1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 October 28, 2000 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 (I.R.S. employer of incorporation or identification no.) organization) 3155 EL-BEE ROAD, DAYTON, OHIO 45439 (Address of principal (Zip Code) executive offices) (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 [ ] 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 December 11, 2000, 11,437,326 shares of the issuer's common stock, without par value, were outstanding. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE ELDER-BEERMAN STORES CORP. INDEX PAGE ---- PART I FINANCIAL INFORMATION ITEM 1. Financial Statements Condensed Consolidated Balance Sheets as of October 28, 2000 (Unaudited) and as of January 29, 2000...................... 1 Condensed Consolidated Statements of Operations for the 13 weeks ended October 28, 2000 and October 30, 1999 (Unaudited)................................................. 2 Condensed Consolidated Statements of Operations for the 39 weeks ended October 28, 2000 and October 30, 1999 (Unaudited)................................................. 3 Condensed Consolidated Statements of Cash Flows for the 39 weeks ended October 28, 2000 and October 30, 1999 (Unaudited)................................................. 4 Notes to Condensed Consolidated Financial Statements (Unaudited)................................................. 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........................................................ 11 PART II OTHER INFORMATION ITEM 1. Legal Proceedings........................................... 12 ITEM 2. Changes in Securities and Use of Proceeds................... 12 ITEM 3. Defaults Upon Senior Securities............................. 12 ITEM 4. Submission of Matters to a Vote of Security Holders......... 12 ITEM 5. Other Information........................................... 14 ITEM 6. Exhibits and Reports on Form 8-K............................ 14 SIGNATURES............................................................. 15 EXHIBIT INDEX.......................................................... 16 3 PART I. -- FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS. THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS) (UNAUDITED) OCT. 28, 2000 JAN. 29, 2000 ------------- ------------- ASSETS Current assets: Cash and equivalents...................................... $ 8,296 $ 8,276 Customer accounts receivable (less allowance for doubtful accounts: October 28, 2000 -- $1,753; January 29, 2000 -- $2,048)........................................ 129,999 140,356 Merchandise inventories................................... 214,431 165,451 Other current assets...................................... 21,208 20,250 -------- -------- Total current assets.............................. 373,934 334,333 Property, fixtures and equipment, less accumulated depreciation and amortization............................. 82,801 74,932 Other assets................................................ 46,628 45,630 -------- -------- Total assets...................................... $503,363 $454,895 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term obligations.................. $ 1,325 $131,086 Accounts payable.......................................... 61,052 36,556 Other accrued liabilities................................. 17,200 25,892 -------- -------- Total current liabilities......................... 79,577 193,534 Long-term obligations, less current portion................. 201,289 6,130 Deferred items.............................................. 8,697 9,054 -------- -------- Total liabilities................................. 289,563 208,718 Shareholders' equity: Common stock, no par, 11,434,726 shares at October 28, 2000 and 14,923,846 at January 29, 2000 issued and outstanding............................................ 242,013 260,171 Unearned compensation -- restricted stock, net............ (760) (1,779) Deficit................................................... (27,453) (12,215) -------- -------- Total shareholders' equity........................ 213,800 246,177 -------- -------- Total liabilities and shareholders' equity........ $503,363 $454,895 ======== ======== See notes to condensed consolidated financial statements 1 4 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 13-WEEKS ENDED 13-WEEKS ENDED OCT. 28, 2000 OCT. 30, 1999 -------------- -------------- Revenues: Net sales................................................. $ 154,647 $ 149,162 Financing................................................. 6,769 6,178 Leased departments........................................ 513 575 ----------- ----------- Total revenues.................................... 161,929 155,915 Costs & expenses: Cost of merchandise sold, occupancy and buying expenses... 122,357 105,951 Selling, general and administrative expenses.............. 45,817 44,935 Provision for doubtful accounts........................... 1,078 828 Interest expense.......................................... 3,591 3,127 Other expense (income).................................... 1,889 (62) ----------- ----------- Total costs & expenses............................ 174,732 154,779 Income (loss) from continuing operations before income tax expense (benefit)......................................... (12,803) 1,136 Income tax expense (benefit)................................ (4,609) 432 ----------- ----------- Income (loss) from continuing operations.................... (8,194) 704 Discontinued operations..................................... -- (1,442) ----------- ----------- Net loss.................................................... $ (8,194) $ (738) =========== =========== Basic net income (loss) per common share Continuing operations..................................... $ (0.58) $ 0.05 Discontinued operations................................... -- (0.10) ----------- ----------- Net loss.................................................... $ (0.58) $ (0.05) =========== =========== Weighted average number of shares outstanding............... 14,026,403 15,345,183 Diluted net income (loss) per common share Continuing operations..................................... $ (0.58) $ 0.05 Discontinued operations................................... -- (0.10) ----------- ----------- Net loss.................................................... $ (0.58) $ (0.05) =========== =========== Diluted weighted average number of shares outstanding....... 14,026,403 15,415,147 See notes to condensed consolidated financial statements 2 5 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED) 39-WEEKS ENDED 39-WEEKS ENDED OCT. 28, 2000 OCT. 30, 1999 -------------- -------------- Revenues: Net sales................................................. $ 427,587 $ 418,022 Financing................................................. 20,235 19,099 Leased departments........................................ 1,640 1,759 ----------- ----------- Total revenues.................................... 449,462 438,880 Costs & expenses: Cost of merchandise sold, occupancy and buying expenses... 323,417 300,290 Selling, general and administrative expenses.............. 130,357 128,368 Provision for doubtful accounts........................... 3,807 2,687 Interest expense.......................................... 9,611 8,440 Other expense (income).................................... 6,079 (284) ----------- ----------- Total costs & expenses............................ 473,271 439,501 Loss from continuing operations before income tax benefit... (23,809) (621) Income tax benefit.......................................... (8,571) (236) ----------- ----------- Loss from continuing operations............................. (15,238) (385) Discontinued operations..................................... -- (1,807) ----------- ----------- Net loss.................................................... $ (15,238) $ (2,192) =========== =========== Basic and diluted net loss per common share Continuing operations..................................... $ (1.05) $ (0.02) Discontinued operations................................... -- (0.12) ----------- ----------- Net loss.................................................... $ (1.05) $ (0.14) =========== =========== Weighted average number of shares outstanding............... 14,445,854 15,618,170 See notes to condensed consolidated financial statements 3 6 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) (UNAUDITED) 39-WEEKS ENDED 39-WEEKS ENDED OCT. 28, 2000 OCT. 30, 1999 -------------- -------------- Cash flows from operating activities: Net loss.................................................. $(15,238) $(2,192) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization.......................... 11,406 10,966 Loss on discontinued operations........................ -- 1,807 Loss on asset impairment............................... 504 -- Changes in assets and liabilities, excluding discontinued operations.............................. (23,339) (45,944) Cash used in discontinued operations...................... -- (1,518) -------- ------- Net cash used in operating activities............. (26,667) (36,881) Cash flows from investing activities: Capital expenditures, net................................. (15,941) (11,707) Proceeds from the sale of fixed assets.................... 10 403 -------- ------- Net cash used in investing activities............. (15,931) (11,304) Cash flows from financing activities: Net borrowings (payments) under asset securitization agreement.............................................. (24,238) 29 Net borrowings under revolving lines of credit............ 88,096 58,270 Payments on long-term obligations......................... (1,469) (812) Payments to acquire common stock.......................... (17,674) (7,345) Other..................................................... (2,097) (223) -------- ------- Net cash provided by financing activities............ 42,618 49,919 Increase (decrease) in cash and equivalents................. 20 1,734 Cash and equivalents -- beginning of period................. 8,276 8,146 -------- ------- Cash and equivalents -- end of period....................... $ 8,296 $ 9,880 ======== ======= Supplemental cash flow information: Interest paid............................................. $ 8,667 $ 7,881 Supplemental non-cash investing and financing activities: Capital leases............................................ 3,009 -- See notes to condensed consolidated financial statements 4 7 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 January 29, 2000. 