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

THE BON-TON STORES, INC.

(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 is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):

Large accelerated filer o      Accelerated filer þ      Non-accelerated filer 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 June 1, 2007, there were 14,182,634 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)		May 5,				February 3,
(Unaudited)		2007				2007
Assets
Current assets:
Cash and cash equivalents		$	24,391			$	24,733
Merchandise inventories			824,571				787,487
Prepaid expenses and other current assets			93,677				84,731
Deferred income taxes			17,858				17,858
Total current assets			960,497				914,809
Property, fixtures and equipment at cost, net of accumulated depreciation and amortization of $334,284 and $311,160 at May 5, 2007 and February 3, 2007, respectively			880,381				897,886
Deferred income taxes			76,873				76,586
Goodwill			27,824				27,377
Intangible assets, net of accumulated amortization of $14,487 and $12,087 at May 5, 2007 and February 3, 2007, respectively			174,300				176,700
Other long-term assets			40,132				41,441
Total assets		$	2,160,007			$	2,134,799
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	229,882			$	209,742
Accrued payroll and benefits			47,781				68,434
Accrued expenses			141,215				178,642
Current maturities of long-term debt			5,368				5,555
Current maturities of obligations under capital leases			1,948				1,936
Income taxes payable			—				48,086
Total current liabilities			426,194				512,395
Long-term debt, less current maturities			1,246,953				1,120,169
Obligations under capital leases, less current maturities			68,955				69,456
Other long-term liabilities			99,827				86,383
Total liabilities			1,841,929				1,788,403
Contingencies (Note 8)
Shareholders’ equity:
Preferred Stock — authorized 5,000,000 shares at $0.01 par value; no shares issued			—				—
Common Stock — authorized 40,000,000 shares at $0.01 par value; issued shares of 14,520,434 and 14,469,196 shares at May 5, 2007 and February 3, 2007, respectively			145				145
Class A Common Stock — authorized 20,000,000 shares at $0.01 par value; issued and outstanding shares of 2,951,490 at May 5, 2007 and February 3, 2007			30				30
Treasury stock, at cost - 337,800 shares at May 5, 2007 and February 3, 2007			(1,387	)			(1,387	)
Additional paid-in-capital			133,104				130,875
Accumulated other comprehensive income			798				1,189
Retained earnings			185,388				215,544
Total shareholders’ equity			318,078				346,396
Total liabilities and shareholders’ equity		$	2,160,007			$	2,134,799

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

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

		THIRTEEN
		WEEKS ENDED
(In thousands except share and per share data)		May 5,				April 29,
(Unaudited)		2007				2006
Net sales		$	737,561			$	561,774
Other income			22,646				14,813
			760,207				576,587
Costs and expenses:
Costs of merchandise sold			490,672				351,580
Selling, general and administrative			260,132				199,780
Depreciation and amortization			26,960				18,514
Amortization of lease-related interests			1,229				702
(Loss) income from operations			(18,786	)			6,011
Interest expense, net			27,469				23,868
Loss before income taxes			(46,255	)			(17,857	)
Income tax benefit			(16,956	)			(7,022	)
Net loss		$	(29,299	)		$	(10,835	)
Per share amounts –
Basic:
Net loss		$	(1.78	)		$	(0.66	)
Basic weighted average shares outstanding			16,481,756				16,389,962
Diluted:
Net loss		$	(1.78	)		$	(0.66	)
Diluted weighted average shares outstanding			16,481,756				16,389,962

