BON TON STORES INC - FORM 10-Q

Attached files

file	filename
EX-31.2 - EXHIBIT 31.2 - BON TON STORES INC	c09434exv31w2.htm
EX-32.1 - EXHIBIT 32.1 - BON TON STORES INC	c09434exv32w1.htm
EX-31.1 - EXHIBIT 31.1 - BON TON STORES INC	c09434exv31w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

For the Quarter ended October 30, 2010

Commission File Number 0-19517

THE BON-TON STORES, INC.

2801 East Market Street

York, Pennsylvania 17402

(717) 757-7660

Incorporated in Pennsylvania IRS No. 23-2835229

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 twelve 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 þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company þ
		(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

As of November 26, 2010, there were 16,111,769 shares of Common Stock, $.01 par value, and 2,951,490 shares of Class A Common Stock, $.01 par value, outstanding.

TABLE OF CONTENTS


PART I: FINANCIAL INFORMATION
	ITEM 1. FINANCIAL STATEMENTS
		CONSOLIDATED BALANCE SHEETS
		CONSOLIDATED STATEMENTS OF OPERATIONS
		CONSOLIDATED STATEMENTS OF CASH FLOWS
		CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
	ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
	ITEM 4. CONTROLS AND PROCEDURES
PART II: OTHER INFORMATION
	ITEM 6. EXHIBITS
SIGNATURES
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1

PART I: FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

THE BON-TON STORES, INC.

CONSOLIDATED BALANCE SHEETS


(In thousands except share and per share data)	October 30,			January 30,
(Unaudited)	2010			2010
Assets
Current assets:
Cash and cash equivalents	$	18,366		$	18,922
Merchandise inventories		920,600			659,399
Prepaid expenses and other current assets		74,482			87,690

Total current assets		1,013,448			766,011

Property, fixtures and equipment at cost, net of accumulated depreciation and amortization of $663,077 and $594,020 at October 30, 2010 and January 30, 2010, respectively		717,943			756,618
Deferred income taxes		12,673			13,303
Intangible assets, net of accumulated amortization of $44,741 and $38,477 at October 30, 2010 and January 30, 2010, respectively		132,251			138,794
Other long-term assets		38,371			47,281

Total assets	$	1,914,686		$	1,722,007


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	348,533		$	163,671
Accrued payroll and benefits		43,542			48,297
Accrued expenses		156,104			160,737
Current maturities of long-term debt		7,857			7,509
Current maturities of obligations under capital leases		5,725			5,044
Deferred income taxes		15,371			14,820
Income taxes payable		193			—

Total current liabilities		577,325			400,078

Long-term debt, less current maturities		1,033,662			951,315
Obligations under capital leases, less current maturities		62,504			65,405
Other long-term liabilities		155,639			163,453

Total liabilities		1,829,130			1,580,251


Commitments and contingencies

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 16,449,569 and 15,942,348 at October 30, 2010 and January 30, 2010, respectively		164			159
Class A Common Stock — authorized 20,000,000 shares at $0.01 par value; issued and outstanding shares of 2,951,490 at October 30, 2010 and January 30, 2010		30			30
Treasury stock, at cost — 337,800 shares at October 30, 2010 and January 30, 2010		(1,387	)		(1,387	)
Additional paid-in-capital		151,132			149,649
Accumulated other comprehensive loss		(47,054	)		(52,912	)
(Accumulated deficit) retained earnings		(17,329	)		46,217

Total shareholders’ equity		85,556			141,756

Total liabilities and shareholders’ equity	$	1,914,686		$	1,722,007

The accompanying notes are an integral part of these consolidated financial statements.

THE BON-TON STORES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS


	THIRTEEN						THIRTY-NINE
	WEEKS ENDED						WEEKS ENDED
(In thousands except per share data)	October 30,			October 31,			October 30,			October 31,
(Unaudited)	2010			2009			2010			2009

Net sales	$	700,514		$	703,946		$	1,970,483		$	1,957,705
Other income		16,423			18,667			44,285			53,135

		716,937			722,613			2,014,768			2,010,840


Costs and expenses:
Costs of merchandise sold		432,852			439,029			1,224,343			1,242,492
Selling, general and administrative		235,422			234,798			687,498			694,548
Depreciation and amortization		24,798			28,016			77,538			84,810
Amortization of lease-related interests		1,131			1,216			3,424			3,660

Income (loss) from operations		22,734			19,554			21,965			(14,670	)
Interest expense, net		28,347			23,201			85,037			69,321


Loss before income taxes		(5,613	)		(3,647	)		(63,072	)		(83,991	)
Income tax provision		661			506			474			365


Net loss	$	(6,274	)	$	(4,153	)	$	(63,546	)	$	(84,356	)


Per share amounts —
Basic:
Net loss	$	(0.36	)	$	(0.24	)	$	(3.60	)	$	(4.96	)

Diluted:
Net loss	$	(0.36	)	$	(0.24	)	$	(3.60	)	$	(4.96	)

The accompanying notes are an integral part of these consolidated financial statements.

THE BON-TON STORES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS


	THIRTY-NINE
	WEEKS ENDED
(In thousands)	October 30,			October 31,
(Unaudited)	2010			2009
Cash flows from operating activities:
Net loss	$	(63,546	)	$	(84,356	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		77,538			84,810
Amortization of lease-related interests		3,424			3,660
Share-based compensation expense		5,570			3,485
Loss on sale of property, fixtures and equipment		208			103
Reclassification of other comprehensive loss		5,858			7,085
Amortization of deferred financing costs		6,959			3,054
Amortization of deferred gain on sale of proprietary credit card portfolio		(1,811	)		(1,810	)
Deferred income taxes		1,181			3,458
Changes in operating assets and liabilities:
Increase in merchandise inventories		(261,201	)		(234,588	)
Decrease in prepaid expenses and other current assets		13,208			41,726
Decrease in other long-term assets		2,669			1,786
Increase in accounts payable		177,341			152,945
Decrease in accrued payroll and benefits and accrued expenses		(10,577	)		(24,101	)
Increase in income taxes payable		193			122
(Decrease) increase in other long-term liabilities		(4	)		593

Net cash used in operating activities		(42,990	)		(42,028	)


Cash flows from investing activities:
Capital expenditures		(36,048	)		(22,210	)
Proceeds from sale of property, fixtures and equipment		77			86

Net cash used in investing activities		(35,971	)		(22,124	)


Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		(433,534	)		(476,142	)
Proceeds from issuance of long-term debt		512,285			539,531
Cash dividends paid		—			(866	)
Restricted shares forfeited in lieu of payroll taxes		(4,082	)		—
Deferred financing costs paid		(717	)		(322	)
Increase (decrease) in bank overdraft balances		4,453			(2,107	)

Net cash provided by financing activities		78,405			60,094


Net decrease in cash and cash equivalents		(556	)		(4,058	)

Cash and cash equivalents at beginning of period		18,922			19,719


Cash and cash equivalents at end of period	$	18,366		$	15,661

The accompanying notes are an integral part of these consolidated financial statements.

THE BON-TON STORES, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY


												Accumulated
												Other			(Accumulated
				Class A					Additional			Compre-			Deficit)
(In thousands)	Common			Common		Treasury			Paid-in			hensive			Retained
(Unaudited)	Stock			Stock		Stock			Capital			Loss			Earnings			Total

BALANCE AT JANUARY 30, 2010	$	159		$	30	$	(1,387	)	$	149,649		$	(52,912	)	$	46,217		$	141,756


Comprehensive loss (Note 11):
Net loss		—			—		—			—			—			(63,546	)		(63,546	)
Pension and postretirement benefit plans		—			—		—			—			2,910			—			2,910
Cash flow hedges		—			—		—			—			2,948			—			2,948

Total comprehensive loss																			(57,688	)

Restricted shares forfeited in lieu of payroll taxes		(4	)		—		—			(4,078	)		—			—			(4,082	)
Share-based compensation expense		9			—		—			5,561			—			—			5,570


BALANCE AT OCTOBER 30, 2010	$	164		$	30	$	(1,387	)	$	151,132		$	(47,054	)	$	(17,329	)	$	85,556

The accompanying notes are an integral part of these consolidated financial statements.

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

1. BASIS OF PRESENTATION

The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on January 31, 1996 as the successor of a company incorporated on January 31, 1929. The Bon-Ton Stores, Inc. operates, through its subsidiaries, 277 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, in the Detroit, Michigan area, under the Parisian nameplate. The Bon-Ton Stores, Inc. conducts its operations through one business segment.

