| BON TON STORES INC Item 1A Risk Factors Cautionary Statements Relating to Forward-Looking Information We have made, in this Annual Report on Form 10-K, forward-looking statements relating to developments, results, conditions or other events we expect or anticipate will occur |
| These statements may relate to revenues, earnings, store openings, business strategy, market conditions and the competitive environment |
| The words “believe,” “may,” “will,” “estimate,” “intend,” “expect,” “anticipate,” “plan” and similar expressions as they relate to the Company, or future or conditional verbs, such as “will,” “should,” “would,” “may” and “could,” are intended to identify forward-looking statements |
| Forward-looking statements are based on management’s then-current views and assumptions and we undertake no obligation to update them |
| Forward-looking statements are subject to risks and uncertainties and actual results may differ materially from those projected |
| An investment in our securities carries certain risks |
| Investors should carefully consider the risks described below and other risks which may be disclosed in our filings with the SEC before investing in our securities |
| Our substantial debt could adversely affect our financial condition and prevent us from fulfilling our debt obligations |
| As of April 1, 2006, we had total debt of approximately dlra1dtta1 billion |
| Our substantial debt could have important consequences to our investors |
| For example, it could: • make it more difficult for us to satisfy our debt obligations; • cause our failure to comply with the financial and restrictive covenants contained in the indenture governing our senior unsecured notes and our senior secured credit facility, which could cause a default under those instruments and which, if not cured or waived, could have a material adverse effect on us; • increase our vulnerability to general adverse economic and industry conditions; 9 _________________________________________________________________ • limit our ability to borrow money or sell equity to fund future working capital, capital expenditures, debt service requirements and other general corporate requirements; • require us to dedicate a substantial portion of our cash flow from operations to payments on our debt, thereby reducing our ability to use our cash flow for other purposes, including capital expenditures; • limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; • make it more difficult for us to meet our debt service obligations in the event that there is a substantial increase in interest rates because the debt under our senior secured credit facility bears interest at fluctuating rates; and • place us at a competitive disadvantage compared to our competitors that have less debt |
| Our ability to service our debt depends upon, among other things, our ability to replenish inventory, generate sales and maintain our stores |
| If we do not generate sufficient cash from our operations to service our debt obligations, we will need to take one or more actions, including refinancing our debt, obtaining additional financing, selling assets, obtaining additional equity capital, or reducing or delaying capital expenditures |
| We cannot be certain that our earnings will be sufficient to allow us to pay the principal and interest on our debt and meet our other obligations |
| Debt under our senior secured credit facility bears interest at a floating rate |
| Accordingly, changes in prevailing interest rates may affect our ability to meet our debt service obligations |
| A higher interest rate on our debt would adversely affect our operating results |
| In the event we are unable to meet our debt service obligations or in the event we default in some other manner under our credit facilities, the lenders thereunder could elect to declare all borrowings outstanding, together with accumulated and unpaid interest and other fees, immediately due and payable, which would have a material adverse effect on our business, financial condition and results of operations |
| Our discretion in some matters is limited by the restrictions contained in our senior secured credit facility and in the indenture that governs our senior unsecured notes, and any default on our senior secured credit facility or the indenture that governs the senior unsecured notes could harm our business, profitability and growth prospects |
| The agreement that governs our senior secured credit facility and the indenture that governs our senior unsecured notes contain a number of covenants that limit the discretion of our management with respect to certain business matters and may impair our ability to respond to changing business and economic conditions |
| The senior secured credit facility and the indenture, among other things, restrict our ability to: • incur additional debt or issue guarantees of debt; • sell preferred stock; • create liens; • make restricted payments (including the payment of dividends or the repurchase of our capital stock); • make certain types of investments; • sell stock in our restricted subsidiaries; • pay dividends or other payments from subsidiaries; • enter into transactions with affiliates; and • sell all or substantially all of our assets or merge or consolidate with another company |
| 10 _________________________________________________________________ Our senior secured credit facility contains financial covenants that require us to comply with a minimum excess availability requirement |
| Our ability to borrow funds for any purpose depends on our satisfying this requirement |
| If we fail to comply with any of the financial covenants or the other restrictions contained in our senior secured credit facility or any future financing agreements, an event of default could occur |