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

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

		THIRTEEN
		WEEKS ENDED
(In thousands)		May 5,				April 29,
(Unaudited)		2007				2006
Cash flows from operating activities:
Net loss		$	(29,299	)		$	(10,835	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			26,960				18,514
Amortization of lease-related interests			1,229				702
Share-based compensation expense			1,702				749
Excess tax benefit from share-based compensation			(175	)			(832	)
Gain on sale of property, fixtures and equipment			(534	)			(558	)
Amortization of deferred financing costs			977				3,199
Amortization of deferred gain on sale of proprietary credit card portfolio			(603	)			(603	)
Changes in operating assets and liabilities, net of effect of acquisition:
Increase in merchandise inventories			(37,084	)			(29,280	)
Increase in prepaid expenses and other current assets			(8,946	)			(19,269	)
Decrease in other long-term assets			583				564
Increase (decrease) in accounts payable			20,808				(19,733	)
(Decrease) increase in accrued payroll and benefits and accrued expenses			(53,717	)			30,419
Decrease in income taxes payable			(47,911	)			(15,371	)
Increase (decrease) in other long-term liabilities			13,807				(1,398	)
Net cash used in operating activities			(112,203	)			(43,732	)
Cash flows from investing activities:
Capital expenditures			(11,135	)			(15,220	)
Acquisition, net of cash acquired			(51	)			(1,055,527	)
Proceeds from sale of property, fixtures and equipment			2,551				535
Net cash used in investing activities			(8,635	)			(1,070,212	)
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations			(179,789	)			(205,947	)
Proceeds from issuance of long-term debt			305,897				1,359,110
Cash dividends paid			(857	)			(422	)
Proceeds from stock options exercised			352				546
Excess tax benefit from share-based compensation			175				832
Deferred financing costs paid			(253	)			(27,549	)
(Decrease) increase in bank overdraft balances			(5,029	)			576
Net cash provided by financing activities			120,496				1,127,146
Net (decrease) increase in cash and cash equivalents			(342	)			13,202
Cash and cash equivalents at beginning of period			24,733				9,771
Cash and cash equivalents at end of period		$	24,391			$	22,973
Supplemental Cash Flow Information:
Interest paid		$	39,134			$	9,488
Net income taxes paid		$	39,625			$	15,640

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

THE BON-TON STORES, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

																		Accumulated
																		Other
						Class A								Additional				Compre-
(In thousands except per share data)		Common				Common				Treasury				Paid-in				hensive				Retained
(Unaudited)		Stock				Stock				Stock				Capital				Income				Earnings				Total
BALANCE AT FEBRUARY 3, 2007		$	145			$	30			$	(1,387	)		$	130,875			$	1,189			$	215,544			$	346,396
Comprehensive loss (Note 9):
Net loss			—				—				—				—				—				(29,299	)			(29,299	)
Pension plan, net of $29 tax effect																			51								51
Change in fair value of cash flow hedges, net of $316 tax effect			—				—				—				—				(442	)			—				(442	)
Total comprehensive loss																											(29,690	)
Dividends to shareholders, $0.05 per share			—				—				—				—				—				(857	)			(857	)
Stock options exercised			—				—				—				352				—				—				352
Share-based compensation expense			—				—				—				1,702				—				—				1,702
Excess tax benefit from share-based compensation			—				—				—				175				—				—				175
BALANCE AT MAY 5, 2007		$	145			$	30			$	(1,387	)		$	133,104			$	798			$	185,388			$	318,078

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 and per share data)

1. BASIS OF PRESENTATION

     The Bon-Ton Stores, Inc., a Pennsylvania corporation, was incorporated on January 31, 1996 as the successor of a company incorporated on January 31, 1929. The Bon-Ton Stores, Inc. operates, through its subsidiaries, 277 department stores, including eight furniture galleries, in 23 states in the Northeast, Midwest and upper Great Plains under the Bon-Ton, Bergner’s, Boston Store, Carson Pirie Scott, Elder-Beerman, Herberger’s and Younkers nameplates and, under the Parisian nameplate, stores in the Detroit, Michigan area. 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 by generally accepted accounting principles. In the opinion of management, all adjustments (primarily consisting of normal recurring accruals) 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 February 3, 2007.

     All references to the “first quarter of 2007” and the “first quarter of 2006” are to the thirteen weeks ended May 5, 2007 and April 29, 2006, respectively. All references to “2007” and “2006” are to the fifty-two weeks ending February 2, 2008 and the fifty-three weeks ended February 3, 2007, respectively.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires that management make estimates and assumptions which affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Adoption of New Accounting Pronouncement

     In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes (“FIN No. 48”). FIN No. 48 prescribes a recognition and derecognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 requires that the Company recognize, in the financial statements, the impact of a tax position if that position is more likely than not of being sustained under audit, based on the technical merits of the position.