The accompanying unaudited consolidated financial statements include the accounts of The Bon-Ton Stores, Inc. and its wholly owned subsidiaries (collectively, “the Company”). All intercompany transactions and balances have been eliminated in consolidation.

The unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. In the opinion of management, all adjustments considered necessary for a fair presentation of interim periods have been included. The Company’s business is seasonal in nature and results of operations for the interim periods presented are not necessarily indicative of results for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 30, 2010.

For purposes of the following discussion, references to the “first quarter of 2010” are to the 13 weeks ended May 1, 2010. References to the “third quarter of 2010” and the “third quarter of 2009” are to the 13 weeks ended October 30, 2010 and October 31, 2009, respectively. References to “fiscal 2010” are to the 52 weeks ending January 29, 2011; references to “fiscal 2009” are to the 52 weeks ended January 30, 2010.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions about future events. These estimates and assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and the reported amounts of revenues and expenses. Such estimates include those related to merchandise returns, the valuation of inventories, long-lived assets, intangible assets, insurance reserves, contingencies, litigation and assumptions used in the calculation of income taxes and retirement and other post-employment benefits, among others. These estimates and assumptions are based on management’s best estimates and judgments. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in estimates resulting from further changes in the economic environment will be reflected in the financial statements in future periods.

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 loss for the periods presented.

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

Recently Issued Accounting Standards

In January 2010, the Financial Accounting Standards Board issued Accounting Standards Update No. 2010-06, Fair Value Measurements and Disclosures (Topic 820): Improving Disclosures about Fair Value Measurements (“ASU 2010-06”), which requires new disclosures regarding recurring or nonrecurring fair value measurements. Entities are required to separately disclose significant transfers into and out of Level 1 and Level 2 measurements in the fair value hierarchy and the reasons for the transfers, and to provide information on purchases, sales, issuances and settlements on a gross basis in the reconciliation of Level 3 fair value measurements. In addition, entities must provide fair value measurement disclosures for each class of assets and liabilities and, for Level 2 or Level 3 measurements, disclose the valuation technique and inputs used in determining fair value for each class. ASU 2010-06 impacts disclosure requirements only. The Company adopted ASU 2010-06 in the first quarter of 2010, with the exception of the additional information in the reconciliation of Level 3 assets and liabilities, which will be effective in fiscal 2011. There were no transfers into or out of Level 1 or 2 of the fair value hierarchy during the 39 weeks ended October 30, 2010.

2. PER-SHARE AMOUNTS

The following table presents a reconciliation of net loss and weighted average shares outstanding used in basic and diluted earnings (loss) per share (“EPS”) calculations for each period presented:


	THIRTEEN						THIRTY-NINE
	WEEKS ENDED						WEEKS ENDED
	October 30,			October 31,			October 30,			October 31,
	2010			2009			2010			2009

Basic Loss Per Common Share
Net loss	$	(6,274	)	$	(4,153	)	$	(63,546	)	$	(84,356	)
Less: Income allocated to participating securities		—			—			—			—

Net loss available to common shareholders	$	(6,274	)	$	(4,153	)	$	(63,546	)	$	(84,356	)


Weighted average common shares outstanding		17,627,630			17,008,132			17,646,088			17,000,824


Basic loss per common share	$	(0.36	)	$	(0.24	)	$	(3.60	)	$	(4.96	)


Diluted Loss Per Common Share
Net loss	$	(6,274	)	$	(4,153	)	$	(63,546	)	$	(84,356	)
Less: Income allocated to participating securities		—			—			—			—

Net loss available to common shareholders	$	(6,274	)	$	(4,153	)	$	(63,546	)	$	(84,356	)


Weighted average common shares outstanding		17,627,630			17,008,132			17,646,088			17,000,824
Common shares issuable — stock options		—			—			—			—

Weighted average common shares outstanding assuming dilution		17,627,630			17,008,132			17,646,088			17,000,824


Diluted loss per common share	$	(0.36	)	$	(0.24	)	$	(3.60	)	$	(4.96	)

Due to the Company’s net loss position, weighted average unvested restricted shares (participating securities) of 1,373,480 and 1,261,004 for the third quarter of 2010 and 2009, respectively, and 1,241,438 and 1,093,837 for the 39 weeks ended October 30, 2010 and October 31, 2009, respectively, were excluded from the calculation of both basic and diluted EPS.

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

In addition, weighted average stock option shares (non-participating securities) of 1,056,322 and 1,084,306 for the third quarter of 2010 and 2009, respectively, and 1,059,750 and 1,100,943 for the 39 weeks ended October 30, 2010 and October 31, 2009, respectively, were excluded from the calculation of diluted EPS as they would have been antidilutive. Certain of these stock option shares were excluded solely due to the Company’s net loss position. Had the Company reported net income for the third quarter of 2010 and 2009, these shares would have had an effect of 204,653 and 73,614 dilutive shares, respectively, for purposes of calculating diluted EPS. Had the Company reported net income for the 39 weeks ended October 30, 2010 and October 31, 2009, these shares would have had an effect of 243,487 and 25,054 dilutive shares, respectively, for purposes of calculating diluted EPS.

3. FAIR VALUE MEASUREMENTS

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements and Disclosures (“ASC 820”) defines fair value and establishes a framework for measuring fair value. ASC 820 establishes fair value hierarchy levels that prioritize the inputs used in valuations determining fair value. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are primarily quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs based on the Company’s own assumptions.

As of October 30, 2010 and January 30, 2010, the Company held two interest rate swap contracts required to be measured at fair value on a recurring basis (see Note 4). The fair values of these interest rate swap contracts are derived from discounted cash flow analysis utilizing an interest rate yield curve that is readily available to the public or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these interest rate swap contracts as a Level 2 fair value measurement. There has been no change in the valuation technique used to determine the fair value of the interest rate swap contracts.

The interest rate swap liability comprises the entirety of the Company’s financial assets and liabilities carried at fair value and measured on a recurring basis. The carrying value of the interest rate swap liability as of October 30, 2010 and January 30, 2010 is as follows:


					Significant
			Quoted Prices		Other		Significant
			in Active		Observable		Unobservable
	Total Carrying		Markets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
October 30, 2010	$	3,520	$	—	$	3,520	$	—

January 30, 2010	$	6,319	$	—	$	6,319	$	—

The carrying values of the Company’s cash and cash equivalents, accounts payable and financial instruments reported within prepaid expenses and other current assets and other long-term assets approximate fair value. The carrying value of the Company’s long-term debt, including current maturities but excluding capital leases, was $1,041,519 and $958,824 at October 30, 2010 and January 30, 2010, respectively, and the estimated fair value was $1,046,325 and $888,647 at October 30, 2010 and January 30, 2010, respectively. The fair value estimate of the Company’s long-term debt is based on quoted market rates available to the Company or discounted cash flow analysis as appropriate.

4. INTEREST RATE DERIVATIVES

The Company enters into interest rate swap agreements to manage the fixed/variable interest rate mix of its debt portfolio. These derivatives are accounted for in accordance with ASC Topic 815, Derivatives and Hedging (“ASC 815”).

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. In conjunction with 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) control the aggregate interest rate risk of the debt portfolio. The Company enters into interest rate swap agreements to change the fixed/variable interest rate mix of the debt portfolio in order to maintain an appropriate balance of fixed-rate and variable-rate debt.

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

On the date the derivative instrument is entered into, the Company designates the derivative as a hedge 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 other comprehensive income or loss (“OCI”) and reclassified into the statement of operations as the underlying hedged item affects earnings, such as when quarterly settlements are made on the hedged forecasted transaction. 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, if any, is recorded in the current statement of operations. Also, changes in the fair value of a derivative that is not designated as a hedge, if any, are entirely recorded in the statement of operations. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions; this process includes relating all derivatives that are designated as cash flow hedges to specific balance sheet assets or liabilities. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in 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 or loss (“AOCI”) related to the derivative are recorded in the statement of operations for the current period.

