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