UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

Form 10-K

 

ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

 

2801 East Market Street

York, Pennsylvania 17402

(717) 757-7660

www.bonton.com

 

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes o     No þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ

 

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. (Check one):

 

(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

 

The aggregate market value of the voting stock held by non-affiliates of the registrant was approximately $58.7 million as of the last business day of the registrant’s most recently completed second fiscal quarter. For purposes of this calculation only, the registrant has excluded all shares held in the treasury or that may be deemed to be beneficially owned by executive officers and directors of the registrant. By doing so, the registrant does not concede that such persons are affiliates for purposes of the federal securities laws.

 

As of March 27, 2009, there were 15,282,373 shares of Common Stock, $.01 par value, and 2,951,490 shares of Class A Common Stock, $.01 par value, outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portions of the definitive proxy statement for the 2009 Annual Meeting of Shareholders (the “Proxy Statement”) are incorporated by reference in Part III to the extent described in Part III.

 

 

The Bon-Ton Stores, Inc. operates on a fiscal year, which is the 52 or 53 week period ending on the Saturday nearer January 31 of the following calendar year. References to “2008,” “2007” and “2006” represent the 2008 fiscal year ended January 31, 2009, the 2007 fiscal year ended February 2, 2008 and the 2006 fiscal year ended February 3, 2007, respectively. References to “2009” represent the 2009 fiscal year ending January 30, 2010.

 

References to “the Company,” “we,” “us,” and “our” refer to The Bon-Ton Stores, Inc. and its subsidiaries. References to “Carson’s” are to the Northern Department Store Group acquired by the Company from Saks Incorporated (“Saks”) effective March 5, 2006. References to “Elder-Beerman” denote The Elder-Beerman Stores Corp. and its subsidiaries, which were acquired by the Company in October 2003. References to “Bon-Ton” refer to the Company’s stores operating under the Bon-Ton and Elder-Beerman nameplates. References to “Parisian” refer to the stores acquired from Belk, Inc. (“Belk”) effective October 29, 2006.

 

PART I

 

 

Overview

 

The Company was founded in 1898 and is 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 as well as cosmetics, home furnishings and other goods. We currently operate 280 stores in mid-size and metropolitan markets in 23 Northeastern, Midwestern and upper Great Plains states under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates and, under the Parisian nameplate, stores in the Detroit, Michigan area, encompassing a total of approximately 26 million square feet.

 

Industry Overview

 

We compete in the department store segment of the U.S. retail industry. Department stores have historically dominated apparel and accessories retailing, occupying a cornerstone in the U.S. retail landscape for more than 100 years. Over time, department stores have evolved from single unit, family owned, urban locations to regional and national chains serving communities of all sizes. Today, we operate in a highly competitive, highly fragmented and rapidly changing environment as 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.

 

Our operating results and performance, and that of our competitors, depend significantly on economic conditions and their impact on consumer spending. During 2008, a combination of economic factors created an extremely adverse environment for the retail industry, including the department store sector. We believe that these factors included volatility in the capital markets, with limited or no access to credit for many companies and consumers. These credit market conditions, the general downturn in the U.S. economy, and weakening consumer sentiment contributed to a significant reduction in consumer spending as compared with 2007 and other recent years.

 

Merchandise

 

Merchandise Mix

 

Our stores offer a broad assortment of quality fashion apparel and accessories for women, men and children, as well as cosmetics, home furnishings and other goods at moderate and better price points. Our comprehensive merchandise assortment includes nationally distributed brands at competitive prices and unique product at compelling values through our private brands. We further

differentiate our merchandise assortment with exclusive product from nationally distributed brands. The following table illustrates our net sales by product category for the last three years:

 

 

Nationally Distributed Brands

 

Our nationally distributed brand assortment includes many of the most well-known and popular labels in the apparel, accessories, footwear, cosmetics and home furnishings industries such as Calvin Klein, Chanel, Coach, Easy Spirit, Bandolino, Børn, Clarks, Estée Lauder, Jones New York, Liz Claiborne, Anne Klein II, Nautica, Columbia, Nine West, OshKosh and Ralph Lauren. We believe these brands enable us to position our stores as headquarters for fashion, offering both newness and wardrobe staples at competitive prices. We believe that we maintain excellent relationships with our merchandise vendors, working collaboratively to select the most compelling assortments for our customers.

 

Private Brands

 

Our exclusive private brands complement our offerings of nationally distributed brands and are a key component of our overall merchandising strategy. Our private brand portfolio includes popular brands such as Victor by Victor Alfaro, Studio Works, Living Quarters, Relativity, Laura Ashley, Consensus, Cuddle Bear, Ruff Hewn, Statements, Breckenridge, Kenneth Roberts and Karen Neuberger Home. By providing exclusive fashion products at price points that are more attractive than nationally distributed brand alternatives, our private brand program creates value for our customers and increases our brand exclusiveness, competitive differentiation and customer loyalty. Our private brand program also presents the opportunity to increase our overall gross margin by virtue of the more efficient cost structure inherent in the design and sourcing of in-house brands.

 

Vendor Relationships and Sourcing

 

Our highly experienced team of buyers has developed long-standing and strong relationships with many of the leading vendors in the marketplace. Our scale, geographic footprint and market leadership make us an important distribution channel for leading merchandise vendors to reach their target consumers. We believe that our status as a key account to many of our vendors serves to strengthen our ability to negotiate for merchandise exclusive to our stores as well as better pricing terms. We monitor and evaluate the sales and profitability performance of each vendor and adjust our purchasing decisions based upon the results of this analysis.

 

Consistent with industry practice, we receive allowances from certain of our vendors in support of the merchandise sold to us that was marked down or that did not allow us to achieve certain margins upon sale to our customers. Additionally, we receive advertising allowances and reimbursement of certain payroll expenses from some of our vendors, which primarily represent reimbursements of specific, incremental and identifiable costs incurred to promote and sell the vendors’ merchandise.

Marketing and Customer Service

 

We are committed to providing our customers with a satisfying shopping experience by offering trend-right fashions, differentiated product, value and convenience. Critical elements of our customer service approach are:

 

 

Marketing

 

Our strategic marketing initiatives develop and enhance our brand equity and support our position as a leading shopping destination among our target customers. We conduct a multi-faceted marketing program, including newspaper advertisements and inserts, broadcast advertisements, direct mail and in-store events. We use a combination of (i) advertising and sales promotion activities to reach and build brand image and traffic and (ii) customer-specific communications and purchase incentives to drive customer spending and loyalty. Both types of marketing efforts focus primarily on our target customer of women between the ages of 35 and 60 with annual household incomes of $55,000 to $125,000, with the intention of increasing visit frequency and purchases per visit. Additionally, our marketing activities attract a broader audience, including juniors, seniors and men. We seek to attract new customers and to maintain customer loyalty by actively communicating with our customers through the execution of targeted marketing facilitated by sophisticated customer relationship management capabilities.

 

Effective communication includes showcasing our “hometown store” tradition. We are focused on important, cause-related efforts and events to enhance our connection with the communities in which we operate and with the customers we serve. These strategic initiatives garner favorable publicity, drive traffic and generate incremental sales. Additionally, these efforts serve to differentiate us from our competitors.

 

We maintain an active calendar of in-store events to promote our sales efforts. These events include appearances by well-known designers and personalities, trunk shows, fashion shows and cosmetic makeovers from leading makeup artists.

 

Proprietary Credit Card

 

Evidencing our customer satisfaction and loyalty is the high penetration rate of our proprietary credit card program that is administered by HSBC Bank Nevada, N.A. (“HSBC”). We have over 4.6 million active proprietary credit card holders.

 

Our proprietary credit card loyalty program is designed to cultivate long-term relationships with our customers. The loyalty program offers rewards and privileges to all members meeting annual earned points requirements. Our targeted loyalty program focuses on our most active customers and includes marketing features such as advanced sales notices and extra savings events. Included in our five-year strategic plan is the objective to increase proprietary credit card penetration as a driver of total sales growth. To achieve this goal, we implemented a new proprietary credit card loyalty program called “Your Rewards” in August 2008. Your Rewards expands the customer savings element of our previous programs and provides greater shopping flexibility and customer rewards.

 

Customer Service

 

We maintain a sales force of knowledgeable and well-trained sales associates who deliver excellent service to our customers. Sales associates are trained in the areas of customer service,

selling skills and product knowledge. We employ a two-tiered strategy to achieve effective customer service. In selected areas, we offer one-on-one selling with dedicated associates to assist customers with merchandise selections. Our customers also appreciate the convenience of self-service formats in many departments and efficient service centers to expedite their purchases. Our new associates receive computer-based training for effective, efficient and uniform training. We actively monitor and analyze, through our scheduling program, the service levels in our stores in order to maximize sales associate productivity and store profitability.

 

Competition

 

The retail industry is highly competitive and fragmented. We face competition for customers from traditional department store operators such as Belk, Inc., Dillard’s, Inc. and Macy’s, Inc.; national chain retailers such as J. C. Penney Company, Inc., Kohl’s Corporation and Sears Holdings Corporation; mass merchandisers such as Target Corporation and Wal-Mart Stores, Inc.; specialty stores; and catalogue and online retailers. In addition, we face competition for suitable store locations from other department stores, national chain retailers, mass merchandisers and other large-format retailers. In a number of our markets, we compete for customers with national department store chains which offer a similar mix of branded merchandise as we do. In other markets, we face potential competition from national chains that, to date, have not entered such markets and from national chains that have stores in our markets but currently do not carry similar branded goods. In all markets, we generally compete for customers with stores offering moderately priced goods. Many of our competitors have substantially greater financial and other resources than we do, and many of those competitors have significantly less debt than we do and may thus have greater flexibility to respond to changes in our industry.

 

We believe that we compare favorably with our competitors with respect to quality, depth and breadth of merchandise, prices for comparable quality merchandise, customer service and store environment. We also believe our knowledge of and focus on small to mid-size markets, developed over our many years of operation, give us an advantage in these markets that cannot be readily duplicated. In markets in which we face traditional department store competition, we believe that we compete effectively.

 

Trademarks and Trade Names

 

We own or license various trademarks and trade names, including our store nameplates and private brands. We believe our trademarks and trade names are important and that the loss of certain of our trademarks or trade names, particularly the store nameplates, could have a material adverse effect on us. We are not aware of any claims of infringement or other challenges to our right to use our trademarks in the United States that would have a material adverse effect on our consolidated financial position, results of operations or liquidity.