The Company has two interest rate swap contracts to effectively convert a portion of its variable-rate debt to fixed-rate debt, both of which were entered into on July 14, 2006 and expire on July 14, 2011. These contracts entail the exchange of fixed-rate and floating-rate interest payments periodically over the life of the agreement. The floating-rate interest payments are based on three-month LIBOR rates. The following indicates the notional amount of these interest rate swap contracts and the range of fixed-rates associated with these contracts:


	October 30,			October 31,
	2010			2009
Fixed swaps (notional amount)	$	100,000		$	100,000
Range of pay rate		5.48%-5.49	%		5.48%-5.49	%

On December 4, 2009, the Company amended and restated its senior secured credit facility, at which time the Company de-designated and re-measured its two interest rate swaps and discontinued hedge accounting prospectively in accordance with ASC 815. Specifically, ASC 815 requires the immediate recognition of the expected cumulative ineffectiveness, with the remaining amount to remain in AOCI and be reclassified into the statement of operations as the originally hedged forecasted transactions affect the statement of operations. All changes in fair value after December 4, 2009 are recognized in interest expense.

The following table summarizes the fair value (see Note 3) and presentation in the consolidated balance sheet:


	Balance Sheet Location	Derivative Assets		Derivative Liabilities
October 30, 2010	Accrued Expenses	$	—	$	3,520
January 30, 2010	Other Long-Term Liabilities	$	—	$	6,319

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The following table summarizes the effect of the interest rate swaps on the consolidated statement of operations and OCI or AOCI, prior to being de-designated on December 4, 2009:

Amount of

Location of

Amount of

Loss

Amount of

Location of Loss

Reclassified

Recognized

Loss

Reclassified from

from AOCI to

in the

Recognized

AOCI to the

the Statement

Statement of

in OCI

Statement of

of Operations

Operations

(effective

Operations

(effective

(ineffective

portion)

(effective portion)

portion)

13 Weeks Ended October 31, 2009

1,515

Interest Expense, Net

1,270

Interest Expense, Net

—

39 Weeks Ended October 31, 2009

4,641

Interest Expense, Net

3,496

Interest Expense, Net

—

The following table summarizes the effect of the interest rate swaps on the consolidated statement of operations and AOCI, after being de-designated on December 4, 2009:

Amount of

Location of Loss

Loss

Location of

Loss

Reclassified from

Reclassified

Loss

Recognized

AOCI to the

from AOCI to

Recognized in

in the

Statement of

the Statement

Statement of

Operations

of Operations

Operations

13 Weeks Ended October 30, 2010

Interest Expense, Net

982

Interest Expense, Net

245

39 Weeks Ended October 30, 2010

Interest Expense, Net

2,948

Interest Expense, Net

1,088

At October 30, 2010, it is expected that $1,848 of losses in AOCI related to interest rate swaps will be reclassified into the statement of operations within the next nine months.

5. SUPPLEMENTAL BALANCE SHEET INFORMATION

Prepaid expenses and other current assets were comprised of the following:


	October 30,		January 30,
	2010		2010
Prepaid expenses	$	39,046	$	30,778
Other receivables		34,236		48,624
Income tax receivables		1,200		8,288

Total	$	74,482	$	87,690

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

6. SUPPLEMENTAL CASH FLOW INFORMATION

The following supplemental cash flow information is provided for the periods reported:


	THIRTY-NINE
	WEEKS ENDED
	October 30,			October 31,
	2010			2009

Cash paid for:
Interest, net of amounts capitalized	$	91,140		$	79,452
Income taxes, net of refunds received		(6,598	)		(32,088	)

Non-cash investing activities:
Decrease in accrued property, fixtures and equipment included in accounts payable and accrued expenses	$	(285	)	$	(194	)
Assets acquired under capital leases		1,724			6,546

7. EXIT OR DISPOSAL ACTIVITIES

The following table summarizes exit or disposal activities during the 39 weeks ended October 30, 2010 related to involuntary associate termination costs associated with the Company’s cost reductions in corporate and store personnel implemented in January 2010 and the 39 weeks ended October 30, 2010, the closing of its Bon-Ton store in Latham, New York and the announced January 2011 closings of its Elder-Beerman store in Centerville, Ohio and Bon-Ton store in Frederick, Maryland:


	Termination			Other
	Benefits			Costs			Total
Balance as of January 30, 2010	$	1,688		$	—		$	1,688
Provisions:
Thirteen weeks ended May 1, 2010		473			—			473
Thirteen weeks ended July 31, 2010		11			279			290
Thirteen weeks ended October 30, 2010		374			—			374
Payments:
Thirteen weeks ended May 1, 2010		(1,980	)		—			(1,980	)
Thirteen weeks ended July 31, 2010		(160	)		—			(160	)
Thirteen weeks ended October 30, 2010		(177	)		(259	)		(436	)

Balance as of October 30, 2010	$	229		$	20		$	249

The above provisions were included within selling, general and administrative expense.

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

8. EMPLOYEE DEFINED AND POSTRETIREMENT BENEFIT PLANS

The Company provides benefits to certain current and former associates who are eligible under a defined benefit pension plan and various supplemental pension plans (collectively, the “Pension Plans”). Net periodic benefit expense for the Pension Plans includes the following (income) and expense components:


	THIRTEEN						THIRTY-NINE
	WEEKS ENDED						WEEKS ENDED
	October 30,			October 31,			October 30,			October 31,
	2010			2009			2010			2009
Interest cost	$	2,543		$	2,822		$	7,629		$	8,464
Expected return on plan assets		(1,977	)		(1,764	)		(5,931	)		(5,294	)
Recognition of net actuarial loss		970			1,219			2,910			3,657

Net periodic benefit expense	$	1,536		$	2,277		$	4,608		$	6,827

During the 39 weeks ended October 30, 2010, contributions of $596 were made to the Pension Plans. The Company anticipates contributing an additional $169 to fund the Pension Plans in fiscal 2010 for an annual total of $765.

The Company also provides medical and life insurance benefits to certain former associates under a postretirement benefit plan (“Postretirement Benefit Plan”). Net periodic benefit expense of $81, comprised solely of interest expense, was recorded in the third quarter of 2010. Net periodic benefit expense of $64, comprised of interest expense of $87 and recognition of net actuarial gain of $23, was recorded in the third quarter of 2009. During the 39 weeks ended October 30, 2010, the Company recorded net periodic benefit expense of $244, comprised solely of interest expense. During the 39 weeks ended October 31, 2009, net periodic benefit expense of $194, comprised of interest expense of $262 and recognition of net actuarial gain of $68, was recorded. During the 39 weeks ended October 30, 2010, payments under the Postretirement Benefit Plan exceeded participant premiums received by $353. The Company anticipates contributing an additional $575 to fund the Postretirement Benefit Plan in fiscal 2010 for a net annual total of $928.

9. INCOME TAXES

The provisions codified within ASC Topic 740, Income Taxes (“ASC 740”), require companies to assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. In accordance with ASC 740, the Company maintained a full valuation allowance throughout fiscal 2009 and the 39 weeks ended October 30, 2010 on all the Company’s net deferred tax assets. The Company’s deferred tax asset valuation allowance totaled $165,457 and $140,452 at October 30, 2010 and January 30, 2010, respectively.

Given the Company’s valuation allowance position, no tax benefit was recognized on the Company’s loss before income taxes in the 13 and 39 weeks ended October 30, 2010 and October 31, 2009. The tax provision of $474 recorded in the 39 weeks ended October 30, 2010 includes certain state income tax expense and recognition of deferred tax liabilities associated with indefinite-lived assets, partially offset by a $1,507 tax benefit resulting from recognition of uncertain tax positions due to a statute of limitations expiration. The tax provision of $365 recorded in the 39 weeks ended October 31, 2009 includes certain state income tax expense and recognition of deferred tax liabilities associated with indefinite-lived assets, partially offset by a $1,633 tax benefit resulting from recognition of uncertain tax positions due to a statute of limitations expiration.

As of October 30, 2010, it is reasonably possible that gross unrecognized tax benefits could decrease by $42 within the next 12 months due to the expiration of certain statutes of limitations.

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

10. CONTINGENCIES

In October 2010, the Company became aware that a third-party it had contracted with as its agent to receive, monitor and pay utility bills for the Company’s properties became delinquent in its payment of the Company’s utility bills, despite timely receipt of funds from the Company. The Company recorded an estimated $2.9 million liability for the unpaid utility bills; this liability was offset by a $2.85 million insurance receivable through the Company’s commercial crime policy.