     The Company adopted FIN No. 48 effective February 4, 2007, and, as a result, was not required to adjust its existing reserves for uncertain tax positions. As of the date of adoption, the Company had $18,275 of gross unrecognized tax benefits and $1,332 of interest reserves on those unrecognized benefits. The amount of unrecognized tax benefits that would impact the Company’s effective tax rate if recognized, inclusive of the related interest, is $12,377. There are currently no pending settlements with the taxing authorities that would cause the Company to decrease its tax reserves within the next twelve months.

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

     It is the Company’s policy to record interest on unrecognized tax benefits and assessments as income tax expense. Management is of the opinion that penalties are not applicable on any of the Company’s uncertain tax positions. The tax years ending January 31, 2004 through the present are open to examination by taxing jurisdictions to which the Company is subject.

Future Accounting Changes

     In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”). SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements, but does not require any new fair value measurements. SFAS No. 157 is effective for years beginning after November 15, 2007. The Company is in the process of evaluating what effect, if any, adoption of SFAS No. 157 may have on the consolidated financial statements.

     In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159 permits companies to measure many financial instruments and certain other assets and liabilities at fair value on an instrument by instrument basis. SFAS No. 159 also establishes presentation and disclosure requirements to facilitate comparisons between companies that select different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective for years beginning after November 15, 2007. The Company is in the process of evaluating what effect, if any, adoption of SFAS No. 159 may have on the consolidated financial statements.

2. PER-SHARE AMOUNTS

     The presentation of earnings per share (“EPS”) requires a reconciliation of numerators and denominators used in basic and diluted EPS calculations. The numerator, net loss, is identical in both calculations. The following table presents a reconciliation of weighted average shares outstanding for the respective calculations for each period presented in the accompanying consolidated statements of operations:

		THIRTEEN
		WEEKS ENDED
		May 5,				April 29,
		2007				2006
Basic calculation			16,481,756				16,389,962
Effect of dilutive shares –
Restricted shares and restricted stock units			—				—
Options			—				—
Diluted calculation			16,481,756				16,389,962

     The following securities were antidilutive and, therefore, were not included in the computation of diluted EPS for the periods indicated:

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

		THIRTEEN
		WEEKS ENDED
		May 5,				April 29,
		2007				2006
Antidilutive shares –
Restricted shares and restricted stock units			701,893				526,165
Options			637,626				510,919

     Certain of the securities noted above were excluded from the computation of dilutive shares solely due to the Company’s net loss position in the thirteen weeks ended May 5, 2007 and April 29, 2006. The following table shows the approximate effect of dilutive securities had the Company reported a profit for these periods:

		THIRTEEN
		WEEKS ENDED
		May 5,				April 29,
		2007				2006
Effect of dilutive securities –
Restricted shares and restricted stock units			402,042				201,366
Options			238,303				64,770

3. CARSON’S ACQUISITION

     Effective March 5, 2006, pursuant to the October 29, 2005 purchase agreement with Saks Incorporated (“Saks”), as amended, the Company acquired all of the outstanding securities of two subsidiaries of Saks that were solely related to the business of owning and operating the 142 retail department stores that operated under the names Carson Pirie Scott, Younkers, Herberger’s, Boston Store and Bergner’s (collectively, “Carson’s”).

     During the first quarter of 2007, the Company made its final purchase accounting allocations in accordance with SFAS No. 141, “Business Combinations.” Additional professional fees increased the total purchase price by $51, property, fixtures and equipment was reduced by $397 due to a valuation adjustment, and, as a result of those adjustments, goodwill increased by $448. The final purchase price and purchase price allocation is reflected in the following table:

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

Final Purchase Price

Cash purchase		$	1,040,188
Carson’s severance			514
Professional fees incurred			11,863
Total		$	1,052,565

