Form 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

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

For the Quarter ended August 1, 2009

Commission File Number 0-19517

THE BON-TON STORES, INC.

2801 East Market Street

York, Pennsylvania 17402

(717) 757-7660


Incorporated in Pennsylvania		IRS No. 23-2835229

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

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

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


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

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

As of August 28, 2009, there were 15,609,459 shares of Common Stock, $.01 par value, and 2,951,490 shares of Class A Common Stock, $.01 par value, outstanding.

PART I: FINANCIAL INFORMATION


ITEM 1.		FINANCIAL STATEMENTS

THE BON-TON STORES, INC.
CONSOLIDATED BALANCE SHEETS


(In thousands except share and per share data)	August 1,			January 31,
(Unaudited)	2009			2009
Assets
Current assets:
Cash and cash equivalents	$	15,591		$	19,719
Merchandise inventories		675,321			666,081
Prepaid expenses and other current assets		80,408			113,441

Total current assets		771,320			799,241


Property, fixtures and equipment at cost, net of accumulated depreciation and amortization of $551,261 and $498,556 at August 1, 2009 and January 31, 2009, respectively		793,591			832,763
Deferred income taxes		9,662			9,994
Intangible assets, net of accumulated amortization of $34,991 and $30,611 at August 1, 2009 and January 31, 2009, respectively		143,548			148,171
Other long-term assets		27,695			31,152

Total assets	$	1,745,816		$	1,821,321


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	178,318		$	143,423
Accrued payroll and benefits		29,311			36,116
Accrued expenses		164,597			179,073
Current maturities of long-term debt		6,283			6,072
Current maturities of obligations under capital leases		4,272			2,730
Deferred income taxes		10,247			7,328
Income taxes payable		384			62

Total current liabilities		393,412			374,804


Long-term debt, less current maturities		1,065,332			1,083,449
Obligations under capital leases, less current maturities		66,534			65,319
Other long-term liabilities		162,723			163,572

Total liabilities		1,688,001			1,687,144


Contingencies (Note 11)

Shareholders’ equity:
Preferred Stock — authorized 5,000,000 shares at $0.01 par value; no shares issued		—			—
Common Stock — authorized 40,000,000 shares at $0.01 par value; issued shares of 15,949,652 and 14,880,173 at August 1, 2009 and January 31, 2009, respectively		159			149
Class A Common Stock — authorized 20,000,000 shares at $0.01 par value; issued and outstanding shares of 2,951,490 at August 1, 2009 and January 31, 2009		30			30
Treasury stock, at cost - 337,800 shares at August 1, 2009 and January 31, 2009		(1,387	)		(1,387	)
Additional paid-in-capital		146,915			144,577
Accumulated other comprehensive loss		(57,971	)		(59,464	)
(Accumulated deficit) retained earnings		(29,931	)		50,272

Total shareholders’ equity		57,815			134,177

Total liabilities and shareholders’ equity	$	1,745,816		$	1,821,321

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

THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS


	THIRTEEN						TWENTY-SIX
	WEEKS ENDED						WEEKS ENDED
(In thousands except share and per share data)	August 1,			August 2,			August 1,			August 2,
(Unaudited)	2009			2008			2009			2008

Net sales	$	609,228		$	673,384		$	1,253,759		$	1,373,632
Other income		16,076			21,513			34,468			44,288

		625,304			694,897			1,288,227			1,417,920


Costs and expenses:
Costs of merchandise sold		383,097			431,962			803,463			894,462
Selling, general and administrative		222,923			246,394			459,750			502,168
Depreciation and amortization		28,696			29,892			56,794			58,910
Amortization of lease-related interests		1,217			1,206			2,444			2,414
Goodwill impairment		—			17,767			—			17,767

Loss from operations		(10,629	)		(32,324	)		(34,224	)		(57,801	)
Interest expense, net		23,194			24,376			46,120			48,738


Loss before income taxes		(33,823	)		(56,700	)		(80,344	)		(106,539	)
Income tax provision (benefit)		939			(22,874	)		(141	)		(38,650	)


Net loss	$	(34,762	)	$	(33,826	)	$	(80,203	)	$	(67,889	)


Per share amounts —
Basic:
Net loss	$	(2.04	)	$	(2.01	)	$	(4.72	)	$	(4.04	)


Basic weighted average shares outstanding		17,006,401			16,796,187			16,997,170			16,786,887

Diluted:
Net loss	$	(2.04	)	$	(2.01	)	$	(4.72	)	$	(4.04	)


Diluted weighted average shares outstanding		17,006,401			16,796,187			16,997,170			16,786,887

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

THE BON-TON STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS


	TWENTY-SIX
	WEEKS ENDED
(In thousands)	August 1,			August 2,
(Unaudited)	2009			2008
Cash flows from operating activities:
Net loss	$	(80,203	)	$	(67,889	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		56,794			58,910
Amortization of lease-related interests		2,444			2,414
Goodwill impairment		—			17,767
Share-based compensation expense		2,348			2,692
Loss on sale of property, fixtures and equipment		115			644
Amortization of deferred financing costs		2,021			2,074
Amortization of deferred gain on sale of proprietary credit card portfolio		(1,207	)		(1,207	)
Deferred income taxes		3,251			(4,889	)
Changes in operating assets and liabilities:
(Increase) decrease in merchandise inventories		(9,240	)		44,099
Decrease (increase) in prepaid expenses and other current assets		33,033			(43,252	)
Decrease in other long-term assets		1,435			3,409
Increase in accounts payable		39,513			21,593
Decrease in accrued payroll and benefits and accrued expenses		(18,637	)		(16,061	)
Increase (decrease) in income taxes payable		322			(899	)
Increase in other long-term liabilities		2,821			8,146

Net cash provided by operating activities		34,810			27,551


Cash flows from investing activities:
Capital expenditures		(12,976	)		(52,759	)
Proceeds from sale of property, fixtures and equipment		67			83

Net cash used in investing activities		(12,909	)		(52,676	)


Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		(336,157	)		(346,697	)
Proceeds from issuance of long-term debt		316,406			381,530
Cash dividends paid		(866	)		(1,733	)
Deferred financing costs paid		—			(266	)
Decrease in bank overdraft balances		(5,412	)		(10,867	)

Net cash (used in) provided by financing activities		(26,029	)		21,967


Net decrease in cash and cash equivalents		(4,128	)		(3,158	)

Cash and cash equivalents at beginning of period		19,719			21,238


Cash and cash equivalents at end of period	$	15,591		$	18,080

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

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

1. BASIS OF PRESENTATION

The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on January 31, 1996 as the successor of a company incorporated on January 31, 1929. As of August 1, 2009, The Bon-Ton Stores, Inc. operated, through its subsidiaries, 280 department stores in 23 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates and, in the Detroit, Michigan area, the Parisian nameplate. The Bon-Ton Stores, Inc. conducts its operations through one business segment.

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

The unaudited consolidated financial statements have been prepared in accordance with the instructions for Form 10-Q and do not include all information and footnotes required in annual consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 165, “Subsequent Events” (“SFAS No. 165”), the Company performed an evaluation of subsequent events for the accompanying consolidated financial statements and notes through September 9, 2009, the date this report was issued. In the opinion of management, all adjustments and disclosures considered necessary for a fair presentation of interim periods have been included. The Company’s business is seasonal in nature and results of operations for the interim periods presented are not necessarily indicative of results for the full fiscal year. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 31, 2009.

For purposes of the following discussion, references to the “fourth quarter of 2008” are to the 13 weeks ended January 31, 2009. References to the “second quarter of 2009” and the “second quarter of 2008” are to the 13 weeks ended August 1, 2009 and August 2, 2008, respectively. References to “fiscal 2009” are to the 52 weeks ending January 30, 2010.

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

Recently Issued Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 prescribes the Accounting Standards Codification (“Codification”) as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009; accordingly, references to authoritative accounting literature in the Company’s consolidated financial statements in its Form 10-Q for the period ending October 31, 2009 and future periodic filings will be in accordance with the Codification. The Company does not expect the adoption of SFAS No. 168 to have a material impact on its consolidated financial statements.