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 will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

11. COMPREHENSIVE LOSS

Comprehensive loss was determined as follows:


	THIRTEEN						THIRTY-NINE
	WEEKS ENDED						WEEKS ENDED
	October 30,			October 31,			October 30,			October 31,
	2010			2009			2010			2009

Net loss	$	(6,274	)	$	(4,153	)	$	(63,546	)	$	(84,356	)

Other comprehensive income (loss):
Amortization of pension and postretirement benefit plans		970			1,196			2,910			3,589
Cash flow hedge derivative income (loss)		982			(245	)		2,948			(1,145	)

Comprehensive loss	$	(4,322	)	$	(3,202	)	$	(57,688	)	$	(81,912	)

As a result of the deferred tax asset valuation allowance maintained throughout fiscal 2009 and the 39 weeks ended October 30, 2010, the changes recognized within other comprehensive income (loss) in all periods presented were recorded effectively on a gross basis.

12. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

On March 6, 2006, The Bon-Ton Department Stores, Inc. (the “Issuer”), a wholly owned subsidiary of the Company, entered into an Indenture with The Bank of New York, as trustee, under which the Issuer issued $510,000 aggregate principal amount of its 10-1/4% Senior Notes due 2014. The Notes are guaranteed on a senior unsecured basis by the Company and by each of the Company’s subsidiaries, other than the Issuer, that is an obligor under the Company’s senior secured credit facility. The guarantees are full and unconditional and joint and several.

The condensed consolidating financial information for the Company, the Issuer and the Company’s guarantor and non-guarantor subsidiaries as of October 30, 2010 and January 30, 2010 and for the third quarter of 2010 and 2009 and the 39 weeks ended October 30, 2010 and October 31, 2009 as presented below has been prepared from the books and records maintained by the Company, the Issuer 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.

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
October 30, 2010


	Bon-Ton
	(Parent				Guarantor		Non-Guarantor		Consolidating			Company
	Company)		Issuer		Subsidiaries		Subsidiaries		Eliminations			Consolidated

Assets
Current assets:
Cash and cash equivalents	$	1	$	10,346	$	8,019	$	—	$	—		$	18,366
Merchandise inventories		—		465,806		454,794		—		—			920,600
Prepaid expenses and other current assets		—		61,910		12,406		700		(534	)		74,482

Total current assets		1		538,062		475,219		700		(534	)		1,013,448

Property, fixtures and equipment at cost, net		—		202,733		233,995		281,215		—			717,943
Deferred income taxes		—		4,805		7,868		—		—			12,673
Intangible assets, net		—		56,041		76,210		—		—			132,251
Investment in and advances to affiliates		85,555		603,969		26,820		316		(716,660	)		—
Other long-term assets		—		32,370		1,793		4,208		—			38,371

Total assets	$	85,556	$	1,437,980	$	821,905	$	286,439	$	(717,194	)	$	1,914,686


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—	$	348,533	$	—	$	—	$	—		$	348,533
Accrued payroll and benefits		—		33,027		10,515		—		—			43,542
Accrued expenses		—		72,656		82,671		1,311		(534	)		156,104
Current maturities of long-term debt and obligations under capital leases		—		4,177		2,548		6,857		—			13,582
Deferred income taxes		—		6,667		8,704		—		—			15,371
Income taxes payable		—		119		74		—		—			193

Total current liabilities		—		465,179		104,512		8,168		(534	)		577,325

Long-term debt and obligations under capital leases, less current maturities		—		802,484		53,020		240,662		—			1,096,166
Other long-term liabilities		—		110,344		43,945		1,350		—			155,639

Total liabilities		—		1,378,007		201,477		250,180		(534	)		1,829,130


Shareholders’ equity		85,556		59,973		620,428		36,259		(716,660	)		85,556


Total liabilities and shareholders’ equity	$	85,556	$	1,437,980	$	821,905	$	286,439	$	(717,194	)	$	1,914,686

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
January 30, 2010


	Bon-Ton
	(Parent				Guarantor		Non-Guarantor		Consolidating			Company
	Company)		Issuer		Subsidiaries		Subsidiaries		Eliminations			Consolidated

Assets
Current assets:
Cash and cash equivalents	$	1	$	9,962	$	8,959	$	—	$	—		$	18,922
Merchandise inventories		—		339,616		319,783		—		—			659,399
Prepaid expenses and other current assets		—		73,640		11,549		3,035		(534	)		87,690

Total current assets		1		423,218		340,291		3,035		(534	)		766,011

Property, fixtures and equipment at cost, net		—		226,915		239,850		289,853		—			756,618
Deferred income taxes		—		4,277		9,026		—		—			13,303
Intangible assets, net		—		59,332		79,462		—		—			138,794
Investment in and advances to (from) affiliates		141,755		489,259		153,717		316		(785,047	)		—
Other long-term assets		—		38,561		4,263		4,457		—			47,281

Total assets	$	141,756	$	1,241,562	$	826,609	$	297,661	$	(785,581	)	$	1,722,007


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—	$	163,671	$	—	$	—	$	—		$	163,671
Accrued payroll and benefits		—		40,632		7,665		—		—			48,297
Accrued expenses		—		73,953		85,979		1,339		(534	)		160,737
Current maturities of long-term debt and obligations under capital leases		—		3,635		2,409		6,509		—			12,553
Deferred income taxes		—		5,650		9,170		—		—			14,820

Total current liabilities		—		287,541		105,223		7,848		(534	)		400,078

Long-term debt and obligations under capital leases, less current maturities		—		715,891		54,948		245,881		—			1,016,720
Other long-term liabilities		—		120,469		41,706		1,278		—			163,453

Total liabilities		—		1,123,901		201,877		255,007		(534	)		1,580,251


Shareholders’ equity		141,756		117,661		624,732		42,654		(785,047	)		141,756


Total liabilities and shareholders’ equity	$	141,756	$	1,241,562	$	826,609	$	297,661	$	(785,581	)	$	1,722,007

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended October 30, 2010


	Bon-Ton
	(Parent						Guarantor			Non-Guarantor			Consolidating			Company
	Company)			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales	$	—		$	303,955		$	396,559		$	—		$	—		$	700,514
Other income		—			6,803			9,620			—			—			16,423

		—			310,758			406,179			—			—			716,937

Costs and expenses:
Costs of merchandise sold		—			187,748			245,104			—			—			432,852
Selling, general and administrative		—			107,908			136,273			24			(8,783	)		235,422
Depreciation and amortization		—			9,662			12,342			2,794			—			24,798
Amortization of lease-related interests		—			647			484			—			—			1,131

Income (loss) from operations		—			4,793			11,976			(2,818	)		8,783			22,734

Other income (expense):
Intercompany rental and royalty income		—			—			1,740			7,043			(8,783	)		—
Equity in (losses) earnings of subsidiaries		(5,613	)		10,127			—			—			(4,514	)		—
Interest expense, net		—			(20,533	)		(3,750	)		(4,064	)		—			(28,347	)


(Loss) income before income taxes		(5,613	)		(5,613	)		9,966			161			(4,514	)		(5,613	)
Income tax provision		661			661			330			—			(991	)		661


Net (loss) income	$	(6,274	)	$	(6,274	)	$	9,636		$	161		$	(3,523	)	$	(6,274	)

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended October 31, 2009


	Bon-Ton
	(Parent						Guarantor			Non-Guarantor			Consolidating			Company
	Company)			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales	$	—		$	307,443		$	396,503		$	—		$	—		$	703,946
Other income		—			7,780			10,887			—			—			18,667

		—			315,223			407,390			—			—			722,613

Costs and expenses:
Costs of merchandise sold		—			192,046			246,983			—			—			439,029
Selling, general and administrative		—			106,786			136,826			22			(8,836	)		234,798
Depreciation and amortization		—			11,222			13,924			2,870			—			28,016
Amortization of lease-related interests		—			698			518			—			—			1,216

Income (loss) from operations		—			4,471			9,139			(2,892	)		8,836			19,554

Other income (expense):
Intercompany rental and royalty income		—			—			1,793			7,043			(8,836	)		—
Equity in (losses) earnings of subsidiaries		(3,647	)		9,725			—			—			(6,078	)		—
Interest expense, net		—			(17,843	)		(1,187	)		(4,171	)		—			(23,201	)


(Loss) income before income taxes		(3,647	)		(3,647	)		9,745			(20	)		(6,078	)		(3,647	)
Income tax provision		506			506			153			—			(659	)		506


