10-Q/A 1 l01944be10vqza.txt THE ELDER-BEERMAN STORES CORP. 10-Q/A -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q/A (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 FOR QUARTERLY PERIOD ENDED MAY 03, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ________ TO________ COMMISSION FILE NUMBER: 0-02788
THE ELDER-BEERMAN STORES CORP. (Exact name of registrant as specified in its charter) OHIO 31-0271980 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 3155 EL-BEE ROAD, DAYTON, OHIO 45439 (Address of principal executive offices) (Zip Code)
(937) 296-2700 (Registrant's telephone number, including area code) NOT APPLICABLE (Former name, former address and former fiscal year, if changed since last report) --------------------- Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [ ] No [X] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] APPLICABLE ONLY TO CORPORATE ISSUERS: Indicate the number of shares outstanding of the issuer's classes of common stock, as of the latest practicable date. As of June 12, 2003 11,581,445 shares of the issuer's common stock, without par value, were outstanding. -------------------------------------------------------------------------------- -------------------------------------------------------------------------------- THE ELDER-BEERMAN STORES CORP. INDEX
PAGE ---- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of May 3, 2003, May 4, 2002 and February 1, 2003................................ 1 Condensed Consolidated Statements of Operations for the 13 weeks ended May 3, 2003 and May 4, 2002..................... 2 Condensed Consolidated Statements of Cash Flows for the 13 weeks ended May 3, 2003 and May 4, 2002..................... 3 Notes to Condensed Consolidated Financial Statements........ 4 Item 2. Management's Discussion and Analysis of Consolidated Financial Condition and Results of Operations............... 8 Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................................ 12 Item 4. Disclosure Controls And Procedures.......................... 12 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K............................ 13 SIGNATURES........................................................... 14 CERTIFICATIONS....................................................... 14 INDEX TO EXHIBITS....................................................
EXPLANATORY NOTE This Form 10-Q/A speaks as of the original filing date of our quarterly report on Form 10-Q and has not been updated to reflect events occurring subsequent to the original filing date. With this Form 10-Q/A, we are refiling our entire quarterly report on Form 10-Q for the quarter ended May 3, 2003 as amended, other than Item 4 of Part I, to reflect our responses to the comments of the Staff of the Securities and Exchange Commission. Nothing in this Form 10-Q/A changes any amounts, line items, or classifications as presented in our financial statements for the quarter ended May 3, 2003 that were included with our quarterly report on Form 10-Q for the quarter ended May 3, 2003 as filed June 16, 2003. For a more recent description of our business and the risk factors that may affect our business, results of operations and financial condition, including the effects of current business and economic conditions in our industry and in our target markets, please review and consider the various disclosures we have made in our recent reports filed with the Securities and Exchange Commission, including our Current Reports on Form 8-K and our Quarterly Report on Form 10-Q for the second quarter of the fiscal year ending January 31, 2004. PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
MAY 3, 2003 MAY 4, 2002 FEB. 1, 2003 ----------- ----------- ------------ (DOLLARS IN THOUSANDS) ASSETS Current assets: Cash and equivalents...................................... $ 7,345 $ 7,532 $ 9,735 Customer accounts receivable (less allowance for doubtful accounts: May 3, 2003 -- $2,998; May 4, 2002 -- $2,677; February 1, 2003 -- $3,298)............................ 120,147 123,973 127,786 Merchandise inventories................................... 149,784 150,562 138,748 Other current assets...................................... 15,723 21,215 17,162 -------- -------- -------- Total current assets................................... 292,999 303,282 293,431 -------- -------- -------- Property, fixtures and equipment, less accumulated depreciation and amortization............................. 89,261 98,833 90,181 Other Assets................................................ 26,587 25,263 27,436 -------- -------- -------- Total assets........................................... $408,847 $427,378 $411,048 ======== ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations.................. $ 4,763 $ 7,329 $ 5,456 Accounts payable.......................................... 50,092 39,548 40,607 Other accrued liabilities................................. 26,213 24,812 31,918 -------- -------- -------- Total current liabilities.............................. 81,068 71,689 77,981 -------- -------- -------- Long-term obligations, less current portion................. 