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

In May 2009, the FASB issued SFAS No. 165, which establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. The Company adopted this standard, as required, for the period ended August 1, 2009. The adoption of SFAS No. 165 did not have a material impact on the Company’s consolidated financial statements.

In December 2008, the FASB issued FASB Staff Position (“FSP”) 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 required by FSP No. 132(R)-1 must be provided in the Company’s Annual Report on Form 10-K for fiscal 2009. The Company does not expect the adoption of FSP No. 132(R)-1 to have a material impact on its consolidated financial statements.

2. PER-SHARE AMOUNTS

Effective February 1, 2009, the Company adopted FSP Emerging Issues Task Force No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF No. 03-6-1”). Under FSP EITF No. 03-6-1, unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and shall be included in the computation of earnings per share (“EPS”) pursuant to the two-class method as described in SFAS No. 128, “Earnings Per Share.” The Company’s unvested restricted shares and restricted stock units are considered participating securities. All prior-period EPS data presented is required to be adjusted retrospectively to conform to the provisions of FSP EITF No. 03-6-1. However, in the event of a net loss, participating securities are to be excluded from the calculation of both basic and diluted EPS.

Due to the Company’s net loss position, unvested restricted shares (participating securities) totaling approximately 1,207,994 and 607,602 for the second quarter of 2009 and 2008, respectively, and approximately 1,010,253 and 595,523 for the 26 weeks ended August 1, 2009 and August 2, 2008, respectively, were excluded from the calculation of both basic and diluted EPS.

In addition, stock option shares (non-participating securities) totaling approximately 1,098,412 and 1,145,663 for the second quarter of 2009 and 2008, respectively, and approximately 1,109,262 and 1,036,451 for the 26 weeks ended August 1, 2009 and August 2, 2008, respectively, were excluded from the calculation of diluted EPS as they would have been antidilutive. Certain of these stock option shares were excluded solely due to the Company’s net loss position. Had the Company reported a profit for the second quarter of 2009 and 2008, these shares would have had an approximate effect of 1,549 and 4,698 dilutive shares, respectively, for purposes of calculating diluted EPS. Had the Company reported a profit for the 26 weeks ended August 1, 2009 and August 2, 2008, these shares would have had an approximate effect of 775 and 4,714 dilutive shares, respectively, for purposes of calculating diluted EPS.

3. FAIR VALUE OF FINANCIAL INSTRUMENTS

SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), defines fair value and establishes a framework for measuring fair value. Effective February 3, 2008, the Company adopted the provisions of SFAS No. 157 for financial assets and liabilities that are measured at fair value on a recurring basis. Effective February 1, 2009, the Company adopted the provisions of SFAS No. 157 for non-financial assets and liabilities that are not required or permitted to be measured at fair value on a recurring basis. There were no material fair value measurements required for the Company’s non-financial assets and liabilities during the second quarter of 2009 and the 26 weeks ended August 1, 2009.

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

SFAS No. 157 establishes fair value hierarchy levels that prioritize the inputs used in valuations that determine fair value. Level 1 inputs are unadjusted quoted prices in active markets for identical assets or liabilities. Level 2 inputs are primarily quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs based on the Company’s own assumptions.

As of August 1, 2009 and January 31, 2009, the Company held two interest rate swap contracts required to be measured at fair value on a recurring basis. The fair values of these interest rate swap contracts are derived from discounted cash flow analysis utilizing an interest rate yield curve that is readily available to the public or can be derived from information available in publicly quoted markets. Therefore, the Company has categorized these interest rate swap contracts as a Level 2 fair value measurement.

The interest rate swap liability comprises the entirety of the Company’s financial assets and liabilities carried at fair value and measured on a recurring basis. The carrying value of the interest rate swap liability as of August 1, 2009 and January 31, 2009 is as follows:


					Significant
			Quoted Prices		Other		Significant
			in Active		Observable		Unobservable
	Total Carrying		Markets		Inputs		Inputs
	Value		(Level 1)		(Level 2)		(Level 3)
August 1, 2009	$	6,608	$	—	$	6,608	$	—

January 31, 2009	$	5,708	$	—	$	5,708	$	—

In April 2009, the FASB issued FSP No. 107-1 and Accounting Principles Board (“APB”) 28-1, “Interim Disclosures about Fair Value of Financial Instruments” (“FSP FAS 107-1 and APB 28-1”). FSP FAS 107-1 and APB 28-1 amends SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial Reporting.” FSP FAS 107-1 and APB 28-1 requires disclosures about the fair value of the Company’s financial instruments on an interim basis. Effective May 3, 2009, the Company adopted the provisions of FSP FAS 107-1 and APB 28-1.

The carrying values of the Company’s cash and cash equivalents, accounts payable and financial instruments reported within prepaid expenses and other current assets and other long-term assets approximate fair value. The carrying value of the Company’s long-term debt, including current maturities but excluding capital leases, was $1,071,615 and $1,089,520 at August 1, 2009 and January 31, 2009, respectively, and the estimated fair value was $769,135 and $605,813 at August 1, 2009 and January 31, 2009, respectively. The fair value estimate of the Company’s long-term debt was based on quoted market prices or, where applicable, derived from discounted cash flow analysis.

4. INTEREST RATE DERIVATIVES

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (“SFAS No. 161”). SFAS No. 161 enhances disclosures for derivative instruments and hedging activities, including: (1) how and why a company uses derivative instruments; (2) the manner in which derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS No. 133”); and (3) the effect of derivative instruments and related hedged items on a company’s financial position, financial performance and cash flows. The Company adopted SFAS No. 161 as of February 1, 2009. As SFAS No. 161 relates specifically to disclosures, this standard had no impact on the Company’s financial condition, results of operations or cash flows.

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

The Company enters into interest rate swap agreements to manage the fixed/variable interest rate mix of its debt portfolio. These derivatives are accounted for in accordance with SFAS No. 133, SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities,” SFAS No. 157 and SFAS No. 161.

It is the policy of the Company to identify on a continuing basis the need for debt capital and evaluate financial risks inherent in funding the Company with debt capital. In conjunction with this ongoing review, the debt portfolio and hedging program of the Company is managed to: (1) reduce funding risk with respect to borrowings made or to be made by the Company to preserve the Company’s access to debt capital and provide debt capital as required for funding and liquidity purposes, and (2) control the aggregate interest rate risk of the debt portfolio. The Company enters into interest rate swap agreements to change the fixed/variable interest rate mix of the debt portfolio in order to maintain an appropriate balance of fixed-rate and variable-rate debt.

On the date the derivative instrument is entered into, the Company designates the derivative as a hedge of the variability of cash flows to be received or paid related to a recognized asset or liability (“cash flow hedge”). Changes in the fair value of a derivative that is designated as, and meets all required criteria for, a cash flow hedge are recorded in other comprehensive income or loss (“OCI”) and reclassified into the statement of operations as the underlying hedged item affects earnings, such as when quarterly settlements are made on the hedged forecasted transaction. The portion of the change in fair value of a derivative associated with hedge ineffectiveness or the component of a derivative instrument excluded from the assessment of hedge effectiveness, if any, is recorded in the current statement of operations. Also, changes in the fair value of a derivative that is not designated as a hedge, if any, are entirely recorded in the statement of operations. The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions; this process includes relating all derivatives that are designated as cash flow hedges to specific balance sheet assets or liabilities. The Company also formally assesses, both at the inception of the hedge and on an ongoing basis, whether each derivative is highly effective in offsetting changes in cash flows of the hedged item. If it is determined that a derivative is not highly effective as a hedge, or if a derivative ceases to be a highly effective hedge, the Company will discontinue hedge accounting prospectively for the respective derivative. In addition, if the forecasted transaction is no longer likely to occur, any amounts in accumulated other comprehensive income or loss (“AOCI”) related to the derivative are recorded in the statement of operations for the current period.