| An event of default could result in the acceleration of some or all of our debt |
| If the debt is accelerated, we would not have, and may not be able to obtain, sufficient funds to repay our debt, which could have a material adverse effect on our business, financial condition and results of operations |
| We may not be able to attract or retain a sufficient number of customers in a highly competitive retail environment, which would have an adverse effect on our business, financial condition and results of operations |
| We compete with other department stores and many other retailers, including store-based, mail-order and internet retailers |
| Many of our competitors have significant financial and marketing resources |
| The principal competitive factors in our business are price, quality and selection of merchandise, reputation, store location, advertising and customer service |
| We cannot assure you that we will be able to compete successfully against existing or future competitors |
| Our expansion into new markets served by our competitors and the entry of new competitors into, or expansion of existing competitors in, our markets could have a material adverse effect on our business, financial condition and results of operations |
| We may not be able to accurately predict customer-based trends and effectively manage our inventory levels, which could reduce our revenues and adversely affect our business, financial condition and results of operations |
| It is difficult to predict what merchandise consumers will want |
| A substantial part of our business is dependent on our ability to make correct trend decisions for a wide variety of goods and services |
| Failure to accurately predict constantly changing consumer tastes, preferences, spending patterns and other lifestyle decisions, particularly given the long lead times for ordering much of our merchandise from vendors, could adversely affect our long-term relationships with our customers |
| Our managers focus on inventory levels and balance these levels with inventory plans and reviews of trends; however, if our inventories become too large, we may have to “mark down” or decrease our sales price, and we may be required to sell a significant amount of unsold inventory at discounted prices or even below cost, which could have a material adverse effect on our business, financial condition and results of operations |
| We may not be able to obtain adequate capital to support our operations and growth strategies |
| Our operations and growth strategies require adequate capital, the availability of which depends on our ability to generate cash flow from operations, borrow funds on satisfactory terms and raise funds in the capital markets |
| We may need seasonal borrowing capacity in addition to the funds available under our senior secured credit facility to fund our working capital requirements |
| The inability to obtain adequate capital could have a material adverse effect on our business, financial condition and results of operations |
| If we are unable to obtain various services necessary for the operation of NDSG that we have contracted to receive from Saks for a certain minimum period of time following the acquisition of NDSG, we may not be able to operate NDSG’s business successfully or at all |
| Certain support services necessary to operate NDSG, including credit operations, procurement, accounting, bank card processing, store planning, construction, facilities maintenance and energy, information technology and human resources, were historically provided by divisions of 11 _________________________________________________________________ Saks and were not included in the acquisition of NDSG We do not yet have the capability to provide these necessary support services to NDSG, and have contracted with Saks to provide those services under a transition services agreement |
| If Saks is unable to, refuses to or otherwise fails to provide these contracted-for services, we may not be able to provide, either directly or through a third party, services necessary to support the operations of NDSG In any such event, our business, financial condition and results of operations could be materially adversely affected |
| Our operating results fluctuate from season to season |
| Our stores experience seasonal fluctuations in net sales and consequently in operating income, with peak sales occurring during the back-to-school and holiday seasons |
| Any decrease in net sales or margins during our peak selling periods, decrease in the availability of working capital needed in the months before these periods or reduction in vendor allowances could have a material adverse effect on our business, financial condition and results of operations |
| We usually order merchandise in advance of peak selling periods and sometimes before new fashion trends are confirmed by customer purchases |
| We must carry a significant amount of inventory, especially before the peak selling periods |
| If we are not successful in selling our inventory, especially during our peak selling periods, we may be forced to rely on markdowns or promotional sales to dispose of the inventory or we may not be able to sell the inventory at all, which could have a material adverse effect on our business, financial condition and results of operations |
| Weather conditions could adversely affect our results of operations |
| Because a significant portion of our business is apparel sales and subject to weather conditions in our markets, our operating results may be unexpectedly and adversely affected by inclement weather |