Net (loss) income	$	(4,153	)	$	(4,153	)	$	9,592		$	(20	)	$	(5,419	)	$	(4,153	)

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirty-Nine Weeks Ended October 30, 2010


	Bon-Ton
	(Parent						Guarantor			Non-Guarantor			Consolidating			Company
	Company)			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales	$	—		$	855,121		$	1,115,362		$	—		$	—		$	1,970,483
Other income		—			18,126			26,159			—			—			44,285

		—			873,247			1,141,521			—			—			2,014,768

Costs and expenses:
Costs of merchandise sold		—			530,153			694,190			—			—			1,224,343
Selling, general and administrative		—			314,970			398,774			73			(26,319	)		687,498
Depreciation and amortization		—			30,509			38,391			8,638			—			77,538
Amortization of lease-related interests		—			1,970			1,454			—			—			3,424

(Loss) income from operations		—			(4,355	)		8,712			(8,711	)		26,319			21,965

Other income (expense):
Intercompany rental and royalty income		—			—			4,973			21,346			(26,319	)		—
Equity in (losses) earnings of subsidiaries		(63,072	)		3,037			—			—			60,035			—
Interest expense, net		—			(61,754	)		(11,001	)		(12,282	)		—			(85,037	)


(Loss) income before income taxes		(63,072	)		(63,072	)		2,684			353			60,035			(63,072	)
Income tax provision		474			474			984			—			(1,458	)		474


Net (loss) income	$	(63,546	)	$	(63,546	)	$	1,700		$	353		$	61,493		$	(63,546	)

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirty-Nine Weeks Ended October 31, 2009


	Bon-Ton
	(Parent						Guarantor			Non-Guarantor			Consolidating			Company
	Company)			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Net sales	$	—		$	848,178		$	1,109,527		$	—		$	—		$	1,957,705
Other income		—			25,257			27,878			—			—			53,135

		—			873,435			1,137,405			—			—			2,010,840

Costs and expenses:
Costs of merchandise sold		—			539,241			703,251			—			—			1,242,492
Selling, general and administrative		—			315,885			404,886			67			(26,290	)		694,548
Depreciation and amortization		—			34,011			42,009			8,790			—			84,810
Amortization of lease-related interests		—			2,106			1,554			—			—			3,660

Loss from operations		—			(17,808	)		(14,295	)		(8,857	)		26,290			(14,670	)

Other income (expense):
Intercompany rental and royalty income		—			—			4,944			21,346			(26,290	)		—
Equity in losses of subsidiaries		(83,991	)		(12,874	)		—			—			96,865			—
Interest expense, net		—			(53,309	)		(3,422	)		(12,590	)		—			(69,321	)


Loss before income taxes		(83,991	)		(83,991	)		(12,773	)		(101	)		96,865			(83,991	)
Income tax provision		365			365			965			—			(1,330	)		365


Net loss	$	(84,356	)	$	(84,356	)	$	(13,738	)	$	(101	)	$	98,195		$	(84,356	)

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
Thirty-Nine Weeks Ended October 30, 2010


	Bon-Ton
	(Parent						Guarantor			Non-Guarantor			Consolidating			Company
	Company)			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:	$	4,082		$	(71,404	)	$	25,495		$	11,617		$	(12,780	)	$	(42,990	)


Cash flows from investing activities:
Capital expenditures		—			(17,376	)		(18,672	)		—			—			(36,048	)
Intercompany Investing activity		—			(29	)		—			—			29			—
Proceeds from sale of property, fixtures and equipment		—			46			31			—			—			77

Net cash used in investing activities		—			(17,359	)		(18,641	)		—			29			(35,971	)


Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		—			(426,874	)		(1,790	)		(4,870	)		—			(433,534	)
Proceeds from issuance of long-term debt		—			512,285			—			—			—			512,285
Deferred financing costs paid		—			(717	)		—			—			—			(717	)
Intercompany financing activity		—			—			(6,004	)		(6,747	)		12,751			—
Restricted shares forfeited in lieu of payroll taxes		(4,082	)		—			—			—			—			(4,082	)
Increase in bank overdraft balances		—			4,453			—			—			—			4,453

Net cash (used in) provided by financing activities		(4,082	)		89,147			(7,794	)		(11,617	)		12,751			78,405


Net increase (decrease) in cash and cash equivalents		—			384			(940	)		—			—			(556	)

Cash and cash equivalents at beginning of period		1			9,962			8,959			—			—			18,922


Cash and cash equivalents at end of period	$	1		$	10,346		$	8,019		$	—		$	—		$	18,366

THE BON-TON STORES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands except share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
Thirty-Nine Weeks Ended October 31, 2009


	Bon-Ton
	(Parent						Guarantor			Non-Guarantor			Consolidating			Company
	Company)			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:	$	866		$	(51,174	)	$	12,323		$	7,079		$	(11,122	)	$	(42,028	)


Cash flows from investing activities:
Capital expenditures		—			(16,131	)		(6,079	)		—			—			(22,210	)
Intercompany Investing activity		—			(1,713	)		—			—			1,713			—
Proceeds from sale of property, fixtures and equipment		—			24			62			—			—			86

Net cash used in investing activities		—			(17,820	)		(6,017	)		—			1,713			(22,124	)


Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		—			(469,935	)		(1,661	)		(4,546	)		—			(476,142	)
Proceeds from issuance of long-term debt		—			539,531			—			—			—			539,531
Intercompany financing activity		—			(866	)		(6,010	)		(2,533	)		9,409			—
Cash dividends paid		(866	)		—			—			—			—			(866	)
Deferred financing costs paid		—			(322	)		—			—			—			(322	)
Decrease in bank overdraft balances		—			(2,107	)		—			—			—			(2,107	)

Net cash (used in) provided by financing activities		(866	)		66,301			(7,671	)		(7,079	)		9,409			60,094


Net decrease in cash and cash equivalents		—			(2,693	)		(1,365	)		—			—			(4,058	)

Cash and cash equivalents at beginning of period		1			10,769			8,949			—			—			19,719


Cash and cash equivalents at end of period	$	1		$	8,076		$	7,584		$	—		$	—		$	15,661

13. AMENDMENTS TO CREDIT CARD PROGRAM AGREEMENT

Effective July 30, 2010, the Company and HSBC Bank Nevada, N.A. (“HSBC”) entered into a Fourth Amendment (the “Fourth Amendment”) to the Credit Card Program Agreement (the “CCPA”). Under the Fourth Amendment, the right of either party to terminate the Third Amendment to the CCPA (the “Opt Out Right”) was extended to August 31, 2010. Prior provisions regarding notice and prescribed cash payment to the other party remained in effect.

Effective August 31, 2010, the Company and HSBC entered into a Fifth Amendment (the “Fifth Amendment”) to the CCPA. Under the Fifth Amendment, either party may exercise its Opt Out Right by providing written notice to the other party no earlier than January 1, 2011 and not later than January 31, 2011. Prior provisions regarding prescribed cash payment to the other party remain effective.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


ITEM 2.		MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

For purposes of the following discussion, references to the “third quarter of 2010” and the “third quarter of 2009” are to the 13 weeks ended October 30, 2010 and October 31, 2009, respectively. References to “2010” and “2009” are to the 39 weeks ended October 30, 2010 and October 31, 2009, respectively. References to “fiscal 2010” and “fiscal 2009” are to the 52 weeks ending January 29, 2011 and the 52 weeks ended January 30, 2010, respectively. References to “the Company,” “we,” “us,” and “our” refer to The Bon-Ton Stores, Inc. and its subsidiaries.

Overview

General

We are one of the largest regional department store operators in the United States, offering a broad assortment of brand-name fashion apparel and accessories for women, men and children. Our merchandise offerings also include cosmetics, home furnishings and other goods. We currently operate 277 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, in the Detroit, Michigan area, under the Parisian nameplate, encompassing a total of approximately 26 million square feet.

We operate in the department store segment of the U.S. retail industry, which is a highly competitive and fragmented environment. The department store industry continues to evolve in response to consolidation among merchandise vendors as well as the evolution of competitive retail formats — mass merchandisers, national chain retailers, specialty retailers and online retailers — and the advent of mobile technology and social media.