At August 1, 2009, the Company had two interest rate swap contracts to effectively convert a portion of its variable-rate debt to fixed-rate debt, both of which were entered into on July 14, 2006 and expire on July 14, 2011. These contracts entail the exchange of fixed-rate and floating-rate interest payments periodically over the life of the agreement. The floating-rate interest payments are based on three-month LIBOR rates. The following indicates the notional amounts of these interest rate swap contracts as of August 1, 2009 and the range of fixed-rates associated with these contracts:


Interest rate swaps (notional amount)		$100,000
Range of fixed pay rates		5.48% – 5.49%

The following table summarizes the fair value and presentation in the consolidated balance sheet of the interest rate swaps designated as cash flow hedging instruments under SFAS No. 133 as of August 1, 2009:


Balance Sheet Location	Derivative Assets		Derivative Liabilities
Other Long-Term Liabilities	$	—	$	6,608

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

The following table summarizes the effect of the interest rate swaps on the consolidated statement of operations and AOCI:

Amount of

Amount of Loss

Location of

Loss

Amount of

Location of Loss

Reclassified

Loss

Recognized

Loss

Reclassified from

from AOCI to

Recognized in

in the

Recognized

AOCI to the

the Statement

Statement of

in OCI

Statement of

of Operations

Operations

(effective

Operations

(effective

(ineffective

portion)

(effective portion)

portion)

Second Quarter of 2009

1,201

Interest Expense, Net

1,132

Interest Expense, Net

—

26 Weeks Ended August 1, 2009

3,126

Interest Expense, Net

2,226

Interest Expense, Net

—

At August 1, 2009, it is expected that approximately $3,827 of losses in AOCI related to interest rate swaps will be reclassified into the statement of operations within the next 12 months. As of August 1, 2009, the maximum time over which the Company is hedging its exposure to the variability in future cash flows related to forecasted transactions is 23 months.

5. SUPPLEMENTAL BALANCE SHEET INFORMATION

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


	August 1,		January 31,
	2009		2009
Prepaid expenses	$	38,664	$	32,822
Other receivables		40,482		49,473
Income tax receivables		1,262		31,146

Total	$	80,408	$	113,441

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

6. SUPPLEMENTAL CASH FLOW INFORMATION

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


	TWENTY-SIX
	WEEKS ENDED
	August 1,			August 2,
	2009			2008
Cash paid for:
Interest, net of amounts capitalized	$	44,340		$	47,429
Income taxes, net of refunds received		(32,538	)		5,626

Non-cash investing activities:
(Decrease) increase in accrued property, fixtures and equipment included in accounts payable and accrued expenses	$	(982	)	$	545
Assets acquired under capital leases		4,602			—

7. EXIT OR DISPOSAL ACTIVITIES

The following table summarizes exit or disposal activities during the 26 weeks ended August 1, 2009 related to involuntary associate termination costs associated with the Company’s cost reductions implemented in January 2009 and the 26 weeks ended August 1, 2009, the closing of its Elder-Beerman store in Hamilton, Ohio in March 2009 and the announced closing of its Elder-Beerman store in Northwood, Ohio in September 2009:


	Termination			Other
	Benefits			Costs			Total
Balance as of January 31, 2009	$	2,324		$	70		$	2,394
Provisions:

Thirteen weeks ended May 2, 2009		1,641			—			1,641
Thirteen weeks ended August 1, 2009		294			—			294
Payments:

Thirteen weeks ended May 2, 2009		(3,845	)		—			(3,845	)
Thirteen weeks ended August 1, 2009		(283	)		(70	)		(353	)


Balance as of August 1, 2009	$	131		$	—		$	131

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

In connection with the acquisition of The Elder-Beerman Stores Corp. in October 2003, the Company incurred expenses related to the termination of a lease. The Company made payments of $30 in the second quarter of 2009 and payments of $50 during the 26 weeks ended August 1, 2009 related to this termination. The liability for the lease termination was $757 as of August 1, 2009 and will be paid over the remaining contract period ending in 2030.

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

8. EMPLOYEE DEFINED AND POSTRETIREMENT BENEFIT PLANS

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


	THIRTEEN						TWENTY-SIX
	WEEKS ENDED						WEEKS ENDED
	August 1,			August 2,			August 1,			August 2,
	2009			2008			2009			2008
Service cost	$	—		$	39		$	—		$	78
Interest cost		2,820			2,935			5,642			5,870
Expected return on plan assets		(1,765	)		(3,075	)		(3,530	)		(6,151	)
Recognition of prior service cost		—			1			—			2
Recognition of net actuarial loss		1,219			126			2,438			252

Net periodic benefit expense	$	2,274		$	26		$	4,550		$	51

During the 26 weeks ended August 1, 2009, contributions of $6,063 were made to the Pension Plans. Included in those contributions was a payment of $5,658 for the settlement of a previously terminated supplemental pension plan. No gain or loss was recognized in connection with that settlement. The Company anticipates contributing an additional $334 to fund the Pension Plans in fiscal 2009, for an annual total of $6,397.

The Company also provides medical and life insurance benefits to certain former associates under a postretirement benefit plan (“Postretirement Benefit Plan”). Net periodic benefit expense of $66, comprised of interest expense of $88 and recognition of net actuarial gain of $22, was recorded in the second quarter of 2009. Net periodic benefit expense of $95, comprised solely of interest expense, was recorded in the second quarter of 2008. During the 26 weeks ended August 1, 2009, net periodic benefit expense of $130, comprised of interest expense of $175 and recognition of net actuarial gain of $45, was recorded. During the 26 weeks ended August 2, 2008, the Company recorded net periodic benefit expense of $190, comprised solely of interest expense. During the 26 weeks ended August 1, 2009, payments under the Postretirement Benefit Plan exceeded participant premiums received by $121. The Company anticipates contributing an additional $708 to fund the Postretirement Benefit Plan in fiscal 2009, for a net annual total of $829.

9. INCOME TAXES

SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”) requires companies to assess whether valuation allowances should be established against their deferred tax assets based on consideration of all available evidence using a “more likely than not” standard. In accordance with SFAS No. 109, a full valuation allowance was established during the fourth quarter of 2008, and maintained throughout the 26 weeks ending August 1, 2009, on nearly all the Company’s net deferred tax assets. The Company’s deferred tax asset valuation allowance totaled $174,938 and $145,468 at August 1, 2009 and January 31, 2009, respectively.

Given the Company’s valuation allowance position, no tax benefit was recognized on the Company’s loss before income taxes for the 26 weeks ending August 1, 2009. The tax benefit of $141 recorded for the 26 weeks ending August 1, 2009 reflects a $1,633 tax benefit related to statute of limitations expiration recorded pursuant to FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”), largely offset by certain state income tax expense and FIN 48 related expense accruals.

For the second quarter of 2008 and the 26 weeks ended August 2, 2008, the effective income tax rate was calculated utilizing a methodology based on year-to-date actual results rather than projected full fiscal-year results, pursuant to provisions of FIN 18, “Accounting for Income Taxes in Interim Periods.”

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

10. GOODWILL IMPAIRMENT

The Company recorded a goodwill impairment charge of $17,767 in the second quarter of 2008 in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets.” The economic environment at the end of the second quarter of 2008 had depressed stock values for many companies, including that of the Company. This factor, coupled with the expectation that the economic challenges at that time would impede recovery in the retail sector, led the Company to determine that its goodwill should be reviewed for impairment. The fair value of the Company’s single reporting unit was estimated using a combination of its common stock trading value at the end of the second quarter of 2008, a discounted cash flow analysis and other generally accepted valuation methodologies. As a result of the impairment review, the Company determined its goodwill was fully impaired.

11. CONTINGENCIES

In April 2009, in connection with the 2006 sale of a store lease, the Company instituted legal proceedings against the purchaser, and its guarantor, to collect $1,654 due. As of August 1, 2009, the Company is owed $6,503 from this sale, of which $1,654 is past due. The Company believes it will collect all amounts owed.