 

Information Technology and Systems

 

During 2008, we continued our investment in technology infrastructure equipment and software. We focused on updating systems and improving business processes with emphasis on customer service, associate productivity and the reduction of operating costs. A multi-year program to implement Bon-Ton’s advanced point-of-sale system in the Carson’s stores was begun in 2007; currently, 50 Carson’s stores have been completed with an additional 17 scheduled for implementation in 2009. Our eCommerce store, which was established in 2007, continued its growth in sales and available assortment. A new third-party fulfillment capability offering merchandise not carried in store locations was added to our eCommerce store, significantly expanding our merchandise offerings. Advanced web technologies at our eCommerce store offer customers efficient and easy-to-use features such as optimized product search capabilities and provide us with an effective delivery vehicle for tailored marketing programs. In 2008, we completed upgrades to our security systems, communications networks and policies to improve data security. We achieved certified compliance to Payment Card Industry (PCI) Data Security Standards, providing increased protection for customer information. We also implemented the first half of our consolidated telecommunications network to streamline both

voice and data communications, increase capacity and speed, and significantly reduce communications costs. It is anticipated that this project will be completed in 2009.

 

Inventory Management

 

Our merchandising function is centralized, with a staff of buyers and a planning and allocation team who have responsibility for determining the merchandise assortment, quantities to be purchased and allocation of merchandise to each store.

 

We primarily operate on a pre-distribution model through which we allocate merchandise on our initial purchase orders to each store. This merchandise is shipped from our vendors to our distribution facilities for delivery to designated stores. We then have the ability to direct replenishment merchandise to the stores that demonstrate the highest customer demand. This reactive distribution technique helps minimize excess inventory and affords us timely and accurate replenishment.

 

Our distribution facilities are electronically monitored by our merchandising staff to facilitate the distribution of goods to our stores. We utilize electronic data interchange (EDI) technology with most vendors, which is designed to move merchandise onto the selling floor quickly and cost-effectively by allowing vendors to deliver merchandise pre-labeled for individual store locations. In addition, we utilize high-speed automated conveyor systems to scan bar coded labels on incoming cartons of merchandise and direct cartons to the proper processing areas. Most of our merchandise is unloaded in the receiving area and immediately “cross-docked” to the shipping dock for delivery to the stores. Certain processing areas are staffed with personnel equipped with hand-held radio frequency terminals that can scan a vendor’s bar code and transmit the necessary information to a computer to record merchandise on hand. We utilize third-party carriers to distribute our merchandise to our stores.

 

The majority of our merchandise is held in our stores. We closely monitor the inventory levels and assortments in our stores to facilitate reorder and replenishment decisions, satisfy customer demand and maximize sales. 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.

 

We have a customer return policy allowing customers to return merchandise with proper documentation. A reserve is provided in our consolidated statements of operations for estimated merchandise returns, based on historical returns experience, and is reflected as an adjustment to sales and costs of merchandise sold.

 

Seasonality

 

Our business, like that of most retailers, is subject to seasonal fluctuations, with the major portion of sales and income realized during the second half of each year, which includes the holiday season. Due to the fixed nature of certain costs, our selling, general and administrative (“SG&A”) expenses are typically higher as a percentage of net sales during the first half of each year. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for a full year. In addition, quarterly results of operations depend upon the timing and amount of revenues and costs associated with the opening, closing and remodeling of existing stores.

 

Capital Investments

 

We make capital investments to support our long-term business goals and objectives. We invest capital in new and existing stores, distribution and support facilities, and information technology.

 

In 2009, we expect capital expenditures to total approximately $40 million, net of approximately $7 million of landlord contributions, reflecting a reduction from the prior year’s expenditures of approximately $85 million. As part of our focus on continually improving our store base, capital will be employed for remodels and expansions of certain stores, and on-going store upgrades. We are

focused on maintaining the quality of our stores and our brand equity while prudently limiting expenditures in response to current economic conditions.

 

In 2009, we do not plan to open any new stores. We will be relocating one store to a larger space in the same shopping mall and closing the existing store.

 

We believe capital investments for information technology are necessary to support our business strategies. We are continually upgrading our information systems to improve efficiency and productivity. Included in the 2009 capital budget are expenditures for numerous information technology projects, most notably on-going efforts to implement Bon-Ton’s advanced point-of-sale system in the Carson’s stores.

 

Associates

 

As of March 27, 2009, we had approximately 29,100 full-time and part-time associates. We employ additional part-time associates during peak selling periods. We believe that our relationship with our associates is good.

 

Available Information

 

Our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports are available without charge on our website, www.bonton.com, as soon as reasonably practicable after they are filed electronically with the Securities and Exchange Commission (“SEC”).

 

We also make available on our website, free of charge, the following documents:

 

 

Executive Officers

 

The following table sets forth certain information regarding our executive officers as of March 27, 2009:

 

 

 

Mr. Grumbacher has been Executive Chairman of the Board of Directors since February 2005. He served as Chairman of the Board of Directors from August 1991 to February 2005. He was Chief

Executive Officer from 1985 to 1995 and from June 2000 to August 2004. From 1977 to 1989 he was President.

 

Mr. Bergren has been President and Chief Executive Officer since August 2004. Mr. Bergren, who joined the Company in November 2003 as Vice Chairman and served as President and Chief Executive Officer of Elder-Beerman from February 2002 through August 2004, served in senior executive positions at Belk from 1985 to 2002.

 

Mr. Buccina was appointed Vice Chairman, President — Merchandising in June 2006. He had been President and Chief Merchandising Officer of Carson’s from April 2006 to June 2006. Prior to that time, he had served as President — Head Merchant of the Northern Department Store Group of Saks (“NDSG”) for more than five years.

 

Mr. Byers was appointed to his current position in February 2008. He served as Vice Chairman — Stores, Operations, Private Brand, Planning & Allocation from October 2006 to February 2008, and as Executive Vice President — Stores and Visual Merchandising from April 2006 to October 2006. Prior to that time, he had served as Executive Vice President of Stores and Visual Merchandising of NDSG since August 2004. He held the post of Senior Vice President / Territory Director of Stores for Kohl’s Corporation between 2000 and August 2004.

 

Mr. Clouser has been Executive Vice President — Human Resources since April 2006, and assumed additional responsibilities for Corporate Procurement, Corporate Operations and Information Services in February 2008. He served as Senior Vice President — Human Resources from February 2005 to April 2006 and Vice President — Employment and Training from April 2004 to February 2005. For more than four years prior to that time, he was Senior Vice President — Human Resources at Elder-Beerman.

 

Mr. Plowman has been Executive Vice President — Finance since April 2006, Chief Financial Officer since May 2005 and Principal Accounting Officer since June 2003. He served as Senior Vice President — Finance from September 2001 to April 2006.

 

Ms. Schrantz has been Executive Vice President — Sales Promotion and Marketing since March 2009. Prior to that, she served as Executive Vice President — Stores and Visual since March 2008. She served as Senior Vice President — Merchandise Planning and Internet Marketing from September 2006 to February 2008, and as Senior Vice President — Product Development and Private Brand from September 2005 to August 2006. Before joining the Company, Ms. Schrantz held various merchandising posts of increasing responsibility at the Proffitts/McRae’s division of Saks for more than five years.

 

 

Cautionary Statements Relating to Forward-Looking Information

 

We have made, in this Annual Report on Form 10-K, forward-looking statements relating to developments, results, conditions or other events we expect or anticipate will occur. These statements may relate to revenues, earnings, store openings, business strategy, general economic conditions, market conditions and the competitive environment. The words “believe,” “may,” “might,” “will,” “estimate,” “intend,” “expect,” “anticipate,” “plan” and similar expressions as they relate to the Company, or future or conditional verbs, such as “will,” “should,” “would,” “may” and “could,” are intended to identify forward-looking statements. Forward-looking statements are based on management’s then-current views and assumptions and we undertake no obligation to update them. Forward-looking statements are subject to risks and uncertainties, and actual results may differ materially from those projected.

 

An investment in our securities carries certain risks. Investors should carefully consider the risks described below and other risks which may be disclosed in our filings with the SEC before investing in our securities.

There can be no assurance that our liquidity will not be adversely affected by changes in the financial markets and global economy.

 

Historically, we have generated cash flow from operating activities and used supplemental borrowings under our credit facility to provide the liquidity we need to operate our business. The downturn in the global economy and the recent distress in the financial markets have resulted in extreme volatility in the capital markets and diminished liquidity and credit availability. The tightening of credit markets could make it more difficult for us to access funds, to refinance our existing indebtedness, to enter into agreements for new indebtedness or to obtain funding through the issuance of securities and could potentially increase our borrowing costs. If such conditions were to persist, we would seek alternative sources of liquidity, but there can be no assurance that we would be successful in obtaining such additional liquidity. As a result, we may not be able to meet our obligations as they become due.

 

General economic conditions could have an adverse effect on our financial condition and results of operations.

 

Consumer spending habits, including spending for the merchandise that we sell, are affected by, among other things, prevailing economic conditions, levels of employment, salaries and wage rates, prevailing interest rates and credit terms, housing costs, energy costs, income tax rates and policies, inflation, consumer confidence and consumer perception of economic conditions. In addition, consumer purchasing patterns may be influenced by consumers’ disposable income, credit availability and debt levels. A continued or incremental slowdown in the United States’ economy or an uncertain economic outlook could adversely affect consumer spending habits, resulting in lower net sales and profits, including the potential write-down of the current valuation of long-lived assets, intangible assets and deferred tax assets.

 

Our vendors, landlords, lenders and other business partners could also be adversely affected by difficult economic conditions. This, in turn, could impact us through increasing the risk of bankruptcy of our vendors, landlords, lenders and business partners, increasing the cost of goods, creating a void in product, reducing access to liquid funds or credit, increasing the cost of credit or other impacts which we are unable to fully anticipate.

 

We conduct our operations in a highly competitive retail environment which could have an adverse effect on our business, financial condition and results of operations.

 

We compete with other department stores and many other retailers, including store-based, mail-order and internet retailers. Many of our competitors have financial and marketing resources that greatly exceed ours. The principal competitive factors in our business are price, quality and selection of merchandise, reputation, store location, advertising and customer service. We cannot ensure that we will be able to compete successfully against existing or future competitors, or that prolonged periods of deep discount pricing by our competitors during periods of weak consumer confidence or economic instability will not have a material adverse effect on our business. Our expansion into new markets served by our competitors and the entry of new competitors into, or expansion of existing competitors in, our markets could have a material adverse effect on our business, financial condition and results of operations.

 

Failure to maintain key vendor and factor relationships may adversely affect our business, financial condition and results of operations.

 

Our business is dependent to a significant degree upon close relationships with our vendors and their factors and our ability to purchase brand name merchandise at competitive prices and terms. The loss of key vendor and factor support could have a material adverse effect on our business. There can be no assurance that we will be able to acquire brand name merchandise at competitive prices or on competitive terms in the future. For example, certain merchandise that is

high profile and in high demand may be allocated by vendors based upon the vendors’ internal criteria, which are beyond our control.