Economic Factors and Company Performance

Our operating results and performance, and that of our competitors, depend significantly on economic conditions and their impact on consumer spending. We remain cautiously optimistic about the economic environment for fiscal 2010. We will continue to focus on sales and marketing initiatives to positively impact our sales performance, particularly when economic conditions improve, and assess options to further reduce our cost structure. On November 18, 2010, we provided the following assumptions with respect to fiscal 2010:

	•		a comparable store sales increase in the range of 1.0% to 1.5%;

	•		a gross margin rate of 37.7%, an improvement over the fiscal 2009 rate of 37.1%;

	•		a reduction of $15.0 million to $20.0 million in our selling, general and administrative (“SG&A”) expenses; and

	•		an effective tax rate of 0%.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Results of Operations

The following table summarizes changes in selected operating indicators of the Company, illustrating the relationship of various income and expense items to net sales for the respective periods presented (components may not add or subtract to totals due to rounding):


	THIRTEEN						THIRTY-NINE
	WEEKS ENDED						WEEKS ENDED
	October 30,			October 31,			October 30,			October 31,
	2010			2009			2010			2009
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Other income		2.3			2.7			2.2			2.7

		102.3			102.7			102.2			102.7

Costs and expenses:
Costs of merchandise sold		61.8			62.4			62.1			63.5
Selling, general and administrative		33.6			33.4			34.9			35.5
Depreciation and amortization		3.5			4.0			3.9			4.3
Amortization of lease-related interests		0.2			0.2			0.2			0.2

Income (loss) from operations		3.2			2.8			1.1			(0.7	)
Interest expense, net		4.0			3.3			4.3			3.5

Loss before income taxes		(0.8	)		(0.5	)		(3.2	)		(4.3	)
Income tax provision		0.1			0.1			—			—

Net loss		(0.9	)%		(0.6	)%		(3.2	)%		(4.3	)%

Third Quarter of 2010 Compared with Third Quarter of 2009

Net sales: Net sales in the third quarter of 2010 were $700.5 million, compared with $703.9 million in the third quarter of 2009, reflecting a decrease of 0.5%. Comparable store sales decreased 0.3%. Our sales performance in the third quarter was hampered by unseasonably warm weather in our markets in August and October. September sales, by contrast, unaffected by unseasonable temperatures, exhibited a solid comparable store increase. The decrease in sales of cold-weather merchandise, in fact, accounted for the entirety of the comparable sales decline in the period.

Merchandise categories with notable sales increases in the third quarter of 2010 included Footwear, Cosmetics and Better Sportswear (included in Women’s Apparel). Footwear benefited from increased inventory investment in the period and favorable customer response to new fall updated product, particularly fashion boots. The introduction of innovative treatment product and fragrance launches fueled the sales performance in Cosmetics. Better Sportswear sales increased as customers responded favorably to our assortment. Sales of better merchandise throughout our product categories significantly outperformed sales of moderately-priced traditional goods during the period.

The poorest performing categories in the period were Coats, Moderate Sportswear (both included in Women’s Apparel) and Juniors’ Apparel. Sales in Coats were significantly impacted by the unseasonable weather. The performance in Juniors’ Apparel reflects slower sweater and knit top sales.

Other income: Other income, which includes income from revenues received under a credit card program agreement with HSBC Bank Nevada, N.A., leased departments and other customer revenues, was $16.4 million, or 2.3% of net sales, in the third quarter of 2010 as compared with $18.7 million, or 2.7% of net sales, in the third quarter of 2009. The decrease primarily reflects reduced leased department income, the result of the conversion in late fiscal 2009 of Fine Jewelry to an owned department.

Costs and expenses: Gross margin in the third quarter of 2010 increased $2.7 million to $267.7 million as compared with $264.9 million in the comparable prior year period. The increase is attributable to an improved gross margin rate. Gross margin as a percentage of net sales increased 60 basis points to 38.2% in the third quarter of 2010 from 37.6% in the same period last year. We improved our merchandise margins primarily through well-executed inventory management, which resulted in decreased markdowns in the period.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

SG&A expense in the third quarter of 2010 was $235.4 million as compared with $234.8 million in the third quarter of 2009, an increase of $0.6 million. The increase is primarily due to higher advertising expenditures and targeted investment spending to support growth in our eCommerce operations, partially offset by ongoing cost control efforts. The current year SG&A expense rate increased slightly to 33.6% of net sales from 33.4% in the comparable prior year period.

Depreciation and amortization expense and amortization of lease-related interests decreased $3.3 million, to $25.9 million in the third quarter of 2010 from $29.2 million in the third quarter of 2009, primarily due to the reduced asset base resulting from significant reductions in capital expenditures in fiscal 2009 (whereby depreciation expense greatly exceeded asset additions) and, to a lesser extent, asset impairments recorded in fiscal 2009.

Income from operations: Income from operations in the third quarter of 2010 was $22.7 million, or 3.2% of net sales, compared with income from operations of $19.6 million, or 2.8% of net sales, in the comparable prior year period.

Interest expense, net: Net interest expense was $28.3 million, or 4.0% of net sales, in the third quarter of 2010 as compared with $23.2 million, or 3.3% of net sales, in the third quarter of 2009. The $5.1 million increase is primarily due to increased borrowing rates and amortization of deferred financing fees under our amended and new credit facilities, partially offset by reduced borrowings.

Income tax provision: The effective tax rate in the third quarter of 2010 and 2009 largely reflects the Company’s valuation allowance position against all net deferred tax assets. The $0.7 million income tax provision in the third quarter of 2010 includes certain state income tax expense and recognition of deferred tax liabilities associated with indefinite-lived assets, as does the $0.5 million income tax provision in the third quarter of 2009.

Net loss: Net loss in the third quarter of 2010 was $6.3 million, or 0.9% of net sales, compared with a net loss of $4.2 million, or 0.6% of net sales, in the third quarter of 2009.

2010 Compared with 2009

Net sales: Net sales in 2010 were $1,970.5 million, compared with $1,957.7 million in 2009, reflecting an increase of $12.8 million, or 0.7%. Comparable store sales increased 0.9% in the 39 weeks, largely due to a strong first quarter performance. Newness and value combined to drive sales increases in Footwear and Better Sportswear (included in Women’s Apparel) in 2010. We believe our value message continued to resonate with our customers as sales in Intimate Apparel and Accessories benefited from successful private brand strategies and expanded moderate offerings.

Sales in Coats (included in Women’s Apparel) were significantly impacted by unseasonable weather in the third quarter. Juniors’ Apparel sales have continued to underperform as compared with other merchandise categories as our customer has not responded to our merchandise offerings. Sales in Furniture (included in Home) continue to be adversely impacted by the challenging housing market and slow economy.

Other income: Other income was $44.3 million, or 2.2% of net sales, in 2010 as compared with $53.1 million, or 2.7% of net sales, in 2009. The decrease primarily reflects reduced leased department income, the result of the conversion in late fiscal 2009 of Fine Jewelry to an owned department.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Costs and expenses: Gross margin in 2010 was $746.1 million as compared with $715.2 million in 2009, reflecting an increase of $30.9 million. The increase in gross margin dollars was due to the increased sales volume and an increased margin rate in the period. Gross margin as a percentage of net sales increased 130 basis points to 37.9% in the current year from 36.5% last year, primarily due to decreased net markdowns and increased sales penetration of private brand and value-priced offerings, both of which typically generate higher net markup and gross margin.

SG&A expense in 2010 was $687.5 million as compared with $694.5 million in 2009. The $7.1 million decrease was the result of continued cost control efforts, partially offset by incentive compensation accruals. The expense rate in 2010 decreased 60 basis points to 34.9%, reflecting both the decreased expenditures and higher sales volume in the current year.

Depreciation and amortization expense and amortization of lease-related interests decreased $7.5 million to $81.0 million in 2010, primarily due to the reduced asset base resulting from significant reductions in capital expenditures in fiscal 2009 (whereby depreciation expense greatly exceeded asset additions) and, to a lesser extent, asset impairments recorded in fiscal 2009.

Income (loss) from operations: Income from operations in 2010 was $22.0 million, an improvement of $36.6 million over the loss from operations of ($14.7) million in 2009.

Interest expense, net: Net interest expense was $85.0 million, or 4.3% of net sales, in 2010 as compared with $69.3 million, or 3.5% of net sales, in 2009. The $15.7 million increase principally reflects higher borrowing rates and amortization of deferred financing fees under our amended and new credit facilities, partially offset by reduced borrowings.

