<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 2, 1998
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 1-10767
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VALUE CITY DEPARTMENT STORES, INC.
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(Exact name of registrant as specified in its charter)
Ohio 31-1322832
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3241 Westerville Road, Columbus, Ohio 43224
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (614) 471-4722
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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
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Class Outstanding at June 5, 1998
- ------------------------------------ ---------------------------------
Common Stock, Without Par Value 32,145,015 Shares
<PAGE> 2
VALUE CITY DEPARTMENT STORES, INC.
TABLE OF CONTENTS
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<TABLE>
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PAGE NO.
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
May 2, 1998 and August 2, 1997 3
Consolidated Statements of Income
Three months and nine months ended
May 2, 1998 and May 3, 1997 4
Consolidated Statements of Cash Flows
Nine months ended May 2, 1998
and May 3, 1997 5
Notes to the Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosures about Market Risk N/A
PART II. OTHER INFORMATION
Item 1. Legal Proceedings N/A
Item 2. Changes in Securities N/A
Item 3. Defaults Upon Senior Securities N/A
Item 4. Submission of Matters to a Vote of Security Holders N/A
Item 5. Other Information N/A
Signatures 12
Item 6. Exhibits and Reports on Form 8-K
Part A: Exhibit 27 Financial Data Schedule for Third Quarter Form 10-Q 13
Part B: Reports on Form 8-K A Form 8-K was filed on May 22, 1998 relating
To Item 2 - "Acquisition or Disposition of Assets"
</TABLE>
page 2
<PAGE> 3
VALUE CITY DEPARTMENT STORES, INC.
PART 1. - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
(UNAUDITED)
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<TABLE>
<CAPTION>
MAY 2, AUGUST 2,
1998 1997
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ASSETS
<S> <C> <C>
Current assets:
Cash and equivalents $ 43,359 $ 11,614
Accounts receivable, net 3,266 5,683
Receivables from affiliates 1,003 1,084
Inventories 254,821 236,784
Prepaid expenses and other assets 5,905 12,137
Assets held for sale - 20,776
Deferred income taxes 10,640 9,208
--------- ---------
Total current assets 318,994 297,286
Property and equipment, at cost:
Furniture, fixtures and equipment 147,222 141,588
Leasehold improvements 101,910 97,798
Capital leases 15,303 15,213
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264,435 254,599
Accumulated depreciation and amortization (117,250) (101,148)
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Property and equipment, net 147,185 153,451
Investment in joint venture 8,717 -
Other assets 9,140 7,236
--------- ---------
Total assets $ 484,036 $ 457,973
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 86,946 $ 69,649
Accounts payable to affiliates 15,356 11,344
Demand note payable - 12,000
Accrued expenses:
Compensation 8,128 8,882
Taxes 18,076 11,753
Other 16,980 22,901
Current maturities of long-term obligations 2,199 2,281
--------- ---------
Total current liabilities 147,685 138,810
Long-term obligations, net of current maturities 55,700 57,763
Deferred income taxes and other noncurrent liabilities 4,027 4,960
Shareholders' equity:
Common shares, without par value; 80,000,000 authorized;
issued, including Treasury shares, 32,499,365 shares and
32,259,045 shares, respectively 111,971 110,068
Contributed capital 11,428 10,728
Retained earnings 156,887 139,455
Deferred compensation expense, net (833) (982)
Treasury shares, at cost, 368,600 shares (2,829) (2,829)
--------- ---------
Total shareholders' equity 276,624 256,440
--------- ---------
Total liabilities and shareholders' equity $ 484,036 $ 457,973
========= =========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
page 3
<PAGE> 4
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
------------------------------- -------------------------------
MAY 2, MAY 3, MAY 2, MAY 3,
1998 1997 1998 1997
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Total sales $ 301,349 $ 278,573 $ 1,011,316 $ 961,237
Less licensed departments sales (56,560) (44,913) (188,915) (138,506)
----------- ----------- ----------- -----------
Net owned sales 244,789 233,660 822,401 822,731
