets at February 3, 2007 and January 28, 2006.
The incremental effect of applying SFAS No. 158 on individual line items in the Consolidated Balance
Sheet at February 3, 2007 is as follows:
Before
Application of
SFAS No. 158
Accrued expenses
Other long-term liabilities
Accumulated other comprehensive (income) loss
Deferred long-term income taxes
$
F-25
(1,877 )
(28,454 )
313
185
Adjustments
$
—
3,732
(2,346 )
(1,386 )
After
Application of
SFAS No. 158
$
(1,877 )
(24,722 )
(2,033 )
(1,201 )
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Components of net periodic benefit (income) expense and other amounts recognized in other
comprehensive (income) loss before income taxes are as follows:
Pension Benefits
2006
2005
Net periodic benefit (income) expense:
Service cost
Interest cost
Expected return on plan assets
Recognized gain
Net periodic benefit (income) expense
Other changes in plan assets and benefit obligations
recognized in other comprehensive (income) loss,
before taxes:
Prior service cost
Actuarial net loss
Total recognized in other comprehensive (income)
loss, before taxes
Total recognized in net periodic cost and other
comprehensive (income) loss, before taxes
$
Medical and
Life Insurance
Benefits
2006
2004
$ 91
213
—
(17 )
$ 287
$
$
18
480
$ —
—
$
—
—
$
—
—
$
498
$ —
$
—
$
—
$ 287
$ (156 )
$
378
$
(1,122 )
66
211
—
(433 )
$ (156 )
$
—
378
—
—
378
125
11,329
(13,074 )
—
$ (1,620 )
$
The Company estimates the following amounts will be amortized from accumulated other comprehensive
(income) loss to net periodic cost during 2007:
Medical and
Life Insurance
Benefits
Pension
Benefits
Net prior service cost
Net actuarial loss
$
4
316
$
—
—
Weighted average assumptions used to determine benefit obligations are as follows:
Pension Benefits
2006
2005
Discount rate
Rate of compensation increase
5.75 %
3.00 %
5.50 %
N/A
Medical and
Life Insurance
Benefits
2006
5.75 %
N/A
For measurement of the other benefits plan, the Company assumed a 10% annual rate of increase in the
per capita cost of covered health care benefits for 2007, grading down to 5.50% by 2012.
F-26
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Weighted average assumptions used to determine net periodic benefit expense (income) are as follows:
Pension Benefits
2006
2005
Discount rate
Expected long-term return on plan assets
Rate of compensation increase
5.75%
7.50%
3.00%
5.50 %
N/A
N/A
2004
Medical and
Life Insurance
Benefits
2006
5.50 %
N/A
N/A
5.75 %
N/A
N/A
The Company’s discount rate assumption is evaluated annually. As a result of the Carson’s acquisition,
the Company reevaluated the method for determining the discount rate. For the year ended February 3, 2007,
the Company utilized the Citibank Pension Discount Curve (“CPDC”). The CPDC is developed by beginning with
a U.S. Treasury par curve that reflects the Treasury Coupon and Strips market. Option-adjusted spreads drawn
from the double-A corporate bond sector are layered in to develop a double-A corporate par curve, from which
the CPDC spot rates are developed. The CPDC spot rates are applied to expected benefit payments, from which
a single constant discount rate can then be developed. The Company believes that utilizing the CPDC to develop
the discount rate is preferable because the developed discount rate is based on the expected timing of benefit
payments. For the years ended January 28, 2006 and January 29, 2005, the discount rate was based on the
Moody’s long-term AA corporate bond rate.
The Company bases its asset return assumption on current and expected allocations of assets, as well
as a long-term view of expected returns on the plan asset categories. The Company assesses the
appropriateness of the expected rate of return on an annual basis and, when necessary, revises the assumption.
In 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the “Act”) became
law. Among other things, the Act introduced a federal subsidy to sponsors of retiree health care benefit plans that
provide a benefit that is at least actuarially equivalent to Medicare Part D. The Company is currently evaluating
whether the postretirement benefit plan drug benefit is at least actuarially equivalent to Medicare Part D.
Consequently, the postretirement benefit obligation and net periodic postretirement benefit expense do not reflect
any amount associated with the subsidy.
Assumed health care cost trend rate can have a significant effect on the amounts reported for the
postretirement health care plan. A one-percentage point change in assumed health care costs would have the
following effects:
One
Percentage
Point
Increase
Effect on total service and interest cost components
Effect on postretirement benefit obligation
$
F-27
26
520
One
Percentage
Point
Decrease
$
(23 )
(471 )
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The weighted average pension plan asset allocation is as follows:
2006
Equity securities
Fixed income
Real estate
65 %
29 %
6%
2005
—
—
—
The Company’s target pension plan asset allocation of equity securities, fixed income and real estate at
February 3, 2007 was 65%, 30% and 5%, respectively. Investment objectives for the pension plan assets
include:
• Providing a long-term return on plan assets that provides sufficient assets to fund pension plan
liabilities at an acceptable level of risk.
• Maximizing the long-term return on plan assets by investing primarily in equity securities. The
inclusion of additional asset classes with differing rates of return, volatility and correlation are utilized
to reduce risk by providing diversification relative to equity securities.
• Diversifying investments within asset classes to reduce the impact of losses in a single investment.
The pension plan assets are invested in compliance with the Employee Retirement Income Security Act
as amended, and any subsequent regulations and laws. The Company does not permit direct purchases of its
securities or the use of derivatives for the purpose of speculation.
Information about the expected cash flows related to the pension and other postretirement benefit plans
is as follows:
Pension
Benefits
Expected Company contributions in 2007
Expected plan benefit payments for year:
2007
2008
2009
2010
2011
2012-2016
F-28
Medical and
Life Insurance
Benefits
$
964
$
913
$
23,138
19,679
19,193
17,246
16,246
78,405
$
913
910
897
873
838
3,409
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
10.
LONG-TERM DEBT
Long-term debt consisted of the following:
February 3,
2007
New senior secured credit facility — expires March 6, 2011; interest
payable periodically at varying rates (7.16% weighted average for 2006)
Senior notes — mature on March 15, 2014; interest payable each March
15 and September 15 at 10.25%
New mortgage loan facility — principal payable in varying monthly
installments, with balance due March 6, 2016; interest payable monthly
at 6.21%; secured by land and buildings
Revolving credit facility — terminated March 6, 2006; interest paid
periodically at varying rates (4.91% weighted average for 2005)
Mortgage notes payable — principal payable in varying monthly
installments through June 2016; interest payable monthly at 9.62%;
secured by land and buildings
Mortgage note payable — principal payable January 1, 2011; interest
payable monthly at 5.00%; secured by a building and fixtures
Total debt
Less: current maturities
Long-term debt
$
$
$
342,300
January 28,
2006
$
—
510,000
—
256,568
—
—
25,550
15,856
16,902
1,000
1,125,724
(5,555 )
1,120,169
$
1,000
43,452
(961 )
42,491
On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned subsidiary of The Bon-Ton
Stores, Inc., and certain of its subsidiaries, Bank of America and certain other lenders entered into a Loan and
Security Agreement (“New Senior Secured Credit Facility”) which provides for up to $1,000,000 of revolver
borrowings. The New Senior Secured Credit Facility includes a last-in, first-out revolving credit facility of up to
$900,000 and a first-in, last-out revolving credit facility of up to $100,000 and has a sub-limit of $150,000 for the
issuance of standby and documentary letters of credit. All borrowings under the New Senior Secured Credit
Facility are limited by amounts available pursuant to a borrowing base calculation, which is based on
percentages of eligible inventory, real estate and fixed assets, with a reduction for applicable reserves. The New
Senior Secured Credit Facility is guaranteed by The Bon-Ton Stores, Inc. and certain of its subsidiaries. The New
Senior Secured Credit Facility is secured by substantially all of the assets of the Company, except for certain
mortgaged real property. As part of the New Senior Secured Credit Facility, Bank of America and the other
lenders will make available certain swing line loans in an aggregate amount not to exceed $75,000 outstanding at
any one time. Borrowings under the New Senior Secured Credit Facility bear interest at either (i) the prime rate
established by Bank of America, from time to time, plus the applicable margin (the “Prime Rate”) or (ii) the LIBOR
rate from time to time, plus the applicable margin. The applicable margin will be determined based upon the
excess availability under the New Senior Secured Credit Facility. The swing line loans bear interest at the same
rate applicable to last in, first out Prime Rate loans. The Company is required to pay a commitment fee to the
lenders for unused commitments at a rate of 0.25% to 0.30% per annum, based upon the unused portion of the
total commitment under the New Senior Secured Credit Facility. The New Senior Secured Credit
F-29
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Facility expires March 6, 2011. Financial covenants contained in the New Senior Secured Credit Facility require
that the minimum excess availability be greater than $75,000 at all times. In addition, there are certain restrictions
against the incurrence of additional indebtedness, pledge or sale of assets, payment of dividends and
distributions, and other similar restrictions. Dividends paid by the Company may not exceed $15,000 over the life
of the agreement, or $4,000 in any single year. Capital expenditures are limited to $125,000 per year, with a
one-year carryover of any prior year unused amount. The available borrowing capacity under the New Senior
Secured Credit Facility will be used in the future for general corporate purposes. As of February 3, 2007, the
Company had borrowings of $342,300, with $341,335 of borrowing availability (before taking into account the
minimum borrowing availability covenant of $75,000) and letter-of-credit commitments of $47,855.
On March 6, 2006, The Bon-Ton Department Stores, Inc. entered into an indenture (the “Indenture”) with
The Bank of New York, as trustee, under which The Bon-Ton Department Stores, Inc. issued $510,000
aggregate principal amount of its 10 1 / 4 % Senior Notes due 2014 (the “Notes”). The Notes are guaranteed on a
senior unsecured basis by The Bon-Ton Stores, Inc. and by each of its subsidiaries that is an obligor under the
New Senior Secured Credit Facility. The Notes mature on March 15, 2014. The Notes may not be redeemed prior
to March 15, 2010, except that the Company may redeem up to 35% of the Notes prior to March 15, 2009
through the proceeds of an equity offering. The interest rate of the Notes is fixed at 10 1 / 4 % per year. Interest
on the Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2006. The
Indenture includes covenants that limit the ability of the Company and its restricted subsidiaries to, among other
things, incur additional debt, pay dividends and make distributions, make certain investments, enter into certain
types of transactions with affiliates, use assets as security in other transactions, and sell certain assets or merge
with or into other companies.
On March 6, 2006, certain bankruptcy remote special purpose entities (each an “SPE” and, collectively,
the “SPEs”) that are indirect wholly owned subsidiaries of The Bon-Ton Stores, Inc. entered into loan agreements
with Bank of America, pursuant to which Bank of America provided a new mortgage loan facility in the aggregate
principal amount of $260,000 (the “New Mortgage Loan Facility”). The New Mortgage Loan Facility has a term of
ten years and is secured by mortgages on twenty-three retail stores and one distribution center owned by the
SPEs. Each SPE entered into a lease with each of The Bon-Ton Stores, Inc. subsidiaries operating on such
SPE’s properties. A portion of the rental income received under these leases will be used to pay the debt service
under the New Mortgage Loan Facility. The New Mortgage Loan Facility requires level monthly payments of
principal and interest based on an amortization period of twenty-five years and the balance outstanding at the
end of ten years will then become due and payable. The interest rate for the New Mortgage Loan Facility is a
fixed rate of 6.2125%. Financial covenants contained in the New Mortgage Loan Facility require that the SPEs
maintain certain financial thresholds, as defined in the agreements.
The Company used the net proceeds of the Notes offering and the New Mortgage Loan Facility, along
with initial borrowings under its New Senior Secured Credit Facility, to finance the acquisition of Carson’s, pay
related fees and expenses in connection with the acquisition and related financing transactions, and pay the
outstanding balance under the Company’s previous revolving credit agreement.
Prior to March 6, 2006, the Company’s amended and restated revolving credit facility agreement (the
“Credit Agreement”) provided a revolving line of credit of $300,000. Borrowing availability under the Credit
Agreement was calculated based on eligible inventories, fixed assets and real estate, which were pledged as
collateral. The revolving credit line interest rate, based on LIBOR or an index rate plus an applicable margin, and
fee charges were determined by a formula based upon the Company’s borrowing availability. Under the Credit
Agreement, the Company incurred fees at a
F-30
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
rate of 0.250 to 0.375 percentage point on the unused line of credit. As of January 28, 2006, the Company had
borrowings of $25,550 and letter-of-credit commitments of $14,341, with $173,789 of borrowing availability
(which was subject to the minimum borrowing availability covenant of $10,000). On March 6, 2006, the Credit
Agreement was terminated and replaced with the Senior Secured Credit Facility in connection with the
acquisition of Carson’s (see Note 2).
On May 17, 1996, the Company entered into a $23,400, twenty-year mortgage agreement secured by its
four stores in Rochester, New York.
The Company entered into a loan agreement with the City of Scranton, Pennsylvania on July 5, 2000; the
loan is secured by the Company’s store located in Scranton. The loan provided $1,000 to be used for certain
store renovations. The loan agreement provides for interest payments, which began February 1, 2006 at a rate of
5.0% per annum. The principal balance is to be paid in full by January 1, 2011.
The Company was in compliance with all loan agreement restrictions and covenants during 2006.
The fair value of the Company’s debt, excluding interest rate swaps, was estimated at $1,149,957 and
$45,192 at February 3, 2007 and January 28, 2006, respectively, and is based on an estimate of rates available
to the Company for debt with similar features.
Debt maturities by year at February 3, 2007, are as follows:
2007
2008
2009
2010
2011
2012 and thereafter
11.
$
5,555
5,915
6,394
7,864
349,670
750,326
$ 1,125,724
INTEREST RATE DERIVATIVES
In accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”
(“SFAS No. 133”), and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging
Activities,” the Company recognizes all derivatives on the balance sheet at fair value. On the date the derivative
instrument is entered into, the Company generally designates the derivative as a hedge of a forecasted
transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash
flow hedge”). Changes in the fair value of a derivative that is designated as, and meets all required criteria for, a
cash flow hedge are recorded in accumulated other comprehensive income (loss) and reclassified into earnings
as the underlying hedged item affects earnings. The portion of the change in fair value of a derivative associated
with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge
effectiveness is recorded in current earnings. Also, changes in the entire fair value of a derivative that is not
designated as a hedge are recorded in earnings. The Company formally documents all relationships between
hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. This process includes relating all derivatives that are designated as cash flow
hedges to specific balance sheet liabilities.
F-31
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Company also formally assesses, both at the inception of the hedge and on an ongoing basis,
whether each derivative is highly effective in offsetting changes in fair values or cash flows of the hedged item. If
it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly
effective hedge, the Company will discontinue hedge accounting prospectively for the respective derivative. In
addition, if the forecasted transaction is no longer likely to occur, any amounts in accumulated other
comprehensive income (loss) related to the derivative are recorded in the statement of income for the current
period.
It is the policy of the Company to identify on a continuing basis the need for debt capital and evaluate
financial risks inherent in funding the Company with debt capital. Reflecting the result of this ongoing review, the
debt portfolio and hedging program of the Company is managed to (1) reduce funding risk with respect to
borrowings made or to be made by the Company to preserve the Company’s access to debt capital and provide
debt capital as required for funding and liquidity purposes, and (2) reduce the aggregate interest rate risk of the
debt portfolio in accordance with certain debt management parameters. The Company enters into interest rate
swap agreements to change the fixed/variable interest rate mix of the debt portfolio in order to maintain the
percentage of fixed-rate and variable-rate debt within parameters set by management. In accordance with these
parameters, swap agreements are used to reduce interest rate risks and costs inherent in the Company’s debt
portfolio. At February 3, 2007 and January 28, 2006, the Company had interest rate swap contracts outstanding
to effectively convert a portion of its variable-rate debt to fixed-rate debt. These contracts entailed the exchange
of fixed-rate and floating-rate interest payments periodically over the agreement life. The following table indicates
the notional amounts as of February 3, 2007 and January 28, 2006 and the range of interest rates paid and
received by the Company during the years ended on those respective dates:
February 3,
2007
Fixed swaps (notional amount)
Range of receive rate
Range of pay rate
$
100,000
5.36%-5.50%
5.48%-5.49%
January 28,
2006
$
30,000
2.20%-4.29%
5.43%
The two $50,000 interest rate swaps held at February 3, 2007 were entered into on July 14, 2006 and
expire on July 14, 2011. The $30,000 interest rate swap held at January 28, 2006 expired February 6, 2006. The
net income or expense from the exchange of interest rate payments associated with these swaps is included in
interest expense. The estimated fair value of the interest rate swap agreements, based on dealer quotes, at
February 3, 2007 and January 28, 2006, was an unrealized loss of $1,444 and $9, respectively, and represents
the amount the Company would pay if the agreements were terminated as of said dates. At February 3, 2007 and
January 28, 2006, the Company reflected other long-term liabilities of $1,444 and $9, respectively, to recognize
the fair value of its interest rate swaps.
Changes in the fair value of derivatives qualifying as cash flow hedges are reported in accumulated other
comprehensive income (loss). Gains and losses are reclassified into earnings as the underlying hedged item
affects earnings, such as when quarterly settlements are made on the hedged forecasted transaction.
At February 3, 2007, it is expected that approximately $191 of net-of-tax losses in accumulated other
comprehensive income (loss) will be reclassified into earnings within the next twelve months. As of February 3,
2007, the maximum time over which the Company is hedging its exposure to the variability in future cash flows
for forecasted transactions is 53 months.
F-32
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
12.
INTEREST COSTS
Interest costs for the Company are as follows:
Interest costs incurred
Interest income
Capitalized interest, net
Interest expense, net
Interest paid
13.
2006
2005
2004
$ 107,538
(324 )
(71 )
$ 107,143
$ 80,230
$ 12,262
(122 )
(88 )
$ 12,052
$ 11,853
$ 13,539
(95 )
(7 )
$ 13,437
$ 12,506
SECURITIZATION OF RECEIVABLES
Prior to the termination of the receivables securitization program on July 8, 2005, the Company
securitized its proprietary credit card portfolio through an accounts receivable facility (the “Facility”). Under the
Facility agreement, which was contingent upon receivables meeting certain performance criteria, the Company
sold through The Bon-Ton Receivables Partnership, LP, a wholly owned subsidiary of the Company and
qualifying special purpose entity under SFAS No. 140, “Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities,” up to $250,000 of an undivided percentage interest in the receivables
on a limited recourse basis. In connection with the Facility agreement, the Company retained servicing
responsibilities, subordinated interests and an interest-only strip, all of which were retained interests in the
securitized receivables.
During 2005 and 2004, the Company recognized securitization income of $2,680 and $9,146,
respectively. This income was reported as a component of selling, general and administrative expense.
The Company recognized servicing fees, which it reported as a component of selling, general and
administrative expense, of $1,989 and $4,415 for 2005 and 2004, respectively. Net credit losses on the total
managed credit card receivables were $6,253 and $13,480 for 2005 and 2004, respectively.
14.
COMMITMENTS AND CONTINGENCIES
Leases
The Company is obligated under operating leases for a significant portion of its store properties. Certain
leases provide for additional rental payments based on a percentage of sales in excess of a specified base
(contingent rentals) and for payment by the Company of operating costs (taxes, maintenance and insurance),
both of which vary by lease.
F-33
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
At February 3, 2007, future minimum lease payments for the fixed, noncancelable terms of operating
leases and the present value of net minimum lease payments under capital leases are as follows:
Capital
Leases
Year
2007
2008
2009
2010
2011
2012 and thereafter
Total net minimum rentals
Less: Amount representing interest
Present value of net minimum lease payments, of which $1,936 is
due within one year
$
$
Operating Leases
7,224
7,375
7,500
7,500
7,500
89,375
126,474
(55,082 )
$
$
$
89,472
87,219
80,855
71,175
60,279
247,367
636,367
71,392
Minimum rental commitments under operating leases are reflected without reduction for rental income
due in future years under noncancelable subleases since income under these subleases is immaterial. Some of
the store leases contain renewal options ranging from one to fifty-nine years. Included in the minimum lease
payments under operating leases are leased vehicles, copiers, fax machines, computer equipment and a
related-party commitment with an entity associated with the Company’s majority shareholder of $224 for years
2007 through 2010 and $112 for 2011.
Rental expense consisted of the following:
Operating leases:
Buildings:
Rental expense
Contingent rentals
Fixtures and equipment
Contingent rentals on capital leases
Totals
2006
2005
2004
$ 80,532
9,794
3,408
—
$ 93,734
$ 45,243
2,967
2,713
—
$ 50,923
$ 43,491
3,019
1,252
15
$ 47,777
Rental expense includes amounts paid to an entity related to the Company’s majority shareholder of
$224 for each of 2006, 2005 and 2004.
Selling space has been licensed to certain other retailers (“leased departments”) in many of the
Company’s facilities. Future minimum lease payments and rental expense disclosed above are reflected without
a reduction for leased departments license income.
F-34
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Contingencies
In connection with the acquisition of Carson’s, the Company assumed liability for the following matter but
only to the extent it applies to the entities acquired from Saks: On October 25, 2005 the Chapter 7 trustee for the
bankruptcy estate of Kleinert’s Inc. filed a complaint against Saks and several of its subsidiaries in the United
States Bankruptcy Court for the Southern District of New York. In its initial complaint the plaintiff, as assignee,
alleged breach of contract, fraud, and unjust enrichment, among other causes of action, and seeks compensatory
and punitive damages due to Saks assessment of alleged improper chargebacks against Kleinert’s Inc. totaling
approximately $4,000 which wrongful acts the plaintiff alleges caused the insolvency and bankruptcy of Kleinert’s
Inc. On August 15, 2006 the plaintiff, as assignee, filed an amended complaint in which it asserts the following
claims, among others: (1) defendants applied improper chargebacks to the accounts payable of Kleinert’s, which
led to the extreme financial distress and Kleinert’s eventual bankruptcy and Kleinert’s incurred liabilities and lost
profits of at least $100,000 and plaintiff requests punitive damages of no less than $50,000 (conversion claim);
(2) from 1998-2003 defendants charged back an amount not less than $4,000 to Kleinert’s and these
chargebacks improperly benefited the defendants, and plaintiff requests $4,000 on this claim (unjust enrichment
claim); (3) defendants falsely represented that its $4,000 in chargebacks were proper and Kleinert’s reliance on
defendants’ misrepresentations caused Kleinert’s to lose not less than $4,000 and caused it to file for bankruptcy
resulting in liabilities and lost profits of $100,000, and plaintiff requests punitive damages of no less than $50,000
(fraud claim); (4) defendants wrongfully charged back at least $4,000 and these unwarranted chargebacks
assisted Kleinert’s officers and directors in booking fictitious sales revenue and accounts receivable and
perpetrating a fraud on Kleinert’s lenders in excess of $25,000, and plaintiff requests punitive damages of no less
than $50,000 (fraud claim); (5) defendants used dishonest, improper and unfair means in conducting business
with Kleinert’s and interfered with Kleinert’s relationship with its lenders (tortious interference with prospective
economic advantage claim); (6) defendants assisted officers of Kleinert’s in breaching their fiduciary duties to
Kleinert’s and to its creditors by falsifying borrowing base certificates given to the lenders, and defendants knew
that their improper chargeback scheme was assisting these breaches of fiduciary duty by Kleinert’s officers, with
respect to which plaintiff requests $100,000 plus $50,000 in punitive damages (aiding and abetting breach of
fiduciary duty claim); (7) defendants knew that their improper chargeback scheme was assisting the perpetration
of fraud by Kleinert’s officers, and plaintiff requests $100,000 plus $50,000 in punitive damages (aiding and
abetting fraud claim); and (8) various fraudulent conveyance claims with respect to which plaintiff requests
damages of $4,000.
