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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 3, 2002
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)
<Table>
OHIO 31-0271980
(State or other jurisdiction of (I.R.S. employer identification no.)
incorporation or organization)
3155 EL-BEE ROAD, DAYTON, OHIO 45439
(Address of principal executive offices) (Zip Code)
</Table>
(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 September 5, 2002 11,529,169 shares of the issuer's common stock,
without par value, were outstanding.
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THE ELDER-BEERMAN STORES CORP.
INDEX
<Table>
<Caption>
PAGE
----
PART I FINANCIAL INFORMATION
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets as of August 3, 2002,
August 4, 2001 and February 2, 2002......................... 1
Condensed Consolidated Statements of Operations for the 13
weeks ended August 3, 2002 and August 4, 2001............... 2
Condensed Consolidated Statements of Operations for the 26
weeks ended August 3, 2002 and August 4, 2001............... 3
Condensed Consolidated Statements of Cash Flows for the 26
weeks ended August 3, 2002 and August 4, 2001............... 4
Notes to Condensed Consolidated Financial Statements........ 5
ITEM 2. Management's Discussion and Analysis of Consolidated
Financial Condition and Results of Operations............... 10
ITEM 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 14
PART II OTHER INFORMATION
ITEM 1. Legal Proceedings........................................... 15
ITEM 2. Changes in Securities and Use of Proceeds................... 15
ITEM 3. Defaults Upon Senior Securities............................. 15
ITEM 4. Submission of Matters to a Vote of Security Holders......... 15
ITEM 5. Other Information........................................... 15
ITEM 6. Exhibits and Reports on Form 8-K............................ 15
SIGNATURES............................................................ 17
CERTIFICATIONS........................................................ 17
EXHIBIT INDEX......................................................... 18
</Table>
PART I. -- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
AUG. 3, 2002 AUG. 4, 2001 FEB. 2, 2002
------------ ------------ ------------
ASSETS
Current assets:
Cash and equivalents.................................. $ 6,881 $ 6,213 $ 7,142
Customer accounts receivable (less allowance for
doubtful accounts: August 3, 2002 -- $2,250; August
4, 2001 -- 1,436; February 2, 2002 -- $2,985)...... 117,138 122,321 129,121
Merchandise inventories............................... 146,799 172,303 151,761
Other current assets.................................. 20,073 24,900 21,435
-------- -------- --------
Total current assets.......................... 290,891 325,737 309,459
-------- -------- --------
Property, fixtures and equipment, less accumulated
depreciation and amortization......................... 96,237 92,540 98,078
Goodwill................................................ -- 16,513 16,012
Other Assets............................................ 27,309 34,824 27,513
-------- -------- --------
Total assets.................................. $414,437 $469,614 $451,062
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term obligations.............. $ 7,311 $ 3,880 $ 5,531
Accounts payable...................................... 39,627 54,673 39,108
Other accrued liabilities............................. 22,693 21,085 26,819
-------- -------- --------
Total current liabilities..................... 69,631 79,638 71,458
-------- -------- --------
Long-term obligations, less current portion............. 132,120 162,259 148,489
Deferred items.......................................... 14,585 12,227 13,905
Shareholders' equity:
Common stock, no par, 11,528,587 shares at August 3,
2002, 11,416,515 shares at August 4, 2001, and
11,494,266 shares at February 2, 2002 issued and
outstanding........................................ 242,299 241,882 242,273
Unearned compensation -- restricted stock............. (258) (271) (302)
Deficit............................................... (39,150) (22,733) (19,870)
Other comprehensive loss.............................. (4,790) (3,388) (4,891)
-------- -------- --------
Total shareholders' equity.................... 198,101 215,490 217,210
-------- -------- --------
Total liabilities and shareholders' equity.... $414,437 $469,614 $451,062
======== ======== ========
</Table>
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)
<Table>
<Caption>
13-WEEKS ENDED 13-WEEKS ENDED
AUG. 3, 2002 AUG. 4, 2001
-------------- --------------
Revenues:
Net sales................................................. $ 133,578 $ 130,468
Financing................................................. 6,629 6,605
Other..................................................... 697 679
----------- -----------
Total revenues.............................................. 140,904 137,752
----------- -----------
Costs and expenses:
Cost of merchandise sold, occupancy, and buying
