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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For quarterly period ended August 02, 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 X No ___
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 August 30, 2003, 11,585,457 shares of the issuer's common stock,
without par value, were outstanding.
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THE ELDER-BEERMAN STORES CORP.
INDEX
PART I. FINANCIAL INFORMATION PAGE
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of August 2, 2003, August 3, 2002 and
February 1, 2003 .................................................................................1
Condensed Consolidated Statements of Operations for the 13 weeks ended August 2, 2003 and
August 3, 2002 ...................................................................................2
Condensed Consolidated Statements of Operations for the 26 weeks ended August 2, 2003 and
August 3, 2002 ...................................................................................3
Condensed Consolidated Statements of Cash Flows for the 26 weeks ended August 2, 2003 and
August 3, 2002....................................................................................4
Notes to Condensed Consolidated Financial Statements..............................................5
ITEM 2. Management's Discussion and Analysis of Consolidated Financial Condition
and Results of Operations.........................................................................9
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.......................................15
ITEM 4. Controls And Procedures..........................................................................15
PART II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders..............................................16
ITEM 6. Exhibits and Reports on Form 8-K.................................................................16
SIGNATURES....................................................................................................17
EXHIBIT INDEX.................................................................................................18
PART I. - FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS.
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Dollars in thousands)
AUG. 2, 2003 AUG. 3, 2002 FEB. 1, 2003
------------ ------------ ------------
ASSETS
Current assets:
Cash and equivalents $ 7,325 $ 6,881 $ 9,735
Customer accounts receivable (less allowance for doubtful accounts:
August 2, 2003 - $2,438; August 3, 2002 - $2,250; February 1, 2003 - $3,298) 113,577 117,138 127,786
Merchandise inventories 144,286 146,799 138,748
Other current assets 17,082 20,073 17,162
--------- --------- ---------
Total current assets 282,270 290,891 293,431
--------- --------- ---------
Property, fixtures and equipment, less accumulated depreciation
and amortization 88,027 96,237 90,181
Other Assets 25,834 27,309 27,436
--------- --------- ---------
Total assets $ 396,131 $ 414,437 $ 411,048
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations $ 3,896 $ 7,311 $ 5,456
Accounts payable 51,280 39,627 40,607
Other accrued liabilities 25,700 22,693 31,918
--------- --------- ---------
Total current liabilities 80,876 69,631 77,981
--------- --------- ---------
Long-term obligations, less current portion 102,978 132,120 115,127
Deferred items 8,568 13,502 11,214
Shareholders' equity:
Common stock, no par, 11,585,457 shares at August 2, 2003, 11,528,587 shares at
August 3, 2002, and 11,536,460 shares at February 1, 2003 issued and outstanding 243,444 243,382 243,419
Unearned compensation - restricted stock (92) (258) (197)
Deficit (38,654) (40,208) (34,043)
Other comprehensive loss (989) (3,732) (2,453)
--------- --------- ---------
Total shareholders' equity 203,709 199,184 206,726
--------- --------- ---------
Total liabilities and shareholders' equity $ 396,131 $ 414,437 $ 411,048
========= ========= =========
See notes to condensed consolidated financial statements
1
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
13-WEEKS ENDED 13-WEEKS ENDED
AUG. 2, 2003 AUG. 3, 2002
-------------- --------------
Revenues:
Net sales $ 132,558 $ 133,578
Financing 6,587 6,629
Other 624 697
------------ ------------
Total revenues 139,769 140,904
------------ ------------
Costs and expenses:
Cost of merchandise sold, occupancy, and buying expenses 97,385 95,938
Selling, general, administrative, and other expenses 38,590 39,909
Depreciation and amortization 4,935 5,006
Interest expense 2,197 2,768
------------ ------------
Total costs and expenses 143,107 143,621
------------ ------------
Loss before income tax benefit (3,338) (2,717)
Income tax benefit (1,202) (978)
------------ ------------
Net loss $ (2,136) $ (1,739)
============ ============
Net loss per common share - basic and diluted $ (0.19) $ (0.15)
Weighted average number of shares outstanding 11,415,401 11,378,922
See notes to condensed consolidated financial statements
2
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
(Dollars in thousands, except per share amounts)
26-WEEKS ENDED 26-WEEKS ENDED