On December 8, 2005 Adamson Apparel, Inc. filed a purported class action lawsuit against Saks in the
United States District Court for the Northern District of Alabama. In its complaint the plaintiff asserts breach of
contract claims and alleges that Saks improperly assessed chargebacks, timely payment discounts, and
deductions for merchandise returns against members of the plaintiff class. The lawsuit seeks compensatory and
incidental damages and restitution. Under the terms of the purchase agreement relating to the acquisition of
Carson’s from Saks, the Company may have an obligation to indemnify Saks for any damages incurred by Saks
under this lawsuit by Adamson Apparel solely to the extent that such damages relate to the business acquired
from Saks.
In addition, the Company is party to legal proceedings and claims that arise during the ordinary course of
business.
In the opinion of management, the ultimate outcome of any such litigation and claims, including the two
matters detailed above, will not have a material adverse effect on the Company’s financial position, results of
operations or liquidity.
F-35
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
15.
SHAREHOLDERS’ EQUITY
The Company’s capital structure consists of common stock with one vote per share and Class A common
stock with ten votes per share. Transfers of the Company’s Class A common stock are restricted. Upon sale or
transfer of ownership or voting rights of Class A common stock to other than permitted transferees, such shares
will convert to an equal number of common stock shares. Additionally, the Company has authorized
5,000,000 shares of preferred stock; however, no preferred shares have been issued. Treasury stock is
accounted for using the cost method.
16.
COMPREHENSIVE INCOME (LOSS)
The accumulated balances for each classification of other comprehensive income (loss) are as follows:
Accumulated
Other
Pension and
Cash
Flow
Hedges
Postretirement
Benefit Plans
Balance at January 31, 2004
Net current period change
Reclassification adjustments for gains (losses)
reclassified into income
Balance at January 29, 2005
Net current period change
Balance at January 28, 2006
Net current period change
Adjustment for the initial application of
SFAS No. 158
Balance at February 3, 2007
—
—
$
$
—
—
2,346
2,033
F-36
$
53
(427 )
422
(5 )
(839 )
—
(313 )
$
(1,298 )
818
Comprehensive
Income (Loss)
$
—
(844 )
(1,298 )
818
53
(427 )
422
(5 )
(1,152 )
$
2,346
1,189
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The related tax effects allocated to each component of accumulated other comprehensive income (loss)
are as follows:
Before-Tax
Amount
2004:
Cash flow hedges:
Net derivative gain
Reclassification adjustments for gains reclassified into
income
Other comprehensive income
2005:
Cash flow hedges:
Net derivative gain
Other comprehensive income
2006:
Pension and postretirement benefit plans:
Prior service cost during the period
Actuarial net loss
Cash flow hedges:
Net derivative loss
Other comprehensive loss
17.
$
$
1,321
Tax Benefit
(Expense)
$
(503 )
Net-of-Tax
Amount
$
818
86
1,407
(33 )
(536 )
53
871
690
690
(268 )
(268 )
422
422
(18 )
(480 )
(498 )
7
178
185
(11 )
(302 )
(313 )
(1,444 )
(1,942 )
$
605
790
$
(839 )
(1,152 )
STOCK-BASED COMPENSATION
The Company’s Amended and Restated 2000 Stock Incentive and Performance-Based Award Plan
(“2000 Stock Plan”), as amended through June 20, 2006, provides for the granting of common stock options,
restricted shares and restricted stock units to certain employees, officers, directors, consultants and advisors. A
maximum of 2,600,000 shares may be granted under the 2000 Stock Plan, of which 1,180,812 shares remained
available as of February 3, 2007. Vesting periods for the awards are at the discretion of the Company’s Board of
Directors.
The Company’s Amended and Restated 1991 Stock Option and Restricted Stock Plan (“1991 Stock
Plan”), as amended through June 17, 1997, provided for the granting of common stock options,
performance-based common stock options as part of a long-term incentive plan for selected officers and
restricted shares. A maximum of 1,900,000 shares were available under the 1991 Stock Plan; no shares remain
available as of February 3, 2007.
Stock options granted during 2006 were granted with an exercise price equal to the market value of the
underlying stock on the grant date, vest over three to four years and have a contractual
F-37
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
term of seven years. Stock options granted in 2005 and 2004 generally vest over two to four years and have a
contractual term of seven or ten years.
Restricted shares granted during 2006 vest over one to three years. Employees granted restricted shares
are not required to pay for the shares; however, they must remain employed with the Company until the
restrictions on the shares lapse. Restricted shares granted in 2005 and 2004 generally vest over two to four
years.
Restricted stock units granted during 2006, 2005 and 2004 vest over one to two years. Employees and
directors who are granted restricted stock units are not required to pay for the shares but must remain employed
by the Company, or continue to serve as a member of its Board of Directors, until the restricted stock units vest.
In addition, vesting of certain restricted stock units awarded during 2006 is subject to the achievement of
specified criteria based on Company performance.
The Company generally issues new stock to satisfy share-based award exercises.
Adoption of SFAS No. 123R
Effective January 29, 2006, the Company adopted SFAS No. 123R, which revised SFAS No. 123.
SFAS No. 123R requires the Company to measure the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award and to recognize that cost over the
period that an employee is required to provide service in exchange for the award. Any awards of liability
instruments to employees would be measured at fair value at each reporting date through settlement.
Prior to adopting SFAS No. 123R, the Company followed the intrinsic value method of accounting for
stock-based employee compensation in accordance with APB No. 25 and related interpretations. The Company
adopted SFAS No. 123R using the modified prospective application method, which requires that provisions of
SFAS No. 123R are applied to all share-based awards granted, modified, repurchased or cancelled on
January 29, 2006 and thereafter. For those grants made prior to January 29, 2006 that are nonvested and
outstanding as of January 29, 2006, the Company started recognizing the remaining unrecognized compensation
cost over the remaining service period as required by SFAS No. 123R. Accordingly, the results of prior periods
have not been restated.
The following table shows the increase (decrease) effect of adopting SFAS No. 123R on selected
reported items:
2006
Income before income taxes
Net income
Basic earnings per shares
Diluted earnings per share
Cash flows provided by operating activities
Cash flows provided by financing activities
$ (2,095 )
(1,345 )
(0.08 )
(0.08 )
(1,062 )
1,062
F-38
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The following table illustrates the effect on net income and income per share for grants issued prior to
January 29, 2006 had the Company applied the fair value recognition provisions of SFAS No. 123 to those grants
in 2005 and 2004:
2005
2004
Net income, as reported
Add: Stock-based compensation expense included in net income, net of income tax
of $895 and $171 for 2005 and 2004, respectively
Deduct: Total stock-based compensation expense determined under
fair-value-based method for all awards, net of income tax of $1,396 and $361 for
2005 and 2004, respectively
$ 26,014
$ 20,162
1,412
279
(2,174 )
(587 )
Pro forma net income
$ 25,252
$ 19,854
$
$
Net income per share:
Basic
As reported
Pro forma
Diluted
As reported
Pro forma
$
1.61
1.56
1.57
1.53
$
1.27
1.25
1.24
1.22
The compensation cost that has been recorded within SG&A expense for the Company’s share-based
award plans was $5,779, $2,307 and $450 for 2006, 2005 and 2004, respectively. The total income tax benefit
recognized in the statements of operations for stock-based award compensation was $2,069, $895 and $171 for
2006, 2005 and 2004, respectively.
Cash received from exercise under all share-based payment arrangements was $1,086, $1,442 and
$2,312 for 2006, 2005 and 2004, respectively. The excess tax benefit realized for the tax deductions from
share-based payment arrangements was $1,062, $1,022 and $889 for 2006, 2005 and 2004, respectively.
Awards with graded vesting are recognized using graded amortization.
Based upon an examination of forfeiture rates for the various classes of stock options, restricted stock
units and restricted shares, Company management does not believe that the total number of options or shares
that are vested and expected to vest as of February 3, 2007 are materially different from the respective number
of options or shares outstanding as of February 3, 2007.
Stock Options
The fair value of each option award was estimated on the grant date using the Black-Scholes option
valuation model and the assumptions noted in the following table:
2006
Weighted average grant date fair value
Weighted average risk-free interest rate
Weighted average expected volatility
Weighted average expected dividend yield
Weighted average expected term (years)
$ 13.75
4.9 %
51.7 %
0.3 %
4.6
2005
$ 8.99
4.1 %
48.8 %
0.5 %
5.1
2004
$ 7.76
3.9 %
52.4 %
0.7 %
7.7
F-39
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The risk-free interest rates used in 2006, 2005 and 2004 were based on the zero-coupon U.S. Treasury
bond, with a term equal to the expected term of the stock options. The volatility used in 2006, 2005 and 2004
represents the historical volatility of the Company’s common shares over a period that approximates the
expected term of the stock options. The expected dividend yields used in 2006, 2005 and 2004 were estimated
based on historical dividend yields. The expected terms of options granted in 2006, 2005 and 2004 were
estimated using the average of the vesting period and the contractual term, in accordance with guidance
provided within SEC Staff Accounting Bulletin No. 107.
The Company’s stock options include stock options granted under the 2000 Stock Plan and the 1991
Stock Plan.
A summary of the stock options under the Company’s stock option plans as of February 3, 2007 and
changes during 2006 are presented below:
Shares Under
Option
Outstanding as of
January 28, 2006
Granted
Exercised
Forfeited
Outstanding as of
February 3, 2007
Exercisable as of
February 3, 2007
546,030
207,500
(134,863 )
(10,000 )
Weighted
Average
per-Share
Exercise Price
Weighted
Average
Remaining
Aggregate
Contractual Term
(Years)
Intrinsic
Value
$ 13.15
29.23
8.07
19.82
608,667
19.66
6.10
$ 10,751
211,167
$ 11.88
5.83
$
5,371
The total intrinsic value of options exercised was $2,987, $2,701 and $4,169 during 2006, 2005 and
2004, respectively. As of February 3, 2007, there was $2,414 of total unrecognized compensation cost related to
unvested stock options; that cost is expected to be recognized over a weighted average period of 0.95 years.
F-40
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Restricted Stock Units
Restricted stock units consist of those units granted under the 2000 Stock Plan. The fair value of each
restricted stock unit award is calculated using the stock price at the date of grant. A summary of the restricted
stock units as of February 3, 2007 and changes during 2006 are presented below:
Restricted Stock Units
Performance and
Service Required
Service Required
Outstanding as of
January 28, 2006
Granted
Outstanding as of
February 3, 2007
—
20,259
46,375
16,849
20,259
63,224
Weighted Average GrantDate Fair Value
Performance and
Service Required
Service Required
$
—
21.90
$ 15.09
24.92
21.90
17.71
As of February 3, 2007, all restricted stock units in the above table were vested. As of February 3, 2007,
there was no unrecognized compensation cost related to restricted stock units. Vested awards will be settled in
shares after certain events and time periods occur, as defined within the terms of the restricted stock unit grant
agreements.
The total fair value of restricted stock units vested during 2006, 2005 and 2004 was $1,385, $414 and
$414, respectively.
The weighted-average grant date fair value of restricted stock units granted during 2006, 2005 and 2004
was $23.27 per unit, $17.89 per unit, and $13.05 per unit, respectively.
The Company pays cash dividend equivalents on most outstanding restricted stock units.
Restricted Shares
The Company’s restricted shares consist of restricted shares granted under the 2000 Stock Plan. The fair
value of each restricted share award is calculated using the stock price at the date of grant. A summary of the
restricted share awards as of February 3, 2007 and changes during 2006 are presented below:
Restricted Shares
Nonvested as of January 28, 2006
Granted
Forfeited
Nonvested as of February 3, 2007
471,647
149,269
(10,500 )
610,416
Weighted Average
Grant-Date Fair
Value
$
17.58
27.86
17.86
20.09
As of February 3, 2007, there was $6,731 of total unrecognized compensation cost related to restricted
shares that is expected to be recognized over a weighted average period of 2.32 years.
No restricted shares vested during 2006. The total fair value of shares vested during 2005 and 2004 was
$907 and $659, respectively.
The Company pays cash dividends on all outstanding restricted shares.
F-41
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
18.
INCOME TAXES
Components of the income tax provision were as follows:
2006
Current:
Federal
State
Total current
Deferred:
Federal
State
Total deferred
Income tax provision
$
31,915
3,730
35,645
(8,838 )
(7,166 )
(16,004 )
$ 19,641
F-42
2005
$
30,780
2,335
33,115
(24,235 )
3,249
(20,986 )
$ 12,129
2004
$
3,300
1,265
4,565
7,591
(276 )
7,315
$ 11,880
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
Components of gross deferred tax assets and liabilities were comprised of the following:
Deferred tax assets:
Net operating losses
Property, fixtures and equipment
Accrued expenses
Inventories
Rent amortization
Deferred revenue
Alternative minimum tax credits
Bad debt reserve
Asset write-down
Sale and leaseback
Equity compensation
Other
Gross deferred tax assets
Less: Valuation allowance
Total gross deferred tax assets
Deferred tax liabilities:
Intangibles
Pension obligations
Other
Total gross deferred tax liabilities
Net deferred tax assets
February 3,
2007
January 28,
2006
$
$
$
60,446
14,774
9,534
15,122
9,123
5,334
2,064
536
994
697
3,486
1,139
123,249
(25,419 )
97,830
(1,190 )
(2,104 )
(92 )
(3,386 )
94,444
$
53,119
11,454
7,840
7,541
6,498
6,036
2,064
671
507
651
942
405
97,728
(43,910 )
53,818
—
—
(239 )
(239 )
53,579
In assessing the realizability of the deferred tax assets, the Company considered whether it was
more-likely-than-not that the deferred tax assets will not be realized. The Company considered the scheduled
reversal of deferred tax liabilities, projected future taxable income, tax planning strategies and limitations
pursuant to Section 382 of the Internal Revenue Code (“Section 382”). As a result, a valuation allowance of
$25,419 and $43,910 was recorded at February 3, 2007 and January 28, 2006, respectively. If actual results
differ from these estimates or these estimates are adjusted in future periods, the Company may need to adjust its
valuation allowance, which could materially impact its financial position and results of operations.
At February 3, 2007, the Company had federal and state net operating loss carry-forwards of $95,900
and $291,025, respectively, which are available to offset future federal and state taxable income, subject to
certain limitations imposed by Section 382. These net operating losses will expire at various dates from 2007
through 2026.
F-43
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Company has alternative minimum tax credits of $2,064 as February 3, 2007 and January 28, 2006,
the use of which is subject to the limitations imposed by Section 382. The Company acquired these credits in
connection with the acquisition of Elder-Beerman. These credits can be carried-forward indefinitely.
A valuation allowance reduction of $17,397 was recorded in 2006 in connection with purchase
accounting for the acquisition of Carson’s, representing a reduction in the Company’s pre-acquisition valuation
allowances against certain net operating losses acquired as part of the October 2003 acquisition of
Elder-Beerman. The valuation allowance reduction was recorded pursuant to the projection of additional net
operating loss utilization based on the expected accretive impact from Carson’s on the Company’s long-term
pre-tax income.
A reconciliation of the statutory federal income tax rate to the effective tax rate is presented below:
2006
Tax at statutory rate
State income taxes, net of federal benefit
Valuation allowance changes, net
Changes in state deferred tax rate
Other, net
Effective tax rate
35.0 %
0.8
(6.7 )
(0.6 )
1.0
29.5 %
2005
35.0 %
4.1
(4.8 )
(1.4 )
(1.1 )
31.8 %
2004
35.0 %
3.1
—
(2.3 )
1.3
37.1 %
In 2006, 2005 and 2004, the Company made income tax payments (net of refunds) of $16,610, $10,125
and $14,442, respectively.
F-44
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
19.
QUARTERLY RESULTS (UNAUDITED)
2006:
Net sales
Other income
Costs and expenses:
Costs of merchandise
sold
Selling, general and
administrative
Depreciation and
amortization
Amortization of
lease-related interests
Income (loss) from
operations
Interest expense, net
Income (loss) before
income taxes
Income tax provision
(benefit)
Net income (loss)
Per Share Amounts —
Basic:
Net income (loss)
Basic weighted average
shares outstanding
Diluted:
Net income (loss)
Diluted weighted average
shares outstanding
Quarter Ended
July 29,
October 28,
2006
2006
April 29,
2006
$
561,774
14,813
576,587
$
746,772
19,974
766,746
$
804,100
22,859
826,959
February 3,
2007
$
1,249,633
35,885
1,285,518
351,580
485,933
509,829
771,420
199,780
258,361
273,581
324,750
18,514
26,823
28,756
29,096
702
1,046
831
1,141
6,011
23,868
(5,417 )
27,285
13,962
27,929
159,111
28,061
(17,857 )
(32,702 )
(13,967 )
131,050
$
(7,022 )
(10,835 )
$
(12,927 )
(19,775 )
$
(3,066 )
(10,901 )
$
42,656
88,394
$
(0.66 )
$
(1.20 )
$
(0.66 )
$
5.37
16,389,962
$
(0.66 )
16,389,962
16,430,971
$
(1.20 )
16,430,971
16,439,314
$
(0.66 )
16,439,314
16,461,968
$
5.20
16,986,165
The quarter ended April 29, 2006 includes results of the acquired Carson’s operations beginning
March 5, 2006 and, reflected in interest expense, net, charges of $2,319 for the write-off of fees associated with
the Company’s previous revolving credit agreement and $4,500 for fees associated with a bridge facility required
in connection with the financing of the Carson’s acquisition.
The quarter ended February 3, 2007 represents a fourteen week period and includes the results of the
acquired Parisian stores beginning October 29, 2006.
The quarters ended April 29, 2006, July 29, 2006, October 28, 2006 and February 3, 2007 include
integration costs of $4,405, $3,753, $3,729 and $3,682, respectively, recorded within selling, general and
administrative expense.
F-45
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The quarters ended October 28, 2006 and February 3, 2007 include asset impairment charges of $1,000
and $1,923, respectively, recorded within depreciation and amortization expense.
The quarter ended February 3, 2007 includes a state tax benefit of $4,100 recorded within income tax
provision.
2005:
Net sales
Other income
Costs and expenses:
Costs of merchandise
sold
Selling, general and
administrative
Depreciation and
amortization
Amortization of
lease-related interests
Income (loss) from
operations
Interest expense, net
Income (loss) before
income taxes
Income tax provision
(benefit)
Net income (loss)
Per Share Amounts —
Basic:
Net income (loss)
Basic weighted average
shares outstanding
Diluted:
Net income (loss)
Diluted weighted average
shares outstanding
Quarter Ended
July 30,
October 29,
2005
2005
April 30,
2005
$
262,533
2,158
264,691
$
274,346
1,814
276,160
$
285,676
2,126
287,802
January 28,
2006
$
464,615
14,327
478,942
167,415
174,048
189,229
291,479
94,664
93,425
97,759
121,297
6,260
7,411
7,277
6,297
173
173
231
262
(3,821 )
3,306
1,103
3,600
(6,694 )
2,804
59,607
2,342
(7,127 )
(2,497 )
(9,498 )
57,265
$
(2,715 )
(4,412 )
$
(1,052 )
(1,445 )
$
(3,198 )
(6,300 )
$
19,094
38,171
$
(0.27 )
$
(0.09 )
$
(0.39 )
$
2.34
16,122,555
$
(0.27 )
16,122,555
16,186,097
$
(0.09 )
16,186,097
16,218,717
$
(0.39 )
16,218,717
16,290,287
$
2.30
16,620,234
In connection with the sale of the proprietary credit card portfolio, the Company recorded pre-tax charges
of $1,187, $1,008 and $74 in the quarters ended July 30, 2005, October 29, 2005 and January 28, 2006,
respectively. Such amounts include the loss on the sale, costs associated with involuntary termination benefits
and contract terminations, and accelerated depreciation.
F-46
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The quarter ended January 28, 2006 includes an income tax benefit adjustment of approximately $2,200
principally associated with a net reduction of the income tax valuation allowances that were established in
connection with the October 2003 purchase of Elder-Beerman, partially offset by the income tax impact from the
sale of the proprietary credit card portfolio.
20.
GUARANTOR AND NON-GUARANTOR SUBSIDIARIES
On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned subsidiary of the Company,
entered into an Indenture with The Bank of New York, as trustee, under which The Bon-Ton Department Stores,
Inc. issued approximately $510,000 aggregate principal amount of its 10 1 / 4 % Senior Notes due 2014 (see
Note 10). The Notes are guaranteed on a senior unsecured basis by the Company and by each of the
Company’s subsidiaries that is an obligor under the New Senior Secured Credit Facility.
The condensed consolidating financial information for the Company, the Company’s guarantor
subsidiaries and the Company’s non-guarantor subsidiaries as of February 3, 2007 and January 28, 2006 and for
2006, 2005 and 2004 as presented below have been prepared from the books and records maintained by the
Company and the guarantor and non-guarantor subsidiaries. The condensed financial information may not
necessarily be indicative of the results of operations or financial position had the guarantor and non-guarantor
subsidiaries operated as independent entities. Certain intercompany revenues and expenses included in the
subsidiary records are eliminated in consolidation. As a result of this activity, an amount due to/due from affiliates
will exist at any time.