Final Purchase Price Allocation

Cash and cash equivalents		$	3,110
Merchandise inventories			455,207
Prepaid expenses			33,687
Property, fixtures and equipment			724,447
Deferred income taxes			21,951
Goodwill			24,860
Intangible assets			178,180
Other assets			9,040
Total assets acquired			1,450,482
Accounts payable			(158,860	)
Accrued payroll and benefits			(34,560	)
Other accrued expenses			(79,088	)
Obligations under capital leases			(73,000	)
Other liabilities			(52,409	)
Total liabilities assumed			(397,917	)
Net assets acquired		$	1,052,565

4. SUPPLEMENTAL BALANCE SHEET INFORMATION

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

		May 5,				February 3,
		2007				2007
Landlord receivables		$	1,073			$	15,000
Prepaid expenses			39,903				29,527
Other			52,701				40,204
Total		$	93,677			$	84,731

5. INTEGRATION ACTIVITIES

     In connection with the acquisition of Carson’s in March 2006, the Company developed integration plans, including the transfer of Bon-Ton’s existing merchandising and marketing functions to Carson’s former headquarters in Milwaukee, Wisconsin, resulting in involuntary terminations. The Company expects to pay the balance of the involuntary termination costs by November 3, 2007.

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

     In connection with the acquisition of The Elder-Beerman Stores Corp. in October 2003, the Company developed integration plans resulting in lease terminations. The liability balance for lease terminations will be paid over the remaining contract periods ending in 2030.

     Activities during the first quarter of 2007 related to these integration activities are as follows:

		Termination				Lease
		Benefits				Termination				Total
Balance as of February 3, 2007		$	333			$	987			$	1,320
Provision			24				—				24
Payments			(205	)			(20	)			(225	)
Balance as of May 5, 2007		$	152			$	967			$	1,119

     The above provision was included within selling, general and administrative (“SG&A”) expense.

6. EXIT OR DISPOSAL ACTIVITIES

     On February 24, 2007, the Company closed its Carson Pirie Scott store at One South State Street in Chicago, Illinois. In connection with the closing of this store, the Company developed plans resulting in involuntary associate termination benefits and other closing costs of $2,934 and $1,432, respectively. During 2006, the Company recognized $2,436 and $273 of the total expected termination benefits and other costs, respectively. Activities during the first quarter of 2007 related to these costs are as follows:

		Termination				Other
		Benefits				Costs				Total
Balance as of February 3, 2007		$	2,436			$	—			$	2,436
Provision			498				1,159				1,657
Payments			(2,914	)			(1,159	)			(4,073	)
Balance as of May 5, 2007		$	20			$	—			$	20

     The Company expects to pay the balance of the termination benefits during the thirteen weeks ending August 4, 2007. The above provision was included in SG&A expense.

     The following table summarizes other exit or disposal activities during the first quarter of 2007 related to the closing of three stores and a distribution center in the period, accrued transition services agreement costs related to the Carson’s acquisition in 2006, accrued lease termination costs related to a store closed in January 2006 and accrued costs related to the sale of the Company’s credit card accounts in July 2005:

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

		Termination				Lease				Contract				Other
		Benefits				Termination				Termination				Costs				Total
Balance as of February 3, 2007		$	341			$	344			$	32			$	231			$	948
Provision			664				—				—				189				853
Payments			(639	)			(90	)			(21	)			(420	)			(1,170	)
Balance as of May 5, 2007		$	366			$	254			$	11			$	—			$	631

     The above provision was included in SG&A expense. The Company expects to incur charges of $83 and $45 for termination benefits and other costs during the thirteen weeks ending August 4, 2007. The Company expects to pay the balance of the termination benefits and contract termination fee during the thirteen weeks ending August 4, 2007, and the balance of the lease termination fee through February 1, 2008. Additionally, during the first quarter of 2007, the Company sold an owned property related to a closed store and paid, in full, the related mortgage. The Company recognized a $510 gain on the building sale within SG&A expense, and recognized a $1,019 loss on the mortgage payoff within interest expense, net.

7. EMPLOYEE BENEFIT PLANS

     The Company provides eligible employees with retirement benefits under a 401(k) salary reduction and retirement contribution plan (the “Plan”). The Company made an annual contribution of $10,090 to the Plan during the first quarter of 2007. The Company recorded Plan expense of $2,808 and $1,943 during the first quarters of 2007 and 2006, respectively.