expenses............................................... 95,938 94,333
Selling, general, administrative, and other expenses...... 39,909 40,825
Depreciation and amortization............................. 5,006 4,692
Interest expense.......................................... 2,768 3,482
----------- -----------
Total costs and expenses.......................... 143,621 143,332
----------- -----------
Loss before income tax benefit.............................. (2,717) (5,580)
Income tax benefit.......................................... (978) (2,009)
----------- -----------
Net loss.................................................... $ (1,739) $ (3,571)
=========== ===========
Net loss per common share -- basic and diluted.............. $ (0.15) $ (0.32)
Weighted average number of shares outstanding............... 11,378,922 11,314,970
</Table>
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)
<Table>
<Caption>
26-WEEKS ENDED 26-WEEKS ENDED
AUG. 3, 2002 AUG. 4, 2001
-------------- --------------
Revenues:
Net sales................................................. $ 274,744 $ 269,962
Financing................................................. 13,787 13,754
Other..................................................... 1,385 1,383
----------- -----------
Total revenues.............................................. 289,916 285,099
----------- -----------
Costs and expenses:
Cost of merchandise sold, occupancy, and buying
expenses............................................... 201,083 193,438
Selling, general, administrative, and other expenses...... 81,404 81,368
Depreciation and amortization............................. 9,977 9,385
Interest expense.......................................... 5,608 6,819
----------- -----------
Total costs and expenses.......................... 298,072 291,010
----------- -----------
Loss before income tax benefit.............................. (8,156) (5,911)
Income tax benefit.......................................... (2,936) (2,128)
----------- -----------
Loss before cumulative effect of a change in accounting
principle................................................. (5,220) (3,783)
Cumulative effect of a change in accounting principle....... (14,060) --
----------- -----------
Net loss.................................................... $ (19,280) $ (3,783)
=========== ===========
Net loss per common share -- basic and diluted
Loss before cumulative effect of a change in accounting
principle.............................................. $ (0.46) $ (0.33)
Cumulative effect of a change in accounting principle..... (1.24) --
----------- -----------
Net loss.................................................... $ (1.70) $ (0.33)
Weighted average number of shares outstanding............... 11,374,378 11,314,911
</Table>
See notes to condensed consolidated financial statements.
3
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<Table>
<Caption>
26-WEEKS ENDED 26-WEEKS ENDED
AUG. 3, 2002 AUG. 4, 2001
-------------- --------------
Cash flows from operating activities:
Net loss.................................................. $(19,280) $(3,783)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 9,977 9,385
Cumulative effect of a change in accounting
principle............................................ 14,060 --
Asset impairment....................................... 1,037 --
Changes in assets and liabilities...................... 15,304 8,388
-------- -------
Net cash provided by operating activities............ 21,098 13,990
Cash flows from investing activities:
Capital expenditures, net................................. (4,604) (8,146)
Proceeds from the disposal of investments................. 326 --
-------- -------
Net cash used in investing activities................ (4,278) (8,146)
Cash flows from financing activities:
Net payments under asset securitization agreement......... (8,133) (11,680)
Net borrowings (payments) under revolving lines of
credit................................................. (6,465) 5,702
Payments on long-term obligations......................... (3,792) (1,469)
Proceeds from an installment note......................... 3,464 --
Debt acquisition payments................................. (2,098) --
Other..................................................... (57) (62)
-------- -------
Net cash used in financing activities................ (17,081) (7,509)
-------- -------
Decrease in cash and equivalents............................ (261) (1,665)
Cash and equivalents -- beginning of period................. 7,142 7,878
-------- -------
Cash and equivalents -- end of period....................... $ 6,881 $ 6,213
======== =======
Supplemental cash flow information:
Interest paid............................................. $ 6,019 $ 6,053
Supplemental non-cash investing and financing activities:
Capital leases............................................ 337 6,446
</Table>
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
and the cumulative effect of a change in accounting principle discussed in
note 6) 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 2, 2002.