Income tax provision: The effective tax rate in 2010 and 2009 largely reflects the Company’s valuation allowance position against all net deferred tax assets. The $0.5 million income tax provision in 2010 includes certain state income tax expense and recognition of deferred tax liabilities associated with indefinite-lived assets, partially offset by a $1.5 million tax benefit resulting from recognition of uncertain tax positions due to a statute of limitations expiration. The $0.4 million income tax provision in 2009 includes certain state income tax expense, a tax position exposure accrual, and recognition of deferred tax liabilities associated with indefinite-lived assets—partially offset by a $1.6 million tax benefit resulting from recognition of uncertain tax positions due to a statute of limitations expiration.

Net loss: Net loss in 2010 was $63.5 million, or 3.2% of net sales, compared with a net loss of $84.4 million, or 4.3% of net sales, in 2009.

Non-GAAP Financial Measure — EBITDA

We have prepared our condensed consolidated financial statements in accordance with generally accepted accounting principles (“GAAP”). In addition, the non-GAAP financial performance measure of EBITDA (defined as earnings before interest, income taxes and depreciation and amortization, including amortization of lease-related interests) is as follows:


	THIRTEEN				THIRTY-NINE
	WEEKS ENDED				WEEKS ENDED
(In thousands)	October 30,		October 31,		October 30,		October 31,
(Unaudited)	2010		2009		2010		2009

EBITDA	$	48,663	$	48,786	$	102,927	$	73,800

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

We consider EBITDA to be an important supplemental measure of our performance. It is frequently used by securities analysts, investors and other interested parties to evaluate the performance of companies in our industry and by some investors to determine a company’s ability to service or incur debt. In addition, our management uses EBITDA internally to compare the profitability of our stores. EBITDA is not calculated in the same manner by all companies and accordingly is not necessarily comparable to similarly entitled measures of other companies and may not be an appropriate measure for performance relative to other companies. EBITDA should not be assessed in isolation from or construed as a substitute for net income or cash flows from operations, which are prepared in accordance with GAAP. EBITDA has limitations as an analytical tool and is not intended to represent, and should not be considered to be a more meaningful measure than, or an alternative to, measures of operating performance as determined in accordance with GAAP.

The following table reconciles EBITDA to net loss as presented in our condensed consolidated statements of operations (prepared in accordance with GAAP):


	THIRTEEN						THIRTY-NINE
	WEEKS ENDED						WEEKS ENDED
(In thousands)	October 30,			October 31,			October 30,			October 31,
(Unaudited)	2010			2009			2010			2009

Net loss	$	(6,274	)	$	(4,153	)	$	(63,546	)	$	(84,356	)
Adjustments:
Income tax provision		661			506			474			365
Interest expense, net		28,347			23,201			85,037			69,321
Depreciation and amortization		24,798			28,016			77,538			84,810
Amortization of lease-related interests		1,131			1,216			3,424			3,660


EBITDA	$	48,663		$	48,786		$	102,927		$	73,800

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 fiscal year, which includes the holiday season. 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 fiscal year. We typically finance working capital increases in the second half of each fiscal year through additional borrowings under our revolving credit facility.

Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full fiscal year.

Liquidity and Capital Resources

At October 30, 2010, we had $18.4 million in cash and cash equivalents and $461.6 million available under our asset-based revolving credit facility (before taking into account the minimum borrowing availability covenant under such facility of $75.0 million). In anticipation of continued economic uncertainty in fiscal 2010, we maintained our focus on maximizing cash flow by reducing operating expenses and continuing to control inventory levels in order to benefit our working capital needs. We anticipate that these actions will positively impact our fiscal 2010 cash flow.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Typically, cash flows from operations are impacted by the effect on sales of (1) consumer confidence, (2) weather in the geographic markets served by the Company, (3) general economic conditions and (4) 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. While uncertain economic conditions affect our assessment of short-term liquidity, and while there can be no assurances, we consider our resources, including cash flows from operations supplemented by borrowings under our revolving credit facility, adequate to satisfy our cash needs for at least the next 12 months.

The following table summarizes material measures of the Company’s liquidity and capital resources:


	October 30,		October 31,
(Dollars in millions)	2010		2009

Working capital	$	436.1	$	482.1
Current ratio		1.76:1		1.95:1
Debt to total capitalization ⁽¹⁾		0.93:1		0.96:1
Unused availability under lines of credit ⁽²⁾	$	461.6	$	245.6


(1)		Debt includes obligations under capital leases. Total capitalization includes shareholders’ equity and debt.

(2)		Subject to a minimum borrowing availability covenant of $75.0 million.

Our primary sources of working capital are cash flows from operations and borrowings under our revolving credit facility, which provides for up to $675.0 million in borrowings (limited by amounts available pursuant to a borrowing base calculation and a $75.0 million minimum borrowing availability covenant). 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. The seasonality of our business historically provides the greatest cash flow from operations during the holiday season, with fiscal fourth quarter net sales generating the strongest profits of our fiscal year. As holiday sales significantly reduce inventory levels, this reduction, combined with net income, historically provides us with strong cash flow from operations at the end of our fiscal year.

Decreases in working capital and the current ratio are primarily the result of an increase in the current year accounts payable balance, reflecting increased vendor and factor support, an indication, we believe, of increased vendor confidence due to an increase in our excess borrowing capacity. The decrease in debt to total capitalization is largely due to cash flow generated in the fourth quarter of fiscal 2009 utilized to reduce debt. The increase in unused availability under lines of credit as compared with the prior year largely reflects reduced direct borrowings, the result of increased liquidity afforded us by the term loan facility entered into in fiscal 2009, which enabled us to pay a portion of the outstanding borrowings under our revolving credit facility, and, to a lesser extent, reduced use of letters of credit.

Cash provided by (used in) our operating, investing and financing activities is summarized as follows:


	THIRTY-NINE
	WEEKS ENDED
	October 30,			October 31,
(Dollars in millions)	2010			2009

Operating activities	$	(43.0	)	$	(42.0	)
Investing activities		(36.0	)		(22.1	)
Financing activities		78.4			60.1

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Net cash used in operating activities amounted to $43.0 million and $42.0 million in 2010 and 2009, respectively. Cash outflow increased marginally in the current year as the improvement in business performance, resulting in the significant reduction of our net loss in 2010, was offset by increased working capital investment and reduced non-cash expenses.

Net cash used in investing activities primarily reflects capital expenditures for store remodels and information technology. Capital expenditures totaled $36.0 million and $22.2 million in 2010 and 2009, respectively; these expenditures do not reflect reductions for external contributions of $4.6 million and $5.5 million in 2010 and 2009, respectively. We anticipate our fiscal 2010 capital expenditures will not exceed $50.0 million (net of external contributions of $6.5 million), an increase over our fiscal 2009 capital investments of $32.3 million (which does not reflect reductions for external contributions of $7.6 million).

Net cash provided by financing activities amounted to $78.4 million and $60.1 million in 2010 and 2009, respectively. The increase in net cash provided in the current year primarily reflects increased net debt proceeds to support cash requirements for increased capital expenditures and forfeitures of common stock shares by employees in lieu of tax payments, partially offset by a year-over-year change in bank overdraft balances.

Critical Accounting Policies

Our discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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. Such estimates include those related to merchandise returns, the valuation of inventories, long-lived assets, intangible assets, insurance reserves, contingencies, litigation and assumptions used in the calculation of income taxes and retirement and other post-employment benefits, among others. 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:

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.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 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 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 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 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.

As of January 30, 2010, approximately 32% of our inventories were valued using a first-in, first-out cost basis and approximately 68% of our inventories were valued using a last-in, first-out (“LIFO”) cost basis. As is currently the case with many companies in the retail industry, our LIFO calculations yielded inventory increases in recent prior 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 indicated 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 an estimated realizable value. These reductions totaled $41.7 million as of October 30, 2010 and January 30, 2010. 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 recorded when determined to be collectable and authorized by internal management. Allowances are generally credited to costs of goods sold, provided the allowance is: (1) for merchandise either permanently marked down or sold, (2) not predicated on a future purchase, and (3) not predicated on a future increase in the purchase price from the vendor. If the aforementioned criteria are not met, the allowances are recorded as an adjustment to the cost of merchandise capitalized in inventory and reflected as a reduction of costs of merchandise sold when the related merchandise is sold.