AUG. 2, 2003 AUG. 3, 2002
-------------- --------------
Revenues:
Net sales $ 263,610 $ 274,744
Financing 13,449 13,787
Other 1,323 1,385
------------ ------------
Total revenues 278,382 289,916
------------ ------------
Costs and expenses:
Cost of merchandise sold, occupancy, and buying expenses 194,525 201,083
Selling, general, administrative, and other expenses 76,550 81,404
Depreciation and amortization 9,852 9,977
Interest expense 4,660 5,608
------------ ------------
Total costs and expenses 285,587 298,072
------------ ------------
Loss before income tax benefit (7,205) (8,156)
Income tax benefit (2,594) (2,936)
------------ ------------
Loss before cumulative effect of changes in accounting principles (4,611) (5,220)
Cumulative effect of changes in accounting principles -- (15,118)
------------ ------------
Net loss $ (4,611) $ (20,338)
============ ============
Net loss per common share - basic and diluted
Loss before cumulative effect of changes in accounting principles $ (0.40) $ (0.46)
Cumulative effect of changes in accounting principles -- (1.33)
------------ ------------
Net loss $ (0.40) $ (1.79)
Weighted average number of shares outstanding 11,411,101 11,374,378
See notes to condensed consolidated financial statements
3
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
Condensed Consolidated Statements Of Cash Flows
(Dollars in thousands)
26-WEEKS ENDED 26-WEEKS ENDED
AUGUST 2, 2003 AUG. 3, 2002
-------------- --------------
Cash flows from operating activities: $ 18,773 $ 21,098
Cash flows from investing activities:
Capital expenditures, net (7,481) (4,604)
Proceeds from the disposal of investments -- 326
-------- --------
Net cash used in investing activities (7,481) (4,278)
Cash flows from financing activities:
Net payments under asset securitization agreement (20,433) (8,133)
Net borrowings (payments) under revolving lines of credit 9,531 (6,465)
Payments on long-term obligations (2,807) (3,792)
Issuance of an installment note -- 3,464
Debt acquisition payments -- (2,098)
Other 7 (57)
-------- --------
Net cash used in financing activities (13,702) (17,081)
-------- --------
Decrease in cash and equivalents (2,410) (261)
Cash and equivalents - beginning of period 9,735 7,142
-------- --------
Cash and equivalents - end of period $ 7,325 $ 6,881
======== ========
Supplemental cash flow information:
Interest paid $ 4,703 $ 6,019
Supplemental non-cash investing and financing activities:
Capital leases 337
See notes to condensed consolidated financial statements.
4
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 second quarter of 2002
financial statements to conform to the second 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 August 2, 2003 and August 3, 2002 were 776,447 and
117,129, respectively. Dilutive potential common shares for the 26 weeks ended
August 2, 2003 and August 3, 2002 were 483,113 and 86,692, respectively. There
was no dilutive effect of potential common shares for the periods presented.
3. STOCK-BASED COMPENSATION
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
half of 2003 and the first half of 2002. The following table illustrates the
effect on net loss and loss per share if the Company had applied the fair value
recognition provisions of SFAS No. 123, Accounting for Stock-Based Compensation,
to stock-based employee compensation (dollars in thousands, except per share
data):
5
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements - Continued
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 2, 2003 AUGUST 3, 2002 AUGUST 2, 2003 AUGUST 3, 2002
-------------- -------------- -------------- --------------
Net loss as reported $(2,136) $(1,739) $(4,611) $(20,338)
Deduct: Additional stock-based
compensation under fair value
based method, net of tax (107) (137) (237) (274)
------- ------- ------- --------
Pro forma net loss $(2,243) $(1,876) $(4,848) $(20,612)
======= ======= ======= ========
Loss per common share - diluted:
As reported $ (0.19) $ (0.15) $ (0.40) $ (1.79)
Pro forma $ (0.20) $ (0.16) $ (0.42) $ (1.81)
4. SHAREHOLDERS' EQUITY
The comprehensive loss for the 13 weeks ended August 2, 2003 and August 3,
2002, was $1.4 million and $2.0 million, respectively. The comprehensive loss
for the 26 weeks ended August 2, 2003 and August 3, 2002, was $3.1 million and
$20.2 million, respectively. Following is a reconciliation between net loss and
comprehensive loss (dollars in thousands):
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 2, 2003 AUGUST 3, 2002 AUGUST 2, 2003 AUGUST 3, 2002
-------------- -------------- -------------- --------------
Net loss $(2,136) $(1,739) $(4,611) $(20,338)
Net unrealized gain (loss) on cash
flow hedges, net of tax 695 (286) 1,464 179
------- ------- ------- --------
Comprehensive loss $(1,441) $(2,025) $(3,147) $(20,159)
======= ======= ======= ========
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 $1.5
million liability at August 2, 2003, a $5.7 million liability at August 3, 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 26 week period ended
August 2, 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.