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, deferred shares, and
warrants outstanding 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 3, 2002 and
August 4, 2001 were 117,129 and 177,854, respectively. Dilutive potential
common shares for the 26 weeks ended August 3, 2002 and August 4, 2001 were
86,692 and 127,795, respectively. There was no dilutive effect of potential
common shares for the periods presented.
3. STOCK-BASED COMPENSATION
During the second quarter of 2002, a total of 32,000 stock options were
granted at fair market value to designated employees under the Company's
Equity and Performance Incentive Plan (the "Plan"). These options granted
have a maximum term of ten years and vest over five years.
Nonemployee directors may take all or a portion of their annual base retainer
fee in the form of a discounted stock option. During the second quarter of
2002 a total of 22,153 stock options, with an exercise price of $2.36, were
granted under this plan. These options vest on February 3, 2003.
4. SHAREHOLDERS' EQUITY
The comprehensive loss for the 13 weeks ended August 3, 2002 and August 4,
2001, was $2.1 million and $3.8 million, respectively. The comprehensive loss
for the 26 weeks ended August 3, 2002 and August 4, 2001, was $19.2 million
and $6.5 million, respectively. Following is a reconciliation between net
loss and comprehensive loss, $(000's):
<Table>
<Caption>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------- -------------------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Net loss............................... $(1,739) $(3,571) $(19,280) $(3,783)
Change in minimum pension liability,
net of tax........................ (78) -- (78) --
Net unrealized gain (loss) on cash
flow hedges, net of tax........... (286) (198) 179 (2,726)
------- ------- -------- -------
Comprehensive loss..................... $(2,103) $(3,769) $(19,179) $(6,509)
======= ======= ======== =======
</Table>
5
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
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
$5.7 million liability at August 3, 2002, a $4.3 million liability at August
4, 2001, and a $6.0 million liability at February 2, 2002. 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 3, 2002.
6. IMPLEMENTATION OF NEW ACCOUNTING STANDARDS
Effective February 3, 2002, the beginning of the new fiscal year, the Company
adopted Statement of Financial Accounting Standards ("SFAS") No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 142 provides that goodwill
and intangible assets with indefinite lives will not be amortized, but rather
will be tested for impairment at least on an annual basis. Intangible assets
with finite useful lives will continue to be amortized over their useful
lives. In addition, SFAS No. 142 requires a transitional impairment test as
of the adoption date.
The Company had approximately $16.0 million in goodwill recorded in its
balance sheet as of February 2, 2002. The Company completed the goodwill
transitional impairment test during the first quarter of 2002, and determined
that all of the goodwill recorded was impaired under the fair value
impairment test approach as required by SFAS No. 142. The fair values of the
reporting units were estimated using the expected present value of associated
future cash flows and market values of comparable businesses where available.
Upon adoption of SFAS No. 142, a $14.1 million charge, net of tax, was
recognized in the first quarter of 2002 to record the impairment of goodwill
and was classified as a cumulative effect of a change in accounting
principle.