Cost of sales (154,475) (153,686) (521,916) (526,011)
----------- ----------- ----------- -----------
Gross profit 90,314 79,974 300,485 296,720
Selling, general and administrative expenses (93,028) (91,825) (292,024) (287,501)
License fees from affiliates
and other operating income 6,268 4,990 21,589 15,832
----------- ----------- ----------- -----------
Operating profit (loss) 3,554 (6,861) 30,050 25,051
Interest expense, net (556) (1,271) (1,996) (3,612)
Gain on disposal of assets, net 5 4 1,605 138
Amortization of excess net assets over cost - 232 - 927
----------- ----------- ----------- -----------
Income (loss) before equity in loss of
joint venture and (provision)
benefit for income taxes 3,003 (7,896) 29,659 22,504
Equity in loss of joint venture (136) - (918) -
----------- ----------- ----------- -----------
Income (loss) before (provision) benefit
for income taxes 2,867 (7,896) 28,741 22,504
(Provision) benefit for income taxes (1,178) 3,034 (11,309) (8,725)
----------- ----------- ----------- -----------
Net income (loss) $ 1,689 ($ 4,862) $ 17,432 $ 13,779
=========== =========== =========== ===========
Basic earnings (loss) per share $ 0.05 ($ 0.15) $ 0.55 $ 0.43
=========== =========== =========== ===========
Diluted earnings (loss) per share $ 0.05 ($ 0.15) $ 0.54 $ 0.43
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
page 4
<PAGE> 5
VALUE CITY DEPARTMENT STORES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
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<TABLE>
<CAPTION>
NINE MONTHS ENDED
-------------------------
MAY 2, MAY 3,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,432 $ 13,779
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization 19,464 21,865
Amortization of excess net assets over cost - (927)
Deferred income taxes and other noncurrent liabilities (2,365) 610
Loss of joint venture 918 -
Gain on disposal of assets (1,605) (138)
Change in working capital, assets and liabilities:
Receivables 592 (713)
Inventories (18,035) (14,029)
Prepaid expenses and other assets 4,800 (7,203)
Accounts payable 21,309 (48)
Accrued expenses 610 (5,380)
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Net cash provided by operating activities 43,120 7,816
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (12,136) (40,435)
Proceeds from sale of assets 22,358 62
Investment in joint venture (9,637) -
Other assets (1,534) (718)
Notes receivable 1,906 128
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Net cash provided by (used in) investing activities 957 (40,963)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments under demand note facility (12,000) (7,000)
Principal payments of long-term obligations (2,235) (10,266)
Net proceeds from issuance of common shares 1,903 550
Proceeds from issuance of long-term obligations - 50,000
-------- --------
Net cash (used in) provided by financing activities (12,332) 33,284
-------- --------
Net increase in cash and equivalents 31,745 137
Cash and equivalents, beginning of period 11,614 10,484
-------- --------
Cash and equivalents, end of period $ 43,359 $ 10,621
======== ========
</TABLE>
The accompanying notes are an integral part of the consolidated financial
statements.
page 5
<PAGE> 6
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MAY 2, 1998 AND MAY 3, 1997
(UNAUDITED)
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1. BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of Value
City Department Stores, Inc. ("VCDS") and its wholly owned subsidiaries. These
entities are herein referred to collectively as the "Company." The Company
operates a chain of full-line off-price department stores, principally under the
name "Value City."
The balance sheet for August 2, 1997 is condensed information taken from the
audited financial statements. The interim financial statements are unaudited and
are presented pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, the consolidated financial statements should
be read in conjunction with the financial statement disclosures contained in the
Company's 1997 Annual Report. In the opinion of management, the accompanying
consolidated financial statements reflect all adjustments necessary (which are
of a normal recurring nature) to present fairly the financial position and
results of operations and cash flows for the interim periods presented, but are
not necessarily indicative of the results of operations for a full fiscal year.