 

In addition, given the weak global markets, vendors and factors may seek assurances to protect against non-payment of amounts due them. If we continue to experience declining operating performance, and if we experience severe liquidity challenges, vendors and factors may demand that we accelerate our payment for their products. These demands could have a significant adverse impact on our operating cash flow and result in a severe diminishment of our liquidity. Under such circumstances, borrowings under our existing credit facility could reach maximum levels, in which case we would take actions to obtain additional liquidity. However, there can be no assurance that we would be successful obtaining such additional liquidity. As a result, we may not be able to meet our obligations as they become due. In addition, if our vendors are unable to access liquidity or become insolvent, they could be unable to supply us with product or continue with their support of our advertising and promotional programs. Any such disruptions could negatively impact our ability to acquire merchandise or obtain vendor allowances in support of our advertising and promotional programs, which in turn could have a material adverse impact on our business, operating results, financial condition or cash flow.

 

Failure to fully realize the benefits expected from our cost savings initiatives in 2009 could have a material adverse effect on our business and results of operations. Additionally, declines in sales below what is anticipated could have a material adverse effect on our business and results of operations.

 

There can be no assurance that we will be successful in fully realizing the anticipated benefits from our cost savings initiatives in 2009. Our ability to benefit from these initiatives is subject to both the risks affecting our business generally and the inherent difficulties associated with implementation. In addition, should our sales decline more than anticipated, we may not have the ability to further reduce costs commensurate with the decrease in sales given our high fixed cost structure. Failure to realize the benefits expected to result from these cost savings initiatives, or facing sales declines of a greater magnitude than anticipated, which could be increasingly difficult to mitigate due to our high fixed cost structure, could have a material adverse effect on our business and results of operations.

 

Our substantial debt could adversely affect our financial condition.

 

As of January 31, 2009, we had total debt of approximately $1.2 billion, which is subject to restrictions and financial covenants. This could have important consequences to our investors. For example, it could:

 

 

 

Our ability to service our debt depends upon, among other things, our ability to replenish inventory at competitive prices and terms, generate sales and maintain our stores. If we do not generate sufficient cash from our operations to service our debt obligations, we will need to take one or more actions, including refinancing our debt, obtaining additional financing, selling assets, obtaining additional equity capital, or reducing or delaying capital expenditures. We cannot be certain that our cash flow will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations. Debt under our senior secured credit facility bears interest at a floating rate, a portion of which is offset by fixed-rate swap derivatives. Accordingly, changes in prevailing interest rates may affect our ability to meet our debt service obligations. A higher interest rate on our debt would adversely affect our operating results. If we are unable to meet our debt service obligations or if we default under our credit facilities, our lenders could elect to declare all borrowings outstanding, together with accumulated and unpaid interest and other fees, immediately due and payable, which would have a material adverse effect on our business, financial condition and results of operations.

 

Our discretion in some matters is limited by the restrictions contained in our senior secured credit facility and mortgage loan facility agreements and in the indenture that governs our senior unsecured notes, and any default on our senior secured credit facility, mortgage loan facility or the indenture that governs the senior unsecured notes could harm our business, profitability and growth prospects.

 

The agreements that govern our senior secured credit facility and mortgage loan facility, and the indenture that governs our senior unsecured notes, contain a number of covenants that limit the discretion of our management with respect to certain business matters and may impair our ability to respond to changing business and economic conditions. The senior secured credit facility, the mortgage loan facility and the indenture, among other things, restrict our ability to:

 

 

The borrowing base calculation under our senior secured credit facility contains an inventory advance rate subject to periodic review at the lender’s discretion. Based upon the most recent inventory appraisal in February 2009, we realized a decrease in our advance rate, the effect of which would have reduced borrowing availability by $31.4 million had the new advance rate been applied to our calculation at January 31, 2009.

 

Our senior secured credit facility contains a financial covenant that requires us to comply with a minimum excess availability requirement of $75 million. Our ability to borrow funds for any purpose depends on our satisfying this requirement.

If we fail to comply with the financial covenant or the other restrictions contained in our senior secured credit facility, mortgage loan facility or the indenture that governs our senior unsecured notes, an event of default would occur. An event of default could result in the acceleration of our debt due to the cross-default provisions within our debt agreements. If the debt is accelerated, we would not have, and may not be able to obtain, sufficient funds to repay our debt, which could have a material adverse effect on our business, financial condition and results of operations.

 

Changes in the terms of our proprietary credit card program could have an adverse effect on our operations.

 

Our proprietary credit card program is operated, under agreement, by HSBC. HSBC issues our proprietary credit cards to our customers and we receive a percentage of the net credit sales thereunder. The inability or unwillingness of HSBC to provide support for our proprietary credit card program under similar terms or conditions as exist today may result in a decrease in credit card sales to our customers and a loss of revenues attributable to payments from HSBC. In addition, if our agreement with HSBC is terminated under circumstances in which we are unable to quickly and adequately contract with a comparable replacement vendor, our customers who have accounts under our proprietary credit card program will be unable to use their cards. This would likely result in a decrease in sales to such customers, a loss of the revenues attributable to the payments from HSBC and an adverse effect on customer goodwill, any or all of which could have a material adverse effect on our business and results of operations.

 

Our pension costs could increase at a higher than anticipated rate.

 

Significant changes in interest rates, decreases in the fair value of plan assets and investment losses on plan assets have affected and could further affect the funded status of our plans and could increase future funding requirements of the pension plans. A significant increase in future funding requirements could have a negative impact on our cash flows, financial condition and results of operations.

 

While we are not required to make any mandatory contributions to the defined benefit pension plan in 2009, 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, continued losses of asset values may necessitate increased funding of the defined benefit pension plan in the future to meet minimum federal government requirements. The continued 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.

 

We may not be able to accurately predict customer-based trends and effectively manage our inventory levels, which could reduce our revenues and adversely affect our business, financial condition and results of operations.

 

It is difficult to predict what and how much merchandise consumers will want. A substantial part of our business is dependent on our ability to make correct trend decisions. Failure to accurately predict constantly changing consumer tastes, spending patterns and other lifestyle decisions, particularly given the long lead times for ordering much of our merchandise, could adversely affect our long-term relationships with our customers. Our managers focus on inventory levels and balance these levels with inventory plans and reviews of trends; however, if our inventories become too large, we may have to “mark down” or decrease our sales prices, and we may be required to sell a significant amount of unsold inventory at discounted prices or even below cost.

An inability to find qualified domestic and international vendors and fluctuations in the exchange rate with countries in which our international vendors are located could adversely affect our business.

 

The products we sell are sourced from a wide variety of domestic and international vendors. Our ability to find qualified vendors and source products in a timely and cost-effective manner, including obtaining vendor allowances in support of our advertising and promotional programs, represents a significant challenge. The availability of products and the ultimate costs of buying and selling these products, including advertising and promotional costs, are not completely within our control and could increase our merchandise and operating costs. Additionally, costs and other factors specific to imported merchandise, such as trade restrictions, tariffs, currency exchange rates and transport capacity and costs, are beyond our control and could restrict the availability of imported merchandise or significantly increase the costs of our merchandise and adversely affect our business, financial condition and results of operations.

 

Conditions in, and the United States’ relationship with, the countries where we source our merchandise could adversely affect our business.

 

A majority of our merchandise is manufactured outside of the United States. Political instability or other events resulting in the disruption of trade from the countries where our merchandise is manufactured or the imposition of additional regulations relating to, or duties upon, the merchandise we import could cause significant delays or interruptions in the supply of our merchandise or increase our costs. If we are forced to source merchandise from other countries, those goods may be more expensive or of inferior quality from the merchandise we now sell. If we are unable to adequately replace the merchandise we currently source with merchandise produced elsewhere, our business, financial condition and results of operations could be adversely affected.

 

Our business is seasonal.

 

Our business is subject to seasonal influences, with a major portion of sales and income historically realized during the second half of the fiscal year, which includes the holiday season. This seasonality causes our operating results to vary considerably from quarter to quarter and could have a material adverse impact on the market price of our common stock. We must carry a significant amount of inventory, especially before the peak selling periods. If we are not successful in selling our inventory, especially during our peak selling periods, we may be forced to rely on markdowns, vendor support or promotional sales to dispose of the inventory or we may not be able to sell the inventory at all, which could have a material adverse effect on our business, financial condition and results of operations.

 

Weather conditions could adversely affect our results of operations.

 

Because a significant portion of our business is apparel sales and subject to weather conditions in our markets, our operating results may be unexpectedly and adversely affected by inclement weather. Frequent or unusually heavy snow, ice or rain storms might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability. Extended periods of unseasonable temperatures in our markets, potentially during our peak seasons, could render a portion of our inventory incompatible with those unseasonable conditions, reduce sales and adversely affect our business.

 

Our business could be significantly disrupted if we cannot retain or replace members of our management team.

 

Our success depends to a significant degree upon the continued contributions of our executive officers and other key personnel, both individually and as a group. Our future performance will be substantially dependent on our ability to retain or replace our executive officers and key

personnel and the inability to retain or replace our executive officers and key personnel could prevent us from executing our business strategy.

 

The ownership and leasing of significant amounts of real estate expose us to possible liabilities.

 

We currently own or lease 280 stores, which subjects us to the risks associated with owning and leasing real estate. In particular, because of changes in the investment climate for real estate, the value of a property could decrease, and its operating costs could increase. Store leases generally require us to pay a fixed minimum rent and a variable amount based on a percentage of sales at that location. These leases generally do not allow for termination prior to the end of the lease term without economic consequences. If a store is not profitable and we make the decision to close it, we may remain committed to perform certain obligations under the lease, including the payment of rent, for the balance of the lease term. In addition, as each of the leases expires, we may be unable to negotiate renewals, either on commercially acceptable terms or at all, which could cause us to close stores in desirable locations. If an existing owned store is not profitable and we make the decision to close it, we may be required to record an impairment charge and/or exit costs associated with the closing of that store. In addition, lease or other obligations may restrict our right to cease operations of an unprofitable owned or leased store, which may cause us to continue to operate the location at a loss.

 

Current store locations may become less desirable, and desirable new locations may not be available for a reasonable price, if at all.

 

The success of any store depends substantially upon its location. There can be no assurance that current locations will continue to be desirable as demographic patterns change. Neighborhood or economic conditions where stores are located could decline in the future, resulting in potentially reduced sales in those locations. In addition, if we cannot obtain desirable new locations our sales will suffer or if we cannot obtain these locations at reasonable prices our cost structure will increase.

 

Risks associated with our private brands could adversely affect our business.