112,681 141,112 115,127 Deferred items.............................................. 10,021 13,296 11,214 Shareholders' equity: Common stock, no par, 11,581,064 shares at May 3, 2003, 11,531,554 shares at May 4, 2002, and 11,536,460 shares at February 1, 2003 issued and outstanding............. 243,424 243,456 243,419 Unearned compensation -- restricted stock................. (145) (338) (197) Deficit................................................... (36,518) (37,411) (34,043) Other comprehensive loss.................................. (1,684) (4,426) (2,453) -------- -------- -------- Total shareholders' equity............................. 205,077 201,281 206,726 -------- -------- -------- Total liabilities and shareholders' equity............. $408,847 $427,378 $411,048 ======== ======== ========
See notes to condensed consolidated financial statements 1 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
13-WEEKS ENDED 13-WEEKS ENDED MAY 3, 2003 MAY 4, 2002 -------------- -------------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Net sales................................................. $ 131,052 $ 141,166 Financing................................................. 6,862 7,158 Other..................................................... 699 688 ----------- ----------- 138,613 149,012 ----------- ----------- Costs and expenses: Cost of merchandise sold, occupancy, and buying expenses............................................... 97,140 105,145 Selling, general, administrative, and other expenses...... 37,960 41,495 Depreciation and amortization............................. 4,917 4,971 Interest expense.......................................... 2,463 2,840 ----------- ----------- Total costs and expenses............................... 142,480 154,451 ----------- ----------- Loss before income tax benefit.............................. (3,867) (5,439) Income tax benefit.......................................... (1,392) (1,958) ----------- ----------- Loss before cumulative effect of changes in accounting principles................................................ (2,475) (3,481) Cumulative effect of changes in accounting principles....... -- (15,118) ----------- ----------- Net loss.................................................... $ (2,475) $ (18,599) =========== =========== Net loss per common share -- basic and diluted Loss before cumulative effect of changes in accounting principles............................................. $ (0.22) $ (0.31) Cumulative effect of changes in accounting principles..... -- (1.33) ----------- ----------- Net loss.................................................... $ (0.22) $ (1.64) Weighted average number of shares outstanding............... 11,406,800 11,369,834
See notes to condensed consolidated financial statements 2 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
13-WEEKS ENDED 13-WEEKS ENDED MAY 3, 2003 MAY 4, 2002 -------------- -------------- (DOLLARS IN THOUSANDS) Cash flows from operating activities: Net loss.................................................. $(2,475) $(18,599) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation and amortization.......................... 4,917 4,971 Cumulative effect of changes in accounting principles........................................... -- 15,118 Asset impairment....................................... -- 1,037 Changes in assets and liabilities...................... 2,146 5,761 ------- -------- Net cash provided by operating activities............ 4,588 8,288 Cash flows from investing activites: Capital expenditures, net................................. (3,839) (2,604) Proceeds from the disposal of investments................. -- 326 ------- -------- Net cash used in investing activities................ (3,839) (2,278) Cash flows from financing activities: Net payments under asset securitization agreement......... (6,770) (5,493) Net borrowings (payments) under revolving lines of credit................................................. 5,000 (1,652) Payments on long-term obligations......................... (1,369) (1,933) Issuance of an installment note........................... -- 3,464 Other..................................................... -- (6) ------- -------- Net cash used in financing activities................ (3,139) (5,620) ------- -------- Increase (decrease) in cash and equivalents................. (2,390) 390 Cash and equivalents -- beginning of period................. 9,735 7,142 ------- -------- Cash and equivalents -- end of period....................... $ 7,345 $ 7,532 ======= ======== Supplemental cash flow information: Interest paid............................................. $ 2,428 $ 3,104 Supplemental non-cash investing and financing activities: Capital leases............................................ 35