The Company is party to other legal proceedings and claims that arise during the ordinary course of business. In the opinion of management, the ultimate outcome of any such litigation and claims will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

12. COMPREHENSIVE LOSS

Comprehensive loss was determined as follows:


	THIRTEEN						TWENTY-SIX
	WEEKS ENDED						WEEKS ENDED
	August 1,			August 2,			August 1,			August 2,
	2009			2008			2009			2008

Net loss	$	(34,762	)	$	(33,826	)	$	(80,203	)	$	(67,889	)
Other comprehensive income (loss):
Amortization of pension and postretirement benefit plans		1,197			79			2,393			159
Cash flow hedge derivative (loss) income		(69	)		605			(900	)		1,541

Comprehensive loss	$	(33,634	)	$	(33,142	)	$	(78,710	)	$	(66,189	)

As a result of the additional deferred tax asset valuation allowance established in the fourth quarter of 2008 and maintained throughout the 26 weeks ended August 1, 2009, the changes recognized within other comprehensive income (loss) in the second quarter of 2009 and the 26-week period ended August 1, 2009 were recorded on a gross basis. In the second quarter of 2008 and the 26 weeks ended August 2, 2008, these changes were recorded net of tax.

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

13. GUARANTOR AND NON-GUARANTOR SUBSIDIARIES

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

The condensed consolidating financial information for the Company, the Issuer and the Company’s guarantor and non-guarantor subsidiaries as of August 1, 2009 and January 31, 2009 and for the second quarter of 2009 and 2008 and the 26 weeks ended August 1, 2009 and August 2, 2008 as presented below has been prepared from the books and records maintained by the Company, the Issuer and the guarantor and non-guarantor subsidiaries. The condensed financial information may not necessarily be indicative of the results of operations or financial position had the guarantor and non-guarantor subsidiaries operated as independent entities. Certain intercompany revenues and expenses included in the subsidiary records are eliminated in consolidation. As a result of this activity, an amount due to/due from affiliates will exist at any time.

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
August 1, 2009


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

Assets
Current assets:
Cash and cash equivalents	$	1	$	7,814	$	7,776	$	—	$	—		$	15,591
Merchandise inventories		—		352,919		322,402		—		—			675,321
Prepaid expenses and other current assets		—		67,308		11,826		1,953		(679	)		80,408

Total current assets		1		428,041		342,004		1,953		(679	)		771,320

Property, fixtures and equipment at cost, net		—		244,785		253,242		295,564		—			793,591
Deferred income taxes		—		1,713		7,949		—		—			9,662
Intangible assets, net		—		61,649		81,899		—		—			143,548
Investment in and advances to (from) affiliates		57,814		524,006		61,597		315		(643,732	)		—
Other long-term assets		—		18,680		4,429		4,586		—			27,695

Total assets	$	57,815	$	1,278,874	$	751,120	$	302,418	$	(644,411	)	$	1,745,816


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—	$	178,318	$	—	$	—	$	—		$	178,318
Accrued payroll and benefits		—		21,667		7,644		—		—			29,311
Accrued expenses		—		89,276		74,559		1,441		(679	)		164,597
Current maturities of long-term debt and obligations under capital leases		—		1,951		2,321		6,283		—			10,555
Deferred income taxes		—		2,199		8,048		—		—			10,247
Income taxes payable		—		230		154		—		—			384

Total current liabilities		—		293,641		92,726		7,724		(679	)		393,412

Long-term debt and obligations under capital leases, less current maturities		—		826,558		56,177		249,131		—			1,131,866
Other long-term liabilities		—		122,221		39,269		1,233		—			162,723

Total liabilities		—		1,242,420		188,172		258,088		(679	)		1,688,001


Shareholders’ equity		57,815		36,454		562,948		44,330		(643,732	)		57,815


Total liabilities and shareholders’ equity	$	57,815	$	1,278,874	$	751,120	$	302,418	$	(644,411	)	$	1,745,816

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
January 31, 2009


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

Assets
Current assets:
Cash and cash equivalents	$	1	$	10,769	$	8,949	$	—	$	—		$	19,719
Merchandise inventories		—		329,808		336,273		—		—			666,081
Prepaid expenses and other current assets		—		91,644		21,797		606		(606	)		113,441

Total current assets		1		432,221		367,019		606		(606	)		799,241

Property, fixtures and equipment at cost, net		—		261,922		269,357		301,484		—			832,763
Deferred income taxes		—		5,214		4,780		—		—			9,994
Intangible assets, net		—		63,981		84,190		—		—			148,171
Investment in and advances to (from) affiliates		135,042		558,968		58,476		317		(752,803	)		—
Other long-term assets		—		19,729		6,714		4,709		—			31,152

Total assets	$	135,043	$	1,342,035	$	790,536	$	307,116	$	(753,409	)	$	1,821,321


Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	—	$	143,423	$	—	$	—	$	—		$	143,423
Accrued payroll and benefits		—		24,676		11,440		—		—			36,116
Accrued expenses		866		93,342		84,921		1,416		(1,472	)		179,073
Current maturities of long-term debt and obligations under capital leases		—		495		2,236		6,071		—			8,802
Deferred income taxes		—		2,548		4,780		—		—			7,328
Income taxes payable		—		16		46		—		—			62

Total current liabilities		866		264,500		103,423		7,487		(1,472	)		374,804

Long-term debt and obligations under capital leases, less current maturities		—		839,020		57,358		252,390		—			1,148,768
Other long-term liabilities		—		123,351		39,032		1,189		—			163,572

Total liabilities		866		1,226,871		199,813		261,066		(1,472	)		1,687,144


Shareholders’ equity		134,177		115,164		590,723		46,050		(751,937	)		134,177


Total liabilities and shareholders’ equity	$	135,043	$	1,342,035	$	790,536	$	307,116	$	(753,409	)	$	1,821,321

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended August 1, 2009


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

Net sales	$	—		$	262,320		$	346,908		$	—		$	—		$	609,228
Other income		—			10,018			6,058			—			—			16,076

		—			272,338			352,966			—			—			625,304

Costs and expenses:
Costs of merchandise sold		—			165,536			217,561			—			—			383,097
Selling, general and administrative		—			101,167			130,435			23			(8,702	)		222,923
Depreciation and amortization		—			11,528			14,241			2,927			—			28,696
Amortization of lease-related interests		—			699			518			—			—			1,217

Loss from operations		—			(6,592	)		(9,789	)		(2,950	)		8,702			(10,629	)

Other income (expense):
Intercompany rental and royalty income		—			—			1,586			7,116			(8,702	)		—
Equity in losses of subsidiaries		(33,823	)		(9,351	)		—			—			43,174			—
Interest expense, net		—			(17,880	)		(1,117	)		(4,197	)		—			(23,194	)


Loss before income taxes		(33,823	)		(33,823	)		(9,320	)		(31	)		43,174			(33,823	)
Income tax provision		939			939			643			—			(1,582	)		939


Net loss	$	(34,762	)	$	(34,762	)	$	(9,963	)	$	(31	)	$	44,756		$	(34,762	)

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended August 2, 2008


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

Net sales	$	—		$	286,720		$	386,664		$	—		$	—		$	673,384
Other income		—			9,065			12,448			—			—			21,513

		—			295,785			399,112			—			—			694,897

Costs and expenses:
Costs of merchandise sold		—			184,479			247,483			—			—			431,962
Selling, general and administrative		—			111,637			143,591			20			(8,854	)		246,394
Depreciation and amortization		—			14,111			12,844			2,937			—			29,892
Amortization of lease-related interests		—			750			456			—			—			1,206
Goodwill impairment		—			8,488			9,279			—			—			17,767

Loss from operations		—			(23,680	)		(14,541	)		(2,957	)		8,854			(32,324	)

Other income (expense):
Intercompany rental and royalty income		—			—			1,739			7,115			(8,854	)		—
Equity in losses of subsidiaries		(56,700	)		(15,282	)		—			—			71,982			—
Interest expense, net		—			(17,738	)		(2,343	)		(4,295	)		—			(24,376	)