 

We offer our customers quality products at competitive prices marketed under our private brands. We expect to continue to grow our private label offerings and have invested in our development and procurement resources and marketing efforts related to these exclusive brand offerings. The expansion of our private brand offerings subjects us to certain additional risks. These include, among others, risks related to: our failure to comply with government and industry safety standards; mandatory or voluntary product recalls related to our private brand offerings; our ability to successfully protect our proprietary rights in our exclusive offerings and risks associated with overseas sourcing and manufacturing. In addition, damage to the reputation of our private brand trade names may generate negative customer sentiment. Our failure to adequately address some or all of these risks could have a material adverse effect on our business, results of operations and financial condition.

 

Our business could be significantly disrupted and burdened with additional costs if our associates unionize.

 

While we believe our relationship with our associates is good, we cannot be assured that we will not become the subject of unionization campaigns similar to those faced by our competitors. The potential for unionization could increase if the U.S. Congress passes proposed legislation called the Employee Free Choice Act in which unions can organize based on card check authorization rather than by secret ballot election. This proposed legislation also provides for third-party arbitration of collective bargaining agreements. If some or all of our workforce were to become unionized and collective bargaining agreement terms were significantly different from our current compensation arrangements or work practices, it could have a material adverse effect on our business, financial condition and results of operations.

Failure to successfully maintain and update information technology systems and enhance existing systems may adversely affect our business.

 

To keep pace with changing technology, we must continuously provide for the design and implementation of new information technology systems as well as enhancements of our existing systems. Any failure to adequately maintain and update the information technology systems supporting our sales operations or inventory control could prevent us from processing and delivering merchandise, which could adversely affect our business, financial condition and results of operations.

 

A security breach that results in the unauthorized disclosure of Company, employee or customer information could adversely affect our business, reputation and financial condition.

 

The protection of customer, employee, and Company data is critical to us. The regulatory environment surrounding information security and privacy is increasingly demanding, with the frequent imposition of new and constantly changing requirements. In addition, customers have an expectation that we will adequately protect their personal information. Although we have appropriate security measures in place, our facilities and systems, and those of our third-party service providers, could be vulnerable to security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming and/or human errors or other similar events. A significant breach of customer, employee or Company data could damage our reputation and result in lost sales, fines or lawsuits.

 

Tim Grumbacher has voting control over matters submitted to a vote of the shareholders, and he may take actions that conflict with the interests of our other shareholders and holders of our debt securities.

 

Collectively, Tim Grumbacher, trusts for the benefit of Mr. Grumbacher’s grandchildren and The Grumbacher Family Foundation beneficially own shares of our outstanding common stock (which is entitled to one vote per share) and shares of our Class A common stock (which is entitled to ten votes per share) representing, in the aggregate, more than 50% of the votes eligible to be cast by shareholders in the election of directors and generally. Accordingly, Mr. Grumbacher has the power to control all matters requiring the approval of our shareholders, including the election of directors and the approval of mergers and other significant corporate transactions. The interests of Mr. Grumbacher and certain other stockholders may conflict with the interests of our other shareholders and holders of our debt securities.

 

In addition to Mr. Grumbacher’s voting control, certain provisions of our charter documents and Pennsylvania law could discourage potential acquisition proposals and could deter, delay or prevent a change in control of the Company that our other shareholders consider favorable and could depress the market value of our common stock.

 

Certain provisions of our articles of incorporation and by-laws, as well as provisions of the Pennsylvania Business Corporation Law, could have the effect of deterring takeovers or delaying or preventing changes in control or management of the Company that our shareholders consider favorable and could depress the market value of our common stock.

 

Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, which is applicable to us, may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in his or her best interest. In general, Subchapter F could delay for five years and impose conditions upon “business combinations” between an “interested shareholder” and us, unless prior approval by our Board of Directors is given. The term “business combination” is defined broadly to include various merger, consolidation, division, exchange or sale transactions, including transactions using our assets for refinancing purposes. An “interested shareholder,” in general, would be a beneficial owner of shares entitling that person to cast at least 20% of the votes that all shareholders would be entitled to cast in an election of directors.

Our stock price has been and may continue to be volatile.

 

The market price of our common stock has been and may continue to be volatile and may be significantly affected by:

 

 

 

None.

 

 

We currently operate 280 stores in 23 states, encompassing approximately 26 million square feet. We own 33 stores, have ground leases on eight stores, and lease 239 stores.

 

We operate under eight nameplates, as follows:

 

 

 

Our corporate headquarters is located in York, Pennsylvania where the majority of our administrative and sales support functions reside. Our merchandising and marketing functions are located in Milwaukee, Wisconsin. We own two distribution centers located in Rockford, Illinois and Green Bay, Wisconsin, and we lease two distribution centers located in Allentown, Pennsylvania and Fairborn, Ohio. We have a furniture warehouse attached to our Naperville, Illinois store.

 

 

On December 8, 2005, Adamson Apparel, Inc. filed a purported class action lawsuit against Saks in the United States District Court for the Northern District of Alabama. In its complaint the plaintiff asserted breach of contract claims and alleged that Saks improperly assessed chargebacks, timely payment discounts and deductions for merchandise returns against members of the plaintiff class. The lawsuit sought compensatory and incidental damages and restitution. Under the terms of the purchase agreement relating to the acquisition of NDSG from Saks in March 2006, the Company had an obligation to indemnify Saks for any damages incurred by Saks under this lawsuit by

Adamson Apparel, Inc. solely to the extent that such damages related to the business the Company acquired from Saks.

 

A settlement of this action was reached in the second quarter of 2008. The outcome of this matter had no material effect on our financial condition, results of operations or liquidity.

 

We are 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 condition, results of operations or liquidity.

 

 

None.

 

PART II

 

 

Our common stock is traded on The Nasdaq Global Select Stock Market (symbol: BONT). There is no established public trading market for our Class A common stock. The Class A common stock is convertible on a share-for-share basis into common stock at the option of the holder. The following table sets forth the high and low sales price of our common stock for the periods indicated as furnished by Nasdaq:

 

 

 

On March 27, 2009, we had approximately 238 shareholders of record of common stock and four shareholders of record of Class A common stock.

 

We have paid quarterly cash dividends on Class A common stock and common stock since July 15, 2003. Pursuant to our senior secured credit facility agreement, as amended November 20, 2007, any dividends paid may not exceed $5.0 million in any year or $20.0 million during the term of the agreement, which expires March 2011 ($8.6 million of which has been paid through March 27, 2009). In addition, pursuant to the indenture that governs our senior unsecured notes, any dividends paid may not exceed $0.24 per share in any year. We paid $0.05 per share on Class A common stock and common stock in each quarter of 2007 and the first three quarters of 2008. The dividend of $0.05 per share on Class A common stock and common stock declared in the fourth quarter of 2008 was paid in the first quarter of 2009. While a dividend was not declared at its last meeting on March 17, 2009, our Board of Directors may consider dividends in subsequent periods as it deems appropriate.

 

STOCK PERFORMANCE GRAPH

 

The following graph compares the yearly percentage change in the cumulative total shareholder return on the Company’s common stock from January 31, 2004 through January 31, 2009, and the cumulative total return on the Center for Research in Security Prices Total Return Index for The Nasdaq Stock Market (U.S. Companies) and the Nasdaq Retail Trade Stocks Index during such period. The comparison assumes $100 was invested on January 31, 2004 in the Company’s common stock and in each of the foregoing indices and assumes the reinvestment of any dividends.

 

 

 

 

 

 

 

 

Overview

 

General

 

We compete in the department store segment of the U.S. retail industry. Founded in 1898, the Company is one of the largest regional department store operators, offering a broad assortment of brand-name fashion apparel and accessories for women, men and children as well as cosmetics, home furnishings and other goods. We currently operate 280 stores in 23 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates and, under the Parisian nameplate, stores in the Detroit, Michigan area, encompassing a total of approximately 26 million square feet. The Company had net sales of $3.1 billion in 2008.

 

Effective March 5, 2006, we purchased all of the outstanding securities of two subsidiaries of Saks that were solely related to the business of owning and operating 142 retail department stores. The stores are located in 12 states in the Midwest and upper Great Plains regions and operate under the names Carson Pirie Scott, Younkers, Herberger’s, Boston Store and Bergner’s. Under the terms of the purchase agreement, we paid approximately $1.0 billion in cash for Carson’s.

 

To finance the acquisition and the payoff of our previous revolving credit facility, we entered into a new revolving credit facility which provides for up to $1.0 billion in borrowings, issued $510.0 million in senior unsecured notes, and entered into a new mortgage loan facility in the aggregate principal amount of $260.0 million.

 

On October 25, 2006, we entered into an asset purchase agreement with Belk, pursuant to which we agreed to purchase assets in connection with four department stores, all operated under the Parisian nameplate, and the rights to construct a new Parisian store, which opened in October 2007. The purchase price was $25.7 million in cash. In addition, we agreed to assume specific liabilities and obligations of Belk and its affiliates with respect to the acquired Parisian stores. The acquisition of these Parisian stores was effective as of October 29, 2006.

 

Economic Factors and Company Performance

 

Our performance in 2008 reflects the declining U.S. economy and record low consumer confidence that have greatly impacted the retail industry, including the department store sector. A wide range of factors contributed to the difficult economic environment: a poor housing market, high energy costs, mortgage and credit market concerns, rising unemployment and a loss of wealth due to the decline in the stock market. We believe that, for these reasons, consumers were less willing to spend their discretionary income.

 

While we prudently managed variables within our control — inventory investment, operating expenses and capital expenditures — in response to the deteriorating economic situation, we were unable to counteract the severe external pressures. As a result, we reported a decline in sales and gross margin, as well as considerable asset impairments and an income tax valuation allowance adjustment, resulting in a significant loss for the year. Given the outlook of continued recessionary factors, we anticipate another difficult year in 2009. Assumptions in our 2009 projections include:

 

 

In response to the deepening economic crisis, we have implemented a cost savings plan in 2009 which builds upon the expense control efforts initiated in 2008; actions taken include the reduction of corporate and store personnel, the elimination of bonus payments for senior executives and merit-based wage increases for all associates, the suspension of employer contributions to our 401(k) plan, and the reduction of capital spending and inventory levels. The impact of these actions is estimated to be an annualized increase in income from operations of $70.0 million. Our cash flow in 2009 will benefit from these savings as well as the lower capital spending.

 

Summary of Charges

 

In 2008, we recognized material non-cash charges which we believe are primarily a result of the downturn in our business and the expectation that current economic challenges will impede near-term recovery in the retail sector. Our assessment of the recoverability of these assets considered Company-specific projections, assumptions about market rates and transactions and, in the case of goodwill, our market capitalization at the time of testing. As a result of the reviews, the following charges were recorded:

 

 

 

The charges noted above compare unfavorably with a per share impact for asset impairment charges of $(0.16) in 2007.