6
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 liability 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 26 weeks ended August 2, 2003 (dollars in thousands):
Severance and other costs:
Balance as of February 1, 2003 ... $ 179
Charge recorded .................. 154
Used for intended purpose ........ (333)
-------
Balance as of August 2, 2003 ..... $ 0
=======
Executive retirement and other costs:
Balance as of February 1, 2003 ... $ 1,431
Used for intended purpose ........ (372)
-------
Balance as of August 2, 2003 ..... $ 1,059
=======
9. RECENT EVENTS
On September 15, 2003, the Company entered into an Agreement and Plan of
Merger with The Bon-Ton Stores, Inc. ("Bon-Ton") and its wholly owned subsidiary
Elder Acquisition Corp. ("B-T Sub"). The merger agreement provides for the sale
of the Company to Bon-Ton and that shareholders of the Company will receive
$8.00 per share in cash for their common shares.
Pursuant to the terms of the merger agreement with Bon-Ton, Bon-Ton will,
on or before September 23, 2003, commence a tender offer to purchase all of the
outstanding Company shares, followed by a second step merger of Elder-Beerman
with B-T Sub. Elder-Beerman will be the surviving corporation in the merger.
Completion of the tender offer is conditioned, among other things, upon: (i) at
least two-thirds of Elder-Beerman's outstanding common shares, on a fully
diluted basis, being tendered and not withdrawn prior to the expiration date of
the offer, (ii) the proceeds of the financings under Bon-Ton's commitment
letters being available to Bon-Ton and (iii) satisfaction of applicable
regulatory requirements.
On June 25, 2003, Elder-Beerman entered into a merger agreement with
Wright Holdings, Inc. In connection Elder-Beerman's execution of its merger
agreement with Bon-Ton, the Company terminated its merger agreement with Wright
Holdings, Inc.
7
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 TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 2, 2003 AUGUST 3, 2002 AUGUST 2, 2003 AUGUST 3, 2002
-------------- -------------- -------------- --------------
Department Store
Revenues .................. $ 133,182 $ 134,275 $ 264,933 $ 276,129
Operating loss ............ (4,091) (3,923) (8,273) (8,143)
Finance Operations
Revenues .................. $ 6,587 $ 6,629 $ 13,449 $ 13,787
Operating profit .......... 4,040 4,054 8,336 8,611
Segment Subtotal
Revenues .................. $ 139,769 $ 140,904 $ 278,382 $ 289,916
Operating profit (loss) (1) (51) 131 63 468
(1) Segment operating profit (loss) is reconciled to loss before income
tax benefit as follows:
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
AUGUST 2, 2003 AUGUST 3, 2002 AUGUST 2, 2003 AUGUST 3, 2002
-------------- -------------- -------------- --------------
Segment operating profit (loss) ...... $ (51) $ 131 $ 63 $ 468
Store closing costs & other costs (5) (116) (1,063) (2,152)
Asset impairment ................ -- -- -- (1,037)
Interest expense ................ (2,197) (2,768) (4,660) (5,608)
Merger costs .................... (686) -- (686) --
Other ........................... (399) 36 (859) 173
------- ------- ------- -------
$(3,338) $(2,717) $(7,205) $(8,156)
======= ======= ======= =======
8
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 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 August 2, 2003 ("Second
Quarter 2003") and August 3, 2002 ("Second Quarter 2002"), and the 26 week
periods ended August 2, 2003 ("First Half 2003") and August 3, 2002 ("First Half
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
Second Quarter 2003 Compared to Second Quarter 2002
Net sales, total sales less customer returns, for the Second Quarter 2003
decreased by 0.8% to $132.6 million from $133.6 million for the Second Quarter
2002. Comparable store sales, sales for stores opened for 13 months, increased
by 1.6%. Furniture and domestics, within the Home Store merchandise category,
had net sales increases of $1.2 million (18.4%) and $1.4 million (9.2%),
respectively. Women's moderate and special size sportswear, within the Women's
Ready To Wear & Intimate merchandise category, had net sales increases of 2.8%
and 5.1%, respectively. The furniture increase was primarily due to the increase
in mattress sales as we added mattress shops in five stores. Additionally, the
home store sales in July 2003 reflect the movement of the beginning of a sales
event into the last week of July from the month of August.