Additionally, allowances are received from vendors in connection with cooperative advertising programs and for reimbursement of certain payroll expenses. These allowances 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.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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. In addition, we are required to assess whether valuation allowances should be established against our deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. 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 operations or as an adjustment to accumulated other comprehensive income in the balance sheet and the statement of shareholders’ equity.

We reported net deferred tax liabilities of $2.7 million and $1.5 million at October 30, 2010 and January 30, 2010, respectively. In assessing the realizability of our deferred tax assets, we considered whether it is more likely than not that our deferred tax assets will be realized based upon all available evidence, including scheduled reversal of deferred tax liabilities, historical operating results, projected future operating results, tax carry-back availability and limitations pursuant to Section 382 of the Internal Revenue Code, among others. Significant weight is given to evidence that can be objectively verified. As a result, current or previous losses are given more weight than any projected future taxable income. In addition, a recent three-year historical cumulative loss is considered a significant element of negative evidence that is difficult to overcome.

We evaluate our deferred tax assets each reporting period, including assessment of the Company’s cumulative income or loss over the prior three-year period, to determine if valuation allowances are required. With respect to our reviews during fiscal 2009, our three-year historical cumulative loss and the continuation of uncertain near-term economic conditions impeded our ability to rely on our projections of future taxable income in assessing valuation allowance requirements. As such, we concluded that it was necessary to maintain a full valuation allowance on our net deferred tax assets. With respect to our three quarterly reviews in 2010, we concluded it was necessary to continue the position of a full valuation allowance on our net deferred tax assets.

Our deferred tax asset valuation allowance totaled $165.5 million and $140.5 million at October 30, 2010 and January 30, 2010, 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. If sufficient positive evidence arises in the future indicating that all or a portion of the deferred tax assets meet the more likely than not standard, the valuation allowance would be reversed accordingly in the period that such a conclusion is reached.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. Interpretations and guidance surrounding income tax laws and regulations change over time, and changes to our assumptions and judgments 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 $717.9 million and $756.6 million at October 30, 2010 and January 30, 2010, respectively.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

We are required 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 underperformance 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 are determined through various techniques, including discounted cash flow models and market approaches, as considered necessary. 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.

Intangible Assets

Net intangible assets totaled $132.3 million and $138.8 million at October 30, 2010 and January 30, 2010, respectively. Our intangible assets at October 30, 2010 are principally comprised of $65.6 million of lease interests that relate to below-market-rate leases and $66.6 million associated with trade names, private label brand names and customer lists. The lease-related interests are being amortized using a straight-line method. The customer lists are being amortized using a declining-balance method. At October 30, 2010, trade names and private label brand names of $54.0 million have been deemed as having indefinite lives.

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, which requires certain assumptions and estimates regarding industry economic factors. Our policy is to conduct impairment testing based on our most current business plans, which reflect anticipated changes in the economy and the industry.

Should significant changes in the manner of our use of assets or overall business strategy, future results or economic events cause us to adjust our projected cash flows, future estimates of fair value may not support the carrying amount of these assets. If actual results prove inconsistent with our assumptions and judgments, we could be exposed to a material impairment charge.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

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 or changes in state statutes and the mix of states in which we operate could result in a change to the required reserve levels.

Pension and Supplementary Retirement Plans

We provide an unfunded supplementary pension plan to certain key executives. Through acquisitions, we acquired a defined benefit pension plan and assumed the liabilities of supplementary pension plans and a postretirement benefit plan. Major assumptions used in accounting for these plans include the discount rate and the expected long-term rate of return on the defined benefit plan’s assets.

The discount rate assumption is evaluated annually. We utilize the Citibank Pension Discount Curve (“CPDC”) to develop the discount rate assumption. The CPDC is developed from 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 based on the expected timing of these benefit payments.

We base our 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. We assess the appropriateness of the expected rate of return on an annual basis and, when necessary, revise the assumption.

Changes in the assumptions regarding the discount rate and expected return on plan assets may result in materially different expense and liability amounts. Actuarial estimations may differ materially from actual results, reflecting many factors including changing market and economic conditions, changes in investment strategies, higher or lower withdrawal rates and longer or shorter life-spans of participants. In addition, while we are not required to make any mandatory contributions to the defined benefit pension plan in fiscal 2010, the funded status of this plan and the related cost reflected in our financial statements are affected by various factors that are subject to an inherent degree of uncertainty, particularly in the current economic environment. Under the Pension Protection Act of 2006, losses of asset values may necessitate increased funding of the defined benefit pension plan in the future to meet minimum federal government requirements. Downward pressure on the asset values of the defined benefit pension plan may require us to fund obligations earlier than we forecasted, which would have a negative impact on cash flows from operations.

THE BON-TON STORES, INC.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

Forward-Looking Statements

Certain information included in this report and other materials filed or to be filed by the Company with the Securities and Exchange Commission contain statements that are forward-looking within the meaning of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements, which may be identified by words such as “may,” “could,” “would,” “will,” “plan,” “expect,” “believe,” “anticipate,” “estimate,” “project,” “intend” or other similar expressions, involve important risks and uncertainties that could significantly affect results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. Factors that could cause such differences include, but are not limited to, risks related to retail businesses generally; a significant and prolonged deterioration of general economic conditions which could negatively impact the Company, including the potential write-down of the current valuation of intangible assets and deferred taxes; changes in the terms of the Company’s proprietary credit card program; potential increase in pension obligations; consumer spending patterns, debt levels, and the availability and cost of consumer credit; additional competition from existing and new competitors; inflation; deflation; changes in the costs of fuel and other energy and transportation costs; weather conditions that could negatively impact sales; uncertainties associated with expanding or remodeling existing stores; the ability to attract and retain qualified management; the dependence upon relationships with vendors and their factors; a data security breach or system failure; the ability to reduce or control SG&A expenses; the incurrence of unplanned capital expenditures; the ability to obtain financing for working capital, capital expenditures and general corporate purposes; the impact of new regulatory requirements including the Credit Card Accountability Responsibility and Disclosure Act of 2009 and the Health Care Reform Act; and the financial condition of mall operators. Additional factors that could cause the Company’s actual results to differ from those contained in these forward-looking statements are discussed in greater detail under Item 1A of the Company’s Form 10-K filed with the Securities and Exchange Commission.

THE BON-TON STORES, INC.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk and Financial Instruments

Refer to disclosures contained on page 35 of our 2009 Annual Report on Form 10-K. There have been no material changes in our exposures, risk management strategies, or hedging positions since January 30, 2010.


ITEM 4.		CONTROLS AND PROCEDURES

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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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.

Changes in Internal Control over Financial Reporting

There were no changes to our internal controls over financial reporting that occurred during the 13 weeks ended October 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

THE BON-TON STORES, INC.

PART II: OTHER INFORMATION


ITEM 6.		EXHIBITS

(a) The following exhibits are filed pursuant to the requirements of Item 601 of Regulation S-K:


Exhibit		Description	Document Location

	10.1	Fifth Amendment to the Credit Card Program Agreement	Exhibit 10.1 to the Current Report on Form 8-K filed on September 7, 2010

	10.2	Amendment No. 1 to The Bon-Ton Stores, Inc. 2009 Omnibus Incentive Plan	Exhibit 10.1 to the Current Report on Form 8-K filed on November 24, 2010 (“11/24/10 Form 8-K”)

	10.3	Form of Restricted Stock Agreement — Performance Shares	Exhibit 10.2 to the 11/24/10 Form 8-K

	10.4	Amendment to The Bon-Ton Stores, Inc. Cash Bonus Plan	Exhibit 10.3 to the 11/24/10 Form 8-K

	31.1	Certification of Byron L. Bergren	Filed herewith.

	31.2	Certification of Keith E. Plowman	Filed herewith.

	32.1	Certification Pursuant to Rules 13a-14(b) and 15d-14(b) of the Securities Exchange Act of 1934	Furnished herewith.

SIGNATURES

Pursuant to the requirements 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.
DATE: December 9, 2010	BY:	/s/ Byron L. Bergren
		Byron L. Bergren
		President and Chief Executive Officer

DATE: December 9, 2010	BY:	/s/ Keith E. Plowman
		Keith E. Plowman
		Executive Vice President, Chief Financial Officer and Principal Accounting Officer

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BON TON STORES INC Reports

BON TON STORES INC - FORM 10-Q - December 9, 2010

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BON TON STORES INC Reports