See notes to condensed consolidated financial statements. 3 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include accounts of The Elder-Beerman Stores Corp. and its wholly-owned subsidiaries (the "Company"). All intercompany transactions and balances have been eliminated in consolidation. In the opinion of management, the Company has made all adjustments (primarily consisting of normal recurring accruals) considered necessary for a fair presentation for all periods presented. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. The Company's business is seasonal in nature and the results of operations for the interim periods are not necessarily indicative of the results for the full fiscal year. It is suggested these condensed consolidated financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's Annual Report on Form 10-K for the year ended February 1, 2003. Certain reclassifications have been made to the first quarter of 2002 financial statements to conform to the first quarter of 2003 financial statement presentation. 2. PER SHARE AMOUNTS Net earnings (loss) per common share is computed by dividing net earnings (loss) by the weighted-average number of common shares outstanding during the period presented. Stock options, restricted shares, and deferred shares represent potential common shares and are included in computing diluted earnings per share when the effect would be dilutive. Dilutive potential common shares for the 13 weeks ended May 3, 2003 and May 4, 2002 were 151,724 and 68,188, respectively. There was no dilutive effect of potential common shares for the periods presented. 3. STOCK-BASED COMPENSATION During the first quarter of 2003, a total of 342,500 stock options were granted at fair market value to designated employees under the Company's Equity and Performance Incentive Plan (the "Plan"). These options granted have a maximum term of ten years and vest over five years. Nonemployee directors may receive all or a portion of their annual base retainer fee in the form of discounted stock options. During the first quarter of 2003 a total of 24,999 stock options, with an exercise price of $2.10, were granted under this plan. These options vest on February 2, 2004. In December 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 148, Accounting for Stock-Based Compensation -- Transition and Disclosure. SFAS No. 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 requires expanded and more prominent disclosure in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method on reported results. This statement was effective for interim financial statements beginning after December 15, 2002. The Company continues to measure compensation cost for stock options issued to employees and directors using the intrinsic value based method of accounting in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees. Total compensation costs charged to loss before income tax benefit for all stock-based compensation awards was approximately $0.1 million for the first quarter of 2003 and the first quarter of 2002. The following table illustrates the effect on net loss and loss per share if the Company had applied the fair value recognition 4 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) provisions of SFAS No. 123, Accounting for Stock-Based Compensation, to stock-based employee compensation (dollars in thousands, except per share data):
THIRTEEN WEEKS ENDED ------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- Net loss as reported........................................ $(2,475) $(18,599) Deduct: Total stock-based compensation under fair value based method, net of tax............................... 130 137 ------- -------- Pro forma net loss........................................ $(2,605) $(18,736) ======= ======== Loss per common share -- diluted: As reported............................................ $ (0.22) $ (1.64) Pro forma.............................................. $ (0.23) $ (1.65)
4. SHAREHOLDERS' EQUITY The comprehensive loss for the 13 weeks ended May 3, 2003 and May 4, 2002, was $1.7 million and $18.1 million, respectively. Following is a reconciliation between net loss and comprehensive loss (dollars in thousands):
THIRTEEN WEEKS ENDED ------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- Net loss.................................................... $(2,475) $(18,599) Net unrealized gain on cash flow hedges, net of tax....... 769 465 ------- -------- Comprehensive loss.......................................... $(1,706) $(18,134) ======= ========
5. DERIVATIVE FINANCIAL INSTRUMENTS The Company utilizes interest rate swap agreements to effectively establish long-term fixed rates on borrowings under the Securitization Facility, thus reducing the impact of interest rate changes on future income. These swap agreements, which are designated as cash flow hedges, involve the receipt of variable rate amounts in exchange for fixed rate interest payments over the life of the agreements. The fair value of the Company's swap agreements was a $2.6 million liability at May 3, 2003, a $5.3 million liability at May 4, 2002, and a $3.8 million liability at February 1, 2003. This liability is included in deferred items on the condensed consolidated balance sheet. The adjustment to record the net change in fair value was recorded, net of income taxes, in other comprehensive loss. There was no ineffectiveness during the 13 week period ended May 3, 2003. In fiscal 2003, the Company expects the amounts to be reclassified out of other comprehensive loss to earnings to be immaterial to the financial statements. 6. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued. SFAS No. 145 primarily rescinds SFAS No. 4 which allowed gains or losses from the extinguishment of debt to be classified as an extraordinary item. As a result, the criteria set forth by APB Opinion No. 30 will now be used to classify those gains or losses. SFAS No. 145 becomes effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 as of February 2, 2003, the beginning of our new fiscal year. The adoption of SFAS No. 145 did not have a material impact on the financial statements. 5 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 7. NEW ACCOUNTING STANDARDS NOT YET ADOPTED In April 2003, SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Primarily the changes in this statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This statement is effective for all contracts entered into or modified after June 30, 2003, and all hedging relationships entered into after June 30, 2003. Management does not believe the adoption of this statement will have a material impact on the Company's financial statements. In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued. This statement requires that certain financial instruments that under previous guidance could be accounted for as equity, should now be classified as a liabilities in the statement of financial position. This statement is effective May 31, 2003 for new or modified financial instruments, otherwise it is effective at the beginning of the first interim period beginning after June 15, 2003. Management does not believe the adoption of this statement will have a material impact on the Company's financial statements. 8. ASSET IMPAIRMENT AND OTHER EXPENSES On January 7, 2003 the Company announced its plan to close its Forest Fair Mall department store located in Cincinnati, OH. During the 13 weeks ended May 3, 2003 the Company recorded pre-tax costs of $0.9 million for excess inventory markdowns and $0.1 million for severance and other costs. The closing was completed April 29, 2003. The following is a summary related to the severance and other costs for the 13 weeks ended May 3, 2003, (dollars in thousands): Severance and other costs: Balance as of February 1, 2003............................ $ 179 Charge recorded........................................... 145 Used for intended purpose................................. (181) ------ Balance as of May 3, 2003................................. $ 143 ====== Executive retirement and other costs: Balance as of February 1, 2003............................ $1,431 Used for intended purpose................................. (172) ------ Balance as of May 3, 2003................................. $1,259 ======
9. SUBSEQUENT EVENT On May 16, 2003 the Company announced that it had recently received unsolicited expressions of interest relating to the possible acquisition of the Company. After considering these expressions of interest, the Company entered into a letter agreement with one of the interested parties. Under this letter agreement, the Company and the interested party will discuss, on an exclusive basis for a limited period of time, the possible sale of the Company. The Company has retained RBC Capital Markets to advise it in this process. There can be no assurance that these discussions will result in any transaction involving the Company. 6 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 10. SEGMENT REPORTING The following table sets forth financial information by segment, (dollars in thousands):
THIRTEEN WEEKS ENDED ------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- Department Store Revenues.................................................. $131,751 $141,854 Operating loss............................................ (4,182) (4,220) Finance Operations Revenues.................................................. $ 6,862 $ 7,158 Operating profit.......................................... 4,296 4,557 Segment Subtotal Revenues.................................................. $138,613 $149,012 Operating profit (1)...................................... 114 337
--------------- (1) Segment operating profit is reconciled to loss before income tax benefit as follows:
THIRTEEN WEEKS ENDED ------------------------- MAY 3, 2003 MAY 4, 2002 ----------- ----------- Segment operating profit.................................... $ 114 $ 337 Store closing costs....................................... (1,058) (1,353) Severance and other costs................................. -- (683) Asset impairment.......................................... -- (1,037) Interest expense.......................................... (2,463) (2,840) Other..................................................... (460) 137 ------- ------- $(3,867) $(5,439) ======= =======