| Frequent or unusually heavy snow, ice or rain storms might make it difficult for our customers to travel to our stores and thereby reduce our sales and profitability |
| Extended periods of unseasonable temperatures in our markets, potentially during our peak seasons, could render a portion of our inventory incompatible with those unseasonable conditions |
| Reduced sales from extreme or prolonged unseasonable weather conditions could adversely affect our business, financial condition and results of operations |
| Our failure to effectively integrate NDSG into our existing business could have a material adverse effect on our business, financial condition and results of operations |
| Our management believes that the full integration of NDSG will allow us to achieve cost savings relating to the elimination of duplicate departments and redundant infrastructure and to achieve operating efficiencies, as well as revenue enhancement opportunities |
| However, the anticipated benefits are based on projections and assumptions and not on actual results |
| Accordingly, we cannot assure you that we will realize the anticipated benefits |
| Our ability to realize these benefits could be adversely impacted by difficulties in integrating NDSG’s operations, by any inability to achieve certain economies of scale and by the diversion of management’s attention from our ongoing business concerns |
| Integrating operations will require significant efforts and expenses |
| Personnel may leave or be terminated because of the acquisition of NDSG If these factors limit our ability to integrate the operations of NDSG successfully or on a timely basis, our expectations of future results of operations, business opportunities, growth prospects and cost savings expected to result from the acquisition of NDSG may not be met |
| We may not be able to capitalize on expected business opportunities, including retaining NDSG’s current customers, assumptions underlying estimates of expected cost savings may be inaccurate, or general industry and business conditions may deteriorate |
| We may encounter difficulties integrating our internal controls, procedures and policies |
| In addition, our growth and operating strategies for NDSG’s business may be different from the strategies that NDSG pursued as part of Saks |
| If our strategies are not the proper strategies for NDSG, it could have a material adverse effect on our business, financial condition and results of operations |
| 12 _________________________________________________________________ We may pursue strategic acquisitions of businesses which may not be completed or, if completed, may not be successfully integrated into our existing business |
| We may pursue increased market penetration through strategic acquisitions |
| If we are unable to successfully complete acquisitions or to effectively integrate acquired businesses, our ability to grow our business or to operate our business effectively could be reduced, and our business, financial condition and operating results could suffer |
| We also cannot assure you that we will be able to integrate the operations of any future completed strategic acquisitions without encountering difficulty regarding different business strategies with respect to marketing, integration of personnel with disparate business backgrounds and corporate cultures, integration of different point-of-sale systems and other technology and managing relationships with other business partners |
| The consummation and integration of any future acquisition involve many risks, including the risks of: • diverting management’s attention from our ongoing business concerns; • being unable to obtain financing on terms favorable to us; • entering markets in which we have no direct prior experience; • improperly evaluating new services, products and markets; • being unable to maintain uniform standards, controls, procedures and policies; • being unable to integrate new technologies or personnel; • incurring the expenses of any undisclosed or potential liabilities; and • the departure of key management and employees |
| Failure to maintain our current key vendor relationships may adversely affect our business, financial condition and results of operations |
| Our business is dependent to a significant degree upon close relationships with our vendors and our ability to purchase brand name merchandise at competitive prices |
| The loss of key vendor support could have a material adverse effect on our business, financial condition and results of operations |
| There can be no assurance that we will be able to acquire brand name merchandise at competitive prices or on competitive terms in the future |
| For example, certain merchandise that is high profile and in high demand may be allocated by vendors based upon the vendors’ internal criteria, which are beyond our control |
| An inability to find qualified domestic and international vendors and fluctuations in the exchange rate with countries in which our international vendors are located could adversely affect our business |
| The products we sell are sourced from a wide variety of domestic and international vendors |
| Our ability to find qualified vendors and source products in a timely and cost-effective manner, including obtaining vendor allowances in support of our advertising and promotional programs, represents a significant challenge |
| The availability of products and the ultimate costs of buying and selling these products, including advertising and promotional costs, are not completely within our control and could increase our merchandise and operating costs and adversely affect our business |