NET SALES BY DEPARTMENT
Second Quarter 2003 Second Quarter 2002
------------------- -------------------
Merchandise Category (Dollars in thousands)
Women's Ready to Wear & Intimate $ 48,426 36.5% $ 48,886 36.6%
Accessories, Shoes & Cosmetics . 31,450 23.7% 32,640 24.4%
Men's & Children's ............. 24,464 18.5% 26,069 19.5%
Home Store ..................... 28,218 21.3% 25,983 19.5%
-------- -------- -------- --------
Net Sales ...................... $132,558 100.0% $133,578 100.0%
======== ======== ======== ========
Financing revenue from the Company's proprietary credit card for the
Second Quarter 2003 and the Second Quarter 2002 remained flat at $6.6 million.
While net sales were essentially flat, the penetration rate, the percentage of
net sales under the Company's proprietary credit card, increased to 50.4% for
the Second Quarter 2003 versus 47.6% for the Second Quarter 2002. However, this
improvement did not generate additional finance revenue
9
because charge customers continued to pay their Elder-Beerman charge account
balances down at a faster rate than the previous year.
Other revenue, which is primarily from leased departments, for the Second
Quarter 2003 decreased by 10.5% to $0.6 million from $0.7 million for the Second
Quarter 2002. The fine jewelry leased department had a 19.7% reduction in sales
volume, which resulted in a corresponding reduction of our commissions.
Cost of merchandise sold, occupancy, and buying expenses increased to
73.5% of net sales for the Second Quarter 2003 from 71.8% of net sales for the
Second Quarter 2002. During the Second Quarter 2003 merchandise gross margins
decreased 1.8% versus the Second Quarter 2002 due to an increase in markdowns
required to sell seasonal summer merchandise. During the Second Quarter 2002
income of $0.2 million was recorded to adjust the charge recorded during the
First Quarter 2002 related to the closing of the Company's Downtown Dayton, Ohio
store.
Second Quarter 2003 Second Quarter 2002
------------------- -------------------
(Dollars in thousands)
Net Sales .................... $132,558 100.0% $133,578 100.0%
Gross Margin ................. 46,775 35.3% 49,525 37.1%
-------- -------- -------- --------
Cost of Merchandise Sold ..... 85,783 64.7% 84,053 62.9%
Buying and Occupancy Expenses 11,602 8.8% 11,885 8.9%
-------- -------- -------- --------
Cost of Goods Sold, Occupancy,
and Buying Expenses ..... $ 97,385 73.5% $ 95,938 71.8%
======== ======== ======== ========
Selling, general, administrative, and other expenses decreased to 29.1% of
net sales for the Second Quarter 2003 from 29.9% for the Second Quarter 2002.