7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Quarterly Report on Form 10-Q contains "forward-looking statements," including predictions of future operating performance, events or developments such as our future sales, gross margins, profits, expenses, income and earnings per share. In addition, words such as "expects," "anticipates," "intends," "plans," "believes," "hopes," and "estimates," and variations of such words and similar expressions, are intended to identify forward-looking statements. Because forward-looking statements are based on a number of beliefs, estimates and assumptions by management that could ultimately prove inaccurate, there is no assurance that forward-looking statements will prove to be accurate. Many factors could materially affect our actual future operations and results. Factors that could materially affect performance include the following: increasing price and product competition; fluctuations in consumer demand and confidence, especially in light of current uncertain general economic conditions; the availability and mix of inventory; fluctuations in costs and expenses; consumer response to the Company's merchandising strategies, advertising, marketing and promotional programs; the effectiveness of management; the timing and effectiveness of new store openings, particularly its new stores opened in the last two years; weather conditions that affect consumer traffic in stores; the continued availability and terms of bank and lease financing and trade credit; the outcome of pending and future litigation; consumer debt levels; the impact of any new consumer bankruptcy laws; inflation and interest rates and the condition of the capital markets. National security threats and ongoing U.S. involvement in Iraq could magnify some of these factors. Elder-Beerman undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. The following is a discussion of the financial condition and results of operations of the Company for the 13 week periods ended May 3, 2003 ("First Quarter 2003") and May 4, 2002 ("First Quarter 2002"). The Company's fiscal year ends on the Saturday closest to January 31. The discussion and analysis that follows is based upon and should be read in conjunction with the Company's Condensed Consolidated Financial Statements and the Notes thereto included in Part I, Item I. RESULTS OF OPERATIONS FIRST QUARTER 2003 COMPARED TO FIRST QUARTER 2002 Net sales, total sales less customer returns, for the First Quarter 2003 decreased by 7.2% to $131.1 million from $141.2 million for the First Quarter 2002. Comparable store sales, sales for stores opened for 13 months, decreased by 7.7%. The Accessories, Shoes & Cosmetics merchandise category sales were able to remain flat due to an enhanced merchandising emphasis on key items in fashion jewelry. The Men's and Children's categories of business had the largest sales decrease of 12.3% or $3.4 million. First Quarter Sales were impacted by extremely cold weather and snow in February as comparable same store sales were less than the previous year by 14.5% ($6.2 million). NET SALES BY DEPARTMENT
MERCHANDISE CATEGORY FIRST QUARTER 2003 FIRST QUARTER 2002 -------------------- ------------------- ------------------- (DOLLARS IN THOUSANDS) Women's Ready to Wear & Intimate............. $ 45,990 35.1% $ 49,260 34.9% Accessories, Shoes & Cosmetics............... 35,251 26.9% 35,959 25.5% Men's and Children's......................... 23,936 18.3% 27,294 19.3% Home Store................................... 25,875 19.7% 28,653 20.3% -------- ------ -------- ------ Net Sales.................................... $131,052 100.0% $141,166 100.0%
Financing revenue from the Company's proprietary credit card for the First Quarter 2003 decreased by 4.1% to $6.9 million from $7.2 million for the First Quarter 2002. The decrease is due to the lower sales volume, which was partially offset by an increase in the penetration rate, the percentage of net sales paid for with the Company's proprietary credit card, to 48.5% for the First Quarter 2003 versus 45.4% for the First Quarter 2002. Charge customers continued to pay their Elder-Beerman charge account balances down faster than the previous year. 8 Other revenue, which is primarily from leased departments, for the First Quarter 2003 and the First Quarter 2002 was $0.7 million. Because of the merchandising emphasis on fashion jewelry as mentioned above, the revenue from the fine jewelry leased department, which is the largest volume lease department for the Company, was able to remain essentially flat. Cost of merchandise sold, occupancy, and buying expenses decreased to 74.1% of net sales for the First Quarter 2003 from 74.5% of net sales for the First Quarter 2002. During the First Quarter 2003 merchandise gross margins increased 0.8% versus the First Quarter 2002 due to improved sales and gross margin of the Accessories, Shoes & Cosmetics merchandise category. The First Quarter 2003 included a charge of $0.9 million in inventory markdowns related to the closing of the Forest Fair Mall store in Cincinnati, Ohio. During the First Quarter 2002 a charge for inventory markdowns of $1.0 million related to the closing of the Company's Downtown Dayton, Ohio store was recorded.
