10-Q 1 l03087ae10vq.txt THE ELDER-BEERMAN STORES CORPORATION | FORM 10-Q ================================================================================ 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. ================================================================================ 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)

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)

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)

See notes to condensed consolidated financial statements 3 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES Condensed Consolidated Statements Of Cash Flows (Dollars in thousands)

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

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):

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):

(1) Segment operating profit (loss) is reconciled to loss before income tax benefit as follows:

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

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.

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

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.

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.

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

ELDER BEERMAN STORES CORP 10-Q