 

Results of Operations

 

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

 

 

2008 Compared with 2007

 

Net sales:  Net sales in 2008 decreased 7.0% to $3,130.0 million from $3,365.9 million in 2007. Comparable store sales decreased 7.4% from the prior year. We believe the comparable store sales decline reflects a confluence of factors that created an adverse economic environment throughout the year, particularly the last quarter of 2008, which weakened consumer sentiment and pressured spending.

 

The best performing merchandise category in the period was Children’s Apparel. Sales increases in this category primarily reflect expanded and improved product selection in branded playwear and outerwear. The poorest performing categories in the period were Furniture (included in Home) and Moderate Sportswear and Dresses (both included in Women’s Apparel). Furniture sales were impacted by the difficult housing market in new construction and existing home sales, and continued deterioration in consumer spending for more expensive items. Moderate Sportswear and Dresses have been impacted by the challenging economic environment, which has resulted in reduced consumer spending on discretionary items. Sales in Moderate Sportswear were also affected by the decision made in 2007 by certain of our key vendors to exit the moderate sportswear business. It was not until the fall of 2008 that we began receiving merchandise from new, replacement vendors.

 

Other income:  Other income, which includes income from revenues received under our credit card program agreement with HSBC, leased departments and other customer revenues, was $95.5 million, or 3.0% of net sales, in 2008 as compared with $102.7 million, or 3.0% of net sales, in 2007. The decrease primarily reflects reduced sales volume in the current year.

 

Costs and expenses:  Gross margin dollars in 2008 were $1,095.0 million as compared with $1,215.8 million in 2007, a decrease of $120.8 million. The decrease in gross margin dollars reflects the reduced sales volume and a decrease in the gross margin rate. Gross margin as a percentage of sales decreased 1.1 percentage points to 35.0% in the current year from 36.1% in the prior year. The decrease in the gross margin rate primarily reflects an increased net markdown rate in response to the challenging economic environment.

 

SG&A expense in 2008 was $1,033.5 million as compared with $1,066.7 million in 2007, a decrease of $33.1 million. The decrease primarily resulted from expense reductions in payroll, benefits and advertising in response to our sales trend. Other expense reductions were due to increased efficiencies in operations and prior year store closing expenses. Despite the expense savings, the expense rate in 2008 increased 1.3 percentage points to 33.0% of net sales, compared with 31.7% in 2007, due to the reduced sales volume.

 

In 2008, depreciation and amortization expense and amortization of lease-related interests increased $0.2 million, to $122.2 million, from $122.0 million in 2007.

 

We recorded a non-cash goodwill impairment charge of $17.8 million in the second quarter of 2008 in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Based upon our review, the fair value of our single reporting unit, estimated using a combination of our common stock trading value as of the end of the second quarter of 2008, a discounted cash flow analysis and other generally accepted valuation methodologies, was less than the carrying amount. There was no such charge in 2007. See Notes 1 and 3 in the Notes to Consolidated Financial Statements.

 

In the fourth quarter of 2008, in accordance with the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), we recorded $17.9 million of non-cash asset impairment charges which resulted in a reduction in the carrying amount of certain store properties. We recorded charges of $2.7 million for asset impairments in 2007. See Notes 1 and 2 in the Notes to Consolidated Financial Statements.

 

In the fourth quarter of 2008, a review was completed of the carrying value of certain intangible assets in accordance with SFAS No. 142. As a result of our assessment, we recorded non-cash asset impairment charges of $8.1 million related to the reduction in the value of four indefinite-lived trade names and two indefinite-lived private label brand names. In 2007, we recorded impairment charges of $1.3 million related to the reduction in the value of two indefinite-lived private label brand names. See Notes 1 and 3 in the Notes to Consolidated Financial Statements.

 

(Loss) income from operations:  The loss from operations in 2008 was $(9.0) million, or (0.3)% of net sales, as compared with income from operations of $125.7 million, or 3.7% of net sales, in 2007.

 

Interest expense, net:  Net interest expense in 2008 was $97.8 million, or 3.1% of net sales, as compared with $108.2 million, or 3.2% of net sales, in 2007. The $10.3 million decrease primarily reflects decreased borrowing levels and reduced interest rates in the current year and $1.0 million of prior year expense incurred for the early extinguishment of debt.

 

Income tax provision:  The income tax provision reflects an effective tax rate of (59.1)% in 2008, compared with 34.0% in 2007. The 2008 income tax provision includes an unfavorable $108.5 million tax expense adjustment in the fourth quarter of 2008 pursuant to establishment of an additional valuation allowance against our deferred tax assets and a favorable $7.0 million tax benefit adjustment in the third quarter of 2008 related to expiration of certain exposures pursuant to the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN No. 48”).

 

Net (loss) income:  Net loss in 2008 was $(169.9) million, or (5.4)% of net sales, as compared with net income of $11.6 million, or 0.3% of net sales, in 2007.

 

2007 Compared with 2006

 

2007 consisted of 52 weeks, while 2006 consisted of 53 weeks. Comparability between the periods is also affected by the inclusion of five additional weeks of Carson’s operations in the first quarter of 2007; the prior year period includes Carson’s operations following the March 5, 2006 acquisition.

 

Net sales:  Net sales in 2007 increased 0.1% to $3,365.9 million from $3,362.3 million in 2006. The total sales increase reflects the inclusion of the five additional weeks of sales from Carson’s in the first quarter of 2007 as well as sales at the acquired Parisian stores, partially offset by a reduction for closed stores and the inclusion of an additional week of sales in the prior year, reflective of the fifty-three week fiscal period. The balance of sales in 2007 reflects a Bon-Ton comparable store net sales decrease of 6.5% and, for informational purposes only, a full-year Carson’s comparable store net sales decrease of 1.6%, which, in total, approximates $112 million.

 

We believe that the comparable store net sales decline was the result of several factors including, among others:

 

 

The best performing merchandise categories in the period were Children’s Apparel, Footwear and Better Sportswear (included in Women’s Apparel). Children’s Apparel benefited from increased inventory investment and the introduction of new vendors and licensed product. Sales increases in Footwear were primarily the result of increased inventory investment and the expansion of certain vendors into additional stores. Better Sportswear sales increased as customers responded favorably to our new and expanded offerings of private brand merchandise and key branded vendors.

 

The poorest performing categories in the period were Home (which includes Furniture), Moderate Sportswear and Coats (both included in Women’s Apparel). The sales decrease in Home was primarily due to the elimination of the prior year liquidation event, the impact of which was particularly significant in the second quarter of 2007, and the concerns in the housing market. Sales in Coats and Moderate Sportswear were adversely impacted by the unseasonable weather. Moderate Sportswear was also affected by the decision made by certain of our key vendors to exit the moderate sportswear business; the Company was unable to develop sufficient new merchandise resources to mitigate the sales volume erosion in 2007.

 

Other income:  Other income, which includes income from revenues received under our credit card program agreement with HSBC, leased departments and other customer revenues, was $102.7 million, or 3.0% of net sales, in 2007 as compared with $93.5 million, or 2.8% of net sales, in 2006. The increase in dollars was primarily due to the inclusion of thirteen weeks of Carson’s operations in the first quarter of 2007 as compared with eight weeks of Carson’s post-acquisition operations in the first quarter of 2006 and increased revenues received under the credit card program agreement, partially offset by the inclusion of an additional week of operations in the prior year.

 

Costs and expenses:  Gross margin dollars in 2007 were $1,215.8 million as compared with $1,243.5 million in 2006, a decrease of $27.7 million. The decrease in gross margin dollars primarily reflects the reduced sales volume attributable to the comparable store sales decrease and a

decrease in the gross margin rate. Gross margin as a percentage of sales decreased 0.9 percentage point to 36.1% in the current year from 37.0% in the prior year. The decrease in the gross margin rate reflects the inclusion of Carson’s sales and markdowns for the first five weeks of the current year; this historically clearance-driven period with reduced margins was not included in the prior year period. Additionally, the gross margin rate was impacted by increased net markdowns in the third and fourth quarters of 2007, the result of increased promotional activity in response to unseasonable weather conditions and the challenging economic environment.

 

SG&A expense in 2007 was $1,066.7 million as compared with $1,056.5 million in 2006, an increase of $10.2 million. The principal factors in the increase in SG&A expense were the inclusion of five incremental weeks of Carson’s operations in the first quarter of 2007 as compared with the first quarter of 2006 and increases in those costs affected by normal inflationary adjustments. These increases were partially offset by a reduction in integration expenses, increased efficiencies in operations in 2007 and the inclusion of an additional week of operations in the prior year. The 2007 expense rate increased 0.2 percentage point to 31.7%.

 

Depreciation and amortization expense and amortization of lease-related interests increased $18.0 million, to $122.0 million, in 2007 from $104.0 million in 2006, primarily the result of including thirteen weeks of Carson’s operations in the first quarter of 2007 as compared with eight weeks of Carson’s operations in the first quarter of 2006 as well as the increased expense associated with asset additions.

 

In 2007 we recorded $2.7 million of asset impairment charges which resulted in a reduction in the carrying amount of certain store properties, as compared with $2.9 million of charges in 2006 for an impaired store property and a reduction in the value of duplicate information systems software. Additionally, in 2007 we recorded an impairment charge of $1.3 million related to a reduction in the value of two indefinite-lived private label brand names. There was no such charge in 2006.

 

Income from operations:  Income from operations in 2007 was $125.7 million, or 3.7% of net sales, as compared with $173.7 million, or 5.2% of net sales, in 2006.

 

Interest expense, net:  Net interest expense in 2007 was $108.2 million, or 3.2% of net sales, as compared with $107.1 million, or 3.2% of net sales, in 2006. The $1.0 million increase is principally due to the net additional weeks of interest expense on debt incurred in connection with the acquisition of Carson’s compared with such interest expense in the prior year, partially offset by a prior year charge of $6.8 million for the write-off of fees associated with a bridge facility and the early extinguishment of previous debt.

 

Income tax provision:  The income tax provision reflects an effective tax rate of 34.0% in 2007 as compared with 29.5% in 2006. Included in the prior year provision is an income tax benefit adjustment of $4.1 million principally associated with a net reduction in income tax valuation allowances.

 

Net income:  Net income in 2007 was $11.6 million, or 0.3% of net sales, as compared with $46.9 million, or 1.4% of net sales, in 2006.

 

Liquidity and Capital Resources

 

At January 31, 2009, we had $19.7 million in cash and cash equivalents and $268.7 million available under our asset-based revolving credit facility (before taking into account the minimum borrowing availability of $75.0 million). The borrowing base calculation under our revolving credit facility contains an inventory advance rate subject to periodic review at the lender’s discretion. Based upon the most recent inventory appraisal in February 2009, we realized a decrease in our advance rate, the effect of which would have reduced borrowing availability by $31.4 million had the new advance rate been applied to our calculation at January 31, 2009.