F-47
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
February 3, 2007
Bon-Ton
(Parent
Company)
Assets
Current assets:
Cash and cash
equivalents
Merchandise
inventories
Prepaid expenses and
other current assets
Deferred income taxes
Total current assets
Property, fixtures and
equipment at cost, net
Deferred income taxes
Goodwill
Intangible assets, net
Investment in and
advances to (from)
affiliates
Other long-term assets
Total assets
Liabilities and
Shareholders’ Equity
Current liabilities:
Accounts payable
Accrued payroll and
benefits
Accrued expenses
Current maturities of
long-term debt and
obligations under
capital leases
Income taxes payable
Total current liabilities
Long-term debt and
obligations under capital
leases, less current
maturities
Other long-term liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
$
1
Issuer
$
7,122
Guarantor
Subsidiaries
$
17,610
Non-Guarantor
Subsidiaries
$
—
Consolidating
Eliminations
$
—
Company
Consolidated
$
24,733
—
262,532
524,955
—
—
787,487
—
—
1
40,240
2,038
311,932
43,016
15,820
601,401
1,475
—
1,475
—
—
—
84,731
17,858
914,809
—
—
—
—
158,582
11,145
2,965
2,599
407,556
63,061
24,412
174,101
331,748
2,380
—
—
—
—
—
—
897,886
76,586
27,377
176,700
348,426
—
$ 348,427
796,500
26,861
$ 1,310,584
$
315,038
11,338
1,596,907
$
$
$
—
$
$
—
—
—
—
2,031
2,031
209,742
(586 )
3,242
338,259
—
$
$
(1,459,378 )
—
(1,459,378 )
—
$
—
41,441
2,134,799
$
209,742
16,801
65,762
51,633
112,880
—
—
—
—
68,434
178,642
—
(7,428 )
284,877
1,936
52,575
219,024
5,555
908
6,463
—
—
—
7,491
48,086
512,395
69,456
56,966
345,446
1,251,461
266,869
—
273,332
64,927
—
—
2,031
346,396
853,300
29,417
1,167,594
142,990
$ 348,427
$ 1,310,584
$
1,596,907
F-48
$
338,259
—
—
—
(1,459,378 )
$
(1,459,378 )
1,189,625
86,383
1,788,403
346,396
$
2,134,799
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
January 28, 2006
Bon-Ton
(Parent
Company)
Assets
Current assets:
Cash and cash equivalents
Merchandise inventories
Prepaid expenses and
other current assets
Deferred income taxes
Total current assets
Property, fixtures and
equipment at cost, net
Deferred income taxes
Goodwill
Intangible assets, net
Investment in and advances
to (from) affiliates
Other long-term assets
Total assets
Liabilities and Shareholders’
Equity
Current liabilities:
Accounts payable
Accrued payroll and
benefits
Accrued expenses
Current maturities of
long-term debt and
obligations under capital
leases
Income taxes payable
Total current liabilities
Long-term debt and
obligations under capital
leases, less current
maturities
Other long-term liabilities
Total liabilities
Shareholders’ equity
Total liabilities and
shareholders’ equity
$
10
—
$
7,455
154,126
Guarantor
Subsidiaries
$
2,306
130,458
Non-Guarantor
Subsidiaries
$
—
—
Consolidating
Eliminations
$
—
—
Company
Consolidated
$
9,771
284,584
—
—
10
22,587
4,036
188,204
5,825
3,090
141,679
—
—
—
—
—
—
28,412
7,126
329,893
—
—
—
—
126,506
2,156
2,965
2,850
22,321
44,035
—
2,163
18,852
262
—
—
—
—
—
—
167,679
46,453
2,965
5,013
(51,569 )
138
158,767
$
210
704
20,028
$
$
—
$
296,979
—
$ 296,989
$
Issuer
—
(33,327 )
8,498
$ 297,852
$
$
$
87,318
—
(212,293 )
—
(212,293 )
—
$
—
9,340
561,343
$
87,318
—
—
15,267
26,560
3,719
26,132
—
—
—
—
18,986
52,692
—
4,895
4,895
—
13,285
142,430
74
8,437
38,362
961
126
1,087
—
—
—
1,035
26,743
186,774
—
—
4,895
292,094
26,550
31,379
200,359
97,493
24
8,581
46,967
111,800
15,941
—
17,028
3,000
$ 296,989
$ 297,852
$
158,767
F-49
$
20,028
—
—
—
(212,293 )
$
(212,293 )
42,515
39,960
269,249
292,094
$
561,343
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
2006
Bon-Ton
(Parent
Company)
Net sales
Other income
Costs and expenses:
Costs of merchandise sold
Selling, general and
administrative
Depreciation and
amortization
Amortization of
lease-related interests
(Loss) income from
operations
Other income (expense):
Intercompany interest
income
Intercompany rental and
royalty income
Equity in earnings (losses)
of subsidiaries
Interest expense, net
Income (loss) before income
taxes
Income tax provision (benefit)
Net income (loss)
$
Issuer
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
$ 645,159
21,197
666,356
—
429,885
1,688,877
—
2
213,490
879,773
12
—
27,526
64,846
10,817
—
103,189
—
470
3,250
—
—
3,720
36,805
173,667
(2 )
(5,015 )
2,717,120
72,334
2,789,454
$
152,708
$
—
—
—
Company
Consolidated
—
—
—
$
—
—
—
Consolidating
Eliminations
$
—
2,118,762
(36,805 )
(10,829 )
3,362,279
93,531
3,455,810
1,056,472
1,700
—
—
—
(1,700 )
—
—
—
10,606
26,199
(36,805 )
—
—
(11,978 )
—
(16,671 )
(214,861 )
1,700
—
(107,143 )
(1,301 )
(541 )
(760 )
(214,861 )
(74,692 )
(140,169 )
66,524
19,641
46,883
64,826
—
66,524
19,641
$ 46,883
150,035
(80,194 )
$
64,826
18,936
45,890
$
151,336
56,297
95,039
F-50
$
$
$
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
2005
Bon-Ton
(Parent
Company)
Net sales
Other income
Costs and expenses:
Costs of merchandise sold
Selling, general and
administrative
Depreciation and
amortization
Amortization of
lease-related interests
(Loss) income from
operations
Other income (expense):
Intercompany interest
income
Intercompany rental and
royalty income
Equity in earnings (losses)
of subsidiaries
Interest expense, net
Income (loss) before income
taxes
Income tax provision (benefit)
Net income (loss)
$
Issuer
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
$ 670,003
11,337
681,340
—
427,645
394,526
—
7
216,725
205,072
(208 )
—
21,034
5,021
1,190
—
27,245
—
622
217
—
—
839
15,314
21,419
(982 )
14,451
50,195
10,197
—
—
—
(10,197 )
—
—
—
11,804
2,647
(14,451 )
—
—
(1,890 )
(56,219 )
10,197
—
(12,052 )
(225 )
(81 )
(144 )
(56,219 )
(18,663 )
(37,556 )
38,143
12,129
26,014
(7 )
27,953
—
38,143
12,129
$ 26,014
$
$
—
(4,732 )
28,266
(15,627 )
27,953
7,234
20,719
617,167
9,088
626,255
$
28,491
11,510
16,981
F-51
$
$
—
—
—
Company
Consolidated
—
—
—
$
—
—
—
Consolidating
Eliminations
$
—
822,171
(14,451 )
$
1,287,170
20,425
1,307,595
407,145
$
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
2004
Bon-Ton
(Parent
Company)
Net sales
Other income
Costs and expenses:
Costs of merchandise sold
Selling, general and
administrative
Depreciation and
amortization
Amortization of
lease-related interests
(Loss) income from
operations
Other income (expense):
Intercompany interest
income
Intercompany rental and
royalty income
Equity in earnings (losses)
of subsidiaries
Interest expense, net
Income (loss) before income
taxes
Income tax provision (benefit)
Net income (loss)
$
Issuer
Guarantor
Subsidiaries
Non-Guarantor
Subsidiaries
$ 679,037
4,941
683,978
—
428,208
402,206
—
8
225,242
213,736
1
—
19,972
6,116
1,190
—
27,278
—
422
109
—
—
531
10,134
13,478
23,066
45,479
10,197
—
—
—
(10,197 )
—
—
—
20,418
2,648
(23,066 )
—
—
(1,778 )
(49,627 )
10,197
—
(13,437 )
(321 )
(122 )
(199 )
(49,627 )
(18,230 )
(31,397 )
32,042
11,880
20,162
(8 )
21,853
—
32,042
11,880
$ 20,162
$
$
$
28,095
10,704
17,391
F-52
$
$
$
—
$
1,310,372
9,251
1,319,623
830,414
(23,066 )
(1,191 )
—
(5,801 )
27,774
(16,055 )
21,853
7,648
14,205
631,335
4,310
635,645
—
—
—
Company
Consolidated
—
—
—
$
—
—
—
Consolidating
Eliminations
415,921
$
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
2006
Bon-Ton
(Parent
Company)
Cash flows from
operating activities:
Cash flows from
investing activities:
Capital expenditures
Acquisitions, net of cash
acquired
Proceeds from sale of
property, fixtures and
equipment
Net cash used in
investing activities
Cash flows from
financing activities:
Payments on long-term
debt and capital lease
obligations
Proceeds from issuance
of long-term debt
Intercompany financing
activity
Cash dividends paid
Proceeds from stock
options exercised
Excess tax benefit from
share-based
compensation
Deferred financing costs
paid
Increase in bank
overdraft balances
Net cash (used in)
provided by
financing activities
Net (decrease)
increase in cash
and cash
equivalents
Cash and cash
equivalents at
beginning of period
Cash and cash
equivalents at end of
period
$
607
Issuer
$
—
(61,980 )
—
(1,073,295 )
—
Non-Guarantor
Subsidiaries
Consolidating
Eliminations
$
$
$
65,165
8,312
(271,567 )
Company
Consolidated
$
117,663
—
—
(100,977 )
—
—
—
(1,073,295 )
766
—
—
—
—
(1,171,756 )
—
(967,788 )
(38,997 )
1,750
—
(1,133,525 )
(38,231 )
—
(961,605 )
(1,705 )
—
(4,478 )
—
1,788,355
2,516
—
260,000
2,048,355
—
(1,702 )
(616 )
—
1,086
—
—
—
—
1,086
—
1,062
—
—
—
1,062
—
(25,031 )
—
—
(27,839 )
—
15,881
—
—
15,881
(616 )
818,046
271,567
1,069,055
(9 )
1
(9,925 )
—
7,455
$
7,122
(261,026 )
—
$
—
(1,702 )
271,567
—
(2,808 )
—
(11,630 )
(333 )
10
$
315,146
Guarantor
Subsidiaries
(8,312 )
15,304
—
—
14,962
2,306
—
—
9,771
17,610
F-53
$
—
$
—
$
24,733
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
2005
Bon-Ton
(Parent
Company)
Cash flows from
operating activities:
Cash flows from
investing activities:
Capital expenditures
Acquisition, net of cash
acquired
Proceeds from sale of
property, fixtures and
equipment
Net cash (used in)
provided by
investing activities
Cash flows from
financing activities:
Payments on long-term
debt and capital
lease obligations
Proceeds from
issuance of
long-term debt
Intercompany financing
activity
Cash dividends paid
Proceeds from stock
options exercised
Deferred financing
costs paid
Increase (decrease) in
bank overdraft
balances
Net cash used in
financing activities
Net increase
(decrease) in cash
and cash
equivalents
Cash and cash
equivalents at
beginning of period
Cash and cash
equivalents at end of
period
$
234
$
Guarantor
Subsidiaries
141,784
$
—
(15,032 )
—
(2,054 )
—
32,495
Non-Guarantor
Subsidiaries
$
665
Consolidating
Eliminations
Company
Consolidated
$
$
(21,354 )
153,824
—
—
(29,179 )
—
—
—
(2,054 )
2,056
209
—
2,514
209
—
(28,719 )
(14,147 )
249
—
(16,837 )
(12,091 )
—
(447,694 )
(745 )
(874 )
—
(449,313 )
—
312,700
—
—
—
312,700
—
—
21,354
—
—
(1,668 )
(226 )
—
1,442
—
—
—
—
(336 )
—
—
—
(336 )
(4,257 )
—
—
(1,067 )
(132,366 )
(26,130 )
(874 )
21,354
(138,242 )
8
(7,419 )
(5,726 )
—
—
(13,137 )
2
14,874
8,032
—
—
22,908
—
—
10
(21,128 )
—
3,190
(226 )
$
Issuer
$
7,455
$
2,306
F-54
$
—
$
—
—
(1,668 )
1,442
$
9,771
Table of Contents
THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share and per share data)
The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
2004
Bon-Ton
(Parent
Company)
Cash flows from
operating activities:
Cash flows from
investing activities:
Capital expenditures
Acquisition, net of cash
acquired
Proceeds from sale of
property, fixtures and
equipment
Net cash used in
investing activities
Cash flows from
financing activities:
Payments on long-term
debt and capital
lease obligations
Proceeds from
issuance of
long-term debt
Intercompany financing
activity
Cash dividends paid
Proceeds from stock
options exercised
Deferred financing
costs paid
Increase (decrease) in
bank overdraft
balances
Net cash provided by
(used in) financing
activities
Net (decrease)
increase in cash
and cash
equivalents
Cash and cash
equivalents at
beginning of period
Cash and cash
equivalents at end of
period
21.
$
(718 )
$
12,563
—
(24,167 )
—
(185 )
—
150
$
36,475
Non-Guarantor
Subsidiaries
$
718
Consolidating
Eliminations
Company
Consolidated
$
$
(20,385 )
28,653
—
—
(31,523 )
—
—
—
(185 )
140
—
—
290
(7,356 )
—
(24,202 )
(7,216 )
—
—
(31,418 )
—
(380,823 )
(1,823 )
(718 )
—
(383,364 )
—
388,900
—
—
388,900
—
—
20,385
—
—
(1,602 )
—
710
—
2,312
—
(21,095 )
—
—
(1,602 )
—
—
—
—
(526 )
—
—
—
—
2,118
20,385
7,838
2,312
(526 )
—
4,937
(2,819 )
—
710
13,198
(25,737 )
(718 )
1,559
3,522
—
—
5,073
13,315
4,510
—
—
17,835
(8 )
10
$
Guarantor
Subsidiaries
Issuer
2
$
14,874
$
8,032
$
—
$
—
$
22,908
SUBSEQUENT EVENTS
On March 29, 2007, the Company announced a quarterly cash dividend of $0.05 per share on Class A
common stock and common stock, payable May 1, 2007 to shareholders of record as of April 16, 2007.
F-55
Table of Contents
Schedule II: VALUATION AND QUALIFYING ACCOUNTS
THE BON-TON STORES, INC. AND SUBSIDIARIES
Classification
Year ended January 29, 2005 :
Allowances for doubtful accounts
and sales returns
Accrual for sales returns
Year ended January 28, 2006 :
Allowances for doubtful accounts
and sales returns
Accrual for sales returns
Year ended February 3, 2007 :
Accrual for sales returns
Balance at
Beginning
of Period
Charged to
Costs &
Expenses
Deductions
Balance at
End of
Period
Other
—
—
$ 6,132,000
$ 1,339,000
$ 13,520,000 (1)
$
—
$
$
(13,480,000 )(2)
(141,000 )
$
$
$ 6,172,000
$ 1,198,000
$
$
$
$
(6,258,000 )(2)
(290,000 )
$
$
$ 4,080,000
$
$
(2,605,000 )
$ 10,044,000 (4)
6,225,000 (1)
—
—
(6,139,000 )(3)
3,172,000 (3)
NOTES:
(1) Provision for merchandise returns and loss on credit sales.
(2) Uncollectible accounts written off, net of recoveries.
(3) Adjustment related to the proprietary credit card portfolio sale to HSBC Bank Nevada, N.A.
(4) Adjustment represents acquisition purchase accounting.
F-56
$
$
6,172,000
1,198,000
$
$
—
4,080,000
$
11,519,000
Table of Contents
EXHIBIT INDEX
Exhibit
10 .2(b)
10 .14
10 .16
10 .22(c)
10 .28(c)
10 .29(a)
10 .29(b)
10 .31(a)
10 .31(b)
21
23
31 .1
31 .2
32
Description
First Amendment to Employment Agreement with David B. Zant
The Bon-Ton Stores, Inc. Deferred Compensation Plan
The Bon-Ton Stores, Inc. Change of Control and Material Transaction Severance Plan for
Certain Employees of Acquired Employers
Second Amendment to the Credit Card Program Agreement
Amendment No. 2 to Amended and Restated Transition Services Agreement between Saks
Incorporated and The Bon-Ton Stores, Inc.
Carson Pirie Scott & Co. Supplemental Executive Retirement Plan
First Amendment to the Carson Pirie Scott & Co. Supplemental Executive Retirement Plan
Private Brands Agreement between The Bon-Ton Stores, Inc. and Belk, Inc.
Amendment No. 1 to the Private Brands Agreement between The Bon-Ton Stores, Inc. and
Belk, Inc.
Subsidiaries of the Registrant
Consent of KPMG LLP
Certification of Byron L. Bergren
Certification of Keith E. Plowman
Certification Pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of
1934
EXHIIBT 10.2(b)
FIRST AMENDMENT TO EMPLOYMENT AGREEMENT
This FIRST AMENDMENT TO EMPLOYMENT AGREEMENT, dated as of May 1, 2006 ("First Amendment"), is by and between THE
BON-TON STORES, INC., a Pennsylvania corporation (the "Company"), and DAVID ZANT ("Employee").
W I T N E S S E T H:
WHEREAS, the Company and Employee entered into an Agreement dated as of December 13, 2004 ("Agreement") with respect to the
employment of Employee as the Vice Chairman and Chief Merchandising Officer of the Company;
WHEREAS, the Agreement terminates on January 31, 2008, unless sooner terminated by the Company or the Employee; and
WHEREAS, the Human Resources and Compensation Committee ("HRCC") of the Company's Board of Directors have approved certain
modifications to the Agreement.
NOW THEREFORE, in consideration of the mutual promises and covenants contained herein and intending to be legally bound hereby, the
Company and Employee agree as follows:
1. Position and Responsibilities. Amendment of Section 1(a) of the Agreement. Section 1(a) of the Agreement is deleted and the following is
substituted in lieu thereof:
"The Company and the Employee agree that Employee shall be transferred to the position of the Company's Vice Chairman, Private Brand and
Planning & Allocation. Employee shall have the responsibilities for the Company's Private Brand, Planning and Allocation, Internet Promotion
and Sales matters and shall report to the President and Chief Executive Officer or such other direct report as the President and Chief Executive
Officer may designate."
2. Place of Performance. Amendment of Section 3 of the Agreement. Section 3 of the Agreement is deleted and the following is substituted in
lieu thereof:
"Place of Performance. Employee's shall be based at the regular executive offices of the Company in Milwaukee, Wisconsin, except for travel
required for Company business. Employee's cost of relocation to Milwaukee, Wisconsin shall be fully reimbursed in accordance with the
Company's relocation policy. In the event of a relocation of the Company's executive offices in the future requiring Employee to relocate his
residence, Employee shall relocate subject to reimbursement for relocation expenses on the same basis and to the same extent as other similarly
situated Company executives."
3. Compensation. Amendment of Section 4(c) of the Agreement. Section 4(c) of the Agreement is deleted and the following is substituted in
lieu thereof:
"Annual Bonus. Employee will participate in The Bon-Ton Stores, Inc. Cash Bonus Plan ("Cash Bonus Plan") in accordance with its terms and
conditions as it may be amended in accordance with its provisions or such other annual bonus plan as may be established by the Company. For
each of the fiscal years of the Company during the Term, Employee shall be eligible to earn a bonus, with the following parameters: a threshold
bonus of 56.25% of Employee's Base Salary; a target bonus of 75% of Employee's Base Salary; and a maximum bonus of 112.5% of
Employee's Base Salary. If earned, one bonus will be paid depending on the level of achievement with respect to performance measures
determined for each of the Company's fiscal years by the Human Resources and Compensation Committee ("HRCC"). The HRCC shall retain
discretion with respect to this bonus as is provided under the terms of the Cash Bonus Plan. To the extent reasonably practicable, the annual
bonus shall be computed within 90 days following the close of the Company's fiscal year and paid within 30 days of its computation. Employee
must be employed on the last day of the Company's fiscal year to receive a bonus, except as otherwise provided in Paragraph 7(a)(iii) of this
First Amendment with respect to a Discharge Without Cause, Resignation for Good Reason or Resignation Without Good Reason as those
terms are defined below."
4. Other Benefits. Amendment of Section 7 of the Agreement.
(a) Section 7 of the Agreement is amended to set forth the following agreement between the Company and Employee: Employee shall be
entitled to payment of his reasonable attorneys fees incurred in connection with this First Amendment up to a maximum of $3,000.
(b) In all other respects, Section 7 of the Agreement shall remain in effect.
5. Termination of Employment. Amendment of Section 9(c) of the Agreement.
(a) Resignation for Good Reason. Section 9(c) of the Agreement is amended to set forth the following agreement between the Company and
Employee:
For purposes of the Agreement, "Good Reason" shall mean any of the following violations of the Agreement by the Company: causing
Employee, without Employee's consent, to cease to have duties and responsibilities commensurate with those of Vice Chairman, Private Brand
and Planning & Allocation; any reduction in the Employee's base salary; any reduction in the Employee's potential bonus eligibility amounts;
any required relocation from the Milwaukee, Wisconsin area; and any substantial breach of any material provision of this Agreement.
(b) In all other respects, Section 9(c) of the Agreement shall remain in effect.
6. Termination of Employment. Amendment of Section 9(e) of the Agreement.
Section 9(e) of the Agreement is deleted and the following is substituted in lieu thereof:
-2-
"Discharge for Cause. The Company may discharge Employee at any time for "Cause," which shall be limited to: Employee's material and
serious breach or neglect of Employee's responsibilities; willful violation or disregard of standards of conduct established by law; willful
violation or disregard of standards of conduct established by Company policy as may from time to time be communicated to Employee; fraud,
willful misconduct, misappropriation of funds or other dishonesty; conviction of a crime of moral turpitude; any misrepresentation made in this
Agreement; or any material breach by Employee of any provision of this Agreement (including, without limitation, acceptance of employment
with another company or performing work or providing advice to another company, as an employee, consultant or in any other similar capacity
while still an employee of the Company)."
7. Payments Upon Termination. Amendment of Section 10(a) of the Agreement.
Section 10(a) of the Agreement is deleted and the following is substituted in lieu thereof:
"(a) Discharge Without Cause, Resignation for Good Reason or Resignation Without Good Reason. If Employee is discharged without Cause,
resigns for Good Reason or resigns without Good Reason, other than following a Change in Control, Employee shall receive:
(i) his then current rate of base salary, less taxes and normal deductions, for a period of twelve (12) months, payable in equal installments in
accordance with the Company's regular payroll practices. To the extent Employee resigns without Good Reason, any severance payments shall
be offset by the annual base salary received by Employee during the period covered by the severance payment from any subsequent
employment;
(ii) continuation of the Company's contribution towards his Company group medical benefits for up to twelve (12) months or until Employee
becomes eligible for comparable benefits at a new employer;
(iii) after having completed at least three (3) months of employment in the Company's fiscal year, a pro-rata bonus for that year (based on the
number of days employed in the fiscal year) based on the Company's full year performance in accordance with Section 4(c) of the Agreement,
as amended by this First Amendment. The bonus, if any, will be paid as soon as practicable after the end of the fiscal year in which the
termination occurs.
The Employee's right to any payments or benefits provided under Section 10(a) of the Agreement, as amended by this First Amendment, shall
be contingent upon (i) execution by the Employee at or about the time of termination of his employment of a general release of claims
(including without limitation contractual, common law and statutory claims) in a form satisfactory to the Company in favor of the Company
and its officers, directors, executives and agents substantially; and
(ii) compliance by the Employee with all of the terms of this Agreement, as amended by this First Amendment, including without limitation
paragraphs 11 and 12 of the Agreement, as amended by this First Amendment."
-3-
8. Non-Competition and Confidentiality. Amendment of Section 12(a)(ii) of the Agreement.
(a) Section 12(a)(ii) of the Agreement is amended to set forth the following agreement between the Company and Employee as follows: The
phrase "After the cessation of his employment" is deleted.
(b) In all other respects, Section 12(a)(ii) of the Agreement shall remain in effect.
9. Defined Terms. Capitalized terms used but not defined herein shall have the meanings ascribed thereto in the Agreement.