FIRST QUARTER 2003 FIRST QUARTER 2002 ------------------ ------------------ (DOLLARS IN THOUSANDS) Net Sales...................................... $131,052 100.0% $141,166 100.0% Gross Margin................................... 46,378 35.4% 48,866 34.6% -------- ----- -------- ----- Cost of Merchandise Sold....................... 84,674 64.6% 92,300 65.4% Buying and Occupancy Expenses.................. 11,526 8.8% 11,895 8.4% Store Closing Markdowns........................ 940 0.7% 950 0.7% -------- ----- -------- ----- Cost of Goods Sold, Occupancy, and Buying Expenses..................................... $ 97,140 74.1% $105,145 74.5% ======== ===== ======== =====
Selling, general, administrative, and other expenses decreased to 29.0% of net sales for the First Quarter 2003 from 29.4% for the First Quarter 2002. The reduction in the expenses is a result of the implementation of an expense initiative combining our store's giftwrap and selling service desks that reduced store selling expenses 0.3% of sales. First Quarter 2002 expenses include: (1) $0.4 million in charges related to the closing of the downtown Dayton, OH store; (2) $0.7 million for severance costs to implement expense reductions, and (3) $1.0 million in charges to write-down long-term assets to their fair value. First Quarter 2002 also included miscellaneous income of $0.6 million from a sale of noncore assets and life insurance proceeds. Depreciation and amortization expense decreased to $4.9 million for the First Quarter 2003 compared to $5.0 million for the First Quarter 2002. Interest expense decreased to $2.5 million for the First Quarter 2003 from $2.8 million for the First Quarter 2002. The decrease is primarily due to reduced average borrowing. An income tax benefit was recorded in the First Quarter 2003 and the First Quarter 2002 at a rate of 36.0%. A cumulative effect of a change in accounting principle charge was recorded during the First Quarter 2002 in the amount of $14.1 million, net of tax, relating to goodwill impairment as required under SFAS No. 142, Goodwill and Other Intangible Assets. Also in the First Quarter 2002 a cumulative effect of a change in accounting principle was recorded in the amount of $1.1 million, net of tax, relating to the change in method for recording actuarial losses for the Stone & Thomas defined benefit pension plan. LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are cash flow from operations and borrowings under its Revolving Credit Facility and Receivable Securitization Facility (collectively, the "Credit Facilities"). The Company's primary ongoing cash requirements are to fund debt service, finance working capital and capital expenditures. Factors that could affect operating cash flows include, but are not limited to, increasing price and product competition, fluctuations in consumer demand and confidence, the availability and quality of inventory, the availability and terms of bank financing and trade credit, consumer debt levels, and changes in the finance charges imposed by the Company on its charge card holders. 9 The Company believes that it will generate sufficient cash flow from operations, as supplemented seasonally by its available borrowings under the Credit Facilities, to service debt requirements, meet anticipated working capital needs and to invest in capital expenditures. Net cash provided by operating activities was $4.6 million for the First Quarter 2003, compared to $8.3 million for the First Quarter 2002. A net loss of $2.5 million was recorded in the First Quarter 2003. A net loss of $18.6 was recorded in the First Quarter 2002. During the First Quarter 2002 non-cash after-tax charges of $14.1 million relating to the goodwill impairment and $1.1 million relating to the change in method for recording actuarial losses for the Stone & Thomas defined benefit pension plan were recorded. Additionally, the First Quarter 2002 included a non-cash pre-tax charge of $1.0 million to write-down long-term assets to their fair value. During the First Quarter 2003 merchandise inventories increased $11.0 million compared to a decrease of $1.2 million during the First Quarter 2002. Trade accounts payable during the First Quarter 2003 increased $9.5 million compared to an increase of $1.1 million during the First Quarter 2002. The First Quarter 2002 inventory and accounts payable reflect the implementation of an initiative to improve the productivity and flow of inventories, which caused the First Quarter 2002 to not reflect the seasonal increase in inventories and accounts payable that normally occur during the first quarter. Net cash used in investing activities was $3.8 million for the First Quarter 2003, compared to $2.3 million for the First Quarter 2002. The increase is due to the opening of our new DeKalb, Illinois store. For the First Quarter 2003, net cash used in financing activities was $3.1 million compared to $5.6 million for the First Quarter 2002, which represents reduced borrowing required for operating and investing activities. As of May 3, 2003, the following sources of liquidity were available to the Company: - cash and equivalents of $7.3 million. - revolving credit facility with the capacity of up to $135.0 million, with excess availability at May 3, 2003 of $66.5 million, reflecting $11.0 million in borrowings. - receivable securitization facility with the capacity of up to $135.0 million, of which $95.4 million was utilized. CRITICAL ACCOUNTING POLICIES AND ESTIMATES The Company's discussion and analysis of financial condition and results of operations