The reduction in expenses is a result of implementation of a store level expense
initiative to combine our store's gift wrap and selling service desks. It is
anticipated that this initiative that was started in early 2003 will continue to
provide savings throughout fiscal 2003. During the Second Quarter 2003 a charge
was recorded for $0.7 million of expenses incurred in connection with the
potential acquisition of the Company. Second Quarter 2002 included a charge of
$0.4 million in severance costs, which was partially offset by $0.2 million in
miscellaneous income from a sale of noncore assets.
Depreciation and amortization expense decreased to $4.9 million for the
Second Quarter 2003 compared to $5.0 million for the Second Quarter 2002.
Interest expense decreased to $2.2 million for the Second Quarter 2003
from $2.8 million for the Second Quarter 2002 reflecting lower average
borrowings compared to last year.
An income tax benefit was recorded in the First Quarter 2003 and the First
Quarter 2002 at a rate of 36.0%.
First Half 2003 Compared to First Half 2002
Net sales, total sales less customer returns, for the First Half 2003
decreased by 4.1% to $263.6 million from $274.7 million for the First Half 2002.
Comparable store sales, sales for stores opened for 13 months, decreased by
3.2%. Furniture, within the Home Store merchandise category, had a net sales
increase of $1.4 million (8.7%). Women's accessories and cosmetics, within the
Accessories, Shoes, & Cosmetics merchandise category, had net sales increases of
$0.3 million (1.7%) and $0.3 million (1.0%), respectively. In the first quarter
of 2003 comparable sales decreased 7.7%. Our First Quarter sales performance was
significantly impacted by severe winter weather in February. Second Quarter 2003
sales performance improved to a comparable store sales increase of 1.6%. The
Company recorded comparable store sales increases for each month of the second
quarter. The Home Store benefited from the addition of an event in the month of
June, as well as the movement of the beginning of a sales event into the last
week of July 2003 from the month of August.
10
NET SALES BY DEPARTMENT
First Half 2003 First Half 2002
--------------- ---------------
Merchandise Category (Dollars in thousands)
Women's Ready to Wear & Intimate $ 94,416 35.8% $ 98,146 35.7%
Accessories, Shoes & Cosmetics . 66,701 25.3% 68,599 25.0%
Men's & Children's ............. 48,400 18.4% 53,363 19.4%
Home Store ..................... 54,093 20.5% 54,636 19.9%
-------- -------- -------- --------
Net Sales ...................... $263,610 100.0% $274,744 100.0%
======== ======== ======== ========
Financing revenue from the Company's proprietary credit card for the First
Half 2003 decreased by 2.5% to $13.4 million from $13.8 million for the First
Half 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 sold
through the Company's proprietary credit card, to 49.4% for the First Half 2003
versus 46.5% for the First Half 2002. Charge customers paid their Elder-Beerman
charge account balances down faster than in the previous year.
Other revenue, which is primarily from leased departments, for the First
Half 2003 decreased by 4.5% to $1.3 million from $1.4 million for the First Half
2002. The reduction in sales in the fine jewelry leased department resulted in a
corresponding reduction of our commission for the First Half 2003.
Cost of merchandise sold, occupancy, and buying expenses increased to
73.8% of net sales for the First Half 2003 from 73.2% of net sales for the First
Half 2002. During the First Half 2003 merchandise gross margins decreased 0.4%
versus the First Half 2002 due to an increase in markdowns to clear seasonal
merchandise. The First Half 2003 included a charge of $0.9 million related to
the closing of the Forest Fair Mall store in Cincinnati, Ohio. During the First
Half 2002 a charge of $0.8 million related to the closing of the Company's
Downtown Dayton, Ohio store was recorded.