10. Controlling Law. This First Amendment and all questions relating to its validity, interpretation, performance and enforcement (including,
without limitation, provisions concerning limitations of actions), shall be governed by and construed in accordance with the laws of the
Commonwealth of Pennsylvania, notwithstanding any conflict-of-laws doctrines of such state or any other jurisdiction to the contrary, and
without the aid of any canon, custom or rule of law requiring construction against the draftsman.
11. Execution in Counterparts. This First Amendment may be executed in any number of counterparts, each of which shall be deemed to be an
original against any party whose signature appears thereon, and all of which shall together constitute one and the same instrument. This First
Amendment shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the
parties hereto.
12. Effect of Amendment. Except as may be affected by this First Amendment, all of the provisions of the Agreement, as amended hereby,
shall continue in full force and effect. The provisions of this First Amendment shall not constitute a waiver or modification of any terms or
conditions of the Agreement other than as expressly set forth herein.
IN WITNESS WHEREOF, the parties hereto, intending to be legally bound, have duly executed and delivered, in Pennsylvania, this First
Amendment.
THE BON-TON STORES, INC.
/s/ Byron Bergren
----------------------------By: Byron Bergren
Chief Executive Officer
8/11/06
-------------------Date
EMPLOYEE
/s/ David Zant
----------------------------By: David Zant
8-10-06
-------------------Date
-4-
.
.
.
EXHIBIT 10.14
BON-TON DEFERRED COMPENSATION PLAN DOCUMENT
TABLE OF CONTENTS
Article
------1.
Purpose of the Plan......................................
Page
---1
2.
Definitions..............................................
1
3.
Participation............................................
2
4.
Deferrals and Company Contributions......................
3
5.
Maintenance of Accounts..................................
4
6.
Payment of Benefits......................................
5
7.
Amendment or Termination.................................
6
8.
General Provisions.......................................
7
ARTICLE 1. PURPOSE OF THE PLAN
This Plan has been authorized by the Board of Directors to be effective on and after July 1, 1994, and is intended to promote contributions by a
select group of management or highly compensated employees of the Company by providing such individuals with an opportunity to defer a
portion of compensation they may receive as base salary or as a bonus under a bonus program maintained by the Company. The Plan is
unfunded.
ARTICLE 2. DEFINITIONS
2.01
"ACCOUNT" shall mean the bookkeeping account maintained for each
Participant to record the amount of Base Salary and/or Bonus such
participant has elected to defer pursuant to Article 4, and the Company
contribution, if any and as provided in Section 4.03, all as adjusted
pursuant to Article 5.
2.02
"ADMINISTRATIVE COMMITTEE" shall mean the committee established by the HR
Compensation Committee with the responsibilities set forth in this Plan.
2.03
"AFFILIATED COMPANY" shall mean any company, corporation or business
directly or indirectly controlled by the Company, whether or not such
company, corporation or business participates in the Plan.
2.04
"BASE SALARY" shall mean the Participant's annual fixed compensation paid
periodically during the calendar year, including allowances but excluding
any Bonus or other form of special pay.
2.05
"BENEFICIARY" shall mean one or more beneficiaries or contingent
beneficiaries designated by a Participant pursuant to Section 6.06.
2.06
"BONUS" shall mean the amount, if any, of cash awarded to an employee of
the Company under the Company's performance bonus program, a "guaranteed"
performance bonus or other bonus approved by the HR Compensation
Committee. Excluded from the "bonus" determination shall include payments
designated for the purpose of retention, relocation or as a sign-on bonus.
2.07
"CHANGE OF CONTROL" shall be as defined in the 2000 Amended and Restated
Stock Option and Restricted Stock Plan of the Company, or any successor
plan thereof.
2.08
"COMPANY" shall mean Bon-Ton Department Stores, Inc., a Pennsylvania
corporation.
2.09
"COMPENSATION COMMITTEE" shall mean the Human Resources/Compensation
Committee of the Board of Directors of the Company.
2.10
"DEFERRAL AGREEMENT" shall mean the completed agreement, including any
amendments, attachments and appendices thereto, in such form approved by
the Plan Administrator, between an Eligible Executive and the Company,
under which the Eligible Executive agrees to defer Base Salary and/or a
Bonus under the Plan.
2.11
"EFFECTIVE DATE" shall mean July 1, 1994, the effective date of the Plan.
1
2.12
"ELIGIBLE EXECUTIVE" shall mean an employee of the Company designated as
eligible to participate in this Plan by the Compensation Committee.
2.13
"PARTICIPANT" shall mean, except as otherwise provided in Article 3, each
Eligible Executive who has executed a Deferral Agreement pursuant to the
requirements of Section 3.01.
2.14
"PLAN" shall mean the Deferred Compensation Plan for Bon-Ton Department
Stores, Inc. as set forth in this document, as it may be amended from time
to time.
2.15
"PLAN ADMINISTRATOR" shall mean the individual(s) appointed by the
Administrative Committee with the responsibilities set forth in this Plan.
2.16
"PLAN YEAR" shall mean the calendar year, except that the 1994 Plan Year
shall begin on the Effective Date and continue to the succeeding December
31.
2.17
"SAVINGS PLAN" shall mean Bon-Ton Stores, Inc. Retirement Contribution
Plan.
2.18
"VALUATION DATE" shall mean the last business day of each calendar quarter
following the Effective Date, or such other day as the Plan Administrator
may determine.
ARTICLE 3. PARTICIPATION
3.01
3.02
IN GENERAL
a.
An Eligible Executive shall become a Participant as of the date such
Eligible Executive first files a Deferral Agreement with the Plan
Administrator, provided however, such Deferral Agreement shall be
effective for purposes of deferring Base Salary or cash Bonus only
as provided in Article 4.
b.
The Deferral Agreement shall be in writing and be properly completed
upon a form approved by the Plan Administrator who shall be the sole
judge of the proper completion thereof. Such Deferral Agreement
shall provide, subject to the limitation specified in Section
4.02(a), for the deferral of a portion of Base Salary or all or any
portion of cash Bonus and for an investment election as provided in
Section 5.01. The Deferral Agreement shall include such other
provisions as the Administrative Committee deems appropriate.
TERMINATION OF PARTICIPATION; RE-EMPLOYMENT
a.
Participation shall cease upon a Participant's termination of
employment with the Company except to the extent otherwise provided
in Section 6.02.
b.
If a former Participant whose participation in the Plan ceased under
Section 3.02(a) is re-employed as an Eligible Executive, the former
Participant may again become a Participant in accordance with the
provisions of Section 3.01.
2
ARTICLE 4. DEFERRALS AND COMPANY CONTRIBUTIONS
4.01 FILING REQUIREMENTS
a. Annual Elections
1. Prior to the close of business on December 31 in any Plan Year, an Eligible Executive may elect, subject to the limits of Section 4.02(a)
below, to defer a portion of Base Salary that is otherwise earned and payable in the succeeding Plan Year or cash Bonus earned in the
succeeding Plan Year (and paid in the year following) by filing a Deferral Agreement with the Plan Administrator.
2. The Plan Administrator may designate an earlier election date. If December 31 does not fall on a business day, such filing must be made by
the close of business on the last prior business day.
3. If an employee becomes an Eligible Executive on or after January 1 in any Plan Year, he may elect to defer Base Salary or cash Bonus for
that year by filing a Deferral Agreement with the Plan Administrator prior to the close of business on the thirtieth business day following the
date he becomes an Eligible Executive; provided, however, that cash Bonus may be deferred only if the amount of Bonus for that Plan Year has
not already been determined by appropriate action of the Board of Directors and Base Salary may be deferred only to the extent it has not yet
become earned and payable.
4. Upon written notification to an Eligible Executive by the Plan Administrator, an election may be required in advance of the dates indicated
above, but may not be accepted by the Plan Administrator if delivered later than the dates indicated above.
5. Notwithstanding any other provision to the contrary, an election to defer any part of Base Salary payable in the 1994 Plan Year shall be
made within 30 days from the Effective Date and shall apply to Base Salary earned and payable after July 31, 1994.
b. A Participant's election to defer Base Salary or cash Bonus for any Plan Year shall become irrevocable on the last day the deferral of such
Base Salary or cash Bonus may be elected under Section 4.01(a). A Participant may revoke or change his election to defer Base Salary or cash
Bonus at any time prior to the date the election becomes irrevocable. Any such revocation or change shall be made in a form and manner
determined by the Plan Administrator.
c. Except as to a Participant who becomes an Eligible Employee on or after January 1 of the then current Plan Year, a Participant's Deferral
Agreement shall apply only with respect to Base Salary earned and payable in the Plan Year following the Plan Year in which the Deferral
Agreement is filed with the Plan Administrator under
Section 4.01(a). A Participant's Deferral Agreement shall only apply to cash Bonus earned in a full plan year after the Deferral Agreement is
filed with the Plan Administrator under Section
4.01(a). An Eligible Executive must file, in accordance with the provisions of Section 4.01(a), a new deferral Agreement for each Plan Year the
Eligible Executive desires to defer Base Salary or cash Bonus.
d. Notwithstanding anything in this Plan to the contrary, if an Eligible Executive
1. receives a withdrawal on account of hardship from any plan maintained by the Company which meets the requirements of
Section 401(k) of the Internal Revenue Code (or any successor thereto), and
2. is precluded from making contributions to such 401(k) plan for at least 6 months after receipt of the hardship withdrawal,
3
no amounts shall be deferred under this Plan pursuant to the Eligible Executive's Deferral Agreements until such time as the Eligible Executive
is again permitted to contribute to such 401(k) plan. Any Base Salary or cash Bonus payment which would have been deferred pursuant to a
Deferral Agreement but for the application of this Section 4.01(d) shall be paid to the Eligible Executive as if he had not entered into a Deferral
Agreement.
4.02 AMOUNT AND TIMING OF DEFERRAL
a. An Eligible Executive who is designated an Officer of the Company by the Compensation Committee may defer up to 20% of Base Salary,
provided the minimum deferral of Base Salary shall not be less than $5,000. Any Eligible Executive may defer up to 100% of cash Bonus,
provided the minimum deferral election of cash Bonus shall not be less than $1,000. Any deferral of Base Salary or cash Bonus shall, as to
amount, either be in whole percentages or in increments of $1,000. All deferrals must be made in full calendar years and must be deferred to
not earlier than the third January 1 succeeding the date the Base Salary or cash Bonus deferred would otherwise first be payable.
b. The Administrative Committee may establish such other maximum or minimum
limits on the amount of Base Salary or cash Bonus which may be deferred or
the timing of such deferral. Eligible Executives shall be given written
notice of any such limits at least ten business days prior to the date
they take effect.
4.03
AMOUNT OF COMPANY CONTRIBUTION
Each Participant's Account may be credited with an additional amount equal
to the difference between the amount of the contribution the Company would
have made to such participant for that Plan Year under Section 4(e) of the
Savings Plan but for the Participant's deferral of compensation under this
Plan and the amount actually contributed by the Company to such
Participant under Section 4(e) of the Savings Plan for that Plan Year. The
Company contribution pursuant to this Section 4.03 shall be credited to
such Participant's Account on the first day of the month following the
Company's contribution to Participant's Savings Plan.
4.04
CREDITING TO ACCOUNT
The amount of Base Salary or cash Bonus which a Participant has elected to
defer pursuant to Section 4.02 shall be credited to such Participant's
Account no later than the first business day of the first calendar month
following the date the Base Salary or cash Bonus would have been paid to
the Participant in the absence of a Deferral Agreement.
4.05
VESTING
A Participant shall at all times be 100% vested in his Account.
ARTICLE 5. MAINTENANCE OF ACCOUNTS
5.01
INTEREST ON ACCOUNTS
The Company shall credit the Accounts with interest computed as follows:
Each Participant shall elect in his Deferral Agreement to have the amounts
credited to his Account indexed to the Balanced Fund and/or the Bond
(Fixed Income) Fund offered under the Savings Plan, or the successor to
either under the Savings Plan, provided, however, that if the Participant
shall elect to have a portion indexed to each, such
4
apportionment must be in whole percentage increments. Such earnings and
losses shall be net of fund expenses.
The Participant may change his election to index to either the Balanced
Fund or the Bond Fund, as to the amounts then credited to his Account
and/or future deferrals, by filing an appropriate written notice with the
Plan Administrator pursuant to the same rules in effect concerning the
change of investment elections under the Savings Plan. If a Participant
fails to make an election under this Section 5.01, he shall be deemed to
have elected to have indexed his Account to the Bond Fund.
5.02
INDIVIDUAL ACCOUNTS
The Plan Administrator shall maintain, or cause to be maintained, records
showing the balance of each Participant's Account. On or about March 1 and
September 1 of each year, each Participant shall be furnished with a
statement setting forth the value of his Account.
5.03
VALUATION OF ACCOUNTS
a. The Plan Administrator shall value or cause to be valued each
Participant's Account at least quarterly. On each Valuation Date there
shall be allocated to the Account of each Participant the appropriate
amount determined in accordance with Section 5.01.
b. Whenever an event requires a determination of the value of a Participant's
Account, the value shall be computed as of the Valuation Date coincident
with, or immediately following, the date of the event.
ARTICLE 6. PAYMENT OF BENEFITS
6.01
COMMENCEMENT OF PAYMENT
Except as otherwise provided in this Article 6, a Participant's Account
shall be distributed in cash in a single sum as soon as practicable after
the Valuation Date coincident with or immediately following the earliest
of (a) the date(s) the Participant elects to have such Account paid to
him; provided, however, in no event shall any such amount be payable
within three years of the January 1 of the Plan Year during which such
compensation was deferred; (b) the date the employment of the Participant
by the Company is terminated; or (c) the date of a Change of Control of
the Company. Distributions are subject to pending regulations from the IRS
regarding code section 409A.
6.02
PAYMENT ON RETIREMENT
Notwithstanding the foregoing, if a Participant terminates employment due
to retirement, he may elect, in lieu of a single sum payment, to receive
distribution of his Account in annual installments over a period not to
exceed fifteen years, provided, however, any such election must be made at
least two years prior to the Participant's retirement date. Any such
election shall supersede any prior election as to payment of the Account.
If such election is not so made, a single sum payment shall be made. The
amount of each annual installment shall equal the balance in his Account
as of the Valuation Date coincident with or next preceding the date of
each payment, divided by the remaining number of installments payable. As
used in this Section 6.02, retirement shall mean normal retirement at age
65 or early retirement at not earlier than age 55 with five years of
continuous service as an Officer with the Company.
5
6.03
PAYMENT ON DEATH
Except with respect to payments made pursuant to Section 6.04, if a
Participant dies prior to receiving full payment of his Account, the
remaining amount in his Account shall be payable in cash in a single sum
to his Beneficiary as soon as practicable after the Valuation Date
coincident with or next following his death.
6.04
PAYMENT ON VOLUNTARY TERMINATION
If a Participant shall voluntarily terminate his employment with the
Company, the Administrative Committee may elect, in lieu of a single sum
payment, to pay the Account in annual installments over a period not to
exceed three years. The amount of each annual installment shall equal the
balance in his Account as of the Valuation Date coincident with or next
preceding the date of each payment divided by the remaining number of
installments payable.
6.05
HARDSHIP PAYMENTS
a. While employed by the Company, a Participant may, in the event of a severe
financial hardship, request a withdrawal from his Account. The request
shall be made in a time and manner determined by the Administrative
Committee, shall not be for a greater amount than the amount required to
meet the financial hardship, and shall be subject to approval by the
Administrative Committee, which approval shall be at the sole discretion
of the Administrative Committee.
b. For purposes of this Section 6.05, financial hardship shall include:
1. sudden or unexpected illness or accident of the Participant or of a dependent of the Participant;
2. loss of the Participant's property due to a casualty or other extraordinary circumstances arising as a result of events beyond the control of the
Participant;
3. any other extraordinary circumstances of the Participant if such circumstances would result in a present or impending critical financial need
which the Participant is unable to satisfy with funds reasonably available from other sources.
c. Except as otherwise provided in this Article 6, no portion of a
Participant's Account may be withdrawn prior to the date the Participant
elected in the Deferral Agreement.
6.06
DESIGNATION OF BENEFICIARY
A Participant may, in a time and manner determined by the Plan
Administrator, designate a Beneficiary (which may include the
Participant's estate) to receive any benefits which may be payable under
this Plan upon his death. If the Participant fails to designate a
Beneficiary, or if the Beneficiary fails to survive the Participant, such
benefits shall be paid to the Participant's estate. A Participant may
revoke or change any designation made under this Section 6.06 in a time
and manner determined by the Plan Administrator.
ARTICLE 7. AMENDMENT OR TERMINATION
7.01
RIGHT TO TERMINATE
The Company may, by action of the Compensation Committee, terminate this
Plan and the related Deferral Agreements at any time. In the event the
Plan and related Deferral Agreements are terminated, each Participant or
Beneficiary shall receive a single sum payment in cash equal to the
balance of his Account. The single sum payment shall be made as soon as
practicable following the date the Plan is terminated and
6
shall be in lieu of any other benefit which may be payable to the
Participant or Beneficiary under this Plan.
7.02
RIGHT TO AMEND
The Company may, by action of the Compensation Committee, amend this Plan
and the related Deferral Agreements in any way on 30 days prior notice to
the Participants. If any amendment to this Plan or to the Deferral
Agreements shall adversely affect the rights of a Participant, such
Participant must consent in writing to such amendment prior to its
effective date. If such Participant does not consent to the amendment, the
Plan and related Deferral Agreements shall be deemed terminated with
respect to such Participant and he shall receive a single sum payment of
his Account in cash as soon thereafter as is practicable. Notwithstanding
the foregoing, a change in any investment index options under Section
5.01, or the imposition of additional limits upon future deferral
elections shall not be deemed to adversely affect any Participant's
rights.
ARTICLE 8. GENERAL PROVISIONS
8.01
ADMINISTRATION
a. This Plan shall be administered by the Plan Administrator appointed by the
Administrative Committee. The Administrative Committee shall establish
rules for the administration of the Plan and shall have discretionary
authority to interpret and construe the Plan. The Plan Administrator shall
take any other action necessary to the proper operation of the Plan.
b. Prior to paying any benefit under this Plan, the Plan Administrator may
require the Participant or Beneficiary to provide such information or
material as the Plan Administrator, in his sole discretion, shall deem
necessary to make any determination he may be required to make under this
Plan. The Plan Administrator may withhold payment of any benefit under
this Plan until he receives all such information and material and is
reasonably satisfied of its accuracy.
c. Any disputes between a Participant or Beneficiary and the Plan
Administrator shall be subject to resolution by determination of the
Administrative Committee.
d. All acts and decisions of the Administrative Committee shall be final and
binding upon all Participants, former Participants, Beneficiaries, and
employees of the Company.
8.02
NO FUNDING
Nothing contained in this Plan or in a Deferral Agreement shall require
the Company to segregate any monies from its general funds, or to create
any trusts, or to make any special deposits for any amounts to be paid to
any Participant, former Participant or Beneficiary. Neither a Participant,
former Participant, Beneficiary, or their heirs or personal
representatives, shall have any right, title or interest in or to any
funds of the Company on account of this Plan or on account of having
completed a Deferral Agreement.
8.03
NO CONTRACT OF EMPLOYMENT
The existence of this Plan or of a Deferral Agreement does not constitute
a contract for continued employment between an Eligible Executive or a
Participant and the Company. Except as otherwise limited by the terms of
any valid employment contract or agreement entered into between the
Company and an Eligible Executive or Participant, the Company reserves the
right to modify an Eligible Executive's or Participant's remuneration and
to terminate an Eligible Executive or a Participant for any reason and at
any
7
time, not with standing the existence of this Plan or of a Deferral
Agreement.
8.04
WITHHOLDING TAXES
All payments under this Plan shall be net of an amount sufficient to
satisfy any federal, state or local withholding tax requirements.
8.05
NONALIENATION
The right to receive any benefit under this Plan may not be transferred,
assigned, pledged or encumbered by a Participant, former Participant, or
Beneficiary in any manner and any attempt to do so shall be void. No such
benefit shall be subject to garnishment, attachment or other legal or
equitable process without the prior written consent of the Company.
8.06
CLAIMS PROCEDURE
The Plan Administrator shall provide adequate notice in writing to any
Participant, former Participant or Beneficiary whose claim for a
withdrawal or payment under this Plan has been denied, setting forth the
specific reasons for such denial. A reasonable opportunity shall be
afforded to any such Participant, former Participant or Beneficiary for a
full and fair review by the Administrative Committee of a decision denying
the claim. The Administrative Committee's decision on any such review
shall be final and binding on the Participant, former Participant or
Beneficiary and all other interested persons.
8.07
FACILITY OF PAYMENT
In the event the Administrative Committee shall find that a Participant or
his Beneficiary is unable to care for his affairs because of illness or
accident, the Administrative Committee may direct that any benefit payment
due, unless claim shall have been made therefore by a duly appointed legal
representative, be paid to his spouse, a child, a parent or other blood
relative, or to a person with whom he resides, and any such payment so
made shall be a complete discharge of the liabilities of the Plan and/or
the Company therefore.
8.08
LIMITATION OF LIABILITY
The Company, the members of the Compensation Committee and of the
Administrative Committee, the Plan Administrator, and any officer,
employee or agent of the Company shall not incur any liability
individually or on behalf of any other individuals or on behalf of the
Company for any act or failure to act made in good faith in relation to
this Plan.
8.09
INDEMNIFICATION
The members of the Compensation Committee and of the Administrative
Committee, the Plan Administrator, and the officers, employees and agents
of the Company shall, unless prohibited by any applicable law, be
indemnified by the Company against any and all liabilities arising by
reason of any act, or failure to act, in relation to the Plan including,
without limitation, expenses reasonably incurred in the defense of any
claim relating to the Plan, amounts paid in any compromise or settlement
relating to the Plan and any civil penalty or excise tax imposed by any
applicable statute, if:
a. the act or failure to act shall have occurred
1. in the course of the person's service as an officer, employee or agent of the Company or as a member of the Compensation Committee or of
the Administrative Committee or as the Plan Administrator, or
2. in connection with a service provided with or without charge to the Plan or to the Participants or
8
Beneficiaries of the Plan, if such service was requested by the Compensation Committee or the Administrative Committee or the Plan
Administrator, and
b. the act or failure to act was made in good faith. This determination shall be made by the Company and shall be conclusive.
The foregoing indemnification shall be from the assets of the Company.
However, the Company's obligation hereunder shall be offset to the extent
of any otherwise applicable insurance coverage under a policy maintained
by the Company or any other person, or other source of indemnification.
8.10
PAYMENT OF EXPENSES
All administrative expenses of the Plan and all benefits under the Plan
shall be paid from the general assets of the Company.
8.11
CONSTRUCTION
a. The Plan is intended to constitute an unfunded deferred compensation
arrangement for a select group of management or highly compensated
personnel. All rights hereunder shall be governed by and construed in
accordance with the Employee Retirement Income Security Act of 1974, as
amended, and the laws of the Commonwealth of Pennsylvania.
b. The masculine pronoun shall mean the feminine wherever appropriate.
c. The captions inserted in the Plan are inserted as a matter of convenience and shall not affect the construction of the Plan.