2. PER SHARE AMOUNTS Basic income (loss) per common share is computed by dividing net income (loss) by the weighted-average number of common shares outstanding. Stock options, restricted shares, deferred shares, and warrants outstanding represent potential common shares and are included in computing diluted income per share when the effect would be dilutive. A reconciliation of the weighted average shares used in the basic and diluted earnings per share calculation is as follows: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------------------ ------------------------------------ OCTOBER 28, 2000 OCTOBER 30, 1999 OCTOBER 28, 2000 OCTOBER 30, 1999 ---------------- ---------------- ---------------- ---------------- Weighted average common shares outstanding - basic.................... 14,026,403 15,345,183 14,445,854 15,618,170 Dilutive potential common shares: Warrants................. Stock options............ 944 Restricted shares........ 6,537 Deferred shares.......... 62,483 ---------- ---------- ---------- ---------- Adjusted weighted average shares - diluted......... 14,026,403 15,415,147 14,445,854 15,618,170 3. STOCK-BASED COMPENSATION During the 13 week period ended October 28, 2000 ("Third Quarter 2000"), a total of 21,000 stock options were granted to nonemployee directors at fair market value under the Company's Equity and Performance Incentive Plan (the "Plan"). These options granted have a maximum period of ten years and vest over 3 years. Also, there were 6,099 restricted shares awarded to nonemployee directors under the Plan. The fair market value of the restricted shares is being amortized over the 3-year vesting period. Nonemployee directors may take all or a portion of their annual base retainer fee in the form of a discounted stock option. During the Third Quarter 2000 a total of 18,416 and 845 stock options, with exercise prices of $3.258 and $3.610 respectively, were granted under this plan. These options vest on February 5, 2001. 5 8 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (UNAUDITED) 4. DEBT On May 19, 2000 the Company entered into a three-year Revolving Credit Facility ("Credit Facility"), and through its financing subsidiary, a three-year variable rate securitization loan agreement ("Securitization Facility") with a commercial bank that expires May 18, 2003. Outstanding borrowings of $194.0 million on the Credit and Securitization Facilities due May 2003 are classified as long-term liabilities. The Credit Facility provides for borrowing and letters of credit in an aggregate amount up to $150 million subject to a borrowing base formula based primarily on merchandise inventories. There is a $40 million sublimit for letters of credit. The Company has the option to finance borrowings at either Prime, plus 25 basis points or LIBOR, plus 175 basis points through January 19, 2001 after which borrowing rates are subject to a leverage ratio. The Securitization Facility is a revolving agreement whereby the Company can borrow up to $150 million. The Company's customer accounts receivables are pledged as collateral under the Securitization Facility. The borrowings under this facility are subject to a borrowing-based formula based primarily on outstanding customer accounts receivable. Borrowings bear interest at approximately one month LIBOR, plus 5 basis points. Certain financial covenants related to debt are included in the Credit and Securitization facility agreements. Additionally, there are certain other restrictive covenants including limitations on the incurrence of additional liens, indebtedness, payment of dividends, distributions or other payments on and repurchase of outstanding capital stock, investments, mergers, stock transfer and sale of assets. Certain ratios related to the performance of the accounts receivable portfolio are also included. 5. STORE CLOSING On March 2, 2000 the Company announced its plan to close its downtown Wheeling and downtown Charleston stores in West Virginia. During the 26 week period ended July 29, 2000 the Company recorded costs of $0.5 million for fixed asset impairment and $2.1 million for excess inventory markdowns. In addition, expense of $2.1 million was recorded for lease settlements, severance and other costs. Both store closings were completed during the 13 week period ended July 29, 2000. As of October 28, 2000, $0.5 million of the recorded costs for lease settlements remain accrued. Payment of the lease settlement for the Charleston location is contingent upon the sale of another property owned by the Company. On September 29, 2000 the Company announced its plan to close its Evansville, Indiana store. During the Third Quarter 2000 the Company recorded costs of $1.3 million for excess inventory markdowns and $0.1 million for severance and other costs. As of October 28, 2000 $1.2 million of the recorded costs remain accrued. The Evansville closing is expected to be completed prior to fiscal year end. The excess inventory markdowns are included in cost of merchandise sold, occupancy, and buying expenses and all other costs are included in selling, general, administrative and other expenses. 6. STRATEGIC INITIATIVE On August 11, 2000 the Company announced that it completed an evaluation of strategic alternatives previously announced on February 28, 2000, and began implementation of a new three-part strategic plan. The plan calls for a shift in merchandising strategy to aggressively grow its opening price point and moderate priced value driven assortments, an acceleration of new concept store development, and streamlining of the Company's expense structure. 