| Additionally, costs and other factors specific to imported merchandise, such as trade restrictions, tariffs, currency exchange rates and transport capacity and costs, are beyond our control and could restrict the availability of imported merchandise or significantly increase the costs of our merchandise sales and adversely affect our business, financial condition and results of operations |
| 13 _________________________________________________________________ The loss of the outside vendor that operates our proprietary credit card programs could have an adverse effect on our operations and financial results |
| Our proprietary credit card programs are operated by HSBC Under our agreements with HSBC, HSBC issues our proprietary credit cards to our customers and we receive a percentage of the net credit sales thereunder |
| If for any reason HSBC is unwilling or unable to provide the services comprising our proprietary credit card programs, or our agreements with HSBC are terminated, in either case under circumstances in which we are unable to quickly and adequately contract with a comparable replacement vendor of such services, our customers who have accounts under our proprietary credit card programs will be unable to use their cards, which would likely result in a certain decrease in sales to such customers, a loss of the revenues attributable to the payments from HSBC, and an adverse effect on customer goodwill, any or all of which could have a material adverse effect on our business, financial condition and results of operations |
| Conditions in, and the United States’ relationship with, the foreign countries where we source our merchandise could adversely affect our business |
| A majority of our merchandise is manufactured outside of the United States, primarily in India and the Far East |
| As a result, political instability or other events resulting in the disruption of trade from the countries where our merchandise is manufactured or the imposition of additional regulations relating to, or duties upon, the merchandise we import could cause significant delays or interruptions in the supply of our merchandise or increase our costs, either of which could have a material adverse effect on our business |
| If we are forced to source merchandise from other countries, those goods may be more expensive or of a different or inferior quality from the merchandise we now sell |
| If we were unable to adequately replace the merchandise we currently source with merchandise produced elsewhere, our business, financial condition and results of operations could be adversely affected |
| Our business could be significantly disrupted if we cannot retain or replace members of our management team |
| Our success depends to a significant degree upon the continued contributions of our executive officers and other key personnel, both individually and as a group |
| Our future performance will be substantially dependent on our ability to retain or replace our key personnel and the inability to retain or replace our key personnel could prevent us from executing our business strategy |
| Labor conditions could adversely affect our results of operations |
| Our performance is dependent on attracting and retaining a large number of quality sales associates |
| Many of those sales associates are in entry level or part-time positions with historically high rates of turnover |
| Our ability to meet our labor needs while controlling costs is subject to external factors such as unemployment levels, prevailing wage rates, minimum wage legislation and changing demographics |
| Changes that adversely impact our ability to attract and retain quality sales associates could adversely affect our performance |
| Inflation may adversely affect our business operations in the future |
| In recent years, we have experienced certain inflationary conditions in our cost base due primarily to (1) changes in foreign currency exchange rates that have reduced the purchasing power of the US dollar and (2) increases in selling, general and administrative expenses, particularly with regard to employee benefits |
| Inflation can harm our margins and profitability if we are unable to increase prices or cut costs enough to offset the effects of inflation in our cost base |
| If inflation in these or other costs worsens, we cannot assure you that our attempts to offset the effects of inflation through control of expenses, passing cost increases to our customers or any 14 _________________________________________________________________ other method will be successful |
| Any future inflation could adversely affect our business, financial condition and results of operations |
| If we are unable to effectively market our business or if our advertising campaigns are ineffective, our revenues may decline and our results of operations could be adversely affected |
| We spend extensively on advertising and marketing |
| Our business depends on effective marketing to generate customer traffic in our stores |
| If our advertising and marketing efforts are not effective, our business, financial condition and results of operations could be negatively affected |
| Failure to successfully maintain and update information technology systems and enhance existing systems may adversely affect our business |
| To keep pace with changing technology, we must continuously provide for the design and implementation of new information technology systems as well as enhancements of our existing systems |
| Any failure to adequately maintain and update the information technology systems supporting our sales operations or inventory control could prevent us from processing and delivering merchandise, which could adversely affect our business, financial condition and results of operations |
| Our inability to protect our intellectual property rights or our infringement on the property rights of others could adversely affect our business |