IN WITNESS WHEREOF, Bon-Ton Department Stores, Inc. has caused this Plan to be amended this 15th day of March, 2005.
BON-TON DEPARTMENT STORES, INC.
9
EXHIBIT 10.16
CHANGE OF CONTROL AND MATERIAL TRANSACTION SEVERANCE PLAN FOR
CERTAIN EMPLOYEES OF ACQUIRED EMPLOYERS
On April 3, 2006, the Human Resources and Compensation Committee (the "HRCC") of the Board of Directors (the "Board") of The Bon-Ton
Stores, Inc. (the "Company") adopted a Change of Control and Material Transaction Severance Plan for Certain Employees of Acquired
Employers (the "Severance Plan"), to protect certain former participants in the Saks Incorporated Change of Control and Material Transaction
Severance Plan (the "Saks Plan") as required under the terms of the Purchase Agreement between Saks Incorporated and the Company dated
October 24, 2005 and amended on February 16, 2006 (the "Purchase Agreement"). The Severance Plan was effective as of 12:01 a.m., Chicago
time, on March 5, 2006. The new employees of the Company who are former employees of Saks Incorporated and were participants under the
Saks Plan are eligible to participate in the Severance Plan if they became an employee of the Company on or shortly after the date the
Severance Plan became effective. The Severance Plan provides for severance benefits if (1) a participant's employment is terminated by the
Company without Cause (as defined in the Severance Plan) and as a result of, and within two years after, a Change of Control or (2) a
participant terminates his or her employment with the Company for Good Reason (as defined in the Severance Plan) within two years after a
Change of Control. For purposes of the Severance Plan, "Change of Control" means consummation of the transactions contemplated by the
Purchase Agreement. The severance benefit is calculated based on the title a participant held with Saks Incorporated immediately prior to the
effective date of the Severance Plan, as indicated in the following chart:
SCHEDULE OF BENEFITS UNDER THE SEVERANCE PLAN
POSITION OF EMPLOYMENT IMMEDIATELY PRIOR
TO EFFECTIVE DATE OF THE SEVERANCE PLAN
(GROUP OF DESIGNATED EXECUTIVES)
---------------------------------------Division Presidents and Corporate Executive Vice
Presidents and Senior Vice Presidents
SEVERANCE PAYMENT IN ACCORDANCE WITH
SECTION 3.C OF THE SEVERANCE PLAN
-----------------------------------104 weeks
Division Executive Vice Presidents and Senior Vice
Presidents
78 weeks
Corporate Vice Presidents and Division DMMs
52 weeks
Director-level associates and Buyers
26 weeks
Other exempt associates
(1) 2 weeks plus (2) 1 week per
completed year of service measured
from employment anniversary date to
employment anniversary date up to a
maximum of 12 weeks. For example,
the total severance payment for
associates with 5 completed years of
service would be 7 weeks of base
salary and the total severance
payment for associates with 12 or
more completed years of service
would be 14 weeks of base salary.
The Severance Plan is intended to qualify as an unfunded welfare plan under Section 3(1) of the Employee Retirement Income Security Act of
1974, as amended.
EXHIBIT 10.22(c)
SECOND AMENDMENT TO THE CREDIT CARD PROGRAM AGREEMENT
This Second Amendment to the Credit Card Program Agreement ("Second Amendment") is made and entered into as of the 15th day of
December, 2006 ("Amendment Effective Date") by and between HSBC Bank Nevada, National Association ("HSBC"), and The Bon-Ton
Stores, Inc. ("Bon-Ton") to that certain Credit Card Program Agreement, dated as of June 20, 2005 ("Agreement"), as amended by the First
Amendment to the Credit Card Program Agreement dated effective as of March 1, 2006.
WHEREAS, the parties recognize that Bon-Ton has purchased from Belk, Inc. ("Belk") four (4) Parisian-branded retail store locations ("the
Parisian Stores");
WHEREAS, the parties recognize that, in connection with the purchase of the Parisian Stores, that HSBC has agreed to purchase from GE
Money Bank ("GE") certain private label credit card accounts associated with the Parisian Stores ("the Parisian Accounts"); and,
WHEREAS, the parties desire to further amend the Agreement to reflect their agreement as to the incorporation of the Parisian Accounts into
the Program.
NOW THEREFORE, in consideration of the mutual promises, covenants and agreements set forth below and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, HSBC and Bon-Ton do hereby agree as follows:
1. HSBC will purchase the Parisian Accounts from GE pursuant to a Purchase and Sale Agreement to be executed concurrently with this
Second Amendment; further, the parties agree that the Parisian Accounts will be considered "Accounts" as defined in the Agreement, with the
exceptions as agreed to in
Section 3 of this Second Amendment.
2. The parties agree that during the period of time beginning with the Amendment Effective Date and ending at 11:59 p.m. on February 3,
2007, the Parisian Accounts will be serviced pursuant to an agreement that HSBC Private Label Corporation (f/k/a Household Corporation) an
Affiliate of HSBC, has with Jackson Office Properties, Inc. (f/k/a North Park Fixtures, Inc., the successor to McRae's, Inc.), dated April 15,
2003 ("the Servicing Agreement"). Beginning on February 4, 2007, the Parisian Accounts will be serviced by HSBC Private Label
Corporation.
3. The parties agree to the provisions contained in Schedule 3 to this Second Amendment.
To the extent the provisions of this Second Amendment are inconsistent with the Agreement, this Second Amendment shall govern.
This Second Amendment supersedes all prior communications and shall be binding upon and inure to the benefit of the parties, their respective
successors and assigns.
All capitalized terms not otherwise defined herein shall have the same meaning afforded them in the Agreement.
Except as otherwise modified herein, the terms and conditions of the Agreement remain in full force and effect.
In witness whereof, the parties hereby execute this Second Amendment by their authorized representatives.
The Bon-Ton Stores, Inc.
HSBC Bank Nevada, National Association
By: /s/ H. Todd Dissinger
-----------------------H. Todd Dissinger
Vice President and Secretary
By: /s/ Asim Majeed
-------------------Asim Majeed
Executive Vice President
1
EXHIBIT 10.28 (c)
AMENDMENT NO. 2 TO
AMENDED AND RESTATED TRANSITION SERVICES AGREEMENT
(SELLER AS SERVICE PROVIDER)
This AMENDMENT NO. 2 TO AMENDED AND RESTATED TRANSITION SERVICES
AGREEMENT (SELLER AS SERVICE PROVIDER) (this "Amendment"), dated as of December 20, 2006, is made by and between Saks
Incorporated, a Tennessee corporation ("Seller"), and The Bon-Ton Stores, Inc., a Pennsylvania corporation ("Buyer").
RECITALS
WHEREAS, Seller and Buyer are parties to that certain Amended and Restated Transition Services Agreement (Seller as Service Provider),
dated as of March 10, 2006 and effective as of March 5, 2006, as amended by that certain Amendment No. 1, dated as of June 5, 2006 (as
amended, the "Agreement"); and
WHEREAS, the parties desire to amend the Agreement to extend the term during which certain Services are provided by Seller or its Affiliates
to Buyer and its Affiliates (with respect to the Business) and terminate or reduce other Services;
NOW, THEREFORE, the parties hereto agree as follows:
1. Termination of Procurement and Sign Making Service. Pursuant to
Section 8 of the Agreement, Buyer hereby terminates the Procurement and Sign Making Service effective as of October 4, 2006. Buyer
acknowledges and agrees that, pursuant to Section 7(d) of the Agreement, it shall remain liable for (i) the payment of fees and expenses
accruing for the period prior to termination even though such fees may not become due until after termination and (ii) 50% of the monthly fees
associated with the Procurement and Sign Making Service (in the amount of $28,382 per month) from October 5, 2006 through March 4, 2007.
2. Amendment and Restatement of Annex A. The parties acknowledge and agree that Annex A to the Agreement shall be amended and restated
in its entirety as set forth in Schedule I hereto (and, where applicable, Annex B to the Agreement shall be deemed to be modified by the
amendments to Annex A).
3. Waiver of Extension and Termination Rights With Respect to Certain Services. In consideration for the reductions in services and monthly
fees for Services as set forth in Section 2 of this Amendment, Buyer acknowledges and agrees that, notwithstanding Sections 7 and 8 of the
Agreement, except as expressly set forth in this Amendment, Buyer shall have no further right to renew or terminate early any of the following
Services: (a) Loss Prevention, (b) Logistics, (c) Accounting, (d) Bankcard Processing, (e) Financial Planning and Internal Reporting
(Hyperion), (f) Store Planning, Construction, Facilities Maintenance and Energy, (g) Information Technology/ Telecommunications, (h) Real
Estate, and (i) Procurement and Sign Making.
4. Capitalized Terms. Terms that are used but not defined herein shall have the meanings ascribed to such terms in the Agreement.
5. Execution in Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be considered an original
instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have
been signed by each of the parties hereto and delivered to each of the other parties hereto.
[Signature Page Follows]
2
IN WITNESS WHEREOF, each of the parties has caused this Amendment to be duly executed as of the date set forth above.
SAKS INCORPORATED
By:
/s/ Charles J. Hansen
----------------------------------Name: Charles J. Hansen
Title: Executive Vice President and
General Counsel
THE BON-TON STORES, INC.
By:
/s/ Keith E. Plowman
----------------------------------Name: Keith E. Plowman
Title: EVP & CFO
Signature Page to Amendment No. 2 to Amended and Restated Transition Services Agreement (Seller as Service Provider)
EXHIBIT 10.29(a)
CARSON PIRIE SCOTT & CO.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
As Adopted Effective February 1, 1990 (and including amendments through ____________________________, 1996)
CARSON PIRIE SCOTT & CO.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
As Adopted Effective February 1, 1990
(and including amendments through October 4, 1994)
This Plan, originally effective as of February 1, 1990, was adopted by P.A. Bergner & Co., the predecessor to Carson Pirie Scott & Co., as an
unfunded plan for the purpose of providing supplemental retirement benefits to a select group of management or highly compensated
employees.
The Plan has been subsequently amended to clarify the Plan's vesting formula, to reflect the sponsor's corporate reorganization and to address
the effect of a change in control. Such amendments, through October 4, 1994, are hereby reflected in this restated document.
CARSON PIRIE SCOTT & CO.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
As Adopted Effective February 1, 1990
(and including amendments through October 4, 1994)
TABLE OF CONTENTS
PAGE
---1
ARTICLE 1
-
DEFINITIONS
ARTICLE 2
-
ELIGIBILITY AND PARTICIPATION
6
2.1.
Eligibility
6
2.2.
Participation
6
2.3.
Re-Employed Participants
6
2.4.
Termination of Participation
7
VESTING AND FORFEITURES
8
3.1.
Vesting
8
3.2.
Forfeiture Upon Death
8
3.3.
Other Forfeitures
9
3.4.
Non-Competition
9
ARTICLE 3
ARTICLE 4
-
RETIREMENT BENEFITS
11
4.1.
-
Accrued Benefit
11
4.2.
Time of Payment
12
4.3.
Form of Payment
12
4.4.
Death Benefit
13
4.5.
Optional Benefit Forms
13
4.6.
Simultaneous Death
14
4.7.
Designation of Beneficiary
14
ARTICLE 5
CLAIMS
15
5.1.
Claims Procedure
15
5.2.
Claims Review Procedure
15
ARTICLE 6
-
COMMITTEES
17
6.1.
Quorum
17
6.2.
Duties
17
6.3.
Binding Authority
18
6.4.
Exculpation
18
6.5.
Indemnification
19
6.6.
Compensation
19
6.7.
Information
19
6.8.
Self-interest
20
GENERAL PROVISIONS
21
7.1.
Non-Property Interest
21
7.2.
Disclosure
21
7.3.
Other Rights
21
7.4.
Amendment or Termination
22
7.5.
Severability
22
7.6.
No Employment Rights
22
7.7.
Incapacity
23
7.8.
Absence of Security Interest
23
7.9.
Transferability of Rights
23
ARTICLE 7
-
-
7.10. Governing Law
ARTICLE 8
-
24
CHANGE IN CONTROL
25
8.1
Effect of Change in Control on Vesting
25
8.2
Effect of Change in Control on Distributions
25
8.3.
Change in Control
26
ii
ARTICLE 1
DEFINITIONS
The following words and phrases as used herein shall have the following meanings, unless a different meaning is required by the context:
1.1. "ACCRUED BENEFIT" means, with respect to each Participant, the amount determined in accordance with Section 4.1.
1.2. "ACTUARIAL ASSUMPTIONS" means the actuarial assumptions established from time to time by the Retirement Plan Committee in
accordance with Section
6.2. Initially, such actuarial assumptions shall be based or the 1983 Group Annuity Mortality Table and an 8% annual interest rate.
1.3. "AVERAGE COMPENSATION" means, with respect to each Participant, the average of such Participant's Compensation based on any
five calendar years of the Company (whether or not consecutive) out of such Participant's last ten years of service as an Eligible Employee in
which such Participant earned the highest amount of Compensation.
1.4. "CAUSE" means any of the following:
(i) fraud, embezzlement, theft or dishonesty against the Company or any of its subsidiaries or affiliates or the Board of Directors of the
Company;
(ii) any felony or misdemeanor involving moral turpitude for which a Participant is convicted or pleads nolo contendere or which, in the
reasonable opinion of the
-1-
Board of Directors of the Company, may cause embarrassment to the Company or any of its subsidiaries or affiliates;
or
(iii) any failure to follow reasonable directions or instructions of the Chief Executive Officer or Board of Directors of the Company or a breach
of the Participant's material obligations under any employment agreement with the Company, and such failure or breach shall have continued
for a period of 30 days after receipt of written notice thereof from the Chief Executive Officer or Board of Directors of the Company.
1.5. "CODE" means the Internal Revenue Code of 1986, amended from time to time.
1.6. "COMPANY" means Carson Pirie Scott & Co., and its successors and assigns.
1.7. "COMPENSATION" means, with respect to any Participant during a calendar year, the base salary plus regular annual bonuses awarded
under the Carson Pirie Scott & Co. Executive Bonus Plan, if any, paid to such Participant for service as an Eligible Employee during such
calendar year, including salary deferral contributions made in accordance with
Section 401(k) of the Code and deferrals to the Carson Pirie Scott & Co. Deferred Compensation Plan, but excluding any other compensation
(including, but not limited to, amounts payable under the P. A. Bergner & Co. Incentive Compensation Plan, the Carson Pirie Scott & Co. 1993
Stock Incentive Plan, the Carson Pirie Scott & Co.
-2-
Long-Term Incentive Plan, and any similar long-term incentive plan or incentive compensation plan, any special bonuses or any non-cash
compensation, and any severance payments). Compensation paid to Participant for service as an Eligible Employee for less than a full calendar
year shall not be annualized.
1.8. "COMPENSATION COMMITTEE" means the Compensation Committee of the Board of Directors of the Company.
1.9. "EC BENEFIT" shall have the meaning set forth in Section 4.1.
1.10. "ELIGIBLE EMPLOYEE" MEANS any person who is an Employee and is eligible to participate in the Plan on or after February 1, 1990
in accordance with the provisions of Article II, except that any Employee with an individual supplemental retirement income arrangement with
the Company or any of its subsidiaries or affiliates shall be eligible only to the extent provided in writing under such arrangement or other
agreement with the Company.
1.11. "EMPLOYEE" means any person employed by the Company or any of its subsidiaries or affiliates other than as a director, consultant or
independent contractor, and any other person who receives severance pay from the Company and is entitled to be treated as an employee in
accordance with an employment agreement.
1.12. "EMPLOYERS" means the Company and any of its subsidiaries or affiliates participating in the Plan pursuant to a
-3-
written designation of the Board of Directors of the Company.
1.13. "EXECUTIVE COMMITTEE" means the Executive Committee of the Company, the members of which are appointed from time to time
by the Chief Executive Officer of the Company subject to written confirmation by the Compensation Committee or Board of Directors of the
Company.
1.14. "OFFSETS" shall have the meaning set forth in Section 4.1.
1.15. "PARTICIPANT" means any Eligible Employee who has received a written notice of his or her participation in the Plan or any former
Eligible Employee who is entitled to benefits hereunder.
1.16. "PLAN" means the Carson Pirie Scott & Co. Supplemental Executive Retirement Plan, as set forth herein and as amended from time to
time.
1.17. "PLAN YEAR" means the twelve-month period commencing on February 1 of each year, beginning with February 1, 1990.
1.18. "RETIREMENT PLAN COMMITTEE" means the Retirement Plan Committee of the Company, the members of which are appointed
from time to time by the Board of Directors of the Company.
1.19. "SEC BENEFIT" shall have the meaning set forth in Section 4.1.
1.20. "SENIOR EXECUTIVE COMMITTEE" means the Senior Executive Committee of the Company, the members of which are appointed
from time to time by the Chief Executive Officer of the Company, subject to written confirmation by the
-4-
Compensation Committee or the Board of Directors of the Company.
1.21. "START-UP BENEFIT" means the initial amount, if any, of a Participant's Accrued Benefit as may be determined by the Compensation
Committee in its sole discretion and set forth in a written notice of participation provided to the Participant upon his or her admission as a
Participant in the Plan.
1.22. "TOTAL DISABILITY" means any permanent mental or physical condition which
(i) prevents a Participant from reasonably discharging the duties of his or her position, (ii) is attested to in writing from time to time by a
physician selected by the Company and reasonably acceptable to the Participant, and (iii) has continued for at least 6 consecutive months or for
a period aggregating 6 months in any period of 18 consecutive months for the same or related condition.
1.23. "YEAR OF SERVICE" means, with respect to each Participant, each twelve-month period of service as an Employee without duplication.
Periods of service of fewer than twelve months shall be disregarded.
1.24. "VESTED ACCRUED BENEFIT" means, as of any determination date, the vested portion of a Participant's Accrued Benefit determined
in accordance with Article 3 and the actuarial assumptions in effect on the date of the Participant's termination of his or her status as an
Employee.
-5-
ARTICLE 2
ELIGIBILITY AND PARTICIPATION
2.1. Eligibility. Each Employee who is a member of the Senior Executive Committee or Executive Committee shall be eligible to participate in
the Plan, subject to written approval of such eligibility and participation by the Compensation Committee in its sole discretion. In addition, the
Chief Executive Officer of the Company may from time to time submit names of Employees to the Compensation Committee for its approval
of such Employees' participation in the Plan, which approval shall be at the sole discretion of the Compensation Committee.
2.2. Participation. The Compensation Committee shall notify each Eligible Employee in writing of his or her eligibility to participate in the
Plan and, in the sole discretion of the Compensation Committee, of any Start-Up Benefit granted to such Eligible Employee. Eligible
Employees shall not become Participants until they have delivered to the Compensation Committee their written acceptance of the terms and
conditions of the Plan and of any additional terms and conditions of their accrual of benefits pursuant to Article 4.
2.3. Re-Employed Participants. Any former Participant who has forfeited all or any part of his or her Accrued Benefit by reason of a
termination of status as an Employee prior to age 55 and who is subsequently re-employed as an Employee
-6-
on a substantially full-time basis shall be eligible to participate in the Plan in accordance with Sections 2.1 and 2.2, except that, unless
otherwise agreed to in writing by the Compensation Committee, his or her prior Accrued Benefit shall remain forfeited and not be restored until
the Participant has completed 5 Years of Service as an Eligible Employee following such re-employment. Any former Participant who
terminates his or her status as an Employee on or after attaining age 55 shall be eligible to participate in the Plan upon re-employment as an
Eligible Employee on a substantially full-time basis, but payment of such Participant's benefit under the Plan shall be suspended during such
re-employment.
2.4. Termination of Participation. The Compensation Committee reserves the right, in its sole discretion, to suspend or terminate at any time
any Participant's participation in all or any portion of the Plan by giving written notice thereof to the Participant, except that in no event shall
such suspension or termination reduce the Vested Accrued Benefit of such Participant. A notice of suspension or termination of participation
may relate to, but need not be limited to, a Participant's eligibility for benefit accrual, vesting or redetermination of Average Compensation, or
all of the above.
-7-
ARTICLE 3
VESTING AND FORFEITURES
3.1. Vesting. No Participant (other than members of the Senior Executive Committee on January 1, 1991) shall become vested under the Plan
with respect to any Accrued Benefit prior to attaining age 55 while an Employee. Subject to the other provisions of this Article and Section 2.4,
a Participant who has attained age 55 while an Employee and members of the Senior Executive Committee on January 1, 1991, shall become
vested under this Plan with respect to his or her Accrued Benefit in accordance with the vesting schedule set forth below:
Vested
Percentage
---------0%
50%
60%
70%
80%
90%
100%
Years of Service
---------------less than 5
5
6
7
8
9
10 or more
In addition, a Participant shall become vested under the Plan, regardless of Years of Service, (i) 100% upon such Participant's incurrence of a
Total Disability while an Employee or (ii) in accordance with the terms of any employment agreement between such Participant and the
Company.
3.2. Forfeiture Upon Death. Notwithstanding any other provision of the Plan, a Participant shall forfeit his or her Vested Accrued Benefit, in its
entirety, upon the
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Participant's death, unless the Participant has terminated service as an Employee prior to his or her death and has elected to receive payment
under the Plan in a form providing a survivor benefit, in which event such survivor benefit shall be paid in accordance with its terms.
3.3. Other Forfeitures. A Participant's Vested Accrued Benefit shall, to the extent not already paid, be forfeited in its entirety upon the
Participant's termination of his or her status as an Employee for Cause or upon his or her breach of the provisions of Section 3.4. In addition, a
Participant's Accrued Benefit, to the extent not vested in accordance with Section 3.1, shall be forfeited in its entirety upon the Participant's
termination of service (other than for Total Disability) as an Employee prior to age 55.
3.4. Non-Competition. The payment of benefits defined in Article 4 to any Participant shall cease and, to the maximum extent permitted by
law, all unpaid amounts shall be forfeited if, (i) the Participant uses or discloses to any third person any material trade secret or other material
confidential information of the Company or its subsidiaries or affiliates, or (ii) within eighteen months following the Participant's termination
of employment with the Company or any of its subsidiaries or affiliates before attaining age 62, the Participant competes, directly or indirectly,
with any business of the Company or any of its subsidiaries or affiliates in which the
-9-
Participant was engaged in at the time of such termination of employment (the "Former Business Activity"), unless such competition occurs
more than 25 miles from any location of the Former Business Activity in existence at the time of such termination or the Participant obtains the
prior written consent of the Compensation Committee. This Section will be applicable to competition as an investor, employee, consultant,
officer or director; provided that nothing in this Section 3.4 shall prevent any such Participant's investment in the securities of any company so
long as he does not own, directly or indirectly, more than 5% of the voting stock of such company.
-10-
ARTICLE 4
RETIREMENT BENEFITS
4.1. Accrued Benefit. The Accrued Benefit of a Participant as of any determination date shall be stated in the form of a single life annuity for
the Participant, commencing as of the date the Participant attains age 62 or, if later, the determination date (using the actuarial assumptions in
effect on such date), and shall be for an amount equal to the sum of the Participant's EC Benefit plus SEC Benefit (which sum shall not be less
than the Participant's Start-up Benefit or greater than 40% of the Participant's Average Compensation), reduced by the Offsets, further
described below:
EC Benefit. A Participant's EC Benefit is the product of (a) .243% (.00243), (b) the Participant's Average Compensation, and (c) the number of
the Participant's calendar month of service as a member of the Executive Committee and not of the Senior Executive Committee; provided that
in no event shall such product exceed 35% of the Participant's Average Compensation.