are based upon the Company's consolidated financial statements, which are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Management bases its estimates and judgements on historical experience and other various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgements 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. The Company's accounting policies are more fully described in Note A to the Consolidated Financial Statements included in the Company's Annual Report on Form 10-K for the year ended February 1, 2003. Management believes the following critical accounting policies affect its more significant judgements and estimates used in the preparation of the consolidated financial statements. Revenue Recognition. Sales revenues are recognized on merchandise inventory sold upon receipt by the customer. Finance revenue is generated by outstanding customer accounts receivable and recognized as interest is accrued on these outstanding balances. Other revenue consists primarily of leased department revenue. Leased department revenue is recognized as the Company earns commission from the sale of merchandise within leased departments. 10 Comparable Store Sales. Store sales included in the comparable store sales calculation (sometimes referred to as same store sales) are sales for those stores open 13 months. A new store's sales are included in comparable store sales the first full month after the fiscal anniversary of the store's grand opening. Inventory Valuation. Merchandise inventories are valued by the retail inventory method ("RIM") applied on a last-in, first-out ("LIFO") basis and are stated at the lower of cost or market. Under the RIM, the valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost-to retail ratio to the retail value of inventories. Inherent in the RIM calculation are certain management judgements and estimates including, but not limited to, merchandise markon, markups, markdowns and shrinkage, which significantly impact the ending inventory valuation and resulting gross margins. Shrinkage is estimated as a percentage of sales for the period from the last inventory date to the end of the fiscal period, typically the second Sunday/Monday of January. Such estimates are based on experience and the most recent physical inventory results. While it is not possible to quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that minimize shrinkage experience. These estimates, coupled with the fact that the RIM is an averaging process, can produce distorted cost figures under certain circumstances. Distortions could occur primarily by applying the RIM to a group of products that is not fairly uniform in terms of its cost and selling price relationship and turnover, and applying RIM to transactions over a period of time that include different rates of gross profit, such as seasonal merchandise. To reduce the potential for such distortion in the inventory valuation, the Company's RIM utilizes over 250 departments within 18 LIFO inventory pools in which fairly homogenous classes of merchandise are grouped. Management believes that the Company's RIM provides an inventory valuation which reasonably approximates cost and results in carrying inventory at the lower of cost or market. Long-lived Assets. In evaluating the carrying value and future benefits of long-lived assets, management performs a comparison of the anticipated undiscounted future net cash flows of the related long-lived asset to their carrying amount in accordance with SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Management believes at this time that the long-lived assets carrying values and useful lives to be appropriate. Customer Accounts Receivable. Customer accounts receivable is shown net of an allowance for uncollectible accounts. The Company calculates the allowance for uncollectible accounts using a model that analyzes factors such as bankruptcy filings, delinquency rates, historical charge-off patterns, recovery rates, and other portfolio data. The Company's calculation is reviewed by management to assess whether, based on recent economic events, the allowance for uncollectible accounts is appropriate to estimate losses inherent in the portfolio. Vendor Allowances. The Company receives allowances from its vendors through a variety of programs and arrangements, including co-operative advertising and markdown reimbursement programs. Given the promotional nature of the Company's business, the allowances are generally intended to offset the Company's cost of promoting, advertising and selling the vendor's products in its stores. Co-operative advertising allowances are reported as a reduction of advertising expense in the period in which the advertising occurred. Markdown reimbursements are credited to cost of goods sold during the period in which vendor approval is received. Accordingly, a reduction or increase in vendor allowances has an inverse impact on cost of goods sold, occupancy, and buying expense and/or selling, general, administrative and other expense. Income Taxes. The Company has generated net operating loss carryforwards ("NOL's") from previous years. Generally accepted accounting principles require the Company to record a valuation allowance against the deferred tax asset associated with the NOL's if it is more likely than not that the Company will not be able to fully utilize it to offset future taxes. It is possible that the Company could be profitable in the future at levels which cause management to conclude that it is more likely than not that the Company will be able to