SFAS No. 142 requires the presentation of net earnings (loss) and related
earnings (loss) per share data adjusted for the effect of goodwill
amortization. The following table provides net loss and per share data for
the 13 weeks and 26 weeks ended August 3, 2002 and August 4, 2001, adjusted
for the impact of goodwill amortization on the results of the prior year
period (dollars in thousands, except per share data):
<Table>
<Caption>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------- -------------------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Net loss:
Reported continuing operations........ $(1,739) $(3,571) $(5,220) $(3,783)
Add back goodwill amortization, net of
tax................................ -- 115 -- 239
------- ------- ------- -------
Adjusted continuing operations........ $(1,739) $(3,456) $(5,220) $(3,544)
======= ======= ======= =======
Net loss per common share -- basic
and diluted:
Reported continuing operations........ $ (0.15) $ (0.32) $ (0.46) $ (0.33)
Goodwill amortization................. -- 0.01 -- 0.02
------- ------- ------- -------
Adjusted continuing operations........ $ (0.15) $ (0.31) $ (0.46) $ (0.31)
======= ======= ======= =======
</Table>
6
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The changes in the carrying amount of goodwill are as follows, $(000's):
<Table>
<Caption>
DEPARTMENT FINANCE
STORE OPERATIONS TOTAL
---------- ---------- --------
Balance as of February 2, 2002....................... $ 14,475 $ 1,537 $ 16,012
Impairment loss recognized......................... (14,475) (1,537) (16,012)
-------- ------- --------
Balance as of August 3, 2002......................... $ -- $ -- $ --
======== ======= ========
</Table>
In August 2001, SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets", was issued, which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. While SFAS No.
144 supersedes SFAS No. 121 "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of", it retains many of the
fundamental provisions of that statement. SFAS 144 became effective for
fiscal years beginning after December 15, 2001. The Company adopted SFAS 144
effective February 3, 2002. The adoption did not have a material impact on
the Company's financial statements.
7. NEW ACCOUNTING STANDARDS NOT YET ADOPTED
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 rescinds SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt-an amendment of APB Opinion No. 30", which required
all gains or losses from extinguishment of debt, if material, to be
classified as an extraordinary item, net of related income tax effect. As a
result, the criteria set forth by APB Opinion 30 will now be used to classify
those gains or losses. SFAS No. 64 amended SFAS No. 4, and is no longer
necessary because SFAS No. 4 was rescinded. SFAS No. 44 was issued to
establish accounting requirements for the effect of transition to the
provisions of the Motor Carrier Act of 1980, which is no longer necessary.
SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases", to eliminate
an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS
No. 145 becomes effective for fiscal years beginning after May 15, 2002, with
early application encouraged. Management does not believe the adoption of
SFAS No. 145 will have a material impact on the financial statements.
In June 2002, SFAS No. 146, "Accounting for Costs Associated with Exit or
Disposal Activities", was issued. SFAS No. 146 changes the timing of when
companies recognize costs associated with exit or disposal activities, so
that the costs would generally be recognized when they are incurred rather
than at the date of a commitment to an exit or disposal plan. SFAS No. 146 is
effective for exit or disposal activities initiated after December 31, 2002,
and could result in the Company recognizing the costs of future exit or
disposal activities over a period of time as opposed to as a single event.
8. ASSET IMPAIRMENT AND OTHER EXPENSES
The Company must periodically evaluate the carrying amount of its long-lived
assets, when events and circumstances warrant such a review, to ascertain if
any assets have been impaired. The carrying amount of a long-lived asset is
considered impaired when the anticipated undiscounted cash flows generated by
the asset is less that its carrying amount. Because of the immaterial cash
flow generation during fiscal 2001 of the Department Store's Erie, PA
location coupled with a sales decline during the first quarter of 2002, the
Company performed a cash flow projection for that store location. Based on
the cash flow projection, the Company determined that as of May 4, 2002, the
carrying amount of the long-lived assets for that location were not
recoverable and exceeded their fair value. Accordingly, in the first quarter
of 2002 the Company recorded a pre-tax impairment loss of $0.4 million in
selling, general, administrative, and other expenses to write-down that
location's long-lived assets to their fair value.
7
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
The Company has for sale a building located in downtown Charleston, WV, which
was recorded at its estimated fair market value. The Company has received a
letter of intent from the state of West Virginia to purchase the building for
less than the estimated fair market value, which the Company has accepted.
Accordingly, in the first quarter of 2002 the Company recorded a pre-tax
impairment loss of $0.6 million in selling, general, administrative, and
other expenses to write-down the building to its revised fair value.