SEC Benefit. A Participant's SEC Benefit is the product of (a) .278% (.00278), (b) the Participant's Average Compensation, and (c) the number
of the Participant's calendar months of service as a member of the Senior Executive Committee; provided that in no event shall such product
exceed 40% of the Participant's Average Compensation.
Offsets. A Participant's Offsets are as follows: (i) The value of any benefit payable under any defined benefit plan of the Company or any of its
subsidiaries or affiliates, plus (ii) the value of any vested benefit under any defined benefit plan or non-qualified supplemental retirement plan
with respect to any business acquired by the Company or any of its subsidiaries or affiliates that has accrued to the Participant prior to the date
of such
-11-
acquisition, plus (iii) 100% of the Participant's Primary Social Security Benefit, plus (iv) the value of any other retirement benefit provided by
any retirement plan maintained by the Company or any of its subsidiaries or affiliates other than benefits under a 401(k) plan, the Carson Pirie
Scott & Co. Deferred Compensation Plan, and the P.A. Bergner & Co. Incentive Compensation Plan.
A Participant who attains age 62 while an Employee shall not cease to accrue further benefits under the Plan unless the Participant has reached
the maximum benefit limit set forth in Section 4.1. If the Participant accrues a further benefit after attaining age 62, the Participant's Accrued
Benefit shall be determined as of the date of the last such accrual.
4.2. Time of Payment. A Participant shall be entitled to payment of the vested portion of his or her Accrued Benefit commencing upon the
Participant's termination of his or her status as an Employee on or after attaining age 62; provided, however, that the Retirement Plan
Committee in its discretion may, at the Participant's written request, accelerate or defer the commencement of payment to the date requested by
the Participant. If a Participant becomes re-employed as an Employee on a substantially full-time basis after payment has commenced,
payments under the Plan shall be suspended until the Participant terminates such reemployment.
4.3. Form of Payment. Unless an optional form of benefit is elected by a Participant in accordance with Section 4.4, a Participant's Vested
Accrued Benefit shall be payable in the form of an annuity for the life of the Participant in
-12-
accordance with the payroll practices of the Company for its executive officers. Actuarial principles adopted from time to time by the
Retirement Plan Committee shall be used to determine the amount of each periodic payment and of the optional forms of payment. The amount
of benefit under the Plan that would otherwise be payable to a Participant at age 62 shall be actuarially reduced, in accordance with the
Actuarial Assumptions, if it commences to be paid prior to the Participant's 62nd birthday. If the commencement of payment of a Participant's
benefit is deferred by the Retirement Plan Committee pursuant to Section 4.2 (other than by reason of re-employment) beyond the Participant's
62nd birthday, such benefit shall be actuarially increased in accordance with the Actuarial Assumptions.
4.4. Death Benefit. A death benefit shall be payable to the designated beneficiary of a Participant upon such Participant's death only if an
optional form of benefit providing for a survivor benefit is selected by the Participant. Such death benefit shall be payable only if such
Participant's death occurs at a time he is receiving benefits under the Plan under Section 4.2 (or was receiving benefits but had such benefits
suspended as a result of reemployment in accordance with Section 4.2).
4.5. Optional Benefit Forms. When a Participant who is entitled to a Vested Accrued Benefit terminates service as an Employee, the Participant
may elect an optional form of
-13-
payment (other than a lump sum) as permitted by the Retirement Plan Committee at the time of such termination. All optional forms of
payment shall be actuarially equivalent to the normal form of payment expressed in Section 4.3. The Retirement Plan Committee may, in its
sole discretion, select the optional forms of payment permitted under the Plan except such optional forms shall always include (i) a joint and
50% survivor annuity and (ii) a joint and 100% survivor annuity. The Retirement Plan Committee, in its sole discretion, may prepay, in
accordance with reasonable actuarial assumptions adopted from time to time by the Retirement Plan Committee, all or any portion of a
Participant's Vested Accrued Benefit without penalty.
4.6. Simultaneous Death. In the event of the simultaneous death of a Participant and his or her designated beneficiary, it shall be presumed for
purposes of this Article that the beneficiary of the Participant predeceased the Participant.
4.7. Designation of Beneficiary. A Participant who elects an optional form of benefit providing for a survivor benefit in the event of the
Participant's death shall designate in writing one or more beneficiaries to receive such survivor benefit. Any such designation shall be
irrevocable once payments have commenced.
-14-
ARTICLE 5
CLAIMS
5.1. Claims Procedure. If any Participant or his or her designated beneficiary has a claim for benefits which is not being paid, such claimant
may file with the Retirement Plan Committee a written claim setting forth the amount and nature of the claim, supporting facts, and the
claimant's address. The Retirement Plan Committee shall notify each claimant of its decision in writing by registered or certified mail within 60
days after its receipt of a claim or, under special circumstances, within 120 days after its receipt of a claim. If a claim is denied, the written
notice of denial shall set forth the reasons for such denial, refer to pertinent Plan provisions on which the denial is based, describe any
additional material or information necessary for the claimant to realize the claim, and explain the claim review procedure under the Plan.
5.2. Claims Review Procedure. A claimant whose claim has been denied or such claimant's duly authorized representative may file, within 60
days after notice of such denial is received by the claimant, a written request for review of such claim by the Compensation Committee. If a
request is so filed, the Compensation Committee shall review the claim and notify the claimant in writing of its decision within 30 days after
receipt of such request. In special
-15-
circumstances, the Compensation Committee may extend for up to 30 additional days the deadline for its decision. The notice of the final
decision of the Compensation Committee shall include the reasons for its decision and specific references to the Plan provisions on which the
decision is based. The decision of the Compensation Committee shall be final and binding on all parties.
-16-
ARTICLE 6
COMMITTEES
6.1. Quorum. A majority of the members of the Compensation Committee or Retirement Plan Committee, as the case may be, shall constitute a
quorum for any meeting of such committee held with respect to the Plan, and the acts of a majority of the members of either such committee,
whether at a meeting or approved in writing without a meeting shall be valid acts of such committee.
6.2. Duties. The Compensation Committee shall have the power, discretion, and duty to do all things necessary or convenient to effect the
intent and purposes of the Plan, whether or not such powers and duties are specifically set forth herein, and, by way of amplification and not
limitation of the foregoing, the Compensation Committee shall have the discretion and power to:
(A) provide rules and regulations for the management, operation and administration of the Plan, and, from time to time, amend or supplement
such rules and regulations;
(B) construe the Plan in its sole discretion to the fullest extent permitted by law, which shall be final and conclusive upon all parties hereto;
(C) correct any defect, supply any omission, or reconcile any inconsistency in the Plan in such manner and to
-17-
such extent as it shall deem appropriate in its sole discretion to carry the same into effect;
(D) establish actuarial principles and assumptions from time to time for use with respect to the Plan (unless such actuarial principles and
assumptions are otherwise established by the Retirement Plan Committee as described in Sections 1.2 and 4.5); and
(E) delegate all or any portion of the power to manage, operate and administer the Plan to the Retirement Plan Committee.
6.3. Binding Authority. The acts and determinations of the Compensation Committee or its duly authorized delegate within the powers
conferred by the Plan shall be final and conclusive for all purposes of the Plan, and shall not be subject to any appeal or review. If challenged in
court, any such act or determination shall not be subject to de novo review and shall not be overturned unless proven to be arbitrary and
capricious based upon the evidence considered by the Compensation Committee or its duly authorized delegate at the time of such act or
determination.
6.4. Exculpation. No member of the Compensation Committee or the Retirement Plan Committee shall be directly or indirectly responsible or
otherwise liable by reason of any action or default as a member of that committee or of the exercise of or failure to exercise any power or
discretion as such member, except for such action,
-18-
default, exercise or failure to exercise resulting from such member's gross negligence or willful misconduct. No member of the Compensation
Committee or the Retirement Plan Committee shall be liable in any way for the acts or defaults of any other member of the committee, or any
of its advisors, agents or representatives.
6.5. Indemnification. The Company shall indemnify and hold harmless each member of the Compensation Committee or Retirement Plan
Committee against any and all expenses and liabilities arising out of his or her own membership on either such committee, except expenses and
liabilities arising out of a member's gross negligence or willful misconduct.
6.6. Compensation. Members of the Compensation Committee or Retirement Plan Committee who are employees of the Company shall not
receive any compensation for their services rendered as such members. No other members of either such Committee shall receive any
compensation for their services rendered as members unless otherwise agreed to by the Board of Directors of the Company, but such member
shall be entitled to be reimbursed for reasonable expenses incurred by them in administering the Plan. Any such compensation and expenses, as
well as extraordinary expenses authorized by the Company, shall be paid by the Company.
6.7. Information. The Company may furnish to the Committees in writing all information the Committees may deem
-19-
appropriate for the exercise of their powers and duties in the administration of the Plan. Such information may include, but shall not be limited
to, the names of all Participants, their earnings and their dates of birth,employment, termination of employment, retirement or death. Such
information shall be conclusive for all purposes of the Plan, and the Committees shall be entitled to rely thereon without any investigation
thereof.
6.8. Self-interest. No member of the Compensation Committee or the Retirement Plan Committee may act, vote or otherwise influence a
decision of either such committee specifically relating to his or her benefits, if any, under the Plan.
-20-
ARTICLE 7
GENERAL PROVISIONS
7.1. Non-Property Interest. Any Participant who may have or claim any interest in or right to any compensation, payment, or benefit payable
hereunder, shall rely solely upon the unsecured promise of the Company, as set forth herein for the payment thereof, and nothing herein
contained shall be construed to give to or vest in the Participant or any other person now or at any time in the future, any right, title, interest, or
claim in or to any specific asset, fund, reserve, account, insurance or annuity policy or contract, or other property of any kind whatsoever
owned by the Company, or in which the Company may have any right, title, or interest, now or at any time in the future.
7.2. Disclosure. The Retirement Plan Committee shall make available to each Participant for examination at the principal office of the
Company (or at such other location as may be determined by the Retirement Plan Committee), a copy of the Plan and such of its records, or
copies thereof, as may pertain to any benefits of such Participant under the Plan.
7.3. Other Rights. The Plan shall not affect or impair the rights or obligations of the Company or a Participant under any other contract,
arrangement, or pension, profit sharing or other compensation plan.
-21-
7.4. Amendment or Termination. Notwithstanding any other provision of the Plan, the Plan may be amended, modified, suspended, or
terminated by the Compensation Committee in its sole discretion, except no such action, by itself, shall create a forfeiture of or otherwise
reduce a Participant's Vested Accrued Benefit. No Participant or his or her spouse, heirs and beneficiaries shall have any contractual right to
future benefits otherwise payable as of the date of termination of the Plan. Upon termination of the Plan, the Vested Accrued Benefits shall be
payable in accordance with the terms of the Plan, except to the extent determined otherwise by the Compensation Committee.
7.5. Severability. If any term or condition of the Plan shall be invalid or unenforceable to any extent or in any application, then the remainder of
the Plan, with the exception of such invalid or unenforceable provision, shall not be affected thereby, and shall continue in effect and
application to its fullest extent.
7.6. No Employment Rights. Neither the establishment of the Plan, any provisions of the Plan, nor any action of the Compensation Committee
or Retirement Plan Committee shall be held or construed to confer upon any employee the right to a continuation of employment by the
Company. Subject to any applicable employment contract, the Company reserves the right to dismiss any employee, or otherwise deal with any
employee to the same extent as though the Plan had not been adopted.
-22-
7.7. Incapacity. If the Retirement Plan Committee determines that a Participant or a designated beneficiary is unable to care for his or her
affairs because of illness or accident or other physical or mental disability or because he or she is a minor, the Retirement Plan Committee may
cause the payments due to such person to be made to another person (including a duly appointed guardian, committee or other legal
representative) for his or her benefit without any responsibility of the Retirement Plan Committee to see to the application of such payment.
Any such payment shall be a complete discharge of the Company's obligation to such person under the Plan.
7.8. Absence of Security Interest. The Plan is unfunded and any liability of the Company to any person with respect to benefits payable under
the Plan shall give rise only to a claim as an unsecured creditor against the general assets of the Company.
7.9. Transferability of Rights. No Participant or spouse of a Participant shall have any right to commute, encumber, transfer or otherwise
dispose of or alienate any present or future right or expectancy which he may have at any time to receive payments of benefits hereunder,
which benefits and the right thereto are expressly declared to be non-assignable and nontransferable, except to the extent required by law. Any
attempt to transfer or assign a benefit, or any rights granted hereunder, by a Participant or the spouse of a Participant shall, in the sole
-23-
discretion of the Compensation Committee (after consideration of such facts as it deems pertinent), be grounds for terminating any rights of the
Participant, his joint or contingent annuitant or beneficiary, to any portion of the Plan benefits not previously paid.
7.10. Governing Law. The Plan shall be construed, administered, and enforced according to the laws of the State of Illinois except to the extent
that such laws are preempted by the federal laws of the United States of America.
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ARTICLE 8
CHANGE IN CONTROL
8.1 Effect of Change in Control on Vesting. Notwithstanding any other provision of this Plan to the contrary, in the event of a Change in
Control, all Participants who remain employed with the Company at the time of a Change in Control shall become fully vested in their entire
Accrued Benefit hereunder.
8.2 Effect of Change in Control on Distributions. Notwithstanding any other provision of this Plan to the contrary, in the event of a Change in
Control, each Participant who remains employed with the Company at the time of a Change in Control shall receive an immediate single sum
distribution of the entire present value of the Participant's Accrued Benefit within 60 days after the Participant's termination of employment for
any reason if the termination occurs within two years after the Change in Control. Further, any Participant who terminated employment prior to
the Change in Control and who is in pay status at the time of the Change in Control shall receive an immediate single sum distribution of the
present value of the Participant's remaining Vested Accrued Benefit within 60 days after the Change in Control. For purposes of this Section
8.2, the present value of a Participant's Accrued Benefit shall be determined using either the interest rate used in the
-25-
Actuarial Assumptions in effect with respect to the Plan at the time of the Change in Control or the interest rate or rates which would be used
by the Pension Benefit Guaranty Corporation to value annuities (immediate or deferred, whichever is appropriate) for plans terminating as of
the first day of the Plan Year during which the distribution is made, whichever results in the larger benefit. (Participants who are employed at
the time of a Change in Control but who do not terminate employment within two years after the Change in Control and Participants who
terminated employment prior to a Change in Control but who are not in pay status at the time of the Change in Control shall receive
distribution of their Vested Accrued Benefits in accordance with Article 4 and the terms of this Plan without regard to this Section 8.2.)
8.3. Change in Control. For purposes of this Article 8, the term "Change in Control" shall have the same meaning as given it in the Carson Pirie
Scott & Co. 1993 Stock Incentive Plan, as amended from time to time.
-26-
EXHIBIT 10.29(b)
CARSON PIRIE SCOTT & CO.
OFFICER'S CERTIFICATE
WHEREAS, Carson Pirie Scott & Co. (the "Company") has adopted and currently maintains the Carson Pirie Scott & Co. Supplemental
Executive Retirement Plan (the "Plan"); and
WHEREAS, the Company desires to amend the Plan to clarify certain Plan provisions; and
WHEREAS, by resolutions dated October 4, 1994, the Carson Pirie Scott & Co. Compensation Committee authorized the Company's Vice
President and General Counsel to make any amendments to the Plan as may be necessary to clarify the Plan or otherwise;
NOW, THEREFORE, the Carson Pirie Scott & Co. Supplemental Executive Retirement Plan is hereby amended as follows:
1. The definition of "Average Compensation" in Section 1.3 of the Plan is amended by replacing the reference to "five fiscal years" with the
phrase "five calendar years."
2. The definition of "Compensation" in Section 1.7 of the Plan is amended in its entirety to read as follows:
"Compensation" means, with respect to any Participant during a calendar year, the base salary plus regular annual bonuses awarded under the
Carson Pirie Scott & Co. Executive Bonus Plan, if any, paid to such Participant for service as an Eligible Employee during such calendar year,
including salary deferral contributions made in accordance with Section 401 (k) of the Code and deferrals to the Carson Pirie Scott & Co.
Deferred Compensation Plan, but excluding any other compensation (including, but not limited to, amounts payable under the P. A. Bergner &
Co. Incentive Compensation Plan, the Carson Pirie Scott & Co. 1993 Stock Incentive Plan, the Carson Pirie Scott & Co. Long-Term Incentive
Plan, and any similar long-term incentive plan or incentive compensation plan, any special bonuses or any non-cash compensation, and any
severance payments). Compensation paid to a Participant for service as an Eligible
Employee for less than a full calendar year shall not be annualized."
3. The first sentence of Section 3.1 dealing with vesting shall be amended In its entirety to read as follows:
"No participant (other than members of the Senior Executive Committee on January 1, 1991) shall become vested under the Plan with respect
to any Accrued Benefit prior to attaining age 55 while an Employee."
The above amendments are intended to clarify the Plan document to reflect the Plan's current administration of the Supplemental Executive
Retirement Plan.
-2-
EXHIBIT 10.31(a)
PRIVATE BRANDS AGREEMENT
This PRIVATE BRANDS AGREEMENT (this "Agreement"), dated as of October 30, 2006 and effective as of October 29, 2006 (the
"Effective Time"), is made between Belk, Inc., a Delaware corporation ("Seller"), and The Bon-Ton Stores, Inc., a Pennsylvania corporation
("Buyer").
RECITALS
WHEREAS, pursuant to that certain Stock Purchase Agreement, dated as of August 1, 2006, by and between Saks Incorporated ("Saks") and
Seller (the "Stock Purchase Agreement"), Saks has sold to Seller, and Seller has purchased, all of the outstanding capital stock of Parisian
Stores, Inc., an Alabama corporation, Parisian Wholesalers, Inc., an Alabama corporation, and Parisian Alabama, Inc., a Delaware corporation
(each, a "Company" and, collectively, the "Companies"); and
WHEREAS, following the completion of the transactions contemplated by the Stock Purchase Agreement, the Companies were merged with
and into Seller; and
WHEREAS, Seller is engaged in the business of owning and operating retail department stores under the nameplate Parisian (the "Parisian
Business"); and
WHEREAS, in connection with the transactions contemplated by the Stock Purchase Agreement, Saks and Seller have entered into a Private
Brands Agreement, dated as of October 25, 2006 (the "Saks Private Brands Agreement"), pursuant to which Saks and Seller have made certain
agreements with respect to the sale of merchandise bearing private label brands; and
WHEREAS, pursuant to that certain Asset Purchase Agreement, dated as of October 23, 2006, by and between Seller and Buyer (the "Asset
Purchase Agreement"), Seller has sold to Buyer, and Buyer has purchased, certain assets used in connection with the operation of the following
four Parisian department stores that Seller acquired as part of the Parisian Business (collectively, the "Stores"): Fairfield Commons,
Beavercreek, Ohio; Circle Center, Indianapolis, Indiana; Meadowbrook Mall, Rochester Hills, Michigan; and Laurel Park Place, Livonia,
Michigan; and
WHEREAS, in connection with the transactions contemplated by the Asset Purchase Agreement, Seller and Buyer desire to enter into certain
agreements with respect to the sale of merchandise bearing private label brands by Buyer at the Stores.
NOW, THEREFORE, in consideration of the premises and the mutual representations, warranties, covenants and agreements contained in this
Agreement, and for other good and valuable consideration, the receipt and sufficiency of which are acknowledged, the parties agree as follows:
1. SCOPE.
(a) For the purposes of this Agreement: (i) "Products" shall mean collectively Inventory Products, On Order Products, Direct Order
Merchandise and Replenishment Merchandise; (ii) "Inventory Products" shall mean merchandise bearing a Private Brand in the inventory of
the Business (as defined in the Asset Purchase Agreement) at the Effective Time that is located in the Stores or is being held for sale in the
Stores; (iii) "On Order Products" shall mean merchandise, including sample merchandise, attributable to the Business bearing a Private Brand
that is the subject of purchase orders or commitment sheets issued by Saks or its Affiliates or Seller or its Affiliates and accepted by Vendors
prior to the Effective Time that was ordered for the Stores and scheduled for delivery to the Stores on or prior to February 20, 2007 and remain
unfilled as of the Effective Time, all as set forth on Schedule 1 attached hereto; (iv) "Direct Order Merchandise" shall mean merchandise
bearing a Private Brand sourced from Vendors located in the United States that Seller or its Affiliate or Saks or its Affiliate or Buyer or its
Affiliate (to the extent permitted by the applicable Vendors) shall order directly from the Vendors in accordance with this Agreement, but
excluding Replenishment Merchandise; (v) "Replenishment Merchandise" shall mean regularly stocked merchandise bearing a Private Brand
that Seller or its Affiliate or Saks or its Affiliate or Buyer or its Affiliate (to the extent permitted by the applicable Vendors) shall maintain on
its replenishment system and order directly from Vendors for the Parisian Business including the Stores and as to which Seller or its Affiliates
shall otherwise deal directly with Vendors; (vi) "Saks Sourced Products" shall mean, collectively, Inventory Products and On Order Products;
and (vii) "Private Brands" shall mean, collectively, those trademarks set forth on Exhibit A and identified as owned by third parties and
licensed to Saks ("Third Party Brands") or Seller or its Affiliates ("Seller Licensed Brands") or owned by Seller or its Affiliates ("Seller Owned
Brands"). Notwithstanding the foregoing, Associated Merchandising Corporation shall not be a Vendor of Direct Order Merchandise but shall
be a Vendor of On Order Products and Replenishment Merchandise.
(b) Subject to obtaining any necessary consents or approvals from Vendors or the owners or licensors of any applicable Third Party Brands,
Buyer's obligations to purchase Inventory Products and On Order Products shall be firm and not subject to modification or cancellation.
(c) Buyer acknowledges that: (i) neither Saks nor Seller is a manufacturer of the Products; (ii) Saks has entered or will enter into agreements
with one or more third party vendors, agents or service providers ("Vendors") to enable Saks to deliver Saks Sourced Products to Seller and
Seller to acquire Replenishment Merchandise and Direct Order Merchandise from Vendors;
(iii) Saks has agreed that Seller and its Affiliates may enter into direct business relationships with Vendors of Replenishment Merchandise and
Direct Order Merchandise for the purposes of acquiring such merchandise; and (iv) Buyer will receive the benefits of Saks' and Seller's
business relationships with Vendors and the owners or licensors of the Third Party Brands.