     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 (income) expense for the Pension Plans includes the following components:

		THIRTEEN
		WEEKS ENDED
		May 5,				April 29,
		2007				2006
Service cost		$	32			$	34
Interest cost			3,042				117
Expected return on plan assets			(3,668	)			—
Recognition of prior service cost			1				—
Recognition of net actuarial loss			79				—
Net periodic benefit (income) expense		$	(514	)		$	151

     During the first quarter of 2007, contributions of $184 were made to the Pension Plans. The Company anticipates contributing an additional $780 to fund the Pension Plans in 2007 for an annual total of $964.

     The Company provides medical and life insurance benefits to certain former associates under a postretirement benefit plan. Net periodic benefit interest expense of $103 and $47 was recorded

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

in the first quarters of 2007 and 2006, respectively. During the first quarter of 2007, participant premiums received exceeded payments under the plan by $76. The Company anticipates contributing $989 to fund this plan in 2007 for a net annual total of $913.

8. CONTINGENCIES

     In connection with the acquisition of Carson’s, the Company assumed liability for the following matter but only to the extent it applies to the entities acquired from Saks: On October 25, 2005 the Chapter 7 trustee for the bankruptcy estate of Kleinert’s Inc. filed a complaint against Saks and several of its subsidiaries in the United States Bankruptcy Court for the Southern District of New York. In its initial complaint the plaintiff, as assignee, alleged breach of contract, fraud, and unjust enrichment, among other causes of action, and seeks compensatory and punitive damages due to Saks’ assessment of alleged improper chargebacks against Kleinert’s Inc. totaling approximately $4,000 which wrongful acts the plaintiff alleges caused the insolvency and bankruptcy of Kleinert’s Inc. On August 15, 2006 the plaintiff, as assignee, filed an amended complaint in which it asserts the following claims, among others: (1) defendants applied improper chargebacks to the accounts payable of Kleinert’s, which led to the extreme financial distress and Kleinert’s eventual bankruptcy and Kleinert’s incurred liabilities and lost profits of at least $100,000 and plaintiff requests punitive damages of no less than $50,000 (conversion claim); (2) from 1998-2003 defendants charged back an amount not less than $4,000 to Kleinert’s and these chargebacks improperly benefited the defendants, and plaintiff requests $4,000 on this claim (unjust enrichment claim); (3) defendants falsely represented that its $4,000 in chargebacks were proper and Kleinert’s reliance on defendants’ misrepresentations caused Kleinert’s to lose not less than $4,000 and caused it to file for bankruptcy resulting in liabilities and lost profits of $100,000, and plaintiff requests punitive damages of no less than $50,000 (fraud claim); (4) defendants wrongfully charged back at least $4,000 and these unwarranted chargebacks assisted Kleinert’s officers and directors in booking fictitious sales revenue and accounts receivable and perpetrating a fraud on Kleinert’s lenders in excess of $25,000, and plaintiff requests punitive damages of no less than $50,000 (fraud claim); (5) defendants used dishonest, improper and unfair means in conducting business with Kleinert’s and interfered with Kleinert’s relationship with its lenders (tortious interference with prospective economic advantage claim); (6) defendants assisted officers of Kleinert’s in breaching their fiduciary duties to Kleinert’s and to its creditors by falsifying borrowing base certificates given to the lenders, and defendants knew that their improper chargeback scheme was assisting these breaches of fiduciary duty by Kleinert’s officers, with respect to which plaintiff requests $100,000 plus $50,000 in punitive damages (aiding and abetting breach of fiduciary duty claim); (7) defendants knew that their improper chargeback scheme was assisting the perpetration of fraud by Kleinert’s officers, and plaintiff requests $100,000 plus $50,000 in punitive damages (aiding and abetting fraud claim); and (8) various fraudulent conveyance claims with respect to which plaintiff requests damages of $4,000.