Loss before income taxes		(56,700	)		(56,700	)		(15,145	)		(137	)		71,982			(56,700	)
Income tax benefit		(22,874	)		(22,874	)		(6,319	)		—			29,193			(22,874	)


Net loss	$	(33,826	)	$	(33,826	)	$	(8,826	)	$	(137	)	$	42,789		$	(33,826	)

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Twenty-Six Weeks Ended August 1, 2009


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

Net sales	$	—		$	540,735		$	713,024		$	—		$	—		$	1,253,759
Other income		—			17,477			16,991			—			—			34,468

		—			558,212			730,015			—			—			1,288,227

Costs and expenses:
Costs of merchandise sold		—			347,195			456,268			—			—			803,463
Selling, general and administrative		—			209,099			268,060			45			(17,454	)		459,750
Depreciation and amortization		—			22,789			28,085			5,920			—			56,794
Amortization of lease-related interests		—			1,408			1,036			—			—			2,444

Loss from operations		—			(22,279	)		(23,434	)		(5,965	)		17,454			(34,224	)

Other income (expense):
Intercompany rental and royalty income		—			—			3,151			14,303			(17,454	)		—
Equity in losses of subsidiaries		(80,344	)		(22,599	)		—			—			102,943			—
Interest expense, net		—			(35,466	)		(2,235	)		(8,419	)		—			(46,120	)


Loss before income taxes		(80,344	)		(80,344	)		(22,518	)		(81	)		102,943			(80,344	)
Income tax (benefit) provision		(141	)		(141	)		812			—			(671	)		(141	)


Net loss	$	(80,203	)	$	(80,203	)	$	(23,330	)	$	(81	)	$	103,614		$	(80,203	)

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Twenty-Six Weeks Ended August 2, 2008


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

Net sales	$	—		$	584,616		$	789,016		$	—		$	—		$	1,373,632
Other income		—			19,079			25,209			—			—			44,288

		—			603,695			814,225			—			—			1,417,920

Costs and expenses:
Costs of merchandise sold		—			380,849			513,613			—			—			894,462
Selling, general and administrative		—			230,128			289,715			41			(17,716	)		502,168
Depreciation and amortization		—			27,248			25,788			5,874			—			58,910
Amortization of lease-related interests		—			1,505			909			—			—			2,414
Goodwill impairment		—			8,488			9,279			—			—			17,767

Loss from operations		—			(44,523	)		(25,079	)		(5,915	)		17,716			(57,801	)

Other income (expense):
Intercompany rental and royalty income		—			—			3,486			14,230			(17,716	)		—
Equity in losses of subsidiaries		(106,539	)		(26,135	)		—			—			132,674			—
Interest expense, net		—			(35,881	)		(4,241	)		(8,616	)		—			(48,738	)


Loss before income taxes		(106,539	)		(106,539	)		(25,834	)		(301	)		132,674			(106,539	)
Income tax benefit		(38,650	)		(38,650	)		(10,974	)		—			49,624			(38,650	)


Net loss	$	(67,889	)	$	(67,889	)	$	(14,860	)	$	(301	)	$	83,050		$	(67,889	)

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
Twenty-Six Weeks Ended August 1, 2009


	Bon-Ton
	(Parent						Guarantor			Non-Guarantor			Consolidating			Company
	Company)			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:	$	866		$	30,755		$	6,349		$	4,685		$	(7,845	)	$	34,810


Cash flows from investing activities:
Capital expenditures		—			(10,952	)		(2,024	)		—			—			(12,976	)
Intercompany Investing activity		—			(896	)		—			—			896			—
Proceeds from sale of property, fixtures and equipment		—			23			44			—			—			67

Net cash used in investing activities		—			(11,825	)		(1,980	)		—			896			(12,909	)


Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		—			(332,013	)		(1,097	)		(3,047	)		—			(336,157	)
Proceeds from issuance of long-term debt		—			316,406			—			—			—			316,406
Intercompany financing activity		—			(866	)		(4,445	)		(1,638	)		6,949			—
Cash dividends paid		(866	)		—			—			—			—			(866	)
Decrease in bank overdraft balances		—			(5,412	)		—			—			—			(5,412	)

Net cash used in financing activities		(866	)		(21,885	)		(5,542	)		(4,685	)		6,949			(26,029	)


Net decrease in cash and cash equivalents		—			(2,955	)		(1,173	)		—			—			(4,128	)

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


Cash and cash equivalents at end of period	$	1		$	7,814		$	7,776		$	—		$	—		$	15,591

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
Twenty-Six Weeks Ended August 2, 2008


	Bon-Ton
	(Parent						Guarantor			Non-Guarantor			Consolidating			Company
	Company)			Issuer			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Cash flows from operating activities:	$	1,733		$	2,557		$	27,190		$	5,275		$	(9,204	)	$	27,551


Cash flows from investing activities:
Capital expenditures		—			(29,588	)		(23,171	)		—			—			(52,759	)
Proceeds from sale of property, fixtures and equipment		—			20			63			—			—			83

Net cash used in investing activities		—			(29,568	)		(23,108	)		—			—			(52,676	)


Cash flows from financing activities:
Payments on long-term debt and capital lease obligations		—			(342,980	)		(894	)		(2,823	)		—			(346,697	)
Proceeds from issuance of long-term debt		—			381,530			—			—			—			381,530
Intercompany financing activity		—			(1,733	)		(5,025	)		(2,446	)		9,204			—
Cash dividends paid		(1,733	)		—			—			—			—			(1,733	)
Deferred financing costs paid		—			(260	)		—			(6	)		—			(266	)
Decrease in bank overdraft balances		—			(10,867	)		—			—			—			(10,867	)

Net cash (used in) provided by financing activities		(1,733	)		25,690			(5,919	)		(5,275	)		9,204			21,967


Net decrease in cash and cash equivalents		—			(1,321	)		(1,837	)		—			—			(3,158	)

Cash and cash equivalents at beginning of period		1			9,604			11,633			—			—			21,238


Cash and cash equivalents at end of period	$	1		$	8,283		$	9,796		$	—		$	—		$	18,080

14. THIRD AMENDMENT TO THE CREDIT CARD PROGRAM AGREEMENT

On August 4, 2009, the Company entered into a Third Amendment to the Credit Card Program Agreement (the “Third Amendment”) with HSBC Bank Nevada, N.A. (“HSBC”), effective as of January 1, 2009. Under the agreement, which is in effect through June 20, 2012, the Company continues to participate in the revenue generated by credit sales. The Third Amendment defines additional protection for the credit lines of certain of the Company’s credit card customers, revises the compensation the Company will receive for certain types of sales made on the credit cards and provides that the Company and HSBC will share certain losses associated with the credit card program. Either party may terminate the Third Amendment between April 1, 2010 and July 31, 2010 and revert back to the terms and conditions of the agreement prior to the Third Amendment upon providing notice and making a prescribed cash payment to the other party. Pursuant to the terms of the Third Amendment, the Company reduced other income by $3,099 and $6,162 in the second quarter of 2009 and the 26 weeks ended August 1, 2009, respectively. The impact of the Third Amendment on the Company’s financial results is estimated to be a reduction of other income of $9,000 in fiscal 2009.

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


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

For purposes of the following discussion, references to the “fourth quarter of 2008” are to the 13 weeks ended January 31, 2009. References to the “first quarter of 2009” are to the 13 weeks ended May 2, 2009. References to the “second quarter of 2009” and the “second quarter of 2008” are to the 13-week periods ended August 1, 2009 and August 2, 2008, respectively. References to “2009” and “2008” are to the 26 weeks ended August 1, 2009 and August 2, 2008, respectively. References to “fiscal 2009” and “fiscal 2008” are to the 52 weeks ending January 30, 2010 and the 52 weeks ended January 31, 2009, respectively. References to “the Company,” “we,” “us,” and “our” refer to The Bon-Ton Stores, Inc. and its subsidiaries.

Overview

We are one of the largest regional department store operators in the United States, offering a broad assortment of brand-name fashion apparel and accessories for women, men and children. Our merchandise offerings also include cosmetics, home furnishings and other goods. We currently operate 279 stores in mid-size and metropolitan markets in 23 Northeastern, Midwestern and upper Great Plains states under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates and, in the Detroit, Michigan area, the Parisian nameplate, encompassing a total of approximately 26 million square feet.