(d) With respect to Products bearing Third Party Brands ("Third Party Branded Products"), Buyer acknowledges that: (i) neither Saks nor Seller
owns the Third Party Brands; (ii) Saks has entered into license agreements with third parties that impose upon Saks certain obligations and
restrictions with respect to the use of Third Party Brands and the sale and
-2-
marketing of the Third Party Branded Products; (iii) Saks must obtain the consent of the owners or licensors of the Third Party Brands in order
to permit the transfer or sale to Seller of Third Party Branded Products (including Third Party Branded Products which Seller will transfer or
sell to Buyer), and the resale of the Third Party Branded Products to customers (including Third Party Branded Products sold in the Stores); (iv)
it shall be necessary for Seller to take certain actions with respect to Third Party Branded Products in order to prevent Saks from being in
breach or default of obligations under its license agreements for the Third Party Brands (and for Buyer to take certain actions with respect to
Third Party Branded Products under this Agreement in order to prevent Seller from being in breach or default of its obligations under the Saks
Private Brands Agreement); and (v) agreements relating to Third Party Brands may terminate prior to the expiration or termination of this
Agreement (in which case Saks shall be under no obligation to make such Third Party Branded Products available to Seller and Seller shall be
under no obligation to make such Third Party Branded Products available to Buyer).
(e) Subject to any obligations under the license agreements for Third Party Brands and the obligations of Seller under the Saks Private Brands
Agreement, Buyer will promote, market and sell the Third Party Branded Products in the Stores in the same manner and to the same extent as
the Third Party Branded Products were promoted, marketed and sold by Seller and its Affiliates prior to the Effective Time. Without limiting
the generality of the foregoing, Buyer shall be responsible for the proportionate share attributable to the Business (to the extent not prohibited
by the applicable Vendors) of Seller's portion of any advertising or promotional obligations set forth in any license agreement between Saks
and the owner or licensor of any Third Party Brand in effect as of the Effective Time which are charged to Seller pursuant to the Saks Private
Brands Agreement and any such license agreement entered into after the Effective Time with the consent of Seller and Buyer with the owner or
licensor of a Third Party Brand which are charged to Seller pursuant to the Saks Private Brands Agreement. Subject to the consent of the owner
or licensor of each Third Party Brand, Buyer shall sell the Third Party Branded Products purchased hereunder to retail customers in the
ordinary course of business only in the Stores. With respect to the promotion, marketing and sale of Third Party Branded Products in the Stores,
when and as requested (subject to reasonable notice) by Saks or Seller, Buyer shall take any action deemed reasonably necessary by Saks or
Seller to protect the image, reputation and goodwill represented by the Third Party Brands, to enable Seller to remain in compliance with its
obligations under the Saks Private Brands Agreement, and to enable Saks to remain in compliance with Saks' obligations under any license
agreement in effect as of the Effective Time and any such license agreement entered into after the Effective Time with the consent of Seller and
Buyer with the owner or licensor of a Third Party Brand. Without limiting the generality of the foregoing, when and as requested by Saks or
Seller, Buyer shall: (i) deliver to Seller copies of advertising or promotional material for Third Party Branded Products with respect to the
Stores; and (ii) modify or discontinue any advertising or promotional material or other activity or practice with respect to the Third Party
Branded Products with respect to the Stores that is not in compliance with the requirements of this Agreement or the Saks Private Brands
Agreement or Saks' license agreements for the Third Party Brands.
(f) Buyer shall not alter any Third Party Brand on any Third Party Branded Product, apply or use any Third Party Brand on other goods or with
respect to any services, or relabel, retag (to the extent of modifying any Private Brand or tradename on a tag), modify or repackage the Third
Party Branded Products in any manner. Seller's obligation to deliver or sell
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to Buyer any Saks Sourced Products under this Agreement or the Asset Purchase Agreement, or Buyer's or Seller's right to purchase from
Vendors Replenishment Merchandise or Direct Order Merchandise for the Stores, shall be conditioned upon the receipt by Saks of any consent
or approval required under an agreement between Saks and a Vendor or the owner or licensor of any Third Party Brand. Seller hereby agrees to
exercise all rights of Seller under the Saks Private Brands Agreement to cause Saks to use its commercially reasonable efforts to obtain from
any Vendors or the owners or licensors of any applicable Third Party Brand any consents necessary for Saks to perform its obligations under
the Saks Private Brands Agreement and for Seller to perform its obligations under this Agreement and for Buyer to sell all Third Party Branded
Products purchased hereunder in the ordinary course of business at the Stores in accordance with the requirements of the license agreements for
the Third Party Brands, provided neither Saks nor Seller shall be obligated to pay any money or provide other consideration to a Vendor or the
owner or licensor of a Third Party Brand in order to obtain any such consent. The delivery or sale of Third Party Branded Products to Buyer
pursuant to this Agreement shall not be deemed to be a grant to Buyer of any right, title, interest or license in and to the Third Party Brands or
other intellectual property rights in the Third Party Branded Products other than the limited right to promote, market and sell the Third Party
Branded Products at the Stores in accordance with the terms of the Saks Private Brands Agreement and this Agreement. Buyer shall not seek to
register or otherwise contest the ownership of any Third Party Brand used on the Products.
(g) Buyer acknowledges that: (i) Saks' agreement with AMC ("AMC Agreement"), a Vendor of Saks Sourced Products, Direct Order
Merchandise and Replenishment Merchandise, contains an annual minimum service charge requirement with respect to Saks Sourced Products
to be purchased under this Agreement and Replenishment Merchandise and Direct Order Merchandise to be purchased directly by Saks or
Seller or Buyer; and (ii) Saks' license agreement with the owner or licensor of certain Third Party Brands contain annual minimum royalty
obligations with respect to the Retail Sales (as hereinafter defined) of certain Third Party Branded Products. The quantities of Saks Sourced
Products to be purchased under the Saks Private Brands Agreement by Saks from AMC and Replenishment Merchandise and Direct Order
Merchandise to be purchased by Seller or Buyer directly from AMC pursuant to this Agreement represent a substantial portion of the goods to
be purchased by Saks under the AMC Agreement. The royalties attributable to certain Third Party Branded Products to be purchased under the
Saks Private Brands Agreement represent a significant portion of Saks' minimum royalty obligations under the applicable license agreements
for the Third Party Brands. Accordingly, Buyer shall be responsible for a proportionate share represented by the Business of Seller's share of
any shortfall in meeting the applicable minimums set forth in Exhibit B to the Saks Private Brands Agreement if, in the case of the AMC
Agreement, Seller's purchases of Saks Sourced Products purchased by Saks from AMC or Replenishment Merchandise and Direct Order
Merchandise purchased by Seller or Buyer from AMC, or in the case of the license agreements, royalties from Retail Sales of the affected
Third Party Branded Products, fail to meet the minimum amounts set forth on Exhibit B to this Agreement for the periods indicated; provided,
however, that Buyer shall not be responsible for any portion of the shortfall to the extent that any portion of such shortfall is attributable to the
failure of Saks to obtain from any Vendors or the owners or licensors of the affected Third Party Brands any consents or approvals required
under any agreement between Saks and a Vendor or such owner or licensor. Subject to the foregoing, Buyer's proportionate share of Seller's
share of a shortfall shall be equal to: (A) in the case of the
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AMC Agreement, the amount, if any, by which the minimum set forth on Exhibit B to this Agreement exceeds the sum of the service charges
payable to AMC attributable to Seller's actual purchases on behalf of Buyer pursuant to this Agreement of Saks Sourced Products, and all
purchases pursuant to this Agreement of Direct Order Merchandise and Replenishment Merchandise, for the Stores and sourced through AMC;
and (B) in the case of each of the affected Third Party Branded Products, the amount, if any, by which the minimum set forth on Exhibit B to
this Agreement exceeds the sum of the royalties actually paid by Saks based upon Buyer's Retail Sales of such Third Party Branded Products.
For the purposes of this Agreement, "Retail Sales" shall mean Buyer's gross retail sales price of the Third Party Branded Products, less amounts
granted for returns or allowances to retail customers who purchase the Third Party Branded Products. Retail Sales shall not include any sales or
use taxes collected by Buyer from a retail customer. Notwithstanding the foregoing, Buyer shall not be obligated to pay any share of a shortfall
for an applicable period if Saks or Seller is not obligated to pay any shortfall with respect to its contracted minimum to AMC or the owner or
licensor of a Third Party Brand. Seller agrees that Buyer shall receive a credit against the AMC minimum service charges and the minimum
royalty charges of Third Party Branded Products set forth in Exhibit B to this Agreement in the amount of any excess above required
minimums of service charges or commissions attributable to purchases of merchandise by Buyer directly from AMC or any excess above
required minimums of royalties in respect of such Third Party Branded Products pursuant to any private brands agreement between Saks and
Buyer with respect to other stores operated by Buyer; provided, however, that Buyer shall indemnify and hold harmless Seller (without regard
to any limitations set forth in Section 10(a); except that Buyer shall have no indemnity obligation hereunder to the extent that such claims arise
from the fraud, gross negligence or willful misconduct of Seller or its Affiliates) against any damages incurred by Seller to Saks resulting from
Buyer's setoff of such amounts against the minimums set forth in Exhibit B to this Agreement provided that Buyer shall be given notice of and
have the right to defend any such claim brought by Saks and Seller shall not settle any such claim without the prior written consent of Buyer.
(h) Buyer acknowledges that Saks' license agreement with the licensor of the Laura Ashley Brands ("Laura Ashley License") expires on
December 31, 2007, and that Saks has an obligation for minimum royalties through such date. On or prior to the expiration or termination of
the Saks Private Brands Agreement, Seller shall enter into a sublicense agreement or similar arrangement with Saks under the terms of which
Seller will be licensed to source Laura Ashley branded merchandise from third parties, will be obligated to pay the royalties on the Retail Sales
of such merchandise, and will be obligated to pay its proportionate share of the minimum royalties of Saks determined in accordance with the
principles set forth in Section 1(g). The sublicense will contain such other terms and conditions as are required under the Laura Ashley License
and as are customary for an agreement of this nature. The sublicense shall be subject to the consent of the licensor under the terms of the Laura
Ashley License. Seller will use commercially reasonable efforts to cause Saks to enter into a sublicense agreement or similar arrangement with
Buyer under the terms of which Buyer will be licensed to source Laura Ashley branded merchandise from third parties, will be obligated to pay
the royalties on the Retail Sales of such merchandise at the Stores, and will be obligated to pay its proportionate share of the minimum royalties
of Saks determined in accordance with the principles set forth in Section 1(g).
(i) Under the Saks Private Brands Agreement, Saks has agreed to permit Seller to establish a direct business relationship with each Vendor of
Replenishment Merchandise
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and Direct Order Merchandise. Seller shall provide Buyer such information as Buyer may reasonably require in order for Buyer to place orders
for Replenishment Merchandise and Direct Order Merchandise through Seller. Seller agrees that it shall, at the request of Buyer, place orders
for Replenishment Merchandise and Direct Order Merchandise on behalf of Buyer until such time as Buyer shall have the right and the ability
to place such orders directly with such Vendors. The commercial terms for the acquisition by Seller on behalf of Buyer of Replenishment
Merchandise and Direct Order Merchandise shall be established between Seller and the Vendors, with the prior written consent of Buyer.
Without limiting the generality of the foregoing, all orders for Replenishment Merchandise and Direct Order Merchandise for the Stores by
Seller on behalf of Buyer shall, at the request of Buyer, be placed by Seller for the account of Buyer directly with each Vendor, with invoices
for the Replenishment Merchandise and Direct Order Merchandise with respect to such orders to be issued by each Vendor to Seller and by
Seller to Buyer, and payment to be made by Buyer directly to Seller on or before the date on which payment is required to be made on an
invoice submitted by each Vendor. Replenishment Merchandise and Direct Order Merchandise for the Stores bearing Third Party Brands shall
be subject to the royalty obligations under Section 2(c). Replenishment Merchandise purchased for the Stores from AMC shall be credited
against Buyer's proportionate share of Seller's portion of Saks' annual minimum service charge obligation to AMC under Section 1(g). In
connection therewith, within ten (10) days following the end of each month, Buyer shall submit to Seller a written report identifying the
quantity, Buyer's fully landed cost and first cost of any Replenishment Merchandise purchased for the Stores from AMC and delivered to
Buyer during the preceding month, and such other information as Seller may reasonably require.
(j) THIS AGREEMENT AND THE ASSET PURCHASE AGREEMENT STATE THE ONLY TERMS AND CONDITIONS UNDER
WHICH SELLER SHALL SELL TO BUYER, AND BUYER SHALL PURCHASE FROM SELLER, THE SAKS SOURCED PRODUCTS.
2. PRICE AND SALES REPORTS.
(a) The price for Inventory Products has been established and shall be deemed to be subsumed within the purchase price for the Assets
purchased under the Asset Purchase Agreement.
(b) The price for On Order Products for the Stores shall be Saks' fully landed cost for such Products (including the invoice price from each
Vendor of On Order Products, all freight (air, ocean or land), insurance, duties, brokers or agents fees or commissions, imposts, levies, taxes or
other amounts paid by Saks with respect to the procurement of On Order Products) plus a load factor allocated to the Products. The load factor
shall be seven and one-half percent (7.5%) of the fully landed cost of the On Order Products.
(c) Seller shall exercise its rights under the Saks Private Brands Agreement to cause Saks to pay when due all royalties payable by Saks to the
owners or licensors of the Third Party Brands. Within fifteen (15) days following the end of a calendar quarter (i.e., each three (3) month period
ending on March 31, June 30, September 30 and December 31 of each year), Buyer shall submit to Seller, and Seller shall incorporate into
Seller's report submitted to Saks, a written sales report signed and certified as accurate in all material respects by an officer of Buyer
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identifying the Retail Sales of each category of Third Party Branded Products sold by Buyer in the Stores during the applicable quarter. Such
report shall be required even if no sales of a particular Third Party Branded Product have been made in the Stores in such quarter. In no event
shall Seller's receipt of Buyer's report be deemed to be a waiver of Seller's right to challenge (on behalf of itself or the owner or licensor of a
Third Party Brand) the accuracy of any report or the amount of any payment due from Buyer.
(d) So long as Seller is required to maintain an irrevocable letter of credit ("LOC") for the benefit of Saks under the Saks Private Brands
Agreement, Buyer shall pay to Seller a proportionate share of the fees paid and payable to the issuer of such LOC (the "LOC Bank") with
respect to the issuance and maintenance of such LOC during the Term. Seller shall submit to Buyer (i) within five (5) days after the date of this
Agreement an invoice for Buyer's proportionate share of any LOC fees prepaid by Seller with respect to the issuance of the LOC prior to the
date hereof for periods during the Term and
(ii) at least five (5) days prior to the date on which Seller shall be obligated to pay any additional fees to the LOC Bank with respect to the
maintenance of the LOC during the Term an invoice for Buyer's proportionate share of such fees. Buyer shall pay the amount of each invoice
submitted by Seller pursuant to this
Section 2(d) within five (5) days of the date of such invoice. Buyer's proportionate share of any applicable LOC shall be equal to that
percentage of the total On Order Products secured by such LOC that are designated for the Stores.
3. DELIVERY, TITLE AND RISK OF LOSS.
(a) Inventory Products shall be deemed to be delivered to Buyer as of the date hereof. On Order Products shall be deemed to be delivered to
Buyer at such time as the On Order Products are delivered to Saks by a Vendor under the applicable purchase order or other agreement between
Saks and the Vendor but only after the date that such On Order Products have been identified for shipment to the Stores.
(b) Freight, insurance and other costs attributable to the delivery and sale of On Order Products shall be determined in accordance with Saks'
past practices.
(c) Title and risk of loss for Inventory Products shall be deemed to have passed to Buyer as of the date hereof. Title and risk of loss for On
Order Products shall be deemed to pass automatically from Seller to Buyer at such time as title and risk of loss passes from the Vendor to Saks
pursuant to the applicable purchase order or other agreement between Saks and the Vendor.
(d) Upon receipt Buyer shall have the right to reject any delivery of On Order Products that is shipped late or that is non-conforming, provided
Buyer indemnifies Seller with respect to all claims that may arise with respect to such rejection without regard to any limitations set forth in
Section 10(a) except to the extent that such claims arise from the fraud, gross negligence or willful misconduct of Seller or its Affiliates.
4. BILLING AND PAYMENT.
(a) Buyer shall promptly pay Seller's invoices and other amounts due under this Agreement. Seller will provide reasonable additional
information requested by Buyer in
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writing supporting Seller's invoices. Unless otherwise provided herein or directed otherwise by Seller, Buyer shall pay all invoices or other
amounts due, as applicable, in the case of invoices, not later than fifteen (15) days following receipt by Buyer of Seller's invoice, or, in the case
of other amounts, on the due date. Buyer shall not be entitled to offset any amounts owing to it by Saks or any of Saks' Affiliates or Seller or
any of Seller's Affiliates against amounts payable by Buyer hereunder or under any other agreement or arrangement. Should Buyer reasonably
and in good faith dispute any portion of an invoice, Buyer shall pay the undisputed portion of the invoice in accordance with this Section 4(a)
and promptly notify Seller in writing of the nature and basis of the dispute.
(b) All charges and fees to be paid by Buyer to Seller under this Agreement are exclusive of any applicable taxes required by law to be
collected from Buyer (including withholding, sales, use, excise or services taxes, which may be assessed on the provision of any services
hereunder). If a withholding, sales, use, excise or services tax is assessed on the delivery or sale of Saks Sourced Products or the provision of
any other services under this Agreement, Buyer shall pay directly, reimburse or indemnify Seller and its Affiliates for such tax. The parties
shall cooperate with each other in determining the extent to which any tax is due and owing under the circumstances, and shall provide and
make available to each other any resale certificate, information regarding out-of-state use of materials, services or sale, and other exemption
certificates or information reasonably requested by the other party; provided that if any such tax is assessed against Seller by Saks, Buyer shall
be obligated to pay directly, reimburse or indemnify Seller and its Affiliates for such tax.
(c) All payments required to be made pursuant to this Agreement shall bear interest from and including: (i) the date ten (10) days following
receipt by Buyer of Seller's invoice for undisputed invoiced amounts (but only in cases in which Buyer has not paid within ten (10) days
following receipt by Buyer of Seller's invoice); or (ii) the due date with respect to other amounts, in each case to but excluding the date of
payment at a rate equal to one percent (1%) per month, or such higher rate as Saks or Seller may be obligated to pay to an owner or licensor
under a license agreement for a Third Party Brand, or to a Vendor under an applicable agreement or purchase order. Such interest shall be
payable at the same time as the payment to which it relates is made and shall be calculated on the basis of the number of days (excluding the
payment date) by which the payment date follows the date such payment is due.
5. BOOKS AND RECORDS; AUDITS.
(a) Buyer shall prepare and maintain complete and accurate books of account and records (specifically including without limitation the
originals or copies of documents supporting entries in the books of account and records) covering all transactions arising out of or relating to
this Agreement. Seller and its duly authorized representatives (or in the case of Third Party Branded Products, the owner or licensor of the
Third Party Brand), upon appropriate advance notice to Buyer, shall have the right, during regular business hours, for the duration of this
Agreement, and for a term of one (1) year following the early termination or expiration of this Agreement, to audit said books of account and
records and examine all other documents and materials in the possession of, or under the control of, Buyer with respect to the subject matter of
this Agreement. All such books of account, records and documents shall be kept available by Buyer for at least one (1) year after the early
termination or expiration of this Agreement.
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(b) If, as a result of any audit of Buyer's books and records, it is shown that with respect to any calendar quarter during the Term (as hereafter
defined), royalties or minimums paid by Buyer to Seller were: (i) less than the amounts which should have been paid, Buyer immediately shall
pay such shortfall to Seller together with the interest due under Section 4(e) with respect to the shortfall; and (ii) greater than the amounts
which should have been paid, Seller shall refund such overpayment to Buyer to the extent Seller is entitled to, or obtains after utilizing
commercially reasonable efforts without incurring any cost or expense, a refund of the overpayment from a Vendor or the owner or licensor of
a Third Party Brand. If the amount of a shortfall is equal to or more than the percentage in the applicable license agreement for a Third Party
Brand of the payment actually due Seller, Buyer shall reimburse Seller for the cost to Seller of such audit.
(c) In addition to any inspection or audit by Seller under Section
5(a). Buyer shall permit Saks and the owner or licensor of a Third Party Brand, as applicable, to inspect the facilities and operations where
Buyer conducts business activities with respect to Stores to the extent required by the Saks Private Brands Agreement or the agreement relating
to the applicable Third Party Brand.
6. TERM OF AGREEMENT; TERMINATION.
(a) This Agreement shall commence on the Effective Time and shall continue (unless sooner terminated pursuant to the terms hereof) through
January 31, 2007 ("Term"). This Agreement shall not be subject to renewal.
(b) Buyer may terminate this Agreement at any time upon written notice to Seller in the event of a material breach of this Agreement by Seller.
Such termination shall become effective thirty (30) days from the date of Seller's receipt of such notice unless the breach is cured.
(c) Seller may terminate this Agreement at any time upon written notice to Buyer in the event of a material breach of this Agreement by Buyer.
Such termination shall become effective thirty (30) days from the date of Buyer's receipt of such notice unless the breach is cured; provided,
that if such breach relates to the non-payment by Buyer of any amount due under Section 4, then termination under this Section 6(c) shall be
effective twenty (20) days from the date of receipt of notice of breach from Seller unless all unpaid fees or expenses that are in payment default
have been paid in full within such 20-day period.
(d) Following the expiration of this Agreement under Section 6(a) or the termination of this Agreement by Buyer under Section 6(b). but
subject to the terms and conditions of this Agreement, Seller shall continue to deliver any previously undelivered On Order Products.
Following any termination of this Agreement by Seller under Section 6(c). but subject to the terms and conditions of this Agreement, Seller
may elect to continue to deliver any previously undelivered On Order Products, provided under no circumstances shall Seller be obligated to do
so.
(e) Notwithstanding any other provision in this Agreement to the contrary, whether this Agreement expires or is terminated by Seller or Buyer,
or whether this Agreement is
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subject to a partial termination under Section 7, Buyer shall remain liable for the payment of all amounts due with respect to Products delivered
under the terms of this Agreement, even though Products may not be delivered or sold until after such expiration or termination; provided that
the parties acknowledge and agree that Buyer shall have no obligation with respect to any Product that is not scheduled for delivery to the
Stores prior to February 20, 2007. Further, in the event of expiration or termination of this Agreement, Sections 1(e) through l(i), 2, 3, 4, 5, 6, 8,
10, 11 and 13 through 22 shall continue in full force and effect; provided that Sections 1(g) and 1(h) shall not survive if this Agreement is
terminated pursuant to Section 6(b). Notwithstanding any other provisions of this Agreement, in no event will Buyer have any obligations
whatsoever arising from Section 1(g) or otherwise relating to the minimum service charges or royalties set forth in Exhibit B or for any load
factor payments pursuant to Section 2(b), in any such case for any period other than during the Term.
7. PARTIAL TERMINATION. Subject to Section 6(d), this Agreement shall automatically terminate with respect to: (i) any category of Third
Party Branded Product upon the expiration or termination for any reason of the applicable license agreement between Saks and the owner or
licensor of the Third Party Brand; (ii) any other Product affected by the expiration or termination of a purchase order, sourcing or other
agreement between Saks or Seller and a Vendor of the Product; or (iii) all Products upon termination of the Saks Private Brands Agreement.