6 9 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (UNAUDITED) The Company estimates that, including severance costs for job reductions, the Company will incur up to $16 million in charges to complete this restructuring. Charges of $11.3 million have been incurred as of October 28, 2000. The Company expects to incur the balance of the restructuring charges prior to fiscal year end. These charges reflect: approximately $2 million in severance pay and other expenses in connection with job reductions, including severance costs in connection with the termination of the former president and chief operating officer; approximately $2 million in outside professional fees and expenses incurred in connection with the development of the restructuring plan and negotiations with shareholders regarding the Year 2000 proxy; and an estimated $12 million in additional merchandise markdowns to be incurred to bring the Company's merchandise assortments into a position consistent with the new merchandising strategy. 7. SHAREHOLDERS' EQUITY On August 29, 2000 the Company announced its intention to commence a tender offer for its common stock. In October 2000, the Company completed the tender offer and purchased 3,462,363 shares of its common stock for $17.7 million, which includes expenses of approximately $0.4 million. 8. ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". In June 2000, the FASB issued SFAS No. 138, which amended certain provisions of SFAS No. 133. SFAS No. 133 requires new, more comprehensive disclosures relating to the Company's use of derivative instruments and its hedging activities. The Company is required to adopt SFAS No. 133 for its fiscal year beginning after June 15, 2000, which begins on February 4, 2001. The Company has formed a team to identify known and embedded derivatives, evaluate hedge criteria, develop hedge documentation, and address other derivatives accounting and disclosure issues. The Company is currently determining the impact of SFAS No. 133, as amended, on its financial statements. The Company will adopt SFAS No. 133 on February 4, 2001. In December 1999, the Securities and Exchange Commission issued Staff Accounting Bulletin 101, "Revenue Recognition in Financial Statements", ("SAB 101"), which provides guidance on applying generally accepted accounting principles for recognizing revenue. SAB 101, as amended, is effective for the 13 week period ended February 3, 2001. The Company is reviewing the impact of SAB 101 on its financial statements, and does not believe that its adoption will have a material impact on the consolidated financial position, results of operations and cash flows. 9. DISCONTINUED OPERATIONS During the 13 week period ended January 29, 1999 the company sold its wholly owned subsidiary, The Bee-Gee Shoe Corp. ("Bee-Gee"), the specialty shoe store operation. Loss from operations for the 13 week period ending October 30, 1999 ("Third Quarter 1999") were nominal and for the 39 week period ending October 30, 1999 were approximately $0.4 million, net of income tax benefits of approximately $0.3 million. An estimated loss on disposal of $1.4 million was recorded during the Third Quarter 1999. The financial statements and notes have been reclassified for all periods presented to reflect Bee-Gee as a discontinued operation. 7 10 THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED (UNAUDITED) 10. SEGMENT REPORTING The following table sets forth financial information by segment, $(000's): THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------------------ ------------------------------------ OCTOBER 28, 2000 OCTOBER 30, 1999 OCTOBER 28, 2000 OCTOBER 30, 1999 ---------------- ---------------- ---------------- ---------------- Department Store Revenues................ $155,160 $149,737 $429,227 $419,781 Operating profit (loss)............... (3,227) 90 (13,106) (7,929) Finance Operations Revenues................ $ 9,046 $ 8,373 $ 26,378 $ 25,238 Operating profit........ 5,918 5,737 17,046 17,161 Segment Subtotal Revenues (1)............ $164,206 $158,110 $455,605 $445,019 Operating profit (2).... 2,691 5,827 3,940 9,232 (1) Segment revenues is reconciled to reported revenues as follows: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------------------ ------------------------------------ OCTOBER 28, 2000 OCTOBER 30, 1999 OCTOBER 28, 2000 OCTOBER 30, 1999 ---------------- ---------------- ---------------- ---------------- Segment revenues......... $164,206 $158,110 $455,605 $445,019 Intersegment operating charge eliminated..... (2,277) (2,195) (6,143) (6,139) -------- -------- -------- -------- $161,929 $155,915 $449,462 $438,880 ======== ======== ======== ======== (2) Total segment operating profit is reconciled to income (loss) from continuing operations before income tax expense (benefit) as follows: THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED ------------------------------------ ------------------------------------ OCTOBER 28, 2000 OCTOBER 30, 1999 OCTOBER 28, 2000 OCTOBER 30, 1999 ---------------- ---------------- ---------------- ---------------- Segment operating profit................ $ 2,691 $5,827 $ 3,940 $9,232 Store closing costs...... (1,353) (6,073) Restructuring costs...... (9,327) (11,341) Interest expense......... (3,591) (3,127) (9,611) (8,440) Other.................... (1,223) (1,564) (724) (1,413) -------- ------ -------- ------ $(12,803) $1,136 $(23,809) $ (621) ======== ====== ======== ====== 8 11 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS. This Quarterly Report on Form 10-Q contains certain forward-looking statements that are based on management's current beliefs, estimates and assumptions concerning the operations, future results and prospects of Elder-Beerman and the retail industry in general. All statements that address operating performance, events or developments that management anticipates will occur in the future, including statements related to future sales, profits, expenses, income and earnings per share, future finance and capital market activity, or statements expressing general optimism about future results, are forward-looking statements. In addition, words such as "expects," "anticipates," "intends," "plans," "believes," "estimates," variations of such words and similar expressions are intended to identify forward-looking statements. Actual results may differ materially from those in the forward- looking statements. Accordingly, there is no assurance that forward-looking statements will prove to be accurate. Many factors could affect Elder-Beerman's future operations and results, such as the following: increasing price and product competition; fluctuations in consumer demand and confidence; the availability and mix of inventory; fluctuations in costs and expenses; the effectiveness of advertising, marketing and promotional programs; weather conditions that affect consumer traffic in stores; the continued availability and terms of financing; the outcome of pending and future litigation; and general economic conditions, such as the rate of employment, inflation and interest rates and the condition of the capital markets. Forward-looking statements are subject to the safe harbors created under the federal securities laws. Elder-Beerman undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following is a discussion of the financial condition and results of operations of the Company for the 13 week periods ended October 28, 2000 ("Third Quarter 2000") and October 30, 1999 ("Third Quarter 1999"), and the 39 week periods ended October 28, 2000 ("Nine Months of 2000") and October 30, 1999 ("Nine Months of 1999"). The Company's fiscal year ends on the Saturday closest to January 31. The discussion and analysis which follow are based upon and should be read in conjunction with the Condensed Consolidated Financial Statements and the Notes thereto included in Part I, Item I. RESULTS OF OPERATIONS THIRD QUARTER 2000 COMPARED TO THIRD QUARTER 1999 Net sales for the Third Quarter 2000 increased by 3.7% to $154.6 million from $149.2 million for the Third Quarter 1999. Comparable store sales increased by 0.7%. Men's clothing, intimate apparel, furniture, ladies' moderate sportswear, and ladies' coats had the most significant sales increases. Financing revenue from the Company's private label credit card for the Third Quarter 2000 increased by 9.6% to $6.8 million from $6.2 million for the Third Quarter 1999. The increase in finance charges is due to an increase in late fees charged, partially offset by a reduction in carrying charges due to lower average outstanding accounts receivable. Cost of merchandise sold, occupancy, and buying expenses increased to 79.1% of net sales for the Third Quarter 2000 from 71.0% of net sales for the Third Quarter 1999. This increase is primarily due to inventory adjustments of approximately $7.6 million relating to the Company's new strategic plan announced on August 11, 2000, and $1.3 million for the closing of the Evansville, Indiana store. The Company also experienced reduced merchandise gross margin performance resulting from additional markdowns to clear slow moving merchandise. Selling, general and administrative expenses decreased to 29.6% of net sales for the Third Quarter 2000 from 30.1% for the Third Quarter 1999. This reduction is primarily due to the implementation of the expense initiatives called for in the Company's new strategic plan. 9 12 Provision for doubtful accounts was 0.7% of net sales for the Third Quarter 2000 and 0.6% for the Third Quarter 1999. This change is caused by an anticipated increase in write-offs due to an increase in the account balances because of additional late fees. Interest expense increased to $3.6 million for the Third Quarter 2000 from $3.1 million for the Third Quarter 1999. The increase is due to transactional fee increases related to the Credit Facilities and increased interest rates. Other expense of $1.9 million was incurred during the Third Quarter 2000. This is primarily for severance costs and outside professional fees and expenses incurred in connection with the new strategic plan. An income tax benefit was recorded in the Third Quarter 2000 at the rate of 36.0% compared to an expense recorded in the Third Quarter 1999 at the rate of 38.0%. During the Third Quarter 1999 the Company adopted a plan to dispose of Bee-Gee and consummated the sale in the fourth quarter of 1999. The loss in the Third Quarter 1999 is almost entirely a loss on disposal. Refer to the Notes to Condensed Consolidated Financial Statements