     On December 8, 2005 Adamson Apparel, Inc. filed a purported class action lawsuit against Saks in the United States District Court for the Northern District of Alabama. In its complaint the plaintiff asserts breach of contract claims and alleges that Saks improperly assessed chargebacks, timely payment discounts, and deductions for merchandise returns against members of the plaintiff class. The lawsuit seeks compensatory and incidental damages and restitution. Under the terms of the purchase agreement relating to the acquisition of Carson’s from Saks, the Company may have an obligation to indemnify Saks for any damages incurred by Saks under this lawsuit by Adamson Apparel solely to the extent that such damages relate to the business acquired from Saks.

     In addition, the Company is party to legal proceedings and claims that arise during the ordinary course of business.

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

     In the opinion of management, the ultimate outcome of any such litigation and claims, including the two matters detailed above, will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.

9. COMPREHENSIVE LOSS

     Comprehensive loss was determined as follows:

		THIRTEEN
		WEEKS ENDED
		May 5,				April 29,
		2007				2006
Net loss		$	(29,299	)		$	(10,835	)
Other comprehensive (loss) income:
Amortization of pension plan amounts, net of tax			51				—
Cash flow hedge derivative (loss) income, net of tax			(442	)			5
Comprehensive loss		$	(29,690	)		$	(10,830	)

10. SUBSEQUENT EVENT

     On May 22, 2007, the Company’s Board of Directors declared a quarterly cash dividend of $0.05 per share on Class A Common Stock and Common Stock, payable August 1, 2007 to shareholders of record as of July 16, 2007.

11. 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 Bon-Ton Department Stores, Inc. 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 Bon-Ton Department Stores, Inc., 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 May 5, 2007 and February 3, 2007 and for the first quarters of 2007 and 2006 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 and per share data)

The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
May 5, 2007

		Bon-Ton
		(Parent								Guarantor				Non-Guarantor				Consolidating				Company
		Company)				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	1			$	6,400			$	17,990			$	—			$	—			$	24,391
Merchandise inventories			—				253,220				571,351				—				—				824,571
Prepaid expenses and other current assets			—				51,868				41,086				723				—				93,677
Deferred income taxes			—				2,038				15,820				—				—				17,858
Total current assets			1				313,526				646,247				723				—				960,497
Property, fixtures and equipment at cost, net			—				172,055				383,366				324,960				—				880,381
Deferred income taxes			—				13,841				63,032				—				—				76,873
Goodwill			—				2,965				24,859				—				—				27,824
Intangible assets, net			—				2,541				171,759				—				—				174,300
Investment in and advances to affiliates			320,108				875,746				212,217				558				(1,408,629	)			—
Other long-term assets			—				26,832				10,275				3,025				—				40,132
Total assets		$	320,109			$	1,407,506			$	1,511,755			$	329,266			$	(1,408,629	)		$	2,160,007
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	—			$	229,882			$	—			$	—			$	—			$	229,882
Accrued payroll and benefits			—				7,281				40,500				—				—				47,781
Accrued expenses			—				39,864				101,130				221				—				141,215
Current maturities of long-term debt and obligations under capital leases			—				—				1,948				5,368				—				7,316
Total current liabilities			—				277,027				143,578				5,589				—				426,194
Long-term debt and obligations under capital leases, less current maturities			—				984,742				68,955				262,211				—				1,315,908
Other long-term liabilities			2,031				32,818				63,930				1,048				—				99,827
Total liabilities			2,031				1,294,587				276,463				268,848				—				1,841,929
Shareholders’ equity			318,078				112,919				1,235,292				60,418				(1,408,629	)			318,078
Total liabilities and shareholders’ equity		$	320,109			$	1,407,506			$	1,511,755			$	329,266			$	(1,408,629	)		$	2,160,007

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Balance Sheet
February 3, 2007