To facilitate comparisons with the current period, certain amounts in prior year
financial statements have been reclassified to conform to the current year
presentation.
2. INVESTMENT IN JOINT VENTURE
In July 1997, the Company entered into agreements with Mazel Stores, Inc. to
create VCM, Ltd. ("VCM"), a 50/50 joint venture. In August 1997, VCM purchased
100% of the capital stock of L.F. Widmann, Inc. which previously operated the
Company's health and beauty care departments as licensed departments and
purchased the assets of the Company's toys and sporting goods departments. VCM
now operates the health and beauty care and toys and sporting goods departments
in all of the Company's stores under license and operating agreements that
provide for fees based on a percentage of sales, as defined, for license fees,
advertising fees and credit and administrative charges. The Company provides
certain personnel, administrative and service functions for which it receives a
monthly fee from VCM to cover the related costs. The license and operating
agreements are for a term of ten years ending on the last day of fiscal 2007 and
contain certain provisions whereby either business partner can initiate
renegotiation of terms if certain minimum requirements are not met. The Company
accounts for its fifty percent interest in the joint venture under the equity
method. In addition, the Company has guaranteed 50% of VCM's $25.0 million
demand note facility. At May 2, 1998, VCM had $11.0 million of total borrowings
and $2.4 million of issued and outstanding letters of credit under this
facility.
page 6
<PAGE> 7
VALUE CITY DEPARTMENT STORES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED MAY 2, 1998 AND MAY 3, 1997
(UNAUDITED)
================================================================================
3. EARNINGS PER SHARE
Earnings per share are computed in accordance with Statement on Financial
Accounting Standard No. 128, "Earnings per Share," which requires the
presentation of basic and diluted earnings per share. Basic earnings per share
is based on a simple weighted average of common shares outstanding. Diluted
earnings per share reflects the potential dilution of common equivalent shares
(stock options), calculated by using the treasury stock method. The numerator
for the calculation of basic and diluted earnings per share is net income. The
denominator is summarized as follows (in thousands):
<TABLE>
<CAPTION>
Three months ended Nine months ended
------------------------ ----------------------
May 2, May 3, May 2, May 3,
1998 1997 1998 1997
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<S> <C> <C> <C> <C>
Weighted average shares outstanding 32,009 31,742 31,931 31,722
Assumed exercise of dilutive stock options 557 127 224 337
------ ------ ------ ------
Number of shares for computation of
diluted earnings per share 32,566 31,869 32,155 32,059
====== ====== ====== ======
</TABLE>
Options to purchase 162,000 shares of stock at $20.25 per share were outstanding
during the nine months ended May 2, 1998 and options to purchase 470,500 shares
of stock ranging from $8.63 to $20.25 were outstanding during the nine months
ended May 3, 1997 but were not included in the computation of diluted earnings
per share because the options' exercise prices were greater than the average
market price of the stock.
4. SUBSEQUENT EVENTS
At a closing on May 8, 1998, the Company purchased 99.9% of the common stock of
Shonac Corporation ("Shonac") from Nacht Management, Inc. and Schottenstein
Stores Corporation ("SSC"). SSC owns approximately 62% of the Company's
outstanding common stock. The Company also acquired the store operations of
Valley Fair Corporation from SSC. The combined purchase price for both
acquisitions was $107.9 million. Shonac has been the shoe licensee in all of the
Company's stores since its inception in 1969 and also operates a chain of
free-standing retail shoe outlets located throughout the United States,
principally under the name DSW Shoe Warehouse. Valley Fair Corporation operates
two department stores located in Irvington and Little Ferry, New Jersey. The
Company has been a licensee of certain departments in these two stores for 18
years.
Both acquisitions will be accounted for as purchases and were effective as of
May 3, 1998. The acquisitions were funded by cash provided by operations and
approximately $88.0 million from the Company's new long-term revolving bank
credit facility. In conjunction with the acquisitions, the Company replaced its
$100.0 million credit facility and Shonac's $30.0 million facility with a new
$185.0 million unsecured revolving credit facility. The facility has a three
year term and generally bears interest at a floating rate of LIBOR plus 1.5%.