note 9. Nine Months of 2000 Compared to Nine Months of 1999 Net sales for the Nine Months of 2000 increased by 2.3% to $427.6 million from $418 million for the Nine Months of 1999. Comparable store sales decreased by 0.9%. Men's clothing, furniture, shoes, ladies' moderate sportswear, cosmetics, and ladies' coats had the most significant sales increases. Financing revenue from the Company's private label credit card for the Nine Months of 2000 increased by 5.9% to $20.2 million from $19.1 million for the Nine Months of 1999. The increase in finance charges is due to an increase in late fees charged, partially offset by a reduction in carrying charges due to lower average outstanding accounts receivable. Cost of merchandise sold, occupancy, and buying expenses increased to 75.6% of net sales for the Nine Months of 2000 from 71.8% of net sales for the Nine Months of 1999. This increase is primarily due to inventory adjustments of approximately $7.6 million relating to the Company's new strategic plan announced on August 11, 2000, and $3.4 million for the closing of the Wheeling and Charleston, West Virginia stores, and the Evansville, Indiana store. In addition, the Company experienced reduced merchandise gross margin performance. Selling, general, and administrative expenses were 30.5% of net sales for the Nine Months of 2000 and 30.7% of net sales for the Nine Months of 1999. This reduction is primarily due to the implementation of the expense initiatives called for in the Company's new strategic plan. Provision for doubtful accounts was 0.9% of net sales for the Nine Months of 2000 and 0.6% for the Nine Months of 1999. This change is caused by an anticipated increase in write-offs due to an increase in the account balances because of additional late fees. Interest expense increased to $9.6 million for the Nine Months of 2000 from $8.4 million for the Nine Months of 1999. The increase is due to transactional fee increases related to the Credit Facilities and increased interest rates. Other expense of $6.1 million was incurred during the Nine Months of 2000. This amount includes $3.7 million that is for severance costs, including severance costs in connection with the termination of the former president and chief operating officer, and outside professional fees and expenses incurred in connection with the new strategic plan. Also included is an expense of $2.7 million for lease buyout, severance cost, and write-down of fixed assets related to the closing of the Company's Wheeling and Charleston, West Virginia stores, and the Evansville, Indiana store, partially offset by interest income. An income tax benefit was recorded in the Nine Months of 2000 at the rate of 36.0% compared to a benefit recorded in the Nine Months of 1999 at the rate of 38.0%. During the third quarter of 1999 the Company adopted a plan to dispose of Bee-Gee and consummated the sale in the fourth quarter of 1999. During the Nine Months of 1999 the Company recorded a loss of $1.8 million. This loss includes an estimated loss on disposal. Refer to the Notes to Condensed Consolidated Financial Statements note 9. 10 13 LIQUIDITY AND CAPITAL RESOURCES The Company's principal sources of funds are cash flow from operations and borrowings under the Revolving Credit Facility and Receivable Securitization Facility (collectively, the "Credit Facilities"). The Company's primary ongoing cash requirements are to fund debt service, make capital expenditures, and finance working capital. Net cash used in operating activities was $26.7 million for the Nine Months of 2000, compared to $36.9 million used in the Nine Months of 1999. During the Nine Months of 2000 the seasonal increase in inventory levels was $14.1 million less than in the Nine Months of 1999. Also, during the Nine Months of 2000 accounts payable increased by $24.5 million compared to an increase of $15.7 million during the Nine Months of 1999. Net cash used in investing activities was $15.9 million for the Nine Months of 2000, compared to $11.3 million for the Nine Months of 1999. The Company has spent $4.2 million more than last year in capital expenditures for store maintenance, remodeling, and data processing, primarily due to the addition of a third new store opened in 2000 as opposed to two new stores in 1999. For the Nine Months of 2000, net cash provided by financing activities was $42.6 million compared to $49.9 for the Nine Months of 1999, which represents reduced borrowing to fund cash used in operating and investing activities. In October 2000 the Company completed the tender offer previously announced on August 29, 2000. The Company purchased 3,462,363 shares of its common stock for $17.7 million, which includes expenses of approximately $0.4 million. On May 19, 2000 the Company completed the replacement of its existing Credit Facilities, which were set to expire in December 2000, with agreements similar in scope and with 36 month terms. The new Revolving Credit Facility provides for borrowings and letters of credit in an aggregate amount up to $150,000,000, subject to a borrowing base formula based on seasonal merchandise inventories. There is a $40,000,000 sublimit for letters of credit. The Company's replacement Receivable Securitization Facility provides for borrowings up to $150,000,000 based on qualified, pledged accounts receivable