		Bon-Ton
		(Parent								Guarantor				Non-Guarantor				Consolidating				Company
		Company)				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Assets
Current assets:
Cash and cash equivalents		$	1			$	7,122			$	17,610			$	—			$	—			$	24,733
Merchandise inventories			—				262,532				524,955				—				—				787,487
Prepaid expenses and other current assets			—				41,064				43,016				651				—				84,731
Deferred income taxes			—				2,038				15,820				—				—				17,858
Total current assets			1				312,756				601,401				651				—				914,809
Property, fixtures and equipment at cost, net			—				158,582				407,492				331,812				—				897,886
Deferred income taxes			—				13,525				63,061				—				—				76,586
Goodwill			—				2,965				24,412				—				—				27,377
Intangible assets, net			—				2,599				174,101				—				—				176,700
Investment in and advances to affiliates			348,426				794,071				314,073				345				(1,456,915	)			—
Other long-term assets			—				26,861				11,338				3,242				—				41,441
Total assets		$	348,427			$	1,311,359			$	1,595,878			$	336,050			$	(1,456,915	)		$	2,134,799
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable		$	—			$	209,742			$	—			$	—			$	—			$	209,742
Accrued payroll and benefits			—				16,801				51,633				—				—				68,434
Accrued expenses			—				65,629				112,880				133				—				178,642
Current maturities of long-term debt and obligations under capital leases			—				—				1,936				5,555				—				7,491
Income taxes payable			2,031				(6,520	)			52,575				—				—				48,086
Total current liabilities			2,031				285,652				219,024				5,688				—				512,395
Long-term debt and obligations under capital leases, less current maturities			—				853,300				69,456				266,869				—				1,189,625
Other long-term liabilities			—				29,417				55,937				1,029				—				86,383
Total liabilities			2,031				1,168,369				344,417				273,586				—				1,788,403
Shareholders’ equity			346,396				142,990				1,251,461				62,464				(1,456,915	)			346,396
Total liabilities and shareholders’ equity		$	348,427			$	1,311,359			$	1,595,878			$	336,050			$	(1,456,915	)		$	2,134,799

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended May 5, 2007

		Bon-Ton
		(Parent								Guarantor				Non-Guarantor				Consolidating				Company
		Company)				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	140,551			$	597,010			$	—			$	—			$	737,561
Other income			—				4,297				18,349				—				—				22,646
			—				144,848				615,359				—				—				760,207
Costs and expenses:
Costs of merchandise sold			—				95,673				394,999				—				—				490,672
Selling, general and administrative			—				50,381				219,606				(654	)			(9,201	)			260,132
Depreciation and amortization			—				5,659				18,320				2,981				—				26,960
Amortization of lease-related interests			—				58				1,171				—				—				1,229
Loss from operations			—				(6,923	)			(18,737	)			(2,327	)			9,201				(18,786	)
Other income (expense):
Intercompany rental and royalty income			—				—				1,966				7,235				(9,201	)			—
Equity in losses of subsidiaries			(46,255	)			(20,625	)			—				—				66,880				—
Interest expense, net			—				(18,707	)			(3,279	)			(5,483	)			—				(27,469	)
Loss before income taxes			(46,255	)			(46,255	)			(20,050	)			(575	)			66,880				(46,255	)
Income tax benefit			(16,956	)			(16,956	)			(7,459	)			—				24,415				(16,956	)
Net loss		$	(29,299	)		$	(29,299	)		$	(12,591	)		$	(575	)		$	42,465			$	(29,299	)

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Operations
Thirteen Weeks Ended April 29, 2006

		Bon-Ton
		(Parent								Guarantor				Non-Guarantor				Consolidating				Company
		Company)				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Net sales		$	—			$	128,585			$	433,189			$	—			$	—			$	561,774
Other income			—				4,444				10,369				—				—				14,813
			—				133,029				443,558				—				—				576,587
Costs and expenses:
Costs of merchandise sold			—				88,024				263,556				—				—				351,580
Selling, general and administrative			2				56,249				150,375				5				(6,851	)			199,780
Depreciation and amortization			—				5,198				10,656				2,660				—				18,514
Amortization of lease-related interests			—				118				584				—				—				702
Income (loss) from operations			(2	)			(16,560	)			18,387				(2,665	)			6,851				6,011
Other income (expense):
Intercompany interest income			1,700				—				—				—				(1,700	)			—
Intercompany rental and royalty income			—				—				2,515				4,336				(6,851	)			—
Equity in earnings (losses) of subsidiaries			(19,555	)			17,479				—				—				2,076				—
Interest expense, net			—				(20,474	)			(2,166	)			(2,928	)			1,700				(23,868	)
Income (loss) before income taxes			(17,857	)			(19,555	)			18,736				(1,257	)			2,076				(17,857	)
Income tax provision (benefit)			(7,022	)			(7,690	)			7,390				—				300				(7,022	)
Net income (loss)		$	(10,835	)		$	(11,865	)		$	11,346			$	(1,257	)		$	1,776			$	(10,835	)