The interest rate on $40.0 million has been locked in at a fixed annual rate of
7.395% for a three year period under a SWAP agreement. The terms of the credit
facility require the Company to comply with certain restrictive covenants and
financial ratio tests; maintain minimum consolidated tangible net worth and
consolidated total debt to consolidated adjusted earnings before interest,
taxes, depreciation and amortization ratios; and, limits the amount of annual
capital expenditures.
page 7
<PAGE> 8
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
THREE MONTHS ENDED MAY 2, 1998 COMPARED TO THREE MONTHS ENDED MAY 3, 1997
Total sales, which include licensed departments sales, increased from
$278.6 million to $301.3 million, an increase of $22.7 million or 8.2%. Net
owned sales increased from $233.7 million to $244.8 million; however, last
year's reported sales include toys and sporting goods sales of $10.1
million. These departments are now operated by VCM, Ltd. ("VCM"), a 50/50
joint venture between the Company and Mazel Stores, Inc., and are therefore
treated as licensed department sales. Excluding these sales from the prior
year period, net sales increased from $223.6 million to $244.8 million, an
increase of approximately $21.2 million or 9.5%. Owned sales for stores
opened during the prior year not yet considered comparable increased $0.2
million. This was offset by a loss of approximately $2.4 million in owned
sales for two stores which were closed during the current year. Comparable
store owned sales increased $23.4 million or 10.8%.
Gross profit increased from $80.0 million to $90.3 million, an increase of
$10.3 million, or 12.9%. Expressed as a percentage of owned sales, gross
profit increased from 34.2% to 36.9%. Last year's gross profit included
approximately $3.3 million related to the toys and sporting goods
departments. Excluding this amount from the prior year, gross profit, as a
percentage of owned sales, increased from 34.3% to 36.9% due primarily to
lower markdowns augmented by higher initial markup.
Selling, general and administrative expenses ("SG&A") increased $1.2
million, or 1.3% from $91.8 million to $93.0 million, and decreased as a
percentage of owned sales from 39.3% to 38.0%. Stores opened during the
prior fiscal year that are not yet considered comparable contributed an
increase in expenses of $0.7 million. This was offset by savings of $0.9
million for two stores closed during the current year. New store SG&A, as a
percentage of owned sales, is higher than that of comparable stores, due
primarily to pre-opening and depreciation expenses. Comparable store SG&A
increased by approximately $2.0 million but decreased 1.9% as a percentage
of owned sales. Home office expenses increased by approximately $1.6
million but decreased 0.4% as a percentage of owned sales. This was more
than offset by net expense reductions of approximately $2.2 million related
to the toys and sporting goods departments for which the Company no longer
directly incurs SG&A expense. If this year's and last year's quarters were
adjusted to eliminate the effects of the change in the toys and sporting
goods departments, SG&A for the quarter would be 38.3% to sales versus
40.4% in last year's quarter.
Based upon its experience, the Company estimates the average cost of
opening a new store to range from approximately $5.0 million to $6.5
million, including leasehold improvements, fixtures, inventory, pre-opening
expenses and other costs. Preparations for opening a store generally take
between eight and twelve weeks. The Company charges pre-opening expenses to
operations ratably over the first twelve months of store operations. It has
been the Company's experience that new stores generally achieve
profitability and contribute to net income after the first full year of
operations. Nine stores opened less than twelve months as of the beginning
of the current fiscal year had a pre-tax net operating loss of $1.6 million
for the current three month period, including $0.2 million of pre-opening
expense amortization. Thirteen stores opened less than twelve months during
last year had pre-tax net operating loss of $4.6 million for the quarter,
including $1.8 million of pre-opening expense amortization.