On May 2, 2002 the Company announced its plan to close its downtown Dayton,
OH department store. During the 26 weeks ended August 3, 2002 the Company
recorded pre-tax costs of $0.8 million for excess inventory markdowns and
$0.3 million for severance and other costs. The closing was completed July
25, 2002.
On April 22, 2002 the Company announced the implementation of additional
expense reduction initiatives. These initiatives eliminated 105 associate
positions and resulted in the recording a pre-tax charge of $0.7 million for
severance costs.
On May 28, 2002 the Company announced that Scott J. Davido, its executive
vice president, chief financial officer, secretary and treasurer, left the
company to pursue other opportunities. Mr. Davido is entitled to his current
base salary through the end of his employment agreement. The Company recorded
a pre-tax expense of approximately $0.3 million during the second quarter of
2002 for Mr. Davido's remaining salary and benefits payable.
The following is a summary related to the severance and restructuring costs
for the 26 weeks ended August 3, 2002, $(000's):
<Table>
Severance and other costs -- Dayton, OH store:
Charge recorded........................................... $ 262
Used for intended purpose................................. (143)
------
Balance as of August 3, 2002.............................. $ 119
======
Severance and other costs:
Balance as of February 2, 2002............................ $ 537
Charge recorded........................................... 1,114
Used for intended purpose................................. (861)
------
Balance as of August 3, 2002.............................. $ 790
======
Executive retirement and other costs:
Balance as of February 2, 2002............................ $2,175
Used for intended purpose................................. (372)
------
Balance as of August 3, 2002.............................. $1,803
======
</Table>
8
THE ELDER-BEERMAN STORES CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
9. SEGMENT REPORTING
The following table sets forth financial information by segment, $(000's):
<Table>
<Caption>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------- -------------------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Department Store
Revenues..................... $134,275 $131,147 $276,129 $271,345
Operating loss............... (5,174) (8,079) (10,674) (11,222)
Finance Operations
Revenues..................... $ 8,689 $ 8,580 $ 17,920 $ 17,741
Operating profit............. 5,305 5,480 11,142 11,581
Segment Subtotal
Revenues (1)................. $142,964 $139,727 $294,049 $289,086
Operating profit (2)......... 131 (2,599) 468 359
</Table>
(1) Segment revenues is reconciled to reported revenues as follows:
<Table>
<Caption>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------- -------------------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Segment revenues............... $142,964 $139,727 $294,049 $289,086
Intersegment operating charge
eliminated................ (2,060) (1,975) (4,133) (3,987)
-------- -------- -------- --------
$140,904 $137,752 $289,916 $285,099
======== ======== ======== ========
</Table>
(2) Segment operating profit is reconciled to loss before income tax
benefit as follows:
<Table>
<Caption>
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
------------------------------- -------------------------------
AUGUST 3, 2002 AUGUST 4, 2001 AUGUST 3, 2002 AUGUST 4, 2001
-------------- -------------- -------------- --------------
Segment operating profit....... $ 131 $(2,599) $ 468 $ 359
Store closing costs.......... 315 -- (1,038) --
Severance and other costs.... (431) -- (1,114) --
Asset impairment............. -- -- (1,037) --
Interest expense............. (2,768) (3,482) (5,608) (6,819)
Other........................ 36 501 173 549
------- ------- ------- -------
$(2,717) $(5,580) $(8,156) $(5,911)
======= ======= ======= =======
</Table>
9
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. The
national tragedy of September 11, 2001 and subsequent national security threats
and warnings could magnify some of those factors. Factors that could materially
affect performance include the following: increasing price and product
competition; fluctuations in consumer demand and confidence, especially in light
of current uncertain general economic conditions; the availability and mix of
inventory; fluctuations in costs and expenses; consumer response to the
Company's merchandising strategies, advertising, marketing and promotional
programs; the effectiveness of management; the timing and effectiveness of new
store openings, particularly its new concept stores opened in Fall Season of
2001 (DuBois, PA, Alliance, OH and Kohler, WI) and in Spring Season 2002
(Coldwater, MI); 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. 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 August 3, 2002 ("Second
Quarter 2002") and August 4, 2001 ("Second Quarter 2001"), and the 26 week
periods ended August 3, 2002 ("First Half 2002") and August 4, 2001 ("First Half
2001"). 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 2002 Compared to Second Quarter 2001
Net sales for the Second Quarter 2002 increased by 2.4% to $133.6 million
from $130.5 million for the Second Quarter 2001. Comparable store sales
decreased by 1.8%. Women's outerwear, moderate sportswear, accessories,
domestics, and home had the best performance.