Second Quarter 2003 Second Quarter 2002
------------------- -------------------
(Dollars in thousands)
Net Sales .................... $263,610 100.0% $274,744 100.0%
Gross Margin ................. 93,153 35.3% 98,218 35.7%
-------- -------- -------- --------
Cost of Merchandise Sold ..... 170,457 64.7% 176,526 64.3%
Buying and Occupancy Expenses 23,128 8.8% 23,780 8.7%
Store Closing Charge ......... 940 0.3% 777 0.2%
-------- -------- -------- --------
Cost of Goods Sold, Occupancy,
and Buying Expenses ..... $194,525 73.8% $201,083 73.2%
======== ======== ======== ========
Selling, general, administrative, and other expenses decreased to 29.0% of
net sales for the First Half 2003 from 29.6% for the First Half 2002. The
reduction in the expenses is primarily a result of implementation of an expense
initiative combining our store's gift wrap and selling service desks. It is
anticipated that this initiative that was started in early 2003 will continue to
provide savings throughout fiscal 2003. During the First Half 2003 a charge was
recorded for $0.7 million for expenses incurred by the Company relating to the
potential acquisition of the Company. The First Half 2002 included: (1) $0.3
million in charges to reflect the write-down of amounts and expenses related to
the closing of the downtown Dayton, OH store; (2) $1.1 million recorded for
severance costs incurred due to the implementation of expense reduction
initiatives, and (3) $1.0 million in charges to write-down long-term assets to
their fair value.
Depreciation and amortization expense decreased to $9.9 million for the
First Half 2003 compared to $10.0 million for the First Half 2002.
Interest expense decreased to $4.7 million for the First Half 2003 from
$5.6 million for the First Half 2002 reflecting lower average borrowings.
An income tax benefit was recorded in the First Half 2003 and the First
Half 2002 at a rate of 36.0%.
11
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 and to finance working capital and
capital expenditures.
The Company believes that it will generate sufficient cash flow from
operations, as supplemented seasonally by its available borrowings under the
Credit Facilities, to fund debt service and to 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.
Net cash provided by operating activities was $18.8 million for the First
Half 2003, compared to $21.1 million for the First Half 2002. A net loss of $4.6
million was recorded in the First Half 2003. A net loss of $20.3 million was
recorded in the First Half 2002. During the First Half 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 Half
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 Half 2003 merchandise inventories
increased $5.5 million compared to a decrease of $5.0 million during the First
Half 2002. Trade accounts payable during the First Half 2003 increased $10.7
million compared to an increase of $2.0 million during the First Half 2002. The
First Half 2002 inventory and accounts payable reflect a supply chain initiative
to flow inventory receipts closer to customer demand (i.e. sales expectations).
Net cash used in investing activities was $7.5 million for the First Half
2003, compared to $4.3 million for the First Half 2002. The increase in capital
expenditures is primarily due to the opening of our new DeKalb, Illinois store
and an investment related to the implementation of an expense reduction
initiative to combine our stores' gift wrap and selling service desks.
For the First Half 2003, net cash used in financing activities was $13.7
million compared to $17.1 million for the First Half 2002, which represents
reduced borrowing required for operating and investing activities.
As of August 2, 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 of $61.1 million, reflecting
$15.5 million in borrowings.
- Receivable securitization facility with the capacity of up to
$135.0 million, of which $81.7 million was utilized.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of financial condition and results
of operations is 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 judgments on historical
experience and other various
12
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.
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 judgments 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 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.
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 judgments 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, typically the second Sunday/Monday of January, to the end of the
fiscal period. 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.
13
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 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 liability 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.
RECENT EVENTS
On September 15, 2003, the Company entered an into Agreement and Plan of
Merger with The Bon-Ton Stores, Inc. ("Bon-Ton") and its wholly owned subsidiary
Elder Acquisition Corp. ("B-T Sub"). The merger agreement provides for the sale
of the Company to Bon-Ton and that shareholders of the Company will receive
$8.00 per share in cash for their common shares.
Pursuant to the terms of the merger agreement with Bon-Ton, Bon-Ton will,
on or before September 23, 2003, commence a tender offer to purchase all of the
outstanding Company shares, followed by a second step merger of Elder-Beerman
with B-T Sub. Elder-Beerman will be the surviving corporation in the merger.
Completion of the tender offer is conditioned, among other things, upon: (i) at
least two-thirds of Elder-Beerman's outstanding common shares, on a fully
diluted basis, being tendered and not withdrawn prior to the expiration date of
the offer, (ii) the proceeds of the financings under Bon-Ton's commitment
letters being available to Bon-Ton and (iii) satisfaction of applicable
regulatory requirements.