License fees from affiliates and other operating income increased from $5.0
million to $6.3 million, an increase of $1.3 million or 25.6%, and
increased as a percentage of owned sales from 2.1% to 2.6%. The increase in
the percentage is due primarily to $0.9 million of license fees received
from VCM on toys and sporting goods sales of $8.2 million.
Operating profit increased from a loss of $6.9 million to a profit of $3.6
million, an increase of approximately $10.5 million as a result of the
above factors.
Interest expense, net of interest income, decreased from $1.3 million to
$0.6 million due primarily to decreased borrowings.
The Company no longer recognizes income for amortization of excess net
assets over cost due to the amount being fully amortized as of the third
quarter of fiscal 1997.
Equity in loss of joint venture represents the Company's fifty percent
interest in VCM's net losses for the quarter.
Income before provision for income taxes increased from a loss of $7.9
million to income of $2.9 million, an increase of $10.8 million as a result
of the above factors.
page 8
<PAGE> 9
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
NINE MONTHS ENDED MAY 2, 1998 COMPARED TO NINE MONTHS ENDED MAY 3, 1997
Total sales, which include licensed departments sales, increased from
$961.2 million to $1,011.3 million, an increase of $50.1 million or 5.2%.
Net owned sales decreased from $822.7 million to $822.4 million; however,
last year's reported sales include toys and sporting goods sales of $46.7
million. These departments are now operated by VCM and are treated as
licensed department sales. Excluding these sales from the prior year
period, net sales increased from $776.0 million to $822.4 million, an
increase of approximately $46.4 million or 6.0%. Owned sales for stores
opened during the prior year not yet considered comparable increased $13.7
million. This was partially offset by a loss of approximately $4.9 million
in owned sales for two stores which were closed during the current nine
months. Comparable store owned sales increased $37.6 million or 5.5%.
Gross profit increased from $296.7 million to $300.5 million, an increase
of $3.8 million, or 1.3%. Expressed as a percentage of owned sales, gross
profit increased from 36.1% to 36.5%. Last year's gross profit included
approximately $15.3 million related to the toys and sporting goods
departments. Excluding this amount from the prior year, gross profit, as a
percentage of owned sales, increased from 36.3% to 36.5% due primarily to
increased initial markup partially offset by higher markdowns.
SG&A increased $4.5 million, or 1.6% from $287.5 million to $292.0 million,
and increased as a percentage of owned sales from 34.9% to 35.5%. Stores
opened during the prior fiscal year that are not yet considered comparable
contributed an increase in expenses of $3.8 million. This was partially
offset by savings of $1.7 million for two stores closed during the current
nine months. New store SG&A, as a percentage of owned sales, is higher than
that of comparable stores, due primarily to pre-opening and depreciation
expenses. Comparable store SG&A increased by approximately $4.9 million but
decreased 0.7% as a percentage of owned sales. Home office expenses
increased by approximately $4.9 million and remained constant as a
percentage of owned sales. This was more than offset by net expense
reductions of approximately $7.4 million related to the toys and sporting
goods departments for which the Company no longer directly incurs SG&A
expense. If this year's and last year's nine month periods were adjusted to
eliminate the effects of the change in the toys and sporting goods
departments, SG&A for the nine months would be 35.8% of sales versus 36.5%
last year.
Nine stores opened less than twelve months as of the beginning of the
current fiscal year had a pre-tax net operating loss of $3.7 million for
the current nine month period, including $1.5 million of pre-opening
expense amortization. Thirteen stores opened less than twelve months during
last year had pre-tax operating loss of $2.8 million, including $4.8
million for the nine months of pre-opening expense amortization.
License fees from affiliates and other operating income increased from
$15.8 million to $21.6 million, an increase of $5.8 million or 36.4%, and
increased as a percentage of owned sales from 1.9% to 2.6%. This is
primarily attributable to $4.4 million of license fees received from VCM on
their toys and sporting goods sales of $39.8 million.
Operating profit increased from $25.1 million to $30.1 million, an increase
of approximately $5.0 million as a result of the above factors.