Financing revenue from the Company's private label credit card for the
Second Quarter 2002 and the Second Quarter 2001 was $6.6 million.
Other revenue, which is primarily from leased departments, for the Second
Quarter 2002 and the Second Quarter 2001 was $0.7 million.
Cost of merchandise sold, occupancy, and buying expenses decreased to 71.8%
of net sales for the Second Quarter 2002 from 72.3% of net sales for the Second
Quarter 2001. During the Second Quarter 2002 merchandise gross margins increased
0.6% versus the Second Quarter 2001, which was primarily due to reduced
markdowns. Also, 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 29.9% of
net sales for the Second Quarter 2002 from 31.3% for the Second Quarter 2001.
The decrease is primarily due to expense initiatives that have already been
implemented, $0.2 million in miscellaneous income from a sale of noncore assets,
and $0.1 million in income recorded to adjust the charge recorded during the
First Quarter 2002 for expenses related to the closing of the Company's Downtown
Dayton, Ohio store. The decrease was partially offset by $0.4 million recorded
for
10
severance costs incurred due to the implementation of expense reduction
initiatives. During the Second Quarter 2001 income of $0.6 million relating to
an investment in a cooperative buying group was recorded.
Depreciation and amortization expense increased to 3.7% of net sales for
the Second Quarter 2002 compared to 3.6% of net sales for the Second Quarter
2001. The increase is primarily due to increased capital expenditures related to
the opening of new concept stores. Effective February 3, 2002, goodwill is no
longer to be amortized, refer to the Notes to Condensed Consolidated Financial
Statements note 6.
Interest expense decreased to $2.8 million for the Second Quarter 2002 from
$3.5 million for the Second Quarter 2001. The decrease is primarily due to
reduced average borrowing.
An income tax benefit was recorded in the Second Quarter 2002 and the
Second Quarter 2001 at a rate of 36.0%.
First Half 2002 Compared to First Half 2001
Net sales for the First Half 2002 increased by 1.8% to $274.7 million from
$270.0 million for the First Half 2001. Comparable store sales decreased by
2.3%. Women's outerwear, moderate sportswear, better sportswear, accessories,
and domestics had the best performance.
Financing revenue from the Company's private label credit card for the
First Half 2002 and the First Half 2001 was $13.8 million.
Other revenue, which is primarily from leased departments, for the First
Half 2002 and the First Half 2001 was $1.4 million.
Cost of merchandise sold, occupancy, and buying expenses increased to 73.2%
of net sales for the First Half 2002 from 71.7% of net sales for the First Half
2001. During the First Half 2002 merchandise gross margins were reduced 0.9%
versus the First Half 2001, which was primarily due to additional markdowns
taken during the First Quarter 2002 to clear excess inventory. Also, 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 29.6% of
net sales for the First Half 2002 from 30.1% for the First Half 2001. The
decrease is primarily due to expense initiatives that have already been
implemented and $0.8 million in miscellaneous income from a sale of noncore
assets and life insurance proceeds. The decrease was partially offset by: (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, refer to the Notes to Condensed Consolidated
Financial Statements note 8. During the First Half 2001 income of $0.6 million
relating to an investment in a cooperative buying group was recorded.