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

Our operating performance, and that of our competitors, depends significantly on economic conditions and the resulting impact on consumer spending. Many of the economic indicators associated with consumer discretionary spending were challenged in fiscal 2008 and remain weak in 2009. Given the outlook of continued recessionary factors, we anticipate another difficult year in fiscal 2009. As such, in fiscal 2009 we expect:

•

a comparable store sales decrease in the range of 7.0% to 9.0%;

•

a reduction in other income;

•

a gross margin rate of 36.0%;

•

a reduction of approximately $80.0 million in our selling, general and administrative (“SG&A”) expenses; and

•

an effective tax rate of 0%.

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

Results of Operations

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


	THIRTEEN						TWENTY-SIX
	WEEKS ENDED						WEEKS ENDED
	August 1,			August 2,			August 1,			August 2,
	2009			2008			2009			2008
Net sales		100.0	%		100.0	%		100.0	%		100.0	%
Other income		2.6			3.2			2.7			3.2

		102.6			103.2			102.7			103.2

Costs and expenses:
Costs of merchandise sold		62.9			64.1			64.1			65.1
Selling, general and administrative		36.6			36.6			36.7			36.6
Depreciation and amortization		4.7			4.4			4.5			4.3
Amortization of lease-related interests		0.2			0.2			0.2			0.2
Goodwill impairment		—			2.6			—			1.3

Loss from operations		(1.7	)		(4.8	)		(2.7	)		(4.2	)
Interest expense, net		3.8			3.6			3.7			3.5

Loss before income taxes		(5.6	)		(8.4	)		(6.4	)		(7.8	)
Income tax provision (benefit)		0.2			(3.4	)		—			(2.8	)

Net loss		(5.7	)%		(5.0	)%		(6.4	)%		(4.9	)%

Second Quarter of 2009 Compared with Second Quarter of 2008

Net sales: Net sales in the second quarter of 2009 were $609.2 million, compared with $673.4 million in the second quarter of 2008, reflecting a decrease of $64.2 million, or 9.5%. Comparable store sales decreased 9.8% in the second quarter of 2009. We believe the comparable store sales decline was due to the continued challenging economic environment, with consumer spending negatively impacted. Additionally, due to inventory management efforts, there was significantly less clearance inventory throughout the second quarter of 2009 compared with the prior year, further challenging sales.

The best performing merchandise categories in the second quarter of 2009 were Soft Home (included in Home), Children’s Apparel and Moderate Sportswear (included in Women’s Apparel). Soft Home sales benefited from a successful semi-annual home event and a well-managed in-stock inventory position throughout the period on all basic textiles. Sales of moderately-priced branded goods as well as the expansion of basics and introduction of new private brand categories were key in the performance in Children’s Apparel. Sales in Moderate Sportswear continue to benefit from a shift by our customers toward a value-orientation that we believe is in response to the current economic situation; our moderate zone provides the value and price-points our customers are seeking.

Better Sportswear (included in Women’s Apparel) and Furniture (included in Home) performed poorly in the second quarter of 2009, continuing a trend from the prior 13 weeks. We believe discretionary spending for more expensive items is under significant pressure, as evidenced by the poor performance of this merchandise throughout our families of business.

Other income: Other income, which includes income from revenues received under a credit card program agreement with HSBC Bank Nevada, N.A. (“HSBC”), leased departments and other customer revenues, was $16.1 million, or 2.6% of net sales, in the second quarter of 2009 as compared with $21.5 million, or 3.2% of net sales, in the second quarter of 2008. The decrease was primarily due to reduced sales volume and reduced income associated with our proprietary credit card program. Proprietary credit card income decreased as a result of lower sales volume as well as an amendment to the credit card program agreement with HSBC. Other income was reduced by $3.1 million in the second quarter of 2009 pursuant to the amended agreement with HSBC which revises the compensation the Company will receive for certain types of credit sales and provides that the Company and HSBC will share certain losses associated with the credit card program. See Note 14 in the Notes to Consolidated Financial Statements.

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

Costs and expenses: Gross margin in the second quarter of 2009 decreased $15.3 million to $226.1 million as compared with $241.4 million in the comparable prior year period. The decrease is attributable to decreased sales volume. Gross margin as a percentage of net sales increased approximately 130 basis points to 37.1% in the second quarter of 2009 from 35.9% in the same period last year, primarily due to disciplined inventory management efforts that resulted in decreased net markdowns.

SG&A expense in the second quarter of 2009 was $222.9 million as compared with $246.4 million in the second quarter of 2008, a decrease of $23.5 million. The reduction is largely the result of our cost savings initiatives in response to the difficult economic environment. While SG&A expenses decreased significantly, the current year expense rate remained consistent with the prior year at 36.6% of net sales due to the shortfall in sales.

Depreciation and amortization expense and amortization of lease-related interests decreased $1.2 million, to $29.9 million in the second quarter of 2009 from $31.1 million in the second quarter of 2008, primarily due to the reduced asset base resulting from significant asset impairments recorded in the fourth quarter of 2008.

The Company 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”) as, based upon our review, the fair value of the Company’s 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. See Note 10 in the Notes to Consolidated Financial Statements.

Loss from operations: The loss from operations in the second quarter of 2009 was $10.6 million, or 1.7% of net sales, compared with a loss from operations of $32.3 million, or 4.8% of net sales, in the comparable prior year period.

Interest expense, net: Net interest expense was $23.2 million, or 3.8% of net sales, in the second quarter of 2009 as compared with $24.4 million, or 3.6% of net sales, in the second quarter of 2008. The $1.2 million decrease primarily reflects decreased borrowing levels and reduced interest rates.

Income tax provision (benefit): The income tax provision of $0.9 million in the second quarter of 2009 reflects an effective tax rate of (2.8)%, compared with an income tax benefit of $22.9 million in the second quarter of 2008 reflecting an effective tax rate of 40.3%. The current year results principally reflect the fact that the Company maintained a nearly full valuation allowance position against all net deferred tax assets throughout 2009.

Net loss: Net loss in the second quarter of 2009 was $34.8 million, or 5.7% of net sales, compared with a net loss of $33.8 million, or 5.0% of net sales, in the second quarter of 2008.

2009 Compared with 2008

Net sales: Net sales in 2009 were $1,253.8 million, compared with $1,373.6 million in 2008, reflecting a decrease of $119.9 million, or 8.7%. Comparable store sales decreased 9.2% in 2009. We believe the comparable store sales decline reflects the continuation of the difficult economic environment, which has pressured consumer spending. Additionally, due to inventory management efforts, there was significantly less clearance inventory throughout 2009 compared with the prior year, further challenging sales.

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

Our customers’ spending patterns have shifted as a result of the current economic situation. Sales trends indicate movement toward a value-orientation, with decided emphasis on price. Sales in Moderate Sportswear (included in Women’s Apparel), the best performing category in the period, have benefited from this shift as our moderate zone provides the value our customers are seeking. We are seeing similar success in sales of moderate goods throughout our families of business. Conversely, the poor performances of Better Sportswear (included in Women’s Apparel) and Furniture (included in Home) suggest our customers are spending their limited discretionary dollars on more moderately-priced merchandise. Better Sportswear is the most difficult business in Women’s Apparel at this time. Furniture sales continue to be adversely impacted by the difficult housing market and continued deterioration in consumer spending for bigger ticket items.

Other income: Other income was $34.5 million, or 2.7% of net sales, in 2009 as compared with $44.3 million, or 3.2% of net sales, in 2008. The decrease primarily reflects reduced sales volume and reduced income associated with our proprietary credit card program. Proprietary credit card income decreased as a result of lower sales volume as well as an amendment to the credit card program agreement with HSBC. Other income was reduced by $6.2 million in 2009 pursuant to the amended agreement with HSBC, which revises the compensation the Company will receive for certain types of credit sales and provides that the Company and HSBC will share certain losses associated with the credit card program. See Note 14 in the Notes to Consolidated Financial Statements.