fully realize the deferred tax assets associated with the NOL's. Subsequent revisions to the estimated net realizable value of the deferred tax asset could cause our provision for income taxes to vary significantly from period to period, although our cash tax payments would remain unaffected until the benefit of the NOL's are realized. Pension Liability. In connection with the acquisition of Stone & Thomas in 1998, the Company assumed the liability for a defined-benefit pension plan. The Company annually evaluates pension benefits for this plan, including all relevant assumptions required by accounting principles generally accepted in the United States of 11 America. Due to the technical nature of pension accounting, the Company uses an outside actuary to provide assistance in calculating the estimated future obligation associated with this plan. Since there are many estimates and assumptions involved in calculating pension benefits, differences between actual future events and prior year estimates and assumptions could result in adjustments to pension expense and the related obligation. Such assumptions include the discount rate and the expected long-term rate of return on the related plan assets. ACCOUNTING STANDARDS In April 2002, SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections, was issued. SFAS No. 145 primarily rescinds SFAS No. 4 which allowed gains or losses from the extinguishment of debt to be classified as an extraordinary item. As a result, the criteria set forth by APB Opinion No. 30 will now be used to classify those gains or losses. SFAS No. 145 becomes effective for fiscal years beginning after May 15, 2002. The Company adopted SFAS No. 145 as of February 2, 2003, the beginning of our new fiscal year. The adoption of SFAS No. 145 did not have a material impact on the financial statements. In April 2003, SFAS No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities, was issued. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts, and hedging activities accounted for under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. Primarily the changes in this statement improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. This statement is effective for all contracts entered into or modified after June 30, 2003, and all hedging relationships entered into after June 30, 2003. Management does not believe the adoption of this statement will have a material impact on the Company's financial statements. In May 2003, SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, was issued. This statement requires that certain financial instruments that under previous guidance could be accounted for as equity, should now be classified as a liabilities in the statement of financial position. This statement is effective May 31, 2003 for new or modified financial instruments, otherwise it is effective at the beginning of the first interim period beginning after June 15, 2003. Management does not believe the adoption of this statement will have a material impact on the Company's financial statements. SUBSEQUENT EVENT On May 16, 2003 the Company announced that it had recently received unsolicited expressions of interest relating to the possible acquisition of the Company. After considering these expressions of interest, the Company entered into a letter agreement with one of the interested parties. Under this letter agreement, the Company and the interested party will discuss, on an exclusive basis for a limited period of time, the possible sale of the Company. The Company has retained RBC Capital Markets to advise it in this process. There can be no assurance that these discussions will result in any transaction involving the Company. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The Company is subject to the risk of fluctuating interest rates in the normal course of business, primarily as a result of its variable rate borrowing. The Company has entered into a variable to fixed rate interest-rate swap agreement to effectively reduce its exposure to interest rate fluctuations. A hypothetical 100 basis point change in interest rates would not materially affect the Company's financial position, liquidity or results of operations. The Company does not maintain a trading account for any class of financial instrument and is not directly subject to any foreign currency exchange or commodity price risk. As a result, the Company believes that its market risk exposure is not material to the Company's financial position, liquidity or results of operations. 12 PART II. -- OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits -- See Index to Exhibits. (b) During the Quarter ended May 3, 2003, the Company did not file any Reports on Form 8-K. 13 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 ELDER-BEERMAN STORES CORP., an Ohio corporation By: /s/ EDWARD A. TOMECHKO ------------------------------------ Edward A. Tomechko Executive Vice President -- Chief Financial Officer, Treasurer and Secretary Dated: October 15, 2003 14 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 31.1 Certification of Chief Executive Officer of The Elder-Beerman Stores Corp. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer of The Elder-Beerman Stores Corp. in accordance with Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of Chief Executive Officer of The Elder-Beerman Stores Corp. in accordance with Section 906 of the Sarbannes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer of The Elder-Beerman Stores Corp. in accordance with Section 906 of the Sarbannes-Oxley Act of 2002.