Depreciation and amortization expense increased to 3.6% of net sales for
the First Half 2002 compared to 3.5% of net sales for the First Half 2001. The
increase is primarily due to increased capital expenditures related to the
opening of new concept stores. Effective February 3, 2002, goodwill is no longer
to be amortized, refer to the Notes to Condensed Consolidated Financial
Statements note 6.
Interest expense decreased to $5.6 million for the First Half 2002 from
$6.8 million for the First Half 2001. The decrease is primarily due to reduced
average borrowing.
An income tax benefit was recorded in the First Half 2002 and the First
Half 2001 at a rate of 36.0%.
A cumulative effect of a change in accounting principle charge was recorded
during the First Quarter 2002 in the amount of $14.1 million, net of tax. This
charge was to record the goodwill impairment determined under SFAS No. 142,
refer to the Notes to Condensed Consolidated Financial Statements note 6.
11
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, make capital expenditures, and
finance working capital.
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, or a reduction
in the finance charges imposed by the Company on its charge card holders.
The Company believes that it will generate sufficient cash flow from
operations, as supplemented by its available borrowings under the Credit
Facilities, to meet anticipated working capital and capital expenditure
requirements, as well as debt service requirements under the Credit Facilities.
Net cash provided by operating activities was $21.1 million for the First
Half 2002, compared to $14.0 million provided in the First Half 2001. A net loss
of $19.3 million was recorded in the First Half 2002 compared to a net loss of
$3.8 million in the First Half 2001. The First Half 2002 included a pre-tax
charge of $1.0 million to write-down long-term assets to their fair value, and a
$14.1 million after-tax charge to record the goodwill impairment, refer to the
Notes to Condensed Consolidated Financial Statements notes 6 and 8. During the
First Half 2002 merchandise inventories decreased $5.0 million compared to an
increase of $18.2 million during the First Half 2001. Trade accounts payable
during the First Half 2002 increased $2.0 million compared to an increase of
$22.7 million during the First Half 2001.
Net cash used in investing activities was $4.3 million for the First Half
2002, compared to $8.1 million for the First Half 2001. The decrease is due to
reduced capital expenditures for store maintenance, remodeling, and data
processing. Also, the Company received $0.3 million for the sale of idle
property during the First Quarter 2002.
For the First Half 2002, net cash used in financing activities was $17.1
million compared to $7.5 million for the First Half 2001, which represents
reduced borrowing required for operating and investing activities.
On July 9, 2002, the Company amended and extended its existing Credit
Facilities, which were set to expire in May 2003. The early refinancing provides
the Company with continued operating flexibility with respect to working capital
management and capital expenditures. The amended Credit Facilities are similar
in scope and will expire in July 2005. The terms and borrowing rates are
substantially similar to the predecessor Credit Facilities with the exception of
maximum borrowings, which have been reduced to decrease fees the Company
historically has paid for unused borrowing capacity.
The amended Revolving Credit Facility will provide for borrowings and
letters of credit in an aggregate amount up to $135,000,000, reduced from
$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 amended
Receivable Securitization Facility will provide for borrowings up to
$135,000,000, reduced from $150,000,000, based on qualified, pledged accounts
receivable balances.
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.
Critical Accounting Policies and Estimates
The Company's discussion and analysis of financial condition and results of
operations are based upon the Company's consolidated financial statements, which
are prepared in conformity with accounting principles
12
generally accepted in the United States of America. The preparation of the
consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the consolidated financial statements and the reported amounts of
revenues and expenses during the reporting period. Management bases its
estimates and judgements on historical experience and other various assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgements about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or conditions.
The Company's accounting policies are more fully described in Note A to the
Consolidated Financial Statements included in the Company's Annual Report on
Form 10-K for the year ended February 2, 2002. Management believes the following
critical accounting policies affect its more significant judgements and
estimates used in the preparation of the consolidated financial statements.