On June 25, 2003, Elder-Beerman entered into a merger agreement with
Wright Holdings, Inc. In connection Elder-Beerman's execution of its merger
agreement with Bon-Ton, the Company terminated its merger agreement with Wright
Holdings, Inc.
14
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.
ITEM 4. CONTROLS AND PROCEDURES
Based on a recent evaluation, as of the end of the period covered by this
Quarterly Report on Form 10-Q, the Company's Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures (as defined in Rule 13a-14 and 15d-14 issued under the Securities
Exchange Act of 1934) are effective in timely alerting them to material
information relating to the Company and its consolidated subsidiaries required
to be included in periodic reports filed under such Act.
There were no changes in the Company's internal controls over financial
reporting that occurred during the Company's last fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
15
PART II. - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Elder-Beerman held its annual meeting of shareholders on June 5, 2002. The
Board of Directors recommended that the shareholders reelect all ten directors
for terms that will expire on the date of the annual meeting of shareholders in
2004. There were 11,581,064 common shares entitled to vote at the meeting. A
total of 9,454,134 shares or 81.6% of shares were represented at the meeting.
FOR WITHHELD
--- --------
Byron L. Bergren 9,410,250 43,884
Mark F.C. Berner 9,400,456 53,678
Dennis S. Bookshester 9,298,149 155,985
Eugene I. Davis 9,248,814 205,320
Charles Macaluso 9,403,763 50,371
Steven C. Mason 9,395,429 58,705
Thomas J. Noonan 9,262,927 191,207
Laura H. Pomerantz 9,277,136 176,998
Jack A. Staph 9,307,363 146,771
Charles H. Turner 9,411,013 43,121
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits. See Index to Exhibits.
3(a) During the quarter ended August 2, 2003, the Company filed with the
Securities and Exchange Commission, Reports on Form 8-K on May 14,
19, and 22, 2003; June 4 and 25, 2003; and July 10 and 30, 2003.
16
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
Dated: September 15, 2003 By: /s/ Edward A. Tomechko
--------------------------- -------------------------------------
Edward A. Tomechko
Executive Vice President --
Chief Financial Officer, Treasurer
and Secretary
17
INDEX TO EXHIBITS
(2) PLAN OF ACQUISITION, REORGANIZATION, ARRANGEMENT, LIQUIDATION OR
SUCCESSION.
*2.1 Agreement and Plan of Merger among The Elder-Beerman Stores Corp., Wright
Holdings, Inc., and Wright Sub, Inc. dated June 25, 2003 is incorporated by
reference from the Company Report on Form 8-K filed with the Securities and
Exchange Commission on June 26, 2003.
*2.2 Amendment No. 1, dated September 9, 2003, to the Agreement and Plan of
Merger among The Elder-Beerman Stores Corp., Wright Holdings, Inc., and Wright
Sub, Inc. dated June 25, 2003 is incorporated by reference from the Company
Report on Form 8-K filed with the Securities and Exchange Commission on
September 10, 2003.
*2.3 Amendment No. 2, dated September 12, 2003, to the Agreement and Plan of
Merger among The Elder-Beerman Stores Corp., Wright Holdings, Inc., and Wright
Sub, Inc. dated June 25, 2003 is incorporated by reference from the Company
Report on Form 8-K filed with the Securities and Exchange Commission on
September 15, 2003.
(4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES
**4.1 Amendment No. 2 dated June 25, 2003, to the Rights Agreement, between The
Elder-Beerman Stores Corp. and Norwest Bank Minnesota, N.A., as Rights Agent.
(31) RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
**31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15(d)-14(a).
**31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15(d)-14(a).
(32) SECTION 1350 CERTIFICATIONS
** 32.1 +Certification of Chief Executive Officer Pursuant to Section 1350.
**32.2 +Certification of Chief Financial Officer Pursuant to Section 1350.
- ---------------
"*" Incorporated by reference from another filing with the Securities and
Exchange Commission.
"**" Filed herewith
"+" A signed original of this written statement required by Section 1350 has
been provided to The Elder-Beerman Stores Corp. and will be retained by the
company and furnished to the Securities and Exchange Commission or its Staff
upon request.
18