 

While much of the reported loss in 2008 resulted from material non-cash charges for asset impairments and deferred tax valuation allowances, our operating performance decreased as well. In anticipation of continued recessionary pressures in 2009, we have heightened our focus on maximizing operating cash flow and have significantly curtailed our planned capital expenditures. Additionally, we will continue to control inventory levels in order to benefit our working capital needs. We anticipate that these actions, together with projected cash benefits from our cost savings initiatives, will positively impact our 2009 cash flow.

 

Our business is dependent to a significant degree upon close relationships with our vendors and their factors. The loss of key vendor or factor support could have a material adverse effect on our business. Given the weak global markets, vendors and factors may seek assurances to protect against non-payment of amounts due them. If we continue to experience declining operating performance, and if we experience severe liquidity challenges, vendors and factors may demand that we accelerate our payment for their products. These demands could have a significant adverse impact on our operating cash flow and result in a severe diminishment of our liquidity. Under such circumstances, borrowings under our existing credit facility could reach maximum levels, in which case we would take actions to obtain additional liquidity. However, there can be no assurance that we would be successful obtaining such additional liquidity. As a result, we may not be able to meet our obligations as they become due. In addition, if our vendors are unable to access liquidity or become insolvent, they could be unable to supply us with product or continue with their support of our advertising and promotional programs. Any such disruptions could negatively impact our ability to acquire merchandise or obtain vendor allowances in support of our advertising and promotional programs, which in turn could have an adverse impact on our business, operating results, financial condition or cash flow.

 

Historically, we have generated cash flow from operating activities and used supplemental borrowings under our credit facility to provide the liquidity we need to operate our business. The downturn in the global economy and the recent distress in the financial markets have resulted in extreme volatility in the capital markets and diminished liquidity and credit availability. The tightening of credit markets could make it more difficult for us to access funds, to refinance our existing indebtedness, to enter into agreements for new indebtedness or to obtain funding through the issuance of securities and could potentially increase our borrowing costs. If such conditions were to persist, we would seek alternative sources of liquidity, but there can be no assurance that we would be successful obtaining such additional liquidity. As a result, we may be unable to meet our obligations as they become due.

 

Typically, cash flows from operations are impacted by consumer confidence, weather in the geographic markets served by the Company, and economic and competitive conditions existing in the retail industry; a downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate our business. Currently, our business model is adversely impacted by additional economic drivers reflective of the global recession. While the current and anticipated future difficult economic conditions affect our assessment of short-term liquidity, we consider our resources (cash flows from operations supplemented by borrowings under the credit facility) adequate to satisfy our 2009 cash needs. While there can be no assurances, management believes there should be sufficient liquidity to cover our short-term funding needs.

 

The following table summarizes material measures of our liquidity and capital resources:

 

 

 

Our primary sources of working capital are cash flows from operations and borrowings under our revolving credit facility. 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.

 

Working capital levels decreased minimally between 2008 and 2007. The increase in the current ratio in 2008, as compared with 2007, primarily reflects proportionately larger decreases in current liabilities as compared with current assets, principally due to reduced accrued liabilities relating to benefits. The increase in debt to total capitalization is largely due to the significant decrease in shareholders’ equity in 2008, the result of the net loss for the period as well as a decline in the funded status of the Company’s defined benefit pension plans. The decrease in unused availability under lines of credit as compared with the prior year reflects decreased availability primarily due to reduced inventory levels as well as increased documentary letters of credit to support the purchasing of inventory.

 

Increases in working capital and the current ratio in 2007, as compared with 2006, largely reflect reductions in accrued liabilities and income taxes payable. The decrease in debt to total capitalization reflects cash flow generated in 2007 utilized to reduce debt levels. The increase in unused availability under lines of credit as compared with the prior year primarily reflects decreases in direct borrowings and standby letters of credit to support the importing of merchandise and as collateral for obligations related to general liability and workers’ compensation insurance.

 

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

 

 

 

The decrease in net cash provided by operating activities in 2008 as compared with 2007 largely reflects a decrease in business performance, resulting in the current year loss (compared with prior year income), partially offset by increased non-cash charges such as depreciation and amortization; impairment charges for long-lived assets, intangible assets and goodwill; and the increase in the valuation allowance against deferred tax assets. We sought to reduce our working capital needs and, accordingly, reduced inventory levels in 2008 and we plan to continue to control inventory levels in 2009. The change in cash flows from operating activities in 2007 primarily reflects decreases in

merchandise inventories due to inventory management efforts in response to sales trends, partially offset by a reduction in net income.

 

We invested $84.8 million, $109.7 million and $95.2 million in capital expenditures (not reduced by landlord contributions) in 2008, 2007 and 2006, respectively. These investments were for the opening, expanding and remodeling of stores as well as investments in information technology. Additional capital investment of $1,073.3 million in 2006 was expended for the acquisition of Carson’s and Parisian. We have significantly reduced our capital expenditures in response to current economic conditions and expect capital expenditures to total approximately $40 million (net of approximately $7 million of landlord contributions) in 2009, as we are limiting store expansion and remodel activities in the near term. Included in future capital expenditures is continued investment in information technology for on-going efforts to implement Bon-Ton’s advanced point-of-sale system in the Carson’s stores.

 

The decrease in net cash used in financing activities in 2008 as compared with 2007 primarily reflects net payments made to reduce long-term debt in 2007, the result of increased operating cash flows in that year. Proceeds from the issuance of long-term debt totaled $2,048.4 million in 2006, reflecting increased borrowings to fund the acquisitions of Carson’s and Parisian.

 

On March 6, 2006, The Bon-Ton Department Stores, Inc., a wholly owned subsidiary of The Bon-Ton Stores, Inc., and certain of its subsidiaries, Bank of America, N.A. (“Bank of America”) and certain other lenders entered into a Loan and Security Agreement (“Senior Secured Credit Facility”) which provides for up to $1.0 billion of revolver borrowings. The Senior Secured Credit Facility includes a last-in, first-out revolving credit facility of up to $900.0 million and a first-in, last-out revolving credit facility of up to $100.0 million, and has a sub-limit of $150.0 million for the issuance of standby and documentary letters of credit. All borrowings under the Senior Secured Credit Facility are limited by amounts available pursuant to a borrowing base calculation, which is based on percentages of eligible inventory, real estate and fixed assets, with a reduction for applicable reserves. The Senior Secured Credit Facility is guaranteed by The Bon-Ton Stores, Inc. and certain of its subsidiaries. The Senior Secured Credit Facility is secured by substantially all the assets of the Company, except for leasehold interests and certain mortgaged real property. As part of the Senior Secured Credit Facility, Bank of America and the other lenders will make available certain swing line loans in an aggregate amount not to exceed $75.0 million outstanding at any one time. Borrowings under the Senior Secured Credit Facility bear interest at either (i) the prime rate established by Bank of America, from time to time, plus the applicable margin (the “Prime Rate”) or (ii) the LIBOR rate from time to time plus the applicable margin. The applicable margin is determined based upon the excess availability under the Senior Secured Credit Facility. The swing line loans bear interest at the same rate applicable to last-in, first-out Prime Rate loans. We are required to pay a commitment fee to the lenders for unused commitments at a rate of 0.25% to 0.30% per annum, based upon the unused portion of the total commitment under the Senior Secured Credit Facility. The Senior Secured Credit Facility expires March 6, 2011. The financial covenant contained in the Senior Secured Credit Facility requires that the minimum excess availability be greater than $75.0 million at all times. In addition, there are certain restrictions against the incurrence of additional indebtedness, pledge or sale of assets, payment of dividends and distributions, and other similar restrictions. Per the November 20, 2007 amendment of the Senior Secured Credit Facility, dividends paid may not exceed $20.0 million over the life of the agreement ($8.6 million of which has been paid out through March 27, 2009), or $5.0 million in any single year, and capital expenditures are limited to $150.0 million per year, with a one-year carryover of any prior year unused amount. The Senior Secured Credit Facility also provides that it is a condition precedent to borrowing that no event has occurred that could reasonably be expected to have a material adverse effect, as defined in the agreement, on the Company. If we fail to comply with the financial covenant or the other restrictions contained in our Senior Secured Credit Facility, mortgage loan facility or the indenture that governs our senior unsecured notes, an event of default would occur. An event of default could result in the acceleration of our debt due to the cross-default provisions within our debt agreements. As of

January 31, 2009, the Company had borrowings of $320.1 million, with $268.7 million of borrowing availability (before taking into account the minimum borrowing availability covenant of $75.0 million) and letter-of-credit commitments of $33.2 million. The borrowing base calculation under the Senior Secured Credit Facility contains an inventory advance rate subject to periodic review at the lender’s discretion. Based upon the most recent inventory appraisal in February 2009, we realized a decrease in our advance rate, the effect of which would have reduced borrowing availability by $31.4 million had the new advance rate been applied to our calculation at January 31, 2009.

 

On April 8, 2009, we elected to reduce our commitment under our Senior Secured Credit Facility to $800.0 million from the previous $1.0 billion, which will reduce interest expense associated with the unused commitment fee.

 

On March 6, 2006, The Bon-Ton Department Stores, Inc. entered into an Indenture (the “Indenture”) with The Bank of New York, as trustee, under which The Bon-Ton Department Stores, Inc. issued $510.0 million aggregate principal amount of its 101/4% Senior Notes due 2014 (the “Notes”). The Notes are guaranteed on a senior unsecured basis by The Bon-Ton Stores, Inc. and certain of its subsidiaries. The Notes mature on March 15, 2014. The Notes may not be redeemed prior to March 15, 2010. The interest rate of the Notes is fixed at 101/4% per year. Interest on the Notes is payable on March 15 and September 15 of each year, beginning on September 15, 2006. The Indenture includes covenants that limit the ability of the Company and its restricted subsidiaries to, among other things, incur additional debt, pay dividends and make distributions, make certain investments, enter into certain types of transactions with affiliates, use assets as security in other transactions, and sell certain assets or merge with or into other companies.