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. RIM is an
averaging method that has been widely used in the retail industry due to its
practicality. Inherent in the RIM calculation are certain management judgements
and estimates including, but not limited to, merchandise markon, markups,
markdowns and shrinkage, which significantly impact the ending inventory
valuation and resulting gross margins. 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 Statement of Financial Accounting Standard
No. 144. 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.
Income Taxes. The Company has generated net operating loss carryforwards
("NOL's") from previous years. Generally accepted accounting principles require
that we 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 we 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.
Accounting Standards
See the Notes to Condensed Consolidated Financial Statements note 7 for the
discussion of the potential effect of recently issued accounting standards on
the Company's financial position or results of operations.
13
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.
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.
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.
None.
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:
3(a) Amended Articles of Incorporation (previously filed as Exhibit
3(a) to the Company's 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
(previously filed as Exhibit 3(b) to the Company's Form 10-Q for
the quarterly period ended October 20, 2000 (the "2000 3rd Quarter
10-Q") and incorporated herein by reference).
3(c) Amended Code of Regulations (previously filed as Exhibit 3(c) to
the 2000 3rd Quarter 10-Q and incorporated herein by reference).
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 20, 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
15
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).
10(a) Amended and Restated Credit Agreement, dated as of July 9, 2002,
among The Elder Beerman Stores Corp., as Borrower, the Lenders
party thereto, Citibank, N.A., as Issuer and Citicorp USA, Inc.,
as Agent and Swing Loan Bank.
10(b) Severance Agreement, dated as of June 10, 2002, by and between The
Elder-Beerman Stores Corp. and Edward A. Tomechko.
10(c) Addendum to Consulting Agreement, dated August 24, 2002, between
The Elder-Beerman Stores Corp. and Renaissance Partners, L.C.
(b) On May 31, 2002, the Company filed a Current Report on Form 8-K
regarding the appointment of Edward A. Tomechko as Executive Vice President,
Chief Financial Officer, Treasurer and Secretary.
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 12, 2002
By: /s/ EDWARD A. TOMECHKO
------------------------------------
Edward A. Tomechko
Executive Vice President -- Chief
Financial Officer, Treasurer and
Secretary
CERTIFICATIONS
I, Byron L. Bergren, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
Elder-Beerman Stores Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 12, 2002
/s/ BYRON L. BERGREN
--------------------------------------
Byron L. Bergren
President and Chief Executive Officer
I, Edward A. Tomechko, Executive Vice President -- Chief Financial Officer,
Treasurer and Secretary, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The
Elder-Beerman Stores Corp.;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements made, in light of the
circumstances under which such statements were made, not misleading with
respect to the period covered by this quarterly report; and
3. Based on my knowledge, the financial statements, and other
financial information included in this quarterly report, fairly present in
all material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in this
quarterly report.
Date: September 12, 2002
/s/ EDWARD A. TOMECHKO
--------------------------------------
Edward A. Tomechko
Executive Vice President -- Chief
Financial Officer, Treasurer and
Secretary
17
EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
3(a) Amended Articles of Incorporation (previously filed as
Exhibit 3(a) to the Company's 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 (previously filed as Exhibit 3(b) to the
Company's Form 10-Q for the quarterly period ended October
20, 2000 (the "2000 3rd Quarter 10-Q") and incorporated
herein by reference).
3(c) Amended Code of Regulations (previously filed as Exhibit
3(c) to the 2000 3rd Quarter 10-Q and incorporated herein by
reference).
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
20, 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).
10(a) Amended and Restated Credit Agreement, dated as of July 9,
2002, among The Elder Beerman Stores Corp., as Borrower, the
Lenders party thereto, Citibank, N.A., as Issuer and
Citicorp USA, Inc., as Agent and Swing Loan Bank.
10(b) Severance Agreement, dated as of June 10, 2002, by and
between The Elder-Beerman Stores Corp. and Edward A.
Tomechko.
10(c) Addendum to Consulting Agreement, dated August 24, 2002,
between The Elder-Beerman Stores Corp. and Renaissance
Partners, L.C.
</Table>
18