Interest expense, net of interest income, decreased from $3.6 million to
$2.0 million due primarily to decreased borrowings.
Gain on sale of assets, net, increased from $0.1 million to $1.6 million,
due to a net gain recognized on the sale of land, building and improvements
at a site originally purchased for future store development and a gain
recognized on the sale of lease rights for a store that was closed during
the second quarter.
Equity in loss of joint venture represents the Company's fifty percent
interest in VCM's net losses. These losses are due primarily to weak sales
attributable to transitioning the toys and sporting goods and health and
beauty care merchandise inventories to a new format.
Income before provision for income taxes increased from $22.5 million to
$28.7 million, an increase of $6.2 million as a result of the above
factors.
page 9
<PAGE> 10
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
LIQUIDITY AND CAPITAL RESOURCES
Net working capital was $171.3 million at May 2, 1998 compared to $158.5 million
at August 2, 1997. Current ratios at those dates were 2.16 and 2.14 to 1.0,
respectively.
Net cash provided by operating activities totaled $43.1 million and $7.8 million
for the nine months ended May 2, 1998 and May 3, 1997, respectively. Net income,
adjusted for depreciation and amortization, provided $36.9 million of operating
cash flow for the nine months ended May 2, 1998. In addition, operating cash
flow was increased by $3.3 million representing an increase in inventories net
of an increase in accounts payable of $21.3 million. For the nine months ended
May 3, 1997, net income, adjusted for depreciation and amortization, provided
$35.6 million of operating cash flow which was decreased by $14.1 million
representing an increase in inventories net of a decrease in accounts payable of
$48,000.
Net cash provided by investing activities totaled $1.0 million for the 1998
period while net cash used in investing activities totaled $41.0 million for the
1997 period. Capital expenditures during the current nine months include $1.6
million for stores opened in the prior year, $5.2 million for capital
improvements in existing stores, $1.1 million for energy management systems,
$1.8 million for renovations in existing warehouses, $2.4 million for M.I.S.
equipment upgrades and $0.1 million for transportation equipment. Capital
expenditures were offset by $22.4 million of proceeds from the sale of assets,
primarily from those classified as assets held for sale as of August 2, 1997,
including the land, building and improvements at a site originally purchased for
future store development; the inventory and fixed assets related to the
Company's toys and sporting goods departments which were sold to VCM, at cost in
August 1997; and, the lease rights and leasehold improvements at a store that
was closed during the second quarter. The Company also incurred net cash outlays
of $9.6 million to obtain a fifty percent interest in the VCM joint venture.
Other investing activities include cash outlays of $1.5 million for other assets
and cash receipts of $1.9 million from notes receivable. The Company's inventory
control and POS systems are not yet year 2000 compliant. The inventory control
system will require approximately $0.2 million of programming changes which are
scheduled for completion in 1998. The POS system will be addressed during 1998
in conjunction with an upgrade to IBM software at a cost of approximately $1.0
million. Capital expenditures for the balance of the fiscal year are estimated
at approximately $10.0 million.
The Company had a $100.0 million credit facility with its bank bearing interest
at or below the prime lending rate depending on certain borrowing elections made
by the Company. At May 2, 1998, the prime rate was 8.5%, there were no direct
borrowings but $12.7 million of letters of credit were issued and outstanding
for merchandise purchases, leaving $87.3 million available under the facility.
In conjunction with the Company's investment in VCM, the Company guaranteed
fifty percent of VCM's $25.0 million demand note facility. At May 2, 1998, VCM
had $11.0 million of borrowings and $2.4 million of issued and outstanding
letters of credit under the facility.