Costs and expenses: Gross margin in 2009 was $450.3 million as compared with $479.2 million in 2008, reflecting a decrease of $28.9 million. The decrease in gross margin dollars was due to the decreased sales volume in the period. Gross margin as a percentage of net sales increased approximately 100 basis points to 35.9% in the current year from 34.9% last year, primarily due to decreased net markdowns.

SG&A expense in 2009 was $459.8 million as compared with $502.2 million in 2008, a decrease of $42.4 million, evidencing that initiatives targeting an annualized $80 million of expense reductions in the Company’s cost structure are proceeding as planned. Despite the expense savings, the expense rate in 2009 marginally increased to 36.7% of net sales, compared with 36.6% in 2008, due to the reduced sales volume.

Depreciation and amortization expense and amortization of lease-related interests decreased $2.1 million, to $59.2 million in 2009 from $61.3 million in 2008, primarily due to the reduced asset base resulting from significant asset impairments recorded in the fourth quarter of 2008.

The Company recorded a non-cash goodwill impairment charge of $17.8 million in 2008 in accordance with SFAS No. 142 as, upon review in the second quarter of 2008, the fair value of the Company’s 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. See Note 10 in the Notes to Consolidated Financial Statements.

Loss from operations: The loss from operations in 2009 was $34.2 million, or 2.7% of net sales, compared with $57.8 million, or 4.2% of net sales, in 2008.

Interest expense, net: Net interest expense was $46.1 million, or 3.7% of net sales, in 2009 as compared with $48.7 million, or 3.5% of net sales, in 2008. The $2.6 million decrease principally reflects decreased borrowing levels and reduced interest rates in 2009.

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

Income tax benefit: The income tax benefit of $0.1 million in 2009 reflects an effective tax rate of 0.2%, compared with an income tax benefit of $38.7 million in 2008 reflecting an effective tax rate of 36.3%. The current year results principally reflect the fact that the Company maintained a nearly full valuation allowance position against all net deferred tax assets throughout 2009.

Net loss: Net loss in 2009 was $80.2 million, or 6.4% of net sales, compared with a net loss of $67.9 million, or 4.9% of net sales, in 2008.

Seasonality

Our business, like that of most retailers, is subject to seasonal fluctuations, with the major portion of sales and income realized during the second half of each fiscal year, which includes the holiday season. Due to the fixed nature of certain costs, SG&A expense is typically higher as a percentage of net sales during the first half of each fiscal year. We typically finance working capital increases in the second half of each fiscal year through additional borrowings under our revolving credit facility.

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

Liquidity and Capital Resources

At August 1, 2009, we had $15.6 million in cash and cash equivalents and $173.7 million available under our asset-based revolving credit facility (before taking into account the minimum borrowing availability covenant under such facility of $75.0 million). In anticipation of continued recessionary pressures in fiscal 2009, we heightened our focus on maximizing cash flow by reducing operating expenses and significantly curtailing our planned capital expenditures. Additionally, we are continuing 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 fiscal 2009 cash flow.

Typically, cash flows from operations are impacted by the effect on sales of (1) consumer confidence, (2) weather in the geographic markets served by the Company, (3) general economic conditions and (4) competitive conditions existing in the retail industry; a downturn in any single factor or a combination of factors could have a material adverse impact upon our ability to generate sufficient cash flows to operate our business. Currently, our business model is adversely impacted by additional economic drivers reflective of the global recession. While difficult economic conditions affect our assessment of short-term liquidity, and while there can be no assurances, we consider our resources, including cash flows from operations supplemented by borrowings under our revolving credit facility, adequate to satisfy our cash needs for at least the next 12 months.

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

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


	August 1,		August 2,
(Dollars in millions)	2009		2008

Working capital	$	377.9	$	427.4
Current ratio		1.96:1		1.97:1
Debt to total capitalization ⁽¹⁾		0.95:1		0.80:1
Unused availability under lines of credit ⁽²⁾	$	173.7	$	238.0


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

(2)		Subject to a minimum borrowing availability covenant of $75.

Our primary sources of working capital are cash flows from operations and borrowings under our revolving credit facility, which provides for up to $800.0 million in borrowings. In the first quarter of 2009, we elected to reduce the previous $1.0 billion commitment under our revolving credit facility by $200.0 million in order to reduce interest expense associated with the unused commitment fee.

Decreases in working capital and the current ratio are primarily the result of decreased levels of merchandise inventories due to our inventory management efforts in response to sales trends, and decreased prepaid and deferred income taxes as a result of the Company’s recent net losses and valuation allowance position. The increase in debt to total capitalization is largely due to the significant decrease in shareholders’ equity in fiscal 2008 and 2009, the result of the net loss in the respective periods, which in fiscal 2008 includes the charges for asset impairments and deferred tax valuation allowances, as well as the decline in the funded status of the Company’s defined benefit pension plans. These unfavorable factors are partially mitigated by reduced debt levels in 2009. The decrease in unused availability under lines of credit as compared with the prior year reflects reduced availability primarily due to decreased inventory levels and increases in trade and standby letters of credit, partially offset by reduced borrowings.

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


	TWENTY-SIX
	WEEKS ENDED
	August 1,			August 2,
(Dollars in millions)	2009			2008

Operating activities	$	34.8		$	27.6
Investing activities		(12.9	)		(52.7	)
Financing activities		(26.0	)		22.0

Net cash provided by operating activities amounted to $34.8 million and $27.6 million in 2009 and 2008, respectively. The increase in net cash provided in the current year primarily reflects reduced working capital requirements, most notably funded through the receipt of an approximate $30 million tax refund and increased accounts payable, partially offset by increased merchandise inventories. Additionally, the increase in cash provided in the current year was partially offset by an increased net loss in the period.

Net cash used in investing activities amounted to $12.9 million in 2009, compared with $52.7 million in 2008, as capital expenditures were significantly reduced in the current year in response to economic conditions.

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

Net cash used in financing activities amounted to $26.0 million in 2009, compared with net cash provided by financing activities of $22.0 million in the prior year. The change primarily reflects net debt reduction due to decreased cash requirements for current year operating activities and reduced capital expenditures.

Our capital expenditures in 2009, which do not reflect reductions for landlord contributions of $2.0 million, totaled $13.0 million. Capital expenditures for fiscal 2009, net of approximately $7 million of landlord contributions, are not expected to exceed $40 million, a significant reduction from the prior year’s capital expenditures of $84.8 million (which do not reflect reductions for landlord contributions of $18.9 million), as we are limiting store expansion and remodel activities in the near term. Included in fiscal 2009 planned capital expenditures is continued investment in information technology.

Critical Accounting Policies

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

Critical accounting policies are defined as those that are reflective of significant judgments and uncertainties, and could potentially lead to materially different results under different assumptions and conditions. We believe our critical accounting policies are as described below:

Inventory Valuation

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

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

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

We regularly review inventory quantities on-hand and record an adjustment for excess or old inventory based primarily on an estimated forecast of merchandise demand for the selling season. Demand for merchandise can fluctuate greatly. A significant increase in the demand for merchandise could result in a short-term increase in the cost of inventory purchases while a significant decrease in demand could result in an increase in the amount of excess inventory quantities on-hand. Additionally, estimates of merchandise demand may prove to be inaccurate, in which case we may have understated or overstated the adjustment required for excess or old inventory. If our inventory is determined to be overvalued in the future, we would be required to recognize such costs in costs of goods sold and reduce operating income at the time of such determination. Likewise, if inventory is later determined to be undervalued, we may have overstated the costs of goods sold in previous periods and would recognize additional operating income when such inventory is sold. Therefore, although every effort is made to ensure the accuracy of forecasts of merchandise demand, any significant unanticipated changes in demand or in economic conditions within our markets could have a significant impact on the value of our inventory and reported operating results.