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
Thirteen Weeks Ended May 5, 2007

		Bon-Ton
		(Parent								Guarantor				Non-Guarantor				Consolidating				Company
		Company)				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Cash flows from operating activities:		$	505			$	(119,057	)		$	8,181			$	3,824			$	(5,656	)		$	(112,203	)
Cash flows from investing activities:
Capital expenditures			—				(7,462	)			(3,673	)			—				—				(11,135	)
Acquisition, net of cash acquired			—				(51	)			—				—				—				(51	)
Proceeds from sale of property, fixtures and equipment			—				15				41				2,495				—				2,551
Net cash (used in) provided by investing activities			—				(7,498	)			(3,632	)			2,495				—				(8,635	)
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations			—				(174,455	)			(489	)			(4,845	)			—				(179,789	)
Proceeds from issuance of long-term debt			—				305,897				—				—				—				305,897
Intercompany financing activity			—				(505	)			(3,680	)			(1,471	)			5,656				—
Cash dividends paid			(857	)			—				—				—				—				(857	)
Proceeds from stock options exercised			352				—				—				—				—				352
Excess tax benefit from share-based compensation			—				175				—				—				—				175
Deferred financing costs paid			—				(250	)			—				(3	)			—				(253	)
Decrease in bank overdraft balances			—				(5,029	)			—				—				—				(5,029	)
Net cash (used in) provided by financing activities			(505	)			125,833				(4,169	)			(6,319	)			5,656				120,496
Net (decrease) increase in cash and cash equivalents			—				(722	)			380				—				—				(342	)
Cash and cash equivalents at beginning of period			1				7,122				17,610				—				—				24,733
Cash and cash equivalents at end of period		$	1			$	6,400			$	17,990			$	—			$	—			$	24,391

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

The Bon-Ton Stores, Inc.
Condensed Consolidating Statement of Cash Flows
Thirteen Weeks Ended April 29, 2006

		Bon-Ton
		(Parent								Guarantor				Non-Guarantor				Consolidating				Company
		Company)				Issuer				Subsidiaries				Subsidiaries				Eliminations				Consolidated
Cash flows from operating activities:		$	(133	)		$	189,589			$	18,752			$	2,754			$	(254,694	)		$	(43,732	)
Cash flows from investing activities:
Capital expenditures			—				(9,967	)			(5,253	)			—				—				(15,220	)
Acquisition, net of cash acquired			—				(1,055,527	)			—				—				—				(1,055,527	)
Proceeds from sale of property, fixtures and equipment			—				17				518				—				—				535
Net cash used in investing activities			—				(1,065,477	)			(4,735	)			—				—				(1,070,212	)
Cash flows from financing activities:
Payments on long-term debt and capital lease obligations			—				(205,541	)			(166	)			(240	)			—				(205,947	)
Proceeds from issuance of long-term debt			—				1,106,650				—				252,460				—				1,359,110
Intercompany financing activity			—				124				(4,775	)			(250,043	)			254,694				—
Cash dividends paid			(422	)			—				—				—				—				(422	)
Proceeds from stock options exercised			546				—				—				—				—				546
Excess tax benefit from share-based compensation			—				832				—				—				—				832
Deferred financing costs paid			—				(24,818	)			—				(2,731	)			—				(27,549	)
(Decrease) increase in bank overdraft balances			—				(2,044	)			2,620				—				—				576
Net cash provided by (used in) financing activities			124				875,203				(2,321	)			(554	)			254,694				1,127,146
Net (decrease) increase in cash and cash equivalents			(9	)			(685	)			11,696				2,200				—				13,202
Cash and cash equivalents at beginning of period			10				7,455				2,306				—				—				9,771
Cash and cash equivalents at end of period		$	1			$	6,770			$	14,002			$	2,200			$	—			$	22,973