balances. The terms and borrowing rates are substantially similar to the predecessor Receivable Securitization Facility. The Company believes that it will generate sufficient cash flow from operations, as supplemented by its available borrowings under the new Credit Facilities, to meet anticipated working capital and capital expenditure requirements, as well as debt service requirements under the new Credit Facilities. The Company may from time to time consider acquisitions of department store assets and companies. Acquisition transactions, if any, are expected to be financed through a combination of cash on hand from operations, available borrowings under the Credit Facilities, and the possible issuance from time to time of long-term debt or other securities. Depending upon the conditions in the capital markets and other factors, the Company will from time to time consider the issuance of debt or other securities, or other possible capital market transactions, the proceeds of which could be used to refinance current indebtedness or for other corporate purposes. 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. 11 14 PART II. -- OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS. The Company is currently involved in several legal proceedings arising from its normal business activities and reserves have been established where appropriate. However, no legal proceedings have arisen or become reportable events during this quarter, and management believes that none of the remaining legal proceedings will have a material adverse effect on the financial condition, results of operations or cash flows of the Company. In addition, as a result of the bankruptcy, the Company remains subject to the jurisdiction of the Bankruptcy Court for matters relating to the consummation of the Plan. ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS. (a) Not Applicable. (b) Not Applicable. (c) Not Applicable. (d) Not Applicable. ITEM 3. DEFAULTS UPON SENIOR SECURITIES. Not Applicable. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. (1) The Board of Directors recommended that the shareholders elect four Directors listed below to Class II of the classified Board for a three-year term expiring in 2003. Because the amendment to Article IX of the Company's Amended Articles of Incorporation (the "Articles") was approved by the shareholders at the Annual Meeting (see Item Number 4), the entire Board of Directors, including the newly elected directors, must be re-elected at the Company's annual shareholder meeting in 2001. FOR WITHHELD ---------- -------- Mark F. C. Berner................................. 12,622,096 545,993 Dennis S. Bookshester............................. 12,596,692 571,397 Eugene I. Davis................................... 12,619,739 548,350 Charles H. Turner................................. 12,617,234 550,855 (2) Shareholders approved an increase by 500,000 the number of shares of common stock covered by The Elder-Beerman Stores Corp. Equity and Performance Incentive Plan. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,551,336 1,395,354 221,399 0 (3) Shareholders approved an amendment to Article X of the Company's Amended Articles of Incorporation (the "Articles") to reduce from 72% to a majority of the Company's outstanding shares of common stock the shareholder approval required to amend or repeal any section of the Articles. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- ------- ------- ---------------- 11,122,674 153,499 43,463 1,848,453 (4) Shareholders approved an amendment to Article IX of the Articles to eliminate the classification of the Company's Board of Directors and to replace this structure with a single class board of directors under which all directors of the Company are elected by the shareholders on an annual basis. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,140,314 139,723 39,599 1,848,453 12 15 (5) Shareholders approved the adoption of a new Article XIV to the Articles pursuant to which Elder-Beerman would opt out of the provisions of Chapter 1704 of the Ohio Revised Code, which Chapter sets forth certain restrictions on the ability of an Ohio corporation to engage in certain business combinations and other transactions that involve shareholders that have the ability to exercise 10% or more of the voting power of such corporation. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,079,565 193,360 46,711 1,848,453 (6) Shareholders approved an amendment to Regulation 34 of the Company's Amended Code of Regulations (the "Regulations") to lower from 72% to a majority of the Company's outstanding shares of common stock the shareholder approval requirement needed to amend or repeal any Regulation in the Regulations. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,127,676 155,044 36,916 1,848,453 (7) Shareholders approved an amendment to Regulation 9 of the Regulations to lower from 72% to a majority of the Company's outstanding shares of common stock the shareholder approval required to alter the size of the Board. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,129,409 152,211 38,016 1,848,453 (8) Shareholders approved an amendment to Regulation 3(a) of the Regulations to permit a shareholder or shareholders who own 10% rather than 50% of Elder-Beerman's outstanding shares of common stock to call special meetings of shareholders. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,105,048 177,902 36,686 1,848,453 (9) Shareholders approved an amendment to Regulation 7(c) of the Regulations to provide that any shareholder who desires to bring business before an annual meeting of Elder-Beerman's shareholders must notify Elder-Beerman not more than 90 days, but not less than 45 days in advance of such meeting of its intent to do so and of the nature of such business. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,138,957 143,893 36,786 1,848,453 (10) Shareholders approved an amendment to Regulation 12 of the Regulations to provide that any shareholder who desires to propose any nominees for election to Elder- Beerman's Board of Directors must notify Elder-Beerman not more than 90 days, but not less than 45 days in advance of such meeting of its intent to do so. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,141,461 140,889 37,286 1,848,453 (11) Shareholders approved the adoption of a new Regulation 35 to the Regulations, pursuant to which the Company would opt out of the provisions of the Ohio Control Share Acquisition Act. FOR AGAINST ABSTAIN BROKER NON-VOTES - ---------- --------- ------- ---------------- 11,095,334 183,932 40,370 1,848,453 13 16 ITEM 5. OTHER INFORMATION. None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) The following Exhibits are included in this Quarterly Report on Form 10-Q: 2(a) Third Amended Joint Plan of Reorganization of The Elder-Beerman Stores Corp. and its Subsidiaries dated November 17, 1997 (previously filed as Exhibit 2 to the Company's Form 10 filed on November 26, 1997, and incorporated herein by reference) 3(a) Amended Articles of Incorporation (previously filed as Exhibit 3(a) to the Form 10-K filed on April 30, 1998 (the "Form 10-K") and incorporated herein by reference) 3(b) Certificate of Amendment to the Amended Articles of Incorporation 3(c) Amended Code of Regulations 4(a) Stock Certificate for Common Stock (previously filed as Exhibit 4(a) to the Company's Form 10/A-1 filed on January 23, 1998 and incorporated herein by reference) 4(b) Rights Agreement By and Between The Elder-Beerman Stores Corp. and Norwest Bank Minnesota, N.A., dated as of December 30, 1997 (previously filed as Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed on November 17, 1998 (the "Form 8-A") and incorporated herein by reference) 4(c) Warrant Agreement by and Between Beerman-Peal Holdings, Inc. and the Elder-Beerman Stores Corp. for 249,809 shares of Common Stock at a strike price of $12.80 per share dated December 30, 1997 (previously filed as Exhibit 4(d) to the Form 10-K and incorporated herein by reference) 4(d) Warrant Agreement by and Between Beerman-Peal Holdings, Inc. and the Elder-Beerman Stores Corp. for 374,713 shares of Common Stock at a strike price of $14.80 per share dated December 30, 1997 (previously filed as Exhibit 4(e) to the Form 10-K and incorporated herein by reference) 4(e) Amendment No. 1 to the Rights Agreement, dated as of November 11, 1998 (previously filed as Exhibit 4.2 to the Form 8-A and incorporated herein by reference) 27 Financial Data Schedule (b) No reports on Form 8-K were filed during the period. 14 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE ELDER-BEERMAN STORES CORP., an Ohio corporation By: /s/ Scott J. Davido ------------------------------------- Scott J. Davido Executive Vice President, Chief Financial Officer and Treasurer (on behalf of the Registrant and as Principal Financial Officer) Dated: December 11, 2000 15 18 EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 2(a) Third Amended Joint Plan of Reorganization of The Elder-Beerman Stores Corp. and its Subsidiaries dated November 17, 1997 (previously filed as Exhibit 2 to the Company's Form 10 filed on November 26, 1997, and incorporated herein by reference) 3(a) Amended Articles of Incorporation (previously filed as Exhibit 3(a) to the Form 10-K filed on April 30, 1998 (the "Form 10-K"), and incorporated herein by reference) 3(b) Certificate of Amendment to the Amended Articles of Incorporation 3(c) Amended Code of Regulations 4(a) Stock Certificate for Common Stock (previously filed as Exhibit 4(a) to the Company's Form 10/A-1 filed on January 23, 1998 and incorporated herein by reference) 4(b) Rights Agreement By and Between The Elder-Beerman Stores Corp. and Norwest Bank Minnesota, N.A., dated as of December 30, 1997 (previously filed as Exhibit 4.1 to the Company's Registration Statement on Form 8-A filed on November 17, 1998 (the "Form 8-A") and incorporated herein by reference) 4(c) Warrant Agreement by and Between Beerman-Peal Holdings, Inc. and the Elder-Beerman Stores Corp. for 249,809 shares of Common Stock at a strike price of $12.80 per share dated December 30, 1997 (previously filed as Exhibit 4(e) to the Form 10-K and incorporated herein by reference) 4(d) Warrant Agreement by and Between Beerman-Peal Holdings, Inc. and the Elder-Beerman Stores Corp. for 374,713 shares of Common Stock at a strike price of $14.80 per share dated December 30, 1997 (previously filed as Exhibit 4(e) to the Form 10-K and incorporated herein by reference) 4(e) Amendment No. 1 to the Rights Agreement, dated as of November 11, 1998 (previously filed as Exhibit 4.2 to the Form 8-A and incorporated herein by reference) 27 Financial Data Schedule 16