As of January 31, 2009, approximately 32% of our inventories were valued using a first-in, first-out cost basis and approximately 68% of our inventories were valued using a last-in, first-out (“LIFO”) cost basis. As is currently the case with many companies in the retail industry, our LIFO calculations yielded inventory increases in recent prior years due to deflation reflected in price indices used. The LIFO method values merchandise sold at the cost of more recent inventory purchases (which the deflationary indices indicated to be lower), resulting in the general inventory on-hand being carried at the older, higher costs. Given these higher values and the promotional retail environment, we have reduced the carrying value of our LIFO inventories to an estimated realizable value. These reductions totaled $41.6 million as of August 1, 2009 and January 31, 2009. 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 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.

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

We reported net deferred tax liabilities of $0.6 million at August 1, 2009 and net deferred tax assets of $2.7 million at January 31, 2009. In assessing the realizability of our deferred tax assets, we considered whether it is more likely than not that our deferred tax assets will be realized based upon all available evidence, including scheduled reversal of deferred tax liabilities, historical operating results, projected future operating results, tax carry-back availability and limitations pursuant to Section 382 of the Internal Revenue Code, among others. 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 evaluate 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 are required. With respect to our review for the fourth quarter of 2008, a significant element of negative evidence considered was our 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 nearly full valuation allowance was established on our net deferred tax assets during the fourth quarter of 2008. With respect to our reviews for the first and second quarters of 2009, we concluded that it was necessary to continue the position of a nearly full valuation allowance on our net deferred tax assets.

Our deferred tax asset valuation allowance totaled $174.9 million and $145.5 million at August 1, 2009 and January 31, 2009, 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.

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 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 $793.6 million and $832.8 million at August 1, 2009 and January 31, 2009, respectively.

SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” requires us to test a long-lived asset for recoverability whenever events or changes in circumstances indicate that its carrying value may not be recoverable. Factors that could trigger an impairment review include the following:

•

Significant underperformance of stores relative to historical or projected future operating results,

•

Significant changes in the manner of our use of assets or overall business strategy, and

•

Significant negative industry or economic trends for a sustained period.

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

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

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

Intangible Assets

Net intangible assets totaled $143.5 million and $148.2 million at August 1, 2009 and January 31, 2009, respectively. Our intangible assets at August 1, 2009 are principally comprised of $73.9 million of lease interests that relate to below-market-rate leases and $69.6 million associated with trade names, private label brand names and customer lists. The lease-related interests are being amortized using a straight-line method. The customer lists are being amortized using a declining-balance method. At August 1, 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, 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.

Insurance Reserve Estimates

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

Pension and Supplementary Retirement Plans

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

The discount rate assumption is evaluated annually. We utilize the Citibank Pension Discount Curve (“CPDC”) to develop the discount rate assumption. The CPDC is developed from a U.S. Treasury par curve that reflects the Treasury Coupon and Strips market. Option-adjusted spreads drawn from the double-A corporate bond sector are layered-in to develop a double-A corporate par curve, from which the CPDC spot rates are developed. The CPDC spot rates are applied to expected benefit payments, from which a single constant discount rate can then be developed based on the expected timing of these benefit payments.

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

We base our asset return assumption on current and expected allocations of assets, as well as a long-term view of expected returns on the plan asset categories. We assess the appropriateness of the expected rate of return on an annual basis and, when necessary, revise the assumption.

Changes in the assumptions regarding the discount rate and expected return on plan assets may result in materially different expense and liability amounts. Actuarial estimations may differ materially from actual results, reflecting many factors including changing market and economic conditions, changes in investment strategies, higher or lower withdrawal rates and longer or shorter life-spans of participants. In addition, while we are not required to make any mandatory contributions to the defined benefit pension plan in fiscal 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.

Recently Issued Accounting Standards

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162” (“SFAS No. 168”). SFAS No. 168 prescribes the Accounting Standards Codification (“Codification”) as the single source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in preparation of financial statements in conformity with generally accepted accounting principles in the United States. The Codification is effective for interim and annual periods ending after September 15, 2009; accordingly, references to authoritative accounting literature in our consolidated financial statements in our Form 10-Q for the period ending October 31, 2009 and future periodic filings will be in accordance with the Codification. We do not expect the adoption of SFAS No. 168 to have a material impact on our consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events” (“SFAS No. 165”). SFAS No. 165 establishes general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or available to be issued. We adopted this standard, as required, for the period ended August 1, 2009. The adoption of SFAS No. 165 did not have a material impact on our consolidated financial statements.

In December 2008, the FASB issued FASB Staff Position (“FSP”) 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 required by FSP No. 132(R)-1 must be provided in our Annual Report on Form 10-K for fiscal 2009. We do not expect the adoption of FSP No. 132(R)-1 to have a material impact on our consolidated financial statements.

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

Forward-Looking Statements

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

THE BON-TON STORES, INC.


ITEM 3.		QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market Risk and Financial Instruments

Refer to disclosures contained on page 36 of our 2008 Annual Report on Form 10-K. There have been no material changes in our exposures, risk management strategies, or hedging positions since January 31, 2009.


ITEM 4.		CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in reports filed pursuant to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this report and, based on this evaluation, concluded that our disclosure controls and procedures are effective.

Changes in Internal Control over Financial Reporting

There were no changes to our internal controls over financial reporting that occurred during the 13 weeks ended August 1, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

THE BON-TON STORES, INC.

PART II: OTHER INFORMATION


ITEM 4.		SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

On June 16, 2009, the Company held its Annual Meeting of Shareholders. The following matters were submitted for vote:

The following individuals were nominated and elected by the votes set forth opposite his or her name to serve as the directors of the Company:


Lucinda M. Baier	For:	41,099,900
	Withhold Authority:	200,228

Byron L. Bergren	For:	41,014,208
	Withhold Authority:	285,920

Philip M. Browne	For:	41,108,489
	Withhold Authority:	191,639

Shirley A. Dawe	For:	40,439,993
	Withhold Authority:	860,135

Marsha M. Everton	For:	40,417,140
	Withhold Authority:	882,988

Michael L. Gleim	For:	40,268,340
	Withhold Authority:	1,031,788

M. Thomas Grumbacher	For:	41,106,211
	Withhold Authority:	193,917

Todd C. McCarty	For:	40,442,086
	Withhold Authority:	858,042

With respect to the proposal to approve The Bon-Ton Stores, Inc. 2009 Omnibus Incentive Plan, 35,852,433 votes were cast in favor, 1,751,945 votes were cast against and 34,521 votes abstained.

With respect to the proposal to ratify the appointment of KPMG LLP as the Company’s independent registered public accounting firm for 2009, 41,215,580 votes were cast in favor, 48,141 votes were cast against and 36,407 votes abstained.

THE BON-TON STORES, INC.


ITEM 6.		EXHIBITS

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


Exhibit		Description	Document Location

	10.1	Third Amendment to the Credit Card Program Agreement	Incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed on August 10, 2009

	31.1	Certification of Byron L. Bergren	Filed herewith.

	31.2	Certification of Keith E. Plowman	Filed herewith.

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	THE BON-TON STORES, INC.

DATE: September 9, 2009	BY:	/s/ Byron L. Bergren Byron L. Bergren
		President and
		Chief Executive Officer

DATE: September 9, 2009	BY:	/s/ Keith E. Plowman Keith E. Plowman
		Executive Vice President,
		Chief Financial Officer and
		Principal Accounting Officer


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

BALANCE AT JANUARY 31, 2009	$	149	$	30	$	(1,387	)	$	144,577	$	(59,464	)	$	50,272		$	134,177


Comprehensive loss (Note 12):
Net loss		—		—		—			—		—			(80,203	)		(80,203	)
Pension and postretirement benefit plans		—		—		—			—		2,393			—			2,393
Change in fair value of cash flow hedges		—		—		—			—		(900	)		—			(900	)

Total comprehensive loss																	(78,710	)

Share-based compensation expense		10		—		—			2,338		—			—			2,348


BALANCE AT AUGUST 1, 2009	$	159	$	30	$	(1,387	)	$	146,915	$	(57,971	)	$	(29,931	)	$	57,815