8. CONFIDENTIALITY. Each party shall, and shall cause each of its Affiliates and each of its and their officers, directors and employees to,
hold all information relating to the business of the other party (and in the case of Buyer information of Saks and its Affiliates disclosed by
Seller or any of its Affiliates to Buyer) disclosed to it by reason of this Agreement (the "Confidential Information") confidential, and shall not
disclose or permit to be disclosed any such Confidential Information to any third party unless legally required to disclose such information;
provided, however, that to the extent that a Person receiving Confidential Information hereunder may receive the written advice of outside
counsel that disclosure of any Confidential Information is required in order that such Person not commit a violation of law, such Person: (a) to
the extent not inconsistent with such Person's obligation to disclose, will give the other party hereto prompt notice of such request so that such
party may seek an appropriate protective order; (b) may only disclose such information if it shall first have used commercially reasonable
efforts to, and, if practicable, shall have afforded the other party the opportunity to, obtain an appropriate protective order or other satisfactory
assurance of confidential treatment for the information required to be so disclosed; and (c) if such protective order or other remedy is not
obtained, or the other party waives such Person's compliance with the provisions of this Section 8, shall only furnish that portion of the
Confidential Information which is legally required to be so disclosed. As used herein, "Confidential Information" does not include any
information that: (i) is or becomes generally available to the public other than as a result of a disclosure by the party receiving the Confidential
Information in violation of this Agreement; (ii) was available to the receiving party on a non-confidential basis prior to its disclosure by the
disclosing party; (iii) becomes available to the receiving party from a Person other than the disclosing party or its Affiliates who is not, to the
receiving party's knowledge, subject to any legally binding obligation to keep such information confidential; or (iv) such party demonstrates is
or was independently developed by or on behalf of a party without the direct or indirect use of any of the other party's Confidential
Information.
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9. THIRD PARTY NON-DISCLOSURE AGREEMENTS. To the extent that any information disclosed under this Agreement requires a
specific form of non-disclosure agreement under the terms of an applicable license agreement for a Third Party Brand as a condition of its
disclosure or use, Buyer shall execute
(and shall cause Buyer's employees to execute, if and to the extent required) any such form in substantially the same form executed by Saks or
Seller (if required). To the extent Buyer reasonably requires information with respect to a license agreement for a Third Party Brand, Seller will
exercise its rights under the Saks Private Brands Agreement to require Saks to provide such information, subject to obtaining any necessary
consent from the licensor. Buyer acknowledges that a licensor may grant or withhold any such consent in its sole discretion.
10. LIMITATION OF LIABILITY; DISCLAIMER; INDEMNITY.
(a) Neither party nor their respective Affiliates shall be liable to the other party and its Affiliates or any third party for any special, incidental,
consequential (including loss of revenues or profits), exemplary or punitive damages arising from any claim relating to this Agreement or any
of the Products to be provided hereunder or the performance of or failure to perform such party's obligations under this Agreement, whether
such claim is based on warranty, contract, tort (including negligence or strict liability) or otherwise, all of which are hereby excluded by
agreement of the parties regardless of whether or not a party to this Agreement has been advised of the possibility of such damages. Any of the
foregoing categories of damages Seller is required to pay a third party on account of or attributable to Buyer's conduct shall be deemed to be
direct damages of Seller and not subject to the previous sentence. SELLER SPECIFICALLY DISCLAIMS ALL WARRANTIES OF ANY
KIND, EXPRESS OR IMPLIED, ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING WITHOUT LIMITATION
ANY WARRANTY OF MERCHANTABILITY, FITNESS OR NON-INFRINGEMENT. Seller shall have no liability to Buyer for any breach
by Saks of its obligations under the Private Brands Agreement so long as Seller uses its commercially reasonable efforts to exercise all rights of
Seller under the Private Brands Agreement in respect of such breach. Notwithstanding the foregoing, Seller's cumulative aggregate liability to
Buyer and its Affiliates under this Agreement shall not exceed the amount paid by Buyer for the Products giving rise to the claim unless such
claim arises from fraud or willful misconduct of Seller or its Affiliates. Notwithstanding anything contained herein to the contrary, the
limitations set forth in this Section 10(a) shall not apply with respect to any breach of Section 8.
(b) Buyer shall indemnify Seller and its Affiliates against all Losses attributable to: (i) third party claims arising from or relating to the
activities contemplated by this Agreement to the extent that such Losses arise from the fraud, gross negligence or willful misconduct of Buyer,
any of its Affiliates or any of their respective employees, officers or directors; and (ii) product liability claims involving personal injury or
property damage arising out of the use of any Product sold by Buyer at the Stores. With respect to product liability claims, nothing in the
foregoing indemnity shall preclude Buyer from seeking recourse against the manufacturer of any Product giving rise to the claim.
(c) Seller shall indemnify Buyer and each of its Affiliates against all Losses attributable to any third party claims arising from or relating to the
activities contemplated by this Agreement to the extent that such Losses arise from the fraud, gross negligence or willful
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misconduct of Seller, any of its Affiliates or any of their respective employees, officers or directors.
(d) All claims for indemnification pursuant to this Section 10 shall be made in accordance with the procedures set forth in Sections 11.3 and
11.5 of the Asset Purchase Agreement.
(e) At its expense, Buyer shall procure and maintain in full force and effect at all times during which the Products are being sold by Buyer at
the Stores, and for a period of one (1) year thereafter, with responsible insurance carriers reasonably acceptable to Seller at least Five Million
Dollars ($5,000,000) of products liability insurance coverage with respect to its sale of the Products at the Stores. Such insurance coverage
shall name Seller as an additional insured and shall provide for a minimum of twenty (20) days prior written notice to Seller in the event that
the insurance carrier intends to cancel or substantially reduce the insurance coverage. Such insurance coverage may be obtained in conjunction
with a policy of product liability insurance which covers other products manufactured and/or sold by Buyer. Buyer shall also procure and
maintain during the Term of this Agreement and for a period of one
(1) year thereafter, at least the minimum business insurance coverages, including but not limited to bodily injury, property damage, workers
compensation, business interruption and general liability that are required by the laws and regulations of any jurisdiction in which Buyer sells
the Products. Upon request, Buyer shall furnish or cause to be furnished to Seller a certificate(s) of insurance evidencing the maintenance of the
insurance coverages required by this Section 10(e).
11. RELATIONSHIP OF PARTIES. The contractual relationship between the parties established under this Agreement is solely that of seller
and purchaser. Except as specifically provided herein, neither party shall: (a) act or represent or hold itself out as having authority to act as an
agent or partner of the other party; or (b) in any way bind or commit the other party to any obligations or agreement. Nothing contained in this
Agreement shall be construed as creating a partnership, joint venture, agency, trust, fiduciary relationship or other association of any kind, each
party being individually responsible only for its obligations as set forth in this Agreement. The parties' respective rights and obligations
hereunder shall be limited to the contractual rights and obligations expressly set forth herein on the terms and conditions set forth herein.
12. FORCE MAJEURE. If Saks or any of its Affiliates or Seller or any of its Affiliates or any Vendor is prevented from or delayed in
complying, either totally or in part, with any of the terms or provisions of the Saks Private Brands Agreement or this Agreement by reason of
fire, flood, storm, strike, walkout, lockout or other labor trouble or shortage, delays by unaffiliated suppliers or carriers, shortages of fuel,
power, raw materials or components, any law, order, proclamation, regulation, ordinance, demand, seizure or requirement of any governmental
authority, riot, civil commotion, war, rebellion, acts of terrorism, nuclear accident or other causes beyond the reasonable control of any such
Person or other acts of God, or acts, omissions or delays in acting by any governmental or military authority or Buyer, then upon notice to
Buyer, the affected provisions and/or other requirements of this Agreement shall be suspended during the period of such disability and Seller
shall have no liability to Buyer, its Affiliates or any other Person in connection therewith. Seller and Buyer shall make commercially
reasonable efforts to remove such disability within thirty (30) days after giving notice of such disability; provided,
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however, that nothing in this Section 12 will be construed to require the settlement of any strike, walkout, lockout or other labor dispute on
terms which, in the reasonable judgment of Seller, are contrary to its interest or require that Seller take any action against Saks. It is understood
that the settlement of a strike, walkout, lockout or other labor dispute or a dispute with Saks under the Saks Private Brands Agreement will be
entirely within the discretion of Seller.
13. NOTICES. All notices or other communications required or permitted hereunder shall be in writing and shall be delivered personally, by
facsimile or sent by private courier or by registered or certified mail, and shall be deemed given when so delivered personally, by facsimile or
by private courier or, if mailed, two business days after the mailing, as follows:
If to Seller, to:
Belk, Inc.
2801 West Tyvola Road
Charlotte, NC 28217
Facsimile: (704)357-1883
Attention: General Counsel
with a copy to:
King & Spalding
1180 Peachtree Street Atlanta, GA 30309
Facsimile: (404) 572-5132 Attention: John D. Capers, Jr.
If to Buyer, to:
The Bon-Ton Stores, Inc.
2801 East Market Street
York, Pennsylvania 17402
Facsimile: (717) 751-3008
Attention: Vice President and General Counsel
with a copy to:
Wolf, Block, Schorr and Solis-Cohen LLP 1650 Arch Street, 22nd Floor Philadelphia, Pennsylvania 19103 Facsimile: (215) 977-2334
Attention: Henry Miller, Esq.
or to such other address as such party may indicate by a notice delivered to the other party hereto.
14. SUCCESSORS AND ASSIGNS. The rights under this Agreement shall not be assignable by Buyer and the duties shall not be delegated by
Buyer without the prior written
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consent of Seller, such consent not to be unreasonably withheld or delayed; provided, however, that Buyer may assign its rights under this
Agreement to any direct or indirect wholly owned subsidiary of Buyer provided that no such assignment shall relieve Buyer of any of its
obligations hereunder. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their successors and permitted
assigns. Except for the rights afforded owners or licensors of Third Party Brands expressly set forth herein, nothing in this Agreement,
expressed or implied, is intended or shall be construed to confer upon any Person other than the parties and successors and assigns permitted by
this Section 14 any right, remedy or claim under or by reason of this Agreement. Without limiting the generality of foregoing, Buyer
acknowledges that except as set forth herein this Agreement does not confer upon Buyer any rights under the Saks Private Brands Agreement
and that under no circumstances will Buyer have any right to make any claim against Saks or otherwise to communicate with Saks with respect
to the transactions contemplated by this Agreement except through Seller as specifically provided in this Agreement.
15. ENTIRE AGREEMENT; AMENDMENTS. This Agreement and the Exhibits attached hereto and the other documents delivered pursuant
hereto contain the entire understanding of the parties hereto with regard to the subject matter contained herein or therein, and supersede all
other prior representations, warranties, agreements, understandings or letters of intent between or among any of the parties hereto (it being
understood, however, that the Asset Purchase Agreement and agreements contemplated thereby set forth certain additional understandings
between Seller and Buyer regarding the relationship between Seller and Buyer after the Effective Time). This Agreement shall not be amended,
modified or supplemented except by a written instrument signed by an authorized representative of the parties hereto.
16. PARTIAL INVALIDITY. Wherever possible, each provision hereof shall be interpreted in such manner as to be effective and valid under
applicable law, but in case any one or more of the provisions contained herein shall, for any reason, be held to be invalid, illegal or
unenforceable in any respect, such provision shall be ineffective to the extent, but only to the extent, of such invalidity, illegality or
unenforceability without invalidating the remainder of such invalid, illegal or unenforceable provision or provisions or any other provisions
hereof, unless such a construction would be unreasonable.
17. WAIVERS. Any term or provision of this Agreement may be waived, or the time for its performance may be extended, by the party or
parties entitled to the benefit thereof. Any such waiver shall be validly and sufficiently authorized for the purposes of this Agreement if, as to
any party, it is authorized in writing by an authorized representative of such party. The failure of any party hereto to enforce at any time any
provision of this Agreement shall not be construed to be a waiver of such provision, nor in any way to affect the validity of this Agreement or
any part hereof or the right of any party thereafter to enforce each and every such provision. No waiver of any breach of this Agreement shall
be held to constitute a waiver of any other or subsequent breach.
18. EXECUTION IN COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall be considered an original
instrument, but all of which shall be considered one and the same agreement, and shall become binding when one or more counterparts have
been signed by each of the parties hereto and delivered to Seller and Buyer.
-14-
19. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the internal laws of the State of New York
without giving effect to the principles of conflicts of law thereof except Section 5-1401 of the New York General Obligations Law.
20. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY IRREVOCABLY WAIVES ANY AND ALL RIGHT TO
TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE
TRANSACTIONS CONTEMPLATED HEREBY.
21. INTERPRETATION. Capitalized terms used in this Agreement and not otherwise defined herein have the meanings given to such terms in
the Asset Purchase Agreement. For purposes of this Agreement: (a) the words "include," "includes" and "including" shall be deemed to be
followed by the words "without limitation"; (b) the word "or" is not exclusive; and (c) the words "herein," "hereof," "hereby," "hereto" and
"hereunder" refer to this Agreement as a whole. Unless the context otherwise requires, references herein (i) to Sections mean the Sections of
this Agreement and (ii) to an agreement, instrument or other document means such agreement, instrument or other document as amended,
supplemented and modified from time to time to the extent permitted by the provisions thereof and by this Agreement. Headings of Sections
are inserted for convenience of reference only and shall not be deemed a part of or to affect the meaning or interpretation of this Agreement.
This Agreement shall be construed without regard to any presumption or rule requiring construction or interpretation against the party drafting
an instrument or causing any instrument to be drafted.
22. EXHIBITS AND SCHEDULES. Exhibits A and B shall be construed with and as an integral part of this Agreement to the same extent as if
it was set forth verbatim herein.
REMAINDER OF PAGE INTENTIONALLY LEFT BLANK
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IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed, ail as of the Effective Time.
BELK, INC.
By: /s/ Ralph A. Pitts
------------------------------------Name: Ralph A. Pitts
Title: Executive Vice President and
General Counsel
THE BON-TON STORES, INC.
By:
Name:
Title:
SIGNATURE PAGE
TO
PRIVATE BRANDS AGREEMENT
IN WITNESS WHEREOF, each of the parties has caused this Agreement to be duly executed, all as of the Effective Time.
BELK, INC.
By:
Name:
Title:
THE BON-TON DEPARTMENT STORES, INC.
By: /s/ Keith E. Plowman
-------------------------------------Name: Keith E. Plowman
Title: Executive Vice President and Chief
Financial Officer
SIGNATURE PAGE
TO
PRIVATE BRANDS AGREEMENTS
EXHIBIT 10.31(b)
EXECUTION VERSION
AMENDMENT NO. 1
This AMENDMENT NO. 1 to the Agreements (as hereinafter defined) (this "Amendment"), dated as of December 20, 2006, is made by and
among Saks Incorporated, a Tennessee corporation ("Saks"), The Bon-Ton Stores, Inc., a Pennsylvania corporation ("Bon-Ton"), and Belk, Inc,
a Delaware corporation ("Belk").
WITNESSETH:
WHEREAS, Saks and Parisian Stores, Inc., an Alabama corporation ("Parisian") are parties to that certain Product Sourcing Agreement, dated
as of September 6, 2006 (the "Belk Product Sourcing Agreement");
WHEREAS, Parisian has been merged with and into Belk and, as a consequence of that merger, Belk is the successor in interest to Parisian
under the Belk Product Sourcing Agreement;
WHEREAS, Bon-Ton and Belk are parties to that certain Private Brands Agreement, dated as of October 30, 2006, and effective as of October
29, 2006 (the "Bon-Ton Private Brands Agreement," and together with the Belk Product Sourcing Agreement, the "Agreements");
WHEREAS, Saks and Belk desire to amend the Belk Product Sourcing Agreement; and
WHEREAS, Belk and Bon-Ton desire to amend the Bon-Ton Private Brands Agreement.
NOW, THEREFORE, in consideration of the premises and mutual agreements herein set forth, and intending to be legally bound hereby, the
parties hereto agree that each of the Belk Product Sourcing Agreement and the Bon-Ton Private Brands Agreement shall be and hereby is
amended as follows:
1. Amendment to the Bon-Ton Private Brands Agreement. Belk and Bon-Ton acknowledge and agree that Exhibit B to the Bon-Ton Private
Brands Agreement is hereby amended and restated to read in its entirety as set forth in Attachment I hereto.
2. Amendment to Belk Product Sourcing Agreement. Saks and Belk acknowledge and agree that Section 3(a) of the Belk Product Sourcing
Agreement is hereby amended and restated to read in its entirety as follows:
"(a) Minimum Payment. In consideration of Supplier's commitment to continue sourcing Licensed Articles and to delegate its sourcing rights
hereunder, during the Term, Retailer shall pay to Supplier in addition to the cost of Licensed Articles sourced from Supplier or purchased
directly from Authorized Manufacturers the total sum of $698,642 ("Minimum Payment") payable in installments as follows:
(i) with respect to the period commencing on the Effective Date and concluding September 30, 2006, the sum of $125,575;
(ii) with respect to the Calendar Quarter commencing October 1, 2006, and concluding December 31, 2006, the sum of $114,219; and
(iii) with respect to the period commencing on January 1, 2007 and concluding December 31, 2007, the sum of $458,848 payable in Quarterly
installments of $114,712."
3. Agreements as Amended. The term "Agreement" as used in the Belk Product Sourcing Agreement shall be deemed to refer to the Belk
Product Sourcing Agreement as amended hereby, the term "Agreement" as used in the Bon-Ton Private Brands Agreement shall be deemed to
refer to the Bon-Ton Private Brands Agreement as amended hereby, and this Amendment shall be effective as of October 28, 2006, as if
executed on such date. It is expressly understood and agreed that except as provided above, all terms, conditions and provisions contained in
the Belk Product Sourcing Agreement and the Bon-Ton Private Brands Agreement shall remain in full force and effect without any further
change or modification whatsoever.
4. Full Force and Effect. If any term, provision, covenant or restriction of this Amendment is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Amendment, the Belk
Product Sourcing Agreement and the Bon-Ton Private Brands Agreement, shall remain in full force and effect and shall in no way be affected,
impaired or invalidated.
5. Governing Law. This Amendment shall be governed by and construed in accordance with the internal laws of the State of New York without
giving effect to the principles of conflicts of law thereof except Section 5-1401 of the New York General Obligations Law.
6. Execution in Counterparts. This Amendment may be executed in two or more counterparts and each of such counterparts shall for all
purposes be deemed to be an original, and all such counterparts shall together constitute but one and the same instrument.
[Remainder of Page Intentionally Blank]
-2-
IN WITNESS WHEREOF, the parties have caused this Amendment to be duly executed as of the day and year first above written.
SAKS INCORPORATED
By: /s/ Charles J. Hansen
----------------------------------------Name: CHARLES J. HANSEN
Title: Executive vice President
THE BON-TON STORES, INC.
BY:
/s/ Keith E. Plowman
----------------------------------------Name: Keith E. Plowman
Title: E.V.P./C.F.O.
BELK, INC.
BY:
/s/ Paul Thum Suden
--------------------------------------Paul Thum Suden
Executive Vice President
.
.
.
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARY
---------Bonstores Realty One, LLC
Bonstores Realty Two, LLC
Bon-Ton Distribution, Inc.
Carson Pirie Scott II, Inc.
Carson Pirie Scott, LLC
Elder-Beerman Holdings, Inc.
Elder-Beerman Operations, LLC
Elder-Beerman West Virginia, Inc.
Herberger's Department Stores, LLC
McRIL, LLC
The Bon-Ton Department Stores, Inc.
The Bon-Ton Giftco, Inc.
The Bon-Ton Properties - Eastview L. P.
The Bon-Ton Properties - Greece Ridge L. P.
The Bon-Ton Properties - Irondequoit L. P.
The Bon-Ton Properties - Marketplace L. P.
The Bon-Ton Stores of Lancaster, Inc.
The Bon-Ton Trade, LLC
The Elder-Beerman Stores Corp.
All subsidiaries are wholly owned.
JURISDICTION OF
ORGANIZATION
---------------Delaware
Delaware
Illinois
Mississippi
Alabama
Ohio
Ohio
West Virginia
Minnesota
Virginia
Pennsylvania
Florida
Delaware
Delaware
Delaware
Delaware
Pennsylvania
Delaware
Ohio
EXHIBIT 23
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
The Bon-Ton Stores, Inc.:
We consent to the incorporation by reference in the registration statements on Form S-8 (File Nos. 33-43105, 33-51954, 333-36633,
333-36661, 333-36725, 333-46974, 333-65120, 333-118700, and 333-139107), and Form S-3 (File No. 333-112425) of The Bon-Ton Stores,
Inc. of our reports dated April 17, 2007, with respect to the consolidated balance sheets of The Bon-Ton Stores, Inc. and subsidiaries as of
February 3, 2007 and January 28, 2006, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the
fiscal years in the three-year period ended February 3, 2007, and the related financial statement schedule, management's assessment of the
effectiveness of internal control over financial reporting as of February 3, 2007 and the effectiveness of internal control over financial reporting
as of February 3, 2007, which reports appear in the February 3, 2007 annual report on Form 10-K of The Bon-Ton Stores, Inc. Our report dated
April 17, 2007 on the consolidated financial statements refers to the adoption of Statement of Financial Accounting Standards No. 123R
"Share-Based Payment," effective January 29, 2006, and Statement of Financial Accounting Standards No. 158 "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans," effective February 3, 2007.
/s/ KPMG LLP
Philadelphia, Pennsylvania
April 17, 2007
EXHIBIT 31.1
CERTIFICATION OF BYRON L. BERGREN
I, Byron L. Bergren, 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 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 report;
3) Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
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 report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
DATE:
April 17, 2007
By: /s/ Byron L. Bergren
-------------------------Byron L. Bergren
President and Chief
Executive Officer and Director
EXHIBIT 31.2
CERTIFICATION OF KEITH E. PLOWMAN
I, Keith E. Plowman, 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 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 report;
3) Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4) The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules
13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision,
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 report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most
recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial reporting; and
5) The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent
functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal
control over financial reporting.
DATE:
April 17, 2007
By: /s/ Keith E. Plowman
----------------------------Keith E. Plowman
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
EXHIBIT 32
CERTIFICATIONS PURSUANT TO RULES 13a-14(b) and 15d-14(b) OF THE SECURITIES
EXCHANGE ACT OF 1934
In connection with the Annual Report of The Bon-Ton Stores, Inc. on Form 10-K for the period ended February 3, 2007, as filed with the
Securities and Exchange Commission (the "Report"), each of the undersigned officers of The Bon-Ton Stores, Inc., certifies pursuant to 18
U.S.C. Section 1350, that:
1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of The
Bon-Ton Stores, Inc.
DATE: April 17, 2007
By: /s/ Byron L. Bergren
----------------------------------Byron L. Bergren
President and Chief
Executive Officer and Director
By: /s/ Keith E. Plowman
----------------------------------Keith E. Plowman
Executive Vice President,
Chief Financial Officer and
Principal Accounting Officer
A signed original of this written statement has been provided to The Bon-Ton Stores, Inc. and will be retained by The Bon-Ton Stores, Inc. and
furnished to the Securities and Exchange Commission or its staff upon request.