 

On March 6, 2006, certain bankruptcy-remote special purpose entities (each an “SPE” and, collectively, the “SPEs”) that are indirect wholly owned subsidiaries of The Bon-Ton Stores, Inc. entered into loan agreements with Bank of America, pursuant to which Bank of America provided a new mortgage loan facility in the aggregate principal amount of $260.0 million (the “Mortgage Loan Facility”). The Mortgage Loan Facility has a term of ten years and is secured by mortgages on twenty-three retail stores and one distribution center owned by the SPEs. Each SPE entered into a lease with each of The Bon-Ton Stores, Inc. subsidiaries operating on such SPE’s properties. A portion of the rental income received under these leases will be used to pay the debt service under the Mortgage Loan Facility. The Mortgage Loan Facility requires level monthly payments of principal and interest based on an amortization period of twenty-five years and the balance outstanding at the end of ten years will then become due and payable. The interest rate for the Mortgage Loan Facility is fixed at 6.2125%. Financial covenants contained in the Mortgage Loan Facility require that the SPEs maintain certain financial thresholds, as defined in the agreements. In addition, the SPEs are required to establish lease shortfall reserve accounts pursuant to the terms of the Mortgage Loan Facility. If the SPEs’ EBITDA (earnings before interest, taxes, depreciation and amortization) falls below prescribed levels, excess cash, as defined in the agreement, shall be deposited in the lease shortfall reserve account and access to these funds is restricted.

 

We used the net proceeds of the Notes offering and Mortgage Loan Facility, along with borrowings under the Senior Secured Credit Facility, to finance the acquisition of Carson’s, refinance our previous revolving credit agreement, and pay related fees and expenses in connection with the acquisition and related financing transactions.

 

Aside from planned capital expenditures, our primary cash requirements will be to service debt and finance working capital increases during peak selling seasons. Additionally, in the first quarter of 2009, we paid $5.7 million pursuant to the termination of one of our unfunded supplemental pension plans.

 

We paid a quarterly cash dividend of $0.05 per share on shares of Class A common stock and common stock on May 1, 2008, August 1, 2008, November 3, 2008 and February 2, 2009 to shareholders of record as of April 15, 2008, July 15, 2008, October 15, 2008, and January 15, 2009,

respectively. Our Board of Directors may consider dividends in subsequent periods as it deems appropriate.

 

Contractual Obligations and Commitments

 

The following tables reflect our contractual obligations and commitments as of January 31, 2009:

 

Contractual Obligations

 

 

 

In addition, we expect to make cash contributions to our supplementary pension plans and the postretirement medical and life insurance benefit plan in the amount of $7.2 million, $1.5 million, $1.5 million, $1.4 million and $1.4 million in 2009, 2010, 2011, 2012 and 2013, respectively, and $5.1 million in the aggregate for the five years thereafter.

 

We do not anticipate making a contribution to the Carson defined benefit pension plan in 2009. Funding requirements will depend on changes in the discount rate, the actual performance of plan assets, and the impact of The Pension Protection Act of 2006.

 

Note 9 in the Notes to Consolidated Financial Statements provides a more complete description of our benefit plans.

 

Commitments

 

 

 

Documentary letters of credit are primarily issued to support the purchasing of merchandise, which includes our private brand goods. Standby letters of credit are primarily issued to support the purchasing of merchandise and as collateral for obligations related to general liability and workers’

compensation insurance. Surety bonds are primarily for previously incurred and expensed obligations related to workers’ compensation.

 

In the ordinary course of business, we enter into arrangements with vendors to purchase merchandise up to twelve months in advance of expected delivery. These purchase orders do not contain any significant termination payments or other penalties if cancelled.

 

Critical Accounting Policies

 

Our discussion and analysis of financial condition and results of operations are based upon the Consolidated Financial Statements, which have been prepared in accordance with U.S. generally accepted accounting principles. Preparation of these financial statements required us to make estimates and judgments that affected reported amounts of assets and liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities at the date of our financial statements. On an ongoing basis, we evaluate our estimates, including those related to merchandise returns, bad debts, inventories, goodwill, intangible assets, income taxes, financings, contingencies, insurance reserves, and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

 

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially lead to materially different results under different assumptions and conditions. We believe our critical accounting policies are as described below. For a discussion of the application of these and other accounting policies, see the Notes to Consolidated Financial Statements.

 

Inventory Valuation

 

Inventories are stated at the lower of cost or market with cost determined by the retail inventory method. Under the retail inventory method, the valuation of inventories at cost and the resulting gross margin is derived by applying a calculated cost-to-retail ratio to the retail value of inventories. The retail inventory method is an averaging method that has been widely used in the retail industry. Use of the retail inventory method will result in valuing inventories at the lower of cost or market if markdowns are taken timely as a reduction of the retail value of inventories.

 

Inherent in the retail inventory method calculation are certain significant management judgments and estimates including, among others, merchandise markups, markdowns and shrinkage, which significantly impact both the ending inventory valuation at cost and the resulting gross margin. These significant estimates, coupled with the fact that the retail inventory method is an averaging process, can, under certain circumstances, result in individual inventory components with cost above related net realizable value. Factors that can lead to this result include applying the retail inventory method to a group of products that is not fairly uniform in terms of its cost, selling price relationship and turnover; or applying the retail inventory method to transactions that include different rates of gross profit, such as those relating to seasonal merchandise. In addition, failure to take timely markdowns can result in an overstatement of inventory under the lower of cost or market principle. We believe that the retail inventory method we use provides an inventory valuation that approximates cost and results in carrying inventory in the aggregate at the lower of cost or market.

 

We regularly review inventory quantities on-hand and record an adjustment for excess or old inventory based primarily on an estimated forecast of merchandise demand for the selling season. Demand for merchandise can fluctuate greatly. A significant increase in the demand for merchandise could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand. Additionally, estimates of future merchandise demand may prove to be inaccurate, in which case we may have understated or overstated the adjustment required for excess or old inventory. If our inventory is

determined to be overvalued in the future, we would be required to recognize such costs in costs of goods sold and reduce operating income at the time of such determination. Likewise, if inventory is later determined to be undervalued, we may have overstated the costs of goods sold in previous periods and would recognize additional operating income when such inventory is sold. Therefore, although every effort is made to ensure the accuracy of forecasts of future merchandise demand, any significant unanticipated changes in demand or in economic conditions within our markets could have a significant impact on the value of our inventory and reported operating results.

 

Prior to the Carson’s acquisition, we utilized the last-in, first-out (“LIFO”) cost basis for all of our inventories. In connection with the Carson’s acquisition, we evaluated the inventory costing for the acquired inventories and elected the first-in, first-out (“FIFO”) cost basis for the majority of the acquired Carson’s locations. As of January 31, 2009 and February 2, 2008, approximately 32% of our inventories were valued using a FIFO cost basis and approximately 68% of our inventories were valued using a LIFO cost basis. As is currently the case with many companies in the retail industry, our LIFO calculations yielded inventory increases 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 $41.6 million and $37.0 million as of January 31, 2009 and February 2, 2008, respectively. Inherent in the valuation of inventories are significant management judgments and estimates regarding future merchandise selling costs and pricing. Should these estimates prove to be inaccurate, we may have overstated or understated our inventory carrying value. In such cases, operating results would ultimately be impacted.

 

Vendor Allowances

 

As is standard industry practice, allowances from merchandise vendors are received as reimbursement for charges incurred on marked-down merchandise. Vendor allowances are generally credited to costs of goods sold, provided the allowance is: (1) collectable, (2) for merchandise either permanently marked down or sold, (3) not predicated on a future purchase, (4) not predicated on a future increase in the purchase price from the vendor, and (5) authorized by internal management. If the aforementioned criteria are not met, the allowances are reflected as an adjustment to the cost of merchandise capitalized in inventory.

 

Additionally, allowances are received from vendors in connection with cooperative advertising programs and for reimbursement of certain payroll expenses. These allowances received from each vendor are reviewed to ensure reimbursements are for specific, incremental and identifiable advertising or payroll costs incurred to sell the vendor’s products. If a vendor reimbursement exceeds the costs incurred, the excess reimbursement is recorded as a reduction of cost purchases from the vendor and reflected as a reduction of costs of merchandise sold when the related merchandise is sold. All other amounts are recognized as a reduction of the related advertising or payroll costs that have been incurred and reflected in SG&A expense.

 

Income Taxes

 

Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities, and the valuation allowance recorded against net deferred tax assets. Pursuant to SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”), 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, SFAS No. 109 requires that companies 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. 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.

 

Our net deferred tax assets were $2.7 million and $104.9 million at January 31, 2009 and February 2, 2008, respectively. In assessing the realizability of our deferred tax assets, we considered whether it was 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. Pursuant to SFAS No. 109, significant weight is to be given to evidence that can be objectively verified. As a result, a company’s 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 evaluated our deferred tax assets each reporting period, including assessment of the Company’s cumulative income over the prior three-year period, to determine if valuation allowances were required. A significant element of negative evidence was the Company’s three-year historical cumulative loss as of the fourth quarter of 2008. This, combined with uncertain near-term economic conditions, reduced our ability to rely on our projections of future taxable income in establishing the deferred tax assets valuation allowance at January 31, 2009. Accordingly, a full valuation allowance was established during the fourth quarter of 2008 on nearly all the Company’s net deferred tax assets, resulting in a tax expense adjustment of $108.5 million.

 

We recorded a valuation allowance of $145.5 million and $14.3 million at January 31, 2009 and February 2, 2008, 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 under SFAS No. 109, the valuation allowance would be reversed accordingly in the period that such a conclusion is reached.

 

Effective February 4, 2007, we adopted the provisions of FIN No. 48, which prescribes a recognition and derecognition threshold and measurement element for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Accordingly, we establish reserves for certain tax positions that we believe are supportable, but are potentially subject to successful challenge by applicable taxing authorities. However, interpretations and guidance surrounding income tax laws and regulations change over time. Changes in 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 $832.8 million and $885.5 million at January 31, 2009 and February 2, 2008, respectively.

 

SFAS No. 144 requires the Company to test a long-lived asset for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Factors that could trigger an impairment review include the following:

 

 

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 calculated based on a discounted cash flow analysis. Should cash flow estimates differ significantly from actual results, an impairment could arise and materially impact our financial position and results of operations. Given the seasonality of operations, impairment is not conclusive, in many cases, until after the holiday period in the fourth quarter is concluded.

 

Newly opened stores may take time to generate positive operating and cash flow results. Factors such as store type, store location, current marketplace awareness of private label brands, local customer demographic data and current fashion trends are all considered in determining the time-frame required for a store to achieve positive financial results. If conditions prove to be substantially different from expectations, the carrying value of new stores’ long-lived assets may ultimately become impaired.

 

We evaluated the recoverability of our long-lived assets in accordance with SFAS No. 144. As a result, in 2008 we recognized a $17.9 million asset impairment charge which resulted in a reduction in the carrying amount of certain store properties. These 2008 analyses anticipate continued difficult economic conditions. Should economic conditions result that are worse than anticipated, additional impairment charges could result. In 2007 we recorded $2.7 million of asset impairment charges which resulted in a reduction in the carrying amount of certain store properties. Impairment losses of $2.9 million, which resulted in a reduction in the carrying amount of a store property and a reduction in the value of duplicate information systems software resulting from the acquisition of Carson’s, were recorded in 2006.