At a closing on May 8, 1998, the Company purchased 99.9% of the common stock of
Shonac Corporation ("Shonac") from Nacht Management, Inc. and Schottenstein
Stores Corporation ("SSC"). SSC owns approximately 62% of the Company's
outstanding common stock. The Company also acquired the store operations of
Valley Fair Corporation from SSC. The combined purchase price for both
acquisitions was $107.9 million. Shonac has been the shoe licensee in all of the
Company's stores since its inception in 1969 and also operates a chain of
free-standing retail shoe outlets located throughout the United States,
principally under the name DSW Shoe Warehouse. Valley Fair Corporation operates
two department stores located in Irvington and Little Ferry, New Jersey. The
Company has been a licensee of certain departments in these two stores for 18
years.
Both acquisitions will be accounted for as purchases and were effective as of
May 3, 1998. The acquisitions were funded by cash provided by operations and
approximately $88.0 million from the Company's new long-term revolving bank
credit facility. In conjunction with the acquisitions, the Company replaced its
$100.0 million credit facility and Shonac's $30.0 million facility with a new
$185.0 million unsecured revolving credit facility. The facility has a three
year term and generally bears interest at a floating rate of LIBOR plus 1.5%.
The interest rate on $40.0 million has been locked in at a fixed annual rate of
7.395% for a three year period under a SWAP agreement. The terms of the credit
facility require the Company to comply with certain restrictive covenants and
financial ratio tests; maintain minimum consolidated tangible net worth and
consolidated total debt to consolidated adjusted earnings before interest,
taxes, depreciation and amortization ratios; and, limits the amount of annual
capital expenditures.
The Company believes that the cash generated by its operations, along with the
available proceeds from its new credit facility will be sufficient to meet its
future obligations including capital expenditures.
SEASONALITY
The Company's business is affected by the pattern of seasonality common to most
retail businesses. Historically, the majority of its sales and operating profit
have been generated during the first six months of its fiscal year, which
includes the back-to-school and Christmas selling seasons.
page 10
<PAGE> 11
VALUE CITY DEPARTMENT STORES, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
================================================================================
INCOME TAXES
The effective tax rate was 39.3% and 38.8% for the nine months ended May 2,
1998 and May 3, 1997, respectively.
INFLATION
The results of operations and financial condition are presented based upon
historical cost. While it is difficult to accurately measure the impact of
inflation because of the nature of the estimates required, management
believes that the effect of inflation, if any, on the results of operations
and financial condition has been minor.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1995) contained
herein or made by management of the Company involve risks and
uncertainties, and are subject to change based on various important
factors. The following factors, among others, in some cases have affected
and in the future could affect the Company's financial performance and
actual results and could cause actual results for 1998 and beyond to differ
materially from those expressed or implied in any such forward-looking
statements: the ability of the Company's new senior management team to
implement its strategies, the ability of the Company to integrate the
operations of Shonac and Valley Fair, changes in consumer spending
patterns, consumer preferences and overall economic conditions, the impact
of competition and pricing, changes in weather patterns, changes in
existing or potential duties, tariffs or quotas, paper and printing costs
and the ability to hire and train associates.
page 11
<PAGE> 12
SIGNATURE
---------
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.
VALUE CITY DEPARTMENT STORES, INC.
(Registrant)
By /s/ Robert M. Wysinski
-------------------------------------------
Robert M. Wysinski, Senior Vice President,
Chief Financial Officer, Treasurer
And Secretary *
Date: June 12, 1998
- -------------------
- --------------------------------------------------------------------------------
* Mr. Wysinski is the principal financial officer and has been duly authorized
to sign on behalf of the registrant.
page 12
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<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
statements of income and balance sheets and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> AUG-01-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> MAY-02-1998
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<SECURITIES> 0
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<PP&E> 264,435
<DEPRECIATION> 117,250
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0
0
<COMMON> 111,971
<OTHER-SE> 164,653
<TOTAL-LIABILITY-AND-EQUITY> 484,036
<SALES> 822,401
<TOTAL-REVENUES> 822,401
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<TOTAL-COSTS> 813,940
<OTHER-EXPENSES> 0
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<INTEREST-EXPENSE> 1,996
<INCOME-PRETAX> 28,741
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<NET-INCOME> 17,432
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