| Our trademarks and trade names are important to our business and are generally sufficient to permit us to carry on our business as presently conducted |
| We cannot, however, know whether we will be able to secure protection for our intellectual property in the future or if that protection will be adequate for future operations |
| Further, we face the risk of ineffective protection of intellectual property rights in jurisdictions where we source and distribute our products |
| We also cannot be certain that our activities do not infringe on the proprietary rights of others |
| If we are compelled to prosecute infringing parties, defend our intellectual property or defend ourselves from intellectual property claims made by others, we may face significant expense and liability |
| Our stock price has been and may continue to be volatile |
| The market price of our common stock has been and may continue to be volatile and may be significantly affected by: • actual or anticipated fluctuations in our operating results; • announcements of new services by us or our competitors; • developments with respect to conditions and trends in our industry; • governmental regulation; • general market conditions; and • other factors, many of which are beyond our control |
| In addition, the stock market has recently, and from time to time, experienced significant price and volume fluctuations that have adversely affected the market prices of securities of companies without regard to their operating performances |
| 15 _________________________________________________________________ Tim Grumbacher beneficially owns shares of our capital stock giving him voting control over matters submitted to a vote of the shareholders, and he may take actions that conflict with the interests of our other shareholders and holders of our debt securities |
| Collectively, as of April 3, 2006, Tim Grumbacher, trusts for the benefit of members of Mr |
| Grumbacher’s family and The Grumbacher Family Foundation beneficially own shares of our outstanding common stock (which is entitled to one vote per share) and shares of our Class A common stock (which is entitled to ten votes per share) representing, in the aggregate, approximately 63prca of the votes eligible to be cast by shareholders in the election of directors and generally |
| Accordingly, Mr |
| Grumbacher has the power to control all matters requiring the approval of our shareholders, including the election of directors and the approval of mergers and other significant corporate transactions |
| Grumbacher and certain other stockholders may conflict with the interests of our other shareholders and holders of our debt securities |
| Grumbacher’s voting control, certain provisions of our charter documents and Pennsylvania law could discourage potential acquisition proposals and could deter, delay or prevent a change in control of our company that our other shareholders consider favorable and could depress the market value of our common stock |
| Certain provisions of our articles of incorporation and by-laws, as well as provisions of the Pennsylvania Business Corporation Law, could have the effect of deterring takeovers or delaying or preventing changes in control or management of the Company that our shareholders consider favorable and could depress the market value of our common stock |
| Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law of 1988, which is applicable to us, may have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a shareholder might consider in his or her best interest, including those attempts that might result in a premium over the market price for the shares held by shareholders |
| In general, Subchapter F of Chapter 25 of the Pennsylvania Business Corporation Law could delay for five years and impose conditions upon “business combinations” between an “interested shareholder” and us, unless prior approval by our board of directors is given |
| The term “business combination” is defined broadly to include various merger, consolidation, division, exchange or sale transactions, including transactions using our assets for purchase price amortization or refinancing purposes |
| An “interested shareholder,” in general, would be a beneficial owner of shares entitling that person to cast at least 20prca of the votes that all shareholders would be entitled to cast in an election of directors |
| Our business is subject to global economic and political conditions beyond our control |
| Global economic and political factors that are beyond our control influence our forecasts and directly affect our performance |
| These factors include interest rates, rates of economic growth, fiscal and monetary policies of governments, inflation, deflation, consumer credit availability, consumer debt levels, tax rates and policy, unemployment trends, terrorist threats and activities, worldwide military and domestic disturbances and conflicts, and other matters that influence consumer confidence and spending |
| Increasing volatility in financial markets may cause these factors to change with a greater degree of frequency and magnitude |
| Increases in interest rates would increase our financing costs |
| Regulatory and litigation developments could adversely affect our results of operations |
| Various aspects of our operations are subject to federal, state or local laws, rules and regulations, any of which may change from time to time |
| Additionally, we are regularly involved in various litigation matters that arise in the ordinary course of business |
| Litigation or regulatory developments could adversely affect our business, financial condition and results of operations |