 

Goodwill and Intangible Assets

 

Net intangible assets totaled $148.2 million and $165.9 million at January 31, 2009 and February 2, 2008, respectively. Our intangible assets at January 31, 2009 are principally comprised of $77.3 million of lease interests that relate to below-market-rate leases and $70.8 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 January 31, 2009, lease-related interests and customer lists had average remaining lives of fourteen years and ten years, respectively, for amortization purposes. At January 31, 2009, trade names and private label brand names of $54.1 million have been deemed as having indefinite lives.

 

In accordance with SFAS No. 142, goodwill and other intangible assets that have indefinite lives are reviewed for impairment at least annually or when events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. Fair value is determined using quoted market prices and/or 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.

 

We recorded a goodwill impairment charge of $17.8 million in the second quarter of 2008 in accordance with SFAS No. 142. Based upon our review, the fair value of our single reporting unit, estimated using a combination of our common stock trading value as of the end of the second quarter of 2008, a discounted cash flow analysis and other generally accepted valuation methodologies, was less than the carrying amount. The charge reduced the balance of goodwill to zero at January 31, 2009 from the $17.8 million balance at February 2, 2008. No such charge was recorded in 2007 or 2006.

 

Other indefinite-lived intangible assets were reviewed in the second quarter of 2008 as well, with the determination that no impairment adjustments were required on these assets at that time. Because of the significant economic downturn experienced during the fourth quarter of 2008, we reviewed the intangible assets for impairment and recognized asset impairment charges of $8.0 million and $0.1 million on indefinite-lived trade names and private label brand names, respectively. As a result of our review of the carrying value of intangible assets for 2007, we recorded an asset impairment charge of $1.3 million related to the reduction in the value of two indefinite-lived private label brand names. No such charge was recorded in 2006.

 

While the value of intangible assets has been substantially reduced, should future results or economic events cause a change in our projected cash flows, future determination 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.

 

Insurance Reserve Estimates

 

We use a combination of insurance and self-insurance for a number of risks, including workers’ compensation, general liability and employee-related health care benefits, a portion of which is paid by our associates. We determine the estimates for the liabilities associated with these risks by considering historical claims experience, demographic factors, severity factors and other actuarial assumptions. A change in claims frequency and severity of claims from historical experience as well as changes in state statutes and the mix of states in which we operate could result in a change to the required reserve levels.

 

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 three 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. Our target pension plan asset allocation of equity securities, fixed income and real estate at January 31, 2009 and February 2, 2008 was 65%, 30% and 5%, respectively.

 

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 2009, 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, continued losses of asset values may necessitate increased funding of the defined benefit pension plan in the future to meet minimum federal government requirements. The

continued 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.

 

In the first quarter of 2009, we paid $5.7 million pursuant to the termination of one of our unfunded supplemental pension plans.

 

Future Accounting Changes

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements; however, it does not require any new fair value measurements. SFAS No. 157 was effective for years beginning after November 15, 2007 for financial assets and liabilities that are measured at fair value on a recurring basis. Accordingly, effective February 3, 2008, we adopted the provisions of SFAS No. 157 for financial assets and liabilities that are measured at fair value on a recurring basis; the adoption of SFAS No. 157 did not have a material impact on our consolidated financial statements. See Note 4 in the Notes to Consolidated Financial Statements regarding the implementation of SFAS No. 157.

 

Pursuant to the option for a one-year deferral of SFAS No. 157’s fair-value measurement requirements for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis, we elected to defer application of SFAS No. 157 to, among others, goodwill, fixed asset and intangible asset impairment testing, and liabilities for exit or disposal activities initially measured at fair value. We expect the full adoption of this statement in 2009 will not have a material impact on the consolidated financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities — an Amendment of FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 requires companies to provide qualitative disclosures about the objectives and strategies for using derivatives, quantitative data about the fair value of and gains and losses on derivative contracts, and details of credit-risk-related contingent features in their hedged positions. The statement also requires companies to disclose more information about the location and amounts of derivative instruments in financial statements; how derivatives and related hedges are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”; and how the hedges affect the entity’s financial position, financial performance and cash flows. SFAS No. 161 is effective for years beginning after November 15, 2008. We expect the adoption of this statement will not have a material impact on the consolidated financial statements.

 

In December 2008, the FASB issued Staff Position No. 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets” (“FSP No. 132(R)-1”). FSP No. 132(R)-1 requires entities to provide enhanced disclosures about investment allocation decisions, the major categories of plan assets, the inputs and valuation techniques used to measure fair value of plan assets, the effect of fair value measurements using significant unobservable inputs on changes in plan assets for the period and significant concentrations of risk within plan assets. The enhanced disclosures about plan assets required by FSP No. 132(R)-1 must be provided in our Annual Report on Form 10-K for the year ending January 30, 2010. We are currently assessing the potential impacts, if any, on the consolidated financial statements.

 

 

Market Risk and Financial Instruments

 

We are exposed to market risk associated with changes in interest rates. To provide some protection against potential rate increases associated with our variable-rate facilities, we enter into derivative financial transactions in the form of interest rate swaps. The interest rate swaps are used to hedge a portion of the underlying variable-rate facilities. The swaps are qualifying hedges and the interest rate differential is reflected as an adjustment to interest expense over the life of the swaps.

 

At January 31, 2009, we held two “variable-to-fixed” rate swaps with a notional amount of $50.0 million each. The notional amount does not represent amounts exchanged by the parties; rather, it is used as the basis to calculate amounts due and to be received under the rate swap. During 2008 and 2007, we did not enter into or hold derivative financial instruments for trading purposes.

 

The following table provides information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates, including debt obligations and the interest rate swaps. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates at January 31, 2009. For the interest rate swaps, the table presents the notional amount and weighted average pay and receive interest rates by expected maturity date. For additional discussion of our interest rate swaps, see Note 11 in the Notes to Consolidated Financial Statements.

 

 

Seasonality and Inflation

 

Our business, like that of most retailers, is subject to seasonal fluctuations, with the major portion of sales and income realized during the second half of each fiscal year, which includes the holiday season. See Note 19 in the Notes to Consolidated Financial Statements for the Company’s quarterly results for 2008 and 2007. Due to the fixed nature of certain costs, SG&A expense is typically higher as a percentage of net sales during the first half of each year. Working capital requirements fluctuate during the year as well and generally reach their highest levels during the third and fourth quarters.

 

Because of the seasonality of our business, results for any quarter are not necessarily indicative of results that may be achieved for a full year. In addition, quarterly operating results are impacted by the timing and amount of revenues and costs associated with the opening of new stores and the closing and remodeling of existing stores.

 

Although we cannot determine the precise effects of inflation on our business, we do not believe inflation has had a material impact on operating results during the past three years. However, there can be no assurance that our business will not be affected by material inflationary adjustments in the future.

 

 

Information called for by this item is set forth in the Consolidated Financial Statements and Financial Statement Schedule contained in this report and is incorporated herein by this reference. See index at page F-1.

 

 

None.

 

 

Attached as exhibits to this Form 10-K are certifications of the Company’s Chief Executive Officer and Chief Financial Officer, which are required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). This “Controls and Procedures” section includes information concerning the controls and controls evaluation referred to in the certifications. This section should be read in conjunction with the certifications for a more complete understanding of the topics presented.

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed pursuant to the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report and, based on this evaluation, concluded that our disclosure controls and procedures are effective.

 

Management Report on Internal Control over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of its financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company’s assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company’s receipts and expenditures are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of its assets that could have a material effect on the financial statements.

 

Management assessed the Company’s internal control over financial reporting as of January 31, 2009, the end of the 2008 fiscal year. Management based its assessment on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and the Company’s overall control environment.

 

Based on its assessment, management has concluded that the Company’s internal control over financial reporting was effective as of the end of the fiscal year to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with generally accepted accounting principles. The results of management’s assessment were reviewed with the Audit Committee of the Company’s Board of Directors.

 

KPMG LLP independently assessed the effectiveness of the Company’s internal control over financial reporting. KPMG LLP has issued an attestation report, which is included below.

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

The Bon-Ton Stores, Inc.:

 

We have audited The Bon-Ton Stores, Inc. internal control over financial reporting as of January 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Bon-Ton Stores, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, The Bon-Ton Stores, Inc. maintained, in all material respects, effective internal control over financial reporting as of January 31, 2009, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of The Bon-Ton Stores, Inc. and subsidiaries as of January 31, 2009 and February 2, 2008, and the related consolidated statements of operations, shareholders’ equity, and cash flows for each of the fiscal years in the three-year period ended January 31, 2009, and the related financial statement schedule, and our report dated April 15, 2009 expressed an unqualified opinion on those consolidated financial statements and the related financial statement schedule.

 

 

Philadelphia, Pennsylvania

April 15, 2009

 

Inherent Limitations on Effectiveness of Controls

 

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls or internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements because of error or fraud will not occur or that all control issues and instances of fraud, if any, within our Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based, in part, on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

 

Changes in Internal Control Over Financial Reporting

 

Except as discussed below, there were no changes to the Company’s internal control over financial reporting that occurred during the thirteen weeks ended January 31, 2009 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

The Company made certain changes to its internal control over financial reporting in connection with implementation of new general ledger and account payable computer systems, which were implemented pursuant to the Company’s ongoing technology improvements. Management believes the new controls are effective.

 

 

None.

 

PART III

 

 

As part of our system of corporate governance, our Board of Directors has adopted a Code of Ethical Standards and Business Practices applicable to all directors, officers and associates. This Code is available on our website at www.bonton.com.

 

The information regarding executive officers is included in Part I under the heading “Executive Officers.” The remainder of the information called for by this Item is incorporated by reference to the sections entitled “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance and Board of Directors Information” of the Proxy Statement.

 

 

The information called for by this Item is incorporated by reference to the section entitled “Executive Compensation” of the Proxy Statement.

 

 

The information called for by this Item is incorporated by reference to the sections entitled “Security Ownership of Directors and Executive Officers” and “Equity Compensation Plan Information” of the Proxy Statement.

 

 

The information called for by this Item is incorporated by reference to the sections entitled “Related Party Transactions” and “Director Independence” of the Proxy Statement.

 

 

The information called for by this Item is incorporated by reference to the section entitled “Fees Paid to KPMG” of the Proxy Statement.

 

PART IV

 

 

(a) The following documents are filed as part of this report:

 

1. Consolidated Financial Statements — See the Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1.

 

2. Financial Statement Schedule — See the Index to Consolidated Financial Statements and Financial Statement Schedule on page F-1.

 

(b) The following are exhibits to this Form 10-K and, if incorporated by reference, we have indicated the document previously filed with the SEC in which the exhibit was included.